<PAGE>
Exhibit 99.1
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTEG INCORPORATED (A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
Report of Independent Auditors.............................................1
Balance Sheets.............................................................2
Statements of Operations...................................................3
Statement of Changes in Shareholders' Equity (Deficiency)..................4
Statements of Cash Flows...................................................11
Notes to Financial Statements..............................................12
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
Integ Incorporated
We have audited the accompanying balance sheets of Integ Incorporated (a
development stage company) as of December 31, 1999 and 1998 and the related
statements of operations, changes in shareholders' equity (deficiency) and cash
flows for each of the three years in the period ended December 31, 1999, and for
the period from April 3, 1990 (inception) to December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Integ Incorporated at December
31, 1999 and 1998 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999, and for the period
from April 3, 1990 (inception) to December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
February 17, 2000
1
<PAGE>
Integ Incorporated
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30,
1998 1999 2000
------------ ------------ ------------
Unaudited
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,175,695 $ 2,953,270 $ 1,564,375
Prepaid expenses 132,229 82,755 --
Accounts receivable - related party -- 181,669 127,085
------------ ------------ ------------
Total current assets 11,307,924 3,217,694 1,691,460
Furniture and equipment 9,538,478 8,498,173 8,438,016
Less accumulated depreciation (2,715,684) (3,088,449) (3,571,626)
------------ ------------ ------------
6,822,794 5,409,724 4,866,390
Other assets 23,883 8,579 4,640
------------ ------------ ------------
Total assets $ 18,154,601 $ 8,635,997 $ 6,562,490
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 195,148 $ 18,334 $ 34,806
Accrued employee compensation and related expenses 726,077 436,570 188,792
Other accrued expenses 92,356 56,969 46,582
Notes payable -- -- 30,432
Current portion of capital lease obligations 145,761 14,178 --
Current portion of long-term debt 1,251,247 1,398,098 1,301,399
------------ ------------ ------------
Total current liabilities 2,410,589 1,924,149 1,602,011
------------ ------------ ------------
Long-term liabilities:
Capital lease obligations, less current portion 14,178 -- --
Long-term debt, less current portion 2,672,018 1,273,920 333,293
------------ ------------ ------------
Total long-term liabilities 2,686,196 1,273,920 333,293
------------ ------------ ------------
Shareholders' equity:
Preferred stock, Series B,
Authorized shares - 3,000,000,
Issued and outstanding shares - 1,771,236 at
June 30, 2000 -- -- 3,091,908
Common Stock, par value $.01 per share:
Authorized shares - 20,000,000
Issued and outstanding shares - 9,580,704 in 1998,
9,728,624 in 1999 and 9,859,078 in 2000 95,807 97,286 98,591
Additional paid-in capital 54,616,721 54,786,327 55,039,048
Deficit accumulated during the development stage (41,524,253) (49,368,631) (53,522,319)
------------ ------------ ------------
13,188,275 5,514,982 4,707,228
Deferred compensation (130,459) (77,054) (80,042)
------------ ------------ ------------
Total shareholders' equity 13,057,816 5,437,928 4,627,186
------------ ------------ ------------
Total liabilities and shareholders' equity $ 18,154,601 $ 8,635,997 $ 6,562,490
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3, 1990
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1997 1998 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating expenses:
Research and development $ 5,318,900 $ 5,455,999 $ 2,336,761 $ 23,878,909
Manufacturing development 2,513,224 2,171,087 1,880,521 9,048,797
General and administrative 4,629,534 3,243,901 3,285,948 17,899,257
------------ ------------ ------------ ------------
12,461,658 10,870,987 7,503,230 50,826,963
------------ ------------ ------------ ------------
Operating loss (12,461,658) (10,870,987) (7,503,230) (50,826,963)
Other income (expense):
Interest income 1,564,190 890,120 342,006 4,771,004
Interest expense (684,001) (1,203,218) (682,135) (3,183,933)
Other 17,078 98,180 (1,019) (128,739)
------------ ------------ ------------ ------------
897,267 (214,918) (341,148) 1,458,332
------------ ------------ ------------ ------------
Net loss for the period and deficit
accumulated during development stage $(11,564,391) $(11,085,905) $ (7,844,378) $(49,368,631)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share
Basic and diluted $ (1.24) $ (1.17) $ (.81) $ (14.79)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common shares
outstanding
Basic and diluted 9,305,332 9,477,390 9,649,424 3,338,724
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
<CAPTION>
PERIOD FROM
APRIL 3, 1990
(INCEPTION) TO
NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30,
1999 2000 2000
------------ ------------ ------------
Unaudited Unaudited
<C> <C> <C>
Operating expenses:
Research and development $ 1,828,079 $ 1,288,679 $ 25,167,588
Manufacturing development 1,495,334 1,425,102 10,473,899
General and administrative 2,609,684 1,249,784 19,149,041
------------ ------------ ------------
5,933,097 3,963,565 54,790,528
------------ ------------ ------------
Operating loss (5,933,097) (3,963,565) (54,790,528)
Other income (expense):
Interest income 290,232 81,523 4,852,527
Interest expense (532,194) (304,992) (3,488,925)
Other (735) 33,346 (95,393)
------------ ------------ ------------
(242,697) (190,123) 1,268,209
------------ ------------ ------------
Net loss for the period and deficit
accumulated during development stage $ (6,175,794) $ (4,153,688) $(53,522,319)
------------ ------------ ------------
------------ ------------ ------------
Net loss per share
Basic and diluted $ (.64) $ (.42) $ (13.27)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of common shares
outstanding
Basic and diluted 9,643,883 9,827,211 4,034,551
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (Deficiency)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED COMMON STOCK
----------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------
<S> <C> <C> <C> <C>
Founders' Common Stock issued during April 1990 at
$.015 per share -- $-- 250,000 $2,500
Net loss for the period -- -- -- --
----------------------------------------------
Balance at December 31, 1990 -- -- 250,000 2,500
Net loss for the year -- -- -- --
----------------------------------------------
Balance at December 31, 1991 -- -- 250,000 2,500
Net loss for the year -- -- -- --
----------------------------------------------
Balance at December 31, 1992 -- -- 250,000 2,500
Net loss for the year -- -- -- --
----------------------------------------------
Balance at December 31, 1993 -- -- 250,000 2,500
Deferred compensation related to restricted stock
grant -- -- 183,333 1,833
Net loss for the year -- -- -- --
----------------------------------------------
Balance at December 31, 1994 (carried forward) -- -- 433,333 4,333
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT DEFERRED
CAPITAL STAGE COMPENSATION TOTAL
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Founders' Common Stock issued during April 1990 at
$.015 per share $ 1,250 $ -- $ -- $ 3,750
Net loss for the period -- (290,900) -- (290,900)
-----------------------------------------------------------------
Balance at December 31, 1990 1,250 (290,900) -- (287,150)
Net loss for the year -- (622,016) -- (622,016)
-----------------------------------------------------------------
Balance at December 31, 1991 1,250 (912,916) -- (909,166)
Net loss for the year -- (653,934) -- (653,934)
-----------------------------------------------------------------
Balance at December 31, 1992 1,250 (1,566,850) -- (1,563,100)
Net loss for the year -- (682,725) -- (682,725)
-----------------------------------------------------------------
Balance at December 31, 1993 1,250 (2,249,575) -- (2,245,825)
Deferred compensation related to restricted stock
grant 149,417 -- (151,250) --
Net loss for the year -- (2,492,220) -- (2,492,220)
-----------------------------------------------------------------
Balance at December 31, 1994 (carried forward) 150,667 (4,741,795) (151,250) (4,738,045)
</TABLE>
4
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (Deficiency) (continued)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED COMMON STOCK
-------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 (brought forward) -- $-- 433,333 $4,333
Previously issued redeemable convertible preferred stock;
all shareholders agreed to cancel their respective
redemption privileges during June 1995:
Series A Convertible Preferred, authorized 928,571 shares,
liquidating preference of $.56 per share, sold during April
and November 1990 928,571 9,286 -- --
Series B Convertible Preferred, authorized
800,000 shares, liquidating preference of
$1.00 per share, sold during May 1991 800,000 8,000 -- --
Series C Convertible Preferred, authorized
356,000 shares, liquidating preference of
$2.50 per share, sold during January 1992 to
May 1993 346,000 3,460 -- --
Series D Convertible Preferred, authorized
1,209,731 shares, liquidating preference of
$2.75 per share, less offering expenses of
$7,245, sold during February and May 1994 1,074,372 10,743 -- --
Series E Convertible Preferred Class 1,
authorized 5,879,655, liquidating preference
of $4.00 per share, less offering expenses of
$1,861,168, sold during June 1995 5,604,655 56,047 -- --
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT DEFERRED
CAPITAL STAGE COMPENSATION TOTAL
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 (brought forward) $ 150,667 $(4,741,795) $ (151,250) $(4,738,045)
Previously issued redeemable convertible preferred stock;
all shareholders agreed to cancel their respective
redemption privileges during June 1995:
Series A Convertible Preferred, authorized 928,571 shares,
liquidating preference of $.56 per share, sold during April
and November 1990 510,714 -- -- 520,000
Series B Convertible Preferred, authorized
800,000 shares, liquidating preference of
$1.00 per share, sold during May 1991 792,000 -- -- 800,000
Series C Convertible Preferred, authorized
356,000 shares, liquidating preference of
$2.50 per share, sold during January 1992 to
May 1993 861,540 -- -- 865,000
Series D Convertible Preferred, authorized
1,209,731 shares, liquidating preference of
$2.75 per share, less offering expenses of
$7,245, sold during February and May 1994 2,936,534 -- -- 2,947,277
Series E Convertible Preferred Class 1,
authorized 5,879,655, liquidating preference
of $4.00 per share, less offering expenses of
$1,861,168, sold during June 1995 20,501,405 -- -- 20,557,452
</TABLE>
5
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (Deficiency) (continued)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED COMMON STOCK
--------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------
<S> <C> <C> <C> <C>
Value of warrants to purchase Preferred Stock
issued in connection with bridge loan financing -- $ -- -- $--
Value of stock options to purchase Common Stock
issued for consulting services -- -- -- --
Value of options and warrants to purchase Common
Stock issued in connection with guarantee of -- -- -- --
leases
Value related to the extension of the exercise
period of certain stock options previously
granted to individuals -- -- -- --
Deferred compensation related to stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss for the year -- -- -- --
---------------------------------------------------------
Balance at December 31, 1995 (carried forward) 8,753,598 87,536 433,333 4,333
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT DEFERRED
CAPITAL STAGE COMPENSATION TOTAL
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Value of warrants to purchase Preferred Stock
issued in connection with bridge loan financing $ 179,800 $ -- $ -- $ 179,800
Value of stock options to purchase Common Stock
issued for consulting services 24,000 -- -- 24,000
Value of options and warrants to purchase Common
Stock issued in connection with guarantee of 104,841 -- -- 104,841
leases
Value related to the extension of the exercise
period of certain stock options previously
granted to individuals 6,750 -- -- 6,750
Deferred compensation related to stock options 960,208 -- (960,208) --
Amortization of deferred compensation -- -- 187,106 187,106
Net loss for the year -- (5,048,730) -- (5,048,730)
-------------------------------------------------------------
Balance at December 31, 1995 (carried forward) 27,028,459 (9,790,525) (924,352) 16,405,451
</TABLE>
6
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (Deficiency) (continued)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED COMMON STOCK
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 (brought forward) 8,753,598 $ 87,536 433,333 $ 4,333
Value of warrants to purchase Common Stock issued
in connection with equipment loan agreement -- -- -- --
Shares issued in connection with initial public
offering less offering expenses of $2,375,706 -- -- 3,000,000 30,000
Conversion of preferred stock (8,753,598) (87,536) 5,835,705 58,357
Shares issued pursuant to exercise of stock options -- -- 6,666 67
Deferred compensation related to stock options -- -- -- --
Value of options granted to purchase Common Stock
issued for consulting services -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss for the year -- -- -- --
--------------------------------------------------------------
Balance at December 31, 1996 (carried forward) -- -- 9,275,704 92,757
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT DEFERRED
CAPITAL STAGE COMPENSATION TOTAL
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 (brought forward) $ 27,028,459 $ (9,790,525) $ (924,352) $ 16,405,451
Value of warrants to purchase Common Stock issued
in connection with equipment loan agreement 874,416 -- -- 874,416
Shares issued in connection with initial public
offering less offering expenses of $2,375,706 26,094,294 -- -- 26,124,294
Conversion of preferred stock 29,179 -- -- --
Shares issued pursuant to exercise of stock options 7,056 -- -- 7,123
Deferred compensation related to stock options 56,329 -- (56,329) --
Value of options granted to purchase Common Stock
issued for consulting services 179,600 -- (179,600) --
Amortization of deferred compensation -- -- 515,939 515,939
Net loss for the year -- (9,083,432) -- (9,083,432)
--------------------------------------------------------------
Balance at December 31, 1996 (carried forward) 54,269,333 (18,873,957) (644,342) 34,843,791
</TABLE>
7
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (Deficiency) (continued)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED COMMON STOCK
---------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 (brought forward) -- $ -- 9,275,704 $ 92,757
Shares issued pursuant to employee stock purchase
plan and exercise of stock options -- -- 69,154 692
Shares issued pursuant to exercise of warrants, net
of 9,303 redeemed -- -- 21,808 218
Amortization of deferred compensation -- -- -- --
Deferred compensation adjustment for cancellation
of stock options -- -- -- --
Value related to the acceleration of vesting and
extension of the exercise period of certain
stock options previously granted to an officer
and director -- -- -- --
Net loss for the year -- -- -- --
----------------------------------------------------------
Balance at December 31, 1997 (carried forward) -- -- 9,366,666 93,667
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT DEFERRED
CAPITAL STAGE COMPENSATION TOTAL
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 (brought forward) $ 54,269,333 $(18,873,957) $ (644,342) $ 34,843,791
Shares issued pursuant to employee stock purchase
plan and exercise of stock options 111,624 -- -- 112,316
Shares issued pursuant to exercise of warrants, net
of 9,303 redeemed 66,444 -- -- 66,662
Amortization of deferred compensation -- -- 294,484 294,484
Deferred compensation adjustment for cancellation
of stock options (22,062) -- 22,062 --
Value related to the acceleration of vesting and
extension of the exercise period of certain
stock options previously granted to an officer
and director 93,332 -- -- 93,332
Net loss for the year -- (11,564,391) -- (11,564,391)
--------------------------------------------------------------
Balance at December 31, 1997 (carried forward) 54,518,671 (30,438,348) (327,796) 23,846,194
</TABLE>
8
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (Deficiency) (continued)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED COMMON STOCK
----------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 (brought forward) -- $-- $9,366,666 $ 93,667
Shares issued pursuant to employee stock purchase
plan and exercise of stock options -- -- 211,351 2,113
Shares issued pursuant to exercise of warrants, net
of 6,201 redeemed -- -- 2,687 27
Amortization of deferred compensation -- -- -- --
Deferred compensation adjustment for cancellation
of stock options -- -- -- --
Net loss for the year -- -- --
---------------------------------------------
Balance at December 31, 1998 -- -- 9,580,704 95,807
Shares issued pursuant to employee stock purchase
plan and exercise of stock options -- -- 72,006 720
Shares issued in lieu of employee compensation -- -- 75,914 759
Value of options to purchase common stock issued
for consulting services -- -- -- --
Amortization of deferred compensation -- -- -- --
Deferred compensation adjustment for cancellation
of stock options -- -- -- --
Net loss for the year -- -- --
-----------------------------------------------------------
Balance at December 31, 1999 -- -- 9,728,624 97,286
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT DEFERRED
CAPITAL STAGE COMPENSATION TOTAL
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 (brought forward) $ 54,518,671 $(30,438,348) $ (327,796) $ 23,846,194
Shares issued pursuant to employee stock purchase
plan and exercise of stock options 237,648 -- (35,425) 204,336
Shares issued pursuant to exercise of warrants, net
of 6,201 redeemed (27) -- -- --
Amortization of deferred compensation -- -- 93,191 93,191
Deferred compensation adjustment for cancellation
of stock options (139,571) -- 139,571 --
Net loss for the year -- (11,085,905) -- (11,085,905)
-----------------------------------------------------------
Balance at December 31, 1998 54,616,721 (41,524,253) (130,459) 13,057,816
Shares issued pursuant to employee stock purchase
plan and exercise of stock options 79,187 -- -- 79,907
Shares issued in lieu of employee compensation 94,134 -- -- 94,893
Value of options to purchase common stock issued
for consulting services 4,920 -- (4,920) --
Amortization of deferred compensation -- -- 49,690 49,690
Deferred compensation adjustment for cancellation
of stock options (8,635) -- 8,635 --
Net loss for the year -- (7,844,378) -- (7,844,378)
Balance at December 31, 1999 54,786,327 (49,368,631) (77,054) 5,437,928
</TABLE>
9
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (Deficiency) (continued)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED COMMON STOCK
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 (brought forward) -- $ -- $ 9,728,624 $ 97,286
Shares issued pursuant to exercise of employee
stock options -- -- 105,454 1,055
Shares issued in lieu of employee compensation -- -- 25,000 250
Preferred stock issued under Series B Purchase
Agreement 1,771,236 3,091,908 -- --
Value of options to purchase common stock issued
for consulting services -- -- -- --
Deferred compensation adjustment for cancellation
of stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss for the period -- -- -- --
-------------------------------------------------------------------
Balance at September 30, 2000 (unaudited) 1,771,236 $ 3,091,908 9,859,078 $ 98,591
-------------------------------------------------------------------
-------------------------------------------------------------------
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT DEFERRED
CAPITAL STAGE COMPENSATION TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 (brought forward) $ 54,786,327 $(49,368,631) $ (77,054) $ 5,437,928
Shares issued pursuant to exercise of employee
stock options 113,352 -- -- 114,407
Shares issued in lieu of employee compensation 101,312 -- -- 101,562
Preferred stock issued under Series B Purchase
Agreement -- -- -- 3,091,908
Value of options to purchase common stock issued
for consulting services 39,890 -- (39,890) --
Deferred compensation adjustment for cancellation
of stock options (1,833) -- 1,833 --
Amortization of deferred compensation -- -- 35,069 35,069
Net loss for the period -- (4,153,688) (4,153,688)
---------------------------------------------------------------------
Balance at September 30, 2000 (unaudited) $ 55,039,048 $(53,522,319) $ (80,042) $ 4,627,186
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
10
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------
1997 1998 1999
-------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(11,564,391) $(11,085,905) $ (7,844,378)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 824,348 1,072,299 1,056,723
Deferred compensation amortization 294,484 93,191 49,690
Amortization of loan commitment fee 77,463 -- --
Impairment of fixed assets -- -- 384,160
(Gain) loss on sale of equipment and deposit write-off 27,436 -- (1,029)
Value of options, warrants and stock related to debt
financing, lease guarantee, extension of options,
compensation and consulting services 116,334 -- 94,893
Changes in operating assets and liabilities:
Receivables 84,425 -- (181,669)
Prepaid expenses and other assets (7,213) 462,532 64,778
Notes Payable -- -- --
Accounts payable and accrued expenses 148,203 (370,970) (501,708)
-----------------------------------------------------
Net cash used in operating activities (9,998,911) (9,828,853) (6,878,540)
-----------------------------------------------------
INVESTING ACTIVITIES
Purchase of furniture and equipment (4,756,243) (1,075,312) (78,169)
Proceeds from sale of furniture and equipment 3,750 1,111 51,385
-----------------------------------------------------
Net cash used in investing activities (4,752,493) (1,074,201) (26,784)
-----------------------------------------------------
FINANCING ACTIVITIES
Proceeds from sale of Convertible Preferred Stock -- -- --
Proceeds from bridge loan debt -- -- --
Proceeds from borrowings under loan agreement 2,995,879 1,138,293 --
Payments on long-term debt (383,533) (885,002) (1,251,247)
Payments on capital lease obligations (142,771) (155,635) (145,761)
Proceeds from sale of Common Stock 178,978 204,336 79,907
-----------------------------------------------------
Net cash (used in) provided by financing activities 2,648,553 301,992 (1,317,101)
-----------------------------------------------------
(Decrease) increase in cash and cash equivalents (12,102,851) (10,601,062) (8,222,425)
Cash and cash equivalents at beginning of period 33,879,608 21,776,757 11,175,695
-----------------------------------------------------
Cash and cash equivalents at end of period $ 21,776,757 $ 11,175,695 $ 2,953,270
-----------------------------------------------------
-----------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Fixed assets capitalized under capital lease and
loan agreements $ -- $ -- $ 11,182
The Company converted $2,900,000 of debt into
Series E Convertible Preferred Stock $ -- $ -- $ --
<CAPTION>
PERIOD FROM
APRIL 3, 1990
(INCEPTION) TO NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30
------------ ------------
1999 1999 2000
Unaudited
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(49,368,631) $ (6,175,794) $ (4,153,688)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation 3,809,238 847,637 531,800
Deferred compensation amortization 1,140,410 31,761 35,070
Amortization of loan commitment fee 250,074 -- --
Impairment of fixed assets 384,160 -- 6,936
(Gain) loss on sale of equipment and deposit write-off 94,616 (901) (24,533)
Value of options, warrants and stock related to debt
financing, lease guarantee, extension of options,
compensation and consulting services 466,029 106,370 105,500
Changes in operating assets and liabilities:
Receivables (210,498) -- 181,669
Prepaid expenses and other assets 297,303 (143,542) (44,330)
Notes Payable -- -- 30,432
Accounts payable and accrued expenses 511,873 (294,481) (241,693)
Net cash used in operating activities (42,625,426) (5,628,950) (3,572,837)
INVESTING ACTIVITIES
Purchase of furniture and equipment (8,948,196) (48,240) (12,576)
Proceeds from sale of furniture and equipment 99,325 3,500 41,707
Net cash used in investing activities (8,848,871) (44,740) 29,131
FINANCING ACTIVITIES
Proceeds from sale of Convertible Preferred Stock 22,789,732 -- 3,091,908
Proceeds from bridge loan debt 2,900,000 -- --
Proceeds from borrowings under loan agreement 5,486,446 -- --
Payments on long-term debt (2,667,112) (891,369) (1,037,326)
Payments on capital lease obligations (679,887) (124,797) (14,178)
Proceeds from sale of Common Stock 26,598,388 962 114,407
Net cash (used in) provided by financing activities 54,427,567 (1,015,204) 2,154,811
(Decrease) increase in cash and cash equivalents 2,953,270 (6,688,894) (1,388,895)
Cash and cash equivalents at beginning of period -- 11,175,695 2,953,270
Cash and cash equivalents at end of period $ 2,953,270 $ 4,486,801 $ 1,564,375
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Fixed assets capitalized under capital lease and
loan agreements $ 141,442 $ -- $ --
The Company converted $2,900,000 of debt into
Series E Convertible Preferred Stock $ 2,900,000 $ -- $ --
<CAPTION>
PERIOD FROM
APRIL 3, 1990
(INCEPTION) TO
SEPTEMBER 30,
2000
--------------
Unaudited
<S> <C>
OPERATING ACTIVITIES
Net loss $(53,522,319)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation 4,341,038
Deferred compensation amortization 1,175,480
Amortization of loan commitment fee 250,074
Impairment of fixed assets 391,096
(Gain) loss on sale of equipment and deposit write-off 70,083
Value of options, warrants and stock related to debt
financing, lease guarantee, extension of options,
compensation and consulting services 571,529
Changes in operating assets and liabilities:
Receivables (28,831)
Prepaid expenses and other assets 252,973
Notes Payable 30,432
Accounts payable and accrued expenses 270,180
Net cash used in operating activities (46,198,265)
INVESTING ACTIVITIES
Purchase of furniture and equipment (8,960,772)
Proceeds from sale of furniture and equipment 141,032
Net cash used in investing activities (8,819,740)
FINANCING ACTIVITIES
Proceeds from sale of Convertible Preferred Stock 25,881,640
Proceeds from bridge loan debt 2,900,000
Proceeds from borrowings under loan agreement 5,486,446
Payments on long-term debt (3,704,437)
Payments on capital lease obligations (694,065)
Proceeds from sale of Common Stock 26,712,795
Net cash (used in) provided by financing activities 56,582,379
(Decrease) increase in cash and cash equivalents 1,564,375
Cash and cash equivalents at beginning of period --
Cash and cash equivalents at end of period $ 1,564,375
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Fixed assets capitalized under capital lease and
loan agreements $ --
The Company converted $2,900,000 of debt into
Series E Convertible Preferred Stock $ 2,900,000
</TABLE>
SEE ACCOMPANYING NOTES.
11
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements
December 31, 1999
1. DESCRIPTION OF BUSINESS
Integ Incorporated was formed in April 1990 and is a development stage company
engaged in the development of a hand-held glucose monitoring product for use by
people with diabetes that avoids the pain and blood associated with conventional
"finger stick" technology. Utilizing the Company's proprietary interstitial
fluid sampling technology, the LifeGuide System will allow people with diabetes
to frequently monitor their glucose levels without repeatedly enduring the pain
of lancing their fingers to obtain a blood sample.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less when purchased to be cash equivalents. At December 31, 1999
and 1998, the Company's cost of investments in marketable securities and
government securities, respectively, approximated market value, with no
resulting unrealized gains and losses recognized. The cash equivalents are
considered available-for-sale.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost and depreciated primarily on a
straight-line basis over estimated useful lives of three to five years.
INCOME TAXES
The Company accounts for income taxes under the liability method. Deferred
income taxes are provided for temporary differences between the financial
reporting and tax bases of assets and liabilities.
12
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION PLANS
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company follows the disclosure only provisions of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123").
Accordingly, the Company has made pro forma disclosures of what net loss and
loss per share would have been had the provisions of Statement 123 been applied
to the Company's stock options.
NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding during the periods presented. Diluted loss per share
is the same as basic loss because the effect of all options and warrants is
anti-dilutive.
AUTOMATIC CONVERSION OF PREFERRED STOCK
Upon the closing of the initial public offering on July 1, 1996, all outstanding
shares of convertible preferred stock were automatically converted into an
aggregate of 5,835,705 shares of common stock.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1998 financial statements have been reclassified
to conform with the 1999 presentation.
13
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The accompanying financial statements as of September 30, 2000, and for the nine
month periods ended September 30, 2000, and 1999, and the period from April 3,
1990 (inception) to September 30, 2000, are unaudited. In the opinion of
management of the Company, these financial statements reflect all adjustments,
consisting only of normal and recurring adjustments necessary for a fair
presentation of the financial statements. The results of operations for the nine
month period ended September 30, 2000, are not necessarily indicative of the
results that may be expected for the full year ending December 31, 2000.
3. CAPITAL AND OPERATING LEASES
The Company leases its office facility and certain office equipment under
operating leases. Rent expense of $400,958, $377,485 and $432,686 was recorded
for noncancelable operating leases and sub-leases for the years ended December
31, 1999, 1998 and 1997, respectively. Future minimum lease commitments for
operating leases with remaining terms in excess of one year, excluding executory
costs such as real estate taxes, insurance and maintenance expense, are payable
as follows:
<TABLE>
Year ending December 31:
<S> <C>
2000 $301,865
2001 2,694
2002 1,347
-------------------
$305,906
===================
</TABLE>
14
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
3. CAPITAL AND OPERATING LEASES (CONTINUED)
The Company leases certain furniture and laboratory and office equipment under
other leases which are accounted for as capital leases for financial statement
purposes. The cost of furniture and equipment in the accompanying balance sheets
includes the following amounts under capital leases:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------------------------
<S> <C> <C>
Cost $665,499 $665,499
Less accumulated amortization (660,432) (575,436)
------------------------------------
$ 5,067 $ 90,063
====================================
</TABLE>
3. CAPITAL AND OPERATING LEASES (CONTINUED)
Future minimum lease payments required under capital leases together with the
present value of the net future minimum lease payments at December 31, 1999 are
as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000 $ 14,178
-------------------
Total minimum lease payments 14,178
Less amount representing interest --
-------------------
Present value of net minimum payments 14,178
Less current portion (14,178)
===================
Capital lease obligations, net of current portion $ --
===================
</TABLE>
15
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
4. LONG-TERM DEBT
During 1996, the Company entered into an equipment loan agreement which
provided for borrowings up to $12.5 million to finance the purchase of
equipment and fixtures including automated manufacturing equipment and
tooling. Loans are paid back monthly over a four-year period. The obligation
of the lender to make additional loans expired December 31, 1998. The Company
borrowed $-0- and $1,138,293 in 1999 and 1998, respectively, under this
agreement.
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
---------------------------------
<S> <C> <C>
10.65% note payable for equipment loan, due in monthly installments
of $26,495 through February 2000, and $138,962 due April 2000 $ 164,051 $ 430,881
10.65% note payable for equipment loan, due in monthly installments
of $12,082 through November 2000, and $63,879 due January 2001 168,001 268,585
10.65% note payable for equipment loan, due in monthly installments
of $49,636 through February 2001, and $262,439 due April 2001 793,497 1,196,551
10.90% note payable for equipment loan, due in monthly installments
of $35,507 through August 2001, and $186,943 due October 2001 714,700 974,044
10.20% note payable for equipment loan, due in monthly installments of
$21,510 through January 2002, $35,507 due February 2002, and
$113,248 due April 2002 527,597 670,756
10.15% note payable for equipment loan, due in monthly installments
of $11,443 through May 2002, and $60,976.71 due July 2002 304,172 382,448
---------------------------------
2,672,018 3,923,265
Less current portion (1,398,098) (1,251,247)
=================================
Long-term debt, net of current portion $1,273,920 $2,672,018
=================================
</TABLE>
<TABLE>
Aggregate maturities of long-term are as follows:
<S> <C>
2000 $1,398,098
2001 1,025,633
2002 248,287
-------------------
$2,672,018
===================
</TABLE>
16
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
5. LICENSE AND DEVELOPMENT AGREEMENT
On April 2, 1999, the Company entered into a License and Development Agreement
("License Agreement") with Amira Medical ("Amira"). Under the License Agreement,
the companies have formed a strategic alliance to jointly develop a new
generation of home glucose monitoring tests utilizing interstitial fluid
("ISF"). Products to be developed will combine the Company's ISF collection
technology with Amira's glucose measurement technologies. Both the Company and
Amira will contribute resources to the development of the product, which will be
manufactured by the Company and commercialized by Amira. As part of each party's
contribution to the development process, each party shall independently bear the
costs and contribute the resources necessary for the development activities for
which each party is responsible. In the event Integ exhausts its resources,
Amira will lend Integ minimum funding required to retain listing on one of
NASDAQ's markets. Any such loan will be unsecured. (See Note 12 for further
developments related to this agreement.)
In connection with the License Agreement, the Company and Amira entered into an
Option Agreement dated as of April 2, 1999, pursuant to which Amira granted to
the Company, an option, exercisable at a future date, to merge under certain
circumstances with a wholly-owned, newly formed subsidiary of Amira for a total
consideration of 2 million shares of Amira common stock and $20 million cash,
subject to certain conditions. The Option Agreement was entered into as a
condition and inducement to the Company's and Amira's willingness to enter into
the License Agreement.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK
Series A, B, C, D and E Convertible Preferred Shares issued in 1995 were
automatically converted three shares of preferred into two shares of common
stock upon the closing of the public offering of the Company's securities on
July 1, 1996.
17
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
7. REVERSE STOCK SPLIT
On April 24, 1996, the Board of Directors approved a reverse stock split of
2-for-3 for the Company's common stock. Accordingly, all share, per share,
weighted average share, and stock option information was restated to reflect the
split. The reverse stock split impacted the conversion prices of the preferred
stock and the numbers of shares of common stock into which the preferred stock
would convert but had no effect upon the numbers of preferred stock warrants and
shares of preferred stock issued and outstanding. Accordingly, all preferred
stock and preferred stock price amounts have not been adjusted for the reverse
stock split.
8. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS AND RESTRICTED STOCK GRANT
The Company has 1990, 1991 and 1994 stock option plans which provide for the
issuance of incentive and nonqualified stock options and restricted stock grants
to employees and consultants. Under the plans, the exercise price of options
granted is determined by the Company's Board of Directors, but incentive stock
options must be granted at exercise prices greater than or equal to the fair
market value of the Company's stock as of the grant date. A total of 3,213,333
shares of the Company's common stock have been reserved for issuance under all
three plans as of December 31, 1999.
During 1998, the Company repriced all outstanding employee options and those
held by consultants who were actively engaged in consulting activities as of
September 22, 1998 to an exercise price of $.81 per share. The Company valued
the repricing of the consultant options at $35,425 and is recognizing the
expense over the vesting period of the options.
18
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
Options outstanding were granted as follows:
<TABLE>
<CAPTION>
SHARES PLAN NON-PLAN WEIGHTED AVERAGE
AVAILABLE OPTIONS OPTIONS EXERCISE
FOR GRANT OUTSTANDING OUTSTANDING PRICE PER SHARE
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 863,556 1,159,778 42,993 $4.66
Granted at market price (618,625) 618,625 -- 6.26
Exercised -- (47,953) -- 0.84
Canceled 15,483 (15,483) -- 3.01
------------------------------------------------
Balance at December 31, 1997 260,414 1,714,967 42,993 5.34
Shares reserved 1,000,000 -- -- --
Granted at market price (922,012) 922,012 -- 1.54
Exercised -- (166,923) -- 0.98
Canceled 922,504 (922,504) -- 5.93
------------------------------------------------
Balance at December 31, 1998 1,260,906 1,547,552 42,993 3.06
Granted at market price (677,240) 677,240 -- 1.71
Exercised -- (89,330) -- 0.13
Canceled 112,224 (112,224) -- 2.20
------------------------------------------------
Balance at December 31, 1999 695,890 2,023,238 42,993 $2.89
================================================
</TABLE>
The following table summarizes information about the stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.00 -- $ 2.99 1,606,649 7.89 years $1.30 619,922 $ .92
3.00 -- 8.99 140,750 3.72 years 5.42 119,707 5.36
9.00 -- 11.00 318,832 3.50 years 9.77 280,749 9.78
----------------- -----------------
2,066,231 6.90 years $2.89 1,020,378 $3.88
================= =================
</TABLE>
19
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
During 1991 and 1993, the Company granted options outside the plans to purchase
42,993 shares of the Company's common stock at $.83 per share to Medical
Innovation Fund ("MIF"), a significant shareholder of the Company (see Note 11).
20
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
Options outstanding expire at various dates during the period from October 2000
through December 2009. The number of options exercisable as of December 31,
1999, 1998 and 1997 was 1,020,378, 703,093 and 710,982, respectively, at
weighted average prices of $3.88, $3.00 and $3.92 per share, respectively.
The weighted average grant date fair value of options granted at market prices
during the years ended December 31, 1999, 1998 and 1997 was $1.93, $1.43 and
$4.92 per share, respectively. The weighted average grant date fair value of
options granted below market prices during the years ended December 31, 1995 and
1996 was $4.01 and $6.93 per share, respectively.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, if the exercise price of the Company's employee
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net loss per share is required by Statement 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of Statement 123. The fair value for these
options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for 1999, 1998 and
1997: risk free interest rates of 5.60%, 5.31% and 6.33%, respectively; no
dividend yield; volatility factor of the expected market price of the Company's
common stock of .560, 1.047 and .656, respectively; and a weighted-average life
of the option of 10 years.
21
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Pro forma net loss $(8,530,183) $(12,151,311) $(13,535,200)
Pro forma net loss per common share-basic
and diluted $(.88) $(1.28) $(1.45)
</TABLE>
The pro forma effect on net loss for 1997, 1998 and 1999 is not representative
of the pro forma effect on net loss in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to 1995.
During 1995 and 1996, options were granted to purchase a total of 433,710 shares
of the Company's common stock at exercise prices below the current market price.
The Company recognized $960,208 and $56,329 during the years ended 1995 and
1996, respectively, as deferred compensation for the excess of the deemed value
of the underlying common stock over the aggregate exercise price of such
options. The deferred compensation is amortized ratably over the vesting period
of the options. For the years ended 1996, 1997 and 1998, $477,076, $314,096 and
$225,365, respectively, was expensed.
22
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
During 1996, the Company granted 30,000 options to certain advisors of the
Company. In accordance with FASB 123, the Company recognized $179,600 as
deferred compensation. The deferred compensation is amortized ratably over the
vesting period of the options. In 1996, 1997 and 1998, $65,279, $87,835 and
$26,486 was charged to expense, respectively.
Unamortized deferred compensation at December 31, 1999 is related to the other
options granted for services and is expected to be charged to operations as
follows:
<TABLE>
<S> <C>
2000 $23,071
2001 15,220
2002 12,840
2003 9,193
2004 9,193
Thereafter 7,537
-------------------
$77,054
===================
</TABLE>
WARRANTS
In connection with the sale of Series C Convertible Preferred Stock during 1992
and 1993, the Company issued warrants to the holders for the purchase of 46,665
shares (including warrants for 13,333 shares issued to MIF (see Note 11), and
warrants for 17,778 shares issued to Artesian Capital Limited Partnership) of
its common stock exercisable immediately at a price of $3.75 per share. These
MIF and Artesian Capital Limited Partnership warrants were exercised in 1997,
and 8,888 of the remaining warrants were exercised and 6,666 expired at various
dates during the period from January 1998 through May 1998. During May 1994, the
Company issued warrants which expired during May 1999 to a
consultant/stockholder for the purchase of 6,666 shares of common stock
exercisable immediately at a price of $4.13 per share. The value of these
warrants was determined to be $24,000, based on the value of the services
received, and
23
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
was expensed. In addition, during March and December of 1994 and June 1995, the
Company issued warrants for the purchase of 159,042 shares of Series D
Convertible Preferred Stock (convertible into 106,027 shares of common stock at
$4.13 per share) to MIF II, exercisable immediately at $2.75 per share (see Note
11). Warrants for the purchase of 27,273 shares expired during February 1999,
warrants for the purchase of 108,085 shares expire during December 2004, and
warrants for the purchase of 23,684 shares expire during June 2005.
In connection with the bridge loan arrangement during January 1995, the Company
issued warrants to investors for the purchase of 429,630 shares of Series E
Convertible Preferred Stock, Class 2, at $3.375 per share (convertible into
286,414 shares of common stock at $5.06 per share). These warrants expire in
January 2005. The value of these warrants was determined to be $179,800 based on
the difference between the stated interest rate and the Company's estimated
effective borrowing rate for the term of the notes and was expensed as
additional interest expense during 1995.
In consideration of the equipment loan agreement discussed in Note 4, the
Company has agreed to issue warrants for the purchase of common stock equal to
8.8% of the total dollar value of the credit line available under the agreement.
The value of these warrants was determined to be $874,416 and was expensed over
the term of the loan agreement. Each warrant is exercisable initially at $6.00
per share or, subsequent to any equity financing, at 80% of the per share price
of each subsequent financing, if such occurs. Warrants for the purchase of
18,318, 34,689 and 94,390 shares of common stock were issued in 1996, 1997 and
1998, respectively. The weighted average exercise price of these warrants was
$7.45. These warrants expire in December 2003.
24
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
9. EMPLOYEE STOCK PURCHASE PLAN
The 1997 Employee Stock Purchase Plan (the Purchase Plan), as approved by the
shareholders on June 4, 1997, is a qualified plan pursuant to Internal Revenue
Code Section 423. The Purchase Plan allows eligible employees an opportunity to
purchase an aggregate of 300,000 shares of the Company's common stock through a
series of annual offerings for each calendar year (except for the initial
purchase period of the Purchase Plan which was for a six month period beginning
July 1, 1997). Payroll deductions between 1% and 10% of an employee's eligible
compensation may be used to purchase stock at a price per share equal to 85% of
the lesser of the fair market value of the Company's common stock at the
beginning or end of each purchase period. Under terms of the Purchase Plan, no
participant may acquire more than 10,000 shares of the Company's common stock or
more than $10,000 in aggregate fair market value of common stock (as determined
at the beginning of each purchase period) during any purchase period. Common
shares sold to employees under the Purchase Plan in 1998 and 1999 totaled 44,428
and 58,590, respectively.
10. INCOME TAXES
The Company has incurred net operating losses since inception. As of December
31, 1999, the Company had net operating losses (NOL) and research and
development tax credit carryforwards of approximately $17,203,000 and
$1,079,000, respectively, available to offset its future income tax liability.
The NOL and tax credit carryforwards begin to expire in the year 2005. No
benefit has been recorded for such loss carryforwards, and utilization in future
years may be limited, if significant ownership changes have occurred.
Components of deferred tax assets at December 31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------------------------------
<S> <C> <C>
Net operating loss and credit carryforward $ 7,444,000 $ 6,530,000
Start-up costs 11,284,000 9,025,000
Valuation allowance (18,728,000) (15,555,000)
--------------------------------
Net deferred tax assets $ -- $ --
================================
</TABLE>
25
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
11. RELATED PARTY TRANSACTIONS
Laboratory and office furniture and equipment used by the Company with an
original cost of approximately $801,000 as of December 31, 1998 and 1999 are
leased under sublease arrangements with FIM, Inc. and FIM II, Inc., both
entities related to the Company through MIF and MIF II, which are significant
shareholders of the Company. These leases are accounted for as capital leases
for financial statement purposes. In addition, MIF and MIF II have guaranteed
future lease payments, of which approximately $12,760 is payable as of December
31, 1999. In consideration of such guarantee by MIF, the Company issued
nonqualified options to MIF for the purchase of 42,993 shares of common stock
exercisable immediately at a price of $.83 per share. Options for 30,523 shares
expire during May 2001 and options for 12,470 shares expire during April 2003.
The value of these options was determined to be $20,878 based on the difference
between the stated interest rate and the Company's estimated effective borrowing
rate for the term of the lease and was fully amortized by December 31, 1998. In
consideration of such guarantee by MIF II, the Company issued warrants to MIF II
for the purchase of 131,769 shares of Series D Convertible Preferred Stock
exercisable immediately at a price of $2.75 per share which are convertible into
87,845 shares of common stock at $4.13 per share. These warrants expire during
the period from December 2004 through June 2005. The value of these warrants was
determined to be $83,962 based on the difference between the stated interest
rate and the Company's estimated effective borrowing rate for the term of the
lease. Approximately $15,304, $18,267 and $22,689 was charged to interest
expense during the years ended December 31, 1999, 1998 and 1997, respectively,
and the remainder will be amortized over the term of the lease.
In consideration of the bridge loan arrangement during January 1995 discussed in
Note 8, the Company issued to MIF II warrants for the purchase of 222,222 shares
of Series E Convertible Preferred Stock, Class 2, exercisable immediately at a
price of $3.375 per share and convertible into 148,148 shares of common stock at
$5.06 per share. The value of these warrants was determined to be $93,000 of the
$179,800 total discussed in Note 8. These warrants expire during January 2005.
26
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
From inception through December 31, 1995, the Company made payments under
consulting agreements with two directors, one of which is a limited partner of
MIF's general partner, and one shareholder. In 1995, the total expense under
these agreements was $129,000. In 1997, 1998 and 1999, the Company made payments
under a consulting agreement with a director who is a limited partner of MIF's
general partner totaling $81,000 per year.
Beginning in September 1999, the Company subleased office space and provided
certain administrative services to a company whose principals include several
directors and shareholders. Total sublease rental received in 1999 was
approximately $66,000.
12. SERIES B PREFERRED STOCK PURCHASE AGREEMENT
On February 16, 2000, the Company and Amira Medical entered into a preferred
stock purchase agreement which is intended to provide funding to Integ at its
current operational level for the continued development of the LifeGuide (TM)
System through 2000. Under the agreement, Amira will provide Integ with up to
$5.6 million in funding through the purchase of Integ Series B Preferred Stock.
Should the Company exercise it's option to merge with Amira in the future, the
Series B will not participate in the merger considerations. The Series B
Preferred Stock is redeemable for cash or common stock, at the option of the
Company, in the case of a change in control or if the Company does not exercise
its option to merge with Amira.
As part of the agreement, the Company will hold $1,500,000 of its existing cash
in reserve. As of September 30, 2000, the Company has raised $3.1 million
(unaudited) through the sale of 1,771,236 shares of Series B Preferred Stock.
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