As filed with the Securities and Exchange Commission on March 15, 2000
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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.
815 Northwest Parkway
Eagan, MN 55121
(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.
815 Northwest Parkway
Eagan, MN 55121
(651) 647-6370
(Name, address and telephone number of agent for service)
Copies to:
Melodie Rose, Esq.
Fredrikson & Byron, P.A.
900 Second Avenue South, Suite 1100
Minneapolis, Minnesota 55402
(612) 347-7000
---------------------------
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: [ ]
---------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================
Title of each class Proposed maximum Proposed maximum Amount of
of securities to be Amount to be offering price aggregate offering registration
registered registered(1) per unit(2) price(2)(3) fee(4)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value 5,144,031 $3.8125 $19,611,618 $5,177.47
===========================================================================================================
</TABLE>
(1) Does not include the 3,361,733 shares, the resale of which shares was
previously registered pursuant to Registration Statement
No. 333-70487.
(2) Estimated solely for the purpose of calculating registration fees
pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
(3) Does not include aggregate offering price for 3,361,733 shares,
the resale of which shares was previously registered pursuant to
Registration Statement No. 333-70487.
(3) Does not include filing of $1,489.46 fee for 3,361,733 shares,
the resale of which shares was previously registered pursuant to
Registration Statement No. 333-70487.
---------------------------------
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.
* Pursuant to Rule 429 under the Securities Act of 1933, the
Prospectus which constitutes part of this Registration Statement
also relates to the resale of an aggregate of 3,361,733 shares of
the Registrant's common stock registered on Form SB-2, Registration
No. 333-70487. As such, this Registration Statement also serves as
Post-Effective Amendment No. 1 to the Registrant's Registration
Statement on Form SB-2, Registration No. 333-70487.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 15, 2000
QUANTECH LTD.
8,505,764 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 March 13, 2000, as reflected on such markets was $3.38
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 _____________, 2000
<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...................................................... 45
Legal Matters............................................................. 46
Experts................................................................... 46
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
FasTraQ(TM). The FasTraQ consists of an instrument that sits on the top of a
counter or cart and reads PrePaQ(TM) disposable test cartridges developed by
Quantech. Each Quantech PrePaQ test cartridge will contain from one to four
different medical tests such as those for a heart attack or pregnancy. Hand held
communication devices called ReaLinQTM communicators provide real time test
results directly from the FasTraQ instrument to the medical staff members
treating a patient.
The FasTraQ 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 metal. Quantech's
technology creates SPR in a controlled environment which enables the FasTraQ 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 $20 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 FasTraQ 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 FasTraQ 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 FasTraQ system to provide the number of different
quantitative tests the emergency department requires on an urgent basis. We
received approval from the Food and Drug Administration for our first two heart
attack tests (myoglobin and CK-MB) and our pregnancy test (hCG).
Quantech is a Minnesota corporation that was formed on April 14, 1993.
Its principal executive offices are located at 815 Northwest Parkway, Eagan,
Minnesota 55121. Its telephone number is (651) 647-6370 and its fax number is
(651) 647-6369.
1
<PAGE>
The Offering
Securities offered............... 8,505,764 shares of common stock. (1)
Securities outstanding........... 5,759,549 shares of common stock. (2)
1,368,068 shares of Series A Convertible
Preferred Stock (each share convertible
into 4 common shares).
2,999,667 shares of Series B Convertible
Preferred Stock.
1,000,000 shares of Series C Convertible
Preferred Stock.
Use of proceeds.................. Quantech will not receive any proceeds
from the sale of common stock in the
offering.
--------------------------
(1) Includes:
a) 1,090,264 shares currently outstanding;
b) 2,999,667 shares issuable upon conversion of outstanding shares of
Series B Convertible Preferred Stock;
c) 1,000,000 shares issuable upon conversion of outstanding shares of
Series C Convertible Preferred Stock; and
d) 3,415,833 shares issuable upon exercise of outstanding warrants.
(2) Does not include:
a) 5,472,272 shares issuable upon conversion of outstanding shares of
Series A Convertible Preferred Stock;
b) 2,999,667 shares issuable upon conversion of outstanding shares of
Series B Convertible Preferred Stock;
c) 1,000,000 shares issuable upon conversion of outstanding shares of
Series C Convertible Preferred Stock; and
d) 5,780,220 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. The trading price of our common stock could
decline due to any of these risks, and you may lose all or part of your
investment.
We expect to incur losses in the future and we need additional financing to
complete commercial development of the FasTraQ and to commence sales.
We have incurred net losses in each year since inception. We expect to
increase significantly our research and development, sales and marketing,
manufacturing and general and administrative expenses in the future. We will
spend these amounts before we receive any incremental revenue from these
efforts. Additional financing through investment capital, funding by strategic
partner(s) or licensing revenues will be needed to operate until revenues can be
generated in an amount sufficient to support operations. 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 and could depress the market price of our common stock.
"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,
1999, and December 31, 1999 we had an accumulated deficits of $22,727,284 and
26,081,636, respectively. The report of the independent auditors on Quantech's
financial statements for the year ended June 30, 1999, 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 FasTraQ is not complete and may not be completed on the
current timetable and budget. Failure to meet these objective could result in a
decline in our stock price, causing investor losses.
Components of the FasTraQ system are under various stages of
development. Until the FasTraQ development is completed and cleared through the
FDA, there can be no assurance that the FasTraQ 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 "We expect to incur losses
in the future and we need additional financing to complete commercial
development of the FasTraQ and to commence sales" above. Additionally, the final
price that we will need to charge to cover the costs of the FasTraQ instrument
and the PrePaQ test cartridges cannot be determined until development is
complete and FDA clearances have been obtained. If Quantech cannot receive FDA
approval and offer the FasTraQ system with certain required features and tests
at a cost acceptable to potential customers, it will be impossible for Quantech
to continue operations. Failures in any of these areas will disappoint investors
and could result in a decline in our stock price thus causing investors to lose
substantial money.
We may not succeed in persuading potential buyers to replace existing equipment
and facilities with our system or in convincing the medical community and
3
<PAGE>
third-party payers of the reliability, faster speed and lower cost of tests
conducted on the FasTraQ.
In general, the commercial success of the FasTraQ 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 system must provide results of STAT tests quicker than
current hospital tests for emergency department doctors.
We have not established a distribution system and may not have the resources to
effectively market our product.
We have had no experience in marketing our system. We intend to market
our system in the United States through either a direct sales force or through a
strategic partner with an established distribution system, and in foreign
markets through a strategic partner(s), but no assurance can be given that such
arrangements can be made. Establishing 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. Sales through distributors could be less profitable than direct
sales. Sales of our products through multiple channels could also confuse
customers and cause the sale of our products to decline. We will not control our
distribution partners. Our partners could sell competing products and may devote
insufficient sales efforts to our products. We may not be able to have our
distributors purchase minimum quantities. As a result, even if we are
dissatisfied with the performance of our partners, we may be unable to terminate
our agreements with these partners or enter into alternative arrangements
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 FasTraQ instrument, PrePaQ test cartridges and ReaLinQ communicators in
compliance with regulatory requirements, such as the FDA's Good Manufacturing
Practices, while maintaining product quality and acceptable manufacturing costs.
The instrument, communicators 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 have
only one manufacturing facility which must be registered with the FDA. If we
fail to produce enough products at our manufacturing facility or at a
third-party manufacturing facility we may be unable to deliver products to our
customers on a timely basis. Our failure to deliver products on a timely basis
could lead to customer dissatisfaction and damage our reputation.
Our ability to market and sell our products and generate revenue depends upon
receipt of domestic and foreign regulatory approval for our products and
manufacturing operations.
4
<PAGE>
The FasTraQ instrument and PrePaQ test cartridges are human diagnostic
medical devices subject to regulation by the United States FDA and agencies of
foreign countries. The FDA regulates the system 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
instrument 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.
The FDA also requires us to adhere to current Good Manufacturing
Practices regulations, which include production design controls, testing,
quality control, storage and documentation procedures. The FDA may at any time
inspect our facilities to determine whether adequate compliance has been
achieved. Compliance with current Good Manufacturing Practices regulations for
medical devices is difficult and costly. In addition, we may not continue to be
compliant as a result of future changes in, or interpretations of, regulations
by the FDA or other regulatory agencies. If we do not achieve continued
compliance, the FDA may withdraw marketing clearance or require product recall.
When any change or modification is made to a device or its intended use, the
manufacturer may be required to reassess compliance with current Good
Manufacturing Practices regulations, which may cause interruptions or delays in
the marketing and sale of our products. Sales of our products outside the United
States are subject to foreign regulatory requirements that vary from country to
country. The time required to obtain approvals from foreign countries may be
longer or shorter than that required for FDA approval, and requirements for
foreign licensing may differ from FDA requirements. The Federal, state and
foreign laws and regulations regarding the manufacture and sale of our products
are subject to future changes, as are administrative interpretations of
regulatory agencies. If we fail to comply with applicable federal, state or
foreign laws or regulations, we could be subject to enforcement actions,
including product seizures, recalls, withdrawal of clearances or approvals and
civil and criminal penalties.
We may not succeed in marketing our product against 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 FasTraQ. 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 sale of our system may require a significant
sales effort to gain market share. If the features and costs of our system are
not compelling it will not successfully compete in its market.
The FasTraQ must comply with regulations governing the qualifications of persons
operating it and high qualification requirements could adversely affect sales.
Use of the FasTraQ will be subject to the Clinical Laboratory
Improvement Act of 1988. This regulation governs the qualifications of persons
5
<PAGE>
supervising a laboratory test and the persons performing the laboratory test. We
have based our marketing plan on the belief that our 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
system were 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 FasTraQ will initially be Quantech's only product making us vulnerable to
technological obsolescence.
The FasTraQ 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 that 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.
Failure to maintain patent protection of the FasTraQ 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 our system. The existence or issuance of such patents may require us
to make costly significant changes in the design of the FasTraQ 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.
We are dependent upon our few employees and the loss of our CEO, CFO/COO or
Executive VP of R&D could leave Quantech without sufficient management expertise
to continue operations successfully.
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 Robert Case, our CEO, Greg
Freitag, our COO and CFO or Thomas Witty, our Executive V.P. of R&D, would have
a material adverse effect on Quantech.
If we do not attract and retain skilled personnel, we will not be able to expand
our business.
Our products are based on chemical, electrical and optical
technologies. Accordingly, we require skilled personnel to develop, manufacture,
sell and support our products. Our future success will depend largely on our
ability to continue to hire, train, retain and motivate additional skilled
6
<PAGE>
personnel. We continue to experience difficulty in recruiting and retaining
skilled personnel because the pool of experienced persons is small and we
compete for personnel with other companies, many of which have greater resources
than we do. Consequently, if we are not able to attract and retain skilled
personnel, we will not be able to meet our development and product launch
timetable or budgets.
Failure of users of the FasTraQ to obtain adequate reimbursement from
third-party payors could limit market acceptance of the FasTraQ, which could
prevent us from achieving market acceptance and profitability.
The FasTraQ will be marketed to hospitals who bill various third-party
payors, such as managed care organizations, government health programs, private
health insurance plans and other similar programs, for the health care products
and services provided to their patents. Failure by hospitals and other users of
the FasTraQ to obtain adequate reimbursement from third-party payors, or any
reduction in the reimbursement by third-party payors to hospitals and other
users as a result of using the FasTraQ could limit market acceptance of the
FasTraQ, which could prevent us from achieving profitability.
We could be exposed to product liability claims once the FasTraQ is launch which
could adversely affect our cash position and our ability to obtain and maintain
insurance coverage at satisfactory rates.
The manufacture and sale of our products will expose us to product
liability claims and product recalls, including those, which may arise from
misuse or malfunction of, or design flaws in, our products. Product liability
claims or product recalls, regardless of their ultimate outcome, could require
us to spend significant time and money in litigation or to pay significant
damages. We currently do not maintain insurance; however, prior to marketing our
product we intend to obtain product liability insurance coverage in an amount,
which we deem, appropriate. There can be no assurance that such insurance will
be available on commercially reasonable terms or that if obtained it will be
adequate to cover the costs of any product liability claims made against us.
Shares eligible for future sale 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.
Upon registration of the Shares offered hereby, nearly all shares of
Quantech's outstanding common stock are eligible to be sold in the public market
along with almost all shares that may be obtained upon exercise of outstanding
options, warrants or conversion of Series A, B and C Convertible Preferred
Stock. The sale of a large 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.
7
<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 March 13, 2000 was $3.38 per
share.
High Low
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......................... $ 1.81 $ 1.38
Fiscal 2000:
First Quarter.......................... $ 1.69 $ 1.06
Second Quarter......................... $ 1.50 $ 0.88
Third Quarter through March 13, 2000... $ 5.00 $ 1.09
As of March 13, 2000 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, B or C 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.
8
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of Quantech as of and for the
years ended June 30, 1998 and 1999 is derived from the financial statements that
have been audited by McGladrey & Pullen, LLP, independent auditors. Quantech's
financial statements for the six month period ended December 31, 1998 and 1999
and the period from September 30, 1991 (date of inception) to December 31, 1999
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 with 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 Six Months Ended 1991 (Date of
June 30, December 31, Inception), to
----------------------------------------------------------- December 31,
1998 1999 1998 1999 1999
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 12 $ 2 $ 1 $ 2 $ 187
----------------------------------------------------------------------------
Expenses:
General and administrative 1,221 1,593 931 1,324 12,080
Research and development 1,608 1,816 975 1,231 9,301
Minimum royalty expense 113 150 75 75 1,300
Losses resulting from transactions
With Spectrum Diagnostics Inc. -- -- -- -- 556
Net exchange gain -- -- -- -- (67)
Interest 719 733 715 26 1,976
----------------------------------------------------------------------------
Total expenses 3,661 4,292 2,696 2,656 25,146
----------------------------------------------------------------------------
Loss before income taxes (3,649) (4,290) (2,695) (2,654) (24,959)
Income taxes -- -- -- -- 42
----------------------------------------------------------------------------
Net Loss $ (3,649) $ (4,290) $ (2,695) $ (2,654) $ (25,001)
============================================================================
Net loss attributable to common shareholders
Net loss $ (3,649) $ (4,290) $ (2,695) $ (2,654)
Preferred stock accretion -- (377) (91) (263)
Beneficial conversion feature of
preferred stock -- -- -- (440)
----------------------------------------------------------
Net loss attributable to common shareholders $ (3,649) $ (4,667) $ (2,786) $ (3,357)
==========================================================
Loss per basic and diluted common share $ (1.45) $ (1.75) $ (1.06) $ (1.04)
Weighted average common shares
Outstanding 2,524 2,674 2,620 3,228
</TABLE>
9
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1998 1999 1999
------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Total current assets $ 203 $ 530 $ 280
Total property and equipment 179 166 163
Total other assets 2,803 2,422 2,259
------------------------------------------------------
Total assets $ 3,185 $ 3,118 $ 2,702
======================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Short-term debt $ 3,113 $ 746 $ 750
Accounts payable 97 112 634
Accrued expenses 247 198 295
------------------------------------------------------
Total current liabilities 3,457 1,056 1,679
------------------------------------------------------
Redeemable Preferred Stock -- 5,113 5,135
Stockholders' Equity (Deficit)
Common stock 16,308 16,499 17,290
Preferred stock 831 1,810
Additional paid-in capital 1,477 2,343 2,869
Deficit accumulated during the development stage (18,057) (22,724) (26,081)
------------------------------------------------------
Total stockholders' equity (deficit) (272) (3,051) (4,112)
------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 3,185 $ 3,118 $ 2,702
======================================================
</TABLE>
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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 Six Months Ended December 31, 1999 and 1998
Quantech has incurred a net loss of $25,001,263 from September 30, 1991
(date of inception) through December 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, and $1,300,000 of minimum royalties have been paid on the license.
General and administration expenses increased to $1,324,216 for the six
months ended December 31, 1999 from $931,641 for the same period in 1998
primarily due to market research expenses including fees paid to consultants and
research firms and costs to attend industry trade shows, partially offset by
lower costs associated with financing activities. We expect general and
administrative expenses to increase in the future as we complete development of
our system, prepare for market launch and begin to manufacture and distribute
our products. Quantech will also begin to incur increasing sales and marketing
expenses.
Research and development costs increased to $1,231,217 for the six
months ended December 31, 1999 from $974,645 for the same period in 1998
primarily due to increased internal development work. We expect R&D spending to
significantly increase as we complete the commercial development of our system,
conduct additional FDA work, and begin to establish higher volume manufacturing
capabilities.
Minimum royalty expense of $75,000 was unchanged for the six months
ended December 31, 1999 compared to the same period in 1998. The final minimum
royalty payment has been made, and in the future we expect to incur additional
royalty expense when royalties based on revenues exceed minimum payments (see
Notes to Financial Statements, Note 2 - License Agreement).
Interest expense decreased to $25,776 for the six months ended December
31, 1999 from $714,982 during the same period in 1998 as a result of reduced
debt. Interest expense is expected to remain flat for the remainder of the
fiscal year as Quantech does not anticipate any debt other than borrowing up to
$750,000 from its bank credit facility.
For the six months ended December 31, 1999 Quantech had losses of
$2,654,399 as compared to $2,695,200 for the same period in 1998.
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The loss was slightly smaller as lower interest expense was mostly offset by
higher operating expenses.
The timetable for submitting additional tests to the FDA and
introduction of Quantech's 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, 1999 and 1998
Quantech has incurred a net loss of $22,346,864 from September 30, 1991
(date of inception) through June 30, 1999 due to expenses related to formation
and operation of SDS in Italy, continuing costs of raising capital, normal
expenses of operating over an extended period of time, funds applied to research
and development, royalty payments related to the SPR technology, losses due to
expenses of Quantech's predecessor, Spectrum Diagnostics Inc. and interest on
borrowed funds. In addition, an investment of $3,356,629 was made when Quantech
purchased the rights to the SPR technology.
For the year ended June 30, 1999 Quantech had interest income of $1,886
compared to $12,435 for the 1998 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 increased from $1,221,196 for the
year ended June 30, 1998 to $1,593,451 for the year ended June 30, 1999. The
increase in general and administration expenses was primarily due to costs
related to financing activities and market research. The financing costs
included commissions, charges for warrants and options issued in connection with
financing activities and professional fees. Market research expenses included
fees paid to consultants and research firms and costs to attend industry trade
shows. We expect general and administrative expenses to increase in the future
as we complete development of our system, prepare for market launch and begin to
manufacture and distribute our products. The Company will also begin to incur
increasing sales and marketing expenses.
Research and development costs increased from $1,608,361 in 1998 to
$1,815,727 in 1999. The increase was primarily due to costs related to the
preparation of 510(k) submissions to the FDA and increased development work. We
expect R&D spending to significantly increase as we complete the commercial
development of our system, conduct additional FDA work, and begin to establish
higher volume manufacturing capabilities.
Minimum royalty expense increased to $150,000 in 1999 as compared to
$112,500 in 1998 as a result of the higher minimum royalties owed under
Quantech's amended license with Ares-Serono. We will continue to accrue royalty
expense of $37,500 per quarter until the final minimum payment is made in
December 1999. In the future we expect to incur additional royalty expense when
royalties based on revenues exceed minimum payments.
Interest expense of $732,524 in 1999 was only slightly changed from
$719,126 in 1998. Interest expense during fiscal year 2000 is expected to be
significantly lower due to reduced debt.
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For the year ended June 30, 1999 Quantech had a loss of $4,289,816 as
compared to $3,648,748 for the same period ended June 30, 1998. This increased
loss was primarily a result of higher general and administrative and research
and development expenses in 1999. Net cash used in operations, however,
decreased slightly to $2,398,520 in 1999 from $2,476,331 in 1998 primarily due
to higher non-cash charges for development work performed by Millennium Medical
Systems in exchange for a warrant to purchase shares of Quantech common stock.
We expect cash used in operations to increase during fiscal year 2000 as we
complete development of our system and prepare for market launch.
Liquidity and Capital Resources
From inception to December 31, 1999, Quantech has raised approximately
$22,800,000 through a combination of public stock sales, private stock sales and
debt obligations. Quantech began offering for sale shares of Series B Preferred
Stock in May 1999, and amended the provisions of its offering in October 1999 to
provide for a price of $1.00 per share. Such offering was completed in February
2000 and Quantech raised an aggregate of $3,905,000. In February 2000, Quantech
raised $1,000,000 from the sale of Series C Preferred Stock. The shares were
sold at $1.00 per share, and each share is convertible into one share of
Quantech common stock. In November 1999, Quantech received $15,000 from the sale
of a warrant to purchase 75,000 shares of common stock.
Quantech anticipates that its cash on hand will allow it to maintain
operations through July 2000. Additional financing of approximately $10 million
will be needed to develop and submit to the FDA additional tests, complete
clinical evaluation of the system, establish manufacturing capabilities and
prepare for sales of the FasTraQ. Quantech is currently 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 stockholders. See "Risk Factors -- We need
additional cash and will require at least $10 million in additional financing to
complete commercial development of our system and have no commitment to receive
any additional significant funding." Although Quantech has a limited lending
arrangement with its bank to a maximum of $750,000, all of which credit line
will be used by July 2000, it does not anticipate receiving any additional
significant funding from commercial lenders.
Quantech incurred capital expenditures of $37,913 in the six month
period ended December 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.
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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
FasTraQ(TM). The FasTraQ consists of an instrument that sits on the top of a
counter or cart and reads PrePaQ(TM) disposable test cartridges developed by
Quantech. Each Quantech PrePaQ test cartridge will contain from one to four
different medical tests such as those for a heart attack or pregnancy. Hand held
communication devices called ReaLinQTM communicators provide real time test
results directly from the FasTraQ instrument to the medical staff members
treating a patient.
The FasTraQ 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 metal. Quantech's
technology creates SPR in a controlled environment which enables the FasTraQ 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 $20 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 FasTraQ 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 ("ED").
We expect the FasTraQ 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 FasTraQ system to provide the number of different
quantitative tests the emergency department requires on an urgent basis. We
received approval from the Food and Drug Administration for our first two heart
attack tests (myoglobin and CK-MB) and our pregnancy test (hCG).
Quantech's FasTraQ Patient Treatment Information Platform
General
The Quantech FasTraQ Patient Treatment Information Platform ("PTIP") is
a new multi-menu STAT testing system with real time communication capabilities
that is in the final stages of commercial development. The FasTraQ consists of
the reading instrument, PrePaQ disposable test cartridges and ReaLinQ
communication units. It will combine accuracy with simplicity of use and
automatically transfer information to the appropriate ED personnel. The PrePaQ
cartridges can process up to four tests at a time and the FasTraQ instrument can
simultaneously run up to 20 PrePaQ test cartridges.
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The FasTraQ Testing Instrument
The Quantech FasTraQ testing instrument is designed to fill the needs
of the ED. Most importantly, the FasTraQ instrument is designed to be compatible
with new PrePraQ test disposables when Quantech introduces them to the market.
As a result, when Quantech adds tests through the introduction of new
disposables, its original instrument will accommodate these various tests
without system obsolescence or significant training of personnel.
The FasTraQ instrument consists of a communication module and up to
five testing modules. It will be of a size capable of sitting on a bench top or
cart. The communication module will contain a microprocessor, a computer touch
screen, barcode readers, interfaces for hospital information systems and
Quantech testing modules and systems to communicate with the Quantech ReaLinQ
communicators. Each test module will be able to run up to four PrePaQ test
disposables and contain a white light source and a number of optical components.
The light is split into a number of channels, providing for quality controls and
multiple tests per disposable. When the PrePaQ is inserted into a port of the
test module an internal bar-code reader identifies the type of tests to be run.
A touch screen and/or an external barcode reader on the communication
module and/or a barcode reader in the ReaLinQ communicator will enable the user
to enter both a user number and the patient or specimen ID number. The
instrument's computer screen and a screen on each test module will display test
results. 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 or sent to the ED staff via
the Quantech ReaLinQ communicators.
The module configuration of the instrument allows it to run up to 20
PrePaQ test cartridges simultaneously. This provides flexibility to meet the
necessary test throughput capability for a given institution. The instrument
size allows it to be located in the ED or associated STAT or rapid response lab.
Quantech intends to offer several industry standard reagent rental programs
whereby the FasTraQ instrument will be provided to the hospital and it may
retain the FasTraQ without cost as long as a specified number of PrePaQ test
disposables are purchased. The ability of Quantech's biosensor FasTraQ to
convert biological data into digital signals should also permit designs that
capitalize on future advances in microcomputer and microfluidic technology.
The PrePaQ Disposable Test Cartridge
Quantech's PrePaQ disposable test cartridge consists of an injection
molded plastic carrier containing a metal coated sensor surface. The metallic
surface is overlaid with reagents that react specifically with the analyte to be
identified and measured. An important feature of the PrePaQ will be the ability
to attach a standard vacutainer-type tube, complete with its top intact, to the
PrePaQ disposable so that it is easy to use and the user has minimal exposure to
the patient sample. One or more separate tests may be performed on a single
disposable providing Quantech the capability to develop clinically related
panels of tests by simply adding the appropriate reagents. Future PrePaQ
disposables for certain tests may also be configured to handle samples of urine
and other body fluids.
A further advantage of Quantech's PrePaQ test disposable will be that
an operator will not be required to add reagents. This simplicity translates
into ease of use and immediacy of results. PrePaQ disposables will be configured
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to provide single or multiple clinically-related tests. Because the same
configuration may be used for all tests, manufacturing and quality control costs
should be minimized. Additional development of the PrePaQ disposable 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 disposable.
The ReaLinQ Wireless Communicator
At the option of the user, the FasTraQ may include the ReaLinQ wireless
communication capability to input all emergency test information directly into
the FasTraQ from, and automatically provide the appropriate ED staff members
with test results at, "patient-side". The LAN transmission unit will be located
in the instruments' communication module. Hand held receivers or communicators
similar to pagers will be provided to the ED staff. When the patient arrives in
the ED the appropriate ED staff member can input necessary information. When the
ED staff member begins the test process at the FasTraQ instrument, the
instrument will be directed to send the results to the ED team for the
particular patient. When the results are completed they are provided to the
ReaLinQ communicators and the receiving parties acknowledge receipt of the
information.
The receipt of test information through the ReaLinQs will speed results
by eliminating the need for the ED staff to go back to the instrument or printer
multiple times to determine if the tests are finished. Also, because the
treatment team may be scattered throughout the ED, it will no longer be
necessary to track down individual team members to provide them with the
results. The ReaLinQ communicators will also have the ability to receive other
patient information such as hospital records if made available.
Comparison of Product Technologies
A number of basic methods, whether performed manually or by automated
instruments, are utilized in diagnostic testing including immunoassays, DNA
probes, electrochemistry, coagulation and chemical reactions. Each of these
testing methodologies requires a separate system and the performance of a series
of operations by a skilled technologist. These operations consist of sample
preparation, addition of reagents, further method-specific manipulations, and
reading and interpretation of raw data. Central and STAT laboratory automated
systems have mechanized, rather than eliminated many of these steps and have
been unable to combine a number of different methodologies or technologies into
a single system. Quantech's digital SPR technology, in contrast, can be used for
these and other basic testing methods within a single instrument, but without
complicated processing by the operator.
Central labs provide quality results on a menu of tests, however, STAT
test results take from 45 minutes to 3 hours to be returned to the ED.
Additionally STAT tests disrupt the batch testing of central labs. Although STAT
labs have quicker turnaround time with the quality advantages of the central
lab, personnel and equipment requirements of STAT labs result in high test
costs. Point-of-care instruments have reduced turnaround time, and in some
instances have lower test costs than STAT labs, but fail to meet laboratory
quality and ED needs due to lack of interface to the laboratory information
system, manipulation of patient sample, nonconcordance with central lab results
and lack of quantitative results. Most importantly, their limited test menu
keeps them from eliminating the testing time for tests they cannot perform thus
making the treatment process only as fast and efficient as the slowest test from
the lab. Quantech's FasTraQ system expects to address these shortcomings of the
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current testing environment and products by combining the advantages of central
lab and point-of-care testing into a system with the following anticipated
features:
o STAT quantitative test menu (a number instead of qualitative yes/no)
o User-friendly system, rapid test turnaround time (less 15 minutes)
o Real time monitoring of test information status
o Multi-test, single use disposable (up to four tests per PrePaQ)
o Cost effective (comparable to central lab STAT test costs, 2x-4x less
than STAT lab)
o Remote results receipt acknowledgement; auto-release of test module
o Throughput of up to 20 PrePaQ cartridges simultaneously
o Concordance with central lab test results
o Whole blood/closed tube (vacutainer) patient sample capability
o Full-time laboratory information system interface
o Automatic user/patient/test/QC input
o Internet ordering, training and information transfer
The Market
General Discussion
Excluding home diagnostics, the overall worldwide in-vitro diagnostic
market ("IVD") is approximately $20 billion. Commercial, hospital central and
hospital STAT/rapid response laboratories currently account for the majority of
this market with testing divided between non-urgent and urgent (STAT) tests. We
are focused on the ED STAT testing portion of this market.
STAT tests are required by critical care physicians in areas such as
surgical suites, ICUs/CCUs and emergency departments because of the time
sensitive nature of their treatment. However, results of STAT tests from the
central laboratory can take a minimum of 45 minutes and up to three hours for
the physician to receive the results. This delay affects patient treatment and
increases costs. Although STAT laboratories have been established to reduce this
time delay, test costs are often 2-4 times that of the central lab and reduced
test time turnaround has not been effectively achieved.
The United States ED testing market is highly concentrated. There are
approximately 1,032 EDs in the United States that each see more than 30,000
patients per year with the average ED in this group seeing 50,000 patients
annually. These ED's represent approximately 55% of the ED 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. (VHA). This concentration results in a high level of revenue passing
through a limited number of sites.
Pressure has increased to reduce the length of patient stay and provide
a greater portion of services in outpatient settings. Because the cost of
providing care in the ED far exceeds those of general medical or surgical units,
a primary goal of the ED is to determine the appropriate care path for a patient
so they may be treated, sent home or moved to a different area of the hospital.
Quick determination of this care path is made possible by rapid, accurate and
clinically relevant quantitative test results that are efficiently delivered to
the care provider. For this reason, STAT labs were established to reduce test
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turnaround time, but their high test cost and still often lengthy turnaround
time have limited their effectiveness in reducing patient treatment costs.
Point-of-care ("POC") testing represents a growing segment of the IVD market and
a response to rising costs of health care that have produced changes in hospital
reimbursement. POC instruments have tried to fill the gap left by STAT labs, but
lack of central and STAT lab features and true increases in efficiencies have
limited their penetration of the ED testing market.
The strategic direction chosen by Quantech is to exploit the inherent
technological advantages of its SPR technology and current information
technologies, which allows it to address the shortfalls of the central and STAT
labs and POC instruments. As such, Quantech will focus on the STAT testing and
information delivery needs of hospital ED's.
The Emergency Department
Critical Care Units include Intensive Care Units, Surgical Suites and
Emergency Departments ("ED"). Quantech's FasTraQ PTIP will first be marketed to
EDs. EDs must respond to critical patient conditions and conduct tests on an
as needed basis in order to support the health care team when a patient's
condition is life threatening. Most tests conducted in the ED are required STAT
(urgent) and are processed 24 hours a day.
Tests processed in a STAT manner significantly increase cost as they
require the hospital central or STAT laboratory to remain open at times when
they are not otherwise busy. Further, STAT testing in the central lab interrupts
batch testing and thus negatively affects cost while STAT labs costs are high
because of the inability to spread operating and capital costs across a larger
number of tests. The solution to this difficulty and expense is to bring a
system designed for STAT testing to the patient site in a manner that will
provide cost-effective test results promptly, accurately and with the requisite
throughput.
Because of space limitations in the ED, and a desire not to train
personnel on a number of different instruments, a single instrument for the ED
STAT test menu is desirable. Such ED STAT test menu includes:
o Cardiac marker panel (CK-MB, troponin I, myoglobin)
o hCG (Pregnancy)
o Blood Cell panel (WBC, RBC, Hct and Hgh)
o Coagulation
o Electrolytes (not blood gases which are performed by pulse oximetry in
ED)
o Kidney Panel (Bun/Creatinine)
o Pancreas Panel
o Therapeutic Drug Monitoring (Digoxin, Theophylline)
o Drugs of Abuse (e.g., Cocaine, Marijuana)
o Amylase
o Liver Panel
In 1998 there were 98 million patient visits to 4200 EDs in the United
States of which 1,032 ED's saw 55% of the patients. Approximately 60% of these
patients received tests. Europe represents a similar number and concentration of
ED patient testing. Quantech estimates the worldwide ED STAT testing market to
be more than $6 billion. As a result, a limited number of sites produce a
significant amount of STAT testing revenue.
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Quantech will introduce the FasTraQ with a cardiac panel to test for
heart attacks, a quantitative pregnancy test and expects to provide a number of
the other tests performed in the ED. The combination of these tests provides a
significant market. Because of the FasTraQ's initial test menu, and additional
tests to be provided, Quantech believes it can achieve substantial market
penetration. The Company will pay attention to groupings of tests for particle
needs so that all tests necessary for a particular patient can be run on the
FasTraQ. Since the needs of other areas of critical care are similar to those
tests required by the ED, the Company anticipates that growth into these other
areas will be evolutionary.
Cardiac Markers
Cardiac markers are needed to triage and treat individuals that arrive
at the ED with chest pain. Hospitals are aware of a need for more rapid cardiac
diagnosis and in response have started to establish chest pain centers in
emergency departments for triaging patients. Lacking, however, are whole blood,
cost effective, rapid cardiac test results. Quantech has chosen a test panel for
heart attacks as one of its initial tests because of the high need,
reimbursement and volume these tests represent.
During a myocardial infarction ("AMI"), certain proteins are released
from the damaged heart muscle into the blood stream as a result of damage to the
muscle. These proteins are in varying concentrations and consist of CK-MB,
troponin, myosin light chain and myoglobin. Myoglobin is the earliest of the
markers to be detected and the first to leave the body. CK-MB and troponin I are
later markers but stay in the body longer and are more specific to cardiac
damage. Combinations of these markers are thus used to cover the required time
frames.
Cardiac markers are important to help to identify patients who have
suffered an AMI. Such tests, however, are most useful if they can be performed
in under fifteen minutes in the ED or mobile care unit so that medical personnel
may take immediate action. Most of the existing test modalities require a
central laboratory system that may delay the results beyond their effective
need. The FasTraQ will provide emergency personnel with the ability to receive
quantitative results for a heart attack in less than 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% subsequently "rule-in"
for acute AMI. Assuming an average cost of $3,000 per admission, this represents
a total expenditure of $6 billion annually on patients who do not have AMI. This
also does not take into account that 2-8% of patients with acute chest pain that
are released from the ED without treatment subsequently fulfill criteria for AMI
resulting in deaths and complications that represent greater than 20% of the
malpractice dollars awarded in the field of emergency medicine.
Not only are costs of admission and malpractice claims an important
issue, making a rapid definitive diagnosis of chest pain has become more
important. In the past when a patient was in the early stages of a heart
attack/AMI, there was little treatment available. In the last 10 years,
substantial progress has been made in thrombolytic therapy. If the therapy is
started within 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 (allergic
reactions, bleeding) if the patient has not suffered an AMI, rapid accurate
testing for an AMI is very important.
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Pregnancy
Every woman of child-bearing age who enters the ED and requires a
procedure that could injure a fetus (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 cardiac
markers. The FasTraQ will have a whole blood quantitative test for the pregnancy
marker hCG. Whole blood is an advantage in the ED as it is the preferred method
of sample collection as compared to urine and may be obtained from a patient
that is unconscious.
A rapid quantitative 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 abdomen pain for women presenting to the
ED. Determination of an ectopic pregnancy is made through the quantitative
testing of hCG. The ability of the Quantech system to perform pregnancy and
other tests will show its advantage as a quantitative multi-test platform.
Patient Treatment Information
In order for a physician to diagnosis a patient he or she requires
information. The FasTraQ will provide the most critical piece of information,
test results. Other information such as patient records, x-rays, etc. are also
important. Because the FasTraQ is expected to communicate with the hospital
computer information system, it will be able to deliver available non-diagnostic
information.
The Ability to converge many pieces of information is the next step for
the practice of medicine. Technology is providing many avenues to make this
information convergence complete. Quantech is taking advantage of these
technologies by providing not just a diagnostic system, but a complete patient
treatment information platform.
Sales and Marketing
Background
Quantech will form a strategic marketing group. Initially this
marketing group will begin creating awareness of Quantech and its system.
Currently Quantech is evaluating strategic distribution partners 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 monitor the market for future products. If
Quantech establishes a direct sales force the marketing group will initiate that
effort.
Quantech is currently in discussions with a number of potential
partners. Determination of whether to ultimately market through a strategic
partner will be based upon factors such as size of sales force, presence in
hospital, pricing and discounts. The benefits of a strategic partner of lowering
marketing and sales cost and penetration of the market will be weighed against
distribution discounts, commitment to the sale of the Quantech product and
Quantech's ability to cost effectively rollout its product.
If an appropriate distribution partner cannot be engaged, the marketing
group will focus on sales of the system to the highest volume emergency
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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, the
Company believes that a small focused sales effort will enable it to effectively
penetrate the ED market.
International
Shortly after the launch of the FasTraQ in the United States, Quantech
intends to begin sales in western Europe and after appropriate approvals, in
Japan. These markets are similar to the United States in both menu of STAT
testing and concentration of patients in a small number of facilities. The
Company will manage and support international distributors if a strategic
distribution partner is not engaged. Quantech has completed its international
marketing research and has begun identifying potential distribution partners.
Clients
The purchasing decision for diagnostic testing equipment is made by the
laboratory manager, although the end user of the FasTraQ will be ED personnel.
Under CLIA regulation, the laboratory is responsible for training, instrument
calibration and quality assurance of testing systems. As such, the laboratory
manager prefers a STAT-testing instrument with the following features:
o Comparable performance to central lab instrument with concordant
results
o One (maximum of two) instruments for entire ED STAT menu
o Full-time, bi-directional laboratory information system ("LIS")
interface with information automatically downloaded to LIS
o Automated user/patient/test/QC information input
o User ID and lockout capability by laboratory
o Minimum user training
o Costs comparable to central lab STAT tests - less than STAT lab
As the ultimate users ED personnel must also accept any system that
will be used for their STAT testing needs. Although they cannot buy a testing
system without laboratory approval, they are capable of preventing a system from
being purchased. A system that is acceptable to the ED must provide the
following features:
o Comparable performance to central lab instrument with concordant
results
o Rapid turnaround time (less than 15 minutes)
o One (maximum of two) instruments for entire ED STAT menu
o Whole blood, closed collection tube sampling and transfer
o Automatic LIS download
o User friendly - minimum training and time at instrument
o High reliability
o Test menu so all patient testing completed
o Limitation of steps necessary to receive information
To achieve market penetration of the FasTraQ, Quantech's marketing
strategy will be focused on achieving the acceptance of both laboratory and ED
personnel. Testing systems to date have been unable to meet the needs of both
21
<PAGE>
groups because of technology limitations. The FasTraQ is being designed to meet
the requirements of both groups by trying to incorporate all of the required
features into a single platform.
Although the laboratory and ED are important customers, the FasTraQ
will also appeal to hospital administration. Quantech believes that the
FasTraQ's ability to simplify and improve the ED treatment process can be shown
to facilitate the growth and profitability of the ED. Because more patients can
be seen with the same fixed cost resources, the FasTraQ should provide
significant incremental revenue to the hospital, while the variable cost of the
test will be comparable to current costs.
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 FasTraQ 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 FasTraQ system and the individual tests to be provided on the FasTraQ.
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.
Three such point of care systems, i-STAT Corp. (in conjunction with Abbott
Laboratories), Diametrics Medical (in conjunction with Agilent Technologies) and
Careside, Inc., which market point of care testing instruments have become
recognized point of care testing systems. Quantech does not believe current
products of i-STAT, Diametrics or Careside are capable, however, of providing
the breadth of tests and features required by the emergency department.
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<PAGE>
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 FasTraQ. Limitation of the tests that
competitors' system can perform is believed by Quantech to provide it a
competitive advantage because the FasTraQ 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
FasTraQ 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 FasTraQ. If Quantech is able to launch its system, no
assurance exists that competitive pressures will not negatively affect its
pricing of both the FasTraQ instrument and the individual test cartridges.
The Technology
The FasTraQ 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
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.
23
<PAGE>
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
Quantech's system is comprised of a modular instrument, disposable
tests and communicators. The instrument consists of electronics and optics, most
of which are off the shelf parts, and does not require complicated assembly
procedures. The ReaLinQ communicators are based upon current handheld data
transfer devices. Production of the FasTraQ instrument and ReaLinQ communicators
will be performed by a contract manufacturer to Quantech under quality standards
set by the Company. The contract supplier has not yet been selected. Quantech
will take delivery of the instrument and communicators, perform final quality
inspection and inventory the units for final shipment.
Quantech's disposable 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 disposable. This
final manufacturing will consist of applying the assay (chemistry) on the gold
coated sensor grating, placing the final grating piece into the carrier,
performing the final assembly, labeling the unit and packaging the disposable
for final shipment.
Regulatory Environment
The Company has received clearance from the FDA to market in the
clinical environment its cardiac tests, myoglobin and CK-MB, and its pregnancy
test, hCG. Each test for the FasTraQ must obtain FDA approval. The Company must
also submit its instrument to the FDA for approval. The instrument will be
provided to the FDA for such approval after its commercial development is
completed.
The Company believes that the products it initially proposes to
manufacture and market will be classified as medical devices and will therefore
be subject to regulation by the United States Food and Drug Administration (the
"FDA") and, in some instances, by foreign government authorities. Under the 1976
amendments to the Federal Food, Drug and Cosmetics Act (the "FFDCA") and
regulations promulgated thereunder, manufacturers of medical devices must comply
with certain regulations governing the testing, manufacturing and packaging of
medical devices. Under the FFDCA, medical devices are subject to different
levels of testing and review. The most comprehensive level of review requires
that a clinical evaluation program be conducted before a device receives
premarket approval by the FDA for commercial distribution. As a manufacturer of
medical devices, the Company will also be subject to certain other FDA
regulations, and its manufacturing processes and facilities will be subject to
periodic inspection, without warning, to ensure compliance. Comparable agencies
in certain states and foreign countries will also regulate the Company's
activities. The Company's products could be subject to recall by the FDA or the
Company itself, if it appears that the products and their use do not conform to
regulations.
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<PAGE>
Generally, medical devices intended for human use that are to be
marketed in the United States are placed in one of three regulatory
classifications depending upon the degree of testing and review to which the
device will be subject. The Company expects that its products will not be
subjected to the highest level of scrutiny because they are in-vitro (outside of
the body) diagnostic devices which do not come into contact directly with a
living human being. Specifically, the systems would be classified as either
Class I or Class II devices as distinct from implantable devices, which are
classified as Class III devices.
The Company believes that premarket clearance can be obtained for its
initial system and tests through submission of a 510(k) premarket notification
("510(k) Notification") demonstrating the product's substantial equivalence to
another device legally marketed pursuant to 510(k) Notification clearance. The
FDA may also require, in connection with the 510(k) Notification, that it be
provided with the test results supporting this claim. The FDA may further
require, in connection with the 510(k) Notification, that it be provided with
test results demonstrating the safety and efficacy of the device. Under certain
circumstances, such clinical data can be obtained only after submitting to the
FDA an application for an Investigational Device Exemption ("IDE").
For new products that are not considered to be "substantially
equivalent" to an existing device, two levels of FDA approval will probably be
required before marketing in the United States can begin. First, the FDA and
participating medical institutions must approve the Company's application for an
IDE, permitting clinical evaluations of the product utilizing human samples
under controlled experimental conditions. Second, the FDA must grant to the
Company a Premarket Approval ("PMA"). The FDA should grant a PMA if it finds
that the product complies with all regulations and manufacturing standards. In
addition, the FDA may require further clinical evaluation of the product, or it
may grant a PMA but restrict the number of devices distributed or require
additional patient follow-up for an indefinite period of time. Completion of
this process could take up to 12 months and involve significant costs. The
Company believes it is unlikely that it will be required to obtain a PMA with
respect to any of its currently proposed products, except where mandated by the
FDA such as HIV, cancer and hepatitis detection tests. Any claims of panel
diagnostics are subject to a PMA procedure. The Company anticipates that it will
make claims in reference to its cardiac markers. These claims will be made after
the products are marketed with only single claim implications. Accordingly, the
products should not be delayed in their initial introduction. If a PMA is
required for the Company's initial system and CK-MB test, introduction of the
initial system likely would be significantly delayed, which could have a
material adverse effect on the Company, although preliminary indications from
the FDA are consistent with a 510(k) filing.
For products subject to either 510(k) or PMA regulations, the FDA
requires that the Company conduct any required studies following Good Clinical
Practice and Good Laboratory Practice guidelines. Also, the manufacture of
products subject to 510(k) or PMA regulations both must be in accordance with
current Good Manufacturing Practice. For sale in foreign countries, compliance
with ISO 9000 standards will be required. Sales of medical devices outside the
U.S. are subject to foreign regulatory requirements. Medical devices may not be
sold in EU countries unless they display CE mark certification. The Company's
products will be manufactured according to ISO 9001 and EN 46001 quality
standards and the Company expects to be able to apply the CE mark to its
products. In addition, international sales of medical devices manufactured in
the U.S. but not approved by the FDA for distribution in the U.S. are subject to
FDA export requirements. Under these requirements, the Company 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.
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<PAGE>
Specific requirements demanded of a laboratory depend upon the
complexity of the test performed. Clinical Laboratory Improvement Act of 1988
("CLIA") regulations establish three categories of laboratory tests, for which
regulatory requirements become increasingly stringent as the complexity of the
test rises: (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. All
laboratories performing tests of moderate or high complexity must obtain either
a registration certificate or a certificate of accreditation from Health Care
Financing Administration ("HCFA") or an organization to whom HCFA has delegated
such authority. HCFA has allowed electronic controls for some POC instruments to
serve the function of daily quality control performance to allow non-laboratory
personnel to run such POC systems. The tests to be performed by the Company's
system are initially expected to fall within the moderate complexity class as
defined by current CLIA regulations, as all analogous POC instruments 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, whereas the individual who operates the machine
requires no formal laboratory education and only task-specific training. The
Company may, but has not yet, applied for the waiver.
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. In addition, if Quantech sublicenses the technology, Quantech will pay
a royalty of 15 percent of all revenues received by Quantech under any
sublicense. To date, Quantech has paid $1,300,000 of cumulative royalty
payments. This amount satisfies the requirements of the license agreement until
royalty accruals based on revenues exceed such minimum payment amount. 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 continues 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.
PE Corp. Agreement
Quantech provided PE Corp. ("PE") with exclusive worldwide rights to
the SPR technology licensed from Ares-Serono for products other than those
regulated by the FDA or products sold outside the United States if they would be
regulated by the FDA if sold in the United States. PE also received two of
Quantech's SPR research breadboards. As part of PE's research and development
26
<PAGE>
efforts, it applied certain of its technology to develop a large density,
high-throughput diagnostic breadboard using Quantech's SPR technology (the "PE
High Density Technology"). PE granted Quantech an exclusive worldwide license to
the PE High Density Technology for use in FDA medical diagnostics.
Through the optical and chemistry deposition advancements made by PE,
they are able to read up to 1000 test areas on a single 1 cm by 1 cm slide.
Quantech believes such two dimensional array capability, as now used in genomic
screening research, should allow Quantech to expand the FasTraQ upstream from
the critical care area to the central laboratory. Vertical expansion to
intensive care units, surgical suites, doctor offices and home testing should
also be possible. Future generations of Quantech's current FasTraQ system are
also expected to benefit from the PE 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 PE technology. If Quantech does not proceed
to commercialize the SPR based technology licensed from PE, all rights revert
back to PE. The PE technology will not be initially incorporated into the
FasTraQ system.
HTS BioSystems, Inc.
After Quantech and PE significantly advanced the state-of-the-art in
the SPR technology, they agreed that a separate company, which could be focused
on promoting the non-medical use of the SPR technology, would be most effective
in bringing products to market without affecting mainstream activities of either
company. Quantech and PE formed HTS BioSystems, Inc. ("HTS") on December 7,
1999, which is 80% owned by Quantech and 20% owned by PE. PE provided HTS: 1. a
sub-license to all of its rights to the Quantech SPR technology (the
"Sublicense"); 2. a license for non-medical use of the PE High Density
Technology (the "License"); 3. one of PE's Quantech SPR breadboard instruments;
and 4. the PE breadboard for the PE High Density Technology. Quantech is
required to provide HTS with office space, management support, technical
assistance and any other needs required by HTS until HTS is funded in a manner
adequate to support its own operations.
HTS will owe to PE: 1. a 4% royalty on products using only SPR other
than those for use in the food and beverages, chemical and industrial and
environmental testing markets; 2. a 4% royalty on products using only the PE
High Density Technology; and 3. a 6% royalty on products using both
technologies. No minimum royalties, or royalties on the first $3 million of
sales, are required to be paid. Quantech receives 15% of any royalties paid to
PE by HTS for products which incorporate Quantech's SPR technology. In the event
that HTS does not seek to commercialize the SPR or PE High Density Technology,
then the rights revert back to PE. PE also has a five-year right of first
negotiation in the event that HTS wishes to license or sell any of its
technology licensed from PE. Quantech is entitled to an 8% royalty on products
using its SPR technology sold to the food and beverages, chemical and industrial
and environmental testing markets.
The combination of technology and intellectual property from both PE
and Quantech provided to HTS is expected to support the accelerated development
of label-free, cost effective detection systems for the pharmaceutical and
genomics research markets. In addition to label free systems, HTS intends to
become the source of various other high-throughput systems and chemistries for
the detection of molecular and cellular changes and interactions for the fields
of functional genomics, proteomics and drug discovery.
27
<PAGE>
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 Patent for grating coupled SPR 06/05/90 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT,
biosensor. Used in FasTraQ System JP, LU, NL, NO, SE, WO
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
Merlin II Patent for grating coupled SPR 21/11/89 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT,
biosensor. Used in FasTraQ System JP, LU, NL, NO, SE, WO
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
Cellulose Nitrate Films Patent for grating coupled SPR 12/02/91 AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
biosensor. Used in FasTraQ System GR, IL, IT, JP, LU, NL, SE
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
Calibration Notches Not used in FasTraQ 09/05/89 AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
GR, IL, IT, JP, LU, NL, SE
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
Enhanced SPR biosensor Not used in FasTraQ Pending AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
assay GR, IL, IT, JP, LU, NL, SE
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
Sensor Using Photoresist Not used in FasTraQ 09/03/88 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT,
LU, NL, NO, SE, WO
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
Waveguide Sensor Not used in FasTraQ Pending AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
IT, JP, LU, NL, NO, SE, WO
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
Restrahlen Effect Sensor Not used in FasTraQ N/A GB ONLY
- -------------------------- ------------------------------------- ------------------ --------------------------------------------
</TABLE>
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 27 people on a full and part-time basis and engages
consultants and independent contractors to provide services related to the
development of the FasTraQ 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 20,900 sq. ft.) at
815 Northwest Blvd., Eagan, Minnesota at a base monthly rent of approximately
$16,000 pursuant to a lease arrangement which expires April 2007. Thereafter,
Quantech has an option to extend the lease for an additional five years.
28
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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.
29
<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
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
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
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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.
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.,
iNTELEFILM 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 a director. 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 $100,000 for fiscal 1999.
31
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------------------- -----------------
Other All
Annual Other
Compen Securities Compen
Name and Fiscal Salary Bonus -sation Underlying -sation
Principal Position Year ($) ($) ($) Options (#) ($)
- --------------------------- -------- ----------- ------ ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert Case, 1999 $82,500 0 0 525,000 0
CEO 1998 $0 0 0 102,500 0
1997 $0 0 0 12,500 0
Gregory G. Freitag, 1999 $128,750 0 0 510,000 0
COO, CFO 1998 $125,000 0 0 115,000 0
1997 $125,000 0 0 0 0
Thomas R. Witty, 1999 $128,750 0 0 140,000 0
Ph.D., 1998 $93,750 0 $33,000 (1) 50,000 0
Executive VP of R&D 1997 0 0 0 0 0
- ------------------------
</TABLE>
(1) Other Annual Compensation for Mr. Witty consisted of amounts paid for
consulting services before he became a Quantech employee.
Option/SAR Grants During 1999 Fiscal Year. The following table provides
information related to options granted during fiscal 1999 to the executive
officers named in the summary compensation table above. Quantech has not granted
any stock appreciation rights.
<TABLE>
<CAPTION>
Individual Grants
- -----------------------------------------------------------------------------------------------------------------
Number of Percent of Total
Securities
Underlying Options/SARs
Options/SARs Granted to Exercise or
Granted Employees in Base Price Expiration
Name (#) Fiscal Year ($/Share) Date
- ------------------------ -------------------- ------------------ -------------- --------------------
<S> <C> <C> <C> <C>
Robert Case 400,000 (1) 28.7% $0.75 October 7, 2003
Robert Case 125,000 (2) 9.0% $1.50 April 2, 2004
Gregory G. Freitag 385,000 (3) 27.6% $0.75 October 7, 2003
Gregory G. Freitag 125,000 (4) 9.0% $1.50 April 2, 2004
Thomas R. Witty 40,000 (5) 2.9% $0.75 October 7, 2003
Thomas R. Witty 100,000 (6) 7.2% $1.50 April 2, 2004
- ------------------------
</TABLE>
(1) Such option is an incentive stock option and is immediately
exercisable.
(2) Such option is an incentive stock option with 41,667 shares immediately
exercisable, 41,667 shares exercisable on April 2, 2000, and 41,666
shares exercisable on April 2, 2001.
(3) Such option is an incentive stock option and is immediately
exercisable.
(4) Such option is an incentive stock option with 41,667 shares immediately
exercisable, 41,667 shares exercisable on April 2, 2000, and 41,666
shares exercisable on April 2, 2001.
(5) Such option is an incentive stock option with 26,667 shares immediately
exercisable and 13,333 shares exercisable on October 7, 2000.
32
<PAGE>
(6) Such option is an incentive stock option with 33,333 shares immediately
exercisable, 33,334 shares exercisable on April 2, 2000, and 33,333
shares exercisable on April 2, 2001.
- ------------------------
Option Exercises and Value of Options at End of Fiscal 1999. 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.
<TABLE>
<CAPTION>
Number of Unexercised
Securities Underlying Value of Unexercised
Shares Options at End In-the-Money Options
Acquired of Fiscal 1999 at End of Fiscal 1999 (1)
on Value --------------------------------- -------------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------- ----------- ----------- -------------- --------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Robert Case 0 N/A 556,667 83,333 $300,000 N/A
Gregory G.
Freitag 0 N/A 541,667 83,333 $288,750 N/A
Thomas R.
Witty 0 N/A 110,000 80,000 $20,000 $10,000
</TABLE>
(1) Value based on market value of the Company's Common Stock on June 30,
1999 ($1.50 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, Freitag and Witty has
employment contracts. All contracts allow for termination at-will by Quantech.
Pursuant to Mr. Case's 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 a six-months' base salary and
bonus, and one-year's salary and bonus if termination is due to a change in
control, as defined in the agreement. In the event Quantech terminates Mr.
Witty's employment due to a change in control he is entitled to a six-months'
base salary, as defined in the agreement.
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
33
<PAGE>
price of $0.75 per share. 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 per share.
In November 1998, Quantech issued a warrant to purchase 1,800,000
shares of Common Stock to Millennium Medical Systems, of which entity Dr. Robert
W. Gaines, who became a Director of the Company in December 1999, is sole owner,
in exchange for engineering development work. The warrant has an exercise price
of $1.10 per share and can be exercised any time before November 13, 2003.
In September 1999, Quantech sold a warrant to purchase 175,000 shares
of Common Stock to Dr. Robert W. Gaines, a Director Nominee of the Company, for
$10,000. The warrant has an exercise price of $1.25 per share and can be
exercised any time before September 9, 2004.
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. In
December 1999 the Quantech shareholders approved an increase to 4,000,000 shares
reserved for issuance under the1998 plan. 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 2,263,515 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.
34
<PAGE>
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 92,500 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 92,500 shares of Quantech common
stock have been granted under the 1996 option plan of which all 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.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table provides information as of February 29, 2000
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 February
29, 2000. 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>
Number of Shares Owned Before Offering
-------------------------------------- No. Shares %
No. Shares Owned Owned
Warrant Conversion Offered After After
Name/Group Shares Shares Shares Hereby Offering Offering(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2788675 Canada Inc. - - 16,000 16,000 - *
___________________________________
(1) Assumes conversion of Series A, B and C preferred stock into common stock
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
2789817 Canada Inc. - - 16,000 16,000 - *
Ted Adams - 500 - 500 - *
Alan Andalman IRA - - 50,000 50,000 - *
Roy Anderson III 10,000 2,500 - 2,500 10,000 *
Roy & Louise Anderson - 2,500 - 2,500 - *
Gregory & Ann Anklam 2,000 500 - 500 2,000 *
David & Meleah Arnold 15,000 15,088 67,260 15,088 82,260 *
Mark Ashton 59,053 - 32,000 11,305 79,748 *
Axiom Solutions, Inc. 95,743 - - 95,743 - *
Joel Bachul - - 10,000 10,000 - *
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 - *
Mark Bartholomay - - 10,000 10,000 - *
Richard T. Bennet 44,676 6,103 - 6,103 44,676 *
Richard Bernstein - - 25,000 25,000 - *
Les Biller - 6,036 - 6,036 - *
Kenneth Bjerk - - 75,000 75,000 - *
Nicholas Bluhm - 5,750 - 5,750 - *
Bob, Inc. 26,668 12,805 67,156 12,805 93,824 *
Donald Brattain - 2,500 233,332 102,500 133,332 *
Paul Braun 21,424 2,787 30,000 32,787 21,424 *
Courtney Brown 10,533 2,523 29,276 17,523 24,809 *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Timothy Burton 25,936 3,542 - 3,542 25,936 *
Anthony Carideo - 500 - 500 - *
Robert Case(2) 598,334 6,314 48,952 6,314 647,286 4.1%
815 Northwest Parkway
Eagan, Minnesota 55121
Joseph Catarious - 2,500 - 2,500 - *
Lee Chapman 5,500 1,250 19,868 1,250 25,368 *
Christianson Investments Co. Ltd. - 5,000 - 5,000 - *
Ann M. Christianson 2,402 599 - 599 2,402 *
Lynn A. Christianson 2,402 599 - 599 2,402 *
Warren G. Christianson 7,500 3,895 - 3,895 7,500 *
Warren T. A. Christianson 2,402 599 - 599 2,402 *
Confidential Investment Services - - 100,000 100,000 - *
John Dalpee 5,000 - 5,000 5,000 5,000 *
Kenneth Dawkins 66,668 - 50,000 50,000 66,668 *
David Dent 10,000 10,118 86,372 35,118 71,372 *
Brad deWerd - 100 - 100 - *
Robert & Rita deWerd 1,000 - 22,000 22,000 1,000 *
Tom & Kathy deWerd - 250 - 250 - *
John & Emily Dirksen - 250 10,000 10,250 - *
DRAFTCO - 2,500 - 2,500 - *
Neil Durhman - 10,000 - 10,000 - *
Mike Edwards 22,820 - - 2,275 20,545 *
Paul Ehlen - 2,511 15,952 2,511 15,952 *
Stanley & Carol Eilers - 22,618 129,136 52,618 99,136 *
Engelkes-Abels Funeral Home, Inc. 4,000 1,000 10,000 11,000 4,000 *
___________________________________
(2) Includes 598,334 issuable upon exercise of options.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Weems Estelle - 22,500 - 22,500 - *
Richard Evans - 500 - 500 - *
Kelly Farrell - - 45,200 20,000 25,200 *
Tracy Farrell - - 5,000 5,000 - *
Lee Felicetta - 500 - 500 - *
Hohn E. Feltl - 200 - 200 - *
Four Skis Investments 11,784 1,613 - 1,613 11,784 *
Carol M. Freeman 2,402 599 - 599 2,402 *
Gregory Freitag(3) 583,609 9,761 15,952 9,761 599,561 3.8%
815 Northwest Parkway
Eagan, Minnesota 55121
Jim Gahlon 10,063 1,169 8,248 1,169 18,311 *
James Gaines - - 350,000 350,000 - *
Robert Gaines Jr., MD(4) 25,001 181,783 47,852 181,783 72,853 *
815 Northwest Parkway
Eagan, Minnesota 55121
Rob Gaines 5,000 - - 5,000 - *
Robert D. Gearou 7,500 3,125 - 3,125 7,500 *
Thomas Gearou 12,050 2,500 - 2,500 12,050 *
Sue Karen Getzlaff-Rall - - 16,000 16,000 - *
John Gildea - - 50,000 50,000 - *
Robert Gjerde - 10,133 71,480 10,133 71,480 *
Ronald L. Glassman 20,000 6,103 24,672 6,103 44,672 *
Glymar Inc. - 500 - 500 - *
Gold Country Holdings - 16,510 93,380 16,510 93,380 *
Larry Goldsmith - - 10,000 10,000 - *
David Goldsteen 451,140 51,038 78,452 51,038 529,592 3.4%
___________________________________
(3) Includes 583,334 shares issuable upon exercise of options.
(4) Includes 20,001 shares issuable upon exercise of options. 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 the Millennium, has sole voting power
and investment power over such shares.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Mark Goldsteen 72,152 12,800 - 12,800 72,152 *
Sima Griffith - 38,456 - 38,456 - *
Donald F. Hagen Revocable Trust - 6,071 72,824 6,071 72,824 *
Albert Hall - - 50,000 50,000 - *
James Hansen 1,250 25,000 - 25,000 1,250 *
Thomas Harkness 5,000 2,500 - 2,500 5,000 *
Bill Hay 4,000 750 - 750 4,000 *
Timothy Heaney - 1,000 6,924 1,000 6,924 *
Kenneth Hess 5,000 - - 5,000 - *
Julie A. Higgins 2,402 599 - 599 2,402 *
HK Financial Corp. 71,033 16,305 79,748 16,305 150,781 *
Bruce Hubbard - 400 - 400 - *
Richard & Diane Hubers 41,000 - 120,000 120,000 41,000 *
Industricorp, FBO Twin City Carpenters 5,000 2,220 225,000 227,220 5,000 *
Intermed Anstalt 13,750 2,500 22,000 24,500 13,750 *
Roland Isaacson 14,000 9,414 46,172 9,414 60,172 *
Jon & Susan Iverson - 10,579 84,956 10,579 84,956 *
Steven Johnson, MD & Jean Johnson - - 10,000 10,000 - *
Theodore Johnson 5,000 1,250 15,000 16,250 5,000 *
Wesley Johnson 3,250 500 - 500 3,250 *
Jeanne M. Jungbauer - 6,852 50,156 6,852 50,156 *
E. Elmer & E. Joyce Jutila 2,000 500 - 500 2,000 *
John Jutila - 500 - 500 - *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
John Kaiser 5,000 - - 5,000 - *
Judith Kaufman - 750 6,960 750 6,960 *
Nassar Kazeminy 1992 GRAT - - 83,332 50,000 33,332 *
Nasser Kazeminy 4,250 - 183,332 150,000 37,582 *
Yvonne Kazeminy 1992 GRAT - - 83,332 50,000 33,332 *
Bernard Kegan - 500 - 500 - *
Michael S. Kelly - 200 - 200 - *
Curtis Kemp - - 25,000 25,000 - *
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. 177 685,454 159,492 685,454 159,669 *
Peter & Shelagh Klein - 3,035 21,412 3,035 21,412 *
Steven Kopesky 20,000 16,597 90,568 46,597 80,568 *
Brandon Koress 3,699 1,250 - 1,250 3,699 *
Stephen Korolnek Holdings Ltd. - - 18,000 18,000 - *
Kreiger Investment Co. LP - 14,613 93,332 14,613 93,332 *
David & Kathryn Kruskopf 2,000 500 - 500 2,000 *
Martin Lackner 20,808 3,500 - 3,500 20,808 *
Lakewood Ortho Clinic-Mark Mills 2,000 500 - 500 2,000 *
Ron Laska 16,968 - 8,000 18,000 6,968 *
Dennis LaValle 90,001 96,561 464,088 161,894 488,756 3.1%
Bruce Lawin 14,635 - 15,000 21,783 7,852 *
Eugene & Beverly Lentsch - - 50,000 50,000 - *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Phil Levin 6,600 - 106,736 100,000 13,336 *
Clifford S. Lozinski 15,996 1,188 - 1,188 15,996 *
Lawrence Lozinski 2,524 346 - 346 2,524 *
Roberta Lozinski Trust 8,420 1,152 - 1,152 8,420 *
Tony Lozinski 2,524 346 - 346 2,524 *
Victor Lozinski 9,260 1,267 - 1,267 9,260 *
Roger Lucas - 1,250 - 1,250 - *
Wayne Lund 22,000 7,500 - 7,500 22,000 *
James Lyons(5) 393,334 97,688 562,720 97,688 956,054 6.0%
815 Northwest Parkway
Eagan, Minnesota 55121
Mark Lyons - 5,353 37,760 5,353 37,760 *
Joan C. Maclin - 1,055 7,444 1,055 7,444 *
Plato Marroulis - 1,250 - 1,250 - *
Jerry Mathwig 133,334 - 16,667 50,000 100,001 *
Victor Mavar 5,000 1,250 - 1,250 5,000 *
Andrea McAllister - 625 - 625 - *
Timothy McDonald - 525 - 525 - *
James McDonnell 7,136 1,012 - 1,012 7,136 *
Robert & Teresa McDonnell 40,788 6,071 - 6,071 40,788 *
Timothy McDonnell 21,412 3,035 - 3,035 21,412 *
Sally McGuire - - 58,332 25,000 33,332 *
Robert McKiel - 41,542 - 41,542 - *
Lawrence Meacham - 5,794 62,620 25,794 42,620 *
David Metz - 625 - 625 - *
Millennium Medical Systems LLC 454,545 1,345,455 - 1,800,000 - *
___________________________________
(5) Includes 113,334 shares issuable upon exercise of options.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Jonathan E. Miller - 1,166 8,580 1,166 8,580 *
Steven E. Miller 31,164 - - 3,848 27,316 *
Minn Shares, Inc. 17,868 2,533 - 2,533 17,868 *
David Mitchell & Connie Foote - 10,185 71,844 10,185 71,844 *
Clint Morrison 16,667 - - 16,667 - *
James Murphy 4,000 1,000 - 1,000 4,000 *
Nathan Newman - 100 - 100 - *
Vincent O'Connell 50,000 21,965 143,480 71,965 143,480 *
Steve O'Hara - 500 - 500 - *
Okabena Partnership K 75,000 59,922 399,484 59,922 474,484 3.0%
John & Delores Owensby - 4,500 - 4,500 - *
John Pagnucco 10,000 39,456 10,000 59,456 - *
Deming Payne - 11,283 47,852 11,283 47,852 *
Richard Perkins(6) 148,334 2,500 - 2,500 148,334 *
815 Northwest Parkway
Eagan, Minnesota 55121
Lawrence Perlman - - 130,000 130,000 - *
Thomas Pierce - 500 - 500 - *
William and Judith Prain 5,000 1,250 50,000 51,250 5,000 *
Product Design Center 100,113 - - 100,113 - *
Charles Pully 17,100 9,772 45,680 9,772 62,780 *
Scott Punchacar 3,000 - - 3,000 - *
Joseph D. Pupel 10,000 1,125 - 1,125 10,000 *
Pyramid Partners, L.P. 250,000 - - 250,000 - *
Mary J. Rasley - 599 - 599 - *
Willard & Kathy Rehbein 20,000 7,500 50,000 57,500 20,000 *
___________________________________
(6) Includes 73,334 shares issuable upon exercise of options.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Richfield Bank & Trust/Wiggins 2,000 500 - 500 2,000 *
River Edge Partners, Inc. 10,000 2,500 91,668 27,500 76,668 *
Richard S. & Sylvia Rog - 14,853 142,088 14,853 142,088 *
Robert & Lois Schmiege - 1,875 5,000 6,875 - *
Donald Schreifels - - 15,000 15,000 - *
John & Gloria Schweich 2,500 625 - 625 2,500 *
Allan Sekhavat - 2,500 - 2,500 - *
Sekhavat, Ltd. Partnership 28,000 7,000 - 7,000 28,000 *
Jerry Shaughnessy - 37,206 14,108 37,206 14,108 *
R.H. Joseph Shaw - 5,000 - 5,000 - *
Franciska Shuler 7,352 1,042 - 1,042 7,352 *
Patrick & Barbara Sidders 3,106 300 - 300 3,106 *
Six C's Investment Group 5,000 2,500 - 2,500 5,000 *
Special Situations Private Equity
Fund L.P. - - 1,000,000 1,000,000 - *
Al Steffes 5,000 1,250 - 1,250 5,000 *
Michael Stone - 50 - 50 - *
Douglas Strickland - - 30,000 30,000 - *
Edward Strickland(7) 440,834 42,315 453,628 42,315 894,462 5.6%
815 Northwest Parkway
Eagan, Minnesota 55121
Scott Strickland 10,000 7,371 338,756 292,371 63,756 *
William R. & Catherine A. Swanson 10,000 3,841 18,156 3,841 28,156 *
Douglas V. Swanson 18,367 - - 2,319 16,048 *
James Swenson - 2,505 8,800 2,505 8,800 *
William J. Szlaius - 750 6,980 750 6,980 *
Scott Taylor - 750 6,968 750 6,968 *
___________________________________
(7) Includes 110,834 shares issuable upon exercise of options.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
David & Susan Thymian - 12,308 106,064 42,308 76,064 *
Larry & Gayla Torguson 2,000 500 5,000 5,500 2,000 *
Marlin Torguson 34,750 16,000 795,436 124,000 722,186 4.5%
Allen J. Tower - 6,783 47,852 6,783 47,852 *
Trip Investments - 1,000 - 1,000 - *
Ben Trainer 10,000 3,750 50,000 53,750 10,000 *
Charles Underbrink 16,250 31,250 22,000 53,250 16,250 *
Frank Vargas - 693 - 693 - *
Thomas M. Vertin - 5,200 36,684 5,200 36,684 *
George Vitalis - 17,500 - 17,500 - *
Randall S. & Nancy B. Vollertsen - 4,033 28,448 4,033 28,448 *
Chris Warren - 5,000 - 5,000 - *
Larry Weaver - 12,500 - 12,500 - *
James Weinzetl - 3,746 86,088 28,746 61,088 *
John White 10,000 10,118 61,372 10,118 71,372 *
Thomas Witty(8) 143,334 - - - 143,334 *
815 Northwest Parkway
Eagan, Minnesota 55121
Jeff & Joni Zalasky 6,658 7,946 107,148 57,946 63,806 *
Alvin Zelickson 2,500 625 20,000 20,625 2,500 *
Richard D. & Deborah K. Zimmerman - 16,958 - 16,958 - *
All directors and executive officers
as a Group (7 persons) 2,332,780 340,361 1,129,104 340,361 3,461,884 20.7%
- -------------------------------------------------
* Less than 1%
___________________________________
(8) Includes 143,334 shares issuable upon exercise of options.
</TABLE>
<PAGE>
DESCRIPTION OF SECURITIES
General
Quantech's articles of incorporation authorize the issuance of up to
75,000,000 shares, 51,252,585 shares consisting of common stock, no par value
per share, 17,587,000 undesignated shares, 2,160,748 shares of Series A
Convertible Preferred Stock, 2,999,667 shares of Series B Convertible Preferred
Stock, and 1,000,000 shares of Series C 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 5,759,549 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 for Series A Convertible
Preferred Stock 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;
40
<PAGE>
o Increase the authorized number of shares of Series A Convertible
Preferred Stock;
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 were
1,368,068 shares of Series A Convertible Preferred Stock outstanding as of
February 29, 2000. 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.
Redemption. If at any time after November 5, 2003, Quantech receives a
written request from the holders of at least 50% of the outstanding shares of
Series A Convertible Preferred Stock, Quantech will redeem all of such
outstanding shares by paying in cash an amount equal to the sum of the original
purchase price plus a 10% return 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 Quantech's Statement of Designation for Series B Convertible
Preferred Stock 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
41
<PAGE>
share may be converted. Holders of common stock, Series A Convertible Preferred
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 $1.00 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, in the event that
Quantech sells common stock, or securities convertible into common stock with a
conversion price, less than $1.00 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 Series B Convertible Preferred Stock per share liquidation preference
divided by such sale or conversion price.
42
<PAGE>
Series C Convertible Preferred Stock
The following description of the Series C Convertible Preferred Stock
is subject to the detailed provisions contained in Quantech's articles of
incorporation and Quantech's Statement of Designation for Series C Convertible
Preferred Stock 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 C 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
Stock, Series B Convertible Preferred Stock and Series C 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 C Convertible Preferred Stock then outstanding,
Quantech may not:
o Alter or change the rights, preferences or privileges of the Series C
Convertible Preferred Stock;
o Increase the authorized number of shares of Series C Convertible
Preferred Stock;
o Issue any shares of capital stock with any preference over Series C
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 C 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, B and C 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 $1.00 per share, as adjusted, third to the holders of Series C Convertible
Preferred Stock in an amount equal to $1.00 per share, as adjusted, and the
remainder ratably to the holders of common stock.
Conversion of Shares. Each share of Series C 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
43
<PAGE>
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, in the event that
Quantech sells common stock, or securities convertible into common stock with a
conversion price, less than $1.00 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 Series C Convertible Preferred Stock per share liquidation preference
divided by such sale or conversion price.
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
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 3,426,205
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
44
<PAGE>
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
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.
45
<PAGE>
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
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.
46
<PAGE>
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, 1998 and 1999 and
for the years ended June 30, 1998 and 1999, included in this prospectus and
Registration Statement of which this prospectus is a part, have been audited by
McGladrey & Pullen, LLP, independent 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.
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.
47
<PAGE>
QUANTECH LTD.
FINANCIAL STATEMENTS
CONTENTS
INDEPENDENT AUDITOR'S REPORT F-2
FINANCIAL STATEMENTS
Balance sheets as of June 30, 1998 and 1999, and
December 31, 1999 (unaudited) F-3 - F-4
Statements of operations for the years ended
June 30, 1998 and 1999, the six months ended
December 31, 1998 and 1999 (unaudited) and
the period from September 30, 1991 (date of
inception) to December 31, 1999 (unaudited) F5
Statements of stockholders' equity (deficit) for the
period from September 30, 1991 (date of inception)
to December 31, 1999 (unaudited) F6 - F15
Statements of cash flows for the years ended
June 30, 1998 and 1999, the six months ended
December 31, 1998 and 1999 (unaudited) and the
period from September 30, 1991 (date of inception)
to December 31, 1999 (unaudited) F16 - F18
Notes to Financial Statements F19 - F34
<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, 1998 and 1999, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the years ended
June 30, 1998 and 1999. 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, 1998 and 1999, and the results of its operations
and its cash flows for the years ended June 30, 1998 and 1999, 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.
/S/ McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
July 14, 1999
<PAGE>
QUANTECH LTD. (A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30, December 31,
ASSETS 1998 1999 1999
- ----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 46,135 $ 436,223 $ 244,165
Prepaid expenses:
Product development expense (Note 4) 115,000 57,500 -
Other 42,044 36,037 36,167
--------------------------------------------------
Total current assets 203,179 529,760 280,332
--------------------------------------------------
Property and Equipment
Equipment 366,493 427,508 465,421
Leasehold improvements 15,000 15,000 15,000
--------------------------------------------------
381,493 442,508 480,421
Less accumulated depreciation 202,201 276,295 318,067
--------------------------------------------------
179,292 166,213 162,354
--------------------------------------------------
Other Assets
License agreement, at cost, less accumulated
amortization (Note 4) 2,735,807 2,409,180 2,245,867
Prepaid product development expense, less
current portion (Note 4) 57,500 - -
Patents 9,029 13,045 13,045
--------------------------------------------------
2,802,336 2,422,225 2,258,912
--------------------------------------------------
$ 3,184,807 $ 3,118,198 $ 2,701,598
==================================================
See Notes to Financial Statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' June 30, June 30, December 31,
EQUITY (DEFICIT) 1998 1999 1999
- ----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Current Liabilities
Short-term debt (Note 3) $ 3,112,818 $ 746,000 $ 750,000
Accounts payable 97,333 111,858 634,261
Accrued expenses:
Minimum royalty commitment (Note 4) 75,000 75,000 150,000
Spectrum Diagnostics, Inc. obligations 19,846 - -
Payroll and vacation 103,157 120,300 139,677
Interest 48,594 3,100 5,000
--------------------------------------------------
Total current liabilities 3,456,748 1,056,258 1,678,938
--------------------------------------------------
Redeemable Series A Preferred Stock, authorized
2,391,901 shares; issued and outstanding -0-,
1,697,707 and 1,617,234 shares at June 30, 1998;
and 1999, and December 31, 1999; redeemable
after November 5, 2003, at $5,413,507
(Notes 6 and 9) - 5,113,142 5,134,827
--------------------------------------------------
Commitments and Contingencies (Notes 4, 5, and 8)
Stockholders' Equity (Deficit) (Notes 2, 3, 6, 7, and 9)
Series B Preferred Stock, no par value; authorized
2,966,667 shares; outstanding -0-, 623,334 and
1,961,667 shares at June 30, 1998 and 1999,
and December 31, 1999, respectively - 891,500 1,845,318
Common stock, no par value; authorized
50,141,432 shares; outstanding 2,565,040
2,741,534 and 3,551,304 shares at June 30,
1998 and 1999, and December 31, 1999,
respectively 16,308,438 16,498,837 17,290,256
Subscriptions receivable - (60,000) (35,000)
Additional paid-in capital 1,476,669 2,342,745 2,868,895
Deficit accumulated during the development stage (18,057,048) (22,724,284) (26,081,636)
--------------------------------------------------
(271,941) (3,051,202) (4,112,167)
--------------------------------------------------
$ 3,184,807 $ 3,118,198 $ 2,701,598
==================================================
</TABLE>
F-4
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
September 30,
Six Months Ended 1001 (Date of
Years Ended June 30 December 31 Inception) to
--------------------------- --------------------------- December 31,
1998 1999 1998 1999 1999
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income $ 12,435 $ 1,886 $ 1,068 $ 1,810 $ 186,912
------------------------------------------------------------------------
Expenses:
General and administrative 1,221,196 1,593,451 931,641 1,324,216 12,079,451
Research and development 1,608,361 1,815,727 974,645 1,231,217 9,301,010
Minimum royalty expense (Note 4) 112,500 150,000 75,000 75,000 1,300,000
Losses resulting from transactions with
Spectrum Diagnostics, Inc. - - - - 556,150
Net exchange gain - - - - (67,172)
Interest 719,126 732,524 714,982 25,776 1,976,141
------------------------------------------------------------------------
3,661,183 4,291,702 2,696,268 2,656,209 25,145,580
------------------------------------------------------------------------
Loss before income taxes (3,648,748) (4,289,816) (2,695,200) (2,654,399) (24,958,668)
Income taxes (Note 8) - - - - 42,595
------------------------------------------------------------------------
Net loss $(3,648,748) $(4,289,816) $(2,695,200) $(2,654,399) $(25,001,263)
========================================================================
Net loss attributable to common stockholders:
Net loss $(3,648,748) $(4,289,816) $(2,695,200) $(2,654,399)
Preferred stock accretion - (377,420) (90,785) (263,103)
Beneficial conversion feature of preferred stock - - - (439,850)
---------------------------------------------------------
Net loss attributable to common
stockholders $(3,648,748) $(4,667,236) $(2,785,985) $(3,357,352)
=========================================================
Loss per basic and diluted common share $ (1.45) $ (1.75) $ (1.06) $ (1.04)
=========================================================
Weighted-average common shares outstanding 2,523,975 2,673,812 2,620,475 3,228,137
=========================================================
See Notes to Financial Statements.
</TABLE>
F-5
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series B Preferred Stock Common Stock
------------------------------ -------------------------------
Shares Issued Amount Shares Issued Amount
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <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
Common stock issuance costs - - - -
Cumulative translation adjustment - - - -
---------------------------------------------------------------
Balance, December 31, 1991 - - 190,000 3,766,320
Net loss - - - -
Common stock transactions:
Common stock issued, September 1992 - - 35,000 699,033
Common stock issuance costs - - - -
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
Net loss - - - -
Common stock transactions:
Common stock issued, January 1993 - - 8,000 1,600
Common stock issued, April 1993 - - 1,500 300
Change in common stock par value resulting
from merger - - - (4,420,353)
Repayments - - - -
---------------------------------------------------------------
Balance, June 30, 1993 - - 234,500 46,900
Net loss - - - -
12,000 shares of common stock to be issued - - - -
Repayments - - - -
---------------------------------------------------------------
Balance, June 30, 1994 - - 234,500 46,900
Net loss - - - -
Common stock issued, June 1995 - - 107,500 21,500
Warrants issued for services - - - -
---------------------------------------------------------------
(Continued)
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Additional Common Stock During the Other
Paid-In Paid for, but Subscriptions Due From Development Comprehensive
Capital Not Issued Receivable Officers Stage Income
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ - $ - $ - $ - $ - $ -
- - - - (594,620) -
- - - - - -
1,788,254 - - - - -
(889,849) - - - - -
- - - - - 387,754
- -------------------------------------------------------------------------------------------------
898,405 - - - (594,620) 387,754
- - - - (2,880,988) -
875,967 - (53,689) - - -
(312,755) - - - - -
- 120,000 - - - -
- - - (27,433) - -
- - - - - (209,099)
- - - - - (178,655)
- -------------------------------------------------------------------------------------------------
1,461,617 120,000 (53,689) (27,433) (3,475,608) -
- - - - (996,089) -
118,400 (120,000) - - - -
11,700 - - - - -
4,420,353 - - - - -
- - - 5,137 - -
- -------------------------------------------------------------------------------------------------
6,012,070 - (53,689) (22,296) (4,471,697) -
- - - - (1,543,888) -
- 30,000 - - - -
- - 53,689 22,296 - -
- -------------------------------------------------------------------------------------------------
6,012,070 30,000 - - (6,015,585) -
- - - - (2,070,292) -
276,068 (30,000) (20,000) - - -
40,200 - - - - -
- -------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Series B Preferred Stock Common Stock
------------------------------ -------------------------------
Shares Issued Amount Shares Issued Amount
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1995 - - 342,000 68,400
Net loss - - - -
Common stock issued, net of issuance costs of
$848,877:
July 1995 - - 308,000 61,600
August 1995 - - 35,880 7,176
September 1995 - - 690,364 138,073
November 1995 - - 94,892 18,978
December 1995 - - 560,857 112,172
May 1996 - - 313,750 62,750
June 1996 - - 252 51
Payment received on subscription receivable - - (960) (192)
Compensation expense recorded on stock options - - - -
---------------------------------------------------------------
Balance, June 30, 1996 - - 2,345,035 469,008
Net loss - - - -
Stock offering costs - - - -
Common stock issued upon exercise of options
and warrants:
September 1996 - - 500 100
October 1996 - - 8,500 1,700
November 1996 - - 750 150
December 1996 - - 13,500 2,700
January 1997 - - 1,000 200
February 1997 - - 7,500 1,500
March 1997 - - 7,000 1,400
Payments received on subscription receivable - - - -
Compensation expense recorded on stock options - - - -
Common stock issued, June 1997 - - 18,250 3,650
Warrants issued with notes payable - - - -
---------------------------------------------------------------
Balance, June 30, 1997 - - 2,402,035 480,408
Net loss - - - -
Conversion of common stock from par value to
no par value - - - 15,392,446
(Continued)
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Additional Common Stock During the Other
Paid-In Paid for, but Subscriptions Due From Development Comprehensive
Capital Not Issued Receivable Officers Stage Income
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6,328,338 - (20,000) - (8,085,877) -
- - - - (2,396,963) -
1,304,450 - - - - -
161,460 - - - - -
2,370,389 - - - - -
425,482 - - - - -
1,292,473 - - - - -
3,300,422 - - - - -
3,650 - - - - -
(14,808) - 20,000 - - -
125,000 - - - - -
- -------------------------------------------------------------------------------------------------
15,296,856 - - - (10,482,840) -
- - - - (3,925,460) -
(12,310) - - - - -
2,400 - - - - -
40,800 - - - - -
3,600 - - - - -
64,800 - (57,500) - - -
4,800 - - - - -
17,250 - - - - -
33,600 - - - - -
- - 57,500 - - -
48,000 - - - - -
105,850 - - - - -
371 - - - - -
- -------------------------------------------------------------------------------------------------
15,606,017 - - - (14,408,300) -
- - - - (3,648,748) -
(15,392,446) - - - - -
</TABLE>
F-9
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Series B Preferred Stock Common Stock
------------------------------ -------------------------------
Shares Issued Amount Shares Issued Amount
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <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 - - - -
April 1998 - - - -
Warrants issued with notes payable - - - -
Amount attributable to value of debt conversion
feature - - - -
Warrants issued for license agreement:
December 1997 - - - -
Compensation expense recorded on stock options - - - -
Adjustment of fractional shares due to 1-for-20
reverse stock split - - (73) -
---------------------------------------------------------------
Balance, June 30, 1998 - - 2,565,040 16,308,438
Net loss - - - -
Warrants issued with notes payable - - - -
Common stock issued upon conversion of notes
payable:
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:
August 1998 - - 2,045 5,114
Common stock issued for equipment and services
received:
July 1998 - - 5,714 20,000
August 1998 - - 9,196 27,589
September 1998 - - 12,557 11,318
December 1998 - - 6,078 5,688
(Continued)
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Additional Common Stock During the Other
Paid-In Paid for, but Subscriptions Due From Development Comprehensive
Capital Not Issued Receivable Officers Stage Income
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- - - - - -
- - - - - -
15,215 - - - - -
500 - - - - -
939 - - - - -
988,444 - - - - -
230,000 - - - - -
28,000 - - - - -
- - - - - -
- -------------------------------------------------------------------------------------------------
1,476,669 - - - (18,057,048) -
- - - - (4,289,816) -
76 - - - - -
- - - - - -
- - - - - -
- - - - - -
- - - - - -
- - - - - -
- - - - - -
- - - - - -
- - - - - -
</TABLE>
F-11
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Series B Preferred Stock Common Stock
------------------------------ -------------------------------
Shares Issued Amount Shares Issued Amount
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1998 (continued)
Stock options issued for services:
October 1998 - - - -
Common stock issued upon conversion of Series A
Preferred Stock:
November 1998 - - 74,052 55,539
January 1999 - - 15,952 11,964
March 1999 - - 500 375
April 1999 - - 20,000 15,000
Warrants issued for acquisition of engineering
development agreement:
November 1998 - - - -
Compensation expense recorded on stock options - - - -
Warrants issued in conjunction with Series A
Preferred Stock - - - -
Accretion to redemption value of Series A
redeemable Preferred Stock - - - -
Issuance of Series B Preferred Stock 623,334 891,500 - -
---------------------------------------------------------------
Balance, June 30, 1999 623,334 $ 891,500 2,741,534 $ 16,498,837
Net loss (unaudited) - - - -
Series B Preferred Stock issued (unaudited):
July 1999 216,666 291,829 - -
August 1999 86,667 116,989 - -
September 1999 16,667 22,500 - -
October 1999 - adjust price to $1.00 (Note 6) 471,666 - - -
November 1999 100,000 100,000 - -
December 1999 480,000 472,500 - -
Beneficial conversion expense on Series B
Preferred Stock (unaudited) - - - -
Common stock issued upon conversion of preferred
stock (unaudited):
July 1999 - - 32,000 24,000
August 1999 (33,333) (50,000) 179,121 159,341
September 1999 - - 80,852 60,639
October 1999 - - 50,000 37,500
December 1999 - - 13,252 9,939
(Continued)
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Additional Common Stock During the Other
Paid-In Paid for, but Subscriptions Due From Development Comprehensive
Capital Not Issued Receivable Officers Stage Income
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
42,000 - - - - -
- - - - - -
- - - - - -
- - - - - -
- - - - - -
554,000 - - - - -
43,000 - - - - -
227,000 - - - - -
- - - - (377,420) -
- - (60,000) - - -
- -------------------------------------------------------------------------------------------------
$ 2,342,745 $ - $ (60,000) $ - $ (22,724,284) $ -
- - - - (2,654,399) -
- - - - - -
- - - - - -
- - - - - -
- - - - - -
- - (20,000) - - -
- - - - - -
439,850 - - - (439,850) -
- - - - - -
- - - - - -
- - - - - -
- - - - - -
- - - - - -
</TABLE>
F-13
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Series B Preferred Stock Common Stock
------------------------------ -------------------------------
Shares Issued Amount Shares Issued Amount
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1999 (continued)
Common stock issued upon exercise of warrant,
September 1999 (unaudited) - - 454,545 500,000
Warrants issued (unaudited):
September 1999 - - - -
November 1999 - - - -
Compensation recorded on stock options (unaudited) - - - -
Payments received on subscriptions receivable
(unaudited) - - - -
Accretion to redemption value of Series A
redeemable Preferred Stock (unaudited) - - - -
---------------------------------------------------------------
Balance December 31, 1999 1,961,667 $ 1,845,318 3,551,304 $ 17,290,256
===============================================================
See Notes to Financial Statements.
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Additional Common Stock During the Other
Paid-In Paid for, but Subscriptions Due From Development Comprehensive
Capital Not Issued Receivable Officers Stage Income
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- - - - - -
10,000 - (10,000) - - -
15,000 - (15,000) - - -
61,300 - - - - -
- - 70,000 - - -
- - - - (263,103) -
- -------------------------------------------------------------------------------------------------
$ 2,868,895 $ - $ (35,000) $ - $ (26,081,636) $ -
=================================================================================================
</TABLE>
F-15
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
September 30,
Six Months Ended 1991 (Date of
Years Ended June 30 December 31 Inception) to
---------------------------- --------------------------- December 31,
1998 1999 1998 1999 1999
- ------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (3,648,748) $(4,289,816) $(2,695,200) $(2,654,399) $(25,001,263)
Adjustments to reconcile net loss to net cash
used in operating activities:
Elimination of cumulative translation adjustment - - - - (178,655)
Depreciation 62,934 74,094 17,758 41,772 364,421
Amortization 379,727 441,627 81,655 220,814 2,398,785
Noncash compensation services and interest 787,429 1,403,241 597,595 61,300 2,789,220
Losses resulting from transactions with Spectrum
Diagnostics, Inc. - - - - 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 1,062 6,007 7,239 (130) 47,925
Increase (decrease) in accounts payable (10,128) 14,524 124,543 522,403 626,038
Increase (decrease) in accrued expenses (48,607) (48,197) 179,872 96,277 568,801
-------------------------------------------------------------------------
Net cash used in operating activities (2,476,331) (2,398,520) (1,686,538) (1,711,963) (17,761,078)
-------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (16,713) (61,015) (8,457) (37,913) (537,179)
Proceeds on disposition of property - - - - 37,375
Organization expenses - - - - (97,547)
Patent expenses (134) (4,016) (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 - - - - (101,643)
Purchase of Spectrum Diagnostics, Inc., net of
cash and cash equivalents acquired - - - - (1,204,500)
-------------------------------------------------------------------------
Net cash used in investing activities (16,847) (65,031) (12,473) (37,913) (4,521,298)
-------------------------------------------------------------------------
Cash Flows From Financing Activities
Net proceeds from the sale of common stock and
warrants - - - 525,000 13,405,797
Net proceeds from sale of Series A Preferred Stock - 1,523,909 - - 1,523,909
Net proceeds from sale of Series B Preferred Stock - 831,500 - 1,003,818 1,835,318
Proceeds from debt obligations 1,820,420 498,230 502,230 4,000 6,051,085
Payments received on stock subscriptions
receivable - - - 25,000 30,000
Payments on debt obligations - - - - (522,810)
-------------------------------------------------------------------------
Net cash provided by
financing activities 1,820,420 2,853,639 502,230 1,557,818 22,323,299
-------------------------------------------------------------------------
(Continued)
</TABLE>
F-16
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
September 30,
Six Months Ended 1991 (Date of
Years Ended June 30 December 31 Inception) to
---------------------------- --------------------------- December 31,
1998 1999 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 (672,758) 390,088 (1,196,781) (192,058) 244,165
Cash and Cash Equivalents
Beginning 718,893 46,135 46,135 436,223 -
-------------------------------------------------------------------------
Ending $ 46,135 $ 436,223 $(1,150,646) $ 244,165 $ 244,165
=========================================================================
Cash Payments for Interest $ 20,374 $ 46,795 $ 68,120 $ 77,470 $ 284,735
=========================================================================
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
Issuance of warrants in connection with:
Product development 230,000 - - - 230,000
Acquisition of sublicense agreement 165 - - - 165
Issuance of convertible debt 451 76 - - 527
Guarantee of debt 15,716 - - - 15,716
Acquisition of engineering development
agreement - 554,000 554,000 - 554,000
Series A preferred stock sales and exchange
for debt - 227,000 227,000 - 227,000
Amount attributable to value of beneficial debt
conversion feature 988,444 546,902 546,902 - 1,535,346
Amount attributable to value of beneficial
conversion feature of Series B preferred stock - - - 439,850 439,850
Capital expenditures included in accounts payable 6,667 - - - 6,667
Advances to Spectrum Diagnostics, Inc. - - - - 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 85,000 42,000 61,300 281,503
Series A preferred stock issued for debt obligations - 3,521,692 3,374,136 - 3,521,692
Accretion to redemption value of Series A redeemable
preferred stock - 377,420 90,785 263,103 640,523
=========================================================================
(Continued)
</TABLE>
F-17
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
September 30,
Six Months Ended 1991 (Date of
Years Ended June 30 December 31 Inception) to
---------------------------- --------------------------- December 31,
1998 1999 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.:
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 $ 64,595 $ 64,595 $ - $ 384,229
Exercise of warrant - 5,114 5,114 500,000 5,005,114
Acquisition of license agreement 390,000 - - - 390,000
Subscriptions receivable - - - - 5,000
Debt obligations - 37,812 37,812 - 2,355,937
Accounts payable - - - - 40,000
Accrued expenses - - - - 360,394
Series A Preferred Stock - 82,878 55,539 241,419 324,297
Series B Preferred Stock - - - 50,000 50,000
-------------------------------------------------------------------------
$ 435,584 $ 190,399 $ 163,060 $ 791,419 $ 8,914,971
=========================================================================
See Notes to Financial Statements.
</TABLE>
F-18
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 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.
On December 7, 1999, the company formed HTS BioSystems, Inc. (HTS), an 80
percent owned subsidiary with PE Corp (PE). HTS will focus on promoting the
non-medical use of the SPR technology. In conjunction with this formation, PE
provided HTS with
o a sub-license to all of its rights to the Company's SPR non-medical
technology (see Note 4),
o a license for non-medical use of the PE High Density Technology,
o one of PE's SPR breadboard instruments, and
o the PE breadboard for the PE High Density Technology.
The Company is required to provide HTS with office space, management support,
technical assistance and any other needs required by HTS until HTS is funded in
a manner adequate to support its own operations.
HTS will owe to PE:
o a 4 percent royalty on products using only SPR other than those for use
in the food and beverages, chemical and industrial and environmental
testing markets,
o a 4 percent royalty on products using only the PE High Density
Technology, and
o a 6 percent royalty on products using both technologies.
No minimum royalties, or royalties on the first $3,000,000 of sales, are
required to be paid.
HTS will owe the Company:
o 15 percent of any royalties paid to PE by HTS for products which
incorporates the Company's SPR technology, and
o 8 percent royalty on products using its SPR technology sold to the food
and beverages, chemical and industrial and environmental testing
markets.
F-19
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
In the event that HTS does not seek to commercialize the SPR or PE High Density
Technology, then the rights revert back to PE. PE also has a five-year right of
first negotiation in the event that HTS wishes to license or sell any of its
technology licensed from PE.
As of December 31, 1999 HTS had no operations.
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 arose
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 via a technology and development agreement. The expense
is being recognized over this period (see Note 4).
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.
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.
F-20
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
Notes 1. Nature of Business and Significant Accounting Policies (Continued)
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 was
amortized to interest expense using the straight-line method over the term of
the debt based on the expected conversion date of September 30, 1998 (see Note
3). This debt was immediately convertible, with a conversion price of 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 from date of issuance to September 30, 1998,
for the following reasons:
o The Company's history with these types of securities had 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, the conversion rate at September 30, 1998, would likely 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 had significant adverse financial
circumstances prior to September 30, 1998.
Substantially all of the notes were converted to preferred stock after September
30, 1998. The remaining debt holders elected to convert their instruments to
common stock prior to the expected conversion date, and the unamortized portion
of the discount related to their converted debt was charged to interest expense
in the period of conversion.
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 products in addition to conducting its own
research and development. Research and development costs are charged to expense
as incurred.
Basic and diluted net loss per share: Basic per share amounts are computed,
generally, by dividing net income or loss by the weighted-average number of
common shares outstanding. Diluted per share amounts assume the conversion,
exercise, or issuance of all potential common stock instruments unless their
effect is antidilutive, thereby reducing the loss or increasing the income per
common share.
F-21
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Loss per share has been adjusted for accretion on the Company's mandatory
redeemable Series A Preferred Stock, which totaled $377,420 for the year ended
June 30, 1999 and $90,785 and $263,103 for the six months ended December 31,
1998 and 1999, respectively. In addition, loss per share has been adjusted for
the beneficial conversion feature of preferred stock, which totaled $439,850 for
the six months ended December 31, 1999. As described in Notes 6 and 7, the
Company has options and warrants outstanding to purchase shares of common stock,
and the Series A and B Preferred Stock is convertible into common stock.
However, because the Company has incurred losses in all periods presented, the
inclusion of those 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, which the Company adopted in the fiscal year ended June
30, 1999. 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 had
no comprehensive income as defined by SFAS No. 130 for the years ended June 30,
1998 and 1999. The Company's accumulated other comprehensive income in previous
years consisted of the cumulative translation adjustment.
Segments: The FASB has issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information, which the Company adopted in the fiscal
year ended June 30, 1999. Statement No. 131 requires disclosure of certain
information for each reportable segment, including general information, profit
and loss information, segment assets, etc. The Company operates in only one
segment as defined by SFAS No. 131.
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 December 31, 1999, for the six-month periods ended
December 31, 1998 and 1999, and the period from September 30, 1991 (date of
inception), to December 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.
F-22
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
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. These financial statements
do not reflect any adjustments which might be necessary should the Company not
remain a going concern.
The Company does not have sufficient funds to complete commercial development or
commence production and sales of its system. The Company anticipates that its
cash on hand, bank credit facility, and the completion of Quantech's Series B
convertible Preferred Stock offering for up to an additional $500,000 will allow
it to maintain operations through part of fiscal year 2000. Additional financing
of at least $10 million of investment capital, funding by strategic partner(s),
or licensing revenues will be needed for the following: to develop and submit to
the FDA additional tests, to complete clinical evaluation of the system, to
establish manufacturing capabilities, and to prepare for sales of the system.
The Company 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.
Note 3. Short-Term Debt Obligations
Short-term debt obligations as of June 30, 1998 and 1999, and December 31, 1999
were as follows:
June 30
------------------------ December 31,
1998 1999 1999
- -------------------------------------------------------------------------------
13.5% convertible secured promissory notes,
converted to common stock and Series A
Preferred Stock in 1999 $ 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 500,000 746,000 750,000
-------------------------------------
$ 3,112,818 $ 746,000 $ 750,000
=====================================
F-23
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
Note 3. Short-Term Debt Obligations (Continued)
As of June 30, 1998, the Company had secured promissory notes payable totaling
$3,159,720, which were due September 30, 1998. The notes were immediately
convertible (see Note 1) 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 (1)
the 20 consecutive trading days prior to the maturity date of the notes or (ii)
the price at which the transaction which triggers the repayment of the notes was
completed.
In conjunction with the 1997 and 1998 offerings of the above notes, the
investors received warrants to purchase 619,681 shares of common stock. In
addition, the selling agents also received warrants to purchase 21,889 shares of
common stock. The warrants' exercise price is calculated in the same manner as
the notes' conversion price. The warrants were valued at stated cost of $1,310,
which approximated their fair value. The fair value was based upon management's
determination that the effective interest rate of the debt approximated the
market rate of 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.
During the fiscal year ended June 30, 1999, 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 approximated the
market rate of 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.
During 1999, the notes and the related accrued interest were converted to 30,400
shares of common stock and 1,173,902 shares of redeemable Series A Preferred
Stock (see Note 6).
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 December 31, 1999, the
Company has paid $1,150,000 of the cumulative payment. The Company has also
ratably accrued additional minimum royalty payments of $150,000 as of December
31, 1999, because sales or sublicense revenues through December 31, 1999, were
not adequate to meet the cumulative minimum royalty payments. Subsequent to
December 31, 1999, the Company submitted the final payment to the licensor.
F-24
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
Note 4. Agreements (Continued)
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.
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 did not purchase any shares 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,
and 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 PE Corp. (PE),
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 of 8 percent of gross sales if the
licensee sells products containing the Company's technology. 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.
F-25
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
Note 4. Agreements (Continued)
The licensee also received a warrant to purchase 1,400,000 shares of common
stock. 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 was received,
the prepaid asset resulting from this transaction was reduced, and research and
development expense was charged. On December 7, 1999 this warrant was canceled
pursuant to the formation of HTS BioSystems, Inc. (see Note 1).
In conjunction with the above technology and development agreement, the Company
entered into a license for certain portions of this technology. The Company will
be required to pay royalties at 8 percent of its 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.
Research and development agreement: 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. Since all of the services under this agreement have been
rendered, the value has been expensed. In September 1999, the Company issued
454,545 shares of common stock as a result of a partial exercise of this
warrant. 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.
Employment agreements: The Company has at-will employment agreements with its
Chief Executive Officer, Chief Financial Officer. The agreements require the
payment of one year's salary (for the chief financial officer), $150,000 (for
the chief executive officer), or six-months' salary (for the vice president of
research and development) 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 and Vice President of Research and Development 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 April 2007.
Approximate minimum aggregate rental commitments under this lease are $192,000.
In addition, there are monthly payments required for common area maintenance and
other related expenses.
Rental expense for the years ended June 30, 1998 and 1999 was approximately
$58,000 and $79,000 respectively.
F-26
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
Note 6. Stockholders' Equity
Capital stock: As of June 30, 1998, the Company had 12,500,000 capital shares
authorized. 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. The
Board of Directors has designated the authorized shares as common, Series A
Preferred Stock, Series B Preferred Stock, and the remaining are undesignated.
As shares of Series A Preferred Stock and Series B Preferred Stock are converted
to common stock, the number of authorized shares of preferred stock decreases
and the number of authorized shares for common stock increases.
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 reverse split.
Par value of stock: In March 1998, the Company amended its Articles of
Incorporation to change the par value of common stock from $0.01 per share 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).
Redeemable Series A Preferred Stock: In November 1998, the Company established
and designated 2,500,000 shares of previously undesignated shares as Series A
Preferred Stock (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 is being accreted, using the interest method, over the period
until the first redemption date of November 5, 2003.
In November and December 1998, the Company sold 551,431 shares of its Series A
Stock to accredited investors at $3.00 per share and issued 1,173,902 shares of
Series A Stock pursuant to conversion of promissory notes and the related
accrued interest 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.
F-27
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
Note 6. Stockholders' Equity (Continued)
In November 1998 through December 1999, 432,396 shares of common stock were
issued pursuant to conversion of Series A Stock.
Series B Preferred Stock: In May 1999, the Company established and designated
3,000,000 shares of previously undesignated shares as Series B Preferred Stock
(Series B Stock). The shares have no par value and a liquidation value of $1.00
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 or conversion
price lower than $1.00 per share, the number of shares of common stock into
which the shares may be converted will be adjusted to a number equal to the per
share liquidation preference divided by such sale or conversion price.
Through September 1999, the Company sold 943,334 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 $92,182 and will be issuing
warrants to purchase shares of common stock equal to 10 percent of the
underlying shares sold to the selling agents.
In October 1999, the price of the Series B Stock was adjusted to $1.00 from an
initial price of $1.50. In conjunction with this adjustment previous purchasers
received 471,666 additional shares of Series B Stock.
In November and December 1999, 580,000 shares of Series B Stock were sold at
$1.00 per share, net of commissions of $7,500.
As a result of the Series B Stock transactions, the Company recognized a
beneficial conversion feature of $439,850 for the six months ended December
31, 1999.
In August 1999, 33,333 shares of common stock were issued pursuant to conversion
of Series B Stock.
Note 7. Stock Options and Warrants
Options - employee grants: The Company regularly grants options to its
employees, some of which are granted under the Company's 1998 Stock Option Plan
(the Plan). The Plan may grant options for up to 4,000,000 shares, of which
1,916,850 were outstanding at December 31, 1999. 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. Vesting of
options granted to employees is determined on a discretionary basis. One-third
of the options granted to directors are exercisable immediately, with one-third
becoming exercisable on each of the first and second anniversaries of the date
of grant.
F-28
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
Note 7. Stock Options and Warrants (Continued)
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 is less than the fair market value of the stock on the date of
grant. There was no compensation expense recorded for employee grants for the
years ended June 30, 1998 and 1999, and six months ended December 31, 1998 and
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 increased to the pro
forma amounts shown below:
<TABLE>
<CAPTION>
June 30
---------------------------- December 31,
1998 1999 1999
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss attributable to common stockholders,
as reported $(3,648,748) $(4,667,236) $(3,357,352)
Net loss attributable to common stockholders,
pro forma (4,016,450) (5,073,371) (3,548,223)
Net loss per basic and diluted common share,
as reported (1.45) (1.75) (1.04)
Net loss per basic and diluted common share,
pro forma (1.59) (1.90) (1.10)
</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. The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998 and 1999:
June 30
------------------------------ December 31,
1998 1999 1999
- -------------------------------------------------------------------------------
Expected dividend yield $ - $ - $ -
Expected stock price volatility 67.3% 68.7% 64.8%
Risk-free interest rate 6.0% 6.0% 6.0%
Expected life of options (years) 3 3 3
F-29
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
Note 7. Stock Options and Warrants (Continued)
Transactions involving stock options and warrants are summarized as follows:
Weighted-
Stock Average Exercise
Warrants Options Price Per Share
- ------------------------------------------------------------------------------
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
Expired (187,828) (243,009) 7.26
---------------------------------------------
Balance, June 30, 1998 2,671,715 493,500 3.58
Granted 2,156,766 1,650,604 1.10
Exercised (22,500) - 2.50
Expired - (50,140) 3.47
---------------------------------------------
Balance, June 30, 1999 4,805,981 2,093,964 1.59
Granted (unaudited) 292,500 201,870 1.18
Exercised (unaudited) (454,545) - 1.10
Expired (unaudited) (1,442,499) (4,444) 1.32
---------------------------------------------
Balance, December 31, 1999(unaudited) (3,201,437) 2,291,390 1.60
=============================================
The fair value of warrants granted during 1998 and 1999 and the six months ended
December 31, 1999 was $0.13, $0.27 and $0.09 per warrant, respectively.
The fair value of equity instruments granted for goods and services during 1998
and 1999 and the six months ended December 31, 1999 was $0.42, $0.34 and $0.43
per equity instrument, respectively.
The weighted-average fair value of options granted during 1998 and 1999 and the
six months ended December 31, 1999 was $1.09, $0.50 and $0.68 per option,
respectively.
F-30
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
Note 7. Stock Options and Warrants (Continued)
The following tables summarize information about stock options and warrants
outstanding as of December 31, 1999:
OPTIONS AND WARRANTS OUTSTANDING
Weighted-
Average
Number of Remaining Weighted-
Range of Units Contractual Average
Exercise Price Outstanding Life Exercise Price
- --------------------------------------------------------------------------
$0.75 1,794,128 3.6 $ 0.75
$1.00-$1.47 2,033,929 3.8 1.13
$1.50 658,000 4.3 1.50
$1.63-$2.00 27,964 4.3 1.71
$2.40-$2.50 91,400 0.4 2.46
$3.00 372,750 2.5 3.00
$5.00 452,781 1.2 5.00
$12.00 5,000 1.8 12.00
$14.40 29,875 1.8 14.40
------------ $ 1.60
5,465,827
============
OPTIONS AND WARRANTS EXERCISABLE
Number of Weighted-
Units Average
Exercisable Exercise Price
- ------------------------------------------------------------------------------
$0.75 1,759,546 $ 0.75
$1.00-$1.47 1,929,506 1.13
$1.50 257,001 1.50
$1.63-$2.00 3,000 1.84
$2.40-$2.50 91,400 2.46
$3.00 372,250 3.00
$5.00 452,781 5.00
$12.00 5,000 12.00
$14.40 29,875 14.40
------------------- $ 1.63
4,900,359
===================
F-31
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
Note 7. Stock Options and Warrants (Continued)
The number of options and warrants exercisable at June 30, 1998 and 1999 was
3,093,882 and 5,983,401 with weighted-average exercise prices of $3.60 and
$1.65, respectively.
The Company sold the following warrants to purchase shares of common stock to
accredited investors.
Number of Exercise Expiration Selling
Date Shares Price Date Price
- ------------------------------------------------------------------------------
September 1999 175,000 $ 1.25 September 9, 2004 $ 10,000
November 1999 75,000 1.06 November 16, 2004 15,000
Note 8. Income Taxes
The Company's income tax expense consisted 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, 1999, 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 Note 6, 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, 1999, 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
2014 3,397,000 108,000
---------------------------------
$ 15,317,000 $ 424,000
=================================
F-32
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
Note 8. 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:
June 30
------------------------------
1998 1999
- -------------------------------------------------------------------------------
Deferred tax assets:
Loss carryforwards $ 4,053,000 $ 5,208,000
Royalties 26,000 26,000
Research and development credits and deductions 521,000 629,000
Guarantee of Spectrum Diagnositcs, Inc. debt 115,000 115,000
Compensation expense 30,000 295,000
Beneficial conversion feature 150,000 -
Other accruals 29,000 35,000
------------------------------
4,924,000 6,308,000
Valuation allowance for deferred tax assets (4,924,000) (6,308,000)
------------------------------
Net deferred tax assets $ - $ -
==============================
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, 1998 and 1999, due to the valuation allowance recorded against deferred
tax assets.
Note 9. Subsequent Events (Unaudited)
In January 2000, the Board of Directors designated an additional 913,333 shares
of previously undesignated shares as Series B Stock.
In January and February 2000, the Company sold an additional 1,918,000 shares of
Series B Stock for $1.00 per share. In conjunction with this transaction, the
Company paid commissions and accountable expenses in the amount of $141,400 and
issued warrants to purchase 282,900 shares of common stock to the selling
agents.
In January and February 2000, the Company issued 890,000 shares of common stock
pursuant to the conversion of 1,250 shares of Series A Stock and 880,000 shares
of Series B Stock.
F-33
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the six-month periods ended December 31, 1998 and
1999, is unaudited.)
- --------------------------------------------------------------------------------
Note 9. Subsequent Events (Unaudited)(Continued)
In February 2000, the Board of Directors designated 1,000,000 shares of
previously undesignated authorized shares as Series C Preferred Stock (Series C
Stock). Shares of Series C Stock have no par value and a liquidation value of
$1.00 per share. Each share is convertible into, and has voting rights equal to,
one share of common stock. Series C 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 or conversion price lower than
$1.00 per share, the number of shares of common stock into which the shares may
be converted will be adjusted to a number equal to the per share liquidation
preference divided by such sale or conversion price.
The Company sold 1,000,000 shares of Series C Stock to an accredited investor at
a price of $1.00 per share.
In February 2000, the Company sold 328,131 shares of its common stock at $1.50
per share to accredited investors.
F-34
<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 _________________, 2000 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.
8,505,764 Shares
of
Common Stock
---------------------
PROSPECTUS
---------------------
, 2000
<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...............................$ 5,177
Legal Fees......................................... 15,000
Accountants' Fees and Expenses..................... 5,000
Printing Expenses.................................. 5,000
Blue Sky Fees and Expenses......................... 5,000
Transfer Agent Fees and Expenses................... 0
Miscellaneous...................................... 323
---------
Total.........................................$ 35,500
=========
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.
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.
<PAGE>
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.
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
<PAGE>
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 April 1999, 20,000 shares of Common Stock were issued pursuant to
conversion of Series A Convertible Preferred Stock. The sale of such shares was
deemed to be exempt from registration under Section 3(a)(9) of the 1933 Act. The
purchaser acquired these securities for its own account and not with a view to
any distribution thereof to the public.
During May 1999 through February 2000, Quantech sold 3,913,000 shares
of Series B Preferred Stock to accredited investors at a price of $1.00 per
share. Each share of Series B Preferred Stock is convertible into one share of
Quantech Common Stock. The sale of such shares was deemed to be exempt from
registration under Section 4(2) of the Securities Act of 1933 (the "1933 Act")
and Rule 506 promulgated thereunder. The Company paid commissions and
accountable expenses in the aggregate amount of $233,582 to registered
investment banks for acting as selling agents and issued the investment banks
warrants to purchase up to 282,900 shares of Common Stock as additional
compensation. The purchasers acquired these securities for their own account and
not with a view to any distribution thereof to the public.
In September 1999, Quantech sold a warrant to an accredited investor to
purchase 175,000 shares of Quantech common stock at $1.25 per share. The warrant
was sold for $10,000 and may be exercised any time before September 9, 2004. The
sale of the warrant was deemed to be exempt from registration under Section 4(2)
of the 1933 Act and Rule 506 promulgated thereunder. The purchaser acquired this
security for its own account and not with a view to any distribution thereof to
the public.
In September 1999, Quantech issued 454,545 shares of common stock
pursuant to the exercise of a warrant to an accredited investor. The sale of
such shares was deemed to be exempt from registration under Section 4(2) of the
Securities Act of 1933. The purchaser acquired these securities for its own
account and not with a view to any distribution thereof to the public.
During July 1999 through February 2000, Quantech issued 1,318,556 shares
of common stock pursuant to conversion of preferred stock. The sale of such
shares was deemed to be exempt from registration under Section 3(a)(9) of the
1933 Act. The purchasers acquired these securities for their own account and not
with a view to any distribution thereof to the public.
In November 1999, Quantech sold warrants to accredited investors to
purchase 75,000 shares of Quantech common stock at $1.06 per share. The warrants
were sold for $15,000 and may be exercised any time before November 16, 2004.
The sale of such securities was deemed to be exempt from registration under
Section 4(2) of the 1933 Act. The purchasers acquired these securities for their
own account and not with a view to any distribution thereof to the public.
In February 2000, Quantech sold 1,000,000 shares of Series C Preferred
Stock to an accredited investor at a price of $1.00 per share. Each share of
Series C Preferred Stock is convertible into one share of Quantech Common Stock.
The sale of such shares was deemed to be exempt from registration under Section
4(2) of the Securities Act of 1933 (the "1933 Act") and Rule 506 promulgated
thereunder. The purchaser acquired these securities for its own account and not
with a view to any distribution thereof to the public.
<PAGE>
In February 2000, Quantech sold 328,131 shares of its common stock at
$1.50 per share to accredited investors. 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.
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.
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).
<PAGE>
10.8 Research and Development Services Agreement, dated November 13, 1998,
with Millennium Medical Systems, LLC (incorporated by reference to
Exhibit A to Schedule 13D filed by Robert Gaines and Millennium Medical
Systems, LLC on November 23, 1998, File No. 0-19957).
10.9 Lease Agreement for space at 815 Northwest Parkway, Eagan, MN 55121
(incorporated by reference to Exhibit 10.1 of the Registrant's Form
10-Q for the quarter ended December 31, 1999).
10.10* Employment Agreement with Thomas R. Witty, Ph.D.
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.
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;
<PAGE>
(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 March 15,
2000
QUANTECH LTD.
By /s/ Robert Case
Robert Case, Chief Executive Officer
Power of Attorney
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. Each person whose signature to this
Registration Statement appears below hereby constitutes and appoints Robert Case
and Gregory G. Freitag, and each of them, as his or her true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his or
her behalf individually and in the capacity stated below and to perform any acts
necessary to be done in order to file all amendments and post-effective
amendments to this Registration statement, any registration statement filed
pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and any and
all instruments or documents filed as part of or in connection with any of such
amendments or registration statements, and each of the undersigned does hereby
ratify and confirm all that said attorney-in-fact and agent, or his or her
substitutes, shall do or cause to be done by virtue hereof.
Signatures Title Date
- ---------- ----- ----
Chief Executive Officer, Director
/s/ Robert Case (principal executive officer) March 15, 2000
Robert Case
Chief Operating Officer, Chief March 15, 2000
/s/ Gregory G. Freitag Financial Officer and Secretary
Gregory G. Freitag (principal financial and accounting
officer)
/s/ James F. Lyons Director March 15, 2000
James F. Lyons
/s/ Richard W. Perkins Director March 15, 2000
Richard W. Perkins
/s/ Edward E. Strickland Director March 15, 2000
Edward E. Strickland
<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).
10.9 Lease Agreement for space at 815 Northwest Parkway, Eagan, MN 55121
(incorporated by reference to Exhibit No. 10.1 of the Registrant's
Form 10-Q for the quarter ended December 31, 1999).
10.10* Employment Agreement with Thomas R. Witty, Ph.D.
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
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
<PAGE>
corporation shall not be personally liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director.
ARTICLE 9 - INCORPORATOR
9.1) The name and mailing address of the incorporator are as follows:
Gregory G. Freitag
900 Second Avenue South
1100 International Centre
Minneapolis, Minnesota 55402
IN WITNESS WHEREOF, the undersigned incorporator has hereunto set his
hand this 13th day of November, 1992.
/s/ Gregory G. Freitag
Gregory G. Freitag
<PAGE>
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
QUANTECH LTD.
The undersigned, being the Secretary of Quantech Ltd., a Minnesota
corporation, (the "Corporation"), on behalf of the Corporation, does hereby
certify that the following recitals and resolutions were adopted at a duly
called special meeting of the shareholders, pursuant to Minnesota Statutes
Sections 302A.135 and 302A.139
WHEREAS, the Board of Directors of the Corporation believes it
is in the best interest of the Corporation to amend the Articles of
Incorporation to increase the number of authorized common stock shares
from 30,000,000 to 60,000,000 and has previously adopted similar
recitals and resolutions as those proposed here;
IT IS HEREBY RESOLVED THAT:
The shareholders, in accordance with the Corporation's Bylaws,
do hereby approve amending the Corporation's Articles of Incorporation
to increase the number of authorized common stock shares from
30,000,000 to 60,000,000;
RESOLVED FURTHER:
Section 3.1 is hereby amended to read:
ARTICLE 3.1
CAPITAL STOCK
The aggregate number of shares of all classes of stock which
this corporation shall have the authority to issue is Sixty Million
(60,000,000) shares, $.01 par value per share. The Board of Directors
of the corporation is authorized to establish from the undesignated
shares, by resolution adopted and filed in the manner provided by law,
one or more classes or series of shares, to designate each such class
or series (which may include but is not limited to designation as
additional shares of Common Stock), and to fix the relative rights and
preferences of each such class or series.
RESOLVED FURTHER:
The corporation's officers are hereby authorized to complete
all documents necessary and make all filings necessary to effectuate
the amendment to the Corporation's Articles of Incorporation and to
record such Amendment in the Corporation's official record books.
Dated and effective: September 28, 1995.
/s/ George Vitalis
George Vitalis, Secretary
<PAGE>
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF QUANTECH LTD.
The undersigned, being the Secretary of Quantech Ltd., a Minnesota
corporation, (the "Corporation"), on behalf of the Corporation, does hereby
certify that the following recitals and resolutions were adopted at a duly
called special meeting of the shareholders, pursuant to Minnesota Statutes,
Sections 302A.135 and 302A.139.
WHEREAS, the Board of Directors of the Corporation believes it is in
the best interest of the Corporation to amend the Articles of Incorporation to
increase the number of authorized shares from 60,000,000 Common Shares to
120,000,000 shares consisting of 90,000,000 Common Shares and 30,000,000
undesignated shares and has previously adopted similar recitals and resolutions
as those proposed here.
IT IS HEREBY RESOLVED THAT,
The shareholders, in accordance with the Corporation's Bylaws, do
hereby approve amending the Corporation's Articles of Incorporation to increase
the number of authorized shares from 60,000,000 Common Shares to 120,000,000
shares consisting of 90,000,000 Common Shares and 30,000,000 undesignated
shares.
RESOLVED FURTHER, that Section 3.1 is hereby amended to read as
follows:
ARTICLE 3.1
CAPITAL STOCK
The aggregate number of shares of all classes of stock which this
corporation shall have the authority to issue is One Hundred and Twenty Million
(120,000,000) shares, $.01 par value per share, consisting of 90,000,000 Common
Shares and 30,000,000 undesignated shares. The Board of Directors of the
corporation is authorized to establish from the undesignated shares, by
resolution adopted and filed in the manner provided by law, one or more classes
or series of shares, to designate each such class or series (which may include
but is not limited to designation as additional shares of Common Stock), and to
fix the relative rights and preferences of each such class or series.
RESOLVED FURTHER,
The corporation's officers are hereby authorized to complete all
documents necessary and make all filings necessary to effectuate the amendment
to the Corporation's Articles of Incorporation and to record such Amendment in
the Corporation's official record books.
Dated and effective: November 25, 1996.
/s/ Gregory G. Freitag
Gregory G. Freitag, Secretary
<PAGE>
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF QUANTECH LTD.
The undersigned, being the Secretary of Quantech Ltd., a Minnesota
corporation, (the "Corporation"), on behalf of the Corporation, does hereby
certify that the following recitals and resolutions were adopted at a duly
called special meeting of the shareholders, pursuant to Minnesota Statutes,
Sections 302A.135 and 302A.139.
WHEREAS, the Board of Directors of the Corporation believes it is in
the best interest of the Corporation to amend the Articles of Incorporation to
increase the number of authorized shares from 120,000,000 Common Shares to
250,000,000 shares consisting of 200,000,000 Common Shares and 50,000,000
undesignated shares and has previously adopted similar recitals and resolutions
as those proposed here.
IT IS HEREBY RESOLVED THAT,
The shareholders, in accordance with the Corporation's Bylaws, do
hereby approve amending the Corporation's Articles of Incorporation to increase
the number of authorized shares from 120,000,000 Common Shares to 250,000,000
shares consisting of 200,000,000 Common Shares and 50,000,000 undesignated
shares.
RESOLVED FURTHER, that Section 3.1 is hereby amended to read as
follows:
ARTICLE 3.1
CAPITAL STOCK
The aggregate number of shares of all classes of stock, which this
corporation shall have the authority to issue is Two Hundred and Fifty Million
(250,000,000) shares, which shall have a par value of $.01 per share solely for
the purpose of a statute or regulation imposing a tax or fee based upon the
capitalization of the corporation, and which shall consist of 200,000,000 Common
Shares and 50,000,000 undesignated shares. The Board of Directors of the
corporation is authorized to establish from the undesignated shares, by
resolution adopted and filed in the manner provided by law, one or more classes
or series of shares, to designate each such class or series (which may include
but is not limited to designation as additional shares of Common Stock), and to
fix the relative rights and preferences of each such class or series.
RESOLVED FURTHER,
The corporation's officers are hereby authorized to complete all
documents necessary and make all filings necessary to effectuate the amendment
to the Corporation's Articles of Incorporation and to record such Amendment in
the Corporation's official record books.
Dated and effective: December 2, 1997
/s/ Gregory G. Freitag
Gregory G. Freitag, Secretary
<PAGE>
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF QUANTECH LTD.
The undersigned, being the Secretary of Quantech Ltd., a Minnesota
corporation, (the "Corporation"), on behalf of the Corporation, does hereby
certify that the following recitals and resolutions were adopted at a duly
called special meeting of the directors, pursuant to Minnesota Statutes,
Sections 302A.135 and 302A.139.
The Board discussed and determined that it was in the interest of
Quantech to effect the reverse split of its Capital Stock to conform its capital
structure to companies in Quantech's industry, so as to attract potential
financing and strategic partners and to position Quantech for filing on NASDAQ
when it meets such organization's listing requirements. It was determined that
the timing of the split should be coordinated with the release of information
concerning Quantech's filing with the FDA of its test for myoglobin.
A MOTION was made by Mr. Lyons that the directors hereby adopt the
following plan of recapitalization in order to effect a 1-for-20 reverse stock
split effective on the date on which the Amendment of Articles hereinafter
adopted is filed with the Minnesota Secretary of State (the "Effective Date"):
1. One (1) share of Common Stock of the Company shall be issued in
exchange for every twenty (20) shares of Common Stock
outstanding on the Effective Date.
2. Fractional shares resulting on account of such reverse split
shall be rounded down.
3. Promptly following the Effective Date, shareholders shall
exchange certificates representing shares of Common Stock
outstanding on the Effective Date for certificates representing
the appropriate number of shares of Common Stock to reflect the
reverse stock split.
4. On the Effective Date, the number of shares of the Company's
Common Stock reserved for issuance under, or covered by, any
outstanding option or warrant shall be decreased by twenty times
and the per share exercise price shall be increased by such
amount as may be necessary so that the aggregate purchase price
of each outstanding option or warrant after adjustment is equal
to the aggregate purchase price of such option or warrant before
adjustment.
FURTHER RESOLVED, that Section 3.1 of Article 3 of the Articles of
Incorporation is amended to read as follows:
"ARTICLE 3 - CAPITAL STOCK
3.1) Authorized Shares; Establishment of Classes and Series.
The aggregate number of shares the corporation has authority
to issue shall be 12,500,000 shares, which shall have a par
value of $.01 per share solely for the purpose of a statute or
regulation imposing a tax or fee based upon the capitalization
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
<PAGE>
holders of Series A Stock upon any such merger or consolidation shall
be the cash or the value of the property, rights and/or securities
distributed to such holders by the acquiring person, firm or other
entity. The value of such property, rights or other securities shall be
determined in good faith by the Board of Directors of the corporation.
d. The corporation and one of its current directors are
parties to that certain Agreement dated November 5, 1998, which
agreement provides that if the director is required to make any payment
pursuant to that certain Guaranty and Collateral Pledge Agreement, each
dated August 7, 1998, between such director and Norwest Bank Minnesota,
National Association, which has provided the corporation a bank credit
facility in the aggregate principal amount of $750,000, such director
waives any right of recovery of such payment from the corporation
except in the event of a liquidation by the corporation in which event
such director shall be entitled to participate in the distribution of
the corporation's assets in liquidation on a pro rata basis with
holders of Series A Stock pursuant to subparagraph a above as if such
director held an amount of Series A Stock equal to the amount of such
director's payment under the Guaranty and Collateral Pledge Agreement
divided by $3.00.
5. Conversion Right. At the option of the holders thereof, the shares
of Series A Stock shall be convertible, at the office of the corporation (or at
such other office or offices, if any, as the Board of Directors may designate),
into fully paid and nonassessable shares (calculated as to each conversion to
the nearest 1/100th of a share) of Common Stock of the corporation, at the
conversion price, determined as hereinafter provided, in effect at the time of
conversion, each share of Series A Stock being deemed to have a value of $3.00
for the purpose of such conversion. The price at which shares of Common Stock
shall be delivered upon conversion of shares of Series A Stock (herein called
the "conversion price") shall be initially $0.75 per share of Common Stock
(i.e., at an initial conversion rate of four shares of Common Stock for each
share of Series A Stock), provided, however, that such initial conversion price
shall be subject to adjustment from time to time in certain instances as
hereinafter provided. The following provisions shall govern such right of
conversion:
a. In order to convert shares of Series A Stock into shares of
Common Stock of the corporation, the holder thereof shall surrender at
any office hereinabove mentioned the certificate or certificates
therefor, duly endorsed to the corporation or in blank, and give
written notice to the corporation at such office that such holder
elects to convert such shares. Shares of Series A Stock shall be deemed
to have been converted immediately prior to the close of business on
the day of the surrender of such shares for conversion as herein
provided, and the person entitled to receive the shares of Common Stock
of the corporation issuable upon such conversion shall be treated for
all purposes as the record holder of such shares of Common Stock at
such time. As promptly as practicable on or after the conversion date,
the corporation shall issue and deliver or cause to be issued and
delivered at such office a certificate or certificates for the number
of shares of Common Stock of the corporation issuable upon such
conversion.
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
<PAGE>
date of granting of such rights or options) be deemed to have been
issued for such price per share. Except as provided in subparagraph d
below, no further adjustments of the conversion price of the Series A
Stock shall be made upon the actual issue of such Common Stock or of
such Convertible Securities upon exercise of such rights or options or
upon the actual issue of such Common Stock upon conversion or exchange
of such Convertible Securities.
(ii) In case the corporation shall issue or sell (whether
directly or by assumption in a merger or otherwise) any Convertible
Securities, whether or not the rights to exchange or convert thereunder
are immediately exercisable, and the price per share for which Common
Stock is issuable upon such conversion or exchange (determined by
dividing (x) the total amount received or receivable by the corporation
as consideration for the issue or sale of such Convertible Securities,
plus the minimum aggregate amount of additional consideration, if any,
payable to the corporation upon the conversion or exchange thereof, by
(y) the total maximum number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities) shall be
less than the conversion price of the Series A Stock in effect
immediately prior to the time of such issue or at the time of such
issue or sale, then the total maximum number of shares of Common Stock
issuable upon conversion or exchange of all such Convertible Securities
shall (as of the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been issued for
such price per share, provided that (a) except as provided in
subparagraph d below, no further adjustments of the conversion price
shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities, and (b) if any
such issue or sale of such Convertible Securities is made upon exercise
of any rights to subscribe for or to purchase or any option to purchase
any such Convertible Securities for which adjustments of the conversion
price of the Series A Stock have been or are to be made pursuant to
other provisions of this paragraph 5, no further adjustment of the
conversion price shall be made by reason of such issue or sale.
(iii) In case any shares of Common Stock or Convertible
Securities or any rights or options to purchase any such Common Stock
or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount
received by the corporation therefor, without deducting therefrom any
expenses incurred or any underwriting commissions, discounts or
concessions paid or allowed by the corporation in connection therewith.
In case any shares of Common Stock or Convertible Securities or any
rights or options to purchase any such Common Stock or Convertible
Securities shall be issued or sold for a consideration other than cash,
the amount of the consideration other than cash received by the
corporation shall be deemed to be the fair value of such consideration
as determined by the Board of Directors of the corporation, without
deducting therefrom any expenses incurred or any underwriting
commissions, discounts or concessions paid or allowed by the
corporation in connection therewith. In case any shares of Common Stock
or Convertible Securities or any rights or options to purchase such
<PAGE>
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 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
the address last shown on the records of the corporation for such
<PAGE>
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
surrendered its share certificate to the corporation pursuant to
<PAGE>
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
any time (other than under or by reason of provisions designed to
<PAGE>
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.
<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 October 11, 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>
STATEMENT OF 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, 3,000,000 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
<PAGE>
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
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) $1.00 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
<PAGE>
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.
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 $1.00 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 of the date of
adoption of this Designation, the price per share of Common Stock sold
is less than $1.00, 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 $1.00 per share, then the
<PAGE>
conversion price shall be reduced to an amount equal to 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
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.
<PAGE>
(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 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
<PAGE>
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.
(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.
<PAGE>
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 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.
<PAGE>
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
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.
<PAGE>
STATEMENT OF DESIGNATION OF SHARES
OF
QUANTECH LTD.
The undersigned, being all of the members of the Board of Directors of
Quantech Ltd., a Minnesota corporation, acting together as the Board of
Directors pursuant to the provisions of Minnesota Statutes, Section 302A.239, do
hereby consent to the adoption of and do hereby adopt the following resolutions
as of January 4, 2000:
Designation of Series B Preferred Stock
WHEREAS, the corporation's current authorized capitalizaton consists of
51,005,919 authorized shares of Common Stock, 2,407,414 authorized shares of
Series A Preferred Stock, 2,086,667 authorized shares of Series B Preferred
Stock and 19,500,000 authorized but undesignated shares; and
WHEREAS, the corporation desires to sell additional shares of Series B
Preferred Stock and holders of 913,333 shares of Series B Preferred Stock have
converted their shares into shares of Common Stock ("Converted Shares");
WHEREAS, the Converted Shares of Series B Preferred Stock are
designated shares of Common Stock by operation of the terms of the Series B
Preferred Stock;
WHEREAS, the directors deem it advisable to redesignate the Converted
Shares as shares of Series B Preferred Stock by designating 913,333 shares of
undesignated stock as Series B Preferred Stock;
NOW, THEREFORE, RESOLVED, that the President or Chief Operating Officer
be and hereby is authorized and directed to file all necessary documentation
with the Secretary of State to effect such designation.
<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 February 5, 2000.
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>
STATEMENT OF DESIGNATION
Of
Series C Convertible Preferred Stock
WHEREAS, the corporation's current authorized capitalization consists
of 51,138,230 authorized shares of Common Stock, 2,275,103 authorized shares of
Series A Preferred Stock, 2,999,667 shares of Series B Preferred Stock and
18,587,000 authorized but undesignated shares; and
WHEREAS, the Board of Directors deems it advisable to establish an
additional class of shares from the 18,587,000 authorized but undesignated
shares;
NOW, THEREFORE, RESOLVED, that of the 18,587,000 undesignated shares
which the corporation is authorized to issue under its Articles of
Incorporation, 1,000,000 are hereby designated as shares of Series C Convertible
Preferred Stock (the "Series C 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 C 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
C 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 C 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 C Stock are then convertible, as hereinafter provided (except that
shares of Series C 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 C 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 C 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 C Stock, so as to alter any existing
provision relating to Series C Stock or the holders thereof or waive
any of the rights granted to the holders of the Series C Stock by the
Articles of Incorporation of the corporation; or
<PAGE>
b. increase the authorized number of shares of Series C
Stock; or
c. authorize or issue any shares of capital stock having
priority or preference over, or on parity with, Series C Stock as to
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 C 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 C Stock shall be entitled, after the payment of
the preferential amount required to be paid to the Series A and Series
B 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) $1.00 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
<PAGE>
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 C Stock then
outstanding vote otherwise. The amount deemed distributed to the
holders of Series C 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.
5. Conversion Right. At the option of the holders thereof, the shares
of Series C 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 C Stock (herein called the "conversion price")
shall be initially $1.00 per share of Common Stock (i.e., at an initial
conversion rate of one share of Common Stock for each share of Series C 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 C 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 C 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 C 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 a sale of securities by this corporation within twelve
(12) months after the adoption of this Designation, excluding any sale
pursuant to options, warrants or conversion rights outstanding as of
<PAGE>
the date of adoption of this Designation, occurs and is Common Stock at
a price per share less than $1.00, 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 $1.00 per share,
then the conversion price shall be reduced to an amount equal to the
price per share at which such security is sold, convertible or
exercisable.
No adjustment of the conversion price of the Series C 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 C
Stock then in effect.
The holders of at least a majority of the Series C 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 C 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 C 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 C
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
<PAGE>
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 C 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 C 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
<PAGE>
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 C 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 C Stock upon the conversion thereof will be entitled to receive
the number of shares of Common Stock into which such shares of Series C
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 C
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 C Stock in effect immediately
<PAGE>
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 C 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 C 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 C 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 C 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 C Stock, the full
number of shares of Common Stock then deliverable upon the conversion
of all shares of Series C Stock then outstanding.
f. No fractional shares shall be issued upon conversion of the
Series C Stock, and the number of shares of Common Stock to be issued
<PAGE>
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 C 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 C 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 C 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 C 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 C
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 C 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 C 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 C Stock
shall be converted by the corporation, the shares so converted shall not be
reissuable by the corporation as Series C 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 C 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 C 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.
FREDRIKSON & BYRON, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, Minnesota 55402
Telephone: (612) 347-7000
Facsimile: (612) 347-7077
March 15, 2000
Quantech Ltd.
815 Northwest Parkway
Eagan, Minnesota 55121
RE: Registration Statement on Form SB-2 - Exhibit 5.1
Gentlemen/Ladies:
We have acted as counsel for Quantech Ltd. (the "Company") in
connection with the Company's filing of a Registration Statement on Form SB-2
(the "Registration Statement") relating to the registration under the Securities
Act of 1933 (the "Act") of an offering of 8,505,764 shares of Common Stock of
the Company by persons who are currently holders of Common Stock of the Company
(the "Shares") or who may become such holders upon conversion of outstanding
Preferred Stock (the "Preferred Stock") or upon exercise of outstanding warrants
(the "Warrants").
In connection with rendering this opinion, we have reviewed the
following:
1. The Company's Articles of Incorporation;
2. The Company's Bylaws; and
3. Certain corporate resolutions, including resolutions of the
Company's Board of Directors pertaining to the issuance by the
Company of the Preferred Stock, the Warrants and the Shares.
Based upon the foregoing and upon representations and information
provided by the Company, we hereby advise you that in our opinion:
1. The Company's Articles of Incorporation validly authorize the
issuance of the Shares registered pursuant to the Registration
Statement.
2. The Shares to be sold by the selling shareholders named in the
Registration Statement are validly issued, fully paid and
nonassessable.
3. Upon conversion of the Preferred Stock or exercise of the
Warrants in accordance with the terms and conditions of the
Preferred Stock and the Warrants, the shares received and to
be sold by the selling shareholders named in the Registration
Statement will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" included in the Registration Statement and the related Prospectus.
Very truly yours,
FREDRIKSON & BYRON, P.A.
By /s/ Melodie R. Rose
Melodie R. Rose, Vice President
EMPLOYMENT AGREEMENT
PARTIES:
Quantech Ltd. (the "Company")
1419 Energy Park Drive
St. Paul, Minnesota 55108
Thomas R. Witty, Ph.D. (the "Employee")
3414 Kenilworth Lane
Santa Cruz, California 96065
DATE: October 1, 1997
RECITALS:
A. The Company is engaged in the business of developing and
commercializing certain patents, technology, associated proprietary data and
existing operating prototypes related to medical diagnostics based upon Surface
Plasmon Resonance.
B. The Employee seeks to be employed, and the Company seeks to
employ, Employee under the terms of this Agreement.
C. The Employee agrees that as a condition to employment with
the Company the Employee will abide by the terms of this Agreement.
D. The Employee desires to be employed by the Company in a
capacity in which he may contribute to, or receive confidential information, and
acknowledges that the Company will suffer irreparable harm if Employee uses
confidential information outside his employment or makes any unauthorized
disclosure of such confidential information to any third party or uses such
confidential information wrongfully or in competition with the Company.
E. Employee further recognizes that execution of this
Agreement is an express condition of employment.
AGREEMENTS:
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and other benefits now or hereafter paid or made available to
Employee by the Company, the parties hereby agree as follows:
1. Employment at Will. The Company hereby employs Employee as Vice President -
Research and Development of the Company until such time as the Company or
1
<PAGE>
Employee decides to terminate Employee's employment. Nothing in this Agreement
shall be construed to create an employment relationship other than one that is
at will or constituting a commitment, guaranty, agreement, or understanding of
any kind or nature that Quantech shall continue to employ Employee, nor shall
this letter affect in any way the right of Quantech to terminate Employee's
employment at any time and for any reason.
2. Duties and Supervision. During the term of this Agreement, Employee agrees to
devote best efforts to the business and affairs of Employer and agrees to
perform such reasonable services and duties as may, from time to time, be
assigned to him by the Chief Executive Officer, President or Chief Operating
Officer of the Company relating to the research and development of the Company's
products. While employee is employed by the Company, Employee will not perform
services for any other person, firm or corporation, either as an employee or as
an agent or other independent contractor without the express consent of the
Chief Executive Officer of the Company. Employee agrees to comply in ever
respect with the general standards and policies of the Company as in effect from
time to time during Employee's employment, all of which Employer reserves the
right to change in its sole discretion.
3. Compensation.
A. Base Salary. The Company shall pay Employee an initial
annual salary of $125,000 (the "Base Salary"), payable in accordance with the
Company's normal payroll practices in effect from time to time beginning as of
the date this Agreement. The Employee's compensation shall be subject to
discretionary upward adjustments by the Company's Chief Executive Officer.
B. Bonus. The Company shall establish a bonus plan consistent
with Company policy whereby Employee shall be entitle to receive bonuses in cash
and/or securities of the Company as determined by the Company's Board of
Directors or its compensation committee.
4. Other Employee Benefits.
A. Benefits. For so long as Employee remains employed by the
Company, Employer agrees to obtain and maintain for the benefit of Employee,
health insurance benefits of the same nature as the Company maintains from time
to time in favor of its employees in general and to provide such other benefits
as the Company announces from time to time to apply to its employees in general.
B. Rental Car, Housing and Plane fare. Until such time as
Employee's permanent residence is within a reasonable commute by automobile to
a Company facility, the Company will reimburse Employee for his rental car
expense, accommodation rental expense and plane fare for himself, and once a
month for a companion, to the Company.
C. Reimbursement of Expenses. The Company will reimburse
Employee for all of Employees out-of-pocket expenses related to Company
business, provided, however, that any such single expense in excess of $500 will
be approved by the Company's Chief Operating Officer.
2
<PAGE>
D. Vacation. Employee shall be entitled to three (3) weeks of
vacation each year.
E. Options. Employee will be provided a five year
non-qualified stock option to purchase up to 300,000 shares of Quantech Common
Stock at $.25 per share which option shall fully-vest over a two year term
(100,000 shares immediately, 100,000 shares after one year of employment and
100,000 shares after two years of employment) and contain such other general
terms as those provided other Quantech employees.
5. Termination of Employment.
Employee shall not be entitled to any payments upon
termination of employment, except any salary or bonuses that have accrued to
Employee through the date of such termination shall be paid by the Company, and
further provided that Employee shall also be entitled to a lump-sum payment of
six (6) month's base salary if termination of Employment is a result of a sale
of substantially all of the assets of the Company or a change in the control of
more than 50% of the Company's Common Stock pursuant to a single transaction or
a series of transactions by the same acquiring party.
6. General Provisions.
A. Injunctive Relief. In addition to any other relief afforded
by law, the Company shall have the right to enforce the covenants contained in
this Agreement by seeking injunctive relief against Employee and any other
person concerned thereby, it being understood that both damages and injunctive
relief shall be proper modes of relief and are not to be considered as
alternative remedies.
B. Severability and Interpretation. In the event that a
provision of this Agreement is held invalid by a court of competent
jurisdiction, the remaining provisions shall nonetheless be enforceable
according to their terms. Further, in the event that any provision is held to be
overbroad as written, such provision shall be deemed amended to narrow its
application to the extent necessary to make the provision enforceable according
to applicable law and shall be enforced as amended.
C. Entire Agreement. This Agreement constitutes the entire
agreement between the parties and supersedes any and all prior oral or written
understandings between the parties relating to the subject matter hereof, except
for the Confidentiality and Invention Agreement entered into between the Company
and Employee of even date with this Agreement.
D. Modification and Waiver. No purported amendment,
modification or waiver of any provision hereof shall be binding unless set forth
in a written document signed by all parties (in the case of amendments or
modifications) or by the party to be charged thereby (in the case of waivers).
Any waiver shall be limited to the provisions hereof and the circumstances or
event specifically made subject thereto, and shall not be deemed a waiver of any
other term hereof or of the same circumstance or event upon any reoccurrence
thereof.
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<PAGE>
E. Assignment. This Agreement shall be binding on Employee's
heirs, assigns and legal representatives and may be transferred by the Company
to its successors and assigns.
F. Governing Law. This Agreement is governed by and shall be
construed in accordance with the laws of the State of Minnesota.
G. Arbitration. All disputes arising under this Agreement
shall be submitted for arbitration in the state of Minnesota, the United States
of America.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement the day and year first above written.
"Company"
Quantech Ltd.
____________________________
Gregory G. Freitag, COO
"Employee"
____________________________
Thomas R. Witty, Ph.D.
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report, dated July 14, 1999, which includes an emphasis paragraph to an
uncertainty as to the Company's ability to continue as a going concern, on the
financial statements 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
Minneapolis, Minnesota
March 15, 2000
