<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1996.
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________.
Commission File Number 0-28420
INTEG INCORPORATED
- ------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1670176
- --------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
2800 PATTON ROAD
ST. PAUL, MN 55113 (612) 639-8816
- ------------------ --------------
(Address of principal executive offices (Registrant's telephone number,
and zip code) including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $.01 PAR VALUE 9,275,704
- ---------------------------- ---------
(Class) (Number of Shares Outstanding
at November 4, 1996)
<PAGE>
INDEX
INTEG INCORPORATED
(A Development Stage Company)
Page No.
--------
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements (Unaudited)
Balance sheets as of September 30, 1996 and December 31, 1995 3
Statements of Operations for the three-month periods ended
September 30, 1996 and 1995, nine-month periods ended
September 30, 1996 and 1995, and for the period from
April 3, 1990 (inception) through September 30, 1996 4
Statements of Cash Flows for the three-month periods ended
September 30, 1996 and 1995, nine-month periods ended
September 30, 1996 and 1995, and for the period from
April 3, 1990 (inception) through September 30, 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
- --------------------------
Items 1 through 5 have been omitted since all items are
inapplicable or answers are negative
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURE PAGE 10
- --------------
EXHIBIT INDEX 11
- -------------
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTEG INCORPORATED
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
(see NOTE below) (Unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $15,764,138 $36,288,031
Accounts receivable 40,993 66,958
Interest receivable -- 52,540
Prepaid expenses 55,128 126,384
----------- -----------
Total current assets 15,860,259 36,533,913
Furniture and equipment, cost 1,640,936 2,490,940
Less accumulated depreciation (281,949) (582,578)
----------- -----------
1,359,087 1,908,362
Other assets 156,410 230,314
----------- -----------
Total assets $17,375,756 $38,672,589
=========== ===========
Liabilities and shareholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 375,813 $ 403,279
Current portion of capital lease obligations 147,330 139,888
----------- -----------
Total current liabilities 523,143 543,167
Capital lease obligations, less current portion 447,162 1,275,646
Shareholders' equity:
Convertible preferred stock 87,536 --
Common stock 4,333 92,699
Additional paid-in capital 27,028,459 53,245,556
Deficit accumulated during the development stage (9,790,525) (15,907,854)
----------- -----------
17,329,803 37,430,401
Deferred compensation (924,352) (576,625)
----------- -----------
Total shareholders' equity 16,405,451 36,853,776
----------- -----------
Total liabilities and shareholders' equity $17,375,756 $38,672,589
=========== ===========
</TABLE>
NOTE: The December 31, 1995 balance sheet has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
3
<PAGE>
INTEG INCORPORATED
(A Development Stage Company)
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Period from
April 3,
Three months ended Nine months ended 1990
September 30 September 30 (inception) to
---------------------------- ---------------------------- September 30,
1996 1995 1996 1995 1996
----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research & development $ 1,126,364 $ 658,189 $ 2,972,888 $ 1,613,663 $ 8,407,855
General & administrative 790,384 419,586 1,682,380 998,925 4,956,306
Clinical & regulatory 199,138 91,227 455,994 215,986 805,658
Manufacturing development 304,002 252,725 908,263 446,813 1,682,009
Sales & marketing 190,082 102,027 588,389 247,190 1,027,517
----------- ----------- ----------- ----------- ------------
Operating loss (2,610,970) (1,523,754) (6,807,914) (3,522,577) (16,879,345)
Non-operating income (expense):
Interest income 491,656 248,923 839,408 357,518 1,507,636
Interest expense (68,482) (70,140) (148,823) (279,371) (536,145)
----------- ----------- ----------- ----------- ------------
423,174 178,783 690,585 78,147 971,491
----------- ----------- ----------- ----------- ------------
Net loss for the period and deficit
accumulated during the development stage $(2,187,796) $(1,344,971) $(6,117,329) $(3,444,430) $(15,907,854)
=========== =========== =========== =========== ============
Net loss per share:
Primary $(0.24) $(0.65) $(1.56) $(1.66) $(7.35)
=========== =========== =========== =========== ============
Fully-diluted $(0.24) $(0.17) $(0.81) $(0.60) $(3.68)
=========== =========== =========== =========== ============
Weighted average number of
common shares outstanding:
Primary 9,174,000 2,076,000 3,916,000 2,076,000 2,163,000
=========== =========== =========== =========== ============
Fully-diluted 9,237,000 7,912,000 7,580,000 5,707,000 4,318,000
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes.
4
<PAGE>
INTEG INCORPORATED
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from
April 3,
Three months ended Nine months ended 1990
September 30 September 30 (inception) to
---------------------------- ---------------------------- September 30,
1996 1995 1996 1995 1996
----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss $(2,187,795) $(1,344,971) $(6,117,329) $(3,444,430) $(15,907,854)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation & amortization 110,395 53,517 300,729 132,843 612,880
Amortization of deferred compensation 150,611 60,397 382,929 104,022 570,035
Value of options and warrants 8,886 22,228 24,621 315,391 256,102
Changes in operating assets and liabilities:
Accounts receivable (63,758) 22,819 (78,505) 20,933 (119,498)
Prepaid expenses and other assets 76,559 24,147 (117,907) (196,571) (250,018)
Accounts payable and accrued expenses 4,615 78,535 24,507 56,390 400,319
----------- ----------- ----------- ----------- ------------
Net cash used in operating activities (1,900,487) (1,085,328) (5,580,955) (3,011,422) (14,438,034)
Investing activities:
Purchases of furniture and equipment (312,990) (285,191) (850,004) (537,931) (1,792,703)
Proceeds from sale of furniture and
equipment -- -- -- -- 24,579
----------- ----------- ----------- ----------- ------------
Net cash used in investing activities (312,990) (285,191) (850,004) (537,931) (1,768,124)
Financing activities:
Proceeds from sale of common stock 26,133,811 26,133,811 26,137,561
Proceeds from sale of convertible preferred
stock (90,782) 20,557,451 22,789,732
Borrowings under bridge loan 2,900,000
Borrowings under equipment loan 926,418 130,260 926,417
Payments on long-term debt and capital
lease obligations (33,739) (62,654) (105,377) (134,244) (259,521)
----------- ----------- ----------- ----------- ------------
Net cash provided (used) in financing
activities 26,100,072 (153,436) 28,954,852 20,553,467 52,494,189
----------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash 23,886,595 (1,523,955) 20,523,893 17,004,114 36,288,031
Cash at beginning of period 12,401,436 19,030,027 15,764,138 501,958 --
----------- ----------- ----------- ----------- ------------
Cash at end of period $36,288,031 $17,506,072 $36,288,031 $17,506,072 $ 36,288,031
=========== =========== =========== =========== ============
Supplemental cash flow information:
Fixed assets capitalized under capital
lease agreements $ -- $ -- $ 926,418 $ 130,260 $ 1,689,470
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes.
5
<PAGE>
INTEG INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
and nine-month periods ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1996.
(2) NET LOSS PER SHARE
The primary and fully-diluted net loss per share amounts are computed using
the weighted average number of common shares outstanding during the periods
presented. Pursuant to Securities and Exchange Staff Accounting Bulletin
No. 83 ("SAB No. 83"), shares convertible into common stock issued by the
Company at prices less than the Company's initial public offering of stock
during the 12 months preceding the 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 stock
method, as if they were outstanding for all periods up to and including
March 31, 1996.
The fully-diluted net loss per share assumes conversion of all previously
outstanding convertible preferred stock into common stock during the
entirety of each respective reporting period. The primary net loss per
share assumes conversion of all previously outstanding convertible
preferred stock as of July 1, 1996, when such automatic conversion actually
took place.
(3) Initial Public Offering
On July 1, 1996, the Company received net proceeds of $26.1 million from an
initial public offering of 3,000,000 shares of its common stock at $9.50
per share. Also on July 1, 1996, all of the Company's preferred shares
previously outstanding were automatically converted into an aggregate of
5,835,705 shares of common stock on a 2-for-3 basis.
6
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When used in
this Form 10-Q and in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral statements made
with the approval of an authorized executive officer, the word or phrases
"believes," "anticipates," "expects," "intends," "will likely result,"
"estimates," "projects" or similar expressions are intended to identify such
forward-looking statements, but are not the exclusive means of identifying such
statements. These forward-looking statements involve risks and uncertainties
that may cause the Company's actual results to differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, the following: risks
associated with the development of a new technology; dependence on the Lifeguide
System; history of operating losses and expectation of future losses; limited
clinical testing experience; uncertainty of obtaining Food and Drug
Administration clearances; heightened competition; risks associated with the
lack of manufacturing capability and dependence on contract manufacturers and
suppliers; and risks associated with the company's dependence on proprietary
technology, including those related to adequacy of patent and trade secret
protection. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to revise any forward-looking statements in
order to reflect events or circumstances after the date of such statements.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business. Such forward-
looking statements are qualified in their entirety by the cautions and risk
factors set forth under "Cautionary Statement" filed as Exhibit 99.1 to this
Form 10-Q.
GENERAL
Integ, a development stage company, was incorporated on April 3, 1990 to develop
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 self-monitor their glucose levels without repeatedly
enduring the pain of lancing their fingers to obtain a blood sample.
From inception through September 30, 1996, the Company has incurred losses
totaling $15,907,854, consisting of $8,407,855 of research and development
expenses, $4,956,306 of general and administrative expenses and $2,543,693 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 September 30, 1996 and 1995
General: Net losses increased to $2,187,796 during the three months ended
September 30, 1996 from $1,344,971 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 $1,126,364 during the three months ended September 30, 1996 from $658,189
during the same period in 1995. The increase in research and development
expenses was due primarily to increases in product design costs of prototype
materials purchased during the final stages of the development of the Lifeguide
System.
General and administrative expenses: General and administrative expenses
increased to $790,884 during the three months ended September 30, 1996 from
$419,586 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.
7
<PAGE>
Clinical and regulatory expenses: Clinical and regulatory expenses increased to
$199,138 during the three months ended September 30, 1996 from $91,227 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 trials necessary to obtain the required regulatory approvals for the
Lifeguide System.
Manufacturing development expenses: Manufacturing development expenses increased
to $305,002 during the three months ended September 30, 1996 from $252,725
during the same period in 1995. The increase was 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. Once production of the Lifeguide System commences,
manufacturing related costs will be allocated to inventory and cost of goods
sold.
Sales and marketing expenses: Sales and marketing expenses increased to
$190,082 during the three months ended September 30, 1996 from $102,027 during
the same period in 1995. The increase was due primarily to compensation and
recruiting costs and expenses related to building a sales and marketing
organization.
Interest income: Interest income increased to $491,656 during the three months
ended September 30, 1996 from $248,923 during the same period in 1995. The
increase was due primarily to the investment in marketable securities of net
proceeds totaling approximately $26.1 million received on July 1, 1996 from the
Company's Initial Public Offering.
Comparison of Nine Months Ended September 30, 1996 and 1995
General: Net losses increased to $6,117,329 during the nine months ended
September 30, 1996 from $3,444,430 during the same period in 1995.
Research and development expenses: Research and development expenses increased
to $2,972,888 during the nine months ended September 30, 1996 from $1,613,663
during the same period in 1995. The increase in research and development
expenses was due primarily to increases in compensation, product design 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 $1,882,380 during the nine months ended September 30, 1996 from
$998,925 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
$455,994 during the nine months ended September 30, 1996 from $215,986 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 trials necessary to obtain the required regulatory approvals for the
Lifeguide System.
Manufacturing development expenses: Manufacturing development expenses increased
to $908,263 during the nine months ended September 30, 1996 from $446,813 during
the same period in 1995. The increase was 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. Once production of the Lifeguide System commences,
manufacturing related costs will be allocated to inventory and cost of goods
sold.
Sales and marketing expenses: Sales and marketing expenses increased to $588,389
during the nine months ended September 30, 1996 from $247,190 during the same
period in 1995. The increase was due primarily to compensation and recruiting
costs and expenses related to building a sales and marketing organization.
Interest income: Interest income increased to $839,408 during the nine months
ended September 30, 1996 from $357,518 during the same period in 1995. The
increase was due primarily to the investment in marketable securities of net
proceeds totaling approximately $26.1 million received on July 1, 1996 from the
Company's Initial Public Offering.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations since inception have been funded by net proceeds from
the sale of Common and Preferred Stock totaling approximately $49 million
through September 30, 1996. As of September 30, 1996, the Company had cash and
cash equivalents of approximately $36 million and working capital of
approximately $36 million.
On July 1, 1996, the Company received net proceeds of approximately $26.1
million from the initial public offering of 3,000,000 shares of its common
stock. The Company will use the proceeds from this offering, along with its
existing cash, to fund the continued development and testing of and clinical
trials for the Lifeguide System, including research and development,
manufacturing and marketing activities related to the market launch of the
Lifeguide System. The Company invests excess cash in short-term, interest-
bearing, investment grade securities.
The Company expects that the proceeds from its initial public offering, along
with its existing cash, will be sufficient to fund its operations until late
1998. 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, the results of clinical trials and competition. See
Exhibit 99.1 to this Form 10-Q for a more detailed description of the factors
that may affect the Company's future liquidity and capital requirements.
9
<PAGE>
PART II - FINANCIAL INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ ---------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of
the Company (effective July 1, 1996) (1)
3.2 Amended Bylaws of the Company (1)
10.1 *Amendment to Promissory Note dated August 15, 1996
from Frank A. Solomon to the Company
11 Statement of Computation of Per Share Earnings (Losses)
27 Financial Data Schedule
99.1 Cautionary Statement
-----------
* Denotes management contracts and compensatory plans,
contracts and arrangements.
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (SEC File No. 333-4352)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEG INCORPORATED
------------------
(Registrant)
Date: November 13, 1996 By: /s/ Frank A. Solomon
---------------------------------
Frank A. Solomon
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1996 By: /s/ Ronald M. Nelson
---------------------------------
Ronald M. Nelson
Chief Financial Officer
(Principal Financial & Accounting
Officer)
10
<PAGE>
EXHIBIT INDEX
Exhibit Description Page
- ------- ----------- ----
10.1 Amendment to Promissory Note dated August 15,
1996 from Frank A. Solomon to the Company 12
11 Statement of Computation of Per Share Earnings 13
27 Financial Data Schedule Filed Electronically
99.1 Cautionary Statement 14
11
<PAGE>
Exhibit 10.1
------------
AMENDMENT TO PROMISSORY NOTE
AMENDMENT, made as of the 15th day of August, 1996, to the Promissory
Note dated as of August 9, 1994 in the principal amount of $113,438 (the
"Note"), from Frank A. Solomon ("Maker") to Integ Incorporated (formerly InoMet,
Inc.), a Minnesota corporation (the "Lender").
WHEREAS, the Compensation Committee of the Lender's Board of Directors
has authorized an amendment to the Note to eliminate the minimum public offering
price provision for acceleration of the maturity date of the Note; and
WHEREAS, Maker wishes to amend the Note to eliminate the minimum
public offering price provision for acceleration of the maturity date of the
Note.
NOW, THEREFORE, IT IS HEREBY AGREED that the Note shall be amended as
follows:
1. Elimination of Minimum Public Offering Price Requirement for
Acceleration. The second paragraph of the Note is hereby amended in its
entirety to read as follows:
This Note matures on August 9, 1999 (the "Maturity Date"), and the
outstanding principal amount of this Note shall be repaid in full, along
with all accrued and unpaid interest, on the earlier of (i) the date of the
closing of an initial public offering of stock of the Lender yielding gross
proceeds of not less than $10,000,000 and (ii) the Maturity Date.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the date set forth above.
INTEG INCORPORATED
By /s/ Mark B. Knudson
----------------------------------
Mark B. Knudson, Ph.D.
Chairman of the Board of Directors
/s/ Frank A. Solomon
-----------------------------------
12
<PAGE>
EXHIBIT 11
INTEG INCORPORATED
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
April 3, 1990
Three months ended Nine months ended (inception)
-------------------- -------------------- through
9/30/96 9/30/95 9/30/96 9/30/95 9/30/96
-------------
Primary Earnings Per Share:
- ---------------------------
<S> <C> <C> <C> <C> <C>
Average shares outstanding 9,174 433 3,368 433 647
SAB No. 83 shares - shares convertible
into common stock and stock options and
warrants granted at exercise prices less
than the initial public offering price
during the 12 months preceding the initial
public offering using the treasury method -- 1,643 548 1,643 1,516
------- ------- ------- ------- --------
Total 9,174 2,076 3,916 2,076 2,163
======= ======= ======= ======= ========
Net loss $(2,188) $(1,345) $(6,117) $(3,444) $(15,908)
======= ======= ======= ======= ========
Net loss per share $ (0.24) $ (0.65) $ (1.56) $ (1.66) $ (7.35)
======= ======= ======= ======= ========
Fully-Diluted Earnings Per Share:
- ---------------------------------
Average shares outstanding 9,174 433 3,368 433 647
SAB No. 83 shares - shares convertible
into common stock and stock options and
warrants granted at exercise prices less
than the initial public offering price
during the 12 months preceding the initial
public offering using the treasury method -- 1,643 548 1,643 1,516
Assumed conversion of all series of
convertible preferred stock 63 5,836 3,664 3,631 2,156
------- ------- ------- ------- --------
Total 9,237 7,912 7,580 5,707 4,318
======= ======= ======= ======= ========
Net loss $(2,188) $(1,345) $(6,117) $(3,444) $(15,908)
======= ======= ======= ======= ========
Net loss per share $ (0.24) $ (0.17) $ (0.81) $ (0.60) $ (3.68)
======= ======= ======= ======= ========
</TABLE>
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 36,288,031
<SECURITIES> 0
<RECEIVABLES> 119,499
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,533,914
<PP&E> 2,490,940
<DEPRECIATION> 582,578
<TOTAL-ASSETS> 38,672,590
<CURRENT-LIABILITIES> 543,167
<BONDS> 0
<COMMON> 92,699
0
0
<OTHER-SE> 36,761,077
<TOTAL-LIABILITY-AND-EQUITY> 38,672,590
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,482
<INCOME-PRETAX> (2,187,796)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,187,796)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,187,796)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
<PAGE>
Exhibit 99.1
------------
CAUTIONARY STATEMENT
Integ Incorporated ("Integ" or the "Company"), or persons acting on behalf
of the Company, or outside reviewers retained by the Company making statements
on behalf of the Company, or underwriters, from time to time, may make, in
writing or orally, "forward-looking statements" as defined under the Private
Securities Litigation Reform Act of 1995 (the "Act"). This Cautionary Statement
is for the purpose of qualifying for the "safe harbor" provisions of the Act and
is intended to be a readily available written document that contains factors
which could cause results to differ materially from those projected in such
forward-looking statements. These factors are in addition to any other
cautionary statements, written or oral, which may be made or referred to in
connection with any such forward-looking statement.
The following matters, among others, may have a material adverse effect on
the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this Cautionary
Statement in the context of a forward-looking statement shall be deemed to be a
statement that any one or more of the following factors may cause actual results
to differ materially from those which might be projected, forecast, estimated or
budgeted by the Company in such forward-looking statement or statements:
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.
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 September 30, 1996, the
Company had an accumulated deficit of approximately $15,908,000. 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.
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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
Food and Drug Administration ("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 can
also be no assurance that the required FDA clearances will be obtained on a
timely basis or at all. Although the Company believes that its products will be
eligible for a 510(k) clearance from the FDA, there 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. Further, there can be no assurance that any PMA filed by
the Company would be approved on a timely basis or at all. 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.
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.
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
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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.
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 Form 10-Q, no patents have been issued to the
Company with respect to the Lifeguide System. The Company has applied for six
United States patents and for four corresponding PCT foreign patent covering
certain aspects of the technology underlying the Lifeguide System, and the
Company has received notice of allowance on two of these patents. 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 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.
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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.
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.
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.
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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.
FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE
The Company expects that the proceeds from its initial public offering
consummated in July 1996, along with its existing cash, will be sufficient to
fund the Company's operations until late 1998. 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 period, the Company may be required to raise
additional funds through public or private financings, including equity
financings. 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.
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.
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. 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.
The foregoing review of factors pursuant to the Act should not be construed
as exhaustive or as any admission regarding the adequacy of disclosures made by
the Company prior to the effective date of the Act.
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