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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
<Table>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER 0-935
---------------------
MOLECULAR DIAGNOSTICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<Table>
DELAWARE 36-4296006
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
414N. ORLEANS ST., SUITE 510, CHICAGO, IL 60610
(Address of Principal Executive Offices) (Zip Code)
</Table>
(312) 222-9550
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None Not Applicable
</Table>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the Company as of April 15, 2002 was $16,953,949, based upon the closing sales
price of shares of the Company's Common Stock, $0.001 par value per share
("Common Stock"), of $0.89 per share as reported on the Nasdaq Over-the-Counter
Bulletin Board Market on that date.
The number of shares of Common Stock outstanding as of April 15, 2002 was
25,684,223
Index to Exhibits is on page ii-1.
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MOLECULAR DIAGNOSTICS, INC.
ANNUAL REPORT ON FORM 10-K/A
DECEMBER 31, 2001
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
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PART I
ITEM 1. BUSINESS
General Development of Business............................. 1
Recent Developments......................................... 1
a) Bridge Financing................................... 1
b) Resignation of an Officer.......................... 1
c) SpectRx Litigation................................. 2
d) Financial Information About Industry Segments...... 2
Description of Business..................................... 2
a) General Overview................................... 2
b) Products........................................... 2
1) InPath System.................................. 2
c) In-Cell HPV Test................................... 3
d) Samba Software Products and Services............... 3
e) Automated Microscopy Instruments................... 3
1) AcCell......................................... 3
2) AcCell Savant.................................. 4
f) Back-Log of Orders................................. 4
g) Markets............................................ 4
h) Government Regulation, Clinical Studies and
Regulatory Strategy......................................... 5
i) Competition........................................ 8
j) Operations......................................... 9
k) Intellectual Property.............................. 10
l) Research and Development........................... 11
m) Component and Raw Materials........................ 12
n) Working Capital Practices.......................... 13
o) Employees.......................................... 13
Financial Information About Foreign and Domestic Operations
and Export Sales............................................ 13
Cautionary Statement for the Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995..................................................... 14
ITEM 2. PROPERTIES.................................................. 14
ITEM 3. LEGAL PROCEEDINGS........................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 16
</Table>
<Table>
<Caption>
PAGE
----
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 16
Market Information.......................................... 16
Holders..................................................... 16
Dividends................................................... 16
Stock Transfer Agent........................................ 16
Recent Sales of Unregistered Securities and Use of
Proceeds.................................................... 16
Reimbursement of Legal Fees................................. 17
ITEM 6. SELECTED FINANCIAL DATA..................................... 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 18
Results of Operations....................................... 18
a) Overview........................................... 18
b) Significant Accounting Policies.................... 20
c) Revenue............................................ 20
d) Costs and Expenses................................. 21
1) Cost of Goods Sold............................. 21
e) Research and Development........................... 21
f) Selling, General and Administrative................ 21
g) Impairment Loss.................................... 22
h) Other Income and Expense........................... 22
1) Interest Income................................ 22
2) Interest Expense............................... 23
3) Other Income and Expense, Net.................. 23
i) Net Loss........................................... 24
j) Liquidity and Capital Resources.................... 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY............. 29
ITEM 11. EXECUTIVE COMPENSATION...................................... 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON
FORM 10-K/A
Documents Filed as Part of Report........................... 43
a) Financial Statements............................... 43
b) Financial Statement Schedules...................... 43
c) Exhibits........................................... 43
Signatures............................................................ 51
Index to Financial Statements
Report of Independent Auditors........................................ F-1
</Table>
ii
<Table>
<Caption>
PAGE
----
Consolidated Balance Sheets at December 31, 2001 and 2000............. F-2
Consolidated Statements of Operations for the three years ended
December 31, 2001, 2000, and 1999................................... F-3
Consolidated Statements of Cash Flows for the three years ended
December 31, 2001, 2000, and 1999................................... F-4
Consolidated Statement of Stockholder's Equity (Deficit) for the three
years ended December 31, 2001, 2000 and 1999........................ F-6
Notes to Consolidated Financial Statements............................ F-9
EXHIBIT INDEX......................................................... ii-1
</Table>
iii
This amendment is being filed to include the information in Part III, Items
10-13, with respect to information which was previously intended to be
incorporated by reference from the definitive proxy statement of Molecular
Diagnostics, Inc. related to its 2002 Annual Meeting of Stockholders.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
We were incorporated in Delaware in December 1998 as the successor to Bell
National Corporation. Bell National was incorporated in California in 1958. In
December 1998, Bell National, which was then a shell corporation without any
business activity, acquired InPath, LLC, a development stage company engaged in
the design and development of products used in screening for cervical and other
types of cancer. For accounting purposes, the acquisition was treated as if
InPath had acquired Bell National. However, Bell National continued as the legal
entity and the registrant for Securities and Exchange Commission filing
purposes. Bell National merged into Ampersand Medical Corporation, its
wholly-owned subsidiary, in May 1999 in order to change the state of
incorporation of the company to Delaware. In January 1999, we purchased all of
the assets of Samba Technologies, SARL, ("Samba") based in France, from Unilog
Regions, S.A. In September 2001, we acquired 100% of the outstanding stock of
AccuMed International, Inc., ("AccuMed") by means of a merger of AccuMed into
our wholly-owned subsidiary. Shortly after the AccuMed merger we changed our
corporate name to Molecular Diagnostics, Inc. The name change was effected by
the merger of our wholly-owned subsidiary, Molecular Diagnostics, Inc., with and
into Ampersand Medical Corporation. In October 2001, we became a minority
shareholder in Cell Solutions, LLC, a Virginia limited liability company. Except
where the context otherwise requires, "MDI", the "Company", "we" and "our"
refers to Molecular Diagnostics, Inc., its subsidiaries, and its predecessors.
MDI is focused on the design, development and marketing of the InPath
System. The component products of the InPath System are intended to detect, at
the earliest possible stage, cancer and cancer related diseases and may be used
in a laboratory, clinic, or doctor's office. We also design and manufacture the
AcCell computer aided automated microscopy instrument and the AcCell Savant, an
instrument that includes an AcCell and software, which collects quantitative
cellular information used in support of a diagnostic process. These instruments
are sold to laboratories and medical diagnostic companies for use in the
customers' proprietary applications. The instruments, in certain instances, are
also placed in the customers' facility on a fee-for-use basis. Samba designs,
develops and markets web-enabled software based systems for image analysis,
image capture, and image transmission and management for clinical and industrial
applications. Samba also is developing the software used in the InPath System.
Nearly all of our reported revenue to date has been from the sale of Samba
products and services.
RECENT DEVELOPMENTS
BRIDGE FINANCING
On March 19, 2002, we issued a convertible promissory note in the principal
amount of $500,000 to NeoMed Innovations III, L.P. for cash. The note bears
interest at the rate of 7% per year and is due June 15, 2002. The note is
convertible at any time into shares of our common stock at a conversion rate of
no more than $1 per share, subject to adjustment. The note also may be converted
into shares of common stock on the same terms as the price per share of common
stock offered in a proposed private placement. As additional consideration for
the note, we issued NeoMed a warrant to purchase 150,000 shares of our common
stock at an exercise price of $1 per share.
RESIGNATION OF AN OFFICER
On December 31, 2001, Leonard R. Prange tendered his resignation from his
positions as our President, Chief Operating Officer, Chief Financial Officer and
Secretary. Our Board of Directors appointed Peter P.
1
Gombrich, the Chairman of the Board of Directors, in those offices until a
successor was hired. On March 3, 2002, we contracted from Tatum CFO Partners,
LLP, Michael A. Brodeur, for the possible future hire as President, Chief
Operating Officer, Chief Financial Officer, Treasurer and Secretary.
SPECTRX LITIGATION
On February 1, 2002, we reached an out-of-court settlement with SpectRx,
Inc. Under the terms of the settlement, SpectRx paid a lump sum cash payment to
us, and we have granted SpectRx an option to license certain of our technology.
Additional terms of the settlement are confidential. Under the settlement,
neither party admitted any liability or wrongdoing. Welch Allyn, Inc. also was a
party to the settlement agreement.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
We operate primarily in an industry segment involving medical devices,
diagnostics, and supplies. All of our operations during the reporting period
were conducted within this segment. We expect to continue to focus our
operations on this industry segment.
DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
The science of medical diagnostics has advanced significantly during the
past decade. Much of this advance has come as a result of new knowledge of the
human genome and related proteins, which form the foundation of cell biology and
the human body. Our goal is to utilize this research as a base to develop
screening and diagnostic testing products for cancer and cancer-related
diseases. We believe that the success of these products will improve patient
care through more accurate test performance, wider availability and cost
effective service delivery. We are developing an initial series of products to
address these criteria including sample collection devices, chemical and
biological tests, and analysis instruments and related software.
Our strategy is to develop products through internal development processes,
strategic partnerships, licenses and acquisitions of companies. This strategy
has required and will continue to require additional capital. As a result, we
will incur substantial operating losses until we are able to successfully market
some, or all, of our products.
PRODUCTS
The InPath System
We are currently developing and testing a family of products for use in
cancer screening and diagnosis. We call this family of products the InPath
System. The core of the InPath System is a combination of protein
antibodies -- the Cocktail-CVX -- that allows the InPath System to detect and
highlight abnormal cervical cells in a rapid and objective fashion. We intend to
use different antibody combinations to detect and diagnose different types of
cancer and other cancer-related diseases.
The initial application of the InPath System is designed to enhance the
current cervical cancer screening process performed in laboratories, commonly
referred to as the PAP test. Our ultimate goal is to perform this screening test
in a matter of minutes at the point of service, whether in a laboratory,
doctor's office, clinic or mobile medical vehicle. The InPath System includes
the following components:
- A unique sample collection device consisting of a small disposable
balloon, shaped to fit the cervix. The device is intended to replace the
spatula and brush currently used to collect patient cytology samples.
- A biochemical assay, fully-automated, is applied to a sample to identify
abnormal cells.
- In the laboratory version of the InPath System slide based test, this
biochemical assay is applied to sample cells released from a collection
device and deposited on a glass slide.
- In the point of service version of the InPath System, this biochemical
assay is applied directly to the cellular sample and analyzed either in
solution or while still on the collection device.
2
- An instrument which performs an automated analysis of a sample by means
of an optical scan that detects the presence of multiple wavelengths of
fluorescent light. This light is produced by fluorescent reporter tags,
which are attached to certain components used in the biochemical assay.
- In the laboratory version of the InPath System, the AcCell computer
aided automated microscopy instrument uses a camera to read the various
wavelengths of light from the collector.
- In the point of service version of the InPath System, the proprietary
instrument uses custom designed optical devices and lasers to capture
the various wavelengths of light.
- Custom designed software that controls the automated instruments and
processes the analysis of the captured light detected.
IN-CELL HPV TEST
In June 2000, we obtained world-wide exclusive license from Invirion and
Bruce Patterson, M.D., its principal, for a proprietary medical technology to
detect the presence of E6 and E7 genes of the human papillomavirus ("HPV"), a
sexually transmitted disease. These viral oncogenes signify that the virus has
assimilated into the patient's cellular DNA, and presence of E6/E7 genes is much
more closely associated with a woman's risk of developing cervical cancer than
currently marketed HPV tests. We will use this technology as part of the InPath
System to allow physicians to manage patient care. The combination of the two
tests will give the healthcare provider a better picture of the level of any
disease present and whether a patient may be at an increased risk to develop
certain diseases in the future. Based on these results, the health care provider
may prescribe a more thorough course of treatment. We began to offer this
product for sale as an Analyte Specific Reagent ("ASR") for use by laboratories
qualified to perform high complexity tests in "home-brew" applications at the
end of 2001 and recorded initial orders in the first quarter of 2002.
SAMBA SOFTWARE PRODUCTS AND SERVICES
Samba designs, develops and markets web-enabled software based systems for
image analysis, image capture, and image transmission and management in clinical
and industrial applications. Samba also designs the imaging and analysis
software used in the laboratory version of the InPath System. Samba is currently
working on control and analysis software for other instruments in the InPath
System. Nearly all of our reported revenue to date is derived from the sale of
Samba's products and services to other researchers, and other instrument
manufacturers, and pharmaceutical companies.
Samba software suites, a group of programs that may be used alone or in
combination for a particular application, allow the user to capture and share
digital images and related data. Examples of applications are radiology,
pathology, and real-time coordination between a pathologist and a physician
during surgical procedures. Samba software can create a single data folder,
where patient information, physician case notes and diagnostic images from
various sources are maintained or annotated. The software can be employed in
local or wide area networks, or through an Internet browser using
security-encrypted files. All of Samba's software, developed using Visual Basic,
C/C++ and Java, can be used on a wide variety of image capture instruments or
devices and can employ static, historical, or dynamic (live) images. Samba also
provides software customization, installation, interface, network, and Internet
consulting services to the users of its products.
AUTOMATED MICROSCOPY INSTRUMENTS
AcCell
In November 2001, Ventana Medical Systems, Inc. ("Ventana") agreed to
purchase and distribute AcCell with their image analysis software, a computer
aided automated microscopy instrument, designed to
3
help medical specialists examine and diagnose specimens of human cells. AcCell
may be delivered with a variety of features including:
- Robotic slide-feeding systems to load and unload slides from the
microscope;
- Bar code readers to ensure proper identification of samples being
analyzed;
- Electro-mechanical scanning stages to facilitate accurate slide
screening;
- Automated cellular focusing on slides; and
- Data management software to facilitate primary or secondary review of
samples and report results into record-keeping systems.
The current AcCell instrument is a key tool of our research process,
clinical trials, and the InPath System laboratory based test. During the fourth
quarter of 2001, we initiated development of the next generation of the AcCell
instrument, AcCell 2500, utilizing strategic design and manufacturing partners.
During that same fourth quarter, we also signed contracts with customers to
deliver both the current version and the next generation of AcCell instruments
beginning late in 2001. We are continuing to sell and market the instrument to
other potential customers, OEM laboratories and into the diagnostics
marketplace.
AcCell Savant
The AcCell Savant includes an AcCell base instrument as well as an
electronic imaging system and image analysis software. This instrument is
designed for use as a quantitative microscopy platform. We currently have
instruments in use in a customer's laboratory or clinical facility for research
purposes under a fee-per-use contract, which we recently extended through 2003.
As a part of the contract extension, we agreed to provide additional instruments
to handle the customer's laboratory or clinical facility for research purposes
and increased test volumes. The customer has also agreed to be a beta test site
for a new and updated version of the proprietary image analysis software used in
the application. Variations of this platform may also be used with image
analysis software developed by Samba.
BACK-LOG OF ORDERS
At December 31, 2001, we had a backlog (that is, firm purchase orders for
goods or services) of signed contracts of $1,251,362, to be completed within the
next twelve months, amounting to $150,000 for InPath System products; $995,560
for AcCell instruments and AcCell Savant products; and $105,802 for Samba-
related products.
MARKETS
According to several industry reports , there are approximately 60,000,000
PAP tests performed annually in the United States. The U.S. market for cervical
screening today amounts to approximately $1,000,000,000, based on current
average costs to perform the existing test. We do not plan to develop and train
a large direct sales force to sell the InPath System. Our initial strategy is to
market the laboratory version of the InPath System to major laboratory
organizations in the United States. Once the InPath System has been successfully
established in the laboratory market, our strategy is to form alliances with
these laboratories and other medical products distribution companies and utilize
their sales forces to broaden sales of the InPath System to hospitals, clinics,
managed care organizations and office-based physician groups.
The cost of the PAP test outside of the United States, where approximately
100,000,000 tests are performed, vary widely from country to country. Outside of
the United States, most healthcare services are provided by governmental
organizations. Healthcare in many of these countries is managed by governmental
agencies, often at the local level, making the precise number of tests performed
difficult to validate. In developing countries where healthcare, especially
cancer screening may be minimal, non-profit organizations often supplement
government health programs. We estimate the total of the non-U.S. market today
at between $500,000,000 and $600,000,000.
4
We intend to distribute InPath System into both markets pursuant to our
statutory regulatory approvals. We also anticipate that because our products are
more cost-effective and designed to increase access to cervical screening, the
potential combined market could be expanded to a level in excess of
$3,000,000,000.
The AcCell is a key proprietary component of the laboratory version of the
InPath System. In addition, we are marketing the AcCell instrument platform,
including the version currently in development, to medical diagnostic companies
as a means to automate specific diagnostic testing processes. We will attempt to
expand our existing customer base and to supply the AcCell platform to
additional customers who are interested in automating their proprietary
diagnostic testing processes. We market the AcCell as the most versatile and
cost-effective automated microscopy platform currently available. We are
expanding our existing customer base for the AcCell Savant and will continue to
market this product to customers interested in image analysis and quantitative
microscopy. We are introducing a new version of the analysis software used on
the AcCell Savant in mid 2002. We believe these innovations will allow us to
increase the level of potential customer interest in the instrument, thus
enabling us to expand our market.
Samba currently sells its products and services through direct sales and
representatives in Europe and through a distribution arrangement in Central and
South America. Prior to 1999, Samba had a distribution arrangement in North
America. Since our acquisition of Samba, we have marketed Samba products in the
United States. Samba is adding to its distribution agreements to cover specific
countries or market segments in Europe, Asia, the Middle East and North Africa.
During 2000, we added a full time marketing person to introduce the Samba
products to a broad range of potential customers and distribution partners in
the United States. This potential market includes large laboratories, integrated
healthcare delivery networks, web-based medical information providers, and
laboratory and hospital information system vendors. We have licensed Samba
software to a large medical diagnostics company in the United States and have
several pilot-study installations currently in place or planned for 2002 in the
United States.
GOVERNMENT REGULATION, CLINICAL STUDIES AND REGULATORY STRATEGY
The development, manufacture, sale, and distribution of some of our
products is regulated by the Food and Drug Administration ("FDA") and comparable
authorities in certain states and foreign countries. In the United States, the
Food, Drug and Cosmetic Act (the "FD&C Act") and related regulations apply to
some of our products. These products cannot be shipped in interstate commerce
without prior authorization from the FDA.
Medical devices may be authorized by the FDA for marketing in the United
States either pursuant to a pre-market notification under Section 510(k) of the
FD&C Act, commonly referred to as a 510(k) notification, or a pre-market
approval application (a "PMA"). The process of obtaining FDA marketing clearance
and approval from other applicable regulatory authorities is costly and there
can be no guarantee that the process will be successful. The 510(k)
notifications and PMA applications typically require preliminary internal
studies, field studies, and/or clinical trials, in addition to submission of
other design documentation. We manage the regulatory process through the use of
consultants, Clinical Research Organizations, ("CROs") and members of our
Medical Advisory Board.
A 510(k) notification, among other things, requires an applicant to show
that its products are "substantially equivalent" in terms of safety and
effectiveness to an existing FDA cleared predicate product. An applicant may
only market a product submitted through a 510(k) notification after the FDA has
issued a written notification determining the product has been found to be
substantially equivalent.
To obtain PMA approval for a device, an applicant must demonstrate,
independent of other similar devices, that the device in question is safe and
effective for its intended uses. A PMA must be supported by extensive data,
including pre-clinical and clinical trial data, as well as extensive literature
and design documentation to prove the safety and effectiveness of the device.
The PMA process is substantially longer than a 510(k) notification process.
During the review period, the FDA may conduct extensive reviews of our clinical
trial center documentation and our manufacturing facilities and processes or
those of our strategic partners. In addition, the FDA may request additional
information and clarifications and convene a physician advisory panel to assist
in its determination.
5
The FD&C Act generally bars advertising, promoting, or other marketing of
medical devices that the FDA has not approved or cleared. Moreover, FDA
enforcement policy strictly prohibits the promotion of known or approved medical
devices for non-approved or "off-label" uses. In addition, the FDA may withdraw
product clearances or approvals for failure to comply with regulatory standards.
Our current and prospective foreign operations are also subject to
government regulation, which varies from country to country. Many countries,
directly or indirectly through reimbursement limitations, control the price of
most healthcare products. Developing countries put restrictions on the
importation of finished products, which may delay such importation. European
Directives establish the requirements for medical devices in the European Union.
The specific directives are the Medical Device Directive (MDD 93/42/EEC) and the
In-Vitro Diagnostics Device Directive (IVDD/98/79/EEC). The International
Organization for Standardization ("ISO") establishes standards for compliance
with these directives, particularly for quality system requirements.
The FDA has adopted regulations governing the design and manufacture of
medical devices that are, for the most part, harmonized with the ISO's quality
system standards for medical devices. The FDA's adoption of the ISO's approach
to regulation and other changes to the manner in which the FDA regulates medical
devices will increase the cost of compliance with those regulations.
We will be subject to certain registration, record-keeping and medical
device reporting requirements of the FDA. Our manufacturing facilities, or those
of our strategic partners, will be obligated to follow the FDA's Quality System
Regulation and be subject to periodic FDA inspections. Any failure to comply
with the FDA's Quality System Regulation or any other FDA or other government
regulations would have a material adverse effect on our future operations.
The InPath System will need to be cleared for marketing by the FDA, as
described above, prior to its sale and use in the U.S. clinical market. We
cannot be sure whether or when the FDA will clear the InPath System.
Internationally, the InPath System may be subject to various government
regulations, which may delay the introduction of new products and services and
adversely affect our business.
The InPath System may be subject to regulation in the United States under
the Clinical Laboratory Improvement Act ("CLIA"). CLIA establishes quality
standards for laboratories conducting testing to ensure the accuracy,
reliability and timeliness of patient test results, regardless of where the test
is performed. The requirements for laboratories vary depending on the complexity
of the tests performed. Thus, the more complicated the test, the more stringent
the requirement. Tests are categorized as high complexity, moderate complexity
(including the category of provider performed microscopy) and waived tests. CLIA
specifies quality standards for laboratory proficiency testing, patient test
management, quality control, personnel qualifications and quality assurance, as
applicable.
The FDA is responsible for categorization of commercially marketed
laboratory tests. The Centers for Disease Control ("CDC") is responsible for
categorization of laboratory procedures such as provider-performed microscopy.
For commercially-marketed tests, the FDA now determines the appropriate
complexity category as it reviews pre-market submissions for clinical laboratory
devices. Manufacturers are asked to include an extra copy of the package insert
identified as "FOR CLIA CLASSIFICATION" in the submission for product
commercialization (i.e., 510(k) or PMA). Manufacturers are notified of the
assigned complexity through routine FDA correspondence (that is, as an enclosure
with a clearance or approval letter or as a separate letter in response to other
submissions). Categorization is effective as of the date of the written
notification to the manufacturer.
We are developing the InPath System to be user-friendly, require minimum
operator training, and have safety and operating checks built into the
functionality of the instruments. We believe that our efforts will result in the
FDA and/or the CDC assigning the lowest possible classification of the InPath
System. If, however, these products are classified into a higher category, it
may have a significant impact on our ability to market the product in the United
States.
6
We continue to conduct clinical studies and trials on our InPath System
during its development. These studies and trials vary in terms of number of
patient samples, individual product components, specific processes and
conditions, purpose, and other factors which may affect the results.
We have publicly reported the results of some of the studies of the InPath
System and Cocktail-CVX to various medical meetings, in publications and in
public announcements. In January and March 2000, April 2001, and most recently
during the third quarter of 2001, we reported results on specific studies
conducted to demonstrate the system's capability to detect cervical cellular
abnormalities. The average sensitivity for these reported studies and trials was
in excess of 90% and the average specificity was approximately 80%. The
sensitivity factor, the test's performance in detecting versus missing actual
disease, commonly called false negatives, is critical in terms of patient
health. The specificity factor, the test's performance in correctly identifying
patients with disease versus those without, commonly called false positives, is
related to over-treatment and healthcare economics.
In each of the reported studies and trials, the InPath System demonstrated
nearly 100% accuracy in detecting high-grade cervical disease and cancer. In
addition, the results demonstrate that the InPath System produces more accurate
results than the current PAP test. A study conducted in 2000 on the PAP test,
which reviewed the results of 94 previous studies, showed an average sensitivity
of 74% and an average specificity of 68%.
Data from studies of other InPath System products has also been presented
at medical conferences. A study of our In-Cell HPV test showed the test
accurately detected 100% of patients with high-grade disease and 64% of patients
with low-grade disease.
In a presentation of early results of the clinical trial of the InPath
System collector, data showed that the cytology reports on samples collected
with the InPath System collector were at least as accurate as those collected
with the conventional brush/spatula method. The InPath System collector also
proved to be more comfortable for the patient and provided an easier and shorter
examination for the physician. The results of the additional clinical patients
data were submitted in January 2002.
We believe the results of these studies support the continued development
process of the InPath System. We are moving ahead with additional studies and
clinical trials, some of which were begun in late 2001 and others are planned to
begin in mid-2002.
We are using the data from our completed and ongoing clinical trials and
studies to offer for sale our InPath System as an ASR in countries such as the
United States, Mexico, Peru, Chile, India, China and other developing nations.
We are not permitted to market non-ASR our products in certain countries,
including the United States, with clinical or diagnostic claims until we have
received clearance from the appropriate regulatory agency. ASR tests make no
medical claims but may be used by laboratories, who are qualified to perform
high complexity tests, and physicians as components of "home-brew" procedures.
We received our first U.S. ASR orders in early 2002.
We are pursuing regulatory approval of the InPath System products through a
series of submissions and in some cases, using data from a single clinical
study. This tiered approach is designed to accelerate revenue opportunities for
the InPath System in the short term and to drive adoption of our innovative
products over the long term, while minimizing the expense and time involved in
undertaking the appropriate study.
The first stage of the overall strategy involved the submission of our e(2)
Collector for approval as a substantially equivalent device to the brush and
spatula method of gathering samples used in the current PAP tests. The 510(k)
notification was completed and filed in late September 2001. Subsequent data was
furnished to the FDA in the first quarter of 2002.
The second stage of our overall strategy involves a continuing study of the
InPath System and Cocktail-CVX. This submission will cover the InPath System as
a means to eliminate true negative samples from further testing. We anticipate
completion of this portion of the study and submission of the data to the FDA by
the third quarter of 2002. We will also submit the data to foreign regulatory
authorities that have
7
jurisdiction over these products. Subsequently, we will be collecting and
submitting data for the InPath System point of service test.
We anticipate that we will begin launching our clinical trials of the
InPath In-Cell HPV test during the fourth quarter of 2002 and expect completion
of the trial and submission of the data to the FDA during the first quarter of
2003, depending on our ability to raise necessary capital.
If the submissions for the various InPath System products are cleared by
the FDA for sale in the U.S. market or approved for sale by foreign regulatory
agencies, we intend to sell the cleared products in the respective clinical
markets.
INPATH SYSTEM PRODUCT INTRODUCTION TIMELINES
<Table>
<Caption>
PRODUCT PROCESS TIMELINE
- ------- ------- --------
e(2) Collector.............. Clinical trials Completed
Regulatory submission & review Filed September 28, 2001
Regulatory clearance anticipated 2nd Quarter 2002
US sales 2nd Quarter 2002
International sales 2nd Quarter 2002
Cocktail-CVX................ Clinical trials Current through 3rd Quarter 2002
Regulatory submission & review 3rd Quarter 2002
Regulatory clearance projected 3rd Quarter 2003
US sales 4th Quarter 2003
International sales (CE Mark) 4th Quarter 2002
Cocktail-CVX ASRs........... US sales 3rd Quarter 2002
International sales 3rd Quarter 2002
In-Cell HPV test............ Clinical trials 4th Quarter 2002
Regulatory submission & review 1st Quarter 2003
Regulatory clearance anticipated 4th Quarter 2003
US sales 4th Quarter 2003
International sales (CE Mark) 2nd Quarter 2003
In-Cell HPV ASRs............ US Sales 1st Quarter 2002
International sales 4th Quarter 2001
</Table>
We currently distribute AcCell, AcCell Savant and Samba software products
into commercial markets that do not require regulatory clearance. In order to
distribute these products for use in certain clinical applications, however, we
will be required to conduct clinical trials and to make submissions to
applicable regulatory agencies for clearance. We do not have any current plans
to make any submissions to the FDA or other foreign regulatory agencies covering
these products. In the future, some of our customers may include these products
in submissions to the FDA or other foreign regulatory agencies covering their
use in a customer's proprietary diagnostic or clinical process.
COMPETITION
Historically, competition in the healthcare industry has been characterized
by the search for technological innovations and efforts to market such
innovations. The cost of healthcare delivery has always been a significant
factor in markets outside of the United States. In recent years, the U.S. market
has also become much more cost conscious. We believe technological innovations
incorporated into certain of our products offer cost effective benefits that
address this particular market opportunity.
Competitors may introduce new products that compete with ours or those
which we are developing. We believe the portion of our research and development
efforts devoted towards continued refinement and cost
8
reduction of our products will permit us to remain or become competitive in all
of the markets in which we presently distribute or intend to distribute our
products.
The market for our cancer screening and diagnostic product line is
significant but highly competitive. We are unaware of any other company that is
duplicating our efforts to develop a fully-automated, objective analysis and
diagnostic system for cervical cancer screening that can be used at the point of
service. There are a number of companies attempting to develop in-vivo systems
to differentiate between cancerous, pre-cancerous and normal tissue. Our
competition includes many companies with financial, marketing, and research and
development resources substantially greater than ours. There can be no assurance
that our technological innovations will provide us with a competitive advantage.
Similarly, the worldwide markets in which we sell Samba's products are
highly competitive. Several U.S. and foreign companies are developing and
marketing products and services that compete directly with Samba's products and
services. However, Samba has the benefit of a robust customer base throughout
Europe, as well as a few long-term customers in the United States. Our strategy
is to use these customers as references in our marketing efforts to expand the
sales and use of Samba products.
There are several U.S. and foreign companies that produce automated and
quantitative microscopy instruments. In the past, the market for these
instruments has been primarily limited to research applications. However, as a
result of recent advances in the area of molecular diagnostics, we believe the
market for such instruments and applications will increase over the next several
years. We believe our instruments are the most versatile cost-effective
platforms available in the current market whether as an outright purchase or a
fee-for-use application.
We believe that all of our products must compete primarily on the basis of
accuracy, functionality, product features and effectiveness of the product in
standard medical applications. We also believe that cost control and cost
effectiveness are additional key factors in achieving or maintaining a
competitive advantage. We focus a significant amount of product development
effort on producing systems and tests which will not add to overall healthcare
cost. Specifically, there are several companies whose technologies are similar
to, or overlap with MDI's. These include Cytyc Corporation, Tripath Corporation,
Digene Corporation, ChromaVision Systems, Inc., and Applied Imaging, Inc.
However, none of these companies have developed the fully integrated
requirements necessary to deliver a fully-automated solution. To develop
fully-automated solutions, companies must have technologies that fully integrate
microscopy instruments, imaging software and cancer-detecting biochemistry. At
most, our competitors have two of the three technologies. Only our Company has
developed and integrated all three technologies into a solution for cervical
cancer screening.
OPERATIONS
We conduct research and development work for the InPath System using a
combination of our employees, contract workers, and contract laboratory
facilities which are primarily located in Chicago, Illinois, Minneapolis,
Minnesota, San Antonio, Texas and in other various states.
We do not intend to invest capital to construct and maintain a
medical-products manufacturing facility and all its related quality systems
requirements. Our strategy is to utilize the operations, quality systems, and
facilities of a contract manufacturer specializing in medical products
manufacturing to meet our current and future needs. This strategy covers
manufacturing requirements related to InPath System chemical components, plastic
and silicone parts for the sample collector, InPath System instruments and the
AcCell and AcCell Savant instruments.
We have preliminary agreements, including design and development work, with
manufacturers of medical grade components to supply low volumes of the silicone
balloon and other components of the sample collection device. We are negotiating
additional agreements with manufacturers to supply much higher volumes that will
be needed once we begin to sell the sample collection device. These
manufacturers have the capacity to handle high volume production through
facilities in both the United States and several foreign countries.
We entered into a strategic partnership with Cell Solutions, LLP, in
October 2001, to design, develop and improve leading-edge manual slide based
preparation systems with state-of-art biochemical preservatives.
9
We also have a preliminary agreement with a large manufacturer of chemical
and biological tests to integrate the various combinations of ingredients that
make up our assay Cocktail-CVX into a single product delivered in high volume.
We have a sufficient supply of AcCell platforms. The computers, cameras,
automated slide staining equipment and slide preparation equipment, that make up
the remainder of the laboratory version of the InPath System, are available from
several manufacturers. These instruments are used in a sequential process. The
AcCell platform on which the actual sample screening is done is computer
controlled by our proprietary Samba software.
We have preliminary agreements with medical instrument manufacturers
covering the design, development and initial manufacturing of both the next
generation AcCell platform and the point of service instrument.
Samba develops its software products at its own facility located in France.
Additional software development work is conducted at our facility in Chicago.
The Samba software products are installed and integrated with off-the-shelf
computer and imaging components at the customer's location, or at our French or
Chicago facility, immediately prior to delivery. Consulting services are
generally performed at the customer's location, or at our French or Chicago
facility, using customer data and communications access. We have added staff at
our Chicago facility to support the delivery of Samba and image analysis
software products to customers in the United States.
INTELLECTUAL PROPERTY
We rely on a combination of patents, licenses, trade names, trademarks,
know-how, proprietary technology, and policies and procedures to protect our
intellectual property. We consider such security and protection a very important
aspect of the successful marketing of our products in the U.S. and foreign
markets.
In the United States we follow the practice of immediately filing a
provisional patent application for each invention as soon as it has been
determined that the invention meets the minimum standards for patentability.
While a provisional patent application does not provide any formal rights or
protections, it does establish an official priority date for the invention that
carries over to any utility patent applications that are derived from the
provisional application with the next 12 months. A utility patent application
begins the process that can culminate in the issuance of a U.S. patent. We
convert each outstanding provisional patent application into some number of
utility patent applications within this 12 month period. In most cases each
provisional application results in one utility filing. However, in some cases a
single provisional application has generated two independent utility filings or
multiple (up to five) provisional applications have been consolidated into a
single utility application. During the prosecution of a utility application, the
U.S. Patent Office may require us to divide the application into two or more
separate applications or we may file a continuation-in-part patent application
that expands upon the technology claimed in another patent application and which
has the potential of superceding the earlier application. For these reasons,
estimating the number of patents that are likely to issue based upon the numbers
of provisional and utility applications filed is problematical.
Prior to filing a utility application in the United States, we review the
application to determine whether obtaining patent coverage for the invention
outside of the United States is necessary or desirable to support our business
model. If so, a patent application is filed under the Patent Cooperation Treaty
(PCT) at the same time that the U.S. filing is made. Depending upon the nature
of the invention and business considerations, we typically specify the patent
offices in three to six countries to which the PCT application is to be
submitted after the initial examination is completed.
As of December 31, 2001 we have filed ten U.S. utility patent applications
and four PCT applications. We have been informed that one of the U.S. utility
applications has been "allowed" and will issue as a U.S. Patent during the first
quarter of 2002. Twelve additional provisional U.S. patent applications have
also been filed and are expected to be converted to utility applications during
the first half of 2002. These patent applications cover all aspects of the
InPath system including, but not limited to the point of service instrument; the
personal and physicians collectors; and the slide-based test. As a result of the
acquisition of
10
AccuMed, we acquired seventeen issued U.S. patents, six U.S. utility patent
applications; two U.S. design patents; twenty-six foreign patents; and
twenty-four foreign patent applications primarily covering the AcCell and AcCell
Savant technology and related software. We also hold an exclusive license from
Invirion and Dr. Bruce Patterson covering a patent and certain medical
technology for detection of E6 and E7 genes in cancer causing types of HPV
virus. We purchased the license for cash, future royalties, and other
consideration.
We continue to prepare additional patent applications for processes and
inventions arising from our research and development process. The protections
provided by a patent are determined by the claims that are allowed by the patent
office that is processing the application. During the patent prosecution process
it is not unusual for the claims made in the initial application to be modified
or deleted or for new claims to be added to the application. For this reason it
is not possible to know the exact extent of protection provided by a patent
until it issues.
Patent applications filed prior to November 29, 2000 in the United States
are maintained in secrecy until any resulting patent issues. As there have been
examples of U.S. patent applications that have remained "in prosecution" and,
therefore, secret for decades, it is not possible to know with certainty that
any U.S. patent that we may own, file for or have issued to us will not be
pre-empted or impaired by patents filed before ours and that subsequently issue
to others. Utility patent applications filed in the United States after November
29, 2000 are published eighteen months after the earliest applicable filing
date. As this revised standard takes full effect, the chances that such a
"submarine" patent will impair our intellectual property portfolio will be
significantly reduced. Foreign patent applications are automatically published
eighteen months after filing. As the time required to prosecute a foreign
utility patent application generally exceeds eighteen months and the foreign
patents use a "first to file" rather than a "first to invent" standard, we do
not consider submarine patents to be a significant consideration in our patent
protection outside of the United States.
Samba software and technology consists primarily of trade secrets,
know-how, and technical documentation. To further enhance security, we restrict
access to our software source codes and the details of the step-by-step
instructions for command, control and operation of a software program.
Furthermore, a hardware security key, or "dongle," is required in order for a
user to operate the software.
Our products are or will be sold worldwide, under trademarks that we
consider to be important to our business. We own the Samba trademark and trade
names of "Samba", "InPath", "e2 Collector", "Cocktail-CVX", "In-Cell HPV Test",
"AcCell" and "AcCell Savant". We may file additional U.S. and foreign trademark
applications in the future.
Our future technology acquisition efforts will be focused towards those
technologies that have strong patent or trade secret protection.
We cannot be sure that patents or trademarks issued or which may be issued
in the future will provide us with any significant competitive advantages. We
cannot be sure any of our patent applications will be granted or that validity
or enforceability will not be successfully challenged. The cost of any patent
related litigation could be substantial even if we were to prevail. In addition,
we cannot be sure that someone will not independently develop similar
technologies or products, duplicate our technology or design around the patented
aspects of our products. The protection provided by patents depends upon a
variety of factors, which may severely limit the value of the patent protection,
particularly in foreign countries. We intend to protect much of our core
technology as trade secrets, either because patent protection is not possible
or, in our opinion, would be less effective than maintaining secrecy. However,
we cannot be sure that our efforts to maintain secrecy will be successful or
that third parties will not be able to develop the technology independently.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on introducing new
products as well as enhancing our existing product line. We utilize both
in-house and contracted research and development efforts. We believe research
and development is critical to the success of our business strategy. During the
years 2001, 2000, and
11
1999, our research and development expenditures were approximately $4,034,000,
$3,426,000, and, $1,782,000, respectively.
We completed clinical testing of the sample collection device, the e(2)
Collector, and submitted the results of this trial to the FDA in the form of a
510(k) notification on September 28, 2001.
The design and validation of the laboratory version of the InPath System,
including image analysis software developed in-house by Samba, is currently in
process. We have reviewed and validated the performance of over thirty
biological components for use in our Cocktail-CVX. We used samples from patients
with normal and abnormal (those with cancer or its precursors) pathology reports
in our studies. We selected a specific combination of chemical and biological
components for the Cocktail-CVX and commenced testing in the fourth quarter of
2001.
The development of the In-Cell HPV test for use in flow-cytometry and slide
based applications is current in process. We anticipate launching the clinical
trial for the In-Cell HPV test in the fourth quarter of 2002.
The design specifications for the point of service analysis instrument are
complete and several prototypes have been assembled. Additional development work
will progress with an outside strategic design/manufacturing partner based upon
further funding.
Our research work in the area of chemical and biological components will
continue for the foreseeable future as we seek to refine the current process and
add additional capabilities to our analysis procedure, including the detection
of other forms of cancer and precursors to cancer.
We have entered into a contract with an outside strategic
design/manufacturing partner to develop the next generation AcCell instrument
platform. The design specifications are complete and prototypes are in process.
We expect development completion of a new version of the AcCell Savant
image analysis software, which will make the device more user friendly and
in-line with current software technologies in the second quarter, 2002.
We anticipate the need to invest a substantial amount of capital in the
research and development process, including the cost of clinical trials, in
order to complete the development and use of the InPath System and bring it to
market.
COMPONENTS AND RAW MATERIALS
Low cost products are a key component of our business strategy. We designed
the sample collection device using widely available and inexpensive silicone and
plastic materials. These materials are available from numerous sources and can
be fabricated into finished devices by a variety of manufacturers within and
outside the United States. We can use sources outside of the United States so
that we may service a particular market at the lowest possible cost.
The instrument components of the laboratory version of the InPath System
are available from a number of sources. Computers, cameras, automated
slide-staining instruments and automated slide-preparation instruments are
currently available from several large manufacturers. We have an adequate supply
of current AcCell platforms used in the InPath System and have contracted for
the design and manufacture of the next generation of the AcCell platform.
The point of service instruments are designed to use off-the-shelf
components and a limited number of custom manufactured parts or use a third
party manufactured instrument. The strategic partner chosen to manufacturer the
unique final instrument, as is the case with the company building the
prototypes, will be responsible for sourcing, fabrication, and assembly of all
components into the final instrument.
Samba's software products are based on leading edge technology and are
compatible with numerous off-the-shelf computers, computer components,
microscopes, and imaging equipment.
12
WORKING CAPITAL PRACTICES
As of December 31, 2001, we have not sold any InPath System products,
except for ASR's. During the final quarter of 2001 we sold several AcCell
instrument platforms, billed and received fees under an AcCell Savant
fee-for-use contract and closed on the first sale of Samba software products in
the United States. We have financed our U.S. operations and research and
development by raising funds through the sale of debt or equity. We will
continue to use these methods to fund our operations until such time as we are
able to generate adequate revenues and profits from the sales of some or all of
our products.
The sale of Samba products, totaling approximately $802,000 for the year
ended December 31, 2001, outside the United States generates revenue that is
used to support Samba operations. Samba has obtained a 137,204 Euro
(approximately $123,000) revolving line of credit from its bank to provide
supplemental funds, as needed. Availability of funds under the line of credit is
based on and secured by Samba's monthly billings to customers. The line is
especially helpful since collection periods for many customers may exceed
standard thirty-day terms. Customers requiring government funding to pay their
bills or customers outside France often take longer than thirty days to pay. At
times Samba requires a deposit on an order before ordering any equipment or
beginning any work.
Similarly, we believe that future sales of the InPath System or other
products into foreign markets will result in collection periods that may be
longer than those expected for domestic sales of these products. Our strategy
will be to use letters of credit or other secured forms of payment, whenever
possible, in sales of products in foreign markets.
EMPLOYEES
As of March 28, 2002, we employed a total of eighteen full-time employees
in the United States and eleven full-time employees in France. The Samba
employees in France are represented by a national labor union (customary to all
French workers) and Samba management considers its relations with its employees
to be good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Our current operations outside North America are conducted by Samba. Sales
of Samba products have accounted for a nearly all of our sales reported to date.
Markets outside of North America are an important factor in our business
strategy. Any business that operates on a worldwide basis and conducts its
business in one or more local currencies is subject to risks of fluctuations in
the value of those currencies against the dollar. It is subject to changing
political climates, differences in culture and the local practices of doing
business. It is also subject to North American and foreign government actions,
such as export and import rules, tariffs and duties, embargoes, trade sanctions.
We do not regard these risks, however, a significant deterrent to our strategy
to introduce our InPath System to foreign markets.
As we begin to market and sell our InPath System, we will closely review
our foreign operational practices. We will attempt to adopt strategies to
minimize risks of changing economic and political conditions within foreign
countries.
13
<Table>
<Caption>
2001 2000 1999
(IN THOUSANDS) -------- ------- -------
NORTH AMERICA:
Revenue................................................ $ 75 $ 0.0 $ 0.0
Profit (loss).......................................... $(16,468) $(6,506) $(3,932)
Total Assets........................................... $ 10,876 $ 3,617 $ 933
FRANCE:
Revenue................................................ $ 802 $ 1,094 $ 1,040
Profit (loss).......................................... $ (162) $ (105) $ (294)
Total Assets........................................... $ 750 $ 958 $ 938
</Table>
As part of the Series D convertible preferred stock offering in November
2001, we licensed to Ventana software and software technology. We did not
recognize revenue related to the license and technology development agreement
during 2001.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
There are forward-looking statements throughout this report that are not
historical facts, including statements in this Item 1 and statements contained
in material incorporated into this report by reference. These statements are
based on our current expectations and plans and involve many risks and
uncertainties. Some of these risks and uncertainties are factors that affect all
international businesses, while others are specific to us and the areas of the
medical products industry in which we operate.
The factors below in some cases have affected our historical results and
could affect our future results, causing them to differ, possibly materially,
from those expressed in this report's forward-looking statements. These factors
include: economic conditions; technological advances in the medical field;
demand and market acceptance risks for new and existing products, technologies,
and healthcare services; the impact of competitive products and pricing;
manufacturing capacity; new plant start-ups; U.S. and international regulatory,
trade, and tax policies; product development risks, including technological
difficulties; ability to enforce patents; and foreseeable and unforeseeable
foreign regulatory and commercialization factors.
Currency fluctuations are also a significant variable for global companies,
especially fluctuations in local currencies where hedging opportunities are
unreasonably expensive or unavailable. If the value of the U.S. dollar
strengthens relative to the currencies of the countries in which we market or
intend to market our products, our ability to achieve projected sales and net
earnings in such countries could be adversely affected.
We believe that our expectations with regard to forward-looking statements
are based upon reasonable assumptions within the bounds of our current business
and operations knowledge, but we cannot be sure that our actual results or
performance will conform to any future results or performance expressed or
implied by any forward-looking statements.
ITEM 2. PROPERTIES
We occupy approximately 5,700 square feet of leased space at 414 N. Orleans
St., Suite 510, Chicago, Illinois 60610, under a five-year lease, which expires
in September 2006. This space houses our executive offices and a research
laboratory. Samba leases approximately 300 square meters of space in a suburb of
Grenoble, France, at 53, chemin du Vieux Chene, 38240 Meylan. The Samba lease
has a term of nine years expiring in 2008. Samba has the option to terminate the
lease at the end of each three-year period. The location houses Samba's
administrative, sales, and research and development activities. We consider our
facilities to be well utilized, well maintained, and in good operating
condition. We consider the facilities to be suitable for their intended purposes
and to have capacities adequate to meet current and projected needs for our
operations.
14
ITEM 3. LEGAL PROCEEDINGS
On October 20, 2000, we filed suit in Circuit Court of Cook County,
Illinois (Case No. 00 CH 15652), against SpectRx, Inc. and Welch Allyn, Inc. Our
suits sought injunctive relief and damages from SpectRx based on a complaint of
fraud and breach of certain confidentiality agreements with regard to our
business plans, marketing plans, and technology related to in-vivo diagnostic
devices. Our claim arose from disclosure of confidential information to SpectRx
in the course of negotiations contemplating a joint venture to develop new
medical products. The information covered cancer detection systems relying on
fluorescence technologies as well as bio-molecular marking agent for use in
applications within and outside of the body. We also provided SpectRx with
marketing plans, revenue, income and cash flow projections, product development
and launch plans, and product distribution strategies. In addition, we provided
SpectRx with certain confidential technical information regarding patent
applications, measurement technologies, design specifications, quantitative
analyses, optimization techniques, positional information for cellular mapping,
and other technical specifications. Subsequent to the disclosure of our
information to SpectRx, they entered into a business arrangement with Welch
Allyn to develop products of a similar nature to ours. The suit also charged
SpectRx and Welch Allyn with misappropriation of our trade secrets in violation
of the Illinois Trade Secrets Act.
Our suit was filed in response to a suit filed by SpectRx in the Superior
Court of Gwinnett County, Georgia (Civil Action NO. 00-A-7604 1), seeking a
declaratory judgment (but no monetary damages or other relief) that SpectRx did
not breach the confidentiality agreements as charged in our suit. On July 5,
2001, we filed counterclaims, similar to the claims outlined in our Illinois
suit, to the SpectRx action in Georgia.
On February 1, 2002, we reached an out-of- court settlement with SpectRx.
Under the terms of the settlement, SpectRx paid a lump sum cash payment to us,
and we have granted SpectRx an option to license certain of our technology.
Additional terms of the settlement are confidential. Under the terms of the
settlement, neither party admitted any liability or wrongdoing. Welch Allyn also
was a party to the settlement agreement.
Dawn H. Grohs, a former employee of the Company, filed suit against the
Company and certain affiliated companies, as well as two of the Company's senior
officers (C.A. No. 02-C-1010 (U.S. District Court for the Northern District of
Illinois). Ms. Grohs' claims fraud, unjust enrichment, misrepresentation, breach
of contract and quantum meruit related to her assertions that the defendants
allegedly failed to provide her with equity; tortuous interference with
contractual relations and intentional interference with contractual relations
based on alleged encouragement of changes to the business relationship with Ms.
Grohs; breach of the covenant of good faith and fair dealing, negligent
infliction of emotional distress and intentional infliction of emotional
distress based on defendants' treatment of Ms. Grohs; and violation of state law
for alleged unfair and deceptive acts by defendants for the purpose of inducing
Ms. Grohs to continue to provide services without compensation. Ms. Grohs is
seeking $85,000 in wages, $40,250 in expenses, equity for contributions and
efforts during the formation of certain of the Company's affiliates, payment of
a sum to be determined by the court for the intentional and/or negligent
infliction of emotional distress, a finding that the actions of defendants
constitute unfair and deceptive acts, and that the court treble the damages
awarded. In addition to the specific relief described above, each count seeks an
award of attorneys' fees and costs and such other and further relief as the
court deems just and appropriate.
Prior to our acquisition of AccuMed, Garrett Realty, Inc. filed suit
against AccuMed for unpaid rent and related expenses under a lease for premises
located at 900 and 920 N. Franklin in Chicago, Illinois (Circuit Court of Cook
County (Case No. 01 M1 725821)). Garrett is claiming approximately $50,000 is
due them. Even though AccuMed has since vacated the premises, Garrett also is
continuing to claim rent on an ongoing basis. Following completion of MDI's
merger with AccuMed, management decided to vacate AccuMed's leased facility and
consolidate its operations into MDI's headquarters facility. Management is
expected to enter into negotiations with AccuMed's landlord in order to reach a
settlement arrangement relating to the remaining minimum lease payments. Since
MDI has a continuing obligation for the minimum lease payments, MDI recorded a
$290,000 lease obligation in accounting for the AccuMed merger based on the
present value of the future payments.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter of 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock is quoted on the Nasdaq Over-the-Counter Bulletin Board
under the symbol "MCDG" (prior to September 25, 2001 our common stock traded
under the symbol "AMPM"). AccuMed's common stock was quoted on the Nasdaq
Over-the-Counter Bulletin Board under the symbol "ACMI".
The following table lists the high and low closing sale prices per share of
our common stock for the periods indicated, as reported on the Nasdaq
Over-the-Counter Bulletin Board. These prices represent prices between dealers,
and may not include retail mark-ups, mark-downs, or commissions.
<Table>
<Caption>
CLOSING SALES PRICE
RANGE OF COMMON
STOCK
-------------------
HIGH LOW
-------- --------
Year Ended December 31, 2001
1st Quarter................................................. $2.060 $0.810
2nd Quarter................................................. $1.590 $ .970
3rd Quarter................................................. $1.200 $ .360
4th Quarter................................................. $1.250 $ .630
Year Ended December 31, 2000
1st Quarter................................................. $5.563 $1.000
2nd Quarter................................................. $4.125 $2.375
3rd Quarter................................................. $3.500 $1.938
4th Quarter................................................. $2.875 $0.750
</Table>
HOLDERS
As of March 31, 2002, we had approximately 1,369 record holders of our
shares of common stock. This number does not include other persons who may hold
only a beneficial interest, and not an interest of record, in our common stock.
DIVIDENDS
We have not paid a cash dividend on common shares, and the Board of
Directors is not contemplating paying one for the foreseeable future. We have
accrued non-cash cumulative dividends for various preferred share offerings
through December 31, 2001 totaling approximately $2.6 million.
STOCK TRANSFER AGENT
Our stock transfer agent is LaSalle Bank NA, 135 South LaSalle Street,
Chicago, IL 60603, and its telephone number is (312) 904-2000.
RECENT SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS
In November 2001, we completed a private placement of Series C convertible
preferred stock to accredited investors pursuant to Regulation D. We received
$3,635,000 in net proceeds from the sale of 1,331,499 shares of Series C
convertible preferred stock. The Series C convertible preferred stock has a
dividend rate of 10% and is convertible into our common stock at a conversion
rate equal to $0.60 per share. In
16
connection with the private placement, we paid $359,000 in cash and issued
597,750 warrants to purchase our common stock at a purchase price of $1.00 per
share to Bathgate McColley Capital markets as compensation for their services as
placement agent.
Also in November 2001, we completed a private placement of Series D
convertible preferred stock to Ventana pursuant to Regulation D. We received
$1,750,000 in net proceeds from the sale of 175,000 shares of Series D
convertible preferred stock. The Series D convertible preferred stock has a
dividend rate of 10% and is convertible into our common stock at a conversion
rate equal to $1.00 per share. We also issued a three-year warrant to Ventana
entitling the holder to purchase 1,750,000 shares of our common stock at an
exercise price of $1.15 per share. The sale of the Series D Convertible
preferred stock to Ventana was made in conjunction with a license and technology
agreement under which Ventana was granted a perpetual license to Samba software
and agreed to purchase AcCell instruments over a three year period.
In December 2001, we completed an exchange offer in which our shareholders
tendered 10,859,688 shares of our common stock in exchange for approximately
434,388 shares of Series E convertible preferred stock. The Series E convertible
preferred stock has a dividend rate of 10% and is convertible into our common
stock at any time after December 1, 2002 at a conversion rate equal to $0.80 per
share.
REIMBURSEMENT OF LEGAL FEES
On November 1, 2001 MDI issued a Convertible Promissory Note to Schwarz,
Cooper, Greenberger & Krauss ("SCGK") in exchange for $500,000 in legal
services. The Note bears interest at the rate of 12% per year and is due in five
installments. The Note is convertible into Common Stock of MDI upon issuance of
the Note at a conversion price equal to the stock price on the conversion date.
In accordance with Promissory Note provisions, SCGK forgave the final
installment on the note which was due February 28, 2002. Therefore, MDI did not
include the final payment in its debt balance as of December 31, 2001.
MDI executed a settlement agreement with SpectRx in January 2002 regarding
the outstanding litigation in which SCGK served as MDI's counsel. MDI also
executed an agreement with SCGK for its outstanding legal fees, dated February
13, 2002, that stipulated that MDI would provide SCGK with warrants to purchase
750,000 shares of common stock, a promissory note in the amount of $118,500 and
a personal guaranty of the note from Peter Gombrich. MDI was required to pay a
$25,000 fee upon the execution of the agreement.
On February 13, 2002, MDI issued 750,000 warrants to SCGK for its common
stock. The warrants are exercisable at $.01 per share. SCGK is entitled to an
additional set of 750,000 warrants in the event of the default of the promissory
note as described above. The initial 750,000 warrants represent payment for the
SpectRx settlement while the second 750,000 warrants represent a contingent
payment in the event of default under the note. The expiration date of the
warrant is February 12, 2012 and warrants may not be exercised until February
14, 2003.
The Company has not made any payments on the Promissory Note and therefore
the note is in default. The default provisions in the note agreement indicate
that the warrant issued in conjunction with the settlement agreement will be
increased from 750,000 to 1,500,000 shares. Terms of the default are currently
being re-negotiated.
On April 5, 2002 SCGK agreed not to enforce for 60 days a judgment entered
against the Company in favor of SCGK for the amount of $100,000 plus interest
accruing at 12% annually.
17
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data shown below is derived from the audited
Consolidated Financial Statements and notes included elsewhere in this Annual
Report on Form 10-K.
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
<Table>
<Caption>
2001 2000 1999
----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Net Sales................................... $ 877 $ 1,094 $ 1,040
Operating loss.............................. $ (16,087) $ (6,688) $ (4,117)
Net loss available for common
shareholders............................. $ (19,791) $ (6,611) $ (4,226)
PER SHARE DATA:
Net loss.................................... $ (0.62) $ (0.24) $ (0.29)
Weighted average shares outstanding......... 32,019,531 27,869,274 14,336,667
BALANCE SHEET DATA:
Working deficit............................. $ (4,472) $ (3,301) $ (3,204)
Total assets................................ $ 11,626 $ 4,575 $ 1,871
Notes payable: current...................... $ 1,424 $ 1,105 $ 1,095
Notes payable: long-term.................... $ 0 $ 0 $ 26
Stockholders' equity (deficit).............. $ 4,623 $ (125) $ (2,040)
</Table>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
We were incorporated in Delaware on December 15, 1998, as the successor to
Bell National Corporation which was incorporated in California in 1958.
On December 4, 1998, Bell National, then a shell corporation without any
business activity, acquired InPath, LLC, a development-stage company engaged in
the design and development of products used in screening for cervical and other
types of cancer. In the acquisition, Bell National issued 4,288,790 shares of
common stock and warrants to purchase 3,175,850 shares of common stock to the
members of InPath in exchange for their membership interests. The senior
executives of InPath assumed management control of the Company.
For financial reporting and accounting purposes the acquisition was
accounted for as a reverse acquisition whereby InPath was deemed to have
acquired Bell National. However, Bell National was the continuing legal entity
and registrant for SEC filing purposes and income tax filing purposes, until its
merger into Ampersand in May 1999. Because Bell National was a non-operating
public shell company with nominal assets and InPath was a private operating
company, the acquisition was recorded as the issuance of stock for the net
monetary assets of Bell National, accompanied by a recapitalization and no
goodwill or other intangible assets were recorded in accordance with generally
accepted accounting principles.
On September 25, 2001, the Company changed its corporate name to "Molecular
Diagnostics, Inc." in order to better represent its operations and products. The
name change was affected by the merger of Ampersand's wholly owned subsidiary,
Molecular Diagnostics, Inc., with and into Ampersand. The Company retained its
Certificate of Incorporation, except as amended to reflect its new name, bylaws
and capitalization.
The Company is focused on the design, development and marketing of the
InPath System of products. These products are intended to detect cancer and
cancer related diseases. These products may be used in a laboratory, clinic or
doctor's office.
18
The Company has a wholly owned subsidiary, Samba Technologies, Sarl. Samba
designs, develops, and markets web-enabled software based systems for image
analysis, image capture, and image transmission and management for clinical and
industrial applications. Samba is also developing software used in the InPath
System. Nearly all revenues, since the inception of the Company, have been
generated by Samba.
On September 17, 2001, the Company completed its acquisition of AccuMed
pursuant to a merger. In consideration for the acquisition, the Company issued
3,911,245, shares of its common stock to holders of AccuMed common stock, and
218,438 shares of its Series A convertible preferred stock to holders of AccuMed
Series A preferred stock. The value of the transaction, based on the fair value
of the shares of common stock and preferred stock issued by the Company, the
value of options and warrants assumed, the direct acquisition costs incurred,
and the fair market value of tangible and intangible assets purchased, as
determined by a third-party valuation, was approximately $14,178,000.
On October 11, 2001, MDI obtained a 30% investment in Cell Solutions, LLC.
Cell Solutions was formed for the purposes of developing and improving slide
preparation systems. As consideration, MDI provided Cell Solutions five-year
warrants to purchase 172,120 shares of common stock with an exercise price of
$0.82. These warrants were valued using Black-Scholes and determined to have a
value of $127,000. MDI has included the value of these warrants as an investment
at December 31, 2001. MDI determined the fair value of the investment to be
impaired at December 31, 2001. The investment was written down to zero as a
result of the uncertainty of future benefit or revenue stream.
MDI is contractually committed to issue a total of 1,549,086 warrants with
the same terms based upon delivery of certain products by Cell Solutions. As of
December 31, 2001, Cell Solutions had not delivered these products and MDI was
not liable for the issuance of the warrants.
The Company has incurred a significant operating loss since its inception.
Additionally, the Company has raised approximately $23,511,000 since March 1998.
The Company expects that significant on-going operating expenditures will be
necessary to successfully implement its business plan and to develop,
manufacture and market its products. These circumstances raise substantial doubt
about the Company's ability to continue as a going concern. Implementation of
the Company's plans and its ability to continue as a going concern may depend
upon it securing substantial additional financing. Management's plans include
efforts to obtain additional capital. During the nine-months ended September 30,
2001, the Company raised approximately $5,840,000 including $500,000 received as
a deposit in December 2000 from the private sale of 1,499,856 shares of its
Series B convertible preferred stock (See Note 13 to the Consolidated Financial
Statements). The Company received $725,000 in cash in exchange for four
convertible promissory notes. The notes have interest rates of 12% to 15% per
annum and are due between November 15, 2001 and May 15, 2002. The notes are
convertible into the common stock of the Company at a conversion price of $1.00
per share. The Company also received $535,000 in cash in exchange for promissory
notes which were due between February 28, 2001 and December 31, 2001. These
notes have interest rates between 9% and 15% per annum. In November 2001 the
Company received $3,635,000 from the private sale of 1,331,499 shares of Series
C convertible preferred stock and $1,750,000 from the private sale of 175,000
shares of Series D convertible preferred stock (See Note 13 to the Consolidated
Financial Statements). In December 2001, the Company's shareholders tendered
10,859,688 shares of common stock in exchange for approximately 434,388 shares
of Series E convertible preferred stock. There can be no assurance that the
Company will continue to be successful in raising capital. If the Company is
unable to obtain additional capital or generate profitable sales revenues, the
Company may be required to curtail its product development and other activities
and may even be forced to cease operations.
As mentioned in Item 1, for financial reporting and accounting purposes, we
treated the acquisition of InPath by Bell National as if InPath had acquired
Bell National. We recorded the issuance of common stock, combined the equity of
the two companies, and did not record any goodwill. Information presented in our
Consolidated Financial Statements includes the operations of InPath from March
16, 1998 (inception) and the operations of the combined company from December 4,
1998.
19
SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition. Molecular Diagnostics, Inc. recognizes revenue upon
shipment of product or license to customers and no remaining Company obligations
or contingencies exist, or in the case of sales of software by its wholly owned
subsidiary Samba, upon shipment if persuasive evidence of an arrangement exists;
sufficient vendor-specific objective evidence exists to support allocating the
total fee to all elements of the arrangement; the fee is fixed or determinable;
and collection is probable.
Revenue from ongoing client maintenance is recognized ratably over the
post-contract support term, which is generally twelve months. Revenue from
training services and professional services is recognized when the service is
completed. Revenue from implementation and installation services is recognized
using the percentage of completion method. Samba calculates percentage of
completion based on the estimated total number of hours of service required to
complete an implementation project and the number of actual hours of service
rendered. Implementation and installation services are generally completed
within 120 days.
License, Patents, and Technology. License, patents, and purchased
technology are recorded at their acquisition cost. Costs to prepare patent
filings are capitalized when incurred. Costs related to abandoned or denied
patent applications are written off at the time of abandonment or denial.
Amortization is begun as of the date of acquisition or upon the grant of the
final patent. Costs are amortized over the asset's useful life, which ranges
from two to seventeen years. The Company assesses licenses, patents, &
technology quarterly for impairment.
Stock Compensation. As permitted by the Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), Molecular
Diagnostics, Inc. uses the intrinsic value method to account for stock options
as set forth in Accounting Principles Board No. 25, Accounting for Stock Issued
to Employees (APB 25).
Application of Black-Scholes Valuation Model. In applying the
Black-Scholes valuation model, the Company has used an expected dividend yield
of zero, a risk-free interest rate of 6% for 2001 and 2000, a volatility factor
of 90% for 2001 and 216% for 2000, and a fair value of the underlying common
shares of closing market price on the date of the grant. The expected life
equaled the term of the warrants, options, or restricted shares.
REVENUE
Revenues for the year 2001 were $877,000, a decrease of $217,000, or 19.8%,
over revenues for the year 2000. The 2001 revenue decrease was a result of a
decrease in revenues at Samba of $292,000, offset by $75,000 of revenues
generated by MDI in the United States. Samba's revenue declined primarily as a
result of the timing of completing contract deliverables in 2001 compared to
2000 and a decline in the value of the Euro compared to the U.S. Dollar. This
decline in the value of the Euro reduced Samba's revenues by approximately
$44,000. Samba conducts its operations in local currency, the Euro. We convert
the local currency into U.S. Dollars for consolidated reporting purposes.
Samba's revenue recognition is also subject to the timing of receipt and
completion of customer contracts from period to period. We may experience
quarter-to-quarter and year-to-year variability in revenues as a result of these
contract-timing issues until we begin to market some or all of our other
products. MDI generated revenues were comprised of $52,000 from the acquisition
of AccuMed's contracts and $23,000 from the re-sale of one AcCell Unit.
All of our reported revenues for the years 2000 and 1999, amounting to
$1,094,000 and $1,040,000 respectively, were produced through the sales of Samba
products and services. Revenues for the year 2000 reflect an increase of
$54,000, or 5%, over 1999 revenues. During 2000, the average exchange rate of
the Euro (the European Union currency to which the French Franc is fixed) to the
U.S. Dollar declined by approximately 15%. This decline reduced the translated
U.S. Dollar value of Samba's 2000 revenues by approximately $169,000.
20
COSTS AND EXPENSES
Cost of Goods Sold
Cost of goods sold for 2001 amounted to $476,000, a decrease of $161,000,
or 25.3% over 2000 cost of goods sold, resulting primarily from reductions of
net sales and decreases in software products sold with higher gross margins.
Cost of goods sold for 2000 and 1999, amounting to $637,000 and $542,000
respectively, relate to the Samba revenues and represent the cost of computer
and imaging hardware, purchased services and products and software engineering
labor and related expenses. The increase in 2000 costs over 1999 costs reflects
the increase in the level of business as well as a change in the product-mix
components of sales. The hardware component of Samba sales generates a much
higher level of cost and a lower gross margin, than do the software or service
components of sales. Samba may supply necessary hardware or the customer may
supply hardware directly. There is no set pattern in contract hardware and
software components.
RESEARCH AND DEVELOPMENT
We devote a substantial amount of our resources to research and development
("R&D") related to new products, including markers, tests, instruments and
software applications, as well as modifications and refinements of our existing
products.
In 2001, our R&D expenses were $4,034,000, an increase of $608,000, or
17.7% over 2000 R&D expenses a result of increased product development costs for
the Cocktail CVX and HPV assays, the next version of AcCell -- the AcCell 2500,
and the Point-of-Service (POS) product. R&D expenses consist of costs related to
specific development programs with scientists and researchers at universities
and hospitals; full scale device development contracts begun during 1999 with
industrial design and manufacturing companies covering the disposable and
instrument components of the InPath System; payments to medical and engineering
consultants for advice related to the design and development of our products and
their potential uses in the medical technology marketplace, and payroll related
costs for in-house engineering, scientific, laboratory, software development;
and research management staff.
In 2000, our R&D expenses were $3,426,000 compared to $1,782,000 in 1999,
an increase of 92%. During 2000, we incurred significant additional costs of
$160,000 to expand our in-house research related staff; $170,000 to cover
additional medical and technical consultants, including costs related to full
year engagements for those added in 1999; $260,000 to expand our contract
research staffs and related laboratory operations; $110,000 to cover costs
related to clinical trials and studies; and $700,000 in additional outside
design and development costs related to instruments and disposable test
products. These costs were offset by a reduction in software development costs
related to Samba products of approximately $150,000.
In order to reduce our R&D expenses, a portion of the compensation paid to
consultants may be in the form of awards of our common stock (with restrictions
attached) or grants of options to purchase our common stock. Since these awards
and/or option grants cover services to be performed over a future time period,
we are required to calculate their market value at the end of each reporting
period until the work is complete. Included in the above R&D expense amounts for
2001, 2000 and 1999 are non-cash costs of $215,000, $446,000 and $67,000
respectively, related to the calculated cost of these share awards and options
that were charged to expense in each period. We also closed our Cleveland
laboratory facility in January, 2002.
SELLING, GENERAL AND ADMINISTRATIVE
In 2001, selling, general and administrative expenses ("SG&A") were
$6,347,000, an increase of $2,628,000, or 70.7%, over similar expenses for the
year 2000. This increase is primarily due to increased salaries and wages and
related payroll costs and other operating expenses resulting from AccuMed merger
operations integration. Significant components of SG&A are compensation costs
for executive, sales and administrative personnel, professional fees primarily
related to legal or accounting services, travel costs, fees for public and/or
investor relations services, insurance premiums, recruitment fees, marketing
related costs, amortization and depreciation.
21
In 2000, SG&A expenses were $3,719,000 compared to $2,833,000 in 1999, an
increase of 31.3%. The increase in SG&A expenses for 2000 included additional
costs of approximately $210,000 for staff and expenses related to the newly
established sales and marketing activity; $100,000 in legal costs primarily
related to litigation; and $200,000 in travel costs related to the sales and
marketing activity, management of a broader operation, and continued efforts to
raise new equity.
In 1989, we issued 450,000 stock appreciation rights ("SARs") to various
individuals. In 1990, Cadmus Corporation, a company controlled by Alexander
Milley, one of our directors and a significant stockholder, purchased the SARs
from the individual holders. These SARs entitle the holder to receive a payment
equal to the amount by which the market price of our common stock, at the time
of exercise, exceeds $0.30 per share. We can make the payment in cash or by
issuing an equivalent number of shares of common stock. The SARs expired in
November 2001. We are required to charge an amount to expense at the end of each
interim reporting period, which represents the excess of the closing market
price of our common stock over the exercise price at that point in time, until
the SARs are exercised or expire. The charge to expense is cumulative over the
life of the SARs and increases or decreases from period to period in conjunction
with the movement of our common stock price. Included in the above SG&A expense
amounts for 2001, 2000 and 1999 are non-cash expenses (or reductions of
expenses) of ($79,000), $91,000 and $231,000 respectively, which represent the
calculated cost of the SARs charged to expense in each period.
In order to reduce our cash SG&A expenses, we may issue shares of our
common stock (with restrictions attached) or grant options, or warrants to
purchase shares of our common stock in lieu of compensation or payments for
financial advisory work, including advice on deal structure, finder fees,
investor relations and introductory services, and general financial and
investment advice. If the services are completed, we record an expense based on
the value of the services. If the services are to be completed over a future
period of time, we are required to calculate a market value for the shares,
options, or warrants at the end of each reporting period until the services are
completed. Included in the above SG&A expense amounts for 2001 and 2000 are non-
cash expenses of $443,081 and $66,000 respectively, related to the calculated
cost of these share awards, options and warrants, charged to expense in each
period. There were no such non-cash costs in 1999.
IMPAIRMENT LOSS
In 2001, MDI recorded impairment losses aggregating $6,107,000. These
losses are comprised of $5,833,000 for the impairment of goodwill recognized in
MDI's acquisition of AccuMed and $274,000 for the write-off of the full amount
of MDI's pending patent portfolio. At December 31, 2001, management determined
several factors, principally that certain contracts being negotiated by AccuMed
failed to materialize, indicating that the carrying value of goodwill from the
AccuMed acquisition was impaired. Management also performed an assessment of the
development of MDI's pending patent portfolio. As a result of the developmental
nature of the portfolio and significant uncertainty surrounding the ultimate
issuance of the related patents, MDI recorded an impairment loss.
OTHER INCOME AND EXPENSE
Interest Income
During 2001, we earned interest income on notes from Seaside Partners,
L.P., a related party, and AccuMed of, $25,000, and $85,000, respectively. The
interest earned on the AccuMed notes during 2001 and 2000 amounting to $95,000
was reclassified from accrued interest receivable to inter-company accounts
payable in accordance with generally accepted accounting principles when we
closed the acquisition of AccuMed in September 2001.
During 2000, we earned interest income on the notes receivable from Seaside
Partners, L.P. and AccuMed amounting to $73,000. We had no interest income in
1999.
22
Interest Expense
In 2001, our interest expense amounted to $526,000, an increase of
$291,000, or 123.8% over 2000 interest expense. The increase reflects interest
on a higher level of average outstanding debt during the current year. The
amount includes a non-cash expense of $226,000 representing the amortization of
debt discount on two $500,000 convertible promissory notes issued in September
and November 2000 and an additional $500,000 convertible promissory note issued
in May of 2001 in exchange for cash under the same terms as the notes issued in
2000. The conversion price of the 2001 note was less than the market price of
our common stock at the time of the transaction and the holders of this note are
also considered to have a beneficial conversion feature. We recorded the
calculated value of the beneficial conversion feature amounting to $50,000 as
debt discount, and we are amortizing the discount as additional interest expense
over the life of the note. The 2001 amount also includes an additional non-cash
expense of $11,589 representing the value of warrants issued as additional
consideration for a $470,000 note issued to Azimuth Corporation in February
2001, a $100,000 note issued to Azimuth Corporation in August 2001, a $100,000
note issued to Cadmus Corporation in July 2001, and a $25,000 note issued to
Northlea Partners, Ltd. in August 2001. Alexander Milley, one of our directors
and significant stockholder, has a controlling interest in and is considered a
control person of Azimuth Corporation and Cadmus Corporation, and John Abeles,
M.D., also one of our directors, is the managing general partner of Northlea
Partners, Ltd. Lastly, the 2001 amount includes the calculated value of a
warrant issued to Azimuth Corporation in exchange for their waiver of the
conversion feature of the September 2000 convertible promissory note and the
calculated value of a warrant issued to Monsun, SA as consideration for a three
month extension of the due date of the convertible promissory note issued in
November 2000.
In 2000, our interest expense amounted to $235,000 compared to $86,000 in
1999, an increase of 173.3%. The increase reflects a higher rate of interest
paid on new borrowings issued during the year offset by elimination of interest
on a series of 6% convertible subordinated notes issued during 1999, which
automatically converted into common stock on April 28, 2000. The 2000 amount
also includes a non-cash expense of $139,000 representing the amortization debt
discount. We issued two $500,000 convertible promissory notes, to Azimuth
Corporation in September 2000 and to Monsun, SA in November 2000, in exchange
for cash. The notes provide the holder with an option to convert the principal
of the note into our common stock at a conversion price of $1.00 per share any
time after 180 days from the original note issue date. Since the conversion
price was less than the market price of our common stock at the time of the
transaction the holders are considered to have a beneficial conversion feature.
We are required to record the calculated value of this beneficial conversion
feature, amounting to $250,000, as debt discount, and to amortize the discount
as additional interest expense over the life of the note.
In 1999 we incurred interest expense of $86,000. The amount primarily
reflects the interest due on the series of 6% convertible subordinated notes due
2000 issued during 1999.
Other Income and Expense, Net
In 2001, we recorded a $127,000 expense for write-off of warrants earned by
Cell Solutions, LLP, a Virginia limited liability company, as a result of the
uncertainty of future benefit or revenue stream.
In 2000, we had a dispute with our former outside legal counsel regarding
services and fees. We recorded the disputed fee expense represented by invoices
and a note payable in 2000 and 1999. In September 2000, we settled the dispute
for approximately $226,000, less than the existing liability, and recorded the
amount as other income. To be consistent with 1999 consolidated reporting we
also treated $14,000 in refundable income taxes, related to a R & D credit due
to Samba under French taxation rules, as other income. In 1999, we wrote off
$100,000 paid to AccuMed as compensation for a "no shop" clause in a Letter of
Intent whereby we sought to license and purchase certain automated microscopy
technology. We were unable to reach a final agreement and terminated
negotiations in September 1999. We also moved our corporate offices to a new
location and wrote off $21,000 representing the net remaining value of leasehold
improvements related to the old space.
In accordance with French taxation rules, Samba recorded refundable income
taxes in 1999 in the amount of $100,000. These refundable taxes represent a
research and development credit against future
23
income taxes or a direct cash refund available to Samba. For consolidated
reporting purposes, we treated this credit as other income.
NET LOSS
Our net loss for 2001 was $16,630,000. Cumulative dividends on the
outstanding Series B convertible preferred stock, Series C convertible preferred
stock, Series D convertible preferred stock and Series E convertible preferred
stock totaled $562,000. Deemed dividends on the Series B and Series C
convertible preferred stock, resulting from the beneficial conversion feature of
the Series B and Series C convertible preferred stock totaled $2,559,000. The
combined total of the loss and the preferred dividends results in a net loss
available to common stockholders of $19,791,000, or $0.62 per share on
32,019,531 weighted average shares outstanding. The 2001 weighted average shares
outstanding reflect additional shares of common stock issued during the year and
the exchange of 10,859,688 shares of common stock into shares of Series E
convertible preferred stock in December 2001.
Our net loss for 2000 was $6,611,000, or $0.24 per share, on 27,869,274
weighted average outstanding shares. The 2000 weighted average outstanding
shares are 94% higher than the 1999 average. During the year we sold additional
shares of our common stock in a private offering and a series of 6% convertible
subordinated notes issued in 1999 that were automatically converted into shares
of common stock in 2000.
Our net loss for 1999 was $4,226,000, or $0.29 per share, on 14,336,667
weighted average outstanding shares.
We did not have any shares of preferred stock outstanding in 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
R&D, clinical trials and other studies of the components of our InPath
System, conversions from designs and prototypes into product manufacturing,
initial sales and marketing efforts, medical consultants and advisors, and
research, administrative, and executive personnel are and will continue to be
the principal basis for our cash requirements. We have provided operating funds
for the business since its inception through private offerings of debt and
equity to limited numbers of U.S. and foreign accredited investors. We may be
required to make additional offerings in the future to support the operations of
the business until some or all of our products are introduced into the market.
We used $7,963,000 and $5,916,000 during 2001 and 2000, respectively, in
operating activities.
At December 31, 2001 we had cash on hand of $1,025,000, an increase of
$1,012,000 over cash on hand at December 31, 2000 of $13,000. This increase
results from increased funding activities through our convertible notes and
preferred share offerings.
During January 2000, funds received under a late 1999 private offering
cleared our bank and we completed the sale of 1,712,120 shares of common stock
for total gross proceeds of $565,000.
Between February 7, 2000 and April 30, 2000 we sold 3,583,330 shares of our
common stock at a price of $1.50 per share, for total proceeds of $5,329,000 in
a private offering. We received $23,000 in cash proceeds during 2000 from the
exercise of a warrant to purchase 70,000 shares of our common stock. We also
received cash proceeds of $17,000 from the sale of 21,989 shares of common stock
to employees in accordance with the terms of the Employee Stock Purchase Plan.
Of the 3,583,330 shares sold in the private offering, we sold 1,333,333
shares of our common stock to Seaside Partners, L.P., a hedge fund, at $1.50 per
share, for total proceeds of $2,000,000. Dr. Denis M. O'Donnell, one of our
directors, is a member and manager of Seaside Advisors, L.L.C., which provides
investment management services to Seaside Partners, L.P. In lieu of cash, we
agreed to accept payment in the form of a $2,000,000 promissory note due July
27, 2000, bearing interest at the rate of 8% per year. We agreed to extend the
original due date of the note until November 30, 2000. Seaside Partners, L.P.
made payments against the principal of the note amounting to $1,550,000 during
2000. The remaining principal amount of the
24
note was repaid between June 2001 and August 2001. Accrued interest due on the
note amounting to $88,000 was paid in August and December of 2001.
Between March 1, 1999 and June 30, 1999, we issued a series of 6%
convertible subordinated notes in exchange for $994,600 in cash. A $25,000 note
was converted into our common stock on June 4, 1999. All of the remaining notes,
plus accrued interest due thereon, were automatically converted into our common
stock on April 28, 2000. Notes held by Seaside Partners, L.P. and Leonard R.
Prange, our former President and COO/CFO were automatically converted into our
common stock under the same terms and conditions as all the other notes in the
series.
In July 1999, Samba negotiated a Revolving Credit Line with Banc National
de Paris ("BNP"). The terms of this revolver provide that Samba may borrow, in
the form of an advance on payment against monthly billings, up to a maximum of
137,204 Euros, approximately $123,000 U. S. Dollars. The terms of the revolver
require Samba to pay interest at Euribor plus 2.5% (5.9% at December 31, 2001)
on advances outstanding under the revolver and grant BNP a security interest in
Samba accounts receivable. The revolver was renewed in January 2002. As of
December 31, 2001, an amount of $177,000 was outstanding against the revolver.
On December 10, 1999, we issued a senior convertible promissory note to
Azimuth Corporation, a company controlled by Alexander M. Milley, one of our
directors and a significant shareholder, in exchange for $50,000 in cash. The
conversion price of the note was $0.20 per share. On February 22, 2000 Azimuth
exercised its right to convert the note and accrued interest due thereon into
256,250 shares of our common stock.
On March 30, 2000, we signed an agreement with AccuMed to resolve a dispute
over a Patent and Technology License Agreement ("License"), originally dated
September 4, 1998, between InPath and AccuMed. The Amendment to the License
("Amendment"), contemplated by that agreement, was signed on June 9, 2000. The
Amendment assigned the License directly to us, eliminated the minimum royalty
payment schedule in the original License, and reduced the royalty rate to 4%. We
made cash payments to AccuMed under the Amendment totaling $600,000, issued a
$100,000 convertible promissory note, which we prepaid on December 11, 2000, and
issued 128,571 shares of our common stock to AccuMed. The Amendment provided
that the cash payments represent the final minimum license payment and advanced
non-refundable royalty payments. The Amendment also provided that the $100,000
principal amount of the note and the 128,571 shares of common stock at a value
of $450,000 also represented advanced non-refundable royalty payments.
As a further result of the signing of the Amendment in June 2000, we
recorded $500,000 in prepaid royalties. This amount represented the reversal of
an accrual of minimum royalty payments due under the original License and their
related charge to expense, including $250,000 accrued and charged to expense in
1999.
On September 22, 2000, in conjunction with the signing of a Letter of
Intent to merge with AccuMed we loaned AccuMed $300,000 in cash in exchange for
a promissory note bearing interest at 2.5% above the prime rate. On February 7,
2001, this note was cancelled and replaced by a new promissory note, secured by
AccuMed's inventory, issued in conjunction with the signing of a definitive
agreement under which we acquired AccuMed.
On December 28, 2000, we loaned AccuMed an additional $30,000 in
conjunction with the merger. The loan was included in the new secured promissory
note signed on February 7, 2001.
On February 7, 2001, we signed a definitive agreement to merge our
subsidiary, AccuMed Acquisition, Corp., with AccuMed. We formed AccuMed
Acquisition Corp. to acquire AccuMed. Under the terms of this agreement, we
exchanged 3,911,245 shares of our common stock for all of the outstanding common
stock of AccuMed. In addition, we exchanged 218,438 shares of our Series A
convertible preferred stock for all of the outstanding convertible preferred
stock of AccuMed. The 218,438 shares of our Series A convertible preferred stock
are convertible into approximately 95,000 shares of our common stock. On
September 17, 2001 we completed the acquisition of AccuMed. This acquisition was
recorded as a purchase business combination in accordance with Statement of
Financial Accounting Standards No. 141, "Business Combination". The
25
Company has consolidated the results of operations of AccuMed from the date of
acquisition. Fair market value of tangible and intangible assets of AccuMed have
been determined by a third-party valuation resulting in a total purchase price
of approximately $14,178,000.
In June 2000, we entered into a License and Technology Agreement with
Invirion, a company controlled by Dr. Bruce Patterson, granting us worldwide
exclusive rights to certain medical technology for the detection of oncogenic
(cancer causing) types of the HPV. This agreement provides for $500,000 in cash
payments and warrants to purchase 400,000 shares of our common stock at an
exercise price of $0.01, based on technology delivery milestones. On September
12, 2000, we signed an addendum to the agreement. The first addendum provided
that Invirion's ownership and patentability of the technology was established,
the initial HPV probe was delivered, and the first development milestone was
met, and that the $250,000 in cash payments due would be paid in equal
installments over a period of ten months. We also issued warrants to purchase
250,000 shares of our common stock at an exercise price of $0.01 per share in
accordance with the terms of the agreement and first addendum. We used the
Black-Scholes valuation model to determine a fair value for the warrants of
$530,000 and recorded the amount as capitalized license and additional paid in
capital. In January 2001, we signed the second addendum. This second addendum
provided that the second development milestone was met in December 2000 and that
$150,000 cash payment due would be paid in equal installments over a period of
six months beginning in January 2000. The second addendum also amended the
agreement to more closely reflect Dr. Patterson's inventorship and ownership of
the technology. In June 2001, we signed the third addendum to the agreement.
This third addendum provided that the final milestone would be split into three
parts and that the first one was met in June 2001. As a result, we paid Dr.
Patterson $35,000 in cash and issued a warrant to purchase 50,000 shares of our
common stock at an exercise price of $0.01 per share. We used the Black-Scholes
valuation model to determine the fair value for the warrants of $49,000 and
recorded the amount as capitalized license costs and additional paid in capital.
We also signed a Development Agreement with Invirion and Dr. Patterson in
June of 2000 to complete the development and integration of the HPV product with
the InPath System. We paid $100,000 in cash and continue to pay $5,000 monthly
consulting fees to cover all costs to complete the development project.
On September 22, 2000, we issued a convertible promissory note to Azimuth
in exchange for $500,000 in cash. The note bears interest at the rate of 15% per
year and was due twelve months from the date of issue. The note was convertible
into our common stock, any time after the expiration of the first 180 days of
the loan term, at a conversion price of $1.00 per share. Since the conversion
price was less than the market price of our common stock at the time of the
transaction the holders are considered to have a beneficial conversion feature.
We recorded a value of $125,000 to this beneficial conversion feature as debt
discount, reducing the carrying amount of the debt. The debt discount is
amortized as additional interest expense over the life of the note. During 2001
and 2000, we recorded non-cash charges of $91,000 and $34,000 respectively, to
interest expense to reflect the amortized amount of debt discount. In August
2001, we issued Azimuth a warrant, which entitled the holder to purchase 500,000
shares of our common stock at an exercise price on $1.00 per share in exchange
for Azimuth's agreement to relinquish the conversion feature of the note and
extend the due date. We used the Black-Scholes valuation model to calculate a
fair value of the warrant of $25,000 and charged the amount to interest expense.
We repaid the note in full in November 2001. We used $300,000 in proceeds from
this note to fund the AccuMed notes described above. The balance was used to
fund license payments and the initial payment of a settlement arrangement with
our former legal counsel.
On November 1, 2000, we issued a convertible promissory note to Monsun, AS
in exchange for $500,000 in cash. The note bears interest at the rate of 15% per
year and was due twelve months from the date of issue. The note is convertible
into our common stock, any time after the expiration of the first 180 days of
the loan term, at a conversion price of $1.00 per share. Since the conversion
price was less than the market price of our common stock at the time of the
transaction the holders are considered to have a beneficial conversion feature.
We recorded a value of $125,000 to this beneficial conversion feature as debt
discount, reducing the carrying amount of the debt. The debt discount is
amortized as additional interest expense over the life of the note. During 2001
and 2000, we recorded charges of $104,000 and $21,000 to interest expense to
reflect the amortized amount of debt discount. On October 31, 2001 we issued a
warrant to Monsun, AS entitling the holder to purchase 100,000 shares of our
common stock at an exercise price of $0.60 per share, a discount of
26
20% to the market price of our common stock at the time, as consideration for
Monsun's agreement to extend the due date of the note until January 31, 2002. We
used the Black-Scholes valuation model to determine a fair value of the warrant
of $25,000 and charged the amount to interest expense during the period.
On December 4, 2000, we issued a promissory note to Azimuth in exchange for
$200,000 in cash. The note bore interest at the rate of 12% per year and was due
December 31, 2000. As additional consideration for the note we issued Azimuth a
warrant to purchase 50,000 shares of our common stock at a price of $0.937 per
share, the approximate market price of our common stock at the time. Since the
note was not repaid until February 20, 2001 we were required to pay a 3%
increase in the rate of interest from January 1, 2001. We also were required to
issue Azimuth two warrants, each to purchase 12,500 shares of our common stock,
at an exercise price of $0.01 per share.
On December 11, 2000, we issued a promissory note to Azimuth in exchange
for $100,000 in cash. The note bore interest at the rate of 12% per year and was
due 180 days from date of issue. As additional consideration for the note we
issued Azimuth a warrant to purchase 1,000,000 shares of our common stock at a
price of $1.25 per share, an approximate 15% premium to the market price of our
stock at the time. The proceeds of this note were used to repay a convertible
promissory note to AccuMed in conjunction with negotiations to acquire AccuMed.
On February 1, 2001 and February 7, 2001, we issued promissory notes to
Azimuth in exchange for $25,000 and $470,000, respectively, in cash. Those notes
bore interest at the rate of 15% per annum. Those notes were required to be
repaid from the proceeds of any new offering of debt or equity undertaken by us
subsequent to the dates of the notes. As additional consideration for the note
issued on February 7, 2001, we granted Azimuth a warrant to purchase 1,000,000
shares of common stock at an exercise price of $0.25 per share, an approximate
83% discount from the $1.50 market price of the common stock on the date the
warrant was issued. That warrant expires five years from the date of the grant.
We determined the value of the warrant to be $12,000, using the difference
between the fair market interest rate and the stated interest rate. We used
$470,000 to partially fund the loan to AccuMed made on February 7, 2001, in
connection with the signing of a definitive agreement to acquire AccuMed. We
repaid both notes and accrued interest on February 20, 2001. Since the February
7, 2001 note was repaid on February 20, 2001, we charged the entire value of the
warrant, issued as additional consideration for the note, to interest expense
during February 2001. We also repaid two additional promissory notes, issued in
December 2000, and accrued interest on February 20, 2001. The proceeds of the
February 2001 notes were used to fund a portion of the loan to AccuMed upon the
signing of the agreement on February 7, 2001, pursuant to which AccuMed was
merged into our subsidiary.
In February 2001, we sold 1,333,856 shares of Series B convertible
preferred stock to a limited number of U.S. and foreign accredited investors in
a private offering. We received net cash proceeds from the offering of
$5,176,000, including $500,000 received as a deposit in December 2000. On
February 20, 2001, we used $809,000 of the proceeds to repay these two
additional notes issued to Azimuth in December 2000, and all of the related
accrued interest.
Several advisory groups that assisted us in the February 2001 offering were
compensated through the payment of $159,000 in cash, the issuance of 374,000
shares of common stock and the issuance of warrants to purchase 534,000 shares
of common stock at an exercise price of $1.20 per share.
On May 15, 2001, we completed the sale of the remaining 166,000 shares of
authorized Series B convertible preferred stock in the private offering. We
received net cash proceeds of $664,000. An advisory group that assisted us in
finding investors was compensated through the issuance of 66,400 shares of our
common stock. We determined a fair value of approximately $81,000 for the common
stock issued to the advisory group. The fair value was based on the closing
price of our common stock on the date of the transaction.
On May 15, 2001, we issued a convertible promissory note to NeoMed
Innovations III, LP in exchange for $500,000 in cash. The note bears interest at
the rate of 12% per year and is due twelve months from the date of issue. The
note is convertible into common stock, any time after the expiration of the
first 180 days of the loan term at a conversion price of $1.00 per share. The
conversion price of the note was less than the
27
market price of the common stock at the date of issuance and therefore, the
holder is considered to have a beneficial conversion feature. We determined the
value of this beneficial conversion feature to be $50,000. This value was
recorded as a reduction to the debt and will be amortized as additional interest
expense over the life of the note. During the period from May 15, 2001 through
September 30, 2001, we recorded $31,000 to interest expense to reflect the
amortization of the debt discount on this note.
On July 26, 2001, we issued a promissory note to Cadmus Corporation
("Cadmus") in exchange for $100,000 in cash. Alexander Milley, one of our
directors and a significant stockholder, is also considered a control person of
Cadmus. On August 6, 2001, we issued a promissory note to Azimuth in exchange
for $100,000 in cash. The notes which were due on September 22, 2001 and
subsequently extended to November 15, 2001 bore interest at the rate of 15% per
annum. As additional consideration for the notes, we issued five-year warrants
to Cadmus and Azimuth entitling each holder to purchase 250,000 shares of the
common stock at an exercise price of $1.00 per share. The closing market prices
of the common stock on the respective issue dates of the warrants entitling each
holder to purchase 250,000 shares of common stock were $0.73 per share. We
determined using the fair value interest rate method, the fair value of these
warrants to be $1,400. This value was charged to interest expense during the
third quarter.
In August 2001, we agreed to issue a five-year warrant to Azimuth,
entitling the holder to purchase 500,000 shares of common stock at $1.00 per
share. In conjunction with the issuance of this warrant, Azimuth agreed to
relinquish the conversion rights of a convertible promissory note issued by us
in September 2000, which entitled Azimuth to convert the principal and accrued
interest due under the note into common stock at a conversion price of $1.00 per
share. The September 2000 note was considered to have a beneficial conversion
feature for which we had determined a fair value of $125,000 in 2000. This fair
value was recorded as a discount to the debt and was being amortized as
additional interest expense over the term of the note. The closing market price
of the common stock on the issue date of this warrant was $0.73 per share. We
determined the fair value of the warrant to be approximately $25,000 based on
the value of the unamortized debt discount at the date this warrant was issued
and the conversion right on the note was waived. This value was charged to
interest expense during the third quarter.
In November 2001, we received $3,635,000 in net proceeds from the private
sale of 1,331,499 shares of Series C convertible preferred stock to a limited
number of accredited investors. The Series C preferred stock has a dividend rate
of 10% and is convertible into common stock at a conversion rate equal to $0.60
per share.
Also in November 2001, we received $1,750,000 in proceeds from the sale of
175,000 shares of Series D convertible preferred stock in a private sale to
Ventana. The Series D convertible preferred stock has a dividend rate of 10% and
is convertible into the common stock at a conversion rate of $1.00 per share. We
also issued a three-year warrant to Ventana entitling the holder to purchase
1,750,000 shares of common stock at an exercise price of $1.15 per share.
In December 2001, we completed a tender offer to exchange 1/25 of a share
of Series E convertible preferred stock, par value $0.001 per share, for each
outstanding share of our common stock, par value $0.001 per share, up to a
maximum of 20,000,000 shares of common stock, or a maximum of 800,000 Series E
convertible preferred stock. Since the transaction provided no liquidity or
capital resources, further discussion is not considered necessary for this
purpose.
We incurred approximately $542,000 and $307,000 in capital expenditures for
the years ended December 31, 2001 and 2000 respectively. Capital expenditures
are defined as disbursements for laboratory equipment, leasehold improvements,
software, and furniture/fixtures with a purchase price in excess of $1,000 per
item and useful life in excess of one year. The increase in 2001 capital
expenditures resulted in increased purchases of laboratory and computer
equipment and software in support of our product development and research
efforts and in support of our clinical trial network.
Our operations have been, and will continue to be, dependent upon
management's ability to raise operating capital in the form of debt or equity.
We have incurred significant operating losses since inception of the business.
We expect that significant on-going operating expenditures will be necessary to
successfully implement our business plan and develop, manufacture and market our
products. These circumstances raise
28
substantial doubt about our ability to continue as a going concern. There can be
no assurance that we will be able to obtain additional capital to meet our
current operating needs or to complete pending or contemplated licenses or
acquisitions of technologies. If we are unable to raise sufficient adequate
additional capital or generate profitable sales revenues, we may be forced to
substantially curtail product research and development and other activities and
may be forced to cease operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A market risk inherent in our financial statements is the potential loss in
fair value arising from adverse changes in interest rates. We do not engage in
any hedge transactions or use derivative financial instruments to reduce our
exposure to interest rate changes since all of our indebtedness is at fixed
interest rates. At December 31, 2001, the carrying amount of our debt
instruments approximated their fair value. In addition, as of December 31, 2001,
we were not exposed to any material foreign-currency, equity-price or other type
of market or price risk. Samba conducts the majority of its operations in Europe
using local European currencies. At December 31, 2001, we have recorded a
negative cumulative translation adjustment of $53,472 reflecting the valuation,
using December 31, 2001 currency exchange rates, of our investment in and
current account with Samba.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements for the years ended December 31,
2001, 2000, and 1999, together with the report thereon of Ernst & Young LLP
dated April 8, 2002, are filed as part of this report commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
<Table>
<Caption>
NAME OFFICES AND POSITIONS, IF ANY, HELD WITH THE COMPANY; AGE
- ---- ---------------------------------------------------------
Peter P. Gombrich....... Chairman of the Board, Chief Executive Officer and
Director; Age 64
Alexander M. Milley..... Director; Age 48
Robert C. Shaw.......... Director; Age 48
John Abeles, M.D........ Director; Age 57
Denis M. O'Donnell,
M.D................... Director; Age 48
</Table>
NOMINEES
PETER P. GOMBRICH has been Chairman of the Board and Chief Executive
Officer of the Company and a director since December 1998. Mr. Gombrich served
as Chairman of the Board and Chief Executive Officer of InPath, L.L.C.
("InPath"), a bio-molecular medical testing company, since Mr. Gombrich founded
that company in March 1998. InPath was acquired by the Company in December 1998.
In 1994, Mr. Gombrich founded AccuMed International, Inc., a cytopathology
products company, and served as Chairman, President and Chief Executive Officer
of AccuMed until January 1998. From 1990 until he founded AccuMed in 1994, Mr.
Gombrich was a consultant in the cytology and microbiology industries. From July
1985 until September 1989, Mr. Gombrich was President and Chief Executive
Officer, and from July 1985 until November 1990 was Chairman of the Board of
CliniCom Incorporated, a bedside clinical information systems company, which he
founded. In 1976, Mr. Gombrich co-founded St. Jude Medical, Inc., a life support
medical device company, in which he served as Executive Vice President until
1980, when he became President of the pacemaker division of that company,
serving in that position until 1982. Mr. Gombrich has a Bachelor of
29
Science degree in Electrical Engineering from the University of Colorado and a
Masters in Business Administration from the University of Denver.
ALEXANDER M. MILLEY has been a director of the Company since 1989. Mr.
Milley is President and Chairman of the Board of ELXSI Corp. a holding company
with subsidiaries operating in the restaurant and environmental inspection
equipment industries. He is also President and Chairman of the Board of Azimuth,
a holding company with subsidiaries operating in the trade show exhibit and
retail environment design and the distribution of electrical components and
fasteners industries. Mr. Milley was Chairman of the Board and Chief Executive
Officer of Bell National Corporation ("Bell"), a predecessor of the Company
until December 1998 and was President of Bell from August 1990 until December
1998. Mr. Milley is the founder, President, sole director and majority
shareholder of Milley Management, Inc. ("MMI"), a private investment and
management-consulting firm. Mr. Milley is also the President of Cadmus, a
private investment and management-consulting firm. Mr. Milley was Senior Vice
President-Acquisitions from December 1983 until July 1986 of the
Dyson-Kissner-Moran Corporation, a private investment company.
DENIS M. O'DONNELL, M.D. has been a director of the Company since December
1998. Since 1997, he has been Managing Director of Seaside Advisors, L.L.C., an
investment advisor to Seaside Partners a fund specializing in small
capitalization private placements. Prior to joining Seaside Advisors, L.L.C.,
Dr. O'Donnell was President of Novavax, Inc. ("Novavax"), a company engaged in
the development of pharmaceutical products, from its inception in 1995 to 1997.
Dr. O'Donnell currently serves as a director and Chairman of Novavax. From 1991
to 1995, Dr. O'Donnell served as Corporate Vice President of Medical Affairs of
IGI, Inc., a clinical drug testing company. Prior to joining IGI, Inc. in 1991,
Dr. O'Donnell was Director of the Clinical Research Center at MTRA, Inc. a
company engaged as investigator in human clinical trails. Dr. O'Donnell has been
a director of ELXSI Corporation since 1996 and of Columbia Laboratories, Inc., a
pharmaceutical company, since 1999. Dr. O'Donnell is a Fellow of the American
College of Clinical Pharmacology and serves on the Scientific Advisory Board of
the Associates of Clinical Pharmacology.
JOHN H. ABELES, M.D. has been a director of the Company since May 1999. Dr.
Abeles is President of MedVest, Inc. a venture capital and consulting firm he
founded in 1980. He is also General Partner of Northlea Partners, Ltd.
("Northlea Partners"), a family investment partnership. Dr. Abeles was a senior
medical executive at Sterling Drug, Pfizer, and Revlon Healthcare, Inc. and
subsequently was a medical analyst at Kidder, Peabody & Co. Dr. Abeles is a
director of a number of companies operating in the medical device or healthcare
fields, including I-Flow Corporation, Oryx Technology Corp., Encore Medical
Corporation, and DUSA Pharmaceuticals, Inc. Dr. Abeles received his medical
degree and degree in pharmacology at the University of Birmingham in England and
is currently a director at the Higuchi BioSciences Institute at the University
of Kansas.
ROBERT C. SHAW has been a Director of the Company since November 1989. Mr.
Shaw is President of Contempo Design, Inc., a firm specializing in the design of
exhibits and retail environments. Mr. Shaw was Chief Financial Officer of Bell
from November 20, 1989 to December 1998. Mr. Shaw has been a Vice President of
MMI since March 1989, an officer or director of Azimuth or certain of its
subsidiaries since November 1990, a director of Cadmus since January 1992 and an
officer or director of ELXSI since September 1989. Mr. Shaw was Vice President
of Berkeley Softworks, Incorporated ("Berkeley") from September 1987 to March
1989. From January 1987 to September 1987, he was Vice President, and from July
1985 until January 1987, he was Director of Finance and Operations, at Ansa
Software, Incorporated ("Ansa"). Berkeley and Ansa developed and produced
personal computer software.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and directors, and persons who beneficially own
more than 10% of the outstanding shares of the common stock, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and to furnish the Company with copies of all reports they file.
30
Based solely on the Company's review of copies of such reports it has
received and of written representations from certain reporting persons
concerning their beneficial ownership of the common stock, the Company believes
that during 2001, all reports were timely filed except that Mr. Milley filed a
late Form 4 to report a transaction, and Mr. Ritger filed a late Form 4 to
report a transaction.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION
COMPENSATION OF DIRECTORS
The Company compensates its non-management directors through the annual
grant of options to purchase shares of common stock. The options are granted at
the first directors meeting following the annual meeting of stockholders. The
exercise price of the options is set at the fair market value determined by the
closing price of the common stock as reported on the Over-the-Counter Bulletin
Board on the date of the grant. Non-management directors were each granted
options to purchase 219,000 shares, 50,000 shares and 20,000 shares for the
years 2001, 2000 and 1999, respectively. The Company also reimburses directors
for expenses incurred in connection with their attendance at meetings of the
Board of Directors.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
COMPENSATION
-----------------------
ANNUAL COMPENSATION RESTRICTED
------------------------------------ STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OTHER(2)(3) AWARDS OPTIONS
- --------------------------- ---- -------- -------- ------------ ---------- ----------
Peter P. Gombrich,.................. 2001 $247,000 0 $ 9,000 0 150,000
Chairman of the Board and 2000 $227,000 $50,000 $35,153 0 200,000
Chief Executive Officer 1999 $200,000 $50,000 $ 9,000 0 0
Leonard R. Prange,.................. 2001 $177,000 0 $18,307 0 50,000
President, Chief Operating, Chief 2000 $162,500 $25,000 $24,270 0 100,000
Financial Officer and Secretary 1999 $125,000 $25,000 $ 3,500 0 400,000
</Table>
- ---------------
(1)The employment agreements of Mr. Gombrich and Mr. Prange until his
resignation provide that they are each entitled to receive bonus compensation
at the discretion of the Board of Directors. During May 2000 and February
2001, the Board authorized 1999 and 2000 bonus payments, respectively, to Mr.
Gombrich and Mr. Prange.
(2)MDI policy provides that an employee may receive cash compensation in lieu of
unused vacation time or defer unused vacation time for use in future periods.
Mr. Gombrich received cash compensation of $26,153 in 2000 and Mr. Prange
received cash compensation of $18,270 in 2000 and $12,307 in 2001 to offset
portions of their respective unused vacation time.
(3)The employment agreements of Mr. Gombrich and Mr. Prange provide that they
are to receive monthly automobile allowances of $750 and $500, respectively.
(4)Mr. Prange resigned his executive officer positions effective December 31,
2001.
STOCK OPTIONS
OPTION GRANTS IN 2001
The following table sets forth certain information with respect to stock
options relating to common stock granted to the named executive officers during
2001 under the 1999 Equity Incentive Plan.
In addition to providing the number of shares subject to options granted to
the named executive officers, the following table discloses the range of
potential realizable values at various assumed appreciation rates. The table
discloses for the named executive officers the gain or "spread" that would be
realized at the end of the
31
option term for the options granted during 2001, if the price of the common
stock appreciates annually by the percentage levels indicated from the market
price on the date of grant.
<Table>
<Caption>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES
NUMBER OF OF STOCK PRICE
SECURITIES PERCENT OF APPRECIATION
UNDERLYING TOTAL EXERCISE FOR OPTION TERM
OPTIONS OPTIONS IN PRICE PER EXPIRATION --------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% ($) 10% ($)
- ---- ---------- ----------- --------- ---------- -------- ---------
Peter P. Gombrich............... 100,000 6.55% $1.69 2/22/06 $46,623 $103,024
Peter P. Gombrich............... 50,000 3.28% $1.01 7/25/06 $13,952 $ 30,831
Leonard R. Prange(1)............ 50,000 3.28% $1.69 2/22/11 $53,142 $134,671
</Table>
- ---------------
(1)Mr. Prange's options of 50,000 shares granted February 22, 2001 were
cancelled upon his resignation on December 31, 2001.
The following table sets forth information with respect to the value of all
stock options held at December 31, 2001 by the named executive officers. No
options were exercised by the named executive officers in 2002.
FISCAL YEAR END OPTION / SAR VALUES
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS / SARS OPTIONS / SARS
AT FISCAL YEAR END AT FISCAL YEAR END
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Peter P. Gombrich............................. 123,333 226,667 0 0(2)
Leonard R. Prange(1).......................... 400,000 0 $202,520 0(2)
</Table>
- ---------------
(1)On May 27, 1999, Mr. Prange was granted an option to purchase 400,000 shares
of common stock at an exercise price of $0.3937 per share, the fair market
value as of the date of the grant determined in accordance with the
provisions of the 1999 Equity Incentive Plan. One-third of the option vested
on the date of grant, one-third on May 27, 2000, and the remainder vested on
May 27, 2001. Mr. Prange's options for 100,000 shares granted May 23, 2000
and for 50,000 shares granted February 22, 2001 were cancelled upon his
resignation on December 31, 2001.
(2)Options granted to Mr. Gombrich and Mr. Prange during 2000 vest at the rate
of 20% per year beginning on May 23, 2001, and have exercise prices of $2.75
per share. Options granted to Mr. Gombrich during 2001 are options for
100,000 shares which vest at the rate of 33% per year beginning February 22,
2001 with an exercise price of $1.6875 and options for 50,000 shares which
vested on July 25, 2001 with an exercise price of $1.01.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee. The Board of Directors
participates in deliberations concerning executive compensation. Mr. Gombrich,
Chairman of the Board and Chief Executive Officer does not participate in any of
the Board's deliberations concerning his own compensation. Other than Mr.
Gombrich and Messrs. Milley and Shaw, who were officers and directors of Bell, a
predecessor of the Company, no member of the Board of Directors is a current or
former officer or employee of the Company or any of the Company's subsidiaries.
None of the Company's executive officers have served on the board of directors
or on the compensation committee of any other entity that had an executive
officer serving on the Company's Board of Directors.
32
EMPLOYMENT AGREEMENTS
MR. GOMBRICH is employed as Chairman of the Board and Chief Executive
Officer of the Company pursuant to an employment agreement (the "Gombrich
Agreement") with InPath dated May 1, 1998. The Gombrich Agreement was amended on
December 4, 1998, to reflect changes related to the acquisition of InPath by
MDI. Under the Gombrich Agreement, Mr. Gombrich receives annual compensation
consisting of a base salary, a bonus determined at the discretion of the Board
of Directors, and a monthly automobile allowance of $750. Mr. Gombrich's base
salary may be increased at the discretion of the Board of Directors. His base
salary was $225,000 in 2000 and $250,000 in 2001. The Gombrich Agreement had an
initial term of three years, beginning May 1, 1998 and ending April 30, 2001.
Thereafter, the Gombrich Agreement automatically renews for consecutive terms of
two years unless either Mr. Gombrich or the Company elects not to renew it. The
Gombrich Agreement has been renewed and is effective through April 30, 2003. For
two years following the termination of the Gombrich Agreement, Mr. Gombrich may
not participate in a business that substantially and directly competes with the
Company. If there is a change of control, as defined in the Gombrich Agreement,
and the Company thereafter terminates the Gombrich Agreement without cause, or
Mr. Gombrich terminates the agreement for good reason, as defined in the
Gombrich Agreement, Mr. Gombrich is entitled to a lump-sum severance payment
equal to three times the sum of his annual base salary, his annualized monthly
automobile allowance, and the highest incentive compensation paid to him in any
of the previous year incentive compensation periods. If Mr. Gombrich is
terminated without cause or resigns for good reason, and no change of control
has occurred, he is entitled to a lump-sum severance payment equal to two times
the sum of the foregoing amounts.
EXECUTIVE COMPENSATION POLICIES
The Board's intent is to structure the compensation of the Company's
executive officers so as to attract and retain executives capable of leading the
Company to meet its business objectives and to motivate them to enhance
long-term shareholder value. The Company's executive officers receive annual
compensation consisting of cash salary as well as other forms of compensation,
which the Board believes to be in the best interests of the Company and the
stockholders. Examples of such additional compensation are cash bonuses and
automobile allowances. In determining the level of total compensation to be paid
to an executive officer, the Board considers such factors as the officer's
responsibilities, qualifications and contribution to the Company, and the
compensation paid by comparable companies to individuals in comparable
positions. The Board's evaluation of executive officers, except the Chief
Executive Officer, may also be based on the Chief Executive Officer's assessment
of the officer's contribution to the Company. The Board also compensates
executive officers and other key employees by means of stock options or other
types of long-term, equity based awards, primarily under the terms of the 1999
Equity Incentive Plan, with respect to which the Board acts as the compensation
committee.
In selecting new executive officers, the Board considers the specific needs
of the Company and the expertise and special skills offered by the candidates.
The Board then determines starting compensation based on its assessment of the
package needed to attract a particular individual to the Company. Compensation
of continuing officers is also reviewed periodically against this assessment.
The employment agreements for Messrs. Gombrich and Prange provide for
incentive compensation payments at the discretion of the Board. Since the
Company's ultimate financial performance is directly related to its primary
products, which are still in development and have not yet been introduced into
the market, the Board evaluated the performance of the Company and its principal
executives during the year 2001, based on development accomplishments and cost
controls. These development accomplishments included the initiation of a
clinical trial for one of the Company's products, the development of a
laboratory test version of the Company's InPath System, the signing of a license
to allow the incorporation of HPV detection technology into the InPath System,
and the finalization of the bio-molecular assay development for the InPath
System. In addition, management's ability to complete various capital funding
programs, complete the merger of AccuMed International, Inc. into a subsidiary
of the Company, and the maintenance of spending controls focused on getting
products to market, were also considered.
33
The Board has established specific financial and product performance goals
for 2002, which will be used to measure each executive's performance and
eligibility for incentive payments.
The employment agreements for Messrs. Gombrich and Prange provide for
annual increases in base compensation at the discretion of the Board. In
determining base compensation increases, the Board considered general market
factors, which influence the compensation level of similar executives. In
addition, the Board also took account of the fact that the size and development
stage of the Company dictate that the duties of each executive encompass a much
broader and more detailed range of responsibilities and related time commitments
than would be required in a Company able to support a larger executive staff.
Based on the Board's evaluation of all of these factors, the Board voted to
increase the base compensation of each executive for the year 2001 by $25,000.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), generally limits the Company to a deduction, for federal income tax
purposes, of no more than $1,000,000 in a taxable year with respect to
compensation paid to the Chief Executive Officer, or to any of the four most
highly compensated officers of the Company other than the Chief Executive
Officer. Compensation above $1,000,000 may be deducted if it is "qualified
performance-based compensation" within the meaning of the Code. The Board
believes that at the present time it is unlikely that the compensation paid to
any officer of the Company in a taxable year will exceed $1,000,000. Therefore,
the Board has not yet established a policy for determining which forms of
incentive compensation awarded to its executive officers shall be designed to
qualify as "qualified performance-based compensation." The Board intends to
continue to evaluate the effects of the statute and Treasury Regulations and to
comply with Section 162(m) of the Code in the future to the extent consistent
with the best interests of the Company.
34
PERFORMANCE GRAPH
The following graph compares the performance of the common stock with the
performance of the NASDAQ Composite (U.S.) Index and the NASDAQ Medical Devices,
Instruments and Supplies, Manufacturers and Distribution Index. The graph covers
the period from November 30, 1998, immediately prior to the Company's
acquisition of InPath on December 4, 1998, when the Company entered into the
medical-device industry, to December 31, 2001. The acquisition of InPath was
accounted for as a reverse acquisition whereby InPath was deemed to have
acquired the Company. Accordingly, information is shown as if the Company first
became a reporting entity on December 4, 1998. Historical information for the
Company prior to December 1998 is not reported. During the sixteen-month period
preceding the acquisition of InPath, the Company was not engaged in any
business, and immediately before this period of inactivity it was engaged in
designing and distributing drapery and upholstery fabrics. The graph shows the
total cumulative return of an investment of $100 in the group of stocks that
comprise each index. All values assume reinvestment of the full amount of
dividends.
PERFORMANCE GRAPH
[PERFORMANCE GRAPH]
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------
11/1998 12/1998 12/1999 12/2000 12/2001
- ----------------------------------------------------------------------------------------------------
Molecular Diagnostics, Inc. 100.0 625.0 1625.0 2020.0 1800.0
- ----------------------------------------------------------------------------------------------------
NASDAQ Composite 100.0 118.0 209.9 126.3 100.2
- ----------------------------------------------------------------------------------------------------
NASDAQ MED. Devices 100.0 107.1 129.7 133.8 147.0
- ----------------------------------------------------------------------------------------------------
</Table>
35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS AND
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of April 15, 2002, with respect to any
person who is known to the Company to be the beneficial owner of more than 5% of
the outstanding shares of common stock of the Company, the name and address of
such owner, the number of shares of common stock beneficially owned, the nature
of such ownership, and the percentage such ownership is of the outstanding
shares of common stock:
<Table>
<Caption>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- ------------------------------------ ------------------ --------
Peter P. Gombrich........................................... 4,687,731 15.8%
414 N. Orleans, Suite 510
Chicago, IL 60610(1)
Alexander M. Milley......................................... 7,195,828 22.1%
Azimuth Corporation
3600 Rio Vista Boulevard, Suite A
Orlando, FL 32805(2)
William J. Ritger........................................... 6,233,240 22.3%
Seaside Partners, L.P.
623 Ocean Avenue
Sea Girt, NJ 08750(3)
Ventana Medical Systems, Inc................................ 3,500,000 12.0%
3865 N. Business Center Dr.
Tucson, AZ 85705(4)
RS Diversified Growth Fund.................................. 3,650,000 12.4%
388 Market Street
Suite 1700
San Francisco, CA 94111(5)
</Table>
- ---------------
(1)Includes: (i) 2,894,788 shares issuable upon conversion of Series E
convertible preferred stock held by Mr. Gombrich; (ii) 922,277 shares
issuable upon conversion of Series E convertible preferred stock held by Mr.
Gombrich's wife that were convertible as of April 15, 2002; and (iii) 196,666
shares subject to options granted by the Company to Mr. Gombrich that will
become exercisable within sixty days. Mr. Gombrich disclaims beneficial
ownership of the aforesaid shares held by his wife.
(2)Includes: (i) 678,135 shares issuable upon conversion of Series E convertible
preferred stock held by Mr. Milley; (ii) 282,881 shares owned by Cadmus of
which Mr. Milley is a director and executive officer, 1,327,465 shares
subject to conversion of Series E convertible preferred stock held by Cadmus,
250,000 shares issuable to Cadmus under warrants granted by the Company, and
289,285 shares issuable to Cadmus under Stock Appreciation Rights granted by
the Company; (iii) 556,875 shares issuable upon conversion of Series E
convertible preferred stock held by Azimuth, of which Mr. Milley is a
director and executive officer and 2,875,000 shares issuable to Azimuth under
warrants granted by the Company; (iv) 553,666 shares issuable upon conversion
of Series E convertible preferred stock held by MMI, of which Mr. Milley is a
director and executive officer; (v) 163,521 shares issuable upon conversion
of Series E convertible preferred stock held by Winchester National, Inc.
("Winchester National"), of which Mr. Milley is a director and executive
officer; and (vi) 219,000 shares subject to options granted by the Company to
Mr. Milley that will become exercisable within 60 days.
(3)Includes: (i) 250,000 shares issuable upon conversion of Series C convertible
preferred stock and 1,980,000 shares issuable upon conversion of Series E
convertible preferred stock, held by Mr. Ritger; (ii) 70,000 shares owned by
The Research Works, Inc., a corporation controlled by Mr. Ritger; and
36
(iii) 3,735,000 shares owned by Seaside Partners, L.P. ("Seaside"), of which
Mr. Ritger is the Managing Partner.
(4)Includes 1,750,000 shares issuable upon conversion of Series D convertible
preferred stock held by Ventana and 1,750,000 shares issuable to Ventana
under warrants granted by the Company.
(5)Includes 3,650,000 shares issuable upon conversion of Series C convertible
preferred stock held by RS Diversified.
The following table sets forth as of April 15, 2002, with respect to any
person who is known to the Company to be the beneficial owner of more than 5% of
the outstanding shares of Series A convertible preferred stock, the name and
address of such owner, the number of shares of Series A convertible preferred
stock beneficially owned, the nature of such ownership, and the percentage such
ownership is of the outstanding shares of Series A convertible preferred stock:
<Table>
<Caption>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OF CLASS
- --------------------------------------- ------------------ --------
Shannon P. Acks(2).......................................... 29,504 17.2%
502 Reston Mill Lane
Marietta, GA 30067
DW Trustees (BVI) Limited(3)................................ 11,802 6.9%
Piermont House
33/35 Pier Road
St. Helier, Jersey
JE8QP Channel Islands
British Virgin Islands
France Finance IV(4)........................................ 47,250 27.6%
Societe de Bure Ferri
51, rue Vivienne
75002 Paris, FRANCE
Mizbourne Investment Corp.(5)............................... 11,812 6.9%
c/o RNYS F/B/O
1 Hanson Place, 8th Floor
Brooklyn, NY 11243
Fifth Third Bank of Western Ohio, Ttee(6)................... 35,405 20.7%
John Scarbrough Sr. IRA
PO Box 703
Piquah, OH 45356
William R Schoen(7)......................................... 11,812 6.9%
Five Kenilworth Ct
Novato, CA 94945
Vitali Maritime Corp.(8).................................... 23,625 13.8%
c/o RNYS F/B/O
1 Hanson Place, 8th Floor
Brooklyn, NY 11243
</Table>
37
- ---------------
(1)No executive officer or director beneficially owns any shares of Series A
convertible preferred stock.
(2)Convertible into 12,884 shares of common stock.
(3)Convertible into 5,154 shares of common stock.
(4)Convertible into 20,634 shares of common stock.
(5)Convertible into 5,158 shares of common stock.
(6)Convertible into 15,461 shares of common stock.
(7)Convertible into 5,158 shares of common stock.
(8)Convertible into 10,317 shares of common stock.
The following table sets forth as of April 15, 2002, with respect to any
person who is known to the Company to be the beneficial owner of more than 5% of
the outstanding shares of Series B convertible preferred stock, the name and
address of such owner, the number of shares of Series B convertible preferred
stock beneficially owned, the nature of such ownership, and the percentage such
ownership is of the outstanding shares of Series B convertible preferred stock:
<Table>
<Caption>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OF CLASS
- --------------------------------------- ------------------ --------
Presidio Partners, L.P.(2).................................. 302,500 22.3%
44 Montgomery St., Suite 2110
San Francisco, CA 94104
NeoMed Innovations III, L.P.(3)............................. 416,000 30.6%
8 Queensway House, Queen Street
St. Helier
Jersey, JE2 4WD, Channel Islands
Geary Partners, L.P.(4)..................................... 165,000 12.2%
44 Montgomery St., Suite 2110
San Francisco, CA 94104
Monsun, AS(5)............................................... 125,000 9.2%
Torvveien 12 C
1383 Asker, Norway
</Table>
- ---------------
(1)No executive officer or director beneficially owns any shares of Series B
convertible preferred stock.
(2)Converts into 1,210,000 shares of common stock.
(3)Converts into 1,664,000 shares of common stock.
(4)Converts into 660,000 shares of common stock.
(5)Converts into 500,000 shares of common stock.
The following table sets forth as of April 15, 2002, with respect to (1)
any person who is known to the Company to be the beneficial owner of more than
5% of the outstanding shares of Series C convertible preferred stock, (2) each
director, nominee, or executive officer who owns Series C convertible preferred
stock, and (3) executive officers and directors as a group, the name and address
of such owner, the number of shares of Series C convertible preferred stock
beneficially owned, the nature of such ownership, and the percentage such
ownership is of the outstanding shares of Series C convertible preferred stock:
<Table>
<Caption>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- ------------------------------------ ------------------ --------
RS Diversified Growth Fund(1)............................... 730,000 54.8%
388 Market Street
Suite 1700
San Francisco, CA 94111
</Table>
38
<Table>
<Caption>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- ------------------------------------ ------------------ --------
The Paisley Fund, LP(2)..................................... 120,000 9.0%
388 Market Street
Suite 1700
San Francisco, CA 94111
Leonard R. Prange(3)........................................ 20,000 1.5%
641 W. Willow
Chicago, IL 60614
All executive officers and directors as a group(4).......... 20,000 1.5%
(6 persons)
</Table>
- ---------------
(1)Converts into 3,650,000 shares of common stock.
(2)Converts into 600,000 shares of common stock.
(3)Converts into 100,000 shares of common stock.
(4)Converts into 100,000 shares of common stock.
The following table sets forth as of April 15, 2002, with respect to any
person who is known to the Company to be the beneficial owner of more than 5% of
the outstanding shares of Series D convertible preferred stock, the name and
address of such owner, the number of shares of Series D convertible preferred
stock beneficially owned, the nature of such ownership, and the percentage such
ownership is of the outstanding shares of Series D convertible preferred stock:
<Table>
<Caption>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OF CLASS
- --------------------------------------- ------------------ --------
Ventana Medical Systems, Inc.(2).......................... 175,000 100.0%
3865 N. Business Center Dr.
Tucson, AZ 85705
</Table>
- ---------------
(1)No executive officer or director beneficially owns any shares of Series D
convertible preferred.
(2)Converts into 1,750,000 shares of common stock.
The following table sets forth as of April 15, 2002, with respect to (1)
any person who is known to the Company to be the beneficial owner of more than
5% of the outstanding shares of Series E convertible preferred stock, (2) each
director, nominee, or executive officer who owns Series E convertible preferred
stock, and (3) executive officers and directors as a group, the name and address
of such owner, the number of shares of Series E convertible preferred stock
beneficially owned, the nature of such ownership, and the percentage such
ownership is of the outstanding shares of Series E convertible preferred stock:
<Table>
<Caption>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- ------------------------------------ ------------------ --------
Peter P. Gombrich(1)........................................ 138,802 32.0%
Alexander M. Milley(2)...................................... 119,260 27.5%
William J. Ritger(3)........................................ 72,000 16.6%
All directors and executive officers as a group(4)
(6 persons)............................................... 258,062 59.5%
</Table>
- ---------------
(1)Includes 33,537 shares owned by Mr. Gombrich's wife. Mr. Gombrich disclaims
beneficial ownership of the aforesaid shares held by his wife. Converts into
3,817,065 shares of common stock.
(2)Includes: (i) 48,271 shares owned by Cadmus; (ii) 20,250 shares owned by
Azimuth; (iii) 20,133 shares owned by MMI; and (iv) 5,946 shares owned by
Winchester National. Converts into 3,279,662 shares of common stock.
(3)Converts into 1,980,000 shares of common stock.
(4)Converts into 7,096,727 shares of common stock.
39
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of April 15, 2002, certain information
concerning the ownership of common stock of each director, nominee, and
executive officer named in the Summary Compensation Table hereof referred to as
the named executive officers, and all directors and executive officers of the
Company as a group.
<Table>
<Caption>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- ------------------------ ----------------- --------
Peter P. Gombrich (1)...................................... 4,687,731 15.8%
Alexander M. Milley (2).................................... 7,195,828 22.1%
Robert C. Shaw (3)......................................... 719,417 2.8%
John Abeles, M.D. (4)...................................... 410,616 1.6%
Denis M. O'Donnell, M. D.(5)............................... 1,003,901 3.8%
Leonard R. Prange (6)...................................... 1,082,688 4.2%
All directors and executive officers as a group
(6 persons).............................................. 15,100,181 39.6%
</Table>
- ---------------
(1)Includes: (i) 2,894,788 shares issuable upon conversion of Series E
convertible preferred stock held by Mr. Gombrich; (ii) 922,277 shares
issuable upon conversion of Series E convertible preferred stock held by Mr.
Gombrich's wife and (iii) 196,666 shares issuable upon options granted by the
Company to Mr. Gombrich that will become exercisable within 60 days. Mr.
Gombrich disclaims beneficial ownership of the aforesaid shares held by his
wife.
(2)Includes: (i) 678,135 shares issuable upon conversion of Series E convertible
preferred stock held by Mr. Milley; (ii) 282,881 shared owned by Cadmus, of
which Mr. Milley is a director and executive officer, 1,327,465 shares
issuable upon conversion of Series E convertible preferred stock held by
Cadmus, 250,000 shares issuable to Cadmus under warrants granted by the
Company, and 289,285 shares issuable to Cadmus under Stock Appreciation
Rights granted by the Company; (iii) 556,875 shares issuable upon conversion
of Series E convertible preferred stock held by Azimuth, of which Mr. Milley
is a director and executive officer and 2,875,000 shares issuable to Azimuth
under warrants granted by the Company; (iv) 553,666 shares issuable upon
conversion of Series E convertible preferred stock held by MMI, of which Mr.
Milley is a director and executive officer; (v) 163,521 shares issuable upon
conversion of Series E convertible preferred stock held by Winchester
National, of which Mr. Milley is a director and executive officer; and (iii)
219,000 shares issuable upon options granted by the Company to Mr. Milley
that will become exercisable within 60 days.
(3)Includes 219,000 shares issuable upon options granted by the Company to Mr.
Shaw that were exercisable on April 15, 2002 that will become exercisable
within 60 days.
(4)Includes: (i) 191,616 shares owned by Northlea Partners, of which Dr. Abeles
is the general partner; and (ii) 219,000 shares issuable upon options granted
by the Company to Mr. Abeles. Dr. Abeles disclaims beneficial ownership of
all shares owned by Northlea except 1,917 shares, which number are
attributable to his 1% interest in Northlea as general partner.
(5)Includes: (i) 784,901 shares issuable upon warrants granted by the Company to
Dr. O'Donnell and (ii) 219,000 shares issuable upon options granted by the
Company to Dr. O'Donnell.
(6)Includes 100,000 shares subject to conversion of Series C convertible
preferred stock held by Mr. Prange that were convertible as of April 15,
2002. As of December 31, 2001 Len Prange resigned his position as President,
Chief Operations Officer, Chief Financial Officer and Secretary of the
Company. Before his resignation, Mr. Prange had vested options for 400,000
shares of common stock at a purchase price of $0.3937 per share, 100,000
shares at a purchase price of $2.75 per share and 50,000 shares at a purchase
price of $1.6875. Upon his resignation, Mr. Prange waived his rights to
exercise the options for the 100,000 and 50,000 shares respectively, and
exercised 250,000 of the remaining 400,000 option shares for $0.3937 per
share. The $98,425 payment required to exercise this option was waived by the
Company. On
40
March 30, 2002 Mr. Prange exercised his option to purchase 111,000 shares of
common stock. As payment for the exercise price of $43,700, and Mr. Prange
surrendered 39,000 options as payment.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 24, 2000, the Company granted Dr. O'Donnell a warrant to purchase
784,901 shares of common stock exercisable at $0.01 per share, as compensation
as a finder in a private placement of common stock that occurred in 2000 and
2001. The warrant expires three years from the date of its grant.
In 2000 and 2001, the Company sold 3,440,743 shares in a private placement
of which 1,333,333 shares of common stock were sold to Seaside Partners, L.P. at
$1.50 per share for total proceeds of $2,000,000. Dr. O'Donnell, a director, is
a member and manager of Seaside Advisers, L.L.C., a firm which provides
investment management services to Seaside Partners, L.P. The sale was made under
terms similar to other investors in the offering. In lieu of cash, the Company
agreed to accept payment in the form of a $2,000,000 promissory note due July
27, 2000 that bore interest at the rate of 8% per annum. The note provisions
allowed for prepayment at anytime and the due date could be extended by mutual
agreement. The Company retained the stock certificates until the note principal
and accrued interest was paid in full. The Company agreed to extend the due date
of the note until November 30, 2000. Seaside made principal payments amounting
to $1,550,000 during 2000 and the remaining $450,000 principal amount was repaid
between June and August 2001. The accrued interest on the note was paid in
August and December 2001.
On September 22, 2000, the Company issued a convertible promissory note to
Azimuth, a company controlled by Mr. Milley, a director and a significant
stockholder, in exchange for $500,000 in cash. The note bore interest at the
rate of 15% per year and was due twelve months from the date of issue. The note
was convertible into common stock, any time after the expiration of the first
180 days of the loan term, at a conversion price of $1.00 per share. Since the
conversion price was less than the market price of common stock at the time of
the transaction, the holder was considered to have a beneficial conversion
option. The Company is required to record the $125,000 calculated value of this
beneficial conversion option as debt discount, reducing the carrying amount of
the debt and additional paid in capital. The debt discount was amortized as
additional interest expense over the life of the note. During 2001 and 2000, the
Company recorded charges of $91,000 and $34,000, respectively, to interest
expense to reflect the amortized amount of debt discount in each period.
The Company used $300,000 from the September 2000 note to fund a loan to
AccuMed International, Inc. in accordance with the terms of an agreement under
which AccuMed was merged into a wholly-owned subsidiary of the Company. The
balance was used to fund license payments and the initial payment of a
settlement arrangement with the Company's former legal counsel.
On December 4, 2000, the Company issued a promissory note to Azimuth in
exchange for $200,000 in cash. The note bore interest at the rate of 12% per
year and was due December 31, 2000. As additional consideration for the note,
the Company issued Azimuth a five-year warrant to purchase 50,000 shares of
common stock at a price of $0.937 per share, the approximate market price of
common stock at the time. The note was repaid on February 20, 2001. In that the
note was not repaid when due, the Company was obligated by the terms of the note
to pay a 3% increase in the rate of interest from January 1, 2001 until the date
of payment. The Company was also obligated to issue Azimuth two warrants, each
to purchase 12,500 shares of our common stock, at an exercise price of $0.01 per
share, representing a two month late payment penalty. The Company determined the
value of these warrants to be $1,184 and charged the amount to interest expense
during 2001. The proceeds of the note were used for general working capital and
to pay license fees.
On December 11, 2000, the Company issued a promissory note to Azimuth in
exchange for $100,000 in cash. The note bore interest at the rate of 12% per
year and was due 180 days from date of issue. As additional consideration for
the note, the Company issued Azimuth a five-year warrant to purchase 1,000,000
shares of common stock at a price of $1.25 per share, an approximate 15% premium
over the market price of common stock on the date the warrant was issued. The
proceeds of this note were used to repay a convertible promissory note to
AccuMed due on March 29, 2001. The prepayment was made in conjunction with
ongoing negotiations to acquire AccuMed. The Company repaid the note and accrued
interest on February 20, 2001.
41
On February 1, 2001 and February 7, 2001, the Company received $495,000 in
cash from Azimuth in exchange for two promissory notes that bore interest at 15%
per year. Of the cash received, $470,000 was used to partially fund a loan to
AccuMed made on February 7, 2001, in connection with a definitive agreement to
acquire AccuMed. As additional compensation for these loans, the Company issued
Azimuth a five-year warrant to purchase 1,000,000 shares of common stock at an
exercise price of $0.25 per share, an approximate 83% discount from the $1.50
market price of our common stock on the date the warrant was issued. The Company
determined the value of the warrant to be $12,000, using the difference between
the fair market interest rate and the stated interest rate, and recorded the
value as additional paid in capital and also charged the entire value to
interest expense during February 2001. On February 20, 2001, the Company used
$809,000 of the proceeds from a private placement of Series B convertible
preferred stock to repay these notes, two additional notes issued to Azimuth in
December 2000, and all of their related accrued interest.
On July 26, 2001, the Company issued a promissory note to Cadmus in
exchange for $100,000 in cash. On August 6, 2001, the Company issued a
promissory note to Azimuth in exchange for $100,000 in cash. Mr. Milley,
director and a significant stockholder, is also considered a control person of
both Cadmus and Azimuth. The notes which were due on September 22, 2001, and
subsequently extended until November 15, 2001 bore interest at the rate of 15%
per annum. As additional consideration for the notes, the Company issued
five-year warrants to Cadmus and Azimuth entitling the holders to each purchase
250,000 shares of common stock at an exercise price of $1.00 per share. The
closing market prices of common stock on the respective issue dates of the
warrants entitling each holder to purchase 250,000 shares of common stock was
$0.73 per share. The Company determined the fair value of these warrants to be
$1,400 using the fair value interest rate method. This value was charged to
interest expense during the third quarter. The notes were repaid in November
2001.
In August 2001, the Company agreed to issue a five-year warrant to Azimuth
entitling the holder to purchase 500,000 shares of common stock at an exercise
price of $1.00 per share. In conjunction with the issuance of this warrant,
Azimuth agreed to relinquish the conversion rights granted to it under the terms
of the September 2000 convertible promissory note. The closing market price of
common stock on the issue date of the warrant was $.73 per share. The Company
determined the fair value of the warrant to be approximately $25,000 based on
the value of the unamortized debt discount at the date the warrant was issued
and the conversion right under the note was waived. This value was charged to
interest expense during the third quarter of 2001.
On August 6, 2001, the Company issued a promissory note to Northlea
Partners in exchange for $25,000 in cash. Dr. Abeles, a director, is the general
partner of Northlea Partners. The terms of the note are the same as the notes
issued to Cadmus and Azimuth. As additional consideration for this note, the
Company issued a five-year warrant to Northlea Partners entitling the holder to
purchase 62,500 shares of common stock at an exercise price of $1.00 per share.
The closing market price of the common stock on the issue date of this warrant
was $0.73 per share. The Company determined the fair value of the warrant to be
$1,400 using the fair value interest rate method. This value was charged to
interest expense during the third quarter. The note remains outstanding as of
the date of this report.
On September 20, 2001, the Company issued a promissory note to Northlea
Partners in exchange for $15,000 in cash. The note was due on December 20, 2001
and bears interest at the rate of 9% per annum. Also on September 20, 2001, the
Company issued a promissory note to Mr. Shaw, a director, in exchange for
$25,000 in cash. The note was due December 20, 2001 and bore interest at the
rate of 9% per annum. The notes remain outstanding as of the date of this
report.
In October 2001, Mr. Prange, the former President and COO/CFO, purchased
20,000 shares of Series C convertible preferred stock at a purchase price of
$3.00 per share. The purchase was made in conjunction with a private placement
of Series C convertible preferred stock and was made under the same terms and
conditions as other investors in the offering. The Series C convertible
preferred stock has a dividend of 10% and is convertible into common stock at a
conversion price of $0.60 per share.
42
Mr. Gombrich, the CEO and chairman of the board, tendered 2,631,625 shares
of common stock in exchange for 105,265 shares of Series E convertible preferred
stock. Mr. Milley, a director, tendered 616,486 shares of common stock in
exchange for 24,659 shares of Series E convertible preferred stock.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
DOCUMENTS FILED AS PART OF REPORT
(A) 1. FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
INDEX TO FINANCIAL STATEMENTS NUMBER NUMBER
------------------------------------ ------
Report of Independent Auditors.............................. F-1
Consolidated Balance Sheets at December 31, 2001 and 2000... F-2
Consolidated Statements of Operations for the three years
ended December 31, 2001, 2000, and 1999................... F-3
Consolidated Statements of Cash Flows for the three years
ended December 31, 2001, 2000, and 1999................... F-4
Consolidated Statement of Stockholder's Equity (Deficit) for
the three years ended December 31, 2001, 2000 and 1999.... F-6
Notes to Consolidated Financial Statements.................. F-9
(A) 2. FINANCIAL STATEMENT SCHEDULES...................... F-31
</Table>
The following financial statement schedule is filed as part of this report
as page F-31;
Schedule IX -- Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
(a) 3. EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Bell National Corporation Plan of Reorganization (Annex I).
(Incorporated herein by reference to Item 1 of the Bell
National Corporation Annual Report on Form 10-K for the
period from August 20, 1985 to December 31, 1985 and for the
years ended December 31, 1986 and 1987.)*
2.2 Exchange Agreement dated December 4, 1998 among the Company,
InPath, and the InPath Members. (Incorporated herein by
reference to Appendix A to the Bell National Corporation
Definitive Proxy Statement on Schedule 14A, filed on April
30,1999.)*
2.3 Agreement and Plan of Merger of Bell National Corporation
and the Company. (Incorporated herein by reference to
Appendix C to the Bell National Corporation Definitive Proxy
Statement on Schedule 14A, filed on April 30, 1999.)*
2.4 Agreement and Plan of Merger by and among AccuMed
International, Inc., AccuMed Acquisition Corp. and Ampersand
Medical Corporation, dated as of February 7, 2001.
(Incorporated herein by reference to Appendix I to
Registration Statement No. 333-61666.)
2.5 Amendment No. 1, dated May 14, 2001 to the Agreement and
Plan of Merger by and among AccuMed International, Inc.,
AccuMed Acquisition Corp. and Ampersand Medical Corporation,
dated February 7, 2001. (Incorporated herein by reference to
Appendix I to Registration Statement No. 333-61666.)
3.1 Restated Articles of Incorporation. (Incorporated herein by
reference to Exhibit 3.1 of the Bell National Corporation
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988.)*
</Table>
43
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.2 Bylaws of Bell National Corporation. (Incorporated herein by
reference to Exhibit 3.2 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989.)*
3.3 Certificate of Incorporation of the Company as amended.
(Incorporated herein by reference to Appendix D to the Bell
National Corporation Definitive Proxy Statement on Schedule
14A, filed on April 30, 1999.)*
3.4 By-laws of the Company. (Incorporated herein by reference to
Appendix E to the Bell National Corporation Definitive Proxy
Statement on Schedule 14A, filed on April 30, 1999.)*
3.5 Certificate of Designation, Preferences and Rights of Series
A Convertible Preferred Stock of Ampersand Medical
Corporation. (Incorporated herein by reference to Exhibit
3.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)
3.6 Certificate of Designation, Preferences and Rights of Series
B Convertible Preferred Stock of Ampersand Medical
Corporation. (Incorporated herein by reference to Exhibit
3.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)
3.7 Certificate of Incorporation of Molecular Diagnostics, Inc.,
as amended. (Incorporated herein by reference to the
Company's Current Report on Form 8-K dated September 26,
2001.)
3.8 Section 6 of Article VII of the By-laws of the Company as
amended. (Incorporated herein by reference to Exhibit 3.3 to
the Company's S-4 Registration Statement, File No.
333-61666, filed August 24, 2001.)
3.9 Certificate of Designation, Preferences and Rights of Series
C Convertible Preferred Stock of Molecular Diagnostics, Inc.
(Incorporated herein by reference to Exhibit 3.4 to the
Company's S-2 Registration Statement, File No. 333083578
filed February 28, 2002)
3.10 Certificate of Amendment of Certificate of Designation,
Preferences and Rights of Series C Convertible Preferred
Stock. (Incorporated herein by reference to Exhibit 3.5 to
the Company's S-2 Registration Statement, File No. 333083578
filed February 28, 2002)
3.11 Certificate of Amendment of Amended Certificate of
Designation, Preferences and Rights of Series C Convertible
Preferred Stock. (Incorporated herein by reference to
Exhibit 3.6 to the Company's S-2 Registration Statement,
File No. 333083578 filed February 28, 2002)
3.12 Certificate of Designation, Preferences and Rights of Series
D Convertible Preferred Stock. (Incorporated herein by
reference to Exhibit 3.7 to the Company's S-2 Registration
Statement, File No. 333083578 filed February 28, 2002)
3.13 Certificate of Designation, Preferences and Rights of Series
E Convertible Preferred Stock. (Incorporated herein by
reference to Exhibit 3.8 to the Company's S-2 Registration
Statement, File No. 333083578 filed February 28, 2002)
4.1 Form of Common Stock Purchase Warrant, as executed by Bell
National Corporation on December 4, 1998 with respect to
each of Mr. Gombrich, Theodore L. Koenig, William J. Ritger,
Fred H. Pearson, Walter Herbst, AccuMed International, Inc.,
Northlea Partners Ltd., and Monroe Investments, Inc.
(collectively, the "InPath Members"). (Incorporated herein
by reference to Exhibit 3 of the Schedule 13D filed jointly
by the InPath Members on December 14, 1998.)*
4.2 Stockholders Agreement dated December 4, 1998 among the
Company, Winchester National, Inc., the InPath Members, and
Mr. Milley, Mr. Shaw, Cadmus, and MMI (collectively, the
"Claimants"). (Incorporated herein by reference to Exhibit 2
to the Schedule 13D filed jointly by the InPath Members on
December 14, 1998.)*
4.3 Form of Common Stock Purchase Warrant issued to Holleb &
Coff on July 4, 1999 representing the right to purchase
250,000 shares of Common Stock of the Company in connection
with legal services rendered. (Incorporated herein by
reference to Exhibit 4.3 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)*
</Table>
44
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.4 Form of Common Stock Purchase Warrant issued to The Research
Works on October 11, 1999 representing the right to purchase
70,000 shares of Common Stock of the Company in connection
with the preparation of an investment research report.
(Incorporated herein by reference to Exhibit 4.4 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.)*
4.5 Form of Common Stock Purchase Warrant issued to Azimuth
Corporation on December 10, 1999 representing the right to
purchase 50,000 shares of Common Stock of the Company as
additional consideration for a 12% Convertible Promissory
Note issued on the same date. (Incorporated herein by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.)*
4.6 Form of Common Stock Purchase Warrant issued to Richard
Doermer on January 3, 2000 representing the right to
purchase 96,250 shares of Common Stock of the Company in
connection with financial advisory services rendered.
(Incorporated by reference to Exhibit 4.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.7 Form of Common Stock Purchase Warrant issued to Richard
Doermer on January 3, 2000 representing the right to
purchase 75,759 shares of Common Stock of the Company in
connection with financial advisory services rendered.
(Incorporated by reference to Exhibit 4.7 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.8 Form of Common Stock Purchase Warrant issued to Richard
Doermer on January 3, 2000 representing the right to
purchase 121,313 shares of Common Stock of the Company in
connection with financial advisory services rendered.
(Incorporated by reference to Exhibit 4.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.9 Form of Common Stock Purchase Warrant issued to Richard
Doermer on January 3, 2000 representing the right to
purchase 94,697 shares of Common Stock of the Company in
connection with financial advisory services rendered.
(Incorporated by reference to Exhibit 4.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.10 Form of Common Stock Purchase Warrant issued to William J.
Ritger on May 24, 2000 representing the right to purchase
531,614 shares of Common Stock of the Company in connection
with financial advisory services rendered. (Incorporated by
reference to Exhibit 4.10 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
4.11 Form of Common Stock Purchase Warrant issued to Denis M.
O'Donnell on May 24, 2000 representing the right to purchase
784,901 shares of Common Stock of the Company in connection
with financial advisory services rendered. (Incorporated by
reference to Exhibit 4.11 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
4.12 Form of Common Stock Purchase Warrant issued to Prospektiva,
SA on May 23, 2000 representing the right to purchase 48,333
shares of Common Stock of the Company in connection with
financial advisory services rendered. (Incorporated by
reference to Exhibit 4.12 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
4.13 Form of Common Stock Purchase Warrant issued to Dr. Bruce
Patterson, on September 12, 2000 representing the right to
purchase 150,000 shares of Common Stock of the Company as
additional consideration for the achievement of product
development milestones under a License and Development
Agreement for Specific Medical Technology for the Detection
of Oncogenic HPV Virus. (Incorporated by reference to
Exhibit 4.13 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.)*
4.14 Form of Common Stock Purchase Warrant issued to Dr. Bruce
Patterson, on September 12, 2000 representing the right to
purchase 100,000 shares of Common Stock of the Company as
consideration for an Addendum to a License and Development
Agreement for Specific Medical Technology for the Detection
of Oncogenic HPV Virus. (Incorporated by reference to
Exhibit 4.14 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.)*
</Table>
45
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.15 Form of Common Stock Purchase Warrant issued to Osprey
Partners, on November 22, 2000 representing the right to
purchase 100,000 shares of Common Stock of the Company in
connection with financial advisory services to be rendered
over twelve months. (Incorporated by reference to Exhibit
4.15 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)*
4.16 Form of Common Stock Purchase Warrant issued to Univest
Management, Inc. on November 22, 2000 representing the right
to purchase 100,000 shares of Common Stock of the Company in
connection with financial advisory services to be rendered
over twelve months. (Incorporated by reference to Exhibit
4.16 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)*
4.17 Form of Common Stock Purchase Warrant issued to Azimuth
Corporation on December 1, 2000 representing the right to
purchase 50,000 shares of Common Stock of the Company as
additional consideration for a 12% Promissory Note issued on
December 4, 2000. (Incorporated by reference to Exhibit 4.17
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.)*
4.18 Form of Common Stock Purchase Warrant issued to Azimuth
Corporation on December 8, 2000 representing the right to
purchase 1,000,000 shares of Common Stock of the Company as
additional consideration for a 15% Promissory Note issued on
December 11, 2000 in connection with the proposed
acquisition of AccuMed International, Inc. by the Company.
(Incorporated by reference to Exhibit 4.18 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.19 Form of Common Stock Purchase Warrant issued to Azimuth
Corporation on February 7, 2001 representing the right to
purchase 1,000,000 shares of Common Stock of the Company as
additional consideration for two 15% Promissory notes issued
on February 1, 2001 and February 7, 2001 in connection with
the proposed acquisition of AccuMed International, Inc. by
the Company. (Incorporated by reference to Exhibit 4.19 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
4.20 Common Stock Purchase Warrant issued to Azimuth Corporation
on August 6, 2001 representing the right to purchase 250,000
shares of common stock of the Company as additional
consideration for a 15% promissory note. (Incorporated by
reference to Exhibit 4.24 to the Company's S-4 Registration
Statement File No. 333-61666 filed August 24, 2001.)
4.21 Common Stock Purchase Warrant issued to Cadmus Corporation
on August 6, 2001 representing the right to purchase 250,000
shares of common stock of the Company as additional
consideration for a 15% promissory note. (Incorporated by
reference to Exhibit 4.23 to the Company's S-4 Registration
Statement File No. 333-61666 filed August 24, 2001.)
4.22 Common Stock Purchase Warrant issued to Northlea Partners,
Ltd. on August 6, 2001 representing the right to purchase
62,500 shares of common stock of the Company as additional
consideration for a 15% promissory note. (Incorporated by
reference to Exhibit 4.27 to the Company's S-4 Registration
Statement File No. 333-61666 filed August 24, 2001.)
4.23 Common Stock Purchase Warrant issued to Azimuth Corporation
on July 26, 2001 representing the right to purchase 500,000
shares of common stock of the Company as consideration of
Azimuth's waiver of the conversion feature of its $500,000
convertible promissory note issued September 22, 2000.
(Incorporated by reference to Exhibit 4.25 to the Company's
S-4 Registration Statement File No. 333-61666 filed August
24, 2001.)
4.24 Common Stock Purchase Warrant issued to Azimuth Corporation
on August 17, 2001 representing the right to purchase 25,000
shares of common stock of the Company. (Incorporated by
reference to Exhibit 4.26 to the Company's S-4 Registration
Statement File No. 333-61666, filed August 24, 2001.)
4.25 Common Stock Purchase Warrant issued to Tucker Anthony
Incorporated on July 10, 2001 representing the right to
purchase 150,000 shares of common stock of the Company.
(Incorporated by reference to Exhibit 4.28 to the Company's
S-2 Registration Statement, File No. 333-83578 filed
February 28, 2002).
</Table>
46
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.26 Common Stock Purchase Warrant issued to Ventana Medical
Systems, Inc. on November 2, 2001 representing the right to
purchase 1,750,000 shares of common stock of the Company.
(Incorporated by reference to Exhibit 4.29 to the Company's
S-2 Registration Statement, File No. 333-83578 filed
February 28, 2002).
4.27 Form of Confidential $5,000,000 Common Stock Private
Offering Memorandum dated January 2000. (Incorporated by
reference to Exhibit 4.20 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
4.28 Form of Confidential $5,000,000 Series B Convertible
Preferred Stock Private Offering memorandum dated November
2000 and amended January 30, 2001. (Incorporated by
reference to Exhibit 4.21 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
4.29 Amendment No. 1 to Stockholders Agreement dated July 25,
2000 among the Company, the InPath Members, Mr. Milley, Mr.
Shaw, MMI, Cadmus Corporation, and Winchester National, Inc.
(Incorporated by reference to Exhibit 4.22 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
10.1 Stock Appreciation Rights Agreement dated as of November 20,
1989 between the Company and Raymond O'S. Kelly.
(Incorporated herein by reference to Exhibit 10.5 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989.)*
10.2 Stock Appreciation Rights Agreement dated as of November 20,
1989 between the Company and Nicholas E. Toussaint.
(Incorporated herein by reference to Exhibit 10.7 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989.)*
10.3 Stock Appreciation Rights Agreement dated as of November 20,
1989 between the Company and Nicholas E. Toussaint.
(Incorporated herein by reference to Exhibit 10.7 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989.)*
10.4 SAR Agreement Extension dated November 15, 1995 between the
Company and Raymond O'S. Kelly. (Incorporated herein by
reference to Exhibit 10.20 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.)*
10.5 SAR Agreement Extension dated November 15, 1995 between the
Company and Nicholas E. Toussaint. (Incorporated herein by
reference to Exhibit 10.21 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.)*
10.6 Employment Agreement dated May 1, 1998 between Mr. Gombrich
and InPath, LLC, as amended on December 4, 1998.
(Incorporated herein by reference to Exhibit 10.6 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.)*
10.7 Claims Agreement dated December 4, 1998 among the Company,
the Claimants, and Liberty Associates Limited Partnership.
(Incorporated herein by reference to Exhibit 4 to the
Schedule 13D filed jointly by the InPath Members on December
14, 1998.)*
10.8 Ampersand Medical Corporation Equity Incentive Plan
established as of June 1, 1999. (Incorporated herein by
reference to Appendix F to the Bell National Corporation
Definitive Proxy Statement on Schedule 14A, as filed on
April 30, 1999.)*
10.9 Ampersand Medical Corporation Employee Stock Purchase Plan.
(Incorporated herein by reference to Appendix G to the Bell
National Corporation Definitive Proxy statement on Schedule
14A, as filed on April 30, 1999.)*
10.10 Employment Agreement dated June 1, 1999 between Mr. Prange
and the Company. (Incorporated herein by reference to
Exhibit 10.11 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999.)*
10.11 Lease Agreement between the Company and O.P., L.L.C. dated
September 1, 1999 pertaining to the premises located at
suite 305, 414 N. Orleans, Chicago, IL 60610. (Incorporated
herein by reference to Exhibit 10.12 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1999.)*
</Table>
47
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.12 Amendment to Lease Agreement between the Company and O.P.,
L.L.C. dated November 1, 1999 pertaining to the premises at
suite 300, 414 N. Orleans, Chicago, IL 60610. (Incorporated
herein by reference to Exhibit 10.13 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1999.)*
10.13 Form of Note purchase agreements dated between March 1, 1999
and June 29, 1999 between the Company and several
purchasers. (Incorporated herein by reference to Exhibit
10.14 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.)*
10.14 Form of 6% Convertible Subordinated Note Due 2000, dated
between March 1, 1999 and June 29, 1999 issued by the
Company to several purchasers. (Incorporated herein by
reference to Exhibit 10.15 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)*
10.15 Schedule of purchasers of 6% Convertible Notes Due 2000,
including dates and amount purchased. (Incorporated herein
by reference to Exhibit 10.16 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999.)*
10.16 Form of Senior Convertible Promissory Note issued to Azimuth
Corporation on December 10, 1999. (Incorporated herein by
reference to Exhibit 10.17 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)*
10.17 Form of Restricted Stock Award of 50,000 shares of Common
Stock issued to David A. Fishman, M.D., on August 10, 1999
as additional compensation under a 36 month Consulting
Agreement dated June 1, 1999. (Incorporated herein by
reference to Exhibit 10.18 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)
10.18 Form of Restricted Stock award of 50,000 shares of Common
Stock issued to Arthur L. Herbst, M.D., on August 10, 1999
as additional compensation under a 36 month Consulting
Agreement dated July 1, 1999. (Incorporated herein by
reference to Exhibit 10.19 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)*
10.19 Form of $2,000,000 note received from Seaside Partners, L.P.
on April 28, 2000. (Incorporated by reference to Exhibit
10.20 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)*
10.20 Form of $300,000 note received from AccuMed International,
Inc. on September 22, 2000 in conjunction with the proposed
acquisition of AccuMed by the Company. (Incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
10.21 Form of $500,000 Convertible Promissory Note issued to
Azimuth Corporation on September 22, 2000 in connection with
the proposed acquisition of AccuMed International, Inc. by
the Company. (Incorporated by reference to Exhibit 10.22 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
10.22 Form of $500,000 Convertible Promissory Note issued to
Monsun, AS on November 1, 2000. (Incorporated by reference
to Exhibit 10.23 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000.)*
10.23 Form of $200,000 Promissory Note issued to Azimuth
Corporation on December 4, 2000. (Incorporated by reference
to Exhibit 10.24 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000.)*
10.24 Form of $100,000 Promissory Note issued to Azimuth
Corporation on December 11, 2000 in conjunction with the
proposed acquisition of AccuMed International, Inc. by the
Company. (Incorporated by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
10.25 Amendment to Patent and Technology License Agreement dated
June 9, 2000 by and between Ampersand Medical Corporation,
AccuMed International, Inc. and InPath, L.L.C. (Incorporated
by reference to Exhibit 10.26 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000.)*
</Table>
48
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.26 License and Development Agreement for Specific Medical
Technology for the Detection of Oncogenic HPV Virus dated
June 23, 2000, by and between Invirion, Dr. Bruce Patterson,
and Ampersand Medical Corporation. (Incorporated by
reference to Exhibit 10.27 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
10.27 First Addendum to License and Development Agreement for
Specific Medical Technology for the Detection of Oncogenic
HPV Virus dated September 12, 2000, by and between Invirion,
Dr. Bruce Patterson and Ampersand Medical Corporation.
(Incorporated by reference to Exhibit 10.28 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
10.28 Second Addendum to License and Development Agreement for
Specific Medical Technology for the Detection of Oncogenic
HPV Virus dated January 12, 2001, by and between Invirion,
Dr. Bruce Patterson and Ampersand Medical Corporation.
(Incorporated by reference to Exhibit 10.29 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
10.29 Form of $25,000 Promissory Note issued to Azimuth
Corporation on February 1, 2001 in conjunction with the
proposed acquisition of AccuMed International, Inc. by the
Company. (Incorporated by reference to Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
10.30 Form of $470,000 Promissory Note issued to Azimuth
Corporation on February 7, 2001 in conjunction with the
proposed acquisition of AccuMed International, Inc. by the
Company. (Incorporated by reference to Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
10.31 Lease Agreement between the Company and O.P., L.L.C date May
18, 2000, pertaining to premises located at 414 N. Orleans,
Suite 510, Chicago, Illinois 60610. (Incorporated by
reference to Exhibit 10.32 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
10.32 First Amendment to Lease Agreement between the Company and
O.P., L.L.C. dated February 13, 2001, pertaining to
additional premises at 414 N. Orleans, Suite 503, Chicago,
Illinois 60610 and extending the term of the original lease
until February 28, 2006. (Incorporated by reference to
Exhibit 10.33 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000.)*
10.33 Form of Restricted Stock Award of 25,000 shares of Common
Stock issued to Eric A Gombrich on May 1, 2000 as additional
compensation under a 36 month Employment Agreement dated
April 1 2000. (Incorporated by reference to Exhibit 10.34 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
10.34 Form of Restricted Stock Award of 50,000 shares of Common
Stock issued to Ralph M. Richart, M.D., on July 24, 2000 as
additional compensation under a 36 month Consulting
Agreement dated June 1, 2000. (Incorporated by reference to
Exhibit 10.35 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000.)*
10.35 Form of Restricted Stock Award of 50,000 shares of Common
Stock issued to J. Thomas Cox, M.D., on October 20, 2000 as
additional compensation under a 36 month Consulting
Agreement dated October 15, 2000. (Incorporated by reference
to Exhibit 10.36 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000.)
10.36 Form of Voting Agreement between the Company and each of the
officers and directors of AccuMed International, Inc.
(Exhibit A to the Agreement and Plan of Merger included in
Appendix I to the proxy statement-prospectus.)
10.37 $100,000 Promissory Note issued to Cadmus Corporation on
July 26, 2001. (Incorporated by reference to Exhibit 10.39
to the Company's S-4 Registration Statement, File No.
333-61666, filed August 24, 2001.)
10.38 $100,000 Promissory Note issued to Azimuth Corporation on
August 6, 2001. (Incorporated by reference to Exhibit 10.40
to the Company's S-4 Registration Statement, File No.
333-61666, filed August 24, 2001.)
</Table>
49
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.39 $25,000 Promissory Note issued to Northlea Partners, Ltd. on
August 6, 2001. (Incorporated by reference to Exhibit 10.41
to the Company's S-4 Registration Statement, File No.
333-61666, filed August 24, 2001.)
21.1 Subsidiaries of the Company.
</Table>
- ---------------
* SEC File No. 0-935
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8K dated September 17, 2001
reporting, under Item 2, the acquisition of assets as a result of the completion
of a merger transaction by and among AccuMed International, Inc. ("AccuMed"),
AccuMed Acquisition Corp. ("Acquisition Sub"), and the Company, pursuant to
which AccuMed merged with and into Acquisition Sub, which is a wholly owned
subsidiary of the Company.
The Company filed a Current Report on Form 8K dated December 31, 2001
reporting, under Item 5, that Leonard R. Prange tendered his resignation on
December 31, 2001, as President, Chief Operating Officer, Chief Financial
Officer and Secretary of the Company. The Company's Board of Directors appointed
Peter P. Gombrich, the Chairman of the Board of Directors, to fill the vacancy
in those offices until a successor is hired.
(c) SEE ITEM 14 (a)3 ABOVE
(d) THE FINANCIAL STATEMENTS SCHEDULES ARE FILED (AS A SEPARATE SECTION OF
THIS REPORT)
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MOLECULAR DIAGNOSTICS, INC.
BY: /s/ PETER P. GOMBRICH
------------------------------------
Peter P. Gombrich
Chairman of the Board, and
Chief Executive Officer
Date: April 30, 2002
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PETER P. GOMBRICH Director, Chairman of the Board, and Chief April 30, 2002
- ------------------------------------------------ Executive Officer, Acting President and
Peter P. Gombrich Chief Financial Officer (Principal
Executive Officer)
Director April 30, 2002
- ------------------------------------------------
Alexander M. Milley
/s/ JOHN ABELES Director April 30, 2002
- ------------------------------------------------
John Abeles
/s/ DENIS M. O'DONNELL Director April 30, 2002
- ------------------------------------------------
Denis M. O'Donnell
Director April 30, 2002
- ------------------------------------------------
Robert C. Shaw
</Table>
51
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Molecular Diagnostics, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Molecular
Diagnostics, Inc. and Subsidiaries, formerly Ampersand Medical Corporation, as
of December 31, 2001 and 2000, and the related statements of operations, changes
in stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 31, 2001. Our audits also included the financial
statement schedule listed in the index at item 14. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Molecular Diagnostics, Inc.
and Subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company has incurred substantial net losses
from operations and has limited financial resources. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with regard to these matters are described in Note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG, LLP
Chicago, Illinois
April 8, 2002
F-1
PART I -- FINANCIAL INFORMATION
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 1,025 $ 13
Notes receivable.......................................... -- 330
Accounts receivables, net of allowance for doubtful
accounts of $4 at December 31, 2001 and 2000............ 463 465
Accrued interest receivable............................... -- 73
Inventories............................................... 533 248
Refundable taxes.......................................... 116 119
Due from stockholder...................................... 50 46
Prepaid expenses and other current assets................. 141 105
-------- --------
Total current assets............................... 2,328 1,399
Fixed Assets, net........................................... 835 385
Other Assets:
License, patents, and technology, net of amortization..... 8,180 1,637
Goodwill, net of amortization............................. 283 148
Prepaid royalties......................................... -- 1,006
-------- --------
Total assets....................................... $ 11,626 $ 4,575
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.......................................... $ 2,502 $ 1,909
Customer and other deposits............................... 49 547
Accrued payroll costs..................................... 868 231
Accrued expenses.......................................... 1,126 586
Deferred revenue.......................................... 567 195
Revolving line of credit.................................. 177 127
Lease obligation.......................................... 87 --
Notes payable -- related party............................ 65 709
Notes payable............................................. 1,359 396
-------- --------
Total current liabilities.......................... 6,800 4,700
Lease Obligation, less current portion...................... 203 --
-------- --------
Total liabilities.............................. 7,003 4,700
-------- --------
Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value; shares
authorized -- 5,000,000; shares issued and outstanding in
2001 -- 3,493,078......................................... 21,089 --
Common stock, $0.001 par value; shares
authorized -- 50,000,000; shares issued and
outstanding -- 25,304,883 and 30,211,457, at December 31,
2001 and December 31, 2000, respectively.................. 26 30
Additional paid-in capital.................................. 12,212 12,018
Treasury stock; 192,088 shares at December 31, 2001......... (327) --
Deferred compensation....................................... (61) --
Note receivable from stockholder............................ -- (450)
Accumulated deficit......................................... (28,289) (11,626)
Accumulated comprehensive loss --
Cumulative translation adjustment....................... (27) (97)
-------- --------
Total stockholders' equity (deficit)............... 4,623 (125)
-------- --------
Total liabilities and stockholders' equity
(deficit)......................................... $ 11,626 $ 4,575
======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
Net Sales............................................. $ 877 $ 1,094 $ 1,040
Costs and Expenses:
Cost of goods sold.................................. 476 637 542
Research and development............................ 4,034 3,426 1,782
Selling, general and administrative expenses........ 6,347 3,719 2,833
Impairment loss..................................... 6,107 -- --
----------- ----------- -----------
Total costs and expenses.................... 16,964 7,782 5,157
----------- ----------- -----------
Operating Loss........................................ (16,087) (6,688) (4,117)
----------- ----------- -----------
Other income (expense):
Interest expense -- related party................... (230) (155) (14)
Interest expense.................................... (296) (80) (72)
Interest income, related party...................... 25 63 --
Interest income..................................... 85 10 --
Other, net.......................................... (127) 239 (23)
----------- ----------- -----------
(543) 77 (109)
----------- ----------- -----------
Loss before income taxes.............................. (16,630) (6,611) (4,226)
----------- ----------- -----------
Income taxes.......................................... -- -- --
----------- ----------- -----------
Net loss.............................................. $ (16,630) $ (6,611) $ (4,226)
=========== =========== ===========
Preferred stock dividends............................. (562) -- --
Deemed dividend upon issuance of convertible preferred
stock............................................... (2,599) -- --
----------- ----------- -----------
Total dividends....................................... (3,161) -- --
----------- ----------- -----------
Net loss available for common shareholders............ $ (19,791) $ (6,611) $ (4,226)
=========== =========== ===========
Basic and fully diluted net loss per common share..... $ (.62) $ (.24) $ (.29)
=========== =========== ===========
Weighted average number of common shares
outstanding......................................... 32,019,531 27,869,274 14,336,667
=========== =========== ===========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------
2001 2000 1999
-------- ------- -------
Operating Activities:
Net loss.................................................. $(16,630) $(6,611) $(4,226)
Adjustments to reconcile net loss to net cash used for
operating activities:
Forgiveness of amounts due to service providers
recognized as expense in prior years................... -- (220) --
Amortization of debt discount........................... 241 139 --
Depreciation and amortization........................... 683 428 292
Loss on impairment of goodwill.......................... 5,833
Loss on write-off of Cell Solutions..................... 127
Loss on disposal of equipment........................... -- -- 21
Loss on impairment of patents........................... 274
Stock, warrants, and options issued to non-employees for
services............................................... 379 488 201
Compensation expense related to Stock Appreciation
Rights................................................. 252 91 231
Expenses paid with common stock......................... 37 71 --
Interest expense paid with stock........................ 66 20 --
Changes in assets and liabilities:
Accounts receivable, net.............................. 12 (67) (398)
Inventories........................................... (9) (186) (62)
Refundable taxes...................................... (3) 12 (131)
Due from stockholder.................................. (50) -- --
Prepaid expenses and other current assets............. 32 (166) 111
Prepaid royalties..................................... 36 (500) --
Accounts payable...................................... (334) 680 861
Deposits.............................................. 3 7 40
Deferred revenue...................................... 135 127 68
Accrued royalties..................................... -- (250) 250
Accrued expenses...................................... 953 21 697
-------- ------- -------
Net cash used for operating activities...................... (7,963) (5,916) (2,045)
-------- ------- -------
Cash used in investing activities:
Payments for acquisitions................................. -- -- (500)
Net cash acquired......................................... 43 -- --
Expenditures for license, patents, and technology......... (134) (532) (25)
Capital purchases......................................... (542) (307) (144)
Issuances for notes receivable............................ (1,270) (330) --
-------- ------- -------
Net cash used for investing activities...................... (1,903) (1,169) (669)
-------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of convertible notes payable....... -- 500 1,146
Proceeds from issuance of convertible notes payable,
related party........................................... -- 500 --
Proceeds from issuance of notes payable................... 600 -- --
Proceeds from issuance of notes payable, related party.... 810 300 --
Proceeds from issuance of common stock, net of costs
incurred................................................ 6 5,484 983
Proceeds from issuance of preferred stock, net of costs
incurred................................................ 10,452 -- --
Proceeds from note payable from shareholder............... 450 -- --
Payment of notes payable.................................. (27) (175) --
Payment of notes payable, related party................... (1,545) (26) (130)
Proceeds from revolving line of credit, net............... 58 (7) 134
Deposit received for future purchase of stock............... -- 500 --
-------- ------- -------
Net cash provided by financing activities................... 10,804 7,076 2,133
-------- ------- -------
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
2001 2000 1999
------- ----- ------
Effect of exchange rate changes on cash..................... 74 (14) (83)
------ ---- -----
Net increase (decrease) in cash and cash equivalents........ 1,012 (23) (664)
Cash and cash equivalents at beginning of period............ 13 36 700
------ ---- -----
Cash and cash equivalents at end of period.................. $1,025 $ 13 $ 36
------ ---- -----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest.................................................... $ 135 $ 13 $ 5
Income taxes................................................ $ -- $ -- $ --
NON-CASH TRANSACTION DURING THE PERIOD FOR:
Note receivable given to purchase Common Stock.............. -- $450 $ --
Warrants issued for license................................. $ 49 $530 $ --
Common stock issued for license............................. $ -- $450 $ --
Deferred financing costs.................................... $ -- $334 $ --
Warrant issued for Cell Solutions Investment................ $ 127 $ -- $ --
Series E preferred stock issued in exchange for common
stock..................................................... $9,557 $ -- $ --
Preferred stock converted into common stock................. $ 676 $ -- $ --
</Table>
See Note 3 for noncash transaction related to the acquisition of AccuMed.
The accompanying notes are an integral part of these financial statements.
F-5
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
PREFERRED STOCK COMMON STOCK COMMON STOCK
PAR VALUE $0.001 NO PAR VALUE PAR VALUE $0.001 TREASURY STOCK ADDITIONAL
------------------- --------------------- -------------------- ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------- ----------- ------- ----------- ------ -------- ------ ----------
January 1, 1999............ $ -- 12,000,000 1,517 $ -- $ --
Merger of Bell National
into Ampersand Medical
Corporation.............. -- (12,000,000) (1,517) 12,000,000 12 -- 1,505
Cancellation of common
stock.................... (696,570) -- -- --
Comprehensive Loss:
Net loss................. -- -- -- -- --
Foreign currency
translation............ -- -- -- -- --
Total comprehensive
loss...................
Conversion of notes payable
and accrued interest..... -- -- 382,442 -- -- 126
Exercise of warrants....... -- -- 3,251,850 3 -- 20
Warrants issued for
services................. -- -- -- -- 126
Sale of common stock, net
of costs incurred........ -- -- 3,989,848 4 -- 956
Restricted stock issued for
services................. -- -- 100,000 -- -- 21
Options issued to non-
employees for services... -- -- -- -- 54
Compensation expense
related to SARs.......... -- -- -- -- 231
--------- ------- ----------- ------- ----------- ---- -------- ----- -------
December 31, 1999.......... -- $ -- $ -- 19,027,570 $ 19 $ -- $ 3,039
Comprehensive Loss:
Net loss................. -- -- -- -- --
Foreign currency
translation............ -- -- -- -- --
Total comprehensive
loss...................
Note receivable from
stockholder.............. -- -- -- -- --
Conversion of notes payable
and accrued interest..... -- -- 5,412,544 5 -- 1,077
Debt discount on
convertible notes........ -- -- -- -- -- 250
Warrants issued as debt
discount................. -- -- -- -- -- 84
Warrants issued to purchase
license.................. -- -- -- -- -- 530
Warrants issued for
services................. -- -- -- -- -- 91
Exercise of warrants....... -- -- 70,000 -- -- 23
<Caption>
NOTE
RECEIVABLE OTHER TOTAL
FROM DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
STOCKHOLDER COMPENSATION DEFICIT LOSS EQUITY
----------- ------------ ----------- ------------- -------------
January 1, 1999............ $ -- $ -- $ (789) $ -- $ 728
Merger of Bell National
into Ampersand Medical
Corporation.............. -- -- -- -- --
Cancellation of common
stock.................... -- -- -- -- --
Comprehensive Loss:
Net loss................. -- -- (4,226) -- (4,226)
Foreign currency
translation............ -- -- -- (83) (83)
--------
Total comprehensive
loss................... (4,309)
Conversion of notes payable
and accrued interest..... -- -- -- -- 126
Exercise of warrants....... -- -- -- -- 23
Warrants issued for
services................. -- -- -- -- 126
Sale of common stock, net
of costs incurred........ -- 960
Restricted stock issued for
services................. -- -- -- -- 21
Options issued to non-
employees for services... -- -- -- -- 54
Compensation expense
related to SARs.......... -- -- -- -- 231
----- ---- -------- ---- --------
December 31, 1999.......... $ -- $ -- $ (5,015) $(83) $ (2,040)
Comprehensive Loss:
Net loss................. -- -- (6,611) -- (6,611)
Foreign currency
translation............ -- -- -- (14) (14)
--------
Total comprehensive
loss................... (6,625)
Note receivable from
stockholder.............. (450) -- -- -- (450)
Conversion of notes payable
and accrued interest..... -- -- -- -- 1,082
Debt discount on
convertible notes........ -- -- -- -- 250
Warrants issued as debt
discount................. -- -- -- -- 84
Warrants issued to purchase
license.................. -- -- -- -- 530
Warrants issued for
services................. -- -- -- -- 91
Exercise of warrants....... -- -- -- -- 23
</Table>
F-6
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
PREFERRED STOCK COMMON STOCK COMMON STOCK
PAR VALUE $0.001 NO PAR VALUE PAR VALUE $0.001 TREASURY STOCK ADDITIONAL
------------------- --------------------- -------------------- ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------- ----------- ------- ----------- ------ -------- ------ ----------
Sale of common stock....... -- -- 5,300,450 6 -- 5,883
Sale of common stock to
employees................ -- -- 21,989 -- -- 17
Common stock issued for
royalty payment.......... -- -- 128,571 -- -- 386
Common stock issued for
services................. -- -- -- -- 60
Restricted stock issued for
services................. -- -- 225,333 -- -- 202
Restricted stock issued for
compensation............. -- -- 25,000 -- -- 15
Options issued to non-
employees for services... -- -- -- -- 270
Compensation expense
related to SARs.......... -- -- -- -- 91
--------- ------- ----------- ------- ----------- ---- -------- ----- -------
December 31, 2000.......... -- $ -- -- $ -- 30,211,457 $ 30 $ -- $12,018
Comprehensive Loss:
Net loss................. -- -- -- -- --
Foreign currency
translation............ -- -- -- -- --
Total net comprehensive
loss...................
Sale of Series B preferred
stock, net of offering
costs.................... 1,499,856 5,840 -- -- -- -- --
Series B preferred stock
and accumulated dividends
converted to common...... (142,500) (570) -- -- 604,592 1 -- 602
Series A preferred stock,
common stock, options and
warrants issued in
AccuMed acquisition...... 218,438 983 3,911,245 4 (192,088) (327) 8,423
Series A preferred stock
converted to common...... (23,603) (106) -- -- 10,310 -- -- 106
Sale of Series C preferred
stock, net of offering
costs.................... 1,331,499 3,635 -- -- -- --
Sale of Series D preferred
stock.................... 175,000 1,750 -- -- -- --
<Caption>
NOTE
RECEIVABLE OTHER TOTAL
FROM DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
STOCKHOLDER COMPENSATION DEFICIT LOSS EQUITY
----------- ------------ ----------- ------------- -------------
Sale of common stock....... -- -- -- -- 5,889
Sale of common stock to
employees................ -- -- -- -- 17
Common stock issued for
royalty payment.......... -- -- -- -- 386
Common stock issued for
services................. -- -- -- -- 60
Restricted stock issued for
services................. -- -- -- -- 202
Restricted stock issued for
compensation............. -- -- -- -- 15
Options issued to non-
employees for services... -- -- -- -- 270
Compensation expense
related to SARs.......... -- -- -- -- 91
----- ---- -------- ---- --------
December 31, 2000.......... (450) $ $(11,626) $(97) $ (125)
Comprehensive Loss:
Net loss................. -- (16,630) -- (16,630)
Foreign currency
translation............ -- -- -- 70 70
--------
Total net comprehensive
loss................... (16,560)
Sale of Series B preferred
stock, net of offering
costs.................... -- -- -- -- 5,840
Series B preferred stock
and accumulated dividends
converted to common...... -- -- (33) -- --
Series A preferred stock,
common stock, options and
warrants issued in
AccuMed acquisition...... (75) -- -- 9,008
Series A preferred stock
converted to common...... -- -- -- -- --
Sale of Series C preferred
stock, net of offering
costs.................... -- -- -- -- 3,635
Sale of Series D preferred
stock.................... -- -- -- 1,750
</Table>
F-7
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
PREFERRED STOCK COMMON STOCK COMMON STOCK
PAR VALUE $0.001 NO PAR VALUE PAR VALUE $0.001 TREASURY STOCK ADDITIONAL
------------------- --------------------- -------------------- ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------- ----------- ------- ----------- ------ -------- ------ ----------
Common stock tendered for
Series E preferred
stock.................... 434,388 9,557 -- (10,859,688) (11) -- (9,546)
Equity issuance costs...... -- -- -- (272)
Beneficial conversion
feature on convertible
notes.................... -- -- -- 50
Restricted stock issued for
services................. -- -- -- 50
Warrants issued for
services................. -- -- -- 249
Options issued to non-
employees for services... 52
Reversal of Compensation
expense related to
SARs..................... -- -- -- (79)
Sale of common stock to
employees................ -- -- 8,028 -- -- 11
Warrants issued with
debt..................... -- -- -- 66
Warrants issued for
investment in Cell
Solutions................ -- -- -- 127
Deferred compensation
expense for unvested
options issued in
acquisition.............. -- -- -- --
Common stock issued on
exercise of warrants..... -- -- 840,247 1 -- (1)
Common stock issued for
services................. -- -- 510,692 1 -- (1)
Common stock issued to
employees................ -- -- 51,334 -- --
Exercise of options........ -- -- 16,666 -- 5
Options issued to former
officer.................. 303
Payments received on
stockholder note.........
Warrants issued to purchase
license.................. 49
--------- ------- ----------- ------- ----------- ---- -------- ----- -------
December 31, 2001.......... 3,493,078 $21,089 -- $ 25,304,883 $ 26 (192,088) $(327) $12,212
========= ======= =========== ======= =========== ==== ======== ===== =======
<Caption>
NOTE
RECEIVABLE OTHER TOTAL
FROM DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
STOCKHOLDER COMPENSATION DEFICIT LOSS EQUITY
----------- ------------ ----------- ------------- -------------
Common stock tendered for
Series E preferred
stock.................... -- -- -- --
Equity issuance costs...... -- -- -- (272)
Beneficial conversion
feature on convertible
notes.................... -- -- -- 50
Restricted stock issued for
services................. 50
Warrants issued for
services................. -- -- -- 249
Options issued to non-
employees for services... 52
Reversal of Compensation
expense related to
SARs..................... -- -- -- (79)
Sale of common stock to
employees................ -- -- -- 11
Warrants issued with
debt..................... -- -- -- 66
Warrants issued for
investment in Cell
Solutions................ -- -- -- 127
Deferred compensation
expense for unvested
options issued in
acquisition.............. -- 14 -- -- 14
Common stock issued on
exercise of warrants..... -- -- -- --
Common stock issued for
services................. -- -- -- --
Common stock issued to
employees................ -- -- -- --
Exercise of options........ -- -- -- 5
Options issued to former
officer.................. 303
Payments received on
stockholder note......... 450 450
Warrants issued to purchase
license.................. 49
----- ---- -------- ---- --------
December 31, 2001.......... $ -- $(61) $(28,289) $(27) $ 4,623
===== ==== ======== ==== ========
</Table>
The accompanying notes are an integral part of these financial statements.
F-8
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001
NOTE 1. THE COMPANY AND BASIS OF PRESENTATION
Molecular Diagnostics, Inc, which may also be referred to as "MDI" was
incorporated as Ampersand Medical Corporation in Delaware on December 15, 1998,
as the successor to Bell National Corporation ("Bell National"). Bell National
was incorporated in California in 1958.
On September 25, 2001, the Company changed its corporate name to Molecular
Diagnostics, Inc. in order to better represent its operations and products. The
name change was effected by a merger with a wholly-owned subsidiary. Molecular
Diagnostics, Inc. has retained its Certificate of Incorporation, except as
amended to reflect the new name, bylaws and capitalization.
On December 4, 1998, Bell National (then a shell corporation without any
business activity) acquired InPath, LLC, a development-stage company engaged in
the design and development of medical instruments and related tests. In the
acquisition, Bell National issued 4,288,790 shares of common stock and warrants
to purchase 3,175,850 shares of common stock to the members of InPath in
exchange for their units of membership interest in InPath and the senior
executives of InPath assumed management control of MDI.
Based upon the terms of the acquisition agreement, for financial reporting
and accounting purposes the acquisition was accounted for as a reverse
acquisition whereby InPath is deemed to have acquired Bell National. However,
Bell National was the continuing legal entity and registrant for both Securities
and Exchange Commission filing purposes and income tax filing purposes, until
its merger into MDI in May 1999. Because Bell National was a non-operating
public shell company with nominal assets and InPath was a private operating
company, the acquisition was recorded as the issuance of stock for the net
monetary assets of Bell National, accompanied by a recapitalization and no
goodwill or other intangible assets were recorded.
On September 17, 2001, Molecular Diagnostics, Inc. completed an acquisition
transaction whereby AccuMed International, Inc. was merged into a wholly-owned
subsidiary of MDI. The value of the transaction was approximately $14,178,000.
Accordingly, the consolidated financial statements presented hereunder include
the operations of InPath from March 16, 1998 (inception), the operations of Bell
National and Molecular Diagnostics, Inc. from December 4, 1998, and the
operations of AccuMed International, Inc. from September 17, 2001.
Molecular Diagnostics, Inc. is focused on the design, development and
marketing of the InPath System. The InPath System and related products are
intended to detect cancer and cancer related diseases. These products may be
used in a laboratory, clinic, or doctor's office.
Molecular Diagnostics, Inc. has another wholly owned subsidiary, Samba
Technologies, Sarl ("Samba"). MDI acquired all of the assets of Samba in January
1999 from Unilog Regions, SA for approximately $500,000 in cash. Samba designs,
develops, and markets web-enabled software based systems for image analysis,
image capture, and image transmission and management for clinical and industrial
applications. Samba is also developing software used in the InPath System. A
majority of reported revenues since inception of Molecular Diagnostics, Inc.
have been generated by Samba.
Molecular Diagnostics, Inc. has incurred significant operating losses since
its inception. Management expects that significant on-going operating
expenditures will be necessary to successfully implement MDI's business plan and
develop, manufacture and market its products. These circumstances raise
substantial doubt about MDI's ability to continue as a going concern.
Implementation of its plans and its ability to continue as a going concern
depend upon its securing substantial additional financing. Management's plans
include substantial efforts to obtain additional capital. If Molecular
Diagnostics, Inc. is unable to obtain adequate additional financing or generate
profitable sales revenues, management may be required to curtail its product
development and other activities and may be forced to cease operations.
F-9
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
Molecular Diagnostics, Inc. and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated.
New Accounting Standards. On June 29, 2001, the Financial Accounting
Standards Board (FASB) approved its proposed Statements of Financial Accounting
Standards No. 141 (FAS 141), Business Combinations, and No. 142 (FAS 142),
Goodwill and Other Intangible Assets.
FAS 141 supercedes Accounting Principles Board Opinion No. 16 (APB 16),
Business Combinations. The most significant changes made by FAS 141 are: (1)
requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and (2) establishing specific
criteria for the recognition of intangible assets separately from goodwill.
FAS 142 supercedes APB 17, Intangible Assets. FAS 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their
acquisition (i.e., the post-acquisition accounting). The provisions of FAS 142
will be effective for 2002.
The most significant changes made by FAS 142 are (1): goodwill and
indefinite lived intangible assets will no longer be amortized, (2) goodwill
will be tested for impairment at least annually at the reporting unit level, (3)
intangible assets deemed to have an indefinite life will be tested for
impairment at least annually, and (4) the amortization period of intangible
assets with finite lives will no longer be limited to forty years.
The Company adopted FAS 141 effective July 1, 2001 and will adopt FAS 142
effective January 1, 2002. These standards only permit prospective application
of the new accounting; accordingly, the adoption of these standards will not
affect previously reported financial information. The effect of adopting FAS 142
will not be material.
The FASB recently issued FAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. FAS 144 retains
and expands upon the fundamental provisions of existing guidance related to the
recognition and measurement of the impairment of long-lived assets to be held
and used and the measurement of long-lived assets to be disposed of by sale.
Generally, the provisions of FAS 144 are effective for financial statements
issued for fiscal years beginning after December 15, 2001. Earlier application
is encouraged.
Use of Estimates. The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Revenue Recognition. Molecular Diagnostics, Inc. recognizes revenue upon
shipment of product or license to customers and no remaining Company obligations
or contingencies exist, or in the case of sales of software by its wholly owned
subsidiary Samba, upon shipment if persuasive evidence of an arrangement exists;
sufficient vendor-specific objective evidence exists to support allocating the
total fee to all elements of the arrangement; the fee is fixed or determinable;
and collection is probable.
Revenue from ongoing client maintenance is recognized ratably over the
post-contract support term, which is generally twelve months. Revenue from
training services and professional services is recognized when the service is
completed. Revenue from implementation and installation services is recognized
using the percentage of completion method. Samba calculates percentage of
completion based on the estimated total number of hours of service required to
complete an implementation project and the number of actual hours of service
rendered. Implementation and installation services are generally completed
within 120 days.
F-10
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
Cash and Cash Equivalents. Molecular Diagnostics, Inc. considers all
highly liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents.
Inventory of Instruments and Component Parts. Inventory of instruments and
component parts consists of AcCell instruments and component parts necessary to
manufacture AcCell instruments. The manufacturing process is carried out in the
facilities of a third-party contractor. Inventory is stated at the
lower-of-cost-or-market cost is determined by the first-in-first-out (FIFO)
method. The Company has established a policy for reserving obsolete and excess
inventory, generally any non-usable, damaged, or non-salable inventory or
inventory with little or no demand for the product in excess of one year.
Property and Equipment. Property and equipment are stated at cost and are
depreciated using the straight-line method over the assets' estimated useful
lives. Principal useful lives are as follows:
<Table>
<Caption>
Furniture and fixtures............... 5 years
Laboratory equipment................. 5 years
Computer and communications
equipment.......................... 3 years
Leasehold improvements............... Useful life or life of lease,
whichever is shorter
</Table>
Normal maintenance and repairs are charged to expense as incurred,
significant improvements are capitalized.
License, Patents, and Technology. License, patents, and purchased
technology are recorded at their acquisition cost. Costs to prepare patent
filings are capitalized when incurred. Costs related to abandoned or denied
patent applications are written off at the time of abandonment or denial.
Amortization is begun as of the date of acquisition or upon the grant of the
final patent. Costs are amortized over the asset's useful life, which ranges
from two to seventeen years. The Company assesses licenses, patents, &
technology quarterly for impairment.
Goodwill. Amortization expense for 2001, 2000 and 1999 related to goodwill
was approximately $141,000, $146,000 and $167,000 respectively. As described in
New Accounting Standards above, the Company has adopted FAS 141 and will adopt
FAS 142, effective January 1, 2002. FAS 142 sets forth guidelines for
discontinuing periodic goodwill amortization costs in results of operations and
for establishing an annual goodwill impairment review and related net realizable
value asset write-down methodology.
Research and Development Costs. Research and development costs are charged
to operations as incurred. Molecular Diagnostics, Inc. conducts a portion of its
research activities under contractual arrangements with scientists, researchers,
universities, and other independent third parties.
Foreign Currency Translation. The functional currency of Molecular
Diagnostics, Inc.'s foreign operations is the local currency. Accordingly, all
assets and liabilities are translated into United States dollars using year-end
exchange rates, and all revenues and expenses are translated using
weighted-average exchange rates during the year. The amount of foreign currency
translation is not material to the results of operations and the financial
position of Molecular Diagnostics, Inc.
Other Comprehensive Income (Loss). Translation adjustments related to
Molecular Diagnostics, Inc.'s foreign operations are included in other
comprehensive loss and reported separately in stockholders' equity.
Loss Per Share. Basic loss per share is calculated based on the
weighted-average number of outstanding common shares. Diluted loss per share is
calculated based on the weighted-average number of outstanding common shares
plus the effect of dilutive potential common shares. Molecular Diagnostics,
Inc.'s calculation of dilutive net loss per share excludes potential common
shares as the effect would be antidilutive. Cumulative
F-11
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
and deemed dividends on convertible preferred shares totaled approximately
$3,161,000 through December 31, 2001. There were no preferred dividends in 2000
or 1999. Loss per share for common shareholders as of December 31, 2001 is
$0.62. Potential common shares include stock underlying convertible notes,
convertible preferred stock, stock options, and warrants. The weighted-average
number of options and warrants to purchase common stock using the treasury stock
method for 2001 and 2000 was 19,575,547 and 4,936,000 shares, respectively.
Income Taxes. MDI follows the liability method in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using tax rates and laws that are expected to be in
effect when the differences are expected to reverse. Valuation allowances are
provided against deferred tax assets if it is more likely than not that the
deferred tax assets will not be realized.
Stock Compensation. As permitted by the Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), Molecular
Diagnostics, Inc. uses the intrinsic value method to account for stock options
as set forth in Accounting Principles Board No. 25, Accounting for Stock Issued
to Employees (APB 25).
Reclassification. Certain amounts reported in 2000 consolidated financial
statements have been reclassified to conform with 2001 presentation.
Impairment. At each balance sheet date or whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, management of the Company evaluates recoverability of such assets.
An impairment loss is recognized if the amount of undiscounted cash flows is
less than the carrying amount of the asset in which case the asset is written
down to fair value. The fair value of the asset is measured by either quoted
market prices or the present value of estimated expected future cash flows using
a discount rate commensurate with the risks involved.
NOTE 3. ACQUISITION
On September 17, 2001, Molecular Diagnostics, Inc. acquired AccuMed by
issuing 3,911,245 shares of its common stock to holders of all of the
outstanding common stock of AccuMed, and 218,438 shares of its Series A
convertible preferred stock to holders of all of the outstanding Series A
convertible preferred stock of AccuMed.
As a result of the acquisition, MDI (1) assumed AccuMed's outstanding stock
options and warrants, (2) forgave a note receivable due from AccuMed, (3)
wrote-off unamortized license fees and prepaid royalties previously paid under a
licensing agreement with AccuMed and, (4) received 192,088 shares of its common
stock that was held by AccuMed.
The value of the transaction was approximately $14,178,000 and was
determined based on the market price of MDI's common stock over the period of a
few days before and after February 7, 2001, the date the merger was agreed to
and announced. The acquisition was recorded as a purchase business combination
in accordance with Statement of Financial Accounting Standards No. 141, Business
Combinations. Molecular Diagnostics, Inc. is consolidating the results of
AccuMed operations from the date of acquisition.
F-12
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
A summary of the purchase price is as follows (in thousands):
<Table>
Fair value of 3,911,245 common shares issued................ $ 6,649
Fair value of 218,438 Series A preferred shared issued...... 162
Fair value of 1,128,198 AccuMed warrants assumed............ 1,918
Fair value of 366,495 AccuMed stock options assumed......... 606
Note receivable due from AccuMed, including accrued
interest.................................................. 1,595
Unamortized license fees and prepaid royalties previously
paid to AccuMed........................................... 1,423
Fair value of 192,088 MDI common shares held by AccuMed..... (326)
AccuMed liabilities assumed................................. 1,455
Direct acquisition costs incurred by MDI.................... 696
-------
Total purchase price.............................. $14,178
=======
</Table>
The purchase price was allocated to AccuMed's acquired assets based on
their respective fair market values, as follows (in thousands):
<Table>
Cash and cash equivalents................................... $ 43
Inventories................................................. 290
Other current assets........................................ 49
Fixed assets................................................ 115
Deferred compensation....................................... 75
Technology license agreements:
MDI license agreement..................................... 7,230
Dianon license agreement.................................. 260
Goodwill.................................................... 6,116
-------
Total purchase price.............................. $14,178
=======
</Table>
In allocating the purchase price, MDI obtained an appraisal to determine
the fair market values of the acquired technology license agreement and
inventories. Acquired technology license agreements are being amortized over the
remaining life of the respective agreements; seventeen years for the MDI license
agreement and two years for the Dianon license agreement.
The following selected unaudited pro forma consolidated results of
operations are presented as if the acquisition had occurred on January 1, 2000.
This information is presented for illustrative purposes only and is not
necessarily indicative of the operating results that would have been achieved if
the acquisition had been completed as of January 1, 2000, nor are they
necessarily indicative of the future operating results of Molecular Diagnostics,
Inc. The pro forma data does not give effect to any cost savings or
restructuring and integration costs that might result from the integration of
the companies' operations.
Pro forma results for the fiscal years ended December 31 (in thousands):
<Table>
<Caption>
2001 2000
-------- --------
Revenues.................................................... $ 1,586 $ 1,296
Net loss available to common stockholders................... (21,187) (10,084)
Basic and fully diluted net loss per share.................. $ (0.59) $ (0.32)
</Table>
F-13
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
At December 31, 2001, management determined several factors, principally
that certain contracts being negotiated by AccuMed failed to materialize,
indicating that the carrying value of goodwill relating to the AccuMed
acquisition was impaired. Based on this evaluation, MDI recognized an impairment
charge of $5,833,000.
NOTE 4. NOTES AND ACCOUNTS RECEIVABLE -- RELATED PARTY
On April 28, 2000, Molecular Diagnostics, Inc. sold 1,333,333 shares of
common stock to Seaside Partners, LP, a hedge fund, at $1.50 per share, or total
proceeds of $2,000,000. Dr. Denis M. O'Donnell, a director of MDI, is a member
and manager of Seaside Advisors, L.L.C., which provides investment management
services to Seaside Partners, L.P. The sale was in conjunction with the private
offering of common stock of Molecular Diagnostics, Inc. (See Note 13). In lieu
of cash, MDI agreed to accept payment in the form of a $2,000,000 promissory
note due July 27, 2000 and bearing interest at the rate of 8% per annum. The
note provisions allow for prepayment at anytime and the due date may be extended
by mutual agreement. MDI agreed to extend the due date of the note until
November 30, 2000. Seaside Partners, L.P. made principal payments amounting to
$1,550,000 during 2000 and the remaining $450,000 in principal was repaid during
2001 along with all accrued interest. At December 31, 2000 the unpaid principal
of the note was classified as a reduction of stockholders equity.
As of December 31, 2001, the Chairman of the Board and Chief Executive
Officer, Peter Gombrich, owes the Company approximately $50,000. The Company
considers this receivable to be collectible in the ordinary course of business.
NOTE 5. NOTES RECEIVABLE
On September 17, 2001, Molecular Diagnostics, Inc. completed the
acquisition of AccuMed. As a result, loans made to AccuMed prior to the
completion of the merger, $1,270,000 and $330,000 in 2001 and 2000 respectively,
and accrued interest receivable due on the notes, approximately $80,000 and
$10,000 respectively, were reclassified to intercompany accounts and eliminated
in the consolidated financial statements as of December 31, 2001 and 2000 in
accordance with accounting principles generally accepted in the United States.
NOTE 6. PREPAID ROYALTIES
On June 9, 2000, Molecular Diagnostics, Inc. executed an amendment to a
Patent and Technology License Agreement originally dated September 4, 1998,
between InPath and AccuMed. The amendment assigned the Patent and Technology
License Agreement directly to MDI, eliminated a minimum royalty payment required
by the original License, and reduced the royalty rate to 4%. As consideration
for this amendment, MDI paid $500,000 cash, issued a convertible note payable in
the principal amount of $100,000 and issued 128,571 shares of MDI common stock,
with a fixed value of $450,000, to AccuMed. The convertible note was paid in
full during December 2000. The $1,050,000 combined consideration paid to AccuMed
was recorded as prepaid royalty and was being charged to royalty expense based
on the recognition of revenues by MDI. As a result of the completion of the
merger of AccuMed into a wholly-owned subsidiary of MDI, the unamortized prepaid
royalty amount was eliminated in purchase accounting. During 2001 and 2000, MDI
recognized $36,000 and $44,000, respectively, as royalty expense prior to the
completion of the merger.
F-14
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
NOTE 7. FIXED ASSETS
Fixed assets consist of the following at December 31 (in thousands):
<Table>
<Caption>
2001 2000
----- -----
Furniture and fixtures...................................... $ 199 $ 71
Laboratory equipment........................................ 671 240
Computer and communications equipment....................... 286 220
Leasehold improvements...................................... 34 5
----- -----
1,190 536
Less accumulated depreciation and amortization.............. (355) (151)
----- -----
Total............................................. $ 835 $ 385
===== =====
</Table>
NOTE 8. LICENSES, PATENTS, AND TECHNOLOGY
Licenses, patents, and technology include the following at December 31 (in
thousands):
<Table>
<Caption>
2001 2000
------ ------
Licenses.................................................... $1,022 $1,675
Patent costs................................................ 133 183
MDI Technology Agreement.................................... 7,230 --
Dianon Technology Agreement................................. 260 --
------ ------
Subtotal.................................................... 8,645 1,858
Less accumulated amortization............................... (465) (221)
------ ------
Total............................................. $8,180 $1,637
====== ======
</Table>
During the fourth quarter of 2001, management performed an assessment of
the development of the MDI's pending patent portfolio. As a result of the
developmental nature of the portfolio and significant uncertainty surrounding
the ultimate issuance of the related patents, MDI recorded an impairment loss of
$274,000 for the full amount of the carrying value of its pending patent
portfolio.
NOTE 9. DEPOSITS
On December 17, 2000, Molecular Diagnostics, Inc. received $500,000 from
Monsun, AS, a potential investor in a private offering of equity securities of
MDI. The final terms and conditions of the offering were not finalized at
December 31, 2000 and the funds were subject to return. The deposit was applied
to the purchase price of 125,000 shares of Series B convertible preferred stock
in a private offering, as evidenced by a subscription agreement signed by
Monsun, AS in February 2001.
F-15
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
NOTE 10. ACCRUED EXPENSES
Accrued expenses includes the following December 31 (in thousands):
<Table>
<Caption>
2001 2000
------ ----
Accrued interest............................................ $ 38 $ 13
Accrued interest -- related party........................... 103 25
Accrued professional fees................................... 281 --
Accrued taxes............................................... 334 380
Reserve for warranty........................................ 20 21
Other accrued expenses...................................... 350 147
------ ----
Total............................................. $1,126 $586
====== ====
</Table>
MDI is currently delinquent in filing Federal and State Income Tax returns
for 1999 and 2000, and is actively attempting to remedy this matter. MDI also is
delinquent in paying Federal and State 1999 and 2000 employee and employer
payroll taxes. As of December 31, 2001, the Company owed $549,000 in past-due
payroll taxes, including $134,000 in assessed statutory penalties and interest.
MDI is currently in process of communicating through counsel with the Internal
Revenue Service. At this time, MDI believes it is not possible to determine the
impact, if any, upon the Company's financial condition. The amount was included
in accrued payroll costs in the accompanying balance sheet.
NOTE 11. NOTES PAYABLE -- RELATED PARTIES
Long-term debt for related parties at December 31 consisted of:
<Table>
<Caption>
2001 2000
---- ----
Azimuth Corporation, $500,000 Promissory Note issued
September 22, 2000; interest rate 15% per annum;
beneficial conversion feature valued at $125,000.......... $-- $409
Azimuth Corporation, $200,000 Promissory Note issued
December 4, 2000; interest rate 12% per annum; 50,000
warrants issued at $0.937 per share upon execution of
note; additional 25,000 warrants issued for default at
exercise price of $0.01 per share......................... -- 200
Azimuth Corporation, $100,000 Promissory Note issued
December 11, 2000; interest rate 12% per annum, 1,000,000
warrants issued at exercise price of $1.25 per share...... -- 100
Northlea Partners, Ltd., $25,000 Promissory Note issued
August 6, 2001; interest rate 15% per annum............... 25 --
Northlea Partners, Ltd., $15,000 Promissory Note issued
September 20, 2001; interest rate 9% per annum............ 15 --
Robert Shaw, $25,000 Promissory Note issued September 20,
2001; interest rate 9% per annum.......................... 25 --
--- ----
$65 $709
=== ====
</Table>
On August 6, 2001, Molecular Diagnostics, Inc. issued a promissory note to
Northlea Partners, Ltd. in exchange for $25,000 in cash. John Abeles, a director
of MDI, is the general partner of Northlea Partners, Ltd. The note was due on
September 22, 2001 and bears interest at the rate of 15% per annum. As
additional consideration for this note, MDI issued a five-year warrant to
Northlea Partners, Ltd. entitling the holder to purchase 62,500 shares of common
stock at an exercise price of $1.00 per share. The closing market price of
F-16
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
the common stock on the issue date of the warrant was $0.73 per share. MDI
determined the fair value of the warrant to be $1,411 using the fair value
interest rate method. This value was charged to interest expense during the
third quarter. The note and related accrued interest remain outstanding as of
December 31, 2001.
In August 2001, Molecular Diagnostics, Inc. agreed to issue a five-year
warrant to Azimuth Corporation, a company controlled by Alexander M. Milley, a
director and significant stockholder, entitling the holder to purchase 500,000
shares of common stock at an exercise price of $1.00 per share. In conjunction
with the issuance of this warrant, Azimuth agreed to relinquish the conversion
rights granted to it under the terms of the convertible promissory note
described in the preceding paragraph. The closing market price of our common
stock on the issue date of the warrant was $0.73 per share. MDI determined the
fair value of the warrant to be $25,000 using the fair value interest rate
method. This value was charged to interest expense during the third quarter of
2001.
On September 20, 2001, Molecular Diagnostics, Inc. issued a promissory note
to Northlea Partners, Ltd. in exchange for $15,000 in cash. The note was due on
December 20, 2001 and bears interest at the rate of 9% per annum. Also on
September 20, 2001 MDI issued a promissory note to Robert Shaw, a director of
MDI, in exchange for $25,000 in cash. The note was due December 20, 2001 and
bears interest at the rate of 9% per annum. The notes remain outstanding as of
December 31, 2001.
On September 22, 2000, MDI issued a convertible promissory note to Azimuth
Corporation in exchange for $500,000 in cash. The note bore interest at the rate
of 15% per year and was due twelve months from the date of issue. The note was
convertible into common stock of MDI any time after the expiration of the first
180 days of the loan term, at a conversion price of $1.00 per share. The
conversion price was less than the market price of the common stock of MDI at
the date of issuance of the note and therefore, the holder is considered to have
a beneficial conversion feature. MDI determined the value of this beneficial
conversion feature to be $125,000. This value was recorded as a reduction to the
debt and was amortized as additional interest expense over the life of the note.
During 2001 and 2000, MDI recorded $91,000 and $34,000 respectively, to interest
expense.
On December 4, 2000, Molecular Diagnostics, Inc. issued a promissory note
to Azimuth Corporation in exchange for $200,000 in cash. The note bore interest
at the rate of 12% per year and was due December 31, 2000. As additional
consideration for the note MDI issued Azimuth a warrant to purchase 50,000
shares of common stock of MDI at a price of $0.937 per share, the approximate
market price of the common stock at the time. Since the note was not repaid
until February 20, 2001, MDI was required to pay a 3% increase in the rate of
interest from January 1, 2001 until the date of repayment. As a further penalty,
MDI was also required to issue Azimuth two warrants, each to purchase 12,500
shares of MDI's common stock, at an exercise price of $0.01 per share. The value
of these warrants was determined to be $1,184 and the amount was charged to
interest expense during 2001.
On December 11, 2000, Molecular Diagnostics, Inc. issued a promissory note
to Azimuth Corporation in exchange for $100,000 in cash. The note bore interest
at the rate of 12% per year and was due 180 days from date of issue. As
additional consideration for the note MDI issued Azimuth a warrant to purchase
1,000,000 shares of its common stock at a price of $1.25 per share, an
approximate 15% premium to the market price of the common stock at the date of
issuance. The proceeds of this note were used to repay a convertible promissory
note to AccuMed due on March 29, 2001. The prepayment was made in conjunction
with ongoing negotiations to acquire AccuMed.
On February 20, 2001, Molecular Diagnostics, Inc. repaid the principal
amounts and accrued interest on the two December notes.
F-17
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
Molecular Diagnostics, Inc. determined the value of the warrants issued in
conjunction with the December 4, 2000 and December 11, 2000 notes to be $84,000.
This amount was charged to interest expense during 2000.
The carrying amount of notes payable approximates fair value at December
31, 2001 and 2000.
NOTE 12. NOTES PAYABLE
Long-term debt for unrelated parties at December 31 consisted of:
<Table>
<Caption>
2001 2000
------ ----
Monsun, AS, $500,000 Promissory Note issued November 1,
2000; interest rate 15% per annum; beneficial conversion
feature valued at $125,000; extension of maturity date for
issuance of 100,000 warrants at an exercise price of $0.60
per share................................................. $ 590 $396
NeoMed Innovations III, $500,000 Promissory Note issued May
15, 2001; interest rate 12% per annum; beneficial
conversion feature valued at $50,000...................... 481 --
Xillix Technologies Corporation, $361,000 Promissory Note
issued June 26, 1998; interest rate Canadian Prime + 6%
per annum; represents debt of AccuMed International....... 49 --
Western Economic Diversification, $221,000 Promissory Note
issued June 1989; no interest............................. 181 --
Schwarz, Cooper, Greenberger & Krauss, $500,000 Promissory
Note issued October 17, 2001; interest rate 12% per
annum..................................................... 58 --
------ ----
$1,359 $396
====== ====
</Table>
On May 15, 2001, MDI issued a convertible promissory note to NeoMed
Innovations III in exchange for $500,000 in cash. The note bears interest at the
rate of 12% per year and is due twelve months from the date of issue. The note
is convertible into common stock of MDI, any time after the expiration of the
first 180 days of the loan term, at a conversion price of $1.00 per share. The
conversion price of the note was less than the market price of the common stock
of MDI at the date of issuance of the note and therefore, the holder is
considered to have a beneficial conversion feature. MDI determined the value of
this beneficial conversion feature to be $50,000. This value was recorded as a
reduction to the debt and will be amortized as additional interest expense over
the life of the note. During 2001, MDI recorded $31,000 of interest expense
including amortization of the debt discount.
In conjunction with the acquisition of AccuMed International, Inc. on
September 17, 2001, MDI assumed the $180,663 unpaid principal amount of an
outstanding Canadian dollar convertible promissory note payable to Xillix
Technologies. The note is due on demand, bears interest at a rate of 6% over the
Canadian prime rate, and is convertible into the common stock of MDI at a
conversion price of $2.18 per share. Through December 31, 2001, MDI made cash
principal payments against the note amounting to $27,467. MDI also made cash
interest payments of $2,533 during the period ended December 31, 2001.
On October 31, 2001 Monsun, AS and MDI agreed to extend the due date of the
convertible promissory note until January 31, 2002. As consideration for the
extension agreement, MDI issued a three-year warrant to Monsun, as entitling the
holder to purchase 100,000 shares of common stock of MDI at an exercise price of
$0.60 per share. A fair value of $25,000 for the warrant was calculated using
the fair value method and was recorded as additional interest expense during
2001.
In July 1999, Molecular Diagnostics, Inc.'s wholly owned subsidiary, Samba,
negotiated a Revolving Credit Line ("Revolver") with the Banc National de Paris
(BNP). The terms of the Revolver provide that Samba may borrow, in the form of
an advance on payment against monthly billings, up to a maximum of 137,204
Euros, approximately $123,000. The terms of the Revolver require Samba to pay
interest at Euribor
F-18
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
plus 2.5%, (5.9% at December 31, 2001) on advances outstanding under the
Revolver and grant BNP a security interest in Samba accounts receivable. The
Revolver was renewed in January 2002. As of December 31, 2001 MDI recorded
approximately $177,000 in the consolidated balance sheet under the revolving
line of credit. Included in this amount is a cash overdraft of approximately
$65,000.
On November 1, 2000, Molecular Diagnostics, Inc. issued a convertible
promissory note to Monsun, AS in exchange for $500,000 in cash. The note bears
interest at the rate of 15% per year and was due twelve months from the date of
issue. The note is convertible into common stock, any time after the expiration
of the first 180 days of the loan term, at a conversion price of $1.00 per
share. The conversion price of the note was less than the market price of common
stock at the date of issuance of the note and therefore, the holder is
considered to have a beneficial conversion feature. MDI determined the value of
this beneficial conversion feature to be $125,000. This value was recorded as a
reduction to the debt and was amortized as additional interest expense over the
life of the note. During 2001 and 2000, MDI recorded $104,000 and $21,000
respectively to interest expense.
On November 1, 2001 MDI issued a Convertible Promissory Note to Schwarz,
Cooper, Greenberger & Krauss ("SCGK") in exchange for $500,000 in legal
services. The Note bears interest at the rate of 12% per year and is due in five
installments. The Note is convertible into Common Stock of MDI upon issuance of
the Note at a conversion price equal to the stock price on the conversion date.
In accordance with Promissory Note provisions, SCGK forgave the final
installment on the note which was due February 28, 2002. Therefore, MDI did not
include the final payment in its debt balance as of December 31, 2001.
The carrying amounts of notes payable approximates fair value at December
31, 2001 and 2000.
NOTE 13. STOCKHOLDERS' EQUITY
SALE OF EQUITY
Summary of the Company's preferred stock capital table as of December 31,
2001 is as follows:
<Table>
<Caption>
SHARES ISSUED &
OFFERING SHARES AUTHORIZED OUTSTANDING
- -------- ----------------- ---------------
Series A convertible................................... 590,197 194,835
Series B convertible, 10% cumulative................... 1,500,000 1,357,356
Series C convertible, 10% cumulative................... 1,666,666 1,331,499
Series D convertible, 10% cumulative................... 300,000 175,000
Series E convertible, 10% cumulative................... 800,000 434,388
--------- ---------
TOTAL PREFERRED STOCK................................ 4,856,863 3,493,078
========= =========
</Table>
During January 2000, Molecular Diagnostics, Inc. sold 1,712,120 shares of
common stock under a December 1999 private offering for $0.33 per share.
On various dates between February 7, 2000 and April 30, 2000, Molecular
Diagnostics, Inc. sold 3,440,743 shares of its common stock in a Private
Placement Offering to accredited private investors at a price of $1.50 per
share. MDI received total gross proceeds from this offering of $5,329,000.
In October 1999, MDI issued a warrant to The Research Works, as
consideration for the preparation of an investment research report on MDI,
entitling the holder to purchase 70,000 shares of common stock at $0.33 per
share. In April 2000, MDI received $23,100 in proceeds from the exercise of The
Research Works warrant.
F-19
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
During 2000, Molecular Diagnostics, Inc. received cash proceeds of $17,000
from the sale of 21,989 shares of its common stock to employees in accordance
with the terms of the Employee Stock Purchase Plan.
In September 2001, MDI issued 218,438 shares of Series A convertible
preferred stock to AccuMed in conjunction with the acquisition.
In October 2000, the Board of Directors authorized Molecular Diagnostics,
Inc. to raise additional new equity to support current and future operations. In
February 2001, MDI sold 1,333,856 shares of Series B convertible preferred stock
to accredited investors in a private offering. The Series B preferred stock has
a stated value of $4.00 per share, an annual dividend rate of 10%, and is
convertible into common stock at a conversion price equal to $1.00 per share.
MDI received net cash proceeds from the February 2001 offering of $5,176,000,
including $500,000 received during December 2000. Proceeds from the offering
were used to complete the acquisition of AccuMed, repay some outstanding
indebtedness, fund clinical studies and trials of MDI's products, and general
working capital. Upon issuance of the preferred stock, the Company determined
the fair value of its Common Stock to be $1.35 per share. The $1,867,398 was
considered a deemed dividend for loss per share purposes. As commission for
soliciting sales of Series B convertible preferred stock, MDI issued 374,000
shares of Common Stock and 533,542 warrants to advisors. Shares of common stock
were recorded at par value per share of $0.0001 or $374. The value of the
shares, $572,000, and the fair value of the warrants of $817,000 were recorded
as additional paid in capital. The cash payment of $159,000 made to advisors and
the fair value of the Common Stock and warrants were recorded as a debit to
additional paid in capital to reflect the cost of raising equity.
In May 2001, Molecular Diagnostics, Inc. sold the remaining 166,000
authorized shares of Series B convertible preferred stock to an accredited
foreign investor to complete the February 2001 private offering. MDI received
net cash proceeds of $664,000. Upon issuance of the preferred stock, the Company
determined the fair value of its Common Stock on May 15, 2001 to be $1.10 per
share. The $66,400 was considered a deemed dividend for loss per share purposes.
The 66,400 shares of Common Stock issued to the advisory group were recorded as
Common Stock at the par value per share of $0.001, or $66. The balance of the
value determined for the shares, $81,000, was recorded as additional
paid-in-capital to reflect the cost of raising equity.
In November 2001, the Company received $3,635,000 in net proceeds from the
private sale of 1,331,499 shares of Series C Convertible Preferred Stock, to a
limited number of accredited investors. The Series C preferred stock has a
dividend rate of 10% and is convertible into the Common Stock of the Company at
a conversion rate equal to $0.60 per share.
Also in November 2001, the Company received $1,750,000 in proceeds from the
sale of 175,000 shares of Series D Convertible Preferred Stock in a private sale
to Ventana Medical Systems, Inc ("Ventana"). The Series D preferred stock has a
dividend rate of 10% and is convertible into the Common Stock at a conversion
rate of $1.00 per share. The Company also issued a three-year warrant to Ventana
entitling the holder to purchase 1,750,000 shares of the Common Stock of the
Company at an exercise price of $1.15 per share.
In December 2001, the Company completed a tender offer to exchange 1/25 of
a share of Series E convertible preferred stock, par value $0.001 per share, for
each common share of Molecular Diagnostics, par value $0.001 per share, up to a
maximum of 20,000,000 shares of common, or a maximum of 800,000 Series E
preferred stock. As of December 31, 2001, 10,859,688 common shares have been
tendered for 434,388 preferred shares under the terms of this offering and is
valued at $9,557,000.
F-20
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
ISSUANCE OF PREFERRED STOCK
<Table>
SERIES A CONVERTIBLE PREFERRED STOCK
$4.50 per share
Liquidation Value:
$10.3034 per share
Conversion Price:
0.4367 -- Liquidation Value divided by Conversion Price
($4.50/$10.3034)
Conversion Rate:
None
Voting Rights:
None
Dividends:
Any time -- 3 years
Conversion Period:
SERIES B CONVERTIBLE PREFERRED STOCK
$4.00 per share
Liquidation Value:
$1.00 per share
Conversion Price:
4.00 -- Liquidation Value divided by Conversion Price
($4.00/$1.00)
Conversion Rate:
None
Voting Rights:
10% -- Quarterly -- Commencing March 31, 2001
Dividends:
Any time
Conversion Period:
Cumulative dividends in arrears at December 31, 2001 were $35,000
SERIES C CONVERTIBLE PREFERRED STOCK
$3.00 per share
Liquidation Value:
$0.60 per share
Conversion Price:
5.00 -- Liquidation Value divided by Conversion Price
($3.00/$0.60)
Conversion Rate:
None
Voting Rights:
10% -- Quarterly -- Commencing March 31, 2002
Dividends:
Any time
Conversion Period:
SERIES D CONVERTIBLE PREFERRED STOCK
$10.00 per share
Liquidation Value:
$1.00 per share
Conversion Price:
10.00 -- Liquidation Value divided by Conversion Price
($10.00/$1.00)
Conversion Rate:
None
Voting Rights:
10% -- Quarterly -- Commencing April 30, 2002
Dividends:
Any time -- After April 1, 2002
Conversion Period:
SERIES E CONVERTIBLE PREFERRED STOCK
$22.00 per share
Liquidation Value:
$0.80 per share
Conversion Price:
27.50 -- Liquidation Value divided by Conversion Price
($22.00/$0.80)
Conversion Rate:
Equal in all respects to holders of common shares
Voting Rights:
10% -- Quarterly -- Commencing May 31, 2002
Dividends:
Any time -- After December 1, 2002
Conversion Period:
</Table>
F-21
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
ISSUANCE OF RESTRICTED SHARES FOR SERVICES
In August 1999, Molecular Diagnostics, Inc. awarded 50,000 restricted
shares of common stock to a non-employee consultant for services. The award was
originally scheduled to vest over three years. The award was made as partial
consideration for consulting services to be performed under a three-year
consulting agreement. The consultant was required to maintain the consulting
relationship with MDI, except in the case of change of control or termination
MDI, during the entire vesting period. MDI and the consultant agreed to an early
termination, without cause, of the agreement as of July 1, 2000. This
termination resulted in the immediate vesting of the shares. A fair value of
$181,000 was calculated at the July 1, 2000 for the 50,000 shares. MDI charged
the remaining $175,000 in unamortized fair value to consulting expense during
2000.
Also in August 1999, Molecular Diagnostics, Inc. awarded an additional
50,000 restricted shares of common stock to a non-employee consultant under an
agreement for consulting services with terms similar to those outlined in the
preceding paragraph. The measurement date of these shares had not been
determined as of December 31, 2001, and therefore the value of these shares will
be based on the market value of the common stock at the end of each interim
period until the measurement date is determined. A fair value of $45,000 was
calculated at December 31, 2001, using the Black-Scholes valuation model. During
2001 and 2000, MDI recorded $13,000 and $19,000 respectively, as consulting
expense related to these shares.
During 2000, Molecular Diagnostics, Inc. issued additional awards of
restricted shares of common stock to non-employee consultants for services. The
awards total 100,000 shares, and were issued under agreements for consulting
services with terms similar to those outlined in the preceding paragraphs. The
measurement date of these shares had not been determined as of December 31, 2001
and therefore the value of these shares will be based on the market value of
common stock at the end of each interim period until the measurement date is
determined. A fair value of $91,000 was calculated at December 31, 2001 using
the Black-Scholes valuation model. During 2001 and 2000, MDI recorded $30,000
and $10,000 respectively, as consulting expense.
ISSUANCE OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES
Molecular Diagnostics, Inc. issued an option to purchase 50,000 shares of
common stock, at an exercise price of $0.406 per share, to a non-employee
consultant during 1999. The option was issued under a consulting agreement for
services to be performed over three years resulting in a three-year vesting
period. In July 2000, MDI and the consultant agreed to an early termination,
without cause, of the consulting agreement. The early termination resulted in
the immediate vesting of all the options and established a measurement date. A
fair value $181,000 was calculated on the date the options were vested using the
Black-Scholes valuation model. MDI charged the remaining unamortized fair value
of $171,000 to consulting expense during 2000.
Molecular Diagnostics, Inc. issued options to purchase 200,000 shares of
common stock to non-employee consultants during 1999. The options vest over a
period of time, ranging from the date of grant to three years, and have exercise
prices of $0.394 and $0.406 per share. MDI issued these options to consultants
as consideration for consulting services that commenced during 1999 and will be
completed through 2002. Services provided under several consulting agreements
ceased during 2001 and 2000, resulting in the cancellation of 45,000 and 46,666
options, respectively. The measurement date of the remaining outstanding options
had not been determined at December 31, 2001. A fair value of $95,000 was
calculated for the remaining options outstanding at December 31, 2001, using the
Black-Scholes valuation model. This value is charged to consulting expense over
the term of the consulting agreements. The amount of expense to be ultimately
recognized will vary depending on the market value of the common stock at the
end of each period. During 2001 and 2000, MDI recorded $16,000 and $32,000
respectively, as consulting expense related to the remaining outstanding
options.
F-22
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
In January 2000, Molecular Diagnostics, Inc. issued an option to purchase
25,000 shares of common stock at an exercise price of $0.921 per share for
services completed by a non-employee consultant. Accordingly, MDI determined a
fair value of $34,000 using the Black-Scholes valuation model. MDI charged the
amount to selling, general, and administrative expense in 2000.
During 2000, Molecular Diagnostics, Inc. issued an additional 270,000
options to purchase common stock to non-employees for consulting services. The
options vest over a time period, ranging from the date of grant to three years,
and have exercise prices from $1.75 to $2.875 per share. MDI issued these
options to consultants as consideration for consulting services that commenced
during 2000 and will be completed through 2003. As the measurement date of these
options had not been determined as of December 31, 2001, the value of these
options will be determined at the end of each interim period until the
measurement date is determined. A fair value of $144,000 was determined as of
December 31, 2001, using the Black-Scholes valuation model. This value is
charged to consulting expense over the term of the agreements. The amount of
expense to be ultimately recognized will vary depending on the market value of
the common stock at the end of each period. During 2001 and 2000, MDI recorded
$37,000 and $33,000 respectively as consulting expense.
ISSUANCE OF COMMON STOCK FOR SERVICES
During 2000, Molecular Diagnostics, Inc. issued 40,000 shares of common
stock in exchange for medical consulting and financial advisory services. The
services had a fair value of $60,000. During 2001 and 2000, the Company charged
$4,000 and $56,000 respectively, to medical consulting and investor-relations
expenses.
ISSUANCE OF WARRANTS FOR SERVICES
In November 2000, Molecular Diagnostics, Inc. issued warrants to purchase a
total of 200,000 shares of common stock, at an exercise price of $1.00 per
share, to non-employees as compensation for financial services to be provided
under agreements covering a one-year period. The warrants vest in equal amounts
each month over the period. MDI may terminate the agreements upon thirty days
written notice, and any unvested options as of the date of termination would be
cancelled. During 2001, MDI terminated warrants to purchase 46,667 shares of
common stock. The measurement date of these warrants was determined as of
December 31, 2001. A fair value of $75,000 for these warrants was calculated at
December 31, 2001, using the Black-Scholes valuation model. During 2001 and
2000, MDI recorded $59,000 and $17,000 respectively, as selling, general, and
administrative expense.
In January 2001, Molecular Diagnostics, Inc. issued warrants to purchase
80,000 shares of common stock, at an exercise price of $1.00, and 100,000 shares
of common stock, at an exercise price of $.50, to a non employee as compensation
for financial services to be provided under agreements covering January through
April, 2001 and May through December 2001 respectively. The warrant vested in
equal amounts each month. A fair value of $111,000 for these warrants was
calculated in 2001 using Black-Scholes. The agreements were replaced on October
1, 2001 with a new agreement covering a fifteen month period ending on December
31, 2002. In accordance with the terms of the new agreement all of the
outstanding warrants were immediately vested and MDI issued a new warrant to
purchase 150,000 shares of common stock at an exercise price of $0.50. The new
warrant vests in equal amounts each month as services are provided. A fair value
of $120,000 was calculated for these warrants as each months services were
completed and vesting took place, using the Black-Scholes valuation model. MDI
recorded $24,000 as selling, general, and administrative expense in 2001 to
cover the vested warrants.
During 2001, several advisory groups, contracted to assist Molecular
Diagnostics, Inc. in completing the Private Placement Offering of Series B
Convertible Preferred Stock in 2001 were compensated through the payment of
$159,000 in cash, the issuance of 440,692 shares of common stock, and the
issuance of warrants to purchase 533,542 shares of common stock at an exercise
price of $1.20 per share.
F-23
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
ISSUANCE OF WARRANTS TO PURCHASE ASSETS
In June 2000, the Company entered into a License and Technology Agreement
(the "Agreement") with Invirion and Dr. Bruce Patterson, M.D., Ph.D., its
principal, granting the Company exclusive rights to certain medical technology
for the detection of oncogenic (cancer causing) types of the Human Papilloma
Virus ("HPV"). The Agreement provides for $500,000 in cash payments and the
issuance of warrants to purchase 400,000 shares of our Common Stock at an
exercise price of $0.01, based on the delivery of milestones. The first two
milestones were met in 2000 which required us to pay $400,000 and issue 250,000
warrants. The third milestone was reached during 2001 and the Company paid
$34,000 in cash and issued 50,000 warrants. The Company used the Black-Scholes
valuation model to determine a fair value for the warrants issued in 2001 and
2000 of $49,000 and $530,000, respectively, and recorded the amount as license
fees.
APPLICATION OF BLACK-SCHOLES VALUATION MODEL
In applying the Black-Scholes valuation model, the Company has used an
expected dividend yield of zero, a risk-free interest rate of 6% for 2001 and
2000, a volatility factor of 90% for 2001 and 216% for 2000, and a fair value of
the underlying common shares of closing market price on the date of the grant.
The expected life equaled the term of the warrants, options, or restricted
shares.
WARRANTS
At December 31, 2001, the Company had the following outstanding warrants to
purchase shares of Common Stock:
<Table>
<Caption>
WEIGHTED
AVERAGE
TOTAL SHARES EXERCISABLE UNEXERCISABLE EXERCISE PRICE EXPIRATION DATE
- ------------ ----------- ------------- -------------- ---------------
39,834 39,834 0 $15.060 Perpetual
21,840 21,840 0 $10.300 March 13, 2002
5,460 5,460 0 $22.890 August 18, 2002
26,839 26,839 0 $23.750 September 23, 2002
55,000 55,000 0 $ 0.264 January 3, 2003
10,920 10,920 0 $ 6.870 February 3, 2003
48,333 48,333 0 $ 1.500 May 23, 2003
784,901 784,901 0 $ 0.010 May 24, 2003
250,000 250,000 0 $ 0.010 September 11, 2003
50,000 50,000 0 $ 0.010 July 15, 2004
372,500 372,500 0 $ 1.090 August 29, 2004
100,000 100,000 0 $ 0.600 October 31, 2004
1,750,000 1,750,000 0 $ 1.150 November 2, 2004
50,000 50,000 0 $ 0.330 December 10, 2004
1,023,302 1,023,302 0 $ 6.870 March 23, 2005
153,333 153,333 0 $ 1.000 November 22, 2005
50,000 50,000 0 $ 0.937 December 1, 2005
1,000,000 1,000,000 0 $ 1.250 December 8, 2005
180,000 180,000 0 $ 0.720 January 8, 2006
25,000 25,000 0 $ 0.010 February 1, 2006
</Table>
F-24
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
<Table>
<Caption>
WEIGHTED
AVERAGE
TOTAL SHARES EXERCISABLE UNEXERCISABLE EXERCISE PRICE EXPIRATION DATE
- ------------ ----------- ------------- -------------- ---------------
1,000,000 1,000,000 0 $ 0.250 February 7, 2006
533,542 533,542 0 $ 1.200 February 28, 2006
150,000 150,000 0 $ 1.200 July 10, 2006
750,000 750,000 0 $ 1.000 July 26, 2006
312,500 312,500 0 $ 1.000 August 6, 2006
150,000 30,000 120,000 $ 0.500 October 1, 2006
172,120 172,120 0 $ 0.820 October 11, 2006
597,750 597,750 0 $ 1.000 November 30, 2006
250,000 250,000 0 $ 0.330 July 14, 2009
--------- --------- ------- -------
9,913,174 9,793,174 120,000 $ 1.60
========= ========= ======= =======
</Table>
STOCK APPRECIATION RIGHTS
At December 31, 2000, and 1999, MDI had 450,000 stock appreciation rights
(SARs) outstanding. These SARs, issued in 1989, have an exercise price of $0.30
and could be exercised through November 20, 2001. These SARs are deemed
automatically exercised on November 20, 2001 if not done so at the option of the
holder. In general, each SAR entitles the holder to receive upon exercise an
amount equal to the excess, if any, of the market value per share of Common
Stock at the date of exercise over the exercise price of the SAR, plus any
dividends or distributions per share made by MDI prior to the exercise date. In
lieu of making cash payments, MDI may elect and intends, to issue shares of
Common Stock. MDI has recorded compensation expenses of $91,395 and $230,625 for
the years ended December 31, 2000 and 1999, respectively, and a reversal of
compensation expense of $79,020 in 2001, to reflect the difference between the
closing market price of MDI's common stock at November 20, 2001, December 31,
2000 and December 31, 1999 and the exercise price of the SARs.
NOTE 14. LEASES
The Company currently leases approximately 5,700 square feet of space for
its Chicago, Illinois corporate headquarters and research laboratory and offices
under an operating type lease expiring in 2006. The Company's wholly owned
subsidiary, Samba Technologies SARL, leases approximately 300 square meters of
office space in a suburb of Grenoble, France under an operating type lease
expiring in 2008. Samba has the option to terminate the lease at the end of each
three year term. Total rental expense, including expenses related to the
Company's previous headquarters location, Samba's previous temporary office
space, and AccuMed's leased facilities prior to vacating the leased facility
during the years ended December 31, 2001, 2000 and 1999 was $231,000, $90,000
and $61,000, respectively.
F-25
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
Future minimum annual lease payments under these leases as of December 31,
2001 are (in thousands):
<Table>
<Caption>
ACCUMED
OPERATING LEASE
YEAR LEASES OBLIGATION
- ---- --------- ----------
2002..................................................... $194 $118
2003..................................................... $157 $124
2004..................................................... $159 $ 97
2005..................................................... $163
2006..................................................... $ 37
---- ----
Total lease payments..................................... $710 $339
==== ====
Amount of interest included in the minimum lease
payments............................................... $(49)
----
Carrying value of lease obligation....................... $290
Less: current portion.................................... $(87)
----
Long term portion........................................ $203
====
</Table>
Following completion of MDI's merger with AccuMed, management decided to
vacate AccuMed's leased facility and consolidate its operations into MDI's
headquarters facility. Management expects to enter into negotiations with
AccuMed's landlord in order to reach a settlement arrangement relating to the
remaining minimum lease payments. Since MDI has a continuing obligation for the
minimum lease payments, MDI recorded a $290,000 lease obligation in accounting
for the AccuMed merger based on the present value of the future payments.
NOTE 15. INCOME TAXES
Significant components of deferred income taxes consist of the following at
December 31 (in thousands):
<Table>
<Caption>
2001 2000
------- ------
Deferred tax assets related to:
Net operating loss carryforwards.......................... $23,198 $3,962
Goodwill.................................................. 2,333 --
Research and Development Credit........................... 657 --
Writedown of patents...................................... 110 --
Accrued expenses.......................................... 1,054 9
------- ------
27,352 3,971
Less valuation reserve............................ 27,352 3,971
------- ------
Net deferred tax asset...................................... $ -- $ --
======= ======
</Table>
At December 31, 2001, the Company had domestic net operating loss
carryforwards aggregating approximately $57,995,000. For financial reporting
purposes, this entire amount of deferred tax assets related principally to the
net operating loss carryforwards has been offset by a valuation allowance due to
uncertainty regarding the realizations of the assets. The valuation allowance
increased by $23,381,000 and 2,315,000 for the year ended December 31, 2001 and
2000, respectively.
F-26
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
The net operating loss carryforwards and Research and Development credit
carryforwards may not be available to offset future taxable income of MDI due to
statutory limitations based on the changes of ownership and other statutory
restrictions.
The net operating loss carryforwards begin to expire in 2006. The Research
and Development credit carryforwards expire from 2002 to 2014.
NOTE 16. EQUITY INCENTIVE PLAN AND EMPLOYEE STOCK PURCHASE PLAN
On May 25, 1999, stockholders approved the establishment of the 1999 Equity
Incentive Plan effective as of June 1, 1999. The Plan provides that the Board
may grant various forms of equity incentives to directors, employees, and
consultants, including but not limited to Incentive Stock Options, Non-Qualified
Stock Options, Stock Appreciation Rights, and Restricted Stock Awards. Grants
under the Plan are exercisable at Fair Market Value determined as of the date of
grant in accordance with the terms of the Plan. Grants vest to recipients
immediately or ratably over periods ranging from two to five years, and expire
five to ten years from the date of grant.
On May 23, 2000, stockholders approved Amendment No. 1 to the Plan, which
increased the number of shares of common stock allocated for use in the Plan
from 2,000,000 shares to 3,000,000 shares.
Our Board of Directors has also granted options to purchase common stock of
MDI, which are not covered by the terms of the Plan.
MDI applies APB Opinion No. 25 and related interpretations in accounting
for options granted to employees under the Equity Incentive Plan. No
compensation cost was recorded during 2001, 2000 or 1999 for options granted to
employees as the exercise price approximated the fair value of the underlying
common stock on the date of the grant.
Had stock options been accounted for under the fair value method
recommended by FAS 123, the Company's net loss for the years ended December 31,
2001 and 2000 would have been $20,950,000 and $7,639,000 respectively on a pro
forma basis, and a net loss per share for the years ended December 31, 2001 and
2000 of $0.65 and $0.27 on a pro forma basis.
The fair value for these options was estimated at the date of the grant
using a Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 6% for 2001 and 2000; dividend yields
of zero for both years; volatility factors of the expected market price of the
Company's common stock of 90% for 2001 and 216% for 2000 and a weighted average
expected life of the options of 2.5 - 5 years.
F-27
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
A summary of the Company's stock option activity, and related information
follows:
<Table>
<Caption>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- --------
OUTSTANDING AT JANUARY 1, 1999...................... -- --
Granted............................................. 1,035,000 $ 0.3964
Exercised........................................... -- --
Forfeited........................................... (15,000) $ 0.3937
OUTSTANDING AT DECEMBER 31, 1999.................... 1,020,000 $ 0.3964
Granted............................................. 1,510,000 $ 2.5258
Forfeited........................................... (274,166) $ 2.4177
---------
OUTSTANDING AT DECEMBER 31, 2000.................... 2,255,834
=========
Granted............................................. 1,946,000 $ 1.1766
Assumed in acquisition.............................. 366,495 $12.1040
Exercised........................................... (16,666) $ 0.4063
Forfeited........................................... (489,167) $ 1.9206
---------
OUTSTANDING AT DECEMBER 31, 2001.................... 4,062,496
=========
EXERCISABLE AT DECEMBER 31, 2001.................... 2,561,160 $ 1.4958
=========
Weighted average fair value of options granted in
2001.............................................. $ 1.1772
</Table>
At the Annual Meeting on May 25, 1999, the stockholders also approved the
Employee Stock Purchase Plan. The Plan offers employees the opportunity to
purchase shares of our common stock of MDI through a payroll deduction plan, at
85% of the fair market value of such shares at specified enrollment measurement
dates. The aggregate number of shares available for purchase under the Plan is
200,000.
NOTE 17. COMMITMENTS AND CONTINGENCIES
At December 31, 2001, MDI was contractually committed to pay approximately
$2,600,000 to scientists, researchers, universities, and other independent third
parties for services to be performed during 2002. MDI may unilaterally cancel
these contracts with thirty days written notice or for non-performance.
On October 11, 2001, MDI obtained a 30% investment in Cell Solutions, LLC.
Cell Solutions was formed for the purposes of developing and improving slide
preparation systems. As consideration, MDI provides Cell Solutions five-year
warrants to purchase 172,120 shares of common stock with an exercise price of
$0.82. These warrants were valued using Black-Scholes and determined to have a
value of $127,000. MDI has included the value of these warrants as an investment
at December 31, 2001. MDI determined the fair value of the investment to be
impaired at December 31, 2001. The investments was written down to zero as a
result of the uncertainty of future benefit or revenue stream.
In conjunction with the Cell Solutions investment, BioTec Ventures (BTV)
has executed a consulting agreement with MDI that guarantees Mr. Knesel, BTV
owner and manager, three years of annual salaries starting at $60,000 per year
and ending with $100,000 in third and final year. At December 31, 2001 $13,000
was included in consulting expense in conjunction with this agreement.
F-28
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
MDI is contractually committed to issue a total of 1,549,086 warrants with
the same terms based upon delivery of certain products by Cell Solutions. As of
December 31, 2001, Cell Solutions had not delivered these products and MDI was
not liable for the issuance of the warrants.
NOTE 18. QUARTERLY DATA (UNAUDITED)
The following table represents unaudited quarterly operating results for
the two years ended December 31, 2001 and, 2000. The Company prepared this
information on a basis consistent with the Company's audited financial
statements. In management's opinion, the quarterly operating results include all
adjustments necessary (which are of a normal and recurring nature) for the fair
presentation of the results of the interim periods presented. Basic loss per
share for each quarter is computed using the weighted-average number of shares
outstanding during that quarter. Basic loss per share for the full year is
computed using the weighted-average number of shares outstanding during the
year. Thus, the sum of the four quarters' basic loss per share may not equal the
full-year basic loss per share. In addition, due to rounding of each quarters'
operating results, the full-year operating results disclosed in the consolidated
financial statements may not equal the sum of each quarters' operating results
shown below.
<Table>
<Caption>
2001 2000
-------------------------------------- --------------------------------------
QUARTER ENDED QUARTER ENDED
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total revenues............. $ 409 $ 288 $ 174 $ 6 $ 362 $ 179 $ 298 $ 255
Gross profit............... 131 79 65 126 172 20 104 161
Net loss available for
common shareholders...... (4,640) (2,217) (2,344) (10,590) (3,139) (646) (1,475) (1,351)
Basic loss per share....... $ (0.15) $ (0.07) $ (0.07) $ (0.30) $ (0.15) $ (0.02) $ (0.05) $ (0.04)
Weighted average number of
shares outstanding....... 30,269 30,468 31,846 35,440 21,301 29,865 30,056 30,163
</Table>
NOTE 18. SUBSEQUENT EVENTS
Officer Resignation. On December 31, 2001, Leonard R. Prange tendered his
resignation from his positions as President, Chief Operating Officer, Chief
Financial Officer and Secretary of the Company. MDI's Board of Directors
appointed Peter P. Gombrich, the Chairman of the Board of Directors, to fill the
vacancy in those offices until a successor is hired. On April 1, 2002, MDI
contracted with Michael A. Brodeur, a partner of Tatum CFO Partners, LLP and for
the purpose of hiring Mr. Brodeur as MDI's President, Chief Operating Officer,
Chief Financial Officer, Treasurer and Secretary.
Bridge Financing. On March 19, 2002, the Company issued a convertible
promissory note to NeoMed Innovations III, L.P. for the principal amount of
$500,000 in cash. The note bears interest at the rate of 7% per year and is due
June 15, 2002. The note is convertible into shares of our common stock at
anytime after issuance at a conversion rate of $1 per share, subject to
adjustment or the note may be converted into shares of common stock on the same
terms as the price per share of common stock offered in a proposed private
placement. As additional consideration for the note, the Company issued NeoMed a
warrant to purchase 150,000 shares of our common stock at an exercise price of
$1 per share.
REIMBURSEMENT OF LEGAL FEES
SpectRx Litigation Settlement. On February 1, 2002, the Company reached an
out-of-court settlement with SpectRx. Under the settlement, SpectRx paid a lump
sum cash payment of $150,000 to MDI and the
F-29
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 -- (CONTINUED)
Company has granted SpectRx an option to license certain of the Company's
technology. Additional terms of the settlement were confidential. Under the
settlement, neither party admitted any liability or wrongdoing.
From time to time, MDI has been a party to routine pending or threatened
legal proceedings and arbitrations. MDI insures some, but not all, of its
exposure with respect to such proceedings. Based upon information presently
available, and in light of legal and other defenses available to MDI, management
does not consider the liability from any threatened or pending litigation to be
material to MDI. MDI has not experienced any significant environmental problems.
F-30
SCHEDULE IX -- VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
ADDITIONS
CHARGED BALANCE
BALANCE AT TO COSTS AT END
BEGINNING AND OTHER OF
DESCRIPTION OF PERIOD EXPENSES RETIREMENTS CHANGES PERIOD
----------- ---------- ---------- ----------- ------- ---------
RESERVES AND ALLOWANCES DEDUCTED FROM ASSET
ACCOUNTS..................................
ALLOWANCE FOR UNCOLLECTABLE ACCOUNTS
RECEIVABLE................................
Year ended December 31, 1999................ $ 0 $20 $ 0 $0 $20
Year ended December 31, 2000................ $20 $ 0 $16 $0 $ 4
Year ended December 31, 2001................ $ 4 $ 0 $ 0 $0 $ 4
RESERVES AND ALLOWANCES WHICH SUPPORT
BALANCE SHEET CAPTION RESERVES............
WARRANTY RESERVES
Year ended December 31, 1999................ $ 0 $28 $ 0 $0 $28
Year ended December 31, 2000................ $28 $ 0 $ 7 $0 $21
Year ended December 31, 2001................ $21 $ 0 $ 1 $0 $20
INVENTORY RESERVES
Year ended December 31, 1999................ $ 0 $ 0 $ 0 $0 $ 2
Year ended December 31, 2000................ $ 2 $ 0 $ 0 $0 $ 2
Year ended December 31, 2001................ $ 2 $ 0 $ 0 $0 $ 2
</Table>
F-31
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Bell National Corporation Plan of Reorganization (Annex I).
(Incorporated herein by reference to Item 1 of the Bell
National Corporation Annual Report on Form 10-K for the
period from August 20, 1985 to December 31, 1985 and for the
years ended December 31, 1986 and 1987.)*
2.2 Exchange Agreement dated December 4, 1998 among the Company,
InPath, and the InPath Members. (Incorporated herein by
reference to Appendix A to the Bell National Corporation
Definitive Proxy Statement on Schedule 14A, filed on April
30,1999.)*
2.3 Agreement and Plan of Merger of Bell National Corporation
and the Company. (Incorporated herein by reference to
Appendix C to the Bell National Corporation Definitive Proxy
Statement on Schedule 14A, filed on April 30, 1999.)*
2.4 Agreement and Plan of Merger by and among AccuMed
International, Inc. AccuMed Acquisition Corp. and Ampersand
Medical Corporation, dated as of February 7, 2001.
(Incorporated herein by reference to Appendix I to
Registration Statement No. 333-61666.)
2.5 Amendment No. 1, dated May 14, 2001 to the Agreement and
Plan of Merger by and among AccuMed International, Inc.,
AccuMed Acquisition Corp. and Ampersand Medical Corporation,
dated February 7, 2001. (Incorporated herein by reference to
Appendix I to Registration Statement No. 333-61666.)
3.1 Restated Articles of Incorporation. (Incorporated herein by
reference to Exhibit 3.1 of the Bell National Corporation
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988.)*
3.2 Bylaws of Bell National Corporation. (Incorporated herein by
reference to Exhibit 3.2 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989.)*
3.3 Certificate of Incorporation of the Company as amended.
(Incorporated herein by reference to Appendix D to the Bell
National Corporation Definitive Proxy Statement on Schedule
14A, filed on April 30, 1999.)*
3.4 By-laws of the Company. (Incorporated herein by reference to
Appendix E to the Bell National Corporation Definitive Proxy
Statement on Schedule 14A, filed on April 30, 1999.)*
3.5 Certificate of Designation, Preferences and Rights of Series
A Convertible Preferred Stock of Ampersand Medical
Corporation. (Incorporated herein by reference to Exhibit
3.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)
3.6 Certificate of Designation, Preferences and Rights of Series
B Convertible Preferred Stock of Ampersand Medical
Corporation. (Incorporated herein by reference to Exhibit
3.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)
3.7 Certificate of Incorporation of Molecular Diagnostics, Inc.,
as amended. (Incorporated herein by reference to the
Company's Current Report on Form 8-K dated September 26,
2001.)
3.8 Section 6 of Article VII of the By-laws of the Company as
amended. (Incorporated herein by reference to Exhibit 3.3 to
the Company's S-4 Registration Statement, File No.
333-61666, filed August 24, 2001.)
3.9 Certificate of Designation, Preferences and Rights of Series
C Convertible Preferred Stock of Molecular Diagnostics, Inc.
(Incorporated herein by reference to Exhibit 3.4 to the
Company's S-2 Registration Statement, File, No. 333083578
filed February 28, 2002)
3.10 Certificate of Amendment of Certificate of Designation,
Preferences and Rights of Series C Convertible Preferred
Stock. (Incorporated herein by reference to Exhibit 3.5 to
the Company's S-2 Registration Statement, File, No.
333083578 filed February 28, 2002)
3.11 Certificate of Amendment of Amended Certificate of
Designation, Preferences and Rights of Series C Convertible
Preferred Stock. (Incorporated herein by reference to
Exhibit 3.6 to the Company's S-2 Registration Statement,
File, No. 333083578 filed February 28, 2002)
3.12 Certificate of Designation, Preferences and Rights of Series
D Convertible Preferred Stock. (Incorporated herein by
reference to Exhibit 3.7 to the Company's S-2 Registration
Statement, File, No. 333083578 filed February 28, 2002)
</Table>
ii-1
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.13 Certificate of Designation, Preferences and Rights of Series
E Convertible Preferred Stock. (Incorporated herein by
reference to Exhibit 3.8 to the Company's S-2 Registration
Statement, File, No. 333083578 filed February 28, 2002)
4.1 Form of Common Stock Purchase Warrant, as executed by Bell
National Corporation on December 4, 1998 with respect to
each of Mr. Gombrich, Theodore L. Koenig, William J. Ritger,
Fred H. Pearson, Walter Herbst, AccuMed International, Inc.,
Northlea Partners Ltd., and Monroe Investments, Inc.
(collectively, the "InPath Members"). (Incorporated herein
by reference to Exhibit 3 of the Schedule 13D filed jointly
by the InPath Members on December 14, 1998.)*
4.2 Stockholders Agreement dated December 4, 1998 among the
Company, Winchester National, Inc., the InPath Members, and
Mr. Milley, Mr. Shaw, Cadmus, and MMI (collectively, the
"Claimants"). (Incorporated herein by reference to Exhibit 2
to the Schedule 13D filed jointly by the InPath Members on
December 14, 1998.)*
4.3 Form of Common Stock Purchase Warrant issued to Holleb &
Coff on July 4, 1999 representing the right to purchase
250,000 shares of Common Stock of the Company in connection
with legal services rendered. (Incorporated herein by
reference to Exhibit 4.3 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)*
4.4 Form of Common Stock Purchase Warrant issued to The Research
Works on October 11, 1999 representing the right to purchase
70,000 shares of Common Stock of the Company in connection
with the preparation of an investment research report.
(Incorporated herein by reference to Exhibit 4.4 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.)*
4.5 Form of Common Stock Purchase Warrant issued to Azimuth
Corporation on December 10, 1999 representing the right to
purchase 50,000 shares of Common Stock of the Company as
additional consideration for a 12% Convertible Promissory
Note issued on the same date. (Incorporated herein by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.)*
4.6 Form of Common Stock Purchase Warrant issued to Richard
Doermer on January 3, 2000 representing the right to
purchase 96,250 shares of Common Stock of the Company in
connection with financial advisory services rendered.
(Incorporated by reference to Exhibit 4.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.7 Form of Common Stock Purchase Warrant issued to Richard
Doermer on January 3, 2000 representing the right to
purchase 75,759 shares of Common Stock of the Company in
connection with financial advisory services rendered.
(Incorporated by reference to Exhibit 4.7 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.8 Form of Common Stock Purchase Warrant issued to Richard
Doermer on January 3, 2000 representing the right to
purchase 121,313 shares of Common Stock of the Company in
connection with financial advisory services rendered.
(Incorporated by reference to Exhibit 4.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.9 Form of Common Stock Purchase Warrant issued to Richard
Doermer on January 3, 2000 representing the right to
purchase 94,697 shares of Common Stock of the Company in
connection with financial advisory services rendered.
(Incorporated by reference to Exhibit 4.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.10 Form of Common Stock Purchase Warrant issued to William J.
Ritger on May 24, 2000 representing the right to purchase
531,614 shares of Common Stock of the Company in connection
with financial advisory services rendered. (Incorporated by
reference to Exhibit 4.10 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
4.11 Form of Common Stock Purchase Warrant issued to Denis M.
O'Donnell on May 24, 2000 representing the right to purchase
784,901 shares of Common Stock of the Company in connection
with financial advisory services rendered. (Incorporated by
reference to Exhibit 4.11 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
</Table>
ii-2
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.12 Form of Common Stock Purchase Warrant issued to Prospektiva,
SA on May 23, 2000 representing the right to purchase 48,333
shares of Common Stock of the Company in connection with
financial advisory services rendered. (Incorporated by
reference to Exhibit 4.12 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
4.13 Form of Common Stock Purchase Warrant issued to Dr. Bruce
Patterson, on September 12, 2000 representing the right to
purchase 150,000 shares of Common Stock of the Company as
additional consideration for the achievement of product
development milestones under a License and Development
Agreement for Specific Medical Technology for the Detection
of Oncogenic HPV Virus. (Incorporated by reference to
Exhibit 4.13 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.)*
4.14 Form of Common Stock Purchase Warrant issued to Dr. Bruce
Patterson, on September 12, 2000 representing the right to
purchase 100,000 shares of Common Stock of the Company as
consideration for an Addendum to a License and Development
Agreement for Specific Medical Technology for the Detection
of Oncogenic HPV Virus. (Incorporated by reference to
Exhibit 4.14 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.)*
4.15 Form of Common Stock Purchase Warrant issued to Osprey
Partners, on November 22, 2000 representing the right to
purchase 100,000 shares of Common Stock of the Company in
connection with financial advisory services to be rendered
over twelve months. (Incorporated by reference to Exhibit
4.15 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)*
4.16 Form of Common Stock Purchase Warrant issued to Univest
Management, Inc. on November 22, 2000 representing the right
to purchase 100,000 shares of Common Stock of the Company in
connection with financial advisory services to be rendered
over twelve months. (Incorporated by reference to Exhibit
4.16 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)*
4.17 Form of Common Stock Purchase Warrant issued to Azimuth
Corporation on December 1, 2000 representing the right to
purchase 50,000 shares of Common Stock of the Company as
additional consideration for a 12% Promissory Note issued on
December 4, 2000. (Incorporated by reference to Exhibit 4.17
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.)*
4.18 Form of Common Stock Purchase Warrant issued to Azimuth
Corporation on December 8, 2000 representing the right to
purchase 1,000,000 shares of Common Stock of the Company as
additional consideration for a 15% Promissory Note issued on
December 11, 2000 in connection with the proposed
acquisition of AccuMed International, Inc. by the Company.
(Incorporated by reference to Exhibit 4.18 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.19 Form of Common Stock Purchase Warrant issued to Azimuth
Corporation on February 7, 2001 representing the right to
purchase 1,000,000 shares of Common Stock of the Company as
additional consideration for two 15% Promissory notes issued
on February 1, 2001 and February 7, 2001 in connection with
the proposed acquisition of AccuMed International, Inc. by
the Company. (Incorporated by reference to Exhibit 4.19 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
4.20 Common Stock Purchase Warrant issued to Azimuth Corporation
on August 6, 2001 representing the right to purchase 250,000
shares of common stock of the Company as additional
consideration for a 15% promissory note. (Incorporated by
reference to Exhibit 4.24 to the Company's S-4 Registration
Statement File No. 333-61666 filed August 24, 2001.)
4.21 Common Stock Purchase Warrant issued to Cadmus Corporation
on August 6, 2001 representing the right to purchase 250,000
shares of common stock of the Company as additional
consideration for a 15% promissory note. (Incorporated by
reference to Exhibit 4.23 to the Company's S-4 Registration
Statement File No. 333-61666 filed August 24, 2001.)
</Table>
ii-3
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.22 Common Stock Purchase Warrant issued to Northlea Partners,
Ltd. on August 6, 2001 representing the right to purchase
62,500 shares of common stock of the Company as additional
consideration for a 15% promissory note. (Incorporated by
reference to Exhibit 4.27 to the Company's S-4 Registration
Statement File No. 333-61666 filed August 24, 2001.)
4.23 Common Stock Purchase Warrant issued to Azimuth Corporation
on July 26, 2001 representing the right to purchase 500,000
shares of common stock of the Company as consideration of
Azimuth's waiver of the conversion feature of its $500,000
convertible promissory note issued September 22, 2000.
(Incorporated by reference to Exhibit 4.25 to the Company's
S-4 Registration Statement File No. 333-61666 filed August
24, 2001.)
4.24 Common Stock Purchase Warrant issued to Azimuth Corporation
on August 17, 2001 representing the right to purchase 25,000
shares of common stock of the Company. (Incorporated by
reference to Exhibit 4.26 to the Company's S-4 Registration
Statement File No. 333-61666, filed August 24, 2001.)
4.25 Common Stock Purchase Warrant issued to Tucker Anthony
Incorporated on July 10, 2001 representing the right to
purchase 150,000 shares of common stock of the Company.
(Incorporated by reference to Exhibit 4.28 to the Company's
S-2 Registration Statement, File No. 333-83578 filed
February 28, 2002).
4.26 Common Stock Purchase Warrant issued to Ventana Medical
Systems, Inc. on November 2, 2001 representing the right to
purchase 1,750,000 shares of common stock of the Company.
(Incorporated by reference to Exhibit 4.29 to the Company's
S-2 Registration Statement, File No. 333-83578 filed
February 28, 2002).
4.27 Form of Confidential $5,000,000 Common Stock Private
Offering Memorandum dated January 2000. (Incorporated by
reference to Exhibit 4.20 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
4.28 Form of Confidential $5,000,000 Series B Convertible
Preferred Stock Private Offering memorandum dated November
2000 and amended January 30, 2001. (Incorporated by
reference to Exhibit 4.21 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
4.29 Amendment No. 1 to Stockholders Agreement dated July 25,
2000 among the Company, the InPath Members, Mr. Milley, Mr.
Shaw, MMI, Cadmus Corporation, and Winchester National, Inc.
(Incorporated by reference to Exhibit 4.22 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
10.1 Stock Appreciation Rights Agreement dated as of November 20,
1989 between the Company and Raymond O'S. Kelly.
(Incorporated herein by reference to Exhibit 10.5 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989.)*
10.2 Stock Appreciation Rights Agreement dated as of November 20,
1989 between the Company and Nicholas E. Toussaint.
(Incorporated herein by reference to Exhibit 10.7 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989.)*
10.3 Stock Appreciation Rights Agreement dated as of November 20,
1989 between the Company and Nicholas E. Toussaint.
(Incorporated herein by reference to Exhibit 10.7 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989.)*
10.4 SAR Agreement Extension dated November 15, 1995 between the
Company and Raymond O'S. Kelly. (Incorporated herein by
reference to Exhibit 10.20 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.)*
10.5 SAR Agreement Extension dated November 15, 1995 between the
Company and Nicholas E. Toussaint. (Incorporated herein by
reference to Exhibit 10.21 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.)*
10.6 Employment Agreement dated May 1, 1998 between Mr. Gombrich
and InPath, LLC, as amended on December 4, 1998.
(Incorporated herein by reference to Exhibit 10.6 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.)*
</Table>
ii-4
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.7 Claims Agreement dated December 4, 1998 among the Company,
the Claimants, and Liberty Associates Limited Partnership.
(Incorporated herein by reference to Exhibit 4 to the
Schedule 13D filed jointly by the InPath Members on December
14, 1998.)*
10.8 Ampersand Medical Corporation Equity Incentive Plan
established as of June 1, 1999. (Incorporated herein by
reference to Appendix F to the Bell National Corporation
Definitive Proxy Statement on Schedule 14A, as filed on
April 30, 1999.)*
10.9 Ampersand Medical Corporation Employee Stock Purchase Plan.
(Incorporated herein by reference to Appendix G to the Bell
National Corporation Definitive Proxy statement on Schedule
14A, as filed on April 30, 1999.)*
10.10 Employment Agreement dated June 1, 1999 between Mr. Prange
and the Company. (Incorporated herein by reference to
Exhibit 10.11 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999.)*
10.11 Lease Agreement between the Company and O.P., L.L.C. dated
September 1, 1999 pertaining to the premises located at
suite 305, 414 N. Orleans, Chicago, IL 60610. (Incorporated
herein by reference to Exhibit 10.12 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1999.)*
10.12 Amendment to Lease Agreement between the Company and O.P.,
L.L.C. dated November 1, 1999 pertaining to the premises at
suite 300, 414 N. Orleans, Chicago, IL 60610. (Incorporated
herein by reference to Exhibit 10.13 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1999.)*
10.13 Form of Note purchase agreements dated between March 1, 1999
and June 29, 1999 between the Company and several
purchasers. (Incorporated herein by reference to Exhibit
10.14 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.)*
10.14 Form of 6% Convertible Subordinated Note Due 2000, dated
between March 1, 1999 and June 29, 1999 issued by the
Company to several purchasers. (Incorporated herein by
reference to Exhibit 10.15 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)*
10.15 Schedule of purchasers of 6% Convertible Notes Due 2000,
including dates and amount purchased. (Incorporated herein
by reference to Exhibit 10.16 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999.)*
10.16 Form of Senior Convertible Promissory Note issued to Azimuth
Corporation on December 10, 1999. (Incorporated herein by
reference to Exhibit 10.17 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)*
10.17 Form of Restricted Stock Award of 50,000 shares of Common
Stock issued to David A. Fishman, M.D., on August 10, 1999
as additional compensation under a 36 month Consulting
Agreement dated June 1, 1999. (Incorporated herein by
reference to Exhibit 10.18 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)
10.18 Form of Restricted Stock award of 50,000 shares of Common
Stock issued to Arthur L. Herbst, M.D., on August 10, 1999
as additional compensation under a 36 month Consulting
Agreement dated July 1, 1999. (Incorporated herein by
reference to Exhibit 10.19 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)*
10.19 Form of $2,000,000 note received from Seaside Partners, L.P.
on April 28, 2000. (Incorporated by reference to Exhibit
10.20 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)*
10.20 Form of $300,000 note received from AccuMed International,
Inc. on September 22, 2000 in conjunction with the proposed
acquisition of AccuMed by the Company. (Incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
10.21 Form of $500,000 Convertible Promissory Note issued to
Azimuth Corporation on September 22, 2000 in connection with
the proposed acquisition of AccuMed International, Inc. by
the Company. (Incorporated by reference to Exhibit 10.22 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
</Table>
ii-5
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.22 Form of $500,000 Convertible Promissory Note issued to
Monsun, AS on November 1, 2000. (Incorporated by reference
to Exhibit 10.23 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000.)*
10.23 Form of $200,000 Promissory Note issued to Azimuth
Corporation on December 4, 2000. (Incorporated by reference
to Exhibit 10.24 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000.)*
10.24 Form of $100,000 Promissory Note issued to Azimuth
Corporation on December 11, 2000 in conjunction with the
proposed acquisition of AccuMed International, Inc. by the
Company. (Incorporated by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
10.25 Amendment to Patent and Technology License Agreement dated
June 9, 2000 by and between Ampersand Medical Corporation,
AccuMed International, Inc. and InPath, L.L.C. (Incorporated
by reference to Exhibit 10.26 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000.)*
10.26 License and Development Agreement for Specific Medical
Technology for the Detection of Oncogenic HPV Virus dated
June 23, 2000, by and between Invirion, Dr. Bruce Patterson,
and Ampersand Medical Corporation. (Incorporated by
reference to Exhibit 10.27 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
10.27 First Addendum to License and Development Agreement for
Specific Medical Technology for the Detection of Oncogenic
HPV Virus dated September 12, 2000, by and between Invirion,
Dr. Bruce Patterson and Ampersand Medical Corporation.
(Incorporated by reference to Exhibit 10.28 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
10.28 Second Addendum to License and Development Agreement for
Specific Medical Technology for the Detection of Oncogenic
HPV Virus dated January 12, 2001, by and between Invirion,
Dr. Bruce Patterson and Ampersand Medical Corporation.
(Incorporated by reference to Exhibit 10.29 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
10.29 Form of $25,000 Promissory Note issued to Azimuth
Corporation on February 1, 2001 in conjunction with the
proposed acquisition of AccuMed International, Inc. by the
Company. (Incorporated by reference to Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
10.30 Form of $470,000 Promissory Note issued to Azimuth
Corporation on February 7, 2001 in conjunction with the
proposed acquisition of AccuMed International, Inc. by the
Company. (Incorporated by reference to Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
10.31 Lease Agreement between the Company and O.P., L.L.C date May
18, 2000, pertaining to premises located at 414 N. Orleans,
Suite 510, Chicago, Illinois 60610. (Incorporated by
reference to Exhibit 10.32 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
10.32 First Amendment to Lease Agreement between the Company and
O.P., L.L.C. dated February 13, 2001, pertaining to
additional premises at 414 N. Orleans, Suite 503, Chicago,
Illinois 60610 and extending the term of the original lease
until February 28, 2006. (Incorporated by reference to
Exhibit 10.33 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000.)*
10.33 Form of Restricted Stock Award of 25,000 shares of Common
Stock issued to Eric A Gombrich on May 1, 2000 as additional
compensation under a 36 month Employment Agreement dated
April 1 2000. (Incorporated by reference to Exhibit 10.34 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
</Table>
ii-6
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.34 Form of Restricted Stock Award of 50,000 shares of Common
Stock issued to Ralph M. Richart, M.D., on July 24, 2000 as
additional compensation under a 36 month Consulting
Agreement dated June 1, 2000. (Incorporated by reference to
Exhibit 10.35 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000.)*
10.35 Form of Restricted Stock Award of 50,000 shares of Common
Stock issued to J. Thomas Cox, M.D., on October 20, 2000 as
additional compensation under a 36 month Consulting
Agreement dated October 15, 2000. (Incorporated by reference
to Exhibit 10.36 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000.)
10.36 Form of Voting Agreement between the Company and each of the
officers and directors of AccuMed International, Inc.
(Exhibit A to the Agreement and Plan of Merger included in
Appendix I to the proxy statement-prospectus.)
10.37 $100,000 Promissory Note issued to Cadmus Corporation on
July 26, 2001. (Incorporated by reference to Exhibit 10.39
to the Company's S-4 Registration Statement, File No.
333-61666, filed August 24, 2001.)
10.38 $100,000 Promissory Note issued to Azimuth Corporation on
August 6, 2001. (Incorporated by reference to Exhibit 10.40
to the Company's S-4 Registration Statement, File No.
333-61666, filed August 24, 2001.)
10.39 $25,000 Promissory Note issued to Northlea Partners, Ltd. on
August 6, 2001. (Incorporated by reference to Exhibit 10.41
to the Company's S-4 Registration Statement, File No.
333-61666, filed August 24, 2001.)
21.1 Subsidiaries of the Company.
</Table>
- ---------------
* SEC File NO. 0-935
ii-7