SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: Commission File Number:
September 30, 1998 0 - 19957
Quantech Ltd.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1709417
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
1419 Energy Park Drive
St. Paul, MN 55108
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(Address of principal executive offices) (Zip code)
(651)-647-6370
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 2,624,952 shares of
Common Stock, no par value, as of November 12, 1998.
Transitional Small Business Disclosure Format: YES ___ NO X
<PAGE>
Index
PART I. FINANCIAL INFORMATION Page No.
Item 1: Financial Statements:
Balance Sheets as of September 30, 1998 and June 30, 1998 3
Statement of Operations for the Three Months
Ended September 30, 1998 and 1997 and from inception to
September 30, 1998 4
Statement of Stockholders' Equity from inception 5
to September 30, 1998
Statement of Cash Flows for the Three Months ended
September 30, 1998 and 1997 and from inception to
September 30, 1998 7
Notes to Financial Statements 8
Item 2: Management's Discussion and Analysis or Plan of Operation 9
Item 3: Quantitative and Qualitative Disclosure About Market Risk 12
PART II. OTHER INFORMATION 13
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited)
September 30, June 30,
1998 1998
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,236 $ 46,135
Prepaid expenses:
Product development expenses 86,250 115,000
Other 49,370 42,044
------------------- -------------------
Total current assets 136,856 203,179
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EQUIPMENT
Equipment 402,539 366,493
Leasehold improvements 15,000 15,000
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417,539 381,493
Less accumulated depreciation (219,959) (202,201)
------------------- -------------------
Total equipment 197,580 179,292
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OTHER ASSETS
License agreement, at cost, less amortization 2,654,152 2,735,807
Prepaid product development expense, less current portion 57,500 57,500
Patents, at cost 13,045 9,029
------------------- -------------------
Total other assets 2,724,697 2,802,336
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TOTAL ASSETS $ 3,059,133 $ 3,184,807
=================== ===================
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
CURRENT LIABILITIES
Short term debt $ 4,142,888 $ 3,112,818
Accounts payable 221,876 97,333
Accrued expenses:
Interest 161,279 48,594
Spectrum Diagnostics Inc. obligations 19,846 19,846
Minimum royalty commitment 112,500 75,000
Accrued payroll/vacation 132,844 103,157
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Total current liabilities 4,791,233 3,456,748
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STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 2,599,952 shares at
September 30, 1998; and 2,565,040 at June 30, 1998 16,391,521 16,308,438
Additional paid-in capital 1,476,745 1,476,669
Deficit accumulated during the development stage (19,600,366) (18,057,048)
------------------- -------------------
Total stockholders' equity (deficit) (1,732,100) (271,941)
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) $ 3,059,133 $ 3,184,807
=================== ===================
</TABLE>
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Period From
September 30,
Three Months Three Months 1991 (Date of
Ended Ended Inception), to
September 30, September 30, September 30,
1998 1997 1998
--------------------- -------------------- --------------------
<S> <C> <C> <C>
Interest Income $ 653 $ 6,824 $ 183,869
--------------------- -------------------- --------------------
Expenses:
General and Administrative 306,828 222,857 9,468,612
Research and Development 528,111 314,261 6,782,177
Minimum Royalty expense 37,500 18,750 1,112,500
Loses resulting from transactions
with Spectrum Diagnostics Inc. - - 556,150
Net Exchange (gain) - - (67,172)
Interest 671,532 39,376 1,889,373
--------------------- -------------------- --------------------
Total Expenses 1,543,971 595,244 19,741,640
--------------------- -------------------- --------------------
Loss before income taxes (1,543,318) (588,420) (19,557,771)
Income Taxes - - 42,595
--------------------- -------------------- --------------------
Net Loss $ (1,543,318) $ (588,420) $ (19,600,366)
===================== ==================== ====================
Loss per common share $ (0.60) $ (0.24)
Weighted average common shares
outstanding 2,577,751 2,424,864
</TABLE>
<PAGE>
QUANTECH LTD
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY-UNAUDITED
Period From September 30, 1991 (date of Inception), to September 30, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
During
Common Stock Additional the Paid for Due Cumulative
Paid-In Development Subscriptions Not From Translation
Shares Amount Capital Stage Receivable Issued Officers Adjustment
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at Inception
Net Loss for 15 months ($3,475,608)
Common stock transactions:
Common stock issued, October 1991 160,000 $3,154,574
Common stock issued, November 1991 30,000 $611,746 $1,788,254
Common stock issuance costs ($889,849)
Cumulative translation adjustment $387,754
Common stock issued, September 1992 35,000 $699,033 $875,967 ($53,689)
Common stock issuance costs ($312,755)
Common stock to be issued $120,000
Cumulative translation adjustment ($209,099)
Elimination of cumulative translation
adjustment ($178,655)
Officers advances, net ($27,433)
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Balance, December 31, 1992 225,000 $4,465,353 $1,461,617 ($3,475,608) ($53,689) $120,000 ($27,433) $0
Net loss ($996,089)
Common stock transactions:
Common stock issued, January 1993 8,000 $1,600 $118,400 ($120,000)
Common stock issued, April 1993 1,500 $300 $11,700
Change in common stock par
value resulting from merger ($4,420,353) $4,420,353
Repayments $5,137
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Balance, June 30, 1993 234,500 $46,900 $6,012,070 ($4,471,697) ($53,689) $0 ($22,296) $0
Net loss ($1,543,888)
240,000 shares of common
stock to be issued $30,000
Repayments $53,689 $22,296
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Balance, June 30, 1994 234,500 $46,900 $6,012,070 ($6,015,585) $0 $30,000 $0 $0
Net loss ($2,070,292)
Common stock issued, June 1995 107,500 $21,500 276,068 ($20,000) ($30,000)
Warrants issued for services $40,200
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</TABLE>
<PAGE>
QUANTECH LTD
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY-UNAUDITED (continued)
Period From September 30, 1991 (date of Inception), to September 30, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
During
Common Stock Additional the Paid for Due Cumulative
Paid-In Development Subscriptions Not From Translation
Shares Amount Capital Stage Receivable Issued Officers Adjustment
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 342,000 $68,400 $6,328,338 ($8,085,877) ($20,000) $0 $0 $0
Net loss ($2,396,963)
Common stock issued, net of
issuance costs of $848,877:
July, 1995 308,000 $61,600 $1,304,450
August, 1995 35,880 $7,176 $161,460
September, 1995 690,364 $138,073 $2,370,389
November, 1995 94,892 $18,978 $425,482
December, 1995 560,857 $112,172 $1,292,473
May, 1996 313,750 $62,750 $3,300,422
June, 1996 252 $51 $3,650
Payments received on
subscription receivable (960) (192) ($14,808) $20,000
Compensation expense recorded
on stock options $125,000
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Balance, June 30, 1996 2,345,035 $469,008 $15,296,856 ($10,482,840) $0 $0 $0 $0
Net loss ($3,925,460)
Stock offering costs ($12,310)
Common stock issued upon exercise of
options and warrants
September 1996 500 $100 $2,400
October 1996 8,500 $1,700 $40,800
November 1996 750 $150 $3,600
December 1996 13,500 $2,700 $64,800 ($57,500)
January 1997 1,000 $200 $4,800
February 1997 7,500 $1,500 $17,250
March 1997 7,000 $1,400 $33,600
Payments received on
subscription receivable $57,500
Compensation expense recorded
on stock options $48,000
Common stock issued, June 1997 18,250 $3,650 $105,850
Warrants issued with notes payable $371
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</TABLE>
<PAGE>
QUANTECH LTD
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY-UNAUDITED (Continued)
Period From September 30, 1991 (date of Inception), to September 30, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
During
Common Stock Additional the Paid for Due Cumulative
Paid-In Development Subscriptions Not From Translation
Shares Amount Capital Stage Receivable Issued Officer Adjustment
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 2,402,035 $480,408 $15,606,017 ($14,408,300) $0 $0 $0 $0
Net Loss ($3,648,748)
Conversion of common stock from
par value to no par value $15,392,446 ($15,392,446)
Common stock issued for license
agreement: September 1997 150,000 $390,000
Common stock issued for equipment and
services received: March 1998 13,078 $45,584
Warrants issued for services received:
March 1998 $15,215
April 1998 $500
Warrants issued with notes payable $939
Amount attributable to value of debt
conversion feature $988,444
Warrants issued for license agreement
December 1997 $230,000
Compensation expense recorded
on stock options $28,000
Adjustment of fractional shares due to
to 1-for 20 reverse stock split (73)
---------------------------------------------------------------------------------------------
Balance, June 30, 1998 2,565,040 $16,308,438 $1,476,669 ($18,057,048) $0 $0 $0 $0
Net Loss ($1,543,318)
Warrants issued with notes payable $76
Common stock issued upon conversion
of notes payable:
July 1998 2,000 $7,060
September 1998 3,400 $12,002
Common stock issued upon exercise
of warrant: August 1998 2,045 $5,114
Common stock issued for equipment
and services received:
July 1998 5,714 $20,000
August 1998 9,196 $27,589
September 1998 12,557 $11,318
=============================================================================================
Balance, September 30, 1998 2,599,952 $16,391,521 $1,476,745 ($19,600,366) $0 $0 $0 $0
=============================================================================================
</TABLE>
<PAGE>
QUANTECH LTD
(A Development Stage Company)
STATEMENT OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
Period From
September 30,
Three Months Three Months 1991 (Date of
Ended Ended Inception), to
September 30, September 30, September 30,
1998 1997 1998
------------------- ------------------- ------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Loss $ (1,543,318) $ (588,420) $ (19,600,366)
Adjustments to reconcile net loss to net cash used in
operating activities:
Elimination of cumulative translation adjustment - - (178,655)
Depreciation 17,758 15,603 266,313
Amortization 81,655 80,408 1,817,999
Noncash compensation, services and interest 597,595 - 1,922,274
Losses resulting from transactions with
Spectrum Diagnostics Inc. - - 556,150
Write down of investment - - 67,500
Change in assets and liabilities, net of effects from purchase of
Spectrum Diagnostics Inc.:
(Increase) decrease in prepaid expenses 7,239 319 49,287
Increase (decrease) in accounts payable 124,543 (27,664) 213,654
Increase (decrease) in accrued expenses 179,872 (25,102) 700,593
------------------- ------------------- ------------------
Net cash used in operating activities (534,656) (544,856) (14,185,251)
------------------- ------------------- ------------------
Cash Flows From Investing Activities
Purchase of property and equipment (8,457) (1,353) (446,708)
Proceeds on disposition of property - 0 37,375
Patent expenses (4,016) (134) (13,045)
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 - (10,403) (101,643)
Purchase of Spectrum Diagnostics, Inc., net of cash
and cash equivalents acquired - - (1,204,500)
------------------- ------------------- ------------------
Net cash used in investing activities (12,473) (11,890) (4,430,827)
------------------- ------------------- ------------------
Cash Flows From Financing Activities
Net proceeds from the sale of common stock & warrants - 7 12,880,797
Proceeds on debt obligations 502,230 25,000 6,051,085
Payments received on stock subscription receivables - - 5,000
Stock offering costs - - 0
Payments on debt obligations - - (522,810)
------------------- ------------------- ------------------
Net cash provided by financing activities 502,230 25,007 18,414,072
------------------- ------------------- ------------------
Effect of Exchange Rate Changes on Cash - - 203,242
------------------- ------------------- ------------------
Net increase (decrease) in cash (44,899) (531,739) 1,236
Cash
Beginning 46,135 718,893 -
------------------- ------------------- ------------------
Ending $ 1,236 $ 187,154 $ 1,236
=================== =================== ==================
</TABLE>
<PAGE>
QUANTECH LTD.
( A Development Stage Company )
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1. BASIS OF PRESENTATION
In the opinion of the management of the Company, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal,
recurring adjustments) necessary to present fairly the financial position of the
Company as of September 30, 1998 and the results of operations and its cash
flows for the three month periods ended September 30, 1998 and 1997. The results
of operations for any interim period are not necessarily indicative of the
results for the year. These interim financial statements should be read in
conjunction with the Company's annual financial statements and related notes in
the Company's Annual Report on Form 10-KSB for the year ended June 30, 1998.
Note 2. LICENSE AGREEMENT
The Company has a license agreement with Ares-Serono for certain patents,
proprietary information and associated hardware related to 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. As of December 31, 1997,
the Company had paid $1,000,000 of cumulative royalty payments. In order to
maintain its exclusive rights under the license agreement, the Company must make
a $150,000 payment by December 31, of each of 1998 and 1999. The Company accrues
quarterly a pro-rata portion of the $150,000 annual payment and will continue
to do so until royalty accruals based on revenues exceed such minimum annual
payment amount.
Note 3. SERIES A PREFERRED STOCK
In November 1998, the Company established an additional class of shares as
Series A Preferred Stock (the "Series A Stock"), and designated 2,500,000 of its
authorized shares as Series A Stock. Such shares have no par value and a
liquidation value of $3.00 per share. Each share of Series A Stock is
convertible into, and has voting rights equal to, four shares of Common Stock.
If any time after November 5, 2003 the Company receives written request of the
holders of at least 50% of the outstanding shares of Series A Stock, the Company
will redeem all of the outstanding shares by paying in cash an amount equal to
the sum of the original purchase price plus a 10% return per annum. Series A
Stock is automatically converted into shares of Common Stock in the event (i)
the Company closes on an offering of at least $5,000,000 or (ii) at least 50% of
the number of shares of Series A Stock that were outstanding as of November 30,
1998 have been converted or redeemed. The Company issued 1,624,715 shares of
Series A Stock after the quarter ended September 30, 1998.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
History
Quantech Ltd. ("Quantech" or the "Company") is a Minnesota corporation
originally founded in 1991. Quantech is completing development of its critical
care DBx diagnostic system. Quantech's proprietary and robust digital detection
Surface Plasmon Resonance ("SPR") biosensor technology provides the DBx with
user friendly multi-test capabilities. Quantech's critical care system will have
the ability to perform a complete range of clinically related, quantitative
whole blood tests on a single instrument near the patient in 10 to 20 minutes.
The system will be marketed to hospital Critical Care Units, with the initial
focus being Emergency Departments. Hospital Critical Care Units, such as the
Emergency Department, are best able to recognize the immediate positive impact
Quantech's system will have on patient treatment and satisfaction, determination
of appropriate clinical care path and cost containment.
Quantech's system will consist of an easy to use bench top instrument
and test disposables. Each disposable will contain one test, or a panel of up to
four clinically related tests, which will define the particular tests to be
conducted by the instrument. The Company has received FDA 510(k) approval for
its first test for the detection and quantification of the cardiac marker
Myoglobin. This cardiac marker is an aid to physicians in the diagnosis of an
early stage heart attack. Further tests, including the cardiac markers CK-MB and
troponin I and the pregnancy marker hCG, are being developed.
Quantech and The Perkin-Elmer Corporation ("Perkin-Elmer"), a leading
supplier of life science systems and analytical instruments, are parties to a
technology and development agreement. Such agreement provides Perkin-Elmer with
exclusive licenses to certain Quantech technology for use outside of Quantech's
core area of non-nucleic medical diagnostics. Quantech has licensed back from
Perkin-Elmer technology that provides a large density, high throughput
diagnostic testing capacity for its SPR technology. Quantech believes this
capability will allow it to expand its digital SPR technology into central lab,
ICU/CCU, ambulatory, doctor office and home testing markets.
Quantech is a development stage company which has suffered significant
losses from operations, requires additional financing, and ultimately needs to
complete development of its product, generate revenues, and successfully attain
profitable operations to realize the value of its license agreement and remain a
going concern. 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 $19,600,366 from September 30,
1991 (date of inception) through September 30, 1998 due to expenses related to
formation and operation of Quantech's predecessor, Spectrum Diagnostics Inc.
("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 SDS 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 three months ended September 30, 1998 the Company had interest
income of $653 compared to $6,824 for the same period in 1997. This decrease is
a result of less cash on hand as proceeds obtained from Quantech's private
placements of securities have been used for operations and research and
development.
General and administration expenses increased by $83,971 to $306,828
for the three months ended September 30, 1998 from $222,857 for the three months
ended September 30, 1997. The increase in general and administrative spending
<PAGE>
was primarily due to costs associated with financing activities, expenses
incurred to attend the American Association for Clinical Chemistry meeting, and
additional expenses related to Company expansion. The Company anticipates that
these expenses will continue to increase as the Company completes development of
its system and begins to manufacture and distribute its products.
Research and development costs increased to $528,111 in the three
months ended September 30, 1998 from $314,261 in the same period of 1997. This
increase was primarily due to expenses related to the preparation of 510(k)
submissions to the FDA, and engineering design work on the DBx commercial
instrument and related disposables. The Company expects R&D spending to increase
significantly as the Company completes the commercial development of its system,
conducts additional FDA work, and begins to establish higher volume
manufacturing capabilities.
Minimum royalty expense increased to $37,500 during the quarter ended
September 30, 1998 compared to $18,750 for the same quarter in 1997. This
increase was due to the accrual for the minimum payments scheduled for December
1998 and 1999. Royalty expense is expected to remain at $37,500 per quarter
through December 1999 (see Notes to Financial Statements, Note 2 - License
Agreement).
Interest expense increased to $671,532 for the quarter ended September
30, 1998 compared to $39,376 during the same period in 1997. The higher interest
cost was primarily the result of increased debt from the sale of promissory
notes including a $546,902 one-time charge to reflect the conversion feature of
the notes. Future interest expense is expected to decrease significantly due to
the conversion of the promissory notes into preferred stock subsequent to
September 30, 1998.
For the three months ended September 30, 1998 Quantech had a loss of
$1,543,318 as compared to $588,420 for the same period ended September 30, 1997.
A substantial portion of this increased loss was interest cost, with the
remaining increase a result of higher operating expenses and lower interest
income.
The timetable for submitting additional tests to the FDA and
introduction of Quantech's system to the market will be influenced by the
Company's ability to obtain further funding, enter into strategic relationships,
complete commercial prototype development of its system and develop further
tests, and delays it may encounter with the FDA in its review of Quantech's
tests and system. There can be no assurance that the Company will be able to
obtain the required funding, enter into any strategic agreements or ultimately
complete its commercial system.
Liquidity and Capital Resources
From inception to September 30, 1998, Quantech has raised approximately
$18,900,000 through a combination of public stock sales, private stock sales and
debt obligations. In November 1998, the Company raised net proceeds of
$1,387,000 from the sale of 500,000 shares of its Series A Convertible Preferred
Stock (the "A Preferred Stock") to accredited investors. The shares were priced
at $3.00 per share and each share of A Preferred Stock is convertible into four
shares of Common Stock. Noteholders also converted $3,374,138 of the Company's
promissory notes into 1,124,715 shares of the A Preferred Stock in November
1998.
The Company anticipates that the proceeds of this offering will be
sufficient to allow it to maintain operations through January 1999. Additional
financing will be needed to develop and submit to the FDA additional tests,
complete clinical evaluation of the Quantech system, establish manufacturing
capabilities and introduce the system to market. Quantech is currently reviewing
multiple avenues of future funding including a secondary offering of securities,
private sale of equity or debt with equity features or arrangements with
strategic partners. The Company does not have any commitments for any such
financing and 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. See "Cautionary Statements - Immediate and Future
Capital Needs." Although the Company has a limited lending arrangement with its
bank, it does not anticipate receiving significant funding from commercial
lenders.
<PAGE>
Quantech incurred capital expenditures of $36,046 in the three month
period ended September 30, 1998. The Company anticipates significant capital
expenditures in the future 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.
The Company currently has outstanding 2,624,952 shares of Common Stock,
and 1,624,715 shares of A Preferred Stock. It also has options and warrants
outstanding to purchase an additional 4,256,287 shares of Common Stock at
exercise prices from $0.75 to $14.40.
Cautionary Statements
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 instrument within reasonable time frames and financial
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, and specifically those historically encountered by
Quantech, 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, 1998, 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 significant losses from operations, requires additional financing,
and ultimately needs to continue development of its product, generate revenues,
and successfully attain profitable operations to realize the value of its
license agreement and remain a going concern. 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.
Immediate and Future Capital Needs
The Company does not have sufficient funds to complete development of
its system, submit its system to the FDA or commence commercial production and
sales of its system. The Company's ability to continue as a going concern,
complete its system, submit its system to the FDA and commence sales will depend
upon the continued availability of investment capital, funding made by strategic
partner(s) or licensing revenues, until revenues from the sale of instruments
and associated test disposables are sufficient to maintain operations.
Additional funds may have to be raised through equity or debt financing. There
can be no assurance that any additional financing can be obtained on favorable
terms, if at all. Such additional financing may result in dilution to Company
shareholders and/or additional debt to the Company. If funding is not available
immediately, and in the future when needed, the Company may be forced to cease
operations and abandon its business. In such event, Company shareholders could
lose their entire investment.
Year 2000 Compliance
Although the Company's internal systems and products are year 2000
computer compliant, its customers may not be in compliance. The result of
<PAGE>
noncompliance by customers, if any, could result in delays in installing the
Company's systems, extra expense in installation or a failure in the system's
ability to communicate with hospital computers for down-loading information.
Other Factors
As described in the Company's Form 10-KSB for the year ended June 30,
1998 under Cautionary Statements, there are additional factors concerning the
Company that should be considered including: uncertainty of market acceptance of
Quantech's product once introduced, inability or delay in obtaining FDA product
approval, competition, technological obsolescence, ability to maintain patent
protection on the Company's technology and not violate others rights, effects of
government regulation on Quantech's product and its sale, ability to manufacture
its product, dependence on key personnel, exposure to the risk of product
liability and market for the Company's shares.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
Not Applicable.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
In September 1998 the Company sold 7,557 shares of Common Stock at $0.75
per share to an acredited investor. Also in September 1998 the Company
sold 5,000 shares of Common Stock at $1.13 per share to an acredited
investor. The shares were sold pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"). The purchasers of
such Common Stock acquired these securities for their own accounts and
not with a view to any distribution thereof to the public.
In October 1998, 25,000 shares of Common Stock were issued pursuant to
conversion of a promissory note. The shares were sold pursuant to
Section 3(a)(9) of the 1933 Act. The purchaser of such Common Stock
acquired these securities for its own account.
In November 1998, the Company sold 500,000 shares of its Series A
Convertible Preferred Stock to accredited investors at a price of $3.00
per share, and issued 1,124,715 shares of Series A Convertible Preferred
Stock pursuant to conversion of promissory notes at a conversion price
of $3.00 per share. Each share of Series A Convertible Preferred Stock
is convertible into four shares of the Company's Common Stock. The
shares were sold pursuant to Section 4(2) of the 1933 Act and Rule 506
promulgated thereunder. The purchasers of such Preferred Stock acquired
these securities for their own accounts and not with a view to any
distribution thereof to the public.
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on 8-K
a. Exhibits -
3.1 Articles of Incorporation, as amended to date
27. Financial Data Schedule (filed in electronic format only)
b. Reports on 8-K - None
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QUANTECH LTD
/s/ Robert Case
Robert Case
Chief Executive Officer
/s/ Gregory G. Freitag
Gregory G. Freitag
Chief Operating Officer and
Chief Financial Officer
Date: November 16, 1998
<PAGE>
EXHIBIT INDEX
QUANTECH LTD.
FORM 10-QSB for Quarter Ended
September 30, 1998
Exhibit Number Description
- -------------------- ---------------------------------------------------------
3.1 Articles of Incorporation, as amended to date
27 Financial Data Schedule (filed in electronic format only)
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.
<PAGE>
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.
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
Gregory G. Freitag
<PAGE>
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 interest 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
George Vitalis, Secretary
<PAGE>
ARTICLES OF AMENDMENT OF
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 interest of the Corporation to amend the Articles of Incorporation to
increase the number of authorized shares from 60,000,000 Common Shares to
120,000,000 shares consisting of 90,000,000 Common Shares and 30,000,000
undesignated shares 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 shares from 60,000,000 Common Shares to 120,000,000
shares consisting of 90,000,000 Common Shares and 30,000,000 undesignated
shares.
RESOLVED FURTHER, that Section 3.1 is hereby amended to read as
follows:
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 One Hundred and Twenty Million
(120,000,000) shares, $.01 par value per share, consisting of 90,000,000 Common
Shares and 30,000,000 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.
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: November 25, 1996.
/s/ Gregory G. Freitag
Gregory G. Freitag, Secretary
<PAGE>
ARTICLES OF AMENDMENT OF
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 interest of the Corporation to amend the Articles of Incorporation to
increase the number of authorized shares from 120,000,000 Common Shares to
250,000,000 shares consisting of 200,000,000 Common Shares and 50,000,000
undesignated shares 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 shares from 120,000,000 Common Shares to 250,000,000
shares consisting of 200,000,000 Common Shares and 50,000,000 undesignated
shares.
RESOLVED FURTHER, that Section 3.1 is hereby amended to read as
follows:
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 Two Hundred and Fifty Million
(250,000,000) 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 200,000,000 Common
Shares and 50,000,000 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.
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: December 2, 1997
/s/ Gregory G. Freitag
Gregory G. Freitag, Secretary
<PAGE>
ARTICLES OF AMENDMENT OF
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 directors, pursuant to Minnesota Statutes,
Sections 302A.135 and 302A.139.
The Board discussed and determined that it was in the interest of
Quantech to effect the reverse split of its Capital Stock to conform its capital
structure to companies in Quantech's industry, so as to attract potential
financing and strategic partners and to position Quantech for filing on NASDAQ
when it meets such organization's listing requirements. It was determined that
the timing of the split should be coordinated with the release of information
concerning Quantech's filing with the FDA of its test for myoglobin.
A MOTION was made by Mr. Lyons that the directors hereby adopt the
following plan of recapitalization in order to effect a 1-for-20 reverse stock
split effective on the date on which the Amendment of Articles hereinafter
adopted is filed with the Minnesota Secretary of State (the "Effective Date"):
1. One (1) share of Common Stock of the Company shall be issued
in exchange for every twenty (20) shares of Common Stock
outstanding on the Effective Date.
2. Fractional shares resulting on account of such reverse split
shall be rounded down.
3. Promptly following the Effective Date, shareholders shall
exchange certificates representing shares of Common Stock
outstanding on the Effective Date for certificates
representing the appropriate number of shares of Common Stock
to reflect the reverse stock split.
4. On the Effective Date, the number of shares of the Company's
Common Stock reserved for issuance under, or covered by, any
outstanding option or warrant shall be decreased by twenty
times and the per share exercise price shall be increased by
such amount as may be necessary so that the aggregate purchase
price of each outstanding option or warrant after adjustment
is equal to the aggregate purchase price of such option or
warrant before adjustment.
FURTHER RESOLVED, that Section 3.1 of Article 3 of the Articles of
Incorporation is amended to read as follows:
"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 12,500,000 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
<PAGE>
of the corporation, and which shall consist of 10,000,000
Common Shares (hereinafter referred to as "Common Stock") and
2,500,000 undesignated shares. Except as otherwise provided by
these Articles of Incorporation or in a contractual obligation
of the corporation, 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, which rights and preferences may be superior to those
of any of the shares of Common Stock."
FURTHER RESOLVED, that any officer of the Company be and he hereby is
authorized to execute Articles of Amendment of the Articles of Incorporation of
the Company and to cause such Articles of Amendment to be filed with the
Minnesota Secretary of State.
FURTHER RESOLVED, that the form of stock certificate reviewed this date
be and it hereby is adopted to represent the Company's Common Stock from and
after the Effective Date.
FURTHER RESOLVED, that the officers of the Company are hereby
authorized and directed to take all such further action and execute and deliver
all such further documents and instruments as may be necessary or advisable to
effectuate such reverse stock split.
Mr. Perkins seconded the motion and the motion was unanimously approved
by the directors.
Dated and effective: March 17, 1998
/s/ Gregory G. Freitag
Gregory G. Freitag, Secretary
<PAGE>
STATEMENT OF DESIGNATION OF SHARES
OF
QUANTECH LTD.
I hereby certify that the resolutions set forth on Exhibit A attached
hereto were adopted by written action of the Board of Directors of QUANTECH LTD.
on November 5, 1998.
I certify that I am authorized to execute this Statement and I further
certify that I understand that by signing this Statement I am subject to the
penalties of perjury as set forth in Section 609.48 as if I had signed this
Statement under oath.
/s/ Gregory G. Freitag
Gregory G. Freitag, Chief Operating Officer
<PAGE>
EXHIBIT A
Designation of Series A Preferred Stock
WHEREAS, the corporation's current authorized capitalization consists
of 10,000,000 authorized shares of Common Stock and 2,500,000 authorized but
undesignated shares; and
WHEREAS, the Board of Directors deems it advisable to establish an
additional class of shares from the 2,500,000 authorized but undesignated
shares;
NOW, THEREFORE, RESOLVED, that of the 2,500,000 undesignated shares
which the corporation is authorized to issue under its Articles of
Incorporation, 2,500,000 are hereby designated as shares of Series A Preferred
Stock (the "Series A Stock"), with a par value of $0.01 per share solely for
purposes of a statute or regulation imposing a tax or fee based upon the
capitalization of the corporation.
FURTHER RESOLVED, that the rights and preferences of the Series A Stock
shall be as follows:
1. Dividends. In the event that the corporation declares and pays any
dividends in cash with respect to Common Stock, the holder of a share of Series
A Stock will be entitled to receive a dividend per share equal to the dividend
that would have been otherwise payable with respect to such share if it had been
converted into shares of Common Stock prior to the record date of such dividend.
2. Voting. Each outstanding share of Series A Stock shall entitle its
holder to that number of votes on all matters submitted to the stockholders that
is equal to the number of shares of Common Stock into which such holder's shares
of Series A Stock are then convertible, as hereinafter provided (except that
shares of Series A Stock shall have class voting rights as provided in paragraph
3 below and as otherwise now or hereafter required by agreement or law).
3. Additional Class Votes by Series A Stock. Without the affirmative
vote or written consent of the holders (acting together as a class) of at least
a majority of the shares of Series A Stock at the time outstanding, the
corporation shall not:
a. amend the Articles of Incorporation of the corporation in
any respect, including without limitation any certificate or
designation relating to the Series A Stock, so as to alter any existing
provision relating to Series A Stock or the holders thereof or waive
any of the rights granted to the holders of the Series A Stock by the
Articles of Incorporation of the corporation; or
b. increase the authorized number of shares of Series A
Stock; or
c. authorize or issue any shares of capital stock having
priority or preference over, or on parity with, Series A Stock as to
<PAGE>
dividends or distributions in the event of the liquidation, dissolution
or winding up of the corporation, provided that such prohibition shall
not prevent the corporation from issuing any shares which may receive
distributions in such events on a pari passu basis prorated, in the
event assets are insufficient to pay the original purchase price of all
such securities, to the original purchase price of each; or
d. declare or pay any dividend or make any other distribution
on any shares of capital stock of the corporation at any time created
and issued ranking junior to Series A Stock with respect to the rights
to the distribution of assets upon liquidation, dissolution or winding
up of the corporation, other than distributions payable solely in
shares of junior stock.
4. Liquidation.
a. In the event of the liquidation, dissolution or winding up
of the corporation, whether voluntary or involuntary, the holders of
the shares of Series A Stock shall be entitled, subject to the
participation right of certain lenders/guarantors as provided in
subparagraph (d) below, to receive in cash, out of the assets of the
corporation, before any payment shall be made or any assets distributed
to the holders of Common Stock with respect to the payment of dividends
or upon dissolution or liquidation of the corporation, an amount equal
to the sum of (i) $3.00 per share ("Original Purchase Price")
(appropriately adjusted to reflect stock splits, stock dividends,
reorganizations, consolidations and similar changes hereafter
effected), (ii) all dividends unpaid and accumulated or accrued thereon
to the date of such distribution, if any, and (iii) an amount equal to
a return on investment at the rate of 10% per annum, compounded
annually, over the period commencing on the date of original issuance
of the Series A Stock by the corporation and ending on the date of
distribution of assets as specified by the corporation's Board of
Directors. If, upon any liquidation or dissolution of this corporation,
the assets of the corporation shall be insufficient to pay such amount,
the holders of such shares shall share pro rata in any such
distribution in proportion to the full amounts to which they would
otherwise be respectively entitled.
b. After the payment of all preferential amounts required to
be paid pursuant to subparagraph a above, any remaining assets and
funds of the corporation available for distribution to its stockholders
upon the liquidation, dissolution or winding up of the corporation
shall be distributed ratably among the holders of Common Stock.
Thereafter, any such remaining assets and funds shall be distributed.
c. The merger or consolidation of the corporation into or with
another corporation which results in the exchange of outstanding shares
of the corporation for securities or other consideration issued or paid
or caused to be issued or paid by such other corporation or an
affiliate thereof (except if such merger or consolidation does not
result in the transfer of more than 60% of the voting securities of the
corporation), change in control of more than 60% of the voting
securities of the corporation or the sale of all or substantially all
the assets of the corporation, shall be deemed to be a liquidation,
<PAGE>
dissolution or winding up of the corporation for purposes of this
paragraph, unless the holders of a majority of the Series A Stock then
outstanding vote otherwise. The amount deemed distributed to the
holders of Series A Stock upon any such merger or consolidation shall
be the cash or the value of the property, rights and/or securities
distributed to such holders by the acquiring person, firm or other
entity. The value of such property, rights or other securities shall be
determined in good faith by the Board of Directors of the corporation.
d. The corporation and one of its current directors are
parties to that certain Agreement dated November 5, 1998, which
agreement provides that if the director is required to make any payment
pursuant to that certain Guaranty and Collateral Pledge Agreement, each
dated August 7, 1998, between such director and Norwest Bank Minnesota,
National Association, which has provided the corporation a bank credit
facility in the aggregate principal amount of $750,000, such director
waives any right of recovery of such payment from the corporation
except in the event of a liquidation by the corporation in which event
such director shall be entitled to participate in the distribution of
the corporation's assets in liquidation on a pro rata basis with
holders of Series A Stock pursuant to subparagraph a above as if such
director held an amount of Series A Stock equal to the amount of such
director's payment under the Guaranty and Collateral Pledge Agreement
divided by $3.00.
5. Conversion Right. At the option of the holders thereof, the shares
of Series A Stock shall be convertible, at the office of the corporation (or at
such other office or offices, if any, as the Board of Directors may designate),
into fully paid and nonassessable shares (calculated as to each conversion to
the nearest 1/100th of a share) of Common Stock of the corporation, at the
conversion price, determined as hereinafter provided, in effect at the time of
conversion, each share of Series A Stock being deemed to have a value of $3.00
for the purpose of such conversion. The price at which shares of Common Stock
shall be delivered upon conversion of shares of Series A Stock (herein called
the "conversion price") shall be initially $0.75 per share of Common Stock
(i.e., at an initial conversion rate of four shares of Common Stock for each
share of Series A Stock), provided, however, that such initial conversion price
shall be subject to adjustment from time to time in certain instances as
hereinafter provided. The following provisions shall govern such right of
conversion:
a. In order to convert shares of Series A Stock into shares of
Common Stock of the corporation, the holder thereof shall surrender at
any office hereinabove mentioned the certificate or certificates
therefor, duly endorsed to the corporation or in blank, and give
written notice to the corporation at such office that such holder
elects to convert such shares. Shares of Series A Stock shall be deemed
to have been converted immediately prior to the close of business on
the day of the surrender of such shares for conversion as herein
provided, and the person entitled to receive the shares of Common Stock
of the corporation issuable upon such conversion shall be treated for
all purposes as the record holder of such shares of Common Stock at
such time. As promptly as practicable on or after the conversion date,
the corporation shall issue and deliver or cause to be issued and
delivered at such office a certificate or certificates for the number
of shares of Common Stock of the corporation issuable upon such
conversion.
<PAGE>
b. The conversion price shall be subject to adjustment from
time to time as hereinafter provided. Upon each adjustment of the
conversion price each holder of shares of Series A Stock shall
thereafter be entitled to receive the number of shares of Common Stock
of the corporation obtained by multiplying the conversion price in
effect immediately prior to such adjustment by the number of shares
issuable pursuant to conversion immediately prior to such adjustment
and dividing the product thereof by the conversion price resulting from
such adjustment.
c. If and whenever the corporation shall issue or sell any
shares of its Common Stock for a consideration per share less than the
conversion price in effect immediately prior to the time of such issue
or sale of the Common Stock, then, forthwith upon such issue or sale,
the conversion price shall be reduced to such lower price.
No adjustment of the conversion price of the Series A Stock, however,
shall be made in an amount less than 2% of such conversion price in effect on
the date of such adjustment, but any such lesser adjustment shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any such adjustment so carried forward, shall be
an amount equal to or greater than 4% of the conversion price of the Series A
Stock then in effect.
The holders of at least a majority of the Series A Stock then
outstanding may elect to waive the application of the provisions of this
paragraph 5 with respect to any issue or sale by the corporation of shares of
its Common Stock for a consideration per share less than the conversion price of
the Series A Stock in effect immediately prior to the time of such issue or
sale.
For the purposes of this paragraph 5, the following provisions (i) to
(v), inclusive, shall also be applicable:
(i) In the event the corporation shall grant (whether directly
or by assumption in a merger or otherwise) any rights to subscribe for
or to purchase, or any options for the purchase of, (a) Common Stock or
(b) any obligations or any shares of stock of the corporation which are
convertible into, or exchangeable for, Common Stock (any of such
obligations or shares of stock being hereinafter called "Convertible
Securities") whether or not such rights or options or the right to
convert or exchange any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable
upon the exercise of such rights or options or upon conversion or
exchange of such Convertible Securities (determined by dividing (x) the
total amount, if any, received or receivable by the corporation as
consideration for the granting of such rights or options, plus the
minimum aggregate amount of additional consideration payable to the
corporation upon the exercise of such rights or options, plus, in the
case of such rights or options which relate to Convertible Securities,
the minimum aggregate amount of additional consideration, if any,
payable upon the issue of such Convertible Securities and upon the
conversion or exchange thereof, by (y) the total maximum number of
shares of Common Stock issuable upon the exercise of such rights or
options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such rights or options) shall
be less than the conversion price of the Series A Stock in effect
immediately prior to the time of the granting of such rights or
options, then the total maximum number of shares of Common Stock
issuable upon the exercise of such rights or options or upon conversion
<PAGE>
or exchange of the total maximum amount of such Convertible Securities
issuable upon the exercise of such rights or options shall (as of the
date of granting of such rights or options) be deemed to have been
issued for such price per share. Except as provided in subparagraph d
below, no further adjustments of the conversion price of the Series A
Stock shall be made upon the actual issue of such Common Stock or of
such Convertible Securities upon exercise of such rights or options or
upon the actual issue of such Common Stock upon conversion or exchange
of such Convertible Securities.
(ii) In case the corporation shall issue or sell (whether
directly or by assumption in a merger or otherwise) any Convertible
Securities, whether or not the rights to exchange or convert thereunder
are immediately exercisable, and the price per share for which Common
Stock is issuable upon such conversion or exchange (determined by
dividing (x) the total amount received or receivable by the corporation
as consideration for the issue or sale of such Convertible Securities,
plus the minimum aggregate amount of additional consideration, if any,
payable to the corporation upon the conversion or exchange thereof, by
(y) the total maximum number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities) shall be
less than the conversion price of the Series A Stock in effect
immediately prior to the time of such issue or at the time of such
issue or sale, then the total maximum number of shares of Common Stock
issuable upon conversion or exchange of all such Convertible Securities
shall (as of the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been issued for
such price per share, provided that (a) except as provided in
subparagraph d below, no further adjustments of the conversion price
shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities, and (b) if any
such issue or sale of such Convertible Securities is made upon exercise
of any rights to subscribe for or to purchase or any option to purchase
any such Convertible Securities for which adjustments of the conversion
price of the Series A Stock have been or are to be made pursuant to
other provisions of this paragraph 5, no further adjustment of the
conversion price shall be made by reason of such issue or sale.
(iii) In case any shares of Common Stock or Convertible
Securities or any rights or options to purchase any such Common Stock
or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount
received by the corporation therefor, without deducting therefrom any
expenses incurred or any underwriting commissions, discounts or
concessions paid or allowed by the corporation in connection therewith.
In case any shares of Common Stock or Convertible Securities or any
rights or options to purchase any such Common Stock or Convertible
Securities shall be issued or sold for a consideration other than cash,
the amount of the consideration other than cash received by the
corporation shall be deemed to be the fair value of such consideration
as determined by the Board of Directors of the corporation, without
deducting therefrom any expenses incurred or any underwriting
commissions, discounts or concessions paid or allowed by the
corporation in connection therewith. In case any shares of Common Stock
or Convertible Securities or any rights or options to purchase such
Common Stock or Convertible Securities shall be issued in connection
with any merger or consolidation in which the corporation is the
surviving corporation, the amount of consideration therefor shall be
deemed to be the fair value as determined by the Board of Directors of
the corporation of such portion of the assets and business of the
non-surviving corporation or corporations as such Board shall determine
<PAGE>
to be attributable to such Common Stock, Convertible Securities, rights
or options, as the case may be. In the event of any consolidation or
merger of the corporation in which the corporation is not the surviving
corporation or in the event of any sale of all or substantially all of
the assets of the corporation for stock or other securities of any
other corporation, the corporation shall be deemed to have issued a
number of shares of its Common Stock for stock or securities of the
other corporation computed on the basis of the actual exchange ratio on
which the transaction was predicated and for a consideration equal to
the fair market value on the date of such transaction of such stock or
securities of the other corporation, and if any such calculation
results in adjustment of the conversion price of the Series A Stock,
the determination of the number of shares of Common Stock issuable upon
conversion immediately prior to such merger, conversion or sale, for
purposes of subparagraph d below, shall be made after giving effect to
such adjustment of the conversion price.
(iv) In case the corporation shall take a record of the
holders of its Common Stock for the purpose of entitling them (a) to
receive a dividend or other distribution payable in Common Stock or in
Convertible Securities, or in any rights or options to purchase any
Common Stock or Convertible Securities, or (b) to subscribe for or
purchase Common Stock or Convertible Securities, then such record date
shall be deemed to be the date of the issue or sale of the shares of
Common Stock deemed to have been issued or sold upon the declaration of
such dividend or the making of such other distribution or the date of
the granting of such rights of subscription or purchase, as the case
may be.
b. In case the corporation shall (i) declare a dividend upon
the Common Stock payable in Common Stock (other than a dividend
declared to effect a subdivision of the outstanding shares of Common
Stock, as described in subparagraph e below) or Convertible Securities,
or in any rights or options to purchase Common Stock or Convertible
Securities, or (ii) declare any other dividend or make any other
distribution upon the Common Stock payable otherwise than out of
earnings or earned surplus, then thereafter each holder of shares of
Series A Stock upon the conversion thereof will be entitled to receive
the number of shares of Common Stock into which such shares of Series A
Stock have been converted, and, in addition and without payment
therefor, each dividend described in clause (i) above and each dividend
or distribution described in clause (ii) above which such holder would
have received by way of dividends or distributions if continuously held
since such holder became the record holder of such shares of Series A
Stock such holder (i) had been the record holder of the number of
shares of Common Stock then received, and (ii) had retained all
dividends or distributions in stock or securities (including Common
Stock or Convertible Securities, and any rights or options to purchase
any Common Stock or Convertible Securities) payable in respect of such
Common Stock or in respect of any stock or securities paid as dividends
or distributions and originating directly or indirectly from such
Common Stock. For the purposes of the foregoing, a dividend or
distribution other than in cash shall be considered payable out of
earnings or earned surplus only to the extent that such earnings or
earned surplus are charged an amount equal to the fair value of such
dividend or distribution as determined by the Board of Directors of the
corporation.
<PAGE>
c. In case the corporation shall at any time split or
subdivide its outstanding shares of Common Stock into a greater number
of shares, the conversion price of Series A Stock in effect immediately
prior to such subdivision shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock of the
corporation shall be combined into a smaller number of shares, the
conversion price of Series A Stock in effect immediately prior to such
combination shall be proportionately increased.
d. If (i) the purchase price provided for in any right or
option referred to in clause (i) of subparagraph a, or (ii) the
additional consideration, if any, payable upon the conversion or
exchange of Convertible Securities referred to in clause (i) or clause
(ii) of subparagraph a, or (iii) the rate at which any Convertible
Securities referred to in clause (i) or clause (ii) of subparagraph a
are convertible into or exchangeable for Common Stock, shall change at
any time (other than under or by reason of provisions designed to
protect against dilution), the conversion price of the Series A Stock
then in effect hereunder shall forthwith be increased or decreased to
such conversion price as would have obtained had the adjustments made
upon the issuance of such rights, options or Convertible Securities
been made upon the basis of (a) the issuance of the number of shares of
Common Stock theretofore actually delivered upon the exercise of such
options or rights or upon the conversion or exchange of such
Convertible Securities, and the total consideration received therefor,
and (b) the issuance at the time of such change of any such options,
rights, or Convertible Securities then still outstanding for the
consideration, if any, received by the corporation therefor and to be
received on the basis of such changed price; and on the expiration of
any such option or right or the termination of any such right to
convert or exchange such Convertible Securities, the conversion price
of the Series A Stock then in effect hereunder shall forthwith be
increased to such conversion price as would have obtained had the
adjustments made upon the issuance of such rights or options or
Convertible Securities been made upon the basis of the issuance of the
shares of Common Stock theretofore actually delivered (and the total
consideration received therefor) upon the exercise of such rights or
options or upon the conversion or exchange of such Convertible
Securities. If the purchase price provided for in any right or option
referred to in clause (i) of subparagraph a, or the rate at which any
Convertible Securities referred to in clause (i) or clause (ii) of
subparagraph a are convertible into or exchangeable for Common Stock,
shall decrease at any time under or by reason of provisions with
respect thereto designed to protect against dilution, then in case of
the delivery of Common Stock upon the exercise of any such right or
option or upon conversion or exchange of any such Convertible Security,
the conversion price of the Series A Stock then in effect hereunder
shall forthwith be decreased to such conversion price as would have
obtained had the adjustments made upon the issuance of such right,
option or Convertible Security been made upon the basis of the issuance
of (and the total consideration received for) the shares of Common
Stock delivered as aforesaid.
e. The corporation shall at all times insure and keep
available out of its authorized but unissued shares of Common Stock,
for the purpose of effecting the conversion of Series A Stock, the full
number of shares of Common Stock then deliverable upon the conversion
of all shares of Series A Stock then outstanding.
<PAGE>
f. No fractional shares shall be issued upon conversion of the
Series A Stock, and the number of shares of Common Stock to be issued
shall be rounded to the nearest whole share (with one-half being
rounded to the upward). Such conversion shall be determined on the
basis of the total number of shares of Series A Stock the holder is at
the time converting into Common Stock and the aggregate number of
shares of Common Stock issuable upon such conversion.
6. Mandatory Conversion. The Series A Stock shall automatically be
converted into shares of Common Stock of the corporation, without any act by the
corporation or the holders of the Series A Stock, (i) concurrently with the
closing of an offering of the corporation's equity in which the aggregate
offering price of the securities sold for cash by the corporation in the
offering is at least $5,000,000, or such lower amount as may be approved by the
holders of at least a majority of the shares of Series A Stock then outstanding,
voting separately as a class or (ii) at such time as at least 50% of the number
of shares of Series A Stock that were outstanding as of November 30, 1998 have
been converted or redeemed. As used herein, the term "closing" shall mean the
delivery by the corporation of certificates representing the securities of the
corporation offered against delivery to the corporation of payment therefor. Any
conversion of Series A Stock occurring on the date of the closing of a financing
by the corporation satisfying the conditions set forth above shall be deemed to
be a conversion pursuant to the terms of this paragraph 6.
Each holder of a share of Series A Stock converted pursuant to the
preceding paragraph shall be entitled to receive the full number of shares of
Common Stock into which such share of Series A Stock held by such holder could
be converted if such holder had exercised its conversion right at the time of
closing of such financing.
7. Redemption of Series A Stock.
a. If any time after November 5, 2003 the corporation receives
a written request of the holders of not less than fifty percent (50%)
of the then outstanding shares of Series A Stock, voting together as a
single class and on an as-converted basis, (collectively, the
"Initiating Holders"), the corporation shall within thirty (30) days
after the receipt of such notice redeem all of the then outstanding
shares of Series A Stock (or, if less, the maximum amount it may
lawfully redeem) by paying in cash therefor an amount equal to the sum
of the Original Purchase Price and an amount equal to a return on
investment at the rate of 10% per annum, compounded annually, over the
period commencing on the date of original issuance of the Series A
Stock by the corporation and ending on the Redemption Date (defined
below). The aggregate amounts payable with respect to Series A Stock
are hereinafter collectively referred to as the "Redemption Price."
b. At least twenty (20) days prior to the date fixed for any
redemption of any Series A Stock (the "Redemption Date"), written
notice shall be mailed, first class postage prepaid, to each holder of
record (at the close of business on the business day next preceding the
day on which notice is given) of the Series A Stock to be redeemed, at
<PAGE>
the address last shown on the records of the corporation for such
holder or given by the holder to the corporation for the purpose of
notice or if no such address appears or is given at the principal
executive office of the corporation, notifying such holder of the
redemption to be effected, specifying the number of shares to be
redeemed from such holder, the Redemption Date, the Redemption Price,
the place at which payment may be obtained, and the date on which such
holder's conversion rights (as set forth in paragraph 5 above) as to
such shares terminate, and calling upon such holder to surrender to the
corporation, in the manner and at the place designated, the certificate
or certificates representing the shares to be redeemed (the "Redemption
Notice"). On or after the Redemption Date, each holder of Series A
Stock to be redeemed shall surrender to the corporation the certificate
or certificates representing such shares, in the manner and at the
place designated in the Redemption Notice, and thereupon the Redemption
Price of such shares shall be payable to the order of the person whose
name appears on such certificate or certificates as the owner thereof
and each surrendered certificate shall be canceled. In the event less
than all the shares represented by any such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares.
c. From and after the Redemption Date, unless there shall have
been a default in payment of the Redemption Price, all rights of the
holders of Series A Stock, as holders of such shares (except the right
to receive the Redemption Price without interest upon surrender of
their certificate or certificates) shall cease with respect to such
shares which such holders elected to have redeemed, and such shares
shall not thereafter be transferred on the books of the corporation or
be deemed to be outstanding for any purpose whatsoever. If the funds of
the corporation legally available for redemption of shares of Series A
Stock on any Redemption Date are insufficient to redeem the total
number of shares of Series A Stock to be redeemed on such date, those
funds that are legally available will be used to redeem shares of
Series A Stock such that each holder of Series A Stock receives the
same percentage of the aggregate Series A Stock Redemption Price, as
applicable, as such holder would otherwise receive if the corporation
could legally redeem all of the shares put for redemption on such date.
The shares of Series A Stock not redeemed shall remain outstanding and
entitled to all the rights and preferences provided herein. At any time
thereafter when additional funds of the corporation are legally
available for the redemption of shares of Series A Stock, such funds
will immediately be used to redeem the balance of the shares that the
corporation has become obligated to redeem on any Redemption Date but
that it has not redeemed.
d. On or prior to the Redemption Date, the corporation shall
deposit the Redemption Price of all shares of Series A Stock designated
for redemption in the Redemption Notice, and not yet redeemed or
converted, with a bank or trust corporation having aggregate capital
and surplus in excess of $100,000,000 as a trust fund for the benefit
of the respective holders of the shares designated by holders of Series
A Stock for redemption and not yet redeemed, with irrevocable
instructions and authority to the bank or trust corporation to publish
the notice of redemption thereof and pay the Redemption Price for such
shares to their respective holders on or after the Redemption Date,
upon receipt of notification from the corporation that such holder has
<PAGE>
surrendered its share certificate to the corporation pursuant to
subparagraph 7(b) above. As of the date of such deposit, the deposit
shall constitute full payment of the shares to their holders, and from
and after the date of the deposit the shares so called for redemption
shall be redeemed and shall be deemed to be no longer outstanding, and
the holders thereof shall cease to be shareholders with respect to such
shares and shall have no rights with respect thereto except the rights
to receive from the bank or trust corporation payment of the Redemption
Price of the shares, without interest, upon surrender of their
certificates therefor, and the right to convert such shares as provided
in paragraph 5 above. Such instructions shall also provide that any
moneys deposited by the corporation pursuant to this subparagraph 7(d)
for the redemption of shares thereafter converted into shares of the
corporation's Common Stock pursuant to paragraph 6 above prior to the
Redemption Date shall be returned to the corporation forthwith upon
such conversion. The balance of any moneys deposited by the corporation
pursuant to this subparagraph 7(d) remaining unclaimed at the
expiration of two (2) years following the Redemption Date shall
thereafter be returned to the corporation upon its request expressed in
a resolution of its Board of Directors.
8. Status of Converted or Redeemed Stock. In the event any shares of
Series A Stock shall be converted or redeemed by the corporation, the shares so
converted or redeemed shall not be reissuable by the corporation as Series A
Stock but shall be designated authorized shares of Common Stock and available
for issuance by the corporation as Common Stock. At such time as all outstanding
shares of Series A Stock have been converted or redeemed, (i) any theretofore
authorized but unissued shares of such series shall return to the status of
undesignated shares of the corporation, (ii) this Statement of Designation shall
be deemed amended to eliminate all authorized Series A Stock and the terms and
provisions thereof, and (iii) the Board of Directors and officers of the
corporation are authorized to take such action and execute and file such
instruments as may be necessary or appropriate to effect such amendment.
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