-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NtEzW6+E9bChVKlSXXbpRRDhwOk7BQjfIPnk+u2uymFwrOfU1rs5iA+T790tahRQ LNNwo5VRkI9hpGWVwm6YZA== 0000914190-99-000019.txt : 19990127 0000914190-99-000019.hdr.sgml : 19990127 ACCESSION NUMBER: 0000914190-99-000019 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990126 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUANTECH LTD /MN/ CENTRAL INDEX KEY: 0000880354 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 411709417 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-19957 FILM NUMBER: 99512666 BUSINESS ADDRESS: STREET 1: 1419 ENERGY PARK DRIVE CITY: ST PAUL STATE: MN ZIP: 55108 MAIL ADDRESS: STREET 1: 1419 ENERGY PARK DRIVE CITY: ST PAUL STATE: MN ZIP: 55108 FORMER COMPANY: FORMER CONFORMED NAME: SPECTRUM DIAGNOSTICS SPA DATE OF NAME CHANGE: 19930328 10QSB 1 FORM 10-QSB FOR 2ND QUARTER SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended: Commission File Number: December 31, 1998 0 - 19957 Quantech Ltd. (Exact name of registrant as specified in its charter) Minnesota 41-1709417 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) identification No.) 1419 Energy Park Drive St. Paul, MN 55108 (Address of principal executive offices) (Zip code) (651)-647-6370 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: 2,723,082 shares of Common Stock, no par value, as of January 22, 1999. Transitional Small Business Disclosure Format: YES ___ NO X Index PART I. FINANCIAL INFORMATION Page No. Item 1: Financial Statements: Balance Sheets as of December 31, 1998 and June 30, 1998 3 Statements of Operations for the Three Months and Six Months Ended December 31, 1998 and 1997 and from inception to December 31, 1998 4 Statement of Stockholders' Equity from inception 6 to December 31, 1998 Statements of Cash Flows for the Six Months ended December 31, 1998 and 1997 and from inception to December 31, 1998 8 Notes to Financial Statements 9 Item 2: Management's Discussion and Analysis or Plan of Operation 10 Item 3: Quantitative and Qualitative Disclosure About Market Risk 14 PART II. OTHER INFORMATION 15 QUANTECH LTD. (A Development Stage Company) BALANCE SHEET
(Unaudited) December 31, June 30, 1998 1998 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 7,198 $ 46,135 Prepaid expenses: Product development expenses 115,000 115,000 Other 44,020 42,044 ------------ ------------ Total current assets 166,218 203,179 ------------ ------------ EQUIPMENT Equipment 402,539 366,493 Leasehold improvements 15,000 15,000 ------------ ------------ 417,539 381,493 Less accumulated depreciation (238,318) (202,201) ------------ ------------ Total equipment 179,221 179,292 ------------ ------------ OTHER ASSETS License agreement, at cost, less amortization 2,572,494 2,735,807 Prepaid product development expense, less current portion 0 57,500 Patents, at cost 13,045 9,029 ------------ ------------ Total other assets 2,585,539 2,802,336 ------------ ------------ TOTAL ASSETS $ 2,930,978 $ 3,184,807 ============ ============ LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) CURRENT LIABILITIES Short term debt $ 300,000 $ 3,112,818 Accounts payable 77,266 97,333 Accrued expenses: Interest 1,000 48,594 Spectrum Diagnostics Inc. obligations 19,846 19,846 Minimum royalty commitment 0 75,000 Accrued payroll/vacation 120,299 103,157 ------------ ------------ Total current liabilities 518,411 3,456,748 ------------ ------------ REDEEMABLE PREFERRED STOCK 4,916,152 0 STOCKHOLDERS' EQUITY (DEFICIT) Common stock, no par value; authorized 50,000,000 shares; issued and outstanding 2,723,082 shares at December 31, 1998; and 2,565,040 at June 30, 1998 16,484,998 16,308,438 Additional paid-in capital 2,152,165 1,476,669 Prepaid Engineering Development (388,500) 0 Deficit accumulated during the development stage (20,752,248) (18,057,048) ------------ ------------ Total stockholders' equity (deficit) (2,503,585) (271,941) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 2,930,978 $ 3,184,807 ============ ============
QUANTECH LTD. (A Development Stage Company) STATEMENT OF OPERATIONS
Period From September 30, Six Months Six Months 1991 (Date of Ended Ended Inception), to December 31, December 31, December 31, 1998 1997 1998 ------------ ------------ ------------ Interest Income $ 1,068 $ 9,907 $ 184,284 ------------ ------------ ------------ Expenses: General and Administrative 931,641 484,251 10,093,425 Research and Development 974,645 595,349 7,228,711 Minimum Royalty expense 75,000 37,500 1,150,000 Loses resulting from transactions with Spectrum Diagnostics Inc. -- -- 556,150 Net Exchange (gain) -- -- (67,172) Interest 714,982 99,821 1,932,823 ------------ ------------ ------------ Total Expenses 2,696,268 1,216,921 20,893,937 ------------ ------------ ------------ Loss before income taxes (2,695,200) (1,207,014) (20,709,653) Income Taxes -- -- 42,595 ------------ ------------ ------------ Net Loss $ (2,695,200) $ (1,207,014) $(20,752,248) ============ ============ ============ Loss per basic and diluted common share $ (1.03) $ (0.49) Weighted average common shares outstanding 2,623,735 2,488,451
QUANTECH LTD. (A Development Stage Company) STATEMENT OF OPERATIONS Three Months Three Months Ended Ended December 31, December 31, 1998 1997 ----------- ----------- Interest Income $ 415 $ 3,083 ----------- ----------- Expenses: General & Administrative 624,813 261,394 Research and development 446,534 281,088 Minimum royalty expense 37,500 18,750 Loses resulting from transactions with Spectrum Diagnostics Inc. -- -- Net exchange (gain) -- -- Interest 43,450 60,445 ----------- ----------- 1,152,297 621,677 ----------- ----------- Loss before income taxes (1,151,882) (618,594) Income taxes -- =========== =========== Net loss $(1,151,882) $ (618,594) =========== =========== Loss per basic and diluted common share $ (0.43) $ (0.24) Weighted average common shares outstanding 2,669,720 2,552,038 QUANTECH LTD (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY-UNAUDITED Period From September 30, 1991 (date of Inception), to December 31, 1998
Deficit Accumulated Prepaid During Common Stock Additional Engineering the Paid-In Develop- Development Shares Amount Capital ment Stage -------------------------------------------------------------------------- Balance at Inception Net Loss for 15 months ($3,475,608) Common stock transactions: Common stock issued, October 1991 160,000 $3,154,574 Common stock issued, November 1991 30,000 $611,746 $1,788,254 Common stock issuance costs ($889,849) Cumulative translation adjustment Common stock issued, September 1992 35,000 $699,033 $875,967 Common stock issuance costs ($312,755) Common stock to be issued Cumulative translation adjustment Elimination of cumulative translation adjustment Officers advances, net -------------------------------------------------------------------------- Balance, December 31, 1992 225,000 $4,465,353 $1,461,617 $0 ($3,475,608) Net loss ($996,089) Common stock transactions: Common stock issued, January 1993 8,000 $1,600 $118,400 Common stock issued, April 1993 1,500 $300 $11,700 Change in common stock par value resulting from merger ($4,420,353) $4,420,353 Repayments -------------------------------------------------------------------------- Balance,June 30, 1993 234,500 $46,900 $6,012,070 $0 ($4,471,697) Net loss ($1,543,888) 240,000 shares of common stock to be issued Repayments -------------------------------------------------------------------------- Balance, June 30, 1994 234,500 $46,900 $6,012,070 $0 ($6,015,585) Net loss ($2,070,292) Common stock issued, June 1995 107,500 $21,500 $276,068 Warrants issued for services $40,200 -------------------------------------------------------------------------- Balance June 30, 1995 342,000 $68,400 $6,328,338 $0 ($8,085,877) Net loss ($2,396,963) Common stock issued, net of issuance costs of $848,877: July, 1995 308,000 $61,600 $1,304,450 August, 1995 35,880 $7,176 $161,460 September, 1995 690,364 $138,073 $2,370,389 November, 1995 94,892 $18,978 $425,482 December, 1995 560,857 $112,172 $1,292,473 May, 1996 313,750 $62,750 $3,300,422 June, 1996 252 $51 $3,650 Payments received on subscription receivable (960) (192) ($14,808) Compensation expense recorded on stock options $125,000 -------------------------------------------------------------------------- Balance, June 30, 1996 2,345,035 $469,008 $15,296,856 $0 ($10,482,840) Net loss ($3,925,460) Stock offering costs ($12,310) Common stock issued upon exercise of options and warrants September 1996 500 $100 $2,400 October 1996 8,500 $1,700 $40,800 November 1996 750 $150 $3,600 December 1996 13,500 $2,700 $64,800 January 1997 1,000 $200 $4,800 February 1997 7,500 $1,500 $17,250 March 1997 7,000 $1,400 $33,600 Payments received on subscription receivable Compensation expense recorded on stock options $48,000 Common stock issued, June 1997 18,250 $3,650 $105,850 Warrants issued with notes payable $371 --------------------------------------------------------------------------
(Table continued) Sub- Paid for Due Cumulative scriptions Not From Translation Receivable Issued Officers Adjustment ---------------------------------------------------------- Balance at Inception Net Loss for 15 months Common stock transactions: Common stock issued, October 1991 Common stock issued, November 1991 Common stock issuance costs Cumulative translation adjustment $387,754 Common stock issued, September 1992 ($53,689) Common stock issuance costs Common stock to be issued $120,000 Cumulative translation adjustment ($209,099) Elimination of cumulative translation adjustment ($178,655) Officers advances, net ($27,433) ---------------------------------------------------------- Balance, December 31, 1992 ($53,689) $120,000 ($27,433) $0 Net loss Common stock transactions: Common stock issued, January 1993 ($120,000) Common stock issued, April 1993 Change in common stock par value resulting from merger Repayments $5,137 ---------------------------------------------------------- Balance,June 30, 1993 ($53,689) $0 ($22,296) $0 Net loss 240,000 shares of common stock to be issued $30,000 Repayments $53,689 $22,296 ---------------------------------------------------------- Balance, June 30, 1994 $0 $30,000 $0 $0 Net loss Common stock issued, June 1995 ($20,000) ($30,000) Warrants issued for services ---------------------------------------------------------- Balance June 30, 1995 ($20,000) $0 $0 $0 Net loss Common stock issued, net of issuance costs of $848,877: July, 1995 August, 1995 September, 1995 November, 1995 December, 1995 May, 1996 June, 1996 Payments received on subscription receivable $20,000 Compensation expense recorded on stock options ---------------------------------------------------------- Balance, June 30, 1996 $0 $0 $0 $0 Net loss Stock offering costs Common stock issued upon exercise of options and warrants September 1996 October 1996 November 1996 December 1996 ($57,500) January 1997 February 1997 March 1997 Payments received on subscription receivable $57,500 Compensation expense recorded on stock options Common stock issued, June 1997 Warrants issued with notes payable ----------------------------------------------------------
QUANTECH LTD (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY-UNAUDITED Period From September 30, 1991 (date of Inception), to December 31, 1998
Deficit Accumulated Prepaid During Common Stock Additional Engineering the Paid-In Develop- Development Shares Amount Capital ment Stage ---------------------------------------------------------------------------------- Balance, June 30, 1997 2,402,035 $480,408 $15,606,017 $0 ($14,408,300) Net Loss ($3,648,748) Conversion of common stock from par value to no par value $15,392,446 ($15,392,446) Common stock issued for license agreement: September 1997 150,000 $390,000 Common stock issued for equipment and services received: March 1998 13,078 $45,584 Warrants issued for services received: March 1998 $15,215 April 1998 $500 Warrants issued with notes payable $939 Amount attributable to value of debt conversion feature $988,444 Warrants issued for license agreement December 1997 $230,000 Compensation expense recorded on stock options $28,000 Adjustment of fractional shares due to 1-for 20 reverse stock split (73) ---------------------------------------------------------------------------------- Balance, June 30, 1998 2,565,040 $16,308,438 $1,476,669 $0 ($18,057,048) Net Loss ($2,695,200) Warrants issued with notes payable $76 Common stock issued upon conversion of notes payable: July 1998 2,000 $7,060 September 1998 3,400 $12,002 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 Stock options issued for services: October 1998 $42,000 Compensation expense recorded on stock options $21,000 Common stock issued upon conversion of preferred stock: November 1998 92,052 $69,039 Warrants issued for services: November 1998 $619,000 ($518,000) Amortization of warrant expense $129,500 Accrete to liquidation value on Series A Convertible Preferred Stock ($6,580) ================================================================================== Balance, December 31, 1998 2,723,082 $16,484,998 $2,152,165 ($388,500) ($20,752,248) ==================================================================================
Sub- Paid for Due Cumulative scriptions Not From Translation Receivable Issued Officers Adjustment ----------------------------------------------------------- Balance, June 30, 1997 $0 $0 $0 $0 Net Loss Conversion of common stock from par value to no par value Common stock issued for license agreement: September 1997 Common stock issued for equipment and services received: March 1998 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 ----------------------------------------------------------- Balance, June 30, 1998 $0 $0 $0 $0 Net Loss Warrants issued with notes payable Common stock issued upon conversion of notes payable: July 1998 September 1998 October 1998 Common stock issued upon exercise of warrant: August 1998 Common stock issued for equipment and services received: July 1998 August 1998 September 1998 December 1998 Stock options issued for services: October 1998 Compensation expense recorded on stock options Common stock issued upon conversion of preferred stock: November 1998 Warrants issued for services: November 1998 Amortization of warrant expense Accrete to liquidation value on Series A Convertible Preferred Stock =========================================================== Balance, December 31, 1998 $0 $0 $0 $0 ===========================================================
QUANTECH LTD (A Development Stage Company) STATEMENT OF CASH FLOWS - UNAUDITED
Period From September 30, Six Months Six Months 1991 (Date of Ended Ended Inception), to December 31, December 31, December 31, 1998 1997 1998 ----------------- ----------------- ----------------- Cash Flows From Operating Activities Net Loss $ (2,695,200) $ (1,207,014) $(20,752,248) Adjustments to reconcile net loss to net cash used in operating activities: Elimination of cumulative translation adjustment -- -- (178,655) Depreciation 36,117 15,603 284,672 Amortization 220,811 80,408 1,957,155 Noncash compensation, services and interest 808,798 -- 2,133,477 Losses resulting from transactions with Spectrum Diagnostics Inc. -- -- 556,150 Write down of investment -- -- 67,500 Change in assets and liabilities, net of effects from purchase of Spectrum Diagnostics Inc.: (Increase) decrease in prepaid expenses 6,824 319 48,872 Increase (decrease) in accounts payable (20,067) (27,664) 69,044 Increase (decrease) in accrued expenses (105,452) (25,102) 415,269 ------------ ------------ ------------ Net cash used in operating activities (1,748,169) (1,163,450) (15,398,764) ------------ ------------ ------------ Cash Flows From Investing Activities Purchase of property and equipment (8,457) (1,353) (446,708) Proceeds on disposition of property -- 0 37,375 Patent expenses (4,016) (134) (13,045) Organization expenses -- -- (97,547) Officer advances, net -- -- (109,462) Purchase of investment -- -- (225,000) Purchase of license agreement -- -- (1,950,000) Advances to Spectrum Diagnostics, Inc. -- -- (320,297) Prepaid securities issuance costs -- (10,403) (101,643) Purchase of Spectrum Diagnostics, Inc., net of cash and cash equivalents acquired -- -- (1,204,500) ------------ ------------ ------------ Net cash used in investing activities (12,473) (11,890) (4,430,827) ------------ ------------ ------------ Cash Flows From Financing Activities Net proceeds from the sale of preferred stock, common stock and warrants 1,669,475 7 14,550,272 Proceeds on debt obligations 252,230 25,000 5,801,085 Payments received on stock subscription receivables -- -- 5,000 Stock offering costs -- -- 0 Payments on debt obligations (200,000) -- (722,810) ------------ ------------ ------------ Net cash provided by financing activities 1,721,705 25,007 19,633,547 ------------ ------------ ------------ Effect of Exchange Rate Changes on Cash -- -- 203,242 ------------ ------------ ------------ Net increase (decrease) in cash (38,937) (1,150,333) 7,198 Cash Beginning 46,135 718,893 -- ------------ ------------ ------------ Ending $ 7,198 $ (431,440) $ 7,198 ============ ============ ============
QUANTECH LTD. ( A Development Stage Company ) NOTES TO UNAUDITED FINANCIAL STATEMENTS Note 1. BASIS OF PRESENTATION In the opinion of the management of the Company, the accompanying unaudited financial statements contain all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the financial position of the Company as of December 31, 1998 and the results of operations for the three and six month periods and its cash flows for the six month periods ended December 31, 1998 and 1997. The results of operations for any interim period are not necessarily indicative of the results for the year. These interim financial statements should be read in conjunction with the Company's annual financial statements and related notes in the Company's Annual Report on Form 10-KSB for the year ended June 30, 1998. Note 2. LICENSE AGREEMENT The Company has a license agreement with Ares-Serono for certain patents, proprietary information and associated hardware related to SPR technology. The license calls for an ongoing royalty of 6 percent on all products utilizing the SPR technology which are sold by the Company. In addition, if the Company sublicenses the technology, the Company will pay a royalty of 15 percent of all revenues received by the Company under any sublicense. As of December 31, 1998, the Company had paid $1,150,000 of cumulative royalty payments. In order to maintain its exclusive rights under the license agreement, the Company must make a final $150,000 payment by December 31, 1999. The Company accrues quarterly a pro-rata portion of the $150,000 annual payment, and will continue to do so until royalty accruals based on revenues exceed such minimum annual payment amount. Note 3. SERIES A CONVERTIBLE PREFERRED STOCK In November 1998, the Company established an additional class of shares as Series A Convertible Preferred Stock (the "Series A Stock"), and designated 2,500,000 of its authorized shares as Series A Stock. Such shares have no par value and a liquidation preference of $3.00 per share. Each share of Series A Stock is convertible into, and has voting rights equal to, four shares of Common Stock. If any time after November 5, 2003 the Company receives written request of the holders of at least 50% of the outstanding shares of Series A Stock, the Company will redeem all of the outstanding shares by paying in cash an amount equal to the sum of the original purchase price plus a 10% return per annum. Series A Stock is automatically converted into shares of Common Stock in the event (i) the Company closes on an equity financing of at least $5,000,000 or (ii) at least 50% of the number of shares of Series A Stock that were outstanding as of November 30, 1998 have been converted or redeemed. As of January 22, 1999 there were 1,702,319 shares of Series A Stock issued and outstanding. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION History Quantech Ltd. ("Quantech" or the "Company") is a Minnesota company originally founded in 1991. We are completing development of our multi-test critical care DBx diagnostic system (the "DBx"). The DBx uses Quantech's proprietary and robust digital detection Surface Plasmon Resonance ("SPR") biosensor technology. Our use of SPR enables us to integrate multiple diagnostic methodologies, such as immunoassays, DNA probes and chemical binding, into a single, simple system. This flexibility should allow the DBx to provide an extensive menu of rapid, quantitative STAT tests to hospital critical care units. We believe the Emergency Department ("ED") represents the most pressing and unmet customer need for critical care STAT testing. The ED is a significant market requiring a complete menu of clinically related, quantitative, rapid turnaround tests on a single instrument. We are designing the DBx to meet the needs of the ED. The DBx is expected to have the STAT test menu and test performance of central and STAT labs, but with test results in 10 to 20 minutes. Its configuration will consist of a bench top instrument and a series of disposables each offering a single test or a panel of clinically related STAT tests. The system analyzes both whole blood and urine without preparation or addition of reagents by lab technicians or removal of sample from the collection device. We believe this ease of use and ability to locate the DBx in the ED will economically provide hospital physicians with faster STAT test results than hospital central or STAT laboratories. We received FDA 510(k) approval for our first cardiac marker test myoglobin and have submitted to the FDA a 510(k) for the cardiac marker CK-MB. These cardiac marker tests aid physicians in the diagnosis of a heart attack. We expect submission to the FDA of our pregnancy test in late January 1999. Further tests, including the cardiac marker troponin I, are under development. In November 1998, we entered into a development agreement with Millennium Medical Systems, LLC ("Millennium"). Under the terms of the agreement, Millennium will provide us with the proof of concept version of our DBx commercial system in exchange for a warrant to purchase shares of Quantech Common Stock. This agreement reduces our cash needs for the development of our product, and allows us to concentrate our resources on expanding the system test menu, commercial system completion, marketing and manufacturing. Quantech and The Perkin-Elmer Corporation ("Perkin-Elmer"), a leading supplier of life science systems and analytical instruments, are parties to a technology and development agreement. This agreement provides Perkin-Elmer with exclusive licenses to some of our technology for use outside of our core area of non-nucleic medical diagnostics. We have licensed back from Perkin-Elmer technology that provides a large density, high throughput diagnostic testing capacity for our SPR technology. We believe this capability will allow us to expand our digital SPR technology into central lab, ICU/CCU, surgical suite, doctor office and home testing markets. Quantech is a development stage company which has suffered significant losses from operations, requires additional financing, and ultimately needs to complete development of its product, generate revenues, and successfully attain profitable operations to realize the value of its license agreement. These factors raise substantial doubt about the Company's ability to continue as a going concern. Results of Operations The Company has incurred a net loss of $20,752,248 from September 30, 1991 (date of inception) through December 31, 1998 due to expenses related to formation and operation of Quantech's predecessor, Spectrum Diagnostics Inc. ("SDS") in Italy, continuing costs of raising capital, normal expenses of operating over an extended period of time, funds applied to research and development, royalty payments related to the SPR technology, losses due to expenses of SDS and interest on borrowed funds. In addition, an investment of $3,356,629 was made when Quantech purchased the exclusive rights to the SPR technology. For the three and six months ended December 31, 1998 the Company had interest income of $415 and $1,068 compared to $3,083 and $9,907 for the same periods in 1997. These decreases were a result of less cash on hand as proceeds obtained from Quantech's private placements of securities have been used for operations, research and development, and to reduce borrowing from its $750,000 bank credit facility. General and administration expenses increased to $624,813 and $931,641 for the three months and six months ended December 31, 1998 from $261,394 and $484,251 for the same periods in 1997. The increases in general and administrative spending for the quarter were primarily due to costs associated with financing activities, including commission expense of $190,000, charges of $78,000 for warrants and options issued in connection with financing activities and professional fees of $32,000. Such expense increases for the six months were $198,000, $78,000 and $39,000, respectively. Additional expenses for the three and six month periods related to Company expansion also contributed to the increase in general and administration expense. The Company anticipates that these expenses will be lower during the quarter ending March 31, 1999 due to reduced financing activity, but then will increase as the Company raises additional funding, completes development of its system and begins to manufacture and distribute its products. Research and development costs increased to $446,534 and $974,645 in the three months and six months ended December 31, 1998 from $281,088 and $595,349 in the same periods of 1997. These increases were primarily due to expenses related to the preparation of 510(k) submissions to the FDA, and engineering design work on the DBx commercial instrument and related disposables, including year-to-date charges of $200,500 for warrants and options issued in connection with research and development agreements. The Company expects R&D spending to remain flat during the quarter ending March 31, 1999 and then increase as the Company completes the commercial development of its system, conducts additional FDA work, and begins to establish higher volume manufacturing capabilities. Minimum royalty expense increased to $37,500 and $75,000 during the three and six months ended December 31, 1998 compared to $18,750 and $37,500 for the same periods in 1997. These increases were due to the accrual for the minimum payment made in December 1998. Royalty expense is expected to remain at $37,500 per quarter through December 1999 (see Notes to Financial Statements, Note 2 - License Agreement). Interest expense decreased to $43,450 from $60,445 for the quarter ended December 31, 1998 as a result of the conversion of promissory notes into preferred stock on November 5, 1998. Interest expense for the six months ended December 31, 1998 increased to $714,982 compared to $99,821 during the same period in 1997 primarily due to increased debt from the sale of promissory notes including a $546,902 charge to reflect the beneficial conversion feature of the now converted notes. Interest expense is expected to decrease during the quarter ending March 31, 1999 due to the effect of the conversion of the promissory notes for all three months of the quarter, and then to remain flat. For the three and six months ended December 31, 1998 Quantech had losses of $1,151,882 and $2,695,200 as compared to $618,594 and $1,207,014 for the same periods in 1997. The higher loss for the quarter was primarily due to increased operating expenses partially offset by lower interest expense. A substantial portion of the increased loss for the six month period was interest cost, with the remaining increase a result of higher operating expenses and lower interest income. The timetable for submitting additional tests to the FDA and introduction of Quantech's DBx system to the market will be influenced by the Company's ability to obtain further funding, enter into strategic relationships, complete commercial prototype development of its system and develop further tests, and delays it may encounter with the FDA in its review of Quantech's tests and system. There can be no assurance that the Company will be able to obtain the required funding, enter into any strategic agreements or ultimately complete its commercial system. Liquidity and Capital Resources From inception to December 31, 1998, Quantech has raised approximately $20,350,000 through a combination of public stock sales, private stock sales and debt obligations. In November and December 1998, the Company raised net proceeds of $1,669,475 from the sale of 600,617 shares of its Series A Convertible Preferred Stock (the "A Preferred Stock") to accredited investors. The shares were priced at $3.00 per share and each share of A Preferred Stock is convertible into four shares of Common Stock. Noteholders also converted $3,374,138 of the Company's promissory notes into 1,124,715 shares of the A Preferred Stock in November 1998. Additionally, in November 1998 Quantech issued a warrant to purchase 1,800,000 shares of Common Stock at $1.10 per share in exchange for engineering development work. The Company anticipates that its cash on hand and bank credit facility, which had $450,000 available as of December 31, 1998, along with the lower cash requirements resulting from the Millennium development agreement will allow it to maintain operations through April 1999. Additional financing will be needed to develop and submit to the FDA additional tests, complete clinical evaluation of the Quantech system, establish manufacturing capabilities and introduce the system to market. Quantech is currently reviewing multiple avenues of future funding including private sale of equity or debt with equity features or arrangements with strategic partners. The Company does not have any commitments for any such financing and there can be no assurance that the Company will obtain additional capital when needed or that additional capital will not have a dilutive effect on current shareholders. See "Cautionary Statements - Immediate and Future Capital Needs." Although the Company has a limited lending arrangement with its bank to a maximum of $750,000, it does not anticipate receiving any additional significant funding from commercial lenders. Quantech incurred capital expenditures of $36,046 in the six month period ended December 31, 1998. The Company anticipates significant capital expenditures in the future for laboratory and production equipment and office expansion as the Company nears product introduction. The timing and amount of such expenditures will be governed by the Company's development and market introduction schedules which are subject to change due to a number of factors including development delays, FDA approval and availability of future financing. The Company currently has outstanding 2,723,082 shares of Common Stock, and 1,702,319 shares of A Preferred Stock convertible into 6,809,276 shares of Common Stock. It also has options and warrants outstanding to purchase an additional 6,255,031 shares of Common Stock at exercise prices from $0.75 to $14.40. Cautionary Statements The Company wishes to caution investors that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results of operations and cause such results to differ materially from those anticipated in forward-looking statements made in this document and elsewhere by or on behalf of the Company. Immediate and Future Capital Needs We do not have sufficient funds to complete commercial development or commence production and sales of our system. Until the revenues from sale of the instruments and associated test disposables are sufficient to maintain operations, Quantech's ability to continue as a going concern, complete its system, submit its commercial system and tests to the FDA and commence sales will depend upon the continued availability of investment capital, funding made available by strategic partner(s) or licensing revenues. There can be no assurance that any such additional financing can be obtained on favorable terms, if at all. Such additional financing will result in dilution to Company shareholders. If funding is not available when needed, we may be forced to cease operations and abandon our business. In such event, Company shareholders could lose their entire investment. No History of Operations; Development Stage Company; Going Concern Uncertainty To date, we do not have a product ready to be brought to market. Accordingly, Quantech has no operating history and its proposed operations are subject to all of the risks inherent in a new business enterprise, including commercial development of its products, lack of marketing experience and lack of production history. The likelihood of our success must be considered in light of the expenses, difficulties and delays frequently encountered in connection with the start-up of new businesses, those historically encountered by us, and the competitive environment in which we will operate. We have not had any significant revenues to date. As of June 30, 1998 and December 31, 1998, we had an accumulated deficit of $18,057,048 and $20,752,248, respectively. The report of the independent auditors on the Company's financial statements for the year ended June 30, 1998 includes an explanatory paragraph relating to the uncertainty of the Company's ability to continue as a going concern. We are a development stage company which has suffered losses from operations, requires additional financing, needs to continue development of our product, and ultimately needs to generate revenues and successfully attain profitable operations. These factors raise substantial doubt about our ability to continue as a going concern. There can be no assurance that we will be able to develop a commercially viable product or marketing system or attain profitable operations. No Assurance of Successful and Timely Development of Quantech's System Our DBx system, consisting of reading instrumentation and associated disposables, is under various stages of development. We are conducting such development using both internal and external resources. Further development and testing will be required to prove additional testing capability beyond our current tests, commercial viability of our system, and to obtain all required FDA clearances. Until the development process for the commercial system is completed and cleared through the FDA, there can be no assurance that such system will be finished according to our current development timetable and budget, or that development will result in a system that will perform in the manner we anticipated. Additionally, the final cost of our instrument and disposables cannot be finalized until system completion. Our success, if any, will depend on our ability to timely complete our system within estimated cost parameters and efficiently develop tests to expand the DBx's menu of tests. Year 2000 Compliance We believe the Company's internal systems and products are year 2000 compliant. We have, therefore, not developed any contingency plans relating to year 2000 issues and have not budgeted any funds for year 2000 issues. Although we believe that our system is year 2000 compliant, unanticipated year 2000 problems may arise which, depending on the nature and magnitude of the problem, could adversely affect our business. Furthermore, year 2000 problems involving third parties may have a negative impact on our customers or suppliers, the general economy or the ability of businesses to generally receive essential service (such as telecommunications, banking services, etc.) Any such occurrence could adversely affect our business. Other Factors As described in the Company's Form 10-KSB for the year ended June 30, 1998 under Cautionary Statements, there are additional factors concerning the Company that should be considered including: uncertainty of market acceptance of Quantech's product once introduced, inability or delay in obtaining FDA product approval, competition, lack of marketing and manufacturing experience, technological obsolescence, ability to maintain patent protection on the Company's technology and not violate others' rights, effects of government regulation on Quantech's product and its sale, ability to manufacture its product, dependence on key personnel, exposure to the risk of product liability and the limited market for the Company's shares. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not Applicable. PART II OTHER INFORMATION Item 1. Legal Proceedings Not Applicable Item 2. Changes in Securities In December 1998 the Company sold 3,792 shares of Common Stock at $1.50 per share to an accredited investor. Also in December 1998 the Company sold 2,286 shares of Common Stock at $1.83 per share 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, as amended (the "1933 Act"). The purchasers of such Common Stock acquired these securities for their own accounts and not with a view to any distribution thereof to the public. In November 1998, 92,052 shares of Common Stock were issued pursuant to conversion 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 purchasers of such Common Stock acquired these securities for their own accounts. In November and December 1998, the Company 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. The Company paid commissions and accountable expenses in the aggregate amount of $125,700 to registered broker-dealers for acting as selling agents and issued the broker-dealers 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 the Company's Common Stock. The sale of such shares and warrants was deemed to be exempt from registration under Section 4(2) of the 1933 Act and Rule 506 promulgated thereunder. The purchasers acquired these securities for their own accounts and not with a view to any distribution thereof to the public. In November 1998, the Company issued a warrant to purchase 1,800,000 shares of Common Stock in exchange for engineering development work, and issued another warrant to purchase 144,000 shares of Common Stock and paid $190,000 cash to an investment banking firm that arranged the transaction. The exercise prices of the warrants are $1.10 per share and $1.32 per share, respectively. Both warrants expire in November 2003. The sale of such warrants was deemed to be exempt from registration under Section 4(2) of the 1933 Act. The purchasers acquired these securities for their own accounts and not with a view to any distribution thereof to the public. Item 3. Defaults upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders The Company held its annual meeting on December 15, 1998 in Minneapolis, Minnesota. The Company solicited proxies and filed a definitive proxy statement with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. The matters voted upon at the meeting and the votes cast were as follows: No. 1 Election of Mr. James F. Lyons as class 3 director Votes for - 5,240,106 Votes Against - 200 Votes Withheld - 25,158 The terms of the following directors continued after the meeting: Edward E. Strickland, Richard W. Perkins and Robert Case. No. 2 Adoption of the 1998 Stock Option Plan Votes for - 4,001,534 Votes Against - 403,905 Abstain - 8,300 Broker Non-Votes - 851,795 No. 3 Amendment to Articles of Incorporation to increase the number of authorized shares to 75,000,000 shares consisting of 50,000,000 common shares, 2,500,000 Series A preferred shares and 22,500,000 undesignated shares Votes for - 4,275,904 Votes Against - 124,681 Abstain - 13,154 Broker Non-Votes - 851,795 Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on 8-K a. Exhibits - 3.1 Articles of Incorporation, as amended to date 10.1 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). 27 Financial Data Schedule (filed in electronic format only) b. Reports on Form 8-K - None Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. QUANTECH LTD /s/ Robert Case Robert Case Chief Executive Officer /s/ Gregory G. Freitag Gregory G. Freitag Chief Operating Officer and Date: January 26, 1999 Chief Financial Officer EXHIBIT INDEX QUANTECH LTD. FORM 10-QSB for Quarter Ended December 31, 1998 Exhibit Number Description 3.1 Articles of Incorporation, as amended to date 10.1 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). 27 Financial Data Schedule (filed in electronic format only) EX-3.1 2 ARTICLES OF INCORPORATION 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. 3.4) Issuance of Shares to Holders of Another Class or Series. The Board is further authorized to issue shares of one class or series to holders of that class or series or to holders of another class or series to effectuate share dividends or splits. ARTICLE 4 - RIGHTS OF SHAREHOLDERS 4.1) No Preemptive Rights. No shares of any class or series of the corporation shall entitle the holders to any preemptive rights to subscribe for or purchase additional shares of that class or series or any other class or series of the corporation now or hereafter authorized or issued. 4.2) No Cumulative Voting Rights. There shall be no cumulative voting by the shareholders of the corporation. ARTICLE 5 - DIRECTORS 5.1) The names of the person constituting the first Board of Directors is as follows: R. H. Joseph Shaw ARTICLE 6 - MERGER, EXCHANGE, SALE OF ASSETS AND DISSOLUTION 6.1) Where approval of shareholders is required by law, the affirmative vote of the holders of at least a majority of the voting power of all shares entitled to vote shall be required to authorize the corporation (i) to merge into or with one or more other corporations, (ii) to exchange its shares for shares of one or more other corporations, (iii) to sell, lease, transfer or otherwise dispose of all or substantially all of its property and assets, including its good will, or (iv) to commence voluntary dissolution. ARTICLE 7 - AMENDMENT OF ARTICLES OF INCORPORATION. 7.1) After the issuance of shares by the corporation, any provision contained in these Articles of Incorporation may be amended, altered, changed or repealed by the affirmative vote of the holders of at least a majority of the voting power of the shares present and entitled to vote at a duly held meeting or such greater percentage as may be otherwise prescribed by the laws of the State of Minnesota. ARTICLE 8 - LIMITATION OF DIRECTOR LIABILITY 8.1) To the fullest extent permitted by Chapter 302A, Minnesota Statutes, as the same exists or may hereafter be amended, a director of this corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. 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 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 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 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 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 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 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 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 dividends or distributions in the event of the liquidation, dissolution or winding up of the corporation, provided that such prohibition shall not prevent the corporation from issuing any shares which may receive distributions in such events on a pari passu basis prorated, in the event assets are insufficient to pay the original purchase price of all such securities, to the original purchase price of each; or d. declare or pay any dividend or make any other distribution on any shares of capital stock of the corporation at any time created and issued ranking junior to Series A Stock with respect to the rights to the distribution of assets upon liquidation, dissolution or winding up of the corporation, other than distributions payable solely in shares of junior stock. 4. Liquidation. a. In the event of the liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, the holders of the shares of Series A Stock shall be entitled, subject to the participation right of certain lenders/guarantors as provided in subparagraph (d) below, to receive in cash, out of the assets of the corporation, before any payment shall be made or any assets distributed to the holders of Common Stock with respect to the payment of dividends or upon dissolution or liquidation of the corporation, an amount equal to the sum of (i) $3.00 per share ("Original Purchase Price") (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected), (ii) all dividends unpaid and accumulated or accrued thereon to the date of such distribution, if any, and (iii) an amount equal to a return on investment at the rate of 10% per annum, compounded annually, over the period commencing on the date of original issuance of the Series A Stock by the corporation and ending on the date of distribution of assets as specified by the corporation's Board of Directors. If, upon any liquidation or dissolution of this corporation, the assets of the corporation shall be insufficient to pay such amount, the holders of such shares shall share pro rata in any such distribution in proportion to the full amounts to which they would otherwise be respectively entitled. b. After the payment of all preferential amounts required to be paid pursuant to subparagraph a above, any remaining assets and funds of the corporation available for distribution to its stockholders upon the liquidation, dissolution or winding up of the corporation shall be distributed ratably among the holders of Common Stock. Thereafter, any such remaining assets and funds shall be distributed. c. The merger or consolidation of the corporation into or with another corporation which results in the exchange of outstanding shares of the corporation for securities or other consideration issued or paid or caused to be issued or paid by such other corporation or an affiliate thereof (except if such merger or consolidation does not result in the transfer of more than 60% of the voting securities of the corporation), change in control of more than 60% of the voting securities of the corporation or the sale of all or substantially all the assets of the corporation, shall be deemed to be a liquidation, dissolution or winding up of the corporation for purposes of this paragraph, unless the holders of a majority of the Series A Stock then outstanding vote otherwise. The amount deemed distributed to the holders of Series A Stock upon any such merger or consolidation shall 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 conversion price each holder of shares of Series A Stock shall thereafter be entitled to receive the number of shares of Common Stock of the corporation obtained by multiplying the conversion price in effect immediately prior to such adjustment by the number of shares issuable pursuant to conversion immediately prior to such adjustment and dividing the product thereof by the conversion price resulting from such adjustment. c. If and whenever the corporation shall issue or sell any shares of its Common Stock for a consideration per share less than the conversion price in effect immediately prior to the time of such issue or sale of the Common Stock, then, forthwith upon such issue or sale, the conversion price shall be reduced to such lower price. No adjustment of the conversion price of the Series A Stock, however, shall be made in an amount less than 2% of such conversion price in effect on the date of such adjustment, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any such adjustment so carried forward, shall be an amount equal to or greater than 4% of the conversion price of the Series A Stock then in effect. The holders of at least a majority of the Series A Stock then outstanding may elect to waive the application of the provisions of this paragraph 5 with respect to any issue or sale by the corporation of shares of its Common Stock for a consideration per share less than the conversion price of the Series A Stock in effect immediately prior to the time of such issue or sale. For the purposes of this paragraph 5, the following provisions (i) to (v), inclusive, shall also be applicable: (i) In the event the corporation shall grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, (a) Common Stock or (b) any obligations or any shares of stock of the corporation which are convertible into, or exchangeable for, Common Stock (any of such obligations or shares of stock being hereinafter called "Convertible Securities") whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount, if any, received or receivable by the corporation as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the corporation upon the exercise of such rights or options, plus, in the case of such rights or options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue of such Convertible Securities and upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the conversion price of the Series A Stock in effect immediately prior to the time of the granting of such rights or options, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to have been issued for such price per share. Except as provided in subparagraph d below, no further adjustments of the conversion price of the Series A Stock shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. (ii) In case the corporation shall issue or sell (whether directly or by assumption in a merger or otherwise) any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (x) the total amount received or receivable by the corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the corporation upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the conversion price of the Series A Stock in effect immediately prior to the time of such issue or at the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided that (a) except as provided in subparagraph d below, no further adjustments of the conversion price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the conversion price of the Series A Stock have been or are to be made pursuant to other provisions of this paragraph 5, no further adjustment of the conversion price shall be made by reason of such issue or sale. (iii) In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the corporation therefor, without deducting therefrom any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed by the corporation in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the corporation shall be deemed to be the fair value of such consideration as determined by the Board of Directors of the corporation, without deducting therefrom any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed by the corporation in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase such Common Stock or Convertible Securities shall be issued in connection with any merger or consolidation in which the corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value as determined by the Board of Directors of the corporation of such portion of the assets and business of the non-surviving corporation or corporations as such Board shall determine to be attributable to such Common Stock, Convertible Securities, rights or options, as the case may be. In the event of any consolidation or 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. 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. 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 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 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. 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 EX-27 3 ART 5 FDS FOR 2ND QUARTER
5 1 U.S. Dollars 6-MOS JUN-30-1999 JUL-01-1998 DEC-31-1998 1 7,198 0 0 0 0 166,218 417,539 238,318 2,930,978 518,411 0 4,916,152 0 16,484,998 1,763,665 2,930,978 0 0 0 0 0 0 714,982 (2,695,200) 0 (2,695,200) 0 0 0 (2,695,200) (1.03) (1.03)
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