<PAGE>
Prospectus
dated June 26, 1996
3,000,000 Shares Pursuant to Rule 424(b)(1)
and Rule 430A
[INTEG LOGO] on Registration No. 333-4352
Common Stock
All of the 3,000,000 shares of Common Stock offered hereby are being issued
and sold by Integ Incorporated ("Integ" or the "Company").
Prior to the Offering, there has been no public market for the Common Stock of
the Company. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Stock has been
approved for listing, upon notice of issuance, on the Nasdaq National Market
under the symbol "NTEG."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $9.50 $0.665 $8.835
- --------------------------------------------------------------------------------
Total (3)................................. $28,500,000 $1,995,000 $26,505,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $400,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 450,000 shares of Common Stock solely to cover over-
allotments, if any, at the Price to Public less the Underwriting Discount.
If all such shares are purchased, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $32,775,000, $2,294,250 and
$30,480,750 respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters subject to prior
sale when, as, and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected
that certificates for such shares will be available for delivery at the
offices of Piper Jaffray Inc. in Minneapolis, Minnesota on or about July 1,
1996.
Piper Jaffray inc. Montgomery Securities
<PAGE>
[LOGO OF INTEG INCORPORATED APPEARS HERE]
Integ Incorporated is developing the Lifeguide System, a painless and
bloodless hand-held glucose monitoring product for use by people with
diabetes. Utilizing the Company's proprietary interstitial fluid ("ISF")
sampling technology, the Lifeguide System will allow people with diabetes to
frequently self-monitor their glucose levels without repeatedly enduring the
pain of lancing their fingers to obtain a blood sample.
[Artist's rendering of Lifeguide Monitor and Lifeguide Key]
The above is an artist's rendering of the Lifeguide System, which is
currently under development, and the final design may differ from that
shown above. To date, testing of the Lifeguide System has been performed
on benchtop prototypes of the device. The Lifeguide System has not
received clearance from the FDA for commercial sale in the United States.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
----------------
Integ(TM) and Lifeguide(TM) are trademarks of the Company. This Prospectus
also includes trade names, trademarks and registered trademarks of companies
other than Integ.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and Financial Statements and the
Notes thereto appearing elsewhere in this Prospectus. Except as otherwise
noted, all information in this Prospectus, including financial information,
share and per share data, (a) has been adjusted to reflect the conversion of
all outstanding shares of the Company's Series A, Series B, Series C, Series D
and Series E-1 Convertible Preferred Stock (the "Preferred Stock") into an
aggregate of 5,835,705 shares of Common Stock upon closing of the Offering, (b)
reflects the two-for-three reverse stock split of the Common Stock effected on
April 24, 1996 and (c) assumes no exercise of the Underwriters' over-allotment
option. See "Underwriting." Investors should carefully consider the information
set forth under the heading "Risk Factors."
THE COMPANY
Integ Incorporated ("Integ" or the "Company") is developing the Lifeguide
System, a painless and bloodless hand-held glucose monitoring product for use
by people with diabetes. Utilizing the Company's proprietary interstitial fluid
("ISF") sampling technology, the Lifeguide System will allow people with
diabetes to frequently self-monitor their glucose levels without repeatedly
enduring the pain of lancing their fingers to obtain a blood sample. The
Company believes that the Lifeguide System represents a significant
technological advance in glucose monitoring and will enable people with
diabetes to manage their disease more effectively and conveniently. The Company
anticipates that it will file a 510(k) premarket notification with the United
States Food and Drug Administration (the "FDA") for the Lifeguide System in the
first half of 1997.
It is estimated that there are as many as 100 million people with diabetes
worldwide. In the United States, diabetes is a leading cause of blindness,
kidney failure, amputation and heart failure and the fourth leading cause of
death by disease. Nearly 16 million people in the United States have diabetes
and more than 625,000 new cases of diabetes are diagnosed each year. Diabetes
is a chronic disease characterized by the body's inability to maintain the
proper amount of circulating glucose. Glucose levels vary significantly
throughout the day, and the use of personal glucose monitors is a key factor in
the management of diabetes. According to Medical Data International, sales of
personal blood glucose monitoring products in the United States have increased
from approximately $450 million in 1991 to an estimated $730 million in 1995.
The Company estimates that the worldwide market for personal blood glucose
monitoring products was over $1.5 billion in 1995.
Due to the release in 1993 of the results of the landmark Diabetes Control
and Complications Trial (the "DCCT"), people with diabetes are becoming
increasingly aware of the need for more intensive glucose monitoring. The DCCT
demonstrated, through a 1,400 patient trial over a nine-year period, that more
intensive treatment of people with Type I (insulin-dependent) diabetes can
reduce their risk of developing diabetes-related complications by approximately
60%. Despite the recommendation of the DCCT panel that people with Type I
diabetes follow an intensive therapy program, which includes testing glucose
levels at least four times a day, the majority of people with diabetes who use
insulin currently monitor their glucose level less than once per day. The
Company believes that the pain and inconvenience associated with conventional
"finger-stick" blood glucose monitoring systems is the primary reason that most
people with diabetes fail to comply with the recommendations of the DCCT panel.
The Company's proposed Lifeguide System is based on Company research
indicating that ISF glucose levels correlate closely with blood glucose levels.
The Company's proprietary method for ISF sampling involves a painless and
bloodless procedure that draws an ISF sample from the outermost layers of the
skin and captures that sample for measurement of glucose levels. The proposed
Lifeguide System will be comprised of the Lifeguide Monitor, a hand-held,
battery-powered monitor, and the Lifeguide Key, a single-use, disposable sample
collection device.
3
<PAGE>
The Company believes that its Lifeguide System will offer significant
advantages over commercially available personal blood glucose monitoring
systems and alternative non-invasive technologies under development, including:
. Painless Procedure. By drawing ISF from only the outermost layers of the
skin, the Lifeguide System avoids areas of high nerve density,
eliminating the pain associated with conventional "finger-stick" sampling
approaches.
. Bloodless Approach. Utilizing the Company's proprietary ISF sampling
technology, the Lifeguide System is designed to allow for the accurate
measurement of glucose levels without drawing blood.
. Sampling Flexibility. The Lifeguide System is designed to be used on skin
almost anywhere on the body, not merely areas (such as the fingertips)
where blood capillaries and nerve endings are concentrated.
. Ease of Use. The testing procedure of the proposed Lifeguide System has
been reduced to simply holding the device against an area of exposed skin
until an adequate sample has been obtained (5 to 30 seconds) and waiting
briefly for the displayed result.
. Cost Competitive. Unlike some alternative non-invasive technologies under
development, it is anticipated that the proposed Lifeguide System will be
offered at competitive prices and will not be a significant departure
from current consumer buying patterns and reimbursement practices for
commercially available personal glucose monitoring products.
The Company's offices are located at 2800 Patton Road, St. Paul, Minnesota
55113, and its telephone number is (612) 639-8816. The Company was incorporated
in Minnesota in 1990.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company. 3,000,000 shares
Common Stock to be outstanding after
the Offering....................... 9,269,038 shares (1)
Use of proceeds..................... For continued development and testing of
and clinical trials for the Lifeguide
System; capital expenditures; research and
development, manufacturing and marketing
activities; and working capital and other
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol............................. NTEG
</TABLE>
SUMMARY FINANCIAL INFORMATION
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER ENDED MARCH
31, 31,
----------------------- --------------
1993 1994 1995 1995 1996
----- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Operating expenses:
Research and development............ $ 442 $ 1,568 $ 2,463 $ 460 $ 768
General and administrative.......... 237 792 1,417 273 502
Clinical and regulatory............. -- 52 298 61 123
Manufacturing development........... -- 56 718 49 308
Sales and marketing................. -- 54 385 87 189
----- ------- ------- ----- -------
Total operating expenses........... 679 2,522 5,281 930 1,890
----- ------- ------- ----- -------
Operating loss....................... (679) (2,522) (5,281) (930) (1,890)
Interest income (expense), net....... (4) 30 232 (27) 159
----- ------- ------- ----- -------
Net loss........................... $(683) $(2,492) $(5,049) $(957) $(1,731)
===== ======= ======= ===== =======
Pro forma net loss per share (2)..... $ (.81) $ (.22)
======= =======
Pro forma weighted average shares
outstanding (2)..................... 6,269 7,919
======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
AS
ACTUAL ADJUSTED(3)
-------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 14,561 $ 40,666
Working capital......................................... 14,197 40,302
Total assets............................................ 16,545 42,650
Long-term debt and capital lease obligations, less
current portion........................................ 1,259 1,259
Deficit accumulated during the development stage........ (11,521) (11,521)
Total shareholders' equity.............................. 14,818 40,923
</TABLE>
- --------
(1) Based on the number of shares outstanding as of May 1, 1996. Excludes
970,102 shares of Common Stock issuable upon exercise of options
outstanding on such date, which had a weighted average exercise price of
$3.46 per share. Also excludes 459,359 shares of Common Stock issuable upon
exercise of warrants outstanding, which had a weighted average exercise
price of $4.73 per share. See "Description of Capital Stock."
(2) Computed on the basis described in Note 2 of Notes to Financial Statements.
(3) Adjusted to reflect the sale of 3,000,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully.
DEVELOPMENT OF NEW TECHNOLOGY; DEPENDENCE ON THE LIFEGUIDE SYSTEM; UNCERTAINTY
OF MARKET ACCEPTANCE
The Company's future success is entirely dependent upon the successful
development, commercialization and market acceptance of the Lifeguide System,
the development of which is ongoing and the complete efficacy of which has not
yet been demonstrated. To date, the Company has only tested benchtop
prototypes of its proposed device, and the Company does not expect to produce
commercial prototypes of the Lifeguide Monitor and the Lifeguide Key until the
first quarter of 1997. There can be no assurance that unforeseen problems will
not occur in research and development, clinical testing, regulatory
submissions and approval, product manufacturing and commercial scale up,
marketing or product distribution. Any such occurrence could materially delay
the commercialization of the Lifeguide System or prevent its market
introduction entirely. Further, even if successfully developed, the commercial
success of the Lifeguide System will depend upon its acceptance as a painless,
bloodless, accurate, reliable and cost-effective alternative to existing blood
glucose monitoring techniques. The glucose monitoring industry is currently
dominated by several companies with established markets and distribution
channels. Because the proposed Lifeguide System will represent a new practice
in the monitoring of glucose levels, the Company is unable to predict how
quickly, if at all, its products will be accepted by members of the medical
community and people with diabetes. There is no assurance that the Company
will ever derive substantial revenues from the sale of the Lifeguide System.
See "Business."
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES
The Company has generated no revenue and has sustained significant operating
losses each year since its inception. As of March 31, 1996, the Company had an
accumulated deficit of approximately $11,521,000. Net losses for the years
ended December 31, 1993, 1994 and 1995 were approximately $683,000, $2,492,000
and $5,049,000, respectively, and the Company expects such losses to continue
through 1999 and to increase at least through the end of 1998. The Company may
never generate substantial operating revenues or achieve profitability. The
Company's ability to generate revenues from operations and achieve
profitability is dependent upon successful development, regulatory approval
and commercialization of the Lifeguide System and the Company's successful
transition from a development stage company to a fully operating company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
LIMITED CLINICAL TESTING EXPERIENCE; UNCERTAINTY OF OBTAINING FDA CLEARANCES
To date, testing of the Lifeguide System has been performed on benchtop
prototypes solely by Company personnel under controlled circumstances. The
Company expects to make commercial prototypes of the Lifeguide System
available to people with diabetes for self-testing in the first quarter of
1997 and to use the data derived from this testing to support a 510(k)
notification with the FDA to permit commercialization of the Lifeguide System
in the United States. There can be no assurance that the Company will not
encounter problems in clinical testing which will cause the Company to delay
commercialization of the Lifeguide System, and there can be no assurance that
the Lifeguide System will prove to be accurate and reliable on a consistent
basis. Even if accurate and reliable, there can be no assurance that such
testing will show the Company's product to be safe or effective. There also
can be no assurance that a full Premarket Approval application (a "PMA") will
not be required. Approval of a PMA by the FDA would require substantial
clinical trials and other supplemental information regarding the proposed
Lifeguide System. If required, the preparation and filing of a PMA would
materially delay the introduction of the Lifeguide System. In addition, there
can be no assurance that the required FDA clearances or approvals will be
obtained on a timely basis or at all. The Company has no experience in
obtaining regulatory approval. See "--Government Regulation; Need for
Additional Government Clearances," "Business--Clinical Testing" and "--
Government Regulation."
6
<PAGE>
HIGHLY COMPETITIVE MARKETS; RISK OF TECHNOLOGICAL OBSOLESCENCE
The glucose monitoring industry is characterized by continuously evolving
technology and intense competition, and the market is currently dominated by
several companies with established products and distribution channels. In
addition, other companies are attempting to develop minimally- or non-invasive
glucose monitoring products competitive with the proposed Lifeguide System.
There can be no assurance that the Company's competitors and potential
competitors will not succeed in developing or marketing technologies and
products that will be more accepted in the marketplace than the proposed
Lifeguide System or that would render the Company's technology and proposed
device obsolete or noncompetitive. In addition, numerous researchers are
investigating alternative treatments or cures for diabetes. If any of these
efforts are successful in reducing the complications associated with diabetes,
the need for the Company's products could be mitigated or become entirely
nonexistent. Most of the Company's competitors and potential competitors have
substantially greater capital resources, research and development staffs and
facilities than the Company. In addition, most of the Company's competitors
and potential competitors have substantially greater experience than the
Company in research and new product development, obtaining regulatory
approvals and manufacturing and marketing medical devices. Competition within
the glucose monitoring industry could also result in reductions of the prices
of the Company's products and the use of purchase incentive programs that
could adversely affect the Company's revenues and profitability. See
"Business--Competition."
LACK OF MANUFACTURING CAPABILITY; DEPENDENCE ON CONTRACT MANUFACTURERS AND
SUPPLIERS
The Company's Lifeguide System is still in development and the Company has
not yet created or manufactured a commercial prototype of its device. To be
successful, the Company must manufacture the Lifeguide System in compliance
with regulatory requirements, in a timely manner and in sufficient quantities
while maintaining product quality and acceptable manufacturing costs. The
Lifeguide Monitor will be manufactured for the Company by an outside vendor
from primarily off-the-shelf components. The Lifeguide Key will be assembled
by the Company from components to be purchased from outside suppliers.
However, the Company presently has no manufacturing contracts or supply
agreements and has no manufacturing capability. In addition, one component of
the Lifeguide Monitor is available from a single source, as is one component
of the Lifeguide Key. In the event that the Company is unable to obtain either
of these components from their respective suppliers, the Company would be
required to make modifications to its existing Lifeguide System and to obtain
alternative components from alternative suppliers. Any interruption in the
supply of either of these components would have a material adverse effect on
the Company's business, financial condition and results of operation.
Manufacturers often encounter difficulties in scaling up production of new
products, including problems involving production yields, quality control and
assurance, component supplies and shortages of personnel. There can be no
assurance that the Company will be able to achieve and maintain product
quality and reliability when producing the Lifeguide System in the quantities
required for commercialization, nor that the Company will be able to assemble
and manufacture its products at an acceptable cost. See "Business--
Manufacturing."
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend in part on its ability to obtain patent
protection for its proposed products and processes, to preserve its trade
secrets and to operate without infringing the proprietary rights of third
parties. As of the date of this Prospectus, no patents have been issued to the
Company with respect to the Lifeguide System. The Company has applied for four
United States patents and for one corresponding PCT foreign patent covering
certain aspects of the technology underlying the Lifeguide System. There can
be no assurance, however, that any patents will be issued, that the scope of
any patent protection granted to the Company will prevent competitors from
introducing products competitive with the Lifeguide System or that any of the
Company's patents will be held valid or enforceable if subsequently
challenged. Patenting medical devices involves complex legal and factual
questions, and there is no consistent policy regarding the breadth of claims
which issue pertaining to such technologies. The Company also relies upon
unpatented trade secrets, and no assurance can be given that others will not
independently develop or otherwise acquire unpatented technologies
substantially equivalent to those of the Company. In addition, even if the
patents for which the Company has
7
<PAGE>
applied are ultimately issued, other parties may hold or receive patents that
contain claims covering the Lifeguide System and which may delay or prevent
the sale of the Lifeguide System or require licenses resulting in the payment
of fees or royalties by the Company in order for the Company to carry on its
business. There can be no assurance that needed or potentially useful licenses
will be available in the future on acceptable terms or at all.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation could
result in substantial costs to and a diversion of effort by the Company, but
may be necessary to enforce any patents issued to the Company, protect trade
secrets or know-how owned by the Company, defend the Company against claimed
infringement of the rights of others or determine the scope and validity of
the proprietary rights of others. The Company is not currently a party to any
patent or other litigation. The Company routinely monitors patent issuances by
others in its industry, and as a result recently became aware of a patent that
may relate to a feature of the Lifeguide System. The Company engaged outside
patent counsel to review the patent, and such counsel rendered its opinion to
the Company that the patent is not infringed by the Company's technology. In
addition, such counsel advised the Company that if the patent was challenged,
those claims which the Company believes may apply to the Lifeguide System
would be likely to be held invalid based on the existence of prior art not
cited by the patent examiner. There can be no assurance, however, that the
holder of the patent will not pursue litigation which could be costly to the
Company. An adverse determination in any litigation, including any litigation
commenced by the holder of the patent referred to above, could subject the
Company to significant liabilities to third parties, require the Company to
seek licenses from or pay royalties to third parties or prevent the Company
from manufacturing, selling or using its proposed products, any of which could
have a material adverse effect on the Company's business and prospects. See
"Business--Patents and Proprietary Rights."
GOVERNMENT REGULATION; NEED FOR ADDITIONAL GOVERNMENT CLEARANCES
Government regulation in the United States and other countries is a
significant factor in the Company's business. The Company's products will be
regulated by the FDA under a number of statutes including the Federal Food,
Drug and Cosmetic Act, as amended (the "FDC Act"), and the Safe Medical
Devices Act of 1990 (the "SMDA"). Manufacturers of medical devices must comply
with applicable provisions of the FDC Act and the SMDA and certain associated
regulations governing the development, testing, manufacturing, labeling,
marketing and distribution of medical devices and the reporting of certain
information regarding their safety. Both the FDC Act and the SMDA require
certain clearances from the FDA before medical devices, such as the Company's
proposed Lifeguide System, can be marketed.
The Company has not obtained FDA clearance to market the Lifeguide System.
The regulatory process may delay the marketing of new products for lengthy
periods, impose substantial additional costs and provide an advantage to those
of the Company's competitors who have greater financial resources. FDA
marketing clearance regulations depend heavily on administrative
interpretation. There can be no assurance that interpretations made by the FDA
or other regulatory bodies, with possible retroactive effect, will not
adversely affect the Company. There can be no assurance that any such
clearance will be obtained in a timely manner, or at all. In addition, even if
obtained, FDA clearances are subject to continual review, and if the FDA
believes that the Company is not in compliance with the FDC Act, the SMDA or
their associated regulations, it can institute proceedings to detain or seize
the Company's products, require a recall, enjoin future violations and assess
civil and criminal penalties against the Company, its directors, officers or
employees. The FDA may also withdraw market approval for the Company's
products or require the Company to repair, replace or refund the cost of any
device manufactured or distributed by the Company.
The FDC Act will regulate the Company's development, quality control and
manufacturing procedures by requiring the Company to demonstrate compliance
with current Good Manufacturing Practices. The FDA monitors compliance with
these requirements by requiring manufacturers to register with the FDA, which
subjects them to periodic FDA inspections of their manufacturing facilities.
In order to ensure compliance with these requirements, the Company will be
required to expend time, resources and effort in the areas of production and
quality control. If violations of the applicable regulations are noted during
FDA inspections, the continued marketing of any products manufactured by the
Company may be halted or adversely affected.
8
<PAGE>
The Company also plans to eventually distribute its products in several
foreign countries. The Company's products will be subject to a wide variety of
laws and regulations in these markets. Generally, the extent and complexity of
the regulation of medical devices is increasing worldwide, with regulations in
some countries already nearly as exhaustive as those applicable in the United
States. This trend may continue and the cost and time required to obtain
marketing approval in any given country may increase. There can be no
assurance that any foreign approvals will be allowed on a timely basis or at
all. See "--Limited Clinical Testing Experience; Uncertainty of Obtaining FDA
Clearances" and "Business--Government Regulation."
LACK OF COMMERCIAL SALES OR MARKETING EXPERIENCE
The Company has no experience in marketing the Lifeguide System and has not
yet entered into any marketing or distribution arrangements for its proposed
Lifeguide System. There can be no assurance that the Company will be able to
build a suitable sales force or enter into satisfactory marketing arrangements
with third parties when commercial potential develops, if ever, or that its
sales and marketing efforts will be successful. See "Business--Sales and
Marketing."
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The success of the Company is dependent in large part upon the ability of
the Company to attract and retain key management and operating personnel.
Qualified individuals are in high demand and are often subject to competing
offers. In the future, the Company will need to add additional skilled
personnel in the areas of research and development, sales, marketing and
manufacturing. There can be no assurance that the Company will be able to
attract and retain the qualified personnel needed for its business. The loss
of the services of one or more members of the Company's research,
manufacturing or management group or the inability to hire additional
personnel as needed would likely have a material adverse effect on the
Company's business and prospects. See "Business--Employees" and "Management."
FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE
The proceeds of the Offering are expected to be sufficient to fund the
Company's operations for at least 24 months following the consummation of the
Offering. The Company may require substantial additional funds to meet its
working capital requirements for a full-scale commercial introduction of its
proposed Lifeguide System. In order to meet its needs beyond this 24-month
period, the Company may be required to raise additional funds through public
or private financings, including equity financings. Any additional equity
financings may be dilutive to purchasers in the Offering, and debt financing,
if available, may involve restrictive covenants. Adequate funds for the
Company's operations, whether from financial markets or from other sources,
may not be available when needed on terms attractive to the Company or at all.
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its programs designed to facilitate the commercial introduction
of the Lifeguide System or prevent such commercial introduction altogether.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
UNCERTAINTY OF THIRD PARTY REIMBURSEMENT
Sales of the Company's proposed products in certain markets will be
dependent in part on availability of adequate reimbursement for personal
glucose monitoring products from third-party healthcare payors, such as
government and private insurance plans, health maintenance organizations and
preferred provider organizations. Third-party payors are increasingly
challenging the pricing of medical products and services. There can be no
assurance that adequate levels of reimbursement will be available to enable
the Company to achieve market acceptance of the Lifeguide System or maintain
price levels sufficient to realize an appropriate return on its investment in
the development or manufacture of its proposed Lifeguide System. Without
adequate support from third-party payors, the market for the Company's
Lifeguide System may be limited. See "Business--Third Party Reimbursement."
9
<PAGE>
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE
The Company faces an inherent business risk of exposure to product liability
claims in the event that an end-user is adversely affected by its prospective
products. The Company currently carries a product liability insurance policy
covering the Company's clinical testing with an aggregate limit of $1.0
million. There can be no assurance, however, that the Company will be able to
obtain product liability insurance coverage in connection with the
commercialization of the Lifeguide System on commercially reasonable terms, or
at all, or that such insurance, even if obtained, would adequately cover any
product liability claim. A product liability or other claim with respect to
uninsured liabilities or in excess of insured liabilities could have a
material adverse effect on the business and prospects of the Company. See
"Business--Product Liability."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF PRICE
Prior to the Offering there has been no public market for the Common Stock.
Accordingly, there can be no assurance that an active trading market will
develop or be sustained upon completion of the Offering or that the market
price of the Common Stock will not decline below the initial public offering
price. The initial public offering price of the Common Stock was determined by
negotiations between the Company and the Representatives of the Underwriters
and may not be indicative of the prices that will prevail in the public
market. The trading prices of the Company's Common Stock could be subject to
wide fluctuations in response to quarter to quarter variations in the
Company's operating results, announcements by the Company or its competitors
regarding the results of regulatory approval filings or clinical trials or
testing, developments or disputes concerning proprietary rights, technological
innovations or new commercial products, governmental regulatory action,
general conditions in the medical technology industry, or other events or
factors, many of which are beyond the Company's control. In addition, the
stock market has experienced extreme price and volume fluctuations, which have
particularly affected the market prices of many medical technology companies
and which have often been unrelated to the operating performance of such
companies. See "Underwriting."
CONTROL BY SIGNIFICANT SHAREHOLDERS; ANTITAKEOVER PROVISIONS APPLICABLE TO THE
COMPANY
Upon completion of the Offering, the Company's directors and executive
officers beneficially will own in the aggregate approximately 6.0%, and
certain of the Company's other principal shareholders (which are affiliated
with certain of the Company's directors and executive officers) beneficially
will own in the aggregate approximately 35.9%, of the Company's outstanding
shares of Common Stock (including shares subject to outstanding options and
warrants). If these shareholders vote together as a group, they will be able
to substantially influence the business and affairs of the Company, including
the election of individuals to the Company's Board of Directors, and to
otherwise affect the outcome of certain actions that require shareholder
approval, including the adoption of amendments to the Company's articles of
incorporation, and certain mergers, sales of assets and other business
acquisitions or dispositions.
Upon completion of the Offering, the Company will have authorized a class of
5,000,000 shares of undesignated preferred stock, $.01 par value, which may be
issued by the Company's Board of Directors on such terms, and with such
rights, preferences and designations, as the Company's Board of Directors may
determine. In addition, the Company's Amended Bylaws provide for a classified
Board of Directors elected to staggered terms. Finally, the Company is subject
to certain provisions of the Minnesota Business Corporation Act which limit
the voting rights of shares acquired in certain acquisitions and restrict
certain business combinations. Some or all of the foregoing factors could have
the effect of discouraging certain attempts to acquire the Company which could
deprive the Company's shareholders of opportunities to sell their shares of
Common Stock at prices higher than prevailing market prices. See "Description
of Capital Stock--Preferred Stock" and "--Provisions of the Company's Amended
Articles and Bylaws and the Minnesota Business Corporation Act."
RISK OF FUTURE SALES OF COMMON STOCK
Sales of significant amounts of Common Stock in the public market or the
perception that such sales will occur could adversely affect the market price
of the Common Stock or the future ability of the Company to raise capital
through an offering of its equity securities. Of the 9,269,038 shares of
Common Stock to be outstanding upon completion of the Offering, the 3,000,000
shares offered hereby will be eligible for immediate sale in the
10
<PAGE>
public market without restriction unless they are held by "affiliates" of the
Company within the meaning of Rule 144 of the Securities Act of 1933, as
amended (the "Securities Act"). The remaining 6,269,038 shares of Common Stock
held by existing shareholders upon completion of the Offering will be
"restricted securities" as that term is defined in Rule 144 under the
Securities Act. The Company, its directors, officers and certain of its
shareholders (representing 6,126,035 of such restricted shares) have agreed
that they will not sell, directly or indirectly, any Common Stock without the
prior consent of Piper Jaffray Inc. for a period of 180 days from the date of
this Prospectus. Beginning on the 181st day after the date of this Prospectus,
when agreements not to sell such shares expire, approximately 716,239 of the
restricted shares will become eligible for immediate sale, subject to
compliance with the volume limitations and other restrictions of Rule 144, and
approximately 1,413,045 of the restricted shares may become eligible for
immediate sale without restriction pursuant to Rule 144(k). In addition,
certain shareholders and warrantholders, representing approximately 6,250,621
shares of Common Stock, have the right, subject to certain conditions, to
include their shares in future registration statements relating to the
Company's securities and to cause the Company to register certain shares of
Common Stock owned by them. See "Shares Eligible for Future Sale" and
"Underwriting."
NO DIVIDENDS
The Company has never paid or declared a dividend on its capital stock and
does not anticipate doing so for the foreseeable future. See "Dividend
Policy."
SUBSTANTIAL DILUTION TO PURCHASERS IN THE OFFERING
Purchasers of the shares offered hereby will experience an immediate,
substantial dilution in net tangible book value per share of Common Stock. See
"Dilution."
11
<PAGE>
USE OF PROCEEDS
The net cash proceeds to the Company from the sale of the Common Stock
offered hereby are estimated to be approximately $26,105,000 ($30,080,750 if
the Underwriters' over-allotment option is exercised in full), after deducting
the underwriting discount and estimated expenses of the Offering.
The Company anticipates that the net proceeds, including interest earned
thereon, will be used to fund the following: approximately $9 million for
continued development and testing of and clinical trials for the Lifeguide
System; approximately $5 million for capital expenditures, primarily the
development and construction of an initial and a full-scale commercial
manufacturing and assembly line; approximately $10 million for research and
development, manufacturing and marketing activities; and the balance for
working capital and other general corporate purposes. The amounts actually
expended for these purposes will depend upon numerous factors, including the
results of clinical studies, the design and cost of the Company's initial
manufacturing facility, the status of competitive products and other factors.
Pending the use of the net proceeds of the Offering, the Company will invest
the funds in short-term, interest-bearing, investment grade securities. The
Company expects that the proceeds of the Offering, together with cash on hand
and interest expected to be earned thereon, will be sufficient to fund its
operations for at least 24 months following the consummation of the Offering.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock since its inception. The Company currently intends to invest any
earnings in the development and expansion of its business and does not intend
to pay dividends in the foreseeable future. The payment of dividends, if any,
in the future will be at the discretion of the Board of Directors and will
depend on the Company's earnings, financial condition, capital requirements
and other relevant factors.
12
<PAGE>
DILUTION
Pro forma net tangible book value per share represents total assets, less
intangible assets and total liabilities, divided by the number of shares
outstanding as of March 31, 1996 (assuming the conversion into Common Stock of
all of the Company's outstanding shares of Preferred Stock). The Company's pro
forma net tangible book value at March 31, 1996 was $14,692,253 or
approximately $2.34 per share. Without taking into account any changes in such
net tangible book value per share after March 31, 1996, other than to give
effect to the sale of the shares of Common Stock offered hereby and the
receipt of the net proceeds of such sale, the pro forma net tangible book
value per share at March 31, 1996 would have been $40,797,253 or $4.40 per
share. This represents an immediate increase in net tangible book value per
share of $2.06 to existing shareholders and an immediate dilution of $5.10 per
share to new investors. The following table sets forth this per share
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................ $9.50
Pro forma net tangible book value per share as of March 31, 1996. $2.34
Increase per share attributable to new investors................. 2.06
-----
Pro forma net tangible book value per share after the Offering..... 4.40
-----
Dilution per share to new investors................................ $5.10
=====
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996,
the differences between existing shareholders and new investors with respect
to the total number of shares of Common Stock and Preferred Stock (all of
which Preferred Stock will be converted into Common Stock upon the closing of
the Offering) purchased from the Company, the total consideration paid and the
average price per share paid (assuming the sale of 3,000,000 shares of Common
Stock).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 6,269,038 67.6% $27,558,143 49.2% $4.40
New investors............... 3,000,000 32.4 28,500,000 50.8 9.50
--------- ----- ----------- -----
Total..................... 9,269,038 100.0% $56,058,143 100.0%
========= ===== =========== =====
</TABLE>
The above calculations do not give effect to the exercise of (i) outstanding
options to purchase 970,102 shares of Common Stock at a weighted average
exercise price of $3.46 per share outstanding on May 1, 1996, (ii) options to
purchase 105,000 shares of Common Stock at the initial public offering price
which will be granted upon closing of the Offering, (iii) options to purchase
up to an additional 997,891 shares of Common Stock available for issuance
under the Company's stock option plans, and (iv) outstanding warrants to
purchase 459,359 shares of Common Stock at a weighted average exercise price
of $4.73 per share issued in connection with certain financing transactions.
To the extent that these options and warrants become exercisable and are
exercised, there will be further dilution to new investors. See "Description
of Capital Stock."
13
<PAGE>
CAPITALIZATION
The following table sets forth (i) the pro forma capitalization of the
Company at March 31, 1996, giving effect to the conversion of all outstanding
shares of Preferred Stock into Common Stock, and (ii) such pro forma
capitalization as adjusted to give effect to the issuance and sale by the
Company of the 3,000,000 shares of Common Stock offered hereby and the
application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------
PRO FORMA,
PRO FORMA AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt and capital lease obligations, less
current portion......................................... $ 1,259 $ 1,259
------- -------
Shareholders' equity:
Undesignated preferred stock, $.01 par value, 5,000,000
shares authorized; none issued and outstanding........ -- --
Common Stock, $.01 par value, 20,000,000 shares
authorized; 6,269,038 shares issued and outstanding,
pro forma; 9,269,038 shares issued and outstanding,
pro forma as adjusted (1)............................. 63 93
Additional paid-in capital............................. 27,141 53,216
Deficit accumulated during the development stage....... (11,521) (11,521)
Deferred compensation.................................. (865) (865)
------- -------
Total shareholders' equity........................... 14,818 40,923
------- -------
Total capitalization................................. $16,077 $42,182
======= =======
</TABLE>
- --------
(1) Excludes 970,102 shares of Common Stock issuable upon exercise of options
outstanding on May 1, 1996, which had a weighted average exercise price of
$3.46 per share. Also excludes 459,359 shares of Common Stock issuable
upon exercise of warrants outstanding, which had a weighted average
exercise price of $4.73 per share. See "Description of Capital Stock."
14
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
The following selected financial data of the Company are qualified by
reference to and should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and Financial
Statements and the Notes thereto included elsewhere herein. The statements of
operations data for the years ended December 31, 1993, 1994 and 1995, and the
balance sheet data at December 31, 1994 and 1995 are derived from, and are
qualified by reference to, the audited financial statements included elsewhere
in this Prospectus and should be read in conjunction with those financial
statements and notes thereto. The statements of operations data for the years
ended December 31, 1991 and 1992 and the balance sheet data at December 31,
1991, 1992 and 1993 are derived from audited financial statements not included
herein. The selected financial data as of and for the three months ended March
31, 1995 and 1996 and for the period from April 3, 1990 (inception) through
March 31, 1996 have been derived from unaudited financial statements of the
Company which, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the financial information set forth therein. The results for the three
months ended March 31, 1996 are not necessarily indicative of the results to
be expected for the entire year.
<TABLE>
<CAPTION>
THREE
MONTHS ENDED PERIOD FROM
YEAR ENDED DECEMBER 31, MARCH 31, APRIL 3, 1990
------------------------------------- -------------- (INCEPTION) TO
1991 1992 1993 1994 1995 1995 1996 MARCH 31, 1996
----- ----- ----- ------- ------- ----- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Operating expenses:
Research and
development........... $ 401 $ 403 $ 442 $ 1,568 $ 2,463 $ 460 $ 768 $ 6,203
General and
administrative........ 236 254 237 792 1,417 273 502 3,576
Clinical and
regulatory............ -- -- -- 52 298 61 123 472
Manufacturing
development........... -- -- -- 56 718 49 308 1,082
Sales and marketing.... -- -- -- 54 385 87 189 628
----- ----- ----- ------- ------- ----- ------- --------
Total operating
expenses............. 637 657 679 2,522 5,281 930 1,890 11,961
----- ----- ----- ------- ------- ----- ------- --------
Operating loss......... (637) (657) (679) (2,522) (5,281) (930) (1,890) (11,961)
Interest income
(expense), net........ 15 3 (4) 30 232 (27) 159 440
----- ----- ----- ------- ------- ----- ------- --------
Net loss.............. $(622) $(654) $(683) $(2,492) $(5,049) $(957) $(1,731) $(11,521)
===== ===== ===== ======= ======= ===== ======= ========
Pro forma net loss per
share(1).............. $ (.81) $ (.22)
======= =======
Pro forma weighted
average shares
outstanding(1)........ 6,269 7,919
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------ -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 398 $ 401 $ 77 $ 502 $15,764 $ 2,331 $ 14,561
Working capital
(deficit)............. 370 396 (116) 215 15,337 (889) 14,197
Total assets........... 482 558 195 1,247 17,376 3,222 16,545
Long-term debt and
capital lease
obligations, less
current portion....... 28 49 24 499 447 484 1,259
Redeemable convertible
preferred stock(2).... 1,320 2,010 2,185 5,132 -- 5,132 --
Deficit accumulated
during the development
stage................. (913) (1,567) (2,250) (4,742) (9,791) (5,699) (11,521)
Total shareholders'
equity
(deficiency)(2)....... (909) (1,563) (2,246) (4,738) 16,405 (569) 14,818
</TABLE>
- --------
(1) Computed on the basis described in Note 2 of Notes to Financial
Statements.
(2) The Company has not declared or paid any dividend for any of the periods
presented. See "Dividend Policy."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Prospectus. This
Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed elsewhere in this
Prospectus. See "Risk Factors."
GENERAL
Integ, a development stage company incorporated on April 3, 1990, is engaged
in the development of the Lifeguide System, a painless and bloodless hand-held
glucose monitoring product for use by people with diabetes. Utilizing the
Company's proprietary ISF sampling technology, the Lifeguide System will allow
people with diabetes to frequently self-monitor their glucose levels without
repeatedly enduring the pain of lancing their fingers to obtain a blood
sample.
From inception through March 31, 1996, the Company has incurred losses
totaling $11,521,395, consisting of $6,203,455 of research and development
expenses, $3,575,589 of general and administrative expenses and $1,742,351 of
other expenses net of interest income. The Company's activities have consisted
primarily of research and product development, product design, fund raising
and determination of the manufacturing processes and marketing strategies
needed for the introduction of the Lifeguide System planned for the first half
of 1998. The Company has generated no revenue and has sustained significant
operating losses each year since inception. The Company expects such losses to
continue through 1999 and to increase at least through the end of 1998.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 AND 1995
General. Net losses increased to $1,730,870 during the three months ended
March 31, 1996 from $957,277 during the same period in 1995. The Company
expects net losses to continue to escalate during the remainder of 1996 and
during 1997 and 1998 because of anticipated spending increases necessary to
complete the design of the Company's product, expenses resulting from
manufacturing development and clinical testing, marketing and advertising
expenses related to market introduction, and expenses required to establish
and maintain the Company's sales force.
Research and development expenses. Research and development expenses
increased to $768,488 during the three months ended March 31, 1996 from
$460,185 during the same period in 1995. The increase in research and
development expenses was due primarily to increases in compensation, benefit
and employee recruiting costs and, to a lesser extent, increases in consulting
expenses, patent legal fees and the cost of prototype materials purchased.
General and administrative expenses. General and administrative expenses
increased to $501,963 during the three months ended March 31, 1996 from
$272,780 during the same period in 1995. The increase in general and
administrative expenses was due to increases in compensation, facility costs
and depreciation of furniture and equipment.
Clinical and regulatory expenses. Clinical and regulatory expenses increased
to $122,856 during the three months ended March 31, 1996 from $61,104 during
the same period in 1995. The increase was due primarily to increases in
compensation and benefit costs and consulting expenses incurred to plan the
clinical testing necessary to obtain the required regulatory approvals for the
Lifeguide System.
Manufacturing development expenses. Manufacturing development expenses
increased to $307,885 during the three months ended March 31, 1996 from
$48,877 during the same period in 1995. The increase was due primarily to
increases in pre-manufacturing expenses, consisting of compensation and
recruiting costs and
16
<PAGE>
consulting expenses incurred to plan and design the Company's automated
manufacturing processes. These manufacturing related costs will be allocated
to inventory and cost of goods sold once production of the Lifeguide System
commences.
Sales and marketing expenses. Sales and marketing expenses increased to
$189,321 during the three months ended March 31, 1996 from $87,154 during the
same period in 1995. The increase was due primarily to compensation and
recruiting costs, product design costs and expenses related to building a
sales and marketing organization.
Interest income. Interest income increased to $181,849 during the three
months ended March 31, 1996 from $27,062 during the same period in 1995. The
increase was due primarily to the investment in government securities of
proceeds received from the sale of a series of the Company's Preferred Stock
in June 1995. See Note 4 of Notes to Financial Statements.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
General. Net losses increased to $5,048,730 during 1995 from $2,492,220
during 1994 and $682,725 during 1993.
Research and development expenses. Research and development expenses
increased to $2,462,868 during 1995 from $1,568,220 during 1994 and $441,964
during 1993. The increases in research and development expenses were due
primarily to increases in compensation, benefit and employee recruiting costs
and, to a lesser extent, from increases in consulting expenses, patent legal
fees and the cost of prototype materials purchased.
General and administrative expenses. General and administrative expenses
increased to $1,417,365 during 1995 from $792,017 during 1994 and $237,177
during 1993. The increases in general and administrative expenses were due to
increases in compensation, facility costs and depreciation of furniture and
equipment.
Clinical and regulatory expenses. Clinical and regulatory expenses increased
to $297,580 during 1995 from $52,083 during 1994. No clinical and regulatory
expenses were recorded in 1993. The increases were due primarily to increases
in compensation and benefit costs and consulting expenses incurred to plan the
clinical testing necessary to obtain the required regulatory approvals.
Manufacturing development expenses. Manufacturing development expenses
increased to $718,316 during 1995 from $55,430 during 1994. No manufacturing
development expenses were recorded in 1993. The increases were due primarily
to increases in pre-manufacturing expenses, consisting of compensation and
recruiting costs and consulting expenses incurred to plan and design the
Company's automated manufacturing processes.
Sales and marketing expenses. Sales and marketing expenses increased to
$384,722 during 1995 from $54,409 during 1994. No sales and marketing expenses
were recorded in 1993. The increases were due primarily to compensation and
recruiting costs, product design costs and expenses related to building a
sales and marketing organization.
Interest income. Interest income increased to $580,840 during 1995 from
$45,112 during 1994 and $4,244 during 1993. The increases were due primarily
to the investment in government securities of the proceeds from the sale of
the Company's Preferred Stock. See Note 4 of Notes to Financial Statements.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations since inception have been funded by net proceeds
from the sale of Preferred Stock totaling $25,689,732. As of March 31, 1996,
the Company had cash and cash equivalents of $14,561,032 and working capital
of $14,196,596.
On March 27, 1996, the Company executed an equipment loan agreement with a
venture leasing company which provides for borrowings of up to $5,000,000
under a line of credit. The lender has committed to a total line of
$12,500,000 by July 31, 1996 to finance the purchase of furniture and
equipment, including automated manufacturing equipment and tooling. The line
of credit expires December 31, 1998, and approximately $930,000 was borrowed
under the line on March 29, 1996. In consideration of the line of credit, the
Company has agreed to issue warrants for the purchase of Common Stock equal to
8.8% of the dollar value of the borrowings outstanding under such agreement,
as borrowed, or for any unfunded portion of this commitment, if any exists at
December 31, 1998. Each warrant is exercisable initially at $6.00 per share,
or subsequently at 80% of the purchase price per share of a subsequent
financing if such occurs prior to a subsequent funding.
Management expects that the Company's existing cash balance and borrowings
available under the loan agreement discussed above, along with the anticipated
net proceeds of the Offering, will be sufficient to fund the operations of the
Company through at least the next 24 months. The Company's future liquidity
and capital requirements will depend on numerous factors including the extent
to which the Company's Lifeguide System gains market acceptance, the timing of
regulatory actions regarding the Lifeguide System, the costs and timing of
expansion of sales, marketing and manufacturing activities, results of
clinical trials and competition. There can be no assurance that the Company
will not be required to raise additional capital during the next 24 months or
thereafter or that such capital will be available on acceptable terms, or at
all. See "Risk Factors--Future Capital Requirements; No Assurance Future
Capital Will Be Available."
18
<PAGE>
BUSINESS
The Company is engaged in the development of the Lifeguide System, a
painless and bloodless glucose monitoring product for use by people with
diabetes. The Company believes the proposed Lifeguide System will be the first
hand-held glucose monitor that allows people with diabetes to frequently self-
monitor their glucose levels without repeatedly lancing their fingers to
obtain a blood sample. The Lifeguide System utilizes the Company's proprietary
ISF sampling technology. The Company believes that its system will represent a
significant technological advance in glucose monitoring that will enable
people with diabetes to manage their disease more effectively and
conveniently.
INDUSTRY OVERVIEW
DIABETES
It is estimated that there are as many as 100 million people with diabetes
worldwide. In the United States, diabetes is a leading cause of blindness,
kidney failure, amputation and heart failure, and is the fourth leading cause
of death by disease. Diabetes is a chronic disease affecting overall health
which can lead to severe complications and requires active disease management
on a daily basis. Nearly 16 million people in the United States have diabetes,
and more than 625,000 new cases of diabetes are diagnosed each year. According
to the American Diabetes Association, the total estimated cost of diabetes in
the United States exceeds $90 billion per year.
Diabetes is a disease characterized by the body's inability to maintain the
proper amount of circulating glucose. Glucose is derived from the
carbohydrates in food and circulates through the bloodstream to the cells of
the body, where it is converted into energy. The concentration of circulating
glucose must be maintained within a relatively narrow range to maintain normal
health. Insulin, a hormone secreted by the pancreas, is the primary regulatory
mechanism by which the body reduces glucose levels. Diabetes is caused by a
reduction in the number of insulin producing cells, defects in those cells, a
resistance to circulating insulin or various combinations of these factors.
Due to the reduced ability to control circulating glucose levels, people with
diabetes are subject to significant complications affecting their overall
health and life expectancy. High glucose levels result in fatigue, slow
healing and low resistance to infection and, over time, can lead to
retinopathy (eye disease), nephropathy (kidney disease), neuropathy (nerve
disease), cardiovascular complications (heart and blood vessel disease) and
podiatric (foot) complications. Low glucose levels can result in faintness,
weakness and, in severe cases, unconsciousness and death.
The American Diabetes Association estimates that Type I (insulin-dependent
or juvenile onset) diabetes, a form of the disease requiring daily insulin
treatments, comprises approximately 5-10% of diagnosed diabetes cases in the
United States. The other 90-95% of diagnosed diabetes cases in the United
States are comprised of Type II (non-insulin-dependent or adult onset)
diabetes. Type II diabetes is usually managed by oral drug therapy, diet and
exercise but requires treatment with insulin in approximately 35% of all cases
of this type.
GLUCOSE MONITORING
The use of personal glucose monitors is a key factor in the management of
diabetes. Glucose levels are dynamic and vary throughout the day depending
upon food intake, insulin availability, exercise, stress and illness. People
with diabetes attempt to maintain their glucose levels within an acceptable
range through the use of insulin injections, oral hypoglycemic (glucose
reducing) agents, diet, exercise or a combination of these activities. People
with diabetes test their glucose levels at multiple times during the day,
including before eating or when their glucose levels are suspected to be
rising or falling faster than desired.
The Company believes that sales of personal blood glucose monitoring
products have increased significantly in recent years due to technological
innovations, the development of retail distribution channels and increasing
awareness of the benefits of frequent glucose monitoring. Historically,
consumers have selected devices that offer the greatest ease of use while
providing fast and accurate blood glucose measurements, and technological
innovators have tended to capture significant market share rapidly. According
to Medical Data International, sales of personal blood glucose monitoring
products in the United States have increased from approximately
19
<PAGE>
$450 million in 1991 to an estimated $730 million in 1995. The Company
estimates that the worldwide market for personal glucose monitoring products
was over $1.5 billion in 1995.
Due to the release in 1993 of the results of the landmark Diabetes Control
and Complications Trial (the "DCCT"), people with diabetes are becoming
increasingly aware of the need for more intensive glucose monitoring. The
purpose of the trial, which studied more than 1,400 people with Type I
diabetes over a nine-year period, was to determine whether tighter control
over glucose levels would prevent the onset or slow the progression of the
serious complications that often accompany diabetes. Participants in the DCCT
were randomly assigned to either intensive or conventional therapy groups.
Conventional therapy consisted of testing glucose levels once or twice a day
with one or two daily insulin injections. Intensive therapy involved testing
glucose levels at least four times a day with at least three insulin
injections and appropriate modifications to diet and exercise and insulin
doses in accordance with the measured glucose levels. The DCCT demonstrated
that more intensive treatment of Type I diabetes can reduce the risk of
developing various diabetes-related complications by approximately 60%.
The DCCT panel has recommended that people with Type I diabetes follow an
intensive therapy program, including testing their glucose levels at least
four times a day. Many experts on diabetes also believe that people with Type
II diabetes, who do not typically check their glucose levels at regular
intervals, would also benefit from regular monitoring. Currently, however, the
majority of people with diabetes who use insulin monitor their glucose levels
less than once per day.
EXISTING PERSONAL BLOOD GLUCOSE MONITORING SYSTEMS AND ALTERNATIVE
TECHNOLOGIES
Commercially available glucose monitoring systems involve obtaining a
patient's blood sample in order to measure glucose. The primary drawbacks to
this approach are the pain associated with lancing a fingertip to produce the
sample and the mess and inconvenience of handling blood. In conventional
glucose monitoring systems, blood samples are taken from the fingertips
because of the high concentration of capillaries at that site and because the
blood produced at the fingertip can most easily be applied directly to the
test strips used in such devices. Since nerve endings are concentrated in the
fingertips, however, this sampling process results in a significant degree of
pain. The level of patient discomfort is compounded because the fingertips
offer a limited surface area from which to obtain a blood sample, requiring
the patient to repeatedly sample from the same site. In addition, many people
with diabetes are uncomfortable with routinely testing glucose levels in the
presence of others because of the negative perceptions associated with visible
blood.
Most currently available personal blood glucose monitoring systems employ a
disposable test strip in conjunction with a battery-powered, hand-held meter.
These systems usually require the user to (1) assemble the finger-lancing
device, (2) determine the calibration code from the test strip package and
adjust the meter as required to be properly calibrated to the test strip being
used, (3) insert the test strip into the meter, (4) lance the finger and wait
for a drop of blood to form on the fingertip, and (5) apply the blood sample
to the test strip and wait for the meter to display the results. The retail
prices of these systems range from approximately $30 to $130 per meter and
from approximately $0.47 to $0.82 per test strip, although, due to rebates and
trade-ins, test meters are often offered to people with diabetes at
substantially reduced prices in expectation of recurring purchases of test
strips.
The goal of most recent glucose monitoring research has been to develop an
accurate system to monitor glucose without the pain of a finger lance or the
need to handle blood. The Company believes that most of the current research
and development in this area involves either non-invasive near-infrared
spectroscopic or reverse iontophoretic technologies. Non-invasive near-
infrared spectroscopic technology generally attempts to estimate glucose
levels by measuring light absorption when an infrared light signal is
transmitted through or reflected off of a body part. Due to several technical
demands, this approach requires the use of the near-infrared waveband region
for measurement of glucose levels. However, this waveband region is only
weakly absorbed by glucose, resulting in low signal to noise ratios that make
signal detection difficult. In addition, passage of the near-infrared light
through a structurally complicated medium (such as a fingertip) produces
complex data requiring highly sophisticated algorithms for interpretation.
Development of these algorithms has proven to be a major technical challenge
to the development of non-invasive near-infrared spectroscopic technologies.
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Reverse iontophoretic technology uses electrical current to draw glucose
molecules out of the skin for measurement. However, this technology has
inherent difficulties relating to the non-physiologic nature of the sample
obtained. This sample has a concentration of glucose much lower than that
found in the body, making the accurate and precise analysis of the sample
difficult. In addition, a reverse iontophoretic device may be required to be
worn continuously (creating the need for frequent calibration), may cause skin
irritation due to the long-term effects of electrical current passage through
the skin and, because of the long sampling times involved, may lead to results
that are not clinically useful. No glucose monitor using either non-invasive
near-infrared spectroscopic or reverse iontophoretic technologies or any other
non-invasive glucose monitoring technology has ever been commercialized.
The Company believes that the pain and inconvenience associated with
conventional "finger-stick" blood glucose monitoring systems is the primary
reason that most people with diabetes fail to comply with the recommendations
of the DCCT panel. To date, however, completely non-invasive technologies have
failed to provide a practical alternative to commercially available blood
glucose monitoring systems.
THE INTEG SOLUTION
The Company is developing the Lifeguide System, utilizing the Company's
proprietary ISF sampling technology, to allow people with diabetes to easily
and accurately measure their glucose levels without the pain of a finger lance
or the need to handle blood. The Lifeguide System captures an extremely small
physiological (as it exists in the body) sample of ISF in a painless and
bloodless manner and then measures the glucose level in that sample in a
compact, easy-to-use device. The proposed Lifeguide System will be comprised
of the Lifeguide Monitor, a hand-held, battery-powered monitor, and the
Lifeguide Key, a single-use, disposable sample collection device.
THE INTEG TECHNOLOGY
The Company's proposed Lifeguide System is based on Company research
indicating that ISF glucose levels correlate closely with blood glucose
levels. ISF is an extracellular fluid that is prevalent throughout the body
and the skin. ISF is the means through which proteins and chemicals, including
glucose, pass between capillaries and cells. Since the Lifeguide System's
approach obtains a sample from the outermost layers of the skin almost
anywhere on the body, it will avoid the areas of high nerve density and
capillaries found in the deeper layers of the skin, thus eliminating the pain
and blood associated with conventional "finger-stick" sampling approaches.
The Company's proprietary method for ISF sampling involves a simple
procedure that draws an ISF sample from the outermost layers of the skin and
captures that sample for measurement. The ISF sample (approximately 1/100th of
a drop) is analyzed for glucose levels by the Lifeguide Monitor utilizing a
signal from the far-infrared waveband region. The proposed Lifeguide System
will utilize well-established spectroscopic techniques which the Company is
developing into a compact, hand-held, battery-operated configuration. The
proposed Lifeguide Monitor will contain an infrared source set opposite to an
infrared detector, with the sample window on the Lifeguide Key inserted
between the two. When the infrared energy generated by the source passes
through the sample window, glucose in the ISF sample absorbs part of the
energy in a manner that is detected, measured and displayed by the Lifeguide
Monitor.
The Company believes that its approach has significant technological
advantages over non-invasive near-infrared spectroscopic and reverse
iontophoretic technologies. Because the Lifeguide System obtains a physiologic
sample of ISF for testing, the accurate and precise analysis of glucose in the
sample is a straight-forward process. In addition, because the Lifeguide
System removes the ISF from the body for testing, the sample can be accurately
analyzed using well established spectroscopic techniques in the far-infrared
waveband region, the region which produces the strongest signal for measuring
glucose. In infrared spectroscopy, infrared light energy is transmitted
through (or reflected off) a sample containing an analyte (such as glucose),
and the resulting signal is then measured. Because many analytes have
recognizable infrared energy absorption characteristics, measurement of the
resulting signal indicates the amount of the analyte present in the sample.
Each analyte has one waveband region in the infrared spectrum which it absorbs
most strongly. For glucose, the
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far-infrared waveband region is the primary absorbing region, and therefore
gives the strongest signal for measurement. Non-invasive near-infrared
spectroscopy technology cannot use this far-infrared waveband because this
waveband is also strongly absorbed by the water prevalent in body tissue.
POTENTIAL ADVANTAGES OF THE LIFEGUIDE SYSTEM
The Company believes the Lifeguide System will offer significant advantages
over commercially available personal blood glucose monitoring systems and
alternative non-invasive technologies under development, including the
following:
. Painless Procedure--The Lifeguide System is designed to allow for the
accurate measurement of glucose levels without the pain of a finger
lance. Unlike most commercially available glucose monitoring systems
which involve penetrating the deeper layers of the skin to obtain a blood
sample, the Lifeguide System's proprietary sampling method draws from
only the outermost layers of the skin and avoids the areas of high nerve
density. This sampling technology eliminates the pain associated with
conventional "finger-stick" sampling approaches.
. Bloodless Approach--The Lifeguide System is designed to allow for the
accurate measurement of glucose levels without drawing blood. This
bloodless approach eliminates the mess and inconvenience of handling a
blood sample and the negative perceptions associated with visible blood.
The elimination of the need for a blood sample will allow people with
diabetes to use the proposed Lifeguide System discretely in any
environment.
. Sampling Flexibility--The Lifeguide System is designed to be used on skin
almost anywhere on the body, not merely areas (such as the fingertips)
where blood capillaries and nerve endings are concentrated.
. Ease of Use--The Company's proposed Lifeguide System will eliminate some
of the steps required by commercially available personal blood glucose
monitoring systems. With most current systems, after lancing the finger,
a drop of blood must be directed to a small target zone on a thin,
difficult to handle strip. The Company has designed the Lifeguide Key to
be easily handled and inserted into the Lifeguide Monitor. The sampling
procedure of the proposed Lifeguide System has been reduced to simply
holding the device against an area of exposed skin until an adequate
sample has been obtained (5 to 30 seconds) and waiting briefly for a
displayed result.
. Cost Competitive--Unlike some alternative non-invasive technologies under
development, it is anticipated that the proposed Lifeguide System will be
offered at competitive prices and will not be a significant departure
from current consumer buying patterns and reimbursement practices with
respect to commercially available personal glucose monitoring meters and
disposable test strips.
Because of these potential advantages, the Company believes that the
proposed Lifeguide System may facilitate greater compliance with the
recommendations of the DCCT panel.
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THE LIFEGUIDE SYSTEM
The proposed Lifeguide System will be comprised of (i) the Lifeguide
Monitor, a hand-held, battery-powered monitor, and (ii) the Lifeguide Key, a
single-use, disposable sample collection device.
[Line drawing of (i) the Lifeguide Monitor with captions for (and arrows
pointing to corresponding parts of the Lifeguide Monitor): "LCD Readout" (with
readout of 114 mg/dl), "Function Buttons," "Release Button for Lifeguide Key,"
"Lifeguide Key" and "Port for Lifeguide Key"; and (ii) the Lifeguide Key, with
captions for (and arrows pointing to corresponding parts of the Lifeguide Key):
"Sample Window," "Handle" and "Needle."]
The Lifeguide Monitor will be an integrated, compact, easy-to-use glucose
monitoring device similar in size to a hand-held cellular telephone. The
Lifeguide Monitor will consist of an infrared source and detector, an easy-to-
read LCD display screen, a port for the disposable Lifeguide Key and buttons
to access memory and other functional modes. The proposed Lifeguide Monitor
will have visual and audible prompts to assist the user through the sampling
process. The Lifeguide Monitor will have the ability to indicate when an
appropriate sample has been obtained and to self-diagnose any electronic
malfunction. In addition, the Lifeguide Monitor will be capable of
transferring data to a personal computer for review and analysis by the user's
physician.
The single-use, disposable Lifeguide Key is designed to be easily handled by
the user and inserted into the Lifeguide Monitor. The proprietary design of
the Lifeguide Key will allow for the painless capture of the required ISF
sample and the retention of the sample during the measurement and disposal
process. The Lifeguide Key will use a very small needle used to draw a sub-
microliter sample across a specially designed window through which a sample
can be read. The Lifeguide Key will be similar in size to an average house
key. Each Lifeguide Key will be packaged in a sterile pouch along with a
protective cap that will serve as a means for disposal after use.
To operate the Lifeguide System, the user will insert the Lifeguide Key into
the Lifeguide Monitor and hold the Lifeguide System against the skin until the
Lifeguide Monitor indicates the sampling process is complete. The sampling
time will vary from 5 to 30 seconds depending on the user and the location of
sampling. Shortly
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after the sampling process is complete, the Lifeguide System will display the
user's glucose level. Because the ISF sample captured by the Lifeguide Key
will not come into contact with the Lifeguide Monitor, there will be no need
to clean the Lifeguide Monitor after each use. The Company will also offer a
control solution that will allow the user to confirm that the Lifeguide System
is functioning properly.
RESEARCH AND DEVELOPMENT
To date, the Company has been engaged primarily in the research, development
and testing of the Lifeguide System. Since inception, the Company has incurred
approximately $6.2 million in research and development expenses. The Company
believes that it is in the final stages of its product development and expects
to have final design specifications for its first commercial Lifeguide System
by the end of 1996. In 1994, the Company used benchtop prototypes
incorporating the functional components of its Lifeguide System and standard
laboratory electronics to demonstrate that ISF glucose values correlate
closely to blood glucose values obtained with commercially available personal
blood glucose monitors. In addition, the Company has recently conducted
studies using a benchtop prototype of the Lifeguide System incorporating all
of the final components of the Lifeguide System (including battery-powered
electronics) to demonstrate the accuracy of the Lifeguide System when testing
samples containing known glucose values. The Company expects to complete
development of a fully-integrated commercial prototype of the Lifeguide
System, including a hand-held, battery-powered Lifeguide Monitor and a single-
use, disposable Lifeguide Key, each expected to closely resemble the first
commercial version, in the first quarter of 1997.
The Company's success will be dependent upon its ability to manufacture the
Lifeguide System in compliance with regulatory requirements, in a timely
manner and in sufficient quantities while maintaining product quality and
acceptable cost. The personal glucose monitoring products market is
characterized by commercial products which are manufactured in large
quantities at very low cost. As a result, the present focus of the Lifeguide
Monitor development effort is to integrate the current benchtop components
into a hand-held, battery-powered final product that can be reliably and cost-
effectively manufactured. The development focus with respect to the Lifeguide
Key is on identifying the critical factors and specifications that will ensure
that functional, highly reliable samplers can be produced in high volumes at
the lowest unit cost. Both the Lifeguide Monitor and the Lifeguide Key are
being designed to use materials and components that can be easily produced by
suppliers with a minimum of customization. See "--Manufacturing."
CLINICAL TESTING
The goal of the Company's clinical testing to date has been to demonstrate
the correlation between ISF glucose levels and blood glucose levels, and to
test the final components of the Lifeguide System in benchtop prototypes for
accuracy and precision. To date, testing of the Lifeguide System has been
performed on benchtop prototypes solely by Company personnel under controlled
circumstances. All ISF samples used in this testing have been obtained
utilizing the Company's proprietary sampling method.
In December 1994, the Company undertook a program of testing people with
diabetes under a protocol reviewed and approved by the International Diabetes
Center, a diabetes research and treatment center located in Minneapolis,
Minnesota. This testing program was designed to evaluate the correlation
between the results obtained using (i) benchtop prototypes of the Company's
Lifeguide System incorporating the functional components of its Lifeguide
System and standard laboratory electronics, (ii) a standard laboratory assay
for measuring glucose levels in venous blood and (iii) the leading
conventional personal blood glucose monitoring system. The results of this
study demonstrated that ISF glucose levels closely correlate to blood glucose
levels and that the glucose values obtained with benchtop prototypes of the
Lifeguide System closely correlate to those obtained with commercially
available blood glucose monitors.
In early 1996, additional clinical studies were conducted at the Mayo Clinic
and the University of Minnesota. Both of these studies used the Lifeguide
System to obtain samples of ISF and a standard laboratory assay for measuring
glucose levels in venous blood and in ISF. The Mayo Clinic study provides
publishable support for the conclusion that there is a strong correlation
between the glucose levels in ISF to the glucose levels in blood when the
glucose levels are in a relatively steady state. This study compared the ISF
and blood glucose
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values in 66 individuals and yielded a correlation coefficient of 0.96 (on a
0.0 to 1.0 scale, with 1.0 representing a perfect correlation). The University
of Minnesota study, which is ongoing, is being conducted to provide
publishable support for the conclusion that there is a strong correlation
between the glucose levels in ISF and the glucose levels in blood when the
glucose levels are in a state of rapid change. To date, this study has
compared the ISF and blood glucose values in six individuals with Type I
diabetes over a five-hour period of rising and falling glucose values.
Cumulative data from these six subjects has also yielded a correlation
coefficient of 0.96.
In 1996, the Company also conducted studies using a benchtop prototype of
the Lifeguide System incorporating all of the final components of the
Lifeguide System (including battery-powered electronics) to compare the
glucose values obtained using the Lifeguide System to the known glucose values
in the sample. This testing, performed on over 70 samples, yielded a
correlation coefficient of 0.99 (on a 0.0 to 1.0 scale, with 1.0 representing
a perfect correlation).
The Company plans to use commercial prototypes of the Lifeguide System
(expected to be available in the first quarter of 1997) to obtain patient-
generated clinical data in a three-center, 300 patient trial for use in the
Company's application to the FDA for a 510(k) clearance to market the
Lifeguide System. The Company presently plans to submit this application to
the FDA in the first half of 1997.
There can be no assurance that the Company will not encounter problems in
clinical testing which will cause the Company to delay commercialization of
the Lifeguide System, and there can be no assurance that the commercial
version of the Lifeguide System will prove to be accurate and reliable on a
consistent basis. Even if accurate and reliable, there can be no assurance
that such testing will show the Company's product to be safe or cost
effective. See "Risk Factors--Limited Clinical Testing Experience; Uncertainty
of Obtaining FDA Clearances."
MANUFACTURING
The Lifeguide System is designed to be economically produced using proven
manufacturing methods and equipment. As part of its design strategy, the
Company has consulted with component suppliers, automation firms and OEM
electronics manufacturers.
The Company currently plans to utilize an outside manufacturer to assemble
the Lifeguide Monitor. This manufacturer will be used to build all prototypes
of the Lifeguide Monitor for testing and to develop test methods and equipment
for the Company. Most of the components in the Lifeguide Monitor will be
standard, off-the-shelf components. In order to control margins, quality and
supply, the Lifeguide Key will be assembled by the Company at its facilities
from components obtained from outside suppliers. The Lifeguide Key has been
designed to minimize the number of required components and to use components
that can be purchased from suppliers with experience in high volume, medical
product manufacturing. In manufacturing the Lifeguide Key, the Company will
use assembly, test and packaging equipment employing well-known processes
similar to those used for other high speed assembly applications.
One component of the Lifeguide Monitor is available from a single source, as
is one component of the Lifeguide Key. In the event that the Company is unable
to obtain either of these components from their respective suppliers, the
Company would be required to make modifications to its existing Lifeguide
System and to obtain alternative components from alternative suppliers.
Although the Company believes that it can enter into supply agreements with
respect to these components, any interruption in the supply of either of these
components would have a material adverse effect on the Company's business,
financial condition and results of operation.
The Company expects that its most significant manufacturing challenge will
be to quickly increase Lifeguide Key production volumes after the full-scale
commercial introduction of the Lifeguide System. To address this challenge,
the Company anticipates installing and qualifying an initial manufacturing
line prior to installation of any full-scale commercial production lines.
After the installation, evaluation and refinement of the initial line are
completed, the Company anticipates incrementally adding several full-scale
commercial production lines with greatly expanded manufacturing capability.
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The Company presently has no manufacturing contracts or supply agreements
and has no manufacturing capability. There can be no assurance that the
Company will be able to achieve and maintain product quality and reliability
when producing the Lifeguide System in the quantities required for commercial
operations or within a period that will permit the Company to introduce its
products in a timely fashion, nor that the Company will be able to assemble
and manufacture its products at an acceptable cost. See "Risk Factors--Lack of
Manufacturing Capability; Dependence on Contract Manufacturers and Suppliers."
SALES AND MARKETING
The Company intends to direct its sales and marketing efforts at people with
diabetes who use insulin to control their glucose levels, because they tend to
monitor their blood glucose more frequently. The Company believes that insulin
users are more likely to be better educated concerning their condition, are
more motivated to comply with proper disease management and are most likely to
recognize the potential benefits of the Lifeguide System. The Company will
seek to gain product acceptance by implementing a strategy that both promotes
the Company's products directly to people with diabetes and educates
healthcare professionals, managed care decision makers and insurers as to the
potential advantages of the Lifeguide System in facilitating compliance with
the recommendations of the DCCT panel. As part of its education and awareness
strategy, the Company will focus on developing peer reviewed journal articles
authored by leading experts in diabetes, sponsoring publication of papers
based on research covering performance and utility benefits of the Lifeguide
System and conducting regional seminars.
Initially, the Company intends to use various direct marketing methods to
promote its Lifeguide System to people with diabetes, including direct mail,
advertisements in healthcare media and internet and on-line computer services.
In addition, the Company expects to utilize other emerging distribution
channels, including those supporting managed care organizations, on-line and
video merchandising services and direct distribution firms. The Company will
sell the Lifeguide System directly to consumers through a toll-free number and
will support these sales with a customer service organization. As the
Company's customer base grows, the Company expects to utilize traditional
retail distribution channels, including chain and independent drug stores and
other retail outlets. The Company expects eventually to market and distribute
its products outside the United States through third party distribution
channels.
The Company intends to introduce the Lifeguide System in the United States
in two phases: (1) a limited introduction phase, expected to commence in early
1998, subsequent to obtaining 510(k) clearance from the FDA; and (2) a full
commercial introduction phase, expected to commence several months thereafter.
During the limited introduction phase, the Company expects to use an
experienced direct sales force to introduce the Lifeguide System to key
opinion leaders in the treatment of diabetes for use in their practices on a
selected number of people with diabetes. In addition, during this phase the
Company expects to market to selected managed care organizations in
anticipation of full availability of product for contracted utilization. The
primary purposes of the limited introduction phase are to allow the Company to
build manufacturing capability in a controlled fashion prior to full product
commercialization and to ensure that the Company's infrastructure will support
full commercial introduction.
During the full commercial introduction phase, the Company plans to utilize
a three-pronged strategy employing a highly trained and focused direct sales
force. One specialized sales group will concentrate on promotion of the
Company's products to managed care decision makers and insurers. A second
specialized sales group will target the retail distribution channel. A third
group will promote the Company's products to healthcare professionals and
organizations that influence patient choices.
The Company has no experience in marketing the Lifeguide System and has not
yet entered into any marketing or distribution arrangements for the Lifeguide
System. There can be no assurance that the Company will be able to build a
suitable sales force or enter into satisfactory marketing arrangements with
third parties when commercial potential develops, or that its sales and
marketing efforts will be successful. See "Risk Factors--Lack of Commercial
Sales or Marketing Experience."
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PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain patent
protection for its proposed products and processes, to preserve its trade
secrets and to operate without infringing the proprietary rights of third
parties. The Company pursues a policy of seeking patent protection for each of
the areas of invention embodied in the Lifeguide System. The Company has filed
four patent applications in the United States directed towards various aspects
of the technology underlying the Lifeguide System and has received notice of
allowance from the United States Patent and Trademark Office (stating that the
application has been examined and is allowed for issuance as a patent and
requiring payment of a fee within a specified period) of one of these
applications relating to the method of drawing an ISF sample from the outer
layers of the skin for subsequent glucose analysis. The Company has also filed
one corresponding PCT foreign patent application to seek similar patent
protection outside the United States.
The Company has implemented a strategy of pursuing patent applications to
provide both design freedom and protection from competitors. This strategy
includes evaluating and seeking patent protection both for inventions most
likely to be used in the Company's Lifeguide System and for related inventions
likely to be used by others as competing alternatives.
The Company also relies upon trade secrets and proprietary know-how in its
manufacturing processes. The Company requires each of its employees,
consultants, advisors and certain of its vendors to execute a confidentiality
agreement upon the commencement of their relationship with the Company.
No assurance can be given that any patents will be issued, that the scope of
any patent protection granted to the Company will exclude competitors or that
any of the Company's patents will be held valid or enforceable if subsequently
challenged. Patenting medical devices involves complex legal and factual
questions, and there is no consistent policy regarding the breadth of claims
which issue pertaining to such technologies. The Company also relies upon
unpatented trade secrets, and no assurance can be given that others will not
independently develop or otherwise acquire technologies substantially
equivalent to those of the Company. In addition, even if the patents the
Company has applied for are ultimately issued, others may hold or receive
patents that contain claims covering the products proposed to be sold by the
Company and which may delay or prevent the sale of the Lifeguide System or
require licenses resulting in the payment of fees or royalties by the Company
in order for the Company to carry on its business. There can be no assurance
that needed or potentially useful licenses will be available in the future on
acceptable terms or at all.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation could
result in substantial costs to and a diversion of effort by the Company, but
may be necessary to enforce any patents issued to the Company, protect trade
secrets or know-how owned by the Company, defend the Company against claimed
infringement of the rights of others or determine the scope and validity of
the proprietary rights of others. The Company is not currently a party to any
patent or other litigation. The Company routinely monitors patent issuances by
others in its industry, and as a result recently became aware of a patent that
may relate to a feature of the Lifeguide System. The Company engaged outside
patent counsel to review the patent, and such counsel rendered its opinion to
the Company that the patent is not infringed by the Company's technology. In
addition, such counsel advised the Company that if the patent was challenged,
those claims which the Company believes may apply to the Lifeguide System
would be likely to be held invalid based on the existence of prior art not
cited by the patent examiner. There can be no assurance, however, that the
holder of the patent will not pursue litigation which could be costly to the
Company. An adverse determination in any litigation, including any litigation
commenced by the holder of the patent referred to above, could subject the
Company to significant liabilities to third parties, require the Company to
seek licenses from or pay royalties to third parties or prevent the Company
from manufacturing, selling or using its proposed products, any of which could
have a material adverse effect on the Company's business and prospects. See
"--Legal Proceedings" and "Risk Factors--Dependence on Patents and Proprietary
Technology."
THIRD PARTY REIMBURSEMENT
Private insurance companies, self-insured employers, health maintenance
organizations and governmental payors under Medicare and Medicaid programs are
a source of reimbursement to users of blood glucose
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monitoring systems and related products, but there is no uniform policy on
reimbursement among third-party payors. Sales of the Company's proposed
products in certain markets will be dependent in part on availability of
adequate reimbursement from these third-party payors. Although the Company
believes that current reimbursement levels are adequate to support the
introduction of the Lifeguide System, third-party payors are increasingly
challenging the pricing of medical products and services. There can be no
assurance that adequate levels of reimbursement will be available to enable
the Company to achieve market acceptance of the Lifeguide System or maintain
price levels sufficient to realize an appropriate return on its investment in
the development or manufacture of the Lifeguide System. Without adequate
support from third-party payors, the market for the Company's products may be
limited.
The Medicare program reimburses people with diabetes for one meter and for a
one month's supply of test strips at a time as approved by their physicians.
In 1996, the Health Care Financing Administration ("HCFA"), which sets rates
for the Medicare program, set a payment limit of $61.99 for personal blood
glucose monitors and set the maximum reimbursement rates for a box of 50 test
strips at between $33.75 to $39.70, depending on the state in which the
reimbursement is sought. The Office of the Inspector General of the United
States Department of Health and Human Services (the "OIG") is currently
conducting a survey to determine more economical methods of providing blood
glucose test strips to Medicare beneficiaries. These payment limits and
initiatives may lead to increased pricing pressures among manufacturers of
existing blood glucose meters and test strips. The Company's business,
financial condition and results of operations could be adversely affected by
the continuing efforts of governmental and private payors to reduce the costs
of healthcare by lowering reimbursement rates.
As a provider of products that are reimbursed by Medicare, Medicaid and
other third-party payors, the Company will be subject to the anti-kickback
provisions of the Medicare and Medicaid fraud and abuse laws and similar state
laws. These laws prohibit the exchange of remuneration for referrals of
services or products reimbursed by Medicare and Medicaid or other third-party
payors. Violations of these prohibitions may result in civil and criminal
penalties and exclusion from the Medicare and Medicaid programs. The Company
intends to comply with the federal anti-kickback statute and related safe
harbor regulations regarding discount disclosures. See "Risk Factors--
Uncertainty of Third Party Reimbursement."
COMPETITION
The Company believes that its success will depend primarily upon its ability
to create and deliver a painless and bloodless glucose monitoring system on a
timely basis and at a competitive price, effectively create market awareness
and acceptance of its products and maintain the proprietary nature of its
technologies and processes. The glucose monitoring industry is characterized
by intense competition and is currently dominated by several companies with
established products and distribution channels. There are currently four
significant competitors in the worldwide blood glucose monitoring market:
LifeScan, Inc., a subsidiary of Johnson & Johnson, Inc.; Boehringer Mannheim
Corporation, a subsidiary of Boehringer Mannheim GmbH; Bayer Diagnostics, a
division of Bayer AG; and Medisense, Inc. (which has agreed to be purchased by
Abbott Laboratories).
Companies in the glucose monitoring market compete on the basis of
innovative technology, ease of use, price, product reliability and acceptance
by consumers and healthcare professionals. Price competition for the placement
of monitors in the glucose monitoring market is intense and involves marketing
tactics such as rebates, trade-in offers and volume purchase incentive
programs. This price competition could result in reductions of the prices of
the Company's Lifeguide Monitor and the use of purchase incentive programs
that could adversely affect the Company's revenues and profitability.
A number of entities are conducting research on possible non-invasive
methods of determining glucose levels. Data regarding the precise progress of
these companies with respect to these alternative technologies has not
generally been made public.
There can be no assurance that the Company's competitors and potential
competitors will not succeed in developing or marketing technologies and
products that will be more accepted in the marketplace than the proposed
Lifeguide System or that would render the Company's technology and proposed
products obsolete or
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noncompetitive. Most of the Company's competitors and potential competitors
have substantially greater capital resources, research and development staffs
and facilities than the Company. In addition, most of the Company's
competitors and potential competitors have substantially greater experience
than the Company in research and new product development, obtaining regulatory
approvals and manufacturing and marketing medical devices. See "Risk Factors--
Highly Competitive Markets; Risk of Technological Obsolescence" and
"Business--Existing Personal Blood Glucose Monitoring Systems and Alternative
Technologies."
GOVERNMENT REGULATION
Government regulation in the United States and other countries is a
significant factor in the Company's business. The Company's products will be
regulated by the FDA under a number of statutes including the Federal Food,
Drug and Cosmetic Act, as amended (the "FDC Act"), and the Safe Medical
Devices Act of 1990 (the "SMDA"). Manufacturers of medical devices must comply
with applicable provisions of the FDC Act and the SMDA and certain associated
regulations governing the development, testing, manufacturing, labeling,
marketing and distribution of medical devices and the reporting of certain
information regarding their safety. Both the FDC Act and the SMDA require
certain clearances from the FDA before medical devices, such as the Company's
proposed Lifeguide System, can be marketed.
FDA permission to distribute a new device can be obtained in one of two
ways. If a new or significantly modified device is "substantially equivalent"
to an existing legally marketed device, the new device can be commercially
introduced after filing a 510(k) premarket notification with the FDA and the
subsequent issuance by the FDA of an order permitting commercial distribution.
Changes to existing devices that do not significantly affect safety or
effectiveness may be made without an additional 510(k) notification. The
Company believes the Lifeguide System will be eligible for 510(k) clearance
with the predicate device being a commercially available personal blood
glucose monitoring instrument.
A second, more comprehensive approval process applies to a new device that
is not substantially equivalent to an existing product. First, the applicant
must conduct clinical trials in compliance with testing protocols approved by
an institutional review board for the participating research institution.
Second, a Premarket Approval application ("PMA") must be submitted to the FDA
that describes the results of the clinical trials, the device and its
components, the methods, facilities and controls used for its manufacture,
proposed labeling and the demonstration that the product is safe and
effective. Finally, the manufacturing site for the product subject to the PMA
must pass an FDA preapproval inspection. The Company does not believe that its
planned products will require PMA approval, although there can be no assurance
that such an approval will not be required. If required, obtaining a PMA
approval will result in significant delays in and could prevent the
introduction of the Company's products.
In connection with either a 510(k) notification or a PMA, clinical testing
of a "significant risk" device requires the submission to the FDA of an
investigational device exemption ("IDE") application. An IDE application is
not required for a "nonsignificant risk" ("NSR") device. The Company believes
that the proposed Lifeguide System is an NSR device and therefore does not
require an IDE application. However, in the event that the FDA should require
the Company to submit an IDE application, the Company may be required to
repeat all or part of the clinical testing conducted prior to obtaining an
IDE, which may delay approval of the Lifeguide System.
The FDC Act will regulate the Company's development, quality control and
manufacturing procedures by requiring the Company to demonstrate compliance
with current Good Manufacturing Practices. The FDA monitors compliance with
these requirements by requiring manufacturers to register with the FDA, which
subjects them to periodic FDA inspections of their manufacturing facilities.
In order to ensure compliance with these requirements, the Company will be
required to expend time, resources and effort in the areas of production and
quality control. If violations of the applicable regulations are noted during
FDA inspections, the continued marketing of any products manufactured by the
Company may be adversely affected.
The Company also plans eventually to market the Lifeguide System in several
foreign markets. No regulatory approvals have yet been obtained in any such
countries and there is no assurance that any will be
29
<PAGE>
issued. Requirements pertaining to the Lifeguide System will vary widely from
country to country, and involve anything from simple product registrations to
detailed submissions similar to those required by the FDA. See "Risk Factors--
Limited Clinical Testing Experience; Uncertainty of Obtaining FDA Clearances"
and "--Government Regulation; Need for Additional Government Clearances."
EMPLOYEES
As of May 17, 1996, the Company had a total of 52 full-time employees. The
Company also had consulting or other contract arrangements with 18 persons on
a full- or part-time basis. Of this total workforce, 31 persons were engaged
in research and development activities, 14 persons in manufacturing
development, two persons in sales and marketing, 14 persons in clinical,
regulatory and quality functions and 9 persons in support and administrative
functions. It is anticipated that the Company will add approximately 25
employees by the end of 1996, primarily in the areas of manufacturing and
manufacturing engineering.
FACILITIES
The Company currently leases approximately 42,000 square feet of space at
2800 Patton Road, St. Paul, Minnesota. The lease expires on September 30,
2000. The Company believes its facilities will be adequate for its needs
through the full commercial introduction of the Lifeguide System.
PRODUCT LIABILITY
The Company currently carries a product liability insurance policy covering
the Company's clinical testing with an aggregate limit of $1.0 million.
Although the Company expects to obtain product liability insurance coverage in
connection with the commercialization of the Lifeguide System, there can be no
assurance that such insurance will be available on commercially reasonable
terms, or at all, or that such insurance, even if obtained, would adequately
cover any product liability claim. A product liability or other claim with
respect to uninsured liabilities or in excess of insured liabilities could
have a material adverse effect on the business and prospects of the Company.
See "Risk Factors--Product Liability Risk; Limited Insurance Coverage."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
30
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and key management personnel of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Frank A. Solomon(3)........ 52 President, Chief Executive Officer and Director
Katia P. Breslawec......... 42 Vice President, Regulatory and Quality
Susan L. Critzer........... 40 Vice President, Operations
Robert H. Dodge, Ph.D...... 46 Vice President, Research and Development
A. Paul Harding............ 47 Vice President, Sales and Marketing
Ronald M. Nelson........... 45 Chief Financial Officer
Mark B. Knudson,
Ph.D.(1)(3)............... 47 Chairman of the Board of Directors
Frank B. Bennett(1)(2)..... 39 Director
Timothy I. Maudlin(1)...... 45 Director
Terrance G. McGuire(2)..... 40 Director
Robert R. Momsen(3)........ 49 Director
Robert S. Nickoloff........ 67 Director
Walter L. Sembrowich,
Ph.D.(3).................. 53 Director
</TABLE>
- --------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
(3) Member of the Nominating Committee of the Board of Directors.
Frank A. Solomon, one of the founders of the Company, served as a consultant
to the Company from July through December 1990, its President and a director
since January 1991 and as Chief Executive Officer since December 1991. Mr.
Solomon has been involved in the development and marketing of products for the
diagnosis and treatment of diabetes for 12 years. From 1976 to 1989, Mr.
Solomon held various management positions at Eli Lilly and Company ("Eli
Lilly"), including President of Elco Diagnostics, a division of Eli Lilly,
General Manager of the Infusion Products division of Cardiac Pacemakers, Inc.,
a subsidiary of Eli Lilly, Manager in Eli Lilly's medical device merger and
acquisition group, and sequentially as National Sales Manager, Director of
Marketing and Sales and Director of Corporate Development at Physio-Control
Corporation, another subsidiary of Eli Lilly.
Katia P. Breslawec joined the Company in April 1996 as Vice President,
Regulatory and Quality. Before joining the Company, Ms. Breslawec spent nine
years with Sanofi Diagnostics Pasteur, Inc., a manufacturer of clinical
laboratory instruments, in vitro diagnosis reagents, and biologicals. Most
recently, as Director of Regulatory, Ms. Breslawec was responsible for
obtaining FDA approvals required for domestic and international product
commercialization and for maintaining compliance to international quality
standards. Ms. Breslawec was previously Manager of New Product Approvals at
INCSTAR Corp.
Susan L. Critzer joined the Company in January 1995 as Vice President,
Operations. Before joining the Company, Ms. Critzer spent six years with
American Cyanamid Corporation's Davis and Geck ("D&G") Division. Most
recently, she was Director of Engineering for D&G's start-up Endosurgery
division, where she was responsible for the commercialization of all new
laparoscopic products. From 1986 to 1989, Ms. Critzer was with Becton-
Dickinson Corporation where she held management positions in manufacturing
engineering and quality control and was involved in the high volume production
of intravenous catheters.
Robert H. Dodge, Ph.D. joined the Company in July 1994 as Vice President,
Research and Development, having previously spent 11 years in the Diagnostics
Division of Abbott Laboratories ("Abbott"). At Abbott, Dr. Dodge held Research
Director positions in the areas of Chemistry, Instrument Systems Engineering
and Physician Office and Consumer Diagnostics. His product development
experience includes systems for physician's office testing (the Abbott Vision
System) and hospital therapeutic drug monitoring (the TDx system).
31
<PAGE>
A. Paul Harding joined the Company as Vice President, Sales and Marketing in
November 1995, having spent the previous 15 years with Bayer Diagnostics, a
division of Bayer AG ("Bayer"), a leading manufacturer and marketer of glucose
monitoring products. At Bayer, Mr. Harding held various sales and marketing
positions, most recently as Vice President, U.S. Marketing and National
Accounts, and previously as Director of Marketing, U.S. Diabetes Products.
Ronald M. Nelson has acted as the Company's Chief Financial Officer on a
part-time basis since January 1994. Mr. Nelson is a Certified Public
Accountant and was Chief Financial Officer of Mirror Technologies, Inc., a
publicly held distributor of peripherals for use with Macintosh products, from
1987 to 1992. Prior to that, Mr. Nelson served as Treasurer and Controller for
Arden Medical Systems, Inc. ("Arden"). Prior to joining Arden, Mr. Nelson
spent ten years with the public accounting firm of Touche Ross and Company.
Mark B. Knudson, Ph.D., one of the founders of the Company, served as the
President of the Company from its inception in April 1990 through December
1990, and as Chief Executive Officer from its inception through November 1991.
Dr. Knudson has also served as Chairman of the Company's Board of Directors
since its inception. Since 1993, Dr. Knudson has been the Managing Venture
Partner of Medical Innovation Partners II, a Limited Partnership ("MIP II")
that serves as the general partner of Medical Innovation Fund II, a Limited
Partnership ("MIF II") and, since 1989, has also been a special limited
partner of Medical Innovation Partners, a Limited Partnership ("MIP"), the
general partner of Medical Innovation Fund, a Limited Partnership ("MIF"). MIF
and MIF II are institutionally-funded, medically-focused early stage
venture/seed capital partnerships. Dr. Knudson serves as a director of
Diametrics Medical, Inc. ("Diametrics"), a manufacturer of point of care blood
chemistry testing systems, and Heartstream, Inc. and InControl, Inc., each a
company involved in cardiac rhythm management technology.
Frank B. Bennett has been a director of the Company since 1992. Mr. Bennett
is the founder of Artesian Capital Management, Inc. ("Artesian") and Artesian
Management, Inc. ("Artesian Management") and has served as the President of
each of these entities since their inception. Artesian is the general partner
of Artesian Capital Limited Partnership ("Artesian Capital"), and Artesian
Management is the general partner of Artesian Capital Limited Partnership II
("Artesian Capital II"), which are seed and start-up venture investment funds.
Timothy I. Maudlin has been a director of the Company since its inception.
Mr. Maudlin is the Managing General Partner of MIP and MIP II. He has been
active in the formation, management, financing, and development of seed and
start-up medical technology and service companies since 1982. Mr. Maudlin is
currently a director of Diametrics, IVI Publishing, Inc., an interactive
multimedia publisher of health and medical titles, and Curative Health
Services, Inc., a health care services company.
Terrance G. McGuire has been a director of the Company since June 1995. Mr.
McGuire is a Founding General Partner of Polaris Venture Partners, and since
1989, Mr. McGuire has been a General Partner of Beta Partners Limited
Partnership, each of which is a private venture capital firm. Since 1992, Mr.
McGuire has also been a General Partner of Alta V Limited Partnership, a fund
associated with Burr, Egan, Deleage & Co. ("Burr, Egan, Deleage").
Robert R. Momsen has been a director of the Company since June 1995. Since
1982, Mr. Momsen has been a General Partner of InterWest Partners, L.P.
("InterWest Partners"), a group of venture capital management funds. Mr.
Momsen is also director of COR Therapeutics, Inc., a biopharmaceutical
company, Ventritex, Inc., a medical implant device company, and ArthroCare
Corporation, a manufacturer of arthroscopic tools.
Robert S. Nickoloff has been a director of the Company since its inception.
Mr. Nickoloff is a General Partner of MIP and MIP II, where he has been active
in the formation and financing of start-up medical device and service
companies since 1987. He has served as Chairman of the Board of Governors of
the University of Minnesota Hospital and Clinic and is a director of Green
Tree Financial Corporation, Minnesota Power and Light Co. and Northeast
Venture Development Fund.
Walter L. Sembrowich, Ph.D., has been a director of the Company since its
inception. Since co-founding Diametrics in 1990, Dr. Sembrowich held various
management positions at Diametrics through December 1995, including Chief
Executive Officer from 1990 through January 1993, Co-Chairman of the Board
from January
32
<PAGE>
1993 to March 1995 and Executive Vice President of New Business Development
from March 1995 through December 1995. Dr. Sembrowich is currently President
of Aviex, Inc., a management consulting firm. He also serves as a director of
Diametrics and of St. Jude Medical, Inc., a developer and marketer of heart
valves and other cardiovascular devices.
The Company's Board of Directors is divided into three classes as nearly
equal in numbers as possible, with each class serving a three-year term. One
of the three classes of the Board of Directors is elected each year. The terms
of the Company's current Board of Directors expire as follows: Dr. Knudson and
Mr. McGuire, 1997; Mr. Bennett, Mr. Momsen and Dr. Sembrowich, 1998; and
Messrs. Maudlin, Nickoloff and Solomon, 1999. Messrs. Bennett, Maudlin,
McGuire and Momsen were elected to the Board of Directors as designees of
various series of Preferred Stock pursuant to agreements with the Company
which will terminate upon the closing of the Offering. These individuals will
continue to serve as directors upon completion of the Offering.
The Company's executive officers are appointed by the Board of Directors and
serve until their successors are elected or appointed. The Company is
currently actively seeking a full-time Chief Financial Officer.
COMMITTEES
The Board of Directors has established a Compensation Committee, an Audit
Committee and a Nominating Committee. The Compensation Committee makes
recommendations concerning executive salaries and incentive compensation for
employees of the Company, subject to ratification by the full Board of
Directors, and administers the Company's 1990 Incentive and Stock Option Plan
(the "1990 Stock Option Plan"), the 1991 Incentive and Stock Option Plan (the
"1991 Stock Option Plan"), the 1994 Long-Term Incentive and Stock Option Plan
(as amended, the "1994 Stock Option Plan" and together with the 1990 and 1991
Stock Option Plans, the "Stock Option Plans") and the Company's 1996
Directors' Stock Option Plan (the "Directors' Plan"). The Compensation
Committee has delegated authority to the Chief Executive Officer to grant
options in such officer's discretion to employees who are not executive
officers in amounts not exceeding an aggregate of 10,000 shares of Common
Stock per individual in any period of 12 consecutive months pursuant to the
Stock Option Plans.
The Audit Committee reviews the results and scope of the audit and other
services provided by the Company's independent auditors, as well as the
Company's accounting principles and its system of internal controls, and
reports the results of its review to the full Board of Directors and to
management.
The Nominating Committee makes recommendations regarding director and
officer nominations.
DIRECTORS' COMPENSATION
Prior to the Offering, directors of the Company received no compensation for
their services to the Company as such. Upon closing of the Offering, directors
who are not employees of the Company will receive payments of $3,000 per
quarter, $1,000 per meeting attended in person ($500 if attended by telephone)
and $500 per committee meeting attended, up to a maximum of $20,000 per year,
and all directors will be reimbursed for expenses actually incurred in
attending meetings of the Board of Directors and its committees. Upon closing
of the Offering, directors who are not employees of the Company will be
granted options to purchase Common Stock under the Directors' Plan. See "--
Stock Plans."
LIMITATION OF LIABILITY
The Company's Amended and Restated Articles of Incorporation limit the
liability of directors in their capacity as directors to the full extent
permitted by Minnesota law. As permitted by Minnesota law, the Company's
Amended and Restated Articles of Incorporation provide that a director shall
not be liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, except (i) for any breach of the
director's duty of loyalty to the Company or its shareholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for dividends, stock repurchases and other
distributions made in violation of Minnesota law or for violations of the
Minnesota securities laws, (iv) for any transaction from which the director
derived an improper personal benefit or (v) for any act or
33
<PAGE>
omission occurring prior to the effective date of the provision in the
Company's Amended and Restated Articles of Incorporation limiting such
liability. These provisions do not affect the availability of equitable
remedies, such as an action to enjoin or rescind a transaction involving a
breach of fiduciary duty, although, as a practical matter, equitable relief
may not be available. The above provisions also do not limit liability of the
directors for violations of, or relieve them from the necessity of complying
with, the federal securities law.
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth the cash and noncash
compensation for 1995 awarded to or earned by the Chief Executive Officer and
all executive officers of the Company whose salary and bonus earned in 1995
exceeded $100,000 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION STOCK
NAME AND PRINCIPAL --------------------------- OPTIONS (# ALL OTHER
POSITION SALARY BONUS OTHER SHARES) COMPENSATION
- ------------------ -------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Frank A. Solomon....... $189,587 $ -- $48,096(1) 66,666 $ --
President, Chief
Executive Officer and
Director
Susan L. Critzer....... 116,776 -- 33,216(2) 83,332 --
Vice President,
Operations
Robert H. Dodge, Ph.D.. 158,835 -- 31,275(3) 16,666 --
Vice President,
Research and
Development
</TABLE>
- --------
(1) Includes $24,291 of forgiveness on note and $23,805 of bonus to account
for tax consequences resulting from such note forgiveness. See "Certain
Transactions."
(2) Includes $16,776 for reimbursement of relocation expenses and $16,440 of
bonus to account for tax consequences resulting from such expense
reimbursement.
(3) Includes $31,275 of bonus to account for tax consequences resulting from
reimbursement of 1994 relocation expenses.
A. Paul Harding, who was hired as the Company's Vice President, Sales and
Marketing in November 1995, receives an annual salary of $146,000 and has
received an award of stock options to purchase 66,666 shares of Common Stock,
as described more fully below. Katia P. Breslawec, who was hired as the
Company's Vice President, Regulatory and Quality in April 1996, receives an
annual salary of $125,000 and has received an award of stock options to
purchase 33,333 shares of Common Stock, as described below.
Option Grants. The following table summarizes options granted during the
year ended December 31, 1995 to the Named Executive Officers:
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
% OF TOTAL APPRECIATION
OPTIONS FOR OPTION
GRANTED TO EXERCISE TERM(4)
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------
NAME GRANTED(1) IN 1995(2) PER SHARE(3) DATE 5% 10%
- ---- ---------- ---------- ------------ ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Frank A. Solomon........ 66,666 18.7% $1.20 10/31/05 $50,311 $127,498
Susan L. Critzer........ 66,666 18.7 .83 2/24/05 34,798 88,186
16,666 4.7 1.20 10/31/05 12,577 31,874
Robert H. Dodge, Ph.D... 16,666 4.7 1.20 10/31/05 12,577 31,874
</TABLE>
- --------
(1) Each option represents the right to purchase one share of Common Stock.
The options shown in this column were all incentive stock options granted
pursuant to the 1994 Stock Option Plan. The options granted to
34
<PAGE>
Mr. Solomon, Ms. Critzer and Dr. Dodge for 66,666, 16,666 and 16,666
shares, respectively, become exercisable with respect to 25% of the shares
on the anniversary dates of such grants for each of the four years
following such grant. The option granted to Ms. Critzer for 66,666 shares
of Common Stock becomes exercisable with respect to 25% of the shares on
the date of grant and 25% of the shares on the anniversary of such date for
each of the three years thereafter. To the extent not already exercisable,
the options generally become exercisable in the event of a merger in which
the Company is not the surviving corporation, a transfer of all of the
Company's stock, a sale of substantially all of the Company's assets or a
dissolution or liquidation of the Company.
(2) In 1995, the Company granted employees options to purchase an aggregate of
355,971 shares of Common Stock.
(3) The exercise price may be paid in cash, in shares of Common Stock with a
market value as of the date of exercise equal to the option price or a
combination of cash and shares of Common Stock.
(4) The compounding assumes a ten-year exercise period for all option grants.
The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
Common Stock prices. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock and overall stock
market conditions. The amounts reflected in this table may not necessarily
be achieved.
In November 1995, Mr. Harding received options to purchase 66,666 shares of
Common Stock under the 1994 Stock Option Plan. These options are exercisable
at $1.20 per share, expire on October 31, 2005 and become exercisable with
respect to 25% of the shares in November 1995 and 25% of the shares on the
anniversary of such date for each of the three years thereafter.
In April 1996, Ms. Breslawec received options to purchase 33,333 shares of
Common Stock under the 1994 Stock Option Plan. These options are exercisable
at $9.75 per share, expire on April 24, 2006 and become exercisable with
respect to one-third of the shares on the date of grant and one-third of the
shares on the anniversary of such date for each of the two years thereafter.
Option Values
The following table summarizes the value of options held at December 31,
1995 by the Named Executive Officers. No options held by such executive
officers were exercised during 1995.
AGGREGATED OPTION VALUES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995 (#) DECEMBER 31, 1995 ($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Frank A. Solomon............ -- 66,666 $ -- $220,000
Susan L. Critzer............ 16,666 66,666 61,164 238,500
Robert H. Dodge, Ph.D....... 33,333 50,000 122,332 177,336
</TABLE>
- --------
(1) Value based on the difference between the fair market value of the shares
of Common Stock at December 31, 1995 ($4.50), as determined by the Board
of Directors, and the exercise price of the options.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL AGREEMENTS
Except as described below, the Company does not have any employment
agreements with its executive officers. In May 1996, the Company entered into
an agreement with Mr. Solomon providing for severance pay equal to 18 times
his total monthly compensation (including salary and bonus, determined in
accordance with such agreement) if: (i) prior to a change in control (as
defined in such agreement) of the Company, the Company assigns Mr. Solomon
employment responsibilities which are not comparable to his current position
and Mr. Solomon subsequently terminates his employment, or (ii) after such a
change in control, the Company terminates
35
<PAGE>
Mr. Solomon's employment without cause or Mr. Solomon terminates his
employment for good reason (as such terms are defined in such agreement). The
agreement also contains covenants by Mr. Solomon not to compete and not to
solicit the Company's customers or employees during the term of Mr. Solomon's
employment and for 18 months following the termination of his employment for
any reason.
In May 1996, the Company also entered into an agreement with each of Ms.
Breslawec, Ms. Critzer, Dr. Dodge and Mr. Harding providing for severance pay
equal to 12 times the officer's total monthly compensation (including salary
and bonus, determined in accordance with such agreement) if after a change in
control (as defined in such agreement) of the Company, the Company terminates
the officer's employment without cause or the officer terminates his or her
employment for good reason (as such terms are defined in such agreement). Each
such agreement also contains covenants by such officer not to compete and not
to solicit the Company's customers or employees during the term of such
officer's employment and for 12 months following the termination of such
officer's employment for any reason.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Bennett, Dr. Knudson and Mr. Maudlin served as members of the Company's
Compensation Committee during 1995. Dr. Knudson, who also served as the
Company's President in 1990 and as the Chief Executive Officer from 1990 to
1991, is a limited partner of MIP and a general partner of MIP II; and Mr.
Maudlin is a general partner of both MIP and MIP II. MIP and MIP II are the
general partners of MIF and MIF II, respectively, which entities engaged in
certain transactions with the Company, as described below. Mr. Bennett is the
President of each of Artesian and Artesian Management, the general partners of
Artesian Capital and Artesian Capital II, which engaged in certain
transactions with the Company as described below.
Between January 1992 and June 1995, the Company sold shares of Series C, D
and E-1 Preferred Stock (convertible into an aggregate of 885,709 shares of
Common Stock) to MIF, MIF II, Artesian Capital and Artesian Capital II
pursuant to preferred stock purchase agreements on substantially similar terms
as were sold to non-affiliated purchasers or issued such securities pursuant
to the terms of promissory notes bearing substantially similar terms as those
issued to non-affiliates. See "Certain Transactions."
Laboratory and office furniture and equipment used by the Company with an
original cost of approximately $801,000 as of December 31, 1995 are leased
under sublease arrangements with FIM, Inc. and FIM II, Inc., entities related
to the Company through MIF and MIF II. Under the lease arrangements, MIF and
MIF II have guaranteed the lease payments owing to an unrelated third party.
The liability for future lease payments under these guarantees were
approximately $580,000 as of December 31, 1995. In consideration of such
guarantees, the Company issued options to purchase an aggregate of 42,993
shares of Common Stock at an exercise price of $0.84 per share to MIF and
warrants to purchase shares of Series D Preferred Stock, convertible into
106,027 shares of Common Stock at an as converted exercise price of $4.13 per
share, to MIF II. Options to purchase 30,523 shares of Common Stock will
expire in May 2001. The balance of the Common Stock options (12,470 shares)
will expire in April 2003. The Series D Preferred Stock warrants expire during
the period from December 1999 through June 2005.
In connection with the sale of shares of Series C Preferred Stock to MIF and
Artesian Capital during November 1992, the Company issued warrants to MIF and
Artesian Capital for the purchase of 13,333 and 17,778 shares of Common Stock,
respectively. These warrants are exercisable at an as converted price of $3.75
per share and expire in November 1997.
During November and December 1993 and February 1994, the Company borrowed an
aggregate of $300,000 of bridge financing from MIF II. These loans were repaid
during March 1994. In consideration of this financing, the Company issued
warrants to purchase shares of Series D Preferred Stock, convertible into
18,182 shares of Common Stock, to MIF II in March 1994. These warrants are
exercisable at an as converted price of $4.13 per share and expire in February
1999.
During January 1995, in anticipation of its offering of shares of Series E
Preferred Stock, the Company borrowed an aggregate of $2,900,000 and issued
promissory notes under a bridge loan arrangement with certain
36
<PAGE>
investors, including $1,500,000 from MIF II and $500,000 from Artesian
Management. Upon the consummation of the Series E offering in June 1995, these
notes (and all accrued interest thereon) were automatically converted into
shares of Series E-1 Preferred Stock, convertible into 497,935 shares of
Common Stock, at $6.00 per share. In connection with this bridge financing,
investors received warrants for the purchase of shares of Series E-2 Preferred
Stock, convertible into 286,414 shares of Common Stock, at $5.06 per share,
including warrants for 148,148 shares issued to MIF II and warrants for 49,382
shares issued to Artesian Management. These warrants expire in January 2005.
STOCK PLANS
Stock Option Plans. Pursuant to the Stock Option Plans, executive officers,
other employees and consultants of the Company may receive options to purchase
Common Stock. The Stock Option Plans provide for the grant of both incentive
stock options intended to qualify for preferential tax treatment under Section
422 of the Internal Revenue Code of 1986, as amended, and nonqualified stock
options that do not qualify for such treatment. The exercise price of all
incentive stock options granted under the Stock Option Plans must equal or
exceed the fair market value of the Common Stock at the time of grant. The
Stock Option Plans also provide for grants of stock appreciation rights,
restricted stock awards and performance awards. Only employees are eligible
for the grant of incentive stock options. The Stock Option Plans are
administered by the Compensation Committee, which has delegated authority to
the Chief Executive Officer to grant options to employees who are not
executive officers in amounts not exceeding an aggregate of 10,000 shares of
Common Stock per individual in any period of 12 consecutive months.
A total of 1,913,333 shares of Common Stock have been reserved for issuance
under the Stock Option Plans. As of May 1, 1996, the Company had outstanding
options to purchase an aggregate of (i) 927,109 shares, at a weighted average
exercise price of $3.58 per share, pursuant to the Stock Option Plans
(excluding the restricted stock grant to Mr. Solomon) and (ii) 42,993 shares,
at an exercise price of $.84 per share, granted outside of the Stock Option
Plans.
Directors' Plan. The Directors' Plan provides for an automatic grant of
nonqualified stock options to purchase 15,000 shares of Common Stock to
directors who are not employees of the Company on the later of the closing of
the Offering or the date such individuals become directors of the Company, and
an option to purchase 5,000 shares of Common Stock on each subsequent annual
shareholder meeting date, subject to certain limitations. Options granted on
the closing date of the Offering or on the date an individual becomes a
director of the Company shall vest and thereby become exercisable as to 50% of
such shares on the anniversary of the date of such grant and 25% at the
anniversary date for each of the two years thereafter if the holder remains a
director on such dates. Options granted on the date of each annual meeting of
shareholders become exercisable six months subsequent to the date of grant.
The Company has reserved 300,000 shares of Common Stock for issuance under the
Directors' Plan. The option price for directors is equal to the fair market
value of a share of Common Stock as of the date of grant. Pursuant to the
Directors' Plan, Drs. Knudson and Sembrowich and Messrs. Bennett, Maudlin,
McGuire, Momsen and Nickoloff each will receive options to purchase 15,000
shares of Common Stock, which options will be exercisable at the initial
public offering price. Pursuant to the partnership agreement for MIP, Messrs.
Maudlin and Nickoloff will assign to MIP all of the options granted to them
under the Directors' Plan. No other options have been granted under the
Directors' Plan.
37
<PAGE>
CERTAIN TRANSACTIONS
Since January 1992, the Company has sold shares of Preferred Stock as
follows: between January 1992 and May 1993, the Company issued shares of
Series C Preferred Stock convertible into an aggregate of 230,665 shares of
Common Stock at an as converted price of $3.75 per share; in February and May
1994, the Company issued shares of Series D Preferred Stock convertible into
an aggregate of 716,239 shares of Common Stock at an as converted price of
$4.13 per share; and in June 1995, the Company issued shares of Series E-1
Preferred Stock convertible into an aggregate of 3,736,421 shares of Common
Stock at an as converted price of $6.00 per share. Certain of these shares
were sold or issued to the Company's 5% shareholders and entities affiliated
with directors. The Company sold such securities pursuant to preferred stock
purchase agreements on substantially similar terms as were sold to non-
affiliated purchasers or issued such securities pursuant to the terms of
promissory notes bearing substantially similar terms as those issued to non-
affiliates. The following table summarizes the Series C, Series D and Series
E-1 Preferred Stock purchased by the Company's 5% shareholders and entities
affiliated with directors, and their affiliates:
<TABLE>
<CAPTION>
COMMON STOCK ISSUABLE UPON
CONVERSION OF PREFERRED
STOCK
--------------------------
SERIES SERIES
SHAREHOLDERS C D SERIES E-1
------------ ------- ------- ----------
<S> <C> <C> <C>
MIF and MIF II.................................... 125,333 303,031 257,555
Artesian Capital and Artesian Capital II.......... 53,333 60,606 85,851
InterWest Partners................................ -- -- 666,666
Oak Investment Partners VI, L.P................... -- -- 500,000
Delphi Ventures III, L.P.......................... -- -- 416,666
Marquette Venture Partners II, L.P................ -- -- 333,333
Funds affiliated with Burr, Egan, Deleage ........ -- -- 333,332
</TABLE>
The investors in all of the above transactions have rights to require the
Company to register shares pursuant to the Securities Act. See "Shares
Eligible for Future Sale."
Mr. Solomon and Dr. Sembrowich are limited partners of MIP II, which is the
general partner of MIF II, and Dr. Knudson is a limited partner of MIP, which
is the general partner of MIF. As such limited partners, they have no voting
or investment power over shares of Common Stock held by MIF II and MIF,
respectively. Each currently has less than a 1% economic interest in such
shares.
Mr. Bennett is the President of each of Artesian and Artesian Management,
the general partners of Artesian Capital and Artesian Capital II,
respectively. Dr. Knudson is a general partner of MIP II, and Messrs. Maudlin
and Nickoloff are general partners of both MIP and MIP II. For a discussion of
certain Company transactions with Messrs. Bennett and Maudlin, Dr. Knudson,
MIF and MIF II, see "Executive Compensation--Compensation Committee Interlocks
and Insider Participation."
From inception through September 1994, the Company shared office space, lab
equipment and salary costs with companies related through common ownership.
During the years ended December 31, 1992, 1993 and 1994, the Company charged
related entities a total of approximately $212,000, $281,000 and $251,000,
respectively, for these expenses.
Mr. Solomon was granted a restricted award of 183,333 shares of Common Stock
in August 1994, pursuant to the Stock Option Plans. The award was made in
exchange for the surrender of options to purchase 183,333 shares of Common
Stock and the delivery of two promissory notes in the aggregate principal
amount of $151,250 by Mr. Solomon. A note in the principal amount of $113,438
(and the interest accrued in respect thereof) has been forgiven in the
aggregate amount of $24,291, and the remainder will be forgiven upon the
closing of the Offering. The Company also will pay Mr. Solomon a cash bonus
each year to account for tax consequences resulting from such forgiveness of
indebtedness. The shares are subject to repurchase options in favor of the
Company that lapse over time and terminate if Mr. Solomon remains employed by
the Company until August 2, 1997.
Since April 1992, the Company has entered into annual consulting agreements
with Dr. Knudson, Chairman of the Board of Directors, and the current
agreement runs through April 3, 1997. Dr. Knudson acts as consultant
38
<PAGE>
for the Company in the area of technical expertise and advisory services, for
which he is paid $6,750 per month. From April 1995 through March 1996, Dr.
Knudson received an aggregate of $81,000 for such consulting services.
Between May 1, 1992 and December 31, 1995, the Company entered into a series
of consulting agreements with Dr. Sembrowich, a director of the Company. Dr.
Sembrowich acted as a consultant for the Company in the area of technical
expertise and advisory services, for which he was paid $2,000 per month.
During January 1995, in anticipation of its offering of shares of Series E
Preferred Stock, the Company borrowed an aggregate of $2,900,000 and issued
promissory notes under a bridge loan arrangement with certain investors,
including $1,500,000 from MIF II and $500,000 from Artesian Management. Upon
the consummation of the Series E offering in June 1995, these notes (and all
accrued interest thereon) were automatically converted into shares of Series
E-1 Preferred Stock, convertible into 497,937 shares of Common Stock, at an as
converted exercise price of $6.00 per share. In connection with this bridge
financing, investors received warrants for the purchase of shares of Series E-
2 Preferred Stock, convertible into 286,414 shares of Common Stock, at an as
converted exercise price of $5.06 per share, including warrants for 148,148
shares issued to MIF II and warrants for 49,382 shares issued to Artesian
Management. These warrants expire in January 2005.
39
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock, as of May 1, 1996 (after giving effect to the
conversion of the outstanding shares of Preferred Stock into Common Stock upon
the closing of the Offering) and as adjusted to reflect the sale by the
Company of the 3,000,000 shares of Common Stock offered hereby, by: (i) each
person who is known by the Company to beneficially own more than 5% of the
Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers and (iv) all directors and executive officers of the
Company as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES
OWNED
SHARES -----------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED(1) OFFERING(1) OFFERING(1)
---------------- ------------ ---------- -----------
<S> <C> <C> <C>
MIF and MIF II(2)...................... 2,124,991 32.3% 22.2%
9900 Bren Road East
Suite 421
Minnetonka, MN 55343
InterWest Partners(3).................. 666,666 10.6 7.2
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Oak Investment Partners VI, L.P.(4).... 500,000 8.0 5.4
One Gorham Island
Westport, CT 06880
Delphi Ventures III, L.P.(5)........... 416,666 6.6 4.5
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, CA 94025
Marquette Venture Partners II, L.P.(6). 333,333 5.3 3.6
520 Lake Cook Road
Suite 450
Deerfield, IL 60015
Funds affiliated with Burr, Egan,
Deleage(7)............................ 333,332 5.3 3.6
One Post Office Square
Suite 3800
Boston, MA 02109
Artesian Capital and Artesian Capital
II(8)................................. 266,950 4.2 2.9
821 Marquette Avenue South
1700 Foshay Tower
Minneapolis, MN 55402
Mark B. Knudson, Ph.D.(9)(10).......... 233,333 3.7 2.5
Frank A. Solomon(11)................... 183,333 2.9 2.0
Walter L. Sembrowich, Ph.D.(9)(12)..... 40,000 * *
Frank B. Bennett(13)................... -- -- --
Timothy I. Maudlin(10)................. -- -- --
Terrance G. McGuire(14)................ -- -- --
Robert R. Momsen(15)................... -- -- --
Robert S. Nickoloff(10)................ -- -- --
Susan L. Critzer(9).................... 33,333 * *
Robert H. Dodge, Ph.D.(9).............. 33,333 * *
All executive officers and directors as
a group (13 persons)(16).............. 570,109 8.9% 6.0%
</TABLE>
- --------
*Less than 1%.
40
<PAGE>
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes generally voting power
and/or investment power with respect to securities. Shares of Common
Stock subject to options or warrants currently exercisable or exercisable
within 60 days of May 1, 1996 are deemed outstanding for computing the
percentage of the person holding such options but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated by footnote, the Company believes that the persons named in
this table, based on information provided by such persons, have sole
voting and investment power with respect to the shares of Common Stock
indicated.
(2) Includes 1,253,904 shares of Common Stock held by MIF and 560,586 shares
of Common Stock held by MIF II. Also includes 310,501 shares of Common
Stock issuable upon the exercise of outstanding options and warrants held
by MIF and MIF II.
(3) Consists of 662,500 shares of Common Stock held by InterWest Partners V,
L.P. and 4,166 shares of Common Stock held by InterWest Investors V, an
affiliate of InterWest Partners V.
(4) Includes 11,400 shares of Common Stock held by Oak VI Affiliates Fund,
L.P., an affiliate of Oak Investment Partners VI, L.P.
(5) Includes 9,704 shares of Common Stock held by Delphi Investments III,
L.P., an affiliate of Delphi Ventures III, L.P.
(6) Includes 9,259 shares of Common Stock held by MVP II Affiliates Fund,
L.P., an affiliate of Marquette Venture Partners II, L.P.
(7) Includes 329,866 shares of Common Stock held by Alta V Limited
Partnership and 3,466 shares of Common Stock held by Customs House
Partners. The principals of Burr, Egan, Deleage are general partners of
Alta V Management Partners L.P. (the general partner of Alta V Limited
Partnership) and Customs House Partners (together, the "Funds"). As
general partners of the Funds, they may be deemed to share voting and
investment powers for the shares held by the Funds. These principals
disclaim beneficial ownership of all such shares held by the Funds except
to the extent of their proportionate pecuniary interests therein.
(8) Includes 113,939 shares of Common Stock held by Artesian Capital and
85,851 shares of Common Stock held by Artesian Capital II. Also includes
67,160 shares of Common Stock issuable upon the exercise of outstanding
warrants held by Artesian Capital and Artesian Capital II.
(9) Includes the following number of shares of Common Stock issuable upon the
exercise of outstanding options: Dr. Knudson: 33,333 shares; Dr.
Sembrowich: 20,000 shares; Ms. Critzer: 33,333 shares; and Dr. Dodge:
33,333.
(10) Excludes (i) 310,501 shares of Common Stock issuable upon the exercise of
outstanding options and warrants held by MIF and MIF II and (ii)
1,814,490 shares of Common Stock held by MIF and MIF II. Messrs. Maudlin
and Nickoloff are general partners of MIP and MIP II, the general
partners of MIF and MIF II, respectively, and Dr. Knudson is a general
partner of MIP II and a special limited partner of MIP. Each of such
persons disclaims beneficial ownership of such shares, except to the
extent of his proportionate pecuniary interest in such partnership.
(11) Includes 183,333 shares of Common Stock issued pursuant to a restricted
stock award under the Stock Option Plans. See "Certain Transactions."
Excludes shares held by MIF II which Mr. Solomon may be deemed to hold
based on his partnership interest in MIP II. Mr. Solomon disclaims
beneficial ownership of such shares, except to the extent of his
proportionate pecuniary interest in such partnership.
(12) Excludes shares held by MIF II which Dr. Sembrowich may be deemed to hold
based on his partnership interest in MIP II. Dr. Sembrowich disclaims
beneficial ownership of the MIF II shares, except to the extent of his
proportionate pecuniary interest in such partnership.
(13) Excludes (i) 113,939 shares of Common Stock and (ii) 17,778 shares of
Common Stock issuable upon the exercise of outstanding warrants held by
Artesian Capital. Also excludes (i) 85,851 shares of Common Stock and
(ii) 49,382 shares of Common Stock issuable upon the exercise of
outstanding warrants held by Artesian Capital II. Mr. Bennett serves as
the President of Artesian, the general partner of Artesian Capital, and
Artesian Management, the general partner of Artesian Capital II. Mr.
Bennett disclaims beneficial ownership of such shares, except to the
extent of his proportionate pecuniary interest in such partnership.
41
<PAGE>
(14) Excludes shares beneficially owned by Alta V Limited Partnership which
Mr. McGuire may be deemed to hold based on his partnership interest
therein. Mr. McGuire disclaims beneficial ownership of the shares held by
Alta V Limited Partnership, except to the extent of his proportionate
pecuniary interest in such partnership.
(15) Excludes shares beneficially owned by InterWest Partners V and InterWest
Investors which Mr. Momsen may be deemed to hold based on his partnership
interest therein. Mr. Momsen disclaims beneficial ownership of the
InterWest Partners V and InterWest Investors shares, except to the extent
of his proportionate pecuniary interest in such partnership.
(16) See Notes 9, 10, 11, 12, 13, 14 and 15 above. Includes an additional
46,777 shares of Common Stock issuable upon the exercise of outstanding
options held by Ms. Breslawec, Mr. Harding and Mr. Nelson.
DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offering, the total number of shares of all classes
of stock which the Company has authority to issue will be 20,000,000 shares of
Common Stock, $.01 par value, and 5,000,000 shares of undesignated preferred
stock, $.01 par value. As of May 1, 1996, there were 6,269,038 shares of
Common Stock outstanding (assuming conversion into Common Stock of all
outstanding shares of Preferred Stock), which were held of record by 67
shareholders, and no shares of undesignated preferred stock outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. There is no
cumulative voting for the election of directors so that the holders of more
than 50% of the outstanding Common Stock can elect all directors. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors of the Company out of funds legally
available therefor and in liquidation proceedings. Holders of Common Stock
have no preemptive or subscription rights and there are no redemption rights
with respect to such shares. The outstanding shares of Common Stock are, and
the shares of Common Stock offered hereby will be, fully paid and
nonassessable.
PREFERRED STOCK
The Company's Board of Directors is authorized, without further shareholder
action, to issue preferred stock in one or more series and to fix the voting
rights, liquidation preferences, dividend rights, repurchase rights,
conversion rights, redemption rights and terms, including sinking fund
provisions, and certain other rights and preferences, of the preferred stock.
Although there is no current intention to do so, the Board of Directors of
the Company may, without shareholder approval, issue shares of a class or
series of preferred stock with voting and conversion rights which could
adversely affect the voting power or dividend rights of the holders of Common
Stock and may have the effect of delaying, deferring or preventing a change in
control of the Company.
WARRANTS AND OPTIONS
The Company has issued warrants to purchase its Common Stock from time to
time in connection with certain financing arrangements. Warrants to purchase a
total of 339,745 shares of Common Stock have been issued by the Company at a
weighted average exercise price of $4.86 per share in connection with certain
equity financing transactions. Such warrants are all currently exercisable and
expire on dates ranging from November 1997 to January 2005. Warrants to
purchase a total of 119,614 shares of Common Stock have been issued by the
Company at a weighted average exercise price of $4.13 per share in connection
with certain equipment lease financing arrangements. Such warrants are all
currently exercisable and expire during the period from December 1999 through
June 2005. All outstanding warrant agreements provide for antidilution
adjustments in the event of certain mergers, consolidations, reorganizations,
recapitalizations, stock dividends, stock splits or other changes in the
corporate structure of the Company. Holders of warrants to purchase
approximately 406,028 shares of Common Stock will be entitled to certain
rights to cause the Company to register the sale of such shares under the
Securities Act. See "Shares Eligible for Future Sale."
42
<PAGE>
As of May 1, 1996, the Company had issued options to purchase a total of
970,102 shares of Common Stock. Of this amount, options to purchase 927,109
shares of Common Stock had been issued pursuant to the Company's Stock Option
Plans at a weighted average exercise price of $3.58 per share, and options to
purchase 42,993 shares of Common Stock had been issued outside of the Stock
Option Plans at an exercise price of $0.84 per share. Options under the Stock
Option Plans are granted by the Compensation Committee, which has delegated
authority to the Chief Executive Officer to grant options to employees who are
not executive officers in amounts not exceeding an aggregate of 10,000 shares
of Common Stock per individual in any period of 12 consecutive months. The
Compensation Committee may issue options with varying vesting schedules, but
all options granted pursuant to the Stock Option Plans must be exercised
within ten years from the date of grant. The Company has also granted options
to purchase 105,000 shares of Common Stock to directors who are not employees
upon the closing of the Offering pursuant to the Company's Directors' Plan at
an exercise price per share equal to the initial public offering price. See
"Management--Stock Plans." All options granted under the Stock Option Plans or
the Directors' Plan provide for antidilution adjustments in the event of
certain mergers, consolidations, reorganizations, recapitalizations, stock
dividends, stock splits or other changes in the corporate structure of the
Company.
PROVISIONS OF THE COMPANY'S AMENDED ARTICLES AND BYLAWS AND THE MINNESOTA
BUSINESS CORPORATION ACT
The existence of authorized but unissued preferred stock, described above,
and certain provisions of the Company's Amended and Restated Articles of
Incorporation and Amended Bylaws and Minnesota law, described below, could
have an antitakeover effect. These provisions are intended to provide
management flexibility, to enhance the likelihood of continuity and stability
in the composition of the Company's Board of Directors and in the policies
formulated by the Board of Directors and to discourage an unsolicited takeover
of the Company if the Board of Directors determines that such a takeover is
not in the best interests of the Company and its shareholders. However, these
provisions could have the effect of discouraging certain attempts to acquire
the Company which could deprive the Company's shareholders of opportunities to
sell their shares of Common Stock at prices higher than prevailing market
prices.
Pursuant to the Amended Bylaws, the Board of Directors of the Company is
divided into three classes serving staggered three-year terms. As a result, at
least two shareholders' meetings will generally be required for shareholders
to effect a change in control of the Board of Directors.
Section 302A.671 of the Minnesota Business Corporation Act (the "MBCA")
applies, with certain exceptions, to any acquisition of voting stock of the
Company (from a person other than the Company, and other than in connection
with certain mergers and exchanges to which the Company is a party) resulting
in the beneficial ownership of 20% or more of the voting stock then
outstanding. Section 302A.671 requires approval of any such acquisitions by a
majority vote of the shareholders of the Company prior to its consummation. In
general, shares acquired in the absence of such approval are denied voting
rights and are redeemable at their then fair market value by the Company
within 30 days after the acquiring person has failed to give a timely
information statement to the Company or the date the shareholders voted not to
grant voting rights to the acquiring person's shares.
Section 302A.673 of the MBCA generally prohibits any business combination by
the Company, or any subsidiary of the Company, with any shareholder which
purchases 10% or more of the Company's voting shares (an "interested
shareholder") within four years following such interested shareholder's share
acquisition date, unless the business combination is approved by a committee
of all of the disinterested members of the Board of Directors of the Company
before the interested shareholder's share acquisition date.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Common Stock will be
Norwest Bank Minnesota, N.A.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect the prevailing market price and impair
the Company's ability to raise additional funds.
Upon completion of the Offering, the Company will have outstanding an
aggregate of 9,269,038 shares of Common Stock, assuming the issuance of
3,000,000 shares of Common Stock offered by the Company hereby. Of the total
outstanding shares of Common Stock, 3,000,000 shares will be freely tradeable
without restriction or further registration under the Securities Act, unless
held by "affiliates" of the Company, as that term is defined in Rule 144 under
the Securities Act (whose sales would be subject to certain volume limitations
and other restrictions described below).
The remaining 6,269,038 shares of Common Stock held by existing shareholders
upon completion of the Offering will be "restricted securities" as that term
is defined in Rule 144 under the Securities Act. The Company, its officers,
directors and certain of its shareholders (representing 6,126,035 of such
restricted shares) have agreed that they will not sell, directly or
indirectly, any Common Stock without the prior consent of Piper Jaffray Inc.
for a period of 180 days from the date of this Prospectus. Beginning on the
181st day after the date of this Prospectus, when agreements not to sell such
shares expire, approximately 716,239 of the restricted shares will become
eligible for immediate sale, subject to compliance with the volume limitations
and other restrictions of Rule 144, and approximately 1,413,045 of the
restricted shares may become eligible for immediate sale without restriction
pursuant to Rule 144(k).
In general, under Rule 144, as currently in effect, if at least two years
have elapsed from the date that shares of Common Stock were acquired from the
Company or an affiliate of the Company, then the holder is entitled to sell in
"brokers' transactions" or to market makers, within any three-month period
commencing 90 days after the date of this Prospectus, a number of shares that
does not exceed the greater of (i) one percent of the then outstanding shares
of Common Stock (92,690 shares immediately after the Offering) or (ii)
generally, the average weekly trading volume in the Common Stock during the
four calendar weeks preceding the filing of a Form 144 with respect to such
sale, subject to certain other limitations and restrictions. In addition, a
person who is not deemed to have been an affiliate of the Company at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least three years, would be entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above.
The Company intends to file registration statements under the Securities
Act, covering approximately 1,913,333 and 300,000 shares of Common Stock
reserved for issuance under, respectively, the Stock Option Plans and the
Directors' Plan. Such registration statements are expected to be filed soon
after the date of this Prospectus and will automatically become effective upon
filing. Accordingly, shares registered under such registration statements will
be available for sale in the open market, unless such shares are subject to
vesting restrictions with the Company or the contractual restrictions
described above. "See "Management--Stock Option Plans."
In addition, after the Offering, the holders of approximately 5,835,705
shares of Common Stock and warrants to purchase approximately 414,916 shares
of Common Stock (together, the "Registrable Securities") will be entitled to
certain rights to cause the Company to register the sale of such shares under
the Securities Act. After the Offering, if the Company proposes to register
any of its securities under the Securities Act for its own account, holders of
Registrable Securities are entitled to notice of such registration and are
entitled to include Registrable Securities therein, provided, among other
conditions, that the underwriters of any such offering have the right to limit
the number of shares included in such registration. The holders of the
Registrable Securities may require the Company to prepare and file a
registration statement under the Securities Act at its expense, and the
Company is required to use its best efforts to effect such registration,
subject to certain conditions and limitations; provided that the Company shall
not be required to obtain the effectiveness of any such registration statement
until six months after the date of this Prospectus, at the earliest. The
Company is not obligated to effect more than one of these shareholder-
initiated registrations. Holders of not fewer than 100,000 Registrable
Securities may require the Company to file not more than two additional
registration statements per
44
<PAGE>
calendar year on Form S-3 under the Securities Act, subject to certain
conditions and limitations. Registration of such shares would result in such
shares becoming freely tradeable without restriction under the Securities Act
(except for shares purchased by affiliates of the Company) immediately upon
the effectiveness of such registration.
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of Common Stock for sale will have
on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock in the public markets or the
perception that such sales will occur could adversely affect the market price
or the future ability to raise capital through an offering of its equity
securities. See "Risk Factors--Risk of Future Sales of Common Stock."
45
<PAGE>
UNDERWRITING
The Company has entered into a Purchase Agreement (the "Purchase Agreement")
with the underwriters listed in the table below (the "Underwriters"), for whom
Piper Jaffray Inc. and Montgomery Securities are acting as representatives
(the "Representatives"). Subject to the terms and conditions set forth in the
Purchase Agreement, the Company has agreed to sell to the Underwriters, and
each of the Underwriters has severally agreed to purchase, the number of
shares of Common Stock set forth opposite each Underwriter's name in the table
below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Piper Jaffray Inc............................................... 900,000
Montgomery Securities........................................... 900,000
Alex. Brown & Sons Incorporated................................. 135,000
Dillon, Read & Co. Inc. ........................................ 135,000
Hambrecht & Quist LLC........................................... 135,000
Robertson, Stephens & Company, LLC.............................. 135,000
UBS Securities LLC.............................................. 135,000
Cowen & Company................................................. 75,000
Dain Bosworth Incorporated...................................... 75,000
John G. Kinnard and Company, Incorporated....................... 75,000
Needham & Company, Inc. ........................................ 75,000
Punk, Ziegel & Knoell, L.P. .................................... 75,000
Raymond James & Associates, Inc. ............................... 75,000
Vector Securities International, Inc. .......................... 75,000
---------
Total....................................................... 3,000,000
=========
</TABLE>
Subject to the terms and conditions of the Purchase Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold
pursuant to the Purchase Agreement, if any is purchased (excluding shares
covered by the over-allotment option granted therein). In the event of a
default by any Underwriter, the Purchase Agreement provides that in certain
circumstances purchase commitments of the nondefaulting Underwriters may be
increased or the Purchase Agreement may be terminated.
The Representatives have advised the Company that the Underwriters propose
to offer Common Stock directly to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not more than $0.37 per share. Additionally, the
Underwriters may allow, and such dealers may reallow a concession not in
excess of $0.10 per share to certain other dealers. After the Offering, the
initial public offering price and other selling terms may be changed by the
Underwriters.
The Company has granted to the Underwriters an option, exercisable by the
Representatives within 30 days after the date of the Purchase Agreement, to
purchase up to an additional 450,000 shares of Common Stock at the same price
per share to be paid by the Underwriters for the other shares offered hereby.
If the Underwriters purchase any of such additional shares pursuant to this
option, each Underwriter will be committed to purchase such additional shares
in approximately the same proportion as set forth in the table above. The
Underwriters may exercise the option only for the purpose of covering over-
allotments, if any, made in connection with the distribution of the Common
Stock offered hereby.
The Representatives have informed the Company that neither they, nor any
other member of the National Association of Securities Dealers, Inc. (the
"NASD") participating in the distribution of the Offering, will make sales of
shares of Common Stock offered hereby to accounts over which they exercise
discretionary authority without the prior specific written approval of the
customer.
The Offering of the shares of Common Stock is made for delivery when, as and
if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the Offering without notice. The Underwriters
reserve the right to reject an order for the purchase of shares in whole or in
part.
46
<PAGE>
The officers and directors of the Company and certain other shareholders
designated by the Representatives, which will beneficially own in the
aggregate 6,126,035 shares of Common Stock after the Offering, have agreed
that they will not sell, offer to sell, distribute or otherwise dispose of any
shares of Common Stock owned by them prior to the date of the Prospectus for a
period of 180 days after the date of this Prospectus, without the prior
written consent of Piper Jaffray Inc. See "Shares Eligible For Future Sale."
The Company has agreed that it will not, without the Representatives' prior
written consent, offer, sell, issue or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock during
the 180-day period following the date of this Prospectus, except that the
Company may issue shares upon the exercise of options and warrants granted
prior to the date hereof, and may grant additional options under the Stock
Option Plans and Directors' Plan.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock has been determined by
negotiation among the Company and the Representatives. Among the factors
considered in determining the initial public offering price were prevailing
market and economic conditions, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, an assessment of the Company's management and the consideration of
the above factors in relation to the market valuation of companies in related
businesses. See "Risk Factors--No Prior Public Market; Possible Volatility of
Price."
The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
VALIDITY OF SHARES
The validity of the securities offered hereby will be passed upon for the
Company by Dorsey & Whitney LLP, Minneapolis, Minnesota, and for the
Underwriters by Faegre & Benson LLP, Minneapolis, Minnesota. Members of Dorsey
& Whitney LLP own 40,300 shares of Common Stock and warrants to purchase an
additional 14,814 shares of Common Stock.
EXPERTS
The financial statements as of December 31, 1994 and 1995, and for each of
the three years in the period ended December 31, 1995, and the period from
April 3, 1990 (inception) to December 31, 1995, included in this Prospectus
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein and in the Registration
Statement, and such financial statements are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
47
<PAGE>
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed with the Securities and
Exchange Commission (the "Commission"). This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract
or documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
thereto. A copy of the Registration Statement, including exhibits and
schedules thereto, may be inspected by anyone without charge at the
Commission's principal office in Washington, D.C. and copies of all or any
part thereof may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
certain fees prescribed by the Commission.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by its independent auditors and
quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
48
<PAGE>
INTEG INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................. F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statement of Changes in Shareholders' Equity (Deficiency).................. F-5
Statements of Cash Flows................................................... F-7
Notes to Financial Statements.............................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Integ Incorporated
We have audited the accompanying balance sheets of Integ Incorporated as of
December 31, 1994 and 1995 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, 1995, and for the period from April 3,
1990 (inception) to December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Integ Incorporated at
December 31, 1994 and 1995 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, and
for the period from April 3, 1990 (inception) to December 31, 1995, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
February 2, 1996
F-2
<PAGE>
INTEG INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY AT
----------------------- MARCH 31, MARCH 31,
ASSETS 1994 1995 1996 1996
- ------ ---------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............. $ 501,958 $15,764,138 $14,561,032
Accounts receivable...... 49,641 40,993 41,780
Prepaid expenses......... 17,442 55,128 61,634
---------- ----------- -----------
Total current assets... 569,041 15,860,259 14,664,446
Furniture and equipment.... 756,005 1,640,936 2,029,983
Less accumulated
depreciation.............. (78,665) (281,849) (370,144)
---------- ----------- -----------
677,340 1,359,087 1,659,839
Other assets............... 429 156,410 220,339
---------- ----------- -----------
Total assets......... $1,246,810 $17,375,756 $16,544,624
========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIENCY)
- --------------------
Current liabilities:
Accounts payable and
accrued expenses........ $ 219,716 $ 375,813 $ 242,705
Current portion of long-
term debt and capital
lease obligations....... 133,875 147,330 225,145
---------- ----------- -----------
Total current
liabilities......... 353,591 523,143 467,850
Long-term debt and capital
lease obligations, less
current portion........... 498,987 447,162 1,258,546
Redeemable convertible
preferred stock........... 5,132,277 -- --
Shareholders' equity
(deficiency):
Convertible Preferred
Stock................... -- 87,536 87,536 $ --
Undesignated Preferred
Stock, par value $.01
per share:
Authorized shares--
5,000,000 pro forma
Issued and outstanding
shares--none.......... -- -- -- --
Common Stock, par value
$.01 per share:
Authorized shares--
20,000,000 pro forma
Issued and outstanding
shares--433,333--
1994, 1995 and March
31, 1996; 6,269,038
pro forma............. 4,333 4,333 4,333 62,690
Additional paid-in
capital................. 150,667 27,028,459 27,112,576 27,141,755
Deficit accumulated
during the development
stage................... (4,741,795) (9,790,525) (11,521,395) (11,521,395)
---------- ----------- ----------- -----------
(4,586,795) 17,329,803 15,683,050 15,683,050
Deferred compensation.... (151,250) (924,352) (864,822) (864,822)
---------- ----------- ----------- -----------
Total shareholders' equity
(deficiency).............. (4,738,045) 16,405,451 14,818,228 $14,818,228
---------- ----------- ----------- ===========
Total liabilities and
shareholders' equity
(deficiency).............. $1,246,810 $17,375,756 $16,544,624
========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
INTEG INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED APRIL 3, 1990
YEAR ENDED DECEMBER 31, MARCH 31, (INCEPTION)
----------------------------------- ----------------------- TO MARCH 31,
1993 1994 1995 1995 1996 1996
--------- ----------- ----------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Research and
development........... $ 441,964 $ 1,568,220 $ 2,462,868 $ 460,185 $ 768,488 $ 6,203,455
General and
administrative........ 237,177 792,017 1,417,365 272,780 501,963 3,575,589
Clinical and
regulatory............ -- 52,083 297,580 61,104 122,856 472,519
Manufacturing
development........... -- 55,430 718,316 48,877 307,885 1,081,631
Sales and marketing.... -- 54,409 384,722 87,154 189,321 628,452
--------- ----------- ----------- --------- ----------- ------------
679,141 2,522,159 5,280,851 930,100 1,890,513 11,961,646
--------- ----------- ----------- --------- ----------- ------------
Operating loss.......... (679,141) (2,522,159) (5,280,851) (930,100) (1,890,513) (11,961,646)
Non-operating income
(expense):
Interest income........ 4,244 45,112 580,840 27,062 181,849 850,077
Interest expense....... (7,828) (15,173) (348,719) (54,239) (22,206) (409,826)
--------- ----------- ----------- --------- ----------- ------------
(3,584) 29,939 232,121 (27,177) 159,643 440,251
--------- ----------- ----------- --------- ----------- ------------
Net loss for the period
and deficit accumulated
during development
stage.................. $(682,725) $(2,492,220) $(5,048,730) $(957,277) $(1,730,870) $(11,521,395)
========= =========== =========== ========= =========== ============
Net loss per share...... $ (.36) $ (1.26) $ (2.42) $ (.46) $ (.83) $ (5.91)
========= =========== =========== ========= =========== ============
Weighted average number
of common shares
outstanding............ 1,900,000 1,972,000 2,083,000 2,083,000 2,083,000 1,948,000
========= =========== =========== ========= =========== ============
Supplemental earnings
per share:
Pro forma net loss per
share................. $ (.81) $ (.22)
=========== ===========
Pro forma weighted
average number of
shares outstanding.... 6,269,000 7,919,000
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
INTEG INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED COMMON STOCK ADDITIONAL DURING THE
---------------- -------------- PAID-IN DEVELOPMENT DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE COMPENSATION TOTAL
--------- ------ ------- ------ ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Founders' Common Stock
issued during April
1990 at $.015 per
share.................. -- -- 250,000 $2,500 $ 1,250 $ -- $ -- $ 3,750
Net loss for the period. -- -- -- -- -- (290,900) -- (290,900)
--------- ------ ------- ------ ---------- ----------- -------- -----------
Balance at December 31,
1990................... -- -- 250,000 2,500 1,250 (290,900) -- (287,150)
Net loss for the year... -- -- -- -- -- (622,016) -- (622,016)
--------- ------ ------- ------ ---------- ----------- -------- -----------
Balance at December 31,
1991................... -- -- 250,000 2,500 1,250 (912,916) -- (909,166)
Net loss for the year... -- -- -- -- -- (653,934) -- (653,934)
--------- ------ ------- ------ ---------- ----------- -------- -----------
Balance at December 31,
1992................... -- -- 250,000 2,500 1,250 (1,566,850) -- (1,563,100)
Net loss for the year... -- -- -- -- -- (682,725) -- (682,725)
--------- ------ ------- ------ ---------- ----------- -------- -----------
Balance at December 31,
1993................... -- -- 250,000 2,500 1,250 (2,249,575) -- (2,245,825)
Deferred compensation
related to restricted
stock grant............ -- -- 183,333 1,833 149,417 -- (151,250)
Net loss for the year... -- -- -- -- -- (2,492,220) -- (2,492,220)
--------- ------ ------- ------ ---------- ----------- -------- -----------
Balance at December 31,
1994................... -- -- 433,333 4,333 150,667 (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......... 928,571 9,286 -- -- 510,714 -- -- 520,000
Series B Convertible
Preferred, authorized
800,000 shares,
liquidating preference
of $1.00 per share,
sold during May 1991.. 800,000 8,000 -- -- 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...... 346,000 3,460 -- -- 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. 1,074,372 10,743 -- -- 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....... 5,604,655 56,047 -- -- 20,501,405 -- -- 20,557,452
Value of warrants to
purchase Preferred
Stock issued in
connection with bridge
loan financing......... -- -- -- -- 179,800 -- -- 179,800
</TABLE>
See accompanying notes.
F-5
<PAGE>
INTEG INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)--(CONTINUED)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED COMMON STOCK ADDITIONAL DURING THE
----------------- -------------- PAID-IN DEVELOPMENT DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE COMPENSATION TOTAL
--------- ------- ------- ------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 leases.... -- -- -- -- 104,841 -- -- 104,841
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................... 8,753,598 87,536 433,333 4,333 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.............. -- -- -- -- 48,915 -- -- 48,915
Deferred compensation
related to stock
options................ -- -- -- -- 35,202 -- (35,202) --
Amortization of deferred
compensation........... -- -- -- -- -- -- 94,732 94,732
Net loss for the period. -- -- -- -- -- (1,730,870) -- (1,730,870)
--------- ------- ------- ------ ----------- ------------ --------- -----------
Balance at March 31,
1996 (unaudited)....... 8,753,598 $87,536 433,333 $4,333 $27,112,576 $(11,521,395) $(864,822) $14,818,228
========= ======= ======= ====== =========== ============ ========= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
INTEG INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3,
THREE MONTHS ENDED 1990
YEAR ENDED DECEMBER 31, MARCH 31, (INCEPTION)
----------------------------------- ------------------------ TO MARCH 31,
1993 1994 1995 1995 1996 1996
--------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.............. $(682,725) $(2,492,220) $(5,048,730) $ (957,277) $(1,730,870) $(11,521,395)
Adjustments to
reconcile net loss to
cash used in
operating activities:
Depreciation and
amortization....... 27,524 44,123 203,184 38,635 88,295 400,446
Deferred
compensation
amortization....... -- -- 187,106 -- 94,732 281,838
Value of options and
warrants related to
debt financing,
lease guarantee,
extension of
options and
consulting
services........... -- -- 231,481 -- 6,849 238,330
Changes in operating
assets and
liabilities:
Accounts
receivable....... 19,011 (17,321) 8,648 (1,801) (787) (41,780)
Prepaid expenses
and other assets. 186 (11,588) (109,757) (24,252) (28,369) (160,481)
Accounts payable
and accrued
expenses......... (23,435) 212,862 156,097 53,467 (133,108) 242,705
--------- ----------- ----------- ---------- ----------- ------------
Net cash used in
operating
activities...... (659,439) (2,264,144) (4,371,971) (891,228) (1,703,258) (10,560,337)
INVESTING ACTIVITIES:
Purchase of furniture
and equipment........ (7,839) (33,710) (884,931) (146,667) (389,047) (1,331,746)
Proceeds from sale of
furniture and
equipment............ -- 24,579 -- -- -- 24,579
--------- ----------- ----------- ---------- ----------- ------------
Net cash used in
investing
activities...... (7,839) (9,131) (884,931) (146,667) (389,047) (1,307,167)
FINANCING ACTIVITIES:
Proceeds from sale of
Convertible Preferred
Stock................ 175,000 2,947,280 17,657,452 -- -- 22,789,732
Proceeds from bridge
loan debt............ -- -- 2,900,000 2,900,000 -- 2,900,000
Borrowings under
equipment loan....... -- -- -- -- 926,417 926,417
Payments on long-term
debt and capital
lease obligations.... (32,509) (48,568) (38,370) (33,364) (37,218) (191,363)
Proceeds from sale of
Common Stock......... -- -- -- -- -- 3,750
Proceeds from
(payments on)
borrowings from
investor............. 200,000 (200,000) -- -- -- --
--------- ----------- ----------- ---------- ----------- ------------
Net cash provided
by financing
activities...... 342,491 2,698,712 20,519,082 2,866,636 889,199 26,428,536
--------- ----------- ----------- ---------- ----------- ------------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS........... (324,787) 425,437 15,262,180 1,828,741 (1,203,106) 14,561,032
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD... 401,308 76,521 501,958 501,958 15,764,138 --
--------- ----------- ----------- ---------- ----------- ------------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................ $ 76,521 $ 501,958 $15,764,138 $2,330,699 $14,561,032 $ 14,561,032
========= =========== =========== ========== =========== ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Fixed assets
capitalized under
capital lease
agreements........... $ -- $ 632,792 $ 130,260 $ 18,337 $ -- $ 763,052
========= =========== =========== ========== =========== ============
SUPPLEMENTAL DISCLOSURE
OF NONCASH FINANCING
ACTIVITIES:
During the year ended
December 31, 1995:
The Company
converted
$2,900,000 of debt
into Series E
Convertible
Preferred Stock.
</TABLE>
See accompanying notes.
F-7
<PAGE>
INTEG INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. DESCRIPTION OF BUSINESS
Integ Incorporated was formed in April 1990 and is a development stage
company engaged in the development of the Lifeguide System, a painless and
bloodless hand-held glucose monitoring product for use by people with
diabetes. 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, 1995 and March 31, 1996, the Company's investment in government
securities approximated market value, with no resulting unrealized gains and
losses recognized.
Furniture and Equipment
Furniture and equipment are recorded at cost and depreciated primarily on a
straight-line basis over estimated useful lives of 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.
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.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation." The statement prescribes accounting and reporting standards for
all stock-based compensation plans under a fair value method, including
employee stock options and restricted stock grants. The statement, effective
for fiscal years that begin after December 15, 1995, encourages but does not
require expense recognition for the fair value of stock based compensation.
The Company has not determined the impact of the new statement on its
financial statements; however, it expects to continue to follow APB Opinion
No. 25 under the intrinsic value method and provide the required pro forma
disclosures for net income and earnings per share had the fair value method
been adopted.
Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding during the periods presented. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83 ("SAB No.
83"), shares convertible into common stock issued by the Company at prices
less than the initial offering price during the 12 months immediately
preceding the initial public offering, plus stock options and warrants granted
at exercise prices less than the initial public offering price during the same
period, have been included in the determination of shares used in calculating
the net loss per share, using the treasury method, as if they were outstanding
for all periods presented.
Pro forma net loss per share computed in accordance with Accounting
Principles Board Opinion No. 15 and SAB No. 83, after giving effect to the
conversion of all series of convertible preferred stock into common stock,
would be $(.81) and $(.22) for the year ended December 31, 1995 and three
months ended March 31, 1996 on 6,269,000 and 7,919,000 pro forma weighted
average number of shares outstanding, respectively.
F-8
<PAGE>
INTEG INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Automatic Conversion of Preferred Stock
Upon the closing of the offering covered by this Prospectus, all outstanding
shares of convertible preferred stock will automatically be converted into an
aggregate of 5,835,705 shares of common stock. Assuming conversion of the
convertible preferred stock, but without giving effect to the offering itself,
the unaudited pro forma amounts of shareholders' equity at March 31, 1996 are
presented in the balance sheets.
Interim Financial Information
The accompanying financial statements as of March 31, 1996 and for the
three-month periods ended March 31, 1996 and March 31, 1995 are unaudited. In
the opinion of the 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 three-month period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the full year ending
December 31, 1996.
Reclassifications
Certain amounts in the 1994 financial statements have been reclassified to
conform with the 1995 presentation.
3. LONG-TERM DEBT AND LEASES
The Company leases its office facility and certain office equipment under
operating leases. Rent expense of approximately $17,100, $96,400, $251,700 and
$91,800 was recorded for noncancelable operating leases and sub-leases for the
years ended December 31, 1993, 1994 and 1995 and the three months ended March
31, 1996, respectively. Future minimum lease commitments for operating leases
with remaining terms in excess of one year are payable during the years ending
December 31 as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
<S> <C> <C>
Year ending December 31:
1996............................................ $ 338,400 $ 286,500
1997............................................ 391,700 391,700
1998............................................ 391,800 391,800
1999............................................ 397,600 397,600
2000............................................ 298,200 298,200
---------- ----------
$1,817,700 $1,765,800
========== ==========
</TABLE>
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,
------------------ MARCH
1994 1995 31, 1996
-------- -------- --------
<S> <C> <C> <C>
Cost........................................... $705,021 $839,155 $839,155
Less accumulated amortization.................. (66,544) (221,545) (261,171)
-------- -------- --------
$638,477 $617,610 $577,984
======== ======== ========
</TABLE>
During March 1996, the Company executed an equipment loan agreement which
provides for borrowings up to $5 million with a commitment by the lender to
increase the line to $12.5 million by July 31, 1996 to finance the purchase of
equipment and fixtures including automated manufacturing equipment and
tooling. The loan agreement expires during December 1998 and approximately
$930,000 was borrowed during March 1996.
F-9
<PAGE>
INTEG INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under capital leases and principal maturities
of long-term debt consisted of approximately the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 MARCH 31, 1996
------------ -----------------------------
CAPITAL CAPITAL LONG-TERM
LEASES LEASES DEBT TOTAL
------------ -------- --------- ----------
<S> <C> <C> <C> <C>
Year ending December 31:
1996.............................. $195,980 $145,400 $ 37,277 $ 182,677
1997.............................. 175,930 175,930 191,828 367,758
1998.............................. 175,049 175,049 224,192 399,241
1999.............................. 149,840 149,840 262,017 411,857
2000.............................. 11,980 11,981 211,103 223,084
-------- -------- -------- ----------
Total minimum payments.............. 708,779 658,200 926,417 1,584,617
Less amount representing interest... 114,287 100,926 -- 100,926
-------- -------- -------- ----------
Present value of net minimum
payments........................... 594,492 557,274 926,417 1,483,691
Less current portion................ 147,330 142,677 82,468 225,145
-------- -------- -------- ----------
Long-term obligations, net of
current portion.................... $447,162 $414,597 $843,949 $1,258,546
======== ======== ======== ==========
</TABLE>
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Series A, authorized 928,571 shares;
928,571 shares issued and outstanding at
December 31, 1994; redeemable at the
option of the holder at $.56 per share
after May 1, 1995, liquidating
preference of $.56 per share $ 520,000 $ -- $ --
Series B, authorized 800,000 shares;
800,000 shares issued and outstanding at
December 31, 1994; redeemable at the
option of the holder at $1.00 per share
after May 1, 1995, liquidating
preference of $1.00 per share 800,000 -- --
Series C, authorized 356,000 shares;
346,000 shares issued and outstanding at
December 31, 1994; redeemable at the
option of the holder at $2.50 per share
after November 1, 1997, liquidating
preference of $2.50 per share 865,000 -- --
Series D, authorized 1,209,731 shares;
1,074,372 shares issued and outstanding
at December 31, 1994; redeemable at the
option of the holder at $2.75 per share
after November 1, 1998, liquidating
preference of $2.75 per share 2,947,277 -- --
---------- ---------- ----------
Total redeemable convertible preferred
stock $5,132,277 $ -- $ --
========== ========== ==========
</TABLE>
During June 1995, all holders of Series A, B, C and D Convertible Preferred
Stock agreed to cancel the redemption privileges.
Series A, B, C, D and E Convertible Preferred Shares will automatically
convert three shares of preferred into two shares of common stock upon the
closing of a public offering of the Company's securities with aggregate
proceeds of at least $10,000,000.
F-10
<PAGE>
INTEG INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During June 1995, the Company received gross proceeds of approximately
$22,400,000 from the sale of 5,604,655 shares of its Series E Convertible
Preferred Stock, Class 1. During January 1995, in anticipation of its pending
offering, the Company received proceeds of $2,900,000 and issued one-year,
8.5% promissory notes under a bridge loan arrangement with certain investors,
including $1,500,000 received from Medical Innovation Fund II (MIF II) and
$500,000 received from Artesian Management, Inc. (Artesian Management), both
significant shareholders of the Company. Upon consummation of the offering
during June 1995, these promissory notes and all accrued interest thereon
totaling $2,987,620 were automatically converted into 746,905 shares of Series
E Convertible Preferred Stock, Class 1, at $4.00 per share. In connection with
such bridge financing, investors received warrants for the purchase of 429,630
shares of Series E Convertible Preferred Stock, Class 2, at $3.375 per share,
including warrants for 222,222 shares issued to MIF II and warrants for 74,074
shares issued to Artesian Management. The liquidating preference of the Series
E Convertible Preferred Stock, Class 2, is $3.375 per share. The Company has
included $179,800 as additional interest expense during the year ended
December 31, 1995 which represents the value of the warrants issued in
connection with the bridge loan (see Note 6).
5. UNDESIGNATED CAPITAL STOCK AUTHORIZATION AND STOCK SPLIT
As of March 31, 1996, the Company had authorized 20,000,000 shares of
capital stock, of which 9,173,957 shares have been designated as various
series of preferred stock, and 433,333 shares have been issued as common
stock. The 10,392,710 remaining authorized shares are undesignated as of March
31, 1996. According to the Company's Restated Articles of Incorporation, any
shares issued without designation by the Company's Board of Directors are
considered to be common stock with equal rights and preferences.
Stock Authorization and 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 has been restated to
reflect the split. The reverse stock split will have no effect upon the
numbers of shares of preferred stock issued and outstanding (as opposed to the
conversion prices of the preferred stock and the numbers of shares of common
stock into which the preferred stock will convert). Accordingly, all preferred
stock and preferred stock price amounts have not been adjusted for the reverse
stock split. In addition, the Board of Directors approved an increase in the
authorized shares of capital stock to 25,000,000, including 20,000,000 shares
of common stock and 5,000,000 shares of undesignated preferred stock.
6. 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 equal to the fair
market value of the Company's stock as of the grant date. A total of 913,333
shares of the Company's common stock have been reserved for issuance under all
three plans as of March 31, 1996. During April 1996 the Board of Directors
approved an increase in the number of shares authorized for issuance under the
1994 plan by 1,000,000 shares and adopted the 1996 Directors' Stock Option
Plan for which 300,000 shares are reserved, subject to shareholder approval.
F-11
<PAGE>
INTEG INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Options outstanding were granted as follows:
<TABLE>
<CAPTION>
SHARES PLAN NON-PLAN EXERCISE
AVAILABLE OPTIONS OPTIONS PRICE
FOR GRANT OUTSTANDING OUTSTANDING EXERCISABLE PER SHARE
--------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1992................... 12,667 167,333 30,523 115,220 $.84-$1.50
Granted............... (16,666) 16,666 12,470 -- .84
Became exercisable.... -- -- -- 23,669 --
-------- -------- ------ -------
Balance at December 31,
1993................... (3,999) 183,999 42,993 138,889 .84-1.50
Shares reserved....... 333,333 -- -- -- --
Options granted....... (462,318) 462,318 -- -- .83-2.03
Became exercisable.... -- -- -- 96,595 --
Restricted stock
grant................ (183,333) -- -- -- .83
Canceled.............. 354,000 (354,000) -- -- .84-2.03
-------- -------- ------ -------
Balance at December 31,
1994................... 37,683 292,317 42,993 235,484 .83
Shares reserved....... 400,000 -- -- -- --
Granted............... (378,301) 378,301 -- -- .83-1.20
Became exercisable.... -- -- -- 59,943 --
Canceled.............. 23,666 (23,666) -- -- .83
-------- -------- ------ -------
Balance at December 31,
1995................... 83,048 646,952 42,993 295,427 .83-1.20
Granted............... (6,162) 6,162 -- -- 1.20
Became exercisable.... -- -- -- 20,166 --
-------- -------- ------ -------
Balance at March 31,
1996 (unaudited)....... 76,886 653,114 42,993 315,593 $.83-$1.20
======== ======== ====== =======
</TABLE>
Options issued under the plans expire at various dates during the period
from October 2000 through March 2006.
In addition during 1991 and 1993, the Company granted options outside the
plans to purchase 42,993 shares of the Company's common stock at $.84 per
share to Medical Innovation Fund (MIF), a significant shareholder of the
Company (see Note 8).
During August 1995, the Company extended the exercise period of stock
options to purchase 17,999 shares of common stock issued in 1990 to three
individuals for an additional five-year period. The value of this extension
was determined to be $6,750, based on the difference between the exercise
price of $.83 and the fair market value of $1.20 per share, and was expensed
as compensation in 1995.
During April 1996, the Company granted options to purchase 273,995 shares of
the Company's common stock at $9.75 per share, exercisable for ten years, to
officers and employees of the Company. In addition, the Board of Directors
adopted the 1996 Directors' Stock Option Plan, subject to shareholder
approval, under which each non-employee director will receive an option to
purchase 15,000 shares of the Company's common stock, for an aggregate of
105,000 shares, at the closing of this initial public offering.
Deferred Compensation
During August 1994, the Company issued a restricted stock grant under the
Company's stock option plans to its President and Chief Executive Officer for
183,333 shares of common stock at a fair market value determined to be $.83
per share in exchange for two promissory notes. The Company recognized
$151,250 as deferred compensation and is amortizing this amount ratably over
the restriction period of three years and, during the year ended December 31,
1995 and the three months ended March 31, 1996, $109,937 and $7,527 was
expensed, respectively. In addition to the shares being held by the Company
until the restriction lapse occurs,
F-12
<PAGE>
INTEG INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the President and Chief Executive Officer signed two notes in the amount of
the fair market value of the stock grant. For income tax purposes, one note is
forgiven 20% per year and the Company will also award this individual an
additional bonus adequate to cover related income taxes due on the note
forgiveness.
During the period from August 16, 1995 through March 13, 1996, options were
granted to purchase a total of 297,134 shares of the Company's common stock at
exercise prices of $1.20 per share. The Company recognized $960,208 and
$35,202 during the year ended December 31, 1995 and the three months ended
March 31, 1996, respectively, as deferred compensation for the excess of the
deemed value for accounting purposes of the common stock issuable upon
exercise of such options over the aggregate exercise price of such options.
The deferred compensation is amortized ratably over the vesting period of the
options. For the year ended December 31, 1995 and the three months ended March
31, 1996, $77,169 and $87,205, respectively, was expensed.
The remaining unamortized deferred compensation is expected to be charged to
operations as follows:
<TABLE>
<S> <C>
Nine months ending December 31, 1996............................ $412,756
1997............................................................ 298,154
1998............................................................ 98,613
1999............................................................ 39,949
2000 and later.................................................. 15,350
--------
$864,822
========
</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
8), 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 warrants expire at various dates during the period from
November 1997 through May 1998. During May 1994 the Company issued warrants
which expire 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 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 to MIF II, exercisable
immediately at $2.75 per share (see Note 8). Warrants for the purchase of
27,273 shares expire during February 1999, warrants for the purchase of
108,085 shares expire during December 1999, and warrants for the purchase of
23,684 shares expire during June 2005.
In connection with the bridge loan arrangement during January 1995 discussed
in Note 4, 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. These warrants expire during 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 3, 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. Warrants are to be issued as the line is funded, or at the
expiration date of the line in December 1998 for any unfunded portion of the
credit line. 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 13,587
shares of common stock were issued concurrent with the March 1996 funding.
These warrants expire in December 2003. The value of these warrants was
determined to be $48,915 based on the difference between the warrant exercise
price and the estimated fair market value of the common stock and will be
expensed over the term of the loan agreement.
F-13
<PAGE>
INTEG INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
None of the warrants discussed above have been exercised.
7. INCOME TAXES
The Company has incurred net operating losses since inception. As of March
31, 1996, the Company had net operating loss (NOL) and research and
development tax credit carryforwards of approximately $7,167,000 and $260,000,
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 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Loss carryforward.................... $1,202,000 $2,011,000 $2,652,000
Valuation allowance.................. (1,202,000) (2,011,000) (2,652,000)
---------- ---------- ----------
Deferred tax asset................... $ -- $ -- $ --
========== ========== ==========
</TABLE>
8. 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, 1995 and March 31,
1996 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 $580,000 is
payable as of December 31, 1995 ($547,000 is payable as of March 31, 1996). 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 $.84 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. Approximately $6,600 and $1,600 was
charged to interest expense during the year ended December 31, 1995 and the
three months ended March 31, 1996, respectively, and the remainder will be
amortized over the term of the lease. 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. These warrants expire during the period from
December 1999 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 $14,350 and $4,200 was charged to interest expense during the
year ended December 31, 1995 and the three months ended March 31, 1996,
respectively, and the remainder will be amortized over the term of the lease.
In connection with the sale of 60,000 shares of the Company's Series C
Convertible Preferred Stock to MIF during November 1992, the Company issued
warrants to MIF for the purchase of 13,333 shares of its common stock
exercisable immediately at a price of $3.75 per share. These warrants expire
during November 1997.
In consideration of a bridge loan arrangement during 1993, the Company
issued to MIF II warrants for the purchase of 27,273 shares of Series D
Convertible Preferred Stock exercisable immediately at a price of $2.75 per
share. These warrants expire during February 1999.
In consideration of the bridge loan arrangement during January 1995
discussed in Note 6, 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. The value of these warrants was
determined to be $93,000 of the $179,800 total discussed in Note 6. These
warrants expire during January 2005.
F-14
<PAGE>
INTEG INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Since inception, the Company has made payments under consulting agreements
with two directors, one of which is a limited partner of MIF's general
partner, and one shareholder, totaling approximately $125,300, $129,000,
$129,000 and $129,000 during the years ended December 31, 1992, 1993, 1994 and
1995, respectively.
F-15
<PAGE>
No dealer, salesperson or other person is authorized to give any information
or make any representations not contained in this Prospectus in connection
with the offer made by this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such an offer or solicitation. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances, create any
implication that the affairs of the Company since the date hereof or the
information contained herein is correct as of any time subsequent to the date
of this Prospectus.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Dilution.................................................................. 13
Capitalization............................................................ 14
Selected Financial Data................................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 19
Management................................................................ 31
Certain Transactions...................................................... 38
Principal Shareholders.................................................... 40
Description of Capital Stock.............................................. 42
Shares Eligible for Future Sale........................................... 44
Underwriting.............................................................. 46
Validity of Shares........................................................ 47
Experts................................................................... 47
Additional Information.................................................... 48
Index to Financial Statements............................................. F-1
</TABLE>
----------------
Until July 22, 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
3,000,000 Shares
[LOGO OF INTEG INCORPORATED APPEARS HERE]
Common Stock
-----------------
PROSPECTUS
-----------------
Piper Jaffray inc.
Montgomery Securities
June 26, 1996
