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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1999.
[_] 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
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(Exact name of registrant as specified in its charter)
Minnesota 41-167017
- ------------------------ ------------------------------------
(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
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(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 November 9, 1999, the registrant had 9,666,284 shares of $.01 par value
common stock issued and outstanding.
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INTEG INCORPORATED
INDEX
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PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Balance Sheets as of September 30, 1999 and December 31, 1998 3
Statements of Operations for the three and nine months ended
September 30, 1999 and 1998 and for the period from April 3, 1990
(inception) through September 30, 1999 4
Statements of Cash Flows for the three and nine months ended
September 30, 1999 and 1998 and for the period from April 3, 1990
(inception) through September 30, 1999 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities (Use of proceeds from public offering) 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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Integ Incorporated
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
-------------------- ----------------
(unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 4,486,801 $ 11,175,695
Prepaid expenses 275,772 132,229
-------------------- ----------------
Total current assets 4,762,573 11,307,924
-------------------- ----------------
Furniture and equipment 9,581,845 9,538,478
Less accumulated depreciation (3,561,047) (2,715,684)
-------------------- ----------------
6,020,798 6,822,794
Other assets 11,129 23,883
-------------------- ----------------
Total assets $ 10,794,500 $ 18,154,601
==================== ================
Liabilities and shareholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 717,827 $ 1,013,581
Current portion of capital lease obligations 35,142 145,761
Current portion of long-term debt 1,397,205 1,251,247
-------------------- ----------------
Total current liabilities 2,150,174 2,410,589
-------------------- ----------------
Long-term liabilities:
Capital lease obligations, less current portion - 14,178
Long-term debt, less current portion 1,634,691 2,672,018
-------------------- ----------------
Total long-term liabilities 1,634,691 2,686,196
-------------------- ----------------
Shareholders' equity:
Common Stock 96,578 95,807
Additional paid-in capital 54,711,805 54,616,721
Deficit accumulated during the development stage (47,700,049) (41,524,253)
-------------------- ----------------
7,108,334 13,188,275
Deferred compensation (98,698) (130,459)
-------------------- ----------------
Total shareholders' equity 7,009,636 13,057,816
-------------------- ----------------
Total liabilities and shareholders' equity $ 10,794,500 $ 18,154,601
==================== ================
</TABLE>
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Integ Incorporated
(A Development Stage Company)
Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Period from
Three Months Ended Nine Months Ended April 3, 1990
September 30 September 30 (Inception) to
--------------------------- ---------------------------- September 30
1999 1998 1999 1998 1999
----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development $ 449,491 $ 1,092,630 $ 1,828,079 $ 4,395,774 $ 23,370,227
Manufacturing development 409,753 472,628 1,495,334 1,755,799 8,663,611
Clinical and regulatory - 400,028 230,212 1,023,226 3,727,034
General and administrative 542,776 350,485 2,349,499 1,401,789 10,865,532
Sales and marketing - 30,393 29,973 372,741 2,630,428
----------- ----------- ----------- ----------- ------------
Operating loss (1,402,020) (2,346,164) (5,933,097) (8,949,329) (49,256,832)
----------- ----------- ----------- ----------- ------------
Other income (expense):
Interest income 68,275 197,275 290,232 722,785 4,719,230
Interest expense (156,691) (303,321) (532,194) (908,931) (3,033,992)
Other (net) (576) - (735) 94,648 (128,455)
----------- ----------- ----------- ----------- ------------
(88,992) (106,046) (242,697) (91,498) 1,556,783
----------- ----------- ----------- ----------- ------------
Net loss for the period and
deficit accumulated during
the development stage $(1,491,012) $(2,452,210) $(6,175,794) $(9,040,827) $(47,700,049)
=========== =========== =========== =========== ============
Net loss per share:
Basic and diluted ($0.15) ($0.26) ($0.64) ($0.96) ($13.92)
=========== =========== =========== =========== ============
Weighted average number of
common shares outstanding:
Basic and diluted 9,657,784 9,517,034 9,643,883 9,459,875 3,427,271
=========== =========== =========== =========== ============
</TABLE>
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Integ Incorporated
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
Three Months Ended Nine Months Ended April 3, 1990
September 30 September 30 (Inception) to
------------------------ ------------------------ September 30
1999 1998 1999 1998 1999
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss $(1,491,012) $(2,452,210) $(6,175,794) $(9,040,827) $(47,700,049)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 299,108 272,596 847,637 798,034 3,600,154
Deferred compensation amortization 10,587 19,016 31,761 71,243 1,122,481
Amortization of loan committment fee - 96,207 - 293,029 250,074
Stock grants in lieu of compensation 94,893 94,893
Loss(gain) on sale of equipment and deposit write-off - - (901) - 94,744
Value of options and warrants related to debt
financing, lease guarantee, extension of
options and consulting services 3,826 4,567 11,477 13,779 382,613
Changes in operating assets and liabilities:
Receivables - - - - (28,829)
Prepaid expenses and other assets (62,263) 6,418 (143,542) 24,264 88,983
Accounts payable and accrued expenses 55,029 (101,674) (294,481) (121,457) 719,100
----------- ----------- ----------- ----------- ------------
Net cash used in operating activities (1,184,725) (2,155,080) (5,628,950) (7,961,935) (41,375,836)
----------- ----------- ----------- ----------- ------------
Investing activities:
Purchase of furniture and equipment (32,893) (107,159) (48,240) (1,269,010) (8,918,267)
Proceeds from sale of furniture and equipment - 1,111 3,500 1,111 51,440
----------- ----------- ----------- ----------- ------------
Net cash used in investing activities (32,893) (106,048) (44,740) (1,267,899) (8,866,827)
----------- ----------- ----------- ----------- ------------
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 5,486,446
Payments on long-term debt (296,973) (221,072) (891,369) (604,034) (2,307,234)
Payments on capital lease obligations (41,233) (39,412) (124,797) (115,293) (658,923)
Proceeds from sale of Common Stock - 71,225 962 153,424 26,519,443
----------- ----------- ----------- ----------- ------------
Net cash provided by financing activities (338,206) (189,259) (1,015,204) 189,086 54,729,464
----------- ----------- ----------- ----------- ------------
(Decrease) increase in cash and cash equivalents (1,555,824) (2,450,387) (6,688,894) (9,040,748) 4,486,801
Cash and cash equivalents at beginning of period 6,042,625 15,186,396 11,175,695 21,776,757 -
----------- ----------- ----------- ----------- ------------
Cash and cash equivalents at end of period $ 4,486,801 $12,736,009 $ 4,486,801 $12,736,009 $ 4,486,801
=========== =========== =========== =========== ============
</TABLE>
5
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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, 1998, 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, 1998 filed with the Securities and
Exchange Commission.
(2) Net Loss Per Share
Loss per share is calculated under FASB Statement 128. Basic loss per share is
based on the weighted average shares outstanding and exclude any dilutive
effects of options and warrants. Diluted loss per share for the company is the
same as basic earnings per share because the effect of options and warrants is
anti-dilutive.
(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 expired December 31, 1998. The Company borrowed a total of $5.5
million under the agreement.
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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 as
defined in the Private Securities Litigation Reform Act of 1995. 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 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(TM) System, which is still under development; uncertainty of market
acceptance; risks associated with the Company's history of operating losses,
accumulated deficit, expectation of future losses and availability of financing
in the year 2000; risks associated with the corporate alliance; risks associated
with limited clinical testing experience; uncertainty of obtaining Food and Drug
Administration clearances or approvals of a 510 (k) notification, a PMA or any
similar FDA submission; heightened competition; risk of technological
obsolescence; risks associated with the lack of manufacturing capability and
dependence on 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 product
liability and limited insurance coverage.
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 Quarterly Report on Form 10-Q.
General
Integ, a development stage company, was incorporated on April 3, 1990 to develop
the LifeGuide(TM) 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-
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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 September 30, 1999, the Company has incurred losses
totaling $47.7 million, consisting of $23.4 million of research and development
expenses, $10.9 million of general and administrative expenses, $8.7 million of
manufacturing development 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, and development of the manufacturing
equipment and 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.
On April 5, 1999 the Company announced that it had entered into a strategic
alliance with Amira Medical to jointly develop a new generation of home glucose
monitoring tests utilizing interstitial fluid (ISF). Under the alliance,
products to be developed will combine Integ's ISF collection technology with the
Amira's glucose measurement technologies. Both companies will contribute
resources to the products' development, which will be manufactured by the
Company and commercialized by Amira.
As part of the strategic alliance agreement, the Company will have the option at
a future date, to merge with Amira, subject to certain conditions. The complete
terms of the agreement are available as an exhibit to the Integ Current Report
on Form 8-K filed with the Securities and Exchange Commission on April 9, 1999.
As part of the strategic alliance the Company and Amira have established a joint
product development plan. This plan involves four product platform phases:
feasibility, calibration, clinical and commercial. The Company has completed the
feasibility phase of the plan, where it demonstrated the ability to measure ISF
glucose using the Amira AtLast(TM) system in a non-integrated fashion. The
Company is currently in the calibration phase of the joint development plan. The
Company has established a new budget in support of this joint development plan,
which takes into account the contributions that Amira is making toward
completion of LifeGuide product development. This budget became effective June
1, 1999.
In October 1999, the Company conducted two internal trials on people with
diabetes using hand-held prototype clinical meters and sampling keys. These
trials tested the calibration of the system in a predictive manner and the
ergonomics of the system. The trial results met the Company's internal
requirements for ISF sampling success rate and glucose measurement performance
and provided information to refine the commercial product design. The Company
believes it is nearing the end of calibration phase. Upon completion of the
development and calibration of the clinical product, it will initiate Food and
Drug Administration clinical trials. Although there can be no assurance, the
Company expects these trials will be initiated during the first half of 2000.
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The Company's future success is dependent upon the successful development of the
LifeGuide System, the development of which is ongoing and the complete efficacy
of which has not yet been demonstrated, and upon its ability to exercise its
option to merge with Amira. The Company is currently focused on the research and
development activities necessary to complete the LifeGuide System in order to
meet the product specifications and initiate clinical trials.
Results of Operations
Comparison of Three and Nine Months Ended September 30, 1999 and 1998
General: The Company's net loss totaled $1.5 million and $6.2 million for the
three and nine months ended September 30, 1999, as compared to $2.5 million and
$9.0 million for the same periods in 1998. The Company's net loss for the first
quarter ended March 31, 1999 and second quarter ended June 30, 1999 was $2.0
million and $2.7 million, respectively. The Company incurred a one-time special
charge of $1,075,000 during the second quarter associated with the formation of
the strategic alliance with Amira. In accordance with the terms of the strategic
alliance, the Company has charged certain development expenses incurred to
Amira. The Company expects net losses to continue for the next several years.
Research and development expenses: Research and development expenses decreased
to $449,000 during the three months ended September 30, 1999 from $1,093,000
during the same period in 1998. This decrease was primarily attributable to
decreased staffing costs ($156,000), the elimination of the allocation of pilot
plant costs from manufacturing development ($97,000), decreased consulting
expenses ($181,000), severance expenses ($95,000), depreciation expense
($48,000), software expense ($10,000) as well as the allocation of expenses to
Amira ($72,000). These decreases were partially offset by an increase patent
legal expense ($15,000). For the first nine months of 1999 expenses decreased to
$1,828,000 from $4,396,000 during the same period in 1998. This decrease was
primarily attributable to decreased staffing costs ($659,000), the elimination
of the allocation of pilot plant costs allocated from manufacturing development
($616,000), decreased consulting expenses ($824,000), severance expenses
($188,000), prototype expenses ($100,000), recruitment expense ($52,000), lab
supply expense ($41,000), the allocation of expenses to Amira Medical ($96,000)
as well as a decrease in other expenses ($34,000). These decreases were
partially offset by an increase in patent legal expense ($42,000).
Manufacturing development expenses: Manufacturing development expenses decreased
to $410,000 during the three months ended September 30, 1999 from $473,000
during the same period in 1998. The decrease in manufacturing development
expenses is primarily attributable to decreased staffing costs ($19,000),
prototype expenses ($41,000), the allocation of expenses to Amira Medical
($139,000), decreased depreciation expense ($39,000) as well as a decrease in
consulting expenses of ($21,000). These decreases were partially offset by the
elimination of the allocation of pilot plant costs to research and development
($97,000) and increased prototype tooling and test fixtures expenses ($93,000)
as well as an increase in other expenses ($6,000). For the first nine
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months of 1999 expenses decreased to $1,495,000 from $1,756,000 for the same
period in 1998. The decrease in manufacturing development expenses is primarily
attributable to decreased staffing costs ($121,000), prototype expenses
($430,000), severance expense ($78,000), training and development expense
($31,000), travel expense ($36,000), decreased facility allocations ($23,000),
decreased consulting expenses ($35,000), the allocation of expenses to Amira
Medical ($159,000) as well as a decrease in other expenses of ($48,000). These
decreases were partially offset by the elimination of the allocation of pilot
plant costs to research and development ($616,000) and increased prototype
tooling and test fixture expenses ($84,000).
Clinical and regulatory expenses: Because of the strategic alliance with Amira,
the Company no longer incurs expenses categorized previously as Clinical and
regulatory effective June 1, 1999. For the six months ended June 30, 1999
clinical and regulatory expenses of $230,000 consisted of staffing costs
($145,000), consulting expense ($17,000), allocated facility expenses ($23,000)
and depreciation expense ($45,000).
General and administrative expenses: General and administrative expenses
increased to $543,000 during the three months ended September 30, 1999 from
$350,000 during the same period in 1998. The increase is primarily attributable
to increased staffing costs ($110,000) and increased depreciation expense
($142,000). Increased staffing costs are attributable to a realignment and
consolidation of resources due to the strategic alliance with Amira. As
previously stated, Amira is now providing substantial clinical and regulatory
support. The balance of expenses previously classified as clinical and
regulatory, are now reported as general and administrative. This increase was
partially offset by decreased insurance costs ($34,000), travel costs ($16,000)
and a decrease in other expenses ($9,000). For the first nine months ended
September 30, 1999 expenses increased to $2,349,000 from $1,402,000 for the same
period in 1998. The increase is primarily attributable to a one-time special
charge of $1,075,000 associated with the formation of the strategic alliance
with Amira and an increase in staffing costs ($88,000). The increase was
partially offset by decreased insurance costs ($43,000), recruitment expenses
($74,000), severance expenses ($24,000), travel costs ($16,000) as well as
decreased other expenses ($59,000).
Sales and marketing expenses: Because of the strategic alliance with Amira, the
Company no longer incurs expenses categorized previously as sales and marketing
effective June 1, 1999. For the six months ended June 30, 1999 sales and
marketing expenses of $30,000 consisted of consulting ($22,000) and allocated
facility expenses of ($8,000).
Interest income: Interest income decreased to $68,000 and $290,000 during the
three and nine month periods ended September 30, 1999, from $197,000 and
$723,000 during the same period in 1998. The decrease resulted from lower
average balances of cash and cash equivalents.
Interest expense: Interest expense decreased to $157,000 and $532,000 during the
three and nine month periods ended September 30, 1999, from $303,000 and
$909,000 during the same period in 1998. The decrease in interest expense is
attributable to payments made on long-term debt and capital leases. On September
30, 1999, the Company's long
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term liabilities, including current portions, were $3,067,000 as compared to
$3,999,000 on September 30, 1998.
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
$5.5 million. As of September 30, 1999, the Company had cash and cash
equivalents of approximately $4.5 million and working capital of $2.6 million.
The Company believes that its current cash balances will be sufficient to fund
its operations until sometime in mid 2000. In order to meet its capital needs
beyond the first half of 2000, the Company may explore raising additional funds
through private or public financings. Adequate funds for the Company's
operations, whether from third parties, financial markets or 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 entirely. The
Company's future liquidity and capital requirements will depend on numerous
factors, including the success of its strategic alliance with Amira and the
Company's ability to exercise its option to merge with a subsidiary of Amira,
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, manufacturing activities, the results of clinical trials and
competition.
As part of the strategic alliance with Amira, the Company agreed that it would
not take any actions outside the ordinary course of business which would result
in a liability or an obligation to make payments, and would not issue any debt
or debt securities without Amira's consent, and that the amount of any of these
types of liabilities would be deducted from the consideration payable by Amira
in connection with the merger of the Company with a subsidiary of Amira. The
Company also agreed that it would not incur any liabilities or obligations to
make payments in excess of $1,000,000 in the ordinary course of business without
Amira's consent. The Company cannot predict whether these agreements will
adversely affect its ability to meet its future liquidity and capital
requirements.
See Exhibit 99.1 to this Form 10-Q for the quarter ended September 30, 1999 for
a more detailed description of the factors that may affect the Company's future
liquidity and capital requirements.
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General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and non-IT Systems
The Year 2000 Issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company has completed the execution of a plan to resolve the Year 2000
Issue. The plan consisted of four phases: assessment, remediation, testing, and
implementation. These steps have been completed on all systems that could be
significantly affected by the Year 2000 Issue. The last of our systems upgrades,
our internal telephone system was completed and tested in October. Final
verification of the key computer systems was completed by October 31, 1999. The
test results are positive with no system errors being found.
The Company has also completed the gathering information about the Year
2000 compliance status of its significant suppliers and subcontractors (external
agents). No significant issues with any of our suppliers have been identified,
although the Company cannot predict whether any of our suppliers will experience
significant Year 2000 issues.
The Company has been utilizing both internal and external resources to
reprogram or replace, test and implement its systems and equipment for Year 2000
modifications. The total expenses the Company has incurred for the Year 2000
project is approximately $15,000. Since testing is now complete, no additional
expenditures are planned for this project. All Year 2000 related expenses have
been funded through operations.
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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The Company has no derivative financial instruments or derivative commodity
instruments in its cash and cash equivalents investments. The Company's cash and
cash equivalents are invested in highly liquid vehicles, including money market
accounts and high-grade commercial paper as guided by the company's investment
policy. As a result of the Company's investment policy, a decrease in the
interest rate earned would not be material to the Company's results. All of the
Company's transactions are conducted in US dollars. Accordingly, the Company is
not exposed to foreign currency risk.
Part 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 $ 4,486,000
and money market funds
Capital expenditures 2,373,000
Research and development and clinical and regulatory
preparation 10,066,000
Manufacturing scale-up and marketing activities 4,909,000
Working capital and other general corporate purposes 4,266,000
-----------
Total use of proceeds $26,100,000
-----------
Except for officer compensation and relocation payments totaling $1,773,087 in
the aggregate, director compensation totaling $256,000 in the aggregate, and
consulting fees paid to a director totaling $172,125, 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.
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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 Sub-lease Agreement dated July 8, 1999 by and between the
Company and Venturi Group, LLC.
27 Financial Data Schedule.
99.1 Cautionary Statement.
(b) None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INTEG INCORPORATED
(Registrant)
Date: November 12, 1999 By: /s/ Susan L. Critzer
----------------------------------
Susan L. Critzer
President and Chief Executive Officer
Interim Chief Financial Officer
(principal executive officer,
principal financial and accounting
officer)
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EXHIBIT INDEX
Exhibit
- -------
10.1 Sub-lease Agreement dated July 8, 1999 by and between
the Company and Venturi Group, LLC
27. Financial Data Schedule
99.1 Cautionary Statement.
<PAGE>
EXHIBIT 10.1
SUBLEASE AGREEMENT
This Sublease Agreement ("Sublease"), made and entered into this 8th day of
July, 1999 by and between Integ, Inc., a Minnesota corporation ("Integ"), and
Venturi Group, LLC, a Delaware limited liability company ("Tenant").
WITNESSETH:
WHEREAS, Integ entered into that certain Lease dated June 14, 1994 (the
"Prime Lease"), by and between Commers-Klodt III, a Minnesota general
partnership ("Landlord"), as landlord, and InoMet,Inc., a Minnesota corporation
and currently known as Integ, as tenant, as amended by that certain Amendment
dated November 6, 1995, for 41,879 square feet ("Premises") in the building
located at 2800 Patton Road in Roseville, Minnesota ("Building"), a true and
correct copy of which is attached hereto as Exhibit A and made a part hereof;
WHEREAS, Integ desires to sublease a portion of the Premises to Tenant, and
Tenant desires to sublease the same from Integ, upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises to be subleased, the
mutual covenants and agreements herein contained, and of other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is hereby agreed by and between the parties hereto as follows:
1. Subleased Premises. Integ hereby leases unto Tenant, and Tenant hereby
takes from Integ, in its as-is condition, the Subleased Premises, which consists
of approximately 6,000 square feet (the "Subleased Premises") and is identified
by cross-hatching on the attached Exhibit B; provided, however that Tenant shall
occupy 3,000 square feet of the Subleased Premises on June 1, 1999 and the
remaining 3,000 rentable square feet of the Subleased Premises on September 1,
1999.
2. Tenant's Proportionate Share. Tenant's proportionate share of the common
area in the Building is 5.4% for June through August, 1999, inclusive, and 10.7%
thereafter ("Tenant's Proportionate Share").
3. Term. The term of this Sublease shall commence on June 1, 1999 (the
"Commencement Date"), and shall terminate on September 30, 2000, unless sooner
terminated as provided in this Sublease.
4. Rent. For the period commencing on June 1, 1999 and expiring on August
31, 1999, Tenant agrees to pay to Integ annual Base Rent equal to $39,600, which
is equal to the product of $13.20 per rentable square foot in the Subleased
Premises multiplied by 3,000 square feet, in equal monthly installments of
$3,300, and for the period commencing on September 1, 1999 and expiring on
September 30, 2000, Tenant agrees to pay to Integ annual Base Rent equal to
$79,200, which is equal to the product of $13.20 per rentable square foot in the
Subleased
<PAGE>
Premises multiplied by 6,000 square feet, in equal monthly installments of
$6,600. In addition to Base Rent, Tenant shall pay to Integ as additional rent
all additional operating costs associated with Tenant's use of the Subleased
Premises passed through by Landlord to Integ which Integ would not have
otherwise incurred. Together, Base Rent and additional rent shall be referred to
herein as "Rent". Tenant shall pay Rent to Integ on the first day of each month
commencing on the Commencement Date and continuing through the end of the Term,
at such address as may be specified by Integ.
5. Assumption of Obligations. Tenant agrees to assume and perform,
according to the terms of the Prime Lease, all of the duties, covenants,
agreements, obligations and limitations of Integ under the Prime Lease with
respect to the Subleased Premises as if Tenant were the tenant under the Prime
Lease, excepting the duty to make payments to Landlord of rental and other
charges. Tenant agrees that it will take good care of the Subleased Premises,
and will commit no waste, and will not do, suffer, or permit to be done any
injury to the same. It is hereby understood and agreed that Tenant's rights to
use, possess and enjoy the Subleased Premises are subject to the terms and
conditions of the Prime Lease and the rights and remedies of Landlord and Integ
thereunder. Tenant agrees to indemnify Integ against, and to hold Integ harmless
from, any liability, damages, costs or expenses of any kind or nature, including
court costs and reasonable attorneys' fees, resulting from any failure by Tenant
to perform, keep and obey the same.
6. Title and Possession. Subject to receipt of the attached Landlord's
Consent to Sublease, Integ covenants and agrees that it has full right and
authority to enter into this Sublease for the full term hereof, and that Tenant,
upon paying the rents and other sums provided herein, and upon performing the
duties, covenants, agreements and obligations hereof, and upon keeping and
obeying all of the restrictions, conditions and provisions hereof, will have,
hold and enjoy quiet possession of the Subleased Premises for the term herein
granted and with all of the rights and privileges of Integ under the Prime Lease
with respect to the Subleased Premises except the rights given to Integ under
Sections 5, 7 and 8 of the Addendum to the Prime Lease, entitled "Early
Termination Provision", "Option to Extend Lease Term" and "Right of First
Opportunity to Lease", respectively, and as herein expressly excluded or
modified and subject to all of said duties, covenants, agreements, obligations,
restrictions, conditions and provisions. In addition, Tenant shall have the
right to the non-exclusive use of the Building's lunchroom facilities to the
same extent that Integ is permitted use of such facilities under the Prime Lease
and the use of Integ's office furniture, including cubicles, desks, telephones
and chairs, present in the Subleased Premises as of June 1, 1999. In addition to
the services to be provided by Landlord under the terms of the Prime Lease,
Integ will also provide to Tenant, at no additional cost to Tenant unless
specifically stated to the contrary, the services set forth on attached Exhibit
C.
7. Sublease and Assignment. Tenant may not assign this Sublease or further
sublease any portion of the Subleased Premises without the prior written consent
of Integ and Landlord, which consent Integ shall not unreasonably withhold or
delay if Landlord has consented. Tenant shall not pledge its interest hereunder,
or allow liens to be placed on such
-2-
<PAGE>
interest, or suffer this Sublease or any portion thereof to be attached or taken
upon execution. No assignment or further subleasing, even with the consent of
Integ and Landlord, shall relieve Tenant from liability for payment of the Rent
herein provided for or from the obligation to keep and be bound by all of the
terms, conditions and covenants of this Sublease.
8. Damage, Destruction or Condemnation. In the event of damage or
destruction of the Subleased Premises or the taking of all or any part thereof
under the power of eminent domain, this Sublease shall terminate if the Prime
Lease is terminated as a result thereof, and the rent payable hereunder shall
abate for as long as and in the same proportion as the rent due from Integ to
Landlord under the Prime Lease abates as a result thereof.
9. Mutual Release and Waiver of Subrogation. Notwithstanding any provision
of this Sublease to the contrary, Integ and Tenant each hereby waives any and
all rights of recovery, claim, action or cause of action, against the other and
against Landlord, their agents (including partners, both general and limited),
officers, directors, shareholders or employees, for any loss or damage that may
occur to the Subleased Premises, or any improvements thereto, or the Building of
which the Subleased Premises are a part, or any improvements thereto, or any
property of such party therein, by reason of fire, the elements, or any other
cause which could be insured against under the terms of standard fire and
extended coverage insurance policies, regardless of cause or origin, including
negligence of the other party hereto, its agents, officers or employees,
provided that Tenant shall not be released to the extent that Integ is not
released from liability under the Prime Lease, and each covenants that its
insurers shall hold no right of subrogation against such other party.
10. Alterations. The parties agree Tenant is leasing the Subleased Premises
"as-is" and that Tenant shall have the right to make at its expense alterations
to the Subleased Premises only with prior written consent of Landlord and Integ.
Upon the termination of the term hereof, all such alterations, additions and
improvements (except personal property, business and trade fixtures, machinery
and equipment, furniture and movable partitions owned by Tenant) shall be and
remain part of the Subleased Premises and shall not be removed by Tenant unless
such removal is required by Landlord or Integ, in which case Tenant shall remove
the same and restore the Subleased Premises to the same condition in which they
were on the date hereof, reasonable and ordinary wear and tear excepted.
Personal property, business and trade fixtures, machinery and equipment,
furniture and movable partitions owned by Tenant shall be and remain the
property of Tenant and may be removed by Tenant at any time during the term
hereof when Tenant is not in default hereunder. Tenant covenants and agrees to
indemnify Integ and Landlord against, and holds Integ and Landlord harmless
from, all liens, whether for labor or materials arising as the result of
alterations, additions, repairs, or improvements to the Subleased Premises made
by Tenant during the term of this Sublease.
11. Default. If the Rent above referred to or any of the fees identified in
Articles 22 or 23, or any part thereof, whether the same be demanded or not,
shall remain unpaid for a period of ten (10) days from the date when due
hereunder, or if any other term, condition or covenant of this Sublease, express
or implied on the part of Tenant to be kept or performed shall
-3-
<PAGE>
be violated or neglected, and if Tenant shall fail to cure the same within
thirty (30) days from the date of written notice from Integ to Tenant specifying
the violations (unless such default cannot reasonably be completed within 30
days and Tenant begins such cure within thirty (30) days and proceeds with
diligence to complete the cure), or if the Subleased Premises or Tenant's
interest therein shall be taken on execution or other process of law, or if
Tenant shall petition to be or shall be declared bankrupt or insolvent according
to law or shall enter an assignment for the benefit of creditors, or if any
default under the Prime Lease shall occur with respect to Tenant or the
performance by Tenant of any of its covenants and obligations under this
Sublease, then and in any of said cases, Tenant shall be deemed in default, and
Integ shall have all of the rights and remedies against Tenant which would be
available to Landlord against Integ in the event of a default by Integ under the
Prime Lease.
12. Notices. Any notice or communication required or permitted to be given
or served by either party hereto upon the other shall be deemed given or served
in accordance with the provisions of this Sublease when mailed in a sealed
wrapper by United States registered or certified mail, return receipt requested,
postage prepaid, properly addressed as follows:
Integ: Integ, Inc.
2800 Patton Road
Roseville, MN 55113
Attention: Susan L. Critzer
If to Tenant: Venturi Group, LLC
2800 Patton Road
Roseville, MN 55113
Attention: Mark B. Knudson
Each such mailed notice or communication shall be deemed to have been given to,
or served upon, the party to which addressed on the date the same is deposited
in the United States registered or certified mail, postage prepaid, properly
addressed in the manner above provided. Any party hereto may change its address
for the service of notice hereunder by serving written notice hereunder upon the
other party hereto, in the manner specified above, at least ten (10) days prior
to the effective date of such change.
All notices required to be given to Landlord by Integ under the Prime Lease
shall be given by Tenant to Landlord and Integ.
13. Surrender of Subleased Premises. Upon the expiration of the term of
this Sublease, or upon any earlier termination of this Sublease, Tenant shall
quit and surrender possession of the Subleased Premises to Integ in as good
order and condition as the same are now or hereafter may be improved by
Landlord, Integ or Tenant, reasonable wear and tear excepted, and shall, without
expense to Integ, remove or cause to be removed from the Subleased Premises
-4-
<PAGE>
all debris and rubbish, all furniture, equipment, business and trade fixtures,
movable partitioning and other articles of personal property owned by Tenant or
installed or placed by Tenant at its expense in the Subleased Premises, and all
similar articles of any other persons claiming under Tenant, and Tenant shall
repair all damage to the Subleased Premises resulting from such removal.
14. Termination of Prime Lease. It is understood and agreed by and between
the parties hereto that the existence of this Sublease is dependent and
conditioned upon the continued existence of the Prime Lease, and in the event of
the cancellation or termination of the Prime Lease, this Sublease automatically
shall be terminated; provided, however, that this provision shall not be deemed
to release Integ from liability if the Prime Lease is canceled or terminated by
reason of a default by Integ as tenant under the Prime Lease, which default did
not result, in whole or in part, from a default by Tenant hereunder. Tenant
shall have no recourse against Integ if the Prime Lease is canceled or
terminated by reason of a default by Tenant hereunder, or by any reason other
than a default by Integ under the Prime Lease.
15. Waiver. A waiver by Integ of any default, breach or failure of Tenant
under this Sublease shall not be construed as a waiver of any subsequent or
different default, breach or failure.
16. Inspection. Integ reserves the right at all reasonable times during the
term of this Sublease for Integ or Integ's agents to enter the Subleased
Premises for the purpose of inspecting and examining the same, and for all other
reasonable purposes.
17. Holding Over. Tenant shall have no right to hold over after the
expiration or earlier termination of the term hereof. Tenant shall indemnify
Integ for any costs incurred by Integ as a result of its failure to deliver the
Premises to Landlord upon the expiration of the term of the Prime Lease or the
Integ Lease. Acceptance by Integ of rent after such expiration or earlier
termination shall not constitute a consent to a holdover hereunder or result in
a renewal. The foregoing provisions of this paragraph are in addition to, and
shall not limit, Integ's right of reentry or any other rights of Integ hereunder
or as otherwise provided by law.
18. Successors and Assigns. All of the terms, covenants, provisions and
conditions of this Sublease shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
19. Captions. The captions used on the paragraphs of this Sublease are for
convenience only, are not a part of this Sublease, and are not to be considered
in the interpretation hereof.
20. Consent of Landlord. This Sublease is contingent upon approval by
Landlord manifested by Landlord's execution of the Consent to Sublease attached
hereto. Unless and until Landlord executes the Consent to Sublease, this
Sublease shall be of no force or effect, and the parties hereto shall have no
liability or obligation to each other.
-5-
<PAGE>
21. Relationship of Parties. This Sublease does not and shall not create
the relationship of principal and agent, or of partnership, or of joint venture,
or of any other association between Integ and Tenant, the sole relationship
between the parties hereto being strictly that of landlord and tenant.
22. Use of Computer Hardware and Software. Tenant shall have the right to
use the computer hardware and software which are available in Integ's existing
leased pool of such hardware and software as of the date hereof. Integ shall be
responsible for the necessary maintenance and repair of such hardware and
software. Tenant shall pay Integ an amount equal to $1,140 per month, subject to
reasonable increases if the number of Tenant's personnel stationed at the
Subleased Premises is greater than ten (10) individuals (the "Equipment Use
Fee"), during the term of this Sublease for the use of such hardware and
software and shall make such payment along with Tenant's payment of monthly
Rent. The parties agree, however, that the Equipment Use Fee is not to be deemed
as Rent for purposes of this Sublease or the Prime Lease.
23. Additional Fees. Tenant agrees to pay to Integ amounts equal to $1,000
per month during the term of this Sublease for accounting services and $1,500
per month during the term of this Sublease for MIS services, each as provided by
Integ for Tenant (the "Accounting and MIS Fees"). Tenant shall pay the
Accounting and MIS Fees along with Tenant's payment of monthly Rent. In
addition, Tenant agrees to make a one time payment to Integ, as supported by
evidence substantiating Integ's right to such payment (the "One-time Fee"), to
reimburse Integ for costs incurred by Integ on Tenant's behalf in preparing the
Subleased Premises for Tenant's occupancy. The One-time Fee shall be payable by
Tenant upon demand by Integ. Tenant shall also reimburse Integ for those
expenses that Integ incurs on Tenant's behalf for (a) additional computer
hardware beyond hardware available in the Subleased Premises as of the date
hereof and purchased or leased by Integ for Tenant with Tenant's prior consent;
(b) expenses necessitated by Tenant and incurred by Integ with Tenant's prior
consent; (c) year-end audit and tax return work as requested by Tenant; (d) ADP
payroll work as requested by Tenant; and (e) long distance telephone charges
("Miscellaneous Fees"). At Integ's option, Tenant shall either pay such
Miscellaneous Fees on demand by Integ or with payments of monthly Rent. The
parties agree that the Accounting and MIS Fees, the One-time Fee and the
Miscellaneous Fees are not to be deemed as Rent for purposes of this Sublease or
the Prime Lease.
24. Agreement to Negotiate. Integ and Tenant shall negotiate in good faith
during the period commencing on the date hereof and ending on September 1, 1999
in order to determine (a) how to dispose of the computer hardware and software
to be used by Tenant pursuant to the terms of this Sublease, and (b) issues
pertaining to Integ's early termination of the Prime Lease in accordance with
the terms set forth in Section 5 of the Prime Lease in the event that Integ
exercises those certain put option rights set forth in that certain Option
Agreement, dated April 2, 1999, by and between Integ and Amira Medical, a
Delaware corporation, and shall evidence the resolution of such negotiations by
a written document. In the event that the parties hereto cannot reach a mutually
acceptable agreement with respect to the disposition of such hardware and
-6-
<PAGE>
software on or before September 1, 1999, Integ shall retain all ownership rights
and interests in such hardware and software in the event that Integ exercises
the put option rights discussed above. The provisions set forth in this Section
24 regarding Integ's duties to negotiate in good faith with Tenant regarding
Integ's early termination rights set forth in the Prime Lease shall not limit,
alter or amend Integ's rights or ability to terminate the Prime Lease in
accordance with the provisions of Section 5 of the Prime Lease.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed as of the day and year first above written.
INTEG, INC.
By
-------------------------------------
Susan L. Critzer, President and
Chief Executive Officer
VENTURI GROUP, LLC
By
--------------------------------------
Mark B. Knudson, Chairman and
Chief Executive Officer
-7-
<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 THREE MONTHS ENDED SEPTEMBER
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,486,801
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,762,573
<PP&E> 9,581,845
<DEPRECIATION> 3,561,047
<TOTAL-ASSETS> 10,794,500
<CURRENT-LIABILITIES> 2,150,174
<BONDS> 0
0
0
<COMMON> 96,578
<OTHER-SE> 6,913,058
<TOTAL-LIABILITY-AND-EQUITY> 10,794,500
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,402,020
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156,691
<INCOME-PRETAX> (1,491,012)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,491,012)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,491,012)
<EPS-BASIC> ($.15)
<EPS-DILUTED> ($.15)
</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(TM) System;
Uncertainty of Market Acceptance
The Company's future success is dependent upon the success of its alliance
with Amira Medical, and the successful development, of the LifeGuide(TM) System,
which is ongoing and the complete efficacy of which has not yet been
demonstrated. The Company has tested benchtop prototypes of the LifeGuide Meter
and the LifeGuide Key. There can be no assurance that unforeseen problems will
not occur in research and development, clinical testing, regulatory submissions
and clearance or 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
and Availability of Financing in the Year 2000
The Company has generated no revenue and has sustained significant
operating losses each year since its inception. As of September 30, 1999, the
Company had an accumulated deficit of $47.7 million. Net losses for the years
ended December 31, 1996, 1997 and 1998 were approximately $9,083,000,
$11,564,000 and $11,086,000, respectively, and 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.
At its current rate of spending, the Company's existing cash will be
sufficient to fund the Company's operations through approximately the first half
of 2000. 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 the first half of 2000, the Company may
be required to raise additional funds through private or public financings.
Adequate funds for the Company's operations, whether from third parties,
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. Under the strategic alliance with
Amira, the Company will receive a fixed percentage over cost of its LifeGuide
Key. Amira will also fund any additional equipment and tooling required to
produce the LifeGuide System. There can be no assurance that Amira will order
sufficient quantities of the LifeGuide Key in order for the Company to meet its
operating expenses and other needs.
Corporate Alliance
The Company announced on April 5, 1999 that it formed a strategic alliance
with Amira Medical to jointly develop a new generation of home glucose
monitoring tests utilizing interstitial fluid (ISF). In connection with this
strategic alliance, the Company is subject to risks associated with integrating
its operations and personnel with Amira, which could result in a potential
disruption to the business of the Company and potential diversion of management
time and attentions. The Company agreed to use the application of its ISF
sampling technology in the field of glucose measurement exclusively in
connection with the strategic alliance. There can be no assurance that any
glucose measurement products or technologies of Amira will be effectively
assimilated into or integrated with the Company's ISF sampling technology. If
the strategic alliance were not successful, the Company's ability to continue
its existence or identify suitable business alliances or opportunities or
business combinations with another third party would be limited.
2
<PAGE>
Limited Clinical Testing Experience; Uncertainty of Obtaining FDA Clearance or
Approval
Testing of the LifeGuide System has been performed on benchtop prototypes
and hand-held prototypes solely by Company personnel under controlled
circumstances. The Company expects to make commercial prototypes of the
LifeGuide System available for clinical testing by people with diabetes as soon
as the integration with Amira's glucose measurement technology is complete, and
to use the data derived from this testing to support either a 510(k)
notification or Premarket Approval application (PMA) with the Food and Drug
Administration ("FDA") to permit commercialization of the LifeGuide System in
the United States. The Company expects to initiate FDA clinical trials in the
first half of 2000, but there can be no assurance that the Company will not
encounter problems in clinical testing which will cause delays in the
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 LifeGuide System 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 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 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.
3
<PAGE>
Lack of Manufacturing Capability; Dependence on 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
Key will be assembled by the Company from components to be purchased from
outside suppliers. 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 install and qualify
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. The Company pursues a policy of seeking patent protection for each of
the areas of invention embodied in the LifeGuide System. The Company has four
issued United States patents relating to the method of drawing an ISF sample
from the outer layers of the skin, as well as three related US patents. The
company has several pending United States patent applications directed toward
various aspects of the technologies underlying the LifeGuide System. The Company
has also filed two corresponding PCT foreign patent applications related to its
sampling methods, in order to seek similar patent protection outside the United
States. The first of these has received a favorable PCT option and has been
filed in Europe and three non-European countries. The European application has
been granted and is being filed in selected member states. 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, 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.
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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 issuance by others in
its industry. There can be no assurance that third parties will not pursue
litigation that could be costly to the Company. An adverse determination in any
litigation 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 Clearance or Approval
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"), 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 authorization from the FDA before medical devices, such as
the Company's proposed LifeGuide System, can be marketed.
The Company has not obtained FDA clearance or approval 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 and approval 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 the
required clearance or approval will be obtained in a timely manner, or at all.
In addition, even if obtained, FDA clearance and approval decisions 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 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 clearance or 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
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current Good Manufacturing Practices as implemented through the Quality System
Regulation. 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.
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. 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 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.
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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