SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended June 30, 1996
Commission file number 0-19957
QUANTECH LTD.
(Name of Small Business Issuer in its Charter)
Minnesota 41-1709417
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
1419 Energy Park Drive
St. Paul, Minnesota 55108
(Address of Principal Executive Offices; Zip Code)
Issuer's Telephone Number Including Area Code: (612) 647-6370
Securities Registered Under Section 12(b) of the Act: None
Securities Registered Under Section 12(g) of the Act: Common Stock, $.01 par
value
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] Yes No
Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Issuer's revenues for the fiscal year ended June 30, 1996 were $0.
The aggregate market value of the Issuer's Common Stock held by nonaffiliates
(persons other than officers, directors or holders of more than 5% of the
outstanding stock) as of August 8, 1996, was approximately $41,582,937 (based on
the closing sale price of the Issuer's Common Stock on such date).
Shares of Common Stock, $.01 par value, outstanding on August 8, 1996:
46,900,759 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1996 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes No [X]
<PAGE>
INDEX
PART I Page
----
Item 1. Description of Business.................................... 3
Item 2. Description of Property.................................... 18
Item 3. Legal Proceedings.......................................... 18
Item 4. Submission of Matters to a Vote of Security Holders........ 18
PART II
Item 5. Market for Common Equity and Related Stockholder Matters... 19
Item 6. Management's Discussion and Analysis or Plan of Operation.. 19
Item 7. Financial Statements....................................... 24
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 24
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act......... 41
Item 10.Executive Compensation..................................... 42
Item 11.Security Ownership of Certain Beneficial Owners and
Management................................................. 42
Item 12.Certain Relationships and Related Transactions............. 42
Item 13.Exhibits and Reports on Form 8-K........................... 43
Signatures........................................................... 44
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Quantech Ltd. ("Quantech" or the "Company") is a development stage company
incorporated in the State of Minnesota seeking to commercialize its Surface
Plasmon Resonance ("SPR") technology. The Company's initial focus is the
development of SPR for the hospital point-of-care ("POC") medical diagnostic
market. SPR, the core technology of Quantech's proposed medical diagnostic
system, enables the Company to integrate the existing diagnostic methodologies
of immunoassays, DNA probes and chemical binding into a single, simple,
economical system in order to provide rapid, quantitative, diagnostic results.
The Quantech system configuration will consist of a small, bench top instrument
and a series of disposables, each offering a particular test or series of tests.
It is anticipated that the Quantech system will have the ability to analyze body
fluids (e.g., whole blood, urine, saliva) without preparation or addition of
reagents.
Quantech's business strategy is to capitalize on the flexibility, extreme
sensitivity and relatively low cost of its diagnostic system to penetrate and
expand the POC market. Quantech's intended entry into the POC market will be
Critical Care Units of hospitals, the first unit being the Emergency Department
("ED") where the most pressing and unmet customer needs are found. Of the
current POC market segment, approximately 85% is represented by testing in
Critical Care Units. The Critical Care Units represent a significant market as
they require a number of rapid turn-around tests. Although there are some POC
tests available for the Critical Care Units, the Company is not aware of any
currently existing POC product that provides a single instrument that will
perform most of the tests required in the Critical Care Units and especially the
ED. Additionally, there is minimal current competition for POC products in the
ED from the large, multinational companies that are presently focused on serving
the central lab market.
There are approximately 30 commonly ordered tests in the ED, all of which
are ordered STAT (very urgent). Some of the most important diagnostic tests in
the ED are cardiac markers. These tests help to identify whether a patient
experiencing chest pain has suffered a myocardial infarction (heart attack).
Current POC competition for this approximately $500 million annual market
consists of colorimetric, non-quantitative disposable kits. Quantech's first two
tests, intended to be introduced in early calendar 1997, are expected to
quantify these markers in two to five minutes through its objective,
computer-controlled system. Similar results are presently available from the
central lab in 60 to 90 minutes. Quantech's price to the customer will be less
than the existing POC products while offering the advantages of rapid
quantification and cost reduction when compared to the central lab.
Quantech believes the benefits of its system over other POC systems are
that the same instrument is expected to be able to be used for a full range of
tests and provide quantitative results. After the initial introduction of tests
for myocardial infarction, the Company intends to introduce additional tests at
the rate of at least one per quarter. Selection of these tests will be based
upon market demand, ease of development, regulatory hurdles and profit margins.
The Company plans to expand into other critical care diagnostic markets which
have needs similar to the ED. The capabilities of the Quantech system as a
broad, flexible diagnostic testing platform should meet the needs identified by
the POC market and the Company's marketing strategy is expected to enable it to
be competitive in the global medical diagnostics market.
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Strategy
Quantech's objective is to establish its SPR biosensor diagnostic
technology as the standard for critical POC diagnostics and steadily expand the
number of its tests available for its system through the introduction of
additional disposables. To reach that objective, Quantech intends to do the
following:
o Finalize the development of its prototype system for hospital
Emergency Departments (initially configured for the cardiac
marker CK-MB).
o Submit the system to the FDA for regulatory review by the end
of calendar 1996.
o Market this initial system (including evaluating strategic
partners with established distribution channels) in the spring
of 1997.
o Develop additional cardiac markers (specifically, Troponin,
Myoglobin, Myosin and CA-III).
o Develop additional markers for other high demand critical
care tests in medical diagnostic testing (specifically,
pregnancy, therapeutic drugs such as Digoxin, drugs of abuse
and infectious diseases).
o Assess capabilities of SPR in nonmedical testing applications.
Product Description
The Instrument
The Quantech instrument will be designed to fill the anticipated needs of
Critical Care Units and in particular the ED. The instrument will be of a size
capable of sitting on a desk or tabletop and moved from room to room if
necessary. It contains a white light source, a microprocessor, a number of
optical components, a computer touch screen and a drawer mechanism. The light is
split into two parts, a unique development of the Company, that enables the user
to read whole blood samples and provides a base line so quantitative results may
be obtained. The computer touch screen will display results of a given test and
enable the user to enter both a user number and the patient or specimen ID
number. The data or results produced by the instrument will also be stored on
its hard drive, thereby allowing the user to download data to a central computer
upon demand, and may be provided on a hard copy through use of an integrated
printer. A bar-code reader will identify the disposable employed and contain
certain calibration information necessary to effectively maintain quality
control. Most importantly, the instrument will be designed to be compatible with
new test disposables if and when they are introduced to the market. As a result,
when Quantech adds tests through the introduction of new disposables, its
original instrument will accommodate these various tests without a need for
additional hardware or software or training of ED personal.
Because of the small size and configuration of the instrument it will be
able to be located at bedside. It is anticipated that Critical Care Units such
as the ED will have several of these instruments at various locations. For
customers who wish to purchase the instrument, the retail price is anticipated
to be between $18,500 and $25,000. There will also be several industry standard
reagent rental programs based upon the number of disposables purchased.
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Disposables
Quantech's disposable slide consists of an injection molded plastic carrier
containing up to four metal coated grating surfaces. The metallic surface is
overlaid with reagents that react specifically with the analyte to be identified
and measured. One unique aspect of the Quantech disposable will be the ability
to attach a standard vacutainer tube, complete with its top intact, to the
disposable so that it is easy to use and the user has minimal exposure to the
patient sample. The disposables will be configured identically for all of the
tests manufactured by the Company. The only difference between the disposables
will be the reagents coated on each grating to define the particular test.
Future disposables for certain tests may also be configured to handle samples of
urine, saliva, or other body fluid.
Unlike the majority of other disposables on the market, Quantech's
disposables do not require the addition of reagents by the user. This simplicity
translates into lower production costs, quicker development time, easier use,
immediacy of results and reduced costs to the user. Individual disposables will
be packaged in a sterile pouch to provide extended shelf life. Disposables will
be configured to provide single tests or panels of up to three
diagnostically-related tests. Disposables are expected to initially have retail
prices ranging from $5.00 to $35.00 per disposable slide.
The Company has conducted experiments on a limited scale and initial
indications are that the SPR technology is a viable testing method. The Company
intends to manufacture test disposables based upon such SPR technology. The
Company believes that such test disposables will be easily produced, however,
commercial production may pose difficulties which currently are unforeseen.
Because the same disposable configuration may be used for all tests,
manufacturing and quality control costs should be minimized. Additional
development of the disposable is currently being conducted and future
development will continue to expand the number of tests that may be performed in
general and on each disposal.
Comparison of Product Technologies
A number of basic methods, whether performed manually or by automated
instruments, are utilized in diagnostic testing including immunoassays, DNA
probes and chemical reactions. Each of these testing methods requires the
performance of a series of operations by a skilled technologist. These
operations consist of: sample preparation, addition of reagents, further
method-specific manipulations, and reading and interpretation steps. Based upon
the Company's current prototype instrument and test disposables, the Quantech
system, consisting of the instrument and disposable, will not require sample
preparation, addition of reagents or operation by a skilled technologist. No
assurance can be given, however, that the SPR technology can be commercialized
so as to provide an instrument and disposable that will operate in the manner
described or that such instrument will be accepted by the medical community.
<PAGE>
In the Critical Care Units of the hospital, low volume or single test
throughput eliminates the economy of the central lab systems without
significantly shortening turnaround time for test results. Quantech's system
economically employs the same basic technologies, but simplifies the process.
The expected advantages of the Quantech system include:
o Considerably faster test results
o Quantitative results
o Objective results (independent of operator skill or perception)
o Competitively priced instrument and disposables
o Minimal operator training
o No addition of reagents by the operator
o Compact, durable instrument
o Equal to or better sensitivity than other technologies
The Company believes that the products to be developed from the SPR
technology will provide the potential to enable medical tests to be conducted at
the patient site with fewer steps, rapid response time, and minimal operator
training. However, the final commercialized SPR product has not been developed
and no assurance can be given that all of the advantages described above will be
attained.
The Company's first instrument is designed for the POC market described
below. It is designed to combine accuracy with simplicity of use and will be
capable of processing one test disposable at a time with up to three tests per
disposable. Subsequently developed instruments may offer more automation, may
provide greater throughput required by larger facilities, and may incorporate a
small computer for additional data storage and analysis. The ability of
biosensors to convert biological data into digital signals should also permit
designs that capitalize on future advances in microcomputer technology.
The Market
General
The medical diagnostics market can be divided into three broad segments:
home diagnostics, the traditional central lab and POC. Excluding home
diagnostics, the overall world wide in-vitro diagnostic market is growing,
estimated at $13.2 billion in 1994 and expected to grow to $17.5 billion by the
year 2000. Central labs currently account for the majority of this market while
POC represents only a small portion. Introduction of additional POC products,
such as Quantech's system, are expected to cause the POC market to gain a larger
percentage of the overall in-vitro diagnostic market. The extent of such market
shift will be affected by the ability of POC products to provide fast, cost
effective and efficient products.
<PAGE>
Point of Care
POC testing represents one of the most rapidly growing segments of the
in-vitro diagnostics market. Part of this growth is a result of the rising costs
of health care that have produced changes in hospital reimbursement. Pressure
has increased to reduce the length of patient stay and provide a greater portion
of services in ambulatory and outpatient settings. Because the cost of providing
care in Critical Care Units far exceeds those of general medical or surgical
units, one goal of critical care medicine is to shorten the amount of time
patients spend in these settings by instituting therapy based on the rapid
availability of test results.
The strategic direction chosen by Quantech is to exploit the inherent
technological advantages of its SPR technology by identifying the diagnostic
market niche where such technological advantages provide both economic savings
and significant patient benefits. The Company's primary strategy will be to
focus on the critical care diagnostics area. Quantech has identified this area
as one that fulfills both the above criteria. At this time, the large medical
diagnostic testing companies have little presence in this niche as they focus
their resources on the central laboratory. This absence should enable Quantech
to competitively enter the market. However, there is no assurance that the
Quantech system will be accepted by its intended market or that competition from
the large diagnostic companies will not be forthcoming.
In the Critical Care departments and surgical suites, a wide variety of
testing is now conducted that was formerly restricted to the main laboratory.
For example, tests that were done in the central labs, like blood gases and
electrolytes, are now available as POC tests. Conducting testing in proximity to
the patient provides immediate results and avoids the delays, communication
problems and increased costs often associated with a centralized testing
process. The continued growth of the POC market will be a result of the
advantages POC testing has over central laboratories.
Critical Care
Critical Care is defined as the area where immediate diagnostic information
is needed to effect either the treatment or processing of a patient. When test
results are needed in these areas they must be processed in a STAT manner,
thereby significantly increasing the cost. The solution to this difficulty is to
bring a system of diagnostic methodologies to the patient site in a manner that
will provide test results promptly.
A part of the Critical Care Unit is the ED. The Company believes that there
are approximately 30 different diagnostic tests that require prompt results in
the ED. Quantech intends to develop products primarily focused on the ED and
these 30 tests during the first several years of operation. Since the needs of
the other areas of critical care are similar to the ED, the Company anticipates
that growth into these other areas will be evolutionary.
Cardiac Markers
Of the tests needed by the critical care segment of the POC market, the
Company has selected those tests that the Company believes will minimize
development time and regulatory processes and, most importantly, satisfy unmet
demands of the users. Tests for cardiac markers meet all of these criteria.
These markers are needed to triage and treat individuals that arrive at the ED
with chest pain. An estimated 5.5 million patients are evaluated for chest pain
annually in the United States with approximately 3 million admitted to an
intensive-care unit for further evaluation. Of those admitted, only 30%
subsequently "rule-in" for acute myocardial infarction ("AMI"). Assuming an
average cost of $3,000 per admission, this represents a total expenditure of $6
billion annually on patients who do not have AMI. This also does not take into
account that 2% to 8% of patients with acute chest pain that are released from
the ED without treatment subsequently fulfill criteria for AMI resulting in
deaths and complications that represent greater than 20% of the malpractice
dollars awarded in the field of emergency medicine.
<PAGE>
Not only are costs of admission and malpractice claims an important issue,
but in the past, making a rapid definitive diagnosis of chest pain was not as
important as it is today. When a patient was in the early stages of a heart
attack/AMI, there was little treatment available. In the last 10 years,
substantial progress has been made in thrombolytic therapy. If the therapy is
started within six hours of the onset of a heart attack, it can dissolve the
blood clot, clear arteries and save heart muscle tissue. Because these therapies
are expensive and present undesirable side effects if the patient has not
suffered an AMI, rapid testing for an AMI is very important.
During an AMI, certain proteins are released from the damaged heart muscle
into the blood stream as a result of damage to the muscle. These proteins are in
varying concentrations and consist of CK-MB, troponin, myosin, light chain,
myoglobin and CA-III. To identify patients who have suffered an AMI, tests to
identify these proteins/cardiac markers have become important. Such tests,
however, are most effective if they can be performed in under five minutes in
the ED or mobile care unit so that medical personnel may take immediate action.
Presently, there is no method available to provide such results quantitatively.
Most of the existing test modalities require a central laboratory system that
may delay the results beyond their effective need. Quantech's system is expected
to provide emergency personnel with the ability to receive quantitative results
within several minutes.
The high cost of therapy, the urgency of the associated conditions and the
difficulty of a definitive diagnosis creates an urgent demand for these cardiac
marker tests in the critical care setting. Quantech has begun to develop the
disposable slide necessary for its first cardiac marker tests for the ED. This
disposable, and Quantech's related reading instrument, are intended to provide
results in a timely and economic manner and be introduced in the United States
in the spring of 1997.
<PAGE>
Competition
The majority of in-vitro medical diagnostic testing is conducted in
hospital and commercial reference laboratories. These facilities are
particularly suited for efficiently processing a large number of clinical
samples. While most hospital laboratories must maintain the capability to
perform certain STAT tests on single samples, most of the samples handled by
central laboratories are processed in batches. The competitors for this market
have addressed these laboratories' needs for high sample throughput, low reagent
cost and low labor cost by developing automated systems. These systems are
generally complex and expensive incorporating designs, appropriate to the labs
they serve, which presume skilled operators who are expected to perform sample
preparation, system calibration and basic instrument maintenance.
Both the health care providers and their suppliers are heavily committed to
the current central laboratory model. The laboratories are constrained by their
organization structure, their substantial capital investment in instrumentation
and the task of processing a large number of routine (i.e., non-STAT) samples.
The suppliers' corporate infrastructures, marketing and sales organizations,
research and development activities and production capabilities are committed to
this market. Even though the economic savings and medical utility afforded by
POC is becoming widely recognized, it is not necessarily immediately attractive
to the most successful laboratories and the strongest suppliers.
There are more than 150 companies serving this central, clinical laboratory
market. Most of them compete in only one or two segments of the overall market.
Abbott Laboratories, Boehringer Mannheim, and Johnson & Johnson (reinforced by
its acquisition of Kodak Medical) are notable exceptions. These companies have
achieved their broad market penetration by developing several technologies, each
targeted for the specific needs of a market segment and focusing their
marketing, distribution and sales activities on the central lab. The POC market
in general must compete with the central laboratory to gain market share and as
a result Quantech will meet with competition from these companies in both sales
of its system and the individual tests for such system.
There is significant activity in the Critical Care segment of the POC
market. The majority of current systems address the areas of coagulation, blood
gas and basic chemistry (including electrolytes). Two such systems, i-STAT Corp.
which markets a hand-held biosensor instrument and Abaxis, Inc. (Piccolo) which
markets a tabletop analyzer, are capable of determining blood gas and
electrolyte levels and have become recognized POC instruments. The Company does
not believe current products of i-STAT, Abaxis or others are capable, however,
of diagnosing analytes that indicate cardiac markers or any infectious diseases.
There can be no assurance that current or future POC companies or current
companies providing instruments to the central laboratory market will not invent
systems that will have broad immunoassay testing capabilities like those
expected by the Company's system.
With respect to testing for cardiac markers to diagnose AMI, most testing
is done in the Central Labs with turnaround time from 30 to 120 minutes. The
Company is aware of only four companies that provide POC testing for AMI. Of
such companies, Spectral Diagnostics Limited, a Canadian company, markets a
manual method available for two cardiac markers and Boehringer Mannheim has
recently begun to market a manual test for troponin T. As configured, neither
Spectral's, Boehringer's nor the other POC AMI tests can provide quantitative
results and all but Boehringer's test necessitate addition of reagents by the
user.
<PAGE>
The Company believes that there is a need for quantitative measurement of
cardiac markers, pregnancy, drugs and other critical care tests and that such
need continues to be unfulfilled. Quantech plans to enter the market by serving
the unmet needs for quantitative cardiac markers and to extend its penetration
by delivering the full range of ED tests on a single platform. In doing so, the
Company will compete directly with providers of currently available testing
methods. All of the industry leaders, and many of the other companies
participating in the diagnostic testing market, have substantially greater
resources than those available to the Company, including, but not limited to,
financial resources and skilled personnel. However, the Company believes the SPR
technology will enable it to provide products to the POC market, a market niche
believed by the Company to be less competitive.
The Technology
Surface Plasmon Resonance (SPR) Technology
Surface Plasmon Resonance is an optical-electrical phenomenon involving the
interaction of light with the electrons of a metal. The optical-electronic basis
of SPR is the transfer of the energy carried by photons of light to a group of
electrons (a plasmon) at the surface of a metal. Quantech's SPR sensor is a
disposable slide composed of a clear plastic base with a fine grating molded
into its surface. The grating is coated with a very thin layer of gold (1 ounce
of gold is sufficient to produce over 200,000 disposables). Gold is used since
it does not oxidize like other metals, which oxidation affects the ability of
the system to perform the test. The gold is subsequently coated with binding
molecules. The binding molecules may be antibodies, DNA probes, enzymes or other
reagents chosen because they react exclusively with a specific analyte. The
analyte is the substance being measured and defines the test to be done such as
a cardiac marker.
The coated metal surface interacts with light at a characteristic resonant
wavelength that depends upon the molecular composition at the metal's surface.
When the coated metal is exposed to a sample that contains analyte, the analyte
becomes bound to the metal through its specific interaction with the binding
molecules. As an analyte is bound, the composition at the surface changes and
consequently the resonant wavelength shifts. The magnitude of the change in the
resonant wavelength is proportional to the amount of binding that takes place,
which is proportional to the concentration of the analyte in the sample.
SPR biosensors combine the strengths of biology and physics into a single
entity. The utilization of the phenomena of SPR produces high sensitivity.
Applications of SPR that have been reported in the scientific literature or
explored by the Company include immunoassays for hormones, drugs, viruses and
bacteria, quantitation of anesthetic gases, and DNA binding assays. The
Company's SPR biosensor technology presents a simple, unified platform that is
capable of performing a wide range of diagnostic tests.
<PAGE>
The Ares-Serono License
The Company has acquired from Ares-Serono at a total cost of $3.4 million a
worldwide exclusive license (the "License"), to certain patents, proprietary
information and associated hardware (e.g. molds, test rigs, prototypes) related
to the SPR technology. The Ares-Serono affiliated companies (the "Ares-Serono
Group"), based in Switzerland, comprise a multinational organization engaged in
the development and marketing of ethical pharmaceuticals and diagnostic
products, primarily in the field of human fertility, human growth, immunology
and virology. The SPR diagnostic technology was developed by a research and
development partnership (the "R&D Partnership"), the General Partner of which
was a company belonging to the Ares-Serono Group.
The License calls for an ongoing royalty of 6 percent on all products
utilizing the SPR technology which are sold by the Company. If the Company
sublicenses the technology, the Company will pay a royalty of 15 percent of all
revenues received by the Company under any sublicense. If the payments of the 6
percent royalty and the sublicense royalty fail to reach at least $1,000,000 by
December 31, 1997, an additional payment of $150,000 by December 31, 1997 will
be required. The Company has paid to date $850,000. If such payment is not made,
Ares-Serono has the right to cause a reversion to Ares-Serono of a royalty-free
license, thereby depriving the Company of its exclusive rights under the
License. The obligations of Quantech to pay royalties terminate when the total
royalty payments reach a gross amount of $18 million. After such date,
Quantech's rights in the licensed SPR technology continue in perpetuity with no
further obligations to Ares-Serono.
Ares-Serono specifically reserved, and did not license to Quantech, any
rights with or otherwise integrated with certain fluorescence capillary fill
device technology (the "FCFD Technology"). The Company believes that such
limitation does not materially impact the value of the License given Quantech's
current plan of commercialization. In addition, the License is subject to the
contingent right of PA Technology, a U.K. corporation, to request a grant of a
non-exclusive royalty-free license to exploit certain rights in the SPR
technology for applications outside the field of the commercial interests of the
Company. Finally, Ares-Serono has retained the right to further develop the SPR
technology, provided, however, that any products commercialized from such
development may only be sold through Ares-Serono under its name. Quantech is
unaware of any attempts by Ares-Serono to further develop the SPR technology.
Patents and Proprietary Rights
The License covers a total of eight patents. The two principal patents
covering the SPR technology gratings, one patent covering cellulose nitrate
films and one covering calibration notches have been granted in the United
States, Canada, Australia and Europe and all but one of the grating patents that
has been issued in Japan are pending in Japan and Great Britain. Three of the
remaining four patents are either issued or pending in the United States,
Canada, Australia, Europe, Japan and Great Britain. The remaining patent which
is not critical to the Quantech system has been granted in Great Britain. All
developments by the Company pursuant to the License, either proprietary or
patentable in nature, will be the property of the Company. The Company has made
a number of advances that it intends to patent. These developments are in the
methodology of chemically coding the SPR disposables, and in enhancements to the
optics that improve the ease and reliability of calibration and eliminate
nonspecific, sample-to-sample variability. Because the Company's licensed
patents do not expire in less than ten years and Quantech intends to file
additional patents, the Company believes that it has the opportunity to complete
development of its product, establish a market position and seek additional
patents on improvements and related technologies. No assurance can be given,
however, that other companies will not develop technologies substantially
equivalent to those owned, or to be developed, by the Company or that granted or
pending and to filed patents, if granted, will protect the Company's technology.
<PAGE>
Government Regulation
The Company believes that the products it initially proposes to manufacture
and market will be classified as medical devices and will therefore be subject
to regulation by the United States Food and Drug Administration (the "FDA") and,
in some instances, by foreign government authorities. Under the 1976 amendments
to the Federal Food, Drug and Cosmetics Act (the "FFDCA") and regulations
promulgated thereunder, manufacturers of medical devices must comply with
certain regulations governing the testing, manufacturing and packaging of
medical devices. Under the FFDCA, medical devices are subject to different
levels of testing and review. The most comprehensive level of review requires
that a clinical evaluation program be conducted before a device receives
premarket approval by the FDA for commercial distribution. As a manufacturer of
medical devices, the Company will also be subject to certain other FDA
regulations, and its manufacturing processes and facilities will be subject to
periodic inspection, without warning, to ensure compliance. Comparable agencies
in certain states and foreign countries will also regulate the Company's
activities. The Company's products could be subject to recall by the FDA or the
Company itself, if it appears that the products and their use do not conform to
regulations.
Generally, medical devices intended for human use that are to be marketed
in the United States are placed in one of three regulatory classifications
depending upon the degree of testing and review to which the device will be
subject. The Company expects that its products will not be subjected to the
highest level of scrutiny because they are in-vitro (outside of the body)
diagnostic devices which do not come into contact directly with a living human
being. Specifically, the systems would be classified as either Class I or Class
II devices as distinct from implantable devices, which are classified as Class
III devices.
The Company believes that premarket clearance can be obtained for its
initial system and tests through submission of a 510(K) premarket notification
("510(K) Notification") demonstrating the product's substantial equivalence to
another device legally marketed pursuant to 510(K) Notification clearance. The
FDA may also require, in connection with the 510(K) Notification, that it be
provided with the test results supporting this claim. The FDA may further
require, in connection with the 510(k) Notification, that it be provided with
test results demonstrating the safety and efficacy of the device. Under certain
circumstances, such clinical data can be obtained only after submitting to the
FDA an application for an Investigational Device Exemption ("IDE"). The FDA must
either deny the 510(K) Notification or require further information within 90
days. If the FDA has not responded within such time period, the applicant may
proceed to market the new product. Generally, a request by the FDA for a 90 day
extension prior to ruling is not uncommon.
<PAGE>
For new products that are not considered to be "substantially equivalent"
to an existing device, two levels of FDA approval will probably be required
before marketing in the United States can begin. First, the FDA and
participating medical institutions must approve the Company's application for an
IDE, permitting clinical evaluations of the product utilizing human samples
under controlled experimental conditions. Second, the FDA must grant to the
Company a Premarket Approval ("PMA"). The FDA should grant a PMA if it finds
that the product complies with all regulations and manufacturing standards. In
addition, the FDA may require further clinical evaluation of the product, or it
may grant a PMA but restrict the number of devices distributed or require
additional patient follow-up for an indefinite period of time. Completion of
this process could take up to 12 months and involve significant costs. The
Company believes it is unlikely that it will be required to obtain a PMA with
respect to any of its currently proposed products, except where mandated by the
FDA such as HIV, cancer and hepatitis detection tests. Any claims of panel
diagnostics are subject to a PMA procedure. The Company anticipates that it will
make claims in reference to its cardiac markers. These claims will be made after
the products are marketed with only single claim implications. Accordingly, the
products should not be delayed in their initial introduction. If a PMA is
required for the Company's initial system and CK-MB test, introduction of the
initial system likely would be significantly delayed, which could have a
material adverse effect on the Company. Mr. Shaw and Dr. McKiel, the Company's
President and Executive Vice President-Research and Development, respectively,
have extensive experience in FDA approval and compliance matters.
Research and Development
For the year ended June 30, 1996, the year ended June 30, 1995, and the
period from September 30, 1991 (date of inception) to June 30, 1995, the Company
spent $991,701, $503,375 and $2,531,119, respectively, on research and
development of its medical diagnostic system. The Company will continue to spend
funds on final development of its system, development of additional tests and
research and development related to future products.
Manufacturing
The Company does not presently have any manufacturing capabilities, but has
engaged a firm to design the Company's first manufacturing line to produce and
package the Company's test disposable. The Company intends to manufacture its
test disposable and will outsource the manufacture of its instrument. Such third
party manufacturer has not yet been engaged by the Company.
Employees
The Company employs 15 people on a full-time basis and engages consultants
and independent contractors to provide services related to the development of
the SPR technology. The Company expects to hire other personnel in the next 12
months as necessary for FDA work, sales and marketing, manufacturing and
administration.
<PAGE>
Legal Proceedings
The Company is not a party to any litigation that would have a material
adverse effect on its financial condition or results of operations.
History of the Company
The Company is the culmination of developments dating from early 1989. R.
H. Joseph Shaw, the Company's President, learned that Ares-Serono intended to
sell the SPR technology (patents and proprietary information) due to changes in
corporate strategy. Mr. Shaw formed Spectrum Diagnostics Inc. ("SDI") and
purchased an option on the SPR technology. In August 1991, the Company found
itself in the position of having to raise $2 million to make the final payment
on its option with Ares-Serono to acquire the SPR technology or face the loss of
the previous investment. An organization capable of raising the funds within the
necessary time frame was found, New York based Ital American Securities, but the
financing had to be conducted in Italy. Spectrum Diagnostics S.p.A. ("SDS")
purchased the assets of SDI, including the Ares-Serono option, completed the
financing and exercised the option. These funds, while adequate to secure the
technology, were insufficient to fully develop it to a commercial level. In
conjunction with the Italian offering, a concurrent offering was conducted by
Schneider Securities, Inc. in the United States, however, funds raised in such
offering fell short of expectations. The inconvenience and costs associated with
operating under both Italian and U.S. regulations necessitated a repatriation.
Quantech Ltd. was formed under the laws of Minnesota for the purpose of
effecting the change of domicile of SDS from Italy to the state of Minnesota
through a merger with SDS on April 14, 1993. Quantech had no operations prior to
the merger. SDS changed its name to Quantech Ltd. primarily to avoid confusion
with other medical companies. Since that time, the Company has financed its
efforts through a series of private placements of securities. Adequate financing
to conduct the necessary research and development to commercialize its product
has only been available to Quantech in the last eighteen months.
CAUTIONARY STATEMENTS
As provided for under the Private Securities Litigation Act of 1995, the
Company wishes to caution investors that the following important factors, among
others, in some cases have affected and in the future could affect the Company's
actual results of operations and cause such results to differ materially from
those anticipated in forward-looking statements made in this document and
elsewhere by or on behalf of the Company:
No History of Operations; Development Stage Company; Going Concern Uncertainty
To date, the Company does not have a product ready to be brought to market
and its proposed operations are subject to all of the risks inherent in a new
business enterprise, including completion of commercial development and FDA
approval of its products within reasonable time frames and budget constraints,
lack of marketing experience and lack of production history. The likelihood of
the success of the Company must be considered in light of the expenses,
difficulties and delays frequently encountered in connection with the start-up
of new businesses, the development of a new product and the competitive
environment in which the Company will operate. The report of the independent
auditors on the Company's financial Statements for the period ended June 30,
1996, includes an explanatory paragraph relating to the uncertainty of the
Company's ability to continue as a going concern. The Company is a development
stage company which has suffered losses from operations, requires additional
financing, and ultimately needs to successfully attain profitable operations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. There can be no assurance that the Company will be able to
develop a commercially viable product or marketing system or attain profitable
operations.
<PAGE>
Future Capital Needs
The Company does not have sufficient funds to commence commercial
production and sales of its system, but anticipates that its current funding is
adequate to complete FDA approval of its first product and start preproduction
and premarket activities. The Company's ability to begin commercial production
and sales of its system will depend upon the continued availability of
investment capital, funding made by strategic partner(s) or licensing revenues,
until the revenues from sale of the instruments and associated test disposables
are sufficient to maintain operations. Additional funds may have to be raised
through equity or debt financing which could dilute current shareholders. If
funding is not available when needed, the Company may be forced to cease
operations and abandon its business. In such event, Company shareholders could
lose their entire investment
Uncertainty of Market Acceptance
The commercial success of the Company's products will depend upon their
acceptance by the medical community and third-party payors as useful and
cost-effective. Market acceptance will depend upon several factors, including
the establishment of the utility and cost-effectiveness of the Company's tests,
the receipt of regulatory clearances in the United States and elsewhere and the
availability of third-party reimbursement. The availability of POC test systems
for a wide variety of tests has been limited to date. The Company is thus
targeting an emerging market. Diagnostic tests similar to those developed by the
Company are generally performed by a central laboratory at a hospital or clinic.
The approval of the purchase of diagnostic equipment by a hospital is generally
controlled by its central laboratory. The Company expects there will be
resistance by central laboratories to yield control of tests they have
previously performed. Failure of the Company's products to achieve market
acceptance or third-party payor approval would have a material adverse effect on
the Company.
Lack of FDA Product Approval
The Company's products will be regulated as medical devices by the Food and
Drug Administration ("FDA") under the Federal Food, Drug, and Cosmetic Act ("FDC
Act"), and as such require premarket regulatory clearance before
commericialization in the United States. The Company believes that premarket
clearance can be obtained for its systems, except for a few tests the Company
may introduce at a later time, through submission of a 510(K) premarket
notification ("510(K) Notification") demonstrating the product's substantial
equivalence to another device legally marketed pursuant to 510(K) Notification
clearance. Although 510(K) submissions are supposed to be completed by the FDA
within 90 days of submission, there can be no assurance the FDA will approve the
Company's initial system pursuant to a 510(K) Notification, or do so in a timely
manner, and therefore there can be no assurance that the Company will be able to
introduce its initial system in the United States within its anticipated time
frame. If the Company cannot establish to the satisfaction of the FDA that its
products are substantially equivalent, the Company will have to seek premarket
approval ("PMA") of its system, requiring submission of a PMA application
supported by extensive data to prove safety and efficacy. If a PMA is required,
introduction of the initial system likely would be significantly delayed, which
could have a material adverse effect on the Company.
<PAGE>
Limited Manufacturing and Production Experience
To be successful the Company must manufacture its products in compliance
with regulatory requirements, in sufficient quantities and on a timely basis,
while maintaining product quality and acceptable manufacturing costs. The
Company will have to establish a manufacturing facility, or contract with a
third party for manufacturing, which is registered with the FDA. Production of
the Company's disposables requires the placement of antibodies or other binding
reagents on metalized grating surfaces. The chemical and physical conditions for
coating are substantially equivalent to those used to produce other solid state
binding assays. Although the Company believes that its production methods will
be effective for manufacturing its disposables, there can be no assurance that
the methods will be applicable to all the tests it expects to develop or that
the Company will be able to manufacture accurate and reliable products in large
commercial quantities on a timely basis and at an acceptable cost.
Competition
The diagnostic testing market is highly competitive. As POC markets expand,
the Company expects that manufacturers of central and STAT laboratory testing
equipment will compete to maintain their revenue and market share and that new
POC products will be developed. All of the industry leaders and many of the
other companies participating in this market have substantially greater
resources than the resources available to the Company, including, but not
limited to, financial resources and skilled personnel.
Technological Obsolescence
The Company operates in a market characterized by rapid and significant
technological change. While the Company is not aware of any developments in the
medical industry which would render the Company's current or planned products
less competitive or obsolete, there can be no assurance that future
technological changes or the development of new or competitive products by
others will not do so To remain competitive, the Company must continually make
substantial expenditures for development of both equipment and disposables.
<PAGE>
Patent Protection
No assurance can be given that other companies will not develop
technologies substantially equivalent to those owned or to be acquired or
developed by the Company or that the Company will be able to protect its
proprietary technology. The Company is not aware of any issued patents that
would prohibit the use of any technology the Company currently has under
development. However, patents may exist or issue in the future to other
companies covering elements of the Company's systems. The existence or issuance
of such patents may require the Company to make significant changes in the
design of its systems or operational plans. Although the Company believes that
its proposed products will not infringe patent rights of others, there can be no
assurance that such infringement does not, or will not, exist with respect to
the completed product. The Company has not conducted an independent patent
search or evaluation with respect to the SPR technology. Ares-Serono, the
licensor to the Company of its basic SPR technology, has made no warranties as
to the enforceability of any of its patents or the commercial potential of the
technology. Although Ares-Serono has the obligation to defend the patents they
have licensed to the Company, Quantech will be responsible for the defense of
any patents issued to it. Cost of defending patents can be substantial.
Government Regulation
If the Company becomes a provider of health care diagnostic devices as
intended, the Company will be subject to laws and regulations administered by
federal, state and foreign governments. The degree of regulation and areas of
concern differ in each country or region. The Company will be required to comply
with regulations regarding product approval and performance and, in addition,
regulations concerning electronic devices. The industry in which the Company
expects to operate is subject to frequent regulatory changes and there can be no
assurance that the Company will be able to comply with applicable regulations.
In the event of noncompliance, the Company may be unable to market any products.
Product Liability
The Company could be exposed to risk of product liability claims or other
lawsuits in the event of incorrect diagnosis utilizing the SPR equipment and
disposables developed by the Company. Unless the Company maintains product
liability insurance of a sufficient amount, the Company will have to bear the
economic consequences of any claim in excess of its insurance coverage. While
the Company does not presently have such coverage, it will evaluate its
availability at such time as products are commercially introduced. There can be
no assurance that the Company will be able to obtain or maintain such insurance.
<PAGE>
Shares Eligible for Future Sale
The Company has filed a registration statement that, once effective, will
cause all of its 46,900,759 outstanding shares of Common Stock to be available
for public sale. Currently 18,551,145 shares are available for public sale. In
addition, 11,940,103 of a total of 15,853,603 shares that may be obtained upon
exercise of outstanding options and warrants are also included for resale
pursuant to such registration statement. The Company cannot predict the affect
that the availability of these shares for public sale will have on the price of
the Company's stock or when such registration statement will be declared
effective.
Limited Market for Securities
There is a limited trading market for the Company's Common Stock, which is
not listed on any stock exchange or Nasdaq. Although trading in the Company's
Common Stock in calendar 1996 has occurred on a consistent basis, the volume of
shares traded has been very sporadic. There can be no assurance that an
established trading market will develop, the current market will be maintained
or a liquid market for the Company's Common Stock will be available in the
future.
Filing of Schedule 13D by Shareholder Group
On April 23, 1996, as amended August 5, 1996, a group of three shareholders
of the Company, calling itself The Group for the Maximization of Shareholder
Value of Quantech Ltd., notified the Company that it had filed a Schedule 13D
with the Securities and Exchange Commission. The Group indicates that it has
voting power over 11.96% of the voting power of the Company's stock, with
dispositive power over 6.16%. Pursuant to the Schedule 13D, the group states
that it does not believe the Company's present Board of Directors and senior
management are maximizing shareholder value and request the resignation of two
management directors. No proposed new board members are identified and the
Company has not agreed to a reconfiguration of its Board of Directors. In its
amendment, the Group stated that it was considering, among other unidentified
action, demanding a Special Meeting of Shareholders for the purpose of effecting
changes in the Company in order to maximize shareholder value. Because the value
of the Company has significantly increased in the last twelve months and the
Company is making positive steps toward the commercialization of its product,
the Company's management and directors do not believe it is in the best interest
of the Company to allow a minority shareholder group to dictate the management
of the Company. As a result, the Company does not intend to meet the demands of
the Group and will respond in an appropriate manner to any action taken by the
Group.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases office space (comprised of approximately 6,800 sq. ft.)
at 1419 Energy Park Drive, St. Paul, Minnesota at a base monthly rent of
approximately $5,200 pursuant to a lease arrangement which expires February,
2000 and will thereafter proceed on a month-to-month basis. The Company will
require at least 15,000 sq. ft. of space prior to commercial manufacturing of
its system. The Company is currently reviewing additional space to satisfy its
future needs.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1996.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the local over-the-counter and the
National Association of Securities Dealers Bulletin Board markets under the
symbol QQQQ. At August 8, 1996, the Company had approximately 490 shareholders
of record and the bid, asked and closing sale prices of its Common Stock were
$0.843, $0.906 and $0.906, respectively. The following table summarizes the
quarterly high and low sale prices for the Company's Common Stock for the prior
two fiscal years.
High Low
------------------ ----------------------
Fiscal 1995
First Quarter $0.25 $0.0625
Second Quarter $0.25 $0.0625
Third Quarter $0.12 $0.09
Fourth Quarter $0.34 $0.125
Fiscal 1996
First Quarter $0.34 $0.187
Second Quarter $0.81 $0.50
Third Quarter $1.06 $0.50
Fourth Quarter $1.625 $0.68
The Company has never paid a cash dividend on its Common Stock. Payment of
dividends is at the discretion of the Board of Directors. The Board of Directors
plan to retain earnings, if any, for operations and does not intend to pay
dividends in the near future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATIONS
History
Quantech Ltd. ("Quantech" or the "Company") was formed under the laws of
Minnesota for the purpose of effecting the change of domicile of Spectrum
Diagnostics S.p.A ("SDS") from Italy to the state of Minnesota through the
merger with SDS on April 14, 1993. Quantech had no operations prior to the
merger and is continuing the business of SDS to commercialize Surface Plasmon
Resonance ("SPR") technology licensed from Ares-Serono. SPR, the core technology
of Quantech's proposed medical diagnostic system, enables the Company to
integrate the existing diagnostic methodologies of immunoassays, DNA probes and
chemical binding into a single, simple economical system in order to provide
rapid, quantitative, diagnostic results. The Quantech system configuration will
consist of a small, bench top instrument and a series of disposable slides with
multiple tests per slide. It is anticipated that the Quantech system will have
the ability to analyze body fluids (e.g. whole blood, urine, saliva) without
preparation or addition of reagents. The Company's initial focus is to develop
SPR for the hospital emergency room point-of-care ("POC") medical diagnostic
market. Its first test will aid physicians in assessing whether a patient has
suffered a heart attack.
<PAGE>
Quantech is a development stage company which has suffered losses from
operations and will require additional financing to commercialize its product.
The Company's product development must be completed, FDA approval obtained, the
product introduced to the market and ultimately Quantech will need to
successfully attain profitable operations. These factors raise substantial doubt
about the Company's ability to continue as a going concern.
Results of Operations
The Company has incurred a net loss of $10,482,840 from September 30, 1991
(date of inception) through June 30, 1996 due to expenses related to formation
and operation of SDS in Italy, continuing costs of raising capital, normal
expenses of operating over an extended period of time, funds applied to research
and development, royalty payments related to the SPR technology, losses due to
expenses of Quantech's predecessor, Spectrum Diagnostics Inc. and interest on
borrowed funds. In addition, an investment of $3,356,629 was made when Quantech
purchased the exclusive rights to the SPR technology.
For the year ended June 30, 1996 the Company had interest income of $42,038
compared to $0 for the 1995 fiscal year as a result of cash on hand obtained
from Quantech's private placements. General and administration expenses
increased from $1,193,285 for the year ended June 30, 1995 to $1,218,674 for the
year ended June 30, 1996. General and administration expenses, although
increasing slightly in 1996, have in fact changed modestly in how funds are
expended in such category. In fiscal 1996, Quantech was able to reduce general
and administration expenses it has incurred in the past relating to professional
fees, consulting arrangements and other expenses required to maintain an
inadequately funded organization. The overall increase in Quantech's general and
administration expenses in fiscal 1996 was a result of adding personnel, and
costs associated with such personnel, as Quantech continues to build its
infrastructure in anticipation of commercial production of its system. General
and administration expenses will continue to grow as the Company nears market
introduction of, and begins to sell, its system.
Research and development costs increased from $503,375 in 1995 to $991,701
in 1996. This increase is a result of accelerated research and development
activity including hiring of employees and engaging firms to perform contract
development work. Minimum royalty expense decreased in 1996 as compared to 1995
as a result of the declining minimum royalties owed under Quantech's license
with Ares-Serono.
For the year ended June 30, 1996 Quantech had a loss of $2,396,963 as
compared to $2,070,292 for the same period ended June 30, 1995. This increase
was a result of the rise in research and development and general and
administrative expenses in 1996 exceeding decreases in such period in minimum
royalty and financing expenses and the increase in interest income.
Management believes the reduction in general and administration expenses
related to expenditures incurred in supporting an under capitalized
organization, while research and development expenses have increased, reflects
the Company's current stability. Quantech is now able to apply an appropriate
amount of funds to pursue the development and commercialization of its product.
The Company believes it will be able to continue to apply funds to the areas
most appropriate to complete its system and introduce it to the market. This
forward looking information regarding the anticipated use of funds will be
influenced, however, by the timing of product introduction, need for additional
capital and other factors beyond the Company's control.
<PAGE>
In fiscal 1996, the Company has continued to contract for the development
of its prototype instrument and its manufacture; continued to develop the
chemistries necessary to do specific tests; contracted the development of the
disposable slides for the tests; and continued to raise the necessary funds to
stay in operation. Management anticipates that a system suitable to begin FDA
clinical work will be available in the summer/fall of 1996. The next major step
for the Company will be to submit its system to the FDA for approval which is
anticipated prior to the end of calendar 1996. At the time of submission to the
FDA, the system is expected to be ready for the commercial market and marketing
in the United States will proceed upon approval by the FDA. Such FDA approval is
anticipated in the spring of 1997. This timetable will be influenced by the
Company's ability to complete prototype development of its system and necessary
testing for submission of its FDA filing and delays it may encounter with the
FDA in its review of the system.
Liquidity and Capital Resources
From inception to June 30, 1996, Quantech has raised approximately
$15,500,000 through a combination of public stock sales, private stock sales and
debt obligations. Additional funds will be needed to establish sales and
marketing and production capabilities and to begin any significant sales of the
Company's product once development is completed. There can be no assurance that
the Company will obtain additional capital when needed or that additional
capital will not have a dilutive effect on current shareholders.
During its fiscal year ended June 30, 1996, Quantech had a number of events
occur affecting its capital resources. With regard to debt conversion
transactions, holders of Quantech 8% debentures due September 30, 1995, totaling
$997,500 plus accrued interest on such date, converted these amounts to Common
Stock at conversion prices ranging from $.125 to $.25 per share. In total,
including accrued interest to September 30, 1995, these debentures were
converted into 7,484,896 shares of Common Stock. In addition, holders of notes
due March 19, 1996, totaling $1,230,000 plus accrued interest, converted these
notes to Common Stock at a conversion price of $.125 per share on December 31,
1995. In total, including accrued interest, these notes were converted into
11,217,157 shares of Common Stock.
Quantech has also completed three private offerings of its Common Stock. In
July through September 1995, the Company received $2,882,952 of net proceeds as
a result of completion of a private placement of Units at $1.00 per Unit. In
November 1995, it received $430,000 of net proceeds also from the private
placement of $1.00 Units. Each Unit consisted of four (4) shares of Company
Common Stock and a warrant to purchase one share of Common Stock at $.25 per
share. The Company used the proceeds from these offerings for payment of bridge
loans, including interest, minimum royalties due under its license with
Ares-Serono, accounts and accrued payables, purchase of equipment and for
working capital.
<PAGE>
On May 3, 1996, Quantech completed its third private offering of 6,275,000
shares of Common Stock at $.60 per share. Such offering provided the Company
with net proceeds of approximately $3,363,000. Quantech intends to apply the
proceeds of such offering, along with cash on hand, to expenses relating to
product development, FDA submission, establishing sales and marketing and
production capabilities and to provide working capital. Although current funds
are expected to allow the Company to proceed through FDA approval of its system,
Quantech will not have sufficient funds to commence commercial production of its
system. Although the Company has a limited lending arrangement with its bank, it
does not anticipate receiving significant funding from lenders.
Quantech incurred capital expenditures of approximately $188,000 in fiscal
1996. The Company anticipates significant capital expenditures in fiscal 1997
for laboratory and production equipment and office expansion as the Company
nears product introduction. The timing and amount of such expenditures will be
governed by the Company's development and market introduction schedules which
are subject to change due to a number of factors including development delays,
FDA approval and availability of future financing. In addition to capital
expenditures, the Company has a final minimum royalty payment of $150,000 due to
Ares-Serono on December 31, 1997.
The Company currently has outstanding 46,900,759 shares of Common Stock. It
also has options and warrants outstanding to purchase an additional 15,853,603
shares.
Issued But Not Yet Adopted Accounting Standard
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123, "Accounting for Stock-Based Compensation", which establishes
financial accounting and reporting standards for stock-based employee
compensation plans. The Company will be required to adopt Statement No. 123 in
fiscal 1997. The Company does not intend to adopt Statement No. 123 in measuring
expense, however it will present the proforma disclosures and those pro forma
amounts will likely be less than the amounts shown in future statements of
income.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial information of the Company is included as follows:
Page
----
Financial Statements for Fiscal Years 1996 and 1995
Independent Auditors Report........................................ 25
Balance Sheets as of June 30, 1996 and 1995........................ 26
Statements of Operations For the Period from Inception
(September 30, 1991) through June 30, 1996 and for the Years
Ended June 30, 1996 and 1995....................................... 28
Statements of Stockholders' Equity (Deficit) For the
Period from Inception (September 30, 1991) through June 30, 1996... 29
Statement of Cash Flows For the Period from Inception
(September 30, 1991) through June 30, 1996 and for the Years
Ended June 30, 1996 and 1995....................................... 31
Notes to Financial Statements...................................... 33
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and the Board of Directors
Quantech Ltd.
St. Paul, Minnesota
We have audited the accompanying balance sheets of Quantech Ltd. (A Development
Stage Company) as of June 30, 1996 and 1995 and the related statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
June 30, 1996 and 1995 and the period from September 30, 1991 (date of
inception) to June 30, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 Quantech Ltd. (A Development
Stage Company) as of June 30, 1996 and 1995, and the results of its operations
and its cash flows for the years ended June 30, 1996 and 1995 and the period
from September 30, 1991 (date of inception) to June 30, 1996 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is a development stage company which has
suffered losses from operations, requires additional financing and ultimately
needs to successfully attain profitable operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ McGladrey & Pullen, L.L.P.
Minneapolis, Minnesota
July 16, 1996
<PAGE>
QUANTECH LTD. (A Development Stage Company)
BALANCE SHEETS
June 30, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS (Note 3) 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 2,942,871 $ 4,276
Prepaid expenses 41,269 37,222
-----------------------------------------
Total current assets 2,984,140 41,498
-----------------------------------------
Property and Equipment
Equipment 268,058 87,347
Leasehold improvements 15,000 8,000
-----------------------------------------
283,058 95,347
Less accumulated depreciation 78,657 41,257
-----------------------------------------
204,401 54,090
-----------------------------------------
Other Assets
License agreement, at cost, less amortization (Note 4) 2,320,334 2,544,110
Organization expenses, at cost, less amortization 4,675 19,825
Deferred offering costs - 76,437
-----------------------------------------
2,325,009 2,640,372
-----------------------------------------
$ 5,513,550 $ 2,735,960
=========================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Short-term debt (Note 3) $ 24,455 $ 2,628,120
Accounts payable 114,934 785,121
Accrued expenses:
Minimum royalty commitment (Note 4) - 562,500
Spectrum Diagnostics, Inc. obligations (Note 8) 53,637 65,000
Compensation - 104,989
Interest - 283,451
Other - 15,918
-----------------------------------------
Total current liabilities 193,026 4,445,099
-----------------------------------------
Long-Term Obligations
Minimum royalty commitment (Note 4) 37,500 -
-----------------------------------------
Commitments and Contingencies (Notes 4, 5 and 8)
Stockholders' Equity (Deficit) (Notes 2, 3 and 6)
Common stock, $.01 par value; authorized 60,000,000 shares;
shares outstanding, 46,900,759 and 6,840,000 in 1996
and 1995, respectively 469,008 68,400
Additional paid-in capital 15,296,856 6,328,338
Subscriptions receivable - (20,000)
Deficit accumulated during the development stage (10,482,840) (8,085,877)
-----------------------------------------
5,283,024 (1,709,139)
-----------------------------------------
$ 5,513,550 $ 2,735,960
=========================================
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF OPERATIONS
Years Ended June 30, 1996 and 1995, and Period From September 30, 1991
(Date of Inception) to June 30, 1996
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Inception) to
Years Ended June 30, June 30,
-----------------------------------------
1996 1995 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 42,038 $ - $ 89,927
--------------------------------------------------------------
Expenses:
General and administrative 1,218,674 1,193,285 6,141,471
Research and development 991,701 503,375 2,531,119
Minimum royalty expense (Note 4) 125,000 175,000 887,500
Losses resulting from transactions with Spectrum
Diagnostics, Inc. (Note 8) - - 556,150
Net exchange gain - - (67,172)
Financing 103,626 198,632 481,104
--------------------------------------------------------------
2,439,001 2,070,292 10,530,172
--------------------------------------------------------------
Loss before income taxes (2,396,963) (2,070,292) (10,440,245)
Income taxes (Note 7) - - 42,595
--------------------------------------------------------------
Net loss $ (2,396,963) $ (2,070,292) $ (10,482,840)
==============================================================
Loss per common share $ (.07) $ (.31)
=========================================
Weighted average common shares outstanding 31,991,150 6,786,986
=========================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Period From September 30, 1991 (Date of Inception) to June 30, 1996
<TABLE>
<CAPTION>
Common Stock Additional
-----------------------------------------
Shares Par Value Paid-In
Issued Amount Capital
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, at inception - $ - $ -
Net loss - - -
Common stock transactions:
Common stock issued, October 1991 3,200,000 3,154,574 -
Common stock issued, November 1991 600,000 611,746 1,788,254
Common stock issuance costs - - (889,849)
Cumulative translation adjustment - - -
------------------------------------------------------------
Balance, December 31, 1991 3,800,000 3,766,320 898,405
Net loss - - -
Common stock transactions:
Common stock issued, September 1992 700,000 699,033 875,967
Common stock issuance costs - - (312,755)
160,000 shares of common stock to be issued - - -
Officer advances, net - - -
Cumulative translation adjustment - - -
Elimination of cumulative translation adjustment - - -
------------------------------------------------------------
Balance, December 31, 1992 4,500,000 4,465,353 1,461,617
Net loss - - -
Common stock transactions:
Common stock issued, January 1993 160,000 1,600 118,400
Common stock issued, April 1993 30,000 300 11,700
Change in common stock par value resulting
from merger - (4,420,353) 4,420,353
Repayments - - -
------------------------------------------------------------
Balance, June 30, 1993 4,690,000 46,900 6,012,070
Net loss - - -
240,000 shares of common stock to be issued - - -
Repayments - - -
------------------------------------------------------------
Balance, June 30, 1994 4,690,000 46,900 6,012,070
Net loss - - -
Common stock issued, June 1995 2,150,000 21,500 276,068
Warrants issued for services - - 40,200
------------------------------------------------------------
Balance, June 30, 1995 6,840,000 68,400 6,328,338
Net loss - - -
Common stock issued, net of issuance costs of $848,877:
July, 1995 6,160,000 61,600 1,304,450
August, 1995 717,600 7,176 161,460
September, 1995 13,807,296 138,073 2,370,389
November, 1995 1,897,840 18,978 425,482
December, 1995 11,217,157 112,172 1,292,473
May, 1996 6,275,000 62,750 3,300,422
June, 1996 5,058 51 3,650
Payments received on subscription receivable (19,192) (192) (14,808)
Compensation expense recorded on stock options - - 125,000
------------------------------------------------------------
Balance, June 30, 1996 46,900,759 $ 469,008 $ 15,296,856
============================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (continued)
Period From September 30, 1991 (Date of Inception) to June 30, 1996
<TABLE>
<CAPTION>
Deficit
Accumulated
Paid For, During the Cumulative
But Not Subscriptions Due From Development Translation
Issued Receivable Officers Stage Adjustment
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, at inception $ - $ - $ - $ - $ -
Net loss - - - (594,620)
Common stock transactions:
Common stock issued, October 1991 - - - - -
Common stock issued, November 1991 - - - - -
Common stock issuance costs - - - - -
Cumulative translation adjustment - - - - 387,754
--------------------------------------------------------------------------------------
Balance, December 31, 1991 - - - (594,620) 387,754
Net loss - - - (2,880,988) -
Common stock transactions:
Common stock issued, September 1992 - (53,689) - - -
Common stock issuance costs - - - - -
160,000 shares of common stock to be issued 120,000 - - - -
Officer advances, net - - (27,433) - -
Cumulative translation adjustment - - - - (209,099)
Elimination of cumulative translation adjustment - - - - (178,655)
--------------------------------------------------------------------------------------
Balance, December 31, 1992 120,000 (53,689) (27,433) (3,475,608) -
Net loss - - - (996,089) -
Common stock transactions:
Common stock issued, January 1993 (120,000) - - - -
Common stock issued, April 1993 - - - - -
Change in common stock par value resulting
from merger - - - - -
Repayments - - 5,137 - -
--------------------------------------------------------------------------------------
Balance, June 30, 1993 - (53,689) (22,296) (4,471,697) -
Net loss - - - (1,543,888) -
240,000 shares of common stock to be issued 30,000 - - - -
Repayments - 53,689 22,296 - -
--------------------------------------------------------------------------------------
Balance, June 30, 1994 30,000 - - (6,015,585) -
Net loss - - - (2,070,292) -
Common stock issued, June 1995 (30,000) (20,000) - - -
Warrants issued for services - - - - -
--------------------------------------------------------------------------------------
Balance, June 30, 1995 - (20,000) - (8,085,877) -
Net loss - - - (2,396,963) -
Common stock issued, net of issuance
costs of $848,877:
July, 1995 - - - - -
August, 1995 - - - - -
September, 1995 - - - - -
November, 1995 - - - - -
December, 1995 - - - - -
May, 1996 - - - - -
June, 1996 - - - - -
Payments received on subscription receivable - 20,000 - - -
Compensation expense recorded on stock options - - - - -
--------------------------------------------------------------------------------------
Balance, June 30, 1996 $ - $ - $ - $(10,482,840) $ -
======================================================================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
QUANTECH9LTD. (A Development Stage Company)
STATEMENTS OF CASH FLOWS
Years Ended June 30, 1996 and 1995, and Period from September 30, 1991
(Date of Inception) to June 30, 1996
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Years Ended June 30, Inception) to
--------------------------------------- June 30,
1996 1995 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (2,396,963) $ (2,070,292) $ (10,482,840)
Adjustments to reconcile net loss to net cash used
in operating activities:
Elimination of cumulative translation adjustment - - (178,655)
Depreciation 37,400 27,505 125,011
Amortization 238,926 238,926 1,128,279
Noncash compensation and interest 187,050 90,200 489,250
Losses resulting from transactions with
Spectrum Diagnostics, Inc. (Note 8) - - 556,150
Write-down of investment - - 67,500
Change in assets and liabilities, net of effects
from purchase of Spectrum Diagnostics, Inc.:
Increase in prepaid expenses 72,390 (30,056) 35,168
Increase (decrease) in accounts payable (670,187) 379,600 113,379
Increase (decrease) in accrued expenses (647,270) 221,758 365,261
------------------------------------------------------
Net cash used in operating activities (3,178,654) (1,142,359) (7,781,497)
------------------------------------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (187,711) (30,853) (322,441)
Organization expenses - - (97,547)
Officer advances, net - - (109,462)
Purchase of investment - - (225,000)
Purchase of license agreement - - (1,950,000)
Advances to Spectrum Diagnostics, Inc. - - (320,297)
Prepaid securities issuance costs - - (22,943)
Purchase of Spectrum Diagnostics, Inc., net of
cash and cash equivalents acquired - - (1,204,500)
------------------------------------------------------
Net cash used in investing activities (187,711) (30,853) (4,252,190)
------------------------------------------------------
Cash Flows From Financing Activities
Net proceeds from the sale of common stock 6,676,125 - 12,608,236
Proceeds on debt obligations 30,555 1,202,422 2,658,435
Payments received on stock subscription receivables 5,000 - 5,000
Payments on debt obligations (406,720) (61,101) (498,355)
-------------------------------------------------------
Net cash provided by financing
activities 6,304,960 1,141,321 14,773,316
-------------------------------------------------------
Effect of Exchange Rate Changes on Cash - - 203,242
-------------------------------------------------------
Net increase (decrease) in cash 2,938,595 (31,891) 2,942,871
Cash
Beginning 4,276 36,167 -
--------------------------------------------------------
Ending $ 2,942,871 $ 4,276 $ 2,942,871
========================================================
(Continued)
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF CASH FLOWS (Continued)
Years Ended June 30, 1996 and 1995, and Period From September 30, 1991
(Date of Inception) to June 30, 1996
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Inception) to
Years Ended June 30, June 30,
-------------------------------------
1996 1995 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 49,736 $ 26,925 $ 133,171
=========================================================
Supplemental Schedule of Noncash Investing and
Financing Activities
Acquisition of Spectrum Diagnostics, Inc. (Note 8):
Cash purchase price, less $5,199 cash
acquired $ - $ - $ 1,204,500
=========================================================
Fair value of other assets acquired, including
$1,406,629 assigned to the license agreement $ - $ - $ 1,489,500
Liabilities assumed - - (285,000)
---------------------------------------------------------
$ - $ - $ 1,204,500
=========================================================
Advances to Spectrum Diagnostics, Inc. (Note 8) $ - $ - $ 20,000
Prepaid security issuance costs (acquired from
Spectrum Diagnostics, Inc.) ultimately used
to reduce proceeds from the sale of
common stock - - 58,830
Due from Ital-American Securities, Inc. - - (674,734)
Stock issuance costs to be paid - 76,437 237,201
Subscriptions receivable offset by accrued
compensation - - 53,689
Officer advances offset by accrued compensation - - 109,462
Issuance of debt obligation for services and
accounts payable - 40,000 90,000
Issuance of warrants for services - 40,200 40,200
=========================================================
Common stock issued/to be issued for:
Services and interest $ 62,050 $ 212,000 $ 274,050
Subscriptions receivable (15,000) 20,000 5,000
Debt obligations 2,227,500 90,625 2,318,125
Accounts payable - 40,000 40,000
Accrued expenses 293,451 66,943 360,394
---------------------------------------------------------
$ 2,568,001 $ 429,568 $ 2,997,569
=========================================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Quantech Ltd. (Quantech or the Company) was formed under the
laws of Minnesota, for the purpose of effecting the change in domicile of
Spectrum Diagnostics S.p.A (SDS) from Italy to the state of Minnesota through a
merger with SDS on April 14, 1993. The merger has been accounted for as if it
were a pooling of interests and, accordingly, all prior financial statements
include SDS. The Company's fiscal year end is June 30 and SDS' fiscal year end
was December 31.
The Company had no operations prior to the merger and is continuing the business
of SDS to commercialize its Surface Plasmon Resonance (SPR) technology.
Commercialization will consist of developing and introducing an instrument which
will run various tests capable of diagnosing various human health conditions,
and which the Company intends to market to the world medical diagnostic
industry. The Company anticipates that it will grant trade credit to future
customers on credit terms it establishes with individual customers.
A summary of the Company's significant accounting policies follows:
Cash equivalents: The Company maintains its cash in bank deposit and money
market accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts. Cash equivalents
include $2,825,617 invested in money market funds.
Fair value of financial instruments: At June 30, 1996, the Company adopted the
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments.
The following methods and assumptions were used by the Company in estimating the
fair value of each class of financial instruments:
Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of those instruments.
Short-term debt: The fair value of the Company's short-term debt is
estimated based on interest rates for the same or similar debt offered to
the Company having the same or similar remaining maturities with similar
collateral requirements. At June 30, 1996, cost approximated fair value.
Other assets: The license agreement is being amortized by the straight-line
method over the remaining life of the related patents of 15 years (Note 4).
Organization expenses are being amortized by the straight-line method over 5
years.
The Company reviews its intangible assets quarterly to determine potential
impairment by comparing the carrying value of the intangibles with expected
future net cash flows provided by operating activities of the business. Should
the sum of the expected future net cash flows be less than the carrying value,
the Company would determine whether an impairment loss should be recognized. An
impairment loss would be measured by comparing the amount by which the carrying
value exceeds the fair value of the intangible. Fair value will be determined
based on estimated expected future discounted cash flows. To date, management
has determined that no impairment of intangible assets exists.
Property and equipment: Property and equipment are stated at cost. Depreciation
is computed by the straight-line method over five years.
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Income taxes: Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
Research and development: The Company contracts with certain outside parties for
the design and development of its product in addition to conducting its own
research and development. Research and development costs are charged to expense
as incurred.
Loss per common share: Loss per common share is computed based upon the weighted
average number of common shares outstanding during the period. Fully diluted and
primary loss per common share are the same amounts for all periods presented.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Issued but not yet adopted standard: In October, 1995, the FASB issued Statement
No. 123, Accounting for Stock-Based Compensation. Statement No. 123 establishes
financial accounting and reporting standards for stock-based compensation plans.
Statement No. 123 encourages the adoption of a fair value based method of
accounting for stock-based compensation plans, but also allows entities to
continue to measure compensation cost using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees. Entities electing to remain with the accounting in Opinion No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value based method had been applied.
Statement No. 123 is effective for the year ending June 30, 1997. The Company
does not intend to adopt Statement No. 123 in measuring expense, however it will
present the pro forma disclosures and those pro forma amounts will likely be
less than the amounts shown in future statements of income.
Translation of foreign currency statements: Prior to September of 1992, the
functional and reporting currency for SDS was the Italian lire. Concurrent with
the receipt of net proceeds from its initial public offering of common stock in
the United States in September 1992, and in connection with the phase out of its
Italian operations, the functional and reporting currency of SDS changed from
the Italian lire to the United States dollar. As a result, the cumulative
translation adjustment component of equity was eliminated in 1992.
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 2. Basis of Presentation
The Company was incorporated for the purpose of acquiring, developing and
commercializing SPR technology for use in medical diagnostics. The Company has
had no sales and the only revenue generated by the Company since its inception
has been interest income.
The Company is a development stage company which has suffered losses from
operations, requires additional financing and ultimately needs to successfully
attain profitable operations. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not reflect any adjustments which might be necessary should the Company not
remain a going concern.
Management intends to pursue funding of future operations through private or
public common stock offerings, or arrangements with strategic partners. The
proceeds of such offerings or arrangements, if received, along with cash on
hand, will be applied to expenses relating to product development, FDA
submission, establishing sales and marketing and production capabilities and to
provide working capital. Although current funds are expected to allow the
Company to proceed through FDA approval of its system, the Company will not have
sufficient funds to commence commercial production or sale of its system.
Note 3. Short-term Debt Obligations
Short-term debt obligations as of June 30, 1996 and 1995 are as follows:
June 30,
1996 1995
- -------------------------------------------------------------------------------
8% convertible debenture, paid September 1995 $ - $ 25,000
8% convertible debentures, converted to common stock
September, 1995 at $0.125 to $0.25 per share - 997,500
8 - 10% convertible debentures, converted to common stock
December 1995 at $0.125 per share - 1,230,000
11.5% note, paid September 1995 - 25,000
12% notes, paid September 1995 - 327,500
Obligations under capital lease agreements, due in monthly
installments of $1,855, expiring between October and
November 1997, personally guaranteed by the chief
executive officer 24,455 23,120
--------------------------
$ 24,455 $2,628,120
==========================
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 4. Agreements
License agreement: The Company has a license agreement for certain patents,
proprietary information and associated hardware related to the SPR technology.
The license calls for an ongoing royalty of 6 percent on all products utilizing
the SPR technology which are sold by the Company. In addition, if the Company
sublicenses the technology, the Company will pay a royalty of 15 percent of all
revenues received by the Company under any sublicense. If the cumulative
payments of these two royalties fail to reach at least $500,000 by December 31,
1993, $850,000 by December 31, 1995, and $1,000,000 by December 31, 1997, then
each time one of such benchmarks is not met, the licensor has the right to
deprive the Company of its exclusive rights under the license agreement. As of
June 30, 1996, the Company has paid $850,000 of the cumulative payment. The
Company has also ratably accrued additional minimum royalty payments of $37,500
as of June 30, 1996, because sales or sublicense revenues through December 31,
1997 may not be adequate to meet the cumulative minimum royalty payments. The
Company intends to accrue the entire $150,000 by December 31, 1997.
The obligations of the Company to pay royalties terminates on the earlier of
such time as the total royalty payments reach a gross amount of $18,000,000,
which amount would be increased by $2,000,000 each time a benchmark is not met.
After such date, the Company's rights in the licensed SPR technology continue in
perpetuity with no further royalty obligations.
Employment agreements: The Company has three-year employment agreements with its
chief executive officer and its executive vice president of research and
development and a two-year employment agreement with its chief financial
officer. Annual salaries under the agreements are $150,000 for the chief
executive officer and $125,000 for the executive vice president of research and
development and the chief financial officer with such adjustments and bonuses as
may be determined by the Board of Directors. In the event the employment
agreements are terminated for any reason by the Company, other than for cause as
defined in the agreements, the chief executive officer and executive vice
president of research and development would receive the salary due under the
remaining terms of the agreement plus one year's salary, and the chief financial
officer would receive two year's salary and bonus. The chief executive office
and executive vice president of research and development also have the right
upon termination to put any shares they own or have the right to receive
pursuant to options, back to the Company at fair market value. Total shares
subject to this put option, consisting primarily of shares issuable upon
exercise of stock options, totalled approximately 2,200,000 at June 30, 1996.
Consulting agreements: The Company had an agreement with a member of the Board
of Directors whereby the Company agreed to pay the Board member for consulting
services. Consulting expense under this agreement was $45,000 for the year ended
June 30, 1995, which was paid by issuing stock at $0.125 per share.
In August 1993, the Company entered into an agreement with a consultant whereby
the consultant would provide assistance to the Company with respect to
financing, corporate development and other business matters. In consideration
for these services, the consultant was to receive a monthly fee and a
combination of cash and warrants based on performance. The consultant earned a
total of $118,250 under this agreement, which consisted of cash and warrants to
purchase 600,000 shares of common stock at $0.125. (See Note 6) $40,000 of these
fees were expensed in 1995 with the balance expensed in the prior year. In April
1995, this agreement was canceled and no further obligations are due this
consultant.
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 4. Agreements (Continued)
In July 1994, the Company entered into a consulting agreement with a consultant
who was also a secured creditor of the Company, being the holder of $300,000 in
convertible debentures that have since been converted to common stock (see Note
3). The consultant earned $60,000 under this agreement consisting of $10,000 in
cash and 400,000 shares of stock issued at $0.125. In May 1995, this agreement
was canceled.
Note 5. Leases
The Company leases its office space under an agreement which expires February,
2000. The Company leases vehicles and office equipment under various lease
agreements which expire at various dates through 1997. Approximate minimum
aggregate rental commitments under these leases are as follows:
Years ending June 30:
- --------------------------------------------------------------------------
1997 $ 47,000
1998 39,000
1999 38,000
2000 26,000
Rental expense for the years ended June 30, 1996 and 1995, and the period from
September 30, 1991 (date of inception) to June 30, 1996, was $82,134, $103,681,
and $375,067, respectively.
Note 6. Stockholders' Equity
Common stock placements: During the year ended June 30, 1996, the Company
completed three private offerings of its common stock. In September, 1995, the
Company received net proceeds of approximately $2,883,000 from a private
placement of units at $1.00 per unit. In November, 1995, the Company received
net proceeds of approximately $430,000 also from the private placement of $1.00
units. Each unit consisted of four (4) shares of Company common stock and a
warrant to purchase one share of common stock at $.25 per share. In May, 1996,
the Company completed its third private offering of 6,275,000 shares of common
stock at $.60 per share, resulting in net proceeds of approximately $3,363,000.
Common stock purchase warrants: Common stock purchase warrants outstanding as of
June 30, 1996, are summarized below:
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 6. Stockholders' Equity (Continued)
Shares of
Common Exercise Exercisable
Warrant Class Stock Price Until
- -------------------------------------------------------------------------------
Undesignated 150,000 0.125 February, 1997
250,000 0.250 May, 1997
450,000 0.125 August, 1998
1,173,000 0.125 May, 2000
655,000 0.125 June, 2000
687,760 0.250 July, 2000
200,000 0.250 August, 2000
4,382,240 0.250 September, 2000
597,500 0.720 May, 2001
Unit 17,500 5.400 September, 1997
Stock option plan: The Company had 400,000 shares of its common stock reserved
for issuance under a 1992 Stock Option Plan (the Plan) and had granted options
for the purchase of 307,500 shares. In May 1995, the Plan, along with options
granted thereunder, was canceled. As of the date of this report, the Company has
not established a new plan.
Nonqualified stock options: The Company granted nonqualified common stock
options to purchase shares of common stock to certain employees, directors and
other individuals. A summary of outstanding stock options follows:
Number of Exercise Expiration
Shares Price Date
- -------------------------------------------------------------------------------
Balance, June 30, 1994 - $ - -
Options granted 3,392,103 0.125 - 0.25 2000
-------------------------------
Balance, June 30, 1995 3,392,103 $ 0.125 - 0.25
Options granted 3,825,000 0.25 - 0.90 2000-2001
-------------------------------
Balance, June 30, 1996 7,217,103 $ 0.125 - 0.90 2000-2001
===============================
The options that have been granted are exercisable for a period of five years
from the date of grant and vest over a period of two to three years from date of
grant. At June 30, 1996, options for 4,994,606 shares were exercisable at prices
ranging from $0.125 to $0.90.
Compensation expense related to stock option grants was $125,000 in 1996 and $0
in 1995.
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 7. Income Taxes
The Company's income tax expense consists solely of a franchise tax in Italy
during the year ended December 31, 1992, as the Company has incurred no United
States income taxes. For United States income tax purposes, under provisions of
the Internal Revenue Code, the Company has approximately $5,293,000 in operating
loss carryfowards and $91,000 in research and development credits at June 30,
1996, which may be used to offset otherwise future taxable income. These
carryforwards have been limited under the provisions of the Internal Revenue
Code, Section 382, which relates to a 50 percent change in control over a 3-year
period. The annual net operating loss carryforward limitation due to Section 382
is approximately $200,000 per year which reduced the previously available
carryforwards by approximately $2,800,000. In addition, the Company has
"post-change" carryforwards of approximately $2,261,000 that are not limited.
Further changes of control may result in the additional expiration of a portion
of the remaining carryforward before it can be used and are also dependent upon
the Company attaining profitable operations in the future.
Loss and tax credit carryfowards, reduced by the Section 382 limitation
discussed above, as of June 30, 1996 have the following expiration dates:
Net
Operating Tax
Expiration Date Loss Credit
- ---------------------------------------------------------------------
2006 $ 241,000 $ -
2007 1,115,000 -
2008 827,000 20,000
2009 849,000 26,000
2010 - 45,000
2011 2,261,000 -
---------------------------------
$ 5,293,000 $ 91,000
=================================
The tax effects of principal temporary differences at an assumed effective
annual rate of 34 percent are shown in the following table:
June 30,
----------------------------
1996 1995
- ----------------------------------------------------------------------------
Loss carryforwards $ 1,800,000 $ 1,978,000
Royalties - 21,000
Research and development credits and deductions 296,000 251,000
Guarantee of Spectrum Diagnostics, Inc. debt 115,000 137,000
Compensation expense 43,000 -
Accrued payroll - 30,000
-----------------------------
Gross deferred tax assets 2,254,000 2,416,000
Valuation allowance for deferred tax assets (2,254,000) (2,417,000)
-----------------------------
$ - $ -
=============================
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 7. Income Taxes (Continued)
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years ended
June 30, 1996 and 1995, due to the valuation allowance recorded against deferred
tax assets.
Note 8. Spectrum Diagnostics, Inc.
During 1991, SDS acquired substantially all of the assets of Spectrum
Diagnostics, Inc. (SDI) for 1,200,000 shares of SDS common stock plus the
assumption of certain SDI liabilities and guarantees.
As a result of its merger with SDS (see Note 1), Quantech now guarantees payment
of certain SDI liabilities previously guaranteed by SDS. SDI expects to sell an
investment it has in Quantech's common stock, the proceeds of which are expected
to be used to pay certain of SDI's obligations, but are not expected to be
sufficient to pay the entire amount guaranteed by Quantech.
Quantech has accrued its estimated loss which may result should SDI be unable to
pay the obligations discussed above. The Company has recorded a liability of
approximately $54,000 as of June 30, 1996.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, ages and positions of the Company's executive officers are as
follows:
Name Age Position
R. H. Joseph Shaw 51 President, Chief Executive Officer and
Chairman of the Board
Robert R. McKiel, Ph.D. 53 Executive Vice President-Research and
Development and Director
Gregory G. Freitag 34 Chief Financial Officer, Vice President
of Corporate Development and Secretary
R. H. Joseph Shaw has been President, Chief Executive Officer and Chairman
of the Board of the Company and its predecessor entities since their inception.
Mr. Shaw is an honors science graduate with postgraduate work in the area of
medical science. He has taught at McMaster University and Simon Fraser
University in Canada, has served on the Le Dain Royal Commission investigating
the nonmedical use of drugs and was a guest speaker to the U.S. Senate Committee
on Small Business. He has an extensive background in the medical industry and in
1971 started his career with McNeil Laboratories, Ltd., a subsidiary of Johnson
& Johnson ("J&J") in the position of Manager of Scientific Affairs. In that
capacity, he monitored clinical programs and interfaced with the Canadian
equivalent of the FDA. Subsequently, he served as Canadian General Manager of
another J&J company. In 1973, Mr. Shaw joined K-Vet/KVL, a privately owned
medical company, as Executive Vice President, in which capacity he was
responsible for all aspects of the corporate organization. In 1978, Mr. Shaw
purchased the Human Diagnostics Division from this group, which he renamed
Cathra International ("Cathra"). Mr. Shaw remained with Cathra as President
until it was sold in 1985 and coordinated the integration of Cathra and the
purchaser's medical groups into a single operating entity, MCT Medical, Inc. Mr.
Shaw was the President of MCT Medical, Inc. through April 1987. From April 1987
until joining the Company, Mr. Shaw was Vice President and head of diagnostics
of Quadra Logic Technologies, Inc., a company listed on NASDAQ and the Toronto
Stock Exchange. Mr. Shaw has extensive experience in both national and
international markets and has managed the scientific and commercial development
of a number of diagnostic products. He also has experience in establishing and
managing strategic alliances in Canada, the United States, Japan and Europe.
Robert R. McKiel, Ph.D., has been Executive Vice President-Research and
Development since 1992 and a director since May 1995. From 1984 to 1987, Dr.
McKiel served as Vice President of Amersham International, a large medical
company, based in the United Kingdom. From 1987 until joining the Company he
served as a consultant to various companies in the medical diagnostics industry,
including Ares-Serono and Boehringer Mannheim Corporation. In that capacity, he
has been involved in a variety of projects including the design of a clinical
immunochemistry analyzer, implementation of a GMP (Good Manufacturing Practices)
<PAGE>
program for a clinical device manufacturer and a redesign of a pharmaceutical
quality control program. He earned his baccalaureate degree in organic chemistry
at the University of Notre Dame and a doctorate in biological chemistry at the
University of Illinois. After completion of his post-doctoral residency in
clinical chemistry at the University of Illinois Medical Center, he joined the
Illinois Medical Center staff. From 1973 to 1979, he served as an assistant
Director of the University of Illinois Hospital Laboratories and as head of
Radioimmunoassay Laboratory, held various faculty appointments, and taught in
the departments of Biological Chemistry and Pathology. In 1979, Dr. McKiel
joined Amercham Corporation to establish a U.S. based technical support system
for the company's products, and to enhance the Americam's effectiveness in the
design and marketing of new products in the U.S. In 1984, he took on the
additional responsibility of managing the marketing of clinical products.
Gregory G. Freitag has been Chief Financial Officer, Vice President of
Corporate Development and Secretary of the Company since December 1, 1995. From
1987 until joining the Company Mr. Freitag was a lawyer with the Minneapolis,
Minnesota law firm of Fredrikson & Byron, P.A. As a shareholder with Fredrikson
& Byron, he practiced in the corporate, securities and merger and acquisition
areas of law. Mr. Freitag has his J.D. and CPA, has served on securities
advisory committees to the Minnesota Commissioner of Commerce and is included in
the Minnesota Business Guide to Law & Leading Attorneys.
The information required by Item 9 relating to directors is incorporated
herein by reference to the section entitled "Election of Directors" which
appears in the Company's definitive proxy statement for its 1996 Annual Meeting
of Shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference to
the section entitled "Executive Compensation" which appears in the Company's
definitive Proxy Statement for its 1996 Annual Meeting of Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 11 is incorporated herein by reference to
the section entitled "Shareholdings of Principal Shareholders and Management"
which appears in the Company's definitive Proxy Statement for its 1996 Annual
Meeting of Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated herein by reference to
the section entitled "Certain Transactions" in the Company's definitive Proxy
Statement for its 1996 Annual Meeting of Shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See "Exhibit Index" on page following signatures.
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the fourth quarter ended March 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QUANTECH LTD. ("Registrant")
Dated: August 19, 1996 By: /s/ R. H. Joseph Shaw
----------------------
R. H. Joseph Shaw,
CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant, in
the capacities, and on the dates, indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints R.H.
JOSEPH SHAW and GREGORY G. FREITAG as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report on Form 10-KSB and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
Signature Title Date
/s/ R. H. Joseph Shaw Chairman, Chief Executive Officer, August 19, 1996
R.H. Joseph Shaw and Director
/s/ Gregory G. Freitag Chief Financial Officer, Secretary August 19, 1996
Gregory G. Freitag and Treasurer (Chief Financial and
Accounting Officer)
/s/ Robert R. McKiel Director August 19, 1996
Robert R. McKiel
/s/ James F. Lyons Director August 19, 1996
James F. Lyons
/s/ Richard W. Perkins Director August 19, 1996
Richard W. Perkins
/s/ Edward E. Strickland Director August 19, 1996
Edward E. Strickland
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C.
EXHIBIT INDEX TO FORM 10-KSB
OF
QUANTECH LTD.
For The Fiscal Year Ended June 30, 1996
Commission File Number: 0-19957
Exhibit Description
Number
2.1 Plan of Reorganization, dated November 24, 1992, by and among Quantech Ltd.
and Spectrum Diagnostics S.p.A. (incorporated by reference to Exhibit 2.1
of the Registrant's Registration Statement on Form S-4; Reg. No. 33-55356).
2.2 Amendment and Restatement Agreement and Plan of Merger dated January 20,
1993 by and among Quantech Ltd., Spectrum Diagnostics S.p.A. and Spectrum
Diagnostics Corp. (incorporated by reference to Exhibit 2.2 of the
Registrant's Registration Statement on Form S-4; Reg. No. 33-55356).
3.1 Articles of Incorporation of Quantech Ltd. as amended to date.
3.2 Bylaws of Quantech Ltd. (incorporated by reference to Exhibit 3.2 of the
Registrant's Registration Statement on Form S-4; Reg. No. 33-55356).
4.1 Form of Stock Certificate (incorporated by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form S-4; Reg. No. 33-55356).
4.2 Form of Private Placement Warrant (incorporated by reference to Exhibit 4.2
of the Registrant's Registration Statement on Form SB-2; Reg. No.
333-6809).
10.1 Lease for office space at 1419 Energy Park Drive, St. Paul, MN 55108
(incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-KSB
for the Year Ended June 30, 1995).
10.2 Option Agreement with Ares-Serono, as amended (including license) assigned
to Quantech Ltd. pursuant to the Merger (incorporated by reference to
Exhibit 10.2 of the Registrant's Registration Statement on Form S-4; Reg.
No. 33-55356).
10.3*Employment Agreement with R.H. Joseph Shaw (incorporated by reference to
Exhibit 10.3 of the Registrant's Form 10-KSB for the Year Ended June 30,
1995).
10.4*Employment Agreement with Robert M. McKiel (incorporated by reference to
Exhibit 10.4 of the Registrant's Form 10-KSB for the Year Ended June 30,
1995).
10.5 Letter of Amendment to Ares-Serono License (incorporated by reference to
Exhibit 10.6 of the Registrant's Form 10-KSB for the Year Ended June 30,
1995).
<PAGE>
10.6 Agreement with Donnelly Corporation (incorporated by reference to Exhibit
10.6 of the Registrant's Registration Statement on Form SB-2; Reg. No.
333-6809).
10.7*Stock Option to purchase 1,246,000 shares by R.H. Joseph Shaw
(incorporated by reference to Exhibit 10.12 of the Registrant's Form 10-KSB
for the Year Ended June 30, 1995).
10.8*Stock Option to purchase 830,841 shares by Robert M. McKiel (incorporated
by reference to Exhibit 10.13 of the Registrant's Form 10-KSB for the Year
Ended June 30, 1995).
10.9*Employment Agreement with Gregory G. Freitag (incorporated by reference to
Exhibit 10.9 of the Registrant's Registration Statement on Form SB-2;
Reg.No. 333-6809).
10.10First Amendment to Warrant of Messrs. Strickland, Perkins, Lyons, Freitag
and Shaw (incorporated by reference to Exhibit 10.10 of the Registrant's
Registration Statement on Form SB-2; Reg. No. 333-6809)
22 Quantech has no subsidiaries.
24 Power of Attorney (included on signature page to this Form 10-KSB)
27 Financial Data Schedule (filed with electronic version only)
* Management contract or compensatory plan or arrangment.
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
QUANTECH LTD.
The undersigned, being the Secretary of Quantech Ltd., a Minnesota
corporation (the "Corporation"), on behalf of the Corporation, does hereby
certify that the following recitals and resolutions were adopted at a duly
called special meeting of the shareholders, pursuant to Minnesota Statutes
Sections 302A.135 and 302A.139:
WHEREAS, the Board of Directors of the Corporation believes it
is in the best interests of the Corporation to amend the Articles of
Incorporation to increase the number of authorized common stock shares
from 30,000,000 to 60,000,000 and has previously adopted similar
recitals and resolutions as those proposed here;
IT IS HEREBY RESOLVED THAT:
The shareholders, in accordance with the Corporation's Bylaws,
do hereby approve amending the Corporation's Articles of Incorporation
to increase the number of authorized common stock shares from
30,000,000 to 60,000,000;
RESOLVED FURTHER:
Section 3.1 is hereby amended to read:
ARTICLE 3.1
CAPITAL STOCK
The aggregate number of shares of all classes of stock which
this corporation shall have the authority to issue is Sixty Million
(60,000,000) shares, $.01 par value per share. The Board of Directors
of the corporation is authorized to establish from the undesignated
shares, by resolution adopted and filed in the manner provided by law,
one or more classes or series of shares, to designate each such class
or series (which may include but is not limited to designation as
additional shares of Common Stock), and to fix the relative rights and
preferences of each such class or series.
RESOLVED FURTHER:
The corporation's officers are hereby authorized to complete
all documents necessary and make all filings necessary to effectuate
the amendment to the Corporation's Articles of Incorporation and to
record such Amendment in the Corporation's official record books.
Dated and effective September 28, 1995.
/s/ George Vitalis, Secretary
<PAGE>
ARTICLES OF INCORPORATION
OF
QUANTECH LTD.
The undersigned individual, being of full age, for the purpose of forming a
corporation under and pursuant to Chapter 302A of the Minnesota Statutes, as
amended, hereby adopts the following Articles of Incorporation:
ARTICLE 1 - NAME
1.1) The name of the corporation shall be Quantech, Ltd.
ARTICLE 2 - REGISTERED OFFICE
2.1) The registered office of the corporation is located at 1021 Bandana
Boulevard East, Suite 212, St. Paul, Minnesota 55108.
ARTICLE 3 - CAPITAL STOCK
3.1) Authorized Shares; Establishment of Classes and Series. The aggregate
number of shares the corporation has authority to issue shall be 30,000,000
shares, which shall have a par value of $.01 per share solely for the purpose of
a statute or regulation imposing a tax or fee based upon the capitalization of
the corporation, and which shall consist of 15,000,000 shares of Common Stock
and 15,000,000 undesignated shares. The Board of Directors of the corporation is
authorized to establish from the undesignated shares, by resolution adopted and
filed in the manner provided by law, one or more classes or series of shares, to
designate each such class or series (which may include but is not limited to
designation as additional shares of Common Stock), and to fix the relative
rights and preferences of each such class or series.
3.2) Issuance of Shares. The Board of Directors of the corporation is
authorized from time to time to accept subscriptions for, issue, sell and
deliver shares of any class or series of the corporation to such persons, at
such times and upon such terms and conditions as the Board shall determine,
valuing all nonmonetary consideration and establishing a price in money or other
consideration, or a minimum price, or a general formula or method by which the
price will be determined.
3.3) Issuance of Rights to Purchase Shares. The Board of Directors is
further authorized from time to time to grant and issue rights to subscribe for,
purchase, exchange securities for, or convert securities into, shares of the
corporation of any class or series, and to fix the terms, provisions and
conditions of such rights, including the exchange or conversion basis or the
price at which such shares may be purchased or subscribed for.
<PAGE>
3.4) Issuance of Shares to Holders of Another Class or Series. The Board is
further authorized to issue shares of one class or series to holders of that
class or series or to holders of another class or series to effectuate share
dividends or splits.
ARTICLE 4 - RIGHTS OF SHAREHOLDERS
4.1) No Preemptive Rights. No shares of any class or series of the
corporation shall entitle the holders to any preemptive rights to subscribe for
or purchase additional shares of that class or series or any other class or
series of the corporation now or hereafter authorized or issued.
4.2) No Cumulative Voting Rights. There shall be no cumulative voting by
the shareholders of the corporation.
ARTICLE 5 - DIRECTORS
5.1) The names of the person constituting the first Board of Directors is
as follows:
R. H. Joseph Shaw
ARTICLE 6 - MERGER, EXCHANGE, SALE OF ASSETS AND DISSOLUTION
6.1) Where approval of shareholders is required by law, the affirmative
vote of the holders of at least a majority of the voting power of all shares
entitled to vote shall be required to authorize the corporation (i) to merge
into or with one or more other corporations, (ii) to exchange its shares for
shares of one or more other corporations, (iii) to sell, lease, transfer or
otherwise dispose of all or substantially all of its property and assets,
including its good will, or (iv) to commence voluntary dissolution.
ARTICLE 7 - AMENDMENT OF ARTICLES OF INCORPORATION
7.1) After the issuance of shares by the corporation, any provision
contained in these Articles of Incorporation may be amended, altered, changed or
repealed by the affirmative vote of the holders of at least a majority of the
voting power of the shares present and entitled to vote at a duly held meeting
or such greater percentage as may be otherwise prescribed by the laws of the
State of Minnesota.
ARTICLE 8 - LIMITATION OF DIRECTOR LIABILITY
8.1) To the fullest extent permitted by Chapter 302A, Minnesota Statutes,
as the same exists or may hereafter be amended, a director of this corporation
shall not be personally liable to the corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director.
<PAGE>
ARTICLE 9 - INCORPORATOR
9.1) The name and mailing address of the incorporator are as follows:
Gregory G. Freitag
900 Second Avenue South
1100 International Centre
Minneapolis, Minnesota 55402
IN WITNESS WHEREOF, the undersigned incorporator has hereunto set his hand
this 13th day of November, 1992.
/s/ Gregory G. Freitag
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