-----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, JFvRgOCuGlNV3l0yw7oALUUrAribNrXzbA24GqMUH4LXZ7IS3YC7WbWieKM4iZe6 FhaQyLIpbXZN45YNXiOxSA== 0000914190-99-000376.txt : 19991117 0000914190-99-000376.hdr.sgml : 19991117 ACCESSION NUMBER: 0000914190-99-000376 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99752037 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 10QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended: Commission File Number: September 30, 1999 0 - 19957 Quantech Ltd. (Exact name of small business issuer 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 (Issuer's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ____ State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: 3,538,052 shares of Common Stock, no par value, as of November 10, 1999. Transitional Small Business Disclosure Format: YES ___ NO X Index PART I. FINANCIAL INFORMATION Page No. Item 1: Financial Statements: Balance Sheets as of September 30, 1999 and June 30, 1999 3 Statements of Operations for the Three Months Ended September 30, 1999 and 1998 and from inception to September 30, 1999 4 Statement of Stockholders' Equity from inception to September 30, 1999 5 Statements of Cash Flows for the Three Months ended September 30, 1999 and 1998 and from inception to September 30, 1999 7 Notes to Financial Statements 8 Item 2: Management's Discussion and Analysis or Plan of Operation 9 PART II. OTHER INFORMATION 13 2 QUANTECH LTD. (A Development Stage Company) BALANCE SHEET
(Unaudited) September 30, June 30, 1999 1999 ----------------- ----------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 500,692 $ 436,223 Prepaid expenses: Product development expenses 28,750 57,500 Other 36,352 36,037 ----------------- ----------------- Total current assets 565,794 529,760 ----------------- ----------------- EQUIPMENT Equipment 459,274 427,508 Leasehold improvements 15,000 15,000 ----------------- ----------------- 474,274 442,508 Less accumulated depreciation (296,477) (276,295) ----------------- ----------------- Total equipment 177,797 166,213 ----------------- ----------------- OTHER ASSETS License agreement, at cost, less amortization 2,327,523 2,409,180 Patents, at cost 13,045 13,045 ----------------- ----------------- Total other assets 2,340,568 2,422,225 ----------------- ----------------- TOTAL ASSETS $ 3,084,159 $ 3,118,198 ================= ================= LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) CURRENT LIABILITIES Short term debt $ 750,000 $ 746,000 Accounts payable 343,514 111,858 Accrued expenses: Interest 3,100 3,100 Minimum royalty commitment 112,500 75,000 Accrued payroll/vacation 120,300 120,300 ----------------- ----------------- Total current liabilities 1,329,414 1,056,258 ----------------- ----------------- REDEEMABLE PREFERRED STOCK 5,046,634 5,113,142 STOCKHOLDERS' EQUITY (DEFICIT) Series B Preferred Stock, no par value; authorized 2,500,000 shares; outstanding 910,001 and 623,334 shares at September 30, 1999 and June 30, 1999, respectively 1,272,818 891,500 Common stock, no par value; authorized 50,000,000 shares; outstanding 3,488,052 shares and 2,741,534 shares at September 30, 1999 and June 30, 1999, respectively 17,242,817 16,498,837 Subscriptions receivable (70,000) (60,000) Additional paid-in capital 2,352,745 2,342,745 Deficit accumulated during the development stage (24,090,269) (22,724,284) ----------------- ----------------- Total stockholders' equity (deficit) (3,291,889) (3,051,202) ----------------- ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,084,159 $ 3,118,198 ================= =================
3 QUANTECH LTD. (A Development Stage Company) STATEMENT OF OPERATIONS
Period From September 30, Three Months Three Months 1991 (Date of Ended Ended Inception), to September 30, September 30, September 30, 1999 1998 1999 ------------------- ------------------- ------------------ Interest Income $ 1,383 $ 653 $ 186,485 ------------------- ------------------- ------------------ Expenses: General and Administrative 601,335 306,828 11,356,570 Research and Development 591,454 528,111 8,661,247 Minimum Royalty expense 37,500 37,500 1,262,500 Loses resulting from transactions with Spectrum Diagnostics Inc. - - 556,150 Net Exchange (gain) - - (67,172) Interest 9,608 671,532 1,959,973 ------------------- ------------------- ------------------ Total Expenses 1,239,897 1,543,971 23,729,268 ------------------- ------------------- ------------------ Loss before income taxes (1,238,514) (1,543,318) (23,542,783) Income Taxes - - 42,595 ------------------- ------------------- ------------------ Net Loss $ (1,238,514) $ (1,543,318) $ (23,585,378) =================== =================== ================== Net loss attributable to common shareholders: Net loss $ (1,238,514) $ (1,543,318) Preferred stock accretion (127,471) - ------------------- ------------------- Net loss attributable to common shareholders $ (1,365,985) $ (1,543,318) =================== =================== Loss per basic and diluted common share $ (0.47) $ (0.60) Weighted average common shares outstanding 2,922,126 2,577,751
4 QUANTECH LTD (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY Period From September 30, 1991 (date of Inception), to September 30, 1999
Deficit Accumulated During Series B Additional the Sub- Paid for Due Cumulative Preferred Stock Common Stock Paid-In Development scriptions Not From Translation Shares Amount Shares Amount Capital Stage Receivable Issued Officers Adjustment ---------------------------------------------------------------------------------------------------- Balance at Inception Net Loss for 15 months ($3,475,608) Common stock transactions: Common stock issued, October 1991 160,000 $3,154,574 Common stock issued, November 1991 30,000 $611,746 $1,788,254 Common stock issuance costs ($889,849) Cumulative translation adjustment $387,754 Common stock issued, September 1992 35,000 $699,033 $875,967 ($53,689) Common stock issuance costs ($312,755) Common stock to be issued $120,000 Cumulative translation adjustment ($209,099) Elimination of cumulative translation adjustment ($178,655) Officers advances, net ($27,433) ------------------------------------------------------------------------------------------------ Balance, December 31, 1992 0 $0 225,000 $4,465,353 $1,461,617 ($3,475,608)($53,689) $120,000 ($27,433) $0 Net loss ($996,089) Common stock transactions: Common stock issued, January 1993 8,000 $1,600 $118,400 ($120,000) Common stock issued, April 1993 1,500 $300 $11,700 Change in common stock par value resulting from merger ($4,420,353)$4,420,353 Repayments $5,137 ------------------------------------------------------------------------------------------------ Balance,June 30, 1993 0 $0 234,500 $46,900 $6,012,070 ($4,471,697)($53,689) $0 ($22,296) $0 Net loss ($1,543,888) 240,000 shares of common stock to be issued $30,000 Repayments $53,689 $22,296 ------------------------------------------------------------------------------------------------ Balance, June 30, 1994 0 $0 234,500 $46,900 $6,012,070 ($6,015,585) $0 $30,000 $0 $0 Net loss ($2,070,292) Common stock issued, June 1995 107,500 $21,500 $276,068 ($20,000) ($30,000) Warrants issued for services $40,200 ------------------------------------------------------------------------------------------------ Balance June 30, 1995 0 $0 342,000 $68,400 $6,328,338 ($8,085,877)($20,000) $0 $0 $0 Net loss ($2,396,963) Common stock issued, net of issuance costs of $848,877: July, 1995 308,000 $61,600 $1,304,450 August, 1995 35,880 $7,176 $161,460 September, 1995 690,364 $138,073 $2,370,389 November, 1995 94,892 $18,978 $425,482 December, 1995 560,857 $112,172 $1,292,473 May, 1996 313,750 $62,750 $3,300,422 June, 1996 252 $51 $3,650 Payments received on subscription receivable (960) (192) ($14,808) $20,000 Compensation expense recorded on stock options $125,000 ------------------------------------------------------------------------------------------------
QUANTECH LTD (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY Period From September 30, 1991 (date of Inception), to September 30, 1999 (continued)
Deficit Accumulated During Series B Additional the Sub- Paid for Due Cumulative Preferred Stock Common Stock Paid-In Development scriptions Not From Translation Shares Amount Shares Amount Capital Stage Receivable Issued Officers Adjustment ---------------------------------------------------------------------------------------------------- Balance, June 30, 1996 0 $0 2,345,035 $469,008$15,296,856 ($10,482,840) $0 $0 $0 $0 Net loss ($3,925,460) Stock offering costs ($12,310) Common stock issued upon exercise of options and warrants September 1996 500 $100 $2,400 October 1996 8,500 $1,700 $40,800 November 1996 750 $150 $3,600 December 1996 13,500 $2,700 $64,800 ($57,500) January 1997 1,000 $200 $4,800 February 1997 7,500 $1,500 $17,250 March 1997 7,000 $1,400 $33,600 Payments received on subscription receivable $57,500 Compensation expense recorded on stock options $48,000 Common stock issued, June 1997 18,250 $3,650 $105,850 Warrants issued with notes payable $371 ------------------------------------------------------------------------------------------------
5 QUANTECH LTD (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY Period From September 30, 1991 (date of Inception), to September 30, 1999
Deficit Accumulated During Series B Additional the Sub- Paid for Due Cumulative Preferred Stock Common Stock Paid-In Development scriptions Not From Translation Shares Amount Shares Amount Capital Stage Receivable Issued Officers Adjustment --------------------------------------------------------------------------------------------------- Balance, June 30, 1997 2,402,035 $480,408 $15,606,017($14,408,300) $0 $0 $0 $0 Net Loss ($3,648,748) Conversion of common stock from par value to no par value $15,392,446($15,392,446) Common stock issued for license agreement: September 1997 150,000 $390,000 Common stock issued for equipment and services received: March 1998 13,078 $45,584 Warrants issued for services received: March 1998 $15,215 April 1998 $500 Warrants issued with notes payable $939 Amount attributable to value of debt conversion feature $988,444 Warrants issued for license agreement December 1997 $230,000 Compensation expense recorded on stock options $28,000 Adjustment of fractional shares due to 1-for 20 reverse stock split (73) ------------------------------------------------------------------------------------------------ Balance, June 30, 1998 0 $0 2,565,040 $16,308,438 $1,476,669($18,057,048) $0 $0 $0 $0 Net Loss ($4,289,816) 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 $43,000 Common stock issued upon conversion of preferred stock: November 1998 74,052 $55,539 January 1999 15,952 $11,964 March 1999 500 $375 April 1999 20,000 $15,000 Warrants issued for services: November 1998 $781,000 Series B Preferred Stock issued: June 1999 623,334 $891,500 ($60,000) Accrete to redemption value on Series A Preferred Stock ($377,420) ---------------------------------------------------------------------------------------------------
QUANTECH LTD (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY Period From September 30, 1991 (date of Inception), to September 30, 1999 (continued)
Deficit Accumulated During Series B Additional the Sub- Paid for Due Cumulative Preferred Stock Common Stock Paid-In Development scriptions Not From Translation Shares Amount Shares Amount Capital Stage Receivable Issued Officers Adjustment --------------------------------------------------------------------------------------------------- Balance, June 30, 1999 623,334 $891,500 2,741,534 $16,498,837 $2,342,745($22,724,284) ($60,000) $0 $0 $0 Net Loss ($1,238,514) Series B Preferred Stock issued: July 1999 216,666 $291,829 August 1999 86,667 $116,989 September 1999 16,667 $22,500 Common stock issued upon conversion of preferred stock: July 1999 32,000 $24,000 August 1999 (33,333) ($50,000) 179,121 $159,341 September 1999 80,852 $60,639 Common stock issued upon exercise of warrant, September 1999 454,545 $500,000 Warrant issued, September 1999 $10,000 ($10,000) Accrete to redemption value on Series A Preferred Stock ($127,471) --------------------------------------------------------------------------------------------------- Balance September 30, 1999 910,001 $1,272,818 3,488,052 $17,242,817 $2,352,745($24,090,269) ($70,000) $0 $0 $0
QUANTECH LTD (A Development Stage Company) STATEMENTS OF CASH FLOWS - UNAUDITED
Period From September 30, Three Months Three Months 1991 (Date of Ended Ended Inception), to September 30, September 30, September 30, 1999 1998 1999 ------------- ------------- -------------- Cash Flows From Operating Activities Net Loss $ (1,238,514) $ (1,543,318) $ (23,585,378) Adjustments to reconcile net loss to net cash used in operating activities: Elimination of cumulative translation adjustment - - (178,655) Depreciation 20,182 17,758 342,831 Amortization 110,408 81,655 2,288,379 Noncash compensation, services and interest - 597,595 2,727,920 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 (315) 7,239 47,740 Increase (decrease) in accounts payable 231,656 124,543 335,291 Increase (decrease) in accrued expenses 37,500 179,872 510,024 ------------ ------------ ------------- Net cash used in operating activities (839,083) (534,656) (16,888,198) ------------ ------------ ------------- Cash Flows From Investing Activities Purchase of property and equipment (31,766) (8,457) (531,032) Proceeds on disposition of property - - 37,375 Patent expenses - (4,016) (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 - - (101,643) Purchase of Spectrum Diagnostics, Inc., net of cash - and cash equivalents acquired - - (1,204,500) ------------ ------------ ------------- Net cash used in investing activities (31,766) (12,473) (4,515,151) ------------ ------------ ------------- Cash Flows From Financing Activities Net proceeds from the sale of Series A Preferred Stock - - 1,523,909 Net proceeds from the sale of Series B Preferred Stock 431,318 - 1,262,818 Net proceeds from the sale of Common Stock and warrants 500,000 - 13,380,797 Proceeds on debt obligations 4,000 502,230 6,051,085 Payments received on stock subscriptions receivable - - 5,000 Payments on debt obligations - - (522,810) ------------ ------------ ------------- Net cash provided by financing activities 935,318 502,230 21,700,799 ------------ ------------ ------------- Effect of Exchange Rate Changes on Cash - - 203,242 ------------ ------------ ------------- Net increase (decrease) in cash 64,469 (44,899) 500,692 Cash Beginning 436,223 46,135 - ------------ ------------ ------------- Ending $ 500,692 $ 1,236 $ 500,692 ============ ============ =============
7 QUANTECH LTD. ( A Development Stage Company ) NOTES TO UNAUDITED FINANCIAL STATEMENTS Note 1. BASIS OF PRESENTATION In the opinion of the management of Quantech, the accompanying unaudited financial statements contain all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the financial position of Quantech as of September 30, 1999 and the results of operations and its cash flows for the three month periods ended September 30, 1999 and 1998. 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 Quantech's annual financial statements and related notes in Quantech's Annual Report on Form 10-KSB for the year ended June 30, 1999. Note 2. LICENSE AGREEMENT Quantech 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 Quantech. In addition, if Quantech sublicenses the technology, Quantech will pay a royalty of 15 percent of all revenues received by Quantech under any sublicense. As of December 31, 1998, Quantech had paid $1,150,000 of cumulative royalty payments. In order to maintain its exclusive rights under the license agreement, Quantech must make a final $150,000 payment by December 31, 1999. Quantech 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, Quantech established an additional class of shares as Series A convertible preferred stock (the "Series A Preferred Stock"), and designated 2,500,000 of its authorized shares as Series A Preferred Stock. As of November 10, 1999 there were 1,620,547 shares of Series A Preferred Stock issued and outstanding. 8 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION History Quantech Ltd. is a Minnesota company originally founded in 1991. Quantech is completing development of its Hospital Emergency Department Patient Treatment Information Platform. We refer to this platform as the PTIP. The PTIP is expected to run tests for a number of different medical conditions and deliver that test information by wireless communication devices to the Emergency Department ("ED") staff treating a patient. The PTIP consists of an instrument that sits on the top of a counter or cart and reads disposable test cartridges developed by Quantech. Each Quantech test cartridge will contain from one to four different medical tests such as those for a heart attack or pregnancy. The instrument produces test results in a manner different than other testing systems because it uses Quantech's proprietary technology based on the scientific phenomenon known as surface plasmon resonance ("SPR"), which involves the interaction of light with electrons. Quantech's technology creates SPR in a controlled environment which enables its instrument to detect and transmit information concerning the presence and quantity of certain native and foreign molecules in blood, urine or other fluids which may be associated with specific diseases or medical conditions. Transmission of this test information to the ED treatment staff will be performed though the use of a wireless local area network communications system and handheld receiving devices similar to a pager. We are designing the PTIP for the emergency department. It is expected to have the range of available tests and quality performance of hospitals' central and STAT labs, but with test time turnaround of 10 to 20 minutes. The system will analyze both whole blood and urine without preparation or addition of other substances or removal of the sample from the collection device. We believe this ease of use and the ability to locate the PTIP in the ED will economically provide physicians with faster test results than hospital central or STAT laboratories. We expect our system to include an initial menu of more than 20 STAT tests grouped in patient diagnosis-related panels such as cardiac enzymes (heart attack), pregnancy, red and white blood cell counts, blood coagulation, kidney function, pancreas function and electrolytes. Tests for liver functions, drugs of abuse, therapeutic drugs and additional STAT tests will also be made available on the system. Quantech's cardiac markers for myoglobin and CK-MB have received FDA 510(k) approval. A test for pregnancy is being reviewed by the FDA. The final heart attack marker for Troponin I meets clinical requirements and the remaining launch menu of tests are in various stages of development. The ED is a significant and consolidated market. Current processes for providing test information to the ED staff are complicated and require a multitude of steps that greatly increase patient treatment turnaround time. The challenge is to increase efficiency and decrease costs. Time delays and interruption of batch testing in the central lab, and the cost of tests run in STAT labs, have caused both to fall well short of meeting the burden of providing fast and economic STAT test results. Although there are some point-of-care STAT testing products available for the ED, they do not have the required test menu, ease of use, communication capability or quality of results necessary to streamline the entire ED testing process. The solution is seven day a week, 24 hour a day disintermediation of the process for providing ED treatment information. We believe our product will provide this capability. Quantech and The Perkin-Elmer Corporation, 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 medical diagnostics. We have licensed back from Perkin-Elmer 9 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 suites, doctor office and home testing markets. Quantech is a development stage company which has suffered significant losses from operations, requires immediate 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 Quantech's ability to continue as a going concern. Results of Operations Quantech has incurred a net loss of $23,585,378 from September 30, 1991 (date of inception) through September 30, 1999 due to expenses related to formation and operation of Quantech's predecessor, Spectrum Diagnostics Inc. ("SDS") in Italy, continuing costs of raising capital, normal expenses of operating over an extended period of time, funds applied to research and development, royalty payments related to the SPR technology, losses due to expenses of SDS and interest on borrowed funds. In addition, an investment of $3,356,629 was made when Quantech purchased the exclusive rights to the SPR technology. General and administration expenses increased to $601,335 for the three months ended September 30, 1999 from $306,828 for the same period in 1998 primarily due to market research expenses including fees paid to consultants and research firms and costs to attend industry trade shows. We expect general and administrative expenses to increase in the future as we complete development of our system, prepare for market launch and begin to manufacture and distribute our products. Quantech will also begin to incur increasing sales and marketing expenses. Research and development costs increased to $591,454 for the three months ended September 30, 1999 from $528,111 for the same period in 1998 primarily due to increased internal development work. We expect R&D spending to significantly increase as we complete the commercial development of our system, conduct additional FDA work, and begin to establish higher volume manufacturing capabilities. Minimum royalty expense of $37,500 was unchanged for the three months ended September 30, 1999 compared to the same period in 1998. We will continue to accrue royalty expense of $37,500 per quarter until the final minimum payment is made in December 1999. In the future we expect to incur additional royalty expense when royalties based on revenues exceed minimum payments (see Notes to Financial Statements, Note 2 - License Agreement). Interest expense decreased to $9,608 for the quarter ended September 30, 1999 from $671,532 in the same period in 1998 as a result of reduced debt. Interest expense is expected to remain flat for the remainder of the fiscal year as Quantech does not anticipate any debt other than borrowing up to $750,000 from its bank credit facility. For the three months ended September 30, 1999 Quantech had a loss of $1,238,514 as compared to $1,543,318 for the same period in 1998 primarily due to lower interest expense partially offset by higher operating expenses. The timetable for submitting additional tests to the FDA and introduction of Quantech's system to the market will be influenced by Quantech's ability to obtain further funding, enter into strategic relationships, complete commercial prototype development of its system and develop further tests, and delays it may encounter with the FDA in its review of Quantech's tests and system. There can be no assurance that Quantech will be able to obtain the required funding, enter into any strategic agreements or ultimately complete its commercial system. 10 Liquidity and Capital Resources From inception to September 30, 1999, Quantech has raised approximately $22,200,000 through a combination of public stock sales, private stock sales and debt obligations. Quantech began offering for sale shares of Series B Preferred Stock in May 1999, and amended the provisions of such stock in October 1999. The shares are priced at $1.00 per share and each share is convertible into one share of common stock. In September 1999, Quantech received $500,000 pursuant to the exercise of a warrant for 454,545 shares of common stock. Quantech has minimal cash on hand and requires immediate proceeds from the sale of additional Series B Preferred Stock to allow it to maintain operations. Quantech is currently trying to raise $1 million through the sale of Series B Preferred Stock, which funds if raised in total will allow it to operate through February 2000. Additional financing of approximately $10 million will be needed to develop and submit to the FDA additional tests, complete clinical evaluation of the system, establish manufacturing capabilities and prepare for sales of the system. Quantech is currently reviewing multiple avenues of future funding including private sale of equity or debt with equity features or arrangements with strategic partners. Quantech does not have any commitments for any such financing and there can be no assurance that Quantech will obtain additional capital when needed or that additional capital will not have a dilutive effect on current stockholders. See "Cautionary Statements -- We need additional cash and will require at least $10 million in additional financing to complete commercial development of our system and have no commitment to receive any additional significant funding." Although Quantech has a limited lending arrangement with its bank to a maximum of $750,000, all of which credit line will be used by the end of calendar 1999, it does not anticipate receiving any additional significant funding from commercial lenders. Quantech incurred capital expenditures of $31,766 in the three month period ended September 30, 1999. Quantech anticipates significant capital expenditures in the future for laboratory and production equipment and office expansion as Quantech nears product introduction. The timing and amount of such expenditures will be governed by Quantech's development and market introduction schedules which are subject to change due to a number of factors including development delays, FDA approval and availability of future financing. As of November 10, 1999 Quantech had 3,538,052 shares of common stock outstanding. It also had options and warrants outstanding to purchase an additional 5,372,445 shares at exercise prices from $0.75 to $14.40, and Series A and B Preferred Stock convertible into 7,863,855 shares of common stock. Cautionary Statements Quantech wishes to caution investors that the following important factors, among others, in some cases have affected, and in the future could affect, Quantech'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 Quantech. We immediately need additional cash and will require at least $10 million in additional financing to complete commercial development of our system and have no commitment to receive any additional significant funding. Quantech does not have sufficient funds to remain in operation, or complete commercial development or commence production and sales of its system. Quantech has minimal cash on hand and no more availability on its bank credit facility. Quantech must immediately complete the sale of its Series B convertible preferred stock offering for $1 million to maintain current operations and continue operations through February 2000. Additional financing of at least $10 million of investment capital, funding by strategic partner(s) or licensing revenues will be needed for the following: to develop and submit to the FDA additional tests, complete clinical evaluation of the system, establish manufacturing capabilities and prepare for sales of the system. Quantech does not have any commitments for any such additional financing and does not anticipate receiving any additional significant funding from commercial lenders. 11 There can be no assurance that any such additional financing can be obtained on favorable terms, if at all. Any additional equity financing will result in dilution to Quantech stockholders. "Going concern" statement in auditor's report may make it difficult to raise new capital. Quantech has not had any significant revenues to date. As of June 30, 1999 and September 30, 1999, we had accumulated deficits of $22,727,284 and $24,090,269, respectively. The report of the independent auditors on Quantech's financial statements for the year ended June 30, 1999, includes an explanatory paragraph relating to the uncertainty of Quantech's ability to continue as a going concern, which may make it more difficult for Quantech to raise additional capital. Failure to complete development of the system on the current timetable and budget would increase the amount of additional financing required and might make it impossible for Quantech to continue operations. Components of the system are under various stages of development. Until system development is completed and cleared through the FDA, there can be no assurance that the system will be finished according to our current development timetable and budget. Failure to timely finish on budget will require Quantech to seek funding greater than currently anticipated and make it more difficult to raise the additional funding. Additionally, the final price that we will need to charge to cover the costs of the instrument and the test cartridges cannot be determined until development is complete and FDA clearances have been obtained. If Quantech cannot receive FDA approval and offer the system with certain required features at a cost acceptable to potential customers, it will be impossible for Quantech to continue operations. Year 2000 Compliance We believe our internal information and non-information systems are year 2000 compliant. Quantech is in a stage of development of its products at a time when awareness of year 2000 issues allows it to build year 2000 compliance into its products and operations. We believe that any existing suppliers to Quantech who are lost due to year 2000 problems could be replaced at our current stage of development without any serious interruption to our business or any material adverse effect on our operations or financial condition. We are diligently ascertaining at each step of development that our products are compliant and are in the process of contacting key suppliers to address their exposure to year 2000 related risks. We have, therefore, not developed any contingency plans relating to year 2000 issues and have not budgeted any funds for year 2000 issues. Although we believe that our systems are year 2000 compliant, unanticipated year 2000 problems may arise which, depending on the nature and magnitude of the problem, could adversely affect our business. Furthermore, year 2000 problems involving third parties may have a negative impact on our suppliers and potential customers, the general economy or the ability of businesses to receive essential services such as telecommunications and banking. Any such occurrence could adversely affect our business. Other Factors As described in Quantech's Form 10-KSB for the year ended June 30, 1999 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. 12 PART II OTHER INFORMATION Item 1. Legal Proceedings Not Applicable Item 2. Changes in Securities During September 1999, Quantech issued 454,545 shares of common stock pursuant to the exercise of a warrant to an accredited investor. The sale of such shares was deemed to be exempt from registration under Section 4(2) of the Securities Act of 1933. The purchaser acquired these securities for its own account and not with a view to any distribution thereof to the public. Item 3. Defaults upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on 8-K a. Exhibits - 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: November 15, 1999 Chief Financial Officer 13 EXHIBIT INDEX QUANTECH LTD. FORM 10-QSB for Quarter Ended September 30, 1999 Exhibit Number Description - -------------- --------------------------------------------------------- 3 Articles of Incorporation as amended to date 10.1 Amendment dated November 4, 1999 to December 16, 1997 and June 29, 1998 License Agreements with The Perkin-Elmer Corporation 27 Financial Data Schedule (filed in electronic format only) EX-3 2 ARTICLES OF INCORPORATION AS AMENDED TO DATE 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 STATEMENT OF DESIGNATION OF SHARES OF QUANTECH LTD. I hereby certify that the resolutions set forth on Exhibit A attached hereto were adopted by written action of the Board of Directors of QUANTECH LTD. on May 19, 1999. I certify that I am authorized to execute this Statement and I further certify that I understand that by signing this Statement I am subject to the penalties of perjury as set forth in Section 609.48 as if I had signed this Statement under oath. /s/ Gregory G. Freitag Gregory G. Freitag, Chief Operating Officer Designation of Series B Convertible Preferred Stock WHEREAS, the corporation's current authorized capitalization consists of 50,000,000 authorized shares of Common Stock, 2,500,000 authorized shares of Series A Preferred Stock and 22,500,000 authorized but undesignated shares; and WHEREAS, the Board of Directors deems it advisable to establish an additional class of shares from the 22,500,000 authorized but undesignated shares; NOW, THEREFORE, RESOLVED, that of the 22,500,000 undesignated shares which the corporation is authorized to issue under its Articles of Incorporation, 2,000,000 are hereby designated as shares of Series B Convertible Preferred Stock (the "Series B Stock"), with a par value of $0.01 per share solely for purposes of a statute or regulation imposing a tax or fee based upon the capitalization of the corporation. FURTHER RESOLVED, that the rights and preferences of the Series B Stock shall be as follows: 1. Dividends. In the event that the corporation declares and pays any dividends in cash with respect to Common Stock, the holder of a share of Series B Stock will be entitled to receive a dividend per share equal to the dividend that would have been otherwise payable with respect to such share if it had been converted into shares of Common Stock prior to the record date of such dividend. 2. Voting. Each outstanding share of Series B Stock shall entitle its holder to that number of votes on all matters submitted to the stockholders that is equal to the number of shares of Common Stock into which such holder's shares of Series B Stock are then convertible, as hereinafter provided (except that shares of Series B Stock shall have class voting rights as provided in paragraph 3 below and as otherwise now or hereafter required by agreement or law). 3. Additional Class Votes by Series B Stock. Without the affirmative vote or written consent of the holders (acting together as a class) of at least a majority of the shares of Series B Stock at the time outstanding, the corporation shall not: a. amend the Articles of Incorporation of the corporation in any respect, including without limitation any certificate or designation relating to the Series B Stock, so as to alter any existing provision relating to Series B Stock or the holders thereof or waive any of the rights granted to the holders of the Series B Stock by the Articles of Incorporation of the corporation; or b. increase the authorized number of shares of Series B Stock; or c. authorize or issue any shares of capital stock having priority or preference over, or on parity with, Series B Stock as to dividends or distributions in the event of the liquidation, dissolution or winding up of the corporation, provided that such prohibition shall not prevent the corporation from issuing any shares which may receive distributions in such events on a pari passu basis prorated, in the event assets are insufficient to pay the original purchase price of all such securities, to the original purchase price of each; or d. declare or pay any dividend or make any other distribution on any shares of capital stock of the corporation at any time created and issued ranking junior to Series B Stock with respect to the rights to the distribution of assets upon liquidation, dissolution or winding up of the corporation, other than distributions payable solely in shares of junior stock. 4. Liquidation. a. In the event of the liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, the holders of the shares of Series B Stock shall be entitled, after the payment of the preferential amount required to be paid to the Series A Preferred Stock, including the participation right of certain lenders/guarantors as provided in subparagraph (d) of the Designation of Series A Preferred Stock of this corporation, to receive in cash, out of the assets of the corporation, before any payment shall be made or any assets distributed to the holders of Common Stock with respect to the payment of dividends or upon dissolution or liquidation of the corporation, an amount equal to the sum of (i) $1.50 per share ("Original Purchase Price") (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected), and (ii) all dividends unpaid and accumulated or accrued thereon to the date of such distribution, if any. If, upon any liquidation or dissolution of this corporation, the assets of the corporation shall be insufficient to pay such amount, the holders of such shares shall share pro rata in any such distribution in proportion to the full amounts to which they would otherwise be respectively entitled. b. After the payment of all preferential amounts required to be paid pursuant to subparagraph a above, any remaining assets and funds of the corporation available for distribution to its stockholders upon the liquidation, dissolution or winding up of the corporation shall be distributed ratably among the holders of Common Stock. c. The merger or consolidation of the corporation into or with another corporation which results in the exchange of outstanding shares of the corporation for securities or other consideration issued or paid or caused to be issued or paid by such other corporation or an affiliate thereof (except if such merger or consolidation does not result in the transfer of more than 60% of the voting securities of the corporation), change in control of more than 60% of the voting securities of the corporation or the sale of all or substantially all the assets of the corporation, shall be deemed to be a liquidation, dissolution or winding up of the corporation for purposes of this paragraph, unless the holders of a majority of the Series B Stock then outstanding vote otherwise. The amount deemed distributed to the holders of Series B Stock upon any such merger or consolidation shall be the cash or the value of the property, rights and/or securities distributed to such holders by the acquiring person, firm or other entity. The value of such property, rights or other securities shall be determined in good faith by the Board of Directors of the corporation. 5. Conversion Right. At the option of the holders thereof, the shares of Series B Stock shall be convertible, at the office of the corporation (or at such other office or offices, if any, as the Board of Directors may designate), into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100th of a share) of Common Stock of the corporation, at the conversion price, determined as hereinafter provided, in effect at the time of conversion. The price at which shares of Common Stock shall be delivered upon conversion of shares of Series B Stock (herein called the "conversion price") shall be initially $1.50 per share of Common Stock (i.e., at an initial conversion rate of one share of Common Stock for each share of Series B Stock), provided, however, that such initial conversion price shall be subject to adjustment from time to time in certain instances as hereinafter provided. The following provisions shall govern such right of conversion: a. In order to convert shares of Series B Stock into shares of Common Stock of the corporation, the holder thereof shall surrender at any office hereinabove mentioned the certificate or certificates therefor, duly endorsed to the corporation or in blank, and give written notice to the corporation at such office that such holder elects to convert such shares. Shares of Series B Stock shall be deemed to have been converted immediately prior to the close of business on the day of the surrender of such shares for conversion as herein provided, and the person entitled to receive the shares of Common Stock of the corporation issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock at such time. As promptly as practicable on or after the conversion date, the corporation shall issue and deliver or cause to be issued and delivered at such office a certificate or certificates for the number of shares of Common Stock of the corporation issuable upon such conversion. b. The conversion price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the conversion price each holder of shares of Series B Stock shall thereafter be entitled to receive the number of shares of Common Stock of the corporation obtained by multiplying the conversion price in effect immediately prior to such adjustment by the number of shares issuable pursuant to conversion immediately prior to such adjustment and dividing the product thereof by the conversion price resulting from such adjustment. c. If in the next sale of securities by this corporation after the adoption of this Designation, excluding any sale pursuant to options, warrants or conversion rights outstanding as the date of adoption of this Designation, the price per share of Common Stock sold is less than $1.875, or if the security sold is not Common Stock but is convertible into or exercisable to purchase Common Stock at a conversion or exercise price of less than $1.875 per share, then the conversion price shall be reduced an amount equal to 80% of the price per share at which such security is sold, convertible or exercisable. No adjustment of the conversion price of the Series B Stock, however, shall be made in an amount less than 2% of such conversion price in effect on the date of such adjustment, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any such adjustment so carried forward, shall be an amount equal to or greater than 4% of the conversion price of the Series B Stock then in effect. The holders of at least a majority of the Series B Stock then outstanding may elect to waive the application of the provisions of this paragraph 5 with respect to any issue or sale by the corporation of shares of its Common Stock for a consideration per share less than the conversion price of the Series B Stock in effect immediately prior to the time of such issue or sale. For the purposes of this paragraph 5, the following provisions (i) to (v), inclusive, shall also be applicable: (i) In the event the corporation shall grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, (a) Common Stock or (b) any obligations or any shares of stock of the corporation which are convertible into, or exchangeable for, Common Stock (any of such obligations or shares of stock being hereinafter called "Convertible Securities") whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount, if any, received or receivable by the corporation as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the corporation upon the exercise of such rights or options, plus, in the case of such rights or options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue of such Convertible Securities and upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the conversion price of the Series B Stock in effect immediately prior to the time of the granting of such rights or options, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to have been issued for such price per share. Except as provided in subparagraph d below, no further adjustments of the conversion price of the Series B Stock shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. (ii) In case the corporation shall issue or sell (whether directly or by assumption in a merger or otherwise) any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (x) the total amount received or receivable by the corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the corporation upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the conversion price of the Series B Stock in effect immediately prior to the time of such issue or at the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided that (a) except as provided in subparagraph d below, no further adjustments of the conversion price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the conversion price of the Series B Stock have been or are to be made pursuant to other provisions of this paragraph 5, no further adjustment of the conversion price shall be made by reason of such issue or sale. (iii) In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the corporation therefor, without deducting therefrom any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed by the corporation in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the corporation shall be deemed to be the fair value of such consideration as determined by the Board of Directors of the corporation, without deducting therefrom any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed by the corporation in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase such Common Stock or Convertible Securities shall be issued in connection with any merger or consolidation in which the corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value as determined by the Board of Directors of the corporation of such portion of the assets and business of the non-surviving corporation or corporations as such Board shall determine to be attributable to such Common Stock, Convertible Securities, rights or options, as the case may be. In the event of any consolidation or merger of the corporation in which the corporation is not the surviving corporation or in the event of any sale of all or substantially all of the assets of the corporation for stock or other securities of any other corporation, the corporation shall be deemed to have issued a number of shares of its Common Stock for stock or securities of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of such stock or securities of the other corporation, and if any such calculation results in adjustment of the conversion price of the Series B Stock, the determination of the number of shares of Common Stock issuable upon conversion immediately prior to such merger, conversion or sale, for purposes of subparagraph d below, shall be made after giving effect to such adjustment of the conversion price. (iv) In case the corporation shall take a record of the holders of its Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or in any rights or options to purchase any Common Stock or Convertible Securities, or (b) to subscribe for or purchase Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such rights of subscription or purchase, as the case may be. b. In case the corporation shall (i) declare a dividend upon the Common Stock payable in Common Stock (other than a dividend declared to effect a subdivision of the outstanding shares of Common Stock, as described in subparagraph e below) or Convertible Securities, or in any rights or options to purchase Common Stock or Convertible Securities, or (ii) declare any other dividend or make any other distribution upon the Common Stock payable otherwise than out of earnings or earned surplus, then thereafter each holder of shares of Series B Stock upon the conversion thereof will be entitled to receive the number of shares of Common Stock into which such shares of Series B Stock have been converted, and, in addition and without payment therefor, each dividend described in clause (i) above and each dividend or distribution described in clause (ii) above which such holder would have received by way of dividends or distributions if continuously held since such holder became the record holder of such shares of Series B Stock such holder (i) had been the record holder of the number of shares of Common Stock then received, and (ii) had retained all dividends or distributions in stock or securities (including Common Stock or Convertible Securities, and any rights or options to purchase any Common Stock or Convertible Securities) payable in respect of such Common Stock or in respect of any stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Stock. For the purposes of the foregoing, a dividend or distribution other than in cash shall be considered payable out of earnings or earned surplus only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend or distribution as determined by the Board of Directors of the corporation. c. In case the corporation shall at any time split or subdivide its outstanding shares of Common Stock into a greater number of shares, the conversion price of Series B Stock in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the corporation shall be combined into a smaller number of shares, the conversion price of Series B Stock in effect immediately prior to such combination shall be proportionately increased. d. If (i) the purchase price provided for in any right or option referred to in clause (i) of subparagraph a, or (ii) the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in clause (i) or clause (ii) of subparagraph a, or (iii) the rate at which any Convertible Securities referred to in clause (i) or clause (ii) of subparagraph a are convertible into or exchangeable for Common Stock, shall change at any time (other than under or by reason of provisions designed to protect against dilution), the conversion price of the Series B Stock then in effect hereunder shall forthwith be increased or decreased to such conversion price as would have obtained had the adjustments made upon the issuance of such rights, options or Convertible Securities been made upon the basis of (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such options or rights or upon the conversion or exchange of such Convertible Securities, and the total consideration received therefor, and (b) the issuance at the time of such change of any such options, rights, or Convertible Securities then still outstanding for the consideration, if any, received by the corporation therefor and to be received on the basis of such changed price; and on the expiration of any such option or right or the termination of any such right to convert or exchange such Convertible Securities, the conversion price of the Series B Stock then in effect hereunder shall forthwith be increased to such conversion price as would have obtained had the adjustments made upon the issuance of such rights or options or Convertible Securities been made upon the basis of the issuance of the shares of Common Stock theretofore actually delivered (and the total consideration received therefor) upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities. If the purchase price provided for in any right or option referred to in clause (i) of subparagraph a, or the rate at which any Convertible Securities referred to in clause (i) or clause (ii) of subparagraph a are convertible into or exchangeable for Common Stock, shall decrease at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Security, the conversion price of the Series B Stock then in effect hereunder shall forthwith be decreased to such conversion price as would have obtained had the adjustments made upon the issuance of such right, option or Convertible Security been made upon the basis of the issuance of (and the total consideration received for) the shares of Common Stock delivered as aforesaid. e. The corporation shall at all times insure and keep available out of its authorized but unissued shares of Common Stock, for the purpose of effecting the conversion of Series B Stock, the full number of shares of Common Stock then deliverable upon the conversion of all shares of Series B Stock then outstanding. f. No fractional shares shall be issued upon conversion of the Series B Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share (with one-half being rounded to the upward). Such conversion shall be determined on the basis of the total number of shares of Series B Stock the holder is at the time converting into Common Stock and the aggregate number of shares of Common Stock issuable upon such conversion. 6. Mandatory Conversion. The Series B Stock shall automatically be converted into shares of Common Stock of the corporation, without any act by the corporation or the holders of the Series B Stock, (i) concurrently with the closing of an offering of the corporation's equity in which the aggregate offering price of the securities sold for cash by the corporation in the offering is at least $5,000,000, or (ii) at such time as at least 50% of the number of shares of Series B Stock have been converted into Common Stock. As used herein, the term "closing" shall mean the delivery by the corporation of certificates representing the securities of the corporation offered against delivery to the corporation of payment therefor. Any conversion of Series B Stock occurring on the date of the closing of a financing by the corporation satisfying the conditions set forth above shall be deemed to be a conversion pursuant to the terms of this paragraph 6. Each holder of a share of Series B Stock converted pursuant to the preceding paragraph shall be entitled to receive the full number of shares of Common Stock into which such share of Series B Stock held by such holder could be converted if such holder had exercised its conversion right at the time of closing of such financing. 7. Status of Converted Stock. In the event any shares of Series B Stock shall be converted by the corporation, the shares so converted shall not be reissuable by the corporation as Series B Stock but shall be designated authorized shares of Common Stock and available for issuance by the corporation as Common Stock. At such time as all outstanding shares of Series B Stock have been converted, (i) any theretofore authorized but unissued shares of such series shall return to the status of undesignated shares of the corporation, (ii) this Statement of Designation shall be deemed amended to eliminate all authorized Series B Stock and the terms and provisions thereof, and (iii) the Board of Directors and officers of the corporation are authorized to take such action and execute and file such instruments as may be necessary or appropriate to effect such amendment. STATEMENT OF DESIGNATION OF SHARES OF QUANTECH LTD. I hereby certify that the resolutions set forth on Exhibit A attached hereto were adopted by written action of the Board of Directors of QUANTECH LTD. on October 11, 1999. I certify that I am authorized to execute this Statement and I further certify that I understand that by signing this Statement I am subject to the penalties of perjury as set forth in Section 609.48 as if I had signed this Statement under oath. /s/ Gregory G. Freitag Gregory G. Freitag, Chief Operating Officer STATEMENT OF DESIGNATION OF SERIES B CONVERTIBLE PREFERRED STOCK WHEREAS, the corporation's current authorized capitalization consists of 50,000,000 authorized shares of Common Stock, 2,500,000 authorized shares of Series A Preferred Stock and 22,500,000 authorized but undesignated shares; and WHEREAS, the Board of Directors deems it advisable to establish an additional class of shares from the 22,500,000 authorized but undesignated shares; NOW, THEREFORE, RESOLVED, that of the 22,500,000 undesignated shares which the corporation is authorized to issue under its Articles of Incorporation, 3,000,000 are hereby designated as shares of Series B Convertible Preferred Stock (the "Series B Stock"), with a par value of $0.01 per share solely for purposes of a statute or regulation imposing a tax or fee based upon the capitalization of the corporation. FURTHER RESOLVED, that the rights and preferences of the Series B Stock shall be as follows: 1. Dividends. In the event that the corporation declares and pays any dividends in cash with respect to Common Stock, the holder of a share of Series B Stock will be entitled to receive a dividend per share equal to the dividend that would have been otherwise payable with respect to such share if it had been converted into shares of Common Stock prior to the record date of such dividend. 2. Voting. Each outstanding share of Series B Stock shall entitle its holder to that number of votes on all matters submitted to the stockholders that is equal to the number of shares of Common Stock into which such holder's shares of Series B Stock are then convertible, as hereinafter provided (except that shares of Series B Stock shall have class voting rights as provided in paragraph 3 below and as otherwise now or hereafter required by agreement or law). 3. Additional Class Votes by Series B Stock. Without the affirmative vote or written consent of the holders (acting together as a class) of at least a majority of the shares of Series B Stock at the time outstanding, the corporation shall not: a. amend the Articles of Incorporation of the corporation in any respect, including without limitation any certificate or designation relating to the Series B Stock, so as to alter any existing provision relating to Series B Stock or the holders thereof or waive any of the rights granted to the holders of the Series B Stock by the Articles of Incorporation of the corporation; or b. increase the authorized number of shares of Series B Stock; or c. authorize or issue any shares of capital stock having priority or preference over, or on parity with, Series B Stock as to dividends or distributions in the event of the liquidation, dissolution or winding up of the corporation, provided that such prohibition shall not prevent the corporation from issuing any shares which may receive distributions in such events on a pari passu basis prorated, in the event assets are insufficient to pay the original purchase price of all such securities, to the original purchase price of each; or d. declare or pay any dividend or make any other distribution on any shares of capital stock of the corporation at any time created and issued ranking junior to Series B Stock with respect to the rights to the distribution of assets upon liquidation, dissolution or winding up of the corporation, other than distributions payable solely in shares of junior stock. 4. Liquidation. a. In the event of the liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, the holders of the shares of Series B Stock shall be entitled, after the payment of the preferential amount required to be paid to the Series A Preferred Stock, including the participation right of certain lenders/guarantors as provided in subparagraph (d) of the Designation of Series A Preferred Stock of this corporation, to receive in cash, out of the assets of the corporation, before any payment shall be made or any assets distributed to the holders of Common Stock with respect to the payment of dividends or upon dissolution or liquidation of the corporation, an amount equal to the sum of (i) $1.00 per share ("Original Purchase Price") (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected), and (ii) all dividends unpaid and accumulated or accrued thereon to the date of such distribution, if any. If, upon any liquidation or dissolution of this corporation, the assets of the corporation shall be insufficient to pay such amount, the holders of such shares shall share pro rata in any such distribution in proportion to the full amounts to which they would otherwise be respectively entitled. b. After the payment of all preferential amounts required to be paid pursuant to subparagraph a above, any remaining assets and funds of the corporation available for distribution to its stockholders upon the liquidation, dissolution or winding up of the corporation shall be distributed ratably among the holders of Common Stock. c. The merger or consolidation of the corporation into or with another corporation which results in the exchange of outstanding shares of the corporation for securities or other consideration issued or paid or caused to be issued or paid by such other corporation or an affiliate thereof (except if such merger or consolidation does not result in the transfer of more than 60% of the voting securities of the corporation), change in control of more than 60% of the voting securities of the corporation or the sale of all or substantially all the assets of the corporation, shall be deemed to be a liquidation, dissolution or winding up of the corporation for purposes of this paragraph, unless the holders of a majority of the Series B Stock then outstanding vote otherwise. The amount deemed distributed to the holders of Series B Stock upon any such merger or consolidation shall be the cash or the value of the property, rights and/or securities distributed to such holders by the acquiring person, firm or other entity. The value of such property, rights or other securities shall be determined in good faith by the Board of Directors of the corporation. 5. Conversion Right. At the option of the holders thereof, the shares of Series B Stock shall be convertible, at the office of the corporation (or at such other office or offices, if any, as the Board of Directors may designate), into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100th of a share) of Common Stock of the corporation, at the conversion price, determined as hereinafter provided, in effect at the time of conversion. The price at which shares of Common Stock shall be delivered upon conversion of shares of Series B Stock (herein called the "conversion price") shall be initially $1.00 per share of Common Stock (i.e., at an initial conversion rate of one share of Common Stock for each share of Series B Stock), provided, however, that such initial conversion price shall be subject to adjustment from time to time in certain instances as hereinafter provided. The following provisions shall govern such right of conversion: a. In order to convert shares of Series B Stock into shares of Common Stock of the corporation, the holder thereof shall surrender at any office hereinabove mentioned the certificate or certificates therefor, duly endorsed to the corporation or in blank, and give written notice to the corporation at such office that such holder elects to convert such shares. Shares of Series B Stock shall be deemed to have been converted immediately prior to the close of business on the day of the surrender of such shares for conversion as herein provided, and the person entitled to receive the shares of Common Stock of the corporation issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock at such time. As promptly as practicable on or after the conversion date, the corporation shall issue and deliver or cause to be issued and delivered at such office a certificate or certificates for the number of shares of Common Stock of the corporation issuable upon such conversion. b. The conversion price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the conversion price each holder of shares of Series B Stock shall thereafter be entitled to receive the number of shares of Common Stock of the corporation obtained by multiplying the conversion price in effect immediately prior to such adjustment by the number of shares issuable pursuant to conversion immediately prior to such adjustment and dividing the product thereof by the conversion price resulting from such adjustment. c. If in the next sale of securities by this corporation after the adoption of this Designation, excluding any sale pursuant to options, warrants or conversion rights outstanding as of the date of adoption of this Designation, the price per share of Common Stock sold is less than $1.00, or if the security sold is not Common Stock but is convertible into or exercisable to purchase Common Stock at a conversion or exercise price of less than $1.00 per share, then the conversion price shall be reduced to an amount equal to the price per share at which such security is sold, convertible or exercisable. No adjustment of the conversion price of the Series B Stock, however, shall be made in an amount less than 2% of such conversion price in effect on the date of such adjustment, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any such adjustment so carried forward, shall be an amount equal to or greater than 4% of the conversion price of the Series B Stock then in effect. The holders of at least a majority of the Series B Stock then outstanding may elect to waive the application of the provisions of this paragraph 5 with respect to any issue or sale by the corporation of shares of its Common Stock for a consideration per share less than the conversion price of the Series B Stock in effect immediately prior to the time of such issue or sale. For the purposes of this paragraph 5, the following provisions (i) to (v), inclusive, shall also be applicable: (i) In the event the corporation shall grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, (a) Common Stock or (b) any obligations or any shares of stock of the corporation which are convertible into, or exchangeable for, Common Stock (any of such obligations or shares of stock being hereinafter called "Convertible Securities") whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount, if any, received or receivable by the corporation as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the corporation upon the exercise of such rights or options, plus, in the case of such rights or options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue of such Convertible Securities and upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the conversion price of the Series B Stock in effect immediately prior to the time of the granting of such rights or options, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to have been issued for such price per share. Except as provided in subparagraph (d) below, no further adjustments of the conversion price of the Series B Stock shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. (ii) In case the corporation shall issue or sell (whether directly or by assumption in a merger or otherwise) any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (x) the total amount received or receivable by the corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the corporation upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the conversion price of the Series B Stock in effect immediately prior to the time of such issue or at the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided that (a) except as provided in subparagraph d below, no further adjustments of the conversion price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the conversion price of the Series B Stock have been or are to be made pursuant to other provisions of this paragraph 5, no further adjustment of the conversion price shall be made by reason of such issue or sale. (iii) In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the corporation therefor, without deducting therefrom any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed by the corporation in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the corporation shall be deemed to be the fair value of such consideration as determined by the Board of Directors of the corporation, without deducting therefrom any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed by the corporation in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase such Common Stock or Convertible Securities shall be issued in connection with any merger or consolidation in which the corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value as determined by the Board of Directors of the corporation of such portion of the assets and business of the non-surviving corporation or corporations as such Board shall determine to be attributable to such Common Stock, Convertible Securities, rights or options, as the case may be. In the event of any consolidation or merger of the corporation in which the corporation is not the surviving corporation or in the event of any sale of all or substantially all of the assets of the corporation for stock or other securities of any other corporation, the corporation shall be deemed to have issued a number of shares of its Common Stock for stock or securities of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of such stock or securities of the other corporation, and if any such calculation results in adjustment of the conversion price of the Series B Stock, the determination of the number of shares of Common Stock issuable upon conversion immediately prior to such merger, conversion or sale, for purposes of subparagraph d below, shall be made after giving effect to such adjustment of the conversion price. (iv) In case the corporation shall take a record of the holders of its Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or in any rights or options to purchase any Common Stock or Convertible Securities, or (b) to subscribe for or purchase Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such rights of subscription or purchase, as the case may be. b. In case the corporation shall (i) declare a dividend upon the Common Stock payable in Common Stock (other than a dividend declared to effect a subdivision of the outstanding shares of Common Stock, as described in subparagraph e below) or Convertible Securities, or in any rights or options to purchase Common Stock or Convertible Securities, or (ii) declare any other dividend or make any other distribution upon the Common Stock payable otherwise than out of earnings or earned surplus, then thereafter each holder of shares of Series B Stock upon the conversion thereof will be entitled to receive the number of shares of Common Stock into which such shares of Series B Stock have been converted, and, in addition and without payment therefor, each dividend described in clause (i) above and each dividend or distribution described in clause (ii) above which such holder would have received by way of dividends or distributions if continuously held since such holder became the record holder of such shares of Series B Stock such holder (i) had been the record holder of the number of shares of Common Stock then received, and (ii) had retained all dividends or distributions in stock or securities (including Common Stock or Convertible Securities, and any rights or options to purchase any Common Stock or Convertible Securities) payable in respect of such Common Stock or in respect of any stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Stock. For the purposes of the foregoing, a dividend or distribution other than in cash shall be considered payable out of earnings or earned surplus only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend or distribution as determined by the Board of Directors of the corporation. c. In case the corporation shall at any time split or subdivide its outstanding shares of Common Stock into a greater number of shares, the conversion price of Series B Stock in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the corporation shall be combined into a smaller number of shares, the conversion price of Series B Stock in effect immediately prior to such combination shall be proportionately increased. d. If (i) the purchase price provided for in any right or option referred to in clause (i) of subparagraph a, or (ii) the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in clause (i) or clause (ii) of subparagraph a, or (iii) the rate at which any Convertible Securities referred to in clause (i) or clause (ii) of subparagraph a are convertible into or exchangeable for Common Stock, shall change at any time (other than under or by reason of provisions designed to protect against dilution), the conversion price of the Series B Stock then in effect hereunder shall forthwith be increased or decreased to such conversion price as would have obtained had the adjustments made upon the issuance of such rights, options or Convertible Securities been made upon the basis of (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such options or rights or upon the conversion or exchange of such Convertible Securities, and the total consideration received therefor, and (b) the issuance at the time of such change of any such options, rights, or Convertible Securities then still outstanding for the consideration, if any, received by the corporation therefor and to be received on the basis of such changed price; and on the expiration of any such option or right or the termination of any such right to convert or exchange such Convertible Securities, the conversion price of the Series B Stock then in effect hereunder shall forthwith be increased to such conversion price as would have obtained had the adjustments made upon the issuance of such rights or options or Convertible Securities been made upon the basis of the issuance of the shares of Common Stock theretofore actually delivered (and the total consideration received therefor) upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities. If the purchase price provided for in any right or option referred to in clause (i) of subparagraph a, or the rate at which any Convertible Securities referred to in clause (i) or clause (ii) of subparagraph a are convertible into or exchangeable for Common Stock, shall decrease at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Security, the conversion price of the Series B Stock then in effect hereunder shall forthwith be decreased to such conversion price as would have obtained had the adjustments made upon the issuance of such right, option or Convertible Security been made upon the basis of the issuance of (and the total consideration received for) the shares of Common Stock delivered as aforesaid. e. The corporation shall at all times insure and keep available out of its authorized but unissued shares of Common Stock, for the purpose of effecting the conversion of Series B Stock, the full number of shares of Common Stock then deliverable upon the conversion of all shares of Series B Stock then outstanding. f. No fractional shares shall be issued upon conversion of the Series B Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share (with one-half being rounded to the upward). Such conversion shall be determined on the basis of the total number of shares of Series B Stock the holder is at the time converting into Common Stock and the aggregate number of shares of Common Stock issuable upon such conversion. 6. Mandatory Conversion. The Series B Stock shall automatically be converted into shares of Common Stock of the corporation, without any act by the corporation or the holders of the Series B Stock, (i) concurrently with the closing of an offering of the corporation's equity in which the aggregate offering price of the securities sold for cash by the corporation in the offering is at least $5,000,000, or (ii) at such time as at least 50% of the number of shares of Series B Stock have been converted into Common Stock. As used herein, the term "closing" shall mean the delivery by the corporation of certificates representing the securities of the corporation offered against delivery to the corporation of payment therefor. Any conversion of Series B Stock occurring on the date of the closing of a financing by the corporation satisfying the conditions set forth above shall be deemed to be a conversion pursuant to the terms of this paragraph 6. Each holder of a share of Series B Stock converted pursuant to the preceding paragraph shall be entitled to receive the full number of shares of Common Stock into which such share of Series B Stock held by such holder could be converted if such holder had exercised its conversion right at the time of closing of such financing. 7. Status of Converted Stock. In the event any shares of Series B Stock shall be converted by the corporation, the shares so converted shall not be reissuable by the corporation as Series B Stock but shall be designated authorized shares of Common Stock and available for issuance by the corporation as Common Stock. At such time as all outstanding shares of Series B Stock have been converted, (i) any theretofore authorized but unissued shares of such series shall return to the status of undesignated shares of the corporation, (ii) this Statement of Designation shall be deemed amended to eliminate all authorized Series B Stock and the terms and provisions thereof, and (iii) the Board of Directors and officers of the corporation are authorized to take such action and execute and file such instruments as may be necessary or appropriate to effect such amendment. EX-10.1 3 AMENDMENT TO LEASES AMENDMENT TO LICENSE AGREEMENTS Effective Date: November 4, 1999 PARTIES: Quantech, Ltd. (herein called "Quantech") a Minnesota corporation 1419 Energy Park Drive Saint Paul, Minnesota 55108 The Perkin-Elmer Corporation (herein called "PE") a New York Corporation for its PE Biosystems Division 761 Main Avenue Norwalk, Connecticut 06589-0001 RECITALS: A. Quantech and PE are parties to (i) a certain agreement with an effective date of 16 December, 1997 (the "Quantech License Agreement"), pursuant to which, among other things, Quantech granted to PE a license under the Serono Technology and Quantech Intellectual Property and Quantech granted to PE a warrant to purchase 28,000,000 shares of Quantech Common Stock pursuant to a certain Warrant Agreement also dated December 16, 1998 (the "Warrant Agreement"), and (ii) the Perkin Elmer/Quantech License Agreement with an effective date of 29 June 1998, pursuant to which, among other things, PE granted a license to certain PE technology described in a patent application entitled "Surface Plasmon Array System" (the "PE License Agreement"). B. The parties desire to amend the Quantech License Agreement and the PE License Agreement as hereinafter set forth, and, for and in consideration of the mutual promises set forth herein, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. DEFINITIONS 1.1 Capitalized terms not defined herein shall have the definitions set forth in the Quantech License Agreement, or, in sections of this Agreement that amend the PE License Agreement, set forth in the PE License Agreement. 1.2 "Agreements" means the Quantech License Agreement and the PE License Agreement. 1 2. TERMINATION OF WARRANT AGREEMENT The Warrant Agreement be and hereby is terminated effective the date hereof, and is and shall be of no further force and effect. Accordingly, PE shall no longer have the right to purchase shares of stock of Quantech pursuant to the Warrant Agreement. 3. AMENDMENTS TO AGREEMENTS. The Agreements are hereby amended as follows: 3.1 Section 2.2 of the Quantech License Agreement is deleted in its entirety, so that the non-exclusive license granted to PE to Sell Licensed Products throughout the Territory for Nucleic Acid Diagnostics is terminated, effective the date of this Amendment to License Agreement. 3.2 Section 2.3 of the Quantech License Agreement is amended to delete the words "and the Non-exclusive PE License" from the second line of Section 2.3. 3.3 Section 1(d), entitled "Capitalization", of the Section of the Quantech License Agreement entitled "ADDITIONAL REPRESENTATIONS AND WARRANTIES OF QUANTECH, which appears after Section 12.14 of the Quantech License Agreement, is deleted in its entirety. 3.4 Section 5.2 of the Quantech License Agreement is amended to delete the forth and fifth sentences thereof; relating to the reduction of the royalty rate to 7% or 6% if Phases III and IV, respectively, are completed with PE's assistance. 3.5 Section 2.1 of the PE License Agreement is amended to delete the words ", but excluding Nucleic Acid Diagnostics" from the end of Section 2.1, so that the Quantech License will no longer exclude Nucleic Acid Diagnostics. 4. ADDITIONAL AGREEMENTS RELATING TO AGREEMENTS; LIMITED REVERSION OF RIGHTS. 4.1 The parties acknowledge and agree that, under Section 5.2 of the Quantech License Agreement, Phase II has been completed with PE's assistance, so that royalty rates under Section 5.2 of the Quantech License Agreement are currently 8%. 5. INSTRUMENTS AND SUPPORT. For and in consideration of the termination of the Warrant Agreement and the amendment of the Agreements as set forth herein, and for no other consideration: 5.1 Quantech hereby sells, assigns and transfers to PE all of its right, title an interest in and to the two Quantech SPR prototype instruments previously delivered to and currently in PE's possession, and all parts accessories and consumables associated therewith currently in PE's possession (collectively, the "Instruments"), free and clear of all liens, charges, encumbrances and 2 agreements. Quantech represents and warrants that it has good and marketable title to the Instruments, free and clear of all liens, charges, encumbrances and agreements. The instruments are transferred "as is,", "where is", without warranty of any kind. Warranties of fitness for a particular purpose and warranties of merchantibility are expressly disclaimed. 5.2 Quantech will supply to PE, during the one year period commencing July 1, 1999 and ending June 30, 2000: 5.2.1 50 gratings without gold coatings per month, unless requested otherwise by PE, delivered approximately at the middle of each month. 5.2.2 50 gratings with gold coatings, and assembled into flow cells if requested by PE, per month, unless requested otherwise by PE, delivered approximately at the middle of each month. 5.2.3 Up to five hours per month of a combination of telephone and on site technical support, provided that on site support will be provided in not less than two hour increments, and PE shall reimburse Quantech for reasonable travel and lodging approved in advance by PE. 5.2.4 Quantech will deliver the gratings identified above, except to the extent prevented by reasons of Act of Gods, strikes or other labor disputes, failure of suppliers to supply raw materials, or other causes beyond the reasonable control of Quantech (collectively, "Force Majeure Reasons). In the event Force Majeure Reasons prevent or delay delivery, Quantech will use reasonable efforts to mitigate or resolve the Force Majeure Reasons so that delivery, including delivery of past due gratings, may be accomplished at the earliest feasible time. If delivery is delayed for more than 30 days, PE may cancel an order without penalty. 6. AGREEMENTS OTHERWISE IN FULL FORCE AND EFFECT. Except as expressly set forth in this Amendment, the Agreements shall remain in full force and effect in accordance with their terms. IN WITNESS WHEREOF, each of the parties has caused this agreement to be executed in the manner appropriate to each, effective as of the date first above written Quantech, Ltd. The Perkin-Elmer Corporation By: /s/ Greg Freitag By: /s/ Joseph E. Malandrakis Name: Greg Freitag Name: Joseph E. Malandrakis Title: COO and CFO Title: President 3 EX-27 4 FDS FOR QTR ENDED SEPTEMBER 30, 1999
5 1 U.S. Dollars 3-MOS JUN-30-2000 JUL-01-1999 SEP-30-1999 1 500,692 0 0 0 0 565,794 474,274 (296,477) 3,084,159 1,329,414 0 5,046,634 1,272,818 17,242,817 (21,807,524) 3,084,159 0 0 0 0 0 0 9,608 (1,238,514) 0 (1,238,514) 0 0 0 (1,238,514) (0.47) (0.47)
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