OFFERING CIRCULAR
OFFER TO EXCHANGE 800,000 SHARES OF SERIES E CONVERTIBLE PREFERRED
STOCK FOR 20,000,000 SHARES OF COMMON STOCK
OF
MOLECULAR DIAGNOSTICS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON DECEMBER 19, 2001, UNLESS EXTENDED OR EARLIER TERMINATED.
Molecular Diagnostics, Inc., a Delaware corporation, hereby offers, upon
the terms and conditions set forth in this Offering Circular and in the
accompanying letter of transmittal, to exchange (the "Exchange Offer") 1/25 (one
twenty-fifth) of a share of Series E convertible preferred stock, par value
$0.001 per share, of Molecular Diagnostics for each share of common stock, par
value $0.001, of Molecular Diagnostics, commencing on November 20, 2001 and
ending December 19, 2001. We will accept no more than 20,000,000 shares of our
common stock for exchange pursuant to the Exchange Offer. For a more detailed
description of the Series E convertible preferred stock we are proposing to
issue in the Exchange Offer, please see the section of this Offering Circular
entitled "Description of Series E Convertible Preferred Stock." We reserve the
right to terminate or amend the Exchange Offer, in our sole and absolute
discretion, if any of the conditions listed in the section entitled "The
Exchange Offer--Conditions to the Exchange Offer" are not satisfied or waived
prior to the expiration of the Exchange Offer. We also reserve the right, in our
sole and absolute discretion, to extend the period of time during which the
Exchange Offer is open. The Exchange Offer is open to all holders of our common
stock, and is subject to customary conditions. Subject to applicable securities
laws and the terms set forth in this Offering Circular, we reserve the right to
waive any and all conditions other than receipt of necessary government
approvals on or before the expiration of the Exchange Offer.
Any holder of our common stock desiring to tender all or any portion of
their common stock should either (i) complete and sign the enclosed letter of
transmittal (or a facsimile thereof) in accordance with the instructions in the
letter of transmittal, have such holder's signature guaranteed (if required by
Instruction 1 to the letter of transmittal), mail or deliver the letter of
transmittal (or a facsimile thereof) and any other required documents to LaSalle
Bank National Association (the "Exchange Agent") and either deliver the
certificates for tendered common stock along with the letter of transmittal to
the Exchange Agent or tender such common stock pursuant to the procedures for
book-entry transfer set forth in the section of this Offering Circular entitled
"The Exchange Offer -- Procedures for Tendering Common Stock," or (ii) request
such holder's broker, dealer, commercial bank, trust company or other nominee to
effect the transaction for them. Any holder whose common stock is registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
must contact their broker, dealer, commercial bank, trust company or other
nominee to tender their common stock.
IF YOU WISH TO TENDER COMMON STOCK BUT (I) CERTIFICATES EVIDENCING SUCH
COMMON STOCK ARE NOT IMMEDIATELY AVAILABLE, (II) YOU CANNOT COMPLY WITH THE
PROCEDURES FOR BOOK-ENTRY TRANSFER DESCRIBED IN THIS OFFERING CIRCULAR ON A
TIMELY BASIS OR (III) YOU CANNOT DELIVER ALL REQUIRED DOCUMENTS TO THE EXCHANGE
AGENT PRIOR TO THE EXPIRATION OF THE EXCHANGE OFFER, YOU MAY TENDER SUCH COMMON
STOCK BY FOLLOWING THE PROCEDURES FOR GUARANTEED DELIVERY SET FORTH IN THE
SECTION OF THIS OFFERING CIRCULAR ENTITLED "THE EXCHANGE OFFER -- GUARANTEED
DELIVERY PROCEDURES."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
OFFERING CIRCULAR IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The Exchange Agent for the Exchange Offer is:
LASALLE BANK NATIONAL ASSOCIATION
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR
A DISCUSSION OF RISKS YOU SHOULD CONSIDER
BEFORE TENDERING YOUR COMMON STOCK.
---------------------
The date of this Offering Circular is December 18, 2001
THE EXCHANGE OFFER IS BEING MADE IN RELIANCE UPON THE EXEMPTION FROM
REGISTRATION PROVIDED BY SECTION 3(a)(9) OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND APPLICABLE EXEMPTIONS UNDER STATE SECURITIES
LAWS.
---------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED
IN THIS OFFERING CIRCULAR, OTHER THAN THOSE CONTAINED IN THIS OFFERING CIRCULAR
(INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE INTO THIS OFFERING CIRCULAR).
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MAY NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY MOLECULAR DIAGNOSTICS.
---------------------
THIS OFFERING CIRCULAR DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SHARES OF SERIES E CONVERTIBLE PREFERRED
STOCK TO ANY PERSON IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION.
---------------------
THIS OFFERING CIRCULAR IS SUBMITTED TO HOLDERS OF OUR COMMON STOCK FOR
INFORMATIONAL USE SOLELY IN CONNECTION WITH THEIR CONSIDERATION OF THE EXCHANGE
OFFER DESCRIBED IN THIS OFFERING CIRCULAR. ITS USE FOR ANY OTHER PURPOSE IS NOT
AUTHORIZED. THE OFFERING CIRCULAR MAY NOT BE COPIED OR REPRODUCED IN WHOLE OR IN
PART NOR MAY IT BE DISTRIBUTED OR ANY OF ITS CONTENTS BE DISCLOSED TO ANYONE
OTHER THAN THE HOLDER OF COMMON STOCK TO WHOM IT IS SUBMITTED.
---------------------
THIS OFFERING CIRCULAR SUMMARIZES VARIOUS DOCUMENTS AND OTHER INFORMATION.
THOSE SUMMARIES ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE DOCUMENTS
AND INFORMATION TO WHICH THEY RELATE. IN MAKING AN INVESTMENT DECISION, HOLDERS
OF COMMON STOCK MUST RELY ON THEIR OWN EXAMINATION OF MOLECULAR DIAGNOSTICS AND
THE TERMS OF THE EXCHANGE OFFER, INCLUDING THE MERITS AND RISKS INVOLVED. THE
INFORMATION CONTAINED IN THIS OFFERING CIRCULAR IS CORRECT AS OF THE DATE HEREOF
AND NEITHER THE DELIVERY OF THIS OFFERING CIRCULAR NOR THE CONSUMMATION OF THE
EXCHANGE OFFER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AT ANY TIME AFTER THE DATE HEREOF. NO REPRESENTATION IS MADE
TO ANY HOLDER OF COMMON STOCK REGARDING THE LEGALITY OF AN INVESTMENT IN OUR
SERIES E CONVERTIBLE PREFERRED STOCK BY THAT HOLDER UNDER ANY APPLICABLE LEGAL
INVESTMENT OR SIMILAR LAWS OR REGULATIONS. THE CONTENTS OF THIS OFFERING
CIRCULAR ARE NOT TO BE CONSTRUED AS LEGAL, BUSINESS OR TAX ADVICE. HOLDERS OF
COMMON STOCK SHOULD CONSULT THEIR OWN ATTORNEY, BUSINESS ADVISOR AND TAX ADVISOR
AS TO LEGAL, BUSINESS OR TAX ADVICE WITH RESPECT TO THE EXCHANGE OFFER.
---------------------
ALL INQUIRIES RELATING TO THIS OFFERING CIRCULAR AND THE TRANSACTIONS
CONTEMPLATED HEREBY INCLUDING THE PROCEDURES FOR TENDERING IN THE EXCHANGE OFFER
AND REQUESTS FOR ASSISTANCE IN TENDERING YOUR COMMON STOCK, AS WELL AS REQUESTS
FOR ADDITIONAL COPIES OF THE ENCLOSED LETTER OF TRANSMITTAL AND NOTICE OF
GUARANTEED DELIVERY, SHOULD BE DIRECTED TO THE EXCHANGE AGENT AT THE TELEPHONE
NUMBER OR ONE OF THE ADDRESSES LISTED ON THE BACK COVER PAGE OF THIS OFFERING
CIRCULAR. REQUESTS FOR COPIES OF OUR AMENDED QUARTERLY REPORT FOR THE PERIOD
ENDED SEPTEMBER 30, 2001, OUR 2001 AMENDED ANNUAL REPORT, OUR ANNUAL MEETING
PROXY STATEMENT, OUR CURRENT REPORTS SHOULD BE DIRECTED TO THE COMPANY.
---------------------
In this Offering Circular, we, us, our and Molecular Diagnostics refer to
Molecular Diagnostics, Inc.
ii
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
SUMMARY TERM SHEET.......................................... 1
RISK FACTORS................................................ 7
RECENT DEVELOPMENTS......................................... 11
USE OF PROCEEDS............................................. 12
DESCRIPTION OF SERIES E CONVERTIBLE PREFERRED STOCK......... 12
THE EXCHANGE OFFER.......................................... 14
FEDERAL INCOME TAX CONSIDERATIONS........................... 21
DESCRIPTION OF CAPITAL STOCK................................ 23
WHERE YOU CAN FIND MORE INFORMATION ABOUT US................ 34
</Table>
iii
SUMMARY TERM SHEET
Through this Offering Circular and the enclosed letter of transmittal, we
are offering to exchange 1/25 (one twenty-fifth) of a share of Series E
convertible preferred stock for each share of our common stock. The following
are some of the questions you may have as a holder of common stock and answers
to those questions. The following summary highlights selected information from
this Offering Circular and may not contain all the information you will need to
make a decision regarding whether or not to tender your common stock and accept
our Series E convertible preferred stock. This Offering Circular includes
specific terms of the Exchange Offer, including a description of the Series E
convertible preferred stock we are proposing to issue and some financial data.
We encourage you to read carefully this Offering Circular and the documents to
which we refer you in their entirety, including the discussion of risks and
uncertainties affecting our business included in the section of this Offering
Circular entitled "Risk Factors" beginning on page 7.
WHO IS MAKING THE EXCHANGE OFFER?
Molecular Diagnostics, Inc., a Delaware corporation, is making the Exchange
Offer. We are located at 414 North Orleans Street, Suite 510, Chicago, Illinois
60610, and our telephone number is (312) 222-9550. Our common stock is quoted on
the Over-the-Counter Bulletin Board under the symbol "MCDG." For further
information concerning Molecular Diagnostics, please see the section of this
Offering Circular entitled "Where You Can Find More Information About Us."
WHY IS MOLECULAR DIAGNOSTICS MAKING THE EXCHANGE OFFER?
We are making the Exchange Offer in order to reduce the number of
outstanding shares of our common stock and to reduce the concern by shareholders
that registered shares held by the board of directors and executive officers
would be sold in the market. We are authorized to issue up to 50,000,000 shares
of common stock. As of November 16, 2001, if all securities convertible into or
exercisable for common stock were converted or exercised, we would exceed the
amount of common stock we are authorized to issue.
On May 24, 2001, our stockholders approved a one-for -three reverse split
of our common stock. One of the results of the reverse split would be a
reduction of two-thirds in the number of outstanding shares of common stock as
well as the number of shares underlying securities convertible or exercisable
into common stock. Factors such as the current trading price of our common
stock, general market conditions, a possible listing of our common stock on The
American Stock Exchange, the results of recent financings and continuing
negotiations by our investment bankers regarding business alliances, and the
expense and effort required in completing the reverse split, have persuaded the
board of directors that effecting the reverse split is not prudent at this time.
On October 10, 2001, the SEC declared effective, a registration statement
on Form S-2 covering approximately 35,000,000 shares of our common stock,
including shares currently outstanding or underlying securities convertible or
exercisable into common stock. Some members of the investment community have
expressed concern that, as a result of this registration statement, there is a
large volume of our common shares currently available for sale. We believe that
these concerns have led to reluctance to invest in our common stock and may have
depressed the trading price of our common stock. We also believe that our
position is supported by the fact that the trading price of our stock continues
to be depressed, even with recent disclosures of new revenue-producing contracts
and business alliances.
By effecting the Exchange Offer, we would reduce the number of common
shares outstanding as well as those available for sale. The reduction in the
common shares outstanding would provide us with more common stock reserved for
securities convertible or exercisable into our common stock without exceeding
the amount of authorized common stock. It would also reduce the concerns over
the number of common shares available for sale.
The board of directors and executive officers beneficially own a
significant number of the shares covered by the S-2 registration statement.
While these shares are registered and available for resale in compliance with
applicable regulations of the Securities Act, these shareholders have no current
intentions of liquidating their
1
holdings in Molecular Diagnostics and have agreed to tender their shares of
common stock in the Exchange Offer.
WHAT CLASSES AND AMOUNTS OF SECURITIES ARE SOUGHT IN THE EXCHANGE OFFER?
We are offering to acquire up to 20,000,000 shares of our currently
outstanding common stock in exchange for 800,000 shares of our Series E
convertible preferred stock. We reserve the right to terminate or amend the
Exchange Offer in our sole and absolute discretion if any of the conditions
cited in the section of this Offering Circular entitled "The Exchange
Offer--Conditions to the Exchange Offer" are not satisfied or waived prior to
the expiration of the Exchange Offer. We also reserve the right, in our sole and
absolute discretion, to extend the period of time during which the Exchange
Offer is open. As of November 16, 2001, we had outstanding 35,560,517 shares of
our common stock. Assuming 20,000,000 shares of common stock are tendered,
accepted and exchanged, there will be approximately 15,560,517 shares of common
stock outstanding. We will issue fractional shares of Series E convertible
preferred stock in the Exchange Offer. For more information regarding the terms
of the Exchange Offer, please see the section of this Offering Circular entitled
"The Exchange Offer."
WHAT SECURITY IS MOLECULAR DIAGNOSTICS OFFERING TO ISSUE IN EXCHANGE FOR MY
COMMON STOCK?
We are offering to issue 1/25 (one twenty-fifth) of a share of our Series E
convertible preferred stock in exchange for each share of our common stock that
is properly tendered and not withdrawn in the Exchange Offer.
WHAT HAPPENS IF AN EXCHANGE OFFER IS OVERSUBSCRIBED?
If more than 20,000,000 shares of common stock are tendered, we will accept
from each tendering holder of common stock a number of shares based on the
proportion of common stock tendered by that holder to all common stock tendered.
WHAT DOES MOLECULAR DIAGNOSTICS' BOARD OF DIRECTORS THINK OF THE EXCHANGE OFFER?
While our board of directors believes that the Exchange Offer is in our
best interests, the directors are not making any recommendation regarding
whether you should tender your common stock in the Exchange Offer and,
accordingly, you must make your own determination as to whether to tender your
common stock and accept the Series E convertible preferred stock we propose to
issue. However, members of our board of directors and management have notified
us that they intend to tender common stock beneficially owned by them.
WHAT RISKS SHOULD I CONSIDER IN DECIDING WHETHER OR NOT TO TENDER MY COMMON
STOCK?
In deciding whether to participate in the Exchange Offer, you should
carefully consider the discussion of risks and uncertainties affecting our
business described in the section of this Offering Circular entitled "Risk
Factors," the section of our Amended Quarterly Report for the period ended
September 30, 2001 entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" which is incorporated by reference into
this Offering Circular, and the section of our 2000 Amended Annual Report
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which is incorporated by reference into this Offering
Circular.
WILL I GIVE UP ANY LEGAL RIGHTS BY EXCHANGING MY COMMON STOCK?
No. The holders of Series E convertible preferred stock shall be entitled
to vote on all matters on which holders of common stock are entitled to vote. In
addition, the Series E convertible preferred stock you receive will provide you
with seniority over holders of common stock of claims against us, and thus a
degree of protection that holders of common stock do not enjoy.
IS MOLECULAR DIAGNOSTICS PRESENTLY ABLE TO ISSUE THE SERIES E CONVERTIBLE
PREFERRED STOCK?
Yes. The consideration we will issue in the Exchange Offer consists of
currently authorized shares of our preferred stock which may be issued by
designation from the board of directors and without stockholder
2
approval. The Exchange Offer is being made in reliance on the exemption from
registration provided by Section 3(a)(9) of the Securities Act and does not need
to be registered with the Securities and Exchange Commission (the "SEC").
Accordingly, provided that none of the events described in the section of this
Offering Circular entitled "The Exchange Offer -- Conditions to the Exchange
Offer" has occurred, and unless terminated by us, we intend to issue Series E
convertible preferred stock in exchange for properly tendered common stock
promptly following the expiration of the Exchange Offer. For more information
regarding the timing of the issuance of Series E convertible preferred stock in
the Exchange Offer, please see the section of this Offering Circular entitled
"The Exchange Offer -- Acceptance of Common Stock for Exchange; Delivery of
Series E Convertible Preferred Stock."
WILL THE SERIES E CONVERTIBLE PREFERRED STOCK BE LISTED FOR TRADING?
No. Our Series E convertible preferred stock is not listed on any national
securities exchange or quoted in any inter-dealer quotation system. The Series E
convertible preferred stock you receive in your Exchange Offer will not be
freely tradeable and cannot be sold or transferred except under an exemption
from the Securities Act. For more information regarding the Series E convertible
preferred stock, please see the sections in this Offering Circular entitled
"Risk Factors" and "Description of Series E Convertible Preferred Stock," and
the section of our 2000 Amended Annual Report entitled "Market for Registrant's
Common Equity and Related Stockholder Matters."
WHAT ARE THE CONDITIONS TO THE EXCHANGE OFFER?
The Exchange Offer is being made in reliance on the exemption from
registration provided by Section 3(a)(9) of the Securities Act and therefore not
subject to registration with the SEC. The Exchange Offer is not conditioned upon
the exchange of a minimum number of shares of common stock. However, the
Exchange Offer is subject to a number of customary conditions, some of which we
may waive. If any of these conditions are not satisfied, we will not be
obligated to accept and exchange any properly tendered common stock. In
addition, we reserve the right to terminate or amend the Exchange Offer if any
conditions cited in the section entitled "The Exchange Offer--Conditions to the
Exchange Offer" are not satisfied or waived prior to the expiration of the
Exchange Offer. For more information regarding the conditions to the Exchange
Offer, please see the section of this Offering Circular entitled "The Exchange
Offer -- Conditions to the Exchange Offer."
WHAT WILL BE THE EFFECT OF THE EXCHANGE OFFER FOR THE TRADING MARKET OF THE
COMMON STOCK THAT IS NOT EXCHANGED?
Our common stock is quoted on the Over-the-Counter Bulletin Board. There is
currently a limited trading market for the common stock. To the extent that
common stock is tendered and accepted for exchange in the Exchange Offer, the
trading market for the remaining common stock, and as a result the market price
for the unexchanged common stock, may be affected to the extent that the amount
of common stock tendered in the Exchange Offer reduces the float of the common
stock. Nevertheless, we cannot assure you that our common stock will be more or
less actively traded or more or less liquid or at what prices it may trade after
completion of the Exchange Offer.
WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES TO ME OF PARTICIPATING IN THE
EXCHANGE OFFER?
In general, if you exchange your common stock for shares of Series E
convertible preferred stock, you will not recognize gain or loss for U.S.
federal income tax purposes. However, you will recognize income with respect to
the payments you receive from us for dividends that accrue on your Series E
convertible preferred stock. For more information regarding the tax consequences
to you as a result of the Exchange Offer, please see the section of this
Offering Circular entitled "Federal Income Tax Considerations."
The tax consequences you may experience as a result of participating in the
Exchange Offer will depend on your individual situation. You should consult your
tax advisor for a full understanding of these tax consequences.
3
WHAT IS THE EFFECT OF EXCHANGING SERIES E CONVERTIBLE PREFERRED STOCK FOR MY
COMMON STOCK?
The consideration we are offering in the Exchange Offer is Series E
convertible preferred stock. Our financial condition may have an effect on the
price of our common stock, more so than on the price of the Series E convertible
preferred stock. Because we are offering to acquire a significant amount of
common stock in the Exchange Offer, we do not know at what price the common
stock will trade following the consummation of the Exchange Offer. Additionally,
the Series E convertible preferred stock will provide you with seniority of
claims against us and a greater degree of protection than holders of common
stock are entitled. As a result, if we were to file for bankruptcy, holders of
Series E convertible preferred stock would be entitled to be paid prior to
holders of common stock.
WILL MOLECULAR DIAGNOSTICS RECEIVE ANY CASH PROCEEDS FROM THE EXCHANGE OFFER?
No. We will not receive any cash proceeds from the Exchange Offer.
HOW LONG DO I HAVE TO DECIDE WHETHER TO TENDER?
You will have until 5:00 p.m., New York City time, on December 19, 2001. If
you cannot deliver the certificates representing your common stock and the other
documents required to make a valid tender by that time, you may be able to use a
guaranteed delivery procedure. For more information regarding the time period
for tendering your common stock, including the use of a guaranteed delivery
procedure, please see the section of this Offering Circular entitled "The
Exchange Offer -- Terms of the Exchange Offer; Period for Tendering Common
Stock."
UNDER WHAT CIRCUMSTANCES CAN THE EXCHANGE OFFER BE EXTENDED OR AMENDED?
We can extend the Exchange Offer in our sole and absolute discretion, and
we reserve the right to do so. During any extension of the Exchange Offer, the
common stock that was previously tendered and not withdrawn will remain subject
to the extended Exchange Offer. In addition, we expressly reserve the right to
terminate or amend the Exchange Offer in our sole and absolute discretion if any
of the conditions described in the section of this Offering Circular entitled
"The Exchange Offer -- Conditions to the Exchange Offer" are not satisfied or
waived prior to the expiration of the Exchange Offer. For more information
regarding our right to extend or amend the Exchange Offer, please see the
section of this Offering Circular entitled "The Exchange Offer -- Terms of the
Exchange Offer; Period for Tendering Common Stock."
HOW WILL I BE NOTIFIED IF THE EXCHANGE OFFER IS EXTENDED OR AMENDED?
If we extend or amend the Exchange Offer, we will issue a press release or
another form of public announcement. In the case of an extension, a release or
announcement will be issued no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration date of the Exchange
Offer. For more information regarding notification of extensions or amendments
of the Exchange Offer, please see the section of this Offering Circular entitled
"The Exchange Offer -- Terms of the Exchange Offer; Period for Tendering Common
Stock."
HOW DO I TENDER MY COMMON STOCK?
To tender your common stock, you must deliver the certificates representing
your common stock, together with a completed letter of transmittal and any other
documents required by the letter of transmittal, to the Exchange Agent, not
later than the time the Exchange Offer expires. If your common stock is held in
street name (that is, through a broker, dealer or other nominee) the common
stock can be tendered by your nominee through The Depository Trust Company
("DTC"). If you cannot provide the Exchange Agent with all of the required
documents prior to the expiration of the Exchange Offer, you may obtain
additional time to do so by submitting to the Exchange Agent a notice of
guaranteed delivery, which must be certified by a broker, bank or other
fiduciary that is a member of the Securities Transfer Agent Medallion Program or
another eligible institution guarantee. You are also required to guarantee that
these items will be received by the Exchange Agent within three New York Stock
Exchange trading days, and, for your tender to be valid, the
4
Exchange Agent must receive the missing items within that three trading-day
period. For more information regarding the procedures for tendering your common
stock, please see the section of this Offering Circular entitled "The Exchange
Offer -- Procedures for Tendering Common Stock."
WHEN WILL I RECEIVE THE SERIES E CONVERTIBLE PREFERRED STOCK IN EXCHANGE FOR MY
COMMON STOCK?
Subject to the satisfaction or waiver of all conditions to the Exchange
Offer, and assuming we have not previously elected to terminate or amend the
Exchange Offer, we will accept for exchange your common stock that is properly
tendered and not withdrawn prior to the expiration of the Exchange Offer at 5:00
p.m., New York City time, on December 19, 2001. Promptly following this date,
shares of Series E convertible preferred stock will be delivered in exchange for
common stock, up to the maximum amount we are offering to exchange. For more
information regarding our obligation to issue the Series E convertible preferred
stock in exchange for tendered common stock, please see the section of this
Offering Circular entitled "The Exchange Offer -- Acceptance of Common Stock for
Exchange; Delivery of Series E Convertible Preferred Stock."
WHAT HAPPENS IF MY COMMON STOCK IS NOT ACCEPTED FOR EXCHANGE?
If we decide for any reason not to accept any common stock, including if
more common stock is tendered than we are willing to accept, we will return the
common stock to the registered holder at our expense promptly after the
expiration or termination of the Exchange Offer. In the case of common stock
tendered by book-entry transfer into the Exchange Agent's account at DTC, as
described above, DTC will credit any withdrawn or unaccepted common stock to the
tendering holder's account at DTC. For more information regarding the withdrawal
of tendered common stock, please see the sections of this Offering Circular
entitled "The Exchange Offer -- Terms of the Exchange Offer; Period for
Tendering Common Stock" and "-- Withdrawal of Tenders."
UNTIL WHEN MAY I WITHDRAW PREVIOUSLY TENDERED COMMON STOCK?
You may withdraw previously tendered common stock at any time until the
Exchange Offer has expired. If we have not agreed to accept your common stock
for exchange by January 28, 2002, you may withdraw your stock at any time after
that date until we accept your common stock for exchange. For more information
regarding your right to withdraw tendered common stock, please see the section
of this Offering Circular entitled "The Exchange Offer -- Withdrawal of
Tenders."
HOW DO I WITHDRAW PREVIOUSLY TENDERED COMMON STOCK?
To withdraw previously tendered common stock, you must deliver a written
notice of withdrawal to the Exchange Agent with all relevant information
pertaining to the common stock you tendered. For more information regarding the
procedures for withdrawing tendered common stock, please see the section of this
Offering Circular entitled "The Exchange Offer -- Withdrawal of Tenders."
WHOM CAN I TALK TO IF I HAVE QUESTIONS ABOUT THE EXCHANGE OFFER?
If you have questions regarding the information in this Offering Circular
or the procedures for tendering in the Exchange Offer or require assistance in
tendering your common stock, please contact the Exchange Agent. If you would
like additional copies of this Offering Circular, our Amended Quarterly Report
for the period ended September 30, 2001, our 2000 Amended Annual Report, our
Current Reports or our Annual Meeting Proxy Statement, please contact either the
Exchange Agent or Molecular Diagnostics directly.
You can call the Exchange Agent at (312) 904-2458 or write to the Exchange
Agent at the address listed on the back cover page of this Offering Circular.
5
For more information regarding Molecular Diagnostics, please see the
section of the Offering Circular entitled "Where You Can Find More Information
About Us." You can also contact us at:
Molecular Diagnostics, Inc.
414 North Orleans Street, Suite 510
Chicago, Illinois 60610
Attention: Leonard R. Prange
(312) 222-9550
6
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks described below are not the only ones we are
facing. Additional risks not presently known to us or that we currently deem
immaterial 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, and you could lose all or
part of your investment.
THERE IS NO ESTABLISHED TRADING MARKET FOR THE SERIES E CONVERTIBLE PREFERRED
STOCK.
Our Series E convertible preferred stock is a new issue that will not be
listed on any national securities exchange or quoted in any inter-dealer
quotation system, and we do not intend to apply for listing or quotation on any
established trading market. As a result, there will not be a public market for
trading the Series E convertible preferred stock. Accordingly, if you wish to
dispose of all or a part of the Series E convertible preferred stock, you would
have to do so in private, directly negotiated sales until the Series E
convertible preferred stock can be converted into shares of common stock. Thus,
you will probably be unable to liquidate your holding of Series E convertible
preferred stock until it is convertible into shares of our common stock. We
cannot provide any assurance regarding the liquidity of our Series E convertible
preferred stock or the price at which you would be able to sell the Series E
convertible preferred stock.
THE VALUE OF THE SERIES E CONVERTIBLE PREFERRED STOCK MAY BE STATIC.
It is unlikely that the value of the Series E convertible preferred stock
will fluctuate significantly from the $22.00 face value, resulting in the
holders not experiencing any appreciation in the value of their stock. Depending
on market conditions and the performance of Molecular Diagnostics, however, the
price of our common stock could increase in the future and the common stock
might trade at prices greater than the relative value of the Series E
convertible preferred stock. Under those circumstances, the holders of the
Series E convertible preferred stock might not realize the appreciation of our
common stock unless their Series E convertible preferred stock were convertible.
WE HAVE NOT IMPLEMENTED OUR REVERSE STOCK SPLIT, AND IF WE DO, IT MAY NOT HAVE
THE INTENDED EFFECT OF ENHANCING STOCKHOLDER VALUE.
On May 24, 2001, our common stockholders approved a one-for-three reverse
stock split of our common stock. In the split, each three shares of our issued
and outstanding common stock will be reclassified and converted into one share
of common stock. The timing of the reverse split will depend on several factors,
including the possible listing of our common stock on the American Stock
Exchange. Delay in implementing the split may create uncertainty in the market
and investors may be unwilling to buy our common stock until they know when, or
if, the split will be effective. It is intended to increase the acceptance of
our common stock by the financial community and the investing public and could
enhance stockholder value as well as increase our stock price to meet the
minimum price criteria of The American Stock Exchange. The price of our common
stock after the reverse stock split may not increase in an amount proportionate
to the decrease in the number of outstanding shares.
THERE IS A LIMITED MARKET FOR PENNY STOCKS SUCH AS OUR COMMON STOCK; WE MAY NOT
BE ABLE TO LIST ON THE AMERICAN STOCK EXCHANGE.
Our common stock is considered a "penny stock" because, among other things,
its price is below $5 per share, it trades on the Over-the-Counter Bulletin
Board and we have net tangible assets of less than $2,000,000. As a result,
there may be less 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.
7
Although our common stock is currently quoted on the Over-the-Counter
Bulletin Board, an increase in the per share market price may meet criteria to
allow our common stock to be listed on The American Stock Exchange. One of the
purposes of the reverse stock split is to reduce the number of shares
outstanding and, thus, increase our stock price to meet The American Stock
Exchange minimum price of $3.00 a share. We have filed an application for
listing on The American Stock Exchange. However, our management does not know if
listing will or can be effected. The American Stock Exchange Company Guide
states that meeting the Exchange's quantitative listing requirements does not
automatically guarantee that the stock of a company will be approved for
listing. The Company Guide also states that The American Stock Exchange has
discretion in allowing the listing of the stock of a company that does not meet
all of the criteria.
Our independent accountants have noted that there are substantial doubts as
to our ability to continue as a going concern. The listing criteria for The
American Stock Exchange do not discuss the effect of a going concern explanatory
paragraph. The listing analyst for our listing application has indicated that he
would recommend that the listing be denied based on the going concern
explanatory paragraph. We may appeal that decision to the Listing Committee of
The American Stock Exchange, which has latitude to overrule the listing
analyst's recommendation. The formal decision and recommendation of the listing
analyst will not be rendered until we address the issue of the trading price of
our common stock, which is currently below the quantitative requirement. We and
our representatives are in continuing discussions with The American Stock
Exchange over the listing application.
THE HISTORICALLY VOLATILE MARKET PRICE OF OUR COMMON STOCK MAY AFFECT THE VALUE
OF OUR STOCKHOLDERS' INVESTMENT.
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:
- general economic and other external market factors;
- announcements of mergers, acquisitions, licenses and strategic
agreements;
- announcements of private or public sales of securities;
- announcements of new products or technology by us or our competitors;
- fluctuations in operating results; and
- announcements of the Food and Drug Administration ("FDA") actions
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 5,000,000 shares of preferred stock. As of
November 16, 2001 we have approximately 572,485 shares of Series A convertible
preferred stock outstanding which convert into 250,073 shares of our common
stock and 1,457,356 shares of Series B convertible preferred stock outstanding
which convert into 5,829,424 shares of common stock. As of November 16, 2001, we
also have 1,331,499 shares of Series C convertible preferred stock outstanding
which convert into 6,657,495 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 800,000 shares of Series E convertible preferred
stock, the amount of which outstanding will depend upon the number of shares of
common stock tendered in the Exchange Offer.
8
As of November 16, 2001 we have outstanding warrants to purchase 9,106,374
shares of our common stock, outstanding options to purchase approximately
3,507,395 shares of our common stock, and $1,085,000 in principal amount of
convertible promissory notes outstanding which are convertible into 1,038,962
shares of common stock.
Exercise or conversion by the holders of these securities would result in
substantial dilution to our shareholders.
The reverse stock split, when effected, will create almost 33,000,000
additional authorized but unissued shares of our common stock that could be sold
by our board of directors without stockholder approval, thus potentially
diluting the relative stock interests of our exiting stockholders at the time of
sale.
WE EXPECT TO INCUR SIGNIFICANT COSTS ASSOCIATED WITH THE ACCUMED MERGER.
In September 2001, AccuMed International, Inc. merged into our wholly-owned
subsidiary and became a wholly-owned subsidiary of Molecular Diagnostics. We
incurred direct transaction costs of approximately $750,000 which we included as
part of the total purchase cost of AccuMed for accounting purposes. We believe
the combined entity may incur charges to operations, which are not currently
reasonably estimable, in subsequent quarters, to reflect costs associated with
integrating the two companies. There can be no assurance that the combined
company will not incur additional material charges in subsequent quarters to
reflect additional costs associated with the merger.
WE HAVE A LIMITED OPERATING HISTORY AND THERE ARE DOUBTS AS TO OUR BEING A GOING
CONCERN.
We have limited operating history. Our revenues, since our inception in
March 1998, have been derived almost entirely from sales by Samba Technologies,
Sarl, our wholly-owned subsidiary. We have not introduced or sold any of our
InPath System products to date.
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 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
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 prevent our common
stock from being listed on The American Stock Exchange and may make additional
financing more difficult or costly.
WE MAY NOT BE ABLE TO MEET OUR LONG-TERM CAPITAL REQUIREMENTS.
We do not know if we will be able to sustain our longer-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
NEEDED 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 completed a clinical trial for one of our products and
submitted a 501K application to the FDA. We have started clinical trials of two
other products and expect to begin additional trials in 2002. We have not yet
begun clinical trials of any of our AccuMed products. We cannot be certain that
our product development plans will allow these additional trials to commence or
be
9
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 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.
THIS OFFERING CIRCULAR CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO
RISKS AND UNCERTAINTIES.
When we use words such as "believes," "expects," "anticipates," "intends,"
"plans," "estimates", "should," "likely" or similar expressions, we are making
forward-looking statements. The forward-looking statements contained in this
Offering Circular are not subject to the safe-harbor protections of the Private
Securities Litigation Reform Act of 1995. Nevertheless, you should recognize
that these forward-looking statements involve risks, uncertainties and
assumptions. Our future results and stockholder values may differ materially
from those expressed in the forward-looking statements. Many of these factors
that will determine these results and values are beyond our ability to control
or predict. You are cautioned not to put undue reliance on any forward-looking
statements.
10
RECENT DEVELOPMENTS
REVERSE STOCK SPLIT
On May 24, 2001, our stockholders approved a one-for-three reverse split of
our common stock. In the reverse split, each three shares of our issued and
outstanding common stock will be reclassified and converted into one share of
common stock. Fractional shares will not be issued. Instead, our stockholders
will be entitled to receive a cash distribution, without interest, in lieu of
any fractional shares. The reverse stock split will not change the number of
shares of common stock we are authorized to issue.
The timing of the reverse split will depend on several factors, such as the
timing of the possible listing of our common stock on The American Stock
Exchange, the results of the negotiations by our investment bankers in regard to
future financings and business alliances and the expense and effort required to
be expended in completing the reverse split.
One of the principal reasons for seeking stockholder approval to effect a
one-for-three reverse stock split was to increase the per share price of the our
common stock. Although our directors never expected the resulting price of a
post-split share to be exactly three times the price of a pre-split share, they
nevertheless hoped it would be enough to meet or exceed the minimum price
required for listing on The American Stock Exchange. More importantly, the
directors also anticipated that in order for us to successfully apply for
listing on The American Stock Exchange, we would have to successfully conclude
the merger with AccuMed. Moreover, our management recognized that it might be
necessary to delay the reverse split until such time as we had positive news to
report, thus making it more likely that the reverse split would have the desired
effect in the marketplace.
When soliciting the proxies of our stockholders in connection with the vote
to approve the reverse stock split, we stated that we would implement the split,
if approved, as soon as practicable. However for all of the reasons stated
above, our directors do not believe it is yet practicable to give effect to the
reverse stock split. Furthermore, because the proposal approved by our
stockholders did not impose a deadline with respect to effecting the reverse
split, the directors do not believe that the delay in implementing the reverse
split is inconsistent with the approval itself or with the stockholders'
expectations in regard to such implementation. The resolution approving the
amendment to our Certificate of Incorporation to effect the proposed one-for-
three reverse stock split provides that the filing of the amendment with the
Secretary of State of Delaware shall be made at such time as our board of
directors shall determine is advisable. Accordingly, there has been no time
limit placed on the implementation of the reverse split and the directors
believe they are able to effect such split at a time that is appropriate and
practicable in the exercise of their best business judgment, which judgment the
directors of a Delaware corporation are required to exercise in order to
properly discharge their fiduciary duties to the stockholders of the
corporation. Furthermore, the directors are unaware of any statutory or case law
requirement fixing a specific time period within which an amendment to the
certificate of incorporation of a Delaware corporation must be filed once it has
been approved by the stockholders of the corporation. However, in the event that
the reverse split has not been implemented by the time notice of our 2002 annual
meeting of stockholders is required to be given, the directors intend to place
on the ballot for such meeting either a proposal to reconfirm or a proposal to
abandon the reverse stock split.
PRIVATE PLACEMENTS
In November 2001, we raised $3,636,000 in net proceeds from the private
placement of 1,331,499 shares of Series C convertible preferred stock to
accredited investors. The Series C convertible preferred stock has a dividend
rate of 10% and is convertible into common stock at $0.60 per share.
In November 2001, we also raised $1,750,000 in proceeds from the private
placement of 175,000 shares of Series D convertible preferred stock to Ventana
Medical Systems, Inc. The Series D convertible preferred stock has a dividend
rate of 10% and is convertible into the common stock at $1.00 per share. We also
issued a three-year warrant to Ventana entitling them to purchase 1,750,000
shares of the common stock at an exercise price of $1.15 per share.
The Series C convertible preferred stock and Series D convertible preferred
stock are more fully described in the section entitled "Description of Capital
Stock."
11
USE OF PROCEEDS
We will not receive any of proceeds from the Exchange Offer. Molecular
Diagnostics will hold in treasury any common stock that is properly tendered and
accepted pursuant to the Exchange Offer.
DESCRIPTION OF SERIES E CONVERTIBLE PREFERRED STOCK
Our board of directors designated a new series of preferred stock, the
Series E convertible preferred stock, for the purpose of this Exchange Offer. We
are authorized to issue 800,000 shares of Series E convertible preferred stock,
of which none were issued and outstanding as of November 19, 2001. We intend to
issue these shares in the Exchange Offer. Each share of Series E convertible
preferred stock has a stated value of $22 and a conversion price of $0.80,
subject to antidilution adjustment. The Series E convertible preferred stock
ranks senior to our common stock and on parity with our other outstanding
preferred stock which is described in the section entitled "Description of
Capital Stock." We may issue other series of preferred stock at any time and
from time to time without the consent of the holders of the Series E convertible
preferred stock.
DIVIDENDS
Shares of the Series E convertible preferred stock accrue dividends on a
semi-annual basis at an annual rate of 10% per share payable on the last day of
May and November, commencing May 31, 2002, out of any assets or funds legally
available for payment of dividends. Dividends are cumulative and accrue, whether
or not declared by our board of directors, but can only be declared or paid and
set apart for payment if full cumulative dividends for all prior dividend
periods then outstanding shall have been or shall be concurrently paid or
declared and set apart for payment. Dividends are payable in cash provided that
we may pay the dividends for the first two years in cash or in shares of our
common stock. The dividend rate increases to 20% per share if after December 1,
2002 we have not reserved sufficient shares of common stock to allow for the
conversion of all shares of Series E convertible preferred stock.
We may not pay any dividends or any distribution on any class or series of
capital stock ranking junior to the Series E convertible preferred stock except
dividends payable in shares of our stock of any class junior to the preferred
stock, and we may not repurchase or redeem any junior stock, if any dividends on
the Series E convertible preferred stock are then in arrears.
VOTING RIGHTS
The holders of the Series E convertible preferred stock shall be entitled
to vote on any matter on which the holders of common stock are entitled to vote.
If the Series E convertible preferred stock is entitled to vote with the holders
of common stock as one class, each share of Series E convertible preferred stock
shall entitle the holder to the number of votes that equals the number of shares
of common stock into which each share of Series E convertible preferred stock is
convertible. Without first obtaining the approval of a majority of the shares of
Series E convertible preferred stock then outstanding, we may not repeal, amend
or change the Series E convertible preferred stock Certificate of Designations
or our Certificate of Incorporation to alter or change the powers, preferences
or rights of the Series E convertible preferred stock so as to affect them
adversely.
LIQUIDATION
The liquidation preference of the Series E convertible preferred stock is
$22 per share plus all accrued but unpaid dividends. Upon liquidation,
dissolution or winding up of Molecular Diagnostics, each holder of the Series E
convertible preferred stock is entitled to be paid in cash out of our assets
available for distribution to shareholders an amount equal to the liquidation
preference of the Series E convertible preferred stock before any amounts may be
paid to any class or series of capital stock ranking junior to the Series E
convertible preferred stock.
If the assets available for distribution to the holders of Series E
convertible preferred stock and any other security ranking on parity with the
preferred stock are insufficient to pay in full all amounts payable to the
12
holders of the Series E convertible preferred stock and all other parity
securities, then all of the assets available for distribution to the holders of
the Series E convertible preferred stock and parity securities will be
distributed among the holders ratably in proportion to the amounts that would be
payable if there were sufficient assets to permit payment in full. After payment
in full, the holders of the Series E convertible preferred stock will not be
entitled to any further distribution of assets. A merger or consolidation will
be considered a liquidation event in certain circumstances.
RESERVATION OF SHARES
When convertible we will authorize and will reserve and keep available a
sufficient number of shares of our common stock as will be issuable upon the
conversion of all outstanding shares of Series E convertible preferred stock and
dividends payable thereon. These shares of our common stock, when issued, will
be duly and validly issued, fully paid and non-assessable, and free of liens.
REDEMPTION
Shares of the Series E convertible preferred stock are not redeemable.
SINKING FUND
There is no sinking fund for the Series E convertible preferred stock.
CONVERSION
Shares of Series E convertible preferred stock are convertible, at any time
after December 1, 2002, at the option of the holder, into shares of common
stock. Each share of the Series E convertible preferred stock is convertible
into such number of shares of our common stock as is determined by dividing the
$22 stated value per share plus all accrued but unpaid dividends by the then
effective conversion price, which is referred to as the conversion rate.
If the then current market price of our common stock equals or exceeds $22
per share for any 20 consecutive trading days, we may elect to convert all
outstanding shares of Series E convertible preferred stock into common stock at
the then effective conversion rate. If for any reason we do not pay any portion
of the accrued dividends on the Series E convertible preferred stock being
converted, we may pay that portion of unpaid dividends in shares of common
stock.
ADJUSTMENTS TO CONVERSION PRICE
The conversion price and the number of shares of common stock issuable upon
conversion of the Series E convertible preferred stock are subject to adjustment
from time to time upon the occurrence of any of the following events at any
time:
- If we (A) issue common stock as a dividend or a distribution with respect
to any class or series of our capital stock, (B) split or otherwise
subdivide our common stock, (C) combine our outstanding shares of common
stock into a greater or smaller number of shares, or (D) issue any shares
of capital stock in a reclassification;
- If there occurs a merger, consolidation, recapitalization or conveyance
of all or substantially all of our assets.
- The conversion price and the conversion rate will be adjusted when we
implement the reverse stock split.
FRACTIONAL SHARES
We will not issue any fractional shares of common stock upon the conversion
of the Series E convertible preferred stock but rather will pay cash based on
the then current market price per share of our common stock.
13
THE EXCHANGE OFFER
GENERAL
The Exchange Offer is being made in reliance on the exemption from
registration provided by Section 3(a)(9) of the Securities Act. The Series E
convertible preferred stock has not been registered with the SEC and cannot be
sold or transferred except under an exemption under the Securities Act and state
securities laws.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING COMMON STOCK
This Offering Circular and the enclosed letter of transmittal constitute an
offer to exchange 1/25 (one twenty-fifth) of a share of our Series E convertible
preferred stock, par value $0.001, for one share of our common stock, par value
$0.001, subject to the terms and conditions described in this Offering Circular.
Assuming we do not elect to terminate the Exchange Offer, in our sole and
absolute discretion, based on any of the conditions listed below not being
satisfied or waived, we will accept for exchange up to 20,000,000 shares of
outstanding common stock which are properly tendered prior to the expiration of
the Exchange Offer and not withdrawn as permitted below. If more than 20,000,000
shares of common stock are tendered and not withdrawn, we will accept from each
tendering holder of common stock a number of shares determined by multiplying
the shares tendered by a fraction, the numerator of which is the total amount of
common stock tendered by such holder and the denominator of which is the total
amount of common stock tendered by all participants in the Exchange Offer. The
Exchange Offer is being made to all holders of our common stock. As of November
16, 2001, 35,560,517 shares of our common stock are outstanding. This Offering
Circular and the enclosed letter of transmittal are first being sent on or about
November 20, 2001 to all record holders of common stock known to us as of
November 19, 2001. The Exchange Offer will expire at 5:00 p.m., New York City
time, on December 19, 2001. In our sole and absolute discretion, we may extend
the period of time during which the Exchange Offer is open. Our obligation to
accept common stock in the Exchange Offer is subject to the conditions listed
below under the caption "-- Conditions to the Exchange Offers."
We expressly reserve the right, at any time and from time to time, to
extend the period of time during which the Exchange Offer is open, and thereby
delay acceptance of any common stock. If we elect to extend the period of time
during which the Exchange Offer is open, we will give oral or written notice of
the extension, as described below. During any extension, all common stock
previously tendered and not withdrawn will remain subject to the extended
Exchange Offer and may be accepted for exchange by us (up to the maximum amount
we are offering to exchange). We will return to the registered holder, at our
expense, any common stock not accepted for exchange promptly after the
expiration or termination of the Exchange Offer. In the case of an extension, we
will issue a press release or other public announcement no later than 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
expiration of the Exchange Offer.
We expressly reserve the right in our sole and absolute discretion to amend
or terminate the Exchange Offer if any of the events described below under the
caption "-- Conditions to the Exchange Offer" are not satisfied or waived. We
will give you oral or written notice of any amendment, termination or
non-acceptance of the Exchange Offer as promptly as practicable.
CONDITIONS TO THE EXCHANGE OFFER
The Exchange Offer is not conditioned upon the exchange of a minimum number
of shares of common stock. Notwithstanding any other provision of the Exchange
Offer, we are not required to accept any common stock for exchange or to issue
any Series E convertible preferred stock in exchange for common stock if, at any
time before the expiration of the Exchange Offer
14
any of the following events occurs:
- the Exchange Offer is determined to violate any applicable law or any
applicable interpretation of the staff of the SEC;
- an action or proceeding is pending or threatened in any court or by any
governmental agency or third party that might materially impair our
ability to proceed with the Exchange Offer;
- any material adverse development occurs in any existing legal action or
proceeding involving Molecular Diagnostics or our subsidiary; or
- a general suspension of trading of our common stock in the
Over-the-Counter Bulletin Board, a declaration of a banking moratorium by
U.S. or New York authorities or commencement of a war, armed hostilities
or other international or national calamity directly involving the United
States which would materially and adversely effect the Exchange Offer.
These conditions are for our benefit only and we may assert them regardless
of the circumstances giving rise to any condition. We may also waive, to extent
permitted by applicable law, any condition, in whole or in part, at any time in
our sole and absolute discretion prior to the expiration of the Exchange Offer.
Our failure at any time to exercise any of the foregoing rights will not
constitute a waiver of that right and each right is an ongoing right that we may
assert at any time. Moreover, we may terminate or amend the Exchange Offer, in
our sole and absolute discretion, if any of these conditions are not satisfied
or waived prior to the expiration of the Exchange Offer.
PROCEDURES FOR TENDERING COMMON STOCK
When you tender your common stock, and we accept the common stock for
exchange, this will constitute a binding agreement between you and Molecular
Diagnostics, subject to the terms and conditions set forth in this Offering
Circular and the enclosed letter of transmittal. Unless you comply with the
procedures described below under the title "-- Guaranteed Delivery Procedures,"
you must do one of the following prior to the expiration of the Exchange Offer
to participate in the Exchange Offer:
- if you hold common stock in certificated form, tender your common stock
by sending (1) the certificates representing your common stock, in proper
form for transfer, (2) a properly completed and duly executed letter of
transmittal, with any required signature guarantees, and (3) all other
documents required by the letter of transmittal, to LaSalle Bank National
Association, as Exchange Agent, at one of the addresses listed below
under the title "-- Exchange Agent"; or
- if you hold common stock in "street name," tender your common stock by
using the book-entry procedures described below under the title
"-- Book-Entry Transfer" and transmit a properly completed and duly
executed letter of transmittal, with any required signature guarantees,
or an agent's message instead of the letter of transmittal, to the
Exchange Agent.
In order for a book-entry transfer to constitute a valid tender of your
common stock, the Exchange Agent must receive a confirmation of book-entry
transfer of your common stock into its account at The Depository Trust Company
prior to the expiration of the Exchange Offer. The term "agent's message" means
a message, transmitted by DTC and received by the Exchange Agent and forming a
part of the book-entry confirmation, which states that DTC has received an
express acknowledgment from you that you have received and have agreed to be
bound by the letter of transmittal. If you use this procedure, we may enforce
the letter of transmittal against you.
THE METHOD OF DELIVERY OF CERTIFICATES FOR COMMON STOCK, LETTERS OF
TRANSMITTAL, AGENT'S MESSAGES AND ALL OTHER REQUIRED DOCUMENTS IS AT YOUR
DISCRETION. IF YOU DELIVER COMMON STOCK BY MAIL, WE RECOMMEND THAT YOU USE
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. IN ALL CASES,
YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE TIMELY DELIVERY. PLEASE SEND ALL
CERTIFICATES FOR COMMON STOCK, LETTERS OF TRANSMITTAL AND AGENT'S MESSAGES TO
THE EXCHANGE AGENT, AT ONE OF THE ADDRESSES SET
15
FORTH ON THE BACK COVER PAGE OF THIS OFFERING CIRCULAR. PLEASE DO NOT SEND THESE
MATERIALS TO MOLECULAR DIAGNOSTICS, AS THIS WILL NOT BE DEEMED A PROPER TENDER.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless you are either:
- a registered holder of common stock and have not completed the box
entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal; or
- you are tendering common stock for the account of an eligible guarantor
institution.
An eligible guarantor institution means:
- banks, as defined in Section 3(a) of the Federal Deposit Insurance Act;
- brokers, dealers, municipal securities dealers, municipal securities
brokers, government securities dealers and government securities brokers,
as defined in the Securities Exchange Act of 1934;
- credit unions, as defined in Section 19B(1)(A) of the Federal Reserve
Act;
- national securities exchanges, registered securities associations and
clearing agencies, as these terms are defined in the Securities Exchange
Act; and
- savings associations, as defined in Section 3(b) of the Federal Deposit
Insurance Act.
If signatures on a letter of transmittal or a notice of withdrawal are
required to be guaranteed, the guarantor is required to be an eligible guarantor
institution. If you plan to sign the letter of transmittal but you are not the
registered holder of your common stock (which term, for this purpose, includes
any participant in DTC's system whose name appears on a security position
listing as the owner of the common stock) you must have the common stock signed
by the registered holder of the common stock and that signature must be
guaranteed by an eligible guarantor institution. You may also send a separate
instrument of transfer or exchange signed by the registered holder and
guaranteed by an eligible guarantor institution, but that instrument must be in
a form satisfactory to us in our sole discretion. In addition, if a person or
persons other than the registered holder or holders of common stock signs the
letter of transmittal, certificates for the common stock must be endorsed, or
accompanied by stock powers, exactly as the name or names of the registered
holder or holders that appear on the certificates for common stock.
All questions as to the validity, form, eligibility, including time of
receipt, and acceptance of common stock tendered for exchange will be determined
by us in our sole and absolute discretion. Our determination will be final and
binding. We reserve the absolute right to reject any and all improperly tendered
common stock or not to accept any common stock, the acceptance of which might be
unlawful as determined by us or our counsel. We also reserve the absolute right
to waive any defects or irregularities or conditions of the Exchange Offer as to
any common stock either before or after the expiration of the Exchange Offer,
including the right to waive the ineligibility of any holder who seeks to tender
common stock. Our interpretation of the terms and conditions of the Exchange
Offer as to any particular common stock either before or after the expiration of
the Exchange Offer, including the terms and conditions of the letter of
transmittal and the accompanying instructions, will be final and binding. Unless
waived, any defects or irregularities in connection with tenders of common stock
must be cured within a reasonable period of time, as determined by us. Neither
we, the Exchange Agent nor any other person has any duty to give notification of
any defect or irregularity with respect to any tender of common stock for
exchange, nor will we have any liability for failure to give this notification.
If you are a trustee, executor, administrator, guardian, attorney-in-fact
or officer of a corporation, or act in a similar fiduciary or representative
capacity, and wish to sign the letter of transmittal or any certificates for
common stock, you must indicate your status when signing. If you are acting in
any of these capacities, you are required to submit proper evidence satisfactory
to us of your authority to so act unless we waive this requirement.
16
ACCEPTANCE OF COMMON STOCK FOR EXCHANGE; DELIVERY OF SERIES E CONVERTIBLE
PREFERRED STOCK
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
listed above under the caption "--Conditions to the Exchange Offer", we will
accept, promptly after the expiration of the Exchange Offer, common stock up to
an amount which shall not exceed, the maximum number of shares of common stock
we are offering to exchange in the Exchange Offer. We will issue the shares of
Series E convertible preferred stock promptly after acceptance of the common
stock. For purposes of the Exchange Offer, we will be deemed to have accepted
properly tendered common stock for exchange when, as and if we have given oral
or written notice of acceptance to the Exchange Agent, with written confirmation
of any oral notice to be given promptly after any oral notice. In the event that
holders of common stock tender more than the maximum number of shares we are
offering to exchange in the Exchange Offer, we will accept for exchange only
common stock in an amount equal to the maximum number we are offering to
exchange in the Exchange Offer on a pro rata basis among the tendering holders
of common stock.
For each share of common stock accepted for exchange in the Exchange Offer,
the tendering holder will receive 1/25 (one twenty-fifth) of a share of Series E
convertible preferred stock.
The issuance of shares of Series E convertible preferred stock in exchange
for common stock will be made only after the Exchange Agent timely receives
either certificates for all physically tendered common stock, in proper form for
transfer, or a book-entry confirmation of transfer of the common stock into the
Exchange Agent's account at DTC, as the case may be, a properly completed and
duly executed letter of transmittal, with any required signature guarantees, and
all other required documents or, in the case of a book-entry confirmation, a
properly completed and duly executed letter of transmittal, with any required
signature guarantees, or an agent's message instead of the letter of
transmittal. If for any reason we do not accept any tendered common stock or if
common stock are submitted for a number more than the holder desires to
exchange, we will return the unaccepted or non-exchanged common stock without
expense to the registered tendering holder. In the case of common stock tendered
by book-entry transfer into the Exchange Agent's account at DTC by using the
book-entry procedures described below, the unaccepted or non-exchanged common
stock will be credited to an account maintained by the tendering holder with
DTC. Any common stock to be returned to the holder will be returned promptly
after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
Within two business days after the date of this Offering Circular, the
Exchange Agent will establish the required accounts at DTC for the common stock
tendered in the Exchange Offer. Once established, any financial institution that
is a participant in DTC's system may make book-entry delivery of common stock by
causing DTC to transfer the common stock into the Exchange Agent's account at
DTC in accordance with DTC's procedures for transfer. Although delivery of the
common stock may be effected through book-entry transfer at DTC, the letter of
transmittal or facsimile of the letter of transmittal, with any required
signature guarantees, or an agent's message instead of the letter of
transmittal, and any other required documents, must be transmitted to and
received by the Exchange Agent prior to the expiration of the Exchange Offer at
one of the addresses listed below under the caption "-- Exchange Agent." In
addition, the Exchange Agent must receive book-entry confirmation of transfer of
the common stock into the Exchange Agent's account of DTC prior to the
expiration of the Exchange Offer. If you cannot comply with these procedures,
you may be able to use the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your common stock, but
- the certificates for the common stock are not immediately available,
- you do not have enough time to deliver your certificates representing the
common stock or other required documents to the Exchange Agent before the
expiration of the Exchange Offer, or
17
- the procedure for book-entry transfer cannot be completed before the
expiration of the Exchange Offer,
you may effect a tender of your common stock if:
- the tender is made through an eligible guarantor institution;
- prior to the expiration of the Exchange Offer, the Exchange Agent
receives from an eligible guarantor institution a properly completed and
duly executed notice of guaranteed delivery, substantially in the form we
have provided, setting forth your name and address, and the number of
shares of common stock you are tendering and stating that the tender is
being made by notice of guaranteed delivery; these documents may be sent
by overnight courier, registered or certified mail or facsimile
transmission;
- you guarantee that within three NYSE trading days after the date of
execution of the notice of guaranteed delivery, the certificates for all
physically tendered common stock, in proper form for transfer, or a
book-entry confirmation of transfer of the common stock into the Exchange
Agent's account at DTC, including the agent's message that forms a part
of the book-entry confirmation, as the case may be, a properly completed
and duly executed letter of transmittal, with any required signature
guarantees, and any other documents required by the letter of
transmittal, will be deposited by the eligible guarantor institution with
the Exchange Agent; and
- the Exchange Agent receives the certificates for all physically tendered
common stock, in proper form for transfer, or a book-entry confirmation
of transfer of the common stock into the Exchange Agent's account at DTC,
as the case may be, a properly completed and duly executed letter of
transmittal, with any required signature guarantees, and all other
required documents or, in the case of a book-entry confirmation, a
properly completed and duly executed letter of transmittal, with any
required signature guarantees, or an agent's message instead of the
letter of transmittal, in each case within three NYSE trading days after
the date of execution of the notice of guaranteed delivery.
WITHDRAWAL OF TENDERS
YOU MAY WITHDRAW TENDERS OF COMMON STOCK AT ANY TIME PRIOR TO THE
EXPIRATION OF THE EXCHANGE OFFER AND, UNLESS YOUR TENDERED COMMON STOCK HAS
PREVIOUSLY BEEN ACCEPTED FOR EXCHANGE AND YOU HAVE RECEIVED THE SHARES OF SERIES
E CONVERTIBLE PREFERRED STOCK ISSUABLE IN EXCHANGE THEREFOR, YOU MAY ALSO
WITHDRAW PREVIOUSLY TENDERED COMMON STOCK AT ANY TIME AFTER JANUARY 28, 2002.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to the expiration of the Exchange Offer at
one of the addresses listed below under the caption "-- Exchange Agent." Any
notice of withdrawal must specify the name of the person who tendered the common
stock to be withdrawn, identify the common stock to be withdrawn, including the
number of shares of the common stock, and, where certificates for common stock
have been transmitted, specify the name in which the common stock is registered,
if different from that of the withdrawing holder. If certificates for common
stock have been delivered or otherwise identified to the Exchange Agent, then,
prior to the release of the certificates, the withdrawing holder must also
submit the numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an eligible guarantor
institution unless the holder is an eligible guarantor institution. If common
stock has been tendered using the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at DTC to be credited with the withdrawn common stock and otherwise comply with
the procedures of the book-entry transfer facility. All questions as to the
validity, form and eligibility, including time of receipt, of these notices will
be determined by us. Our determination will be final and binding.
Any common stock properly withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any common stock which
has been tendered for exchange but which is not exchanged for any reason will be
returned to the registered holder without cost to that holder promptly after
withdrawal, non-acceptance of tender or termination of the Exchange Offer. In
the case of
18
common stock tendered by book-entry transfer into the Exchange Agent's account
at DTC by using the book-entry transfer procedures described above, any
withdrawn or unaccepted common stock will be credited to the tendering holder's
account at DTC. Properly withdrawn common stock may be re-tendered at any time
prior to the expiration of the Exchange Offer by following one of the procedures
described above under "-- Procedures for Tendering Common Stock."
EXCHANGE AGENT
We have appointed LaSalle Bank National Association as the Exchange Agent.
All completed letters of transmittal and agent's messages should be directed to
the Exchange Agent at one of the addresses set forth below. All questions
regarding the procedures for tendering in the Exchange Offer and requests for
assistance in tendering your common stock should also be directed to the
Exchange Agent at the telephone number or one of the following addresses:
Delivery To:
LaSalle Bank National Association, Exchange Agent
<Table>
By Certified Mail: By Overnight Courier: By Hand:
LaSalle Bank National LaSalle Bank National LaSalle Bank National
Association Association Association
135 South LaSalle Street, 135 South LaSalle Street, 135 South LaSalle Street,
Suite 1960 Suite 1960 Suite 1960
Chicago, Illinois 60603 Chicago, Illinois 60603 Chicago, Illinois 60603
Attention: Mark Rimkus Attention: Mark Rimkus Attention: Mark Rimkus
(registered or certified mail
recommended)
By Facsimile:
(Eligible Guarantor Institutions Only)
(312) 904-2236
To Confirm by Telephone
or for Information Call:
(312) 904-2458
</Table>
DELIVERY OF A LETTER OF TRANSMITTAL OR AGENT'S MESSAGE TO AN ADDRESS OTHER
THAN THE ADDRESSES LISTED ABOVE OR TRANSMISSION OF INSTRUCTIONS BY FACSIMILE
OTHER THAN AS SET FORTH ABOVE IS NOT VALID DELIVERY OF THE LETTER OF TRANSMITTAL
OR AGENT'S MESSAGE.
Requests for additional copies of this Offering Circular, the enclosed
letter of transmittal or the enclosed notice of guaranteed delivery may be
directed to the Exchange Agent at the telephone number or the address listed
above. Requests for copies of our Amended Quarterly Report for the period ended
September 30, 2001, our 2000 Amended Annual Report, our Annual Meeting Proxy
Statement may be directed to the company .
EXPENSES
We expect that we will pay approximately $100,000.00 in expenses relating
to the Exchange Offer. We expect to obtain the cash required to pay our expenses
through cash flow.
RECOMMENDATION
WE ARE NOT MAKING ANY RECOMMENDATION REGARDING WHETHER YOU SHOULD TENDER
YOUR COMMON STOCK, AND, ACCORDINGLY, YOU MUST MAKE YOUR OWN DETERMINATION AS TO
WHETHER TO TENDER YOUR COMMON STOCK FOR EXCHANGE AND ACCEPT THE SERIES E
CONVERTIBLE PREFERRED STOCK WE PROPOSE TO ISSUE. HOWEVER, MEMBERS OF OUR BOARD
OF DIRECTORS AND MANAGEMENT HAVE NOTIFIED US THAT THEY INTEND TO TENDER COMMON
STOCK BENEFICIALLY OWNED BY THEM.
19
SOLICITATION
The Exchange Offer is being made by us in reliance on the exemption from
the registration requirements of the Securities Act, afforded by Section 3(a)(9)
thereof. We therefore will not pay any commission or other remuneration to any
broker, dealer, salesman or other person for soliciting tenders of the common
stock. We have not retained any dealer manager or other agent to solicit tenders
with respect to the Exchange Offer. The Exchange Agent will mail solicitation
materials on our behalf. We will pay the Exchange Agent customary fees for its
services, reimburse the Exchange Agent for its reasonable out-of-pocket expenses
incurred in connection with the provision of these services and pay other
expenses, including filing fees, blue sky fees and printing and distribution
expenses. We will reimburse reasonable expenses incurred by brokers and dealers
in forwarding this Offering Circular and the other materials in connection with
the Exchange Offer to the holders of the common stock. No broker, dealer,
commercial bank or trust company has been authorized to act as our agent for
purposes of the Exchange Offer.
Additional solicitation may be made by telephone, facsimile or in person by
officers and regular employees of Molecular Diagnostics and its affiliates,
without compensation for such solicitation, and by persons so engaged by the
Exchange Agent.
TRANSFER TAXES
You will not be obligated to pay any transfer tax in connection with the
tender of common stock in the Exchange Offer unless you instruct us to register
your shares of Series E convertible preferred stock in the name of, or request
that common stock not tendered or not accepted in the Exchange Offer be returned
to, a person other than the registered tendering holder. In those cases, you
will be responsible for the payment of any applicable transfer tax.
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FEDERAL INCOME TAX CONSIDERATIONS
Set forth below is a discussion of certain federal income tax consequences
to shareholders of Molecular Diagnostics who, pursuant to the Exchange Offer,
exchange their common stock in Molecular Diagnostics for Series E convertible
preferred stock of Molecular Diagnostics.
Molecular Diagnostics intends for the Exchange Offer to qualify as a
"recapitalization" pursuant to section 368(a)(1)(E) of the Internal Revenue Code
of 1986, as amended (the "Code"). If the exchange qualifies as a
recapitalization, the Series E convertible preferred shares received by
shareholders in exchange for the common stock tendered pursuant to the Exchange
Offer will have a basis in the Series E convertible preferred stock which will
be the same as the basis of the common stock tendered and exchanged. Normally,
the basis of a shareholder's common stock will be equal to the price paid upon
the purchase of such shares by the shareholder. The basis of the Series E
convertible preferred stock will be used to determine the gain or loss to be
recognized by a shareholder upon a later sale or taxable disposition of the
Series E convertible preferred stock.
It is possible that the Internal Revenue Service ("IRS") could determine
that some part or all of the Exchange Offer is subject to tax. For example, if
the IRS should determine that the value of the Series E convertible preferred
stock is greater than the value of the common stock tendered by a shareholder,
that shareholder will recognize taxable gain equal to the deemed difference in
value between such shares. Although the stated value of the Series E convertible
preferred stock is greater than the closing price of the common stock on
November 16, 2001, other factors may be considered in establishing the actual
value of the Series E convertible preferred stock. These factors include, but
are not limited to, the value of the common stock on the Expiration Date, the
lack of a trading market for the Series E convertible preferred stock and the
possibility of greater appreciation in the price of the Common Stock in
comparison to the Series E convertible preferred stock. Molecular Diagnostics
has established the liquidation value of the Series E convertible preferred
stock at $22.00 per share in an attempt to equalize the value of the Series E
convertible preferred stock to the common stock. However, there can be no
guarantee that the IRS will agree that the value of the Series E convertible
preferred stock is equal to that of the common stock at the time of the
exchange. Additionally, the IRS could contend that the Series E convertible
preferred stock is "nonqualified preferred shares" as defined in section 351(g)
of the Code and, therefore, that the exchange of common stock for Series E
convertible preferred stock should not be treated as an exchange of stock or
securities for purposes of the nonrecognition provisions of Code section
354(a)(1). Preferred stock, for purposes of the definition of "nonqualified
preferred stock" means stock which is limited and preferred as to dividends and
does not participate in corporate growth to any significant extent. In this
connection, it should be noted that the Series E convertible preferred stock
enjoys a conversion privilege exercisable by the shareholder from and after
December 1, 2002, to convert the Series E convertible preferred stock into
common stock of Molecular Diagnostics at a conversion price which allows the
shareholder to participate in the growth in value of the common stock. Since
that date, no regulations have been adopted or proposed which would give
guidance regarding the definition of "preferred stock" set forth in the Code
However, it is our view that, because the conversion privilege is exercisable by
holders of Series E convertible preferred stock commencing on or after one year
from their issuance, and because the conversion price will allow for such
shareholders to fully participate in the growth of common stock following the
Exchange Offer, the Series E convertible preferred stock does participate in
corporate growth to a significant extent and, therefore, will not be considered
"nonqualified preferred stock" within the meaning of Code section 351(g).
Accordingly, as set forth above, it is our view that the exchange by
shareholders of common stock of Molecular Diagnostics for Series E convertible
preferred stock will constitute a recapitalization under Code section
368(a)(1)(E) and that with the exception of any cash payments received in lieu
of fractional shares, shareholders will recognize neither gain nor loss on the
Exchange Offer. Notwithstanding, in the event that the IRS determines that the
fair market value of the Series E convertible preferred stock exceeds that of
the common stock surrendered, it is likely that the excess received in the
Exchange Offer will be taxable as part of a capital exchange. Alternatively, in
the event the value of the common stock is deemed to be greater than that of the
Series E convertible preferred shares, the shareholder could be entitled to
recognize a loss.
21
Pursuant to Code section 306, if a shareholder of a corporation sells or
otherwise disposes of "section 306 stock" in other than a redemption
transaction, the amount realized on such disposition is treated, in whole or in
part, as ordinary income. Code section 306(c)(1)(B) defines section 306 stock as
including stock which not common stock and which was received by the shareholder
selling or otherwise disposing of such stock in pursuance of a plan of
reorganization under Code section 368(a), and with respect to the receipt of
which gain or loss to the shareholder, with limited exception, was to any extent
not recognized. However, Code section 306(c)(2) provides that the term "section
306 stock" does not include any stock, no part of the distribution of which
would have been a dividend at the time of the distribution if money had been
distributed in lieu of the stock. The term "dividend" is defined in Code section
316 to mean any distribution to a shareholder out of accumulated or current
earnings and profits. We have determined that neither Molecular Diagnostics nor
any member of the affiliated group with it files a consolidated tax return has
any accumulated earnings and profits and that it is highly unlikely that for the
current year any such corporation will have current earnings and profits.
Accordingly, it is our view that, by reason the exception set forth in Code
section 306(c)(2), the Series E convertible preferred stock transferred pursuant
to the exchange transaction will not be considered "section 306 stock." If our
assessment that there is no accumulated and there will be no current earnings
and profits proves to be in error, the Series E convertible stock would be
considered "section 306 stock." Moreover, the IRS could upon audit determine
that Molecular Diagnostics, in fact, has either accumulated or current earnings
and profits as of the effective date of the Exchange Offer. In such event, the
Series E convertible preferred stock would then be considered "section 306
stock."
In the event that the Series E convertible preferred stock is determined to
be "section 306 stock," as noted above, the amount realized on a disposition
thereof (other than pursuant to a redemption) will be treated as ordinary income
to the extent of the stock's ratable share of the amount which would have been a
dividend at the time of distribution, if, in lieu of section 306 stock, the
corporation had distributed money in an amount equal to a fair market value of
the stock at the time of the distribution. Any excess will be treated as gain
from the sale of the stock. Pursuant to Code section 306(a)(1)(c), no loss is
recognized on such disposition. If, however, either a shareholder or Molecular
Diagnostics exercises the conversion privilege provided for in the Series E
convertible preferred stock, then the "section 306 stock" taint will not
carryover to the common stock of Molecular Diagnostics received upon the
exercise of the conversion privilege.
Shareholders are urged to consult their own tax advisors to determine the
effect of this transaction based on their particular circumstances.
22
DESCRIPTION OF CAPITAL STOCK
GENERAL
We have set forth in this section a description of certain rights and
preferences of our convertible preferred stock as well as our other outstanding
securities and contractual obligations because we believe they are materially
relevant to an investor's understanding of an investment in our shares of Series
E Preferred Stock.
Our authorized capital stock consists of 55,000,000 shares, consisting of
50,000,000 shares of common stock, par value $0.001 per share, and 5,000,000
shares of preferred stock, par value $0.001 per share. On November 16, 2001 we
had:
- 35,560,517 shares of common stock issued and outstanding;
- 590,197 shares of Series A convertible preferred stock of which 572,485
were issued and outstanding;
- 1,500,000 shares of Series B convertible preferred stock of which
1,457,356 were issued and outstanding;
- 1,666,666 shares of Series C convertible preferred stock of which
1,331,499 were issued and outstanding;
- 300,000 shares of Series D convertible preferred stock of which 175,000
were issued and outstanding;
- 800,000 shares of Series E convertible preferred stock of which none were
issued and outstanding;
- warrants that entitle the holders the right to purchase 9,106,374 shares
of common stock at prices ranging from $0.01 to $23.75;
- $1,085,000 aggregate principal amount convertible promissory notes that
entitle the holders to purchase 1,038,962 shares of common stock; and
- options that entitle the holders to purchase 3,507,395 shares of common
stock at prices ranging from $0.39 to $36.08.
If, and when, we implement the reverse stock split that our stockholders
approved in May 2001, each three shares of our issued and outstanding common
stock will be converted into one share of common stock and the conversion rights
of our convertible securities will be correspondingly adjusted. The reverse
stock split will not affect the number of shares we are authorized to issue.
COMMON STOCK
Each share of our common stock has the same relative rights and is
identical in all respects with each other share of common stock.
Subject to any prior rights of the holders of any preferred stock then
outstanding, holders of our common stock are entitled to receive such dividends
as are declared by our board of directors out of funds legally available
therefor. Full voting rights are vested in the holders of common stock, each
share being entitled to one vote, subject to the rights of the holders of any
preferred stock then outstanding. Our board of directors may issue authorized
shares of common stock without stockholder approval. Subject to any prior rights
of the holders of any preferred stock then outstanding, in the event of our
liquidation, dissolution or winding up, holders of shares of our common stock
are entitled to receive, pro rata, any assets distributable to stockholders with
respect to shares held by them. Holders of shares of common stock do not have
any preemptive rights to subscribe for any additional securities which may be
issued by us or any cumulative voting rights. The outstanding shares of our
common stock are fully paid and non-assessable.
23
PREFERRED STOCK
Our preferred stock may be issued in one or more series at such time or
times and for such consideration as our board of directors may determine. Our
board of directors is expressly authorized at any time, and from time to time,
to provide for the issuance of preferred stock with such voting rights and other
powers, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions, as shall be stated in
the resolution authorizing the particular series of preferred stock. Our board
of directors is authorized to designate the series and the number of shares
comprising such series, the dividend rate, the redemption rights, if any, any
purchase, retirement or sinking fund provisions, any conversion rights and any
special voting rights with respect to the shares of such series. The ability of
our board of directors to issue preferred stock without stockholder approval
could make an acquisition by an unwanted suitor of a controlling interest in us
more difficult, time-consuming or costly, or otherwise discourage an attempt to
acquire control of us. Shares of preferred stock redeemed or acquired by us may
return to the status of authorized but unissued shares, without designation as
to series, and may be reissued by our board of directors.
SERIES A CONVERTIBLE PREFERRED STOCK
We are authorized to issue 590,197 shares of Series A convertible preferred
stock, of which 572,485 shares were issued and outstanding as of November 16,
2001. Each share of Series A convertible preferred stock has a stated value of
$4.50 and a conversion price of $10.3034, subject to antidilution adjustment.
The Series A convertible preferred stock ranks senior to our common stock and on
parity with our other issued and outstanding preferred stock. We may issue other
series of preferred stock at any time and from time to time without the consent
of the holders of the Series A convertible preferred stock.
DIVIDENDS
Shares of the Series A convertible preferred stock pay no dividends.
VOTING RIGHTS
The holders of the Series A convertible preferred stock have no right to
vote on any matter except as required by Delaware law. If the Series A
convertible preferred stock is entitled to vote with the holders of common stock
as one class, each share of Series A convertible preferred stock shall entitle
the holder to the number of votes that equals the number of shares of common
stock into which each share of Series A convertible preferred stock is
convertible. Without first obtaining the approval of a majority of the shares of
Series A convertible preferred stock then outstanding, we may not repeal, amend
or change the Series A convertible preferred stock Certificate of Designations
or our Certificate of Incorporation to alter or change the powers, preferences
or rights of the Series A convertible preferred stock so as to affect them
adversely.
LIQUIDATION
The liquidation preference of the Series A convertible preferred stock is
$4.50 per share. Upon liquidation, dissolution or winding up of Molecular
Diagnostics, each holder of the Series A convertible preferred stock is entitled
to be paid in cash out of our assets available for distribution to shareholders
an amount equal to the liquidation preference of the Series A convertible
preferred stock before any amounts may be paid to any class or series of capital
stock ranking junior to the Series A convertible preferred stock.
If the assets available for distribution to the holders of Series A
convertible preferred stock and any other security ranking on parity with the
preferred stock are insufficient to pay in full all amounts payable to the
holders of the Series A convertible preferred stock and all other parity
securities, then all of the assets available for distribution to the holders of
the Series A convertible preferred stock and parity securities will be
distributed among the holders ratably in proportion to the amounts that would be
payable if there were sufficient assets to permit payment in full. After payment
in full, the holders of the Series A convertible preferred stock will not be
entitled to any further distribution of assets. A merger or consolidation will
be considered a liquidation event in certain circumstances.
24
RESERVATION OF SHARES
We have authorized and will reserve and keep available a sufficient number
of shares of our common stock as will be issuable upon the conversion of all
outstanding shares of Series A convertible preferred stock and dividends payable
thereon. These shares of our common stock, when issued, will be duly and validly
issued, fully paid and non-assessable, and free of liens.
REDEMPTION
Shares of the Series A convertible preferred stock are not redeemable.
SINKING FUND
There is no sinking fund for the Series A convertible preferred stock.
CONVERSION
Shares of Series A convertible preferred stock are convertible, at any
time, at the option of the holder into shares of common stock. Each share of the
Series A convertible preferred stock is convertible into such number of shares
of our common stock as is determined by dividing the $4.50 stated value by the
then effective conversion price (currently $10.3034), which is referred to as
the conversion rate. The conversion rate is currently 0.4367.
If during the three year period beginning March 1, 2001, the then current
market price of our common stock equals or exceeds $13.50 per share for any 20
consecutive trading days commencing 45 business days before the date in
question, we may elect to convert all then outstanding shares of Series A
convertible preferred stock into common stock at the then effective conversion
rate.
ADJUSTMENTS TO CONVERSION PRICE
The conversion price and the number of shares of common stock issuable upon
conversion of the Series A convertible preferred stock are subject to adjustment
from time to time upon the occurrence of any of the following events at any
time:
- If we (A) issue common stock as a dividend or a distribution with respect
to any class or series of our capital stock, (B) split or otherwise
subdivide our common stock , (C) combine our outstanding shares of common
stock into a greater or smaller number of shares, or (D) issue any shares
of capital stock in a reclassification;
- If there occurs a merger, consolidation, recapitalization or conveyance
of all or substantially all of our assets.
The conversion price and the conversion rate will be adjusted when we
implement the reverse stock split.
FRACTIONAL SHARES
We will not issue any fractional shares of common stock upon the conversion
of the Series A convertible preferred stock but rather will pay cash based on
the then current market price per share of our common stock.
SERIES B CONVERTIBLE PREFERRED STOCK
We are authorized to issue 1,500,000 shares of Series B convertible
preferred stock, of which 1,457,356 shares were outstanding as of November 16,
2001. Each share of Series B convertible preferred stock has a stated value of
$4 and a conversion price of $1, subject to antidilution adjustment. The Series
B convertible preferred stock ranks senior to our common stock and on parity
with our other issued and outstanding preferred stock. We may issue other series
of preferred stock at any time and from time to time without the consent of the
holders of the Series B convertible preferred stock.
25
DIVIDENDS
Shares of the Series B convertible preferred stock accrue dividends on a
quarterly basis at an annual rate of 10% per share payable on the last day of
March, June, September and December, commencing March 31, 2001, out of any
assets or funds legally available for payment of dividends. Dividends are
cumulative and accrue, whether or not declared by our board of directors, but
can only be declared or paid and set apart for payment if full cumulative
dividends for all prior quarterly dividend periods then outstanding shall have
been or shall be concurrently paid or declared and set apart for payment.
We may not pay any dividends or any distribution on any class or series of
capital stock ranking junior to the Series B convertible preferred stock except
dividends payable in shares of our stock of any class junior to the preferred
stock, and we may not repurchase or redeem any junior stock, if any dividends on
the Series B convertible preferred stock are then in arrears.
VOTING RIGHTS
The holders of the Series B convertible preferred stock have no right to
vote on any matter except as required by Delaware law. If the Series B
convertible preferred stock is entitled to vote with the holders of common stock
as one class, each share of Series B convertible preferred stock shall entitle
the holder to the number of votes that equals the number of shares of common
stock into which each share of Series B convertible preferred stock is
convertible. Without first obtaining the approval of a majority of the shares of
Series B convertible preferred stock then outstanding, we may not repeal, amend
or change the Series B convertible preferred stock Certificate of Designations
or our Certificate of Incorporation to alter or change the powers, preferences
or rights of the Series B convertible preferred stock so as to affect them
adversely.
LIQUIDATION
The liquidation preference of the Series B convertible preferred stock is
$4 per share plus all accrued but unpaid dividends. Upon liquidation,
dissolution or winding up of Molecular Diagnostics, each holder of the Series B
convertible preferred stock is entitled to be paid in cash out of our assets
available for distribution to shareholders an amount equal to the liquidation
preference of the Series B convertible preferred stock before any amounts may be
paid to any class or series of capital stock ranking junior to the Series B
convertible preferred stock.
If the assets available for distribution to the holders of Series B
convertible preferred stock and any other security ranking on parity with the
preferred stock are insufficient to pay in full all amounts payable to the
holders of the Series B convertible preferred stock and all other parity
securities, then all of the assets available for distribution to the holders of
the Series B convertible preferred stock and parity securities will be
distributed among the holders ratably in proportion to the amounts that would be
payable if there were sufficient assets to permit payment in full. After payment
in full, the holders of the Series B convertible preferred stock will not be
entitled to any further distribution of assets. A merger or consolidation will
be considered a liquidation event in certain circumstances.
RESERVATION OF SHARES
We have authorized and will reserve and keep available a sufficient number
of shares of our common stock as will be issuable upon the conversion of all
outstanding shares of Series B convertible preferred stock and dividends payable
thereon. These shares of our common stock, when issued, will be duly and validly
issued, fully paid and non-assessable, and free of liens.
REDEMPTION
Shares of the Series B convertible preferred stock are not redeemable.
SINKING FUND
There is no sinking fund for the Series B convertible preferred stock.
26
CONVERSION
Shares of Series B convertible preferred stock are convertible, at any
time, at the option of the holder, into shares of common stock. Each share of
the Series B convertible preferred stock is convertible into such number of
shares of our common stock as is determined by dividing the $4 stated value per
share plus all accrued but unpaid dividends by the then effective conversion
price (currently $1), which is referred to as the conversion rate.
If the then current market price of our common stock equals or exceeds $4
per share for any 40 consecutive trading days, we may elect to convert all
outstanding shares of Series B convertible preferred stock into common stock at
the then effective conversion rate. If for any reason we do not pay any portion
of the accrued dividends on the Series B convertible preferred stock being
converted, we may pay that portion of unpaid dividends in shares of common
stock.
ADJUSTMENTS TO CONVERSION PRICE
The conversion price and the number of shares of common stock issuable upon
conversion of the Series B convertible preferred stock are subject to adjustment
from time to time upon the occurrence of any of the following events at any
time:
- If we (A) issue common stock as a dividend or a distribution with respect
to any class or series of our capital stock, (B) split or otherwise
subdivide our common stock, (C) combine our outstanding shares of common
stock into a greater or smaller number of shares, or (D) issue any shares
of capital stock in a reclassification;
- If there occurs a merger, consolidation, recapitalization or conveyance
of all or substantially all of our assets.
The conversion price and the conversion rate will be adjusted when we
implement the reverse stock split.
FRACTIONAL SHARES
We will not issue any fractional shares of common stock upon the conversion
of the Series B convertible preferred stock but rather will pay cash based on
the then current market price per share of our common stock.
SERIES C CONVERTIBLE PREFERRED STOCK
We are authorized to issue 1,666,666 shares of Series C convertible
preferred stock, of which 1,331,499 were issued and outstanding as of November
16, 2001. Each share of Series C convertible preferred stock has a stated value
of $3 and will have a conversion price of $0.60, subject to antidilution
adjustment. The Series C convertible preferred stock ranks senior to our common
stock and on parity with our other issued and outstanding preferred stock. We
may issue other series of preferred stock at any time and from time to time
without the consent of the holders of the Series C convertible preferred stock.
DIVIDENDS
Shares of the Series C convertible preferred stock accrue dividends on a
semi-annual basis at an annual rate of 10% per share payable on the last day of
March and September, commencing March 31, 2002, out of any assets or funds
legally available for payment of dividends. Dividends are cumulative and accrue,
whether or not declared by our board of directors, but can only be declared or
paid and set apart for payment if full cumulative dividends for all prior
dividend periods then outstanding shall have been or shall be concurrently paid
or declared and set apart for payment. Dividends are payable in cash provided
that we may pay the dividends for the first two years in cash or in shares of
our common stock.
We may not pay any dividends or any distribution on any class or series of
capital stock ranking junior to the Series C convertible preferred stock except
dividends payable in shares of our stock of any class junior to the preferred
stock, and we may not repurchase or redeem any junior stock, if any dividends on
the Series C convertible preferred stock are then in arrears.
27
VOTING RIGHTS
The holders of the Series C convertible preferred stock have no right to
vote on any matter except as required by Delaware law. If the Series C
convertible preferred stock is entitled to vote with the holders of common stock
as one class, each share of Series C convertible preferred stock shall entitle
the holder to the number of votes that equals the number of shares of common
stock into which each share of Series C convertible preferred stock is
convertible. Without first obtaining the approval of a majority of the shares of
Series C convertible preferred stock then outstanding, we may not repeal, amend
or change the Series C convertible preferred stock Certificate of Designations
or our Certificate of Incorporation to alter or change the powers, preferences
or rights of the Series C convertible preferred stock so as to affect them
adversely.
LIQUIDATION
The liquidation preference of the Series C convertible preferred stock is
$3 per share plus all accrued but unpaid dividends. Upon liquidation,
dissolution or winding up of Molecular Diagnostics, each holder of the Series C
convertible preferred stock is entitled to be paid in cash out of our assets
available for distribution to shareholders an amount equal to the liquidation
preference of the Series C convertible preferred stock before any amounts may be
paid to any class or series of capital stock ranking junior to the Series C
convertible preferred stock.
If the assets available for distribution to the holders of Series C
convertible preferred stock and any other security ranking on parity with the
preferred stock are insufficient to pay in full all amounts payable to the
holders of the Series C convertible preferred stock and all other parity
securities, then all of the assets available for distribution to the holders of
the Series C convertible preferred stock and parity securities will be
distributed among the holders ratably in proportion to the amounts that would be
payable if there were sufficient assets to permit payment in full. After payment
in full, the holders of the Series C convertible preferred stock will not be
entitled to any further distribution of assets. A merger or consolidation will
be considered a liquidation event in certain circumstances.
RESERVATION OF SHARES
We will have authorized and will reserve and keep available a sufficient
number of shares of our common stock as will be issuable upon the conversion of
all outstanding shares of Series C convertible preferred stock and dividends
payable thereon. These shares of our common stock, when issued, will be duly and
validly issued, fully paid and non-assessable, and free of liens.
REDEMPTION
Shares of the Series C convertible preferred stock are not redeemable.
SINKING FUND
There is no sinking fund for the Series C convertible preferred stock.
CONVERSION
Shares of Series C convertible preferred stock are convertible at any time
at the option of the holder, into shares of common stock. Each share of the
Series C convertible preferred stock is convertible into such number of shares
of our common stock as is determined by dividing the $3 stated value per share
plus all accrued but unpaid dividends by the then effective conversion price,
which is referred to as the conversion rate.
28
ADJUSTMENTS TO CONVERSION PRICE
The conversion price and the number of shares of common stock issuable upon
conversion of the Series C convertible preferred stock are subject to adjustment
from time to time upon the occurrence of any of the following events at any
time:
- If we (A) issue common stock as a dividend or a distribution with respect
to any class or series of our capital stock, (B) split or otherwise
subdivide our common stock, (C) combine our outstanding shares of common
stock into a greater or smaller number of shares, or (D) issue any shares
of capital stock in a reclassification;
- If there occurs a merger, consolidation, recapitalization or conveyance
of all or substantially all of our assets.
FRACTIONAL SHARES
We will not issue any fractional shares of common stock upon the conversion
of the Series C convertible preferred stock but rather will pay cash based on
the then current market price per share of our common stock.
SERIES D CONVERTIBLE PREFERRED STOCK
We are authorized to issue 300,000 shares of Series D convertible preferred
stock, of which 175,000 were issued and outstanding as of November 16, 2001.
Each share of Series D convertible preferred stock has a stated value of $10 and
a conversion price of $1, subject to antidilution adjustment. The Series D
convertible preferred stock ranks senior to our common stock and on parity with
our other outstanding preferred stock. We may issue other series of preferred
stock at any time and from time to time without the consent of the holders of
the Series D convertible preferred stock.
DIVIDENDS
Shares of the Series D convertible preferred stock accrue dividends on a
semi-annual basis at an annual rate of 10% per share payable on the last day of
April and October, commencing April 30, 2002, out of any assets or funds legally
available for payment of dividends. Dividends are cumulative and accrue, whether
or not declared by our board of directors, but can only be declared or paid and
set apart for payment if full cumulative dividends for all prior dividend
periods then outstanding shall have been or shall be concurrently paid or
declared and set apart for payment. Dividends are payable in cash provided that
we may pay the dividends for the first two years in cash or in shares of our
common stock.
We may not pay any dividends or any distribution on any class or series of
capital stock ranking junior to the Series D convertible preferred stock except
dividends payable in shares of our stock of any class junior to the preferred
stock, and we may not repurchase or redeem any junior stock, if any dividends on
the Series D convertible preferred stock are then in arrears.
VOTING RIGHTS
The holders of the Series D convertible preferred stock have no right to
vote on any matter except as required by Delaware law. If the Series D
convertible preferred stock is entitled to vote with the holders of common stock
as one class, each share of Series D convertible preferred stock shall entitle
the holder to the number of votes that equals the number of shares of common
stock into which each share of Series D convertible preferred stock is
convertible. Without first obtaining the approval of a majority of the shares of
Series D convertible preferred stock then outstanding, we may not repeal, amend
or change the Series D convertible preferred stock Certificate of Designations
or our Certificate of Incorporation to alter or change the powers, preferences
or rights of the Series D convertible preferred stock so as to affect them
adversely.
29
LIQUIDATION
The liquidation preference of the Series D convertible preferred stock is
$10 per share plus all accrued but unpaid dividends. Upon liquidation,
dissolution or winding up of Molecular Diagnostics, each holder of the Series D
convertible preferred stock is entitled to be paid in cash out of our assets
available for distribution to shareholders an amount equal to the liquidation
preference of the Series D convertible preferred stock before any amounts may be
paid to any class or series of capital stock ranking junior to the Series D
convertible preferred stock.
If the assets available for distribution to the holders of Series D
convertible preferred stock and any other security ranking on parity with the
preferred stock are insufficient to pay in full all amounts payable to the
holders of the Series D convertible preferred stock and all other parity
securities, then all of the assets available for distribution to the holders of
the Series D convertible preferred stock and parity securities will be
distributed among the holders ratably in proportion to the amounts that would be
payable if there were sufficient assets to permit payment in full. After payment
in full, the holders of the Series D convertible preferred stock will not be
entitled to any further distribution of assets. A merger or consolidation will
be considered a liquidation event in certain circumstances.
RESERVATION OF SHARES
We will have authorized and will reserve and keep available a sufficient
number of shares of our common stock as will be issuable upon the conversion of
all outstanding shares of Series D convertible preferred stock and dividends
payable thereon. These shares of our common stock, when issued, will be duly and
validly issued, fully paid and non-assessable, and free of liens.
REDEMPTION
Shares of the Series D convertible preferred stock are not redeemable.
SINKING FUND
There is no sinking fund for the Series D convertible preferred stock.
CONVERSION
Shares of Series D convertible preferred stock are convertible, at any time
after April 1, 2002, at the option of the holder, into shares of common stock.
Each share of the Series D convertible preferred stock is convertible into such
number of shares of our common stock as is determined by dividing the $10 stated
value per share plus all accrued but unpaid dividends by the then effective
conversion price, which is referred to as the conversion rate.
If the then current market price of our common stock equals or exceeds $5
per share for any 20 consecutive trading days, we may elect to convert all
outstanding shares of Series D convertible preferred stock into common stock at
the then effective conversion rate. If for any reason we do not pay any portion
of the accrued dividends on the Series D convertible preferred stock being
converted, we may pay that portion of unpaid dividends in shares of common
stock.
ADJUSTMENTS TO CONVERSION PRICE
The conversion price and the number of shares of common stock issuable upon
conversion of the Series D convertible preferred stock are subject to adjustment
from time to time upon the occurrence of any of the following events at any
time:
- If we (A) issue common stock as a dividend or a distribution with respect
to any class or series of our capital stock, (B) split or otherwise
subdivide our common stock, (C) combine our outstanding shares of common
stock into a greater or smaller number of shares, or (D) issue any shares
of capital stock in a reclassification;
30
- If there occurs a merger, consolidation, recapitalization or conveyance
of all or substantially all of our assets.
The conversion price and the conversion rate will be adjusted when we
implement the reverse stock split.
FRACTIONAL SHARES
We will not issue any fractional shares of common stock upon the conversion
of the Series D convertible preferred stock but rather will pay cash based on
the then current market price per share of our common stock.
SERIES E CONVERTIBLE PREFERRED STOCK
Please refer to the description of our Series E convertible preferred stock
in the section entitled "Series E Convertible Preferred Stock."
COMMON STOCK PURCHASE WARRANTS
As of November 16, 2001, we had outstanding 9,106,374 common stock purchase
warrants, each entitling the holder the right to purchase one share of our
common stock. These common stock purchase warrants have exercise prices ranging
from $0.01 to $23.75. Common stock purchase warrants not exercised by their
respective expiration dates will expire.
ADJUSTMENTS TO EXERCISE PRICE
The exercise price and the number of shares of common stock issuable upon
the exercise of the common stock purchase warrants is subject to adjustment from
time to time upon the occurrence of any of the following events:
- If we (A) subdivide shares of our common stock, (B) declare a dividend
upon our common stock payable solely in shares of our common stock, (C)
reclassify or change our common stock into different securities, or (D)
make a distribution on our capital stock other than regular cash
dividends.
The common stock purchase warrants will be adjusted on the same basis as
the common stock if and when we implement the reverse stock split.
RESERVATION OF SHARES
We will have reserved a sufficient number of shares of our common stock as
will be issuable upon exercise of all outstanding common stock purchase warrants
if and when we implement the reverse stock split. Upon issuance, these shares of
common stock will be duly and validly issued, fully paid and non-assessable,
free of all preemptive rights and taxes.
VOTING
The holders of the common stock purchase warrants have no right to vote on
matters submitted to shareholders and have no right to receive dividends.
LISTING
There is no public trading market for the common stock purchase warrants.
FRACTIONAL SHARES
We will not issue fractional shares of common stock upon exercise of the
common stock purchase warrants but rather will pay the holder an amount in cash
equal to the fair market value of any fractional interest.
31
REGISTRATION RIGHTS
We are obligated to register the resale of the common stock into which the
common stock purchase warrants are exercisable provided more than one year has
elapsed from the issuance of the relevant common stock purchase warrant. If we
fail to make a filing with the SEC to register the underlying common stock
within 30 days of the holder's request, the holder is entitled to receive from
us in cash the difference between the exercise price and the average closing
price of our common stock during the 30 calendar days immediately following the
holder's request to register the common stock purchase warrants.
In addition to the common stock purchase warrants described above, we have
issued warrants for services rendered and in connection with financings. These
warrants have the same characteristics as the common stock purchase warrants
described above with respect to reservation of shares, voting, listing and
fractional shares. The particular additional terms of these warrants are as
follows:
AZIMUTH/CADMUS/NORTHLEA/VENTANA COMMON STOCK PURCHASE WARRANTS
On February 7, 2001, we issued a warrant to Azimuth Corporation entitling
Azimuth to purchase 1,000,000 shares of our common stock at an exercise price of
$0.25 per share, subject to the adjustments described below. The Azimuth warrant
expires February 7, 2006.
On August 6, 2001, we issued warrants to Azimuth Corporation, Cadmus
Corporation and Northlea Partners entitling the holders to purchase 250,000,
250,000 and 62,500 shares, respectively, of our common stock at an exercise
price of $1.00 per share, subject to the adjustments described below. These
warrants expire August 6, 2006.
On November 2, 2001, we issued a warrant to Ventana Medical Systems, Inc.
to purchase 1,750,000 shares of our common stock at an exercise price of $1.15
per share, subject to the antidilution adjustments described below. The Ventana
warrant expires November 2, 2004.
ADJUSTMENTS TO EXERCISE PRICE
The exercise price and the number of shares of common stock issuable upon
the exercise of these warrants are subject to adjustment from time to time upon
the occurrence of any of the following events:
- If we (A) pay a dividend or make a distribution of common stock or (B)
subdivide or combine outstanding shares of our common stock;
- If we issue or sell any shares of our common stock at a price per share
less than the exercise price;
- If we dividend or otherwise issue or sell any securities convertible into
our common stock;
- If we (A) merge or consolidate with another entity, (B) sell, lease or
otherwise transfer all or substantially all of our property or assets or
(C) effect a capital reorganization or recapitalization of our common
stock.
BATHGATE WARRANTS
On February 28, 2001, we issued warrants pursuant to a warrant agreement
with Bathgate McColley Capital Group, LLC, entitling the holders of those
warrants to purchase an aggregate of 227,500 shares of our common stock at an
exercise price of $1.20 per share subject to the adjustments described below.
The Bathgate warrants expire February 28, 2006.
ADJUSTMENTS TO EXERCISE PRICE
The exercise price and the number of shares of common stock issuable upon
the exercise of the Bathgate warrants are subject to adjustment from time to
time upon the occurrence of any of the following events:
- If we (A) pay a dividend or make a distribution to holders of our common
stock, (B) subdivide or combine our outstanding shares of our common
stock, or (C) issue by reclassification of our common stock other
securities;
32
- If we issue rights, options, warrants or convertible securities to all or
substantially all holders of our common stock, without charge, entitling
them to purchase common stock below the then current market value per
share of common stock on the date of issuance;
- If we distribute to holders of common stock all or substantially all
evidences of indebtedness of assets or rights, options, warrants or
convertible securities containing the right to purchase our common stock;
- If we (A) consolidate or merge with another entity, or (B) sell or convey
all or substantially all of our property or assets of business. We may
not merge or consolidate with another entity unless we make these
adjustments.
No adjustment to the Bathgate warrants will be made due to any dividends or
distributions out of earnings or grants or exercises of currently authorized or
outstanding options or issuance of shares under our benefit plans.
HOLLEB WARRANT
On July 15, 1999, we issued a warrant to Holleb & Coff entitling Holleb to
purchase 250,000 shares of our common stock at an exercise price of $0.33 per
share. The Holleb warrant expires July 14, 2009.
TUCKER ANTHONY WARRANT
On July 10, 2001, we issued a warrant to Tucker Anthony Incorporated
entitling Tucker Anthony to purchase 150,000 shares of our common stock at an
exercise price of $1.20. The Tucker Anthony warrant expires July 10, 2006.
ADJUSTMENTS TO EXERCISE PRICE
The exercise price and the number of shares of common stock issuable upon
the exercise of the Tucker Anthony warrant is subject to adjustment from time to
time upon the occurrence of any of the following events:
- If we (A) declare a dividend on our outstanding common stock payable in
shares of our capital stock; (B) subdivide or combine outstanding shares
of our common stock into a greater or smaller number of shares; or (C)
issue any shares of our capital stock by way of reclassification,
including a merger or consolidation.
CONVERTIBLE PROMISSORY NOTES
We have issued two convertible promissory notes, one to Monsun A/S due
November 1, 2001 and the other to NeoMed Innovations III, L.P. due May 15, 2002.
Each promissory note is for the principal amount of $500,000. If we prepay the
promissory notes, the holders, at their option, may elect to convert the
promissory note, plus accrued interest, into shares of our common stock at the
conversation rate of $1.00 per share. In addition, the number of shares of
common stock the promissory notes are convertible into is subject to adjustment
from time to time if we (A) subdivide, combine or reclassify our common stock,
or (B) exchange our common stock for securities or property of another company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of our common stock is LaSalle Bank
National Association, Chicago, Illinois.
33
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We file annual, quarterly and special reports and other information with
the SEC. You may read and copy any document we file with the SEC in Washington,
D.C. or at its regional offices located at:
<Table>
Public Reference Room Midwest Regional Office
450 Fifth Street, N.W. Citicorp Center
Room 1024 500 West Madison Street
Washington, D.C. 20549 Suite 1400
Chicago, Illinois 60661
</Table>
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330.
The SEC also maintains a web site that contains reports, proxy statements
and other information about issuers, like us, who file electronically. The
address of that site is: http://www.sec.gov.
The SEC allows us to "incorporate by reference" information we file with
the SEC, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is an important part of this Offering Circular. This
Offering Circular incorporates by reference:
- Annual Report on Form 10-K, as amended, for the year ended December 31,
2000;
- Quarterly Report on Form 10-Q, as amended, for the quarter ended March
31, 2001;
- Quarterly Report on Form 10-Q, as amended, for the quarter ended June 30,
2001;
- Current Report on Form 8-K dated September 17, 2001;
- Current Report on Form 8-K dated September 26, 2001; and
- Quarterly Report on Form 10-Q, as amended, for the quarter ended
September 30, 2001.
You may request a copy of the documents incorporated by reference in this
Offering Circular upon request to the company.
In addition to the foregoing, all reports and other documents that we file
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, subsequent to the date of this Offering Circular and prior to
the expiration date of the Exchange Offer shall be deemed to be incorporated by
reference into this Offering Circular and to be a part hereof from the dates of
filing of such reports and documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Offering Circular to the extent
that a statement contained herein, or in any other subsequently filed document
which also is incorporated or deemed to be incorporated by reference herein,
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Offering Circular.
34
We have appointed LaSalle Bank as the Exchange Agent for the Exchange
Offer. All completed letters of transmittal and agent's messages should be
directed to the Exchange Agent at one of the addresses set forth below. Copies
of the letters of transmittal will be accepted. All questions regarding the
procedures for tendering in the Exchange Offer and requests for assistance in
tendering your common stock should also be directed to the Exchange Agent at the
telephone number or one of the addresses set forth below:
The Exchange Agent is:
LASALLE BANK NATIONAL ASSOCIATION
<Table>
By Certified Mail: By Overnight Courier: By Hand:
LaSalle Bank National LaSalle Bank National LaSalle Bank National
Association Association Association
135 South LaSalle Street, 135 South LaSalle Street, 135 South LaSalle Street,
Suite 1960 Suite 1960 Suite 1960
Chicago, Illinois 60603 Chicago, Illinois 60603 Chicago, Illinois 60603
Attention: Mark Rimkus Attention: Mark Rimkus Attention: Mark Rimkus
</Table>
By Facsimile:
[Eligible Guarantor Institutions Only]
(312) 904-2236
To Confirm by Telephone
Or for Information Call:
(312) 904-2458
DELIVERY OF A LETTER OF TRANSMITTAL OR AGENT'S MESSAGE TO AN ADDRESS OTHER
THAN ONE OF THE ADDRESSES LISTED ABOVE OR TRANSMISSION OF INSTRUCTIONS BY
FACSIMILE OTHER THAN AS SET FORTH ABOVE IS NOT VALID DELIVERY OF THE LETTER OF
TRANSMITTAL OR AGENT'S MESSAGE.
Requests for additional copies of this Offering Circular, the enclosed
letter of transmittal or the enclosed notice of guaranteed delivery may be
directed to the Exchange Agent at the telephone number and address listed above.
Requests for copies of our Amended Quarterly Report for the period ended
September 30, 2001, our 2000 Amended Annual Report, and/or our Annual Meeting
Proxy Statement may be directed to Molecular Diagnostics.
35