<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
MARCH 31, 1997
--------------
[ ] 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 of Incorporation) (I.R.S. Employer Identification
No.)
2800 Patton Road, St. Paul, MN 55113
---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Telephone Number: (612) 639-8816
---------------------------------
(Registrant's telephone number, 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 the filing
requirements for at least the past 90 days. Yes X No ______
-----
As of May 5, 1997, the registrant had 9,285,704 shares of $.01 par value common
stock issued and outstanding.
================================================================================
<PAGE>
INTEG INCORPORATED
INDEX
-----
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Balance Sheets as of March 31, 1997 and December 31, 1996 3
Statements of Operations for the three months ended
March 31, 1997 and 1996 and for the period from
April 3, 1990 (inception) through March 31, 1997 4
Statements of Cash Flows for the three months ended
March 31, 1997 and 1996 and for the period from
April 3, 1990 (inception) through March 31, 1997 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 10
Item 1-5. None
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 11
2
<PAGE>
INTEG INCORPORATED
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 December 31
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 31,844,265 $ 33,825,797
Receivables 77,042 167,065
Prepaid expenses 100,673 157,933
------------- ------------
Total current assets 32,021,980 34,150,795
------------- ------------
Furniture and equipment 4,948,891 3,701,648
Less accumulated depreciation (976,422) (821,476)
------------- ------------
3,972,469 2,880,172
Other assets 529,196 684,933
------------- ------------
TOTAL ASSETS $ 36,523,645 $ 37,715,900
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 872,871 $ 1,236,348
Current portion of long-term debt and
capital lease obligations 530,606 337,277
------------- ------------
Total current liabilities 1,403,477 1,573,625
------------- ------------
Long-term debt and capital lease
obligations,
less current portion 2,655,737 1,298,484
Shareholders' equity:
Common stock 92,857 92,757
Additional paid-in capital 54,277,483 54,269,333
Deficit accumulated during the
development stage (21,335,494) (18,873,957)
------------- ------------
33,034,846 35,488,133
Deferred compensation (570,415) (644,342)
------------- ------------
Total shareholders' equity 32,464,431 34,843,791
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 36,523,645 $ 37,715,900
============= ============
</TABLE>
3
<PAGE>
INTEG INCORPORATED
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
April 3, 1990
Three Months Ended (Inception) to
March 31 March 31
---------------------------
1997 1996 1997
------------- ----------- ---------------
<S> <C> <C> <C>
OPERATING EXPENSES:
Research and development $ 1,141,703 $ 901,331 $ 11,740,632
General and administrative 531,788 294,237 4,850,358
Clinical and regulatory 270,826 145,988 1,452,982
Manufacturing development 553,238 351,482 3,037,203
Sales and marketing 223,518 197,475 1,630,986
-------------- ------------ ---------------
OPERATING LOSS (2,721,073) (1,890,513) (22,712,161)
-------------- ------------ --------------
OTHER INCOME (EXPENSE):
Interest income 422,994 181,849 2,397,682
Interest expense (163,458) (22,206) (778,037)
Other - - (242,978)
-------------- ------------ --------------
259,536 159,643 1,376,667
-------------- ------------ --------------
NET LOSS FOR THE PERIOD AND DEFICIT ACCUMULATED
DURING THE DEVELOPMENT STAGE $(2,461,537) $(1,730,870) $(21,335,494)
-------------- ------------ --------------
NET LOSS PER SHARE:
Primary ($0.27) ($0.83) ($7.96)
Fully-diluted* ($0.27) ($0.22) ($4.50)
-------------- ------------ --------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Primary 9,274,889 2,083,441 2,680,734
Fully-diluted* 9,274,889 7,919,144 4,744,753
-------------- ------------ --------------
</TABLE>
* Assumes conversion of all previously outstanding convertible preferred
stock into common stock during each reporting period prior to July 1, 1996,
the closing date of the company's initial public offering, at which time
all convertible preferred stock was automatically converted into common
stock.
4
<PAGE>
INTEG INCORPORTAED
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
Three Months Ended April 3, 1990
March 31 (Inception) to
--------------------------------------- March 31
1997 1996 1997
--------------- ----------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,461,537) $(1,730,870) $(21,335,494)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 154,946 88,295 1,010,814
Amortization of deferred compensation 73,927 94,732 776,972
Amortization of loan committment fee 77,463 - 250,074
Amortization of options and warrants
related to debt financing, lease guarantee,
extension of options and consulting services 5,750 6,849 260,552
Loss on sale of equipment and deposit write-off - - 68,209
Changes in operating assets and liabilities:
Receivables 90,023 (787) (77,042)
Prepaid expenses and other assets 57,260 (28,369) (165,534)
Accounts payable and accrued expenses (363,477) (133,108) 872,871
------------- --------------- ------------
Net cash used in operating activities (2,365,645) (1,703,258) (18,338,578)
------------- --------------- ------------
INVESTING ACTIVITIES:
Purchase of furniture and equipment (1,236,061) (389,047) (4,274,533)
Proceeds from sale of furniture and equipment - - 43,079
------------ --------------- ------------
Net cash used in investing activities (1,236,061) (389,047) (4,231,454
------------ --------------- ------------
FINANCING ACTIVITIES:
Proceeds from sale of Convertible Preferred Stock - - 22,789,732
Proceeds from bridge loan debt - - 2,900,000
Payments on long-term debt and capital lease obligations (137,670) (37,218) (520,720
Proceeds from sale of Common Stock 8,250 - 26,143,417
Proceeds from Borrowings under equipment loan 1,749,594 926,417 3,101,868
------------ --------------- ------------
Net cash provided by financing activities 1,620,174 889,199 54,414,297
------------ --------------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,981,532) (1,203,106) 31,844,265
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,825,797 15,764,138 -
------------ --------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $31,844,265 $ 14,561,032 $ 31,844,265
------------ --------------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Fixed assets capitalized under capital lease agreements $ 11,182 $ - $ 774,234
The Company converted $2,900,000 of debt into Series E
Convertible Preferred Stock $ - $ - $ 2,900,000
</TABLE>
5
<PAGE>
INTEG INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying financial statements, which are unaudited except for the
balance sheet as of December 31, 1996, have been prepared in accordance with
instructions to Form 10-Q and do not include all the information and notes
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. These financial statements should be read in conjunction with the
financial statements and accompanying notes from the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1996 filed with the Securities and
Exchange Commission.
(2) NET LOSS PER SHARE
Net loss per share is 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 initial public
offering price ($9.50 per share) 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 stock method, as if they were outstanding for all
periods presented prior to the initial public offering.
Fully-diluted net loss per share computed in accordance with Accounting
Principles Board Opinion No. 15 and SAB No. 83 gives effect to the conversion of
all series of 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) EQUIPMENT LOAN AGREEMENT
In March 1996, the Company executed an equipment loan agreement which provided
for borrowings of up to $5,000,000 under a line of credit. In July 1996, the
lender committed to a total line of $12,500,000 to finance the purchase of
furniture and equipment, including automated manufacturing equipment and
tooling. The line of credit expires December 31, 1998, and $3.1 million was
borrowed under the line as of March 31, 1997.
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 next generation, hand-held glucose monitoring product
for use by people with diabetes that avoids the pain and blood associated with
conventional "finger-stick" technologies. 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 March 31, 1997, the Company has incurred losses totaling
$21.3 million, consisting of $11.7 million of research and development expenses,
$4.9 million of general and administrative expenses and $4.7 million 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. The Company has generated no revenue
and has sustained significant operating losses each year since inception. The
Company expects such losses to continue for the next several years.
7
<PAGE>
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. The Company is currently focused on the research and
development activities necessary to modify the current design in order for the
LifeGuide System to meet the Company's product specifications. Until such time
as the commercial prototypes of the LifeGuide System meet the Company's
performance specifications, the Company expects that further increases in non-
research and development expenses will be minimized.
RESULTS OF OPERATIONS
Comparison of Three Month Ended March 31, 1997 and 1996
General: The Company's net loss increased to $2,461,537 during the three months
ended March 31, 1997 from $1,730,870 during the same period in 1996. The
Company expects net losses to continue for the next several years.
Research and development expenses: Research and development expenses increased
to $1,141,703 during the three months ended March 31, 1997 from $901,331 during
the same period in 1996. The increase in research and development expenses was
due primarily to increases in product design costs, compensation and the cost of
prototype materials.
General and administrative expenses: General and administrative expenses
increased to $531,788 during the three months ended March 31, 1997 from $294,237
during the same period in 1996. The increase in general and administrative
expenses was due to increases in compensation and various legal, insurance and
filing costs of being a publicly traded company.
Clinical and regulatory expenses: Clinical and regulatory expenses increased to
$270,826 during the three months ended March 31, 1997 from $145,988 during the
same period in 1996. The increase was due primarily to increases in
compensation and benefit costs of additional staff that were hired to plan the
clinical trials necessary to obtain the required regulatory approvals for the
LifeGuide System.
Manufacturing development expenses: Manufacturing development expenses
increased to $553,238 during the three months ended March 31, 1997 from $351,482
during the same period in 1996. The increase was due primarily to increases in
pre-manufacturing expenses, consisting of facility costs and compensation and
benefit costs of additional staff that were hired 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
costs of goods sold.
Sales and marketing expenses: Sales and marketing expenses increased slightly
to $223,518 during the three months ended March 31, 1997 from $197,475 during
the same period in 1996.
Interest Income: Interest income increased to $422,994 during the three months
ended March 31, 1997 from $181,849 during the same period in 1996. The increase
was due primarily to higher average balances of cash and cash equivalents in
1997 as a result of the investment of net proceeds totaling approximately $26
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 $52 million
through March 31, 1997. The Company had cash and cash equivalents of
approximately $32 million as of March 31, 1997.
The Company believes that its current cash balances, when combined with the $9.4
million unused portion of its line of credit facility, will be sufficient to
fund its operations until approximately mid-1998. The Company's future
liquidity and capital requirements will depend on numerous factors, including
when or if the performance of the LifeGuide System meets the required
performance specifications, 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>
II. OTHER INFORMATION
Item 1-5. None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed herewith.
10.1 Consulting Agreement dated March 14, 1997 between Mark B.
Knudson, Ph.D. and the Company.
11. Statement Re: Computation of Net Loss per Common and
Common Equivalent Share.
27. Financial Data Schedule.
99.1 Cautionary Statement
(b) No reports on Form 8-K were filed during the quarter ended March
31, 1997.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officers.
INTEG INCORPORATED
(Registrant)
Date: May 13, 1997 By: /s/ John R. Brintnall
----------------------
John R. Brintnall
Vice President of Finance
(Principal financial and accounting
officer and duly authorized signatory
on behalf of the Registrant)
11
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10.1 Consulting Agreement dated March 14, 1997 between Mark B. Knudson,
Ph.D. and the Company.
11. Statement Re: Computation of Net Loss per Common and Common Equivalent
Share.
27. Financial Data Schedule (Electronically Filed)
99.1 Cautionary Statement
<PAGE>
EXHIBIT 10.1
------------
INTEG INCORPORATED
CONSULTING AGREEMENT
This Agreement is made effective the 3/rd/ day of April 1997 by and between
Integ Incorporated (Integ), a Minnesota corporation, whose principal place of
business is 2800 Patton Road, St. Paul, MN 55113, and Mark B. Knudson, Ph.D. In
consideration of the mutual covenants and promises set forth herein, the parties
hereby agree as follows:
1. Engagement Area: Integ engages Mark B. Knudson, Ph.D. as a consultant for
--------------
Integ in the area of management, training, technical expertise and advisory
services.
2. Term: Unless terminated as hereafter provided, this Agreement shall begin
----
on April 3, 1997 and end on April 3, 2000. The parties may negotiate one or
more renewals of this Agreement.
3. Duties: Duties will be assigned by Integ and will involve consulting in the
------
area of technical expertise and advisory services.
4. Compensation: Integ shall pay Mark B. Knudson, Ph. D. $6,750.00 per month
------------
in arrears for consulting services rendered in pursuit of this Agreement.
Integ will reimburse Mark B. Knudson, Ph. D. for incidental expenses
ocurred in performing this Agreement, but such expenses shall not exceed
$100.00 per month without Integ's prior written consent. Travel expenses
must be approved in advance by Integ. Mark B. Knudson, Ph. D. shall provide
Integ with appropriate documentation for tax purposes for all expenses paid
by Integ.
5. Termination: Notwithstanding any contrary provision contained elsewhere in
-----------
this Agreement, this Agreement and the rights and obligations of Integ and
Mark B. Knudson hereunder (other than the rights and obligations of the
parties under Section 7 or 9) shall be terminated upon the occurrence of
any of the following events:
a. 90 days after Mark B. Knudson, Ph.D.'s death; or
b. 90 days after Mark B. Knudson, Ph.D. becomes disabled so that he is
unable to render his normal services under this Agreement for a
continuous period of thirty (30) days; or
c. Immediately in the event that Mark B. Knudson, Ph. D. is convicted of
any crime (excluding traffic violations or other minor offenses), or
engages in any activities that constitute a material violation of
normal standards of business ethics; or
<PAGE>
d. Immediately in the event that Mark B. Knudson, Ph. D. willfully refuses
to comply with or implement reasonable policies and work direction
established by Integ; or
e. Upon fifteen (15) days prior written notice Mark B. Knudson, Ph. D., if
Mark B. Knudson has failed in any material respect to perform his
responsibilities hereunder and such default is not cured within such
fifteen (15) day period.
In the event this Agreement is terminated pursuant to this Section 5 prior
to the expiration of the term hereof, Mark B. Knudson, Ph.D. shall be
entitled to receive his monthly consulting fee through the date of
termination, but all other rights to receive consulting fees shall
terminate on such date.
6. Status and Authority: In rendering services pursuant to this Agreement,
--------------------
Mark B. Knudson shall be acting as an independent contractor and not as an
employee or agent of Integ. As an independent contractor, Mark B. Knudson,
Ph.D. shall have no authority, express or implied, to commit or obligate
Integ in any manner whatsoever, except as specifically authorized from time
in writing by an authorized representative of Integ, which authorization
may be general or specific. Nothing contained in this Agreement shall be
construed or applied to create a partnership. Mark. B. Knudson, Ph.D. shall
be responsible for the payment of all federal, state and local taxes
payable with respect to all amounts paid to Mark B. Knudson under this
Agreement; provided, however, that if Integ is determined to be liable for
collection and/or remittance of any such taxes, Mark B. Knudson, Ph.D.
shall immediately reimburse Integ for all such payments made by Integ.
7. Confidential Information: Because of the confidential nature of the
------------------------
information which will be disclosed to Mark B. Knudson, Ph.D. under this
Agreement, Mark B. Knudson will not, except as authorized by Integ,
disclose such confidential information to any other third party or company.
The obligation of confidentiality shall not be applicable with respect to
such information which: (A) was known to Mark B. Knudson, Ph.D. prior to
disclosure, (B) is or becomes known to the public by general publication
without violation of this Agreement, (C) is given to Mark B. Knudson by a
third party having a right to do so, or (D) is independently developed by
Mark B. Knudson, Ph.D. without the use of information supplied by Integ
under this Agreement.
8. Exclusivity: Because of the confidential nature of the information which
-----------
will be disclosed to Mark B. Knudson, Ph.D. under this Agreement, Mark B.
Knudson, Ph.D. will not do any other consulting work in the area of Integ's
interests without prior approval by Integ.
9. Ownership of Inventions and Patents: If any patentable inventions result
-----------------------------------
from performance of this Agreement, all rights under any patents that may
issue on those inventions shall belong exclusively to Integ. Mark B.
Knudson, Ph.D. agrees to assign all such inventions to Integ without
further payment from Integ. Mark B. Knudson also agrees that, upon Integ's
request and at Integ's expense, he would provide reasonable assistance to
Integ in prosecuting patents covering those inventions.
2
<PAGE>
10. Notices: All notices required or permitted by this Agreement shall be in
-------
writing and shall be delivered in person or sent by certified or registered
mail, return receipt required, postage paid as follows:
President
Integ Incorporated
2800 Patton Road
St. Paul, MN 55113
Mark B. Knudson, Ph.D.
1309 West Royal Oaks Drive
Shoreview, MN 55126
or to other's address as either party may designate. All mailing notices
shall be deemed effective upon depositing in the mail.
11. Waiver: The waiver of either party of a breach of any provision of this
------
Agreement shall not operate as or be construed as a continuing waiver or as
a consent to or waiver of such subsequent breach.
12. Modification: This Agreement may only be modified in writing signed by both
------------
parties.
13. Nonassignable: Since the services to be provided under this Agreement are
-------------
personal, all duties to be executed by Mark B. Knudson, Ph.D. shall be
performed by Mark B. Knudson, Ph.D. and may not be assigned or delegated
without written consent of Integ.
14. Entire Agreement: This Agreement constitutes the entire Agreement between
----------------
the parties with respect to the subject matter hereof and supersedes all
previous agreements and understandings rather oral or written between the
parties with respect to the subject hereof.
15. Governing Law: This Agreement shall be governed by the laws of the State of
-------------
Minnesota. In witness thereof, the parties have set forth their hand hither
and to on the date indicated below.
Integ Incorporated
/s/:Frank A. Solomon /s/:Mark B. Knudson, Ph.D.
- -------------------- --------------------------
Title: President/CEO Title: Consultant
Date: March 14, 1997 Date: March 14, 1997
3
<PAGE>
EXHIBIT 11
INTEG INCORPORATED
STATEMENT RE: COMPUTATION OF NET LOSS PER
COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3, 1990
THREE MONTHS ENDED (INCEPTION) TO
MARCH 31 MARCH 31
-------------------------
1997 1996 1997
------------ ----------- --------------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
- --------------------------
Average shares outstanding 9,282,371 433,333 1,267,582
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 0 1,650,108 1,413,152
------------ ----------- --------------
Total 9,282,371 2,083,441 2,680,734
============ =========== ==============
Net loss ($2,461,537) ($1,730,870) ($21,335,494)
============ =========== ==============
Net loss per share ($0.27) ($0.83) ($7.96)
============ =========== ==============
FULLY-DILUTED EARNINGS PER SHARE
- --------------------------------
Average shares outstanding 9,282,371 433,333 1,267,582
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 0 1,650,108 1,413,152
Assumed conversion of all series of
convertible preferred stock 0 5,835,705 2,064,019
------------ ----------- --------------
Total 9,282,371 7,919,146 4,744,753
============ =========== ==============
Net loss ($2,461,537) ($1,730,870) ($21,335,494)
============ =========== ==============
Net loss per share ($0.27) ($0.22) ($4.50)
============ =========== ==============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM * THE
COMPANY'S FINANCIAL STATEMENTS AS OF AND FOR THE QUARTER ENDED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 31,844,265
<SECURITIES> 0
<RECEIVABLES> 77,042
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,021,980
<PP&E> 4,948,891
<DEPRECIATION> 976,422
<TOTAL-ASSETS> 36,523,645
<CURRENT-LIABILITIES> 1,403,477
<BONDS> 2,655,737
0
0
<COMMON> 92,857
<OTHER-SE> 32,371,574
<TOTAL-LIABILITY-AND-EQUITY> 36,523,645
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,721,073
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 163,458
<INCOME-PRETAX> (2,461,537)
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<PAGE>
EXHIBIT 99.1
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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. The Company has tested benchtop prototypes and commercial
prototypes of the LifeGuide Meter and the LifeGuide Key. However, 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 an 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 March 31, 1997, the Company had an
accumulated deficit of $21.3 million. The Company expects such losses to
continue for the next several years. The Company may
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never generate substantial operating revenue or achieve profitability. The
Company's ability to generate revenue 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.
LIMITED CLINICAL TESTING EXPERIENCE; UNCERTAINTY OF OBTAINING FDA CLEARANCES
Testing of the LifeGuide System has been performed on benchtop prototypes and
commercial prototypes solely by Company personnel under controlled
circumstances. After the Company has completed the design of the LifeGuide
System and demonstrated the efficacy of the product, the Company expects to make
commercial prototypes of the LifeGuide System available for clinical testing by
people with diabetes 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, 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. The Company believes and has confirmed with the FDA that the
LifeGuide System will be eligible for a 510(k) clearance from the FDA. Still,
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
effort are successful in reducing the complications associated with diabetes and
can be cost-effectively provided to people 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.
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LACK OF MANUFACTURING CAPABILITY; DEPENDENCE ON CONTRACT MANUFACTURERS AND
SUPPLIERS
The Company's LifeGuide System is still in development. 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 Meter 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. The Company ordered the initial
automated manufacturing line for the LifeGuide Key in late 1996 and anticipates
having this line delivered to the Company in 1997. However, one component of
the LifeGuide Meter 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.
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, the Company has one issued United
States patent relating to the methods of drawing an ISF sample from the outer
layers of the skin, and five additional United States Patent Applications
directed toward various aspects of the technologies underlying the LifeGuide
System. There can be no assurance, however, that any additional 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 that issue for 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
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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
became aware in 1996 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.
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
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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.
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 its existing cash will be sufficient to fund the
Company's operations until mid-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.
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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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