<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
JUNE 30, 1998
[ ] 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: (651) 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 August 11, 1998, the registrant had 9,526,267 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 June 30, 1998 and December 31, 1997 3
Statements of Operations for the three and six months ended
June 30, 1998 and 1997 and for the period from April 3, 1990
(inception) through June 30, 1998 4
Statements of Cash Flows for the three and six months ended
June 30, 1998 and 1997 and for the period from
April 3, 1990 (inception) through June 30, 1998 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
Item 2. Changes in Securities (Use of proceeds from public
offering) 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
<PAGE>
INTEG INCORPORATED
(A Development Stage Company]
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 December 31
1998 1997
-------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,186,396 $ 21,776,757
Prepaid expenses 120,125 137,037
------------ ------------
Total current assets 15,306,521 21,913,794
------------ ------------
Furniture and equipment 9,626,794 8,464,943
Less accumulated depreciation (2,169,489) (1,644,051)
------------ ------------
7,457,305 6,820,892
Other assets 252,610 481,607
------------ ------------
TOTAL ASSETS $ 23,016,436 $ 29,216,293
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,364,768 $ 1,384,551
Current portion of capital lease obligations 163,599 155,901
Current portion of long-term debt 1,036,061 799,913
------------ ------------
Total current liabilities 2,564,428 2,340,365
------------ ------------
Long-term liabilities:
Capital lease obligations, less current portion 76,094 159,673
Long-term debt, less current portion 2,983,910 2,870,061
------------ ------------
Total long-term liabilities 3,060,004 3,029,734
------------ ------------
Shareholders' equity:
Common Stock 94,645 93,667
Additional paid-in capital 54,489,348 54,518,671
Deficit accumulated during the development stage (37,026,965) (30,438,348)
------------ ------------
17,557,028 24,173,990
Deferred compensation (165,024) (327,796)
------------ ------------
Total shareholders' equity 17,392,004 23,846,194
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 23,016,436 $ 29,216,293
============ ============
</TABLE>
3
<PAGE>
INTEG INCORPORATED
(A development State Company)
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
Three Months Ended Six Months Ended April 3, 1990
June 30 June 30 (Inception) to
--------------------------------- -------------------------------- June 30
1998 1997 1998 1997 1998
-------------- -------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES:
Research and development $ 1,597,242 $ 1,154,369 $ 3,303,144 $ 2,296,072 $ 19,389,293
Manufacturing development 602,899 585,703 1,283,171 1,138,941 6,280,360
Clinical and regulatory 295,030 304,944 623,198 575,770 2,992,572
General and administrative 552,861 520,306 1,051,304 1,052,094 7,855,488
Sales and marketing 259,892 225,001 342,348 448,519 2,538,198
------------ ------------ ------------ ------------ ------------
OPERATING LOSS (3,307,924) (2,790,323) (6,603,165) (5,511,396) (39,055,911)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 241,849 416,099 525,510 839,093 4,064,388
Interest expense (309,531) (149,469) (605,610) (312,927) (1,904,190)
Other (net) 91,873 -- 94,648 -- (131,252)
------------ ------------ ------------ ------------ ------------
24,191 266,630 14,548 526,166 2,028,946
------------ ------------ ------------ ------------ ------------
NET LOSS FOR THE PERIOD AND
DEFICIT ACCUMULATED DURING
THE DEVELOPMENT STAGE $ (3,283,733) $ (2,523,693) $ (6,588,617) $ (4,985,230) $(37,026,965)
============ ============ ============ ============ ============
NET LOSS PER SHARE:
Basic and diluted ($ 0.35) ($ 0.27) ($ 0.70) ($ 0.54) ($ 14.85)
============ ============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic and diluted 9,462,297 9,293,020 9,430,701 9,231,907 2,493,079
============ ============ ============ ============ ============
</TABLE>
4
<PAGE>
INTEG INCORPORATED
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Three Months Ended Six Months Ended April 3, 1990
June 30 June 30 (Inception) to
----------------------------- ------------------------------ June 30
1998 1997 1998 1997 1998
----------------------------- ------------------------------ -------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,293,733) $ (2,523,693) $ (6,598,617) $ (4,985,230) $(37,036,965)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 269,264 185,813 525,438 340,759 2,205,654
Deferred compensation amortization 22,423 73,926 52,227 147,853 1,049,756
Amortization of loan committment fee 96,207 -- 196,822 77,463 446,896
Loss on sale of equipment and deposit write-off -- -- -- -- 95,645
Value of options and warrants related to debt
financing, lease guarantee, extension of
options and consulting services 4,586 5,751 9,212 11,501 380,348
Changes in operating assets and liabilities:
Receivables -- 46,085 -- 82,297 (28,829)
Prepaid expenses and other assets 23,465 (54,970) 17,846 2,290 (212,161)
Accounts payable and accrued expenses 158,584 11,602 (9,783) (351,875) 1,374,768
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (2,719,204) (2,255,486) (5,806,855) (4,674,942) (31,724,888)
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of furniture and equipment (992,042) (1,770,109) (1,161,851) (3,006,170) (8,956,566)
Proceeds from sale of furniture and equipment -- -- -- -- 46,829
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (992,042) (1,770,109) (1,161,851) (3,006,170) (8,909,737)
------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from sale of Convertible Preferred Stock -- -- -- -- 22,789,732
Proceeds from bridge loan debt -- -- -- -- 2,900,000
Proceeds from borrowings under loan agreement -- -- 754,989 1,749,594 5,103,142
Payments on long-term debt (198,250) (28,665) (382,962) (131,844) (913,825)
Payments on capital lease obligations (38,258) (35,618) (75,881) (70,109) (454,372)
Proceeds from sale of Common Stock 4,687 13,062 82,199 21,312 26,396,344
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities (231,821) (51,221) 378,345 1,568,953 55,821,021
------------ ------------ ------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,943,067) (4,076,816) (6,590,361) (6,112,159) 15,186,396
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,129,463 31,844,265 21,776,757 33,879,608 --
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,186,396 $ 27,767,449 $ 15,186,396 $ 27,767,449 $ 15,186,396
============ ============ ============ ============ ============
</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, 1997, 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 for the year ended December 31, 1997 filed with the Securities and
Exchange Commission.
(2) NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares of
common stock outstanding during the periods presented. In 1997, the Financial
Accounting Standards Board issued Statement No. 128, Earnings per Share.
Statement 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement 128 requirements.
(3) EQUIPMENT LOAN AGREEMENT
During 1996, the Company entered into an equipment loan agreement which provides
for borrowings up to $12.5 million to finance the purchase of equipment and
fixtures including automated manufacturing equipment and tooling. Loans are paid
back monthly over a four year period. The obligation of the lender to make
additional loans expires December 31, 1998. The Company has borrowed a total of
$5.1 million under this agreement as of June 30, 1998.
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 of the Company, the words
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 and the uncertainty of market acceptance; history of operating losses and
expectation of future losses; limited clinical testing and sales and marketing
experience; uncertainty of obtaining Food and Drug Administration clearances;
heightened competition and risk of technological obsolescence; risks associated
with the lack of manufacturing capability and dependence on contract
manufacturers and suppliers; risks associated with the company's dependence on
proprietary technology, including those related to adequacy of patent and trade
secret protection; risks associated with retaining key personnel and attracting
additional qualified skilled personnel; and the risks associated with raising
additional funds.
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 June 30, 1998, the Company has incurred losses totaling
$37 million, consisting of $19.4 million of research and development expenses,
$7.9 million of general and administrative expenses, $6.3 million of
manufacturing development expenses and $3.4 million of other expenses net of
interest income. The Company's activities have consisted primarily of research
and product development, product design, and development of the manufacturing
equipment and processes and marketing strategies needed for the introduction of
the LifeGuide System. The Company
7
<PAGE>
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.
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.
RESULTS OF OPERATIONS
Comparison of Three and Six Months Ended June 30, 1998 and 1997
General: The Company's net loss totaled $3,283,733 and $6,588,617 during the
three and six months ended June 30, 1998, up from $2,523,693 and $4,985,230
during the same periods in 1997. The Company expects net losses to continue for
the next several years.
Research and development expenses: Research and development expenses increased
38% to $1,597,242 during the three months ended June 30, 1998 from $1,154,369
during the same period in 1997. This increase was primarily due to increases in
consulting and contractor expenses ($258,000), pilot plant costs allocated to
research and development ($240,000), increased staffing costs ($62,000) as well
as the one-time charge for the workforce reduction ($96,000). The impact of
these expense increases was partially offset by reductions in prototype expenses
($146,000) and recruitment ($50,000). For the first half of 1998, research and
development expenses increased 44% to $3,303,144, up from $2,296,072 during the
first half of 1997. The year-to-date increase in research and development
expenses is the result of pilot plant costs allocated to research and
development ($519,000), increases in consulting and contractor expenses
($417,000), higher staffing costs ($191,000) and the one-time charge for the
workforce reduction ($96,000). These increases were partially offset by lower
prototype expenses ($204,000).
Manufacturing development expenses: Manufacturing development expenses increased
3% to $602,899 during the three months ended June 30, 1998 from $585,703 during
the same period in 1997. The increase in manufacturing development expenses is
primarily attributable to increases in samples and prototype expense ($119,000),
depreciation ($99,000) and the one-time charge for the workforce reduction
($78,000). These increases were partially offset by pilot plant costs allocated
to research and development ($240,000) and a decrease in staffing costs
($55,000). Manufacturing development expenses increased 13% to $1,283,171 during
the six months ended June 30, 1998 from $1,138,941 during the same period in
1997. This increase is a combination of higher samples and prototype expenses
($384,000), depreciation expense ($197,000) and the one-time charge for the
workforce reduction ($78,000), partially offset by pilot plant costs allocated
to research and development ($519,000).
Clinical and regulatory expenses: Clinical and regulatory expenses decreased 3%
to $295,030 during the three months ended June 30, 1998 from $304,944 during the
same period in 1997. This decrease is primarily due to decreases in recruitment
expenses ($25,000) and lower staffing costs ($14,000), offset by the one-time
charge for the workforce reduction ($39,000). For the first half of 1998,
clinical and regulatory expenses increased 8% to $623,198 as compared to
$575,770 during the first half of 1997. This increase is largely due to higher
staffing costs ($48,000), the one-time charge for the workforce reduction
($39,000) and increased occupancy charges ($14,000). These increases were
partially offset by lower recruitment expenses ($32,000) and lower travel
expenses ($20,000).
8
<PAGE>
General and administrative expenses: General and administrative expenses
increased 6% to $552,861 during the three months ended June 30, 1998 from
$520,306 during the same period in 1997. This increase is primarily attributable
to increases in legal fees ($34,000), recruitment expenses ($26,000), directors
fees and expenses ($18,000) as well as the one-time charge for the workforce
reduction ($16,000). These increases were partially offset by lower staffing
costs ($48,000) and deferred compensation charges ($11,000). For the first half
of 1998, general and administrative expenses totaled $1,051,304 as compared to
$1,052,094 for the same period in 1997. Although there was not a large
fluctuation in total expenses, there were large changes in individual expenses.
Increases in recruitment expenses ($68,000), legal and audit fees ($33,000), as
well as the one-time charge for the workforce reduction ($16,000) were offset by
lower staffing costs ($100,000) and deferred compensation ($22,000).
Sales and marketing expenses: Sales and marketing expenses increased 16% to
$259,892 during the three months ended June 30, 1998 from $225,001 during the
same period in 1997. This increase was due to the one-time charge for the
workforce reduction ($173,000) which was partially offset by decreases in
staffing costs ($50,000), deferred compensation charges ($28,000), advertising
and promotion expenses ($25,000), consulting expenses ($18,000) and investor and
public relations expenses ($14,000). For the first half of 1998, sales and
marketing expenses decreased 31% to $342,348 from $448,519 during the first half
of 1997. This decrease was due to decreases in staffing costs ($87,000),
advertising and promotion ($70,000), deferred compensation charges ($52,000),
website expenses ($47,000) and consulting expenses ($22,000) which were
partially offset by the one-time charge for the workforce reduction ($173,000).
Interest Income: Interest income decreased to $241,849 and $525,510 for the
three and six month periods ended June 30, 1998, compared to $416,099 and
$839,093 during the comparable 1997 periods. The decrease resulted from lower
average balances of cash and cash equivalents.
Interest expense: Interest expense increased to $309,531 and $605,610 for the
three and six month periods ended June 30, 1998, compared to $149,469 and
$312,927 for the same periods in 1997. The increase in interest expense is
attributable to increased borrowings against the equipment loan agreement signed
in 1996. Approximately $5.1 million was borrowed as of June 30, 1998 as compared
to $3.1 million as of June 30, 1997.
Other income: Other income totaled $91,873 and $94,648 for the three and six
month periods ended June 30, 1998. These amounts primarily consisted of a
receivable written off in a prior year which was paid in full ($26,000) and
money received from the state of Minnesota for a sales tax refund claim filed
for prior years ($66,000).
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 and
proceeds from borrowing under an equipment loan agreement totaling approximately
$5.1 million. As of June 30, 1998 the Company had cash and cash equivalents of
approximately $15.2 million and working capital of $12.7 million.
The Company believes that its current cash balances, when the impact of the
reduction in headcount implemented in April is taken into account, will be
sufficient to fund its operations until sometime during the second half of 1999.
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
9
<PAGE>
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.
II. OTHER INFORMATION
Item 2: Changes in Securities (Use of proceeds from public offering)
The net offering proceeds to the Company from its initial public offering in
1996, after deducting expenses, were approximately $26.1 million. The Company
has used the net offering proceeds to the Company for the following purposes in
the approximate amounts set forth below:
Investment in short-term, interest bearing securities
primarily investment grade commercial paper $15,150,000
and money market funds
Capital expenditures 2,475,000
Research and development and clinical and regulatory
preparation 5,340,000
Manufacturing scale-up and marketing activities 2,310,000
Working capital and other general corporate purposes 825,000
-----------
Total use of proceeds $26,100,000
-----------
Except for officer compensation and relocation payments totaling $1,082,499 in
the aggregate, director compensation totaling $113,000 in the aggregate, and
consulting fees paid to a director totaling $70,875, none of such payments were
paid directly or indirectly to (i) officers or directors of the Company or their
affiliates, (ii) persons owning 10% or more of the Company's equity securities
or (iii) affiliates of the Company.
Item 4: Submission of Matters to a Vote of Security Holders
On June 17, 1998, the Company held a regular meeting of its shareholders, at
which the shareholders voted on the following matters:
1. To elect Frank B. Bennett, Robert R. Momsen and Walter L. Sembrowich,
Ph.D., to the Board of Directors of the Company to serve for three year
terms that will expire at the Company's annual shareholder meeting in
2001. The vote on this resolution was as follows:
Frank B. Bennett: 8,403,203 For; 0 Against; 273,807 Abstain
Robert R. Momsen: 8,108,340 For; 0 Against; 339,769 Abstain
Walter L. Sembrowich, Ph.D.: 8,403,222 For; 0 Against; 273,608 Abstain
The terms of the following directors also continued after the meeting:
Mark B. Knudson, Ph.D. and Terrance G. McGuire (terms expiring at the
Company's annual shareholder meeting in 2000) and Robert S. Nickoloff
and Winston R. Wallin (terms expiring at the Company's annual
shareholder meeting in 1999).
10
<PAGE>
2. To approve the following amendments to the Company's 1996 Directors'
Stock Option Plan (the "Directors' Plan"):
(i) increase from 15,000 shares to 20,000 shares the initial grant to
new non-employee directors pursuant to Section 4(b)(ii) of the
Directors' Plan;
(ii) modify the vesting schedule of such initial option grants to
become vested and thereby exercisable with respect to 6,666 shares
on the 12 month anniversary date of such grants and with respect
to 6,667 shares on each of the 24 month and 36 month anniversary
dates of such grants;
(iii) increase from 5,000 shares to 6,000 shares the annual option
grants to non-employee directors pursuant to Section 4(b)(iii) of
the Directors' Plan; and,
(iv) change the vesting schedule of such annual grants to become vested
and thereby exercisable with respect to 2,000 shares on each of
the 12, 24 and 36 month anniversary dates of such grants.
The vote on this resolution was as follows:
8,301,571 For; 344,173 Against; 31,086 Abstain; 0 Broker non-vote
3. To approve the following amendments to the Company's 1994 Long-Term
Incentive and Stock Option Plan:
(i) increase the number of shares of Common Stock available for
issuance thereunder from 1,733,333 shares to 2,733,333 shares; and
(ii) add the following new Section 4(c):
(c) Award Limitations Under the Plan. No person who is an
employee of the Company at the time of grant may be granted
any Option, Stock Appreciation Right or performance award,
the value of which option, right or award is based solely on
an increase in the value of the Common Shares after the date
of grant of such option, right or award, for more than
500,000 Common Shares (subject to adjustment as provided for
in Section 15 relating to stock splits, etc.), in the
aggregate, in any calendar year period beginning with the
period commencing January 1, 1998 and ending December 31,
1998. The foregoing annual limitation specifically includes
the grant of any awards representing "qualified
performance-based compensation" within the meaning of Section
162(m) of the Code.
The vote on this resolution was as follows:
5,846,018 For; 633,717 Against; 36,101 Abstain; 2,160,994 Broker
non-vote
11
<PAGE>
4. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1998. The
vote on this resolution was as follows:
8,640,053 For; 14,097 Against; 22,860 Abstain; 0 Broker non-vote
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed herewith.
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-4352)).
3.2 Amended Bylaws of the Company (incorporated by reference to
Exhibit 3.3 to the Company's Registration Statement of Form
S-1 (SEC File No. 333-4352)).
10.1 Form of Employment Agreement dated April of 1998 between the
Company and its Vice Presidents. (Exhibit I previously filed
as Exhibit 10.14 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-4352)).
27 Financial Data Schedule.
99.1 Cautionary Statement.
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 1998.
12
<PAGE>
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: August 13, 1998 By: /s/ Susan L. Critzer
--------------------
Susan L. Critzer
Interim President and
Interim Chief Financial Officer
(principal executive officer,
principal financial and accounting
officer)
13
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10.1 Form of Employment Agreement dated April of 1998 between the
Company and its Vice Presidents. (Exhibit I previously filed as
Exhibit 10.14 to the Company's Registration Statement on Form S-1
(SEC File No. 333-4352)).
27. Financial Data Schedule (Electronically Filed).
99.1 Cautionary Statement.
<PAGE>
Exhibit 10.1
INTEG INCORPORATED, INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is effective as of April __, 1998 by and
between Integ Incorporated (the "Company"), a Minnesota corporation, and
_____________________ (the "Employee"), a Minnesota resident.
WHEREAS, the Employee is employed by the Company; and
WHEREAS, and the parties wish to continue the Employee's employment by
the Company subject to the terms and conditions herein;
NOW, THEREFORE, in consideration of the foregoing premises and the
parties' mutual covenants and undertakings contained in this Agreement, the
Company and the Employee hereby agree as follows:
ARTICLE 1.0 DEFINITIONS
Capitalized terms used in this Agreement shall have their defined
meaning throughout the Agreement. The following terms shall have the meanings
set forth below, unless the context clearly requires otherwise.
1.1 BOARD. "Board" shall mean the Board of Directors of the Company.
1.2 DISABILITY. "Disability" shall mean any physical or mental
condition which causes the Employee to fail to render services to the Company
over a period of ninety (90) days during any one hundred eighty (180) day
period. The existence or nonexistence of the Employee's Disability will be
determined in good faith by the Board after notice in writing given to the
Employee at least thirty (30) days prior to such determination. During such
thirty (30) day period, the Employee shall be permitted to make a presentation
to the Board for its consideration.
1.3 GOOD REASON. "Good Reason" shall mean the occurrence of any of the
following events, except for the occurrence of such an event in connection with
the termination of the Employee's employment by the Company for Good Cause (as
defined in section 4.2 hereof), due to the Employee's Disability (as defined in
section 1.2 hereof), or due to the Employee's death:
(a) the assignment to the Employee of employment responsibilities
which are not of reasonably comparable responsibility and
status as the employment responsibilities held by the Employee
on the Effective Date of this Agreement;
(b) an unreasonable reduction by the Company in the Employee's
base salary as in effect on the Effective Date of this
Agreement; or
<PAGE>
(c) the Company's requiring the Employee to be based at a location
that is in excess of 50 miles from the location of the
Employee's principal office on the Effective Date of this
Agreement.
1.4 EFFECTIVE DATE. "Effective Date" shall mean the date on page 1
hereof.
ARTICLE 2.0 EMPLOYMENT
2.1 EMPLOYMENT. Upon the terms and conditions set forth herein, the
Company hereby offers the Employee continuing employment, and the Employee
accepts such continuing employment. Termination of this Agreement by either
party or by mutual agreement of the parties under Article 4.0 shall also
terminate the Employee's employment by the Company.
2.2 DUTIES. The Employee will have the duties and responsibilities the
Employee exercised prior to the date of this Agreement. The Employee agrees that
the Employee will devote the Employee's full time, attention, knowledge, and
skill exclusively to the loyal service of the Company and will use the
Employee's best efforts to carry out all of the duties and responsibilities that
are or may be assigned to the Employee.
ARTICLE 3.0 COMPENSATION AND BENEFITS
3.1 BASE SALARY. The Company shall pay the Employee an annual base
salary of $__________ per year, subject to adjustment from time to time in the
sole discretion of the Company. Such base salary shall be paid in accordance
with the Company's normal payroll practices and will be subject to any
applicable income tax, Social Security and other applicable withholding.
3.2 EMPLOYEE BENEFITS. The Employee shall be entitled to participate in
the employee benefit plans of the Company to the extent that the Employee's
position, title, tenure, salary, age, health, and other qualifications make the
Employee eligible to participate. The Company does not guarantee the adoption or
continuance of any particular employee benefit plan or program during the term
of this Agreement, and the Employee's participation in any such plan or program
shall be subject to the provisions, rules, and regulations applicable thereto.
ARTICLE 4.0 TERMINATION
4.1 TERMINATION. The Employee's employment under this Agreement shall
commence upon the Effective Date and shall be terminable by either party for any
reason or no reason upon a notice of thirty (30) days.
4.2 TERMINATION BY THE COMPANY FOR GOOD CAUSE. Notwithstanding Section
4.1 above, the Company may terminate this Agreement without notice for Good
Cause. For purposes of this Agreement, "Good Cause" shall mean:
- 2 -
<PAGE>
(a) Repeated failure by the Employee to fulfill any of the
Employee's duties, or the Employee's repeated failures or
omissions to carry out lawful and reasonable orders which, in
the reasonable judgment of the Company, are willful and
deliberate and which are not cured within a reasonable period
after the Employee's receipt of written notice thereof from
the Company;
(b) Any absence from the Employee's regular full-time employment
in excess of two (2) weeks that is not due to a vacation, bona
fide illness, Disability, death or other reason expressly
authorized by the Company;
(c) Any act or acts of personal dishonesty by the Employee
intended to result in the personal enrichment of the Employee
at the expense of the Company;
(d) Any wilful and deliberate misconduct of the Employee that is
materially and demonstrably injurious to the Company; or
(e) Any criminal indictment, presentment, or conviction for a
felony of the Employee, whether or not the Company is the
victim of such offense.
4.3 TERMINATION IN THE EVENT OF THE EMPLOYEE'S DEATH OR DISABILITY.
Notwithstanding Section 4.1 above, the Employee's employment under this
Agreement shall terminate in the event of the Employee's death or Disability. In
such event, the Company shall pay to the Employee any amounts due to the
Employee for salary through the termination date together with any other unpaid
and pro rata amounts of accrued vacation pay, sick leave, and/or business
expense reimbursements that may be due under the Company's policies. The
Employee shall not be entitled to any additional compensation.
4.4 TERMINATION BY MUTUAL AGREEMENT. Notwithstanding Section 4.1 above,
the parties may terminate this Agreement at any time and upon any other terms or
conditions by mutual written agreement.
4.5 COMPENSATION UPON TERMINATION BY COMPANY. As the Employee's sole
and exclusive compensation for the termination of the Employee's employment,
other than due to death or Disability, the Company shall pay the Employee as
follows:
(a) If due to termination by the Company for Good Cause or by the
Employee for other than Good Reason, within ten (10) days
after the termination date, the Company shall pay the Employee
any amounts due to the Employee for salary through the
termination date together with any other unpaid and pro rata
amounts of accrued vacation pay, sick leave, and/or business
expense reimbursements that may be due under the Company's
policies.
(b) If due to termination by the Company for other than Good
Cause, or by the Employee for Good Reason, the Company shall
pay the Employee, as severance pay, the Employee's salary in
effect on the termination date or the Effective Date of this
Agreement, whichever is higher, for a term of twelve months
from the
- 3 -
<PAGE>
termination date, subject to required tax withholding. Such
severance pay shall be paid as salary continuation, in
installments over the twelve-month period, in accordance with
the Company's normal payroll practices. The Company shall also
pay to the Employee for the calendar year in which termination
of employment occurs a pro rata portion of any bonus to which
the Employee would have been entitled had the Employee
remained employed for the entire calendar year; such pro rata
portion of such bonus shall be based upon the period of time
the Employee actually worked during the calendar year in which
termination of employment occurs.
(c) The Company shall have no duty or obligation to employ the
Employee following any termination by the Company for any
reason whatsoever, with or without Good Cause, and the
Employee shall have no duty or obligation whatsoever to find
other employment during the term with respect to which
compensation is required to be paid by the Company under
Section 4.5(b) above. However, if and to the extent that the
Employee does have earned income related to new employment or
other work, including consulting work, performed by the
Employee after the first six months of such term, any payments
made under Section 4.5(b) after the first six months of such
term will be reduced by the amount of such earned income
related to new employment or other work, including consulting
work. The Employee shall promptly and fully disclose to the
Company in writing the nature and amount of any such earned
income related to new employment or other work for purposes of
mitigation and reduction of the Company's obligations
hereunder, and the Employee shall be liable to repay any
amounts paid by the Company which should have been so
mitigated and reduced but for the Employee's failure to make
such disclosure.
4.6 SURVIVAL. The provisions of Article 4.0 (relating to termination
rights and the provision of compensation and benefits beyond the termination of
this Agreement), the provisions of Article 6.0 (relating to improvements and
inventions, confidential information, know-how and related matters), the
provisions of 7.0 (relating to dispute resolution) the provisions of Article 8.0
(relating to miscellaneous terms and conditions), and applicable provisions of
the Change in Control Agreement between the parties dated June 30, 1997,
including the non-competition and non-solicitation covenants contained therein,
shall survive the termination of this Agreement for any reason.
ARTICLE 5.0 CHANGE IN CONTROL
5.1 CHANGE IN CONTROL AGREEMENT. This Agreement shall have no effect
upon the Change in Control Agreement entered into between the parties on
____________, a copy of which is attached hereto as Exhibit 1, except to the
extent that it modifies the Employee's at-will employment status. That Change in
Control Agreement, including without limitation, the non-competition and
non-solicitation provisions contained in Section 5 of that Agreement, shall
continue in full force and effect. Nothing contained in this Agreement is
intended to supplant, replace or supersede any provision of the Change in
Control Agreement, including without limitation the non-competition and
non-solicitation provisions contained in Section 5 of that
- 4 -
<PAGE>
Change in Control Agreement, and the Employee expressly acknowledges the
Employee's continuing obligations under those non-competition and
non-solicitation provisions. Should a Change of Control occur, as defined in the
Change in Control Agreement between the parties dated ____________, and the
Employee becomes eligible for compensation under Section 4 of that Change in
Control Agreement as a result of the termination of the Employee's employment,
whether by the Employee or by the Company, this Agreement shall be null and
void, and the Change in Control Agreement shall supersede and replace this
Agreement in all respects.
ARTICLE 6.0 IMPROVEMENTS AND INVENTIONS, CONFIDENTIAL
INFORMATION, TRADE SECRETS, KNOW-HOW, AND RELATED
MATTERS
6.1 AGREEMENT RELATING TO IMPROVEMENTS, CONFIDENTIAL INFORMATION, TRADE
SECRETS, KNOW-HOW AND RELATED MATTERS. The Employee executed an agreement with
the Company entitled "Integ Incorporated Agreement Relating to Improvements and
Inventions, Confidential Information, Trade Secrets, Know-How and Related
Matters" dated ____________, a copy of which is attached to the Change in
Control Agreement as Exhibit A. The Integ Incorporated Agreement Relating to
Improvements and Inventions, Confidential Information, Trade Secrets, Know-How
and Related Matters is incorporated herein by reference. Nothing in this
Agreement negates or supersedes the Integ Incorporated Agreement Relating to
Improvements and Inventions, Confidential Information, Trade Secrets, Know-How,
and Related Matters, and all provisions of said agreement which by their terms
survive the termination of the Employee's employment with the Company continue
in full force and effect and are not negated or otherwise affected by this
Agreement.
ARTICLE 7.0 DISPUTE RESOLUTION
7.1 SCOPE OF ARBITRATION AGREEMENT. Except as provided in Section 7.3,
the provisions of this Article 7 shall apply to any dispute, claim or
controversy arising out of or in connection with this Agreement or in connection
with the Employee's employment, or termination thereof, including: any contract
claims; any tort claims; and any federal or state statutory claims, including
statutory discrimination claims.
7.2 PROCEDURE FOR ARBITRATION. Any dispute, claim or controversy within
the scope of Section 7.1 which has not been settled through negotiation within a
period of thirty (30) days after the date on which either party shall first have
notified the other party in writing of the existence of a dispute shall be
settled by final and binding arbitration under the then-applicable Arbitration
Rules of the American Arbitration Association ("AAA"). Any such arbitration
shall be conducted by one (1) neutral arbitrator appointed by mutual agreement
of the parties or, failing such agreement, in accordance with said Rules. Such
arbitrator shall be an experienced attorney with a background in employment law.
Any such arbitration shall be conducted in Minneapolis, Minnesota. An arbitral
award may be enforced in any court of competent jurisdiction. Notwithstanding
any contrary provision in the AAA Rules, the following additional procedures and
rules shall apply to any such arbitration:
- 5 -
<PAGE>
(a) Each party shall have the right to request from the
arbitrator, and the arbitrator shall order upon good cause
shown, reasonable and limited prehearing discovery, including:
(i) exchange of witness lists; (ii) depositions under oath of
witnesses at a mutually convenient location; (iii) written
interrogatories; and (iv) document requests.
(b) Upon conclusion of the pre-hearing discovery, the arbitrator
shall promptly hold a hearing upon the evidence to be adduced
by the parties and shall promptly render a written opinion and
award.
(c) Each party shall bear its own costs and expenses of the
arbitration, except that the Company shall pay the fees and
costs of the arbitrator, subject to the power of the
arbitrator, in his or her sole discretion, to award all
reasonable costs, expenses and fees to the prevailing party.
7.3 LITIGATION RIGHTS RESERVED. If any dispute arises with regard to
the Employee's breach of the Integ Incorporated Agreement Relating to
Improvements and Inventions, Confidential Information, Trade Secrets, Know-How
and Related Matters, dated ____________, or with regard to the Employee's breach
or threatened breach of the non-competition and non- solicitations contained in
Section 5 of the Change in Control Agreement between the parties dated
__________, the Company may seek any available remedy at law or in equity from a
court of competent jurisdiction.
ARTICLE 8.0 GENERAL PROVISIONS
8.1 SUCCESSORS AND ASSIGNS. This Agreement constitutes a personal
service agreement on the part of the Employee and the Employee's duties
hereunder may not be assigned or delegated to any other person without the prior
written consent of the Company, but all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts are still
payable to the Employee hereunder, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to the
Employee's devisee, legatee, or other designee or, if there be no such designee,
to the Employee's estate. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and be binding upon the successors (by
purchase, merger, consolidation or otherwise) and assigns of the Company.
8.2 NOTICES. All notices, requests and demands required or permitted
hereunder shall be in writing and be personally or courier delivered or mailed
postage prepaid, registered or certified U.S. mail, to the other party at the
address set forth on the last page of this Agreement. Either party may, by
notice hereunder, designate a changed address. Any notice hereunder shall be
deemed effectively given and received: (a) if personally or courier delivered,
upon delivery; or (b) if mailed, on the third (3rd) day after deposit in the
mail.
- 6 -
<PAGE>
8.3 CAPTIONS. The various headings or captions in this Agreement are
for convenience only and shall not affect the meaning or interpretation of this
Agreement.
8.4 GOVERNING LAW; CHOICE OF FORUM. The validity, interpretation,
construction, performance, enforcement and remedies of or relating to this
Agreement, and the rights and obligations of the parties hereunder, shall be
governed by the substantive laws of the State of Minnesota (without regard to
the conflict of laws rules or statutes of any jurisdiction), and, expressly
subject to the dispute resolution mechanism in Article 7.0 above, any and every
other legal proceeding arising out of or in connection with this Agreement shall
be brought in the appropriate state or federal courts located in the State of
Minnesota, each of the parties hereby consenting to the exclusive jurisdiction
of said courts for this purpose, and each of the parties hereby waiving any
right to transfer venue from such courts to a court located in any jurisdiction
outside of the State of Minnesota.
8.5 CONSTRUCTION. Wherever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
8.6 WAIVERS. No failure on the part of either party to exercise, and no
delay in exercising, any right or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right or remedy
hereunder preclude any other or further exercise thereof or the exercise of any
other right or remedy granted hereby or by any related document or by law.
8.7 MODIFICATION. This Agreement may not be modified or amended except
by written instrument signed by the Employee and a member of the Board.
8.8 ENTIRE AGREEMENT. This Agreement (including the attached Exhibit 1)
constitutes the entire agreement and understanding between the parties hereto in
reference to all the matters herein agreed upon. This Agreement replaces in full
all prior employment offers, discussions, requests, agreements or understandings
of the parties hereto, and any and all such prior offers, discussions, requests,
agreements or understandings are hereby rescinded by mutual agreement.
- 7 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered as of the day and year first above written.
_________________________ INTEG INCORPORATED
[Employee]
Address: By: /s/ Frank A. Solomon
-------------------------------------
Title: President and Chief Executive Officer
Address:
2800 Patton Road
St. Paul, MN 55113
[Exhibit 1 hereto was previously filed as Exhibit 10.14 to the Company's
Registration Statement on Form S-1 (file No. 333-4352)]
- 8 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL FINFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1998 AND ITS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 15,186,396
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,306,521
<PP&E> 9,626,794
<DEPRECIATION> 2,169,489
<TOTAL-ASSETS> 23,016,436
<CURRENT-LIABILITIES> 2,564,428
<BONDS> 3,060,004
0
0
<COMMON> 94,645
<OTHER-SE> 17,297,359
<TOTAL-LIABILITY-AND-EQUITY> 23,016,436
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,307,924
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 309,531
<INCOME-PRETAX> (3,283,733)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,283,733)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,283,733)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</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. The Company has tested benchtop prototypes and commercial
prototypes of the LifeGuide Meter and the LifeGuide Key. The Company has
experienced significant delays in completing the development of the LifeGuide
Meter. There can be no assurance that the Company will not experience continuing
delays in this development effort. Also, there can be no assurance that
additional 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.
1
<PAGE>
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 June 30, 1998, the Company had an
accumulated deficit of $37 million. The Company expects such losses to continue
through 2000 and to increase at least through the end of 1999. The Company may
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
hand-held 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. There can be no assurance that the
Company will not encounter problems in clinical testing that will cause the
Company to further 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. 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 or that the FDA would
change its criteria and apply the more stringent PMA (pre-market approval)
process to the LifeGuide System. 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
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
2
<PAGE>
Company in research and new product development, obtaining regulatory approvals
and manufacturing and marketing medical devices. Many of the Company's potential
competitors have already entered into distribution and marketing agreements with
major marketing partners. 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
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 installed
the initial automated manufacturing line for the LifeGuide Key in the second
quarter of 1998 and is currently producing LifeGuide Keys for development trials
from this line. The Company executed a supply agreement with a vendor for the
single, sole-sourced component of the LifeGuide Key, which will provide the
Company with an exclusive cost-protected supply of that component for the next
five years. However, this component is available from a single source. If the
Company were unable to obtain this component from its supplier, the Company
would be required to make modifications to its existing LifeGuide System and to
obtain an alternative component from an alternative supplier. Any interruption
in the supply of this component 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, however, that
the Company will be able to install and qualify an initial automated
manufacturing line or subsequent commercial productions lines on a timely basis
or at all. There also can be no assurance that the Company will be able to
achieve and maintain product quality and reliability when producing the
LifeGuide System in the quantities required for commercial operations or within
a period that will permit the Company to introduce its products in a timely
fashion, or 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 two issued United
States patents 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 which issue pertaining to such technologies. The Company also relies upon
unpatented trade secrets,
3
<PAGE>
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 became aware in 1996 of a patent that may relate to a
feature of the LifeGuide System. The Company engaged outside patent counsel,
Moore & Hansen, 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"), and the FDA Modernization Act (the "FDAMA"). Manufacturers of medical
devices must comply with applicable provisions of the FDC Act, the SMDA, the
FDAMA 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. The FDC Act, the SMDA,
and the FDAMA 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, the FDAMA or their associated regulations, it can
institute
4
<PAGE>
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. In addition, many of the Company's potential competitors have
already entered into distribution and marketing agreements with major marketing
partners. 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. The
Company is currently searching for a successor to its President and Chief
Executive Officer, Frank Solomon. There can be no assurance, however, that the
Company will be able to find a suitable successor to Mr. Solomon in a timely
fashion. In the future, the Company will also 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 additional 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.
5
<PAGE>
FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE
At its current rate of spending, the Company's existing cash, when combined with
the unused portion of its equipment loan agreement, will be sufficient to fund
the Company's operations until sometime during the second half of 1999. The
Company will 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.
6
