-----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, TlctkuJBBdSKISpHEGvL+jHLVsz5YGiUa+eIAEgnl46zKaiN9yX72A/7U14fMLe7 pIO7I+j5LdU5W6kMDL5Fmg== 0001144204-04-004800.txt : 20040414 0001144204-04-004800.hdr.sgml : 20040414 20040414170222 ACCESSION NUMBER: 0001144204-04-004800 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOLECULAR DIAGNOSTICS INC CENTRAL INDEX KEY: 0000075439 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 364296006 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-00935 FILM NUMBER: 04733699 BUSINESS ADDRESS: STREET 1: 900 NORTH FRANKLIN STREET STREET 2: SUITE 210 CITY: CHICAGO STATE: IL ZIP: 60610 BUSINESS PHONE: 4078490290 MAIL ADDRESS: STREET 1: 900 NORTH FRANKLIN STREET 1 STREET 2: SUITE 210 CITY: CHICAGO STATE: IL ZIP: 60610 FORMER COMPANY: FORMER CONFORMED NAME: AMPERSAND MEDICAL CORP DATE OF NAME CHANGE: 19990527 FORMER COMPANY: FORMER CONFORMED NAME: BELL NATIONAL CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: PACIFIC COAST HOLDINGS INC DATE OF NAME CHANGE: 19830303 10KSB 1 modular12231_10ksb.txt ANNUAL REPORT ON FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _______________ COMMISSION FILE NUMBER 0-935 MOLECULAR DIAGNOSTICS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 36-4296006 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 414 N. ORLEANS ST., SUITE 510, CHICAGO, IL 60610 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (312) 222-9550 (Registrant's Telephone Number, Including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED None Not Applicable SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.001 PAR VALUE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |_| No |X| The Company's revenues for the year ended December 31, 2003 were $379,000. The aggregate market value of the Common Stock held by non-affiliates of the Company as of March 31, 2004, was $13,851,636, based upon the closing price of shares of the Company's Common Stock, $0.001 par value per share ("Common Stock"), of $0.24 per share as reported on the Nasdaq Over-the-Counter Bulletin Board Market on that date. The number of shares of Common Stock outstanding as of March 31, 2004 was 72,126,629. MOLECULAR DIAGNOSTICS, INC. ANNUAL REPORT ON FORM 10-K DECEMBER 31, 2003
TABLE OF CONTENTS PAGE PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL DEVELOPMENT OF BUSINESS.................................................................. 1 RECENT DEVELOPMENTS.............................................................................. 1 a) Bridge I Financing ..................................................................... 2 b) Bridge II Financing..................................................................... 1 c) Secured Convertible Note Financing...................................................... 3 d) Secured Convertible Note Financing...................................................... 3 e) Other Financing......................................................................... 3 f) Resignation of Officer.................................................................. 3 g) Litigation Settlements.................................................................. 3 h) Delinquent Payroll Tax Liabilities...................................................... 4 i) Short-term Liquidity Problems........................................................... 4 j) Plan to Restructure Outstanding Liabilities............................................. 5 k) Authorized Shares of Common Stock....................................................... 5 l) Insurance............................................................................... 5 m) Information About Industry Segments..................................................... 5 DESCRIPTION OF BUSINESS.......................................................................... 5 a) General Overview........................................................................ 5 b) Products................................................................................ 5 1) InPath System....................................................................... 6 2) Samba Software Products and Services................................................ 6 2) Automated Microscopy Instruments.................................................... 7 1) AcCell......................................................................... 7 c) Markets................................................................................. 7 d) Government Regulation, Clinical Studies and Regulatory Strategy......................... 7 e) Competition............................................................................. 11 f) Operations.............................................................................. 11 g) Intellectual Property................................................................... 12 h) Research and Development................................................................ 13 i) Component and Raw Materials............................................................. 14 j) Working Capital Practices............................................................... 14 k) Employees............................................................................... 14 FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES..................... 14 CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.................................................................... 14 RISK FACTORS..................................................................................... 15 ITEM 2. DESCRIPTION OF PROPERTIES........................................................................ 18 ITEM 3. LEGAL PROCEEDINGS................................................................................ 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................ 23 MARKET INFORMATION............................................................................... 23 HOLDERS ........................................................................................ 24 DIVIDENDS........................................................................................ 24
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STOCK TRANSFER AGENT............................................................................. 24 RECENT SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS...................................... 24 EQUITY COMPENSATION PLAN TABLE INFORMATION....................................................... 26 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 27 RESULTS OF OPERATIONS............................................................................ 27 a) Overview................................................................................ 27 b) Significant Accounting Policies......................................................... 29 c) Revenue................................................................................. 29 d) Costs and Expenses...................................................................... 29 1) Cost of Goods Sold.................................................................. 29 2) Research and Development............................................................ 29 3) Selling, General and Administrative................................................. 30 4) Impairment Loss..................................................................... 30 5) Other Income and Expense............................................................ 30 1) Interest Income................................................................ 30 2) Interest Expense............................................................... 31 3) Other Income and Expense, Net.................................................. 31 e) Compensation from Discountinued Operations/Gains from Involuntary Conversion............ 31 f) Net Loss................................................................................ 31 g) Liquidity and Capital Resources......................................................... 31 ITEM 7. FINANCIAL STATEMENTS............................................................................. 36 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............. 36 RESIGNATION OF PRIO AUDITORS..................................................................... 35 ENGAGEMENT OF NEW AUDITORS....................................................................... 36 ITEM 8A. CONTROLS AND PROCEDURES.......................................................................... 37 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.................................................. 37 ITEM 10. EXECUTIVE COMPENSATION........................................................................... 39 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................... 42 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................... 47 ITEM 13. EXHIBITS AND REPORTS ON FORM 8K.................................................................. 48 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................................................... 59 Signatures .................................................................................... 60 Index to Financial Statements Reports of Independent Auditors........................................................................... F-1 Consolidated Balance Sheets at December 31, 2003 and 2002................................................. F-3 Consolidated Statements of Operations for the two years ended December 31, 2003 and 2002.................. F-4 Consolidated Statements of Cash Flows for the two years ended December 31, 2003 and 2002.................. F-5 Consolidated Statement of Stockholder's Equity (Deficit) for the two years ended December 31, 2003 and 2002............................................................................. F-7 Notes to Consolidated Financial Statements................................................................ F-12
ii PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL DEVELOPMENT OF BUSINESS We were incorporated in Delaware in December 1998 as the successor to Bell National Corporation. Bell National was incorporated in California in 1958. In December 1998, Bell National, which was then a shell corporation without any business activity, acquired InPath, LLC, a development stage company engaged in the design and development of products used in screening for cervical and other types of cancer. For accounting purposes, the acquisition was treated as if InPath had acquired Bell National. However, Bell National continued as the legal entity and the registrant for Securities and Exchange Commission filing purposes. Bell National merged into Ampersand Medical Corporation, its wholly-owned subsidiary, in May 1999 in order to change the state of incorporation of the company to Delaware. In January 1999, we purchased all of the assets of Samba Technologies, SARL, ("Samba") based in France, from Unilog Regions, S.A. On December 20, 2002, Samba was placed under the protection of the French Commercial Court in a bankruptcy proceeding. On December 19, 2003, Samba's assets, were sold by the French Commercial Court in a bankruptcy liquidation sale. As a result of this sale, MDI lost all rights and title to the assets of Samba, including Samba's software. We have classified Samba's operations as discontinued in our financial statements. In September 2001, we acquired 100% of the outstanding stock of AccuMed International, Inc., ("AccuMed") by means of a merger of AccuMed into our wholly-owned subsidiary. Shortly after the AccuMed merger we changed our corporate name to Molecular Diagnostics, Inc. The name change was effected by the merger of our wholly-owned subsidiary, Molecular Diagnostics, Inc., with and into Ampersand Medical Corporation. In October 2001, we became a minority shareholder in Cell Solutions, LLC, a Virginia limited liability company. Except where the context otherwise requires, "MDI", the "Company", "we" and "our" refers to Molecular Diagnostics, Inc., and subsidiaries, and its predecessors. MDI is currently focused on the design, development and marketing of the InPath System and related image analysis systems. The component products of the InPath System are intended to screen for, at the earliest possible stage, cancer and cancer related diseases and may be used in a laboratory, clinic, or doctor's office. We have designed and manufactured the AcCell computer aided automated microscopy instrument and the AcCell Savant, an instrument that includes an AcCell and software, which collects quantitative cellular information used in support of a diagnostic process. These instruments are sold to laboratories and medical diagnostic companies for use in the customers' proprietary applications. The instruments, in certain instances, are also placed in the customers' facility on a fee-for-use basis. Nearly all of our reported revenue to date has been from the sale of AcCell products and services and from Samba's discontinued operations. RECENT DEVELOPMENTS BRIDGE I FINANCING Between March 22, 2002 and June 28, 2002, MDI issued $3,185,000 in series Bridge I Convertible Promissory Notes to accredited investors. The notes bear interest at the rate of 7% per annum and are convertible at any time into the common stock of MDI at a conversion price equal to 75% of the market price of the common stock on the date of conversion. In addition, MDI issued a warrant, which entitled each holder to purchase one share of common stock, at an exercise price of $0.25 per share, for each dollar principal amount of notes. MDI calculated a fair value of $99,950 for these warrants using the fair value interest rate method and recorded this amount as additional interest expense during 2002. At the time of conversion of the note, the holder is entitled to receive a warrant to purchase one share of common stock for each four shares of common stock into which the note converts at an exercise price equal to 150% of the conversion price of the note. MDI has not determined a value for the warrants as of December 31, 2003. Since the conversion price of the note is at a 25% discount to the market price of the common stock of MDI, the holder is considered to have a beneficial conversion feature. MDI determined the value of the beneficial conversion feature to be $1,041,666 and recorded this amount as additional interest expense during 2002. In February 2003, a note holder, NeoMed Innovations III, converted $1,060,000 in principal amount of Bridge I notes into Bridge II notes. In November 2003, two note holders converted $50,000 in principal amount of notes and $5,287 in accrued interest into 368,579 shares of unregistered common stock. The remaining $2,075,000 in principal of Bridge I notes remains unconverted and outstanding at December 31, 2003. 1 Management has extended a written offer, dated October 10, 2003, to the Bridge I noteholders to convert their Notes and accrued interest into common shares at $0.15 per share. In addition, the Bridge I holders were also offered warrants to purchase one new share for every four shares acquired by the Bridge noteholder upon exercise of such holder's conversion rights under the note. As of April 14, 2004, this offer remained outstanding. From January 1, 2004 through March 31, 2004, holders of $1,200,000 principal amount of Bridge I Convertible Promissory Notes elected to convert their notes and related accrued interest of $152,000 into 9,010,410 shares of unregistered common stock. BRIDGE II FINANCING Beginning in October 2002, MDI began an issue of up to $4,000,000 in series Bridge II Convertible Promissory Notes to accredited investors. The notes bear interest at 12 % per annum payable at maturity date in kind in the form of shares of common stock and were due July 31, 2003. The notes are convertible at any time into the common stock of MDI. The note conversion price and the value of common shares paid in kind as interest for the first $1,000,000 in cash subscriptions, determined on a "first come - first served basis," is $0.10 per share. The note conversion price and the value of common shares paid in kind as interest for the remaining $3,000,000 of principal amount of notes in the series is $0.15 per share. MDI granted each note holder the right to receive a private warrant to purchase one share of the common stock of MDI for each dollar of principal amount of notes held at an exercise price of $0.15 per share. The warrants are not issueable until such time as MDI completes significant additional financing plans. MDI granted a junior security position in all of the Company's assets to the holders of the Bridge II convertible promissory notes. The Bridge II notes automatically convert into shares of Common Stock (subject to adjustments for stock splits, etc.) upon a "Qualified Financing Transaction," which means a transaction in which the Company closes a new debt or equity financing prior to the maturity date that results in net proceeds to the Company of at least four million dollars ($4,000,000). From January 1, 2003 through the closing of the offering on December 5, 2003, MDI issued Bridge II Convertible Promissory Notes in the principal amount of: $1,980,200 in exchange for cash, $1,060,000 as a conversion of a Bridge I Convertible Promissory Note and $305,667 in exchange for a note payable from Peter P. Gombrich, the Company's Chairman, for a total issuance during the year of $3,345,867. In September 2003 an amendment to the Bridge II Convertible Promissory Notes was sent to holders requesting an extension of the maturity date of the notes to July 31, 2004. As additional consideration for the extension, holders were offered an increase in the interest rate from 12% to 15%. In addition, an amendment to the indenture offered an increase in the warrant coverage ratio from 25% to 33%. From January 1, 2004 through March 31, 2004, holders of $1,396,000 principal amount of Bridge II Convertible Promissory Notes elected to convert their notes and related accrued interest of $140,000 into 11,708,118 shares of unregistered common stock. Included in the above conversion amounts are amounts due Peter P. Gombrich, the Company's Chairman, of $305,667 in Bridge II principal and $11,431 in accrued interest, which were converted into 2,113,987 shares of unregistered common stock. SERIES C CONVERTIBLE PREFERRED STOCK CONVERSIONS During the first three months of 2004, holders of Series C Convertible Preferred Stock elected to convert 910,000 shares and accrued dividends into 5,577,173 shares of unregistered common stock. SECURED CONVERTIBLE NOTE FINANCING Beginning in January 2004, Bathgate Capital Partners, LLC began an offering of a maximum of $4,000,000 and a minimum of $1,500,000 in Convertible Promissory Notes to accredited investors. The notes bear interest at 10% per annum payable, on a semi-annual basis, in kind in the form of shares of common stock for the first two years and then in cash for the remaining three years until the maturity date of December 31, 2008. The note conversion price and the value of common shares paid in kind as interest is $0.10 per share. The notes are convertible at any time into the common stock of MDI, although the notes will automatically convert if the last sales price of the stock is $0.30 or higher for twenty consecutive trading days, the daily average trading volume is 250,000, the underlying shares are registered for sale, and the Convertible Promissory Note to an affiliate, Suzanne M. Gombrich, has been paid or converted into common shares. The holders were also granted a security position in all of the Company's assets. MDI granted each note holder the right to 2 receive a 25% warrant coverage on all money invested, therefore, for every $100,000 invested, an investor will receive warrants entitling the holder to purchase 25,000 shares common stock at an exercise price of $0.15. The warrants will expire on December 31, 2008. All investment proceeds were deposited in an escrow account and the funds would not be released until all of the following requirements were met: o A minimum investment of $1,500,000 had been reached o Suzanne Gombrich's Convertible Promissory Note was paid or converted into common shares o Satisfactory due diligence was completed by Bathgate Capital Partners, LLC o A specified portion of Bridge II Convertible Promissory Note holders converted their notes into common shares o Peter P. Gombrich, MDI's Chairman and CEO resign his position as CEO of the Company All of these requirements were satisfied on April 2, 2004 and the Company issued $1,500,000 in convertible promissory notes in exchange for cash. The funds were used for repayment of the Suzanne Gombrich note, payment of certain payroll taxes to the Internal Revenue Service ("IRS"), and working capital. OTHER FINANCING Beginning in February 2004, MDI began a separate offering of Convertible Promissory Notes to accredited investors. These notes bear interest at 10% per annum payable, on a semi-annual basis, in kind in the form of shares of common stock for the first two years and then in cash for the remaining three years until the maturity date of December 31, 2008. The note conversion price and the value of common shares paid in kind as interest is $0.10 per share. The notes are convertible at any time into the common stock of MDI, although the notes will automatically convert if the last sales price of the stock is $0.30 or higher for twenty consecutive trading days, the daily average trading volume is 250,000, the underlying shares are registered for sale, and the Convertible Promissory Note to an affiliate, Suzanne M. Gombrich, has been paid or converted into common shares. The holders were also granted a security position in all of the Company's assets. MDI granted each note holder the right to receive a 25% warrant coverage on all money invested; therefore, for every $100,000 invested an investor will receive 25,000 warrants to purchase common stock at an exercise price of $0.15. The warrants will expire on December 31, 2008. Through March 31, 2004, the Company had issued $1,292,000 in principal amount of convertible promissory notes in exchange for cash. On April 2, 2003, MDI issued a $1,000,000 Convertible Promissory Note to an affiliate, Suzanne M. Gombrich, the wife of Peter Gombrich, MDI's Chairman, in exchange for cash. The note bore interest at the rate of 12% per annum and was convertible into the common stock of MDI at a conversion price of $0.10 per share. As additional consideration, MDI granted the holder a warrant to purchase 1,000,000 shares of the common stock of MDI at an exercise price of $0.15 per share. MDI also granted the holder a first priority security interest in all of the Company's assets. MDI used all of the cash proceeds from the note to fund the $100,000 cost of an option to repurchase all of its assets from Round Valley Capital, LLC and to make the $900,000 payment required to exercise the purchase option in conjunction with the final settlement of the loan with Round Valley Capital, LLC. On April 2, 2004, in conjunction with the release of funds from the Bathgate Capital Partners offering, the Convertible Promissory Note due to Suzanne M. Gombrich was paid in full and her first priority security interest in all the Company's assets was released. The payment on the $1,000,000 Convertible Promissory Note and $126,113.52 of accrued interest as of April 2, 2004 was in the form of $936,114 in cash and 1,900,000 shares of common stock of the Company. RESIGNATION OF OFFICER In February 2004 Peter P. Gombrich resigned as Chief Executive Officer and was appointed Executive Vice President of the Company. Mr. Gombrich remains Chairman of the Board. In February 2004, the Board of Directors appointed Denis M. O'Donnell M.D., a current Director of the Company, to be President and Chief Executive Officer. LITIGATION SETTLEMENTS On May 22, 2001, a judgment in the amount of $312,000 plus interest was entered against AccuMed (Circuit Court of Cook County (Case N0. 97 L 7158)) in favor of Merrill Corporation. The judgment was the result of the settlement of an 3 action brought by Merrill claiming unpaid fees for financial printing services, provided to AccuMed in 1996, and related interest and legal costs totaling in excess of $400,000. Under terms of the settlement and the related judgment, AccuMed was required to make 12 monthly payments of $26,000, and a final payment to include all interest accrued on declining unpaid balance of the judgment over the term of payment. AccuMed made 7 payments in accordance with the terms of the settlement and ceased to make any additional payments. In May of 2002, Merrill asserted its rights under the original judgment and filed a citation to discover assets of AccuMed and obtain the remaining amount due. On October 17, 2002, MDI reached an agreement with Merrill whereby MDI assumed responsibility for the remaining unpaid amount of the judgment and related costs totaling $145,000 and agreed to pay such amount no later than November 15, 2002. In February 2004, MDI settled the amount due to Merrill and fully satisfied all obligations owed to Merrill. The citation proceedings against MDI were dismissed. On July 31, 2002, MDI entered into a settlement and mutual release agreement with Trek Diagnostic Systems, Inc. ("Trek") related to a claim of breach of representations and warranties included in an agreement under which AccuMed sold its microbiology business and related assets to Trek in 1999. Under the settlement agreement, MDI executed an $80,000 promissory note in favor of Trek. The note required principal payments of $40,000 each on September 1 and December 1, 2002. MDI made the initial payment and Trek filed suit against MDI (Court of Common Pleas Cuyahoga County, Ohio (Case No. CV 03 492582)) on January 23, 2003 to collect the remaining $40,000 plus interest at 8% per annum and legal and other costs. On April 18, 2003, judgment was entered against MDI in the amount of $40,000 plus interest. Trek initiated citation proceedings against MDI in the Circuit Court of Cook County, Illinois in 2003. In March 2004, MDI entered into a final settlement agreement with Trek and fully satisfied all amounts due to Trek. The citation proceedings against MDI were dismissed. The Company and its subsidiaries Samba Sarl and AccuMed international, Inc. (collectively, "MDI") are parties to an Amended License and development Agreement with Ventana Medical Systems, Inc. ("Ventana") dated October 31, 2001, pursuant to which MDI has licensed certain intellectual property rights and technical information to Ventana. Under the Amended License and Development Agreement, Ventana was to produce an automated pathology imaging system using the intellectual property rights and technical information licensed from MDI, and Ventana was to pay MDI royalties based on the sales of such imaging system, as well as software support fees related to licensed software rights. MDI and Ventana were also parties to a Letter of Intent and Confidentiality Agreement dated July 12, 2002. Disputes arose between MDI and Ventana regarding their respective performance under the Amended License and Development Agreement and the Letter of Intent. In November 2003, MDI and Ventana negotiated a settlement and release, pursuant to which the Amended License and Development Agreement and the Letter of Intent were modified. Under the terms of the settlement and release, among other things, MDI issued a Promissory Note to Ventana in the principal amount of $62,946 and is also required to deliver two AcCell 2001 workstations. Ventana waived its rights to any prepaid royalties or other fees paid to MDI or its subsidiaries upon signing of the original agreements. DELINQUENT PAYROLL TAX LIABILITIES MDI was delinquent in filing certain Federal and State Income Tax returns for 2002 and 2001. MDI is also delinquent in paying a portion of Federal and State employee and employer payroll taxes for 2003, 2002, and 2001. The delinquent federal payroll taxes relating to 2003 and 2002 were paid in full in April 2004. The Company owed $686,000 and $678,000 as of December 31, 2003 and 2002, respectively, in 2001 federal payroll taxes, including $258,000 and $250,000 respectively in assessed and estimated statutory penalties and interest. MDI has submitted payments of $150,000 against this liability amount and is currently in the process of communicating through counsel with the Internal Revenue Service regarding payment of the balance due. The Company has lost all rights of appeal regarding the outstanding payroll tax liability and could be subject to the seizure of its tangible and intellectual property in the event a payment schedule is not agreed to with the Internal Revenue Service. The amount was included in accrued payroll costs in the accompanying balance sheet. SHORT-TERM LIQUIDITY PROBLEMS We continued to have severe liquidity problems and had insufficient cash on hand to effectively manage our business during the first three months of 2004. In March of 2004, Bathgate Capital Partners LLC raised $1,500,000 funds 4 from the Company issuance of Convertible Promissory Notes, of which the majority of the funds were used for the repayment of the Suzanne Gombrich note. In addition, MDI began a separate offering of Convertible Promissory Notes and has raised $1,292,000 for the payment of legal judgements, IRS taxes, wage claim settlements, and current operating needs. We have continued to raise operating cash through the date of this report through the issuance of additional Convertible Promissory Notes. Management is currently attempting to secure additional financing. PLAN TO RESTRUCTURE OUTSTANDING LIABILITIES The Company's new management team is working to develop a restructuring proposal to provide our unsecured creditors a settlement plan, which is contingent on our ability to raise sufficient new capital. AUTHORIZED SHARES OF COMMON STOCK As a result of the issuance of numerous convertible securities, including the above Convertible Promissory Notes and related warrants, we do not have sufficient shares of common stock authorized to issue upon exercise of all of our currently outstanding convertible securities, warrants and options. The issuance of shares of common stock pursuant to any new financing arrangement is subject to the Company obtaining shareholder approval to increase the authorized shares of common stock of the Company and the Company filing an amended Certificate of Incorporation. Our Board of Directors is considering an increase in the number of authorized shares of common stock from 100,000,000 shares to 300,000,000 shares, although the Board has not made a final decision on the issue. Any ultimate Board approved action requires a vote of our stockholders. The Board intends to place this issue on the agenda at the next annual meeting of our stockholders or at a special meeting to be called for this purpose. The failure to have a sufficient number of authorized shares may constitute a breach of one or more of our agreements governing issuance of such securities. INSURANCE Due to liquidity problems, we were unable to pay the continuing premiums on insurance policies covering Directors & Officers Liability, Public Liability, Property Damage and Workers Employment Compensation. These policies were all cancelled retroactive to October 29, 2002. We are currently working with insurance providers to reinstate our insurance coverage in these areas as soon as possible. INFORMATION ABOUT INDUSTRY SEGMENTS We operate primarily in an industry segment involving medical screening devices, diagnostics, and supplies. All of our operations during the reporting period were conducted within this segment. We expect to continue to focus our operations on this industry segment. BUSINESS GENERAL OVERVIEW The science of medical diagnostics has advanced significantly during the past decade. Much of this advance has come as a result of new knowledge of the human genome and related proteins, which form the foundation of cell biology and the functioning of the human body. Our goal is to utilize this research as a base to develop screening and diagnostic testing products for cancer and cancer-related diseases. We believe that the success of these products will improve patient care through more accurate test performance, wider availability and cost effective service delivery. We are developing an initial series of products to address these criteria including sample collection devices, chemical and biological tests, and analysis instruments and related software. Our strategy is to develop products through internal development processes, strategic partnerships, licenses and acquisitions of companies. This strategy has required and will continue to require additional capital. As a result, we will incur substantial operating losses until we are able to successfully market some, or all, of our products. 5 PRODUCTS THE INPATH(TM) SYSTEM We are currently developing and testing a family of products for use in cancer screening and diagnosis. We call this family of products the InPath System. The core of the InPath System is a combination of protein antibodies--the Cocktail-CVX--that allows the InPath System to detect and highlight abnormal cervical cells in a rapid and objective fashion. In the future, we intend to use different antibody combinations to detect and diagnose different types of cancer and other cancer-related diseases. The initial application of the InPath System is designed to enhance the current cervical cancer screening process performed in laboratories, commonly referred to as the Pap test. Our ultimate goal is to perform this screening test in less time, possibly at the point of service, either in a doctor's office, clinic or mobile medical vehicle. The InPath System includes the following components: o An FDA approved unique sample collection device consisting of a small disposable balloon, shaped to fit the cervix. The device is intended to replace the spatula and brush currently used to collect patient cytology samples. o A biochemical assay, fully-automated, that is applied to a sample to identify abnormal cells. o In the laboratory version of the InPath System slide based test, this biochemical assay is applied to sample cells released from a collection device into a liquid preservative and deposited on a glass slide. o In the point of service version of the InPath System, this biochemical assay is applied directly to the cellular sample and analyzed either in solution or while still on the collection device. o An instrument that performs an automated analysis of a sample by means of an optical scan that detects the presence of multiple wavelengths of fluorescent light. This light is produced by fluorescent reporter tags, which are attached to certain components used in the biochemical assay. o In the laboratory version of the InPath System, the AcCell computer aided automated microscopy instrument uses a camera to read the various wavelengths of light from the sample. o In the future point of service version of the InPath System, the proprietary instrument uses custom designed optical devices and lasers to capture the various wavelengths of light directly on the collector. o Custom designed image analysis software that controls the automated instruments and analyzes the captured wavelengths of light. SAMBA SOFTWARE PRODUCTS AND SERVICES Samba Technologies, Sarl, one of our wholly owned subsidiaries operated under the control of the French Commercial bankruptcy court beginning December 20, 2002. We were unable to raise sufficient capital during 2003 to provide funds to Samba to satisfy its obligations. On December 19, 2003, Samba's assets, were sold by the Court in a bankruptcy liquidation sale. As a result of this sale, MDI lost all rights and title to the assets including Samba software. We have classified Samba's operations as discontinued in our financial statements. 6 AUTOMATED MICROSCOPY INSTRUMENTS ACCELL(TM) In November 2001, Ventana Medical Systems, Inc. ("Ventana") agreed to purchase and distribute AcCell with their image analysis software, a computer aided automated microscopy instrument, designed to help medical specialists examine and diagnose specimens of human cells. During 2002, we agreed that Ventana would assume responsibility for manufacturing the AcCell 2500 instruments directly, rather than purchasing them from us. MDI elected not to develop the 2500 and in November 2003, MDI and Ventana signed a settlement agreement providing for a non-exclusive, royalty-free license agreement to the source code for the AcCell 2500 for its internal use or in the creation of executable code for its customers. In addition, as part of the settlement MDI agreed to provide two workstations valued at $49,500 and issued a promissory note for $62,946 in return for forgiveness of approximately $375,000 of advances against future sales. MDI has elected instead to proceed with the development and manufacture of a new fully integrated workstation (AIPS). It may be delivered with a variety of features including: o Robotic slide-feeding systems to load and unload multiple cassettes and slides to the image system; o Bar code readers to ensure proper identification of samples being analyzed; o Unique image analysis software; o Electro-mechanical scanning stages to facilitate accurate slide screening; o Automated cellular focusing on slides; o Data management software to facilitate primary or secondary review of samples and report results into record-keeping systems. The current workstation is a key tool of our research process, clinical trials, and the InPath System laboratory based test. We continue development of this platform. We may sell and market these instruments to other potential customers, OEM laboratories and into the diagnostics marketplace. MARKETS We do not plan to develop and train a large direct sales force to sell the InPath System. Our initial strategy is to market the laboratory version of the InPath System to major laboratory organizations in the United States. Once the InPath System has been successfully established in the laboratory market, our strategy is to form alliances with these laboratories and other medical products distribution companies and utilize their sales forces to broaden sales of the InPath System to hospitals, clinics, managed care organizations and office-based physician groups. The cost of the Pap test outside of the United States, where approximately 100,000,000 tests are performed, vary widely from country to country. Outside of the United States, most healthcare services are provided by governmental organizations. Healthcare in many of these countries is managed by governmental agencies, often at the local level, making the precise number of tests performed difficult to validate. In developing countries where healthcare, especially cancer screening, may be minimal, non-profit organizations often supplement government health programs. We intend to distribute the InPath System worldwide pursuant to our statutory regulatory approvals. The AIPS workstation is a key component of the laboratory version of the InPath System. In addition, we may market the AIPS instrument platform, including the version currently in development, to medical diagnostic companies as a means to automate specific diagnostic testing processes. We market this system as the most versatile and cost-effective automated microscopy platform currently available. GOVERNMENT REGULATION, CLINICAL STUDIES AND REGULATORY STRATEGY The development, manufacture, sale, and distribution of some of our products is regulated by the U.S. Food and Drug Administration ("FDA") and comparable authorities in certain states and foreign countries. In the United States, the 7 Food, Drug and Cosmetic Act (the "FD&C Act") and related regulations apply to some of our products. These products cannot be shipped in interstate commerce without prior authorization from the FDA. Medical devices may be authorized by the FDA for marketing in the United States either pursuant to a pre-market notification under Section 510(k) of the FD&C Act, commonly referred to as a 510(k) notification, or a pre-market approval application (a "PMA"). The process of obtaining FDA marketing clearance and approval from other applicable regulatory authorities is costly and there can be no guarantee that the process will be successful. The 510(k) notifications and PMA applications typically require preliminary internal studies, field studies, and/or clinical trials, in addition to submission of other design and manufacturing documentation. We manage the regulatory process through the use of consultants, Clinical Research Organizations, ("CROs") and members of our Medical Advisory Board. A 510(k) notification, among other things, requires an applicant to show that its products are "substantially equivalent" in terms of safety and effectiveness to an existing FDA cleared predicate product. An applicant may only market a product submitted through a 510(k) notification after the FDA has issued a written notification determining the product has been found to be substantially equivalent. The e2(TM) collector was approved for marketing by the FDA on May 31, 2002 under the 510(k) notification. To obtain PMA approval for a device, an applicant must demonstrate, independent of other similar devices, that the device in question is safe and effective for its intended uses. A PMA must be supported by extensive data, including pre-clinical and clinical trial data, as well as extensive literature, design and manufacturing documentation to prove the safety and effectiveness of the device. The PMA process is substantially longer than a 510(k) notification process. During the review period, the FDA may conduct extensive reviews of our clinical trial center documentation and our manufacturing facilities and processes or those of our strategic partners. In addition, the FDA may request additional information and clarifications and convene a medical advisory panel to assist in its determination. The FD&C Act generally bars advertising, promoting, or other marketing of medical devices that the FDA has not approved or cleared. Moreover, FDA enforcement policy strictly prohibits the promotion of known or approved medical devices for non-approved or "off-label" uses. In addition, the FDA may withdraw product clearances or approvals for failure to comply with regulatory standards. Our current and prospective foreign operations are also subject to government regulation, which varies from country to country. Many countries, directly or indirectly through reimbursement limitations, control the price of most healthcare products. Developing countries put restrictions on the importation of finished products, which may delay such importation. European Directives establish the requirements for medical devices in the European Union. The specific directives are the Medical Device Directive (MDD 93/42/EEC) and the In-Vitro Diagnostics Device Directive (IVDD/98/79/EEC). The International Organization for Standardization ("ISO") establishes standards for compliance with these directives, particularly for quality system requirements. The FDA has adopted regulations governing the design and manufacture of medical devices that are, for the most part, harmonized with the GMP & ISO quality system standards for medical devices. The FDA's adoption of the ISO's approach to regulation and other changes to the manner in which the FDA regulates medical devices will increase the cost of compliance with those regulations. We will be subject to certain registration, record-keeping and medical device reporting requirements of the FDA. Our manufacturing facilities, or those of our strategic partners, will be obligated to follow the FDA's Quality System Regulation and be subject to periodic FDA inspections. Any failure to comply with the FDA's Quality System Regulation or any other FDA or other government regulations would have a material adverse effect on our future operations. The Cocktail CVX as part of the InPath System will need to be cleared for marketing under a PMA by the FDA, as described above, prior to its sale and use in the U.S. clinical market. We cannot be sure whether or when the FDA will clear the InPath System. Internationally, the InPath System may be subject to various government regulations, which may delay the introduction of new products and services and adversely affect our business. 8 The InPath System may be subject to regulation in the United States under the Clinical Laboratory Improvement Act ("CLIA"). CLIA establishes quality standards for laboratories conducting testing to ensure the accuracy, reliability and timeliness of patient test results, regardless of where the test is performed. The requirements for laboratories vary depending on the complexity of the tests performed. Thus, the more complicated the test, the more stringent the requirement. Tests are categorized as high complexity, moderate complexity (including the category of provider performed microscopy) and waived tests. CLIA specifies quality standards for laboratory proficiency testing, patient test management, quality control, personnel qualifications and quality assurance, as applicable. The FDA is responsible for categorization of commercially marketed laboratory tests. The Centers for Disease Control ("CDC") is responsible for categorization of laboratory procedures such as provider-performed microscopy. For commercially-marketed tests, the FDA now determines the appropriate complexity category as it reviews pre-market submissions for clinical laboratory devices. Manufacturers are asked to include an extra copy of the package insert identified as "FOR CLIA CLASSIFICATION" in the submission for product commercialization (i.e., 510(k) or PMA). Manufacturers are notified of the assigned complexity through routine FDA correspondence (that is, as an enclosure with a clearance or approval letter or as a separate letter in response to other submissions). Categorization is effective as of the date of the written notification to the manufacturer. We are developing the InPath System to be user-friendly, require minimum operator training, and have safety and operating checks built into the functionality of the instruments. We believe that our efforts may result in the FDA and/or the CLIA assigning the lowest possible Classification to the InPath System. If, however, these products are classified into a higher category, it may have a significant impact on our ability to market the product in the United States. We continue to conduct clinical studies and trials on our InPath System during its development. These studies and trials vary in terms of number of patient samples, individual product components, specific processes and conditions, purpose, and other factors, which may affect the results. We have publicly reported the results of some of the studies of the InPath System and Cocktail-CVX at various medical meetings, in publications and in public announcements. Such studies demonstrate the system's capability to detect cervical cellular abnormalities. The sensitivity factor, the test's performance in detecting versus missing actual disease, commonly called false negatives, is critical in terms of patient health. In each of the reported studies and trials, the InPath System demonstrated over 98% sensitivity in detecting high-grade cervical disease and cancer. In addition, the results demonstrate that the InPath System produces more accurate results than the current PAP test. A statistical Analysis conducted in 2000 on the PAP test, which reviewed the results of 94 previous studies, showed an average sensitivity of 74% and an average specificity of 68%. In a presentation of early results of the clinical trial of the InPath System collector, data showed that the cytology reports on samples collected with the InPath System collector were at least as accurate as those collected with the conventional brush/spatula method. The InPath System collector also proved to be more comfortable for the patient and provided less blood and mucus and required only one device to collect both endocervical and ectocervical cells. The results of the additional clinical patients data were submitted in January 2002 and we received 9 FDA clearance to market the collector on May 31, 2002. We believe the results of these studies support the continued development process of the InPath System. We moved ahead with additional studies and clinical trials in late 2001 and others began in 2002. Due to capital limitations we were forced to suspend all of our ongoing studies during the last half of 2002. We completed the initial phase of our clinical studies during 2002 and we hope to begin the last phase during the second half of 2004, contingent on our securing adequate financing for our operations. At the conclusion of the studies, the data will be submitted to the FDA as a PMA and will form the basis of our substantiation of the clinical and economic value of the InPath System. It may also be offered for sale as an Analyte Specific Reagents ("ASR"), which is defined as the specific ingredient required for the laboratory to created their own screening test, in the United States and for full-scale commercial and clinical use in selected international markets, where import and regulatory approvals allow. We are not permitted to market non-ASR products in the United States, with clinical or diagnostic claims until we have received clearance from the FDA. ASR tests make no medical claims but may be used by laboratories, which are qualified to perform high complexity tests, and physicians as components of ASR procedures. In other countries, we may need regulatory and importation approval; however, such approvals are generally based on the data submitted to the FDA. We are pursuing regulatory approval of the InPath System products through a series of submissions and in some cases, using data from a single clinical study. This tiered approach is designed to accelerate revenue opportunities for the InPath System in the short term and to drive adoption of our innovative products over the long term, while minimizing the expense and time involved in undertaking the appropriate study. The first stage of the overall strategy involved the submission of our e2 Collector for approval as a substantially equivalent device to the brush and spatula method of gathering samples used in the current Pap tests. The 510(k) notification was completed and filed in late September 2001. Additional data was furnished to the FDA in the first quarter of 2002 and subsequent to that submission we received approval to market the Collector in the United States. MDI will initiate the full scale manufacturing process through contract manufacturing and intends to introduce it into the commercial market in the second half of 2004. The second stage of our overall strategy involves the continuing study of the InPath System and Cocktail-CVX, as described in preceding paragraphs. This submission will cover the InPath System as a means to eliminate true negative samples from further review. We anticipate completion of this portion of the study and submission of the data to the FDA by the fourth quarter of 2004 or first quarter of 2005. We will also submit the data to foreign regulatory authorities that have jurisdiction over these products. Subsequently, we will continue to collect and submit data for the InPath System point of service test. If the submissions for the various InPath System products are cleared by the FDA for sale in the U.S. market or approved for sale by foreign regulatory agencies, we intend to sell the cleared products in the respective clinical markets. INPATH SYSTEM PRODUCT INTRODUCTION TIMELINES PRODUCT PROCESS TIMELINE e2 Collector........... Clinical trials Completed Regulatory submission & review September 2001 Regulatory clearance received May 2002 US sales (1) 2004 International sales (1) 2004 / 2005 Cocktail-CVX........... Clinical trials (1) 2004 Regulatory submission & review (1) 2004 / 2005 Regulatory clearance projected (1) 2005 US sales (1) 2005 International sales (1) 2005 Cocktail-CVX ASRs ..... US sales 2005 (1) All of the above target dates are contingent on our securing adequate financing for our operations. We currently distribute Automated Microscopy Instruments into commercial markets that do not require regulatory clearance. In order to distribute these products for use in certain clinical applications, however, we will be required to conduct clinical trials and to make submissions to applicable regulatory agencies for clearance. We do not have any current plans to make any submissions to the FDA or foreign regulatory agencies covering these products. In the future, some of our customers may include these products in submissions to the FDA or foreign regulatory agencies covering their use in a customer's proprietary diagnostic or clinical process. 10 COMPETITION Historically, competition in the healthcare industry has been characterized by the search for technological innovations and efforts to market such innovations. The cost of healthcare delivery has always been a significant factor in markets outside of the United States. In recent years, the U.S. market has also become much more cost conscious. We believe technological innovations incorporated into certain of our products offer cost effective benefits that address this particular market opportunity. Competitors may introduce new products that compete with ours, or those which we are developing. We believe the portion of our research and development efforts devoted towards continued refinement and cost reduction of our products will permit us to remain or become competitive in all of the markets in which we presently distribute or intend to distribute our products. The market for our cancer screening and diagnostic product line is significant, but highly competitive. We are unaware of any other company that is duplicating our efforts to develop a fully-automated, objective analysis and diagnostic system for cervical cancer screening that can be used at the point of service. Our competition includes many companies with financial, marketing, and research and development resources substantially greater than ours. There can be no assurance that our technological innovations will provide us with a competitive advantage. There are several U.S. and foreign companies that produce automated and quantitative microscopy instruments. In the past, the market for these instruments has been primarily limited to research applications. However, as a result of recent advances in the area of molecular diagnostics, we believe the market for such instruments and applications will increase over the next several years. We believe our instruments are the most versatile cost-effective platforms available in the current market whether as an outright purchase or a fee-for-use application. We believe that all of our products must compete primarily on the basis of accuracy, functionality, product features and effectiveness of the product in standard medical applications. We also believe that cost control and cost effectiveness are additional key factors in achieving or maintaining a competitive advantage. We focus a significant amount of product development effort on producing systems and tests, which will not add to overall healthcare cost. Specifically, there are several companies whose technologies are similar, adjunctive to, or may overlap with MDI's. These include Cytyc Corporation, Tripath Corporation, Digene Corporation, Ventana Medical Systems, Inc., ChromaVision Systems, Inc., and Applied Imaging, Inc. However, none of these companies have developed the fully integrated solution necessary to deliver a fully automated, proteomic based, solution. To develop fully-automated solutions, companies must have technologies that fully integrate microscopy instruments, imaging software and cancer-detecting biochemistry. At most, our competitors have two of the three technologies. MDI is the only company in the process of developing all three technologies into a solution for cervical cancer screening. OPERATIONS We conduct research and development work for the InPath System using a combination of our employees and contract workers in our Chicago, Illinois laboratory, and contract laboratory facilities located in several locations. We do not intend to invest capital to develop our own distribution and sale organizations, and construct and maintain a medical-products manufacturing facility and all its related quality systems requirements. Our strategy is to utilize the operations, quality systems, and facilities of a contract manufacturer specializing in medical products manufacturing to meet our current and future needs in the U.S. and other international markets. This strategy covers manufacturing requirements related to InPath System chemical components, plastic and silicone parts for the sample collector, InPath System instruments and the AIPS instruments. We are negotiating agreements, including design and development work, with manufacturers of medical grade components to supply the silicone balloon and other components of the sample collection device. We are negotiating additional agreements with manufacturers to supply much higher volumes that will be needed once we begin to sell the sample collection device. These manufacturers have the capacity to handle high volume production through facilities in both the United States and several foreign countries. 11 We also have a preliminary agreement with a large manufacturer of chemical and biological tests to integrate the various combinations of ingredients that make up our assay Cocktail-CVX into a single product delivered in high volume. We have a sufficient supply of workstation platforms. The computers, cameras, automated slide staining equipment and slide preparation equipment, which make up the remainder of the laboratory version of the InPath System, are available from several manufacturers. These instruments are used in a sequential process. The platform on which the actual sample screening is done is computer controlled by our proprietary software. We are currently negotiating agreements with medical instrument manufacturers covering the design, development and initial manufacturing of both the next generation AIPS platform and the future point of service instrument. INTELLECTUAL PROPERTY We rely on a combination of patents, licenses, trade names, trademarks, know-how, proprietary technology, and policies and procedures to protect our intellectual property. We consider such security and protection a very important aspect of the successful marketing of our products in the U.S. and foreign markets. In the United States we follow the practice of immediately filing a provisional patent application for each invention as soon as it has been determined that the invention meets the minimum standards for patentability. While a provisional patent application does not provide any formal rights or protections, it does establish an official priority date for the invention that carries over to any utility patent applications that are derived from the provisional application within the next 12 months. A utility patent application begins the process that can culminate in the issuance of a U.S. patent. We convert each outstanding provisional patent application into some number of utility patent applications within this 12 month period. In most cases each provisional application results in one utility filing. However, in some cases a single provisional application has generated two independent utility filings or multiple (up to five) provisional applications have been consolidated into a single utility application. During the examination of a utility application, the U.S. Patent Office may require us to divide the application into two or more separate applications or we may file a continuation-IN-part patent application that expands upon the technology claimed in another patent application and which has the potential of superseding the earlier application. For these reasons, estimating the number of patents that are likely to be issued based upon the numbers of provisional and utility applications filed is difficult. Prior to filing a utility application in the United States, we review the application to determine whether obtaining patent coverage for the invention outside of the United States is necessary or desirable to support our business model. If so, a patent application is filed under the Patent Cooperation Treaty (PCT) at the same time that the U.S. filing is made. Depending upon the nature of the invention and business considerations, we typically specify the patent offices in three to six countries to which the PCT application is to be submitted after the initial examination is completed. As of March 2004, we have filed eleven U.S. utility patent applications and ten national applications. Four of the U.S. utility applications have issued as U.S. Patents. Seven U.S. and ten foreign patent applications are filed and pending. In order to reduce the expenses related to patent prosecution, we are currently treating these applications as inactive and taking only those actions needed to keep them in effect. This group of patents and patent applications cover all aspects of the InPath system including, but not limited to, the point of service instrument; the personal and physicians' collectors; and the slide-based test. As a result of the acquisition of AccuMed, we acquired thirty-three issued U.S. patents, one U.S. patent application, and nine foreign patents, of which a combined total of seventeen were transferred to a third party under a license agreement. Twenty-four additional foreign patent applications primarily covering the AcCell and AcCell Savant technology and related software, were also acquired. We also hold an exclusive license from Invirion and Dr. Bruce Patterson covering a patent and certain medical technology for detection of E6 and E7 genes in cancer causing types of Human Papilloma Virus ("HPV") virus. We purchased the license for cash, future royalties, and other considerations. We continue to prepare additional patent applications for processes and inventions arising from our research and development process. The protections provided by a patent are determined by the claims that are allowed by the patent office that is processing the application. During the patent prosecution process it is not unusual for the claims made in the initial application to be modified or deleted or for new claims to be added to the application. For this reason it is not possible to know the exact extent of protection provided by a patent until it issues. 12 Patent applications filed prior to November 29, 2000 in the United States are maintained in secrecy until any resulting patent is issued. As there have been examples of U.S. patent applications that have remained "in prosecution" and, therefore, secret for decades, it is not possible to know with certainty that any U.S. patent that we may own, file for or have issued to us will not be pre-empted or impaired by patents filed before ours and that subsequently are issued to others. Utility patent applications filed in the United States after November 29, 2000 are published eighteen months after the earliest applicable filing date. As this revised standard takes full effect, the chances that such a "submarine" patent will impair our intellectual property portfolio will be significantly reduced. Foreign patent applications are automatically published eighteen months after filing. As the time required to prosecute a foreign utility patent application generally exceeds eighteen months and the foreign patents use a "first to file" rather than a "first to invent" standard, we do not consider submarine patents to be a significant consideration in our patent protection outside of the United States. Our products are or may be sold worldwide, under trademarks that we consider to be important to our business. We own the trade names of "InPath(TM)", "e(2) Collector(TM)", "Cocktail-CVX(TM)", "In-Cell HPV Test(TM)", "AcCell(TM)" and "AcCell Savant(TM)". We may file additional U.S. and foreign trademark applications in the future. Our future technology acquisition efforts will be focused toward those technologies that have strong patent or trade secret protection. We cannot be sure that patents or trademarks issued or which may be issued in the future will provide us with any significant competitive advantages. We cannot be sure any of our patent applications will be granted or that validity or enforceability will not be successfully challenged. The cost of any patent related litigation could be substantial even if we were to prevail. In addition, we cannot be sure that someone will not independently develop similar technologies or products, duplicate our technology or design around the patented aspects of our products. The protection provided by patents depends upon a variety of factors, which may severely limit the value of the patent protection, particularly in foreign countries. We intend to protect much of our core technology as trade secrets, either because patent protection is not possible or, in our opinion, would be less effective than maintaining secrecy. However, we cannot be sure that our efforts to maintain secrecy will be successful or that third parties will not be able to develop the technology independently. RESEARCH AND DEVELOPMENT Our research and development efforts are focused on introducing new products as well as enhancing our existing product line. We utilize both in-house and contracted research and development efforts. We believe research and development is critical to the success of our business strategy. During the years 2003 and 2002 our research and development expenditures were approximately $580,00 and $3,338,000, respectively. The design and validation of the laboratory version of the InPath System, including image analysis software, is currently in process. We examined samples from patients with normal and abnormal (those with cancer or its precursors) pathology reports in our studies. Our research work in the area of chemical and biological components will continue for the foreseeable future as we seek to refine the current process and add additional capabilities to our analysis procedure, including the detection of other forms of cancer and precursors to cancer. We are establishing relationships with strategic design/manufacturing partners to develop the next generation Automated Microscopy Instrument platform. The design requirements are complete and prototypes are in process. We anticipate the need to invest a substantial amount of capital in the research and development process, including the cost of clinical trials, in order to complete the development and use of the InPath System and bring it to market. 13 COMPONENTS AND RAW MATERIALS Low cost products are a key component of our business strategy. We designed the sample collection device using widely available and inexpensive silicone and plastic materials. These materials are available from numerous sources and can be fabricated into finished devices by a variety of worldwide manufacturers based on our proprietary designs. The instrument components of the laboratory version of the InPath System are available from a number of sources. Computers, cameras, automated slide-staining instruments and automated slide-preparation instruments are currently available from several large manufacturers. We have an adequate supply of current workstations used in the InPath System and have contracted for the design and manufacture of the next generation of the workstation platform. The point of service instruments are designed to use off-the-shelf components and a limited number of custom manufactured parts or use a third party manufactured instrument. The strategic partner chosen to manufacture the unique final instrument, as is the case with the company building the prototypes, will be responsible for sourcing, fabrication, and assembly of all components into the final instrument. WORKING CAPITAL PRACTICES As of December 31, 2003, we have not sold any InPath System products. During 2003 and 2002, we sold several AcCell instrument platforms, billed and received fees under an AcCell Savant fee-for-use contract. We have financed our U.S. operations and research and development by raising funds through the sale of debt or equity. We will continue to use these methods to fund our operations until such time as we are able to generate adequate revenues and profits from the sales of some or all of our products. Similarly, we believe that future sales of the InPath System or other products into foreign markets may result in collection periods that may be longer than those expected for domestic sales of these products. Our strategy will be to use letters of credit or other secured forms of payment, whenever possible, in sales of products in foreign markets. EMPLOYEES As of March 31, 2004, we employed a total of eight full-time employees in the United States. The staff reductions from prior years were undertaken in late 2002 and during 2003 in order to conserve our limited operating funds. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Markets outside of North America are an important factor in our business strategy. Any business that operates on a worldwide basis and conducts its business in one or more local currencies is subject to risks of fluctuations in the value of those currencies against the dollar. It is subject to changing political climates, differences in culture and the local practices of doing business. It is also subject to North American and foreign government actions, such as export and import rules, tariffs and duties, embargoes and trade sanctions. We do not regard these risks, however, as a significant deterrent to our strategy to introduce our InPath System to foreign markets. As we begin to market and sell our InPath System, we will closely review our foreign operational practices. We will attempt to adopt strategies to minimize risks of changing economic and political conditions within foreign countries. 2003 2002 ---- ---- NORTH AMERICA: Revenue.................................. $ 379 $ 717 Profit (loss)............................ $ (9,804) $ (11,937) Total Assets............................. $ 7,715 $ 9,047 FRANCE: Discontinued operations.................. $ (75) $ (23) Gain from Involuntary conversion......... $ 292 $ -- Total Assets............................. $ -- $ 612 14 CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 There are forward-looking statements throughout this report that are not historical facts, including statements in this Item 1 and statements contained in material incorporated into this report by reference. These statements are based on our current expectations and plans, and involve many risks and uncertainties. Some of these risks and uncertainties are factors that affect all international businesses, while others are specific to us, and the areas of the medical products industry in which we operate. The factors below in some cases have affected our historical results and could affect our future results, causing them to differ, possibly materially, from those expressed in this report's forward-looking statements. These factors include: our ability to raise capital; our ability to settle litigation; our ability to retain key employees, economic conditions; technological advances in the medical field; demand and market acceptance risks for new and existing products, technologies, and healthcare services; the impact of competitive products and pricing; manufacturing capacity; new plant start-ups; U.S. and international regulatory, trade, and tax policies; product development risks, including technological difficulties; ability to enforce patents; and foreseeable and unforeseeable foreign regulatory and commercialization factors. Currency fluctuations are also a significant variable for global companies, especially fluctuations in local currencies where hedging opportunities are unreasonably expensive or unavailable. If the value of the U.S. dollar strengthens relative to the currencies of the countries in which we market or intend to market our products, our ability to achieve projected sales and net earnings in such countries could be adversely affected. We believe that our expectations with regard to forward-looking statements are based upon reasonable assumptions within the bounds of our current business and operations knowledge, but we cannot be sure that our actual results or performance will conform to any future results or performance expressed or implied by any forward-looking statements. RISK FACTORS The risks described below are not the only ones we are facing. Additional risks are described in this report under recent developments and litigation. There may also be risks not presently known to us or that we currently deem immaterial that may also impair our business operations. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks. THERE IS A LIMITED MARKET FOR "PENNY STOCKS" SUCH AS OUR COMMON STOCK. Our Common Stock is considered a "penny stock" because, among other things, our price is below $5 per share, it trades on the Nasdaq Over-the-Counter Bulletin Board Market and we have net tangible assets of less than $2,000,000. As a result, there may be little or no coverage by security analysts, the trading price may be lower, and it may be more difficult for our stockholders to dispose of, or to obtain accurate quotations as to the market value of, their Common Stock. Being a penny stock could limit the liquidity of our Common Stock. THE HISTORICALLY VOLATILE MARKET PRICE OF OUR COMMON STOCK MAY AFFECT THE VALUE OF OUR STOCKHOLDERS' INVESTMENTS. The market price of our Common Stock, like that of many other medical products and biotechnology companies, has in the past been highly volatile. This volatility is likely to continue for the foreseeable future. Factors affecting potential volatility include: o general economic and other external market factors; o announcements of mergers, acquisitions, licenses and strategic agreements; o announcements of private or public sales of securities; 15 o announcements of new products or technology by us or our competitors; o ability to finance our operations; o fluctuations in operating results; and o announcements of the Food and Drug Administration ("FDA") relating to products. OUR COMMON STOCK IS UNLIKELY TO PRODUCE DIVIDEND INCOME FOR THE FORESEEABLE FUTURE. We have never paid a cash dividend on our Common Stock and we do not anticipate paying cash dividends for the foreseeable future. We intend to reinvest any funds that might otherwise be available for the payment of dividends in further development of our business. OUR COMMON STOCK IS SUBJECT TO DILUTION, AND AN INVESTOR'S OWNERSHIP INTEREST AND RELATED VALUE MAY DECLINE. We are authorized to issue up to 10,000,000 shares of preferred stock. As of December 31, 2003, we have approximately 82,655 shares of Series A convertible preferred stock outstanding which convert into 36,102 shares of our common stock; 799,856 shares of Series B convertible preferred stock outstanding which convert into 3,199,424 shares of our common stock; 1,192,833 shares of Series C convertible preferred stock outstanding which convert into 5,964,165 shares of our common stock; 175,000 shares of Series D convertible preferred stock outstanding which convert into 1,750,000 shares of our common stock,; and 260,764 shares of Series E convertible preferred stock outstanding, which convert into 7,171,010 shares of our common stock. There are cumulative dividends due on the Series B, Series C, Series D, and Series E convertible preferred stock, which may be paid in kind in shares of our common stock. Our Certificate of Incorporation gives our board of directors authority to issue the remaining undesignated shares of preferred stock with such voting rights, if any, designations, rights, preferences and limitations as they may determine. At December 31, 2003, we have outstanding warrants to purchase 17,387,000 shares of our common stock, outstanding options to purchase approximately 3,495,000 shares of our common stock, and 450,000 stock appreciation rights which are convertible into 289,286 shares of common stock. At December 31, 2003, outstanding convertible promissory notes are convertible into approximately 42,789,000 shares of our common stock. Under the provisions of certain outstanding convertible promissory notes, the holders have the right to receive a warrant to purchase additional shares of common stock upon exercise of the conversion right. We are unable to determine the exact number of additional warrants to purchase shares of our common stock that will be issuable upon conversion of the notes, although it could approximate 13,189,000. At December 31, 2003, we have approximately 1,333,000 shares of our common stock reserved for future stock options and 160,000 shares of our common stock reserved for future sale to employees. WE HAVE A LIMITED OPERATING HISTORY AND THERE ARE DOUBTS AS TO OUR BEING A GOING CONCERN. We have limited operating history. Our revenues, from inception in March 1998 through 2003, were derived almost entirely from sales by Samba Technologies, Sarl, our wholly-owned subsidiary. The assets of Samba were sold on December 19, 2003 as part of the French Commercial Court ordered liquidation and MDI has lost all rights and title to the assets, including Samba's software. MDI has sold only a very limited amount of our InPath System products to date and cannot be certain as to when sales of the Company's products might occur in the future. We will continue to devote substantial resources to product development. We anticipate that we will continue to incur significant losses unless and until some or all of our products have been successfully introduced, if ever, into the market place. We have incurred substantial losses and have limited financial resources. Consequently our independent accountants have noted that these conditions raise substantial doubt as to our ability to continue as a going concern. Our 16 financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that may result from the outcome of this uncertainty. The going concern explanatory paragraph may make obtaining additional financing more difficult or costly. WE CONTINUE TO HAVE SEVERE LIQUIDITY PROBLEMS. We continue to have severe capital problems, which affect our overall ability to operate our business, including the ability to employ adequate staff and conduct ongoing studies and clinical trials of our products. Failure to raise adequate financing to meet our business needs could materially jeopardize MDI and its ability to conduct its business. There can be no assurance that we will be able to secure the necessary funds. WE MAY NOT BE ABLE TO MEET OUR SHORT-TERM CAPITAL REQUIREMENTS. We believe that our existing capital resources are not sufficient to meet the short-term requirements of our Company. These short-term requirements include a significant amount of liabilities and promissory notes in arrears. In addition, we have unpaid tax liabilities for payroll taxes from 2001 and we recently paid the federal payroll tax liabilities for 2002 and 2003 in April 2004. Therefore, we need to raise additional capital to support our operations. We do not have any current commitments for additional funds, and our management cannot be certain that we will be able to raise such funds. It is unlikely that we will be able to meet our short-term funding requirements through the issuance of notes or other debt instruments. We anticipate that these short-term funding needs will require the sale or issuance of additional shares of common stock on instruments convertible into common stock. Such sales or issuances, if any, may have a dilutive effect on the value of our common stock. We cannot be certain what level of dilution, if any, may occur or if we will be able to complete any such sales of common stock in the future Our operating business plan for 2003 anticipated that we would need to raise new equity. We were not able to raise the necessary level of new equity and had to reduce our operations significantly during the year. The lack of sufficient new equity continued through the first quarter of 2004. A failure to raise sufficient additional funds would adversely affect our ability to meet our short-term capital requirements, resume our clinical tests and meet our product timelines, and/or continue as a going concern. WE MAY NOT BE ABLE TO MEET OUR LONG-TERM CAPITAL REQUIREMENTS. We do not know if we will be able to sustain our long-term operations through future revenues. Whether we will need to raise additional funds to support our long-term operations is influenced by many factors, including the costs, timing and success of efforts to develop products and market acceptance of our products. OUR PRODUCTS ARE SUBJECT TO GOVERNMENT REGULATION AND THEY MAY NOT RECEIVE NECESSARY GOVERNMENT APPROVALS. The sale and use of our products in the United States is regulated by the FDA. We must meet significant FDA requirements before we receive clearance to market our products. Included in these FDA requirements is the conduct of lengthy and expensive clinical trials to prove the safety and efficacy of the products. Until we complete such clinical trials our products may be used only for research purposes or to provide supplemental diagnostic information in the United States. We have FDA approval for one of our products, the e2 Collector. We plan to start clinical trials for the CVX System in 2004. We cannot be certain that our product development plans will allow these additional trials to commence or be completed according to plan or that the results of these trials, or any future trials, when submitted to the FDA along with other information, will result in FDA clearance to market our products in the United States. Sales of medical devices and diagnostic tests outside the United States are subject to foreign regulatory requirements that vary from country to country. The time required to obtain regulatory clearance in a foreign country may be longer or shorter than that required for FDA marketing clearance. Export sales of certain devices that have not received FDA marketing clearance may be subject to regulations and permits, which may restrict our ability to export the products to 17 foreign markets. If we are unable to obtain FDA clearance for our products, we may need to seek foreign manufacturing agreements to be able to produce and deliver our products to foreign markets. We cannot be certain that we will be able to secure such foreign manufacturing agreements. WE MAY NOT BE ABLE TO COMPETE WITH COMPANIES THAT ARE LARGER AND HAVE MORE RESOURCES. We compete in the medical device and diagnostics marketplace with companies that are much larger and have greater financial resources than we do. We cannot be certain that our products will be able to be successfully marketed in this competitive environment. WE MAY NOT BE ABLE TO MARKET OUR PRODUCTS. We do not intend to maintain a direct sales force to market our products. Therefore, in order to successfully market our products, we must be able to negotiate profitable sales and marketing agreements with organizations that have direct sales forces calling on domestic and foreign markets that may use the products. If we are not able to successfully negotiate such agreements, we may be forced to market our products through our own sales force. We cannot be certain that we will be successful in developing and training such a sales force, should one be required, or that we will have the financial resources to carry out such development and training. WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY. We hold a variety of patents and trademarks and have applied for a significant number of additional patents and trademarks with the United States Patent and Trademark Office and several foreign patent authorities. We intend to file additional patent and trademark applications as dictated by our research and development projects and business interests. We cannot be certain that any of the currently pending patent or trademark applications, or any of those which may be filed in the future, will be granted. We protect much of our core technology as trade secrets because our management believes that patent protection would not be possible or would be less effective than maintaining secrecy. We cannot be certain that we will be able to maintain secrecy or that a third-party will not be able to develop technology independently. The cost of litigation to uphold the validity of a patent or patent application, prevent infringement or protect trade secrets can be substantial, even if we are successful. Furthermore, we cannot be certain that others will not develop similar technology independently or design around the patent aspects of our products. THE LOSS OF KEY PERSONNEL COULD CAUSE OUR BUSINESS TO SUFFER. The success of our current and future operations will depend, to a significant extent, upon the experience, abilities, and continued services of key personnel, and a significant loss of the services of any of our current executive or research staff could cause our business to suffer. MDI has experienced significant turnover in its senior management and there can be no assurance that we will be able to attract and retain key personnel. We have entered into some employment agreements with our senior executives and do not carry key-man insurance. ITEM 2. PROPERTIES We occupy approximately 5,700 square feet of leased space at 414 N. Orleans St., Suites 510 and 503, Chicago, Illinois 60610, under a five-year lease, which expires in October 2008. This space houses our executive offices, research laboratory, and engineering development. We consider our facilities to be well utilized, well maintained, and in good operating condition. We consider the facilities to be suitable for their intended purposes and to have capacities adequate to meet current and projected needs for our operations. 18 ITEM 3. LEGAL PROCEEDINGS SETTLED DURING 2002 AND 2003 On October 20, 2000, we filed suit in Circuit Court of Cook County, Illinois (Case No. 00 CH 15652), against SpectRx, Inc. and Welch Allyn, Inc. Our suits sought injunctive relief and damages from SpectRx based on a complaint of fraud and breach of certain confidentiality agreements with regard to our business plans, marketing plans, and technology related to in-vivo diagnostic devices. Our claim arose from disclosure of confidential information to SpectRx in the course of negotiations contemplating a joint venture to develop new medical products. The information covered cancer detection systems relying on fluorescence technologies as well as bio-molecular marking agents for use in applications within and outside of the body. We also provided SpectRx with marketing plans, revenue, income and cash flow projections, product development and launch plans, and product distribution strategies. In addition, we provided SpectRx with certain confidential technical information regarding patent applications, measurement technologies, design specifications, quantitative analyses, optimization techniques, positional information for cellular mapping, and other technical specifications. Subsequent to the disclosure of our information to SpectRx, they entered into a business arrangement with Welch Allyn to develop products of a similar nature to ours. The suit also charged SpectRx and Welch Allyn with misappropriation of our trade secrets in violation of the Illinois Trade Secrets Act. Our suit was filed in response to a suit filed by SpectRx in the Superior Court of Gwinnett County, Georgia (Civil Action NO. 00-A-7604 1), seeking a declaratory judgment (but no monetary damages or other relief) that SpectRx did not breach the confidentiality agreements as charged in our suit. On July 5, 2001, we filed counterclaims, similar to the claims outlined in our Illinois suit, to the SpectRx action in Georgia. On February 1, 2002, we reached an out-of- court settlement with SpectRx. Under the terms of the settlement, SpectRx paid a $150,000 lump sum cash payment to us, and we granted SpectRx an option to license certain of our technology. Additional terms of the settlement are confidential. Under the terms of the settlement, neither party admitted any liability or wrongdoing. Welch Allyn also was a party to the settlement agreement. In 2001, Dawn H. Grohs, a former employee/consultant to the Company, filed suit against the Company and certain affiliated companies, as well as two of the Company's senior officers (C.A. No. 02-C-1010 (U.S. District Court for the Northern District of Illinois). Ms. Grohs' claimed fraud, unjust enrichment, misrepresentation, breach of contract and quantum merit related to her assertions that the defendants allegedly failed to provide her with equity; tortuous interference with contractual relations and intentional interference with contractual relations based on alleged encouragement of changes to the business relationship with Ms. Grohs; breach of the covenant of good faith and fair dealing, negligent infliction of emotional distress and intentional infliction of emotional distress based on defendants' treatment of Ms. Grohs; and violation of state law for alleged unfair and deceptive acts by defendants for the purpose of inducing Ms. Grohs to continue to provide services without compensation. Ms. Grohs sought $85,000 in wages, $40,250 in expenses, equity for contributions and efforts during the formation of certain of the Company's affiliates, payment of a sum to be determined by the court for the intentional and/or negligent infliction of emotional distress, a finding that the actions of defendants constitute unfair and deceptive acts, and that the court treble the damages awarded. In addition to the specific relief described above, each count sought an award of attorneys' fees and costs and such other and further relief the court deems just and appropriate. In October 2002, we reached an out-of-court settlement with Ms. Grohs. Under the terms of the settlement, we paid Ms. Grohs $5,000 in cash and issued 400,000 unregistered shares of our common stock to her. We calculated a fair value of $84,000 for the shares of our common stock. We also granted Ms. Gross an option to purchase 400,000 shares of our common stock at an exercise price of $0.20 per share. One third of the option vested immediately and the remaining two thirds vest in equal amounts on the first and second annual anniversary dates of the grant. The Company and its subsidiaries Samba Sarl and AccuMed International, Inc. (collectively, "MDI") are parties to an Amended License and development Agreement with Ventana Medical Systems, Inc. ("Ventana") dated October 31, 2001, pursuant to which MDI has licensed certain intellectual property rights and technical information to Ventana. Under the Amended License and Development Agreement, Ventana was to produce an automated pathology imaging system using the intellectual property rights and technical information licensed from MDI, and Ventana was to pay MDI royalties based on the sales of such imaging system, as well as software support fees related to licensed software rights. MDI and Ventana were also parties to a Letter of Intent and Confidentiality Agreement dated July 12, 2002. Disputes arose between MDI and Ventana regarding their respective performance under the Amended License and Development Agreement and the Letter of Intent. In November 2003, MDI and Ventana negotiated a settlement and release, pursuant to which the Amended License 19 and Development Agreement and the Letter of Intent were modified. Under the terms of the settlement and release, among other things, MDI issued a Promissory Note to Ventana in the principal amount of $62,946 and is also required to deliver two AcCell 2001 workstations. Ventana waived its rights to any prepaid royalties or other fees paid to MDI or its subsidiaries upon signing of the original agreements. PENDING AS OF DECEMBER 31, 2003 AND SETTLED IN 2004 On May 22, 2001, a judgment in the amount of $312,000 plus interest was entered against AccuMed (Circuit Court of Cook County (Case N0. 97 L 7158)) in favor of Merrill Corporation. The judgment was the result of the settlement of an action brought by Merrill claiming unpaid fees for financial printing services, provided to AccuMed in 1996, and related interest and legal costs totaling in excess of $400,000. Under terms of the settlement and the related judgment, AccuMed was required to make 12 monthly payments of $26,000, and a final payment to include all interest accrued on declining unpaid balance of the judgment over the term of payment. AccuMed made 7 payments in accordance with the terms of the settlement and ceased to make any additional payments. In May of 2002, Merrill asserted its rights under the original judgment and filed a citation to discover assets of AccuMed and obtain the remaining amount due. On October 17, 2002, MDI reached an agreement with Merrill whereby MDI assumed responsibility for the remaining unpaid amount of the judgment and related costs totaling $145,000 and agreed to pay such amount no later than November 15, 2002. In February 2004, MDI settled the amount due to Merrill and fully satisfied all obligations owed to Merrill. The citation proceedings against MDI were dismissed. On July 31, 2002, MDI entered into a settlement and mutual release agreement with Trek Diagnostic Systems, Inc. ("Trek") related to a claim of breach of representations and warranties included in an agreement under which AccuMed sold its microbiology business and related assets to Trek in 1999. Under the settlement agreement, MDI executed an $80,000 promissory note in favor of Trek. The note required principal payments of $40,000 each on September 1 and December 1, 2002. MDI made the initial payment and Trek filed suit against MDI (Court of Common Pleas Cuyahoga County, Ohio (Case No. CV 03 492582)) on January 23, 2003 to collect the remaining $40,000 plus interest at 8% per annum and legal and other costs. On April 18, 2003, judgment was entered against MDI in the amount of $40,000 plus interest. Trek initiated citation proceedings against MDI in the Circuit Court of Cook County, Illinois in 2003. In March 2004, MDI entered into a final settlement agreement with Trek and fully satisfied all amounts due to Trek. The citation proceedings against MDI were dismissed. PENDING AS OF DECEMBER 31, 2003 AND MARCH 31, 2004 Prior to our acquisition of AccuMed, Garrett Realty, Inc. filed suit against AccuMed for unpaid rent and related expenses under a lease for premises located at 900 and 920 N. Franklin in Chicago, Illinois (Circuit Court of Cook County (Case No. 01 M1 725821)). Garrett originally claimed approximately $50,000 was due them. Following completion of our acquisition of AccuMed, management vacated AccuMed's leased facility and consolidated its operations into our headquarters facility. However, Garrett continued to claim ongoing rent and amended its complaint in 2002 claiming approximately $148,000 in unpaid rent and related legal costs through July 2002. On July 18, 2002, judgment was entered in favor of Garrett and against AccuMed in the amount of approximately $157,000. On December 20, 2002, pursuant to a court order, Garret seized approximately $12,500 from an MDI bank account, as a partial payment against the judgment amount. The unpaid remainder of the judgment, approximately $136,000 including interest, will continue to accrue interest until paid in full. Since AccuMed had a continuing obligation for the minimum lease payments, MDI recorded a $290,000 lease obligation in accounting for the AccuMed merger based on the present value of the future payments. We are contesting the right of Garrett to pursue collection of the judgment against the assets of MDI. Management believes that the amount of the accrued lease obligation recorded as of December 31, 2003 is sufficient to cover any remaining expenses of this litigation and the related judgment. During the first quarter of 2004, MDI reached a preliminary settlement on the outstanding judgment, which required six monthly payments of $13,724 each. MDI has made the first two required monthly payments. MDI also agreed to issue 280,000 shares of its common stock as part of the final settlement. The issuance of the shares is subject to shareholder approval of an increase in the number of authorized shares of common stock. On March 28, 2003, The Cleveland Clinic Foundation filed suit against MDI (United States District Court for the Northern District of Ohio, Easter Division, (Case No. 1:03CV0561)) seeking approximately $315,000 plus interest and 20 attorney fees and costs. The sum in question pertains to remaining unpaid fees for certain clinical trial work conducted by The Cleveland Clinic Foundation in the Peoples Republic of China on behalf of MDI. On December 8, 2003, a default judgment in the amount of $260,000 was entered against MDI. At December 31, 2003, MDI has recorded the full amount owing to The Cleveland Clinic Foundation as a liability in its accounts. MDI is currently engaged in settlement discussions with The Cleveland Clinic Foundation. On January 2, 2003, Bowne of Chicago, Inc. ("Bowne") filed suit against MDI (Circuit Court of Cook County, County Department-Law Division (Case No. 03 L 000009)) claiming approximately $342,000, plus interest and attorney fees and costs, related to financial printing service fees provided to MDI by Bowne during the period October 25, 2001 through November 7, 2002. While MDI is actively defending itself against the suit claiming the charges for printing services provided during the period mentioned above were excessive, management has taken a conservative position and recorded the entire amount of the Bowne invoices as outstanding accounts payable on the records of MDI. MDI is currently engaged in settlement discussions with Bowne. On January 9, 2003, Monsun, AS ("Monsun") filed suit against Peter Gombrich, our Chairman, (United States District Court for the Northern District of Illinois Eastern Division (Case No. 03C 0184)) claiming $500,000 plus consequential damages for failure to make payment in compliance with the terms of a personal guaranty signed by Mr. Gombrich in relation to Monsun's grant of an extension in the maturity date of a convertible promissory note in the principal amount of $500,000 issued by MDI on November 1, 2000. The note had an original maturity date of November 1, 2001. The maturity date of the note was initially extended until January 31, 2002 and subsequently to April 1, 2002 and finally to July 31, 2002. Monsun granted the maturity date extensions in exchange for various warrants issued by MDI entitling the holder to purchase shares of our common stock at various prices. In November 2002, our Board of Directors approved the issuance of 200,000 shares of our common stock to Monsun to satisfy a default penalty clause in the guaranty. The terms of the guaranty required that Monsun receive registered shares of our common stock; however, in order to comply with securities laws, we issued the shares of our common stock to Monsun with a restrictive legend, which permits their sale only in compliance with Rule 144 of the ACT. MDI has recorded the principal amount of the note plus accrued and unpaid interest to December 31, 2003 as a note payable on its records. In March of 2004, Monsun obtained a judgment against Mr. Gombrich in the amount of $675,000. Monsun is currently seeking to obtain an additional $545,000 to cover legal fees and costs incurred in enforcing the Guaranty Agreement. Since Mr. Gombrich's potential liability under the suit, including the failure to deliver registered shares of our common stock, is the result of the failure of MDI to pay the principal amount of its convertible promissory note when due, our Board of Directors has agreed that MDI will assume responsibility for Mr. Gombrich's obligations under the guaranty, including legal costs. Management and counsel are unable to determine the result of this pending litigation as of March 31, 2004. We are the defendant in several lawsuits brought by current or former unsecured creditors to collect past due amounts for goods and services. MDI has recorded the amounts due in its records and is attempting to settle these suits and unfiled claims. MDI is a defendant in several wage claims brought by former employees seeking to collect amounts due for unpaid wages and severance benefits. MDI has recorded the amounts due in its records and is attempting to settle these actions On May 16, 2003, the Company, together with its subsidiaries, AccuMed International, Inc. ("AccuMed") and Oncometrics Imaging Corp. ("Oncometrics"), filed suit against MonoGen, Inc. ("MonoGen"), its President, Norman J. Pressman ("Pressman"), and another individual, in the Circuit Court of Cook, County, Illinois (Docket No. 03 CH 08532) (the "State Case"). The dispute that gave rise to the State Case arose out of two license agreements, one between AccuMed and MonoGen, and the other between Oncometrics and MonoGen, in which the rights to limited use of certain intellectual property were granted to MonoGen in return for one-time license fee payments totaling $500,000 (the "License Agreements"). At the time the License Agreements were entered into, the Company had not yet acquired AccuMed and Oncometrics. A portion of the intellectual property subject to the License Agreements was originally licensed by Oncometrics from an entity now known as the British Columbia Cancer Agency ("BCCA"). Pressman was the President of both AccuMed and Oncometrics when the License Agreements were negotiated and executed. Shortly after the License Agreements were signed, Pressman became the President of MonoGen. The Complaint filed in the State Case (the "State Case Complaint") alleged that certain rights to the subject intellectual property were transferred to MonoGen at a below-market price. The State Case Complaint also asserted that the consent of BCCA to the sublicensing of its technology, 21 which was required by the Oncometrics License Agreement, had not been obtained, and that, to the extent BCCA's consent was required, Pressman breached his fiduciary duties to AccuMed and Oncometrics by failing to obtain such consent. The State Case Complaint also alleged that Pressman breached his fiduciary duties by negotiating below-market license fees for the subject technology with his future employer, MonoGen. Almost a year before the State Case Complaint was filed, MonoGen had, in July, 2002, initiated an arbitration proceeding against the Company, AccuMed and Oncometrics (collectively, the "MDI Group") in which MonoGen claimed that the MDI Group was violating MonoGen's rights, and breaching many of the MDI Group's obligations, under the License Agreements. In an effort to resolve this dispute, the MDI Group and MonoGen entered into a settlement agreement (the "Technology Agreement") as of December 23, 2002, pursuant to which certain understandings were reached, including an agreement concerning the MDI Group's sales of certain systems to a number of specifically identified customers, and the royalties to be paid by the MDI Group to MonoGen based on those sales. The Technology Agreement, which also included an arrangement for the MDI Group's maintenance of the patents licensed to MonoGen, did not have the desired effect of finally resolving the dispute among the parties. Thus, the MDI Group filed the State Case Complaint. MonoGen was able to obtain a dismissal for itself from the State Case on the ground that all disputes arising from the agreements with the MDI Group members were required to be submitted to arbitration. The State Case continued against the individual defendants. In July 2003, MonoGen proceeded to file a Second Demand for Arbitration against the members of the MDI Group, but no proceedings were held with respect to that demand. In December, 2003, MonoGen filed a Third Amended Demand for Arbitration, in which MonoGen alleged that the MDI Group had breached its agreements with MonoGen by, among other things, (i) licensing other parties to use technologies that the MDI Group exclusively licensed to MonoGen, (ii) not maintaining the patents that were the subject of the MDI Group's licenses to MonoGen, and (iii) not providing MonoGen with information in regard to improvements made to the technologies licensed to MonoGen by the MDI Group. MonoGen also claimed that the MDI Group had defamed MonoGen in statements impugning MonoGen's rights to the licensed technologies. The MDI Group has denied MonoGen's claims, and has asserted in a counterclaim that the agreements relied upon by MonoGen are invalid. The parties are presently engaged in discovery with respect to this arbitration and the claims asserted in the arbitration are scheduled for a hearing before a panel of American Arbitration Association arbitrators in June, 2004. Because the same basic issues were involved in both the State Case and the arbitration proceeding, and because the License Agreements and the Technology Agreement can only be declared invalid in the arbitration proceedings, the MDI Group decided to concentrate all of its efforts in regard to this matter in the arbitration and therefore entered into an agreement with the remaining defendants in the State Case in February, 2004 to have that suit fully and finally dismissed. On April 14, 2003, we received a notification from the attorney for the licensor, Dr. Bruce Patterson, under the License and Development Agreement covering certain HPV technology, which forms the basis for our In-Cell HPV test, indicating that the licensor intended to terminate the license in accordance with a specific clause of the license, which permits termination in the event the Company makes an assignment for the benefit of creditors or bankruptcy, or otherwise relinquishes or loses control of all its assets. On April 15, 2003, we informed the attorney that the facts used by the licensor to invoke the termination right were incorrect and that we are still in control of all of our assets and that such assets are pledged as security under debt instruments and that such pledges are not included under events which would permit the licensor to terminate the license. We, and our counsel, believe that MDI would prevail should the licensor attempt to pursue a termination action. On July 2, 2003, Dr. Patterson and his company Invirion, Inc. filed suit against MDI in the Circuit Court of Cook County, Illinois (Case No. 03 L 7995). Dr. Patterson seeks approximately $86,000 that he claims is due from MDI under an agreement for his scientific consulting services. This is a dispute with the licensor over completion of the third milestone of the license under which completion requires process and procedure verification by an independent third party. This verification requirement has not been satisfied as of yet, and therefore MDI is contesting this claim. Invirion, in a separate claim, seeks approximately $57,500 for certain HPV test kits that it claims were sold to MDI. MDI is engaged in settlement discussions with Dr. Patterson and Invirion to resolve all outstanding issues. On November 18, 2003, the Medical College of Georgia Research Institute, Inc. filed suit against MDI in the Superior Court of Richmond County, Georgia (Case No. 2003-RCCV-1211) to collect amounts allegedly due pursuant to an 22 agreement to provide a clinical study for MDI. Georgia Research Institute claims that the principal amount of the obligation due from MDI is approximately $86,700. However, Georgia Research Institute is seeking to collect approximately $315,300 pursuant to an interest provision of 10% per month. MDI is contesting this lawsuit, but has made attempts to resolve this dispute by settlement. NEW PROCEEDINGS 2004 On February 18, 2004, current and former employees Daniel Kussworm, Jennifer Kawaguchi, and Susan Keesee filed suit against MDI and one of its officers in the Circuit Court of Cook County, Illinois (04 L 1941). These individuals are seeking to recover wages and other compensation allegedly due to them. Mr. Kussworm seeks approximately $68,600, Ms. Kawaguchi seeks approximately $37,200, and Ms. Keesee seeks approximately $124,800; all amounts exclude interest, court costs, and attorney fees. MDI is engaged in settlement discussions with these three individuals to resolve all outstanding issues. MDI received information that on January 29, 2004, the law firm Ungaretti & Harris filed suit against Accumed International Inc. in the Circuit Court of Cook County, Illinois (04 L 1101), to collect for fees rendered prior to December 31, 2003. Although Accumed has not been formally served with summons and has not seen the legal complaint, it is believed that Ungaretti & Harris is seeking to collect approximately $179,230. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of shareholders during the fourth quarter of 2003. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Our common stock is quoted on the Nasdaq Over-the-Counter Bulletin Board Market under the symbol "MCDG" (prior to September 25, 2001 our common stock traded under the symbol "AMPM"). Between May 27, 2003 and October 6, 2003 our common stock traded on the Over-the-Counter Pink Sheet Market under the symbol MCDG. AccuMed's common stock was quoted on the Nasdaq Over-the-Counter Bulletin Board under the symbol "ACMI". The following table lists the high and low closing sale prices per share of our common stock for the periods indicated, as reported on the Nasdaq Over-the-Counter Bulletin Board. These prices represent prices between dealers, and may not include retail mark-ups, mark-downs, or commissions and may not reflect actual transactions. CLOSING SALES PRICE RANGE OF COMMON STOCK ----- HIGH LOW ---- --- Year Ended December 31, 2003 1st Quarter.................................... $ 0.21 $ 0.08 2nd Quarter.................................... $ 0.42 $ 0.20 3rd Quarter.................................... $ 0.37 $ 0.21 4th Quarter.................................... $ 0.25 $ 0.15 Year Ended December 31, 2002 1st Quarter.................................... $ 1.190 $ 0.820 2nd Quarter.................................... $ 1.120 $ 0.690 3rd Quarter.................................... $ .750 $ 0.380 4th Quarter.................................... $ .340 $ 0.130 23 HOLDERS As of March 31, 2004, we had approximately 1,383 record holders of our shares of common stock. This number does not include other persons who may hold only a beneficial interest, and not an interest of record, in our common stock. DIVIDENDS We have not paid a cash dividend on common shares, and the Board of Directors is not contemplating paying one for the foreseeable future. We paid non-cash dividends, in the form of newly issued shares of our common stock, amounting to $444,297 and $392,869 during 2003 and 2002 respectively, to holders of preferred stock who elected to convert their preferred shares and cumulative dividends into our common stock. We have a contingent obligation to pay cumulative dividends on various Series of convertible preferred stock in the amount of $3,039,000, which we intend to pay through the issuance of shares of our common stock, if and when the holders of the preferred shares elect to convert their shares into our common stock. Cumulative dividends for various Series of convertible preferred stock total approximately $4,768,000 at December 31, 2003, including $1,552,000 in deemed dividends arising as a result of beneficial conversion features on Series' B and C convertible preferred stock sold during 2001. STOCK TRANSFER AGENT Our stock transfer agent is LaSalle Bank NA, 135 South LaSalle Street, Chicago, IL 60603, and its telephone number is (312) 904-2000. RECENT SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS Beginning in October 2002, MDI began an issue of up to $4,000,000 in series Bridge II Convertible Promissory Notes to accredited investors. MDI issued $550,000 in Bridge II notes as of December 31, 2002. From January 1, 2003 through the closing of the offering on December 5, 2003, MDI issued Bridge II Convertible Promissory Notes in the principal amount of: $1,980,200 in exchange for cash, $1,060,000 as a conversion of a Bridge I Convertible Promissory Note and $305,667 in exchange for a note payable from Peter P. Gombrich, the Company's Chairman, for a total issuance during the year of $3,345,867. The notes bear interest at a rate of 12% per annum payable at the maturity date in kind in the form of shares of common stock of MDI. The Company granted the holders a junior security position in all of its assets. The notes are convertible at any time into the common stock of MDI. The note conversion price and the value of common shares paid in kind as interest for the first $1,000,000 in principal amount of cash subscriptions, determined on a "first come - first served basis," is $0.10 per share. The note conversion price and the value of common shares paid in kind as interest for the remaining $3,000,000 of principal amount of notes in the series is $0.15 per share. The conversion price of the notes issued during 2002 and those issued during 2003 was less than the market price of the common stock when the notes were issued; therefore, the holders are considered to have a beneficial conversion feature. MDI determined the value of the beneficial conversion feature to be $1,777,200 and $330,000 at December 31, 2003 and December 31, 2002, respectively. The value was recorded as a reduction of the debt and will be amortized as additional interest over the life of the note. MDI recorded additional interest expense of $1,826,743 to reflect amortization of the discount during the twelve months ended December 31, 2003. The Bridge II notes automatically convert into shares of Common Stock (subject to adjustments for stock splits, etc.) upon a "Qualified Financing Transaction," which means a transaction in which the Company closes a new debt or equity financing prior to the maturity date that results in net proceeds to the Company of at least four million dollars ($4,000,000). At the time MDI completes significant additional funding plans, as outlined in the subscription agreement, each holder of Bridge II notes is entitled to receive a warrant to purchase one share of the common stock of the Company for each four shares of common stock into which the note is convertible at an exercise price of $0.15 per share for notes in the class pertaining to the first $1,000,000 in subscriptions and $0.20 for the remaining $3,000,000 in note principal subscriptions. In September 2003, an amendment to the Bridge II Convertible Promissory Notes was sent to holders requesting an extension of the notes to July 31, 2004. As additional consideration for the extension, holders were offered an increase in the interest rate from 12% to 15%. In addition, an amendment to the indenture also offered an increase in the warrant coverage ratio from 25% to 33%. The Bridge II offering was closed as of December 5, 2003. 24 In January 2003, MDI issued 1,000,000 shares of common stock in exchange for services to a non-employee professional services firm. MDI calculated a fair value of $100,000 for these shares based on the value of the shares on the date of the issuance and recorded the amount as investor relations expense as of March 31, 2003. On April 2, 2003, MDI issued a $1,000,000 Convertible Promissory Note to an affiliate, Suzanne M. Gombrich, the wife of Peter Gombrich, MDI's Chairman, in exchange for cash. The note bore interest at the rate of 12% per annum and was convertible into the common stock of MDI at a conversion price of $0.10 per share. As additional consideration, MDI granted the holder a warrant to purchase 1,000,000 shares of the common stock of MDI at an exercise price of $0.15 per share. MDI also granted the holder a first priority security interest in all of the Company's assets. MDI used all of the cash proceeds from the note to fund the $100,000 cost of an option to repurchase all of its assets from Round Valley Capital, LLC and to make the $900,000 payment required to exercise the purchase option in conjunction with the final settlement of the loan with Round Valley Capital, LLC. On April 2, 2004, in conjunction with the release of funds from the Bathgate Capital Partners offering, the Convertible Promissory Note due to Suzanne M. Gombrich was paid in full and her first priority security interest in all the Company's assets was released. The payment on the $1,000,000 Convertible Promissory Note and $126,113.52 of accrued interest as of April 2, 2004 was in the form of $936,114 in cash and 1,900,000 shares of common stock of the Company. May 2003, MDI issued 875,000 shares of common stock in exchange for services to a non-employee professional services firm. MDI calculated a fair value of $218,750 for these shares based on the market value of the shares on the date they were due and is amortizing the amount over the remainder of the service contract. In June 2003, MDI issued 83,642 shares of common stock to a non-employee service vendor in lieu of payment for unpaid service invoices. MDI determined the value of the shares to be $12,463, which represented the amount of the unpaid invoices. In July 2003, MDI issued 1,400,000 shares of common stock to non-employees for past and future financing and consulting services. MDI calculated a fair value of $504,000 for these shares based on the fair market value of the shares on the date they were issued. Of the total amount, $216,000 is being amortized over the life of the services contract. In August 2003, MDI issued 170,000 shares of common stock to a non-employee financial consultant for past financing services. MDI valued the shares at $51,000. In October 2003, MDI issued 133,333 shares of common stock to a non-employee supplier in lieu of payment for unpaid invoices. MDI valued the shares at $18,935. In December 2003, MDI issued 550,000 and 100,000 shares of common stock to two non-employee service vendors in lieu of payment for current and future services. MDI valued the shares at $81,950 and $15,900, respectively. In August 2003, MDI issued 1,100,000 warrants with an exercise price of $0.17 per share to a non-employee financial consultant for past financial services. MDI valued the warrants at $341,000 using the Black-Scholes valuation model and recorded the amount as a current year administrative expense. In September 2003, MDI issued 1,335,000 warrants with an exercise price of $0.20 per share to non-employee financial consultants for past financial services. MDI valued the warrants at $347,100 using the Black-Scholes valuation model and recorded the amount as a current year administrative expense. In September 2003, MDI issued 500,000 warrants with an exercise price of $0.17 per share to a non-employee consultant in lieu of payment for current and future services. MDI valued the warrants at $150,000 using the Black-Scholes valuation model and is amortizing the amount over the twelve-month period of the consulting term. In November 2003, MDI issued 92,145 warrants with an exercise price of $0.20 per share to Bridge I investors upon conversion of their notes per the indenture agreement. MDI valued the warrants at $16,586 using the Black-Scholes valuation model and recorded the amount as a current year administrative expense. 25 In 2003, holders converted 35,437 shares of Series A convertible preferred stock into 15,478 shares of unregistered common stock. In 2003, a holder converted 66,000 shares of Series C convertible preferred stock, including dividends due thereon as of the conversion date, into 380,403 shares of unregistered common stock. In 2003, holders of the Bridge I convertible promissory notes converted notes and accrued interest totaling $55,287 into 368,579 shares of unregistered common stock. In 2003, holders of the Bridge II convertible promissory notes converted notes and accrued interest totaling $510,300 into 5,103,000 shares of unregistered common stock. We issued the common stock, convertible promissory notes, and warrants pursuant to exemptions under Section 4(2) of the Securities Act of 1934 as amended. * All of the above offerings and sales were deemed to be exempt under rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of the Company or executive officers of the Company, and transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings. EQUITY COMPENSATION PLAN INFORMATION
EQUITY COMPENSATION PLAN INFORMATION PLAN CATEGORY NUMBER OF SECURITIES WEIGHTED-AVERAGE NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE PRICE OF REMAINING AVAILABLE FOR EXERCISE OF OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER EQUITY OUTSTANDING OPTIONS, WARRANTS, AND RIGHTS COMPENSATION PLANS WARRANTS AND RIGHTS (EXCLUDING SECURITIES REFLECTED IN COLUMN (A)) EQUITY COMPENSATION PLANS APPROVED BY SECURITY (A) (B) (C) HOLDERS 1999 EQUITY INCENTIVE PLAN AS AMENDED - 5,500,000 SHARES 3,494,648 $1.1733 1,332,685 1999 EMPLOYEE STOCK PURCHASE PLAN - 200,000 SHARES -- -- 160,415 EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS WARRANTS ISSUED WITH DEBT (1) 7,964,645 $0.4835 0 WARRANTS ISSUED FOR FINDERS SERVICES (2) 4,705,192 $0.4864 0 WARRANTS ISSUED FOR IR SERVICES (3) 680,000 $0.8603 0 WARRANTS ISSUED OF OTHER SERVICES (4) 1,051,493 $0.0861 0 WARRANTS ISSUED FOR ASSET ACQUISITIONS (5) 172,120 $0.82 0 WARRANTS FROM ACCUMED ACQUISITION (6) 1,074,056 $7.1769 0 (7)
26 1) MDI has and will most likely continue to attach warrants to issuances of debt as an additional consideration to debt holders in lieu of payment of higher interest rates on the debt, which would be required based on market interest rates prevalent at the time of the debt issuance and the significant level of risk involved based on the financial condition of MDI. 2) MDI has and will most likely continue to issue warrants to financial advisors who act as finders in the placement of MDI's debt or equity instruments. The issuance of warrants to these advisors significantly reduces the cash costs, which would otherwise be associated with raising debt or equity. 3) MDI has generally included warrants in compensation agreements for providers of investor relations and or public relations services. This practice significantly reduces the cash costs to MDI to obtain these services. 4) From time to time, MDI has issued warrants to providers of legal and consulting services in lieu of cash payments for those services. During 2002, MDI issued a warrant to a law firm entitling the holder to purchase 750,000 shares of MDI's common stock at an exercise price of $0.01 per share in settlement of fees due to the firm arising from the settlement of litigation. A non-employee consultant also agreed to accept a warrant in lieu of approximately $51,000 in unpaid consulting fees due. 5) During 2001, MDI issued warrants under an agreement to acquire a thirty percent (30%) interest in Cell Solutions, Inc., a company assisting in the development of MDI's products. 6) In September 2001, MDI completed the acquisition of AccuMed International, Inc. by merging it into a wholly owned subsidiary of MDI. As a result, MDI assumed stock options and warrants outstanding on the records of AccuMed at the time of the acquisition. The remainder of the options that were assumed in the acquisition are included in total options outstanding under the Equity Incentive Plan. 7) See Footnotes No. 8: Stockholders' Equity and No. 11: Equity Incentive Plan and Employee Stock Purchase Plan to the Consolidated Financial Statements for additional specifics on the Plans listed above and other issuances of equity for compensation. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW We were incorporated in Delaware on December 15, 1998, as the successor to Bell National Corporation, which was incorporated in California in 1958. On December 4, 1998, Bell National, then a shell corporation without any business activity, acquired InPath, LLC, a development-stage company engaged in the design and development of products used in screening for cervical and other types of cancer. In the acquisition, Bell National issued 4,288,790 shares of common stock and warrants to purchase 3,175,850 shares of common stock to the members of InPath in exchange for their membership interests. The senior executives of InPath assumed management control of the Company. For financial reporting and accounting purposes, the acquisition was accounted for as a reverse acquisition whereby InPath was deemed to have acquired Bell National. However, Bell National was the continuing legal entity and registrant for SEC filing purposes and income tax filing purposes, until its merger into Ampersand in May 1999. Because Bell National was a non-operating public shell company with nominal assets and InPath was a private operating company, the acquisition was recorded as the issuance of stock for the net monetary assets of Bell National, accompanied by a recapitalization and no goodwill or other intangible assets were recorded in accordance with generally accepted accounting principles. 27 On September 25, 2001, the Company changed its corporate name to "Molecular Diagnostics, Inc." in order to better represent its operations and products. The name change was effected by the merger of Ampersand's wholly owned subsidiary, Molecular Diagnostics, Inc., with and into Ampersand. The Company retained its Certificate of Incorporation, except as amended to reflect its new name, bylaws and capitalization. The Company is focused on the design, development and marketing of the InPath System of products. These products are intended to screen for cancer and cancer related diseases. These products may be used in a laboratory, clinic or doctor's office. The Company had a wholly owned subsidiary, Samba Technologies, Sarl. Samba designed, developed, and marketed web-enabled software based systems for image analysis, image capture, and image transmission and management for clinical and industrial applications. A significant portion of 2002 revenues and nearly all revenues reported for prior periods, since the inception of the Company, were generated by Samba. Since December 20, 2002, Samba operated under the protection of the French Commercial Court in compliance with the bankruptcy laws of France. On December 19, 2003 the French Commercial Court finalized the liquidation sale of Samba's assets. As of the date of the sale, we lost all rights and title to Samba's assets, and we reflected this involuntary liquidation in our December 31, 2003 financial statements. While the bankruptcy sale of Samba's assets impacts our ability to generate revenue in the short-term, we do not believe that sale of Samba's assets will have a negative material impact on our operations. On September 17, 2001, the Company completed its acquisition of AccuMed pursuant to a merger. In consideration for the acquisition, the Company issued 3,911,245, shares of its common stock to holders of AccuMed common stock, and 218,438 shares of its Series A convertible preferred stock to holders of AccuMed Series A preferred stock. The value of the transaction, based on the fair value of the shares of common stock and preferred stock issued by the Company, the value of options and warrants assumed, the direct acquisition costs incurred, and the fair market value of tangible and intangible assets purchased, as determined by a third-party valuation, was approximately $14,178,000. On October 11, 2001, MDI obtained a 30% investment in Cell Solutions, LLC. Cell Solutions was formed for the purposes of developing and improving slide preparation systems. As consideration, MDI provided Cell Solutions five-year warrants to purchase 172,120 shares of common stock with an exercise price of $0.82. These warrants were valued using Black-Scholes and determined to have a value of $127,000. MDI included the value of these warrants as an investment at December 31, 2001. MDI determined the fair value of the investment to be impaired at December 31, 2001. The investment was written down to zero as a result of the uncertainty of future benefit or revenue stream. MDI is contractually committed to issue a total of 1,549,086 warrants with the same terms based upon delivery of certain products by Cell Solutions. As of December 31, 2003, Cell Solutions had not delivered these products and MDI was not liable for the issuance of the warrants. The Company has incurred a significant operating loss since its inception. The Company has raised approximately $31,682,000 since March 1998. The Company expects that significant on-going operating expenditures will be necessary to successfully implement its business plan and to develop, manufacture and market its products. These circumstances raise substantial doubt about the Company's ability to continue as a going concern. Implementation of the Company's plans and its ability to continue as a going concern may depend upon it securing substantial additional financing. Management's plans include efforts to obtain additional capital. During 2003 and 2002, we raised approximately $4,346,000 and $3,825,000, respectively through the issuance of short-term convertible debt. During 2004, through April 2, we raised an additional $2,792,000 through the issuance of long-term convertible debt. There can be no assurance that the Company will continue to be successful in raising capital. If the Company is unable to obtain additional capital or generate profitable sales revenues, the Company may be required to curtail its product development and other activities and may even be forced to cease operations. As mentioned in Item 1, for financial reporting and accounting purposes, we treated the acquisition of InPath by Bell National as if InPath had acquired Bell National. We recorded the issuance of common stock, combined the equity of the two companies, and did not record any goodwill. Information presented in our Consolidated Financial Statements includes the operations of InPath from March 16, 1998 (inception) and the operations of the combined company from December 4, 1998. 28 SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION. Molecular Diagnostics, Inc. recognizes revenue upon shipment of product or license to customers and no remaining Company obligations or contingencies exist. Revenue from training services and professional services is recognized when the service is completed LICENSE, PATENTS, AND TECHNOLOGY. Licenses, patents, and purchased technology are recorded at their acquisition cost. Costs to prepare patent filings are capitalized when incurred. Costs related to abandoned or denied patent applications are written off at the time of abandonment or denial. Amortization is begun as of the date of acquisition or upon the grant of the final patent. Costs are amortized over the asset's useful life, which ranges from two to seventeen years. The Company assesses licenses, patents, & technology quarterly for impairment. STOCK COMPENSATION. As permitted by the Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123), Molecular Diagnostics, Inc. uses the intrinsic value method to account for stock options as set forth in Accounting Principles Board No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25). APPLICATION OF BLACK-SCHOLES VALUATION MODEL. In applying the Black-Scholes valuation model, the Company has used an expected dividend yield of zero, a risk-free interest rate of 5% and 6% for 2003 and 2002, respectively, a volatility factor of 208% and 90% for the 2003 and 2002 periods, respectively, and a fair value of the underlying common shares of closing market price on the date of the grant for both periods. The expected life equaled the term of the warrants, options, or restricted shares. REVENUE Revenues for the year 2003 were $379,000, a decrease of $338,000, or 47%, over revenues for the year 2002. The 2003 revenue decrease was the result of decreases in the sales of AccuMed related products and services. Revenues for the year 2002 were $717,000. Revenues and related costs and expenses have been adjusted to reflect the liquidation of MDI's French subsidiary, Samba, and its reclassification as a discontinued operation. COSTS AND EXPENSES COST OF GOODS SOLD Cost of goods sold for 2003 amounted to $143,000, a decrease of $103,000, or 42%, over 2002 cost of goods sold. The decrease was primarily the result of a reduction in the number of AcCell instruments sold during the year. Cost of goods sold for 2002 amounted to $246,000. RESEARCH AND DEVELOPMENT We devote a substantial amount of our resources to research and development ("R&D") related to our products, including markers, tests, instruments and software applications. In 2003, our R&D expenses were $580,000, a decrease of $2,672,000, or 82% over 2002 expenses. The decrease was the result of not having a clinical trial in process during 2003, which provided a $1,585,000 reduction in trial costs and related reductions in payroll of $305,000 and consulting fees of $699,000. In 2002, our R&D expenses were $3,252,000, a decrease of $552,000, or 15%, over 2001 R&D expenses. The decrease was the result of reductions in product development costs because the majority of product development was completed in prior years, and a corresponding reduction in consulting costs. R&D expenses consist of costs related to specific development programs with scientists and researchers at universities and hospitals; full scale device development contracts begun during 1999 with industrial design and manufacturing companies covering the disposable and instrument components of the InPath System; payments to medical 29 and engineering consultants for advice related to the design and development of our products and their potential uses in the medical technology marketplace, and payroll related costs for in-house engineering, scientific, laboratory, software development; and research management staff. In order to reduce the cash impact of our R&D expenses, a portion of the compensation paid to consultants may be in the form of awards of our common stock (with restrictions attached) or grants of options to purchase our common stock. Since these awards and/or option grants cover services to be performed over a future time period, we are required to calculate their market value at the end of each reporting period until the work is complete. Included in the above R&D expense amounts for 2003 and 2002 are non-cash expenses of $12,000 and $92,000, respectively, related to the calculated cost of these share awards and options that were charged to expense in each period. SELLING, GENERAL AND ADMINISTRATIVE Significant components of SG&A are compensation costs for executive, sales and administrative personnel, professional fees primarily related to legal or accounting services, travel costs, fees for public and/or investor relations services, insurance premiums, recruitment fees, marketing related costs, amortization and depreciation. In 2003, selling, general and administrative expenses ("SG&A") were $6,230,000, a decrease of $1,490,000, or 19% over similar expenses of 2002. The decrease includes: $964,000 in legal expenses, $921,000 in payroll related to the staffing reductions and a $1,384,000 reduction in professional costs and other general and administrative costs related to the overall expense reduction plan. These reductions were offset by an increase in financing costs of $1,969,000 related to the Bridge II offering finders fee costs. In 2002, selling, general and administrative expenses ("SG&A") were $7,720,000, an increase of $1,696,000, or 28%, over similar expenses for 2001. The increase includes: $780,000 in legal expenses related to various public and private offerings as well as increased litigation costs related to the RVC loan transaction; $406,000 in financing cost primarily related to the RVC loan transaction; $597,000 in printing, accounting and other professional fees related to the aforementioned offerings; and approximately $450,000 in additional amortization resulting from the AccuMed acquisition. These increases were offset by reductions of $250,000 reduction in investor relations expenses and $250,000 in administrative related payroll expenses. In order to reduce our cash SG&A expenses, we may issue shares of our common stock (with restrictions attached) or grant options, or warrants to purchase shares of our common stock in lieu of compensation or payments for financial advisory work, including advice on deal structure, finder fees, investor relations and introductory services, and general financial and investment advice. If the services are completed, we record an expense based on the value of the services. If the services are to be completed over a future period of time, we are required to calculate a market value for the shares, options, or warrants at the end of each reporting period until the services are completed. Included in the above SG&A expense amounts for 2003 and 2002 are non-cash expenses of $1,906,000 and $1,078,000, respectively, related to the calculated cost of these share awards, options and warrants, charged to expense in each period. IMPAIRMENT LOSS In 2003, MDI recorded an impairment loss of $283,000. This loss was comprised of the write-off of the full amount of MDI's goodwill recorded on the acquisition of AccuMed. At December 31, 2003, management determined several factors, principally that contracts and sales relating to the AccuMed products failed to materialize, indicating that the carrying value of goodwill from the AccuMed acquisition was impaired. OTHER INCOME AND EXPENSE INTEREST INCOME We had no interest income during 2003 and 2002. 30 INTEREST EXPENSE In 2003, our interest expense amounted to $3,255,000, an increase of $1,668,000, or 105% over 2002 interest expense. The increase related to an increase of $1,236,000 in amortization of debt discount arising from the beneficial conversion feature of Bridge II convertible promissory notes and $1,500,000 in Bridge II interest expense on the promissory notes. The increases were offset by a reduction in interest expense of $1,050,000 related to the return shares and warrants related to the payoff of the RVC loan in 2003. In 2002, our interest expense amounted to $1,587,000, an increase of $1,070,000, or 207% over 2001 interest expense. The entire increase can be attributed to the amortization of debt discount arising from the beneficial conversion feature of Bridge I and Bridge II convertible promissory notes. OTHER INCOME AND EXPENSE, NET In 2003, MDI recorded a $308,000 in Other Income and Expense, net, which included $525,000 in restructuring income due to the beneficial settlement of outstanding accounts payable. In addition, the Company recorded the realization of a currency translation loss of $220,000 related to the former Samba operations. In January 2002, MDI received $150,000 as an out-of-court settlement of a lawsuit. OPERATION FROM DISCONTINUED OPERATIONS/GAIN FROM INVOLUNTARY CONVERSION The Company's subsidiary Samba, which had maintained its normal operations under the protection of the French Commercial Court, during the 2003 was liquidated by the court appointed Administrator on December 19, 2003. Upon the December 19, 2003 bankruptcy liquidation sale, we lost all rights and title to the Samba's assets and reflected a loss from discontinued operations of $75,000 and a gain from involuntary conversion of $292,000 in 2003. The 2002 Samba operating activity was also restated to reflect the loss from discontinued operations, which amounted to a net loss of $23,000. NET LOSS Our net loss for 2003 was $9,587,000. Cumulative dividends for 2003 on the outstanding Series B convertible preferred stock, Series C convertible preferred stock, Series D convertible preferred stock, and Series E convertible preferred stock totaled $1,473,000. The combined total of the loss and the preferred dividends results in a net loss applicable to common stockholders of $11,060,000, or $0.27 per share on 40,695,186 weighted average shares outstanding. The 2003 weighted average shares outstanding reflect additional shares issued during the year and shares issued as the result of the conversions of Bridge I and II Convertible Promissory Notes and shares of Series C convertible preferred stock, Series E convertible preferred stock, and their related cumulative dividends into our common stock. Our net loss for 2002 was $11,960,000. Cumulative dividends for 2002 on the outstanding Series B convertible preferred stock, Series C convertible preferred stock, Series D convertible preferred stock, and Series E convertible preferred stock totaled $2,012,000. The combined total of the loss and the preferred dividends results in a net loss applicable to common stockholders of $13,972,000, or $0.49 per share on 28,704,245 weighted average shares outstanding. The 2002 weighted average shares outstanding reflect additional shares issued during the year and shares issued as the result of the conversions of shares of Series B convertible preferred stock, Series C convertible preferred stock, and Series E convertible preferred stock, and their related cumulative dividends into our common stock. They also reflect the issuance of 5,750,000 of our common stock as additional collateral on the RVC loan. Although these shares are treated as issued and outstanding at December 31, 2002, they were returned to MDI in 2003 and we cancelled them in April of 2003. If we had not treated these shares as outstanding at December 31, 2002 the net loss applicable to common stockholders would have been $0.52 per share. LIQUIDITY AND CAPITAL RESOURCES R&D, clinical trials and other studies of the components of our InPath System, conversions from designs and prototypes into product manufacturing, initial sales and marketing efforts, medical consultants and advisors, and research, 31 administrative, and executive personnel are and will continue to be the principal basis for our cash requirements. We have provided operating funds for the business since its inception through private offerings of debt and equity to limited numbers of U.S. and foreign accredited investors. We may be required to make additional offerings in the future to support the operations of the business until some or all of our products are introduced into the market. We used $2,989,000 and $4,227,000 during 2003 and 2002, respectively, in operating activities. We had severe liquidity problems during 2003. As a result, we were forced to cut staff and reduce our operations to a minimum level. Officers refrained from drawing salaries during the first quarter as well as parts of the second, third and fourth quarters of 2003 in order to reduce demands on our limited cash position. We were able to raise funds under the Bridge II convertible promissory notes during 2003. The proceeds of the notes were used to satisfy certain obligations coming due at that time as well as a limited amount of current operational expenses. At December 31, 2003, we had no cash on hand, a decrease of $42,000 over cash on hand at December 31, 2002 of $42,000. This decrease results from our loss from operations and our inability to raise sufficient new capital due to very unfavorable conditions in financing markets, both public and private, for companies in general, and especially for small life sciences companies such as ours. We were unable to raise sufficient funds during the year to maintain adequate cash reserves and to meet the ongoing operational needs of the business. On November 1, 2000, we issued a convertible promissory note to Monsun, AS in exchange for $500,000 in cash. The note bears interest at the rate of 15% per year and was due twelve months from the date of issue. The note is convertible into our common stock, any time after the expiration of the first 180 days of the loan term, at a conversion price of $1.00 per share. Since the conversion price was less than the market price of our common stock at the time of the transaction, the holders are considered to have a beneficial conversion feature. We recorded a value of $125,000 to this beneficial conversion feature as debt discount, reducing the carrying amount of the debt. The debt discount is amortized as additional interest expense over the life of the note. During 2001 and 2000, we recorded charges of $104,000 and $21,000 to interest expense to reflect the amortized amount of debt discount. On October 31, 2001 we issued a warrant to Monsun, AS entitling the holder to purchase 100,000 shares of our common stock at an exercise price of $0.60 per share, a discount of 20% to the market price of our common stock at the time, as consideration for Monsun's agreement to extend the maturity date of the note until January 31, 2002. We used the fair value interest rate method to determine a fair value of the warrant of $25,000 and charged the amount to interest expense during the period. On January 31, 2002, we issued a three-year warrant to Monsun, AS entitling the holder to purchase 200,000 shares of our common stock at an exercise price of $0.30 per share, a 70% discount to the market price of our common stock at that date, as consideration for a further extension of the maturity date of the note until April 1, 2002. A fair value of $4,110 was calculated for the warrant using the fair value interest rate method. We recorded the amount as additional interest expense during the period. On April, 1, 2002, we issued a five-year warrant to Monsun, AS entitling the holder to purchase 200,000 shares of our common stock at an exercise price of $0.70 per share, a 23% discount to the market price of our common stock on that date, as consideration for another extension of the maturity date of the note until July 31, 2002. A fair value of $8,287 was calculated for the warrant using the fair value interest rate method and was recorded as additional interest expense during the period. In November 2002, we issued 200,000 shares of our common stock to Monsun, AS in lieu of a default penalty on the note. A fair value of $42,000 for the shares was calculated using the market price of our common stock on the date the shares were issued. We recorded this amount as financing expenses during the period. We made payments against the note, including accrued interest, totaling $117,000 during 2002. The note is currently in default and Monsun has brought suit against Peter Gombrich, our Chairman, to collect the unpaid principal and accrued interest based on Mr. Gombrich's personal guaranty of the note. We are paying Mr. Gombrich's legal expenses to defend the suit. In February 2002, we issued a $118,500 promissory note to Schwartz Cooper Greenberger & Krauss ("SCGK") in exchange for past legal services regarding the settlement of litigation in which we were represented by SCGK. We repaid the note in September of 2002. As part of the settlement related legal services, we also issued a warrant to SCGK entitling the holder to purchase 750,000 shares of our common stock at an exercise price of $0.01 per share. We calculated a fair value of $675,000 for the warrant using the Black-Scholes valuation method and recorded the amount as legal fees during 2002. 32 Between March 22, 2002 and June 28, 2002, we issued $3,185,000 in series Bridge I convertible promissory notes to accredited investors. Included in the total amount of Bridge I notes issued is a note issued to NeoMed Innovations III, which represents the conversion of an outstanding convertible promissory note, including $60,000 in accrued interest due thereon, into a Bridge I convertible promissory note. The notes are due December 31, 2002, bear interest at the rate of 7% per annum and are convertible at any time into our common stock at a conversion price equal to 75% of the market price of our common stock on the date of the conversion. In addition, we issued a warrant, which entitled each holder to purchase one share of common stock, at an exercise price of $0.25 per share, for each dollar principal amount of notes. We calculated a fair value of $99,950 for these warrants using the fair value interest rate method and recorded this amount as additional interest expense during the 2002. At the time of conversion of the note, the holder is entitled to receive a Private Warrant to purchase one share of common stock for each four shares of common stock into which the note converts at an exercise price equal to 150% of the conversion price. Since the measurement date of these warrants was not determined as of December 31, 2003, we have not determined a value for these warrants as of that date. Since the conversion price of the notes is at a 25% discount to the market price of our common stock, the holder is considered to have a beneficial conversion feature. We determined the value of this beneficial conversion feature to be $1,049,808 and recorded this amount as additional interest expense during 2002. In February 2003, NeoMed Innovations III converted $1,060,000 in principal amount of Bridge I convertible promissory notes into Bridge II convertible promissory notes. In November 2003, two note holders converted $50,000 in principal amount of notes and $5,287 in accrued interest into 368,579 shares of unregistered common stock. The remaining $2,075,000 in principal of Bridge I notes remains unconverted and outstanding at December 31, 2003. Management has extended a written offer, dated October 10, 2003, to the Bridge I noteholders to convert their notes and accrued interest into common shares at $0.15 per share. In addition, the Bridge I holders were also offered warrants to purchase one new share for every four shares acquired by the Bridge noteholder upon exercise of such holder's conversion rights under the note. As of April 14, 2004, this offer remained outstanding. In May 2002, we issued a warrant entitling the holder to purchase 51,493 shares of our common stock at an exercise price of $0.01 per share to a non-employee consultant in lieu of payment of consulting fees due for past services. We calculated a fair value of $50,969 for the warrant based on the value of the consulting fees due. We recorded the amount as a reduction of accounts payable. In July 2002, we issued 113,832 shares of our common stock to a vendor in lieu of payment in cash for services. We calculated a fair value for the shares of $78,000 based on the value of the services and the market value of our common stock at the time of the transaction. We recorded the entire amount as administrative expense during 2002. In July 2002, we settled a claim brought by Trek Diagnostic Systems, Inc against AccuMed regarding breach of representations and warranties in a certain agreement under which Trek purchased the microbiology business of AccuMed in 2000. We issued a promissory note to Trek in the amount of $80,000, payable in two equal installments on September 1 and December 1, 2002. We made the first payment but did not make the second causing a default on the note. Trek instituted legal action against us to obtain payment. We paid the remaining amount due during 2003 and a final settlement in the first quarter of 2004. In August 2002, we issued 60,182 shares of our common stock to a financial advisor as consideration for services provided. We determined a fair value of $30,000 for the shares based on the market value of our common stock at the time the shares were issued. We recorded the entire amount as administrative expense during 2002. On August 30, 2002, we issued a promissory note to Round Valley Capital, LLC in the amount of $825,500 representing $650,000 in cash proceeds and $175,500 in unearned interest. The note bears a calculated effective interest rate of 36% per annum and is due June 1, 2003. The note is secured by all of our assets. We issued a certificate representing 5,750,000 shares of our common stock as additional collateral for the loan. We paid cash transaction fees of $147,063. As additional non-cash transaction fees, we issued RVC 711,364 shares of our common and one-year warrants to purchase 681,818 shares of our common stock at an exercise price of $0.20 per share. We calculated affair value of $362,795 for the shares of our common stock based on the market price of our common stock on the date the shares were issued. We calculated a fair value of $156,000 for the warrant using the Black-Scholes valuation method. The total value of the combined cash and non-cash transaction fees was recorded as prepaid financing costs and will be amortized over the life of the note. During 2002, we made principal and interest payments on the note amounting to $350,000 and $59,500, respectively. We also recorded amortization of $377,638 in prepaid financing costs through the end of 2002. As a result of a 33 dispute over the value of certain collateral, RVC declared the note in default shortly after we received the proceeds and began attempts to foreclose on the collateral and all of our assets. We instituted legal action to prevent the foreclosure and sale of our assets. We reached a final settlement, as described under the heading "Recent Developments" covered earlier in this report, with RVC in April of 2003. Beginning in October 2002, MDI began an issue of up to $4,000,000 in series Bridge II Convertible Promissory Notes to accredited investors. MDI issued $550,000 in Bridge II notes as of December 31, 2002. During 2003, MDI issued an additional $2,285,867 in principal amount of Bridge II notes. The notes bear interest at a rate of 12% per annum payable at the maturity date in kind in the form of shares of common stock of MDI. The Company granted the holders a junior security position in all of its assets. The notes are convertible at any time into the common stock of MDI. The note conversion price and the value of common shares paid in kind as interest for the first $1,000,000 in principal amount of cash subscriptions, determined on a "first come - first served basis," is $0.10 per share. The note conversion price and the value of common shares paid in kind as interest for the remaining $3,000,000 of principal amount of notes in the series is $0.15 per share. The conversion price of the notes issued during 2002 and those issued during 2003 was less than the market price of the common stock when the notes were issued; therefore, the holders are considered to have a beneficial conversion feature. MDI determined the value of the beneficial conversion feature to be $1,777,200 and $330,000 at December 31, 2003 and December 31, 2002, respectively. The value was recorded as a reduction of the debt and will be amortized as additional interest over the life of the note. MDI recorded additional interest expense of $1,826,743 to reflect amortization of the discount during the twelve months ended December 31, 2003. The Bridge II notes automatically convert into shares of Common Stock (subject to adjustments for stock splits, etc.) upon a "Qualified Financing Transaction," which means a transaction in which the Company closes a new debt or equity financing prior to the maturity date that results in net proceeds to the Company of at least four million dollars ($4,000,000). At the time MDI completes significant additional funding plans, as outlined in the subscription agreement, each holder of Bridge II notes is entitled to receive a warrant to purchase one share of the common stock of the Company for each four shares of common stock into which the note is convertible at an exercise price of $0.15 per share for notes in the class pertaining to the first $1,000,000 in subscriptions and $0.20 for the remaining $3,000,000 in note principal subscriptions. In September 2003 an amendment to the Bridge II Convertible Promissory Notes was sent to holders requesting an extension of the notes to July 31, 2004. As additional consideration for the extension, holders were offered an increase in the interest rate from 12% to 15%. In addition, an amendment to the indenture also offered an increase in the warrant coverage ratio from 25% to 33%. The Bridge II offering was closed as of December 5, 2003. In November 2002, we issued 400,000 shares of our common stock to a former employee / consultant in settlement of litigation. We calculated a fair value for the shares of $84,000 based on the market price of our common stock on the date the shares were issued. We recorded the entire amount as research and development expense during 2002. In November 2002, we issued 225,001 shares of our common stock to a non-employee consultant as payment for past consulting services in accordance with the provisions of a contract we have with the consultant. We determined a fair value of $180,000 for the shares based on the market price of our common stock on the date the shares were issued. We recorded a reduction in accrued expenses of $130,000 and we recorded the remaining amount as research and development expense during 2002. In November 2002, we issued a warrant entitling the holder to purchase 200,000 shares of our common stock at an exercise price of $0.16 per share to an advisor who acted as a finder for investors in Bridge II convertible promissory notes. We calculated a fair value of $44,000 for the warrant using the Black-Scholes valuation method. We recorded the entire amount as financing costs during 2002. In January 2003, MDI issued 1,000,000 shares of common stock in exchange for services to a non-employee professional services firm. MDI calculated a fair value of $100,000 for these shares based on the value of the shares on the date of the issuance and recorded the amount as investor relations expense as of March 31, 2003. On April 2, 2003, MDI issued a $1,000,000 Convertible Promissory Note to an affiliate, Suzanne M. Gombrich, the wife of Peter Gombrich, MDI's Chairman, in exchange for cash. The note bears interest at the rate of 12% per annum and is convertible into the common stock of MDI at a conversion price of $0.10 per share. As additional consideration, MDI granted the holder a warrant to purchase 1,000,000 shares of the common stock of MDI at an exercise price of $0.15 per 34 share. MDI also granted the holder a first priority security interest in all of the Company's assets. MDI used all of the cash proceeds from the note to fund the $100,000 cost of an option to repurchase all of its assets from Round Valley Capital, LLC and to make the $900,000 payment required to exercise the purchase option in conjunction with the final settlement of the loan with Round Valley Capital, LLC. The principal amount of the Convertible Promissory Note was repaid on April 2, 2004. May 2003, MDI issued 875,000 shares of common stock in exchange for services to a non-employee professional services firm. MDI calculated a fair value of $218,750 for these shares based on the market value of the shares on the date they were due and is amortizing the amount over the remainder of the service contract. In June 2003, MDI issued 83,642 shares of common stock to a non-employee service vendor in lieu of payment for unpaid service invoices. MDI valued the shares at $12,463, which represented the amount of the unpaid invoices. In July 2003, MDI issued 1,400,000 shares of common stock to non-employees for past and future financing and consulting services. MDI calculated a fair value of $504,000 for these shares based on the fair market value of the shares on the date they were issued. Of the total amount $216,000 is being amortized over the life of the services contract. In August 2003, MDI issued 170,000 shares of common stock to a non-employee financial consultant for past financing services. MDI valued the shares at $51,000. In October 2003, MDI issued 133,333 shares of common stock to a non-employee supplier in lieu of payment for unpaid invoices. MDI valued the shares at $18,935. In December 2003, MDI issued 550,000 and 100,000 shares of common stock to two non-employee service vendors in lieu of payment for future services. MDI valued the shares at $81,950 and $15,900, respectively. In August 2003, MDI issued 1,100,000 warrants with an exercise price of $0.17 per share to a non-employee financial consultant for past financial services. MDI valued the warrants at $341,000 using the Black-Scholes valuation model and recorded the amount as a current year administrative expense. In September 2003, MDI issued 1,335,000 warrants with an exercise price of $0.20 per share to non-employee financial consultants for past financial services. MDI valued the warrants at $347,100 using the Black-Scholes valuation model and recorded the amount as a current year administrative expense. In September 2003, MDI issued 500,000 warrants with an exercise price of $0.17 per share to a non-employee consultant in lieu of payment for future services. MDI valued the warrants at $150,000 using the Black-Scholes valuation model and is amortizing the amount over the twelve- month period of the consulting term. In November 2003, MDI issued 92,145 warrants with an exercise price of $0.20 per share to Bridge I investors upon conversion of their notes per the indenture agreement. MDI valued the warrants at $16,586 using the Black-Scholes valuation model and recorded the amount as a current year administrative expense. We incurred approximately $18,000 and $88,000 in capital expenditures for the years ended December 31, 2003 and 2002 respectively. Capital expenditures are defined as disbursements for laboratory equipment, leasehold improvements, software, and furniture/fixtures with a purchase price in excess of $1,000 per item and useful life in excess of one year. The decrease in 2003 capital expenditures resulted from an effort to best utilize the limited investment resources available to the company during 2003. Our operations have been, and will continue to be, dependent upon management's ability to raise operating capital in the form of debt or equity. We have incurred significant operating losses since inception of the business. We expect that significant on-going operating expenditures will be necessary to successfully implement our business plan and develop, manufacture and market our products. These circumstances raise substantial doubt about our ability to continue as a going concern. There can be no assurance that we will be able to obtain additional capital to meet our current operating needs or to complete pending or contemplated licenses or acquisitions of technologies. If we are unable to raise sufficient adequate 35 additional capital or generate profitable sales revenues, we may be forced to substantially curtail product research and development and other activities and may be forced to cease operations. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our Consolidated Financial Statements for the years ended December 31, 2003 and 2002, together with the reports of: Altschuler Melvoin and Glasser, LLP dated April 9, 2004 and June 26, 2003 on the Consolidated Financial Statements for the year ended December 31, 2003 and 2002; Auditeurs & Conseils Associes dated April 8, 2004 and June 26, 2003 on the Financial Statements of Samba Technologies SARL are filed as part of this report commencing on page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE RESIGNATION OF PRIOR AUDITORS: Ernst & Young LLP resigned as our auditors effective February 25, 2003. The reports of Ernst & Young LLP on our 2000 and 2001 financial statements, respectively, included an explanatory paragraph regarding our ability to continue as a going concern. The reports of Ernst & Young LLP on our consolidated financial statements for the aforementioned fiscal years did not contain an adverse opinion or a disclaimer of opinion and, other than as described in the preceding sentence, were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits of our financial statements for each of the two fiscal years ended December 31, 2000 and 2001, and in the subsequent interim period, there were no disagreements with Ernst & Young LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures, which if not resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to the matter in their report. In accordance with paragraph 304(a)(1)(v)A of Regulation S-K we report that a letter from Ernst & Young LLP to our Audit Committee dated April 8, 2002 reported material weaknesses related to the following matters, which were also discussed directly between our Audit Committee and Ernst & Young LLP. o Ernst & Young LLP reported that the financial oversight function to monitor and summarize appropriately the transactions and operations of the Company was ineffective. o Ernst & Young LLP reported that significant account reconciliations/analyses were not performed on a timely basis and additionally, in cases where reconciliations/analyses were prepared, reconciling items had not been investigated and reconciliations were not reviewed or approved. In a meeting with our Audit Committee on August 13, 2002, management reported to the Committee that it had developed procedures, forms, checklists and reporting packages to address these weaknesses and some progress had been made to improve our system of internal controls. We authorized Ernst & Young LLP to respond fully to the inquiries of the successor auditor regarding these matters. ENGAGEMENT OF NEW AUDITORS: The Board of Directors and the Audit Committee, after reviewing proposals from several firms, engaged Altschuler Melvoin and Glasser LLP as our auditors for the fiscal years ended December 31, 2003 and 2002. The engagement was effective April 30, 2003. During the two most recent fiscal years ended and through April 14, 2004, we did not consult with Altschuler, Melvoin and Glasser LLP regarding either the application of accounting principles to a specified transaction, either completed or proposed; or, the type of audit opinion that might be rendered on our financial statements. Altschuler, 36 Melvoin and Glasser LLP has not provided us with a written report or oral advice regarding such principles or audit opinion. ITEM 8A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures - ------------------------------------------------ As of December 31, 2003, we carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This evaluation was done under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer. Based upon that evaluation, they concluded that our disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy our disclosure obligations under the Exchange Act. Our former independent auditors, Ernst & Young, LLP, issued a report at the completion of their audit of our consolidated financial statements for the year ended December 31, 2001 detailing certain deficiencies in our internal control systems and procedures (See Item 9 of this Annual Report on Form 10-K). During 2002, we hired an independent consultant, Tatum CFO Partners, LLP ("Tatum"), to address the issues raised by Ernst & Young, LLP. In August of 2002, Tatum reported to the Audit Committee that it had assisted management in developing procedures, forms, checklists and reporting packages to address these deficiencies, and that progress had been made to improve our system of internal controls. Additional progress in these areas continued through the end of 2002 and during 2003. In designing and evaluating the controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures. Changes in internal controls - ---------------------------- There have been no significant changes in our internal controls, with the exception of those which may have temporarily arisen as a result of the departure of accounting personnel during the first half of 2003 and which reverted to their prior status as soon as new personnel were in place. Our principal financial officer joined MDI in June of 2003 and therefore his review was somewhat limited, and he was required to rely on our books and records, on comments from independent auditors regarding their recently completed audit, and on reviews and discussions with independent consultants who participated in the audit and the preparation of this report and with other members of management. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Name Offices and Positions, If Any, Held With the Company; AgE ---- --------------------------------------------------------- Peter P. Gombrich.............. Chairman of the Board, Director; Age 66 Denis M. O'Donnell, M.D........ President and Chief Executive Officer, Director; Age 50 Dennis L Bergquist............. Chief Financial Officer; Age 43 Alexander M. Milley............ Director; Age 51 Robert C. Shaw................. Director; Age 50* John Abeles, M.D............... Director; Age 59
* Resigned on February 13, 2004. PETER P. GOMBRICH has been Chairman of the Board of the Company and a director since December 1998 and was also Chief Executive Officer from 1998 until his resignation on February 19, 2004. Mr. Gombrich served as Chairman of 37 the Board and Chief Executive Officer of InPath, L.L.C. ("InPath"), a bio-molecular medical testing company, since Mr. Gombrich founded that company in March 1998. InPath was acquired by the Company in December 1998. In 1994, Mr. Gombrich founded AccuMed International, Inc., a cytopathology products company, and served as Chairman, President and Chief Executive Officer of AccuMed until January 1998. From 1990 until he founded AccuMed in 1994, Mr. Gombrich was a consultant in the cytology and microbiology industries. From July 1985 until September 1989, Mr. Gombrich was President and Chief Executive Officer, and from July 1985 until November 1990 was Chairman of the Board of CliniCom Incorporated, a bedside clinical information systems company, which he founded. In 1976, Mr. Gombrich co-founded St. Jude Medical, Inc., a life support medical device company, in which he served as Executive Vice President until 1980, when he became President of the pacemaker division of that company, serving in that position until 1982. Mr. Gombrich has a Bachelor of Science degree in Electrical Engineering from the University of Colorado/Denver and a Masters in Business Administration from the University of Denver. DENIS M. O'DONNELL, M.D. was appointed President and Chief Executive Officer on February 19, 2004 and has been a director of the Company since December 1998. From 1997 to 2003, he was a Managing Director of Seaside Advisors, L.L.C., an investment advisor to Seaside Partners a fund specializing in small capitalization private placements. Prior to joining Seaside Advisors, L.L.C., Dr. O'Donnell was President of Novavax, Inc. ("Novavax"), a company engaged in the development of pharmaceutical products, from its inception in 1995 to 1997. Dr. O'Donnell currently serves as a director and Chairman of Novavax. From 1991 to 1995, Dr. O'Donnell served as Corporate Vice President of Medical Affairs of Novavax, Inc., a clinical drug testing company. Prior to joining Novavax, Inc. in 1991, Dr. O'Donnell was Director of the Clinical Research Center at MTRA, Inc. a company engaged as investigator in human clinical trails. Dr. O'Donnell has been a director of ELXSI Corporation since 1996 and of Columbia Laboratories, Inc., a pharmaceutical company, since 1999. Dr. O'Donnell is a Fellow of the American College of Clinical Pharmacology. DENNIS L BERGQUIST was appointed Chief Financial Officer on June 1, 2003. Mr. Bergquist is a principal and founder of Bergquist & Bergquist, a financial consulting firm, established in 1990. The firm offers services in finance, restructuring, tax, accounting, operations, and executive services of a Chief Financial Officer on a temporary or permanent basis. Mr. Bergquist was Chief Financial Officer of DCNL Incorporated, a privately held beauty supply manufacturer and distributor from 1997 until its sale in 1998 to Helen of Troy, Inc. As both a consultant and Chief Financial Officer, he has been involved in raising private equity and various forms of secured and line-of-credit financing. Mr. Bergquist has a Bachelor of Science degree in Business Administration - Accounting from California State University - Fresno and an MBA in Finance from Cornell University. Mr. Bergquist is a licensed Certified Public Accountant in the State of California. ALEXANDER M. MILLEY has been a director of the Company since 1989. Mr. Milley is President and Chairman of the Board of ELXSI Corp. a holding company with subsidiaries operating in the restaurant and environmental inspection equipment industries. He is also President and Chairman of the Board of Azimuth, a holding company with subsidiaries operating in the trade show exhibit and retail environment design and the distribution of electrical components and fasteners industries. Mr. Milley was Chairman of the Board and Chief Executive Officer of Bell National Corporation ("Bell"), a predecessor of the Company until December 1998 and was President of Bell from August 1990 until December 1998. Mr. Milley is the founder, President, sole director and majority shareholder of Milley Management, Inc. ("MMI"), a private investment and management-consulting firm. Mr. Milley is also the President of Cadmus, a private investment and management-consulting firm. Mr. Milley was Senior Vice President-Acquisitions from December 1983 until July 1986 of the Dyson-Kissner-Moran Corporation, a private investment company. JOHN H. ABELES, M.D. has been a director of the Company since May 1999. Dr. Abeles is President of MedVest, Inc. a venture capital and consulting firm he founded in 1980. He is also General Partner of Northlea Partners, Ltd. ("Northlea Partners"), a family investment partnership. Dr. Abeles was a senior medical executive at Sterling Drug, Pfizer, and Revlon Healthcare, Inc. and subsequently was a medical analyst at Kidder, Peabody & Co. Dr. Abeles is a director of a number of companies operating in the medical device or healthcare fields, including I-Flow Corporation, Oryx Technology Corp., Encore Medical Corporation, and DUSA Pharmaceuticals, Inc. Dr. Abeles received his medical degree and degree in pharmacology at the University of Birmingham in England and is currently a director at the Higuchi BioSciences Institute at the University of Kansas. ROBERT C. SHAW has been a Director of the Company since November 1989 and resigned on February 13, 2004. Mr. Shaw is President of Contempo Design, Inc., a firm specializing in the design of exhibits and retail environments. 38 Mr. Shaw was Chief Financial Officer of Bell from November 20, 1989 to December 1998. Mr. Shaw has been a Vice President of MMI since March 1989, an officer or director of Azimuth or certain of its subsidiaries since November 1990, a director of Cadmus since January 1992 and an officer or director of ELXSI since September 1989. Mr. Shaw was Vice President of Berkeley Softworks, Incorporated ("Berkeley") from September 1987 to March 1989. From January 1987 to September 1987, he was Vice President, and from July 1985 until January 1987, he was Director of Finance and Operations, at Ansa Software, Incorporated ("Ansa"). Berkeley and Ansa developed and produced personal computer software. AUDIT COMMITTEE The audit committee of the board of directors reviews the internal accounting procedures of the Company and consults with and reviews the services provided by our independent accountants. During 2003, the audit committee consisted of Messrs. Alexander Milley and John Abeles, both of whom are considered to be independent. Mr. Milley serves as the financial expert on the Audit Committee. CODE OF ETHICS The Company has adopted its Code of Ethics and Business Conduct for Officers, Directors and Employees that applies to all of the officers, directors and employees of the Company. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's executive officers and directors, and persons who beneficially own more than 10% of the outstanding shares of the common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and to furnish the Company with copies of all reports they file. Based solely on the Company's review of copies of such reports it has received and of written representations from certain reporting persons concerning their beneficial ownership of the common stock, the Company believes that during 2003 all reports were timely filed except that Peter Gombrich is late in filing two reports. ITEM 10. EXECUTIVE COMPENSATION COMPENSATION COMPENSATION OF DIRECTORS The Company compensates its non-management directors through the annual grant of options to purchase shares of common stock. The options are granted at the first directors meeting following the annual meeting of stockholders. The exercise price of the options is set at the fair market value determined by the closing price of the common stock as reported on the Over-the-Counter Bulletin Board on the date of the grant. Non-Management directors were not granted options for the year 2002. Non-management directors were recommended a grant of options to purchase 250,000 shares for the year 2003 pending plan availability. The Company also reimburses directors for expenses incurred in connection with their attendance at meetings of the Board of Directors. 39
SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION ----------------------- ANNUAL COMPENSATION RESTRICTED ------------------------------------- STOCK NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OTHER(2)(3) AWARDS OPTIONS - --------------------------- ---- ------ -------- ----------- ------ ------- Peter P. Gombrich (6)....................... 2003 $ 240,000 $ 0 $ 0 0 0 Chairman of the Board, Chief Executive. 2002 $ 200,000 $ 0 $ 0 0 0 Officer (through 2/19/04).............. 2001 $ 247,000 $ 0 $ 9,000 0 150,000 Leonard R. Prange (4)....................... 2003 $ 0 $ 0 $ 0 0 0 President, Chief Operating Officer,........ 2002 $ 0 $ 0 $ 0 0 0 Chief Financial Officer and ............... 2001 $ 177,000 $ 0 $ 18,307 0 50,000 Secretary (through 12/31/2001) Stephen G. Wasko (5)........................ 2003 $ 0 $ 0 $ 0 0 0 President and Chief Operating Officer.. 2002 $ 85,161 $ 13,750 $ 0 0 0 (6/10/2002 through 1/22/2003)...... 2001 $ 0 $ 0 $ 0 0 0 Dennis L. Bergquist (7)..................... 2003 $ 87,500 $ 0 $ 0 0 0 Chief Financial Officer (from 6/1/03).. 2002 $ 0 $ 0 $ 0 0 0 ................................... 2001 $ 0 $ 0 $ 0 0 0
1) The employment agreements of Mr. Gombrich and Mr. Prange, until his resignation, provide that they are each entitled to receive bonus compensation at the discretion of the Board of Directors. 2) Prior to 2002, MDI policy provides that an employee may receive cash compensation in lieu of unused vacation time or defer unused vacation time for use in future periods. Mr. Prange received cash compensation of $12,307 in 2001 to offset a portion of his unused vacation time. 3) The employment agreements of Mr. Gombrich and Mr. Prange, until his resignation, provide that they are to receive monthly automobile allowances of $750 and $500, respectively. 4) Mr. Prange resigned his executive officer positions effective December 31, 2001. 5) Mr. Wasko was appointed President and Chief Operating Officer on June 10, 2002 and resigned those positions on January 22, 2003. Mr. Wasko did not draw any cash salary or cash bonus payments from September 1, 2002 through his date of resignation in January 2003. Mr. Wasko has filed a claim with the Illinois Department of Labor seeking unpaid compensation due to him for this period. 6) Mr. Gombrich did not draw any cash salary, cash bonus payments, or cash car allowance from September 1, 2002 through December 31, 2002. Mr. Gombrich continued to refrain from drawing any cash compensation for the first five months of 2003. In conjunction with the proposed debt restructuring in 2003, Mr. Gombrich has agreed to forgo $50,000 of unpaid compensation due to him at December 31, 2002. He also agreed to reduce his current salary to $225,000 and to forgo any salary increases due under his employment agreement, automobile allowances, and incentive compensation for 2002 and 2003. 7) Mr. Bergquist was appointed Chief Financial Officer on June 1, 2003. STOCK OPTIONS OPTION GRANTS IN 2002 There were no options relating to common stock granted to the named executive officers during 2002 and 2003. The following table sets forth information with respect to the value of all stock options held at December 31, 2003 by the named current and former executive officers. Mr. Prange exercised options to purchase 361,000 shares of common stock during 2002 40
FISCAL YEAR END OPTION / SAR VALUES NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS AT FISCAL YEAR ENDED AT FISCAL YEAR ENDED -------------------------- -------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Peter P. Gombrich................................. 270,000 80,000 0 0(2) Leonard R. Prange (1)............................. 0 0 0 0 0 ...............................................
____________________________________ 1. On May 27, 1999, Mr. Prange was granted an option to purchase 400,000 shares of common stock at an exercise price of $0.3937 per share, the fair market value as of the date of the grant determined in accordance with the provisions of the 1999 Equity Incentive Plan. One-third of the option vested on the date of grant, one-third on May 27, 2000, and the remainder vested on May 27, 2001. Mr. Prange's options for 100,000 shares granted May 23, 2000 and for 50,000 shares granted February 22, 2001 were cancelled upon his resignation on December 31, 2001. In January of 2002, Mr. Prange exercised options to purchase 250,000 shares of common stock under the terms of his severance agreement. On March 31, 2002 Mr. Prange exercised options to purchase 111,000 shares of common stock and surrendered options to purchase 39,000 shares of common stock in lieu of the exercise price. 2. Options granted to Mr. Gombrich during 2000 vest at the rate of 20% per year beginning on May 23, 2001, and have exercise prices of $2.75 per share. Options granted to Mr. Gombrich during 2001 are options for 100,000 shares, which vest at the rate of 33% per year beginning February 22, 2001 with an exercise price of $1.6875 and options for 50,000 shares, which vested on July 25, 2001 with an exercise price of $1.01. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company does not have a compensation committee. The Board of Directors participates in deliberations concerning executive compensation. Mr. Gombrich, Chairman of the Board and former Chief Executive Officer does not participate in any of the Board's deliberations concerning his own compensation. Other than Mr. Gombrich and Messrs. Milley and Shaw, who were officers and directors of Bell, a predecessor of the Company, no member of the Board of Directors is a current or former officer or employee of the Company or any of the Company's subsidiaries. Dr. O'Donnell serves as a director of Elxsi Corp. of which Mr. Milley is Chairman and CEO. EMPLOYMENT AGREEMENTS Mr. Gombrich was employed as Chairman of the Board and Chief Executive Officer of the Company pursuant to an employment agreement (the "Gombrich Agreement") with InPath dated May 1, 1998. The Gombrich Agreement was amended on December 4, 1998, to reflect changes related to the acquisition of InPath by MDI. Under the Gombrich Agreement, Mr. Gombrich receives annual compensation consisting of a base salary, a bonus determined at the discretion of the Board of Directors, and a monthly automobile allowance of $750. Mr. Gombrich's base salary may be increased at the discretion of the Board of Directors. His base salary was $225,000 in 2000 and $250,000 in 2001 and 2002. In conjunction with the Company's planned restructuring in 2003, Mr. Gombrich agreed to reduce his current base salary to $225,000 and to forgo salary increases, bonus compensation, and the monthly automobile allowance for 2002 and 2003. Mr. Gombrich also agreed to forgo $50,000 in accrued an unpaid compensation due to him for 2002. The Gombrich Agreement had an initial term of three years, beginning May 1, 1998 and ending April 30, 2001. Thereafter, the Gombrich Agreement automatically renews for consecutive terms of two years unless either Mr. Gombrich or the Company elects not to renew it. The Gombrich Agreement has been renewed and is effective through April 30, 2005. For two years following the termination of the Gombrich Agreement, Mr. Gombrich may not participate in a business that substantially and directly competes with the Company. If there is a change of control, as defined in the Gombrich Agreement, and the Company thereafter terminates the Gombrich Agreement without cause, or Mr. Gombrich terminates the agreement for good reason, 41 as defined in the Gombrich Agreement, Mr. Gombrich is entitled to a lump-sum severance payment equal to three times the sum of his annual base salary, his annualized monthly automobile allowance, and the highest incentive compensation paid to him in any of the previous year incentive compensation periods. If Mr. Gombrich is terminated without cause or resigns for good reason, and no change of control has occurred, he is entitled to a lump-sum severance payment equal to two times the sum of the foregoing amounts. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth as of March 31, 2004 with respect to any person who is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of common stock of the Company, the name and address of such owner, the number of shares of common stock beneficially owned, the nature of such ownership, and the percentage such ownership is of the outstanding shares of common stock:
Number of Shares Percent Name and Address of Beneficial Owner Beneficially Owned of Class ------------------------------------ ------------------ -------- Peter P. Gombrich (1)............................................................... 9,176,808 12.8% 414 N. Orleans, Suite 510 Chicago, IL 60610 Alexander M. Milley (2)............................................................. 11,314,273 13.6% Azimuth Corporation 3600 Rio Vista Boulevard, Suite A Orlando, FL 32805 William J. Ritger (3)............................................................... 9,415,151 12.7% Seaside Partners, L.P. 623 Ocean Avenue Sea Girt, NJ 08750 Ventana Medical Systems, Inc (4).................................................... 3,922,877 5.2% 3865 N. Business Center Dr. Tucson, AZ 85705 RS Diversified Growth Fund.......................................................... 4,469,920 6.2% 388 Market Street Suite 1700 San Francisco, CA 94111 NeoMed Innovations, III, L.P. (5)................................................... 10,292,832 12.5% 8 Queensway House, Queen Street St. Helier Jersey, JE2 4WD, Channel Islands Lantana Small Capital Growth........................................................ 5,047,882 7.0% 100 Goose Hill Road Cold Springs Harbor, NY 11724
_______________ 42 1. Includes: (i) 1,021,327 shares of common stock held by Mr. Gombrich's wife as the result of the conversion of Series E convertible preferred stock, including cumulative dividends; (ii) 1,000,000 shares issuable upon exercise of a warrant granted to Mr. Gombrich's wife, which is exercisable within sixty days; and (iii) 270,000 shares issuable upon options granted by the Company to Mr. Gombrich that are exercisable within 60 days. On April, 2, 2004, MDI paid $936,114 in cash and issued 1,900,000 shares of common stock in settlement of the principal and accrued interest due on a convertible promissory note held by Mr. Gombrich's wife. 10,000,000 shares of common stock, which would have been issuable upon conversion of the original note principal, less the shares actually issued in the settlement, are excluded from shares beneficially held by Mr. Gombrich. Mr. Gombrich disclaims beneficial ownership of the aforesaid shares held by his wife. 2. Includes: (i) 833,571 shares issuable upon conversion of Series E convertible preferred stock, including cumulative dividends, held by Mr. Milley; (ii) 282,881 shares owned by Cadmus of which Mr. Milley is a director and executive officer, 1,627,508 shares subject to conversion of Series E convertible preferred stock, including cumulative dividends, held by Cadmus, and 289,285 shares issuable to Cadmus under Stock Appreciation Rights granted by the Company; (iii) 682,738 shares issuable upon conversion of Series E convertible preferred stock, including cumulative dividends, held by Azimuth, of which Mr. Milley is a director and executive officer; (iv) 678,809 shares issuable upon conversion of Series E convertible preferred stock, including cumulative dividends, held by MMI, of which Mr. Milley is a director and executive officer; (v) 200,481 shares issuable upon conversion of Series E convertible preferred stock, including cumulative dividends, held by Winchester National, Inc. ("Winchester National"), of which Mr. Milley is a director and executive officer; and (vi) 219,000 shares subject to options granted by the Company to Mr. Milley that are exercisable within 60 days. In July of 2003, MDI agreed to cancel the outstanding warrants held by Azimuth and Cadmus and to issue a new five-year warrant entitling the holders to purchase 6,500,000 shares of common stock. Shares issuable under this warrant are included in the number of shares beneficially held by Mr. Milley. (See Item 13 Certain Relationships and Related Transactions for additional details concerning this transaction.) 3. Includes: (i) 310,394 shares issuable upon conversion of Series C convertible preferred stock, including shares issuable for cumulative dividends, and 1,674,998 shares issuable upon conversion of Series E convertible preferred stock, including shares issuable for cumulative dividends; (ii) 70,000 shares owned by The Research Works, Inc., a corporation controlled by Mr. Ritger; and (iii) 3,735,000 shares owned by Seaside Partners, L.P. ("Seaside"), of which Mr. Ritger is the Managing Partner. 4. Includes 2,172,877 shares issuable upon conversion of Series D convertible preferred stock, including cumulative dividends, held by Ventana and 1,750,000 shares issuable to Ventana under warrants granted by the Company. 5. Includes: (i) 2,166,165 shares issuable upon conversion of Series B convertible preferred stock, including cumulative dividends; (ii) 7,066,667 shares issuable upon conversion of a Bridge II convertible promissory note, which is convertible at any time; and (iii) 1,060,000 shares issuable upon exercise of warrants granted by the Company that are exercisable within 60 days. The following table sets forth as of March 31, 2004, with respect to any person who is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of SERIES A convertible preferred stock, the name and address of such owner, the number of shares of Series A convertible preferred stock beneficially owned, the nature of such ownership, and the percentage such ownership is of the outstanding shares of Series A convertible preferred stock:
Number of Shares Percent Name and Address of Beneficial Owner(1) Beneficially Owned of Class --------------------------------------- ------------------ -------- France Finance IV (2)............................................................... 47,250 57.0% Societe de Bure Ferri 51, rue Vivienne 75002 Paris, FRANCE Fifth Third Bank of Western Ohio, Ttee (3).......................................... 35,405 43.0% John Scarbrough Sr. IRA PO Box 703 Piquah, OH 45356
43 1. No executive officer or director beneficially owns any shares of Series A convertible preferred stock. 2. Convertible into 20,634 shares of common stock. 3. Convertible into 15,461 shares of common stock. The following table sets forth as of March 31, 2004, with respect to any person who is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of SERIES B convertible preferred stock, the name and address of such owner, the number of shares of Series B convertible preferred stock beneficially owned, the nature of such ownership, and the percentage such ownership is of the outstanding shares of Series B convertible preferred stock:
Number of Shares Percent Name and Address of Beneficial Owner(1) Beneficially Owned of Class --------------------------------------- ------------------ -------- NeoMed Innovations III, L.P. (2).................................................... 416,000 52.0% 8 Queensway House, Queen Street St. Helier Jersey, JE2 4WD, Channel Islands Monsun, AS (3)...................................................................... 125,000 15.6% Torvveien 12 C 1383 Asker, Norway CAT Investment I, AS (4)............................................................ 51,625 6.5% Postboks 1484 Vika 0116 Oslo, Norway Violina, AS (4)..................................................................... 51,625 6.5% Postboks 1484 Vika 0116 Oslo, Norway
__________________ 1. No executive officer or director beneficially owns any shares of Series B convertible preferred stock. 2. Converts into 2,166,155 shares, including shares issuable for cumulative dividends, of common stock. 3. Converts into 664,384 shares, including shares issuable for cumulative dividends, of common stock. 4. Converts into 270,939 shares, including shares issuable for cumulative dividends, of common stock. The following table sets forth as of March 31, 2004, with respect to any person who is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of SERIES C convertible preferred stock, the name and address of such owner, the number of shares of Series C convertible preferred stock beneficially owned, the nature of such ownership, and the percentage such ownership is of the outstanding shares of Series C convertible preferred stock: 44
Number of Shares Percent Name and Address of Beneficial Owner(1) Beneficially Owned of ClasS --------------------------------------- ------------------ -------- William Ritger (2).................................................................. 50,000 17.7% Seaside Partners, L.P. 623 Ocean Avenue Sea Girt, NJ 08750 Stanley Trust Funds (3)............................................................. 66,000 23.3% P.O. Box 180 Pottersville, NJ 07979 Crowell Trusts (4).................................................................. 45,000 15.9% 1004 Vicars Woods, Apt. S-315 Ponte Vedra Beach, FL 32082 Gary Evans (5)...................................................................... 33,000 11.8% 13215 Glad Acres Farmers Branch, TX 75234 Leonard R. Prange (6)............................................................... 20,000 7.1% 641 W. Willow, #142 Chicago, IL 60614 David Morgan (7).................................................................... 17,000 6.0% P.O. Box 470 Meadow Vista, CA 95722 Neil Costa (8)...................................................................... 16,500 5.8% 714 Broadway New York, NY 10003
__________________ 1. No executive officer or director beneficially owns any shares of Series C convertible preferred stock. 2. Converts into 310,394 shares, including shares issuable for cumulative dividends, of common stock. 3. Converts into 409,720 shares, including shares issuable for cumulative dividends, of common stock. 4. Converts into 279,355 shares, including shares issuable for cumulative dividends, of common stock. 5. Converts into 206,927 shares, including shares issuable for cumulative dividends, of common stock. 6. Converts into 124,158 shares, including shares issuable for cumulative dividends, of common stock. 7. Converts into 105,534 shares, including shares issuable for cumulative dividends, of common stock. 8. Converts into 102,430 shares, including shares issuable for cumulative dividends, of common stock. The following table sets forth as of March 31, 2004, with respect to any person who is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of SERIES D convertible preferred stock, the name and address of such owner, the number of shares of Series D convertible preferred stock beneficially owned, the nature of such ownership, and the percentage such ownership is of the outstanding shares of Series D convertible preferred stock: 45
Number of Shares Percent Name and Address of Beneficial Owner(1) Beneficially Owned of Class --------------------------------------- ------------------ -------- Ventana Medical Systems, Inc.(2).................................................... 175,000 100.0% 3865 N. Business Center Dr. Tucson, AZ 85705
__________________ 1. No executive officer or director beneficially owns any shares of Series D convertible preferred. 2. Converts into 2,172,877 shares, including shares issuable for cumulative dividends, of common stock. The following table sets forth as of March 31, 2004, with respect to (1) any person who is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of SERIES E convertible preferred stock, (2) each director, nominee, or executive officer who owns Series E convertible preferred stock, and (3) executive officers and directors as a group, the name and address of such owner, the number of shares of Series E convertible preferred stock beneficially owned, the nature of such ownership, and the percentage such ownership is of the outstanding shares of Series E convertible preferred stock:
Number of Shares Percent Name and Address of Beneficial Owner Beneficially Owned of Class ------------------------------------ ------------------ -------- Alexander M. Milley(1).............................................................. 119,324 45.8% William J. Ritger(2)................................................................ 49,680 19.1% All directors and executive officers as a group(1) (6 persons).................................................................... 119,324 45.8%
_________________ 1. Includes: (i) 48,271 shares owned by Cadmus; (ii) 20,250 shares owned by Azimuth; (iii) 20,133 shares owned by MMI; and (iv) 5,946 shares owned by Winchester National. Converts into 4,023,107 shares of common stock, including shares issuable upon payment of cumulative dividends. 2. Converts into 1,674,998 shares, including shares issuable for cumulative dividends, of common stock. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth as of March 31, 2004, certain information concerning the ownership of common stock of each director, nominee, and executive officer named in the Summary Compensation Table hereof referred to as the named executive officers, and all directors and executive officers of the Company as a group.
Amount and Nature of Beneficial Percent Name of Beneficial Owner Ownership of Class ------------------------ --------- -------- Peter P. Gombrich (1)............................................................... 9,176,808 10.8% Alexander M. Milley (2)............................................................. 11,314,273 13.3% John Abeles, M.D. (4)............................................................... 598,116 --% Denis M. O'Donnell, M. D.(5)........................................................ 219,000 --% Dennis L. Bergquist................................................................. 75,000 --% All directors and executive officers as a group (5 persons)......................... 21,383,197 24.1%
______________ 46 1. Includes: (i) 1,021,327 shares of common stock held by Mr. Gombrich's wife as the result of the conversion of Series E convertible preferred stock, including cumulative dividends; (ii) 1,000,000 shares issuable upon exercise of a warrant granted to Mr. Gombrich's wife, which is exercisable within sixty days; and (iii) 270,000 shares issuable upon options granted by the Company to Mr. Gombrich that are exercisable within 60 days. On April, 2, 2004, MDI paid $936,114 in cash and issued 1,900,000 shares of common stock in settlement of the principal and accrued interest due on a convertible promissory note held by Mr. Gombrich's wife. 10,000,000 shares of common stock, which would have been issuable upon conversion of the original note principal, less the shares actually issued in the settlement, are excluded from shares beneficially held by Mr. Gombrich. Mr. Gombrich disclaims beneficial ownership of the aforesaid shares held by his wife. 2. Includes: (i) 833,571 shares issuable upon conversion of Series E convertible preferred stock, including cumulative dividends, held by Mr. Milley; (ii) 282,881 shares owned by Cadmus of which Mr. Milley is a director and executive officer, 1,627,508 shares subject to conversion of Series E convertible preferred stock, including cumulative dividends, held by Cadmus, and 289,285 shares issuable to Cadmus under Stock Appreciation Rights granted by the Company; (iii) 682,738 shares issuable upon conversion of Series E convertible preferred stock, including cumulative dividends, held by Azimuth, of which Mr. Milley is a director and executive officer; (iv) 678,809 shares issuable upon conversion of Series E convertible preferred stock, including cumulative dividends, held by MMI, of which Mr. Milley is a director and executive officer; (v) 200,481 shares issuable upon conversion of Series E convertible preferred stock, including cumulative dividends, held by Winchester National, Inc. ("Winchester National"), of which Mr. Milley is a director and executive officer; and (vi) 219,000 shares subject to options granted by the Company to Mr. Milley that are exercisable within 60 days. In July of 2003, MDI agreed to cancel the outstanding warrants held by Azimuth and Cadmus and to issue a new five-year warrant entitling the holders to purchase 6,500,000 shares of common stock. Shares issuable under this warrant are included in the number of shares beneficially held by Mr. Milley. (See Item 13 Certain Relationships and Related Transactions for additional details concerning this transaction.) 3. Includes: (i) 191,616 shares owned by Northlea Partners, of which Dr. Abeles is the general partner; (ii) 87,500 shares underlying warrants granted by the Company to Northlea Partners; (iii) 100,000 shares issuable upon conversion of a Bridge II convertible promissory note held By Northlea Partners; and (iv) 219,000 shares issuable upon exercise of options granted by the Company to Dr. Abeles, which are exercisable within 60 days. Dr. Abeles disclaims beneficial ownership of all shares owned by, or issuable to, Northlea except 3,719 shares, which number are attributable to his 1% interest in Northlea as general partner. 4. Includes: 219,000 shares issuable upon options granted by the Company to Dr. O'Donnell. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During 2002, Mr. Gombrich repaid approximately $50,000 owed to MDI at December 31, 2001 and loaned the Company an additional $127,000 in cash. In January of 2002, Mr. Prange, the former President and COO/CFO, exercised options to purchase 250,000 shares of the Company's common stock at $0.3937 per share. In accordance with the terms of Mr. Prange's severance agreement, the Company waived the $98,425 exercise price of the options. On March 31, 2002, Mr. Prange exercised options to purchase 111,000 shares of the Company's common stock at $0.3937 per share and surrendered options to purchase 39,000 shares of common stock in lieu of payment of the exercise price. 47 On May 1, 2003, the Company issued a $15,000 Bridge II convertible promissory note to Northlea Partners in exchange for cash. The terms of the note are identical to all other Bridge II convertible promissory notes issued by the company. On July 18, 2003, Mr. Milley, a director, Azimuth Corporation and Cadmus Corporation, agreed to cancel seven warrants held by Azimuth and one warrant held by Cadmus, which entitled the holders to purchase a total of 3,125,000 shares of common stock at various exercise prices between $0.01 and $1.25 per share. The warrants, issued between December 1999 and August 2001, contained anti-dilution clauses which required MDI to increase the number of shares of common stock the holders were entitled to purchase under the warrants by approximately 1,500,000 shares as of the date of the agreement, with commensurate adjustments in individual exercise prices so that gross proceeds to the Company from exercise of the warrants remained the same. These anti-dilution provisions could have required the Company to make additional adjustments in shares and exercise prices in the future based on the Company's issuance of debt or equity instruments at prices below the adjusted exercise prices of these warrants. In consideration for the parties agreement to cancel these warrants, including their individual anti-dilution clauses, and the forgiveness of approximately $120,000 currently owing to Azimuth and Cadmus, MDI agreed to issue a new five-year warrant entitling the holders to purchase 6,500,000 shares of common stock at an exercise price of $0.30 per share. MDI also agreed to issue a 120 - day warrant entitling the holder to purchase 500,000 shares of common stock at an exercise price of $0.30. The 120 - day warrant expired and was cancelled. Management believes that the Company will derive significant additional benefits in the future as a result of the elimination of the anti dilution provisions in the original warrants. On December 5, 2003, Peter Gombrich, Chairman and former CEO, agreed to convert $305,667 in cash advances, unreimbursed business expenses, and other amounts owed to him by the Company into a Bridge II convertible promissory note. The terms of the note, including interest at the rate of 15% per annum and a conversion rate of $0.15 per share, were identical to those of all other Bridge II notes issued by the Company. In March of 2004, Mr. Gombrich converted the principal amount of the note plus accrued interest due as of the date of conversion into 2,113,987 shares of restricted common stock. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 1. EXHIBITS Exhibit Number Description - ------ ----------- 2.1 Bell National Corporation Plan of Reorganization (Annex I). (Incorporated herein by reference to Item 1 of the Bell National Corporation Annual Report on Form 10-K for the period from August 20, 1985 to December 31, 1985 and for the years ended December 31, 1986 and 1987.)* 2.2 Exchange Agreement dated December 4, 1998 among the Company, InPath, and the InPath Members. (Incorporated herein by reference to Appendix A to the Bell National Corporation Definitive Proxy Statement on Schedule 14A, filed on April 30,1999.)* 2.3 Agreement and Plan of Merger of Bell National Corporation and the Company. (Incorporated herein by reference to Appendix C to the Bell National Corporation Definitive Proxy Statement on Schedule 14A, filed on April 30, 1999.)* 2.4 Agreement and Plan of Merger by and among AccuMed International, Inc., AccuMed Acquisition Corp. and Ampersand Medical Corporation, dated as of February 7, 2001. (Incorporated herein by reference to Appendix I to Registration Statement No. 333-61666.) 2.5 Amendment No. 1, dated May 14, 2001 to the Agreement and Plan of Merger by and among AccuMed International, Inc., AccuMed Acquisition Corp. and Ampersand Medical Corporation, dated February 7, 2001. (Incorporated herein by reference to Appendix I to Registration Statement No. 333-61666.) 48 Exhibit Number DescriptioN - ------ ----------- 3.1 Restated Articles of Incorporation. (Incorporated herein by reference to Exhibit 3.1 of the Bell National Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1988.)* 3.2 Bylaws of Bell National Corporation. (Incorporated herein by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989.)* 3.3 Certificate of Incorporation of the Company as amended. (Incorporated herein by reference to Appendix D to the Bell National Corporation Definitive Proxy Statement on Schedule 14A, filed on April 30, 1999.)* 3.4 By-laws of the Company. (Incorporated herein by reference to Appendix E to the Bell National Corporation Definitive Proxy Statement on Schedule 14A, filed on April 30, 1999.)* 3.5 Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock of Ampersand Medical Corporation. (Incorporated herein by reference to Exhibit 3.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.) 3.6 Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock of Ampersand Medical Corporation. (Incorporated herein by reference to Exhibit 3.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.) 3.7 Certificate of Incorporation of Molecular Diagnostics, Inc., as amended. (Incorporated herein by reference to the Company's Current Report on Form 8-K dated September 26, 2001.) 3.8 Section 6 of Article VII of the By-laws of the Company as amended. (Incorporated herein by reference to Exhibit 3.3 to the Company's S-4 Registration Statement, File No. 333-61666, filed August 24, 2001.) 3.9 Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock of Molecular Diagnostics, Inc. (Incorporated herein by reference to Exhibit 3.4 to the Company's S-2 Registration Statement, File No. 333083578 filed February 28, 2002) 3.10 Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock. (Incorporated herein by reference to Exhibit 3.5 to the Company's S-2 Registration Statement, File No. 333083578 filed February 28, 2002) 3.11 Certificate of Amendment of Amended Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock. (Incorporated herein by reference to Exhibit 3.6 to the Company's S-2 Registration Statement, File No. 333083578 filed February 28, 2002) 3.12 Certificate of Designation, Preferences and Rights of Series D Convertible Preferred Stock. (Incorporated herein by reference to Exhibit 3.7 to the Company's S-2 Registration Statement, File No. 333083578 filed February 28, 2002) 3.13 Certificate of Designation, Preferences and Rights of Series E Convertible Preferred Stock. (Incorporated herein by reference to Exhibit 3.8 to the Company's S-2 Registration Statement, File No. 333083578 filed February 28, 2002) 4.1 Form of Common Stock Purchase Warrant, as executed by Bell National Corporation on December 4, 1998 with respect to each of Mr. Gombrich, Theodore L. Koenig, William J. Ritger, Fred H. Pearson, Walter Herbst, AccuMed International, Inc., Northlea Partners Ltd., and Monroe Investments, Inc. (collectively, the "InPath Members"). (Incorporated herein by reference to Exhibit 3 of the Schedule 13D filed jointly by the InPath Members on December 14, 1998.)* 49 Exhibit Number Description - ------ ----------- 4.2 Stockholders Agreement dated December 4, 1998 among the Company, Winchester National, Inc., the InPath Members, and Mr. Milley, Mr. Shaw, Cadmus, and MMI (collectively, the "Claimants"). (Incorporated herein by reference to Exhibit 2 to the Schedule 13D filed jointly by the InPath Members on December 14, 1998.)* 4.3 Form of Common Stock Purchase Warrant issued to Holleb & Coff on July 4, 1999 representing the right to purchase 250,000 shares of Common Stock of the Company in connection with legal services rendered. (Incorporated herein by reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)* 4.4 Form of Common Stock Purchase Warrant issued to The Research Works on October 11, 1999 representing the right to purchase 70,000 shares of Common Stock of the Company in connection with the preparation of an investment research report. (Incorporated herein by reference to Exhibit 4.4 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)* 4.5 Form of Common Stock Purchase Warrant issued to Azimuth Corporation on December 10, 1999 representing the right to purchase 50,000 shares of Common Stock of the Company as additional consideration for a 12% Convertible Promissory Note issued on the same date. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)* 4.6 Form of Common Stock Purchase Warrant issued to Richard Doermer on January 3, 2000 representing the right to purchase 96,250 shares of Common Stock of the Company in connection with financial advisory services rendered. (Incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.7 Form of Common Stock Purchase Warrant issued to Richard Doermer on January 3, 2000 representing the right to purchase 75,759 shares of Common Stock of the Company in connection with financial advisory services rendered. (Incorporated by reference to Exhibit 4.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.8 Form of Common Stock Purchase Warrant issued to Richard Doermer on January 3, 2000 representing the right to purchase 121,313 shares of Common Stock of the Company in connection with financial advisory services rendered. (Incorporated by reference to Exhibit 4.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.9 Form of Common Stock Purchase Warrant issued to Richard Doermer on January 3, 2000 representing the right to purchase 94,697 shares of Common Stock of the Company in connection with financial advisory services rendered. (Incorporated by reference to Exhibit 4.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.10 Form of Common Stock Purchase Warrant issued to William J. Ritger on May 24, 2000 representing the right to purchase 531,614 shares of Common Stock of the Company in connection with financial advisory services rendered. (Incorporated by reference to Exhibit 4.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.11 Form of Common Stock Purchase Warrant issued to Denis M. O'Donnell on May 24, 2000 representing the right to purchase 784,901 shares of Common Stock of the Company in connection with financial advisory services rendered. (Incorporated by reference to Exhibit 4.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 50 Exhibit Number Description - ------ ----------- 4.12 Form of Common Stock Purchase Warrant issued to Prospektiva, SA on May 23, 2000 representing the right to purchase 48,333 shares of Common Stock of the Company in connection with financial advisory services rendered. (Incorporated by reference to Exhibit 4.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.13 Form of Common Stock Purchase Warrant issued to Dr. Bruce Patterson, on September 12, 2000 representing the right to purchase 150,000 shares of Common Stock of the Company as additional consideration for the achievement of product development milestones under a License and Development Agreement for Specific Medical Technology for the Detection of Oncogenic HPV Virus. (Incorporated by reference to Exhibit 4.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.14 Form of Common Stock Purchase Warrant issued to Dr. Bruce Patterson, on September 12, 2000 representing the right to purchase 100,000 shares of Common Stock of the Company as consideration for an Addendum to a License and Development Agreement for Specific Medical Technology for the Detection of Oncogenic HPV Virus. (Incorporated by reference to Exhibit 4.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.15 Form of Common Stock Purchase Warrant issued to Osprey Partners, on November 22, 2000 representing the right to purchase 100,000 shares of Common Stock of the Company in connection with financial advisory services to be rendered over twelve months. (Incorporated by reference to Exhibit 4.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.16 Form of Common Stock Purchase Warrant issued to Univest Management, Inc. on November 22, 2000 representing the right to purchase 100,000 shares of Common Stock of the Company in connection with financial advisory services to be rendered over twelve months. (Incorporated by reference to Exhibit 4.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.17 Form of Common Stock Purchase Warrant issued to Azimuth Corporation on December 1, 2000 representing the right to purchase 50,000 shares of Common Stock of the Company as additional consideration for a 12% Promissory Note issued on December 4, 2000. (Incorporated by reference to Exhibit 4.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.18 Form of Common Stock Purchase Warrant issued to Azimuth Corporation on December 8, 2000 representing the right to purchase 1,000,000 shares of Common Stock of the Company as additional consideration for a 15% Promissory Note issued on December 11, 2000 in connection with the proposed acquisition of AccuMed International, Inc. by the Company. (Incorporated by reference to Exhibit 4.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.19 Form of Common Stock Purchase Warrant issued to Azimuth Corporation on February 7, 2001 representing the right to purchase 1,000,000 shares of Common Stock of the Company as additional consideration for two 15% Promissory notes issued on February 1, 2001 and February 7, 2001 in connection with the proposed acquisition of AccuMed International, Inc. by the Company. (Incorporated by reference to Exhibit 4.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.20 Common Stock Purchase Warrant issued to Azimuth Corporation on August 6, 2001 representing the right to purchase 250,000 shares of common stock of the Company as additional consideration for a 15% promissory note. (Incorporated by reference to Exhibit 4.24 to the Company's S-4 Registration Statement File No. 333-61666 filed August 24, 2001.) 51 Exhibit Number Description - ------ ----------- 4.21 Common Stock Purchase Warrant issued to Cadmus Corporation on August 6, 2001 representing the right to purchase 250,000 shares of common stock of the Company as additional consideration for a 15% promissory note. (Incorporated by reference to Exhibit 4.23 to the Company's S-4 Registration Statement File No. 333-61666 filed August 24, 2001.) 4.22 Common Stock Purchase Warrant issued to Northlea Partners, Ltd. on August 6, 2001 representing the right to purchase 62,500 shares of common stock of the Company as additional consideration for a 15% promissory note. (Incorporated by reference to Exhibit 4.27 to the Company's S-4 Registration Statement File No. 333-61666 filed August 24, 2001.) 4.23 Common Stock Purchase Warrant issued to Azimuth Corporation on July 26, 2001 representing the right to purchase 500,000 shares of common stock of the Company as consideration of Azimuth's waiver of the conversion feature of its $500,000 convertible promissory note issued September 22, 2000. (Incorporated by reference to Exhibit 4.25 to the Company's S-4 Registration Statement File No. 333-61666 filed August 24, 2001.) 4.24 Common Stock Purchase Warrant issued to Azimuth Corporation on August 17, 2001 representing the right to purchase 25,000 shares of common stock of the Company. (Incorporated by reference to Exhibit 4.26 to the Company's S-4 Registration Statement File No. 333-61666, filed August 24, 2001.) 4.25 Common Stock Purchase Warrant issued to Tucker Anthony Incorporated on July 10, 2001 representing the right to purchase 150,000 shares of common stock of the Company. (Incorporated by reference to Exhibit 4.28 to the Company's S-2 Registration Statement, File No. 333-83578 filed February 28, 2002). 4.26 Common Stock Purchase Warrant issued to Ventana Medical Systems, Inc. on November 2, 2001 representing the right to purchase 1,750,000 shares of common stock of the Company. (Incorporated by reference to Exhibit 4.29 to the Company's S-2 Registration Statement, File No. 333-83578 filed February 28, 2002). 4.27 Form of Confidential $5,000,000 Common Stock Private Offering Memorandum dated January 2000. (Incorporated by reference to Exhibit 4.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.28 Form of Confidential $5,000,000 Series B Convertible Preferred Stock Private Offering memorandum dated November 2000 and amended January 30, 2001. (Incorporated by reference to Exhibit 4.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.29 Amendment No. 1 to Stockholders Agreement dated July 25, 2000 among the Company, the InPath Members, Mr. Milley, Mr. Shaw, MMI, Cadmus Corporation, and Winchester National, Inc. (Incorporated by reference to Exhibit 4.22 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 4.30 Common Stock Purchase Warrant issued to Schwartz Cooper Greenberger & Krauss, Chartered on February 13, 2002 representing the right to purchase 750,000 shares of common stock. (Incorporated by reference to Exhibit 4.30 to the Company's S-2 Registration Statement, File No. 333-83578 filed June 28, 2002.) 4.31 Common Stock Purchase Warrant issued to Monsun As on April 1, 2002 representing the right to purchase 200,000 shares of common stock. (Incorporated by reference to Exhibit 4.31 to the Company's S-2 Registration Statement, File No. 333-83578 filed June 28, 2002.) 4.32 Form of Common Stock Purchase Warrant issued to Cell Solutions, LLC on October 11, 2001 representing the right to purchase 172,120 shares of common stock. (Incorporated by reference to Exhibit 4.32 to the Company's S-2 Registration Statement, File No. 333-83578 filed June 28, 2002.) 52 Exhibit Number Description - ------ ----------- 4.33 Form of Common Stock Purchase Warrant issued in connection with certain Bridge Financing in June 2002. (Incorporated by reference to Exhibit 4.33 to the Company's S-2 registration Statement, File No. 333-83578 filed June 28, 2002.) 4.34 Common Stock Purchase Warrant issued to Richard Domanik on May 30, 2002 representing the right to purchase 51,483 shares of common stock. (Incorporated by reference to Exhibit 4.34 to the Company's S-2 Registration Statement, File No. 333-100150 filed September 27, 2002.) 4.35 Common Stock Purchase Warrant issued to Round Valley Capital, LLC on September 4, 2002 representing the right to purchase 681,818 shares of common stock. (Incorporated by reference to Exhibit 4.35 to the Company's S-2 Registration Statement, File No. 333-100150 filed on September 27, 2002.) 4.36 Amendment No. 1 to the Common Stock Purchase Warrant issued in connection with certain Bridge Financing dated August 20,2002. (Incorporate by reference to the Company's Form 10-K for the year ended December 31, 2002) 4.37 Form of Common Stock Purchase Warrant to be issued in connection with certain Bridge II Financing beginning in October 2002. (Incorporate by reference to the Company's Form 10-K for the year ended December 31, 2002) 4.38 Common Stock Purchase Warrant issued to Qwestar Resources on November 1, 2002 representing the right to purchase 200,000 shares of common stock. (Incorporate by reference to the Company's Form 10-K for the year ended December 31, 2002) 4.39 Form of common stock purchase warrant issued to Suzanne M. Gombrich on April 2, 2003 representing the right to purchase 1,000,000 shares of common stock of the Company in connection with a $1,000,000 loan evidenced by a convertible promissory note issued on that date. (Incorporated by reference to Form 10-QSB filed for the quarter ended June 30, 2003). 4.40 Form of common stock purchase warrant issued to Dan Burns on August 20, 2003 representing the right to purchase 1,100,000 shares of common stock of the Company in connection with raising capital for the Company. (Incorporated by reference to Form 10-QSB filed for the quarter ended September 30, 2003). 4.41 Form of common stock purchase warrant issued to Dan Burns on September 16, 2003 representing the right to purchase 935,000 shares of common stock of the Company in connection with raising capital for the Company. (Incorporated by reference to Form 10-QSB filed for the quarter ended September 30, 2003). 4.42 Form of common stock purchase warrant issued to David Weissberg on September 16, 2003 representing the right to purchase 400,000 shares of common stock of the Company in connection with raising capital for the Company. (Incorporated by reference to Form 10-QSB filed for the quarter ended September 30, 2003). 4.43 Form of common stock purchase warrant issued to Reid Jilek on September 2, 2003 representing the right to purchase 500,000 shares of common stock of the Company in connection with raising capital for the Company. (Incorporated by reference to Form 10-QSB filed for the quarter ended September 30, 2003). 10.1 Stock Appreciation Rights Agreement dated as of November 20, 1989 between the Company and Raymond O'S. Kelly. (Incorporated herein by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989.)* 53 Exhibit Number Description - ------ ----------- 10.2 Stock Appreciation Rights Agreement dated as of November 20, 1989 between the Company and Nicholas E. Toussaint. (Incorporated herein by reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989.)* 10.3 Stock Appreciation Rights Agreement dated as of November 20, 1989 between the Company and Nicholas E. Toussaint. (Incorporated herein by reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989.)* 10.4 SAR Agreement Extension dated November 15, 1995 between the Company and Raymond O'S. Kelly. (Incorporated herein by reference to Exhibit 10.20 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.)* 10.5 SAR Agreement Extension dated November 15, 1995 between the Company and Nicholas E. Toussaint. (Incorporated herein by reference to Exhibit 10.21 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.)* 10.6 Employment Agreement dated May 1, 1998 between Mr. Gombrich and InPath, LLC, as amended on December 4, 1998. (Incorporated herein by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.)* 10.7 Claims Agreement dated December 4, 1998 among the Company, the Claimants, and Liberty Associates Limited Partnership. (Incorporated herein by reference to Exhibit 4 to the Schedule 13D filed jointly by the InPath Members on December 14, 1998.)* 10.8 Ampersand Medical Corporation Equity Incentive Plan established as of June 1, 1999. (Incorporated herein by reference to Appendix F to the Bell National Corporation Definitive Proxy Statement on Schedule 14A, as filed on April 30, 1999.)* 54 Exhibit Number Description - ------ ----------- 10.9 Ampersand Medical Corporation Employee Stock Purchase Plan. (Incorporated herein by reference to Appendix G to the Bell National Corporation Definitive Proxy statement on Schedule 14A, as filed on April 30, 1999.)* 10.10 Employment Agreement dated June 1, 1999 between Mr. Prange and the Company. (Incorporated herein by reference to Exhibit 10.11 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)* 10.11 Lease Agreement between the Company and O.P., L.L.C. dated September 1, 1999 pertaining to the premises located at suite 305, 414 N. Orleans, Chicago, IL 60610. (Incorporated herein by reference to Exhibit 10.12 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)* 10.12 Amendment to Lease Agreement between the Company and O.P., L.L.C. dated November 1, 1999 pertaining to the premises at suite 300, 414 N. Orleans, Chicago, IL 60610. (Incorporated herein by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)* 10.13 Form of Note purchase agreements dated between March 1, 1999 and June 29, 1999 between the Company and several purchasers. (Incorporated herein by reference to Exhibit 10.14 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)* 10.14 Form of 6% Convertible Subordinated Note Due 2000, dated between March 1, 1999 and June 29, 1999 issued by the Company to several purchasers. (Incorporated herein by reference to Exhibit 10.15 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)* 10.15 Schedule of purchasers of 6% Convertible Notes Due 2000, including dates and amount purchased. (Incorporated herein by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)* 10.16 Form of Senior Convertible Promissory Note issued to Azimuth Corporation on December 10, 1999. (Incorporated herein by reference to Exhibit 10.17 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)* 10.17 Form of Restricted Stock Award of 50,000 shares of Common Stock issued to David A. Fishman, M.D., on August 10, 1999 as additional compensation under a 36 month Consulting Agreement dated June 1, 1999. (Incorporated herein by reference to Exhibit 10.18 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)* 10.18 Form of Restricted Stock award of 50,000 shares of Common Stock issued to Arthur L. Herbst, M.D., on August 10, 1999 as additional compensation under a 36 month Consulting Agreement dated July 1, 1999. (Incorporated herein by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)* 10.19 Form of $2,000,000 note received from Seaside Partners, L.P. on April 28, 2000. (Incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 10.20 Form of $300,000 note received from AccuMed International, Inc. on September 22, 2000 in conjunction with the proposed acquisition of AccuMed by the Company. (Incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 10.21 Form of $500,000 Convertible Promissory Note issued to Azimuth Corporation on September 22, 2000 in connection with the proposed acquisition of AccuMed International, Inc. by the Company. (Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 55 Exhibit Number Description - ------ ----------- 10.22 Form of $500,000 Convertible Promissory Note issued to Monsun, AS on November 1, 2000. (Incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 10.23 Form of $200,000 Promissory Note issued to Azimuth Corporation on December 4, 2000. (Incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 10.24 Form of $100,000 Promissory Note issued to Azimuth Corporation on December 11, 2000 in conjunction with the proposed acquisition of AccuMed International, Inc. by the Company. (Incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 10.25 Amendment to Patent and Technology License Agreement dated June 9, 2000 by and between Ampersand Medical Corporation, AccuMed International, Inc. and InPath, L.L.C. (Incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 10.26 License and Development Agreement for Specific Medical Technology for the Detection of Oncogenic HPV Virus dated June 23, 2000, by and between Invirion, Dr. Bruce Patterson, and Ampersand Medical Corporation. (Incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 10.27 First Addendum to License and Development Agreement for Specific Medical Technology for the Detection of Oncogenic HPV Virus dated September 12, 2000, by and between Invirion, Dr. Bruce Patterson and Ampersand Medical Corporation. (Incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 10.28 Second Addendum to License and Development Agreement for Specific Medical Technology for the Detection of Oncogenic HPV Virus dated January 12, 2001, by and between Invirion, Dr. Bruce Patterson and Ampersand Medical Corporation. (Incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 10.29 Form of $25,000 Promissory Note issued to Azimuth Corporation on February 1, 2001 in conjunction with the proposed acquisition of AccuMed International, Inc. by the Company. (Incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 10.30 Form of $470,000 Promissory Note issued to Azimuth Corporation on February 7, 2001 in conjunction with the proposed acquisition of AccuMed International, Inc. by the Company. (Incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 10.31 Lease Agreement between the Company and O.P., L.L.C date May 18, 2000, pertaining to premises located at 414 N. Orleans, Suite 510, Chicago, Illinois 60610. (Incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 10.32 First Amendment to Lease Agreement between the Company and O.P., L.L.C. dated February 13, 2001, pertaining to additional premises at 414 N. Orleans, Suite 503, Chicago, Illinois 60610 and extending the term of the original lease until February 28, 2006. (Incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 10.33 Form of Restricted Stock Award of 25,000 shares of Common Stock issued to Eric A Gombrich on May 1, 2000 as additional compensation under a 36 month Employment Agreement dated April 1 2000. (Incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 56 Exhibit Number Description - ------ ----------- 10.34 Form of Restricted Stock Award of 50,000 shares of Common Stock issued to Ralph M. Richart, M.D., on July 24, 2000 as additional compensation under a 36 month Consulting Agreement dated June 1, 2000. (Incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)* 10.35 Form of Restricted Stock Award of 50,000 shares of Common Stock issued to J. Thomas Cox, M.D., on October 20, 2000 as additional compensation under a 36 month Consulting Agreement dated October 15, 2000. (Incorporated by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.) 10.36 Form of Voting Agreement between the Company and each of the officers and directors of AccuMed International, Inc. (Exhibit A to the Agreement and Plan of Merger included in Appendix I to the proxy statement-prospectus.) 10.37 $100,000 Promissory Note issued to Cadmus Corporation on July 26, 2001. (Incorporated by reference to Exhibit 10.39 to the Company's S-4 Registration Statement, File No. 333-61666, filed August 24, 2001.) 10.38 $100,000 Promissory Note issued to Azimuth Corporation on August 6, 2001. (Incorporated by reference to Exhibit 10.40 to the Company's S-4 Registration Statement, File No. 333-61666, filed August 24, 2001.) 10.39 $25,000 Promissory Note issued to Northlea Partners, Ltd. on August 6, 2001. (Incorporated by reference to Exhibit 10.41 to the Company's S-4 Registration Statement, File No. 333-61666, filed August 24, 2001.) 10.40 $118,500 Promissory Note to Schwartz Cooper Greenberger & Krauss on February 13, 2002. (Incorporated by reference to Exhibit 10.40 to the Company's S-2 Registration Statement, File No. 333-83578 filed June 28, 2002.) 10.41 $650,000 Promissory Note issued to Round Valley Capital, LLC on August 30, 2002. (Incorporated by reference to the Company's S-2 Registration Statement, File No. 333-100150 filed on September 27, 2002.) 10.42 Form of Convertible Promissory Note issued in connection with certain Bridge Financing beginning in March 2002. 10.43 Amendment No. 1 to Convertible Promissory Note issued in connection with certain Bridge Financing dated August 20, 2003. 10.44 Bridge II Convertible Promissory Note Indenture, including Form of Convertible Promissory Note, Form of Security Agreement, Form of Collateral Sharing Agreement, and Form of Warrant issued in connection with certain Bridge II Financing beginning in October 2002. 10.45 Consulting Agreement between the Company and CEOCast, Inc. 10.46 Consulting Agreement between the Company and Redwood Consultants, LLC 10.47 Subscription Agreement for $1,500,000 minimum offering/$4,000,000 Maximum Offering placed by Bathgate Capital Partners LLC 10.48 Form of Note for $1,500,000 minimum offering/$4,000,000 Maximum Offering placed by Bathgate Capital Partners LLC 57 Exhibit Number Description - ------ ----------- 10.49 Form of Registration Rights Agreement for $1,500,000 minimum offering/$4,000,000 Maximum Offering placed by Bathgate Capital Partners LLC 10.50 Form of Security Agreement for $1,500,000 minimum offering/$4,000,000 Maximum Offering placed by Bathgate Capital Partners LLC 10.51 Form of Warrant for $1,500,000 minimum offering/$4,000,000 Maximum Offering placed by Bathgate Capital Partners LLC 10.52 Form of Loan Security Agreement dated April 2, 2003 between the Company and Suzanne M. Gombrich in connection with a $1,000,000 loan evidenced by a convertible promissory note issued on that date. (Incorporated by reference to Form 10-QSB filed for the quarter ended June 30, 2003) 10.53 Form of Convertible Promissory Note dated April 2, 2003 issued by the Company to Suzanne M. Gombrich in exchange for a cash loan of $1,000,000. (Incorporated by reference to Form 10-QSB filed for the quarter ended June 30, 2003) 10.54 Amendment No.1 to the 12% Convertible Secured Promissory Note issued in connection with certain Bridge Financing in October 2002. (Incorporated by reference to Form 10-QSB filed for the quarter ended September 30, 2003) 10.55 Amendment No. 1 to the Indenture issued in connection with certain Bridge Financing in October 2002 (Incorporated by reference to Form 10-QSB filed for the quarter ended September 30, 2003) 10.56 Form of consulting agreement with Dan Burns and Eugene Martineau for the purpose of assisting the Company in certain investor relations and other financial aspects of the Company. (Incorporated by reference to Form 10-QSB filed for the quarter ended September 30, 2003) 10.57 Form of consulting agreement with Dr. Reid Jilek for the purpose of assisting the Company with Joint Ventures, licensing agreements, contracts, and equity and strategic funding sources. (Incorporated by reference to Form 10-QSB filed for the quarter ended September 30, 2003) 21.1 Subsidiaries of the Company. 23.1 Consent of Altschuler, Melvoin and Glasser LLP 31.1 Certification of the Chief Executive Officer of Molecular Diagnostics, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer of Molecular Diagnostics, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer of Molecular Diagnostics, Inc. Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer of Molecular Diagnostics, Inc., Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Code of Ethics and Business Conduct of Officers, Directors and Employees of Molecular Diagnostics, Inc.* SEC File No. 0-935 2. REPORTS ON FORM 8-K On November 20, 2003, the Company filed a Form 8-K Current Report disclosing that it had released a press release announcing its termination of licenses previously granted by subsidiaries to MonGen, Inc. 58 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 2003 2002 -------- --------- Audit Fees $129,056 $117,910 Audit Related Fees -- -- Tax Fees -- -- All other Fees -- -- -------- --------- Total Fees $129,056 $117,910 ======== ======== Altschuler, Melvoin and Glasser LLP (the Firm) has a continuing relationship with American Express Tax and Business Services, Inc. (TBS) from which it leases auditing staff who are full time, permanent employees of TBS and through which its partners provide non-audit services. As a result of this arrangement, the Firm has no full time employees and therefore, none of the audit services performed were provided by permanent full-time employees of the Firm. The Firm manages and supervises the audit and audit staff, and is exclusively responsible for the opinion rendered in connection with its examination. No other services have been provided by TBS. After careful consideration, the Audit Committee of the Board of Directors has determined that payment of the above audit fees is in conformance with the independent status of the Company's principal independent accountants. Before engaging the auditors in additional services the audit committee considers how these services will impact the entire engagement and independence factors. 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized. MOLECULAR DIAGNOSTICS, INC. By: /S/DENIS M. O'DONNELL, M.D. -------------------------------- Denis M. O'Donnell, M.D. Chief Executive Officer Date: April 14, 2004 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /S/ DENIS M. O'DONNELL, M.D. Director, President and Chief Executive April 14, 2004 - ------------------------------------- Officer, (Principal Executive Officer) Denis M. O'Donnell, M.D. /S/ DENNIS L BERGQUIST Chief Financial Officer April 14, 2004 - ------------------------------------- Dennis L. Bergquist (Principal Accounting Officer) /S/ ALEXANDER M. MILLEY Director April 14, 2004 - ------------------------------------- Alexander M. Milley /S/ JOHN ABELES Director April 14, 2004 - ------------------------------------- John Abeles /S/ PETER P. GOMBRICH Chairman of the Board, Director April 14, 2004 - ------------------------------------- Peter P. Gombrich
REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Molecular Diagnostics, Inc. We have audited the accompanying consolidated balance sheets of Molecular Diagnostics, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the related statements of operations, changes in stockholders' equity (deficit) and cash flows for the years then ended. Our audits also included the financial statement schedule listed on Schedule IX. These consolidated financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the financial statements of Samba Technologies, SARL, a wholly owned subsidiary, which statements reflect total assets of $0 and $612,000 December 31, 2003 and 2002, respectively and results from discontinued operations of $217,000 and ($23,000) for the years then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Samba Technologies, SARL as of December 31, 2003 and 2002 and for the years then ended, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Molecular Diagnostics, Inc. and Subsidiaries as of December 31, 2003 and 2002 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred substantial net losses from operations and has limited financial resources. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with regard to these matters are described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /S/ ALTSCHULER, MELVOIN AND GLASSER LLP Chicago, Illinois April 9, 2004 F-1 REPORT OF INDEPENDENT AUDITORS To The Stockholders of SARL Samba Technologies In our opinion the balance sheets, income statements, statements of cash flows and of changes in stockholder's equity of SARL Samba Technologies, present a true and fair view of the Company's financial position as of December 31, 2003 and 2002 and the results for the years then ended and has been prepared in accordance with U.S. Generally Accepted Accounting Principles and is suitable for inclusion in the consolidated accounts of Molecular Diagnostics, Inc. /s/ AUDITEURS & CONSEILS ASSOCIES Paris, France April 8, 2004 F-2 PART I--FINANCIAL INFORMATION
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31, ----------------------- 2003 2002 --------- -------- ASSETS Current Assets: Cash and cash equivalents................................................................... $ -- $ 42 Accounts receivables, net of allowance for doubtful accounts of $50 and $ 145 at December 31, 2003 and 2002, respectively........................................ 26 307 Inventories .............................................................................. 94 427 Refundable taxes............................................................................ -- 56 Deferred financings costs................................................................... 307 288 Prepaid expenses and other current assets................................................... 7 69 --------- -------- Total current assets.......................................................... 434 1,189 Fixed Assets, net........................................................................... 374 666 Other Assets: Licenses, patents, and technology, net of amortization...................................... 6,907 7,521 Goodwill, net of amortization............................................................... -- 283 --------- -------- Total assets.................................................................. $ 7,715 $ 9,659 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Checks issued in excess of amounts on deposit............................................... $ 5 $ -- Accounts payable............................................................................ 5,540 5,226 Accrued payroll costs....................................................................... 1,745 1,856 Accrued expenses............................................................................ 1,401 1,143 Deferred revenue............................................................................ 50 630 Revolving line of credit.................................................................... -- 207 Due to stockholder.......................................................................... 53 127 Lease obligation............................................................................ 279 279 Notes payable--related party................................................................ 1,092 65 Notes payable .............................................................................. 6,099 4,585 --------- ------ Total current liabilities..................................................... 16,264 14,118 Deferred revenue, less current portion...................................................... -- 120 --------- -------- Total liabilities............................................................. 16,264 14,238 --------- -------- Stockholders' Equity (Deficit): Preferred stock, $0.001 par value; shares authorized--10,000,000; shares issued and outstanding - -2,511,108 and 2,781,024 at December 31, 2003 and 2002, respectively (Liquidation value of all classes of preferred stock $14,636,679)....................................... 12,894 16,958 Common stock, $0.001 par value; shares authorized--100,000,000; shares issued and Outstanding--45,830,928 and 36,440,700, at December 31, 2003 and 2002, respectively .............................................................................. 46 37 Additional paid-in capital.................................................................. 29,553 19,557 Treasury stock; 192,088 shares at December 31, 2003 and 2002................................ (327) (327) Deferred compensation....................................................................... -- (11) Accumulated deficit......................................................................... (50,673) (40,642) Accumulated comprehensive loss--Cumulative translation adjustment........................... (42) (151) --------- -------- Total stockholders' equity (deficit).......................................... (8,549) (4,579) ---------- --------- Total liabilities and stockholders' equity (deficit).......................... $ 7,715 $ 9,659 ========= ======== The accompanying notes are an integral part of these consolidated financial statements.
F-3
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, ---------------------------- 2003 2002 ------------ ------------ Net Sales.............................................................................. $ 379 $ 717 Costs and Expenses: Cost of goods sold................................................................ 143 246 Research and development.......................................................... 580 3,252 Selling, general and administrative expenses...................................... 6,230 7,720 Impairment loss................................................................... 283 -- ------------ ------------ Total costs and expenses.......................................................... 7,236 11,218 ------------ ------------ Operating loss......................................................................... (6,857) (10,501) ------------ ------------ Other income (expense): Interest expense--related party................................................... (104) (9) Interest expense.................................................................. (3,151) (1,578) Other, net........................................................................ 308 151 ------------ ------------ (2,947) (1,436) ------------ ------------ Loss from continuing operations before income taxes.................................... (9,804) (11,937) Income taxes........................................................................... -- -- ------------ ------------ Loss from continuing operations........................................................ (9,804) (11,937) Discontinued operations: Gain from involuntary conversion....................................................... 292 -- Results from discontinued operations................................................... (75) (23) ------------- ------------ Net loss............................................................................... $ (9,587) $ (11,960) ============ ============ Preferred stock dividends.............................................................. (1,473) (2,012) ------------- ------------- Total dividends........................................................................ (1,473) (2,012) ------------ ------------- Net loss applicable to common shareholders............................................. $ (11,060) $ (13,972) ============ ============ Basic and fully diluted net loss per common share...................................... $ (.27) $ (.49) =========== ============ Weighted average number of common shares outstanding................................... 40,695,186 28,704,245 ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
F-4
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31, ----------------------- 2003 2002 Operating Activities: Net loss..................................................................................... $ (9,587) $ (11,960) Amortization of debt discount........................................................ 2,507 1,176 Depreciation and amortization........................................................ 869 967 Amortization of fees................................................................. 460 -- Fixed assets in exchange for services................................................ 8 -- Loss on sale of equipment............................................................ (34) -- Licensing fees recognized on preferred stock sale.................................... -- (298) Stock, warrants, and options issued to non-employees for services.................... 2,108 1,284 Notes issued in payment of expenses.................................................. 429 -- Compensation expense related to stock appreciation rights and restricted stock....... 12 -- Impairment of goodwill............................................................... 283 -- Changes in assets and liabilities: Accounts receivable............................................................. 304 257 Inventories..................................................................... 351 98 Refundable taxes................................................................ 60 73 Due from stockholder............................................................ 529 177 Prepaid expenses and other current assets....................................... (531) 26 Checks issued in excess of amounts on deposit................................... 5 -- Accounts payable............................................................... 242 2,742 Deposits........................................................................ (24) (31) Deferred revenue................................................................ (720) 139 Lease obligation................................................................ -- (12) Accrued expenses................................................................ 169 1,135 --------- --------- Net cash used for operating activities........................................................ (2,560) (4,227) --------- --------- Cash used in investing activities: Expenditures for license, patents, and technology........................................ -- (4) Capital purchases........................................................................ (18) (88) --------- --------- Net cash used for investing activities........................................................ (18) (92) --------- --------- Cash flows from financing activities: Proceeds from issuance of convertible notes payable...................................... 1,965 3,825 Proceeds from issuance of convertible notes payable, related party....................... 1,015 -- Proceeds from issuance of notes payable.................................................. -- 80 Payments of notes payable................................................................ (623) (500) Proceeds from sale of fixed assets....................................................... 83 -- Proceeds from revolving line of credit, net.............................................. -- (2) --------- --------- Net cash provided by financing activities..................................................... 2,440 3,403 Effect of exchange rate changes on cash and cash equivalents.................................. 96 (67) --------- ---------- Net decrease in cash and cash equivalents..................................................... (42) (983) Cash and cash equivalents at beginning of period.............................................. 42 1,025 --------- --------- Cash and cash equivalents at end of period.................................................... $ 0 $ 42 ========= ========= (Continued) The accompanying notes are an integral part of these consolidated financial statements.
F-5
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED) (DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31, ---------------------- 2003 2002 -------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR: Interest...................................................................................... $ 868 $ 179 NON-CASH TRANSACTION DURING THE PERIOD FOR: Deferred financing costs...................................................................... $ 1,663 $ 519 Preferred stock and cumulative dividends converted into common stock.......................... $ 4,508 $ 3,297 The accompanying notes are an integral part of these consolidated financial statements.
F-6
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS) PREFERRED STOCK COMMON STOCK NOTE PAR VALUE $0.001 PAR VALUE $0.001 TREASURY STOCK ADDITIONAL RECEIVABLE ----------------- ------------------ -------------- PAID-IN FOR SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER ------ ------ ------ ------ ------ ------ ------- ----------- January 1, 2002................. 3,493,078 $21,089 25,304,883 $ 26 (192,088) $(327) $12,212 $ -- Comprehensive Loss: Net loss...................... -- -- -- -- -- Foreign currency translation... -- -- -- -- -- Total net comprehensive -- -- -- -- -- Loss.......................... Series A preferred stock converted to common.......... (76,743) (345) 33,510 -- -- 345 -- Series B preferred stock and Cumulative dividends converted to common......... (557,500) (2,230) 2,594,175 3 -- 2,590 -- Series C preferred stock and cumulative dividends converted to common.......... (72,666) (218) 392,858 -- -- 235 -- Series E preferred stock, conversion premium and cumulative dividends converted to common..... (5,145) (113) 155,180 -- -- 124 -- Transfer value of warrant and license related to Series D preferred stock.................. (1,225) -- -- 928 -- Deferred compensation expense For unvested options issued in acquisition..................... -- -- -- -- -- Common stock issued to employees... 16,666 -- -- -- -- Common stock issued for services... -- 911,496 1 -- 354 -- Sale of common stock to Employees................. -- 9,568 -- -- 1 -- Common stock issued for loan transaction fees............... -- 711,364 1 -- 363 -- Exercise of options............... -- 361,000 -- -- 44 -- Common stock issued for financing fees................. -- 200,000 -- -- 44 -- Common stock issued for collateral..................... -- 5,750,000 6 -- (6) --
F-7 [part ii]
OTHER TOTAL DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDER'S COMPENSATION DEFICIT LOSS EQUITY (DEFICIT) ------------ ------- ---- ---------------- January 1, 2002................. $ (61) $(28,289) $ (27) $ 4,623 Comprehensive Loss: Net loss...................... -- (11,960) -- (11,960) Foreign currency translation... -- -- (124) (124) ----------- Total net comprehensive -- -- -- Loss.......................... (12,084) Series A preferred stock converted to common.......... -- -- -- -- Series B preferred stock and Cumulative dividends converted to common......... -- (364) -- -- Series C preferred stock and cumulative dividends converted to common.......... -- (18) -- -- Series E preferred stock, conversion premium and cumulative dividends converted to common..... -- (11) -- -- Transfer value of warrant and license related to Series D preferred stock.................. -- -- -- (297) Deferred compensation expense For unvested options issued in acquisition..................... 50 -- -- 50 Common stock issued to employees... -- -- -- -- Common stock issued for services... -- -- -- 354 Sale of common stock to Employees................. -- -- -- 1 Common stock issued for loan transaction fees............... -- -- -- 363 Exercise of options............... -- -- -- 44 Common stock issued for financing fees................. -- -- -- 44 Common stock issued for collateral..................... -- -- -- --
F-8
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS) PREFERRED STOCK COMMON STOCK NOTE PAR VALUE $0.001 PAR VALUE $0.001 TREASURY STOCK ADDITIONAL RECEIVABLE ----------------- ------------------ -------------- PAID-IN FOR SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER ------ ------ ------ ------ ------ ------ ------- ----------- Beneficial conversion feature on convertible notes....... -- -- -- 1,372 -- Reversal of common stock issued as compensation.... -- -- -- (4) -- Reversal of restricted stock issued for services........ -- -- -- (38) -- Reversal of options issued to non-employees for compensation.............. -- -- -- (55) -- Warrants issued for services -- -- -- 848 -- Warrants issued with debt.... -- -- -- 200 -- --------- ------- ---------- ------ ---------- ----- ------- ----- December 31, 2002............ 2,781,024 $16,958 36,440,700 $ 37 192,088 $(327) $19,557 $ -- Comprehensive Loss: Net loss................... -- -- -- -- -- Foreign currency translation -- -- -- -- -- Total net comprehensive -- -- -- -- -- Loss........................ Series A preferred stock converted to common......... (35,437) (159) 15,478 -- -- 159 -- Series C preferred stock and cumulative dividends converted to common......... (66,000) (198) 380,403 -- -- 228 -- Series E preferred stock, conversion premium and cumulative dividends converted to common.......... (168,479) (3,707) 5,150,744 5 -- 4,110 -- Deferred compensation expense For unvested options issued in acquisition............ -- -- -- -- -- Common stock issued for services -- 4,480,888 5 -- 1,095 --
F-9 [part ii]
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS) OTHER TOTAL DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDER'S COMPENSATION DEFICIT LOSS EQUITY (DEFICIT) ------------ ------- ---- ---------------- Beneficial conversion feature on convertible notes....... -- -- -- 1,372 Reversal of common stock issued as compensation.... -- -- -- (4) Reversal of restricted stock issued for services........ -- -- -- (38) Reversal of options issued to non-employees for compensation.............. -- -- -- (55) Warrants issued for services -- -- -- 848 Warrants issued with debt.... -- -- -- 200 ----- ------- ------ -------- December 31, 2002............ $ (11) $(40,642) $ (151) $ (4,579) Comprehensive Loss: Net loss................... -- (9,587) -- (9,587) Foreign currency translation -- -- 109 109 ---------- Total net comprehensive -- -- -- (9,478) Loss........................ Series A preferred stock converted to common......... -- -- -- -- Series C preferred stock and cumulative dividends converted to common......... -- (30) -- -- Series E preferred stock, conversion premium and cumulative dividends converted to common.......... -- (414) -- (6) Deferred compensation expense For unvested options issued in acquisition............ 11 -- -- 11 Common stock issued for services -- -- -- 1,100
F-10
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS) PREFERRED STOCK COMMON STOCK NOTE PAR VALUE $0.001 PAR VALUE $0.001 TREASURY STOCK ADDITIONAL RECEIVABLE ----------------- ------------------ -------------- PAID-IN FOR SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER ------ ------ ------ ------ ------ ------ ------- ----------- Common stock issued for exercise of warrants......... -- 352,500 -- -- -- -- Common stock issued as collateral and cancelled.. -- (6,461,364) (6) -- (104) -- Beneficial conversion feature on convertible notes......... -- -- -- 2,823 -- Bridge I conversion............. -- 368,579 -- -- 72 -- Bridge II conversion............ -- 5,103,000 5 -- 505 -- Warrants issued for services.... -- -- -- 1,108 -- --------- ------ ---------- ------ ------- ----- ------- ------ December 31, 2003......... 2,511,108 $12,894 45,830,928 $ 46 192,088 $(327) $29,553 $ -- ========= ======= ========== ====== ======= ===== ======= ====== The accompanying notes are an integral part of these financial statements.
[part ii]
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS) OTHER TOTAL DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDER'S COMPENSATION DEFICIT LOSS EQUITY (DEFICIT) ------------ ------- ---- ---------------- Common stock issued for exercise of warrants......... -- -- -- -- Common stock issued as collateral and cancelled.. -- -- -- (110) Beneficial conversion feature on convertible notes......... -- -- -- 2,823 Bridge I conversion............. -- -- -- 72 Bridge II conversion............ -- -- -- 510 Warrants issued for services.... -- -- -- 1,108 ----- -------- ---------- ----------- December 31, 2003......... $ --. $(50,673) $ (42) $ (8,549) ====== ======== ======== ========== The accompanying notes are an integral part of these financial statements.
F-11 MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 1. THE COMPANY AND BASIS OF PRESENTATION Molecular Diagnostics, Inc, ("MDI") was incorporated as Ampersand Medical Corporation in Delaware on December 15, 1998, as the successor to Bell National Corporation ("Bell National"). Bell National was incorporated in California in 1958. On September 25, 2001, the Company changed its corporate name to Molecular Diagnostics, Inc. in order to better represent its operations and products. The name change was effected by a merger with a wholly-owned subsidiary. Molecular Diagnostics, Inc. has retained its Certificate of Incorporation, except as amended to reflect the new name, bylaws and capitalization. On December 4, 1998, Bell National (then a shell corporation without any business activity) acquired InPath, LLC, a development-stage company engaged in the design and development of medical instruments and related tests. In the acquisition, Bell National issued 4,288,790 shares of common stock and warrants to purchase 3,175,850 shares of common stock to the members of InPath in exchange for their units of membership interest in InPath and the senior executives of InPath assumed management control of MDI. Based upon the terms of the acquisition agreement, for financial reporting and accounting purposes the acquisition was accounted for as a reverse acquisition whereby InPath is deemed to have acquired Bell National. However, Bell National was the continuing legal entity and registrant for both Securities and Exchange Commission filing purposes and income tax filing purposes, until its merger into MDI in May 1999. Because Bell National was a non-operating public shell company with nominal assets and InPath was a private operating company, the acquisition was recorded as the issuance of stock for the net monetary assets of Bell National, accompanied by a recapitalization and no goodwill or other intangible assets were recorded. On September 17, 2001, Molecular Diagnostics, Inc. completed an acquisition transaction whereby AccuMed International, Inc. was merged into a wholly-owned subsidiary of MDI. The value of the transaction was approximately $14,178,000. Accordingly, the consolidated financial statements presented hereunder include the operations of InPath from March 16, 1998 (inception), the operations of Bell National and Molecular Diagnostics, Inc. from December 4, 1998, and the operations of AccuMed International, Inc. from September 17, 2001, the date of acquisition. Molecular Diagnostics, Inc. is focused on the design, development and marketing of the InPath System and related image analysis systems. The InPath System and related products are intended to detect cancer and cancer related diseases. These products may be used in a laboratory, clinic, or doctor's office. Molecular Diagnostics, Inc. had another wholly owned subsidiary, Samba Technologies, Sarl ("Samba"). MDI acquired all of the assets of Samba in January 1999 from Unilog Regions, SA for approximately $500,000 in cash. Samba designed, developed, and marketed web-enabled software based systems for image analysis, image capture, and image transmission and management for clinical and industrial applications. A majority of the reported revenues prior to 2002 and since inception of MDI were generated by Samba. From December 20, 2002, Samba operated under the protection of the French Commercial Court in compliance with the bankruptcy laws of France. During 2003 MDI was unable to raise sufficient capital to enable it to provide funds to Samba to meet its liability obligations. On December 19, 2003 the French Commercial Court finalized the liquidation sale of the Samba assets. Upon completion of the bankruptcy liquidation sale MDI lost all rights and title to Samba's assets, including Samba's software. MDI has reflected a gain of $292,000 from the involuntary liquidation of Samba's assets by the French Commercial Court in its December 31, 2003 financial statements as discontinued operations. Molecular Diagnostics, Inc. has incurred significant operating losses since its inception. Management expects that significant on-going operating expenditures will be necessary to successfully implement MDI's business plan and develop, manufacture and market its products. These circumstances raise substantial doubt about MDI's ability to continue as a going F-12 concern. Implementation of its plans and its ability to continue as a going concern depend upon its securing substantial additional financing. Management's plans include substantial efforts to obtain additional capital. If Molecular Diagnostics, Inc. is unable to obtain adequate additional financing or generate profitable sales revenues, management may be required to curtail its product development and other activities and may be forced to cease operations. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include Molecular Diagnostics, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. NEW ACCOUNTING STANDARDS. GOODWILL AND OTHER INTANGIBLE ASSETS On June 29, 2001, the Financial Accounting Standards Board (FASB) approved its proposed Statements of Financial Accounting Standards No. 142 (FAS 142), Goodwill and Other Intangible Assets. FAS 142 supercedes APB 17, Intangible Assets. FAS 142 primarily addresses accounting for goodwill and intangible assets subsequent to their acquisition (i.e., the post-acquisition accounting). The most significant changes made by FAS 142 are (1): goodwill and indefinite lived intangible assets will no longer be amortized, (2) goodwill will be tested for impairment at least annually at the reporting unit level, (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually, and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years. The Company adopted FAS 142 effective January 1, 2002. The Company completed its initial review of goodwill and intangible assets during the first quarter of 2002. An additional review was conducted during the second quarter of 2003, in accordance with the adoption of FAS 142, resulting in no impairment of goodwill or intangible assets for the year ended December 31, 2002. A further review was conducted in the first quarter of 2004 with the result being the write-off of the goodwill recorded from the AccuMed International, Inc. acquisition for the year ended December 31, 2003. ASSET RETIREMENT OBLIGATIONS In July 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations" ("FAS 143"). FAS 143 addresses the accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. FAS 143 became effective for MDI in the first quarter of 2002. The provisions of FAS 143 did not have a material impact on the Company's consolidated financial statements. IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed of, including the disposal of business segments and major lines of business. FAS 144 became effective for MDI in the first quarter of 2002. The provisions of FAS 144 did not have a material impact on the Company's consolidated financial statements. VARIABLE INTEREST ENTITIES In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which requires variable interest entities (commonly referred to as SPEs) to be consolidated by the primary beneficiary of the entity if certain criteria are met. FIN 46, as amended in December 2003, is effective for all new variable interest entities created or acquired after December 31,2003. For variable interest entities created or acquired prior to December 31, 2003, the provisions of FIN 46 become effective for the Company during the first reporting period that ends after December 15,2004. For variable interest entities acquired prior to December 31, 2003, any difference between the net amount added to the balance sheet and the amount of any previously recognized interest in the variable interest entity will be recognized as a cumulative effect of an accounting change. The provisions of FASB Interpretation No. 46 will not have a material impact on the Company's consolidated financial statements. F-13 STOCK-BASED COMPENSATION In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure" ("FAS 148"). FAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. FAS 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, FAS 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of FAS 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements of FAS 148 are effective for interim periods beginning after December 15, 2002. The adoption of the provisions of FAS 148 did not have an impact on the Company's consolidated financial statements; however, the Company has modified its disclosures as provided for in the new standard. EXIT AND DISPOSAL ACTIVITIES In July 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("FAS 146"). FAS 146 nullifies the accounting for restructuring costs provided in EITF Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." FAS 146 requires that a liability associated with an exit or disposal activity be recognized and measured at fair value only when incurred. In addition, one-time termination benefits should be recognized over the period employees will render service, if the service period required is beyond a minimum retention period. FAS 146 is effective for exit or disposal activities initiated after December 31, 2002. Management does not expect that the application of the provisions of FAS 146 will have a material impact on the Company's consolidated financial statements. GUARANTEES In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity's product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The initial recognition and initial measurement provisions of FIN 45 are not expected to have a material impact on the Company's consolidated financial statements. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002; therefore, the Company has modified its disclosures if and where appropriate as required. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES In September 2000, the FASB issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - -- a Replacement of FASB Statement No. 125" ("FAS 140"). FAS 140 revises the criteria for accounting for securitizations and other transfers of financial assets and collateral. In addition, FAS 140 requires certain additional disclosures. Except for the new disclosure provisions, which were effective for the year ended December 31, 2000, FAS 140 was effective for the transfer of financial assets occurring after March 31, 2001. The provisions of FAS 140 did not have a material impact on MDI's consolidated financial statements. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In April 2003, the FASB issued SFAS No.149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The Statement amends and clarifies accounting for derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. The adoption of this Statement did not have a material impact on the Company's financial statements. F-14 ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability: many of those instruments were previously classified as equity. The adoption of this Statement did not have a material impact on the Company's financial statements. Use of Estimates. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition. Molecular Diagnostics, Inc. recognizes revenue upon shipment of product or license to customers and no remaining Company obligations or contingencies exist, or in the case of sales of software by its wholly owned subsidiary Samba, upon shipment if persuasive evidence of an arrangement exists; sufficient vendor-specific objective evidence exists to support allocating the total fee to all elements of the arrangement; the fee is fixed or determinable; and collection is probable. Revenue from ongoing client maintenance is recognized ratably over the post-contract support term, which is generally twelve months. Revenue from training services and professional services is recognized when the service is completed. Revenue from implementation and installation services is recognized using the percentage of completion method. Revenue from prepayments under licenses is recognized over the license period. Samba calculated percentage of completion based on the estimated total number of hours of service required to complete an implementation project and the number of actual hours of service rendered. Implementation and installation services are generally completed within 120 days. All revenue recognition related to Samba ceased on December 19, 2003 in accordance with the liquidation sale of Samba's assets by the French Commercial Court. Cash and Cash Equivalents. Molecular Diagnostics, Inc. considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Inventory of Instruments, Component Parts and Labor. Inventory of instruments and component parts consists of AcCell instruments and component parts necessary to manufacture AcCell instruments. The manufacturing process is carried out in the facilities of a third-party contractor. Inventory is stated at the lower-of-cost-or-market; cost is determined by the first-in-first-out (FIFO) method. The Company has established a policy for reserving obsolete and excess inventory, any non-usable, damaged, or non-salable inventory or inventory with little or no demand for the product in excess of one year. Samba's inventory consisted primarily of in-process labor on uncompleted contracts. Property and Equipment. Property and equipment are stated at cost and are depreciated using the straight-line method over the assets' estimated useful lives. Principal useful lives are as follows: Furniture and fixtures.....................................5 years Laboratory equipment.......................................5 years Computer and communications equipment......................3 years Leasehold improvements.....................................Useful life or life of lease, whichever is shorter Normal maintenance and repairs are charged to expense as incurred, significant improvements are capitalized. Licenses, Patents, and Technology. Licenses, patents, and purchased technology are recorded at their acquisition cost. Costs to prepare patent filings are expensed when incurred. Costs related to abandoned patents are written off at the time of abandonment. Amortization is begun as of the date of acquisition or upon the grant of the final patent. Costs are amortized over the asset's useful life, which ranges from two to seventeen years. The Company assesses licenses, patents, and technology quarterly for impairment. F-15 Research and Development Costs. Research and development costs are charged to operations as incurred. Molecular Diagnostics, Inc. conducts a portion of its research activities under contractual arrangements with scientists, researchers, universities, and other independent third parties. Foreign Currency Translation. The functional currency of Molecular Diagnostics, Inc.'s foreign operations is the local currency. Accordingly, all assets and liabilities are translated into United States dollars using year-end exchange rates, and all revenues and expenses are translated using average exchange rates during the year. Other Comprehensive Income (Loss). Translation adjustments related to Molecular Diagnostics, Inc.'s foreign operations are included in other comprehensive loss and reported separately in stockholders' equity (deficit). Realized translation losses arising from the liquidation of Samba's assets by the French Commercial Court are included in the Statement of Operations. Loss Per Share. Basic loss per share is calculated based on the weighted-average number of outstanding common shares. Diluted loss per share is calculated based on the weighted-average number of outstanding common shares plus the effect of dilutive potential common shares. Molecular Diagnostics, Inc.'s calculation of dilutive net loss per share excludes potential common shares as the effect would be antidilutive. Cumulative and deemed dividends on convertible preferred shares totaled approximately $4,768,000 and $3,143,000 at December 31, 2003 and 2002, respectively. Loss per share applicable to common shareholders is $.27 and $.49 as of December 31, 2003 and 2002, respectively. The weighted average shares at December 31, 2002 include the weighted average effect of 5,750,000 shares of common stock issued to Round Valley Capital, LLC in August of 2002. These shares of common stock were issued to RVC as additional collateral for a loan made to the Company. The shares were returned to the Company by RVC upon final settlement of the loan in 2003. MDI cancelled the shares in April of 2003. If MDI had not treated these shares as issued and outstanding at December 31, 2002, the loss per share applicable to common shareholders would have been $0.52. Potential common shares include stock underlying convertible notes, convertible preferred stock, cumulative dividends on preferred stock payable in common stock, stock options, and warrants. The weighted-average number of options and warrants to purchase common stock using the treasury stock method for 2003 and 2002 was 1,960,467 and 14,774,294 shares, respectively. Income Taxes. MDI follows the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are provided against deferred tax assets if it is more likely than not that the deferred tax assets will not be realized. Stock Compensation. As permitted by the Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), Molecular Diagnostics, Inc. uses the intrinsic value method to account for stock options as set forth in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Impairment. At each balance sheet date or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, management of the Company evaluates recoverability of such assets. An impairment loss is recognized if the amount of undiscounted cash flows is less than the carrying amount of the asset in which case the asset is written down to fair value. The fair value of the asset is measured by either quoted market prices or the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved. NOTE 3. FIXED ASSETS Fixed assets consist of the following at December 31 (in thousands): 2003 2002 ------ ------- Furniture and fixtures.............................. $ 114 $ 158 Laboratory equipment............................... 741 786 Computer and communications equipment.............. 313 353 Leasehold improvements............................. 28 34 ------ ------- 1,196 1,331 Less accumulated depreciation and amortization..... (822) (665) ------ ------- Total...................................... $ 374 $ 666 ====== ======= F-16 AGGREGATE DEPRECIATION AND AMORTIZATION EXPENSE For the years ended December 31, 2003 and 2002, depreciation and amortization expense was $257 and $302, respectively. NOTE 4. LICENSES, PATENTS, TECHNOLOGY AND GOODWILL Licenses, patents, technology and goodwill include the following at December 31 (in thousands): 2003 2002 ------ ------- Licenses.................................. $1,013 $ 1,028 Patent costs.............................. 133 133 MDI Technology Agreement.................. 7,230 7,230 Dianon Technology Agreement............... 260 260 ------ ------- Subtotal.................................. 8,636 8,651 Less accumulated amortization............. (1,729) (1,130) ------ ------- Total............................. $6,907 $ 7,521 ====== ======= Goodwill ............................. $ -- $ 283 ====== ======= In 2003, MDI recorded an impairment loss of $283,000. This loss was comprised of the write-off of the full amount of MDI's goodwill recorded on the acquisition of AccuMed. At December 31, 2003, management determined several factors, principally that contracts and sales relating to the AccuMed products failed to materialize, indicating that the carrying value of goodwill from the AccuMed acquisition was impaired and no future cash flows will be realized relating to the goodwill. AGGREGATE AMORTIZATION EXPENSE For the years ended December 31, 2003 and 2002, amortization expense was $612 and $665, respectively. ESTIMATED AMORTIZATION EXPENSE YEAR ENDED DECEMBER 31, 2004........................... $526 2005........................... $526 2006........................... $526 2007........................... $526 2008........................... $526 During 2003 and 2002, the Company recorded all costs related to the prosecution of patents as legal expenses. NOTE 5. ACCRUED EXPENSES Accrued expenses includes the following at December 31 (in thousands): 2003 2002 ------- -------- Accrued interest......................... $ 704 $ 155 Accrued interest--related party.......... 115 111 Accrued professional fees................ -- 146 Accrued taxes............................ 476 412 Reserve for warranty..................... -- 21 Other accrued expenses................... 106 298 ------- -------- Total............................ $ 1,401 $ 1,143 ======= ======== F-17 MDI was delinquent in filing certain Federal and State Income Tax returns for 2002 and 2001. MDI is also delinquent in paying a portion of Federal and State employee and employer payroll taxes for 2003, 2002, and 2001. The delinquent federal payroll taxes relating to 2003 and 2002 were paid in full in April 2004. The Company owed $686,000 and $678,000 as of December 31, 2003 and 2002, respectively, in 2001 federal payroll taxes, including $258,000 and $250,000 respectively in assessed and estimated statutory penalties and interest. MDI has submitted payments of $150,000 against this liability amount and is currently in the process of communicating through counsel with the Internal Revenue Service regarding payment of the balance due. The Company has lost all rights of appeal regarding the outstanding payroll tax liability and could be subject to the seizure of its tangible and intellectual property in the event a payment schedule is not agreed to with the Internal Revenue Service. The amount was included in accrued payroll costs in the accompanying balance sheet. NOTE 6. NOTES PAYABLE--RELATED PARTIES Notes payable to related parties at December 31 (in thousands) consisted of:
2003 2002 ----- ------ Northlea Partners, Ltd., $25,000 Promissory Note issued August 6, 2001; interest rate 15% per annum.............................................................................. 25 25 Northlea Partners, Ltd., $15,000 Promissory Note issued September 20, 2001; interest rate 9% per annum................................................................. 15 15 Northlea Partners, Ltd., $15,000 Bridge II convertible promissory note issued May 1, 2003; interest rate 12% per annum; (see description under Bridge II notes in Note 7-Notes payable, for other terms and conditions)............................. 15 -- Suzanne M. Gombrich, $1,000,000 convertible promissory note issued April 2, 2003; maturity date April 2, 2004 or earlier; interest rate 12% per annum; convertible into common stock at $.10 per share; beneficial conversion feature valued at $970,000; 1,000,000 warrants at exercise................................. 761 -- Peter P. Gombrich, $305,667 Bridge II convertible promissory note issued December 5, 2003; interest rate 12% per annum: (see description under Bridge II notes in Note 7-Notes payable, for other terms and conditions)............................. 251 -- Robert Shaw, $25,000 Promissory Note issued September 20, 2001; interest rate 9% per annum............................................................................. 25 25 ----- ------ $1,092 $ 65 ====== ======
On April 2, 2003, MDI issued a $1,000,000 Convertible Promissory Note to an affiliate, Suzanne M. Gombrich, the wife of Peter Gombrich, MDI's Chairman, in exchange for cash. The note bears interest at the rate of 12% per annum and is convertible into the common stock of MDI at a conversion price of $0.10 per share. As additional consideration, MDI granted the holder a warrant to purchase 1,000,000 shares of the common stock of MDI at an exercise price of $0.15 per share. MDI also granted the holder a first priority security interest in all of the Company's assets. The conversion price of the note was less than the market price of the common stock when the note was issued; therefore, the holder is considered to have a beneficial conversion feature. MDI determined the value of the beneficial conversion feature to be $970,000 using the fair value interest method. The value was recorded as a reduction of the debt and will be amortized as additional interest over the life of the note. MDI recorded additional interest expense of $731,000 to reflect amortization of the discount from the time the note was issued until December 31, 2003. The initial $100,000 of cash proceeds of the note was received in March 2003 and was used to fund the cost of an option to repurchase all of its assets from Round Valley Capital, LLC. The remaining proceeds, received on April 2, 2003, were used to make the $900,000 payment required to exercise the purchase option in conjunction with the final settlement of the loan with Round Valley Capital, LLC. On April 2, 2004 the Convertible Promissory Note due to Suzanne M. Gombrich was paid in full and her first priority security interest in all the Company's assets was released. (See Footnote 14: Subsequent Events) On March 5, 2004, the Bridge II convertible promissory note and accrued interest, issued to Peter Gombrich was converted into 2,113,987 common shares. Further, Peter Gombrich advanced funds to the Company during the year and was owed $52,953 and $126,911 at December 31, 2003 and 2002, respectively. MDI has classified the amount due to Mr. Gombrich under the current liabilities heading "Due to stockholder." The carrying amount of notes payable - related parties approximates fair value at December 31, 2003 and 2002. F-18 NOTE 7. NOTES PAYABLE Notes payable to unrelated parties at December 31 (in thousands) consisted of:
2003 2002 ---- ---- Bridge I Convertible Promissory Notes; due December 31, 2002; interest rate 7% per annum; convertible into common stock at 75% of the market price on date of conversion; beneficial conversion feature valued at $1,042; Bridge Warrants at an exercise price of $0.25 per share; Private Warrants at an exercise price equal to 150% of note conversion price........................... $2,075 $3,185 Bridge II Convertible Promissory Notes; due July 31, 2003; interest rate 12% per annum; convertible into common stock at $0.10 per share; beneficial conversion feature valued at $330,000 as of December 31, 2002; Bridge II warrants at an exercise price of $0.15 per share............................ 2,845 293 Round Valley Capital, LLC $825,500 Promissory Note, including unearned interest dated August 30,2002; interest rate 36% per annum; warrants at an exercise price of $0.20 per share; 711,364 shares of common stock.............................. -- 300 Monsun, AS, $500,000 Promissory Note issued November 1, 2000; interest rate 15% per annum, compounded into principal amount; beneficial conversion feature valued at $125,000; 1st extension of maturity date for issuance of 100,000 warrants at an exercise price of $0.60 per share; 2nd extension of maturity date for the issuance of 200,000 warrants at an exercise price of $0.30 per share; 3rd extension of maturity date for the issuance of 200,000 warrants at an exercise price of $0.70 per share; stock issuance of 200,000 shares of common stock in lieu of default penalty............................................................................... 641 552 Trek Diagnostic Systems $80,000 Promissory Note issued July 31, 2002; due in equal installments on September 1, 2002 and December 1, 2002................................ 15 40 O.P., LLC $29,390 Promissory Note issued May 12, 2003; interest at 7% per annum; monthly principal payment of $1,316 plus interest..................................... 24 -- Xillix Technologies Corporation, $361,000 Promissory Note issued June 26, 1998; interest rate Canadian Prime plus 6% per annum; represents a debt of AccuMed International..... 34 34 Ungaretti and Harris $211,368 Secured Promissory Note issued May 8, 2003; interest at 12% per annum; due September 30, 2003..................................................... 149 -- Ernst & Young $30,800 Promissory Note issued July 17, 2003; due December 31, 2003........ 31 -- Western Economic Diversification, $221,000 Promissory Note issued June 1989; no interest; represents a debt of Oncometrics....................................................... 222 182 Ventana Medical Systems, Inc., 62,946 Promissory Note issued November 30, 2003; due December 31, 2003; interest at 8% per annum payable after December 31, 2003 .......... 63 -- ------ ------ $6,099 $4,585 ====== ======
Between March 22, 2002 and June 28, 2002, MDI issued $3,185,000 in series Bridge I Convertible Promissory Notes to accredited investors. The notes bear interest at the rate of 7% per annum and are convertible at any time into the common stock of MDI at a conversion price equal to 75% of the market price of the common stock on the date of conversion. In addition, MDI issued a warrant, which entitled each holder to purchase one share of common stock, at an exercise price of $0.25 per share, for each dollar principal amount of notes. MDI calculated a fair value of $99,950 for these warrants using the fair value interest rate method and recorded this amount as additional interest expense during 2002. At the time of conversion of the note, the holder is entitled to receive a warrant to purchase one share of common stock for each four shares of common stock into which the note converts at an exercise price equal to 150% of the conversion price of the note. MDI has not determined a value for the warrants as of December 31, 2002. Since the conversion price of the note is at a 25% discount to the market price of the common stock of MDI, the holder is considered to have a beneficial conversion feature. MDI determined the value of the beneficial conversion feature to be $1,041,666 and F-19 recorded this amount as additional interest expense during 2002. In February 2003, a note holder, NeoMed Innovations III, converted $1,060,000 in principal amount of Bridge I notes into Bridge II notes. In November 2003, two note holders converted $50,000 in principal amount of notes and $5,287 in accrued interest into 368,579 shares of unregistered common stock. The remaining $2,075,000 in principal Bridge I notes remains unconverted and outstanding at December 31, 2003. Management has extended a written offer, dated October 10, 2003, to the Bridge I noteholders to convert their Notes and accrued interest into common shares at a conversion rate of $0.15 per share. In addition, the Bridge I holders were also offered warrants to purchase one new share for every four shares acquired by the Bridge noteholder upon exercise of such holder's conversion rights under the note. As of April 4, 2004, this offer remained outstanding. (See Footnote 14: Subsequent Events) Beginning in October 2002, MDI began an issue of up to $4,000,000 in series Bridge II Convertible Promissory Notes to accredited investors. MDI issued $550,000 in Bridge II notes as of December 31, 2002. From January 1, 2003 through the closing of the offering on December 5, 2003, MDI issued Bridge II Convertible Promissory Notes in the principal amount of: $1,980,200 in exchange for cash, $1,060,000 as a conversion of a Bridge I Convertible Promissory Note and $305,667 in exchange for a note payable to Peter P. Gombrich, the Company's Chairman, for a total issuance during the year of $3,345,867. The notes bear interest at a rate of 12% per annum payable at the maturity date in kind in the form of shares of common stock of MDI. The Company granted the holders a junior security position in all of its assets. The notes are convertible at any time into the common stock of MDI. The note conversion price and the value of common shares paid in kind as interest for the first $1,000,000 in principal amount of cash subscriptions, determined on a "first come - first served basis," is $0.10 per share. The note conversion price and the value of common shares paid in kind as interest for the remaining $3,000,000 of principal amount of notes in the series is $0.15 per share. The conversion price of the notes issued during 2002 and those issued during 2003 was less than the market price of the common stock when the notes were issued; therefore, the holders are considered to have a beneficial conversion feature. MDI determined the value of the beneficial conversion feature to be $1,777,200 and $330,000 at December 31, 2003 and December 31, 2002, respectively. The value was recorded as a reduction of the debt and will be amortized as additional interest over the life of the note. MDI recorded additional interest expense of $1,826,743 to reflect amortization of the discount during the twelve months ended December 31, 2003. The Bridge II notes automatically convert into shares of Common Stock (subject to adjustments for stock splits, etc.) upon a "Qualified Financing Transaction," which means a transaction in which the Company closes a new debt or equity financing prior to the maturity date that results in net proceeds to the Company of at least four million dollars ($4,000,000). At the time MDI completes significant additional funding plans, as outlined in the subscription agreement, each holder of Bridge II notes is entitled to receive a warrant to purchase one share of the common stock of the Company for each four shares of common stock into which the note is convertible at an exercise price of $0.15 per share for notes in the class pertaining to the first $1,000,000 in subscriptions and $0.20 for the remaining $3,000,000 in note principal subscriptions. In September 2003 an amendment to the Bridge II Convertible Promissory Notes was sent to holders requesting an extension of the notes to July 31, 2004. As additional consideration for the extension, holders were offered an increase in the interest rate from 12% to 15%. In addition, an amendment to the indenture also offered an increase in the warrant coverage ratio from 25% to 33%. The Bridge II offering was closed as of December 5, 2003. (See Footnote 14: Subsequent Events) On August 30, 2002, MDI issued a Promissory note to Round Valley Capital, LLC ("RVC") in the amount of $825,500 representing $650,000 in cash received by MDI and $175,500 in unearned interest. The note bears a calculated effective interest rate of 36% per annum and is due June 1, 2003. The note is secured by all of the assets of MDI. MDI issued a certificate representing 5,750,000 shares of the common stock of the Company to RVC as collateral for the loan and paid transaction fees including: cash payments of $147,063; 711,364 shares of common stock of MDI; and warrants to purchase 681,818 shares of common stock of MDI at an exercise price of $0.20 per share. MDI recorded the note at a value, net of unearned interest, of $650,000. A fair value of $362,795 was calculated for the shares of common stock of MDI issued to RVC using the market price of the common stock on the date the shares were issued. A fair value of $156,000 was calculated for the warrants using the Black-Scholes valuation method. The total value of the transaction fees was recorded as prepaid financing costs and is being amortized over the life of the note. During 2002, MDI made principal payments against the note of $350,000. RVC declared MDI to be in default under the terms of the note during 2002 and the parties were engaged in litigation and subsequently, settlement negotiations. On April 2, 2003, MDI paid RVC $900,000 in cash in final settlement of the loan, default penalties and to exercise its rights under the asset purchase option agreement. RVC returned the 5,750,000 shares of common stock issued as collateral under the note, 711,364 shares of common stock issued as financing fees, and warrants to purchase 531,818 shares of common stock also issued as financing fees. MDI cancelled F-20 the shares of common stock and the warrants. On February 17, 2003, MDI made additional principal payments amounting to $250,000. MDI recorded interest expense of $16,900 and financing costs, including amortization of accrued financing costs, of $1,009,000 during 2003. In July 2002, MDI agreed to settle a claim brought by Trek Diagnostic Systems, Inc. ("Trek") against AccuMed regarding breach of representation and warranties in a certain agreement under which Trek purchased the microbiology business of AccuMed in 2000. MDI issued a promissory note to Trek in the amount of $80,000, payable in two equal installments on September 1, 2002 and December 1, 2002. MDI made the first payment due on September 1, 2002. MDI did not make the second payment causing a default on the note. Through a court ordered action Trek was able to obtain payments totaling $27,692 during the forth quarter of 2003. In the first quarter of 2004, a final settlement of $12,000 was reached for complete and final settlement of the outstanding note balance. In conjunction with the acquisition of AccuMed International, Inc. on September 17, 2001, MDI assumed the $76,516 unpaid principal amount of an outstanding Canadian dollar convertible promissory note payable to Xillix Technologies. The note is due on demand, bears interest at a rate of 6% over the Canadian prime rate, and is convertible into the common stock of MDI at a conversion price of $2.18 per share. Through December 31, 2001, MDI made cash principal payments against the note amounting to $27,467. During 2002, MDI made further cash principal payments against the note amounting to $14,610. MDI also made cash interest payments of $0 and $390 during 2003 and 2002, respectively. In conjunction with the acquisition of AccuMed International, Inc. on September 17, 2001, MDI assumed the $180,663 unpaid principal balance of an outstanding Canadian dollar loan due from Oncometrics, a wholly owned subsidiary of AccuMed, to Western Economic Diversification ("WED"). Payments against the principal of the loan are due from a percentage of revenues derived from the sales of products, which include technology licensed to Oncometrics under the WED loan agreement. Oncometrics failed to make principal payments as required by the terms of the loan causing a technical default. Neither Oncometrics, nor MDI has received formal notification from WED of the default as required under the terms of the loan. As a result of the default MDI has classified the entire principal of the loan as current. On November 1, 2000, Molecular Diagnostics, Inc. issued a convertible promissory note to Monsun, AS in exchange for $500,000 in cash. The note bears interest at the rate of 15% per year and was due twelve months from the date of issue. The note is convertible into common stock, any time after the expiration of the first 180 days of the loan term, at a conversion price of $1.00 per share. On October 31, 2001 Monsun, AS and MDI agreed to the 1st extension of the maturity date of the convertible promissory note until January 31, 2002. As consideration for the 1st extension agreement, MDI issued a three-year warrant to Monsun, entitling the holder to purchase 100,000 shares of common stock of MDI at an exercise price of $0.60 per share. On January 31, 2002 Monsun, AS and MDI agreed to the 2nd extension of the maturity date of the note until March 31, 2002. As consideration for the 2nd extension agreement, MDI issued a three-year warrant to Monsun, entitling the holder to purchase 200,000 shares of common stock of MDI at an exercise price of $0.30 per share. A fair value of $4,110 for the warrant was calculated using the fair value interest rate method and was recorded as additional interest expense during 2002. On April 1, 2002 Monsun, AS and MDI agreed to the 3rd extension of the maturity date until July 31, 2002. As consideration for the 3rd extension agreement, MDI issued a five-year warrant to Monsun, entitling the holder to purchase 200,000 shares of common stock of MDI at an exercise price of $0.70 per share. A fair value of $8,287 for the warrant was calculated using the fair value interest rate method and was recorded as additional interest expense during 2002. In November 2002, MDI issued 200,000 shares of common stock of MDI as a default penalty on the note. A fair value of $42,000 for the shares was calculated using the market price of the common stock on the date the shares were issued and was recorded as financing expenses during 2002. MDI made payments against the principal of the note amounting to $117,266 and recorded interest expense, in addition to the amounts mentioned above, of $80,200 during 2002. Monsun, AS has initiated a legal action against Peter Gombrich, MDI's Chairman and CEO, as a personal guarantor on the note, in an attempt to collect the unpaid principal balance of the note. The Board of Directors of MDI has agreed to pay Mr. Gombrich's legal costs to defend him against this action. During the first quarter of 2004 Monsun, AS was successful in obtaining a legal judgement against Peter Gombrich as the personal guarantor of the note. F-21 Specific events of default have occurred on a significant majority of the outstanding notes payable, including the Bridge I, Bridge II and Suzanne M. Gombrich convertible promissory notes, issued by MDI, ranging from failure to make principal payments when due to breach of certain warranties and representations. The notes payable require the holder to notify MDI in writing of a declaration of default at which time a cure period, as specified in each individual note, would commence. There is no guarantee that MDI would be able to cure any event of default if, or when, the holder provides the required written notice. Other than the $641,000 Monsun AS convertible promissory note and the Ungaretti and Harris $149,000 note payable, which are the subject of legal actions described in Footnote 10 - Legal Proceedings, MDI has not received any written declarations of default from holders of its outstanding notes payable. The carrying amounts of notes payable approximates fair value at December 31, 2003 and 2002. NOTE 8. STOCKHOLDERS' EQUITY SALE OF EQUITY Summary of the Company's preferred stock capital table as of December 31, 2003 is as follows:
Shares Issued & OFFERING SHARES AUTHORIZED OUTSTANDING -------- ----------------- ----------- Series A convertible.............................................. 590,197 82,655 Series B convertible, 10% cumulative.............................. 1,500,000 799,856 Series C convertible, 10% cumulative.............................. 1,666,666 1,192,833 Series D convertible, 10% cumulative.............................. 300,000 175,000 Series E convertible, 10% cumulative.............................. 800,000 260,764 ----------- ----------- Total Preferred Stock............................................. 4,856,863 2,511,108 =========== ===========
During 2002, holders converted a total of 76,743 shares of Series A convertible preferred stock into 33,510 shares of common stock of the Company. During 2003 holders converted 35,437 shares of Series A convertible preferred stock into 15,478 shares of common stock. During 2002, several additional holders converted 557,500 shares of Series B convertible preferred stock, including cumulative dividends due thereon, into 2,594,175 shares of common stock of MDI. In 2003, a holder converted 66,000 shares of Series C convertible preferred stock, including cumulative dividends due, into 380,403 shares of common stock of the Company. During 2002, several holders converted 72,666 shares of Series C convertible preferred stock, including cumulative dividends due thereon, into 392,858 shares of common stock of MDI. During the first quarter of 2002 the Company completed the delivery terms of the Ventana Medical Systems, Inc. license agreement and transferred $297,500 from Series D preferred stock to license revenue to reflect the value of the license. The Company also determined a measurement date for the warrant during the first quarter of 2002. A fair value of $928,000 was calculated for the warrant using the Black-Scholes valuation method and the Company transferred this amount from preferred stock to additional paid in capital. During December 2002, several holders converted 5,145 shares of Series E convertible preferred stock, including cumulative dividends due thereon, into 155,180 shares of common stock of MDI. In 2003, several holders converted 168,479.28 shares of Series E convertible preferred stock, including cumulative dividends due thereon, into 5,150,744 shares of common stock of the Company. F-22 SUMMARY OF PREFERRED STOCK TERMS SERIES A CONVERTIBLE PREFERRED STOCK Liquidation Value: $4.50 per share Conversion Price: $10.3034 per share Conversion Rate: 0.4367--Liquidation Value divided by Conversion Price ($4.50/$10.3034) Voting Rights: None Dividends: None Conversion Period: Any time--3 years SERIES B CONVERTIBLE PREFERRED STOCK Liquidation Value: $4.00 per share Conversion Price: $1.00 per share Conversion Rate: 4.00--Liquidation Value divided by Conversion Price ($4.00/$1.00) Voting Rights: None Dividends: 10%--Quarterly--Commencing March 31, 2001 Conversion Period: Any time Cumulative dividends in arrears at December 31, 2003 were $909,494 SERIES C CONVERTIBLE PREFERRED STOCK Liquidation Value: $3.00 per share Conversion Price: $0.60 per share Conversion Rate: 5.00--Liquidation Value divided by Conversion Price ($3.00/$0.60) Voting Rights: None Dividends: 10%--Quarterly--Commencing March 31, 2002 Conversion Period: Any time Cumulative dividends in arrears at December 31, 2003 were $775,505 SERIES D CONVERTIBLE PREFERRED STOCK Liquidation Value: $10.00 per share Conversion Price: $1.00 per share Conversion Rate: 10.00--Liquidation Value divided by Conversion Price ($10.00/$1.00) Voting Rights: None Dividends: 10%--Quarterly--Commencing April 30, 2002 Conversion Period: Any time--After April 1, 2002 Cumulative dividends in arrears at December 31, 2003 were $379,247 SERIES E CONVERTIBLE PREFERRED STOCK Liquidation Value: $22.00 per share Conversion Price: $0.80 per share Conversion Rate: 27.50--Liquidation Value divided by Conversion Price ($22.00/$0.80) Voting Rights: Equal in all respects to holders of common shares Dividends: 10%--Quarterly--Commencing December 28, 2001 Conversion Period: Any time--After December 1, 2002 Cumulative dividends in arrears at December 31, 2003 were $1,153,727 ISSUANCE OF RESTRICTED SHARES FOR SERVICES In August 1999, Molecular Diagnostics, Inc. awarded 50,000 restricted shares of common stock to a non-employee consultant under a three-year agreement for consulting services. The restricted shares vested over a twenty-four month period. During 2002, a determination was made to expense these shares over the vesting period. A measurement date was determined and a fair value for these shares of $23,600 was calculated using the Black-Scholes valuation model. During 2003 and 2002 MDI recorded additional expense of $11,600 and a reduction of expense of $13,000, respectively, as consulting expense related to these shares. F-23 During 2000, Molecular Diagnostics, Inc. issued additional awards of restricted shares of common stock to non-employee consultants for services. The awards total 100,000 shares, and were issued under agreements for consulting services with terms similar to those outlined in the preceding paragraph. The measurement date of these shares had not been determined as of December 31, 2002 and therefore the value of these shares will be based on the market value of common stock at the end of each interim period until the measurement date is determined. A fair value of $16,000 was calculated at December 31, 2002 using the Black-Scholes valuation model. During 2002, MDI recorded a reduction of expense of $25,000, as consulting expense. ISSUANCE OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES During 2000, Molecular Diagnostics, Inc. issued an additional 270,000 options to purchase common stock to non-employees under agreements for consulting services. The options vest over a time period, ranging from the date of grant to three years, and have exercise prices from $1.75 to $2.875 per share. MDI issued these options to consultants as consideration for consulting services that commenced during 2000 and will be completed through 2003. One of the consulting agreements was terminated in 2002 and options to purchase 15,000 shares of common stock were cancelled. As the measurement date of these options had not been determined as of December 31, 2003, the value of these options will be determined at the end of each interim period until the measurement date is determined. A fair value of $11,200 was determined as of December 31, 2003, using the Black-Scholes valuation model. This value is charged to consulting expense over the term of the agreements. The amount of expense to be ultimately recognized will vary depending on the market value of the common stock at the end of each period. No activity was recorded during 2003 due to the immaterial change. During 2002, MDI recorded a reduction in expense of $55,000 as consulting expense. ISSUANCE OF COMMON STOCK FOR SERVICES In July 2002, the Company issued 113,832 shares of common stock to a vendor in lieu of payment in cash for services provided. The Company determined a fair value for the shares of $61,000 based on the invoiced value of the services. The Company recorded the entire amount as selling, general and administrative expense in 2002. In August 2002, the Company issued 60,182 shares of common stock to a financial advisor as consideration for services provided. The Company determined a fair value for the shares of $30,000 based on the market value of the stock at the time the services were performed. The Company recorded the entire amount as selling, general and administrative expense in 2002. Also in August 2002, the Company issued 711,364 shares of common stock to Round Valley Capital as part of the transactions fees related to a $650,000 loan. The Company determined a fair value for the shares of $362,795 based on the closing market price of the stock on the date the shares were issued. The Company is amortizing this amount over the life of the loan. During 2002, the Company amortized $161,000 as selling general and administrative expenses to reflect the time the loan was outstanding during the year. The Company also issued an additional 5,750,000 shares of unregistered and restricted common stock to be held as collateral against the note. The Company recorded the $5,750 par value of these shares as common stock and a reduction of additional paid in capital. Because the shares were used only as collateral for the note, no other value was calculated for the shares. In 2003, upon final settlement of the loan, the 711,364 shares and the 5,750,000 shares were returned to MDI and cancelled. In November 2002, the Company issued 400,000 shares of common stock to a former employee / consultant in settlement of litigation. The Company determined a fair value for the shares of $84,000 based on the market price of the stock on the date of issuance. The Company recorded the entire amount as research and development expenses in 2002. In November 2002, the Company issued 225,001 shares of common stock to a non-employee consultant as payment for consulting services performed in 2000 and 2001, which were in addition to those services detailed in the consultant's contract, and for regular services under the contract for the first six months of 2002. The Company determined a fair value for the shares of $180,000 based on the market price of the stock on the date of issue and the unpaid fees outstanding. The Company recorded a reduction in accrued expenses of $130,000 and the remaining amount was recorded as research and development expenses in 2002. F-24 In January 2003, MDI issued 168,913 shares of common stock in exchange for services to a non-employee professional services firm. MDI calculated a fair value of $83,078 for these shares based on the value of the shares on the date of the issuance and recorded the amount as legal expense as of March 31, 2003. In January 2003, MDI issued 1,000,000 shares of common stock in exchange for services to a non-employee professional services firm. MDI calculated a fair value of $100,000 for these shares based on the value of the shares on the date of the issuance and recorded the amount as investor relations expense as of March 31, 2003. In May 2003, MDI issued 875,000 shares of common stock in exchange for services to a non-employee professional services firm. MDI calculated a fair value of $218,750 for these shares based on the market value of the shares on the date they were due and is amortizing the amount over the remainder of the service contract. In June 2003, MDI issued 83,642 shares of common stock to a non-employee service vendor in lieu of payment for unpaid service invoices. MDI valued the shares at $12,546 which represented the amount of the unpaid invoices. In July 2003, MDI issued 1,400,000 shares of common stock to non-employees for past and future financing and consulting services. MDI calculated a fair value of $504,000 for these shares based on the fair market value of the shares on the date they were issued. Of the total amount $216,000 is being amortized over the life of the services contract. In August 2003, MDI issued 170,000 shares of common stock to a non-employee financial consultant for past financing services. MDI valued the shares at $51,000. In October 2003, MDI issued 133,333 shares of common stock to a non-employee supplier in lieu of payment for unpaid invoices. MDI valued the shares at $19,068. In December 2003, MDI issued 550,000 and 100,000 shares of common stock to two non-employee service vendors in lieu of payment for future services. MDI valued the shares at $82,500 and $16,000, respectively. ISSUANCE OF COMMON STOCK UNDER INCENTIVE PLANS In January 2002 a former officer of MDI exercised stock options to purchase 250,000 shares of common stock at an exercise price of $0.3937 per share. The Company recorded the $98,425 exercise price of the options as compensation expense in 2001 in accordance with the terms of the officer's severance agreement. In March 2002, the former officer exercised additional stock options to purchase 111,000 shares of common stock at an exercise price of $0.3937 per share and surrendered options to purchase 39,000 shares of common stock in lieu of the exercise price. ISSUANCE OF WARRANTS FOR SERVICES In January 2001, Molecular Diagnostics, Inc. issued warrants to purchase 80,000 shares of common stock, at an exercise price of $1.00, and 100,000 shares of common stock, at an exercise price of $.50, to a non employee as compensation for financial services to be provided under agreements covering January through April, 2001 and May through December 2001 respectively. The warrants vested in equal amounts each month. The agreements were replaced on October 1, 2001 with a new agreement covering a fifteen-month period ending on December 31, 2002. In accordance with the terms of the new agreement all of the outstanding warrants were immediately vested and MDI issued a new warrant to purchase 150,000 shares of common stock at an exercise price of $0.50. The new warrant vests in equal amounts each month as services are provided. A fair value of $13,500 was calculated for this warrant using the Black-Scholes valuation method as the services were completed and vesting took place during 2002. MDI recorded a reduction of expense of $10,500 as selling, general, and administrative expense in 2002 to cover the vested warrants. In July 2001, the Company issued a warrant to purchase 150,000 shares of common stock at an exercise price of $1.20 per share to an investment-banking firm as compensation for services provided over a twelve-month period. As the measurement date of this warrant had not been determined as of December 31, 2001, the fair value of the warrant will be determined at the end of each interim period until the measurement date is determined. A measurement date was F-25 determined upon completion of services during 2002 and a fair value of $66,375 was calculated, using the Black-Scholes valuation model. During 2002, the company recorded $10,875 respectively, as selling, general and administrative expense . In January 2002, the Company issued a warrant to purchase 200,000 shares of common stock at an exercise price of $0.30 per share to the holder of a convertible promissory note in consideration for a ninety-day extension of the note maturity date. A fair value of the warrant of $4,110 was calculated using the fair value interest method. In April 2002, the Company issued an additional warrant to purchase 200,000 shares of common stock at an exercise price of $0.70 per share to the same note holder for another ninety-day extension of the note maturity date. A fair value of this warrant of $8,287 was calculated using the fair value interest method. The Company recorded both amounts as additional interest expense in 2002. In February 2002, the Company issued a warrant to purchase 750,000 shares of common stock at an exercise price of $0.01 per share to its former legal counsel as compensation for legal services performed in regard to settled litigation. A fair value of the warrant of $675,000 was calculated using the Black-Scholes valuation method. The Company recorded the amount as legal expenses during 2002. Between March 2002 and June 2002, the Company issued a series of Bridge I convertible promissory notes. As additional consideration for the notes, the Company issued warrants to purchase 3,185,000 shares of common stock at an exercise price of $0.25 per share to the note holders. A fair value of the warrants of $99,950 was calculated using the fair value interest method. This amount was recorded as additional interest expense during 2002. On May 31, 2002, the Company issued a warrant to purchase 51,493 shares of common stock at an exercise price of $0.01 per share to a non-employee consultant in lieu of payment of fees due to the consultant for past services. The Company recorded a fair value of $50,969, the value of the consulting fees due, as a reduction of accounts payable. In September 2002, the Company issued a warrant to purchase 681,818 shares of common stock at an exercise price of $0.20 per share to various individuals related to Round Valley Capital, LLC as additional loan transaction fees. A fair value of the warrant of $156,000 was calculated using the Black-Scholes valuation method modified so that cash and non-cash transactions fees did not exceed the loan value. This fair value was amortized as additional financing costs over the life of the loan. The Company recorded $69,333 as financing costs to reflect the amount amortized during 2002. As part of the loan settlement with Round Valley Capital, LLC, in April of 2003, warrants to purchase 481,818 shares of common stock were returned to the Company and cancelled. In November 2002, the Company issued a warrant to purchase 200,000 shares of common stock at an exercise price of $0.16 per share as compensation to an advisor who acted as a finder for investors in Bridge II convertible promissory notes. A fair value for the warrant of $44,000 was calculated using the Black-Scholes valuation method. The Company recorded the amount as financing costs during 2002. On April 2, 2003, MDI issued a warrant to Suzanne M. Gombrich, an affiliate, entitling the holder to purchase 1,000,000 shares of common stock of MDI at an exercise price of $0.15 per share. The warrant was issued as additional consideration for a $1,000,000 convertible promissory note issued on the same date. MDI valued the warrants at $270,000 using the Black-Scholes valuation model and recorded the amount as a current year administrative expense. In August 2003, MDI issued 1,100,000 warrants with an exercise price of $0.17 per share to a non-employee financial consultant for past financial services. MDI valued the warrants at $341,000 using the Black-Scholes valuation model and recorded the amount as a current year administrative expense. In September 2003, MDI issued 1,335,000 warrants with an exercise price of $0.20 per share to non-employee financial consultants for past financial services. MDI valued the warrants at $347,100 using the Black-Scholes valuation model and recorded the amount as a current year administrative expense. In September 2003, MDI issued 500,000 warrants with an exercise price of $0.17 per share to a non-employee consultant in lieu of payment for future services. MDI valued the warrants at $150,000 using the Black-Scholes valuation model and is amortizing the amount over the twelve-month term of the consulting agreement. F-26 In November 2003, MDI issued 92,145 warrants with an exercise price of $0.20 per share to Bridge I investors upon conversion of their notes per the indenture agreement. MDI valued the warrants at $16,586 using the Black-Scholes valuation model and recorded the amount as a current year administrative expense. APPLICATION OF BLACK-SCHOLES VALUATION MODEL In applying the Black-Scholes valuation model for the years 2003 and 2002, the Company has used an expected dividend yield of zero, a risk-free interest rate of 5% and 6% for the 2003 and 2002 periods, respectively, a volatility factor of 208% and 90% for the 2003 and 2002 periods, respectively, and a fair value of the underlying common shares of closing market price on the date of the grant for both periods. The expected life equaled the term of the warrants, options, or restricted shares. WARRANTS At December 31, 2003, the Company had the following outstanding warrants to purchase shares of Common Stock: Weighted Average Total Shares Exercisable Exercise Price Expiration Date ------------ ----------- -------------- --------------- 39,834 39,834 $15.060 Perpetual 372,500 372,500 $1.090 August 29, 2004 100,000 100,000 $0.600 October 31, 2004 1,750,000 1,750,000 $1.150 November 2, 2004 50,000 50,000 $0.330 December 10, 2004 200,000 200,000 $0.300 January 31, 2005 1,023,302 1,023,302 $6.870 March 23, 2005 1,100,000 1,100,000 $0.200 July 2, 2005 200,000 200,000 $1.000 November 22, 2005 50,000 50,000 $0.937 December 1, 2005 1,000,000 1,000,000 $1.250 December 8, 2005 180,000 180,000 $0.720 January 8, 2006 25,000 25,000 $0.010 February 1, 2006 1,000,000 1,000,000 $0.250 February 7, 2006 599,942 599,942 $1.200 February 28, 2006 150,000 150,000 $1.200 July 10, 2006 750,000 750,000 $1.000 July 26, 2006 312,500 312,500 $1.000 August 6, 2006 150,000 150,000 $0.500 October 1, 2006 172,120 172,120 $0.820 October 11, 2006 597,750 597,750 $1.000 November 30, 2006 200,000 200,000 $0.700 March 31, 2007 51,493 51,493 $0.010 May 31,2007 3,185,000 3,185,000 $0.250 July 31, 2007 200,000 200,000 $0.160 November 1, 2007 1,000,000 1,000,000 $0.100 April 2, 2008 500,000 500,000 $0.170 September 2, 2008 400,000 400,000 $0.170 September 16, 2008 935,000 935,000 $0.170 September 16, 2008 92,145 92,145 $0.200 November 13, 2008 250,000 250,000 $0.330 July 14, 2009 750,000 750,000 $0.001 February 12, 2012 ----------- ---------- ------ 17,386,586 17,386,586 $1.243 =========== ========== ====== The Company is obligated under the terms of subscription agreements for Bridge I and Bridge II convertible promissory notes to issue additional warrants to the note holders based on certain events. If and when the holder of a Bridge I note elects to convert the principal of the note into shares of MDI common stock, the holder is entitled to receive a warrant to purchase one share of MDI common stock for each four shares of MDI common stock into which the note is converted at an exercise price equal to $0.20, based on the written offer dated October 10, 2003. Since the Bridge I convertible promissory note holders have not all accepted the offer to convert their Convertible Promissory Notes and accrued interest into common shares at $.015 per share, the number of warrants to be issued cannot be determined until such time as the notes are actually converted into the common stock of MDI. If and when the Company completes additional financing plans as outlined in the subscription agreements for Bridge II notes, the holder of a Bridge II note is entitled to receive a warrant to purchase one share of stock for each three shares into which the note is convertible. The exercise price of the warrants is F-27 $0.15 per share for Bridge II notes, which fall into the class of the first $1,000,000 in cash subscriptions and $0.20 for the holders of the remaining Bridge II notes. Certain warrants in the above table entitling the holders, Azimuth Corporation and Cadmus Corporation, to purchase a total of 3,125,000 shares of common stock, include additional anti-dilution provisions, over and above the standard anti-dilution provisions included in all warrants which cover dilution caused by common stock dividends and stock splits or reverse stock splits. These additional provisions consider other items as dilutive events, including but not limited to the issuance of convertible debt or equity securities, options, warrants, etc. A calculation of the dilutive effect of a convertible security is required at the time the security is issued rather than if and when actual conversion takes place. The Company calculated that at December 31, 2002, these warrants were required to be adjusted to reflect that the holders were entitled to purchase an additional 519,000 shares of common stock. The exercise prices of the warrants would be adjusted so that the total proceeds to the Company from an exercise of these warrants would remain the same. The Company also calculated that as of the beginning of July 2003, additional adjustments were required to reflect that holders were entitled to purchase a further 897,000 additional shares with commensurate adjustments in per share exercise prices. On July 18, 2003, the Company negotiated an agreement with the holders of these warrants. The holders agreed to cancel the warrants and forgive approximately $100,000 owing to the holders by MDI as of that date. The Company agreed to issue a new warrant to the holders entitling them to purchase 6,500,000 shares of common stock at an exercise price of $0.30 per share. The Company also agreed to issue a 120-day warrant entitling the holders to purchase 500,000 shares of common stock at $0.30 per share, which expired November 19, 2003. The new warrants will only contain the standard anti-dilution provisions included in all other warrants. STOCK APPRECIATION RIGHTS At December 31, 2002 and 2001, MDI had 450,000 stock appreciation rights (SARs) outstanding. These SARs, issued in 1989, have an exercise price of $0.30 and could be exercised through November 20, 2001. These SARs are deemed automatically exercised on November 20, 2001 if not done so at the option of the holder. In general, each SAR entitles the holder to receive upon exercise an amount equal to the excess, if any, of the market value per share of Common Stock at the date of exercise over the exercise price of the SAR, plus any dividends or distributions per share made by MDI prior to the exercise date. In lieu of making cash payments, MDI may elect and intends, to issue shares of Common Stock. MDI recorded compensation expense in fiscal years prior to 2002, to reflect the difference between the closing market price of MDI's common stock and the exercise price of the SARs. Since the SARs were deemed exercised at November 20, 2001, no additional entries were required for 2002 or 2003. SHARES OF COMMON STOCK As a result of the issuance of numerous convertible securities, including the above Convertible Promissory Notes and related warrants, MDI does not have sufficient shares of common stock authorized to issue upon exercise of all of the currently outstanding convertible securities, warrants and options. The issuance of shares of common stock pursuant to any new financing arrangement is subject to the Company obtaining shareholder approval to increase the authorized shares of common stock of the Company and the Company filing an amended Certificate of Incorporation. The Board of Directors is considering an increase in the number of authorized shares of common stock from 100,000,000 shares to 300,000,000 shares, although the Board has not made a final decision on the issue. Any ultimate Board approved action requires a vote of the stockholders. The Board intends to place this issue on the agenda at the next annual meeting of the stockholders or at a special meeting to be called for this purpose. The failure to have a sufficient number of authorized shares may constitute a breach of one or more of MDI's agreements governing issuance of such securities. NOTE 9. LEASES As of December 31, 2003, the Company currently leases approximately 5,700 square feet of space for its Chicago, Illinois corporate headquarters and research laboratory and offices under an operating lease expiring in 2008. Total rental expense related to the Company's headquarters location during the years ended December 31, 2003 and 2002 was $125,000 and $179,000, respectively. F-28 The lease obligation relates to the pre-merger office location for AccuMed. During 2002, AccuMed's landlord brought suit against AccuMed for unpaid rent and obtained a judgment in the amount of approximately $157,000. In the first quarter of 2004 a preliminary settlement was reached on the outstanding judgment and the two payments totaling $27,448 were paid and a balance of four monthly payments totaling $54,896 remains. In addition, discussions regarding the issuance of shares of common stock for the balance of the settlement are ongoing and subject to an increase in the authorized shares. Future minimum annual lease payments under these leases as of December 31, 2003 are (in thousands):
Accumed Operating Lease Year Leases Obligation ---- ------ ---------- 2004.................................................................... $129 $ 327 2005.................................................................... $133 2006.................................................................... $137 2007.................................................................... $141 2008.................................................................... $ 121 ----- ----- Total lease payments.................................................... $ 661 $ 327 ===== ===== Amount of interest included in the minimum lease payments............... $ (48) ------ Carrying value of lease obligation...................................... $ 279 ====
NOTE 10 INCOME TAXES Significant components of deferred income taxes consist of the following at December 31 (in thousands):
2003 2002 ---- ---- Deferred tax assets related to: Net operating loss carryforwards........................................................ $ 31,407 $ 27,833 Research and Development Credit......................................................... 642 656 Writedown of patents................................................................ 110 110 Writedown of goodwill............................................................... 113 -- Accrued expenses.................................................................. 106 367 -------- -------- 32,378 28,966 Less valuation reserve....................................................... 32,378 28,966 -------- -------- Net deferred tax asset......................................................... $ -- $ -- ======== ========
At December 31, 2003, the Company had domestic net operating loss carryforwards aggregating approximately $78,500,000. For financial reporting purposes, this entire amount of deferred tax assets related principally to the net operating loss carryforwards has been offset by a valuation allowance due to uncertainty regarding the realization of the assets. The valuation allowance increased by approximately $3,302,000 and $3,947,000 for the years ended December 31, 2003 and 2002, respectively. The net operating loss carryforwards and Research and Development credit carryforwards may not be available to offset future taxable income of MDI due to statutory limitations based on the changes of ownership and other statutory restrictions. The net operating loss carryforwards begin to expire in 2006. The Research and Development credit carryforwards expire from 2004 to 2014. F-29 NOTE 11. EQUITY INCENTIVE PLAN AND EMPLOYEE STOCK PURCHASE PLAN On May 25, 1999, stockholders approved the establishment of the 1999 Equity Incentive Plan effective as of June 1, 1999. The Plan provides that the Board may grant various forms of equity incentives to directors, employees, and consultants, including but not limited to Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, and Restricted Stock Awards. Grants under the Plan are exercisable at fair market value determined as of the date of grant in accordance with the terms of the Plan. Grants vest to recipients immediately or ratably over periods ranging from two to five years, and expire five to ten years from the date of grant. On May 23, 2000, stockholders approved Amendment No. 1 to the Plan, which increased the number of shares of common stock allocated for use in the Plan from 2,000,000 shares to 3,000,000 shares. On June 21, 2002, stockholders approved an Amendment to the Plan, which increased the number of shares allocated for use in the Plan from 3,000,000 shares to 5,500,000 shares. The Board of Directors has also granted options to purchase common stock of MDI, which are not covered by the terms of the Plan. MDI applies APB Opinion No. 25 and related interpretations in accounting for options granted to employees under the Equity Incentive Plan. No compensation cost was recorded during 2003 or 2002 for options granted to employees as the exercise price approximated the fair value of the underlying common stock on the date of the grant. Had stock options been accounted for under the fair value method recommended by FAS 123, the Company's net loss allocated to common shareholders would have been changed to the pro forma amounts indicated below:
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 (in thousands except for per share amounts) NET LOSS APPLICABLE TO COMMON SHAREHOLDERS AS REPORTED............. $ (11,060) $ (13,972) Deduct: Total stock-based compensation expense determined under the fair value based method for all awards and forfeitures, net of related taxes.............................. 213 (345) --------- ---------- PRO FORMA NET LOSS APPLICABLE TO COMMON SHAREHOLDERS............... $ (10,847) $ (14,317) ========== ========== Basic loss per share applicable to common shareholders - as reported..................................... $ (.27) $ (.49) ========= ========== Basic and diluted loss per share applicable to common shareholders - pro forma....................................... $ (.27) $ (.50) ========= ==========
The fair value for these options was estimated at the date of the grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 5% and 6% for the 2003 and 2002 periods, respectively; dividend yields of zero; volatility factors of the expected market price of the Company's common stock of 208% and 90% for both years and a weighted average expected life of the options of 2.5 - 5 years. A summary of the Company's stock option activity, and related information follows: F-30
Weighted Average Exercise Options Price ------- ----- OUTSTANDING AT DECEMBER 31, 2001.................................. 3,792,496 Granted......................................................... 686,833 $ 0.4104 Exercised....................................................... (361,000) $ 0.3937 Forfeited - assumed in acquisition................................ (321,812) $ 6.7961 Forfeited......................................................... (289,000) $ 1.0702 ----------- OUTSTANDING AT DECEMBER 31, 2002.................................. 3,507,517 Granted ......................................................... 600,000 $ 0.3144 Exercised........................................................ -- Forfeited - assumed in acquisition................................ (17,035) $ 4.9169 Forfeited......................................................... (595,834) $ .9385 ------------ OUTSTANDING AT DECEMBER 31, 2003.................................. 3,494,648 =========== EXERCISABLE AT DECEMBER 31, 2003.................................. 2,731,981 $ 1.329 =========== Weighted average fair value of options granted in 2003............ $ 0.3144
At the Annual Meeting on May 25, 1999, the stockholders also approved the Employee Stock Purchase Plan. The Plan offers employees the opportunity to purchase shares of common stock of MDI through a payroll deduction plan, at 85% of the fair market value of such shares at specified enrollment measurement dates. The aggregate number of shares available for purchase under the Plan is 200,000. NOTE 12. COMMITMENTS AND CONTINGENCIES At December 31, 2003, MDI was contractually committed to pay $30,000 to a consultant for services to be performed during 2004. On October 11, 2001, MDI obtained a 30% investment in Cell Solutions, LLC. Cell Solutions was formed for the purposes of developing and improving slide preparation systems. As consideration, MDI provided Cell Solutions five-year warrants to purchase 172,120 shares of common stock with an exercise price of $0.82. These warrants were valued using Black-Scholes and determined to have a value of $127,000. MDI has included the value of these warrants as an investment at December 31, 2002 and 2001. MDI determined the fair value of the investment to be impaired at December 31, 2001. The investment was written down to zero as a result of the uncertainty of future benefit or revenue stream. MDI is contractually committed to issue a total of 1,549,086 warrants with the same terms based upon delivery of certain products by Cell Solutions. As of December 31, 2003, Cell Solutions had not delivered these products and MDI was not liable for the issuance of the warrants. NOTE 13. LEGAL PROCEEDINGS SETTLED DURING 2002 AND 2003 On October 20, 2000, MDI filed suit in Circuit Court of Cook County, Illinois (Case No. 00 CH 15652), against SpectRx, Inc. and Welch Allyn, Inc. MDI's suits sought injunctive relief and damages from SpectRx based on a complaint of fraud and breach of certain confidentiality agreements with regard to MDI's business plans, marketing plans, and technology related to in-vivo diagnostic devices. MDI's claim arose from disclosure of confidential information to SpectRx in the course of negotiations contemplating a joint venture to develop new medical products. The information covered cancer detection systems relying on fluorescence technologies as well as bio-molecular marking agents for use in applications within and outside of the body. MDI also provided SpectRx with marketing plans, revenue, income and cash flow projections, product development and launch plans, and product distribution strategies. In addition, MDI provided SpectRx with certain confidential technical information regarding patent applications, measurement technologies, design specifications, quantitative analyses, optimization techniques, positional information for cellular mapping, and other technical specifications. Subsequent to the disclosure of MDI's information to SpectRx, they entered into a business arrangement with Welch Allyn to develop products of a similar nature to MDI's. The suit also charged SpectRx and Welch Allyn with misappropriation of MDI's trade secrets in violation of the Illinois Trade Secrets Act. MDI's suit was filed in response to a suit filed by SpectRx in the Superior Court of Gwinnett County, Georgia (Civil Action NO. 00-A-7604 1), seeking a declaratory judgment (but no monetary damages or other relief) that SpectRx F-31 did not breach the confidentiality agreements as charged in MDI's suit. On July 5, 2001, MDI filed counterclaims, similar to the claims outlined in MDI's Illinois suit, to the SpectRx action in Georgia. On February 1, 2002, MDI reached an out-of- court settlement with SpectRx. Under the terms of the settlement, SpectRx paid a $150,000 lump sum cash payment to MDI, and MDI granted SpectRx an option to license certain of MDI's technology. Additional terms of the settlement are confidential. Under the terms of the settlement, neither party admitted any liability or wrongdoing. Welch Allyn also was a party to the settlement agreement. In 2001, Dawn H. Grohs, a former employee / consultant to the Company, filed suit against the Company and certain affiliated companies, as well as two of the Company's senior officers (C.A. No. 02-C-1010 (U.S. District Court for the Northern District of Illinois). Ms. Grohs' claimed fraud, unjust enrichment, misrepresentation, breach of contract and quantum merit related to her assertions that the defendants allegedly failed to provide her with equity; tortuous interference with contractual relations and intentional interference with contractual relations based on alleged encouragement of changes to the business relationship with Ms. Grohs; breach of the covenant of good faith and fair dealing, negligent infliction of emotional distress and intentional infliction of emotional distress based on defendants' treatment of Ms. Grohs; and violation of state law for alleged unfair and deceptive acts by defendants for the purpose of inducing Ms. Grohs to continue to provide services without compensation. Ms. Grohs sought $85,000 in wages, $40,250 in expenses, equity for contributions and efforts during the formation of certain of the Company's affiliates, payment of a sum to be determined by the court for the intentional and/or negligent infliction of emotional distress, a finding that the actions of defendants constitute unfair and deceptive acts, and that the court treble the damages awarded. In addition to the specific relief described above, each count seeks an award of attorneys' fees and costs and such other and further relief the court deems just and appropriate. In October 2002, MDI reached an out-of-court settlement with Ms. Grohs. Under the terms of the settlement, MDI paid Ms. Grohs $5,000 in cash and issued 400,000 unregistered shares of its common stock to her. MDI calculated a fair value of $84,000 for the shares of its common stock. MDI also granted Ms. Gross an option to purchase 400,000 shares of MDI common stock at an exercise price of $0.20 per share. One third of the option vested immediately and the remaining two thirds vest in equal amounts on the first and second annual anniversary dates of the grant. The Company and its subsidiaries Samba Sarl and AccuMed international, Inc. (collectively, "MDI") are parties to an Amended License and development Agreement with Ventana Medical Systems, Inc. ("Ventana") dated October 31, 2001, pursuant to which MDI has licensed certain intellectual property rights and technical information to Ventana. Under the Amended License and Development Agreement, Ventana was to produce an automated pathology imaging system using the intellectual property rights and technical information licensed from MDI, and Ventana was to pay MDI royalties based on the sales of such imaging system, as well as software support fees related to licensed software rights. MDI and Ventana were also parties to a Letter of Intent and Confidentiality Agreement dated July 12, 2002. Disputes arose between MDI and Ventana regarding their respective performance under the Amended License and Development Agreement and the Letter of Intent. In November 2003, MDI and Ventana negotiated a settlement and release, pursuant to which the Amended License and Development Agreement and the Letter of Intent were modified. Under the terms of the settlement and release, among other things, MDI issued a Promissory Note to Ventana in the principal amount of $62,946 and is also required to deliver two AcCell 2001 workstations. Ventana waived its rights to any prepaid royalties or other fees paid to MDI or its subsidiaries upon signing of the original agreements. PENDING AS OF DECEMBER 31, 2003 AND SETTLED DURING 2004 On May 22, 2001, a judgment in the amount of $312,000 plus interest was entered against AccuMed (Circuit Court of Cook County (Case N0. 97 L 7158)) in favor of Merrill Corporation. The judgment was the result of the settlement of an action brought by Merrill claiming unpaid fees for financial printing services, provided to AccuMed in 1996, and related interest and legal costs totaling in excess of $400,000. Under terms of the settlement and the related judgment, AccuMed was required to make 12 monthly payments of $26,000, and a final payment to include all interest accrued on declining unpaid balance of the judgment over the term of payment. AccuMed made 7 payments in accordance with the terms of the settlement and ceased to make any additional payments. In May of 2002, Merrill asserted its rights under the original judgment and filed a citation to discover assets of AccuMed and obtain the remaining amount due. On October 17, 2002, MDI reached an agreement with Merrill whereby MDI assumed responsibility for the remaining unpaid amount of the judgment and related costs totaling $145,000 and agreed to pay such amount no later than November 15, 2002. In February F-32 2004, MDI settled the amount due to Merrill and fully satisfied all obligations owed to Merrill. The citation proceedings against MDI were dismissed. On July 31, 2002, MDI entered into a settlement and mutual release agreement with Trek Diagnostic Systems, Inc. ("Trek") related to a claim of breach of representations and warranties included in an agreement under which AccuMed sold its microbiology business and related assets to Trek in 1999. Under the settlement agreement, MDI executed an $80,000 promissory note in favor of Trek. The note required principal payments of $40,000 each on September 1 and December 1, 2002. MDI made the initial payment and Trek filed suit against MDI (Court of Common Pleas Cuyahoga County, Ohio (Case No. CV 03 492582)) on January 23, 2003 to collect the remaining $40,000 plus interest at 8% per annum and legal and other costs. On April 18, 2003, judgment was entered against MDI in the amount of $40,000 plus interest. Trek initiated citation proceedings against MDI in the Circuit Court of Cook County, Illinois in 2003. In March 2004, MDI entered into a final settlement agreement with Trek and fully satisfied all amounts due to Trek. The citation proceedings against MDI were dismissed. PENDING AS OF DECEMBER 31, 2003 Prior to MDI's acquisition of AccuMed, Garrett Realty, Inc. filed suit against AccuMed for unpaid rent and related expenses under a lease for premises located at 900 and 920 N. Franklin in Chicago, Illinois (Circuit Court of Cook County (Case No. 01 M1 725821)). Garrett originally claimed approximately $50,000 was due them. Following completion of MDI's acquisition of AccuMed, management vacated AccuMed's leased facility and consolidated its operations into MDI's headquarters facility. However, Garrett continued to claim ongoing rent and amended its complaint in 2002 claiming approximately $148,000 in unpaid rent and related legal costs through July 2002. On July 18, 2002, judgment was entered in favor of Garrett and against AccuMed in the amount of approximately $157,000. On December 20, 2002, pursuant to a court order, Garret seized approximately $12,500 from an MDI bank account, as a partial payment against the judgment amount. The unpaid remainder of the judgment, approximately $136,000 including interest, will continue to accrue interest until paid in full. Since AccuMed had a continuing obligation for the minimum lease payments, MDI recorded a $290,000 lease obligation in accounting for the AccuMed merger based on the present value of the future payments. MDI is contesting the right of Garrett to pursue collection of the judgment against the assets of MDI. Management believes that the amount of the accrued lease obligation recorded as of December 31, 2003 is sufficient to cover any remaining expenses of this litigation and the related judgment. During the first quarter of 2004, MDI reached a preliminary settlement on the outstanding judgment, which required six monthly payments of $13,724 each. MDI has made the first two required monthly payments. MDI also agreed to issue 280,000 shares of its common stock as part of the final settlement. The issuance of the shares is subject to shareholder approval of an increase in the number of authorized shares of common stock. On March 28, 2003, The Cleveland Clinic Foundation filed suit against MDI (United States District Court for the Northern District of Ohio, Easter Division, (Case No. 1:03CV0561)) seeking approximately $315,000 plus interest and attorney fees and costs. The sum in question pertains to remaining unpaid fees for certain clinical trial work conducted by The Cleveland Clinic Foundation in the Peoples Republic of China on behalf of MDI. On December 8, 2003, a default judgment in the amount of $260,000 was entered against MDI. At December 31, 2003, MDI has recorded the full amount owing to The Cleveland Clinic Foundation as a liability in its accounts. MDI is currently engaged in settlement discussions with The Cleveland Clinic Foundation. On January 2, 2003, Bowne of Chicago, Inc.("Bowne") filed suit against MDI (Circuit Court of Cook County, County Department-Law Division (Case No. 03 L 000009)) claiming approximately $342,000, plus interest and attorney fees and costs, related to financial printing service fees provided to MDI by Bowne during the period October 25, 2001 through November 7, 2002. While MDI is actively defending itself against the suit claiming the charges for printing services provided during the period mentioned above were excessive, management has taken a conservative position and recorded the entire amount of the Bowne invoices as outstanding accounts payable on the records of MDI. MDI is currently engaged in settlement discussions with Bowne. On January 9, 2003, Monsun, AS ("Monsun") filed suit against Peter Gombrich, the Chairman, (United States District Court for the Northern District of Illinois Eastern Division (Case No. 03C 0184)) claiming $500,000 plus consequential damages for failure to make payment in compliance with the terms of a personal guaranty signed by Mr. Gombrich in relation to Monsun's grant of an extension in the maturity date of a convertible promissory note in the F-33 principal amount of $500,000 issued by MDI on November 1, 2000. The note had an original maturity date of November 1, 2001. The maturity date of the note was initially extended until January 31, 2002 and subsequently to April 1, 2002 and finally to July 31, 2002. Monsun granted the maturity date extensions in exchange for various warrants issued by MDI entitling the holder to purchase shares of common stock at various prices. In November 2002, the Board of Directors approved the issuance of 200,000 shares of common stock to Monsun to satisfy a default penalty clause in the guaranty. The terms of the guaranty required that Monsun receive registered shares of common stock, however, in order to comply with securities laws, MDI issued the shares of our common stock to Monsun with a restrictive legend, which permits their sale only in compliance with Rule 144 of the ACT. MDI has recorded the principal amount of the note plus accrued and unpaid interest to December 31, 2003 as a note payable on its records. In March of 2004, Monsun obtained a judgment against Mr. Gombrich in the amount of $675,000. Monsun is currently seeking to obtain an additional $545,000 to cover legal fees and costs incurred in enforcing the Guaranty Agreement. Since Mr. Gombrich's potential liability under the suit, including the failure to deliver registered shares of common stock, is the result of the failure of MDI to pay the principal amount of its convertible promissory note when due, the Board of Directors has agreed that MDI will assume responsibility for Mr. Gombrich's obligations under the guaranty, including legal costs. Management and counsel are unable to determine the result of this pending litigation as of March 31, 2004. MDI is a defendant in several lawsuits brought by current or former unsecured creditors to collect past due amounts for goods and services. MDI has recorded the amounts due in its records and is attempting to settle these suits and unfiled claims. MDI is a defendant in several wage claims brought by former employees seeking to collect amounts due for unpaid wages and severance benefits. MDI has recorded the amounts due in its records and is attempting to settle these actions On May 16, 2003, the Company, together with its subsidiaries, AccuMed International, Inc. ("AccuMed") and Oncometrics Imaging Corp. ("Oncometrics"), filed suit against MonoGen, Inc. ("MonoGen"), its President, Norman J. Pressman ("Pressman"), and another individual, in the Circuit Court of Cook, County, Illinois (Docket No. 03 CH 08532) (the "State Case"). The dispute that gave rise to the State Case arose out of two license agreements, one between AccuMed and MonoGen, and the other between Oncometrics and MonoGen, in which the rights to limited use of certain intellectual property were granted to MonoGen in return for one-time license fee payments totaling $500,000 (the "License Agreements"). At the time the License Agreements were entered into, the Company had not yet acquired AccuMed and Oncometrics. A portion of the intellectual property subject to the License Agreements had originally been licensed by Oncometrics from an entity now known as the British Columbia Cancer Agency ("BCCA"). Pressman was the President of both AccuMed and Oncometrics when the License Agreements were negotiated and executed. Shortly after the License Agreements were signed, Pressman became the President of MonoGen. The Complaint filed in the State Case (the "State Case Complaint") alleged that certain rights to the subject intellectual property were transferred to MonoGen at a below-market price. The State Case Complaint also asserted that the consent of BCCA to the sublicensing of its technology, which was required by the Oncometrics License Agreement, had not been obtained, and that, to the extent BCCA's consent was required, Pressman breached his fiduciary duties to AccuMed and Oncometrics by failing to obtain such consent. The State Case Complaint also alleged that Pressman breached his fiduciary duties by negotiating below-market license fees for the subject technology with his future employer, MonoGen. Almost a year before the State Case Complaint was filed, MonoGen had, in July, 2002, initiated an arbitration proceeding against the Company, AccuMed and Oncometrics (collectively, the "MDI Group") in which MonoGen claimed that the MDI Group was violating MonoGen's rights, and breaching many of the MDI Group's obligations, under the License Agreements. In an effort to resolve this dispute, the MDI Group and MonoGen entered into a settlement agreement (the "Technology Agreement") as of December 23, 2002, pursuant to which certain understandings were reached, including an agreement concerning the MDI Group's sales of certain systems to a number of specifically identified customers, and the royalties to be paid by the MDI Group to MonoGen based on those sales. The Technology Agreement, which also included an arrangement for the MDI Group's maintenance of the patents licensed to MonoGen, did not have the desired effect of finally resolving the dispute among the parties. Thus, the MDI Group filed the State Case Complaint. MonoGen was able to obtain a dismissal for itself from the State Case on the ground that all disputes arising from the agreements with the MDI Group members were required to be submitted to arbitration. The State Case continued against the individual defendants, however. F-34 In July, 2003, MonoGen proceeded to file a Second Demand for Arbitration against the members of the MDI Group, but no proceedings were held with respect to that demand. In December, 2003, MonoGen filed a Third Amended Demand for Arbitration, in which MonoGen alleged that the MDI Group had breached its agreements with MonoGen by, among other things, (i) licensing other parties to use technologies that the MDI Group exclusively licensed to MonoGen, (ii) not maintaining the patents that were the subject of the MDI Group's licenses to MonoGen, and (iii) not providing MonoGen with information in regard to improvements made to the technologies licensed to MonoGen by the MDI Group. MonoGen also claimed that the MDI Group had defamed MonoGen in statements impugning MonoGen's rights to the licensed technologies. The MDI Group has denied MonoGen's claims, and has asserted in a counterclaim that the agreements relied upon by MonoGen are invalid. The parties are presently engaged in discovery with respect to this arbitration and the claims asserted in the arbitration are scheduled for a hearing before a panel of American Arbitration Association arbitrators in June, 2004. Because the same basic issues were involved in both the State Case and the arbitration proceeding, and because the License Agreements and the Technology Agreement can only be declared invalid in the arbitration proceedings, the MDI Group decided to concentrate all of its efforts in regard to this matter in the arbitration and therefore entered into an agreement with the remaining defendants in the State Case in February, 2004 to have that suit fully and finally dismissed. On April 14, 2003, MDI received a notification from the attorney for the licensor, Dr. Bruce Patterson, M.D., Ph.D, under the License and Development Agreement covering certain HPV technology, which forms the basis for the In-Cell HPV test, indicating that the licensor intended to terminate the license in accordance with a specific clause of the license, which permits termination in the event the Company makes an assignment for the benefit of creditors or bankruptcy, or otherwise relinquishes or loses control of all its assets. On April 15, 2003, MDI informed the attorney that the facts used by the licensor to invoke the termination right were incorrect and that MDI was still in control of all of the assets and that such assets are pledged as security under debt instruments and that such pledges are not included under events which would permit the licensor to terminate the license. MDI and their counsel, believe that MDI would prevail should the licensor attempt to pursue a termination action. On July 2, 2003, Dr. Patterson and his company Invirion, Inc. filed suit against MDI in the Circuit Court of Cook County, Illinois (Case No. 03 L 7995). Dr. Patterson seeks approximately $86,000 that he claims are due from MDI under an agreement for his scientific consulting services. This is a dispute with the licensor over completion of the third milestone of the license under which completion requires process and procedure verification by an independent third party. This verification requirement has not been satisfied as of yet, and therefore MDI is contesting this claim. Invirion, in a separate claim, seeks approximately $57,500 for certain HPV test kits that it claims were sold to MDI. MDI is engaged in settlement discussions with Dr. Patterson and Invirion to resolve all outstanding issues. On November 18, 2003, the Medical College of Georgia Research Institute, Inc. filed suit against MDI in the Superior Court of Richmond County, Georgia (Case No. 2003-RCCV-1211) to collect amounts allegedly due pursuant to an agreement to provide a clinical study for MDI. Georgia Research Institute claims that the principal amount of the obligation due from MDI is approximately $86,700. However, Georgia Research Institute is seeking to collect approximately $315,300 pursuant to an interest provision of 10% per month. MDI is contesting this lawsuit, but has made attempts to resolve this dispute by settlement. NEW PROCEEDINGS 2004 On February 18, 2004, current and former employees Daniel Kussworm, Jennifer Kawaguchi, and Susan Keesee filed suit against MDI and one of its officers in the Circuit Court of Cook County, Illinois (04 L 1941). These individuals are seeking to recover wages and other compensation allegedly due to them. Mr. Kussworm seeks approximately $68,600, Ms. Kawaguchi seeks approximately $37,200, and Ms. Keesee seeks approximately $124,800; all amounts exclude interest, court costs, and attorney fees. MDI is engaged in settlement discussions with these three individuals to resolve all outstanding issues. MDI received information that on January 29, 2004, the law firm Ungaretti & Harris filed suit against Accumed International Inc. in the Circuit Court of Cook County, Illinois (04 L 1101), to collect for fees rendered prior to December 31, F-35 2003. Although Accumed has not been formally served with summons and has not seen the legal complaint, it is believed that Ungaretti & Harris is seeking to collect approximately $179,230. NOTE 14. SUBSEQUENT EVENTS CONVERSIONS OF CONVERTIBLE SECURITIES From January 1, 2004 through March 31, 2004, holders of $1,200,000 principal amount of Bridge I Convertible Promissory Notes elected to convert their notes and related accrued interest of $152,000 into 9,010,410 shares of unregistered common stock. From January 1, 2004 through March 31, 2004, holders of $1,396,000 principal amount of Bridge II Convertible Promissory Notes elected to convert their notes and related accrued interest of $140,000 into 11,708,118 shares of unregistered common stock. Included in the above conversion amounts are amounts due Peter P. Gombrich, the Company's Chairman, of $305,667 in Bridge II principal and $11,431 in accrued interest, which were converted into 2,113,987 shares of unregistered common stock. During the first three months of 2004 holders of Series C Convertible Preferred Stock elected to convert 910,000 of preferred shares and accrued dividends into 5,577,173 shares of unregistered common stock. WARRANTS On July 18, 2003, Mr. Milley, a director, Azimuth Corporation and Cadmus Corporation, agreed to cancel seven warrants held by Azimuth and one warrant held by Cadmus, which entitled the holders to purchase a total of 3,125,000 shares of common stock at various exercise prices between $0.01 and $1.25 per share. The warrants, issued between December 1999 and August 2001, contained anti-dilution clauses which required MDI to increase the number of shares of common stock the holders were entitled to purchase under the warrants by approximately 1,500,000 shares as of the date of the agreement, with commensurate adjustments in individual exercise prices so that gross proceeds to the Company from exercise of the warrants remained the same. These anti-dilution provisions could have required the Company to make additional adjustments in shares and exercise prices in the future based on the Company's issuance of debt or equity instruments at prices below the adjusted exercise prices of these warrants. In consideration for the parties' agreement to cancel these warrants, including their individual anti-dilution clauses, and the forgiveness of approximately $120,000 currently owing to Azimuth and Cadmus, MDI agreed to issue a new five-year warrant entitling the holders to purchase 6,500,000 shares of common stock at an exercise price of $0.30 per share. MDI also agreed to issue a 120- day warrant entitling the holder to purchase 500,000 shares of common stock at an exercise price of $0.30. Management believes that the Company will derive significant additional benefits in the future as a result of the elimination of the anti dilution provisions in the original warrants. Although an agreement has been reached in principal between the parties, no definitive agreement has yet been signed. MDI is currently awaiting receipt of final signed documents. SECURED CONVERTIBLE NOTE FINANCING Beginning in January 2004, Bathgate Capital Partners, LLC began an issue of a maximum offering of $4,000,000 and a minimum of $1,500,000 in Convertible Promissory Notes to accredited investors. The notes bear interest at 10% per annum payable, on a semi-annual basis, in kind in the form of shares of common stock for the first two years and then in cash for the remaining three years until due December 31, 2008. The note conversion price and the value of common shares paid in kind as interest is $0.10 per share. The notes are convertible at any time into the common stock of MDI, although the notes will automatically convert if the last sales price of the stock is $0.30 or higher for twenty trading days, the daily average trading volume is 250,000, the underlying shares are registered for sale, and the Convertible Promissory Note to an affiliate Suzanne M. Gombrich has been paid or converted into common shares. The holders were also granted a security position in all of the Company's assets. MDI granted each note holder the right to receive a 25% warrant coverage on all money invested, therefore for every $100,000 invested, an investor will receive 25,000 warrants to purchase common stock at an exercise price of $0.15. The warrants will expire on December 31, 2008. As a requirement of the escrow, the funds would not be released until the following requirements were met: F-36 o A minimum investment of $1,500,000 had been reached o Suzanne Gombrich's Convertible Promissory Note was paid or converted into common shares o Satisfactory due diligence is completed by Bathgate Capital Partners, LLC o A portion of the Bridge II Convertible Promissory Note holders convert their notes into common shares o Peter P. Gombrich, MDI's Chairman and CEO will resign his position as CEO of the Company These requirements were satisfied on April 2, 2004 and the Company issued $1,500,000 in convertible promissory notes in exchange for cash. The funds were used for repayment of the Suzanne Gombrich note, payment of IRS taxes, and working capital. OTHER FINANCING Beginning in February 2004, MDI began a separate offering of Convertible Promissory Notes to accredited investors......... The notes bear interest at 10% per annum payable, on a semi-annual basis, in kind in the form of shares of common stock for the first two years and then in cash for the remaining three years until due December 31, 2008. The note conversion price and the value of common shares paid in kind as interest is $0.10 per share. The notes are convertible at any time into the common stock of MDI, although the notes will automatically convert if the last sales price of the stock is $0.30 or higher for twenty trading days, the daily average trading volume is 250,000, the underlying shares are registered for sale, and the Convertible Promissory Note to an affiliate Suzanne M. Gombrich has been paid or converted into common shares. The holders were also granted a security position in all of the Company's assets. MDI granted each note holder the right to receive a 25% warrant coverage on all money invested, therefore for every $100,000 invested, an investor will receive 25,000 warrants to purchase common stock at an exercise price of $0.15. The warrants will expire on December 31, 2008. Through March 31, 2004 the Company had issued $1,292,000 in principal amount of convertible promissory notes in exchange for cash. On April 2, 2004, as a condition of the Bathgate Capital Partners issuance, the Convertible Promissory Note due to Suzanne M. Gombrich was paid in full and her first priority security interest in all the Company's assets was released. The payment on the $1,000,000 Convertible Promissory Note and $126,114 of accrued interest as of April 2, 2004 was in the form of $936,114 in cash and 1,900,000 shares of common stock of the Company. RESIGNATION OF OFFICER On February 19, 2004, Peter M. Gombrich resigned as Chief Executive Officer and was appointed Executive Vice President of the Company. Also on February 19, 2004, the Board of Directors appointed Denis M. O'Donnell M.D., a current Director of the Company, to be President and Chief Executive Officer. LITIGATION SETTLED BETWEEN JANUARY 1, 2004 AND MARCH 31, 2004 On May 22, 2001, a judgment in the amount of $312,000 plus interest was entered against AccuMed (Circuit Court of Cook County (Case N0. 97 L 7158)) in favor of Merrill Corporation. The judgment was the result of the settlement of an action brought by Merrill claiming unpaid fees for financial printing services, provided to AccuMed in 1996, and related interest and legal costs totaling in excess of $400,000. Under terms of the settlement and the related judgment, AccuMed was required to make 12 monthly payments of $26,000, and a final payment to include all interest accrued on declining unpaid balance of the judgment over the term of payment. AccuMed made 7 payments in accordance with the terms of the settlement and ceased to make any additional payments. In May of 2002, Merrill asserted its rights under the original judgment and filed a citation to discover assets of AccuMed and obtain the remaining amount due. On October 17, 2002, MDI reached an agreement with Merrill whereby MDI assumed responsibility for the remaining unpaid amount of the judgment and related costs totaling $145,000 and agreed to pay such amount no later than November 15, 2002. In February 2004, MDI settled the amount due to Merrill and fully satisfied all obligations owed to Merrill. The citation proceedings against MDI were dismissed. F-37 On July 31, 2002, MDI entered into a settlement and mutual release agreement with Trek Diagnostic Systems, Inc. ("Trek") related to a claim of breach of representations and warranties included in an agreement under which AccuMed sold its microbiology business and related assets to Trek in 1999. Under the settlement agreement, MDI executed an $80,000 promissory note in favor of Trek. The note required principal payments of $40,000 each on September 1 and December 1, 2002. MDI made the initial payment and Trek filed suit against MDI (Court of Common Pleas Cuyahoga County, Ohio (Case No. CV 03 492582)) on January 23, 2003 to collect the remaining $40,000 plus interest at 8% per annum and legal and other costs. On April 18, 2003, judgment was entered against MDI in the amount of $40,000 plus interest. Trek initiated citation proceedings against MDI in the Circuit Court of Cook County, Illinois in 2003. In March 2004, MDI entered into a final settlement agreement with Trek and fully satisfied all amounts due to Trek. The citation proceedings against MDI were dismissed. NEW PROCEEDINGS 2004 On February 18, 2004, current and former employees Daniel Kussworm, Jennifer Kawaguchi, and Susan Keesee filed suit against MDI and one of its officers in the Circuit Court of Cook County, Illinois (04 L 1941). These individuals are seeking to recover wages and other compensation allegedly due to them. Mr. Kussworm seeks approximately $68,600, Ms. Kawaguchi seeks approximately $37,200, and Ms. Keesee seeks approximately $124,800; all amounts exclude interest, court costs, and attorney fees. MDI is engaged in settlement discussions with these three individuals to resolve all outstanding issues. DELINQUENT PAYROLL TAX LIABILITIES MDI is currently delinquent in filing certain Federal and State Income Tax returns for 2002 and 2001. MDI is also delinquent in paying a portion of Federal and State employee and employer payroll taxes for 2003, 2002, and 2001. The delinquent taxes relating to 2003 and 2002 were paid in full in April 2004. The Company owed $686,000 and $678,000 as of December 31, 2003 and 2002, respectively, in past-due 2001 payroll taxes, including $258,000 and $250,000 respectively in assessed and estimated statutory penalties and interest. MDI has submitted payments of $150,000 against this liability amount and is currently in the process of communicating through counsel with the Internal Revenue Service regarding payment of the balance due. The Company has lost all rights of appeal regarding the outstanding payroll tax liability and could be subject to the seizure of its tangible and intellectual property in the event a payment schedule is not agreed to with the Internal Revenue Service. MDI included the amounts due, except for the unknown penalties and interest, as liabilities in the accounting records and Consolidated Financial Statements for the respective periods. SHORT-TERM LIQUIDITY PROBLEMS MDI continued to have severe liquidity problems and had insufficient cash on hand to effectively manage the business during the first three months of 2004. In March 2004, Bathgate Capital Partners LLC raised $1,500,000 funds from the Company issuance of Convertible Promissory Notes of which the majority of the funds were used for the repayment of the Suzanne Gombrich note. In addition, MDI began a separate offering of Convertible Promissory Notes and has raised $1,292,000 for the payment of legal judgements, IRS taxes, wage claim settlements, and current operating needs. MDI has continued to raise operating cash through the date of this report through the issuance of additional Convertible Promissory Notes and management is negotiating additional financing. PLAN TO RESTRUCTURE OUTSTANDING LIABILITIES The Company's new management team is working to develop a restructuring proposal to provide unsecured creditors a settlement plan, which is contingent on the Company's ability to raise sufficient new equity to fund operations. INSURANCE Due to MDI's liquidity problems, the Company was unable to pay insurance premiums for policies covering Directors and Officers Liability, Public liability, Property Damage and Workers Employment Compensation. These policies were all cancelled retroactive to October 29, 2002. MDI is currently working with insurance providers to reinstate the aforementioned insurance coverage. F-38 Schedule IX--Valuation and Qualifying Accounts
Additions Charged Balance Balance At to Costs At End Beginning and Other of Description of Period Expenses Retirements Changes Period - ----------- --------- -------- ----------- ------- ------ Reserves and Allowances deducted from asset accounts......... Allowance for Uncollectable accounts receivable................. Year Ended December 31, 2003............ $ 145 $ 0 $ 95 $ 0 $ 50 Year Ended December 31, 2002............ $ 4 $ 141 $ 0 $ 0 $ 145 Reserves and allowances which support balance sheet caption reserves....... Warranty reserves Year Ended December 31, 2003............ $ 21 $ 0 $ 21 $ 0 $ -- Year Ended December 31, 2002............ $ 20 $ 1 $ 0 $ 0 $ 21 Inventory Reserves Year Ended December 31, 2003............ $ 2 $ 0 $ 2 $ 0 $ -- Year Ended December 31, 2002............ $ 2 $ 0 $ 0 $ 0 $ 2
EX-10.45 3 v02676_ex10-45.txt Exhibit 10.45 CONSULTANT AGREEMENT This Agreement is made and entered into as of the 11th day of November, 2003, between Molecular Diagnostics Corporation and CEOcast, Inc. (the "Consultant") In consideration of and for the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Purpose. The Company hereby employs the Consultant during the Term (as defined below) to render Investor Relations services to the Company, upon the terms and conditions as set forth herein. 2. Term. This Agreement shall be effective for a nine-month period (the "Term") commencing on the date hereof. 3. Duties of Consultant. During the term of this Agreement, the Consultant shall provide to the Company those services outlined in Exhibit A. Notwithstanding the foregoing, it is understood and acknowledged by the parties that the Consultant: (a) shall perform its analysis and reach its conclusions about the Company independently, and that the Company shall have no involvement therein; and (b) shall not render advice and/or services to the Company in any manner, directly or indirectly, that is in connection with the offer or sale of securities in a capital raising transaction or that could result in market making. 4. Expenses. The Company, upon receipt of appropriate supporting documentation, shall reimburse the Consultant for any and all reasonable out-of-pocket expenses incurred by it in connection with services requested by the Company, including, but not limited to, all charges for travel, printing costs and other expenses spent on the Company's behalf. The Company shall immediately pay such expenses upon the presentation of invoices. Consultant shall not incur more than $500 in expenses without the express consent of the Company. 5. Compensation. For services to be rendered by the Consultant hereunder, the Consultant shall receive from the Company upon the signing of the Agreement: 550,000 shares of the Company's fully paid non-assessable common stock (One certificate for 400,000 and the other for 150,000). In the seventh month (May 2004) the Company will issue an additional 250,000 shares of fully paid non-assessable common stock. In addition the Company will pay the Consultant $30,000 in 3 consecutive $10,000 increments beginning on May 1, 2004. The Company shall also pay Consultant expenses as outlined in Section 4 upon presentation of invoices. Company agrees to register Consultant's shares of common stock, at Company's expense, in the next registration statement of its common stock. 5. Further Agreements. Because of the nature of the services being provided by Consultant hereunder, Consultant acknowledges that if it may receive access to Confidential Information (as defined in Section 6 hereof ) and that, as a consultant to the Company, it will attempt to provide advice that serves the best interest of the Company. Because of the uniqueness of this relationship, the Consultant covenants and agrees that, with respect to the Common Stock that it receives. Consultant shall, at all times that it is the beneficial owner of such shares, vote such shares on all matters coming before it as a stockholder of the Company in the same manner as the majority of the Board of Directors of the Company shall recommend. 6. Confidentiality. Consultant acknowledges that as a consequence of its relationship with the Company, it may be given access to confidential information which may include the following types of information; financial statements and related financial information with respect to the Company and its subsidiaries (the "Confidential Financial Information"), trade secrets, products, product development, product packaging, future 1 marketing materials, business plans, certain methods of operations, procedures, improvements, systems, customer lists, supplier lists and specifications, and other private and confidential materials concerning the Company's business (collectively, "Confidential Information"). Consultant covenants and agrees to hold such Confidential Information strictly confidential and shall only use such information solely to perform its duties under this Agreement, and Consultant shall refrain from allowing such information to be used in any way for its own private or commercial purposes. Consultant shall also refrain from disclosing any such Confidential Information to any third parties. Consultant further agrees that upon termination or expiration of this Agreement, it will return all Confidential Information and copies thereof to the Company and will destroy all notes, reports and other material prepared by or for it containing Confidential Information. Consultant understands and agrees that the Company might be irreparably harmed by violation of this Agreement and that monetary damages may be inadequate to compensate the Company. Accordingly, the Consultant agrees that, in addition to any other remedies available to it at law or in equity, the Company shall be entitled to injunctive relief to enforce the terms of this Agreement. Notwithstanding the foregoing, nothing herein shall be construed as prohibiting Consultant from disclosing any Confidential Information (a) which at the time of disclosure. Consultant can demonstrate either was in the public domain and generally available to the public or thereafter becomes a part of the public domain and is generally available to the public by publication or otherwise through no act of the Consultant; (b) which Consultant can establish was independently developed by a third party who developed it without the use of the Confidential Information and who did not acquire it directly or indirectly from Consultant under an obligation of confidence; (c) which Consultant can show was received by it after the termination of this Agreement from a third party who did not acquire it directly or indirectly from the Company under an obligation of confidence; or (d) to the extent that the Consultant can reasonably demonstrate such disclosure is required by law or in any legal proceeding, governmental investigation, or other similar proceeding. Severability. If any provision of this Agreement shall be held or made invalid by a statute, rule, regulation, decision of a tribunal or otherwise, the remainder of this Agreement shall not be affected thereby and, to this extent, the provisions of this Agreement shall be deemed to be severable. 7. Governing Law; Venue; Jurisdiction. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of New York, without reference to principles of conflicts or choice of law thereof. Each of the parties consents to the jurisdiction of the U.S. District Court in the Southern District of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens. to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at it address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Each party waives its right to a trial by jury. 2 8. Miscellaneous. (a) Any notice or other communication between parties hereto shall be sufficiently given if sent by certified or registered mail, postage prepaid, if to the Company, addressed to it at (Provide Address, or to the "Consultant" addressed to it at CEOcast, Inc., 55 John Street, 11th Floor, New York, New York 10038, Attention: Administrator, facsimile number: (212) 732-1131, or to such address as may hereafter be designated in writing by one party to the other. Any notice or other communication hereunder shall be deemed given three days after deposit in the mail if mailed by certified mail, return receipt requested, or on the day after deposit with an overnight courier service for next day delivery, or on the date delivered by hand or by facsimile with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated above (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received). (b) This Agreement embodies the entire Agreement and understanding between the Company and the Consultant and supersedes any and all negotiations, prior discussions and preliminary and prior arrangements and understandings related to the central subject matter hereof. (c) This Agreement has been duly authorized, executed and delivered by and on behalf of the Company and the Consultant. (d) This Agreement and all rights, liabilities and obligations hereunder shall be binding upon and inure to the benefit of each party's successors but may not be assigned without the prior written approval of the other party. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date hereof. Molecular Diagnostics, Inc. By:________________________ CEOcast, Inc. By:________________________ 1.Monthly interview on ceocast.com that will be distributed to over 325,000 opt-in healthcare investors registered on our Internet site. 2. Company featured on the Home Page of our Internet site for one week each quarter. 3. The writing and distribution of press releases to over 325,000 opt-in healthcare investors. 4. Company covered in our weekly newsletter, which is distributed to over 1.6 million investors and 244 brokerage firms. 5. Calls to 100 brokers on each news release. These brokers can buy small-cap securities in particular. 6. Strategic advice and other customary IR services. EX-10.46 4 v02676_ex10-46.txt Exhibit 10.46 CONSULTING AGREEMENT This Consulting Agreement (the "Agreement"), effective as of August 4, 2003 is entered into by and between MOLECULAR DIAGNOSTICS, Inc., a Delaware corporation (herein referred to as the "Company") and REDWOOD CONSULTANTS, LLC, a California Limited Liability Company (herein referred to as the "Consultant"). THIS AGREEMENT VOLUNTARILY REPLACES AND OVERIDES THE AGREEMENT EXECUTED ON JUNE 20, 2003 BY BOTH PARTIES COVERING THE SAME TIME PERIOD. FURTHERMORE, THE COMPANY HAS THE RIGHT TO CANCEL THIS AGREEMENT AT ANY TIME FOR NON PERFORMANCE UPON 30 DAYS NOTICE TO THE CONSULTANT. CONSULTANT AGREES TO PRO-RATE AND AND RETURN SHARES ISSUED TO IT UNDER THIS AGREEMENT IF CONTRACT IS CANCELLED FOR NON PERFORMANCE. RECITALS WHEREAS, Company is a publicly-held corporation with its common stock currently traded on the OTC BULLETIN BOARD MARKET (SYMBOL : MCDG) WHEREAS, Company desires to continue to engage the services of Consultant to represent the company in investors' communications and public relations on a non-exclusive basis with existing shareholders, brokers, dealers and other investment professionals as to the Company's current and proposed activities, and to consult with management concerning such Company activities; NOW THEREFORE, in consideration of the promises and the mutual covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows: 1. Term of Consultancy. Company hereby agrees to contract for the services of the Consultant to act in a consulting capacity to the Company and the Consultant hereby AGREES TO CONTINUE TO PROVIDE SERVICES TO THE COMPANY COMMENCING UPON MONDAY AUG. 4, 2003 AND ENDING ON AUG. 3, 2004. 2. The consultant agrees that although this agreement covers 12 months and that compensation (shares) are earned in essence on a month to month basis wherein 900,000 of restricted 144 shares as full compensation represent 12 months of service. 3. Duties of Consultant. The Consultant agrees that it will generally provide the following specified consulting services during the term specified in Section 1.: (a) Consult and assist the Company in developing and implementing appropriate plans and means for presenting the Company and its business plans and strategy to the financial community, establishing an image for the Company in the financial community, and creating the foundation for subsequent financial public relations efforts; (b) Introduce the Company to the financial community; (c) With the cooperation of the Company, maintain an awareness during the term of this Agreement of the Company's plans, strategy and personnel, as they may evolve during such period, and consult and assist the Company in communicating appropriate information regarding such plans, strategy and personnel to the financial community; (d) Assist and consult the Company with respect to its (i) relations with stockholders, (ii) relations with brokers, dealers, analysts and other investment professionals, and (iii) financial public relations generally; (e) Perform the functions generally assigned to stockholder relations and public relations departments in major corporations, including responding to telephone and written inquiries (which may be referred to the Consultant by the Company); preparing press releases for the Company with the Company's involvement and approval of press releases, reports and other communications with or to shareholders, the investment community and the general public; consulting with respect to the timing, form, distribution and other matters related to such releases, reports and communications; (f) Upon the Company's direction and approval, disseminate information regarding the Company to shareholders, brokers, dealers, other investment community professionals and the general investing public; (g) Upon the Company's approval, conduct meetings, in person or by telephone, with brokers, dealers, analysts and other investment professionals to communicate with them regarding the Company's plans, goals and activities, and assist the Company in preparing for press conferences and other forums involving the media, investment professionals and the general investment public; SPECIFIC OBJECTIVES: 1. IDENTIFY IN CONJUNCTION WITH AND ON BEHALF OF THE COMPANY AT LEAST TWO ( 2 ) MID LEVEL INVESTMENT BANKING OPPORTUNITIES APPROVED BY THE COMPANY WITHIN FOUR ( 4 ) MONTHS OF THIS AGREEMENT 2. OBTAIN TWO ( 2 ) INSTITUTIONAL MARKET MAKERS WITHIN THREE ( 3 ) MONTHS 3. BRING IN NO LESS THAN $ 250,000 IN PRIVATE PLACEMENT FUNDING OVER NEXT ( 3 ) THREE MONTHS 3. Allocation of Time and Energies. The Consultant hereby promises to perform and discharge faithfully the responsibilities which may be assigned to the Consultant from time to time by the officers and duly authorized representatives of the Company in connection with the conduct of its financial and public relations and communications activities, so long as such activities are in compliance with applicable securities laws and regulations. Consultant and staff shall diligently and thoroughly provide the consulting services required hereunder. Although no specific hours-per-day requirement will be required, Consultant and the Company agree that Consultant will perform the duties set forth herein above in a diligent and professional manner. The parties acknowledge and agree that a disproportionately large amount of the effort to be expended and the costs to be incurred by the Consultant and the benefits to be received by the Company are expected to occur within or shortly after the first two months of the effectiveness of this Agreement. It is explicitly understood that Consultant's performance of its duties hereunder will in no way be measured by the price of the Company's common stock, nor the trading volume of the Company's common stock. It is also understood that the Company is entering into this Agreement with Redwood Consultants, LLC ("RWC"), a corporation and not any individual member of RWC. 4. Remuneration. As full and complete compensation for services described in this Agreement, the Company shall compensate RWC as follows: 4.1 For undertaking this engagement and for other good and valuable consideration the Company shall issue 900,000 shares restricted 144 shares which covers the period of 12 months successful services as described herein. These shares constitute payment for Consultant's agreement to consult to the Company and are a nonrefundable, non-apportionable, and non-ratable retainer unless this agreement is terminated by the company. Such shares of common stock are payable at the time after the commencement period (Aug. 4, 2003), however the consultant is aware and is informed that the Company does not have sufficient shares authorized and outstanding, and Consultant understands that shares will BE ISSUED AND DELIVERED TO CONSULTANT WITHIN 10 DAYS AFTER THE AUTHORIZED SHARE COUNT HAS BEEN INCREASED AT THE NEXT ANNUAL SHAREHOLDERS MEETING. COMPANY WARRANTS THAT SHOULD SHAREHOLDERS NOT APPROVE THE INCREASE IN THE AUTHORIZED SHARE COUNT, COMPANY WILL ISSUE TO CONSULTANT AN EQUIVALENT, SUCH AS A CONVERTIBLE PREFERRED STOCK, OR CONVERTIBLE PROMISSORY NOTE WITH SIMILAR TERMS/ EQUIVALENT TO 900,000 SHARES. CONSULTANT IS AWARE THAT A RESTRUCTURING OF THE COMPANY AND THE COMPANY REQUIRING SHAREHOLDER APPROVAL OF AN INCREASE IN AUTHORIZED SHARES NEEDS TO BE COMPLETED FOR SUCH SHARES TO BE SUBSEQUENTLY REGISTERED. Further, if and in the event the Company is acquired in whole or in part, during the term of this agreement, it is agreed and understood Consultant will not be requested or demanded by the Company to return any of the 900,000 shares of Common stock paid to it hereunder. It is further agreed that if at any time during the term of this agreement, the Company or substantially all of the Company's assets are merged with or acquired by another entity, or some other change occurs in the legal entity that constitutes the Company, the Consultant shall retain and will not be requested by the Company to return any of the 900,000 shares. It is further understood by the consultant that should the company terminate this agreement that only shares earned (period consultant services were rendered) shall be retained and the remaining shares shall be returned to the company. 4.2 The shares issued pursuant to this agreement shall be issued in the names of REDWOOD CONSULTANTS , LLC. TAX ID # 68-047-3637 4.3 Additionally, for a period of two years after the effective date hereof, should the Company make any public offering of its securities pursuant to an effective registration statement under the Securities Acts of 1933 or 1934, as amended, Consultant shall be entitled, and the Company agrees, to include in such registration any or all of the common stock given to Consultant by the Company as consideration hereunder [commonly referred to as "Piggyback Registration Rights"]. Such piggyback registration rights, include, at Consultant's option, registration on Form S-1. All such registration rights shall be subject to customary market stand-off and underwriter cutback provisions. 4.4 With each transfer of shares of Common Stock to be issued pursuant to this Agreement (collectively, the "Shares"), Company shall cause to be issued a certificate representing the Common Stock and a written opinion of counsel for the Company stating that said shares are subject to the agreement and that the issuance and eventual transfer of them to Consultant has been duly authorized by the Company. THIS CERTIFICATE IS EXPECTED TO BE ISSUED AND DELIVERED WITHIN 10 DAYS OF THE OCCURENCE OF THE COMPANY'S ANNUAL SHAREHOLDERS MEETING VOTE ALLOWING AN INCREASE IN THE AUTHORIZED SHARE COUNT TO PERMIT SHARE ISSUANCE TO CONSULTANT. 4.5 Consultant acknowledges that the shares of Common Stock to be issued pursuant to this Agreement (collectively, the "Shares") may not been registered under the Securities Act of 1933, and accordingly may be "restricted securities" within the meaning of Rule 144 of the Act. If such, the Shares may not be resold or transferred unless the Company has received an opinion of counsel reasonably satisfactory to the Company that such resale or transfer is exempt from the registration requirements of that Act. 4.6 In connection with the acquisition of Shares hereunder, the Consultant represents and warrants to the Company, to the best of its/his knowledge, as follows: (a) Consultant acknowledges that the Consultant has been afforded the opportunity to ask questions of and receive answers from duly authorized officers or other representatives of the Company concerning an investment in the Shares, and any additional information which the Consultant has requested. (b) Consultant is acquiring the Shares for the Consultant's own account for long-term investment and not with a view toward resale or distribution thereof except in accordance with applicable securities laws. 5. Financing "Finder's Fee". It is understood that in the event Consultant introduces Company, or its nominees, to a lender or equity purchaser, not already having a preexisting relationship with the Company, with whom Company, or its nominees, ultimately finances or causes the completion of such financing, Company agrees to compensate Consultant for such services with a "finder's fee" in the amount of 10% of total gross funding provided by such lender or equity purchaser, such fee to be payable as follows:
- ----------------------------------------------------------------------------------------------------------- IF FUNDING OCCURS WITHIN....... CASH EQUITY AT .15/SHARE - ----------------------------------------------------------------------------------------------------------- 30 days of this agreement 7% 3% - ----------------------------------------------------------------------------------------------------------- 30-60 days of this agreement 5% 5% - ----------------------------------------------------------------------------------------------------------- >60 days of this agreement 5% 3% - -----------------------------------------------------------------------------------------------------------
Should consultant bring in a third party that is subject to a fee for the same funds the consultant fee such fee shall be split (1/2) to third party and company shall negotiate directly with the third party any additional fee prior to an investment being made. It is specifically understood that Consultant is not and does not hold itself out be a Broker/Dealer, but is rather merely a "Finder" in reference to the Company procuring financing sources and acquisition candidates. Any obligation to pay a "Finder's Fee" hereunder shall survive the merging, acquisition, or other change in the form of entity of the Company and to the extent it remains unfulfilled shall be assigned and transferred to any successor to the Company. 5.1 It is further understood that Company, and not Consultant, is responsible to perform any and all due diligence on such lender, equity purchaser or acquisition candidate introduced to it by Consultant under this Agreement, prior to Company receiving funds or closing on any acquisition. However, Consultant will not introduce any parties to Company about which Consultant has any prior knowledge of questionable, unethical or illicit activities. 5.2 Company agrees that said compensation to Consultant shall be paid in full at the time said financing or acquisition is closed (funds received) such compensation to be transferred by Company to Consultant within seven (7) business days of the execution of the financing of acquisition closing document. Payment of said compensation, shall be a condition precedent to the closing of such financing or acquisition, and Company shall execute any and all documents necessary to effect said compensation. 5.3 Consultant will notify Company of introductions it makes for potential sources of financing or acquisitions in a timely manner (within approximately 3 days of introduction) via facsimile memo. If Company has a preexisting relationship with such nominee and believes such party should be excluded from this Agreement, then Company will notify Consultant immediately within twenty-four (24) hours of Consultant's facsimile to Company of such circumstance via facsimile memo. 6. Non-Assignability of Services. Consultant's services under this contract are offered to Company only and may not be assigned by Company to ant entity with which Company merges or which acquires the Company or substantially all of its assets. In the event of such merger or acquisition, all compensation to Consultant herein under the schedules set forth herein shall remain due and payable, and any compensation received by the Consultant may be retained in the entirety by Consultant, all without any reduction or pro-rating and shall be considered and remain fully paid and non-assessable. Notwithstanding the non-assignability of Consultant's services, Company shall assure that in the event of any merger, acquisition, or similar change of form of entity, that its successor entity shall agree to complete all obligations to Consultant, including the provision and transfer of all compensation herein, and the preservation of the value thereof consistent with the rights granted to Consultant by the Company herein, and to Shareholders. 7. Expenses. Consultant agrees to pay for all its expenses (phone, mailing, labor, etc.), other than extraordinary items (TRAVEL REQUIRED BY/OR SPECIFICALLY REQUESTED BY THE COMPANY, LUNCHEONS OR DINNERS TO LARGE GROUPS OF INVESTMENT PROFESSIONALS, MASS FAXING TO A SIZABLE PERCENTAGE OF THE COMPANY'S CONSTITUENTS, INVESTOR CONFERENCE CALLS, PRINT ADVERTISEMENTS IN PUBLICATIONS, ETC.) COMPANY AGREES TO PREPARE AND DELIVER TO CONSULTANT 250 INVESTOR PACKAGES. 8. Indemnification. The Company warrants and represents that all oral communications, written documents or materials furnished to Consultant by the Company with respect to financial affairs, operations, profitability and strategic planning of the Company are accurate and Consultant may rely upon the accuracy thereof without independent investigation. The Company will protect, indemnify and hold harmless Consultant against any claims or litigation including any damages, liability, cost and reasonable attorney's fees as incurred with respect thereto resulting from Company's communication or dissemination of any said information, documents or materials provided. The Consultant will protect, indemnify and hold harmless the Company against any claims or litigation including any damages, liability, cost and t 6 0 reasonable attorney's fees as incurred with respect thereto resulting from Consultant's communication or dissemination of any said information, documents or materials excluding information provided by the Company to the Consultant. 9. Representations. Consultant represents that it is not required to maintain any licenses and registrations under federal or any state regulations necessary to perform the services set forth herein. Consultant acknowledges that, to the best of its knowledge, the performance of the services set forth under this Agreement will not violate any rule or provision of any regulatory agency having jurisdiction over Consultant. Consultant further acknowledges that it is not a securities Broker Dealer or a registered investment advisor. Company acknowledges that, to the best of its knowledge, that it has not violated any rule or provision of any regulatory agency having jurisdiction over the Company. Company acknowledges that, to the best of its knowledge, Company is not the subject of any investigation, claim, decree or judgment involving any violation of the SEC or securities laws. 10. Legal Representation. The Company acknowledges that it has been represented by independent legal counsel in the preparation of this Agreement. Consultant represents that it has consulted with independent legal counsel and/or tax, financial and business advisors, to the extent the Consultant deemed necessary. 11. Status as Independent Contractor. Consultant's engagement pursuant to this Agreement shall be as independent contractor, and not as an employee, officer or other agent of the Company. Neither party to this Agreement shall represent or hold itself out to be the employer or employee of the other. Consultant further acknowledges the consideration provided hereinabove is a gross amount of consideration and that the Company will not withhold from such consideration any amounts as to income taxes, social security payments or any other payroll taxes. All such income taxes and other such payment shall be made or provided for by Consultant and the Company shall have no responsibility or duties regarding such matters. Neither the Company or the Consultant possess the authority to bind each other in any agreements without the express written consent of the entity to be bound. 12. Attorney's Fee. If any legal action or any arbitration or other proceeding is brought for the enforcement or interpretation of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with or related to this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs in connection with that action or proceeding, in addition to any other relief to which it or they may be entitled. 13. Waiver. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by such other party. 14 .Notices. All notices, requests, and other communications hereunder shall be deemed to be duly given if sent by U.S. mail, postage prepaid, addressed to the other party at the address as set forth herein below: - ---------------------------------------------------------------------- To the Company: To the Consultant: Molecular Diagnostics, Inc. Redwood Consultants, LLC Peter Gombrich, CEO Jens Dalsgaard, Managing Director 414 North Orleans Street 366 Bel Marin Keys Blvd. Suite 800 Bel Marin Keys, CA. 94949 Chicago, IL 60610 - ---------------------------------------------------------------------- It is understood that either party may change the address to which notices for it shall be addressed by providing notice of such change to the other party in the manner set forth in this paragraph. Choice of Law, Jurisdiction and Venue. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of California. The parties agree that Marin County, CA. will be the venue of any dispute and will have jurisdiction over all parties. Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the alleged breach thereof, or relating to Consultant's activities or remuneration under this Agreement, shall be settled by binding arbitration in California, in accordance with the applicable rules of the American Arbitration Association, and judgment on the award rendered by the arbitrator(s) shall be binding on the parties and may be entered in any court having jurisdiction as provided by Paragraph 14 herein. Complete Agreement. This Agreement contains the entire agreement of the parties relating to the subject matter hereof. This Agreement and its terms may not be changed orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. AGREED TO: " Molecular Diagnostics, Inc. " Date: By: ___________________________________ Peter Gombrich, Chief Executive Officer "Consultant" REDWOOD CONSULTANTS, LLC Date: By:____________________________________ Jens Dalsgaard, Managing Director EX-10.47 5 v02676_ex10-47.txt Exhibit 10.47 SUBSCRIPTION AGREEMENT MOLECULAR DIAGNOSTICS, INC. Molecular Diagnostics, Inc. (the "Company") has authorized for sale through Bathgate Capital Partners LLC (the "Placement Agent"), 40 Units, each comprising one $100,000 principal amount, 10% secured convertible debentures ("Notes") and warrants ("Warrants") to purchase 25,000 shares of the Company's $.001 par value common stock ("Common Stock"). The Minimum offering is $1,500,000 minimum offering; the Maximum Offering is $4,000,000. The minimum investment is $100,000. The undersigned hereby subscribes for ____________ Units ($________)(the "Subscription Price"). The Common Stock included in the Unit or issuable upon conversion of the Note shall be registered for public sale with the Securities and Exchange Commission (the "Commission"), in accordance with the terms set forth in the registration rights agreement (the "Registration Agreement"), entered into between the holder of the Note (the "Holder") and the Company of even date. The undersigned agrees to pay the aggregate Subscription Price for the Unit being purchased hereunder. The entire purchase price is due and payable upon the submission of this Subscription Agreement, and shall be payable by wire transfer to the order of "Molecular Diagnostics, Inc. Escrow Account" at AMG Guaranty Trust, National Association (the "Escrow Agent"). The wire instructions are as follows: AMG Guaranty Trust Co. ABA No. 102000966 N/O: Trust Department F/B/O Molecular Diagnostics, Inc. Escrow Account Account No. 01- The Company has the right to reject this subscription in whole or in part. The undersigned acknowledges that the Unit being purchased hereunder and its component securities will not be registered under the Securities Act of 1933 (the "Act"), or the securities laws of any state (the "State Acts"), in reliance upon an exemption from the registration requirements of the Act and the State Acts; that absent an exemption from registration contained in the Act and the State Acts, the Unit, Note and Common Stock would require registration; and that the Company's reliance upon such exemptions is based, in material part, upon the undersigned's representations, warranties, and agreements contained in this Subscription Agreement and the Registration Rights Agreement (collectively, the "Subscription Documents"). 1. The undersigned represents, warrants, and agrees as follows: a. The undersigned agrees that this Subscription Agreement is and shall be irrevocable. b. The undersigned has carefully read the Term Sheet dated January 15, 2004; the Form of Secured Convertible Promissory Note, the Form of Warrant, and the Form of General Security Agreement, a list of litigation in which the Company is involved, and the unaudited financial statements of the Company dated November 21, 2003, each of which has been provided to the undersigned; and the following filings made by the Company with the Securities and Exchange Commission ("SEC"), all of which are available on the Internet at www.sec.gov, including the Form 10-K Annual Report filed with the SEC on July 21, 2003, the Form 10-QSB Quarterly Report filed with the SEC on August 1, 2003, the Form 10-QSB Quarterly Report filed with the SEC on August 13, 2003, the Form 10-QSB Quarterly Report filed with the SEC on November 19, 2003, the Form 8-K Current Report filed with the SEC on November 21, 2003 and the Form 10-QSB/A Quarterly Report filed with the SEC on November 21, 2003 (collectively, the "Disclosure Materials") and of which the undersigned acknowledges will obtain from the SEC's web site at www.sec.gov. The undersigned has been given the opportunity to ask questions of, and receive answers from, the Company concerning the terms and conditions of this Offering and the Disclosure Materials and to obtain such additional information, to the extent the Company possesses such information or can acquire it without unreasonable effort or expense, necessary to verify the accuracy of same as the undersigned reasonably desires in order to evaluate the investment. The undersigned understands the Disclosure Materials, and the undersigned has had the opportunity to discuss any questions regarding any of the Disclosure Materials with his counsel or other advisor. Notwithstanding the foregoing, the only information upon which the undersigned has relied is that set forth in the Disclosure Materials. The undersigned has received no representations or warranties from the Company or the Placement Agent, their employees, agents or attorneys, in making this investment decision other than as set forth in the Disclosure Materials. The undersigned does not desire to receive any further information. c. The undersigned is aware that the purchase of the Unit is a speculative investment involving a high degree of risk, that there is no guarantee that the undersigned will realize any gain from this investment, and that the undersigned could lose the total amount of this investment. d. The undersigned understands that no federal or state agency has made any finding or determination regarding the fairness of the Unit for investment, or any recommendation or endorsement of the Unit. e. The undersigned is purchasing the Units for the undersigned's own account, with the intention of holding the Units with no present intention of dividing or allowing others to participate in this investment or of reselling or otherwise participating, directly or indirectly, 2 in a distribution of the Units or the securities underlying the Units, and shall not make any sale, transfer, or pledge thereof without registration under the Act and any applicable securities laws of any state or unless an exemption from registration is available under those laws. f. The undersigned represents that if an individual, he has adequate means of providing for his or her current needs and personal and family contingencies and has no need for liquidity in this investment in the Units. The undersigned has no reason to anticipate any material change in his or her personal financial condition for the foreseeable future. g. The undersigned is financially able to bear the economic risk of this investment, including the ability to hold the Units indefinitely, or to afford a complete loss of his investment in the Units. h. The undersigned represents that the undersigned's overall commitment to investments which are not readily marketable is not disproportionate to the undersigned's net worth, and the undersigned's investment in the Units will not cause such overall commitment to become excessive. The undersigned understands that the statutory basis on which the Units are being sold to the undersigned and others would not be available if the undersigned's present intention were to hold the Units for a fixed period or until the occurrence of a certain event. The undersigned realizes that in the view of the Commission, a purchase now with a present intent to resell by reason of a foreseeable specific contingency or any anticipated change in the market value, or in the condition of the Company, or that of the industry in which the business of the Company is engaged or in connection with a contemplated liquidation, or settlement of any loan obtained by the undersigned for the acquisition of the Units, and for which such Units may be pledged as security or as donations to religious or charitable institutions for the purpose of securing a deduction on an income tax return, would, in fact, represent a purchase with an intent inconsistent with the undersigned's representations to the Company, and the Commission would then regard such sale as a sale for which the exemption from registration is not available. The undersigned will not pledge, transfer or assign this Subscription Agreement. i. The undersigned represents that the funds provided for this investment are either separate property of the undersigned, community property over which the undersigned has the right of control, or are otherwise funds as to which the undersigned has the sole right of management. The undersigned is purchasing the Units with the funds of the undersigned and not with the funds of any other person, firm, or entity and is acquiring the Units for the undersigned's account. No person other than the undersigned has any beneficial interest in the Units being purchased hereunder. j. The address shown under the undersigned's signature at the end of this Subscription Agreement is the undersigned's principal residence if he or she is an individual, or its principal business address if it is a corporation or other entity. 3 l. The undersigned has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Units. m. The undersigned acknowledges that the certificates for the securities comprising the Unit which the undersigned will receive will contain a legend substantially as follows: THE SECURITIES WHICH ARE REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, TRANSFERRED, MADE SUBJECT TO A SECURITY INTEREST, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS AND UNTIL REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), AS AMENDED, OR EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER SUCH ACT. The undersigned further acknowledges that a stop transfer order will be placed upon the certificates for the securities in accordance with the Act. The undersigned further acknowledges that the Company is under no obligation to aid the undersigned in obtaining any exemption from registration requirements. n. The undersigned represents that he is an "accredited investor" as that term is defined under the Act. 2. The undersigned expressly acknowledges and agrees that the Company is relying upon the undersigned's representations contained in the Subscription Documents. The undersigned further acknowledges that Bathgate Capital Partners LLC has acted as placement agent with respect to this offering (the "Placement Agent"). In consideration for its services, the Placement Agent will receive (i) a commission equal to 4% of the gross proceeds of the loan; and (ii) a warrant to purchase 1,000 shares of the Company's Common Stock at a price of $0.18 per share, for each Unit sold in the offering. 3. The Company has been duly and validly incorporated and is validly existing and in good standing as a corporation under the laws of the State of Delaware. The Company represents that it has all requisite power and authority, and all necessary authorizations, approvals and orders required as of the date hereof to own its properties and conduct its business as described in the Disclosure Materials and to enter into this Subscription Agreement and to be 4 bound by the provisions and conditions hereof; provided, however, the Company must file a Certificate of Amendment to the Certificate of Incorporation ("Certificate of Amendment") with the State of Delaware increasing its authorized capital to enable the Company to reserve and issue all of the shares of common stock issuable in connection with the sale of the Units. 4. The Company covenants and agrees that: a. This transaction is subject to the execution of a security agreement, substantially in the form attached hereto as Exhibit A. b. This transaction is subject to the conversion of $190,000 of Suzanne Gombrich's secured promissory note to 1,900,000 shares of common stock. c. This transaction is subject to the conversion of the outstanding $1,980,200 Bridge II 12% secured promissory notes issued from October 2002 to November 2003 to shares of common stock; provided, however, it shall be within the Placement Agent's discretion to close this offering in the event that not all of the Bridge II 12% secured promissory notes are converted. d. Upon the completion of the minimum offering in the amount of $1,500,000, Peter Gombrich will resign as an executive officer of the Company. 5. Except as otherwise specifically provided for hereunder, no party shall be deemed to have waived any of his or its rights hereunder or under any other agreement, instrument or papers signed by any of them with respect to the subject matter hereof unless such waiver is in writing and signed by the party waiving said right. Except as otherwise specifically provided for hereunder, no delay or omission by any party in exercising any right with respect to the subject matter hereof shall operate as a waiver of such right or of any such other right. A waiver on any one occasion with respect to the subject matter hereof shall not be construed as a bar to, or waiver of, any right or remedy on any future occasion. All rights and remedies with respect to the subject matter hereof, whether evidenced hereby or by any other agreement, instrument, or paper, will be cumulative, and may be exercised separately or concurrently. 6. The parties have not made any representations or warranties with respect to the subject matter hereof not set forth herein, and this Subscription Agreement, together with any instruments or documents executed simultaneously herewith in connection with this offering, constitutes the entire agreement between them with respect to the subject matter hereof. All understandings and agreements heretofore had between the parties with respect to the subject matter hereof are merged in this Subscription Agreement and any such instruments and documents, which alone fully and completely expresses their agreement. 7. This Subscription Agreement may not be changed, modified, extended, terminated or discharged orally, but only by an agreement in writing, which is signed by all of the parties to this Subscription Agreement. 5 8. The parties agree to execute any and all such other further instruments and documents, and to take any and all such further actions reasonably required to effectuate this Subscription Agreement and the intent and purposes hereof. 9. This Subscription Agreement shall be governed by and construed in accordance with the laws of the State of Illinois and the undersigned hereby consents to the jurisdiction of the courts of the State of Illinois and the United States District Courts situated therein. [INTENTIONALLY BLANK] 6 EXECUTION BY SUBSCRIBER $ - ------------------------- - ------------------------------------------------------------------------------- Exact Name in Which Title is to be Held - ------------------------------------------------------------------------------- (Signature) - ------------------------------------------------------------------------------- Name (Please Print) - ------------------------------------------------------------------------------- Residence: Number and Street - ------------------------------------------------------------------------------- City State Zip Code - ------------------------------------------------------------------------------- Social Security Number Accepted this _____ day of ___________, 2004, on behalf of Molecular Diagnostics, Inc. By: ----------------------- Peter Gombrich, CEO 7 EX-10.48 6 v02676_ex10-48.txt Exhibit 10.48 FORM OF NOTE THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR UNDER THE PROVISIONS OF ANY APPLICABLE STATE SECURITIES LAWS, BUT HAS BEEN ACQUIRED BY THE REGISTERED HOLDER HEREOF FOR PURPOSES OF INVESTMENT AND IN RELIANCE ON STATUTORY EXEMPTIONS UNDER THE 1933 ACT, AND UNDER ANY APPLICABLE STATE SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER PROVISIONS OF THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT; AND IN THE CASE OF AN EXEMPTION, ONLY IF THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION OF THIS NOTE. MOLECULAR DIAGNOSTICS, INC. ___________ __, 2004 Chicago, Illinois $ .00 10% CONVERTIBLE PROMISSORY NOTE Molecular Diagnostics, Inc., a Delaware corporation (the "Company"), for value received, hereby promises to pay to ____________________, or registered assigns (the "Holder") on December 31, 2008 (the "Maturity Date"), at the Holder's address on the books of the Company (the "Holder's Address"), the principal sum of ____________ Thousand Dollars ($____,000) in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest on the outstanding principal sum hereof at the rate of ten percent (10%) per annum (the "Note"). Principal shall be payable on the Maturity Date in like coin or currency to the Holder hereof at the office of the Company as hereinafter set forth, provided that any payment otherwise due on a Saturday, Sunday or legal Bank holiday may be paid on the following business day. Interest accrued through December 31, 2006 shall be payable on a semi-annual basis on June 30 and December 31 in shares of common stock of the Company at the moving average last sales price of the Company's common stock for the 20 trading days immediately preceding the interest payment date. Interest accrued from January 31, 2007 through December 31, 2008 shall be payable on a semi-annual basis on June 30 and December 31 in like coin or currency to the Holder hereof at the Holder's Address, provided that any payment otherwise due on a Saturday, Sunday or legal Bank holiday may be paid on the following business day. In the event that for any reason whatsoever any interest or other consideration payable with respect to this Note shall be deemed to be usurious by a court of competent jurisdiction under the laws of the State of Illinois or the laws of any other state governing the repayment hereof, then so much of such interest or other consideration as shall be deemed to be usurious shall be held by the holder as security for the repayment of the principal amount hereof and shall otherwise be waived. This Note is one of a series of Notes aggregating up to $4,000,000 in principal. Any conversion of this Note is subject to filing the Certificate of Amendment as set forth in Section 3 of the Subscription Agreement of even date herewith. 1. TRANSFERS OF NOTE TO COMPLY WITH THE 1933 ACT The Holder agrees that this Note may not be sold, transferred, pledged, hypothecated or otherwise disposed of except as follows: (1) to a person whom the Note may legally be transferred without registration and without delivery of a current prospectus under the 1933 Act with respect thereto and then only against receipt of an agreement of such person to comply with the provisions of this Section 1 with respect to any resale or other disposition of the Note; or (2) to any person upon delivery of a prospectus then meeting the requirements of the 1933 Act relating to such securities and the offering thereof for such sale or disposition, and thereafter to all successive assignees. 2. PREPAYMENT; AUTOMATIC CONVERSION; CONVERSION The principal amount of this Note may be prepaid by the Company, in whole or in part without premium or penalty, at any time. Upon any prepayment of the entire principal amount of this Note, all accrued, but unpaid interest shall be paid to the Holder on the date of prepayment. At any time prior to or at the time of repayment of this Note by the Company, the Holder may elect to convert some or all of the principal and interest owing on this Note into shares of the Company's common stock, subject to the restrictions contained herein. The conversion rate shall equal the amount to be converted, divided by $.10 per share. Such election to convert shall be evidenced by completion of the conversion notice attached hereto and delivery of such notice to the Company. The Holder's right to convert the obligations due under this Note to common stock shall supercede the Company's right to repay such obligations in cash, subject to the restrictions contained herein. At anytime prior to the Maturity Date, this Note is automatically converted into shares of common stock of the Company in the event that (i) if the closing sales price of the Company's common stock is equal to or in excess of $.30 for a period of twenty (20) consecutive trading days; (ii) the daily average trading volume for those twenty (20) days is equal to or in excess of 250,000; (iii) the Common Stock underlying the Notes and Warrants is registered for resale under the 1933 Act; (iv) the Company has sufficient shares of Common Stock authorized to issue for the converted notes; and (v) Suzanne Gombrich's secured convertible promissory note has been converted to equity or paid in full. In the event the Company intends to prepay any or all of the outstanding principal or interest on this Note, the Company must provide written notice to the Holder at least ten (10) days prior to the proposed prepayment date ("Prepayment Date"). If the Holder wishes to convert any or all of the outstanding principal or interest on this Note rather than receiving payment in cash, the Holder must notify the Company no later than five (5) days prior to the Prepayment Date by delivering to the Company a completed copy of the conversion notice attached hereto. If the Holder wishes to convert any or all of the outstanding principal or interest on this Note prior to the Maturity Date, rather than receiving payment in cash, the Holder must notify the Company no later than five (5) days prior to the Maturity Date by delivering to the Company a completed copy of the conversion notice attached hereto. In the event the Holder elects to convert a portion of the principal or interest on this Note, or the Company prepays any portion of the principal or interest on this Note, the Holder shall deliver this Note to the Company and the 2 Company shall issue a new Note to the Holder evidencing the reduction of principal or interest. 3. SECURITY. This Note is subject to a General Security Agreement of even date between the Company and the Holder. 4. COVENANTS OF COMPANY The Company covenants and agrees that, so long as any principal of, or interest on, this Note shall remain unpaid, unless the Holder shall otherwise consent in writing, it will comply with the following terms: (a) REPORTING REQUIREMENTS. The Company will furnish to the Holder: (i) as soon as possible, and in any event within ten (10) days after obtaining knowledge of the occurrence of (A) an "Event of Default," as hereinafter defined, (B) an event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default, or (C) a material adverse change in the condition or operations, financial or otherwise, of the Company, taken as whole, the written statement of the Chief Executive Officer or the Chief Financial Officer of the Company, setting forth the details of such Event of Default, event or material adverse change and the action which the Company proposes to take with respect thereto; (ii) promptly after the sending or filing thereof, copies of all financial statements, reports, certificates of its Chief Executive Officer, Chief Financial Officer or accountants and other information which the Company or any subsidiary sends to any holders (other than the Notes) of its securities; (iii) promptly after the commencement thereof, notice of each action, suit or proceeding before any court or other governmental authority or other regulatory body or any arbitrator as to which there is a reasonable possibility of a determination that would (A) materially impact the ability of the Company or any subsidiary to conduct its business, (B) materially and adversely affect the business, operations or financial condition of the Company taken as a whole, or (C) impair the validity or enforceability of the Notes or the ability of the Company to perform its obligations under the Notes. (b) COMPLIANCE WITH LAWS. The Company will comply, in all material respects with all applicable laws, rules, regulations and orders, except to the extent that noncompliance would not have a material adverse effect upon the business, operations or financial condition of the Company taken as a whole. (c) PRESERVATION OF EXISTENCE. The Company will maintain and preserve, and cause each subsidiary, if any, to maintain and preserve, its existence, and become or remain duly qualified and in good standing in each jurisdiction in which the failure to be so qualified would have a material adverse effect on the business, operations or financial condition of the Company, taken as a whole. (d) MAINTENANCE OF PROPERTIES. The Company will maintain and preserve, all of its properties which are necessary in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted, 3 and comply, at all times with the provisions of all leases to which it is a party as lessee or under which it occupies property, so as to prevent any forfeiture or material loss thereof or thereunder. (e) MAINTENANCE OF INSURANCE. The Company will maintain, with responsible and reputable insurers, insurance with respect to its properties and business, in such amounts and covering such risks, as is carried generally in accordance with sound business practice by companies in similar businesses in the same localities in which the Company is situated. (f) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Company will keep adequate records and books of account, with complete entries made in accordance with generally accepted accounting principles, reflecting all of its financial and other business transactions. (g) COMPLIANCE WITH THE SECURITIES EXCHANGE ACT OF 1934. The Company shall comply in all respects with the requirements of the Securities Exchange Act of 1934, including the filing of all reports due thereunder. (h) RESERVATION OF COMMON STOCK. The Company further covenants and agrees that the Company will at all times have authorized and reserved, free from preemptive rights, a sufficient number of shares of its common stock to provide for the conversion of this Note in full. 5. EVENTS OF DEFAULT AND REMEDIES (a) Any one or more of the following events which shall have occurred and be continuing shall constitute an event of default ("Event of Default"): (i) Default in the payment of interest upon this Note, as and when the same shall become due; or (ii) Default in the payment of the principal of this Note, as and when the same shall become due; or (iii) The Company shall fail to perform or observe any affirmative covenant contained in this Note or the subscription agreement executed by the Company and the Holder as of the date hereof and such Default, if capable of being remedied, shall not have been remedied ten (10) days after written notice thereof shall have been given by the Holder to the Company; or (iv) The Company or any subsidiary (A) shall institute any proceeding or voluntary case seeking to adjudicate it bankrupt or insolvent, or seeking dissolution, liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of any order for relief or the appointment of a receiver, trustee, custodian or other similar official for such the Company or any 4 subsidiary or for any substantial part of its property, or shall consent to the commencement against it of such a proceeding or case, or shall file an answer in any such case or proceeding commenced against it consenting to or acquiescing in the commencement of such case or proceeding, or shall consent to or acquiesce in the appointment of such a receiver, trustee, custodian or similar official; (B) shall be unable to pay its debts as such debts become due, or shall admit in writing its inability to apply its debts generally; (C) shall make a general assignment for the benefit of creditors; or (D) shall take any action to authorize or effect any of the actions set forth above in this subsection 3 (iv); or (v) Any proceeding shall be instituted against the Company seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, liquidation, winding up, reorganization, arrangement, adjustment, protection, relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for the Company or for any substantial part of its property, and either such proceeding shall not have been dismissed or shall not have been stayed for a period of sixty (60) days or any of the actions sought in such proceeding (including, without limitation, the entry of any order for relief against it or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property) shall occur; or (vi) One or more final judgments or orders for the payment of money in excess of $100,000 in the aggregate shall be rendered against the Company, and either (A) enforcement proceedings shall have been commenced by any creditor upon any such judgment or order, or (B) there shall be any period of thirty (30) days during which enforcement of any such judgment or order shall not be discharged, stayed or fully satisfied. (b) If an Event of Default described above has occurred, then the Holder may, without further notice to the Company, declare the principal amount of this Note at the time outstanding, together with accrued unpaid interest thereon, and all other amounts payable under this Note to be forthwith due and payable, whereupon such principal, interest and all such amounts shall become and be forthwith due and payable. (c) The Company covenants that in case the principal of, and accrued interest on, the Note becomes due and payable by declaration or otherwise, then the Company will pay in cash to the Holder of this Note, the whole amount that then shall have become due and payable on this Note for principal or interest, as the case may be, and in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable fees and disbursements of the Holder's legal counsel. In case the Company shall fail forthwith to pay such amount, the Holder may commence an action or proceeding at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree against Company or other obligor upon this Note, wherever situated, the monies adjudicated or decreed to be payable. 6. MISCELLANEOUS (a) This Note has been issued by the Company pursuant to authorization of the Board of Directors of the Company. (b) The Company may consider and treat the entity in whose name this Note shall be registered as the absolute owner thereof for all purposes whatsoever (whether or not this Note shall be overdue) and the Company shall not be affected by any notice to the contrary. Subject to the limitations herein stated, the registered owner of this Note shall have the right to transfer this 5 Note by assignment, and the transferee thereof shall, upon his registration as owner of this Note, become vested with all the powers and rights of the transferor. Registration of any new owners shall take place upon presentation of this Note to the Company at its principal offices, together with a duly authenticated assignment. In case of transfer by operation of law, the transferee agrees to notify the Company of such transfer and of his address, and to submit appropriate evidence regarding the transfer so that this Note may be registered in the name of the transferee. This Note is transferable only on the books of the Company by the holder hereof, in person or by attorney, on the surrender hereof, duly endorsed. Communications sent to any registered owner shall be effective as against all holders or transferees of the Note not registered at the time of sending the communication. (c) Payments of principal and interest shall be made as specified above to the registered owner of this Note. No interest shall be due on this Note for such period of time that may elapse between the maturity of this Note and its presentation for payment. (d) The Holder shall not, by virtue, hereof, be entitled to any rights of a shareholder in the Company, whether at law or in equity, and the rights of the Holder are limited to those expressed in this Note. (e) Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Note, if mutilated, the Company shall execute and deliver a new Note of like tenor and date. (f) This Note shall be construed and enforced in accordance with the laws of the State of Illinois. The Company and the Holder hereby consent to the jurisdiction of the Courts of the State of Illinois and the United States District Courts situated therein in connection with any action concerning the provisions of this Note instituted by the Holder against the Company. IN WITNESS WHEREOF, Molecular Diagnostics, Inc. caused this Note to be signed in its name by its Chief Executive Officer. Molecular Diagnostics, Inc. By: ----------------------------------------- Peter Gombrich Chief Executive Officer 6 NOTICE OF CONVERSION (To be executed by the Registered Holder in order to convert the Note) The undersigned hereby elects to convert $_________ of the principal and $_________ of the interest due on the Note issued by Molecular Diagnostics, Inc. into Shares of Common Stock according to the conditions set forth in such Note, as of the date written below. The undersigned further affirms that as of the date hereof, the representations and warranties made by the undersigned in the subscription agreement of even date with the promissory note being converted, are true and correct as if such representations and warranties were made as of the date hereof. Date of Conversion:____________________________________________________________ Conversion Price: $.10 per share Shares To Be Delivered:________________________________________________________ Signature:_____________________________________________________________________ Print Name:____________________________________________________________________ Address:_______________________________________________________________________ 7 EX-10.49 7 v02676_ex10-49.txt Exhibit 10.49 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, by and between Molecular Diagnostics, Inc., a Delaware corporation (the "Company"), and the person whose name appears on the signature page attached hereto (the "Holder"). WHEREAS, pursuant to a subscription agreement (the "Subscription Agreement"), in connection with the proposed private placement (the "Bridge Loan") of the Company's units ("Units") consisting of (i) a $100,000 principal amount, 10% secured convertible promissory note (the "Note"); and (ii) 25,000 warrants to purchase shares of the Company's common stock (the "Warrants"); WHEREAS, pursuant to the terms of and in order to induce the Holder to enter into a certain subscription agreement dated the date hereof between the Company and the Holder (the "Subscription Agreement") to purchase the Units, the Company and the Holder have agreed to enter into this Agreement; and WHEREAS, it is intended by the Company and the Holder that this Agreement shall become effective immediately upon the acquisition by the Holder of the Units; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the Company hereby agrees as follows: 1. Registration Rights. a. Piggyback Registration. If the Company at any time proposes to register any of its securities under the Securities Act of 1933, as amended (the "1933 Act") (other than pursuant to a registration statement filed on Form S-8 or other comparable form)("Company Registration"), the Company shall include the shares of common stock underlying the Bridge Loan and the Warrants (referred to as the "Registerable Securities") in such registration. Provided, however, that if, at any time after giving such written notice of the Company's intention to register any of the Holder's Registerable Securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay the Company Registration, the Company may give written notice of such determination to each Holder and thereupon shall be relieved of its obligation to register any Registerable Securities issued or issuable in connection with such registration (but not from its obligation to pay registration expenses in connection therewith or to register the Registerable Securities in a subsequent registration); and in the case of a determination to delay a registration shall thereupon be permitted to delay registering any Registerable Securities for the same period as the delay in respect of securities being registered for the Company's own account. b. Required Filing. The Company shall prepare and file by 90 days from the date of Closing (the "Filing Date") a registration statement (the "Registration Statement") covering the resale of the Registrable Securities. The Company shall use its best efforts to cause the Registration Statement to be declared effective by the SEC. 2. Cooperation with Company. Holder will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registerable Securities. 3. Registration Procedures. If and whenever the Company is required by any of the provisions of this Agreement to use its best efforts to effect the registration of any of the Registerable Securities under the 1933 Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: a. prepare and file with the Securities and Exchange Commission (the "Commission") a registration statement and shall use its best efforts to cause such registration statement to become effective and remain effective until all the Registerable Securities are sold or become capable of being publicly sold without registration under the 1933 Act. b. prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the 1933 Act with respect to the sale or other disposition of all securities covered by such registration statement whenever the Holder or Holders of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 of the Commission); c. furnish to each Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the 1933 Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Holder; d. use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as each Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable such Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by such Holder, except that the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process; e. use its best efforts to list such securities on any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; 2 f. enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; g. notify each Holder of Registerable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the 1933 Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; and h. furnish, at the request of any Holder on the date such Registerable Securities are delivered to the underwriters for sale pursuant to such registration or, if such Registerable Securities are not being sold through underwriters, on the date the registration statement with respect to such Registerable Securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purpose of such registration, addressed to the underwriters, if any, and to the Holder making such request, covering such legal matters with respect to the registration in respect of which such opinion is being given as the Holder of such Registerable Securities may reasonably request and are customarily included in such an opinion and (ii) letters, dated, respectively, (1) the effective date of the registration statement and (2) the date such Registerable Securities are delivered to the underwriters, if any, for sale pursuant to such registration from a firm of independent certified public accountants of recognized standing selected by the Company, addressed to the underwriters, if any, and to the Holder making such request, covering such financial, statistical and accounting matters with respect to the registration in respect of which such letters are being given as the Holder of such Registerable Securities may reasonably request and are customarily included in such letters. 4. Expenses. All expenses incurred in any registration of the Holder's Registerable Securities under this Agreement shall be paid by the Company, including, without limitation, printing expenses, fees and disbursements of counsel for the Company, expenses of any audits to which the Company shall agree or which shall be necessary to comply with governmental requirements in connection with any such registration, all registration and filing fees for the Holder's Registerable Securities under federal and State securities laws, and expenses of complying with the securities or blue sky laws of any jurisdictions pursuant to Section 3(h)(i); provided, however, the Company shall not be liable for (a) any discounts or commissions to any underwriter; (b) any stock transfer taxes incurred with respect to Registerable Securities sold in the Offering or (c) the fees and expenses of counsel for any Holder, provided that the Company will pay the costs and expenses of Company counsel when the Company's counsel is representing any or all selling security holders. 5. Indemnification. In the event any Registerable Securities are included in a registration statement pursuant to this Agreement: 3 a. Company Indemnity. Without limitation of any other indemnity provided to any Holder, either in connection with the Offering or otherwise, to the extent permitted by law, the Company shall indemnify and hold harmless each Holder, the affiliates, officers, directors and partners of each Holder, any underwriter (as defined in the 1933 Act) for such Holder, and each person, if any, who controls such Holder or underwriter (within the meaning of the 1933 Act or the Securities Exchange Act of 1934 (the "Exchange Act"), against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the 1933 Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any alleged untrue statement of a material fact contained in such registration statement including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein, (iii) any violation or alleged violation by the Company of the 1933 Act, the Exchange Act, or (iv) any state securities law or any rule or regulation promulgated under the 1933 Act, the Exchange Act or any state securities law, and the Company shall reimburse each such Holder, affiliate, officer or director or partner, underwriter or controlling person for any legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable to any Holder in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder or any other officer, director or controlling person thereof. b. Holder Indemnity. Each Holder shall indemnify and hold harmless the Company, its affiliates, its counsel, officers, directors and representatives, any underwriter (as defined in the 1933 Act) and each person, if any, who controls the Company or the underwriter (within the meaning of the 1933 Act or liabilities (joint or several) to which they may become subject under the 1933 Act, the Exchange Act or any state securities law, and the Company shall reimburse each such Holder, affiliate, officer or director or partner, underwriter or controlling person for any legal or other expenses incurred by them in connection with investigating or defending any loss, claim, damage, liability or action; insofar as such losses, claims, damages or liabilities (or actions and respect thereof) to the extent that it arises out of or is based upon a violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder or any other officer, director or controlling person thereof. . c. Notice; Right to Defend. Promptly after receipt by an indemnified party under this Section 6 of notice of the commencement of any action (including any governmental action), such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 8 deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in and if the indemnifying party agrees in writing that it will be responsible for any 4 costs, expenses, judgments, damages and losses incurred by the indemnified party with respect to such claim, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if the indemnified party reasonably believes that representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Agreement only if and to the extent that such failure is prejudicial to its ability to defend such action, and the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Agreement. d. Contribution. If the indemnification provided for in this Agreement is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the indemnified party on the other hand in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relevant fault of the indemnifying party and the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. Notwithstanding the foregoing, the amount any Holder shall be obligated to contribute pursuant to the Agreement shall be limited to an amount equal to the proceeds to such Holder of the Registerable Securities sold pursuant to the registration statement which gives rise to such obligation to contribute (less the aggregate amount of any damages which the Holder has otherwise been required to pay in respect of such loss, claim, damage, liability or action or any substantially similar loss, claim, damage, liability or action arising from the sale of such Registerable Securities). e. Survival of Indemnity. The indemnification provided by this Agreement shall be a continuing right to indemnification and shall survive the registration and sale of any Registerable Securities by any person entitled to indemnification hereunder and the expiration or termination of this Agreement. 6. Remedies. a. Time is of Essence. The Company agrees that time is of the essence of each of the covenants contained herein and that, in the event of a dispute hereunder, this Agreement is to be interpreted and construed in a manner 5 that will enable the Holder to sell their Registerable Securities as quickly as possible after such Holder have indicated to the Company that they desire their Registerable Securities to be registered. Any delay on the part of the Company not expressly permitted under this Agreement, whether material or not, shall be deemed a material breach of this Agreement. b. Remedies Upon Default or Delay. The Company acknowledges the breach of any part of this Agreement may cause irreparable harm to a Holder and that monetary damages alone may be inadequate. The Company therefore agrees that the Holder shall be entitled to injunctive relief or such other applicable remedy as a court of competent jurisdiction may provide. Nothing contained herein will be construed to limit a Holder's right to any remedies at law, including recovery of damages for breach of any part of this Agreement. 7. Notices. a. All communications under this Agreement shall be in writing and shall be mailed by first class mail, postage prepaid, or telegraphed or telexed with confirmation of receipt or delivered by hand or by overnight delivery service, b. If to the Company, at: Molecular Diagnostics, Inc. 414 North Orleans Street, Suite 510 Chicago, IL 60610 or at such other address as it may have furnished in writing to the Holder of Registerable Securities at the time outstanding, or c. if to the Holder of any Registerable Securities, to the address of such Holder as it appears in the stock ledger of the Company. d. Any notice so addressed, when mailed by registered or certified mail shall be deemed to be given three days after so mailed, when telegraphed or telexed shall be deemed to be given when transmitted, or when delivered by hand or overnight shall be deemed to be given when delivered. 8. Successors and Assigns. Except as otherwise expressly provided herein, this Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the Holder. 9. Amendment and Waiver. This Agreement may be amended, and the observance of any term of this Agreement may be waived, but only with the written consent of the Company and the Holder of securities representing a majority of the Registerable Securities; provided, however, that no such amendment or waiver shall take away any registration right of any Holder of 6 Registerable Securities or reduce the amount of reimbursable costs to any Holder of Registerable Securities in connection with any registration hereunder without the consent of such Holder; further provided, however, that without the consent of any other Holder of Registerable Securities, any Holder may from time to time enter into one or more agreements amending, modifying or waiving the provisions of this Agreement if such action does not adversely affect the rights or interest of any other Holder of Registerable Securities. No delay on the part of any party in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any party of any right, power or remedy preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. 10. Counterparts. One or more counterparts of this Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and same instrument. 11. Governing Law. This Agreement shall be construed in accordance with and governed by the internal laws of the State of Illinois, without giving effect to conflicts of law principles. 12. Invalidity of Provisions. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. 13. Headings. The headings in this Agreement are for convenience of reference only and shall not be deemed to alter or affect the meaning or interpretation of any provisions hereof. IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the ___ day of ____________, 2004. HOLDER MOLECULAR DIAGNOSTICS, INC. By: - ---------------------------- ----------------------- Name: Peter Gombrich Chief Executive Officer 7 EX-10.50 8 v02676_ex10-50.txt Exhibit 10.50 GENERAL SECURITY AGREEMENT General Security Agreement dated ____________, 2004, made by Molecular Diagnostics, Inc. a Delaware corporation ("Debtor") having an office at __________________________, in favor of the parties listed on Schedule B attached hereto (the "Secured Parties"). Debtor hereby agrees in favor of Secured Parties as follows: 1. In consideration for loans made or to be made to Debtor substantially for the benefit of Debtor by Secured Parties, evidenced by the Promissory Notes of Debtor in the principal amounts set forth on Schedule B hereto, payable to the order of Secured Parties (such notes, as amended, modified, supplemented, replaced or substituted from time to time, being herein referred to as the "Notes"), Debtor hereby grants to Secured Parties a continuing security interest in, lien upon and a right of setoff against, and Debtor hereby assigns to Secured Parties, all of Debtor's right, title and interest in and to the Collateral described in Section 2, to secure the full and prompt payment, performance and observance of all present and future indebtedness, obligations, liabilities and agreements of any kind of Debtor to Secured Parties arising under or in connection with the Notes, which is existing now or hereafter (all of the foregoing being herein referred to as the "Obligations"). 2. The Collateral is described on Schedule A annexed hereto as part hereof and on any separate schedule(s) identified as Collateral at any time or from time to time furnished by Debtor to Secured Parties (all of which are hereby deemed part of this Security Agreement) and includes claims of Debtor against third parties for loss or damage to or destruction of any Collateral. 3. Debtor hereby warrants, represents, covenants and agrees (as of the date hereof and so long as any Obligation remains outstanding) that: (a) the chief executive office and other places of business of Debtor, the books and records relating to the Collateral (except for such records as are in the possession or control of Secured Parties) and the Collateral are located at the address set forth below and Debtor will not change any of the same, or merge or consolidate with any person or change its name or conduct its business under any trade, assumed or fictitious name, without prior written notice to and consent of Secured Parties; (b) the Collateral is and will be used in the business of Debtor and not for personal, family, household or farming use; (c) the Collateral is now, and at all times will be, owned by Debtor free and clear of all liens, security interests, claims and encumbrances, except as are created by this Security Agreement and those that are set forth on Schedule C; (d) Debtor will not abandon or assign, sell, lease, transfer or otherwise dispose of, other than in the ordinary course of Debtor's business, nor will Debtor suffer or permit any of the same to occur with respect to, any Collateral, without prior written notice to and consent of a designated representative of the Secured Parties; (e) Debtor will make payment or will provide for the payment, when due, of all taxes, assessments or contributions or other public or private charges which have been or may be levied or assessed against Debtor, whether with respect to the Collateral, to any wages or salaries paid by Debtor, or otherwise, will deliver to Secured Parties, on demand, certificates or other evidence satisfactory to Secured Parties attesting thereto and shall cause Debtor's subsidiaries to take any such action as described under this section 3(e); (f) Debtor will use the Collateral for lawful purposes only, with all reasonable care and caution and in conformity in all material respects with all applicable laws, ordinances and regulations; (g) Debtor will, at Debtor's sole cost and expense, keep the Collateral in good order, repair, running condition and in substantially the same condition as on the date hereof, reasonable wear and tear excepted, and Debtor will not, without the prior written consent of Secured Parties, alter or remove any identifying symbol or number upon any of the Collateral; (h) Secured Parties shall at all times have free access to and right of inspection of any Collateral and any papers, instruments and records pertaining thereto (and the right to make extracts from and to receive from Debtor originals or true copies of such records, papers and instruments upon request therefor) and Debtor hereby grants to Secured Parties a security interest in all such records, papers and instruments to secure the payment, performance and observance of the Obligations; (i) the Collateral is now and shall remain personal or intangible property, and Debtor will not permit any Collateral to become a fixture without prior written notice to and consent of Secured Parties and without first making all arrangements, and delivering, or causing to be delivered, to Secured Parties all instruments and documents, including, without limitation, waivers and subordination agreements by any landlords or mortgagees, requested by and satisfactory to Secured Parties to preserve and protect the primary security interest granted herein against all persons; (j) Debtor will, at its sole cost and expense, perform all acts and -2- execute all documents requested by Secured Parties from time to time to evidence, perfect, maintain or enforce Secured Parties' first priority security interest granted herein or otherwise in furtherance of the provisions of this Security Agreement; (k) at any time and from time to time, Debtor shall, at its sole cost and expense, execute and deliver to Secured Parties such financing statements pursuant to the Uniform Commercial Code ("UCC"), applications for certificate of title and other papers, documents or instruments as may be requested by Secured Parties in connection with this Security Agreement, and to the extent permitted by applicable law, Debtor hereby authorizes Secured Parties to execute and file at any time and from time to time one or more financing statements or copies thereof or of this Security Agreement with respect to the Collateral signed only by Secured Parties, and Debtor agrees to pay any recording tax or similar tax arising in connection with the filing of any such financing statement and further agrees to pay any additional recording or similar tax which is incurred in connection therewith; (l) Debtor assumes all responsibility and liability arising from the Collateral; (m) in their discretion, Secured Parties may, at any time and from time to time, upon the occurrence and during the continuance of a Default (as hereinafter defined), demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable by Secured Parties with respect to, any Collateral, and/or extend the time of payment, arrange for payment in installments, or otherwise modify the terms of, or release, any of the Obligations and/or the Collateral, or any obligor, maker, endorser, acceptor, surety or guarantor of, or any Parties to, any of the Obligations or the Collateral, all without notice to or consent by Debtor and without otherwise discharging or affecting the Obligations, the Collateral or the first priority security interest granted herein; (n) in their discretion, Secured Parties may, at any time and from time to time, for the account of Debtor, pay any amount or do any act required of Debtor hereunder and which Debtor fails to do or pay, and any such payment shall be deemed an advance by Secured Parties to Debtor payable on demand together with interest at the highest rate then payable on any of the Obligations; (o) Debtor will promptly pay Secured Parties for any and all sums, costs, and expenses which Secured Parties may pay or incur pursuant to the provisions of this Security Agreement or in perfecting, defending, protecting or enforcing this Security Agreement or the first priority security interest granted herein or in enforcing payment of the Obligations or otherwise in connection with the provisions hereof, including but not limited to all search, filing and recording fees, taxes, fees and expenses for the service and filing of papers, premium on bonds and undertakings, fees of marshals, sheriffs, custodians, auctioneers, court costs, collection charges, travel expenses, and reasonable attorneys' fees, all of which together with interest at the highest rate then payable on any of the Obligations, shall be part of the Obligations and be payable on demand; (p) upon the occurrence and during the continuance of a Default, any proceeds of the Collateral received by Debtor shall not be commingled with other property of Debtor, but shall be segregated, held by Debtor in trust for Secured Parties, and immediately delivered to Secured Parties in the form received, duly endorsed in blank where appropriate to effectuate the provisions hereof, the same to be held by Secured Parties as additional Collateral hereunder or, at Secured Parties' option, to be applied to payment of the Obligations, whether or not due and in any order; (q) in their sole discretion, Secured Parties may, at any time and from time to time, assign, transfer or deliver to any transferee of any Obligations, any Collateral, whereupon Secured Parties shall be fully discharged from all responsibility and the transferee shall be vested with all powers and rights of Secured Parties hereunder with respect thereto, but Secured Parties shall retain all rights and powers with respect to any Collateral not assigned, transferred or delivered; and (r) upon request of Secured Parties, at any time and from time to time, Debtor shall, at its cost and expense, execute and deliver to Secured Parties reports as to the Collateral listing all items thereof, describing the condition of same and setting forth the value thereof (lower of cost or market) all in form and substance reasonably satisfactory to Secured Parties. 4. The term Default as used in this Security Agreement shall mean any event of default, as such term is defined in the Notes. 5. Upon the occurrence and during the continuance of any Default, Secured Parties may, without notice to (except as herein set forth) or demand upon Debtor, declare any Obligations immediately due and payable and Secured Parties shall have the following rights and remedies (to the extent permitted by applicable law) in addition to all rights and remedies of a Secured Parties under the UCC or of Secured Parties under the Obligations, all such rights and remedies being cumulative, not exclusive and enforceable alternatively, successively or concurrently: -3- (a) Secured Parties may, at any time and from time to time, with or without judicial process or the aid and assistance of others, (i) enter upon any premises in which any Collateral may be located and, without resistance or interference by Debtor, take possession of the Collateral, (ii) dispose of any part or all of the Collateral on any such premises, (iii) require Debtor to assemble and make available to Secured Parties at the expense of Debtor any part or all of the Collateral at any place and time designated by Secured Parties which is reasonably convenient to both parties, (iv) remove any part or all of the Collateral from any such premises for the purpose of effecting sale or other disposition thereof (and if any of the Collateral consists of motor vehicles, Secured Parties may use Debtor's license plates), and (v) sell, resell, lease, assign and deliver, grant options for or otherwise dispose of any part or all of the Collateral in its then condition or following any commercially reasonable preparation or processing, at public or private sale or proceedings or otherwise, by one or more contracts, in one or more parcels, at the same or different times, with or without having the Collateral at the place of sale or other disposition, for cash and/or credit, and upon any terms, at such place(s) and time(s) and to such person(s) as Secured Parties deems best, all without demand, notice or advertisement whatsoever except that where an applicable statute requires reasonable notice of sale or other disposition Debtor hereby agrees that the sending of ten days' notice by overnight mail, postage prepaid, to any address of Debtor set forth in this Security Agreement shall be deemed reasonable notice thereof. If any Collateral is sold by Secured Parties upon credit or for future delivery, Secured Parties shall not be liable for the failure of the purchaser to pay for same and in such event Secured Parties may resell or otherwise dispose of such Collateral. Secured Parties may buy any part or all of the Collateral at any public sale and, if any part or all of the Collateral is of a type customarily sold in a recognized market or is of the type which is the subject of widely distributed standard price quotations, Secured Parties may buy such Collateral at private sale and in each case may make payment therefor by any means, whether by credit against the Obligations or otherwise. Secured Parties may apply the cash proceeds actually received from any sale or other disposition to the reasonable expenses of retaking, holding, preparing for sale, selling, leasing and the like, to reasonable attorneys' fees and all legal, travel and other expenses which may be incurred by Secured Parties in attempting to collect the Obligations, proceed against the Collateral or enforce this Security Agreement or in the prosecution or defense of any action or proceeding related to the Obligations, the Collateral or this Security Agreement; and then to the Obligations in such order and as to principal or interest as Secured Parties may desire; and Debtor shall remain liable and will pay Secured Parties on demand any deficiency remaining, together with interest thereon at the highest rate then payable on the Obligations and the balance of any expenses unpaid, with any surplus to be paid to Debtor, subject to any duty of Secured Parties imposed by law to the holder of any subordinate security interest in the Collateral known to Secured Parties. (b) Secured Parties may, at any time and from time to time, as appropriate, set off and apply to the payment of the Obligations, any Collateral in or coming into the possession of Secured Parties or their agents, without -4- notice to Debtor and in such manner as Secured Parties may in their discretion determine. 6. To the extent necessary to enforce their rights hereunder, and after the occurrence and during the continuance of a Default, Debtor and Secured Parties hereby designate and appoint [ ] ("Agent") as attorney-in-fact of Debtor, irrevocably and with power of substitution, with authority to: endorse the name of Debtor on any notes, acceptances, checks, drafts, money orders, instruments or other evidences of Collateral that may come into Secured Parties' possession; sign the name of Debtor on any invoices, documents, assignments; execute proofs of claim and loss; execute endorsements, assignments or other instruments of conveyance or transfer; adjust and compromise any claims under insurance policies or otherwise; execute releases; and do all other acts and things necessary or advisable in the sole discretion of Secured Parties to carry out and enforce this Security Agreement or the Obligations. Neither Secured Parties nor any designee or agent thereof shall be liable for any acts of commission or omission done in good faith, for any error of judgment or for any mistake of fact or law. This power of attorney being coupled with an interest is irrevocable while any Obligations shall remain unpaid. A majority in interest of the Secured Parties may replace the Agent. 7. With respect to the enforcement of Secured Parties' rights under this Security Agreement, Debtor hereby releases Secured Parties and Agent from any claims, causes of action and demands at any time arising out of or with respect to this Security Agreement, the Obligations, the Collateral and its use and/or any actions taken or omitted to be taken by Secured Parties or Agent in good faith with respect thereto, and Debtor hereby agrees to hold Secured Parties and Agent harmless from and with respect to any and all such claims, causes of action and demands. 8. Secured Parties' prior recourse to any Collateral shall not constitute a condition of any demand, suit or proceeding for payment or collection of the Obligations nor shall any demand, suit or proceeding for payment or collection of the Obligations constitute a condition of any recourse by Secured Parties to the Collateral. Any suit or proceeding by Secured Parties to recover any of the Obligations shall not be deemed a waiver of, or bar against, subsequent proceedings by Secured Parties with respect to any other Obligations and/or with respect to the Collateral. No act, omission or delay by Secured Parties shall constitute a waiver of their rights and remedies hereunder or otherwise. No single or partial waiver by Secured Parties of any covenant, warranty, representation, Default or right or remedy which they may have shall operate as a waiver of any other covenant, warranty, representation, Default, right or remedy or of the same covenant, warranty, representation, Default, right or remedy on a future occasion. Debtor hereby waives presentment, notice of dishonor and protest of all instruments included in or evidencing any Obligations or Collateral, and all other notices and demands whatsoever (except as expressly provided herein). 9. Debtor hereby agrees to pay, on demand, all out-of-pocket expenses incurred by Secured Parties in connection with the enforcement of the Notes, this Security Agreement, and the Obligations and in connection with any -5- amendment, including, without limitation, the fees and disbursements of counsel to Secured Parties. 10. In the event of any litigation with respect to any matter connected with this Security Agreement, the Obligations, the Collateral or the Notes, Debtor hereby waives the right to a trial by jury and all rights of setoff. Debtor hereby waives personal service of any process in connection with any such action or proceeding and agrees that the service thereof may be made by certified or registered mail directed to Debtor at any address of Debtor set forth in this Security Agreement. Debtor so served shall appear or answer to such process within thirty days after the mailing thereof. Should Debtor so served fail to appear or answer within said thirty-day period, Debtor shall be deemed in default and judgment may be entered by Secured Parties against Debtor for the amount or such other relief as may be demanded in any process so served. In the alternative, Secured Parties may in their discretion effect service upon Debtor in any other form or manner permitted by law. 11. Debtor shall deliver to Secured Parties on the date of execution of this Security Agreement duly executed UCC-1 financing statements with respect to the Collateral. Upon the payment in full or conversion of the Notes and satisfaction of all Obligations in accordance with the Notes, the security interest granted hereby in the Collateral shall terminate and all rights to the Collateral under this Agreement shall revert to Debtor. Upon any such termination, the Secured Parties shall execute and deliver UCC -3 financing statement releases or other documents of release reasonably requested by Debtor. 12. Secured Parties may assign their rights and obligation hereunder to any Affiliate of Secured Parties provided that such Affiliate assumes all of the liabilities or obligations of Secured Parties hereunder. For purposes of this section, "Affiliate" of any person means any other person or entity which, directly or indirectly, controls or is controlled by that person, or is under common control with that person or entity. "Control" (including, with correlative meaning, the terms "controlled by" and "under common control with"), as used with respect to any person or entity, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person or entity, whether through the ownership of voting securities, by contract or otherwise. 13. All terms herein shall have the meanings as defined in the UCC, unless the context otherwise requires. No provision hereof shall be modified, altered, waived, released, terminated or limited except by a written instrument expressly referring to this Security Agreement and to such provision, and executed by the Parties to be charged. The execution and delivery of this Security Agreement has been authorized by the Board of Directors of Debtor and by any necessary vote or consent of stockholders of Debtor. This Security Agreement and all Obligations shall be binding upon the successors and assigns of Debtor and shall, together with the rights and remedies of Secured Parties hereunder, inure to the benefit of Secured Parties, their executors, administrators, successors, endorsees and assigns. This Security Agreement and -6- the Obligations shall be governed in all respects by the laws of the State of Illinois applicable to contracts executed and to be performed in such state. If any term of this Security Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be affected thereby. Secured Parties is authorized to annex hereto any schedules referred to herein. Debtor acknowledges receipt of a copy of this Security Agreement. 14. All notices and other communications under this Agreement shall be in writing and shall be deemed given when delivered personally, by overnight mail or mailed by certified mail, return receipt requested, to the parties (and shall also be transmitted by facsimile to the persons receiving copies thereof) at the following addresses (or to such other address as a party may have specified by notice given to the other party pursuant to this provision): If to Debtor: Molecular Diagnostics, Inc. 414 North Orleans Street, Suite 510 Chicago, IL 60610 Attn: Mr. Peter Gombrich With a copy to: Sichenzia Ross Friedman Ference LLP 1065 Avenue of the Americas New York, New York 10018 Attn: Gregory Sichenzia, Esq. If to Secured Parties: --------------------- --------------------- --------------------- With a copy to: --------------------- --------------------- --------------------- IN WITNESS WHEREOF, the undersigned has executed or caused this security agreement to be executed in the State of New York on the date first above set forth. MOLECULAR DIAGNOSTICS, INC. By___________________________ Peter Gombrich, Chief Executive Officer -7- SCHEDULE A The property covered by this Security Agreement consists of covers all of Debtor's right, title and interest in, to and under the following properties, assets and rights of the Debtor, in each case whether now or hereafter existing or arising or in which Debtor now has or hereafter owns, acquires or develops an interest and wherever located (collectively, the "Collateral"): (i) all patents and patent applications, domestic or foreign, all licenses relating to any of the foregoing and all income and royalties with respect to any licenses, all rights to sue for past, present or future infringement thereof, all rights arising therefrom and pertaining thereto and all reissues, divisions, continuations, renewals, extensions and continuations in-part thereof; (ii) all general intangibles and all intangible intellectual or other similar property of Debtor of any kind or nature, associated with or arising out of any of the aforementioned properties and assets and not otherwise described above; (iii) all personal and fixture property of every kind and nature including without limitation all goods (including inventory, equipment and any accessions thereto), instruments (including promissory notes), documents, accounts, chattel paper (whether tangible or electronic), deposit accounts, letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), securities and all other investment property, supporting obligations, any other contract rights or rights to the payment of money, insurance claims and proceeds, and all general intangibles (including all payment intangibles); and (iv) all proceeds of any and all of the foregoing Collateral (including license royalties, rights to payment, accounts and proceeds of infringement suits) and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof) or any indemnity, warranty or guaranty payable by reason of loss or damage to or otherwise with respect to the foregoing Collateral). -8- Schedule B Name of Investor Address of Investor Amount of Promissory Notes -9- Schedule C Liens o Debtor is delinquent in filing certain Federal and State Income Tax returns for 2002 and 2001. Debtor is also delinquent in paying a portion of Federal and State employee and employer payroll taxes for 2003, 2002 and 2001. Debtor owed $736,000 and $678,000 as of September 30, 2003 and December 31, 2002, respectively, in past-due payroll taxes, including $241,000 and $250,000 respectively in assessed and estimated statutory penalties and interest. The Internal Revenue Service has filed a lien against Debtor's assets to secure the unpaid payroll taxes. Debtor is currently in the process of communicating through counsel with the Internal Revenue Service to resolve this matter. The amount is included in accrued payroll costs in the accompanying balance sheet. Debtor is also delinquent in paying various state franchise taxes. o On April 2, 2003, Debtor issued a $1,000,000 Convertible Promissory Note to an affiliate, Suzanne M. Gombrich, the wife of Peter Gombrich, Debtor's Chairman and CEO, in exchange for cash. The note bears interest at the rate of 12% per annum and is convertible into the common stock of MDI at a conversion price of $0.10 per share. Debtor also granted the holder a first priority security interest in all of Debtor's assets. o Beginning in October 2002, Debtor began an issue of up to $4,000,000 in series Bridge II Convertible Promissory Notes to accredited investors. The notes bear interest at 12 % per annum payable at maturity date in kind in the form of shares of common stock and were due July 31, 2003. The notes are convertible at any time into the common stock of Debtor. Debtor granted a junior security position in all of the Debtor's assets to the holders of the Bridge II convertible promissory notes. The Bridge II notes automatically convert into shares of Common Stock (subject to adjustments for stock splits, etc.) upon a "Qualified Financing Transaction," which means a transaction in which the Company closes a new debt or equity financing prior to the maturity date that results in net proceeds to the Company of at least four million dollars ($4,000,000). Through September 30, 2003, Debtor issued $1,858,200 in principal amount of Bridge II convertible promissory notes in exchange for cash. Between October 1, 2003 and November 10, 2003, MDI issued an additional $122,000 in principal amount of Bridge II convertible promissory notes in exchange for cash. In September 2003 an amendment to the Bridge II Convertible Promissory Notes was sent to holders requesting an extension of the notes to July 31, 2004. As additional consideration for the extension, holders were offered an increase in the interest rate from 12% to 15%. In addition, an amendment to the indenture offered an increase in the warrant coverage ratio from 25% to 33%. -10- EX-10.51 9 v02676_ex10-51.txt Exhibit 10.51 FORM OF WARRANT neither this warrant nor the shares of Common Stock issuable upon exercise hereof have been registered under the securities act of 1933, as amended, or any applicable state securities law and neither may be sold or otherwise transferred until (i) a registration statement under such securities act and such applicable state securities laws shall have become effective with regard thereto, or (ii) the company shall have received a written opinion of counsel acceptable to the company to the effect that registration under such securities act and such applicable state securities laws is not required in connection with such proposed transfer. MOLECULAR DIAGNOSTICS, INC. COMMON STOCK PURCHASE WARRANT Warrant ________ shares Original Issue Date: _____________, 2004 THIS CERTIFIES THAT, FOR VALUE RECEIVED, _______________ or its registered assigns ("HOLDER") is entitled to purchase, on the terms and conditions hereinafter set forth, at any time or from time to time from the date hereof until 5:00 p.m., Eastern Time, on fifth anniversary of the Original Issue Date set forth above, or if such date is not a day on which the Company (as hereinafter defined) is open for business, then the next succeeding day on which the Company is open for business (such date is the "EXPIRATION DATE"), but not thereafter, to purchase up to ____________ (______) shares of the Common Stock, $.001 par value (the "COMMON Stock"), of Molecular Diagnostics, Inc., a Delaware corporation (the "COMPANY"), at a purchase price of fifteen cents ($0.15) per share (the "EXERCISE PRICE"), such number of shares and Exercise Price being subject to adjustment upon the occurrence of the contingencies set forth in this Warrant. Each share of Common Stock as to which this Warrant is exercisable is a "WARRANT SHARE" and all such shares are collectively referred to as the "WARRANT SHARES." SECTION 1. EXERCISE OF WARRANT; CONVERSION OF WARRANT. (a) Subject to filing the Certificate of Amendment as set forth in Section 3 of the Subscription Agreement, of even date herewith, this Warrant may, at the option of Holder, be exercised in whole or in part from time to time by delivery to the Company at its principal office, Attention: President, on or before 5:00 p.m., Eastern Time, on the Expiration Date, (i) a written notice of such Holder's election to exercise this Warrant (the "EXERCISE NOTICE"), which notice may be in the form of the Notice of Exercise attached hereto, properly executed and completed by Holder or an authorized officer thereof, (ii) payment for the Warrant Shares ("Payment"), as further described in Section 1(b), below, AND (iii) this Warrant (the items specified in (i), (ii), and (iii) are collectively the "EXERCISE MATERIALS"). (b) Payment may be made either in (i) a check payable to the order of the Company, in an amount equal to the product of the Exercise Price MULTIPLIED BY the number of Warrant Shares specified in the Exercise Notice, (ii) by delivery of Warrants, Common Stock and/or Common Stock receivable upon exercise of the Warrants in accordance with Section 1(c) below, or (iii) by a combination of any of the foregoing methods) for the number of Common Shares specified in such form (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the holder per the terms of this Warrant) and the holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein. (c) Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one share of Common Stock is greater than the Purchase Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash the holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being cancelled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Subscription Form in which event the Company shall issue to the holder a number of shares of Common Stock computed using the following formula:
X=Y (A-B) A Where X= the number of shares of Common Stock to be issued to the holder Y= the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) A= the Fair Market Value of one share of the Company's Common Stock (at the date of such calculation) B= Purchase Price (as adjusted to the date of such calculation)
(d) Anything contained herein to the contrary notwithstanding, the Holder, at his option, may exercise the Warrants, in whole or in part, during the Exercise Term by delivering to the Company a confirmation slip issued by a brokerage firm that is a member of the National Association of Securities Dealers, Inc. with respect to the sale of those number of Warrant Shares for which the Warrants are being exercised, and, in such case, the Company shall deliver certificates representing such Warrant Shares on settlement date at the office of the Company's stock transfer agent against payment for such Warrant Shares by such brokerage firm or its clearing broker, made payable to the Company or made payable to the order of the Holder and endorsed by the Holder to the Company. (e) As promptly as practicable, and in any event within two (2) business days after its receipt of the Exercise Materials, Company shall execute or cause to be executed and delivered to Holder a certificate or certificates representing the number of Warrant Shares specified in the Exercise Notice, together with cash in lieu of any fraction of a share, and if this Warrant is partially exercised, a new warrant on the same terms for the unexercised balance of the Warrant Shares. The stock certificate or certificates shall be registered in the name of Holder or such other name or names as shall be designated in the Exercise Notice. The date on which the Warrant shall be deemed to have been exercised (the "EFFECTIVE DATE"), and the date the person in whose name any certificate evidencing the Common Stock issued upon the exercise hereof is issued shall be deemed to have become the holder of record of such shares, shall be the date the Company receives the Exercise Materials, irrespective of the date of delivery of a certificate or certificates evidencing the Common Stock issued upon the exercise or conversion hereof, PROVIDED, HOWEVER, that if the Exercise Materials are received by the Company on a date on which the stock transfer books of the Company are closed, the Effective Date shall be the next succeeding date on which the stock transfer books are open. All shares of Common Stock issued upon the exercise or conversion of this Warrant will, upon issuance, be fully paid and nonassessable and free from all taxes, liens, and charges with respect thereto. SECTION 2. ADJUSTMENTS TO WARRANT SHARES. The number of Warrant Shares issuable upon the exercise hereof shall be subject to adjustment as follows: (a) In the event the Company is a party to a consolidation, share exchange, or merger, or the sale of all or substantially all of the assets of the Company to, any person, or in the case of any consolidation or merger of another corporation into the Company in which the Company is the surviving corporation, and in which there is a reclassification or change of the shares of Common Stock of the Company, this Warrant shall after such consolidation, share exchange, merger, or sale be exercisable for the kind and number of securities or amount and kind of property of the Company or the corporation or other entity resulting from such share exchange, merger, or consolidation, or to which such sale shall be made, as the case may be (the "SUCCESSOR COMPANY"), to which a holder of the number of shares of Common Stock deliverable upon the exercise (immediately prior to the time of such consolidation, share exchange, merger, or sale) of this Warrant would have been entitled upon such consolidation, share exchange, merger, or sale; and in any such case appropriate adjustments shall be made in the application of the provisions set forth herein with respect to the rights and interests of Holder, such that the provisions set forth herein shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to the number and kind of securities or the type and amount of property thereafter deliverable upon the exercise of this Warrant. The above provisions shall similarly apply to successive consolidations, share exchanges, mergers, and sales. Any adjustment required by this Section 2 (a) because of a consolidation, share exchange, merger, or sale shall be set forth in an undertaking delivered to Holder and executed by the Successor Company which provides that Holder shall have the right to exercise this Warrant for the kind and number of securities or amount and kind of property of the Successor Company or to which the holder of a number of shares of Common Stock deliverable upon exercise (immediately prior to the time of such consolidation, share exchange, merger, or sale) of this Warrant would have been entitled upon such consolidation, share exchange, merger, or sale. Such undertaking shall also provide for future adjustments to the number of Warrant Shares and the Exercise Price in accordance with the provisions set forth in Section 2 hereof. (b) In the event the Company should at any time, or from time to time after the Original Issue Date, fix a record date for the effectuation of a stock split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock, or securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "COMMON STOCK EQUIVALENTS") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon exercise or exercise thereof), then, as of such record date (or the date of such dividend, distribution, split, or subdivision if no record date is fixed), the number of Warrant Shares issuable upon the exercise hereof shall be proportionately increased and the Exercise Price shall be appropriately decreased by the same proportion as the increase in the number of outstanding Common Stock Equivalents of the Company resulting from the dividend, distribution, split, or subdivision. Notwithstanding the preceding sentence, no adjustment shall be made to decrease the Exercise Price below $.001 per Share. (c) In the event the Company should at any time or from time to time after the Original Issue Date, fix a record date for the effectuation of a reverse stock split, or a transaction having a similar effect on the number of outstanding shares of Common Stock of the Company, then, as of such record date (or the date of such reverse stock split or similar transaction if no record date is fixed), the number of Warrant Shares issuable upon the exercise hereof shall be proportionately decreased and the Exercise Price shall be appropriately increased by the same proportion as the decrease of the number of outstanding Common Stock Equivalents resulting from the reverse stock split or similar transaction. (d) In the event the Company should at any time or from time to time after the Original Issue Date, fix a record date for a reclassification of its Common Stock, then, as of such record date (or the date of the reclassification if no record date is set), this Warrant shall thereafter be convertible into such number and kind of securities as would have been issuable as the result of such reclassification to a holder of a number of shares of Common Stock equal to the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such reclassification, and the Exercise Price shall be unchanged. (e) The Company will not, by amendment of its Certificate of Incorporation or through reorganization, consolidation, merger, dissolution, issue, or sale of securities, sale of assets or any other voluntary action, void or seek to avoid the observance or performance of any of the terms of the Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of Holder against dilution or other impairment. Without limiting the generality of the foregoing, the Company (x) will not create a par value of any share of stock receivable upon the exercise of the Warrant above the amount payable therefor upon such exercise, and (y) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares upon the exercise of the Warrant. (f) When any adjustment is required to be made in the number or kind of shares purchasable upon exercise of the Warrant, or in the Exercise Price, the Company shall promptly notify Holder of such event and of the number of shares of Common Stock or other securities or property thereafter purchasable upon exercise of the Warrants and of the Exercise Price, together with the computation resulting in such adjustment. (g) The Company covenants and agrees that all Warrant Shares which may be issued will, upon issuance, be validly issued, fully paid, and non-assessable. The Company further covenants and agrees that the Company will at all times have authorized and reserved, free from preemptive rights, a sufficient number of shares of its Common Stock to provide for the exercise of the Warrant in full. SECTION 3. NO STOCKHOLDER RIGHTS. This Warrant shall not entitle Holder hereof to any voting rights or other rights as a stockholder of the Company. SECTION 4. TRANSFER OF SECURITIES. (a) This Warrant and the Warrant Shares and any shares of capital stock received in respect thereof, whether by reason of a stock split or share reclassification thereof, a stock dividend thereon, or otherwise, shall not be transferable except upon compliance with the provisions of the Securities Act of 1933, as amended (the "SECURITIES ACT") and applicable state securities laws with respect to the transfer of such securities. The Holder, by acceptance of this Warrant, agrees to be bound by the provisions of Section 4 hereof and to indemnify and hold harmless the Company against any loss or liability arising from the disposition of this Warrant or the Warrant Shares issuable upon exercise hereof or any interest in either thereof in violation of the provisions of this Warrant. (b) Each certificate for the Warrant Shares and any shares of capital stock received in respect thereof, whether by reason of a stock split or share reclassification thereof, a stock dividend thereon or otherwise, and each certificate for any such securities issued to subsequent transferees of any such certificate shall (unless otherwise permitted by the provisions hereof) be stamped or otherwise imprinted with a legend in substantially the following form: "neither this warrant nor the shares of Common Stock issuable upon exercise hereof have been registered under the securities act of 1933, as amended, or any applicable state securities law and neither may be sold or otherwise transferred until (i) a registration statement under such securities act and such applicable state securities laws shall have become effective with regard thereto, or (ii) the company shall have received a written opinion of counsel acceptable to the company to the effect that registration under such securities act and such applicable state securities laws is not required in connection with such proposed transfer." SECTION 5. REGISTRATION. All Warrant Shares are subject to the rights and privileges granted to the participants in the private placement offering pursuant to which this Warrant was issued. SECTION 5. MISCELLANEOUS. (a) The terms of this Warrant shall be binding upon and shall inure to the benefit of any successors or permitted assigns of the Company and Holder. (b) Except as otherwise provided herein, this Warrant and all rights hereunder are transferable by the registered holder hereof in person or by duly authorized attorney on the books of the Company upon surrender of this Warrant, properly endorsed, to the Company. The Company may deem and treat the registered holder of this Warrant at any time as the absolute owner hereof for all purposes and shall not be affected by any notice to the contrary. (c) Notwithstanding any provision herein to the contrary, Holder may not exercise, sell, transfer, or otherwise assign this Warrant unless the Company is provided with an opinion of counsel satisfactory in form and substance to the Company, to the effect that such exercise, sale, transfer, or assignment would not violate the Securities Act or applicable state securities laws. (d) This Warrant may be divided into separate warrants covering one share of Common Stock or any whole multiple thereof, for the total number of shares of Common Stock then subject to this Warrant at any time, or from time to time, upon the request of the registered holder of this Warrant and the surrender of the same to the Company for such purpose. Such subdivided Warrants shall be issued promptly by the Company following any such request and shall be of the same form and tenor as this Warrant, except for any requested change in the name of the registered holder stated herein. (e) Any notices, consents, waivers, or other communications required or permitted to be given under the terms of this Warrant must be in writing and will be deemed to have been delivered (a) upon receipt, when delivered personally, (b) upon receipt, when sent by facsimile, PROVIDED a copy is mailed by U.S. certified mail, return receipt requested, (c) three (3) days after being sent by U.S. certified mail, return receipt requested, or (d) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. If to Holder, to the registered address of Holder appearing on the books of the Company. Each party shall provide five (5) days prior written notice to the other party of any change in address, which change shall not be effective until actual receipt thereof (f) This Warrant shall be construed and enforced in accordance with the laws of the State of Illinois. The Company and the Holder hereby consent to the jurisdiction of the Courts of the State of Illinois and the United States District Courts situated therein in connection with any action concerning the provisions of this Note instituted by the Holder against the Company. [Signatures on the following page] SIGNATURE PAGE TO COMPANY COMMON STOCK PURCHASE WARRANT IN WITNESS WHEREOF, the Company, has caused this Warrant to be executed in its name by its duly authorized officers under seal, and to be dated as of the date first above written. MOLECULAR DIAGNOSTICS, INC. By: ------------------------------ Name: Peter Gombrich Title: Chief Executive Officer ASSIGNMENT (To be Executed by the Registered Holder to effect a Transfer of the foregoing Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, and assigns and transfers unto _________________________________________________________ the foregoing Warrant and the rights represented thereto to purchase shares of Common Stock of MOLECULAR DIAGNOSTICS, INC. in accordance with terms and conditions thereof, and does hereby irrevocably constitute and appoint ________________ Attorney to transfer the said Warrant on the books of the Company, with full power of substitution. Holder: ------------------------------- ------------------------------- Address Dated: , 20 ------------------ -- In the presence of: ------------------------------- EXERCISE OR CONVERSION NOTICE [To be signed only upon exercise of Warrant] To: MOLECULAR DIAGNOSTICS, INC. The undersigned Holder of the attached Warrant hereby irrevocably elects to exercise the Warrant for, and to purchase thereunder, _____ shares of Common Stock of MOLECULAR DIAGNOSTICS, INC., issuable upon exercise of said Warrant and hereby surrenders said Warrant. The undersigned herewith requests that the certificates for such shares be issued in the name of, and delivered to the undersigned, whose address is ________________________________. If electronic book entry transfer, complete the following: Account Number: ----------------------------------- Transaction Code Number: ------------------ Dated: ------------------- Holder: -------------------------------- -------------------------------- By: ----------------------------- Name: Title: NOTICE The signature above must correspond to the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. EX-31.1 10 modular12231_31-1.txt Exhibit 31.2 CERTIFICATION I, Denis M. O'Donnell, certify that: 1. I have reviewed this Form 10-KSB of Molecular Diagnostics, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: April 14, 2004 /s/ Denis M. O'Donnell Denis M. O'Donnell, M.D. Chief Executive Officer of Molecular Diagnostics, Inc. EX-31.2 11 modular12231_31-2.txt EXHIBIT 31.2 CERTIFICATION I, Dennis L. Bergquist, certify that: 1. I have reviewed this Form 10-KSB of Molecular Diagnostics, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: April 14, 2004 /s/ Dennis L. Bergquist Dennis L. Bergquist Chief Financial Officer of Molecular Diagnostics, Inc EX-32.1 12 modular12231_32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Denis M. O'Donnell, the Chief Executive Officer of Molecular Diagnostics, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Annual Report on Form 10-KSB of the Company for the fiscal year ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: April 14, 2004 /s/ Denis M. O'Donnell Denis M. O'Donnell, M.D. Chief Executive Officer of Molecular Diagnostics, Inc. EX-32.2 13 modular12231_32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Dennis L. Bergquist, the Chief Financial Officer of Molecular Diagnostics, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Annual Report on Form 10-KSB of the Company for the fiscal year ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: April 14, 2004 /s/ Dennis L. Bergquist Dennis L. Bergquist Chief Financial Officer of Molecular Diagnostics, Inc EX-99.1 14 ex99.txt Exhibit 99.1 CODE OF ETHICS AND BUSINESS CONDUCT FOR OFFICERS, DIRECTORS AND EMPLOYEES OF MOLECULAR DIAGNOSTICS, INC. 1. TREAT IN AN ETHICAL MANNER THOSE TO WHOM MOLECULAR DIAGNOSTICS, Inc. HAS AN OBLIGATION The officers, directors and employees of Molecular Diagnostics, Inc. (the "Company") are committed to honesty, just management, fairness, providing a safe and healthy environment free from the fear of retribution, and respecting the dignity due everyone. For the communities in which we live and work we are committed to observe sound environmental business practices and to act as concerned and responsible neighbors, reflecting all aspects of good citizenship. For our shareholders we are committed to pursuing sound growth and earnings objectives and to exercising prudence in the use of our assets and resources. For our suppliers and partners we are committed to fair competition and the sense of responsibility required of a good customer and teammate. 2. PROMOTE A POSITIVE WORK ENVIRONMENT All employees want and deserve a workplace where they feel respected, satisfied, and appreciated. We respect cultural diversity and will not tolerate harassment or discrimination of any kind -- especially involving race, color, religion, gender, age, national origin, disability, and veteran or marital status. Providing an environment that supports honesty, integrity, respect, trust, responsibility, and citizenship permits us the opportunity to achieve excellence in our workplace. While everyone who works for the Company must contribute to the creation and maintenance of such an environment, including our executives and management personnel, which have a responsibility for fostering a work environment that is free and open and will bring out the best in all of us. Supervisors should not place subordinates in a position that could cause them to deviate from acceptable ethical behavior. 3. PROTECT YOURSELF, YOUR FELLOW EMPLOYEES, AND THE WORLD WE LIVE IN We are committed to providing a drug-free, safe and healthy work environment, and to observing environmentally sound business practices. We will strive, at a minimum, to do no harm and where possible, to make the communities in which we work a better place to live. Each of us is responsible for compliance with environmental, health and safety laws and regulations. 4. KEEP ACCURATE AND COMPLETE RECORDS We will maintain accurate and complete Company records. Transactions between the Company and outside individuals and organizations will be accurately entered in our books in accordance with generally accepted accounting practices and principles. The Company will not tolerate anyone misrepresenting facts or falsifying records. It will not be tolerated and will result in disciplinary action. 5. OBEY THE LAW We will conduct our business in accordance with all applicable laws and regulations. Compliance with the law does not comprise our entire ethical responsibility. Rather, it is a minimum, absolutely essential condition for performance of our duties. In conducting business, we shall: A. STRICTLY ADHERE TO ALL ANTITRUST LAWS Officers, directors and employees must strictly adhere to all antitrust laws where the Company is operating. Such laws exist in the United States and in many other countries where the Company may conduct business. These laws prohibit practices in restraint of trade such as price fixing and boycotting suppliers or customers. They also bar pricing intended to run a competitor out of business; disparaging, misrepresenting, or harassing a competitor; stealing trade secrets; bribery; and kickbacks. B. STRICTLY COMPLY WITH ALL SECURITIES LAWS In our role as a publicly owned company, we must always be alert to and comply with the security laws and regulations of the United States and other countries where the Company engages in business. I. DO NOT ENGAGE IN SPECULATIVE OR INSIDER TRADING Federal law and Company policy prohibits officers, directors and employees, directly or indirectly through their families or others, from purchasing or selling company stock while in the possession of material, non-public information concerning the Company. This same prohibition applies to trading in the stock of other publicly held companies on the basis of material, non-public information. To avoid even the appearance of impropriety, Company policy also prohibits officers, directors and employees from trading options on the open market in Company stock under any circumstances. Material, non-public information is any information that could reasonably be expected to affect the price of a stock. If an officer, director or employee is considering buying or selling a stock because of inside information they possess, they should assume that such information is material. It is also important for the officer, director or employee to keep in mind that if any trade they make becomes the subject of an investigation by the government, the trade will be viewed after-the-fact with the benefit of hindsight. Consequently, officers, directors and employees should always carefully consider how their trades would look from this perspective. Two simple rules can help protect you in this area: (1) Do not use non-public information for personal gain. (2) Do not pass along such information to someone else who has no need to know. This guidance also applies to the securities of other companies for which you receive information in the course of your employment at The Company. II. BE TIMELY AND ACCURATE IN ALL PUBLIC REPORTS As a public company, the Company must be fair and accurate in all reports filed with the United States Securities and Exchange Commission. Officers, directors and management of The Company are responsible for ensuring that all reports are filed in a timely manner and that they fairly present the financial condition and operating results of the Company. Securities laws are vigorously enforced. Violations may result in severe penalties including forced sales of parts of the business and significant fines against the Company. There may also be sanctions against individual employees including substantial fines and prison sentences. The principal executive officer and principal financial Officer will certify to the accuracy of reports filed with the SEC in accordance with the Sarbanes-Oxley Act of 2002. Officers and Directors who knowingly or willingly make false certifications may be subject to criminal penalties or sanctions including fines and imprisonment. 6. AVOID CONFLICTS OF INTEREST Our officers, directors and employees have an obligation to give their complete loyalty to the best interests of the Company. They should avoid any action that may involve, or may appear to involve, a material conflict of interest with the Company. Officers, directors and employees should not have any material financial or other business relationships with suppliers, customers or competitors that might impair, or even appear to impair, the independence of any judgment they may need to make on behalf of the Company. HERE ARE SOME WAYS A CONFLICT OF INTEREST COULD ARISE: o Employment by a competitor, or potential competitor, regardless of the nature of the employment, while employed by the Company. o Acceptance of gifts, payment, or services from those seeking to do business with the Company. o Placement of business with a firm owned or controlled by an officer, director or employee or his/her family. o Ownership of, or substantial interest in, a company that is a competitor, client or supplier. o Acting as a consultant to a the Company customer, client or supplier. Officers, directors and employees are under a continuing obligation to disclose any situation that presents the possibility of a conflict or disparity of interest between the officer, director or employee and the Company. Disclosure of any potential conflict is the key to remaining in full compliance with this policy. 7. COMPETE ETHICALLY AND FAIRLY FOR BUSINESS OPPORTUNITIES We must comply with the laws and regulations that pertain to the acquisition of goods and services. We will compete fairly and ethically for all business opportunities. In circumstances where there is reason to believe that the release or receipt of non-public information is unauthorized, do not attempt to obtain and do not accept such information from any source. If you are involved in Company transactions, you must be certain that all statements, communications, and representations are accurate and truthful. 8. AVOID ILLEGAL AND QUESTIONABLE GIFTS OR FAVORS The sale and marketing of our products and services should always be free from even the perception that favorable treatment was sought, received, or given in exchange for the furnishing or receipt of business courtesies. Officers, directors and employees of the Company will neither give nor accept business courtesies that constitute, or could be reasonably perceived as constituting, unfair business inducements or that would violate law, regulation or policies of the Company, or could cause embarrassment to or reflect negatively on the Company's reputation. 9. MAINTAIN THE INTEGRITY OF CONSULTANTS, AGENTS, AND REPRESENTATIVES Business integrity is a key standard for the selection and retention of those who represent the Company. Agents, representatives and consultants must certify their willingness to comply with the Company's policies and procedures and must never be retained to circumvent our values and principles. Paying bribes or kickbacks, engaging in industrial espionage, obtaining the proprietary data of a third party without authority, or gaining inside information or influence are just a few examples of what could give us an unfair competitive advantage and could result in violations of law. 10. PROTECT PROPRIETARY INFORMATION Proprietary Company information may not be disclosed to anyone without proper authorization. Keep proprietary documents protected and secure. In the course of normal business activities, suppliers, customers and competitors may sometimes divulge to you information that is proprietary to their business. Respect these confidences. 11. OBTAIN AND USE COMPANY ASSETS WISELY Personal use of Company property must always be in accordance with corporate policy. Proper use of Company property, information resources, material, facilities and equipment is your responsibility. Use and maintain these assets with the utmost care and respect, guarding against waste and abuse, and never borrow or remove Company property without management's permission. 12. FOLLOW THE LAW AND USE COMMON SENSE IN POLITICAL CONTRIBUTIONS AND ACTIVITIES The Company encourages its employees to become involved in civic affairs and to participate in the political process. Employees must understand, however, that their involvement and participation must be on an individual basis, on their own time and at their own expense. In the United States, federal law prohibits corporations from donating corporate funds, goods, or services, directly or indirectly, to candidates for federal offices -- this includes employees' work time. Local and state laws also govern political contributions and activities as they apply to their respective jurisdictions. 13. BOARD COMMITTEES. The Company shall establish an Audit Committee empowered to enforce this CODE OF ETHICS. The Audit Committee will report to the Board of Directors at least once each year regarding the general effectiveness of the Company's CODE OF ETHICS, the Company's controls and reporting procedures and the Company's business conduct. 14. DISCIPLINARY MEASURES. The Company shall consistently enforce its CODE OF ETHICS and Business Conduct through appropriate means of discipline. Violations of the Code shall be promptly reported to the Audit Committee. Pursuant to procedures adopted by it, the Audit Committee shall determine whether violations of the Code have occurred and, if so, shall determine the disciplinary measures to be taken against any employee or agent of the Company who has so violated the Code. The disciplinary measures, which may be invoked at the discretion of the Audit Committee, include, but are not limited to, counseling, oral or written reprimands, warnings, probation or suspension without pay, demotions, reductions in salary, termination of employment and restitution. Persons subject to disciplinary measures shall include, in addition to the violator, others involved in the wrongdoing such as (i) persons who fail to use reasonable care to detect a violation, (ii) persons who if requested to divulge information withhold material information regarding a violation, and (iii) supervisors who approve or condone the violations or attempt to retaliate against employees or agents for reporting violations or violators. -----END PRIVACY-ENHANCED MESSAGE-----