As filed with the Securities and Exchange Commission on July 2, 1999
Registration No. 333-70487
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-Effective Amendment No. 3 to
FORM SB-2
REGISTRATION STATEMENT
Under the Securities Act of 1933
QUANTECH LTD.
(Exact name of registrant as specified in its charter)
Minnesota 3573 41-1709417
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation of organization) Classification Code) Identification Number)
Quantech Ltd.
1419 Energy Park Drive
St. Paul, MN 55108
(651) 647-6370
(Address and telephone number of principal executive offices and
principal place of business)
---------------------------
Gregory G. Freitag, Chief Financial Officer and Chief Operating Officer
Quantech Ltd.
1419 Energy Park Drive
St. Paul, MN 55108
(651) 647-6370
(Name, address and telephone number of agent for service)
Copies to:
Timothy M. Heaney, Esq.
Fredrikson & Byron, P.A.
900 Second Avenue South, Suite 1100
Minneapolis, Minnesota 55402
(612) 347-7000
---------------------------
<PAGE>
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
---------------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effectiveness until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 2, 1999
QUANTECH LTD.
8,507,349 shares of common stock
Stockholders of Quantech identified in this prospectus are offering all
of the shares to be sold in the offering. These shares may be offered anytime
after the date of this prospectus through broker-dealers in over-the-counter
markets or directly by the selling stockholders in negotiated transactions.
Prices for the shares may be the market prices prevailing at the time of sale or
may be negotiated by the selling stockholder and the buyer. Quantech will not
receive any of the proceeds from the offering.
Shares of Quantech common stock trade on the local over-the-counter
markets and the OTC Bulletin Board under the symbol QQQQ. The closing sale price
of the common stock on June 26, 1999, as reflected on such markets was $1.625
per share.
----------------------
This Investment Involves a High Degree of Risk. You Should Purchase
Shares Only If You Can Afford a Complete Loss. See "Risk Factors" Beginning on
Page 3 of This Prospectus.
----------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
----------------------
The information in this prospectus is not complete and may be changed.
The stockholders selling Quantech common stock pursuant to this prospectus may
not sell these shares until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these shares and it is not an offer to buy these shares in any state where the
offer or sale is not permitted.
----------------------
The date of this prospectus is _____________, 1999
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary................................................. 1
Risk Factors....................................................... 3
Special Note Regarding Forward-Looking Statements.................. 6
Price Range of Common Stock........................................ 7
Dividend Policy.................................................... 7
Selected Financial Data............................................ 8
Management's Discussion and Analysis of Financial Condition
and Results of Operation.......................................... 10
Business........................................................... 14
Management......................................................... 28
Principal and Selling Stockholders................................. 33
Description of Securities.......................................... 42
Plan of Distribution............................................... 46
Legal Matters...................................................... 47
Experts............................................................ 47
Available Information.............................................. 47
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus that you should consider before investing in the common stock.
Quantech
Quantech Ltd. is completing development of a system that is expected to
run tests for a number of different medical conditions. We call our system the
DBx. The DBx consists of an instrument that sits on the top of a counter or cart
and reads disposable test cartridges developed by Quantech. Each Quantech test
cartridge will contain from one to four different medical tests such as those
for a heart attack or pregnancy. The DBx produces test results in a manner
different than other testing systems because it uses Quantech's proprietary
technology based on the quantum physics phenomenon known as surface plasmon
resonance ("SPR"), which involves the interaction of light with the electrons of
a metal. Quantech's technology creates SPR in a controlled environment which
enables the DBx to detect and transmit information concerning the presence and
quantity of certain native and foreign molecules in blood, urine or other fluids
which may be associated with specific diseases or medical conditions.
Excluding tests that can be conducted in the home, the overall world
wide diagnostic market is more than $18 billion. Routine and "STAT" (from the
Latin statim meaning urgent) laboratory tests currently account for the majority
of this market. Routine tests required in the hospital are conducted on testing
systems located in either the hospital's central laboratory or sent to a
laboratory that is not within the hospital. STAT tests are conducted by a
hospital's central laboratories or a smaller, more conveniently located version
of the central laboratories called STAT labs. Obtaining test results from
central laboratories can take a minimum of 45 minutes and up to three hours.
This delay negatively affects patient treatment and increases costs. Although
STAT labs have been established to reduce the time delay, test costs are higher
in STAT labs than central laboratories and turnaround time for tests is not
always reduced. We are designing the DBx to address what we believe is a
pressing need for a test system that can quickly, within 10 to 20 minutes, and
cost effectively provide test results, especially for patients with critical
problems in emergency departments.
We expect the DBx to be launched with at least a panel of three heart
attack tests and a single test for pregnancy. Additional tests are expected to
be added to the DBx system to provide the number of different quantitative tests
the emergency department requires on an urgent basis. We received approval from
the FDA for our first heart attack test and have provided to the FDA submissions
for a second heart attack test and a pregnancy test. Submissions with the FDA
for additional tests and the instrument itself are expected to be made
throughout 1999.
Quantech principal executive offices are located at 1419 Energy Park
Drive, St. Paul, Minnesota 55108. Its telephone number is (651) 647-6370 and its
fax number is (651) 647-6369.
1
<PAGE>
The Offering
Securities offered............... 8,507,349 shares of common stock. (1)
Securities outstanding........... 2,721,534 shares of common stock. (2)
1,702,706 shares of Series A Convertible
Preferred Stock.
556,667 shares of Series B Convertible
Preferred Stock.
Use of proceeds.................. Quantech will not receive any proceeds
from the sale of common stock in the
offering.
-----------------------
(1) Includes:
a) 179,570 shares currently outstanding;
b) 4,921,798 shares issuable upon conversion of outstanding shares of
Series A Convertible Preferred Stock; and
c) 3,405,981 shares issuable upon exercise of outstanding warrants.
(2) Does not include:
a) 4,921,798 shares issuable upon conversion of outstanding shares of
Series A Convertible Preferred Stock; 556,667 shares issuable upon
conversion of outstanding shares of Series B Convertible Preferred
Stock; and
b) 6,866,595 shares issuable upon exercise of outstanding warrants and
options.
2
<PAGE>
RISK FACTORS
Investing in Quantech is risky. You should be able to bear a complete
loss of your investment. You should carefully consider the following risk
factors and other information in this prospectus before deciding to invest in
shares of Quantech's common stock.
We need additional cash by August 1999, will require at least $10 million in
additional financing to complete commercial development of the DBx and to
commence sales and have no commitments to receive any additional significant
funding.
Quantech does not have sufficient funds to complete commercial
development or commence production and sales of the DBx. Quantech anticipates
that its cash on hand and bank credit facility will allow it to maintain
operations through July 1999. Additional financing of at least $10 million of
investment capital, funding by strategic partner(s) or licensing revenues will
be needed to operate through July 2000. This financing will be used to develop
and submit to the FDA additional tests, complete clinical evaluation of the DBx,
establish manufacturing capabilities and prepare for sales of the DBx. Quantech
does not have any commitments for any such additional financing and does not
anticipate receiving any additional significant funding from commercial lenders.
There can be no assurance that any such additional financing can be obtained on
favorable terms, if at all. Any additional equity financing may result in
dilution to Quantech stockholders.
"Going concern" statement in auditor's report may make it difficult to raise new
capital.
Quantech has not had any significant revenues to date. As of June 30,
1998 and March 31, 1999, we had an accumulated deficits of $18,057,048 and
$21,487,464, respectively. The report of the independent auditors on Quantech's
financial statements for the year ended June 30, 1998, includes an explanatory
paragraph relating to the uncertainty of Quantech's ability to continue as a
going concern, which may make it more difficult for Quantech to raise additional
capital.
Development of the DBx is not complete and may not be completed on the current
time-table and budget.
Components of the DBx system are under various stages of development.
Until DBx system development is completed and cleared through the FDA, there can
be no assurance that the DBx system will be finished according to our current
development timetable and budget. Failure to timely finish on budget will
require Quantech to seek funding greater than currently anticipated, thus
intensifying the risks described in Immediate and Future Capital Needs above.
Additionally, the final price that we will need to charge to cover the costs of
the DBx instrument and the test cartridges cannot be determined until
development is complete and FDA clearances have been obtained. If Quantech
cannot receive FDA approval and offer the DBx system with certain required
features at a cost acceptable to potential customers, it will be impossible for
Quantech to continue operations.
We may not succeed in persuading potential buyers to replace existing equipment
and facilities with the DBx or in convincing the medical community and
third-party payers of the reliability, faster speed and lower cost of tests
conducted on the DBx.
3
<PAGE>
In general, the commercial success of Quantech's DBx system will depend
upon its acceptance by the medical community and third-party payers as a
reliable and economical product. The approval of the purchase of diagnostic test
systems by a hospital is generally controlled by its central laboratory. We
expect that there will be resistance by some central laboratories to a new
system until it is proven to have a level of accuracy and precision comparable
to current hospital tests. Finally, the DBx must provide results of STAT tests
quicker than current hospital tests for emergency department doctors.
We lack marketing experience and must establish a distribution system.
We have had no experience in marketing the DBx. We intend to market our
system in both the United States and in foreign markets through a strategic
partner(s) with an established distribution system, but no assurance can be
given that such an arrangement can be made. If such a strategic relationship is
not entered into prior to product launch, we will market our system through a
combination of our own sales force and distributors. Establishing a sales and
marketing capability sufficient to support the level of sales necessary for us
to attain profitability will require substantial efforts and significant
management and financial resources. There can be no assurance that we will be
able to recruit and retain direct sales and marketing personnel, engage
distributors or have our marketing efforts be successful.
We have very limited manufacturing and production experience and have not yet
contracted with third party manufacturers.
To be successful, we must timely manufacture sufficient quantities of
the DBx and test cartridges in compliance with regulatory requirements, such as
the FDA's Good Manufacturing Practices while maintaining product quality and
acceptable manufacturing costs. The instrument and many components of the test
cartridges will be manufactured by outside vendors. We have not entered into
agreements with any of these vendors. There can be no assurance that we can
engage such vendors. Further, if engaged, the limited control we have over any
third party manufacturers as to timeliness of production, delivery and other
factors could affect our ability to supply products on a timely basis.
We ultimately intend to chemically coat and assemble test cartridges
ourselves. We have never operated a manufacturing/assembly business. We will
have to establish a manufacturing facility, or contract for such services with a
third party, which is registered with the FDA.
We need FDA approval of the DBx and test cartridges in order to market them and
failure to obtain approval would mean failure for Quantech.
The DBx instrument and test cartridges are human diagnostic medical
devices subject to regulation by the United States FDA and agencies of foreign
countries. The FDA regulates the DBx as a medical device that requires clearance
before sales can be made in the United States. We believe that such pre-market
clearance can be obtained for our instrument and substantially all of our test
cartridges through submissions of a 510(k) pre-market notification demonstrating
the particular product's substantial equivalence to another device legally
marketed under a similar clearance. There can be no assurance that the FDA or
other government regulators will approve the DBx system and test cartridges in a
timely manner or at all. Delay in approvals, or failure to achieve approvals,
would increase the capital necessary to maintain operations and make it more
difficult to raise required funds.
4
<PAGE>
We face multiple levels of competition, including from manufacturers of central
and STAT laboratory testing equipment and point of care testing products.
The medical testing market is highly competitive. We expect that
manufacturers of central and STAT laboratory testing equipment will compete to
maintain their market shares. Also, point of care testing products exist and
additional products are likely to be introduced to compete with certain tests to
be performed on the DBx instrument. All of the industry leaders and many of the
other companies participating in this market have substantially greater
resources than the resources available to us, including, but not limited to,
financial resources and skilled personnel. Current central lab systems are also
well accepted and entrenched so that sales of the DBx may require a significant
sales effort to gain market share. If the features and costs of the DBx system
are not compelling it will not successfully compete in its market.
The DBx must comply with regulations governing the qualifications of persons
operating it and high qualification requirements could adversely affect sales.
Use of Quantech's DBx system will be subject to the Clinical Laboratory
Improvement Act of 1988. This regulation governs the qualifications of persons
supervising a laboratory test and the persons performing the laboratory test.
Quantech has based its marketing plan on the belief that the DBx system will be
classified as a test of moderate complexity. However, we have not sought the
necessary regulatory approval of this classification. In practical terms,
performing a test of moderate complexity means that the individual supervising
the test must be well educated and well trained, but the individual operating
the system requires no formal laboratory education and only task-specific
training. If our DBx system is not classified as a test of moderate complexity,
we would not have a user-friendly operation advantage, which could have an
adverse effect on sales.
The DBx initially will be Quantech's only product making the company vulnerable
to technological obsolescence.
The DBx will be Quantech's only initial product and is based upon a
single set of core technologies. We operate in a market characterized by rapid
and significant technological change. While we are not aware of any developments
in the medical industry which would render our current or planned product 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, we will need continually to make substantial
expenditures for development of both equipment and additional tests.
We may not be able to maintain patent protection for the technology of the DBx
and failure to do so would put Quantech at substantial risk.
No assurance can be given that we will be able to protect our
proprietary technology. We are not aware of any issued patents that would
prohibit the use of any technology we currently have under development. However,
patents may exist or be issued in the future to other companies covering
elements of the DBx. The existence or issuance of such patents may require us to
make costly significant changes in the design of our systems or operational
plans. We have not conducted an independent patent search or evaluation with
respect to our patented technology. Ares-Serono, the company licensing certain
technology to us made no warranties as to the enforceability of any of the
patents or the commercial potential of the technology. Although Ares-Serono may
defend the patents they have licensed to us, we will be responsible for the
defense of any patents Ares-Serono elects not to defend and all of those issued
to us. The cost of patent litigation can be very substantial.
5
<PAGE>
We are dependent on the Ares-Serono license for the SPR biosensor technology and
will lose exclusive rights to the technology if we do not make our last minimum
royalty payment.
We are dependent upon the worldwide license we acquired from
Ares-Serono to certain patents, proprietary information and associated hardware
related to the SPR biosensor technology. The Ares-Serono license calls for
ongoing royalties based on revenues and a $150,000 minimum royalty payment on
December 31, 1999. If the minimum royalty is payment not made, Ares-Serono has
the right to cause a reversion to it of a royalty-free license, thereby
depriving us of our exclusive rights under the Ares-Serono license.
We are dependent upon our few employees and the loss of either our CEO or CFO
would have a material adverse effect on Quantech.
We have a small number of employees. Although we believe we maintain a
core group sufficient for us to effectively conduct our operations, the loss of
any of our personnel could, to varying degrees, have an adverse effect on our
operations and system development. The loss of either Robert Case, our CEO, or
Greg Freitag, our COO and CFO, would have a material adverse effect on Quantech.
The marketability of shares of Quantech resulting from this Registration
Statement could depress the market price of Quantech's Common Stock and make it
more difficult for Quantech to raise the funds it needs to survive.
As a result of this Registration Statement, all shares of Quantech's
outstanding common stock are eligible to be sold in the public market along with
all shares that may be obtained upon exercise of outstanding options, warrants
or conversion of Series A Convertible Preferred Stock. The sale of a substantial
number of shares could adversely affect the market price and liquidity of
Quantech's securities. Such potential adverse effects on price and liquidity, or
the concern over these issues, could make it more difficult for Quantech to
raise required future funds.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus are not historical facts but are
forward-looking statements. Such forward-looking statements may be identified by
the use of terminology such as "anticipate," "believe," "estimate," "expect,"
"intend," "may," "plans," "project," and similar expressions. Such statements
involve risks and uncertainties and should be evaluated in light of the risk
factors discussed above. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes
may vary materially from those indicated.
6
<PAGE>
Price Range of Common stock
Quantech's common stock is traded on the local over-the-counter markets
and the OTC Bulletin Board under the symbol of QQQQ. Although trading in
Quantech's common stock does occur on a consistent basis, the volume of shares
traded has been sporadic. There can be no assurance that an established trading
market will develop, the current market will be maintained or a liquid market
for Quantech's common stock will be available in the future. Investors should
not rely on historical stock price performance as an indication of future price
performance.
The following table summarizes the high and low sale prices of
Quantech's common stock for the periods indicated. The prices have been adjusted
to reflect a 1-for-20 reverse stock split effected by Quantech on June 2, 1998.
The closing price of Quantech's common stock on June 28, 1999 was $1.625 per
share.
High Low
Fiscal 1997:
Third Quarter............................ $12.40 $ 8.20
Fourth Quarter........................... $ 8.00 $ 4.20
Fiscal 1998:
First Quarter............................ $ 5.60 $ 2.20
Second Quarter........................... $ 5.60 $ 2.80
Third Quarter............................ $ 4.00 $ 2.70
Fourth Quarter........................... $ 7.00 $ 2.60
Fiscal 1999:
First Quarter............................ $ 3.88 $ 0.94
Second Quarter........................... $ 2.56 $ 0.53
Third Quarter............................ $ 2.00 $ 1.38
Fourth Quarter through June 28, 1999..... $ 1.75 $ 1.38
As of March 31, 1999 Quantech had approximately 500 holders of record
of its common stock, excluding stockholders whose stock is held either in
nominee name or street name brokerage accounts. Based on information obtained
from Quantech's transfer agent, as of such date, there were approximately 3,800
stockholders of Quantech's common stock whose stock is held in either nominee
name or street name brokerage accounts.
DIVIDEND POLICY
Quantech has never paid a cash dividend on its common stock or Series A
Convertible Preferred Stock. Payment of dividends is at the discretion of the
board of directors. The board of directors plans to retain earnings, if any, for
operations and does not intend to pay dividends in the foreseeable future.
7
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of Quantech as of and for the
years ended June 30, 1997 and 1998 is derived from the financial statements that
have been audited by McGladrey & Pullen, LLP, independent auditors. Quantech's
financial statements for the nine month period ended March 31, 1998 and 1999 and
the period from September 30, 1991 (date of inception) to March 31, 1998 are
unaudited. However, in the opinion of Quantech, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation have been made.
Interim results may not be indicative of the results of operations to be
expected for a full fiscal year. This financial data should be read in
conjunction with Quantech's financial statements and the notes thereto included
elsewhere in this prospectus and to the Management's Discussion and Analysis of
Results of Operations and Financial Condition which follows.
QUANTECH LTD.
(A Development Stage Company)
Statements of Operations Data
(in thousands except per share data)
<TABLE>
<CAPTION>
Period From
September 30,
Years Ended Nine Months Ended 1991 (Date of
June 30, March 31, Inception), to
----------------------------------------------------------- March 31,
1997 1998 1998 1999 1999
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 81 $ 12 $ 10 $ 1 $ 185
----------------------------------------------------------------------------
Expenses:
General and administrative 1,799 1,221 836 1,208 10,370
Research and development 2,114 1,609 995 1,147 7,401
Minimum royalty expense 75 113 75 113 1,188
Losses resulting from transactions
with Spectrum Diagnostics Inc. -- -- -- -- 556
Net exchange gain -- -- -- -- (67)
Interest 18 719 173 721 1,939
----------------------------------------------------------------------------
Total expenses 4,006 3,661 2,079 3,189 21,387
----------------------------------------------------------------------------
Loss before income taxes (3,925) (3,649) (2,068) (3,188) (21,202)
Income taxes -- -- -- -- 43
----------------------------------------------------------------------------
Net Loss $ (3,925) $ (3,649) $ (2,068) $(3,188) $ (21,245)
============================================================================
Net loss attributable to common shareholders
Net loss $ (3,925) $ (3,649) $ (2,068) $ (3,188)
Preferred stock accretion -- -- -- (242)
----------------------------------------------------------
Net loss attributable to common shareholders $ (3,925) $ (3,649) $ (2,068) $ (3,430)
==========================================================
Loss per basic and diluted common share $ (1.66) $ (1.45) $ (0.82) $ (1.29)
Weighted average common shares
outstanding 2,366 2,524 2,510 2,653
</TABLE>
8
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, June 30, March 31,
1997 1998 1999
------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Total current assets $ 833 $ 203 $ 729
Total property and equipment 206 179 168
Total other assets 2,105 2,803 2,504
------------------------------------------------------
Total assets $ 3,144 $ 3,185 $ 3,401
======================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Short-term debt $ 1,070 $ 3,113 $ 750
Accounts payable 101 97 161
Accrued expenses 295 247 180
------------------------------------------------------
Total current liabilities 1,466 3,457 1,091
------------------------------------------------------
Redeemable Preferred Stock 4,993
Stockholders' Equity (Deficit)
Common stock 480 16,308 16,484
Additional paid-in capital 15,606 1,477 2,321
Deficit accumulated during the development stage (14,408) (18,057) (21,488)
------------------------------------------------------
Total stockholders' equity (deficit) 1,678 (272) (2,683)
------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 3,144 $ 3,185 $ 3,401
======================================================
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of Quantech and the notes thereto included
elsewhere in this prospectus.
Results of Operations
For the Nine Months Ended March 31, 1999 and 1998
Quantech has incurred a net loss of $21,244,854 from September 30, 1991
(date of inception) through March 31, 1999 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 nine months ended March 31, 1999 Quantech had interest income
of $1,475 compared to $10,491 for the same period in 1998. This decrease was a
result of less cash on hand as proceeds obtained from Quantech's private
placements of securities have been used for operations, research and
development.
General and administrative expenses for the nine months ended March 31,
1999 increased to $1,208,240 compared to $836,653 for the same period in 1998.
The increase was primarily due to costs associated with financing activities,
including commission expense of $198,000,charges of $78,000 for warrants and
options issued in connection with financing activities and professional fees of
$39,000. Additional expenses related to Quantech expansion also contributed to
the increase in general and administration expense. We anticipate that these
expenses will increase as we raise additional funding, complete development of
our system and increase corporate infrastructure to begin to manufacture and
distribute our product.
Research and development costs for the nine months ended March 31, 1999
increased to $1,147,396 compared to $994,624 for the same period in 1998
primarily due to costs related to the preparation of 510(k) submissions to the
FDA. We expect R&D spending to increase as the contract with Millennium Medical
Systems ends, we complete the commercial development of the DBx system and
additional tests for the DBx, conduct further FDA work, and begin to establish
higher volume manufacturing capabilities.
Minimum royalty expense increased to $112,500 for the nine months ended
March 31, 1999 compared to $75,000 for the same period in 1998. This increase
was due to the accruals for the minimum payment made in December 1998, and the
payment due in December 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 for the nine months ended March 31, 1999 increased
from $721,145 compared to $172,652 during the same period in 1998 primarily due
to increased debt from the sale of promissory notes including a $546,902 charge
to reflect the beneficial conversion feature of the now converted notes.
Interest expense is expected to remain flat during the next year as Quantech
does not anticipate any debt other than borrowing up to $750,000 from its bank
credit facility.
10
<PAGE>
For the nine months ended March 31, 1999 Quantech had a loss of
$3,187,806 as compared to $2,068,438 for the same period in 1998 primarily due
to higher interest and operating expenses including $624,902 of non-cash charges
related to financing activities.
The timetable for submitting additional tests to the FDA and
introduction of Quantech's DBx system to the market will be influenced by
Quantech'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 Quantech will be
able to obtain the required funding, enter into any strategic agreements or
ultimately complete its commercial system.
For the Year Ended June 30, 1998 and 1997
Quantech incurred a net loss of $18,057,048 from September 30, 1991
(date of inception) through June 30, 1998 due to expenses related to formation
and operation of Spectrum Diagnostics Spa. in Italy, continuing costs of raising
capital, normal expenses of operating over an extended period of time,
expenditures on research and development, royalty payments related to the SPR
based technology and interest on borrowed funds. In addition, an investment of
$3,356,629 was made when Quantech purchased the rights to the SPR based
technology.
For the year ended June 30, 1998 Quantech had interest income of
$12,435 compared to $80,854 for the 1997 fiscal year as 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 decreased from $1,799,117 for the
year ended June 30, 1997 to $1,221,196 for the year ended June 30, 1998. The
decrease in general and administration expenses resulted from the restructuring
that Quantech implemented in the second half of 1997. The restructuring was
aimed at reducing expenses and focusing Quantech's resources on completing
development of its diagnostic system. Changes that were made included reducing
the number of employees, consultants and outside services employed in the
administrative functions. Quantech anticipates that these expenses will increase
significantly in the future as Quantech completes development of its system and
begins to manufacture and distribute its products.
Research and development costs decreased from $2,114,586 in 1997 to
$1,608,361 in 1998. The decrease was due to the above mentioned restructuring,
with cost reductions resulting primarily from reduced outside contract
development work as Quantech focused its resources on completing system
development with a reconfigured internal development team. Spending began to
increase significantly, however, near the end of fiscal 1998 as Quantech
incurred expenses necessary to prepare and file its first 510(k) submission with
the FDA, and engaged outside design engineering firms to assist in finishing
development of the commercial version of its DBx system. Quantech expects R&D
spending to continue at a considerably higher rate in fiscal 1999 as Quantech
completes such development, conducts additional FDA submission work and begins
to establish higher volume manufacturing capabilities.
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Minimum royalty expense increased to $112,500 in 1998 as compared to
$75,000 in 1997 as a result of the higher minimum royalties owed under
Quantech's amended license with Ares-Serono. Royalty expense is expected to
increase to $150,000 in fiscal 1999 to reflect the minimum royalties owed under
Quantech's amended license with Ares-Serono.
Interest expense increased in 1998 to $719,126 as compared to $17,611
in 1997. The higher interest expense was primarily the result of increased debt
from the sale of promissory notes including a $441,542 charge to reflect the
beneficial conversion feature of the notes. Interest expense during fiscal 1999
is expected to be similar to 1998, but may change depending upon the future
capital structure of Quantech.
For the year ended June 30, 1998 Quantech had a loss of $3,648,748 as
compared to $3,925,460 for the same period ended June 30, 1997. This decrease
was a result of the decrease in research and development and general and
administrative expenses in 1998 exceeding increases in such period in minimum
royalty and interest expenses and the decrease in interest income.
Liquidity and Capital Resources
From inception to March 31, 1999, Quantech has raised approximately
$20,600,000 through a combination of public stock sales, private stock sales and
debt obligations. In November and December 1998, Quantech raised net proceeds of
$1,671,474 from the sale of 600,617 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 Quantech's
promissory notes into 1,124,715 shares of the A Preferred Stock in November
1998. Additionally, in November 1998 Quantech issued a warrant to purchase
1,800,000 shares of Common Stock at $1.10 per share in exchange for engineering
development work.
Quantech anticipates that its cash on hand along with the lower cash
requirements resulting from the Millennium development agreement will allow it
to maintain operations through May 1999. Additional financing will be needed to
develop and submit to the FDA the DBx instrument and additional tests, complete
clinical evaluation of the Quantech system, establish manufacturing capabilities
and introduce the system to market.
During May 1999 Quantech began offering for sale a minimum of $500,000
and a maximum of $2,000,000 shares of its Series B Preferred Stock to accredited
investors. In May and June 1999 the Company sold 556,667 shares of its Series B
Preferred Stock at $1.50 per shares. The shares are to be sold at a price of
$1.50 per share. Quantech is also reviewing multiple avenues of future funding
including private sale of equity or debt with equity features or arrangements
with strategic partners. Quantech does not have any commitments for any such
financing and there can be no assurance that Quantech will obtain additional
capital when needed or that additional capital will not have a dilutive effect
on current shareholders. See "Cautionary Statements - We need additional cash in
August 1999 and will require at least $10 million in additional financing to
complete the DBx." Although Quantech has a limited lending arrangement with its
bank to a maximum of $750,000, it does not anticipate receiving any additional
significant funding from commercial lenders.
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Quantech incurred capital expenditures of $43,565 in the nine month
period ended March 31, 1999. Quantech anticipates significant capital
expenditures in the future for laboratory and production equipment and office
expansion as Quantech nears product introduction. The timing and amount of such
expenditures will be governed by Quantech'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.
Year 2000 Compliance
We believe our internal information and non-information systems are
year 2000 compliant. Quantech is in a stage of development of its products at a
time when awareness of year 2000 issues allows it to build year 2000 compliance
into its products and operations. As a development stage company, Year 2000
issues are not significant to Quantech absent a national catastrophe. We believe
that any existing suppliers to Quantech who are lost due to year 2000 problems
could be replaced at our current stage of development without any serious
interruption to our business or any material adverse effect on our operations or
financial condition because they are easily replaced. We are diligently
ascertaining at each step of development that our products are compliant and are
in the process of contacting key suppliers to address their exposure to year
2000 related risks. We have, therefore, not developed any contingency plans
relating to year 2000 issues and have not budgeted any funds for year 2000
issues. Although we believe that our systems are year 2000 compliant,
unanticipated year 2000 problems may arise which, depending on the nature and
magnitude of the problem, could adversely affect our business. Furthermore, year
2000 problems involving third parties may have a negative impact on our
suppliers and potential customers, the general economy or the ability of
businesses to receive essential services such as telecommunications and banking.
Any such occurrence could adversely affect our business.
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BUSINESS
General
Quantech Ltd. is completing development of a system that is expected to
run tests for a number of different medical conditions. We call our system the
DBx. The DBx consists of an instrument that sits on the top of a counter or cart
and reads disposable test cartridges developed by Quantech. Each Quantech test
cartridge will contain from one to four different medical tests such as those
for a heart attack or pregnancy. The DBx produces test results in a manner
different than other testing systems because it uses Quantech's proprietary
technology based on the scientific phenomenon known as surface plasmon resonance
("SPR"), which involves the interaction of light with the electrons of a metal.
Quantech's technology creates SPR in a controlled environment which enables the
DBx to detect and transmit information concerning the presence and quantity of
certain native and foreign molecules in blood, urine or other fluids which may
be associated with specific diseases or medical conditions.
We are designing the DBx primarily for the emergency department. The
DBx is expected to have the range of available tests and quality performance of
hospitals' central and STAT labs, but with test time turnaround of 10 to 20
minutes. The system will analyze both whole blood and urine without preparation
or addition of other substances or removal of the sample from the collection
device. We believe this ease of use and the ability to locate the DBx in the
emergency department will economically provide physicians with faster test
results than hospital central or STAT laboratories.
We have received approval from the FDA for our first heart attack test,
which will test for the cardiac market myoglobin. We have submitted to the FDA
applications for a second heart attack test, which will test for the cardiac
marker CK-MB, and for a pregnancy test, which will test for hCG. Initial launch
of the DBx system is expected in late 1999. Quantech believes the capabilities
of its DBx system as a diverse diagnostic testing platform will meet the needs
of the critical care STAT testing market enabling Quantech to be competitive in
the global medical diagnostics market.
Quantech's DBx System
The Instrument
The DBx system consists of a reading instrument and disposable test
cartridges. The instrument will process up to four tests at a time on a single
disposable test cartridge. Additional reading ports will be designed to be
attached to the base instrument to allow more than one test cartridge to be read
by the instrument at one time. Because the DBx is a biosensor system it can
convert biological data into digital signals. This will allow future designs to
take advantage of advances in microcomputer technology. Most importantly, the
instrument is designed to be compatible with new test cartridges that are
introduced into the market by Quantech without system obsolescence or
significant re-training of personnel.
The instrument will be of a size capable of sitting on a bench top or
cart and of being 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 barcode readers. The light is split into a number of channels,
providing for quality controls and multiple tests per test cartridge. When the
test cartridge is inserted into the instrument, an internal barcode reader
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identifies the type of test to be run. A touch screen and/or an external barcode
reader will enable the user to enter both a user number and the patient or
specimen ID number. The instrument's computer screen will display results of a
given test. The data or results produced by the instrument will also be stored
on an internal hard drive, downloaded to the hospital information system, and
may be provided on a hard copy through use of a printer.
It is anticipated that critical care units such as the emergency
department will have several DBx instruments at various locations. Quantech
intends to offer several industry standard instrument rental programs under
which a hospital may obtain and retain the DBx without cost as long as a
specified number of test cartridges are purchased. For customers who wish to
purchase the instrument, the retail price is anticipated to be $15,000.
The Disposable Test Cartridges
Quantech's disposable test cartridge consists of an injection molded
plastic carrier containing a metal coated sensor surface on which the
interaction of light with electrons may occur. The metallic surface is overlaid
with different chemicals depending on the test or tests to be performed by a
particular cartridge. An important feature of the Quantech test cartridge will
be the ability to attach a standard vacutainer tube which is used to draw blood.
The ability to put blood into the DBx test cartridge without removing it from
the tube will make the DBx easier to use and the user will have minimal exposure
to the blood sample. Future cartridges for certain tests may also be configured
to handle samples of urine and other body fluids.
Because the necessary chemicals are already in the test cartridge, an
operator will not be required to add any other chemicals. Lack of handling
chemicals by the operator translates into easier use than current testing
systems found in the central laboratory and more immediate results. Test
cartridges will be configured to provide single tests or multiple
clinically-related tests. Because the same test cartridge configuration may be
used for all tests, manufacturing and quality control costs should be minimized.
Cartridges are expected to have retail prices ranging from $12.00 to $35.00 per
test cartridge depending on the tests provided. Additional development of the
cartridge is currently being conducted and future development will be undertaken
to expand the number of tests that may be performed in general and on each
cartridge.
Comparison of Product Technologies
A number of basic methods, whether performed manually or by automated
instruments, are utilized in medical 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 include
sample preparation, addition of reagents or chemicals, further method-specific
manipulations, and reading and interpretation of raw data. Each testing method
also requires a specific instrument to perform the particular test. Central and
STAT laboratory automated testing systems have mechanized, rather than
eliminated many of these steps and have been unable to combine a number of
different testing methods or technologies into a single system. The DBx, in
contrast, is expected to be able to be used for these and other basic testing
methods within a single instrument, but without complicated processing by the
operator.
Central and STAT laboratories provide quality results on a number of
different tests. However, tests that are needed urgently take from 45 minutes to
three hours and disrupt the batch testing of central labs. Although STAT labs
have quicker turnaround time with the quality advantages of the central lab,
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personnel and equipment requirements of STAT labs result in high test costs.
Point of care testing instruments have reduced test turnaround time, and in some
instances have lower test costs than STAT labs, but fail to meet laboratory
quality and critical care needs due to:
o The limited number of tests that can be performed;
o Lack of interface to laboratory computer information system;
o Manipulation of patient blood sample;
o Non-similarity to central laboratory results; and
o Lack of quantitative results.
Our DBx is designed to combine the advantages of central laboratory and
point of care testing while eliminating or limiting the disadvantages of these
alternatives by providing the following features and capabilities:
o Ability to perform a number of different STAT tests (heart attack,
pregnancy, white blood count panel, coagulation panel, electrolytes,
amylase, therapeutic drugs, drugs of abuse panel, etc.)
o Rapid test result turn-around time (10-20 minutes)
o Quantitative results using whole blood (no sample processing
by user)
o Multiple tests on one cartridge (up to four clinically related
tests per disposable)
o User-friendly
o Cost effective (less than STAT lab test costs)
o No addition of reagents by the operator
o Transportable instrument can be placed on top of bench or cart
o Similarity to central laboratory test results
o Whole blood/closed tube (vacutainer) patient sample capability
o Full-time laboratory information system computer interface
o Automatic user/patient/test/quality control input
The Market
Excluding home testing, the overall world wide medical testing
(in-vitro diagnostic) market is more than $18 billion. Central and STAT
laboratories currently account for the majority of this market with testing
divided between non-urgent or routine tests and urgent (STAT) tests. Quantech is
focused on the STAT testing portion of this market. STAT tests are required in
areas such as surgical suites, intensive care units, coronary care units and
emergency departments because of the time sensitive nature of their treatment.
However, results of STAT tests from the central laboratory can take 45 minutes
to three hours. This delay affects patient treatment and increases costs.
Although STAT labs have been established to reduce this time delay, test costs
are higher than the central laboratory and reduced test time turnaround is not
always achieved.
Pressure has increased to reduce the length of patient stay in
hospitals 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, a primary goal of critical care
medicine is to make a quick and accurate diagnosis for a patient so they may be
treated, sent home or moved to a different area of the hospital. Point of care
testing has emerged in response to these demands but, as previously discussed,
lack of central and STAT lab features have kept these point of care instruments
from penetrating the critical care testing market. We have chosen a strategic
direction designed to promote the inherent technological advantages of our DBx
system which address the shortfalls of central labs, STAT labs and point of care
instruments.
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Critical Care Units
Critical care units include intensive care units, coronary care units,
surgical suites and emergency departments. Quantech's DBx system will first be
marketed to emergency departments. Most tests conducted in the emergency
department are required STAT and are processed 24 hours a day. Tests processed
in a STAT manner significantly increase cost because hospitals must staff
laboratories around the clock, use sophisticated technology and respond to
urgent and critical patient needs, all without the large test volumes that allow
them to spread the operating and capital costs across a large number of tests.
The solution to this difficulty and expense is to bring a single system designed
to conduct many STAT tests to the patient site in a manner that will provide
cost-effective test results promptly and accurately, without requiring much
space or personnel training. Tests typically required on an urgent basis by an
emergency department include:
o Heart Attack (cardiac marker panel consisting of CK-MB, troponin I,
myoglobin)
o Pregnancy (hCG)
o White Blood Count panel (count with absolute neutrophils, Hct and
Hgh)
o Coagulation
o Therapeutic Drug Monitoring (Digoxin, Theophylline)
o Drugs of Abuse (e.g., Cocaine, Marijuana)
o Electrolytes (not blood gases which are performed by pulse
oximetry in emergency department)
o Amylase
o Liver Enzymes
o Bun/Creatinine
Quantech will introduce its DBx system with at least a cardiac panel to
test for heart attacks and a pregnancy test. As discussed below, these tests
provide a significant market. Quantech will expand the number of tests the DBx
can perform beyond its first tests by adding the additional STAT tests required
by the emergency department. Because no other system known to Quantech can
provide the range of STAT tests required by the emergency department, Quantech
believes it can make substantial market penetration. Since the needs of other
critical care units are similar to those tests required by the emergency
department, Quantech anticipates that growth into these other areas will be
evolutionary.
Heart Attacks. Tests for heart attacks (cardiac markers) are needed to
triage and treat individuals that arrive at the emergency department with chest
pain. Hospitals are aware of a need for more rapid heart attack testing and in
response have started to establish chest pain centers in emergency departments
for triaging patients. Lacking, however, are whole blood, cost effective, rapid
heart attack test results. We have chosen a panel of three heart attack tests
for the initial launch of our DBx system because of the need, reimbursement and
volume these tests represent.
During a heart attack, certain proteins, or cardiac markers, are
released from the damaged heart muscle into the blood stream as a result of
damage to the muscle. These cardiac markers are important to help to identify
patients who have suffered a heart attack. Cardiac markers are in varying
concentrations and consist of CK-MB, troponin I, myosin light chain and
myoglobin. Myoglobin is the first protein that can be detected and the first to
leave the body. CK-MB and troponin I appear later but stay in the body longer
and are more specific to cardiac damage. Therefore, combinations of these
markers are used to cover the required time frames.
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Tests for cardiac markers are most useful if they can be performed in
under twenty minutes. However, most of the existing tests require a central
laboratory system that may delay the results beyond their effective need.
Quantech's system is designed to provide emergency personnel with the ability to
receive test results in 10 to 20 minutes.
An estimated 6 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% are subsequently
considered to have actually had a heart attack. Assuming an average cost of
$3,000 per admission, this represents a total expenditure of $6 billion annually
on patients who did not have a heart attack. This also does not take into
account that 2-8% of patients with acute chest pain that are released from the
emergency department without treatment subsequently have a heart attack
resulting in death or cardiac damage. These misdiagnoses represent greater than
20% of the malpractice dollars awarded in the field of emergency medicine.
The high cost of admission and malpractice claims as well as the
introduction of new heart attack treatments have necessitated the development of
a method to make a rapid definitive diagnosis of chest pain. In the last 10
years, substantial progress has been made in thrombolytic therapy. If the
therapy is started within four to 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
(e.g., allergic reactions, bleeding) if the patient has not suffered a heart
attack, rapid accurate testing for heart attacks is very important.
Pregnancy. Every woman of child bearing age who enters the emergency
department and requires a procedure that could injure a fetus (e.g., x-ray or
drugs) should have a pregnancy test. Because of the delays in obtaining tests
from the central or STAT lab, many women are treated without the physician
receiving the results of the pregnancy test. Malpractice claims in this area are
second only to claims involving misdiagnoses of heart attacks. A rapid pregnancy
test is also important for treatment of ectopic pregnancies (gestation outside
of uterus, often in fallopian tube). Ectopic pregnancy is a leading cause of
abdominal pain for women going to the emergency department. Our DBx system will
have a whole blood quantitative test for the pregnancy marker hCG.
Sales and Marketing
General
The United States emergency department testing market is highly
concentrated. There are 223 high volume trauma centers in the United States that
each see more than 100,000 patients per year. Approximately 2,200 emergency
departments represent over 75% of the STAT testing market. Additionally, the
majority of hospitals belong to a small number of buying groups such as
Columbia/HCA and the Voluntary Hospital Association of America Inc.
Quantech will form a strategic marketing group of approximately three
persons who are familiar with emergency department routines and needs and have
prior diagnostic sales experience. Initially, this marketing group will begin
creating awareness of Quantech and its DBx system. It is intended that Quantech
will engage a strategic distribution partner with a presence in diagnostic
testing to market its products in the United States. If a strategic distribution
partner is engaged, the marketing group will support this distribution partner
and maintain contact with customers to help Quantech to monitor the market for
future products.
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If an appropriate distribution partner cannot be engaged, then the
marketing group will focus on sales of the system to the highest volume
emergency departments. Because of the small number of emergency departments in
the United States, and the large amount of revenue that can be provided by each
one, Quantech believes that a small focused sales effort will enable it to
effectively penetrate the emergency department STAT testing market. Initially,
this direct sales group would total six persons and be increased as Quantech
expanded beyond the high volume trauma centers.
Quantech will maintain a support staff to provide 24 hour product
service both in the interpretation of results and the use of the system, as well
as emergency shipping. There will be no field service. Faulty instruments will
be replaced in the event of failure.
Clients
The purchasing decision for diagnostic testing equipment is in the
hands of the laboratory manager, although the end user of the Quantech DBx
system will be emergency department personnel. Under the Clinical Laboratory
Improvement Act of 1988, the laboratory is responsible for training, instrument
calibration and quality assurance of testing systems. As such, the laboratory
will want a STAT testing instrument to have the following features:
o Comparable performance to central laboratory instrument with
similar results
o One (maximum of two) instruments for emergency department STAT
test needs
o Full-time, bi-directional laboratory information system computer
interface with information automatically downloaded to laboratory
information system
o Automated user/patient/test/quality control information input
o User ID and lockout capability by laboratory
o Minimum user training
o Physically robust - large enough so it does not get stolen
or dropped
o Costs comparable to central lab STAT tests and less than STAT
lab tests
Emergency department personnel as the ultimate users must also accept
any system that will be used for their STAT testing needs. Although in many
instances they cannot buy a testing system without laboratory approval, they are
capable of keeping a system from being purchased. A system that is acceptable to
the emergency department must provide the following features, some of which
coincide with the demands of the laboratory:
o Comparable performance to central laboratory instrument with
similar results
o Rapid turnaround time (less than 20 minutes)
o One (maximum of two) instruments for emergency department STAT
testing needs
o Whole blood, closed collection tube sampling and transfer
o Automatic laboratory information system download
o User friendly - minimum training and time at instrument
o High reliability and large enough to locate and not be stolen
or misplaced
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To achieve market penetration of its DBx system, Quantech's marketing
strategy will be focused on achieving the acceptance of both laboratory and
emergency department personnel. Testing systems to date have been unable to meet
the needs of both groups because of technology limitations. Quantech's DBx
system is designed to meet the requirements of both groups by incorporating all
of the required features into a single instrument.
International
Shortly after the launch of the DBx in the United States, Quantech
intends to begin sales in western Europe and, after receipt of appropriate
approvals, in Japan. These markets are similar to the United States in both the
type of STAT testing required and concentration of patients in a small number of
facilities. Quantech will manage and support international distributors, if a
strategic distribution partner is not engaged. Quantech is currently conducting
further international marketing research and has begun identifying potential
distribution partners.
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 patient
samples. While most hospital laboratories must maintain the capability to
perform certain STAT tests on single patient sample, most of the samples handled
by central laboratories are processed so that one type of test, such as
pregnancy tests, are all run at one time or in batches. The competitors for this
market have addressed these laboratories' needs for high test throughput, low
reagent cost and low labor cost by developing automated systems. STAT labs have
been developed to address the needs of STAT testing and generally use the same
instrumentation found in the central laboratory. These laboratory systems are
generally complex and expensive, incorporating designs appropriate to the
central laboratories they serve which employ 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/STAT laboratory testing system 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 non-STAT tests. The suppliers' corporate infrastructures, marketing
and sales organizations, research and development activities and production
capabilities are committed to this market. As a result, hospitals may maintain
their established means of having testing performed.
There is a significant number of companies serving this central
clinical laboratory market. Most of them compete in only one or two segments of
the overall market. Abbott Laboratories, Roche Diagnostics, and Johnson &
Johnson 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 laboratory. The DBx in general must compete with
central and /or STAT laboratory testing systems to gain market share and, as a
result, Quantech will meet with competition from these companies in both sales
of the DBx system and the individual tests to be provided on the DBx.
There is significant new product activity in certain areas of critical
care STAT testing. Point of care testing systems are addressing limited testing
areas such as coagulation, blood gas and basic chemistry including electrolytes.
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Two such point of care systems, i-STAT Corp. and Diametrics Medical, which
market biosensor testing instruments capable of determining blood gas and
electrolyte levels have become recognized point of care testing systems.
Quantech does not believe current products of i-STAT or Diametrics are capable,
however, of providing the breadth of tests and features required by the
emergency department.
With respect to testing for cardiac markers to diagnose a heart attack,
most testing is done in the hospital central and STAT labs with test result
turnaround times of more than 45 minutes. Quantech is aware of only a limited
number of companies that provide rapid testing for heart attacks. Of such
companies, Spectral Diagnostics Limited, a Canadian company, markets a manual
method available for certain heart attack tests. Roche Diagnostics markets a
manual test for the heart attack marker troponin I. As configured Spectral's and
Roche's heart attack tests can provide only yes/no results instead of
quantitative results such as those provided by central laboratory systems.
Biosite Diagnostics has introduced an instrument and tests for heart attacks but
the extent of sales activity is unclear. Quantech believes that Biosite's system
is not able to provide the number of tests and other STAT testing requirements
expected to be available on the DBx. Limitation of the tests that competitors'
system can perform provides Quantech a competitive advantage because the DBx is
expected to provide a large number of different tests.
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 Quantech, including, but not limited to,
financial resources and skilled personnel. However, Quantech believes the DBx
provides a product that is currently lacking for the critical care STAT testing
market. There can be no assurance that current or future companies will not
invent systems that will have broad testing capabilities and features like those
expected in the DBx. If Quantech is able to launch its system, no assurance
exists that competitive pressures will not negatively affect its pricing of both
the DBx instrument and the individual test cartridges.
The Technology
The DBx is a biosensor which incorporates Quantech's proprietary method
of using SPR to detect certain chemical conditions. A biosensor is an analytical
device that combines a biological sensing or detection element with a suitable
transducer that converts biochemical activity into a measurable form of energy.
A biosensor's input is a specific biological event. Its output is a measurable
signal that corresponds to the input.
Surface plasmon resonance is an optical-electrical phenomenon involving
the interaction of light with the electrons of a metal. The optical-electrical
basis of surface plasmon resonance 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 proprietary method of using SPR consists of a disposable cartridge
composed of a plastic base with a fine grating molded into its surface. The
grating is coated with a very thin layer of gold. Gold is used because it does
not oxidize like other metals which can affect chemistry binding. 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, such as a heart attack marker, and defines the test to be done.
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 the analyte
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being tested, 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.
Quantech's SPR based technology combines the strengths of biology and
physics into a single entity. Other applications of technology using SPR that
have been reported in the scientific literature or explored by Quantech include
immunoassays for cardiac markers, hormones, drugs, viruses and bacteria,
quantitation of anesthetic gases, and DNA binding assays. Quantech's SPR based
technology thus represents a simple, unified platform that is capable of
performing a wide range of diagnostic tests. Quantech's SPR based technology is
also a valuable research tool that Quantech expects will allow it to quickly and
efficiently develop further tests for its system.
Manufacturing
The DBx is comprised of an instrument and disposable test cartridges.
The instrument consists of electronics and optics and does not require
complicated assembly procedures. Production of the instrument will be performed
by a contract manufacturer pursuant to quality standards set by Quantech. The
contract supplier has not yet been selected. Quantech will take delivery of the
instrument, perform final quality inspection and inventory the instrument for
final shipment.
Quantech's test cartridge consists of two parts, the sensor grating
piece with the metal coating and the carrier for such piece. Both the coated
sensor grating and carrier will be produced by contract suppliers according to
Quantech specifications. These pieces will be shipped to either Quantech or
another contract manufacturer to complete final manufacturing of the test
cartridge. This final manufacturing will consist of:
o Applying the assay (chemistry) on the gold coated sensor grating;
o Placing the final grating piece into the carrier;
o Performing the final assembly;
o Labeling the test cartridge; and
o Packaging the test cartridge for final shipment.
Regulatory Environment
Quantech 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 FDA and, in some instances, by foreign
government authorities. Manufacturers of medical devices must comply with
certain United States regulations governing the testing, manufacturing and
packaging of medical devices. Medical devices are subject to different levels of
testing and review and may be subject to periodic inspection, without warning,
to ensure compliance. Comparable agencies in certain states and foreign
countries will also regulate Quantech's activities. Quantech's products could be
subject to recall by the FDA or Quantech 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. Quantech expects that its products will not be subjected
22
<PAGE>
to the highest level of scrutiny because they do not come into contact directly
with a living human being. Specifically, the DBx would be classified as either
Class I or Class II devices as distinguished from implantable devices, which are
classified as Class III devices.
Quantech believes that premarket clearance can be obtained for its
initial system and tests through submission to the FDA of a "510(k) premarket
notification" that demonstrates the product's substantial equivalence to another
device legally marketed pursuant to 510(k) premarket notification clearance. The
FDA may also require, in connection with such notification, that it be provided
with the test results supporting this claim and 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.
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 Quantech's application for an
investigational device exemption, permitting clinical evaluations of the product
utilizing human samples under controlled experimental conditions. Second, the
FDA must grant to Quantech a premarket approval, which is granted if the FDA
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 premarket approval 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.
Quantech believes it is unlikely that it will be required to obtain FDA
premarket approval 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 premarket approval
procedure. Quantech anticipates that it will make claims in reference to its
heart attack tests. These claims will be made after the heart attack test is
marketed with only single claim implications. Accordingly, the heart attack test
should not be delayed in its initial introduction. If FDA premarket approval is
required for Quantech's initial system and heart attack tests, introduction of
the DBx would be significantly delayed, which could have a material adverse
effect on Quantech, although preliminary indications from the FDA are consistent
with a 510(k) filing.
For products subject to either 510(k) premarket notification or
premarket approval regulations, the FDA requires that Quantech conduct any
required studies following its guidelines known as Good Clinical Practices and
Good Laboratory Practices. Also, the manufacture of products subject to 510(k)
premarket notification or premarket approval regulations both must be in
accordance with current FDA regulations known as Good Manufacturing Practices.
Sales of medical devices outside the United States are subject to
foreign regulatory requirements. Compliance with ISO 9000 standards and receipt
of CE mark certification will be required for products sold in the European
Union. Quantech's products will be manufactured according to ISO 9001 and EN
46001 quality standards and Quantech expects to be able to apply the CE mark to
its products. In addition, international sales of medical devices manufactured
in the United States but not approved by the FDA for distribution in the United
States are subject to FDA export requirements. Under these requirements,
Quantech must assure that the product is not in conflict with the laws of the
country for which it is intended for export, in addition to complying with the
other requirements of Section 801(e) of the United States Food, Drug and
Cosmetic Act. No regulatory clearances have yet been obtained in any country
other the United States and there is no assurance that any will be obtained.
Further, regulations and standards are subject to frequent changes. If
regulatory clearances are not obtained, compliance with changes in regulations
or standards are not met or our manufacturing facilities and those of our
contract manufacturers are in violation of applicable regulations, the sale of
the DBx could be materially adversely affected.
23
<PAGE>
Specific requirements demanded of a laboratory depend upon the
complexity of the test performed. Regulations under the Clinical Laboratory
Improvement Act of 1988 establish the following three categories of laboratory
tests:
(1) tests that require little or no operator skill which allows for a
waiver of the regulations;
(2) tests of moderate complexity; and
(3) highly complex tests which require significant operator
skill or training.
Regulatory requirements become increasingly stringent as the complexity
of the test rises. All laboratories performing tests of moderate or high
complexity must obtain either a registration certificate or a certificate of
accreditation from the Health Care Financing Administration or an organization
to whom HCFA has delegated such authority. HCFA has allowed electronic controls
for some point of care instruments to serve the function of daily quality
control performance to allow non-laboratory personnel to run such point of care
testing systems. The tests to be performed by the DBx are initially expected to
be of moderate complexity (class 2). Similar point of care systems that are
presently on the market are classified in this manner. In practical terms,
performing a test of moderate complexity means that the individual supervising
the test, i.e. the physician, pathologist or laboratory director, must be
well-educated and well-trained, but the individual operating the machine
requires no formal laboratory education and only task-specific training.
Quantech may, but has not yet, applied for the waiver to have its DBx system
placed in class 2.
Quantech has received FDA 510(k) premarket approval for its myoglobin
heart attack test for use in the clinical environment. It has submitted its
heart attack test for the cardiac marker CK-MB and its pregnancy test for hCG to
the FDA for similar approval. Each test for the DBx system must obtain FDA
approval. Quantech must also submit its DBx system to the FDA for approval in
both the clinical setting and point of care use. The system will be provided to
the FDA for such approvals after each stage of commercial development is
completed.
24
<PAGE>
Significant Agreements
Ares-Serono License
Quantech has acquired from Ares-Serono at a total cost of $3.4 million
a worldwide exclusive license to certain patents, proprietary information and
associated hardware (e.g. molds, test rigs, prototypes) related to Quantech's
SPR based technology. The Ares Serono license calls for an ongoing royalty of 6
percent on all products utilizing the SPR based technology which are sold by
Quantech. If Quantech sublicenses the technology, Quantech will pay a royalty of
15 percent of all revenues received by Quantech under any sublicense. Quantech
has paid $1,150,000 in minimum royalties to date and must make an additional
payment of $150,000 on December 31, 1999. If such payment is not made,
Ares-Serono has the right to cause a reversion to it of a royalty-free license,
thereby depriving Quantech of its exclusive rights under the Ares Serono
license. The obligations of Quantech to pay royalties terminate when the total
royalty payments reach a gross amount of $18 million. After such total payments,
Quantech's rights in the licensed SPR based 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. Quantech believes that such limitation does not materially
impact the value of the Ares Serono license given Quantech's current plan of
commercialization. In addition, the Ares Serono 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
biosensor technology for applications outside the field of the commercial
interests of Quantech.
The Perkin-Elmer Corporation Agreement
Quantech and The Perkin-Elmer Corporation, 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 medical diagnostics
and co-exclusive rights to nucleic acid medical diagnostics. Perkin-Elmer,
pursuant to the agreement, provides technical assistance related to Quantech's
medical diagnostic system and future royalty payments if Perkin-Elmer sells
products using Quantech's technology.
The technical assistance provided by Perkin-Elmer covers many areas
including math, software, system hardware, optics, chemistry, optical molding,
microfluidics, mechanical engineering, environmental and regulatory performance
and value engineering. Four phases of assistance have been established with a
reduction in Perkin-Elmer's royalty each time a phase is completed. Phase I and
II have been completed setting the royalty at 8% of gross sales of Perkin-Elmer
products which include Quantech technology. If all phases are met, the royalty
will be set at 6% of gross sales. Minimum royalties of $500,000 per year begin
in December of 2000 and expire in conjunction with the related patents,
provided, however, that if Perkin-Elmer does not proceed to commercialize the
licensed SPR biosensor technology prior to such date all rights revert back to
Quantech.
Quantech granted to Perkin-Elmer in December 1997 a warrant to purchase
1.4 million shares of Quantech common stock. The warrant expires in December
2002 and is immediately exercisable. The exercise price of the warrant is 95% of
the average market price of Quantech's common stock for the 25 days prior to the
date Perkin-Elmer provides notice to Quantech of its intent to exercise the
warrant.
25
<PAGE>
Quantech, pursuant to an exclusive license agreement with Perkin-Elmer,
has licensed Perkin-Elmer technology that provides a large density, high
throughput diagnostic testing capacity for Quantech's SPR based technology in
medical diagnostics other than nucleic acid testing. Through the optical and
chemistry deposition advancements made by Perkin-Elmer, they are able to read up
to 100 test areas on a single 1 cm by 1 cm slide and plan to expand this
capacity. Quantech believes such two dimensional array capability, as now used
in genomic screening research, should allow Quantech to expand the DBx upstream
from the critical care area to the central laboratory. Vertical expansion to
intensive care units, surgical suites, doctor offices and home testings should
also be possible. Future generations of Quantech's current DBx system are also
expected to benefit from the Perkin-Elmer technology by reducing the number of
unique test cartridges needed to perform the same number of tests which reduces
inventory requirements and manufacturing costs.
The royalty to be paid by Quantech will be 8% of gross sales of
Quantech products which include the Perkin-Elmer technology. Minimum royalties
to Perkin-Elmer of $500,000 per year begin in December of 2000, provided,
however, that if Quantech does not proceed to commercialize the SPR based
technology licensed from Perkin-Elmer prior to such date, all rights revert back
to Perkin-Elmer. The Perkin-Elmer technology will not be initially incorporated
into the DBx system.
Patents and Proprietary Rights
The Ares Serono license covers a total of eight patents. Some of these
patents relate to the optics, mirrors, light refraction and calibration of the
SPR based instrument. The remaining patents are on the grating, optics
enhancement of the disposals, sensitivity of the chemistry on the disposable,
attachment of the assay reagents to the disposal grating and features of the
prototype instrument. The chart below provides a listing of the patents and
their status.
<TABLE>
<CAPTION>
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
PATENT NAME DESCRIPTION U.S. GRANT DATE COUNTRIES GRANTED
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
<S> <C> <C> <C>
Merlin I Main patent for grating coupled SPR 06/05/90 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT,
biosensor. Used in DBx System JP, LU, NL, NO, SE, WO
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
Merlin II Main patent for grating coupled SPR 21/11/89 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT,
biosensor. Used in DBx System JP, LU, NL, NO, SE, WO
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
Cellulose Nitrate Films Main patent for grating coupled SPR 12/02/91 AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
biosensor. Used in DBx System GR, IL, IT, JP, LU, NL, SE
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
Calibration Notches Minor patent. Not used in DBx 09/05/89 AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
GR, IL, IT, JP, LU, NL, SE
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
Enhanced SPR biosensor Minor patent. Not used in DBx Pending AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
assay GR, IL, IT, JP, LU, NL, SE
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
Sensor Using Photoresist Minor patent. Not used in DBx 09/03/88 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT,
LU, NL, NO, SE, WO
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
Waveguide Sensor Minor patent. Not used in DBx Pending AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
IT, JP, LU, NL, NO, SE, WO
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
Restrahlen Effect Sensor Minor patent. Not used in DBx N/A GB ONLY
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
</TABLE>
26
<PAGE>
All developments by Quantech pursuant to the Ares Serono license,
either proprietary or patentable in nature, are the property of Quantech.
Quantech has made a number of advances that may be patentable and is reviewing
registration of additional patents.
Employees and Property
Quantech employs 16 people on a full and part-time basis and engages
consultants and independent contractors to provide services related to the
development of the DBx system and marketing. Quantech expects to hire other
personnel as necessary for chemistry development, quality control, sales and
marketing, manufacturing and administration.
Quantech leases offices (comprised of approximately 6,800 sq. ft.) at
1419 Energy Park Drive, St. Paul, Minnesota at a base monthly rent of
approximately $5,600 pursuant to a lease arrangement which expires February 2000
and will thereafter proceed on a month-to-month basis.
Legal Proceedings
Quantech is not a party to any litigation that would have a material
adverse effect on its financial condition or results of operations.
27
<PAGE>
MANAGEMENT
Directors and Officers
The directors and officers of Quantech are as follows:
Name Age Position
- ---- --- --------
Robert Case............. 56 Chief Executive Officer and Director
Gregory G. Freitag...... 38 Chief Operating Officer, Chief Financial
Officer and Secretary
Thomas R. Witty, Ph.D... 52 Vice President of Research and Development
Vincent A. Fischer...... 60 Vice President of Manufacturing
James F. Lyons.......... 70 Chairman of the Board of Directors
Richard W. Perkins...... 69 Director
Edward E. Strickland.... 73 Director
Robert Case has been Chief Executive Officer of Quantech since June
1997 and a director of Quantech since October 1996. He founded Case +
Associates, Inc. in 1978 and has been its President since such time. Case +
Associates is a leading consultant in the research, design, development, and
engineering of medical products. Its consulting activities include work for
major multi-national, as well as development stage medical companies, in the
design of products from diagnostic instrumentation and implantable devices to
surgical instruments. He has served as Chairman of the Industrial Designers
Society of America, and was a member of its national board of directors. Mr.
Case has also been a longtime member of the Biomedical Marketing Association. In
addition, Mr. Case conducts both U.S. and European seminars in product
definition and development for Frost & Sullivan, the Society of Plastics
Engineers, the Society for the Advancement of Medical Packaging Institute, and
Northwestern University. His educational background includes product design,
engineering, and marketing at Syracuse University, the Illinois Institute of
Technology, and DePaul University.
Gregory G. Freitag has been Chief Operating Officer of Quantech since
June 1997 and Chief Financial Officer and Secretary of Quantech since December
1995. From 1987 until joining Quantech, Mr. Freitag was a lawyer with the
Minneapolis, Minnesota law firm of Fredrikson & Byron, P.A. As a stockholder
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, was
included in the Minnesota Business Guide to Law & Leading Attorneys, and
received from City Business its "40 under 40" award recognizing Mr. Freitag as
one of the Twin Cities' next generation of business and community leaders.
Thomas R. Witty, Ph.D. was an Organizational and Program Management
Consultant to Quantech Ltd. from August 1997 until October 1997 when he joined
Quantech as Vice President of Research and Development. Dr. Witty has over 23
years of experience in the field of medical diagnostics. Dr. Witty has had
senior program management responsibilities for clinical instrument systems while
at Rohm and Haas, Becton Dickinson, Sanofi and ICN Pharmaceuticals. In addition,
he was a key contributor to the development of a near patient diagnostic system
at Biocircuits and was on the board of directors of SeaLite Sciences, a small
28
<PAGE>
biotechnology company. In these roles, Dr. Witty has led over 20 products to
market through clinical trials and the FDA. Dr. Witty received his Doctor of
Philosophy in Medicinal Chemistry from Purdue University and his Bachelor of
Arts degree with honors in chemistry from Macalester College in St. Paul,
Minnesota. Further academic training was completed under an NIH Fellowship at
the University of Illinois in the U.S. Army Medical Service Corp. and as a
Professor at Colorado State University.
Vincent A. Fischer has been Vice President of Manufacturing of Quantech
since October 1996. Prior to joining Quantech, he was Manager of Instrument
Systems for Boehringer Mannheim in Fremont, California. In that position, he had
responsibility for the manufacture of Boehringer's coagulation and therapeutic
drug instruments. Mr. Fischer has 28 years of experience in the medical device
industry, starting his career in the field of electrical engineering. Mr.
Fischer has an extensive background in positions ranging from manufacturing and
quality control to regulatory affairs and product development. In addition to
Boehringer Mannheim, he has gained his experience at such companies as Baxter
Laboratories, Abbott Laboratories, G.D. Searle, United Medical Manufacturing and
Amersham. Mr. Fischer received his BS degree in Electrical Engineering from the
University of Marquette.
James F. Lyons has been Chairman of the board of Quantech since June
1997 and a director of Quantech since September 1995. From September 1993
through October 1994, when he retired, Mr. Lyons was Chief Executive Officer of
Bio-Vascular, Inc., a cardiovascular medical products company. From 1978 through
1990, Mr. Lyons was President and Chief Executive Officer of BioMedicus, Inc., a
cardiovascular medical products company. Mr. Lyons was also a director and
Chairman of the board from 1991 through 1996 of AVECOR Cardiovascular Inc., and
was a director of ATS Medical, Inc., Bio-Vascular, Inc. and Spine-Tech, Inc.
Richard W. Perkins has been a director of Quantech since September
1995. Since 1985, Mr. Perkins has been President, Chief Executive Officer and a
director of Perkins Capital Management, Inc., Wayzata, Minnesota. Prior thereto,
he was a Senior Vice President of Piper Jaffray Inc., Minneapolis, Minnesota. He
is also a director of Bio-Vascular, Inc., Eagle Pacific Industries, Inc.,
Children's Broadcasting Corporation, Vital Images, Inc., Lifecore Biomedical,
Inc., Nortech Systems, Inc., and CNS, Inc.
Edward E. Strickland has been a director of Quantech since September
1995. Mr. Strickland has been an independent financial consultant for more than
seven years. From October 1990 to January 1991, he performed the duties of Chief
Executive Officer while serving on the Executive Committee of the board of
directors of Reuter, Inc., where he currently serves as the Chairman of the
board. Mr. Strickland also serves as a director of Hector Communications Corp.
and Communication Systems, Inc. and was a director of BioVascular, Inc. and
AVECOR Cardiovascular Inc.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
noncash compensation for each of the last three fiscal years awarded to, or
earned by, the Chief Executive Officer of Quantech and to all executive officers
whose compensation exceeded $100,000 for fiscal 1998.
29
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------------------------------- ---------------
Other Annual Securities All Other
Name and Fiscal Salary Bonus Compensation Underlying Compensation
Principal Position Year ($) ($) ($) Options (#) ($)
- ----------------------- --------- ------------ --------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Robert Case, 1998 $0 0 0 102,500 0
CEO 1997 $0 0 0 12,500 0
Gregory G. Freitag, 1998 $125,000 0 0 115,000
COO, CFO 1997 $125,000 0 0 0 0
1996 $ 72,917 0 0 25,000 0
Robert R. McKiel, 1998 $119,792 0 $5,200 (1) 0 0
former Executive 1997 $125,000 0 0 0 0
VP of R & D 1996 $117,500 0 0 0 0
- ------------------------
</TABLE>
(1) Other Annual Compensation for Mr. McKiel consisted of amounts paid for
consulting services pursuant to an arrangement in connection with his
resignation from Quantech.
Option/SAR Grants During 1998 Fiscal Year. The following table provides
information related to options granted during fiscal 1998 to the executive
officers named in the summary compensation table above. Quantech has not granted
any stock appreciation rights.
Individual Grants
<TABLE>
<CAPTION>
Number of Percent of
Securities Total
Underlying Options/SARs
Options/SARs Granted to Exercise or
Granted Employees in Base Price Expiration
Name (#) Fiscal Year ($/Share) Date
- ---------------------------- -------------------- ------------------ ------------------- ----------------------
<S> <C> <C> <C> <C>
Robert Case 2,500 (1) 0.6% $3.00 April 3, 2003
Robert Case 100,000 (2) 25.3% $3.00 July 14, 2002
Gregory G. Freitag 90,000 (2) 22.7% $3.00 July 14, 2002
Gregory G. Freitag 25,000 (2) 6.3% $3.00 December 1, 2000
Robert R. McKiel 0 N/A N/A N/A
- ------------------------
</TABLE>
(1) Such option is a nonqualified stock option with 1,667 shares
immediately exercisable and 833 shares exercisable on April 3, 1999.
(2) Such option is an incentive stock option and is immediately
exercisable.
Option Exercises and Value of Options at End of Fiscal 1998. The
following table sets forth, for each of the executive officers named in the
summary compensation table above, the year-end value of unexercised options.
30
<PAGE>
<TABLE>
<CAPTION>
Number of Unexercised
Securities Underlying Value of Unexercised
Shares Options at End In-the-Money Options
Acquired of Fiscal 1998 (1) at End of Fiscal 1998 (1)(2)
on Value ---------------------------- -----------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ------------ ----------- -------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert Case 0 N/A 114,167 883 $25,417 $208
Gregory G.
Freitag 0 N/A 115,000 0 $28,750 $0
Robert R. McKiel 0 N/A 41,542 0 $0 $0
- ------------------------
</TABLE>
(1) The shares represented for Mr. McKiel were granted as warrants to
purchase common stock and not options. As such, these shares are not
included in Quantech's Nonqualified Stock Option Plan described below.
(2) Value based on market value of Quantech's common stock on June 30, 1998
($3.25 per share closing price) less the exercise price.
Election of Officers and Directors; Committees of the Board of
Directors. Executive officers of Quantech are elected by the board of directors
on an annual basis and serve at the discretion of the board of directors.
Quantech's board of directors is divided into three classes with each class
being elected for a term of three years after their initial term is completed.
Quantech's directors hold office until their term has expired and their
successors have been elected and qualified.
Quantech's board of directors has established two committees. Our audit
committee has the responsibility of selecting Quantech's independent auditors
and communicating with such auditors on matters of auditing and accounting. Our
audit committee is comprised of directors Perkins, Lyons and Strickland with Mr.
Strickland as Chairman. Our compensation committee has the responsibility of
reviewing on an annual basis all officer compensation and administering any
employee options and plans related thereto. Our compensation committee is also
comprised of directors Perkins, Lyons and Strickland with Mr. Lyons as Chairman.
Employment Agreements. Each of Messrs. Case and Freitag has employment
contracts. Both contracts allow for termination at-will by Quantech. Pursuant to
Mr. Cases' contract he is entitled to a lump-sum payment of $150,000 if his
employment is terminated as a result of a sale of substantially all of the
assets of Quantech or a change in the control of more than 50% of Quantech's
capital stock pursuant to a single transaction or a series of transactions by
the same acquiring party. In the event Quantech terminates Mr. Freitag for any
reason other than for "cause" he is entitled to six months base salary and
bonus.
Certain Transactions. In March 1998, Quantech issued warrants to
purchase 60,000 and 15,000 shares of its common stock to James F. Lyons and
Edward E. Strickland, respectively, directors of Quantech, as compensation for
the guarantee of a $500,000 bank loan to Quantech. The warrants have an exercise
price of $0.75. The amount under such loan was increased by $250,000 in August
and such directors received additional options in September to purchase an
aggregate of 75,000 shares of Quantech's common stock at $1.13 per share for
their extension of the guarantee to this amount. In April 1998, Quantech issued
a warrant to purchase 2,500 shares of its common stock to Gregory G. Freitag,
Quantech's COO and CFO, as compensation for providing short term loans to
Quantech on several occasions during 1997 and 1998. The warrant has an exercise
price of $1.49.
31
<PAGE>
Stock Options. In April 1998, Quantech's board of directors adopted the
1998 Stock Option Plan and reserved 2,000,000 shares for issuance thereunder. If
any options granted under the 1998 option plan expire or are terminated prior to
being exercised in full, then the unexercised portion of such options will once
again be available for additional option grants. Options to purchase 1,585,114
shares of Quantech's common stock have been issued pursuant to the 1998 option
plan.
The purpose of the 1998 option plan is to promote the success of
Quantech and its subsidiaries by facilitating the retention of competent
personnel and by furnishing incentive to officers, directors, employees,
consultants, and advisors upon whose efforts the success of Quantech will depend
to a large degree.
Under the 1998 option plan, all employees, officers and directors
(including non-employee directors) of Quantech or a subsidiary, and consultants
and advisors who perform bona fide services for Quantech or a subsidiary,
provided such services are not in connection with the offer or sale of
securities in a capital raising transaction, are eligible to receive stock
options. It is the intention of Quantech to grant options which qualify as
incentive stock options under section 422 of the Internal Revenue Code, as well
as nonqualified stock options. The 1998 option plan is administered by the board
of directors or by a committee appointed by the board which selects the
individuals to whom options will be granted, the number of shares subject to
each option and the exercise price, terms and conditions of each option.
The exercise price for incentive stock options cannot be less than 100%
of the per share fair market value of Quantech common stock on the date the
option is granted. In the case of incentive stock options granted to holders of
more than 10% of the voting power of Quantech securities, not less than 110% of
such fair market value. The term of an option cannot exceed 10 years, and the
term of an incentive stock option granted to a holder of more than 10% of the
voting power of Quantech cannot exceed five years. The exercise price for
nonqualified stock options is generally 100% of the per share fair market value
of the common stock on the date the option is granted unless otherwise
determined by the committee, provided that the exercise price is not less than
85% of the per share fair market value of the common stock on the date granted.
Non-employee directors of Quantech are granted upon election an option
to purchase 10,000 shares of common stock at a price per share equal to 100% of
the fair market value of the common stock on such date. One-third of such
options are exercisable immediately, with one-third becoming exercisable on each
of the second and third anniversaries of the date of grant. After each
stockholders meeting, if the director is re-elected or his term of office
continues after such stockholders meeting, each non-employee director is granted
an option to purchase 2,500 shares of the common stock at an exercise price per
share equal to 100% of the fair market value of the common stock on such date.
These options are immediately exercisable.
On September 3, 1996, Quantech's board of directors adopted the
Quantech Ltd. Nonqualified Stock Option Plan. The 1996 option plan provides for
the granting of nonqualified options to purchase common stock of Quantech to
employees, directors and members of Quantech's scientific advisory board. A
total of 465,500 shares of Quantech's common stock have been reserved for
issuance upon exercise of options granted under the 1996 option plan.
Outstanding options for the purchase of up to 465,500 shares of Quantech common
stock have been granted under the 1996 option plan of which 440,585 have vested.
Quantech's compensation committee has complete discretion to determine the
persons to whom options are granted under the 1996 plan and to set the terms of
such options including, but not limited to, terms relating to price (which
generally will be the fair market value of Quantech's common stock on the date
of grant), duration, vesting, termination and the number of shares subject to
such option. The 1996 option plan will continue for an indefinite period until
terminated by the board of directors or compensation committee. No additional
options will be granted under 1996 option plan.
32
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table provides information as of December 31, 1998
concerning the beneficial ownership of Quantech's common stock by (i) each
director, (ii) each executive officer named in the summary compensation table
above, (iii) each stockholder known by Quantech to be the beneficial owner of
more than 5% of its outstanding common stock (iv) the directors and officers as
a group and (v) each selling stockholder. Except as otherwise indicated, the
persons named in the table have sole voting and investing power with respect to
all shares of common stock owned by them.
Under the rules of the Securities and Exchange Commission, shares not
actually outstanding are deemed to be beneficially owned by an individual if
such individual has the right to acquire the shares within 60 days of December
31, 1998. Pursuant to such rules, shares deemed beneficially owned by virtue of
an individual's right to acquire them are also treated as outstanding when
calculating the percent of class owned by such individual and when determining
the percent owned by any group in which the individual is included. Ownership
percentages less than 1.0% are marked with an asterisk.
<TABLE>
<CAPTION>
Shares Shares Owned % Owned
Warrant Conversion Offered After After
Name/Group Shares Shares Shares Hereby Offering Offering
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ted Adams 500 500 -- *
American Holographic 12,000 12,000 -- *
Roy Anderson III 10,000 2,500 2,500 10,000 *
Roy Anderson, Jr. 10,000 2,500 2,500 10,000 *
Gregory & Ann Anklam 2,000 500 500 2,000 *
David & Meleah Arnold 15,000 15,088 67,260 82,348 15,000 *
Mark Ashton 750 11,305 79,748 24,386 67,417 1.8%
John G. Ballenger 10,000 2,500 2,500 10,000 *
Bank Heusser & Co. Ltd. 5,000 5,000 -- *
David Barash 1,078 1,078 2,156 -- *
Greg Bemis 7,000 7,000 -- *
Richard T. Bennett 6,103 44,676 17,446 33,333 *
Les Biller 6,036 6,036 -- *
Nicholas Bluhm 5,750 5,750 -- *
Bob, Inc. 12,805 93,824 39,962 66,667 *
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Donald Brattain 2,500 133,332 135,832 -- *
Paul R. Braun 2,787 21,424 24,211 -- *
Courtney Brown 10,533 2,523 14,276 16,799 10,533 *
Timothy Burton 3,542 25,936 29,478 -- *
Anthony Carideo 1,000 500 500 1,000 *
Robert Case(1)
1419 Energy Park Drive 314,167 6,314 48,952 21,933 347,500 8.9%
St. Paul, Minnesota 55108
Joseph Catarious 2,500 2,500 -- *
Lee Chapman 5,500 1,250 1,250 5,500 *
Lee Chapman Profit Plan 19,868 19,868 -- *
Christianson Investments Co. Ltd. 25,000 5,000 5,000 25,000 *
Ann M. Christianson 2,402 599 599 2,402 *
Lynn A. Christianson 2,402 599 599 2,402 *
Warren G. Christianson 31,511 3,895 3,895 31,511 *
Warren T. A. Christianson 2,402 599 599 2,402 *
Kenneth E. Dawkins Rev. Trust 66,668 66,668 -- *
David Dent 10,118 71,372 81,490 -- *
Brad deWerd 100 100 -- *
Robert W. and Rita M. deWerd 1,000 250 250 1,000 *
Tom and Kathy deWerd 1,000 250 250 1,000 *
Glenn Diamond 2,045 2,045 -- *
John & Emily Dirksen 1,000 1,000 -- *
DRAFTCO 2,500 2,500 -- *
Thomas Dunleavy 33,332 33,332 -- *
Herbert Dubuisson 13,336 13,336 -- *
Neil Durhman 10,000 10,000 -- *
- -----------------------------
(1) Includes 315,000 shares issuable upon exercise of options.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Frazier Eales 28,000 28,000 -- *
Mike Edwards 20,545 20,545 -- *
Paul Ehlen 2,511 15,952 5,130 13,333 *
Stan & Carol Eilers 22,618 99,136 121,754 -- *
Engelkes-Abels Funeral Home Inc. 4,000 1,000 1,000 4,000 *
Weems Estelle 22,500 22,500 -- *
Richard Evans 500 500 -- *
Kelly M. Farrell 25,200 25,200 -- *
Lee Felicetta 500 500 -- *
John E. Feltl 200 200 -- *
Richard Fentin 133,332 133,332 -- *
Four Skis Investments 1,613 11,784 13,397 -- *
Carol M. Freeman 2,402 599 599 2,402 *
Gregory G. Freitag(2)
1419 Energy Park Drive 307,775 9,761 15,952 12,380 321,108 8.3%
St. Paul, Minnesota 55108
Jim Gahlon 10,063 1,169 8,248 2,262 17,218 *
R.W. Gaines, Jr., M.D.(3)
640 N. LaSalle Street 5,000 6,783 47,852 14,635 45,000 1.2%
Chicago, Illinois 60610
Robert D. Gearou 7,500 3,125 3,125 7,500 *
Thomas Gearou 12,050 2,500 2,500 12,050 *
Robert Gjerde 10,133 71,480 81,613 -- *
Ronald L. Glassman 6,103 44,672 17,442 33,333 *
Glymar Inc. 500 500 -- *
Gold Country Holdings 16,510 93,380 43,223 66,667 1.8%
- -----------------------------
(2) Includes 307,500 shares issuable upon exercise of options.
(3) Does not include 1,800,000 shares issuable upon exercise of warrants held
by Millennium Medical Systems, LLC, which is listed elsewhere in the table.
Dr. Gaines, as the sole member of Millennium, has sole voting power and
investment power over such shares.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
David Goldsteen
2332 IDS Center 170,504 51,038 359,088 466,028 114,602 3.7%
Minneapolis, Minnesota 55402
Mark W. Goldsteen 20,000 12,800 72,152 84,952 20,000 *
Sima Griffith 15,707 15,707 -- *
Donald F Hagen Revocable Trust 6,071 42,824 48,895 -- *
Thomas Harkness 5,000 2,500 2,500 5,000 *
Bill Hay 4,000 750 750 4,000 *
Timothy Heaney 1,000 6,924 7,924 -- *
Julie A Higgins 2,402 599 599 2,402 *
HK Financial Corp 71,033 16,305 79,748 29,386 137,700 3.8%
Bruce Hubbard 400 400 -- *
Richard G. & Diane Lynn Hubers 40,000 40,000 -- *
Industricorp & Co. 155,000 2,220 2,220 155,000 4.4%
Intermed Anstalt 13,750 2,500 2,500 13,750 *
Roland Isaacson 9,414 60,172 32,333 37,253 1.0%
Jon & Susan Iverson 10,579 84,956 95,535 -- *
Theodore Johnson 5,000 1,250 1,250 5,000 *
Wesley Johnson 3,250 500 500 3,250 *
David & Mary Johnston 2,400 2,400 -- *
Jeanne M. Jungbauer 6,852 50,156 57,008 -- *
E. Elmer & E. Joyce Jutila 2,000 500 500 2,000 *
John Jutila 500 500 -- *
Judith K. Kaufmann 750 6,960 7,710 -- *
Nasser J. Kazeminy 33,332 33,332 -- *
Nasser J. Kazeminy 1992 GRAT 33,332 33,332 -- *
Yvonne P. Kazeminy 1992 GRAT 33,332 33,332 -- *
Bernard Kegan 1,000 500 500 1,000 *
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Michael S. Kelly 200 200 -- *
Kessler Ashler Group LTD. 10,000 10,000 -- *
Kurt King DDS, IRA 1,250 1,250 -- *
Steven King 5,000 1,250 1,250 5,000 *
John G. Kinnard & Company, Inc. 469,054 159,492 495,213 133,333 3.2%
Peter & Shelagh Klein 3,035 21,412 24,447 -- *
Steven H. Kopesky 16,597 120,568 43,832 93,333 2.5%
Brandon Koress 3,699 1,250 1,250 3,699 *
Mitchell Krieger 5,000 14,613 93,332 38,612 74,333 2.0%
David & Kathryn Kruskopf 2,000 500 500 2,000 *
Martin Lackner 3,500 20,808 24,308 -- *
Lakewood Ortho Clinic-Mark Mills 2,000 500 500 2,000 *
Dennis LaValle 24,668 71,561 464,088 202,316 358,001 8.7%
Bruce A. Lawin 6,783 47,852 14,635 40,000 1.1%
Phillip Levin 13,336 13,336 -- *
Clifford S. Lozinski 2,850 1,938 15,996 17,934 2,850 *
Lawrence Lozinski 346 2,524 2,870 -- *
Roberta Lozinski Trust 1,152 8,420 9,572 -- *
Tony Lozinski 346 2,524 2,870 -- *
Victor Lozinski 1,267 9,260 10,527 -- *
Roger Lucas 5,000 1,250 1,250 5,000 *
Wayne Lund 22,000 7,500 7,500 22,000 *
James F. Lyons(4)
1419 Energy Park Drive 190,000 97,688 562,720 406,753 443,655 10.3%
St. Paul, Minnesota 55108
Mark Lyons 5,353 37,760 9,780 33,333 *
Joan C. Maclin 1,055 7,444 8,499 -- *
- -----------------------------
(4) Includes 75,000 shares issuable upon exercise of options.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Plato Marroulis 1,250 1,250 -- *
Jerry E. Mathwig 66,668 66,668 -- *
Victor Mavar 5,000 1,250 1,250 5,000 *
Andrea McAllister 6,383 625 625 6,383 *
Timothy McDonald 525 525 -- *
Robert & Teresa McDonnell 10,118 69,336 79,454 -- *
Sally McGuire 33,332 33,332 -- *
Bob McKiel 41,542 41,542 -- *
Lawrence Meacham 5,794 42,620 48,414 -- *
David Metz 625 625 -- *
Millennium Medical Systems LLC 1,800,000 1,800,000 -- *
Jonathan E. Miller 1,166 8,580 9,746 -- *
Steven E. Miller 3,847 27,316 31,163 -- *
Minn Shares, Inc. 2,533 17,868 20,401 -- *
David Mitchell and Connie Foote 10,185 71,844 82,029 -- *
James Murphy 4,000 1,000 1,000 4,000 *
Nathan Newman 100 100 -- *
Andy O'Connell 20,000 20,000 -- *
H. Vince O'Connell 21,965 143,480 165,445 -- *
William F. Ogden Jr. 33,332 33,332 -- *
Steve O'Hara 500 500 -- *
Okabena Partnership K 75,000 59,922 399,484 534,406 -- *
John W. Owensby 3,000 3,000 -- *
John & Delores Ownesby TTEES 1,500 1,500 -- *
John Pagnucco 15,706 15,706 -- *
Deming L. Payne 11,283 47,852 19,135 40,000 1.1%
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Richard W. Perkins(5)
1419 Energy Park Drive 90,000 2,500 2,500 90,000 2.5%
St. Paul, Minnesota 55108
Thomas Pierce 500 500 -- *
William W. and Judith S. Prain 5,000 1,250 1,250 5,000 *
Charles Pulley 17,100 9,772 45,680 28,785 43,767 1.2%
Joseph D. Pupel 1,125 10,000 11,125 -- *
Mary J. Rasley 2,402 599 599 2,402 *
Willard Rehbein 20,000 5,000 5,000 20,000 *
Willard C. & Kathy A. Rehbein 2,500 2,500 -- *
Richardson Grating 8,000 8,000 -- *
Richfield Bank & Trust/Wiggins 2,000 500 500 2,000 *
River Edge Partners Inc. 10,000 2,500 66,668 69,168 10,000 *
Richard S. Rog 7,197 86,032 53,229 40,000 1.1%
Richard S. & Sylvia C. Rog 7,656 56,056 23,712 40,000 1.1%
Albert Rubenstein 5,000 5,000 -- *
Robert & Lois Schmiege 5,000 1,875 1,875 5,000 *
Thomas Schrade 14,000 14,000 -- *
John & Gloria Schweich 2,500 625 625 2,500 *
Allan Sekhavat 2,500 2,500 -- *
Sekhavat, Ltd. 28,000 7,000 7,000 28,000 *
Gerald Shaughnessy 17,206 14,108 31,314 -- *
R.H. Joseph Shaw 47,500 47,500 -- *
Franciska Shuler 1,042 7,352 8,394 -- *
Patrick Sidders 50 50 -- *
Patrick & Barbra Sidders 3,106 250 250 3,106 *
Six C's Investment Group 5,000 2,500 2,500 5,000 *
- -----------------------------
(5) Includes 35,000 shares issuable upon exercise of options.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Al Steffes 5,000 1,250 1,250 5,000 *
Meindret M. & Bobbi Stek 32,000 32,000 -- *
Michael Stone 50 50 -- *
Edward E. Strickland(6)
1419 Energy Park Drive 82,500 35,935 334,980 270,915 182,500 4.6%
St. Paul, Minnesota 55108
Strickland Family Limited Partnership 105,000 6,380 118,648 91,695 138,333 3.8%
Scott Strickland 100,000 7,371 63,756 57,794 113,333 3.1%
William R. & Catherine A. Swanson 3,841 28,156 11,997 20,000 *
Douglas V. Swanson 2,319 16,048 18,367 -- *
James Swenson 8,855 2,505 8,800 11,305 8,855 *
William J. Szlaius 750 6,980 7,730 -- *
Norris Taylor 9,000 9,000 -- *
Scott Taylor 750 6,968 7,718 -- *
David & Susan Thymian 11,058 76,064 47,122 40,000 1.1%
David Thymian 1,250 1,250 -- *
Larry & Gayla Torguson 2,000 500 500 2,000 *
Marlin Torguson 34,750 16,000 687,436 703,436 34,750 *
Allen J. Tower 6,783 47,852 14,635 40,000 1.1%
Ben Trainer 12,750 3,750 3,750 12,750 *
Trip Investments 1,000 1,000 -- *
Charles Underbrink 16,250 6,250 6,250 16,250 *
Frank Vargas 693 693 -- *
Thomas M. Vertin 5,200 36,684 11,217 30,667 *
George Vitalis 17,500 17,500 -- *
Randall S.& Nancy B. Vollertsen 4,033 28,448 8,281 24,200 *
Joel Walters 14,000 14,000 -- *
- -----------------------------
(6) Includes 72,500 shares issuable upon exercise of options, but excludes
5,000 shares held by the Strickland Family Limited Partnership, which is
listed elsewhere in the table.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Chris Warren 5,000 5,000 -- *
Larry Weaver 12,500 12,500 -- *
James Weinzetl 3,747 61,088 64,835 -- *
Were Living Trust 13,336 13,336 -- *
John A. White 10,118 71,372 81,490 -- *
Jeff Zalasky 22,159 7,946 57,148 39,874 47,379 1.3%
Alvin Zelickson 2,500 625 625 2,500 *
Richard D. & Deborak K. Zimmerman 16,958 16,958 -- *
All directors and executive officers as 984,442 152,198 962,604 714,481 1,384,763 25.3%
a Group (5 persons)(7)
- -----------------------------
(7) Includes 801,667 shares issuable upon exercise of options, but excludes
5,000 shares held by the Strickland Family Limited Partnership.
</TABLE>
41
<PAGE>
DESCRIPTION OF SECURITIES
General
Quantech's articles of incorporation authorize the issuance of up to
75,000,000 shares, 50,000,000 shares consisting of common stock, no par value
per share, 20,500,000 undesignated shares, 2,500,000 shares of Series A
Convertible Preferred Stock and 2,000,000 shares of Series B Convertible
Preferred Stock. None of the holders of any class or series of Quantech's
capital stock have preemptive rights or a right to cumulative voting.
Common Stock
As of the date of this prospectus, there were 2,721,534 shares of
Quantech's common stock issued and outstanding. Quantech's board of directors
may issue additional shares of common stock without the consent of the holders
of common stock.
Voting Rights. Each outstanding share of common stock is entitled to
one vote except as may be otherwise required under the terms of the MBCA. The
holders of common stock do not have cumulative voting rights, which means that
the holders of more than 50% of such outstanding shares voting for the election
of directors can elect all of the directors of Quantech to be elected, if they
so choose.
No Preemptive Rights. Holders of common stock are not entitled to any
preemptive rights.
Dividends and Distributions. Holders of common stock are entitled to
receive such dividends as may be declared by the directors out of funds legally
available therefor and to share pro rata in any distributions to holders of
common stock upon liquidation or otherwise. However, Quantech has not paid cash
dividends on its common stock, and does not expect to pay such dividends in the
foreseeable future.
Series A Convertible Preferred Stock
The following description of the Series A Convertible Preferred Stock
is subject to the detailed provisions contained in Quantech's articles of
incorporation and Quantech's Statement of Designation which have been filed as
Exhibit 3.1 to the Registration Statement, of which this prospectus is a part.
Voting Rights. Each share of Series A Convertible Preferred Stock
entitles its holder to one vote for each share of common stock into which such
share may be converted. Holders of common stock and Series A Convertible
Preferred Stock vote as a single class on all matters submitted to Quantech's
stockholders, except where the Minnesota Business Corporation Act requires
separate class voting, such as with respect to voting on a merger, exchange,
liquidation or amendment to Quantech's articles of incorporation which may
adversely affect holders of Quantech's securities.
Furthermore, without the affirmative vote of the holders of at least a
majority of the shares of Series A Convertible Preferred Stock then outstanding,
Quantech may not:
o Alter or change the rights, preferences or privileges of the
Series A Convertible Preferred Stock;
o Increase the authorized number of shares of Series A Convertible
Preferred Stock;
42
<PAGE>
o Issue any shares of capital stock with any preference over
Series A Convertible Preferred Stock as to dividends or as to
distributions in the event of the liquidation, dissolution or
winding up of Quantech, provided that such prohibition shall not
prevent Quantech 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
o Declare a dividend on the common stock.
Dividends. Holders of Series A Convertible Preferred Stock are not
entitled to any special dividends. Any dividends paid by Quantech, which
dividends are not anticipated, will be paid equally among holders of common
stock and Series A Convertible Preferred Stock.
Liquidation Preference. In the event of the liquidation, dissolution or
winding up of Quantech, whether voluntary or involuntary, assets or surplus
funds of Quantech shall be distributed first to the holders of Series A
Convertible Preferred Stock in an amount equal to $3.00 per share, as adjusted,
next, pro rata to the holders of common stock in an amount equal to the per
share initial amount of paid-in capital represented by such common stock, and
the remainder pro rata, according to shares owned, among the holders of Series A
Convertible Preferred Stock and common stock treating the Series A Convertible
Preferred Stock for these purposes on an as-if-converted basis.
Conversion of Shares. Each share of Series A Convertible Preferred
Stock is convertible, at the option of each holder, at any time into four (4)
shares of Quantech's common stock, subject to proportional adjustment in the
event of Quantech's payment of a stock dividend, stock split of its outstanding
shares of common stock, a combination of its outstanding shares of common stock
into a smaller number of shares, a capital reorganization or merger. There are
1,702,706 shares of Series A Convertible Preferred Stock outstanding as of March
18, 1999. Quantech has reserved a sufficient number of shares of its common
stock for issuance upon conversion of the Shares, which number of reserved
shares will be adjusted in the event of certain actions by Quantech so as to
maintain a level of shares of common stock necessary to provide for the
conversion of all of the Shares.
Concurrently with the occurrence of the closing of an offering of
Company securities for aggregate gross proceeds of at least $5,000,000 or the
date of conversion of more than 50% of the outstanding Shares, each outstanding
share of Series A Convertible Preferred Stock shall automatically convert into
common stock. In addition, in the event that Quantech sells common stock, or
securities convertible into common stock with a conversion price, less than
$0.75 per share, then the number of shares of common stock into which the Shares
may be converted will be adjusted to a number equal to the Shares per share
liquidation preference divided by such sale or conversion price. If at any time
after November 5, 2003 the Company receives a written request from the holders
of 50% or more of the outstanding shares of Series A Convertible Preferred
Stock, the Company is required within 30 days to redeem all of the then
outstanding shares of such Series A Stock by paying in cash an amount equal to
the sum of the original purchase price plus an amount equal to a return of 10%
per annum.
Series B Convertible Preferred Stock
The following description of the Series B Convertible Preferred Stock
is subject to the detailed provisions contained in Quantech's articles of
incorporation and Statement of Designation which have been filed as Exhibit 3.1
to the Registration Statement of which this Prospectus is a part.
Voting Rights. Each share of Series B Convertible Preferred Stock
entitles its holder to one vote for each share of common stock into which such
share may be converted. Holders of common stock, Series A Convertible Preferred
43
<PAGE>
Stock and Series B Convertible Preferred Stock vote as a single class on all
matters submitted to Quantech's stockholders, except where the Minnesota
Business Corporation Act requires separate class voting, such as with respect to
voting on a merger, exchange, liquidation or amendment to Quantech's articles of
incorporation which may adversely affect holders of Quantech's securities.
Furthermore, without the affirmative vote of the holders of at least a
majority of the shares of Series B Convertible Preferred Stock then outstanding,
Quantech may not:
o Alter or change the rights, preferences or privileges of the
Series B Convertible Preferred Stock;
o Increase the authorized number of shares of Series B Convertible
Preferred Stock;
o Issue any shares of capital stock with any preference over Series B
Convertible Preferred Stock as to dividends or as to distributions
in the event of the liquidation, dissolution or winding up of
Quantech, provided that such prohibition shall not prevent Quantech
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
Dividends. Holders of Series B Convertible Preferred Stock are not
entitled to any special dividends. Any dividends paid by Quantech, which
dividends are not anticipated, will be paid equally among holders of common
stock, Series A and Series B Convertible Preferred Stock.
Liquidation Preference. In the event of the liquidation, dissolution or
winding up of Quantech, whether voluntary or involuntary, assets or surplus
funds of Quantech shall be distributed first to the holders of Series A
Convertible Preferred Stock in an amount equal to $3.00 per share, as adjusted,
second to the holders of Series B Convertible Preferred Stock in an amount equal
to $1.50 per share, as adjusted, and the remainder ratably to the holders of
common stock.
Conversion of Shares. Each share of Series B Convertible Preferred
Stock is convertible, at the option of each holder, at any time into one (1)
share of Quantech's common stock, subject to proportional adjustment in the
event of Quantech's payment of a stock dividend, stock split of its outstanding
shares of common stock, a combination of its outstanding shares of common stock
into a smaller number of shares, a capital reorganization or merger. Quantech
has reserved a sufficient number of shares of its common stock for issuance upon
conversion of the Shares, which number of reserved shares will be adjusted in
the event of certain actions by Quantech so as to maintain a level of shares of
common stock necessary to provide for the conversion of all of the Shares.
Concurrently with the occurrence of the closing of an offering of
Company equity securities for aggregate gross proceeds of at least $5,000,000 or
at such time as at least 50% of the number of Shares have been converted into
Common Stock, each outstanding share of Series B Convertible Preferred Stock
shall automatically convert into common stock. In addition, the Series B
Convertible Preferred Stock has anti-dilution provisions that provide for the
adjustment of the number of shares of common stock issuable upon conversion of
the Shares based upon certain events.
Undesignated Shares
The board of directors of Quantech 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
44
<PAGE>
series (which may include, but is not limited to designation as additional
common shares), and to fix the relative rights and preferences of each such
class or series, which rights and preferences may adversely affect the rights of
holders of common stock. None of the undesignated shares have been designated by
Quantech's board of directors.
Warrants
Quantech currently has outstanding warrants to purchase 4,805,981
shares of common stock at exercise prices from $.75 to $14.40 per share. The
shares issuable upon exercise of these warrants are part of the shares offered
by this prospectus.
Transfer Agent
StockTrans, Inc., 7 East Lancaster Ave., Ardmore, PA 19003 (800)
733-1121, is the transfer agent for Quantech's common stock.
Minnesota Business Corporation Act
Certain provisions of Minnesota law described below could have an
anti-takeover effect. These provisions are intended to provide management
flexibility and to enhance the likelihood of continuity and stability in the
composition of Quantech's board of directors and in the policies formulated by
the board and to discourage an unsolicited takeover of Quantech, if the board
determines that such a takeover is not in the best interests of Quantech and its
stockholders. However, these provisions could have the effect of discouraging
certain attempts to acquire Quantech which could deprive Quantech's stockholders
of opportunities to sell their shares of common stock at prices higher than
prevailing market prices.
Section 302A.671 of the Minnesota Statutes applies, with certain
exceptions, to any acquisition of voting stock of Quantech (from a person other
than Quantech, and other than in connection with certain mergers and exchanges
to which Quantech is a party) resulting in the beneficial ownership of 20
percent or more of the voting stock then outstanding. Section 302A.671 requires
approval of any such acquisitions by a majority vote of the stockholders of
Quantech prior to its consummation. In general, shares acquired in the absence
of such approval are denied voting rights and are redeemable at their then fair
market value by Quantech within 30 days after the acquiring person has failed to
give a timely information statement to Quantech or the date the stockholders
voted not to grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any
business combination by Quantech, or any subsidiary of Quantech, with any
stockholder which purchases 10 percent or more of Quantech's voting shares (an
"interested stockholder") within four years following such interested
stockholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the board of
directors of Quantech serving before the interested stockholder's share
acquisition date.
Certain Limited Liability and Indemnification Provisions
Quantech's restated articles of incorporation, as amended, limit the
personal liability of its directors. Specifically, directors of Quantech will
not be personally liable to Quantech or its stockholders for monetary damages
45
<PAGE>
for any breach of their fiduciary duty as directors, except to the extent that
the elimination or limitation of liability is in contravention of the MBCA, as
amended. This provision will generally not limit liability under state or
federal securities law.
Section 302A.521 of the MBCA provides that a Minnesota business
corporation shall indemnify any director, officer, employee or agent of the
corporation made or threatened to be made a party to a proceeding, by reason of
the former or present official capacity (as defined) of the person, against
judgments, penalties, fines, settlements and reasonable expenses incurred by the
person in connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights.
Section 5.1 of Quantech's bylaws provides that each director, officer
and employee of Quantech shall be indemnified by Quantech in accordance with,
and to the fullest extent permissible by, applicable law. Quantech maintains an
insurance policy covering director and officer liability.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of Quantech
pursuant to the foregoing provisions, Quantech has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
PLAN OF DISTRIBUTION
Quantech is registering the shares on behalf of Quantech selling
stockholders. As used in this prospectus, stockholders selling Quantech common
stock pursuant to this prospectus includes donees and pledgees selling shares
received after the date of this prospectus from a selling stockholder named in
this prospectus. Upon Quantech being notified by a selling stockholder that a
donee or pledgee intends to sell more than 500 shares, a supplement to this
prospectus will be filed. All costs, expenses and fees incurred in connection
with the registration of the shares offered hereby will be borne by Quantech.
Brokerage commissions and similar selling expenses, if any, attributable to the
sale of shares will be borne by the selling stockholders.
Sales of shares may be effected by selling stockholders from time to
time in one or more types of transactions, including block transactions, in the
over-the-counter markets, in negotiated transactions, through put or call
options on the shares and through short sales of shares. Shares may be sold at
market prices prevailing at the time of sale or at negotiated prices. The
stockholders of Quantech selling common stock pursuant to this prospectus may
effect such transactions by selling shares directly to purchasers or to or
through broker-dealers as principals or agents. Such brokers-dealers may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders and/or the purchasers of the shares. The selling
stockholders have advised Quantech that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities, nor is there an
underwriter or coordinating broker acting in connection with the proposed sale
of shares by the selling stockholders.
The selling stockholders and any broker-dealers that act in connection
with the sale of shares might be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act. Quantech has agreed to indemnify each
selling stockholder against certain liabilities, including liabilities arising
46
<PAGE>
under the Securities Act. The selling stockholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the shares against certain liabilities, including liabilities arising under
the Securities Act.
Because selling stockholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, the selling stockholders
will be subject to the prospectus delivery requirements of the Securities Act.
Quantech has informed the selling stockholders that the anti-manipulative
provisions of Regulation M promulgated under the Exchange Act may apply to their
sales in the market.
Selling stockholders also may resell all or a portion of the shares
under this prospectus in open market transactions in reliance upon Rule 144
under the Securities Act, provided they meet the criteria and conform to the
requirements of such rule.
Upon Quantech being notified by a selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the Act,
disclosing:
o The name of each such selling stockholder and of the participating
broker-dealer(s);
o The number of shares involved;
o The price at which such shares were sold;
o The commissions paid or discounts or concessions allowed to
such broker-dealer(s), where applicable;
o That such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus; and
o Other facts material to the transaction.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for
Quantech by Fredrikson & Byron, P.A.
EXPERTS
The financial statements of Quantech as of June 30, 1997 and 1998 and
for the years ended June 30, 1997 and 1998, included in this prospectus and
Registration Statement of which this prospectus is a part, have been audited by
McGladrey & Pullen, L.L.P., independent certified public accountants, as set
forth in their report on such financial statements, and are included in this
prospectus in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
Quantech files annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission
("Commission"). You may read and copy any reports, statements or other
information on file at the Commission's public reference room in Washington,
D.C. You can request copies of those documents, upon payment of a duplicating
fee, by writing to the Commission.
47
<PAGE>
Quantech has filed a Registration Statement on Form SB-2 with the
Commission. This prospectus, which forms a part of the Registration Statement,
does not contain all of the information included in the Registration Statement.
Certain information is omitted and you should refer to the Registration
Statement and its exhibits. With respect to references made in this prospectus
to any contract or other document of Quantech, such references are not
necessarily complete and you should refer to the exhibits attached to the
Registration Statement for copies of the actual contract or document. You may
review a copy of the Registration Statement at the Commission's public reference
room at 450 N.W. Fifth Street, N.W., Washington, D.C., 20549 and at the
Commission's regional offices at CitiCorp Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661 and at 7 World Trade Center, Suite 1300, New
York, New York 10048. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Quantech's
Commission filings and the Registration Statement can also be reviewed by
accessing the Commission's Internet web site at http://www.sec.gov.
48
<PAGE>
QUANTECH LTD.
FINANCIAL STATEMENTS
CONTENTS
Independent Auditor's Report F-2
Balance sheets as of June 30, 1997 and 1998, and March
31, 1999 (unaudited) F3 - F4
Statements of operations for the years ended June 30, 1997
and 1998, the nine months ended March 31, 1998 and 1999,
and the period from September 30, 1991 (date of inception)
to March 31, 1999 (unaudited) F5
Statements of stockholders' equity (deficit) for the period
from September 30, 1991 (date of inception) to March
31, 1999 (unaudited) F6 - F13
Statements of cash flows for the years ended June 30, 1997
and 1998, the nine months ended March 31, 1998
and 1999, and the period from September 30, 1991 (date
of inception) to March 31, 1999 (unaudited) F14 - F16
Notes to financial statements F17 - F31
F-1
<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, 1997 and 1998, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the years ended
June 30, 1997 and 1998. 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, 1997 and 1998, and the results of its operations
and its cash flows for the years ended June 30, 1997 and 1998, 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 significant losses from operations, requires significant additional
financing, and ultimately needs to continue development of its product, obtain
FDA approval, 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. 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.
Minneapolis, Minnesota
August 3, 1998
F-2
<PAGE>
QUANTECH LTD. (A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30, March 31,
ASSETS (Note 3) 1997 1998 1999
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 718,893 $ 46,135 $ 403,015
Debt issuance costs 78,699 - -
Prepaid expenses:
Product development expense - 115,000 86,250
Other 35,452 42,044 45,735
Engineering development (Note 10) - - 194,250
--------------------------------------------------------
Total current assets 833,044 203,179 729,250
--------------------------------------------------------
Property and Equipment
Equipment 329,780 366,493 410,058
Leasehold improvements 15,000 15,000 15,000
--------------------------------------------------------
344,780 381,493 425,058
Less accumulated depreciation 139,267 202,201 257,094
--------------------------------------------------------
205,513 179,292 167,964
--------------------------------------------------------
Other Assets
License agreement, at cost, less accumulated
amortization (Note 4) 2,096,558 2,735,807 2,490,837
Prepaid product development expense, less
current portion - 57,500 -
Patents 8,895 9,029 13,045
Organization expenses, net 113 - -
--------------------------------------------------------
2,105,566 2,802,336 2,503,882
--------------------------------------------------------
$ 3,144,123 $ 3,184,807 $ 3,401,096
========================================================
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' June 30, June 30, March 31,
EQUITY (DEFICIT) 1997 1998 1999
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Current Liabilities
Short-term debt (Note 3) $ 1,070,000 $ 3,112,818 $ 750,000
Accounts payable 100,794 97,333 160,799
Accrued expenses:
Minimum royalty commitment (Note 4) 112,500 75,000 37,500
Spectrum Diagnostics, Inc. obligations (Note 8) 36,509 19,846 19,846
Payroll and vacation 54,226 103,157 120,299
Accrued severance 77,265 - -
Interest 10,685 48,594 2,200
Other 4,019 - -
--------------------------------------------------------
Total current liabilities 1,465,998 3,456,748 1,090,644
--------------------------------------------------------
Redeemable Series A Preferred Stock, authorized
2,500,000 shares; issued and outstanding
1,702,706 shares; redeemable after November 5,
2003, at $5,200,419 (Note 10) - - 4,993,334
--------------------------------------------------------
Commitments and Contingencies (Notes 4, 5, and 8)
Stockholders' Equity (Deficit) (Notes 2, 3, 6, 9, and 10)
Common stock, no par value; authorized
50,000,000 shares; outstanding 2,402,035,
2,565,040, and 2,721,534 shares at June 30,
1997 and 1998, and March 31, 1999,
respectively 480,408 16,308,438 16,483,837
Additional paid-in capital 15,606,017 1,476,669 2,320,745
Deficit accumulated during the development stage (14,408,300) (18,057,048) (21,487,464)
--------------------------------------------------------
1,678,125 (271,941) (2,682,882)
--------------------------------------------------------
$ 3,144,123 $ 3,184,807 $ 3,401,096
========================================================
</TABLE>
F-4
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
September 30,
Nine Months Ended 1991 (Date of
Years Ended June 30 March 31 Inception) to
------------------------------ ------------------------------ March 31,
1997 1998 1998 1999 1999
- -------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income $ 80,854 $ 12,435 $ 10,491 $ 1,475 $ 184,691
------------------------------------------------------------------------------
Expenses:
General and administrative 1,799,117 1,221,196 836,653 1,208,240 10,370,024
Research and development 2,114,586 1,608,361 994,624 1,147,396 7,401,462
Minimum royalty expense (Note 4) 75,000 112,500 75,000 112,500 1,187,500
Losses resulting from transactions with
Spectrum Diagnostics, Inc. (Note 8) - - - - 556,150
Net exchange gain - - - - (67,172)
Interest 17,611 719,126 172,652 721,145 1,938,986
------------------------------------------------------------------------------
4,006,314 3,661,183 2,078,929 3,189,281 21,386,950
------------------------------------------------------------------------------
Loss before income taxes (3,925,460) (3,648,748) (2,068,438) (3,187,806) (21,202,259)
Income taxes (Note 7) - - - - 42,595
------------------------------------------------------------------------------
Net loss $ (3,925,460) $ (3,648,748) $ (2,068,438) $ (3,187,806) $ (21,244,854)
==============================================================================
Net loss attributable to common stockholders:
Net loss $ (3,925,460) $ (3,648,748) $ (2,068,438) $ (3,187,806)
Preferred stock accretion - - - (242,610)
--------------------------------------------------------------
Net loss attributable to common
stockholders $ (3,925,460) $ (3,648,748) $ (2,068,438) $ (3,430,416)
==============================================================
Loss per basic and diluted common share $ (1.66) $ (1.45) $ (0.82) $ (1.29)
==============================================================
Weighted-average common shares outstanding 2,365,914 2,523,975 2,510,312 2,652,854
==============================================================
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------------------- Paid-In
Shares Issued Amount Capital
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, at inception - $ - $ -
Net loss - - -
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 - - -
--------------------------------------------------------
Balance, December 31, 1991 190,000 3,766,320 898,405
Net loss - - -
Common stock transactions:
Common stock issued, September 1992 35,000 699,033 875,967
Common stock issuance costs - - (312,755)
8,000 shares of common stock to be issued - - -
Officer advances, net - - -
Cumulative translation adjustment - - -
Elimination of cumulative translation adjustment - - -
--------------------------------------------------------
Balance, December 31, 1992 225,000 4,465,353 1,461,617
Net loss - - -
Common stock transactions:
Common stock issued, January 1993 8,000 1,600 118,400
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 - - -
--------------------------------------------------------
Balance, June 30, 1993 234,500 46,900 6,012,070
Net loss - - -
12,000 shares of common stock to be issued - - -
Repayments - - -
--------------------------------------------------------
Balance, June 30, 1994 234,500 46,900 6,012,070
Net loss - - -
Common stock issued, June 1995 107,500 21,500 276,068
Warrants issued for services - - 40,200
--------------------------------------------------------
(Continued)
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Common Stock During the Cumulative
Paid for, but Subscriptions Due From Development Translation
Not Issued Receivable Officers Stage Adjustment
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ - $ - $ - $ - $ -
- - - (594,620) -
- - - - -
- - - - -
- - - - -
- - - - 387,754
- -------------------------------------------------------------------------------------------------
- - - (594,620) 387,754
- - - (2,880,988) -
- (53,689) - - -
- - - - -
120,000 - - - -
- - (27,433) - -
- - - - (209,099)
- - - - (178,655)
- -------------------------------------------------------------------------------------------------
120,000 (53,689) (27,433) (3,475,608) -
- - - (996,089) -
(120,000) - - - -
- - - - -
- - - - -
- - 5,137 - -
- -------------------------------------------------------------------------------------------------
- (53,689) (22,296) (4,471,697) -
- - - (1,543,888) -
30,000 - - - -
- 53,689 22,296 - -
- -------------------------------------------------------------------------------------------------
30,000 - - (6,015,585) -
- - - (2,070,292) -
(30,000) (20,000) - - -
- - - - -
- -------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------------------- Paid-In
Shares Issued Amount Capital
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1995 342,000 68,400 6,328,338
Net loss - - -
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
Payment received on subscription receivable (960) (192) (14,808)
Compensation expense recorded on stock options - - 125,000
--------------------------------------------------------
Balance, June 30, 1996 2,345,035 469,008 15,296,856
Net loss - - -
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
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 - - -
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
--------------------------------------------------------
Balance, June 30, 1997 2,402,035 480,408 15,606,017
Net loss - - -
Conversion of common stock from par
value to no par value - 15,392,446 (15,392,446)
(Continued)
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Common Stock During the Cumulative
Paid for, but Subscriptions Due From Development Translation
Not Issued Receivable Officers Stage Adjustment
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- (20,000) - (8,085,877) -
- - - (2,396,963) -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- 20,000 - - -
- - - - -
----------------------------------------------------------------------------------------------
- - - (10,482,840) -
- - - (3,925,460) -
- - - - -
- - - - -
- - - - -
- - - - -
- (57,500) - - -
- - - - -
- - - - -
- - - - -
- 57,500 - - -
- - - - -
- - - - -
- - - - -
----------------------------------------------------------------------------------------------
- - - (14,408,300) -
- - - (3,648,748) -
- - - - -
</TABLE>
F-9
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------------------- Paid-In
Shares Issued Amount Capital
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1997 (continued)
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 1-for-20
reverse stock split (73) - -
--------------------------------------------------------
Balance, June 30, 1998 2,565,040 16,308,438 1,476,669
Net loss (unaudited) - - -
Warrants issued with notes payable (unaudited) - - 76
Common stock issued upon conversion of notes
payable (unaudited):
July 1998 2,000 7,060 -
September 1998 3,400 12,002 -
October 1998 25,000 18,750 -
Common stock issued upon exercise of warrant
(unaudited):
August 1998 2,045 5,114 -
(Continued)
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Common Stock During the Cumulative
Paid for, but Subscriptions Due From Development Translation
Not Issued Receivable Officers Stage Adjustment
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
----------------------------------------------------------------------------------------------
- - - (18,057,048) -
- - - (3,187,806) -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
</TABLE>
F-11
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------------------- Paid-In
Shares Issued Amount Capital
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1998 (continued)
Common stock issued for equipment and services
received (unaudited):
July 1998 5,714 20,000 -
August 1998 9,196 27,589 -
September 1998 12,557 11,318 -
December 1998 6,078 5,688 -
Stock options issued for services (unaudited):
October 1998 - - 42,000
Common stock issued upon conversion of
preferred stock (unaudited):
November 1998 74,052 55,539 -
January 1999 15,952 11,964 -
March 1999 500 375 -
Warrants issued for services (unaudited):
November 1998 - - 554,000
Compensation expense recorded on stock options
(unaudited) - - 21,000
Amortization of engineering development
expense (unaudited) - - -
Warrants issued in conjunction with Series A
preferred stock (unaudited) - - 227,000
Accretion to redemption value of Series A
redeemable preferred stock (unaudited) - - -
--------------------------------------------------------
Balance, March 31, 1999 (unaudited) 2,721,534 $ 16,483,837 $ 2,320,745
========================================================
</TABLE>
See Notes to Financial Statements.
F-12
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Common Stock During the Cumulative
Paid for, but Subscriptions Due From Development Translation
Not Issued Receivable Officers Stage Adjustment
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- - - - -
- - - (242,610) -
----------------------------------------------------------------------------------------------
$ - $ - $ - $ (21,487,464) $ -
==============================================================================================
</TABLE>
F-13
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
September 30,
Nine Months Ended 1991 (Date of
Years Ended June 30 March 31 Inception) to
------------------------------ ------------------------------ March 31,
1997 1998 1998 1999 1999
- -------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (3,925,460) $ (3,648,748) $ (2,068,438) $ (3,187,806) $ (21,244,854)
Adjustments to reconcile net loss to net cash
used in operating activities:
Elimination of cumulative translation adjustment - - - - (178,655)
Depreciation 60,610 62,934 46,063 54,893 303,448
Amortization 228,338 379,727 292,323 331,220 2,067,564
Noncash compensation services and interest 48,000 787,429 47,466 1,011,296 2,335,975
Losses resulting from transactions with Spectrum
Diagnostics, Inc. (Note 8) - - - - 556,150
Write-down of investment - - - - 67,500
Changes in assets and liabilities, net of effects
from purchase of Spectrum Diagnostics, Inc.:
Decrease in prepaid expenses 5,817 1,062 (12,460) (3,139) 38,909
Increase (decrease) in accounts payable (14,140) (10,128) 78,704 63,466 152,577
Increase (decrease) in accrued expenses 204,067 (48,607) 4,518 (66,752) 453,969
------------------------------------------------------------------------------
Net cash used in operating activities (3,392,768) (2,476,331) (1,611,824) (1,796,822) (15,447,417)
------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (99,097) (16,713) (17,998) (15,976) (454,227)
Proceeds on disposition of property 37,375 - - - 37,375
Organization expenses - - - - (97,547)
Patent expenses (8,895) (134) (134) (4,016) (13,045)
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 (78,699) - (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 (149,316) (16,847) (28,535) (19,992) (4,438,346)
------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net proceeds from the sale of common stock and
warrants 215,061 - 131 - 12,880,797
Net proceeds from sale of preferred stock - - - 1,671,464 1,671,464
Proceeds from debt obligations 1,070,000 1,820,420 937,000 502,230 6,051,085
Payments received on stock subscriptions
receivable 57,500 - - - 5,000
Payments on debt obligations (24,455) - - - (522,810)
------------------------------------------------------------------------------
Net cash provided by financing
activities 1,318,106 1,820,420 937,131 2,173,694 20,085,536
------------------------------------------------------------------------------
(Continued)
</TABLE>
F-14
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
September 30,
Nine Months Ended 1991 (Date of
Years Ended June 30 March 31 Inception) to
------------------------------ ------------------------------ March 31,
1997 1998 1998 1999 1999
- -------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Effect of Exchange Rate Changes on Cash - - - - 203,242
------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (2,223,978) (672,758) (703,228) 356,880 403,015
Cash and Cash Equivalents
Beginning 2,942,871 718,893 718,893 46,135 -
------------------------------------------------------------------------------
Ending $ 718,893 $ 46,135 $ 15,665 $ 403,015 $ 403,015
==============================================================================
Cash Payments for Interest $ 6,925 $ 20,374 $ 1,165 $ 74,284 $ 234,754
==============================================================================
Supplemental Schedule of Noncash Investing and
Financing Activities
Issuance of debt obligations for services,
accounts payable, and accrued interest $ - $ 219,300 $ - $ - $ 259,500
Issuance of debt for acquisition of license - 550,000 550,000 - 550,000
Issuance of warrants in connection with:
Product development - 230,000 230,000 - 230,000
Acquisition of sublicense agreement - 165 165 - 165
Issuance of convertible debt - 451 74 - 451
Guarantee of debt - 15,716 15,216 - 15,716
Acquisition of engineering development agreement - - - 554,000 554,000
Series A preferred stock sales and exchange for debt - - - 227,000 227,000
Amount attributable to value of beneficial debt
conversion feature - 988,444 - 546,902 1,535,346
Capital expenditures included in accounts payable - 6,667 - - 6,667
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. - - - - (674,374)
Stock issuance costs to be paid - - - - 237,201
Subscriptions receivable offset by accrued
compensation - - - - 53,689
Officer advances offset by accrued compensation - - - - 109,462
Issuance of options and warrants for compensation
and services - 45,203 - 42,000 177,203
Series A preferred stock issued for debt obligations - - - 3,374,138 3,374,138
Accretion to redemption value of Series A redeemable
preferred stock - - - 242,610 242,610
==============================================================================
(Continued)
</TABLE>
F-15
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
September 30,
Nine Months Ended 1991 (Date of
Years Ended June 30 March 31 Inception) to
------------------------------ ------------------------------ March 31,
1997 1998 1998 1999 1999
- -------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental Schedule of Noncash Investing and
Financing Activities (Continued)
Acquisition of Spectrum Diagnostics, Inc.
(Note 8):
Fair value of other assets acquired,
principally the license agreement $ - $ - $ - $ - $ 1,489,500
Liabilities assumed - - - - (285,000)
------------------------------------------------------------------------------
Cash purchase price paid, less
$5,199 cash acquired $ - $ - $ - $ - $ 1,204,500
==============================================================================
Common stock issued for:
Services, equipment, and interest $ - $ 45,584 $ 45,584 $ 64,595 $ 384,229
Exercise of warrant - - - 5,114 5,114
Acquisition of license agreement - 390,000 390,000 - 390,000
Subscriptions receivable - - - - 5,000
Debt obligations - - - 37,812 2,355,937
Accounts payable - - - - 40,000
Accrued expenses - - - - 360,394
Preferred stock - - - 67,878 67,878
------------------------------------------------------------------------------
$ - $ 435,584 $ 435,584 $ 175,399 $ 3,608,552
==============================================================================
</TABLE>
See Notes to Financial Statements.
F-16
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and
1999, is unaudited.)
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Quantech Ltd. (Quantech or the Company) was formed under the
laws of the state 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 was accounted
for as if it were a pooling of interests.
The Company had no operations prior to the merger and is continuing the business
of SDS to commercialize the 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.
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.
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 nature or 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 having the same or similar
remaining maturities with similar risk and collateral requirements. The recorded
value of short-term debt approximates its fair value.
Prepaid product development expense: Prepaid product development expense arises
from the valuation of warrants issued to a licensee in return for technical
assistance to be rendered to the Company by the licensee over a period of
approximately two years. The expense is being recognized over this period (see
Note 4).
Prepaid engineering development expense: Prepaid engineering development expense
arises from the valuation of warrants issued in return for research and
development services to be rendered to the Company over a period of
approximately one year. The expense is being recognized over this period (see
Note 10).
Other assets: The license agreement is being amortized using the straight-line
method over the remaining life of the underlying patents of 15 years (see Note
4). Costs of obtaining additional patents are capitalized and will be amortized
over their useful lives.
F-17
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and 1999,
is unaudited.)
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The Company reviews its intangible assets periodically to determine potential
impairment by comparing the carrying value of the intangibles with expected
future net cash flows. Though the Company has had no sales to date nor an
established market for its product, it has performed market studies to determine
potential size of the market and expected acceptance of its product. This has
been the basis for the Company's expected future net cash flows. 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 would be determined
based on estimated expected future discounted cash flows or appraised value. 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, or the life of the
related lease, whichever is less.
Debt discount attributable to value of conversion feature: The Company has
allocated a portion of the proceeds of its debt to a beneficial conversion
feature, measured by the intrinsic value of that feature. This amount is being
amortized to interest expense using the straight-line method over the remaining
term of the debt based on the expected conversion date of September 30, 1998
(see Note 3). This debt was immediately convertible, with the conversion price
determined as the lesser of $3.53 per share or 80 percent of the average trading
price for 20 consecutive days before a) a financing, sale, merger, or licensing
transaction occurred or b) the maturity date of September 30, 1998. The Company
determined the discount should be amortized over the period of issuance to
September 30, 1998, for the following reasons:
o The Company's history with these types of securities has shown that the
debt holders do not convert until the maturity date;
o No additional financing arrangement was expected to occur before the
maturity date;
o If no additional financing arrangement occurred before the maturity
date, it would be likely that the conversion rate at September 30,
1998, would be more favorable to the debt holders; and
o By not converting, the debt holders would be in a senior secured
position in the event the Company has significant adverse financial
circumstances prior to September 30, 1998.
Substantially all of the notes were converted to preferred stock after September
30, 1998 (see Note 10). For any of the debt holders who elected to convert their
instrument to common stock prior to the expected conversion date, the
unamortized portion of the discount related to their converted debt was charged
to interest expense in the period of conversion.
F-18
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and 1999,
is unaudited.)
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 basis 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: The FASB has issued Statement No. 128, Earnings Per
Share, which supersedes APB Opinion No. 15. Statement No. 128 requires the
presentation of earnings per share by all entities that have common stock or
potential common stock, such as options, warrants, and convertible securities,
outstanding that trade in a public market. Those entities that have only common
stock outstanding are required to present basic earnings per share amounts. All
other entities are required to present basic and diluted per share amounts.
Diluted per share amounts assume the conversion, exercise, or issuance of all
potential common stock instruments unless the effect is to reduce the loss or
increase the income per common share from continuing operations.
The Company has granted options and warrants to purchase shares of common stock
at various amounts per share (see Note 6). Those options and warrants were not
included in the computation of diluted earnings per share because the Company
has incurred losses in all periods. The inclusion of potential common shares in
the calculation of diluted loss per share would have an antidilutive effect.
Therefore, basic and diluted loss per share amounts are the same in each period
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.
Comprehensive income: The FASB has issued Statement No. 130, Reporting
Comprehensive Income, effective for fiscal years beginning after December 15,
1997. Statement No. 130 requires reporting items which are components of other
comprehensive income, such as foreign currency items and unrealized gains and
losses on certain investments in debt and equity securities. The Company will
adopt this statement in the fiscal year ending June 30, 1999. However, it is not
expected to have an effect on the presentation of the Company's financial
statements.
F-19
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and 1999,
is unaudited.)
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Segments: The FASB has issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information, effective for fiscal years beginning
after December 15, 1997. Statement No. 131 requires disclosure of certain
information for each reportable segment, including general information, profit
and loss information, segment assets, etc. The Company will adopt this statement
in the fiscal year ending June 30, 1999. The Company does not expect this
statement to have an effect on its financial statements.
Translation of foreign currency statements: Prior to September of 1992, the
functional and reporting currency for SDS was the Italian lira. 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 lira to the United States dollar. As a result, the cumulative
translation adjustment component of equity was eliminated in 1992.
Interim financial information (unaudited): The financial statements and notes
related thereto as of March 31, 1999, for the nine-month periods ended March 31,
1998 and 1999, and the period from September 30, 1991 (date of inception), to
March 31, 1999, are unaudited but, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations. The
operating results for the interim periods are not indicative of the operating
results to be expected for a full year or for other interim periods. Not all
disclosures required by generally accepted accounting principles necessary for a
complete presentation have been included.
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 significant losses
from operations, requires significant additional financing, and ultimately needs
to continue development of its product, obtain FDA approval, generate revenues,
and successfully attain profitable operations. These factors raise substantial
doubt about the Company's ability to continue as a going concern and realize the
value of its assets, including its license agreement. The financial statements
do not reflect any adjustments which might be necessary should the Company not
remain a going concern.
F-20
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and 1999,
is unaudited.)
Note 2. Basis of Presentation (Continued)
Without immediate funding from equity or debt financing, the Company does not
have sufficient funds to remain a going concern, or to complete commercial
development of and bring its instrument and disposables to commercial production
and realize the value of the license agreement. The Company obtained funding
through a private offering of its Series A Convertible Preferred Stock in
November 1998 and converted notes payable, due September 30, 1998, to Series A
Convertible Preferred Stock (see Note 10). The Company has also increased its
note payable to a bank by $250,000. In addition, the Company intends to pursue a
$500,000 to $2 million Series B Preferred Stock private offering in June 1999
and additional offerings with terms yet to be determined. There is no assurance
that additional financing can be obtained.
Note 3. Short-Term Debt Obligations
Short-term debt obligations as of June 30, 1997 and 1998, and March 31, 1999,
were as follows:
<TABLE>
<CAPTION>
June 30
-------------------------------------------------- March 31,
1997 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
13.5% convertible secured promissory
notes, payable September 1998, secured by
substantially all of the Company's assets $ 1,070,000 $ 3,159,720 $ -
Less discount attributable to value of
beneficial conversion feature - (546,902) -
Prime rate unsecured note payable to a
bank, due December 1999, guaranteed by a
shareholder - 500,000 750,000
--------------------------------------------------------------------------
$ 1,070,000 $ 3,112,818 $ 750,000
==========================================================================
</TABLE>
In April 1998, the Company completed an offering of secured promissory notes of
$1,625,150 to accredited investors and issued warrants in connection with the
sale of such notes to the investors for the purchase of 243,773 shares of common
stock. In addition, the selling agent also received warrants to purchase 10,249
shares of common stock. The notes are convertible into shares of common stock at
a price equal to the lesser of $3.53 or 80 percent of the market price of the
common stock for (i) the 20 consecutive trading days prior to the maturity date
of the notes or (ii) the price at which the transaction which triggers repayment
of the notes is completed. The warrants exercise price is calculated in the same
manner as the notes conversion price.
During May 1998, holders of the Company's convertible secured promissory notes
agreed to convert $219,300 of accrued interest in notes and extend the maturity
date of the notes to September 30, 1998, from June 1, 1998. The notes also
became immediately convertible (see Note 1) under the same pricing terms
discussed above. The note holders received additional warrants to purchase
178,618 shares of common stock in conjunction with the extension.
F-21
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and 1999,
is unaudited.)
Note 3. Short-Term Debt Obligations (Continued)
During May 1998, the Company began offering additional convertible secured
promissory notes to accredited investors. The maximum amount of notes to be
issued was $500,000. As of June 30, 1998, notes in the amount of $245,270 were
issued. This debt was immediately convertible to common stock (see Note 1).
Purchasers of the notes also received warrants for the purchase of 36,790 shares
of common stock. Conversion and warrant exercise pricing terms are the same as
those discussed above.
The above warrants were valued at stated cost of $943, which approximated their
fair value. The fair value was based upon management's determination that the
effective interest rate of the debt was determined to be equal to the market
rate for similar debt instruments with similar risk. Also the value assigned to
the warrants was not materially different than the value computed using the
Black-Scholes pricing model.
Subsequent to year-end, the Company completed the offering by selling an
additional $252,230 of the notes. Warrants to purchase 37,835 shares of common
stock were issued. In conjunction with this offering, the selling agent received
warrants to purchase 3,314 shares of common stock. These warrants were valued at
$76. This fair value was based upon management's determination that the
effective interest rate of the debt was determined to be equal to the market
rate for similar debt instruments with similar risk. Also the value assigned to
the warrants was not materially different than the value computed using the
Black-Scholes pricing model.
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, $1,000,000 by December 31, 1997, $1,150,000
by December 31, 1998, and $1,300,000 by December 31, 1999, the licensor has the
right to deprive the Company of its exclusive rights under the license agreement
(each time one of such benchmarks is not met). As of March 31, 1999, the Company
has paid $1,150,000 of the cumulative payment. The Company has also ratably
accrued additional minimum royalty payments of $37,500 as of March 31, 1999,
because sales or sublicense revenues through March 31, 1999, may not be adequate
to meet the cumulative minimum royalty payments. The Company intends to continue
accruing and paying minimum royalties for future periods until royalties based
on revenues exceed the minimum payment amounts.
The obligations of the Company to pay royalties terminate when 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.
F-22
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and 1999,
is unaudited.)
Note 4. Agreements (Continued)
On March 3, 1994, the Company entered into an agreement with an investor group,
which included a shareholder of the Company, that granted them rights for a
sublicense of the research portion of the original license. This agreement had
no expiration date. The investor group received this sublicense in exchange for
a promise to purchase 10 percent of the aggregate number of shares offered in
the next public offering by the Company, not to exceed an aggregate amount of
$500,000. The investor group has not purchased any shares to date under the
agreement.
In September 1997, the Company entered into an agreement to purchase certain
sublicense rights that had previously been granted to the investor group. In
return for these sublicense rights, the Company issued 150,000 shares of the
Company's common stock, convertible secured promissory notes totaling $550,000,
warrants to purchase 82,500 shares of the Company's common stock, and canceled
the requirement to purchase shares in the next public offering. The purchase of
the sublicense rights was expected to provide the Company with future benefits
as the Company was subsequently able to sign an exclusive sublicense agreement
for nonmedical markets. This agreement provides the Company with a possibility
of receiving a future royalty stream from the sale of products under this new
sublicense agreement. Therefore, the Company capitalized the sublicense rights
at $940,165, the amount that approximates the fair market price of the equity
and debt instruments issued as of the date of the agreement. The value assigned
to the common stock was based on the quoted market value. The values of the
convertible debt instrument and the detachable warrants were based on similar
instruments previously placed by the Company (see Note 3). The value assigned to
the warrants was not materially different than the value computed using the
Black-Scholes pricing model.
Technology and development agreement: During the year ended June 30, 1998, the
Company entered into a technology and development agreement with a leading
supplier of life science systems and analytical instruments, which provides
exclusive license rights to certain of the Company's technology for use outside
of medical diagnostics, and co-exclusive rights to nucleic acid medical
diagnostics. The licensee, pursuant to the agreement, is providing technical
assistance related to the Company's medical diagnostic system and will be
required to pay future royalty payments if the licensee sells products
containing the Company's technology. The royalties to be received will vary
between 6 and 12 percent, depending on the phase of assistance. When all phases
are complete, the royalty will be 6 percent. Minimum annual royalties to be paid
by the licensee will be $500,000 beginning December 2000, expiring in
conjunction with the related patents. Should the licensee fail to commercialize
the licensed technology, all rights will revert back to the Company.
The licensee also received a warrant to purchase 1,400,000 shares of common
stock. The warrant expires December 2002 and is exercisable immediately. The
exercise price of the warrant is 95 percent of the average market price of the
Company's common stock for the 25 days prior to the date the licensee elects to
exercise the warrant. The warrant was valued at $230,000, based on the fair
value of technical assistance expected to be received by the Company over the
term of the technology and development agreement. As the technical assistance is
received, the prepaid asset resulting from this transaction is reduced, and
research and development expense is charged.
F-23
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and 1999,
is unaudited.)
Note 4. Agreements (Continued)
In conjunction with the above technology and development agreement, the Company
has entered into a license for certain portions of this technology. The Company
will be required to pay royalties at 8 percent of sales on products featuring
the technology. Minimum annual royalties of $500,000 begin in December 2000,
expiring in conjunction with the related patents. Should the Company fail to
commercialize the licensed technology, all rights will revert back to the
licensor, and future minimum annual royalty obligations will be canceled.
Employment agreements: The Company has at-will employment agreements with its
chief executive officer and chief financial officer. The agreements require the
payment of one year's salary (for the chief financial officer) or $150,000 (for
the chief executive officer) if employment is terminated due to the sale of the
Company or a greater than 50 percent change in ownership. In addition, the chief
financial officer is entitled to six months' salary if he is terminated without
cause.
Note 5. Leases
The Company leases its office space under an agreement which expires February
28, 2000. Approximate minimum aggregate rental commitments under this lease are
as follows:
Years ending June 30:
1999 $ 38,000
2000 26,000
-----------------------
$ 64,000
-----------------------
Rental expense for the years ended June 30, 1997 and 1998, was approximately
$68,000 and $58,000, respectively.
Note 6. Stockholders' Equity
Capital stock: The Company has authorized 12,500,000 of capital shares
consisting of 10,000,000 common shares and 2,500,000 undesignated shares (see
Note 10 for subsequent activity).
Reverse stock split: On June 2, 1998, the Company reduced the number of shares
outstanding in a 1-for-20 reverse stock split. All share and per share amounts
presented have been retroactively adjusted to reflect the split.
Par value of stock: In March 1998, the Company amended its Articles of
Incorporation to reduce the number of authorized shares from 90,000,000 to
12,500,000. In addition, the common stock was changed from $0.01 per share par
value to no par value. The cumulative amount paid in excess of the previously
stated par value has been reclassed from additional paid-in capital to common
stock on the statement of stockholders' equity (deficit) for the year ended June
30, 1998.
F-24
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and 1999,
is unaudited.)
Note 6. Stockholders' Equity (Continued)
Options and warrants--employee grants: The Company regularly grants options to
its employees. As permitted under generally accepted accounting principles,
these grants are accounted for following APB Opinion No. 25 and related
interpretations. Accordingly, compensation cost has been recognized for those
grants whose exercise price of the grant is less than the fair market value of
the stock on the date of grant. There was $48,000 of compensation expense
recorded for employee grants for the year ended June 30, 1997, and none recorded
for the year ended June 30, 1998, and nine months ended March 31, 1999.
Options and warrants--nonemployee grants: The Company also grants options and
warrants to nonemployees for goods, services, and in conjunction with certain
agreements. These grants are accounted for under FASB Statement No. 123 based on
the grant date fair values.
Options and warrants--pro forma information: Had compensation cost for all of
the stock-based compensation grants and warrants issued been determined based on
the grant date fair values of awards, reported net loss attributable to common
stockholders and net loss per common share would have been reduced to the pro
forma amounts shown below:
<TABLE>
<CAPTION>
June 30
-------------------------------------------------- March 31,
1997 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Net loss attributable to common stockholders,
as reported $ (3,925,460) $ (3,648,748) $ (3,187,806)
Net loss attributable to common stockholders,
pro forma (4,197,373) (4,016,450) (3,518,334)
Net loss per basic and diluted common share,
as reported (1.66) (1.45) (1.29)
Net loss per basic and diluted common share,
pro forma (1.77) (1.59) (1.33)
</TABLE>
The above pro forma effects on net loss and net loss per share are not likely to
be representative of the effects on reported net loss for future years because
options vest over several years and additional awards generally are made each
year.
F-25
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and 1999,
is unaudited.)
Note 6. Stockholders' Equity (Continued)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997 and 1998:
<TABLE>
<CAPTION>
June 30
-------------------------------------------------- March 31,
1997 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Expected dividend yield $ - $ - $ -
Expected stock price volatility 71.63% 67.31% 70.01%
Risk-free interest rate 6.00% 6.00% 6.00%
Expected life of options (years) 3 3 3
</TABLE>
Transactions involving stock options and warrants are summarized as follows (see
Note 10 for subsequent activity):
<TABLE>
<CAPTION>
Weighted-
Stock Average Exercise
Warrants Options Price Per Share
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1996 602,505 186,250 $ 5.40
Granted 172,140 56,175 8.60
Exercised (22,750) (16,000) 4.60
Expired (12,500) (10,916) 9.60
--------------------------------------------------------------------------
Balance, June 30, 1997 739,395 215,509 6.20
Granted 2,120,148 521,000 3.30
Exercised - - -
Expired (187,828) (243,009) 7.26
--------------------------------------------------------------------------
Balance, June 30, 1998 2,671,715 493,500 3.58
Granted (unaudited) 2,876,925 992,054 0.96
Exercised (unaudited) (22,500) - 2.50
Expired (unaudited) (720,159) (32,500) 3.56
--------------------------------------------------------------------------
Balance, March 31, 1999 (unaudited) 4,805,981 1,453,054 $ 1.62
==========================================================================
</TABLE>
The fair value of warrants granted during 1997, 1998, and the nine months ended
March 31, 1999, was $0.002, $0.127, and $0.270, respectively.
The fair value of equity instruments granted for goods and services during 1997,
1998, and the nine months ended March 31, 1999, was $1.371, $0.427, and $0.330,
respectively.
F-26
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and 1999,
is unaudited.)
Note 6. Stockholders' Equity (Continued)
The weighted-average fair value of options granted during 1997, 1998, and the
nine months ended March 31, 1999, was $7.20, $1.09, and $0.31, respectively. The
following tables summarize information about stock options and warrants
outstanding as of March 31, 1999:
Options and Warrants Outstanding
(Unaudited)
<TABLE>
<CAPTION>
Weighted-
Average Weighted-
Range of Number of Remaining Average
Exercise Units Contractual Exercise
Price Outstanding Life Price
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$0.75-$0.81 1,795,927 4.4 $ 0.75
$1.10 1,800,000 4.6 1.10
$1.13-$1.18 102,548 4.4 1.14
$1.32 144,000 4.7 1.32
$1.53 1,400,000(1) 3.7 1.53
$1.63-$2.00 22,004 4.7 1.94
$2.40-$2.50 91,400 1.2 2.46
$3.00 373,000 3.1 3.00
$5.00 495,281 1.5 5.00
$12.00 5,000 2.0 12.00
$14.40 29,875 2.2 14.40
--------------------- -------------------------
6,259,035 $ 1.62
===================== =========================
</TABLE>
OPTIONS AND WARRANTS EXERCISABLE
(Unaudited)
<TABLE>
<CAPTION>
Weighted-
Range of Number of Average
Exercise Units Exercise
Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$0.75-$0.81 1,332,961 $ 0.75
$1.10 1,800,000 1.10
$1.13-$1.18 102,548 1.14
$1.32 144,000 1.32
$1.53 1,400,000 1.53
$1.75-$2.00 17,500 1.97
$2.40-$2.50 91,400 2.46
$3.00 334,835 3.00
$5.00 495,281 5.00
$12.00 5,000 12.00
$14.40 29,875 14.40
--------------------------------------------------------
5,753,400 $ 1.68
========================================================
</TABLE>
F-27
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and 1999,
is unaudited.)
Note 6. Stockholders' Equity (Continued)
(1) These warrants are exercisable at a price equal to 95 percent of the
average of the last sale price of the Company's common stock in 25
consecutive trading days immediately preceding the date of the first
notice of exercise of the warrant received by the Company. The exercise
price of these warrants will change as the market value of the
Company's common stock changes.
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, since 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
$11,920,000 in operating loss carryforwards and $316,000 in research and
development credits at June 30, 1998, which may be used to offset otherwise
future taxable income. These carryforwards are subject to certain limitations
under the provisions of the Internal Revenue Code, Section 382, which relate to
a 50 percent change in control over a three-year period. At June 30, 1998, the
annual net operating loss carryforward limitation due to Section 382 was
approximately $200,000 per year, which reduced the carryforward by $2,800,000.
Further changes of control, including those discussed in Notes 2 and 10, may
result in additional limitations and expiration of additional amounts of the net
operating loss carryforwards. Usage of the net operating loss carryforwards is
also dependent upon the Company attaining profitable operations in the future.
Loss carryforwards and credits for tax purposes, reduced by the Section 382
limitation discussed above, as of June 30, 1998, have the following expiration
dates:
Net Research and
Expiration Operating Development
Date Loss Credits
- ----------------------------------------------------------------------
2006 $ 241,000 $ -
2007 1,115,000 -
2008 827,000 20,000
2009 849,000 26,000
2010 - 45,000
2011 2,193,000 -
2012 3,738,000 117,000
2013 2,957,000 108,000
-------------------------------------------------
$ 11,920,000 $ 316,000
=================================================
F-28
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and 1999,
is unaudited.)
Note 7. Income Taxes (Continued)
The tax effects of principal temporary differences at an assumed effective
annual rate of 34 percent are shown in the following table:
<TABLE>
<CAPTION>
June 30
-------------------------------------------------
1997 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets (liabilities):
Loss carryforwards $ 3,047,000 $ 4,053,000
Royalties 38,000 26,000
Research and development credits and deductions 414,000 521,000
Guarantee of Spectrum Diagnostics, Inc. debt 115,000 115,000
Compensation expense 59,000 30,000
Beneficial conversion feature - 150,000
Other accruals (10,000) 29,000
-------------------------------------------------
3,663,000 4,924,000
Valuation allowance for deferred tax assets (3,663,000) (4,924,000)
-------------------------------------------------
Net deferred tax assets $ - $ -
=================================================
</TABLE>
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, 1997 and 1998, due to the valuation allowance recorded against deferred
tax assets.
Note 8. Spectrum Diagnostics, Inc.
As a result of its merger with SDS (see Note 1), Quantech guaranteed payment of
certain liabilities. As of June 30, 1998, the Company is not aware of any
guarantees outstanding; however, the Company has recorded a liability of $19,800
for potential claims or unknown liabilities.
Note 9. Subsequent Events
During July and August 1998, the Company issued 14,910 shares of its common
stock at prices ranging from $3.00 per share to $3.50 per share for equipment
and services rendered. In addition, 2,000 shares were issued pursuant to the
conversion of a promissory note, and 2,045 shares were issued pursuant to the
exercise of a warrant.
Note 10. Additional Subsequent Events (Unaudited)
In September and October 1998, 3,400 and 25,000 shares of common stock,
respectively, were issued pursuant to the conversion of promissory notes. In
September and from October to December 1998, 12,557 and 6,078, respectively,
shares of common stock were issued for equipment and services rendered at prices
ranging from $0.75 to $1.83 per share.
F-29
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and 1999,
is unaudited.)
Note 10. Additional Subsequent Events (Unaudited) (Continued)
In November 1998, the Company established Series A Preferred Stock (Series A
Stock) and designated 2,500,000 of its authorized and previously undesignated
shares as Series A Stock. The 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. The Series A Stock is not
redeemable until November 5, 2003. If any time after November 5, 2003, the
Company receives a written request from the holders of at least 50 percent of
the outstanding share 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 percent return per annum. Series A Stock is
automatically converted into shares of common stock if (i) the Company closes on
an equity offering of at least $5,000,000 or (ii) at least 50 percent of the
number of shares of Series A Stock that were outstanding as of November 30,
1998, have been converted or redeemed. The excess of redemption value over
carrying value will be accrued, using the interest method, over the period until
the first redemption date of November 5, 2003.
In November and December 1998, the Company sold 600,617 shares of its Series A
Stock to accredited investors at $3.00 per share and issued 1,124,715 shares of
Series A Stock pursuant to conversion of promissory notes at a conversion price
of $3.00 per share. The holders of the promissory notes also received warrants
to purchase 728,957 shares of common stock at an exercise price of $0.75. The
receipt of these warrants canceled the detachable warrants issued in conjunction
with the promissory notes. The new warrants were valued at $162,000 using the
Black-Scholes model. In conjunction with these transactions, the Company paid
commissions and expenses of $125,700 and issued warrants to purchase 176,420
shares of common stock to the selling agents, which were valued at approximately
$65,000 using the Black-Scholes model.
In November 1998 through March 1999, 90,504 shares of common stock were issued
pursuant to conversion of Series A Stock.
In November 1998, a warrant to purchase 1,800,000 shares of common stock was
issued in conjunction with a research and development services agreement. The
warrant is nonforfeitable, fully vested, and exercisable immediately at $1.10
per share and was valued at approximately $518,000 using the Black-Scholes model
as of the contract date, which is the measurement date. This amount was also
recorded as a prepaid expense. Since all of the services under this agreement
had not been rendered, the $388,500 unearned portion as of December 31, 1998,
has been recorded as a prepaid asset. The unearned portion will be recognized as
expense as services are rendered over the term of the agreement. In conjunction
with this agreement, warrants to purchase 144,000 shares of common stock were
issued, and $190,000 in cash was paid to the investment banking firm that
arranged the transaction. These warrants were valued at $36,000 using the
Black-Scholes model.
In December 1998, the Company amended its Articles of Incorporation to increase
the number of authorized shares from 12,500,000 to 75,000,000. As of the last
Board of Directors designation date, 50,000,000 is common stock, 2,500,000 is
Series A Stock, 2,000,000 is Series B Stock, and 20,500,000 is undesignated.
F-30
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the nine-month periods ended March 31, 1998 and 1999,
is unaudited.)
Note 10. Additional Subsequent Events (Unaudited) (Continued)
In October 1998 through March 1999, the Company issued options to purchase
992,054 shares of common stock under the Company's 1998 Stock Option Plan. Under
the 1998 Stock Option Plan, options for up to 2,000,000 shares may be granted.
If any of the options granted under the plan expire or are terminated prior to
being exercised in full, the unexercised portion of such options will once again
be available for additional option grants. The options granted will have a
maximum term of ten years and an exercise price not less than the market price
on the date of grant. One-third of the option grant is exercisable immediately,
with one-third becoming exercisable on each of the second and third
anniversaries of the date of grant.
In May 1999, the Company established Series B Preferred Stock (Series B Stock)
and designated 2,000,000 of its authorized and previously undesignated shares as
Series B Stock. The shares have no par value and a liquidation value of $1.50
per share. Each share of Series B Stock is convertible into, and has voting
rights equal to, one share of common stock. Series B Stock is automatically
converted into shares of common stock if (i) the Company closes on an equity
offering of at least $5,000,000 or (ii) at least 50 percent of the number of
shares of Series B Stock that were outstanding have been converted. In the event
the next sale of securities by the Company results in a price lower than $1.875
per share, holders of Series B Stock will receive additional common stock upon
conversion equal to an amount obtained by dividing the holder's original
investment by 80 percent of the price of the next offering less the number of
Series B Stock shares originally received.
In May and June 1999, the Company sold 556,667 shares of its Series B Stock to
accredited investors at $1.50 per share. In conjunction with this transaction,
the Company paid commissions and expenses of $33,500 and issued warrants to
purchase 55,667 shares of common stock to the selling agents, which were valued
at approximately $43,000 using the Black-Sholes model.
F-31
<PAGE>
Prospective investors may rely only on the information contained in this
prospectus. Neither Quantech nor the selling stockholders has authorized anyone
to provide prospective investors with information different form that contained
in this prospectus. The information in this prospectus is correct only as of the
date of this prospectus, regardless of the time of delivery of this prospectus
or any sale of these securities.
Until ________________, 1999 all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
Quantech, Ltd.
8,507,349 Shares
of
Common Stock
---------------------
PROSPECTUS
---------------------
_____________________, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 302A.521, subd. 2, of the Minnesota Statutes requires Quantech
to indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect to
Quantech, against judgments, penalties, fines, including, without limitation,
excise taxes assessed against the person with respect to an employee benefit
plan, settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions if such person (1) has not been
indemnified by another organization or employee benefit plan for the same
judgments, penalties or fines; (2) acted in good faith; (3) received no improper
personal benefit, and statutory procedure has been followed in the case of any
conflict of interest by a director; (4) in the case of a criminal proceeding,
had no reasonable cause to believe the conduct was unlawful; and (5) in the case
of acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, board committee member or employee, reasonably believed that the
conduct was in the best interests of Quantech, or, in the case of performance by
a director, officer or employee of Quantech involving service as a director,
officer, partner, trustee, employee or agent of another organization or employee
benefit plan, reasonably believed that the conduct was not opposed to the best
interests of Quantech. In addition, Section 302A.521, subd. 3, requires payment
by Quantech, upon written request, of reasonable expenses in advance of final
disposition of the proceeding in certain instances. A decision as to required
indemnification is made by a disinterested majority of the board of directors
present at a meeting at which a disinterested quorum is present, or by a
designated committee of the board, by special legal counsel, by the
stockholders, or by a court.
Provisions regarding indemnification of officers and directors of
Quantech are contained in Article 5 of the Restated Bylaws (Exhibit 3.2 to this
Registration Statement). Quantech maintains a director and officer liability
policy.
Item 25. Other Expenses of Issuance and Distribution.
The following expenses will be paid by Quantech in connection with the
distribution of the securities registered hereby and do not include the
underwriting discount to be paid to the Underwriters. All of such expenses,
except for the SEC registration fee and Nasdaq listing fee, are estimated.
SEC Registration Fee..................$ 3,770
Legal Fees............................ 15,000
Accountants' Fees and Expenses........ 25,000
Printing Expenses..................... 5,000
Blue Sky Fees and Expenses............ 5,000
Transfer Agent Fees and Expenses...... 0
Miscellaneous......................... 730
---------
Total............................$ 54,500
=========
Item 26. Recent Sales of Unregistered Securities.
During the past three years, the Registrant has sold the securities
listed below pursuant to exemptions from registration under the Securities Act.
The information below is presented on a post-reverse stock split basis.
<PAGE>
During May 1998, holders of Quantech's Convertible Secured Promissory
Notes agreed to convert $219,300 of accrued interest into Notes and extend the
maturity date of the Notes to September 30, 1998 from June 1, 1998. The Note
holders received warrants to purchase 178,618 shares of common stock. The
extension of the Notes and issuance of the warrants were made in reliance upon
exemptions from registration provided under Section 4(2) of the Securities Act
of 1933, as amended (the "1933 Act") and Rule 506 of Regulation D. The holders
of these notes and warrants acquired these securities for their own account and
not with a view to any distribution thereof to the public.
During May through August 1998, Quantech completed an offering of
Convertible Secured Promissory Notes in the principal amount of $497,500 to
accredited investors and issued warrants in connection with the sale of such
notes to the investors for the purchase of 74,625 shares of common stock. The
sales were made in reliance upon exemptions from registration provided under
Section 4(2) of the 1933 Act and Rule 506 of Regulation D. Quantech paid
commissions and accountable expenses in the aggregate amount of $20,900 to a
registered investment bank for acting as selling agent and issued the investment
bank a warrant to purchase up to 3,134 shares of common stock as additional
compensation. Such warrant was sold pursuant to Section 4(2) of the 1933 Act.
The purchasers of these notes and warrants acquired these securities for their
own account and not with a view to any distribution thereof to the public.
In July 1998, Quantech sold 5,714 shares of its common stock at $3.50
per share to an accredited investor. The shares were sold pursuant to Section
4(2) of the 1933 Act. The purchaser of such common stock acquired these
securities for its own account and not with a view to any distribution thereof
to the public.
Also in July 1998, 2,000 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 August 1998, Quantech sold 9,196 shares of its common stock at $3.00
per share to an accredited investor. The shares were sold pursuant to Section
4(2) of the 1933 Act. The purchaser of such common stock acquired these
securities for its own account and not with a view to any distribution thereof
to the public.
Also in August 1998, 2,045 shares of common stock were issued pursuant
to exercise of a warrant. The shares were sold pursuant to Section 4(2) of the
1933 Act. The purchaser of such common stock acquired these securities for its
own account and not with a view to any distribution thereof to the public.
In September 1998, 3,400 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 September 1998, Quantech sold 7,557 shares of common stock at $0.75
per share to an accredited investor. Also in September 1998, Quantech sold 5,000
shares of common stock at $1.13 per share to an accredited investor. The shares
were sold pursuant to Section 4(2) of 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.
<PAGE>
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 and December 1998, Quantech sold 600,617 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. Quantech paid commissions and accountable expenses in the aggregate
amount of $125,700 to registered investment banks for acting as selling agents
and issued the investment banks warrants to purchase up to 176,420 shares of
common stock as additional compensation. Each share of Series A Convertible
Preferred Stock is convertible into four shares of Quantech'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.
During November 1998 through March 1999, 90,504 shares of common stock
were issued pursuant to conversion of Series A Convertible Preferred Stock. The
shares were sold pursuant to Section 3(a)(9) of the 1933 Act. The purchasers of
such common stock acquired these securities for their own accounts.
In November 1998, Quantech issued a warrant to purchase 1,800,000
shares of common stock to a company in exchange for engineering development
work, and issued another warrant to purchase 144,000 shares of common stock to
an investment banking firm that arranged the transaction. The exercise prices of
the warrants are $1.10 per share and $1.32 per share, respectively. Both
warrants expire in November 2003. The warrants were sold pursuant to Section
4(2) of the 1933 Act. The purchasers of such warrants acquired these securities
for their own accounts and not with a view to any distribution thereof to the
public.
In December 1998, Quantech sold 3,792 shares of common stock at $1.50
per share to an accredited investor. Also in December 1998, Quantech sold 2,286
shares of common stock at $1.83 to an accredited investor. The shares were sold
pursuant to Section 4(2) of 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 May 1999, the Company established Series B Preferred Stock (Series B
Stock) and designated 2,000,000 of its authorized and previously undesignated
shares as Series B Stock. The shares have no par value and a liquidation value
of $1.50 per share. Each share of Series B Stock is convertible into, and has no
voting rights equal to, one share of common stock. Series B Stock is
automatically converted into shares of common stock if (i) the Company closes on
an equity offering of at least $5,000,000 or (ii) at least 50 percent of the
number of shares of Series B Stock that were outstanding have been converted. In
the event the next sale of securities by the Company results in a price lower
than $1.875 per share, holders of Series B Stock will receive additional common
stock upon conversion equal to an amount obtained by dividing the holder's
original investment by 80% of the price of the next offering less the number
Series B Stock shares originally received.
In May and June 1999, the Company sold 556,667 shares of its Series B
Stock to accredited investors at $1.50 per share. In conjunction with this
transaction, the Company paid commissions and expenses of $33,500 and issued
warrants to purchase 55,667 shares of Common Stock to the selling agents, which
were valued at approximately $43,000 using the Black-Sholes model.
The sales of securities listed above were made in reliance upon
Sections 4(2) and 3(a)(9) of the Securities Act, which provide exemptions for
transactions not involving a public offering, and Regulation D thereunder. The
purchasers of securities described above acquired them for their own account and
not with a view to any distribution thereof to the public. The certificates
evidencing the securities bear legends stating that the shares are not to be
offered, sold or transferred other than pursuant to an effective registration
statement under the Securities Act, or an exemption from such registration
requirements. Except as specified above, no underwriting commissions or
discounts were paid with respect to the sales of unregistered securities
described above.
<PAGE>
Item 27. Exhibits and Financial Statement Schedules.
Exhibit
Number Description
- ------ -----------
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.
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).
5.1** Opinion and Consent of Fredrikson & Byron, P.A.
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 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).
10.4 Employment Agreement with Gregory G. Freitag (incorporated by reference
to Exhibit 10.1 of the Registrant's Form 10-Q for the Quarter Ended
March 31, 1998).
10.5 Employment Agreement with Robert Case (incorporated by reference to
Exhibit 10.2 of the Registrant's Form 10-Q for the Quarter Ended March
31, 1998).
10.6 Technology and Development License Agreement dated December 16, 1997
(incorporated by reference to Exhibit 1 of Schedule 13D filed by The
Perkin-Elmer Corporation on December 23, 1997, File No. 0-19957).
10.7 Perkin Elmer/Quantech License Agreement dated June 29, 1998
(incorporated by reference to Exhibit 10.7 to the Registrant's Form
10-KSB for the year ended June 30, 1998).
10.8 Research and Development Services Agreement, dated November 13, 1998,
with Millenium Medical Systems, LLC (incorporated by reference to
Exhibit A to Schedule 13D filed by Robert Gaines and Millenium Medical
Systems, LLC on November 23, 1998, File No. 0-19957).
22 Quantech has no subsidiaries.
23.1** Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
23.2* Consent of Independent Accountants
24** Power of Attorney (included on signature page)
- -----------------------------
* Filed herewith.
** Previously filed.
<PAGE>
Item 28. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned Registrant further undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant further undertakes that it will:
(1) file, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) include any prospectus required by section 10(a)(3)
of the Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the registration
statement; notwithstanding the foregoing, any
increase or decrease in volume of securities offered
(if the total dollar value of securities offered
would not exceed that which was registered) and any
deviation from the low or high end of the estimated
maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) include any additional or changed material
information on the plan of distribution;
(2) for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at
the time to be the initial bona fide offering; and
(3) file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the
offering.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Minneapolis, State of Minnesota, on July 1,
1999.
QUANTECH LTD.
By /s/ Robert Case
Robert Case, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
Chief Executive Officer, Director
/s/ Robert Case (principal executive officer) July 1, 1999
Robert Case
Chief Operating Officer, Chief
* Financial Officer and Secretary
Gregory G. Freitag (principal financial and accounting
officer)
* Director
James F. Lyons
* Director
Richard W. Perkins
* Director
Edward E. Strickland
* By: /s/ Robert Case
Robert Case, as Attorney-in-fact
Date: July 1, 1999
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quantech Ltd.
EXHIBIT INDEX TO FORM SB-2
Exhibit
Number Description
- ------ -----------
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.
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).
5.1** Opinion and Consent of Fredrikson & Byron, P.A.
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 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).
10.4 Employment Agreement with Gregory G. Freitag (incorporated by reference
to Exhibit 10.1 of the Registrant's Form 10-Q for the Quarter Ended
March 31, 1998).
10.5 Employment Agreement with Robert Case (incorporated by reference to
Exhibit 10.2 of the Registrant's Form 10-Q for the Quarter Ended March
31, 1998).
10.6 Technology and Development License Agreement dated December 16, 1997
(incorporated by reference to Exhibit 1 of Schedule 13D filed by The
Perkin-Elmer Corporation on December 23, 1997, File No. 0-19957).
10.7 Perkin Elmer/Quantech License Agreement dated June 29, 1998
(incorporated by reference to Exhibit 10.7 to the Registrant's Form
10-KSB for the year ended June 30, 1998).
10.8 Research and Development Services Agreement, dated November 13, 1998,
with Millenium Medical Systems, LLC (incorporated by reference to
Exhibit A to Schedule 13D filed by Robert Gaines and Millenium Medical
Systems, LLC on November 23, 1998, File No. 0-19957).
22 Quantech has no subsidiaries.
23.1** Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
23.2* Consent of Independent Accountants
24** Power of Attorney (included on signature page)
- -----------------------------
* Filed herewith
** Previously filed
Exhibit 3.1
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
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
of the corporation, and which shall consist of 10,000,000
<PAGE>
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,
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
<PAGE>
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.
b. The conversion price shall be subject to adjustment from
time to time as hereinafter provided. Upon each adjustment of the
<PAGE>
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
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
<PAGE>
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
to be attributable to such Common Stock, Convertible Securities, rights
or options, as the case may be. In the event of any consolidation or
<PAGE>
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.
<PAGE>
AMENDMENT OF ARTICLES OF INCORPORATION
OF
QUANTECH LTD.
Section 3.1 of the Articles of Incorporation of Quantech Ltd. has been
amended to read as follows:
"3.1 Authorized Shares; Establishment of Classes and Series.
The aggregate number of shares the corporation has the authority to
issue shall be 75,000,000, 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 50,000,000 common shares, 2,500,000 Series A preferred
shares, and 22,500,000 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 common shares), and to fix the relative rights and
preferences of each such class or series."
The foregoing amendment has been approved pursuant to Chapter 302A,
Minnesota Statutes.
I certify that I am authorized to execute this Amendment and I further
certify that I understand that by signing this Amendment I am subject to the
penalties of perjury as set forth in Minnesota Statutes, Section 609.48 as if I
had signed this Amendment under oath.
Dated: December 22, 1998.
/s/ Gregory G. Freitag
Gregory G. Freitag
Chief Operating Officer and
Chief Financial Officer
<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 May 19, 1999.
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>
Designation of Series B Convertible Preferred Stock
WHEREAS, the corporation's current authorized capitalization consists
of 50,000,000 authorized shares of Common Stock, 2,500,000 authorized shares of
Series A Preferred Stock and 22,500,000 authorized but undesignated shares; and
WHEREAS, the Board of Directors deems it advisable to establish an
additional class of shares from the 22,500,000 authorized but undesignated
shares;
NOW, THEREFORE, RESOLVED, that of the 22,500,000 undesignated shares
which the corporation is authorized to issue under its Articles of
Incorporation, 2,000,000 are hereby designated as shares of Series B Convertible
Preferred Stock (the "Series B 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 B 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
B 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 B 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 B Stock are then convertible, as hereinafter provided (except that
shares of Series B 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 B 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 B 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 B Stock, so as to alter any existing
provision relating to Series B Stock or the holders thereof or waive
any of the rights granted to the holders of the Series B Stock by the
Articles of Incorporation of the corporation; or
b. increase the authorized number of shares of Series B Stock;
or
c. authorize or issue any shares of capital stock having
priority or preference over, or on parity with, Series B Stock as to
dividends or distributions in the event of the liquidation, dissolution
<PAGE>
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 B 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 B Stock shall be entitled, after the payment of
the preferential amount required to be paid to the Series A Preferred
Stock, including the participation right of certain lenders/guarantors
as provided in subparagraph (d) of the Designation of Series A
Preferred Stock of this corporation, 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) $1.50 per share
("Original Purchase Price") (appropriately adjusted to reflect stock
splits, stock dividends, reorganizations, consolidations and similar
changes hereafter effected), and (ii) all dividends unpaid and
accumulated or accrued thereon to the date of such distribution, if
any. 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.
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,
dissolution or winding up of the corporation for purposes of this
paragraph, unless the holders of a majority of the Series B Stock then
outstanding vote otherwise. The amount deemed distributed to the
holders of Series B 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.
<PAGE>
5. Conversion Right. At the option of the holders thereof, the shares
of Series B 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. The price at which shares of Common Stock shall be delivered upon
conversion of shares of Series B Stock (herein called the "conversion price")
shall be initially $1.50 per share of Common Stock (i.e., at an initial
conversion rate of one share of Common Stock for each share of Series B 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 B 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 B 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.
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 B 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 in the next sale of securities by this corporation after
the adoption of this Designation, excluding any sale pursuant to
options, warrants or conversion rights outstanding as the date of
adoption of this Designation, the price per share of Common Stock sold
is less than $1.875, or if the security sold is not Common Stock but is
convertible into or exercisable to purchase Common Stock at a
conversion or exercise price of less than $1.875 per share, then the
conversion price shall be reduced an amount equal to 80% of the price
per share at which such security is sold, convertible or exercisable.
No adjustment of the conversion price of the Series B 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
<PAGE>
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 B
Stock then in effect.
The holders of at least a majority of the Series B 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 B 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 B 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
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 B
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,
<PAGE>
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 B 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 B 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
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 B 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.
<PAGE>
(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 B Stock upon the conversion thereof will be entitled to receive
the number of shares of Common Stock into which such shares of Series B
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 B
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.
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 B 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 B 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
<PAGE>
any time (other than under or by reason of provisions designed to
protect against dilution), the conversion price of the Series B 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 B 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 B 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 B Stock, the full
number of shares of Common Stock then deliverable upon the conversion
of all shares of Series B Stock then outstanding.
f. No fractional shares shall be issued upon conversion of the
Series B 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 B 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 B 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 B 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 (ii) at such time as at least 50% of the
number of shares of Series B Stock have been converted into Common Stock. 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 B
<PAGE>
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 B 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 B 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. Status of Converted Stock. In the event any shares of Series B Stock
shall be converted by the corporation, the shares so converted shall not be
reissuable by the corporation as Series B 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 B Stock have
been converted, (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 B 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.
Exhibit 23.2
Consent of Independent Accountants
We hereby consent to the use in this Registration Statement on Form SB-2
Amendment No. 3 of our report, dated August 3, 1998, which includes an emphasis
paragraph to an uncertainty as to the Company's ability to continue as a going
concern, on the financial satements of Quantech, Ltd. We also consent to the
reference to our Firm under the captions "Experts" and "Selected Financial
Data" in the Prospectus.
/s/ McGladrey & Pullen LLP
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
July 1, 1999
