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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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Commission file number: 0-28420
INTEG INCORPORATED
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(Exact name of registrant as specified in its charter)
Minnesota 41-1670176
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(State of incorporation or organization) (I.R.S. Employer Identification No.)
2800 Patton Road, St. Paul, Minnesota 55113
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(Address of principal executive offices) (ZIP Code)
(651) 639-8816
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(Registrant's telephone number, including area code)
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, par value $.01 per share
Common Stock purchase rights
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 20, 2000 was approximately $39,557,122 (based on the last
sale price of $4.03 as reported by The Nasdaq Stock Market(R)).
As of March 20, 2000, 9,815,663 shares of the registrant's Common Stock, par
value $.01 per share, were issued and outstanding.
Documents Incorporated by Reference: Portions of the Registrant's Proxy
Statement for its 2000 Annual Meeting of Shareholders (the "Proxy Statement"),
are incorporated by reference in Part III.
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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Cautionary Statement Regarding Forward Looking Statements
This Annual Report on Form 10-K contains forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. When used in
this Form 10-K 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, risks; dependence on
continued funding from Amira Medical; 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 Annual Report on Form 10-K.
Part I
Item 1. Business
Integ Incorporated (the "Company") announced in April 1999 that it had
formed an 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 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. Under the terms of the strategic
alliance, the Company is responsible for the development of a method to sample
ISF using the Company's proprietary sampling technology, designing and
manufacturing development of a means to integrate the Company's sampling
technology with Amira's test strip technology, and manufacture of a packaged and
sterile LifeGuide Key, including the Company's ISF sampling technology
incorporating Amira's test strip. Under the strategic alliance, Amira is
responsible for development and calibration of a sterilizable test strip, test
strip manufacturing and scale-up and bulk shipping system development, defining
test strip environmental and packaging requirements inputs for the LifeGuide
Key; development of meter electronics, optics, calibration and software;
management of ongoing meter contract manufacturing; filing and holding title to
all regulatory submissions in its name in connection with the strategic
alliance; labeling and packaging the LifeGuide System for final sale and
marketing, sales, distribution and customer service of the LifeGuide System.
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.
Total consideration payable to the Company`s shareholders, optionholders, and
warrantholders in connection with any merger with Amira is $20,000,000 in cash
and 2,000,000 shares of common stock of Amira, subject to reduction in certain
circumstances. 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.
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Under 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 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, in
September 1999. The Company announced completion of the calibration phase in
February 2000. On March 29, 2000 the company announced that, based on
discussions with Amira Medical, it expected to do additional development work on
the LifeGuide System before proceeding to clinical trials. The Company has not
established a new target date for entering clinical trials.
In June 1999, the Company established a new budget for the balance of
1999 in support of the joint development plan, which took into account the
contributions that Amira is making toward completion of LifeGuide product
development.
The Company is developing the LifeGuide System, a next generation
hand-held glucose monitoring product for use by people with diabetes. Utilizing
the Company's proprietary ISF sampling technology, the LifeGuide System will
allow people with diabetes to frequently self-monitor their glucose levels
without repeatedly enduring the pain and mess associated with lancing their
fingers to obtain a blood sample. The Company believes that the proposed
LifeGuide System represents a significant technological advance in glucose
monitoring and will enable people with diabetes to manage their disease more
effectively and conveniently
Integ, a Minnesota corporation, was incorporated in April 1990.
Industry Overview
It is estimated that there are as many as 120 million people with
diabetes worldwide, and nearly 16 million Americans are affected. Diabetes is a
chronic disease affecting overall health, which can lead to severe complications
and requires active disease management on a daily basis.
The use of personal glucose monitors is a key factor in the management
of diabetes. Glucose levels are dynamic and vary throughout the day depending
upon food intake, insulin availability, exercise, stress and illness. People
with diabetes attempt to maintain their glucose levels within an acceptable
range through the use of insulin injections, oral hypoglycemic (glucose
reducing) agents, diet, exercise or a combination of these activities. People
with diabetes often test their glucose levels at multiple times during the day,
including before eating meals or when their glucose levels are suspected to be
rising or falling faster than desired.
The Company believes that sales of personal blood glucose monitoring
products have increased significantly in recent years due to technological
innovations, the development of retail distribution channels and increasing
awareness of the benefits of frequent glucose monitoring. Historically,
consumers have selected devices that offer the greatest ease of use while
providing fast and accurate blood glucose measurements, and technological
innovators have tended to capture significant market share rapidly.
Due to the release in 1993 of the results of the landmark Diabetes
Control and Complications Trial (the "DCCT"), people with diabetes are becoming
increasingly aware of the need for more intensive glucose monitoring. The
purpose of the trial, which studied more than 1,400 people with Type 1
(insulin-dependent) diabetes over an average of six and one half years, was to
determine whether tighter control over glucose levels would prevent the onset or
slow the progression of the serious complications that often accompany diabetes.
Participants in the DCCT were randomly assigned to either intensive or
conventional therapy groups. Conventional therapy consisted of testing glucose
levels once or twice a day with one or two daily insulin injections. Intensive
therapy involved testing glucose levels at least four times a day with at least
three insulin injections, or pump therapy, diet and exercise, and adjustment of
insulin doses in accordance with the measured glucose levels. The DCCT
demonstrated that more intensive treatment of Type 1 diabetes can reduce the
risk of developing various diabetes-related complications by approximately 60%.
The DCCT panel has recommended that people with Type 1 diabetes follow
an intensive therapy program, including testing their glucose levels at least
four times a day. Similarly, the United Kingdom Prospective Diabetes Study
(UKPDS) on over 5,000 patients with Type 2 diabetes, demonstrated that improved
glucose monitoring and control reduced the incidence of diabetes related
complications such as retinopathy, nephropathy and possibly neuropathy. These
clinical findings encourage health care professionals to recommend more testing
for all patients
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with diabetes. Currently, however, the majority of people with diabetes who use
insulin monitor their glucose levels at least once each day.
Existing Personal Blood Glucose Monitoring Systems and New Alternative
Technologies
Most commercially available glucose monitoring systems involve
obtaining a patient's blood sample in order to measure glucose. In conventional
glucose monitoring systems, blood samples are taken from the fingertips because
of the high concentration of capillaries at that site and because the blood
produced at the fingertip can most easily be applied directly to the test strips
used in such devices. The primary drawbacks to this approach are the pain
associated with lancing a fingertip to produce the sample and the mess and
inconvenience of handling blood.
Most currently available personal blood glucose monitoring systems
employ a disposable test strip in conjunction with a battery-powered, hand-held
meter, and a separate lancing device with its own disposable. These systems
usually require the user to (1) assemble the lancing device, (2) determine the
calibration code from the test strip package and adjust the meter as required to
be properly calibrated to the test strip being used, (3) insert the test strip
into the meter, (4) lance the finger or arm and form a drop of blood, and (5)
apply the blood sample to the test strip and wait for the meter to display the
results.
The goal of most recent glucose monitoring research has been to develop
an accurate system to monitor glucose without the pain of a finger lance or the
need to handle blood. Most of this research falls into five categories: 1)
Non-invasive near-infrared spectroscopy, 2) reverse iontophoresis, 3) alternate
site blood sampling techniques, 4) implantable sensors, and 5) ISF technologies.
Non-invasive near-infrared spectroscopic technology generally attempts
to estimate glucose levels by measuring light absorption when an infrared light
signal is transmitted through or reflected off of a body part. Every chemical
entity that absorbs infrared energy has a characteristic waveband where that
absorption occurs. This absorption is proportional to its concentration. It is
this "signature" that allows a chemical entity to be identified and measured.
Reverse iontophoretic technology uses electrical current to draw
glucose molecules out of the skin for measurement. Iontophoresis is a process by
which charged molecules are carried through intact skin by applying a small
amount of electrical current. Reversing that current can pull charged molecules
from the body; with those molecules comes fluid, and with that fluid comes
uncharged molecules like glucose. Such fluid can be accumulated in a test
chamber, in which the glucose can be measured using traditional electrochemical
means. At this time, this technology is targeted toward continuous monitoring as
a supplement to finger-stick testing. One product of this type has been
submitted for FDA approval but not yet approved.
A newer class of products continues to involve the measurement of
glucose in blood but attempts to reduce pain by minimizing the volume of blood
required and broadening the sites available for sampling. The products currently
available in this category involve the same steps as current blood glucose
systems, but allow the user to lance their forearm or thigh rather than the
fingertip. One product of this type is currently on the market and a second
product of this type has received FDA approval. A blood sample is still
required, as is the time and mess associated with getting that sample. Many
people with diabetes are uncomfortable with routinely testing glucose levels in
the presence of others because of the negative perceptions associated with
visible blood. One company has discussed plans for a product that uses blood but
eliminates the separate handling step.
Implantable sensors are targeted toward continuous monitoring of a
patient's glucose level. They generally involve implanting a three-day sensor in
the patient, which is attached through electrical leads to a monitoring device
that is worn externally. One such product is approved by the FDA but its
intended use is limited to identifying trends for the physician retrospectively.
The patients must still use a blood glucose meter for monitoring their glucose
levels, taking therapeutic action, and calibrating the implanted sensor.
ISF technology involves obtaining a sample of ISF from the skin. ISF
technology is being pursued by the Company and others. In addition to the
Company's specific approach for collecting and measuring ISF, examples of other
approaches include creating an opening in the skin using a laser or other means,
drawing ISF through the opening and electrochemically measuring the sample.
Another example includes chemically enhancing the skin's permeability and
allowing ISF to flow into a patch for subsequent colorimetric measurement.
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The Integ Solution
The Company is developing the LifeGuide System to allow people with
diabetes to easily and accurately measure their glucose levels without the need
for a finger lance or the need to handle blood. The LifeGuide System consists of
two main components: the Company's proprietary ISF sampling technology to
collect a sample of ISF and Amira's measuring technology to measure the level of
glucose present in the ISF sample. The current embodiment of the system is being
developed by combining the measurement technology components of the Amira AtLast
blood glucose system, both meter and test strip, with the ISF sample extraction
technology of the LifeGuide System.
The Integ ISF Technology
Interstitial fluid (ISF) is an extracellular fluid that is prevalent
throughout the body and skin. ISF is the means through which proteins and
nutrients, including glucose, pass between capillaries and cells. The LifeGuide
System extracts ISF from the dermis of the skin. The sample is comprised
primarily of interstitial fluid, but may also contain some intracellular fluid
and red blood cells. Samples extracted with the LifeGuide method are very
consistent. A clinical study that compared the glucose levels in multiple
samples taken from single patients showed very tight precision, measured as
coefficients of variation (CVs) that averaged 3-5% for most subjects. The
results of this study were published in Clinical Chemistry and were presented at
the 1999 Oak Ridge Conference of the AACC.
The LifeGuide System is based on research indicating that ISF glucose
levels correlate closely with blood glucose levels. The concentration of glucose
in ISF is very similar to the concentration of glucose in blood, however it
takes a little time for the glucose to travel from blood into the ISF. This time
is called lag time. The magnitude of the lag varies somewhat depending on the
study and the collection and measurement techniques applied. In published
literature, lag times of 10 to 20 minutes are typically reported, with a few
studies claiming as little as no time lag, or as much as 45 minutes. Much
research has been done with microdialysis collection of ISF from the
subcutaneous layer. A review of the scientific literature shows that many
researchers see a good correlation between ISF glucose and blood glucose with a
short time lag when employing the microdialysis technique. Although this sample
collection method differs from the method employed by LifeGuide, the results are
instructive for gaining a general understanding of the relationship between ISF
and blood glucose levels, and the results are similar to internal studies
conducted with LifeGuide. The company is conducting studies to further
understand lag time in various patient populations, particularly as glucose is
rapidly falling. Results of these studies could significantly its ability to
develop a commercially acceptable LifeGuide System.
The LifeGuide(TM) System
The Company's LifeGuide System will be comprised of (i) the LifeGuide
Meter, a reusable glucose measuring device, and (ii) the LifeGuide Key, a
single-use, disposable ISF sample collection device.
The proposed LifeGuide System will be a simple-to-use, ISF-based
glucose testing system intended to be used by people with diabetes in a similar
manner to traditional blood glucose test systems. The system extracts a small
sample of ISF from the dermal layer of the skin on the forearm and measures
glucose in the sample with an integrated, one-piece, disposable, named a "key."
The LifeGuide System will be calibrated to give plasma-equivalent results in
mg/dL just like many blood glucose meters. This is also the method used by
laboratories.
The single-use, disposable LifeGuide Key is designed to be easily
handled by the user and inserted into the LifeGuide Meter. The proprietary
design of the LifeGuide Key will allow for the capture of the required ISF
sample and the retention of the sample during the measurement and disposal
process. The LifeGuide Key contains a very small needle that is used to extract
a small sample of ISF and present it in a very controlled fashion to the
measurement system. No user intervention is required to get the sample to the
measurement zone of the test strip. The LifeGuide Key will be packaged in
individual sterile packages.
The Company believes the LifeGuide System should offer advantages over
commercially available personal blood glucose monitoring systems and products
under development, including the following:
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o Sampling Flexibility--The LifeGuide System is designed to be used on
skin almost anywhere on the body, staying away from areas (such as the
fingertips) where blood capillaries and nerve endings are
concentrated. Initial company efforts are focused on forearm testing.
o Bloodless Approach--The LifeGuide System is designed to allow for the
accurate measurement of glucose levels without drawing blood. This
approach eliminates the mess and inconvenience of handling a blood
sample and the negative perceptions associated with visible blood.
o Ease of Use--The Company's proposed LifeGuide System will eliminate
some of the steps required by commercially available personal blood
glucose monitoring systems. With currently available systems the user
requires two disposables, a lancet and a separate test strip. After
lancing the finger or alternate site, a drop of blood must be formed
and directed to a target zone on a strip. The LifeGuide System
requires only one disposable, the LifeGuide Key. The sampling
procedure of the proposed LifeGuide System has been reduced to simply
inserting the key into the meter, holding the device against an area
of exposed skin until an adequate sample has been obtained and waiting
briefly for a displayed result. This could reduce the possibility of
user errors affecting readings.
o User Safety--The user's safety is ensured in that each single-use key
is sterilized and packaged individually. The meter will not allow a
test to begin with a used sampler, eliminating the possibility that
the sampling device can be used more than once. Also, because the
sample is automatically captured in the key, there are fewer items
requiring disposal.
Because of these potential advantages, the Company believes that the
proposed LifeGuide System may facilitate greater compliance with the
recommendations of the DCCT panel. The Company, however, has not yet finalized
the development of its LifeGuide(TM) System, and there can be no assurance that
the Company will be able to successfully develop a commercially acceptable
product.
Research and Development
Under the terms of its strategic alliance with Amira, the Company is
responsible for research and development of ISF sampling technology, design and
manufacturing development of a means to integrate the ISF sampling technology
with a Amira's test strips and designing the interface between Amira's metering
system and the Company's ISF sampling technology.
Since inception, the Company has incurred approximately $23.9 million
in research and development expenses. The Company spent approximately $2.3
million, $5.5 million and $5.3 million during fiscal years 1999, 1998 and 1997,
respectively, on research and development.
Once the alliance with Amira was formed, 1999 research and development
activities were focused on the integration of Integ's ISF collection technology
with Amira's glucose measurement technology. By fourth quarter of 1999 the
Company had designed, built, and tested a new LifeGuide hand-held prototype
system that reliably collected a one microliter sample of ISF and automatically
delivered it directly to a test strip for glucose measurement. Technical
accomplishments during the year that were inputs to this system design included:
developing a consistently performing calibration of Integ ISF to fingerstick
blood reference values; further analytical work on the relationship between
blood and Integ ISF; development of test strip chemistries that may be
sterilized along with the tiny needle so that a single piece disposable design
could be implemented; and unique microfluidics concepts for handling small ISF
sample volumes.
This integrated prototype LifeGuide System was then tested in a series
of internal trials on people with diabetes. These trials provided user feedback,
gathered data for finalizing factory calibration methods, verified ISF
collection proficiency, and assessed clinical accuracy and precision
performance. While not designed specifically as market research, the trials
indicated what user related improvements and features would be desirable in the
commercial product.
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The Company's success is entirely dependent upon the strategic alliance
with Amira and 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 LifeGuide System
must deliver performance that is acceptable to the Company, its strategic
partner Amira, the FDA and the users of the product.
Clinical Testing
Under the terms of the Development Agreement, Amira is responsible for
filing and holding title to all regulatory submissions in its name in connection
with the jointly developed LifeGuide system.
The Company conducted a series of method comparison studies in the
third and fourth quarter of 1999 on hand-held prototype versions of the
LifeGuide System using the Amira measurement technology. This data was used to
complete the calibration of the clinical hand-held LifeGuide System.
Also in 1999, presentations of two posters, one with a talk, were made
at the 1999 American Association of Clinical Chemistry (AACC) Oak Ridge
Conference. One discussed the results of an internal clinical study that
demonstrated the tight correlation of glucose values gathered from multiple
sites on the forearm. The second described performance of our internal
electrochemical lab system.
The company submitted clinical protocols to the FDA for review in late
January. A meeting was held with the FDA on March 21, 2000 to review these
protocols. The FDA has requested modifications to the protocols submitted and
advised the Company that a PMA may be required. The Company has not yet
determined whether it will pursue a 510(k) or a PMA.
The company has subsequently completed discussions with its partner
Amira, who will be funding further development of the product. Based on these
discussions, the company expects to conduct additional pre-clinical trials to
confirm the protocol additions suggested by the FDA and to verify system
performance and intended use. The Company and Amira also expect to evaluate
additional product changes to improve user features before proceeding with
clinical trials. As a result, clinical trials will not be initiated in second
quarter, as previously anticipated.
To date, testing of the LifeGuide System has been performed solely by
Company and Amira personnel under controlled circumstances. There can be no
assurance that the Company will not encounter problems in completing the
development of the LifeGuide System that would prevent the Company from
initiating clinical testing, and there can be no assurance that the Company will
not encounter problems in clinical testing that would cause the Company to
further delay commercialization of the LifeGuide System. There also can be no
assurance that a commercial version of the LifeGuide System, if developed, 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 and effective, or acceptable to consumers.
Manufacturing
Under the terms of the Development Agreement, the Company is
responsible for manufacturing the LifeGuide key consisting of a packaged and
sterile ISF sampling technology which incorporates Amira's test strip. The
Company anticipates that the LifeGuide Key will be assembled by the Company at
its facilities from components obtained from outside suppliers. In manufacturing
the LifeGuide Key, the Company will use assembly, test and packaging equipment
employing well-known processes similar to those used for other high speed
assembly applications.
Under the terms of the Development Agreement, Amira is responsible for
development of the LifeGuide Meter electronics, optics, calibration and software
and management of meter contract manufacturing.
The LifeGuide System is designed to be economically produced using
proven manufacturing methods and equipment. As part of its design strategy, the
Company has consulted with component suppliers, automation firms and OEM
electronics manufacturers.
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The Company will receive a fixed percentage of profit over its costs up
to a certain cap in producing the LifeGuide Key, which is not based upon the
price that the LifeGuide system may sell at. It is unlikely that the Company
will be able to sell a sufficient number of LifeGuide Keys to Amira to attain
profitability.
The Company expects that one of its most significant manufacturing
challenges will be to quickly increase LifeGuide Key production volumes after
full-scale commercial introduction of the LifeGuide System. To address this
challenge, the Company successfully installed and qualified an initial automated
manufacturing and packaging line in second quarter 1998. This line is flexible
and can be modified for key design changes which will be required with the new
measurement system. This line has a capacity of 20 million keys per year and
will serve as the benchmark for specifying additional higher volume lines.
There can be no assurance, however, 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.
Sales and Marketing
Under the terms of the Development Agreement, Amira is responsible for
marketing, sales, distribution and customer service with respect to the
LifeGuide System. The Company is required to market and sell the LifeGuide
System through Amira. The Company will receive a fixed percentage of profit over
its costs up to a certain cap in producing the LifeGuide Key, which is not based
upon the price that the LifeGuide System may sell at.
Amira is currently in the process of launching its first product and
building its sales, marketing and distribution capabilities. 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 Amira will be able to build a suitable sales force or enter into
satisfactory marketing arrangements with third parties when commercial potential
develops, or that its sales and marketing efforts will be successful.
Patents and Proprietary Rights
Under the terms of the Development Agreement, the Company owns all
right title and interest in all intellectual property which is derived solely
from technology of the Company existing prior to the date of the strategic
alliance and Amira owns all right, title and interest in all intellectual
property which is derived solely from technology of Amira existing prior to the
date of the strategic alliance. Under the terms of the Development Agreement,
the Company and Amira jointly own all right, title and interest in all
intellectual property which is either derived from technology of both the
Company and Amira or is derived from technology that did not exist prior to the
date of the strategic alliance. Under the terms of the Development Agreement,
the Company and Amira lose rights to certain aspects of their intellectual
property in the event of a breach of the Development Agreement by that party.
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 three
issued United States patents relating to the method of drawing an ISF sample
from the outer layers of the skin, as well as two related US patents. The
Company has numerous issued US patents, and US patent applications covering
various aspects of the Company's technology. For example, the Company has
several US patents covering the Company's ISF sampling technology as well as
covering design features of the Company's LifeGuide Key. In addition to its US
patent protection, the Company regularly seeks corresponding patent coverage in
other markets throughout the world. For example, the Company has issued patent
protection in numerous countries, including member states of the European Union
for the Company's ISF sampling technology.
The Company has implemented a strategy of pursuing patent applications
to provide both design freedom and protection from competitors. This strategy
includes evaluating and seeking patent protection covering the
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specific features of the Company's LifeGuide System as well as having the
breadth to cover features of competing alternatives.
The Company also relies upon trade secrets and proprietary know-how in
its manufacturing processes. The Company requires each of its employees,
consultants, advisors and certain of its vendors to execute a confidentiality
agreement upon the commencement of their relationship with the Company.
No assurance can be given that any additional patents will be issued,
that the scope of any patent protection granted to the Company will exclude
competitors or that any of the Company's patents will be held valid or
enforceable if subsequently challenged. Patenting medical devices involves
complex legal and factual questions, and there is no consistent policy regarding
the breadth of claims pertaining to such technologies. The Company also relies
upon unpatented trade secrets, and no assurance can be given that others will
not independently develop or otherwise acquire technologies substantially
equivalent to those of the Company. In addition, even if the patents the Company
has applied for are ultimately issued, others may hold or receive patents that
contain claims covering the products proposed to be sold by the Company and
which may delay or prevent the sale of the LifeGuide System or require licenses
resulting in the payment of fees or royalties by the Company in order for the
Company to carry on its business. There can be no assurance that needed or
potentially useful licenses will be available in the future on acceptable terms
or at all.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation could
result in substantial costs to and a diversion of effort by the Company, but may
be necessary to enforce any patents issued to the Company, protect trade secrets
or know-how owned by the Company, defend the Company against claimed
infringement of the rights of others or determine the scope and validity of the
proprietary rights of others. The Company is not currently a party to any patent
or other litigation. The Company routinely monitors patent issuance by others in
its industry. 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.
Competition
While the Company is not responsible for the commercialization or sales
of the LifeGuide System under the Development Agreement, the Company will be
directly affected by competition in that it will affect demand for the LifeGuide
Key it will manufacture. Under the Development Agreement, the Company is
required to exclusively use its ISF technology in the field of glucose
monitoring to support Amira's commercialization of the LifeGuide System. The
glucose monitoring industry is characterized by intense competition and is
currently dominated by several companies with established products and
distribution channels. There are currently four significant competitors in the
worldwide blood glucose monitoring market: LifeScan, Inc., a subsidiary of
Johnson & Johnson, Inc.; Roche Diagnostics; Bayer Diagnostics, a division of
Bayer AG; and Medisense, Inc. (a subsidiary of Abbott Laboratories).
Companies in the glucose monitoring market compete on the basis of
innovative technology, ease of use, price, product reliability and acceptance by
consumers and healthcare professionals. Price competition for the placement of
monitors in the glucose monitoring market is intense and involves marketing
tactics such as rebates, trade-in offers and volume purchase incentive programs.
If Amira is not able to offer the LifeGuide System at a competitive price, the
Company will not be required to supply as many LifeGuide Keys to Amira, and may
not be able to reach profitability.
A number of entities are conducting research on possible non-invasive
and minimally invasive methods of determining glucose levels. Specific
information regarding the precise progress of these companies with respect to
these alternative technologies has not generally been made public. Several
companies such as TheraSense and Abbott are planning to offer alternate site
blood glucose test systems in the near future. These companies' products will
compete directly with Amira's recently launched product, and may also affect the
success of the LifeGuide System.
There can be no assurance that competitors and potential competitors
will not succeed in developing or marketing technologies and products that will
be more accepted in the marketplace than the proposed LifeGuide System or that
would render the Company's technology and proposed products obsolete or
noncompetitive. Most of
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<PAGE>
Amira's competitors and potential competitors have substantially greater capital
resources, research and development staffs and facilities than the Company. In
addition, most of Amira'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.
Numerous researchers are also 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 LifeGuide System could be reduced or
eliminated.
Government Regulation
Government regulation in the United States and other countries is a
significant factor in the development of the LifeGuide System. The LifeGuide
System 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"), the FDA Modernization Act of 1997 (the
"FDAMA"), and certain associated regulations governing the development, testing,
manufacturing, labeling, marketing and distribution of medical devices as well
as the reporting of certain information regarding their safety. Sales of the
LifeGuide System outside the United States will also be subject to comparable
regulatory requirements.
FDA permission must be received to distribute a new medical device in
the United States and can be obtained in one of two ways. If a new or
significantly modified device is "substantially equivalent" to an existing
legally marketed device, the new device can be commercially introduced after
filing a 510(k) premarket notification with the FDA and the subsequent issuance
by the FDA of an order permitting commercial distribution. Changes to existing
devices that do not significantly affect safety of effectiveness of the device
may be made without an additional 510(k) notification.
The second path to market in the United States involves a more
comprehensive approval process known as a Premarket Approval ("PMA"). The PMA
applies to a new medical device that is not substantially equivalent to a
currently marketed device. First, in a PMA application, the Company must conduct
clinical trials in accordance with testing protocols approved by an
Institutional Review Board ("IRB") for the participating research institution
and the investigational device exemption regulations promulgated by the FDA.
Second, the Company must submit a PMA application that contains the clinical
trial results, and other information required under the FDC Act such as a full
description of the device and its components, a full description of the methods,
facilities and controls used for manufacturing and examples of proposed
labeling. Finally, the manufacturing site(s) for the medical device subject to
the PMA process must operate under Good Manufacturing Practices ("GMP") and pass
an FDA Pre-Approval Inspection before the product is approved.
A meeting was held with the FDA on March 21, 2000 in which the FDA
advised the Company that a PMA may be required for the LifeGuide System. The
Company has not yet determined whether it will pursue a 510(k) or a PMA.
The time required to obtain regulatory clearance or approval of the
LifeGuide System after filing is uncertain. There can be no assurance that
problems will not arise that may delay or ultimately prevent commercialization
of the Company's products or that the FDA will clear or approve the products.
Further, even if regulatory clearance or approval is obtained, such clearance or
approval may include significant limitations on the intended use under which the
individual product may be marketed. The FDA has granted the Company expedited
review of its LifeGuide System application in either 510(k) or PMA form.
Expedited review may shorten the time between submission of clinical trial data
and approval from the FDA to market the LifeGuide System.
The FDA may deny a clearance or approval if the applicable regulatory
criteria are not satisfied or may require additional clinical study testing. The
FDA may, upon review of the requested additional clinical data, ultimately
decide that the submission does not satisfy the regulatory criteria for
clearance or approval. Further, 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 associated regulations, it
has the power to 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
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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 current GMPs as implemented through the Quality System Regulations. The FDA
monitors compliance with these requirements by requiring manufacturers to
register with the FDA, subjecting manufacturers to periodic FDA inspections of
their manufacturing facilities. In order to ensure compliance with these
regulations, the Company will be required to expend time, resources and effort
in the areas of quality assurance and quality control. If violations of the
applicable regulations are noted during FDA inspections, the continued marketing
of any products manufactured by the Company may be adversely affected.
Employees
As of March 27, 2000, the Company had a total of 31 full-time employees
and two part-time employees. The Company also employed 3 persons on a temporary
or contract basis (full and part-time). Of this total work force, 14 persons
were engaged in research and development activities, 12 persons in manufacturing
development and 10 persons in administration. None of the Company's employees is
covered by a collective bargaining agreement. The Company believes that it
maintains good relations with its employees.
Executive Officers of the Registrant
The following sets forth certain information regarding the executive
officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
------------------------------ --- -------------------------------------------------
<S> <C> <C>
Susan L. Critzer.............. 44 President and Chief Executive Officer
Acting Chief Financial Officer, Director
Richard F. Mussmann........... 43 Executive Vice President, Chief Technical Officer
</TABLE>
Susan L. Critzer joined the Company in January 1995 as Vice President,
Operations and assumed the role of President and Chief Executive Officer and
acting Chief Financial Officer in April 1999. Before joining the Company, Ms.
Critzer spent six years with American Cyanamid Corporation's Davis and Geck
("D&G") Division, where she held a number of management positions. Most recently
at D&G, she was Director of Engineering for D&G's start-up endosurgery division,
where she was responsible for the commercialization of all new laparoscopic
products. From 1986 to 1989, Ms. Critzer was with Becton-Dickinson Corporation
where she held management positions in manufacturing engineering and quality
assurance and was involved in the high volume production of intravenous
catheters. Prior to her employment with Becton-Dickinson, Ms. Critzer held a
variety of management, information systems, quality assurance, and engineering
positions with General Motors Corporation. Ms. Critzer holds an MBA from the
University of Michigan, and a BSME from General Motors Institute. MS Critzer
also serves as an Adjunct Professor at the University of St. Thomas in St.Paul,
MN.
Richard F. Mussmann joined the Company in July 1997 as Vice President,
Research and Development and assumed the role of Executive Vice President, Chief
Technical Officer in April 1999. Before joining the Company, Mr. Mussmann served
as Product Management Vice President of Telogy Networks, an embedded
communications software company, where he was responsible for product definition
and planning, marketing programs, and key customer relations. From 1993 to 1995,
Mr. Mussmann was Group Director, New Product Development for Ethicon
Endo-Surgery, a developer and manufacturer of minimally-invasive surgical
instruments, where he was responsible for the successful development and launch
of ten new products. From 1989 to 1993, Mr. Mussmann served as Director of
Corporate Accounts and Research and Development Project Engineering Manager at
Boehringer Mannheim Corporation, where he led the development of several new
products, including the Accu-Chek Advantage(R) Blood Glucose Monitor. Mr.
Mussmann also held various engineering and engineering management
-11-
<PAGE>
positions while employed for 11 years at AT&T Bell Laboratories. He received his
Master's and Bachelor's degrees in electrical Engineering from Purdue
University.
Item 2. Properties
The Company currently leases approximately 42,000 square feet of space
at 2800 Patton Road, St. Paul, Minnesota. The lease expires on September 30,
2000. The Company believes its facilities will be adequate for its needs through
completion of the development of the LifeGuide System. A space improvement at
its existing location will be required to accommodate increased warehouse
requirements prior to commercial introduction once development of the
LifeGuide(TM) System is complete.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
-12-
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Integ Incorporated's common stock trades on The Nasdaq Stock Market(R)
under the symbol NTEG. The following table sets forth the high and low sale
prices per share for the Company's common stock as reported by The Nasdaq Stock
Market(R) for the quarterly periods indicated:
High Low
-------- --------
First Quarter 1998 $ 7.38 $ 3.25
Second Quarter 1998 $ 4.75 $ 2.13
Third Quarter 1998 $ 3.25 $ 0.50
Fourth Quarter 1998 $ 1.81 $ 0.59
First Quarter 1999 $ 1.63 $ 1.00
Second Quarter 1999 $ 3.00 $ 1.31
Third Quarter 1999 $ 2.13 $ 1.44
Fourth Quarter 1999 $ 2.63 $ 1.75
At March 20, 2000 the Company had 244 shareholders of record.
The Company has not declared or paid any cash dividends on its capital
stock since its inception. The Company currently intends to invest any earnings
in the development and expansion of its business and does not intend to pay
dividends in the foreseeable future. The payment of dividends, if any, in the
future will be at the discretion of the Board of Directors and will depend on
the Company's earnings, financial condition, capital requirements and other
relevant factors.
The net 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 in the approximate amounts set forth below:
Investment in short-term, interest bearing securities,
primarily investment grade commercial paper and
money market funds $ 2,927,000
Capital expenditures 2,403,000
Research and development and clinical and regulatory
preparation 10,575,000
Manufacturing scale-up and marketing activities 5,294,000
Working capital and other general corporate purposes 4,901,000
Total use of proceeds $ 26,100,000
Except for officer compensation and relocation payments totaling
$1,873,810 in the aggregate, director compensation totaling $266,500 in the
aggregate, and consulting fees paid to a director totaling $192,375, none of the
net proceeds from the Company's initial public offering 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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<PAGE>
Item 6. Selected Financial Data
The following selected financial data of the Company are qualified by
reference to and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and the Notes thereto included elsewhere herein. The statements of
operations data for the years ended December 31, 1997, 1998 and 1999 and for the
period from April 3, 1990 (inception) to December 31, 1999, and the balance
sheet data at December 31, 1998 and 1999 are derived from, and are qualified by
reference to, the audited financial statements included elsewhere in this report
and should be read in conjunction with those financial statements and notes
thereto. The statements of operations data for the years ended December 31, 1995
and 1996 and the balance sheet data at December 31, 1995, 1996 and 1997 are
derived from audited financial statements not included herein.
SELECTED STATEMENTS OF OPERATIONS DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
April 3,
1990
Year Ended December 31, (Inception)
to December
31,
--------------------------------------------------------------- --------------
1999 1998 1997 1996 1995 1999
--------------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating loss $ (7,503) $ (10,871) $ (12,462) $ (9,920) $ (5,281) $ (50,827)
Net loss $ (7,844) $ (11,086) $ (11,564) $ (9,083) $ (5,049) $ (49,369)
Net loss per share:
Basic and diluted $ (.81) $ (1.17) $ (1.24) $ 1.86 $ (11.65) $ (14.79)
Weighted average number of
common shares outstanding:
Basic and diluted 9,649 9,477 9,305 4,889 433 3,339
</TABLE>
SELECTED BALANCE SHEET DATA
(in thousands, except employee data)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current assets $ 3,218 $ 11,308 $ 21,914 $ 34,151 $ 15,860
Current liabilities 1,924 2,411 2,340 1,574 523
Working capital 1,294 8,897 19,574 32,577 15,337
Total assets 8,636 18,155 29,216 37,716 17,376
Long-term obligations 1,274 2,686 3,030 1,298 447
Shareholders' equity (deficiency) 5,438 13,058 23,846 34,844 16,405
Number of full time employees 28 26 79 63 45
</TABLE>
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 ISF sampling technology, the LifeGuide System will allow
people with diabetes to frequently self-monitor their glucose levels without
repeatedly enduring the pain of lancing their fingers to obtain a blood sample.
From inception through December 31, 1999, the Company has incurred losses
totaling $49.4 million, consisting of $23.9 million of research and development
expenses, $16.5 million of general and administrative expenses, net of interest
income and $9.0 million of manufacturing development expenses. 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.
Based on the results of a large-scale internal study, the Company announced
in August 1998 that it would be replacing the LifeGuide infrared measurement
system with an alternate proven measurement technology. As a result of this
decision, the Company restructured in August and reduced its workforce. In
connection with this restructuring, the Company recorded a one-time charge of
$689,000, all of which is attributable to costs incurred to reduce the workforce
Subsequent to the formation of an alliance with Amira, the Company created
a new operating plan and reporting structure, which represented the
responsibilities outlined in the alliance agreement. The effective date of the
plan was June 1999.
In accordance with the strategic alliance agreement with Amira, the Company
has been and is projected to continue to, receive reimbursement for certain
expenses related to the development of the LifeGuide System. The average monthly
reimbursement has been and is projected to be, approximately $70,000.
The Company's success is entirely dependent upon the strategic alliance
with Amira, Amira's success with their AtLast launch and 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 LifeGuide System must deliver performance that is
acceptable to the Company, its strategic partner Amira, the FDA and the users of
the product.
Results of Operations
General: The Company's net loss totaled $7.8 million during 1999 from $11.1
million during 1998 and $11.6 million during 1997. The Company expects net
losses to continue for the next several years.
Research and development expenses: Research and development expenses
decreased to $2.3 million during 1999 from $5.5 million in 1998 and $5.3 million
from 1997. The decrease in research and development expense in 1999 was
primarily due to decreases in staffing costs ($628,000), allocated pilot plant
costs ($665,000), contractor and consulting expenses ($960,000), prototype
expense ($376,000), the allocation of expenses to Amira ($226,000), decreased
severance expense ($188,000), depreciation expense ($75,000) and other expenses
($120,000) which were partially offset by increased legal expenses ($56,000),
allocated facility expenses ($46,000) and increased travel expenses ($17,000).
The increase in research and development expense in 1998 when compared to 1997
is primarily attributable to increases in the amount of pilot plant costs
allocated to research and development ($665,000) and a one-time charge for the
workforce reduction ($188,000), which were partially offset by decreased
staffing costs ($220,000), prototype expenses ($346,000), employee relocation
costs ($107,000), and lab supply expenses ($60,000).
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<PAGE>
Manufacturing development expenses: Manufacturing development expenses
decreased to $1.9 million during 1999 from $2.2 million in 1997 and $2.5 million
in 1997. The decrease in manufacturing development expenses during 1999 is
primarily attributable to decreased staffing costs ($132,000), prototype
expenses ($398,000), the allocation of expenses to Amira ($279,000), decreased
depreciation expense ($62,000), employee training expenses ($31,000), Travel
($39,000), allocated facility expenses ($38,000) and a decrease in other
expenses of ($85,000). These decreases were partially offset by decreased
allocated pilot plant costs to research and development ($665,000) and increased
prototype tooling/test fixtures $(99,000). The decrease in manufacturing
development expenses during 1998 is primarily attributable to decreased staffing
costs ($208,000), the allocation of pilot plant costs to research and
development ($665,000) and decreases in prototype tooling expenses ($108,000),
travel expenses ($93,000) and the occupancy allocation ($66,000), which were
partially offset by increases in depreciation expense ($347,000), samples and
prototype expenses ($364,000) and a one-time charge for workforce reduction
($78,000).
General and administrative expenses (In accordance with the terms of the
strategic alliance with Amira, the Company no longer incurs expenses categorized
previously as clinical and regulatory and sales and marketing. For presentation
purposes, these expenses have been reclassified as general and administrative.)
General and administrative expenses increased to $3.3 million during 1999 from
$3.2 million in 1998 and $4.7 million in 1997. The increase in general and
administrative expenses in 1999 is primarily attributable to an increase in
consulting expenses ($1.1 million) and a one-time write-off due to obsolescence
of capital equipment ($384,000). This was partially offset by decreases in
staffing costs ($1.1 million), travel ($103,000), facility allocations to Amira
and sub-lessee ($136,000) and miscellaneous expenses ($45,000). The decrease in
general and administrative expenses in 1998 is primarily attributable to
decreased staffing costs ($482,000) and a special charge in 1997 for the
resignation of the Company's President and Chief Executive Officer effective in
1998 ($654,000), which were partially offset by increases in legal and audit
expenses ($100,000), recruitment expenses ($51,000) as well as the one-time
charge for workforce reduction ($28,000). The decrease in 1998 is also due to
(previously classified as clinical and regulatory expenses) decreased staffing
costs ($133,000), recruitment costs ($55,000), travel costs ($33,000), clinical
studies expenses ($28,000) and consulting expenses ($9,000), which were
partially offset by the one-time charge for workforce reduction ($222,000). The
decrease in 1998 is also due to (previously classified as sales and marketing
expenses) decreased staffing costs ($297,000), advertising and promotion
expenses ($97,000), website development expense ($55,000), consulting expenses
($33,000), product development expenses ($35,000) and travel expenses ($17,000),
which were partially offset by a one-time charge for the workforce reduction
($173,000).
Interest income: Interest income decreased to $342,000 during 1999 from
$890,000 in 1998 and $1.6 million during 1997. The decrease in 1999 and 1998 is
a direct result of lower average balances of cash and cash equivalents.
Interest expense: Interest expense decreased to $682,000 during 1999
compared to $1.2 million in 1998 and $684,000 in 1997. The decrease in interest
expense in 1999 is attributable to payments made on long-term debt and capital
leases. The increase in interest expense during 1998 is attributable to
increased borrowings under the equipment loan agreement.
Other income (expense): Other expense totaled $1,000 in 1999. Other income
totaled $98,000 in 1998, which 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 borrowings under an equipment loan agreement totaling $5.5
million. As of December 31, 1999 the Company had cash and cash equivalents of
$3.0 million and working capital of $1.3 million.
The equipment loan agreement contains covenants that place restrictions on
sales of assets, transactions with affiliates, creation of additional debt, and
other customary covenants. Borrowings under the equipment loan agreement are
collateralized by a large part of the Company's assets.
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<PAGE>
Financing activities in 1998 and 1997 consisted of the incurrance of
long-term debt. The Company had a $12.5 million equipment loan agreement which
expired on December 31, 1998. The company borrowed a total of $5.5 million under
the agreement. Borrowings under the equipment loan agreement mature at various
times between April 2000 and May 2002, with interest rates ranging from 10.15%
to 10.90%. There were no debt financing activities in 1999.
On February 16, 2000, the Company entered into a preferred stock agreement
with Amira which is intended to provide up to $5.6 million in funding to Integ
for the continued development of the LifeGuide System through the year 2000.
Sales of preferred stock to Amira only occur after the Company's cash balance
has declined to $1.5 million and the Company will then only sell preferred stock
to Amira from time to time in amounts sufficient for it to meet its expense
incurred in connection with the Company's 2000 budget. Commencing in April 2000,
the Company will be dependent upon sales of stock to Amira to meet its operating
expenses.
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.
The Company's future liquidity and capital requirements will depend on
numerous factors, including when or if the performance of the LifeGuide System
meets the required performance specifications, the ability of the Company to
successfully maintain its strategic alliance with Amira, the ability and desire
of Amira to provide additional funding, the extent to which the Company's
LifeGuide System gains market acceptance, the timing of regulatory actions
regarding the LifeGuide System, and the results of clinical trials and
competition. See Exhibit 99.1 to this Form 10-K for a more detailed description
of the factors that may affect the Company's future liquidity and capital
requirements.
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 spent approximately $15,000 to resolve Year 2000 issues, all of
which were funded through operations. The Company incurred no major Year 2000
technical issues.
Item 7A. 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.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements and notes thereto are included on
pages F-1 to F-25 of this report. See Index to Financial Statements at page F
for a listing of the financial information filed with this report.
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<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the heading "Election of Directors" in
the Proxy Statement is incorporated by reference. Information with respect to
the Company's executive officers is provided under the heading "Executive
Officers of the Registrant" in Part I, Item 1.
Item 11. Executive Compensation
The information contained under the headings "Compensation of
Directors" and "Executive Compensation" in the Proxy Statement is incorporated
by reference, except that the information set forth under the caption "Report of
Compensation Committee on Executive Compensation" and the "Comparative Stock
Performance" graph are not incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Principal Shareholders" in
the Proxy Statement is incorporated by reference.
Item 13. Certain Relationships and Related Transactions
The information contained under the heading "Certain Transactions" in
the Proxy Statement is incorporated by reference.
Part IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedules, and
Reports on Form 8-K
(a) Exhibits, Financial Statements and Financial Statement Schedules
1. Financial Statements
The Company's financial statements are attached hereto beginning
at page F-1. See Index to Financial Statements at page F-1.
2. Financial Statement Schedules
All financial statement schedules are omitted since the required
information is not represented or is not present in amounts sufficient
to require submission of such schedules, or because the information
required is included in the financial statements and notes thereto.
3. Exhibits
Exhibit
Number Description
------ -----------
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)).
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<PAGE>
3.2 Amended Bylaws of the Company (incorporated by reference
to Exhibit 3.3 to the Company's Registration Statement
on Form S-1 (SEC File No. 333-4352)).
4.1 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)).
4.2 Certificate of Designation for Series B Preferred Stock
(incorporated by reference to Exhibit 3.1 to the
Company's Report on Form 8-K, dated February 15, 2000
(SEC File No. 0-28420)).
4.3 Form of Stock Warrant for Shares of Common Stock
(incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-1 (SEC File
No. 333-4352)).
4.4 Form of Stock Warrant for Shares of Series
D Convertible Preferred Stock (incorporated by reference
to Exhibit 4.3 to the Company's Registration Statement
on Form S-1 (SEC File No. 333-4352)).
4.5 Form of Purchase Warrant for Shares of
Series E-2 Convertible Preferred Stock (incorporated by
reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-4352)).
4.6 Warrant to Purchase Shares of Common Stock, dated March
27, 1996, to Venture Lending & Leasing, Inc.
(incorporated by reference to Exhibit 4.5 to the
Company's Registration Statement on Form S-1 (SEC File
No. 333-4352)).
4.7 Registration Rights Provisions applicable to shares of
Preferred Stock (which were automatically converted into
Common Stock upon the closing of the Company's initial
public offering on July 1, 1996) (incorporated by
reference to Exhibit 4.6 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-4352)).
4.8 Rights Agreement, dated November 26, 1996,
between the Company and Norwest Bank Minnesota, N.A., as
Rights Agent (incorporated by reference to Exhibit 1 to
the Company's Registration Statement on Form 8-A, dated
December 6, 1996 (SEC file number 0-28420)).
4.9 Amendment No. 1 to Rights Agreement, dated February 15,
2000, between the Company and Norwest Bank Minnesota,
N.A., as Rights Agent (incorporated by reference to
Exhibit 4.2 to the Company's report on Form 8-K, dated
February 15, 2000 (SEC file number 0-28420)).
10.1 Real Property Lease Agreement dated June
14, 1994 between the Company and Commers-Klodt III, and
Amendment thereto dated November 6, 1995 (incorporated
by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (SEC File No.
333-4352)).
10.2 Equipment Sublease Agreement dated August 15, 1992,
between the Company and FIM, Inc. (incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-4352)).
10.3 Equipment Sublease Agreement dated July 14, 1994,
between the Company and FIM II, Inc. (incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-4352)).
10.4 Loan Agreement dated March 27, 1996, between the Company
and Venture Lending & Leasing, Inc. (incorporated by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-4352)).
-19-
<PAGE>
10.5 Amendment dated August 7, 1997 to the Loan
Agreement dated March 27, 1996, between the Company and
Venture Lending & Leasing, Inc. (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June
30, 1997 (SEC file number 0-28420)).
10.6 *1990 Incentive and Stock Option Plan, including form of
option agreement (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-1
(SEC File No. 333-4352)).
10.7 *1991 Incentive and Stock Option Plan, including form of
option agreement (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report Form 10-Q for the
fiscal quarter ended September 30, 1998 (SEC File No.
0-28420)).
10.8 *1994 Long-Term Incentive and Stock Option Plan (as
revised and restated) (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1998
(SEC File No. 0-28420)).
10.9 *Form of option agreement under 1994
Long-Term Incentive and Stock Option Plan (incorporated
by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (SEC File No.
333-4352)).
10.10 *1996 Directors' Stock Option Plan (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended
September 30, 1998 (SEC File No. 0-28420)).
10.11 *Form of Option agreements under 1996 Directors' Stock
Option Plan.
10.12 Form of Stock Option from the Company to Medical
Innovation Fund (for options granted outside of the
Stock Option Plans) (incorporated by reference to
Exhibit 10.10 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-4352)).
10.13 *Consulting Agreement dated March 14, 1997 between the
Company and Mark B. Knudson (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1997
(SEC file number 0-28420)).
10.14 Separation Agreement dated February 2, 1998 between the
Company and Frank A. Solomon (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report Form
10-Q for the fiscal quarter ended March 31, 1998 (SEC
File No. 0-28420)).
10.15 *Form of Employment Agreement dated April 1998 between
the Company and its Vice Presidents (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June
30, 1998 (SEC File No. 0-28420)), (Exhibit I previously
incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-1 (SEC File
No. 333-4352)).
10.16 Separation Agreement and General Release between Katia
P. Breslawec and the Company (incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30,
1998 (SEC File No. 0-28420)).
10.17 Series B Preferred Stock Purchase Agreement, dated as of
February 15, 2000 by and between the Company and Amira
Medical (incorporated by reference to Exhibit 4.1 to the
Company's Report on Form 8-K, dated February 15, 2000
(SEC File No. 0-28420)).
10.18 Sub-lease Agreement, dated July 8, 1999, by and between
the Company and Venuri Group LLC (incorporated by
reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999 (SEC File No. 0-28420)).
-20-
<PAGE>
10.19 License and Development Agreement, dated April 2, 1999,
by and between Amira Medical. and the Company
(incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K, dated April 2,
1999 (SEC File No. 0-28420)).
10.20 Option Agreement, dated April 2, 1999, by and between
Amira Medical and the Company (incorporated by reference
to Exhibit 10.2 of the Company's Current Report on Form
8-K, dated April 2, 1999 (SEC File No. 0-28420)).
23 Consent of Ernst & Young LLP
24 Powers of Attorney
27 Financial Data Schedules
99.1 Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform
Act of 1995
- ----------------------
* Denotes management contracts and compensatory plans, contracts, and
arrangements.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
fourth quarter of 1999.
-21-
<PAGE>
Signature
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 17, 2000 INTEG INCORPORATED
By: /s/ Susan L. Critzer
--------------------------------------
Susan L. Critzer
President and Chief Executive Officer
Acting Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 17, 2000.
<TABLE>
<S> <C> <C>
/s/ Susan L. Critzer President and Chief Executive Officer March 17, 2000
- ------------------------------------ Acting Chief Financial Officer
Susan L. Critzer
*
- ------------------------------------
Mark B. Knudson, Ph.D. Director March 17, 2000
*
- ------------------------------------
Frank B. Bennett Director March 17, 2000
*
- ------------------------------------
Robert S. Nickoloff Director March 17, 2000
*
- ------------------------------------
Walter L. Sembrowich, Ph.D. Director March 17, 2000
*
- ------------------------------------
Winston R. Wallin Director March 17, 2000
*By: /s/ Susan L. Critzer
- ------------------------------------
Susan L. Critzer
Attorney-in-Fact
</TABLE>
-22-
<PAGE>
Integ Incorporated
Index to Financial Statements
-----------------------------
Page Number
-----------
Report of Independent Auditors F-1
Balance Sheets as at December 31, 1999 and December 31, 1998 F-2
Statements of Operations for the Years Ended December 31, F-3
1999, 1998 and 1997 and for the period from April 3, 1990
(inception) to December 31, 1999
Statements of Shareholders' Equity from April 3, 1990 F-4 to F-9
(inception) to December 31, 1999
Statements of Cash Flows for the Years Ended December 31, F-10 to F-11
1999, 1998 and 1997 and for the period from April 3, 1990
(inception) to December 31, 1999
Notes to Financial Statements F-12 to F-27
F-1
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP]
Report of Independent Auditors
Board of Directors
Integ Incorporated
We have audited the accompanying balance sheets of Integ Incorporated (a
development stage company) as of December 31, 1999 and 1998 and the related
statements of operations, changes in shareholders' equity (deficiency) and cash
flows for each of the three years in the period ended December 31, 1999, and for
the period from April 3, 1990 (inception) to December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Integ Incorporated at December
31, 1999 and 1998 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999, and for the period
from April 3, 1990 (inception) to December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
February 17, 2000
F-2
<PAGE>
Integ Incorporated
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
December 31
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,953,270 $ 11,175,695
Prepaid expenses 82,755 132,229
Accounts receivable - related party 181,669 --
----------------------------
Total current assets 3,217,694 11,307,924
----------------------------
Furniture and equipment 8,498,173 9,538,478
Less accumulated depreciation (3,088,449) (2,715,684)
----------------------------
5,409,724 6,822,794
Other assets 8,579 23,883
----------------------------
Total assets $ 8,635,997 $ 18,154,601
============================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 18,334 $ 195,148
Accrued employee compensation and related expenses 436,570 726,077
Other accrued expenses 56,969 92,356
Current portion of capital lease obligations 14,178 145,761
Current portion of long-term debt 1,398,098 1,251,247
----------------------------
Total current liabilities 1,924,149 2,410,589
----------------------------
Long-term liabilities:
Capital lease obligations, less current portion -- 14,178
Long-term debt, less current portion 1,273,920 2,672,018
----------------------------
Total long-term liabilities 1,273,920 2,686,196
----------------------------
Shareholders' equity:
Common Stock, par value $.01 per share:
Authorized shares - 20,000,000
Issued and outstanding shares - 9,728,624 in 1999 and
9,580,704 in 1998 97,286 95,807
Additional paid-in capital 54,786,327 54,616,721
Deficit accumulated during the development stage (49,368,631) (41,524,253)
----------------------------
5,514,982 13,188,275
Deferred compensation (77,054) (130,459)
----------------------------
Total shareholders' equity 5,437,928 13,057,816
----------------------------
Total liabilities and shareholders' equity $ 8,635,997 $ 18,154,601
============================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
Period from
April 3, 1990
Year ended December 31 (Inception) to
---------------------------------------------- December 31,
1999 1998 1997 1999
---------------------------------------------- -------------
<S> <C> <C> <C> <C>
Operating expenses:
Research and development $ 2,336,761 $ 5,455,999 $ 5,318,900 $ 23,878,909
Manufacturing development 1,880,521 2,171,087 2,513,224 9,048,797
General and administrative 3,285,948 3,243,901 4,629,534 17,899,257
---------------------------------------------- -------------
7,503,230 10,870,987 12,461,658 50,826,963
---------------------------------------------- -------------
Operating loss (7,503,230) (10,870,987) (12,461,658) (50,826,963)
Other income (expense):
Interest income 342,006 890,120 1,564,190 4,771,004
Interest expense (682,135) (1,203,218) (684,001) (3,183,933)
Other (1,019) 98,180 17,078 (128,739)
---------------------------------------------- -------------
(341,148) (214,918) 897,267 1,458,332
---------------------------------------------- -------------
Net loss for the period and deficit
accumulated during development stage $ (7,844,378) $(11,085,905) $(11,564,391) $(49,368,631)
============================================== =============
Net loss per share
Basic and diluted $ (.81) $ (1.17) $ (1.24) $ (14.79)
============================================== =============
Weighted average number of common
shares outstanding
Basic and diluted 9,649,424 9,477,390 9,305,332 3,338,724
============================================== =============
</TABLE>
See accompanying notes.
F-4
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (Deficiency)
<TABLE>
<CAPTION>
Convertible Preferred Common Stock
------------------------------------------------
Shares Amount Shares Amount
------------------------------------------------
<S> <C> <C> <C> <C>
Founders' Common Stock issued during April
1990 at $.015 per share -- $ -- 250,000 $ 2,500
Net loss for the period -- -- -- --
------------------------------------------------
Balance at December 31, 1990 -- -- 250,000 2,500
Net loss for the year -- -- -- --
------------------------------------------------
Balance at December 31, 1991 -- -- 250,000 2,500
Net loss for the year -- -- -- --
------------------------------------------------
Balance at December 31, 1992 -- -- 250,000 2,500
Net loss for the year -- -- -- --
------------------------------------------------
Balance at December 31, 1993 -- -- 250,000 2,500
Deferred compensation related to restricted
stock grant -- -- 183,333 1,833
Net loss for the year -- -- -- --
------------------------------------------------
Balance at December 31, 1994 (carried forward) -- -- 433,333 4,333
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-In Development Deferred
Capital Stage Compensation Total
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Founders' Common Stock issued during April
1990 at $.015 per share $ 1,250 $ -- $ -- $ 3,750
Net loss for the period -- (290,900) -- (290,900)
-----------------------------------------------------------
Balance at December 31, 1990 1,250 (290,900) -- (287,150)
Net loss for the year -- (622,016) -- (622,016)
-----------------------------------------------------------
Balance at December 31, 1991 1,250 (912,916) -- (909,166)
Net loss for the year -- (653,934) -- (653,934)
-----------------------------------------------------------
Balance at December 31, 1992 1,250 (1,566,850) -- (1,563,100)
Net loss for the year -- (682,725) -- (682,725)
-----------------------------------------------------------
Balance at December 31, 1993 1,250 (2,249,575) -- (2,245,825)
Deferred compensation related to restricted
stock grant 149,417 -- (151,250) --
Net loss for the year -- (2,492,220) -- (2,492,220)
-----------------------------------------------------------
Balance at December 31, 1994 (carried forward) 150,667 (4,741,795) (151,250) (4,738,045)
</TABLE>
F-5
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (Deficiency) (continued)
<TABLE>
<CAPTION>
Convertible Preferred Common Stock
-----------------------------------------------
Shares Amount Shares Amount
----------- ------------ ------- --------
Balance at December 31, 1994 (brought forward) -- $ -- 433,333 $ 4,333
Previously issued redeemable convertible
preferred stock; all shareholders agreed to
cancel their respective redemption privileges
during June 1995:
Series A Convertible Preferred, authorized
928,571 shares, liquidating preference of
$.56 per share, sold during April and
November 1990 928,571 9,286 -- --
Series B Convertible Preferred, authorized
800,000 shares, liquidating preference of
$1.00 per share, sold during May 1991 800,000 8,000 -- --
Series C Convertible Preferred, authorized
356,000 shares, liquidating preference of
$2.50 per share, sold during January 1992
to May 1993 346,000 3,460 -- --
Series D Convertible Preferred, authorized
1,209,731 shares, liquidating preference of
$2.75 per share, less offering expenses of
$7,245, sold during February and May 1994 1,074,372 10,743 -- --
Series E Convertible Preferred Class 1,
authorized 5,879,655, liquidating preference
of $4.00 per share, less offering expenses of
$1,861,168, sold during June 1995 5,604,655 56,047 -- --
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-In Development Deferred
Capital Stage Compensation Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 (brought forward) $ 150,667 $ (4,741,795) $ (151,250) $ (4,738,045)
Previously issued redeemable convertible
preferred stock; all shareholders agreed to
cancel their respective redemption privileges
during June 1995:
Series A Convertible Preferred, authorized
928,571 shares, liquidating preference of
$.56 per share, sold during April and
November 1990 510,714 -- -- 520,000
Series B Convertible Preferred, authorized
800,000 shares, liquidating preference of
$1.00 per share, sold during May 1991 792,000 -- -- 800,000
Series C Convertible Preferred, authorized
356,000 shares, liquidating preference of
$2.50 per share, sold during January 1992
to May 1993 861,540 -- -- 865,000
Series D Convertible Preferred, authorized
1,209,731 shares, liquidating preference of
$2.75 per share, less offering expenses of
$7,245, sold during February and May 1994 2,936,534 -- -- 2,947,277
Series E Convertible Preferred Class 1,
authorized 5,879,655, liquidating preference
of $4.00 per share, less offering expenses of
$1,861,168, sold during June 1995 20,501,405 -- -- 20,557,452
</TABLE>
F-6
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (Deficiency) (continued)
<TABLE>
<CAPTION>
Convertible Preferred Common Stock
----------------------------------------------------
Shares Amount Shares Amount
----------------------------------------------------
<S> <C> <C> <C> <C>
Value of warrants to purchase Preferred Stock
issued in connection with bridge loan -- $ -- -- $ --
financing --
Value of stock options to purchase Common Stock
issued for consulting services -- -- -- --
Value of options and warrants to purchase Common
Stock issued in connection with guarantee of
leases -- -- -- --
Value related to the extension of the exercise
period of certain stock options previously
granted to individuals -- -- -- --
Deferred compensation related to stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss for the year -- -- -- --
----------------------------------------------------
Balance at December 31, 1995 (carried forward) 8,753,598 87,536 433,333 4,333
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-In Development Deferred
Capital Stage Compensation Total
------------------------------------------------------------
<S> <C> <C> <C> <C>
Value of warrants to purchase Preferred Stock
issued in connection with bridge loan $ 179,800 $ -- $ -- $ 179,800
financing
Value of stock options to purchase Common Stock
issued for consulting services 24,000 -- -- 24,000
Value of options and warrants to purchase Common
Stock issued in connection with guarantee of
leases 104,841 -- -- 104,841
Value related to the extension of the exercise
period of certain stock options previously
granted to individuals 6,750 -- -- 6,750
Deferred compensation related to stock options 960,208 -- (960,208) --
Amortization of deferred compensation -- -- 187,106 187,106
Net loss for the year -- (5,048,730) -- (5,048,730)
------------------------------------------------------------
Balance at December 31, 1995 (carried forward) 27,028,459 (9,790,525) (924,352) 16,405,451
</TABLE>
F-7
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (Deficiency) (continued)
<TABLE>
<CAPTION>
Convertible Preferred Common Stock
---------------------------------------------------------
Shares Amount Shares Amount
---------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 (brought forward) 8,753,598 $ 87,536 433,333 $ 4,333
Value of warrants to purchase Common Stock
issued in connection with equipment loan
agreement -- -- -- --
Shares issued in connection with initial public
offering less offering expenses of $2,375,706 -- -- 3,000,000 30,000
Conversion of preferred stock (8,753,598) (87,536) 5,835,705 58,357
Shares issued pursuant to exercise of stock
options -- -- 6,666 67
Deferred compensation related to stock options -- -- -- --
Value of options granted to purchase Common
Stock issued for consulting services -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss for the year -- -- -- --
---------------------------------------------------------
Balance at December 31, 1996 (carried forward) -- -- 9,275,704 92,757
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-In Development Deferred
Capital Stage Compensation Total
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 (brought forward) $ 27,028,459 $ (9,790,525) $ (924,352) $ 16,405,451
Value of warrants to purchase Common Stock
issued in connection with equipment loan
agreement 874,416 -- -- 874,416
Shares issued in connection with initial public
offering less offering expenses of $2,375,706 26,094,294 -- -- 26,124,294
Conversion of preferred stock 29,179 -- -- --
Shares issued pursuant to exercise of stock
options 7,056 -- -- 7,123
Deferred compensation related to stock options 56,329 -- (56,329) --
Value of options granted to purchase Common
Stock issued for consulting services 179,600 -- (179,600) --
Amortization of deferred compensation -- -- 515,939 515,939
Net loss for the year -- (9,083,432) -- (9,083,432)
-----------------------------------------------------------
Balance at December 31, 1996 (carried forward) 54,269,333 (18,873,957) (644,342) 34,843,791
</TABLE>
F-8
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (Deficiency) (continued)
<TABLE>
<CAPTION>
Convertible Preferred Common Stock
---------------------------------------------------
Shares Amount Shares Amount
---------------------------------------------------
Balance at December 31, 1996 (brought forward) -- $ -- 9,275,704 $ 92,757
Shares issued pursuant to employee stock
purchase plan and exercise of stock options -- -- 69,154 692
Shares issued pursuant to exercise of warrants,
net of 9,303 redeemed -- -- 21,808 218
Amortization of deferred compensation -- -- -- --
Deferred compensation adjustment for
cancellation of stock options -- -- -- --
Value related to the acceleration of vesting and
extension of the exercise period of certain
stock options previously granted to an
officer and director -- -- -- --
Net loss for the year -- -- -- --
---------------------------------------------------
Balance at December 31, 1997 (carried forward) -- -- 9,366,666 93,667
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-In Development Deferred
Capital Stage Compensation Total
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 (brought forward) $ 54,269,333 $(18,873,957) $ (644,342) $ 34,843,791
Shares issued pursuant to employee stock
purchase plan and exercise of stock options 111,624 -- -- 112,316
Shares issued pursuant to exercise of warrants,
net of 9,303 redeemed 66,444 -- -- 66,662
Amortization of deferred compensation -- -- 294,484 294,484
Deferred compensation adjustment for
cancellation of stock options (22,062) -- 22,062 --
Value related to the acceleration of vesting and
extension of the exercise period of certain
stock options previously granted to an
officer and director 93,332 -- -- 93,332
Net loss for the year -- (11,564,391) -- (11,564,391)
------------------------------------------------------------
Balance at December 31, 1997 (carried forward) 54,518,671 (30,438,348) (327,796) 23,846,194
</TABLE>
F-9
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (Deficiency) (continued)
<TABLE>
<CAPTION>
Convertible Preferred Common Stock
---------------------------------------------------
Shares Amount Shares Amount
---------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 (brought forward) -- $ -- 9,366,666 $ 93,667
Shares issued pursuant to employee stock
purchase plan and exercise of stock options -- -- 211,351 2,113
Shares issued pursuant to exercise of warrants,
net of 6,201 redeemed -- -- 2,687 27
Amortization of deferred compensation -- -- -- --
Deferred compensation adjustment for
cancellation of stock options -- -- -- --
Net loss for the year -- -- --
---------------------------------------------------
Balance at December 31, 1998 -- -- 9,580,704 95,807
Shares issued pursuant to employee stock
purchase plan and exercise of stock options -- -- 72,006 720
Shares issued in lieu of employee compensation -- -- 75,914 759
Value of options to purchase common stock issued
for consulting services -- -- -- --
Amortization of deferred compensation -- -- -- --
Deferred compensation adjustment for
cancellation of stock options -- -- -- --
Net loss for the year -- -- --
---------------------------------------------------
Balance at December 31, 1999 -- $ -- 9,728,624 $ 97,286
===================================================
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-In Development Deferred
Capital Stage Compensation Total
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 (brought forward) $ 54,518,671 $(30,438,348) $ (327,796) $ 23,846,194
Shares issued pursuant to employee stock
purchase plan and exercise of stock options 237,648 -- (35,425) 204,336
Shares issued pursuant to exercise of warrants,
net of 6,201 redeemed (27) -- -- --
Amortization of deferred compensation -- -- 93,191 93,191
Deferred compensation adjustment for
cancellation of stock options (139,571) -- 139,571 --
Net loss for the year -- (11,085,905) -- (11,085,905)
-------------------------------------------------------------
Balance at December 31, 1998 54,616,721 (41,524,253) (130,459) 13,057,816
Shares issued pursuant to employee stock
purchase plan and exercise of stock options 79,187 -- -- 79,907
Shares issued in lieu of employee compensation 94,134 -- -- 94,893
Value of options to purchase common stock issued
for consulting services 4,920 -- (4,920) --
Amortization of deferred compensation -- -- 49,690 49,690
Deferred compensation adjustment for
cancellation of stock options (8,635) -- 8,635 --
Net loss for the year -- (7,844,378) -- (7,844,378)
----------------------------------------------------------------
Balance at December 31, 1999 $ 54,786,327 $(49,368,631) $ (77,054) $ 5,437,928
================================================================
</TABLE>
See accompanying notes.
F-10
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
April 3, 1990
Year ended December 31 (Inception) to
--------------------------------------------- December 31,
1999 1998 1997 1999
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss $ (7,844,378) $(11,085,905) $(11,564,391) $(49,368,631)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 1,056,723 1,072,299 824,348 3,809,238
Deferred compensation amortization 49,690 93,191 294,484 1,140,410
Amortization of loan commitment fee -- -- 77,463 250,074
Impairment of fixed assets 384,160 -- -- 384,160
(Gain) loss on sale of equipment and
deposit write-off (1,029) -- 27,436 94,616
Value of options, warrants and stock
related to debt financing, lease
guarantee, extension of options,
compensation and consulting services 94,893 -- 116,334 466,029
Changes in operating assets and
liabilities:
Receivables (181,669) -- 84,425 (210,498)
Prepaid expenses and other assets 64,778 462,532 (7,213) 297,303
Accounts payable and accrued expenses (501,708) (370,970) 148,203 511,873
--------------------------------------------------------------
Net cash used in operating activities (6,878,540) (9,828,853) (9,998,911) (42,625,426)
--------------------------------------------------------------
Investing activities:
Purchase of furniture and equipment (78,169) (1,075,312) (4,756,243) (8,948,196)
Proceeds from sale of furniture and
equipment 51,385 1,111 3,750 99,325
--------------------------------------------------------------
Net cash used in investing activities (26,784) (1,074,201) (4,752,493) (8,848,871)
--------------------------------------------------------------
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
-- 1,138,293 2,995,879 5,486,446
Payments on long-term debt (1,251,247) (885,002) (383,533) (2,667,112)
Payments on capital lease obligations (145,761) (155,635) (142,771) (679,887)
Proceeds from sale of Common Stock 79,907 204,336 178,978 26,598,388
--------------------------------------------------------------
Net cash (used in) provided by financing
activities (1,317,101) 301,992 2,648,553 54,427,567
--------------------------------------------------------------
(Decrease) increase in cash and cash
equivalents (8,222,425) (10,601,062) (12,102,851) 2,953,270
Cash and cash equivalents at beginning of
period 11,175,695 21,776,757 33,879,608 --
--------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,953,270 $ 11,175,695 $ 21,776,757 $ 2,953,270
==============================================================
</TABLE>
F-11
<PAGE>
Integ Incorporated
(A Development Stage Company)
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Period from
April 3, 1990
Year ended December 31 (Inception) to
--------------------------------- December 31,
1999 1998 1997 1999
--------------------------------- --------------
<S> <C> <C> <C> <C>
Supplemental disclosure of cash flow
information
Fixed assets capitalized under capital
lease and loan agreements $ -- $ -- $ 11,182 $ 141,442
The Company converted $2,900,000 of debt
into Series E Convertible Preferred Stock. $ -- $ -- $ -- $ 2,900,000
</TABLE>
See accompanying notes.
F-12
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements
December 31, 1999
1. Description of Business
Integ Incorporated was formed in April 1990 and is a development stage company
engaged in the development of a hand-held glucose monitoring product for use by
people with diabetes that avoids the pain and blood associated with conventional
"finger stick" technology. Utilizing the Company's proprietary interstitial
fluid sampling technology, the LifeGuide System will allow people with diabetes
to frequently monitor their glucose levels without repeatedly enduring the pain
of lancing their fingers to obtain a blood sample.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of
three months or less when purchased to be cash equivalents. At December 31, 1999
and 1998, the Company's cost of investments in marketable securities and
government securities, respectively, approximated market value, with no
resulting unrealized gains and losses recognized. The cash equivalents are
considered available-for-sale.
Furniture and Equipment
Furniture and equipment are recorded at cost and depreciated primarily on a
straight-line basis over estimated useful lives of three to five years.
Income Taxes
The Company accounts for income taxes under the liability method. Deferred
income taxes are provided for temporary differences between the financial
reporting and tax bases of assets and liabilities.
Stock Compensation Plans
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
F-13
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
The Company follows the disclosure only provisions of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123").
Accordingly, the Company has made pro forma disclosures of what net loss and
loss per share would have been had the provisions of Statement 123 been applied
to the Company's stock options.
Net Loss Per Share
Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding during the periods presented. Diluted loss per share
is the same as basic loss because the effect of all options and warrants is
anti-dilutive.
Automatic Conversion of Preferred Stock
Upon the closing of the initial public offering on July 1, 1996, all outstanding
shares of convertible preferred stock were automatically converted into an
aggregate of 5,835,705 shares of common stock.
Reclassifications
Certain amounts in the 1997 and 1998 financial statements have been reclassified
to conform with the 1999 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-14
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
3. Capital and Operating Leases
The Company leases its office facility and certain office equipment under
operating leases. Rent expense of $400,958, $377,485 and $432,686 was recorded
for noncancelable operating leases and sub-leases for the years ended December
31, 1999, 1998 and 1997, respectively. Future minimum lease commitments for
operating leases with remaining terms in excess of one year, excluding executory
costs such as real estate taxes, insurance and maintenance expense, are payable
as follows:
Year ending December 31:
2000 $301,865
2001 2,694
2002 1,347
--------------
$305,906
==============
The Company leases certain furniture and laboratory and office equipment under
other leases which are accounted for as capital leases for financial statement
purposes. The cost of furniture and equipment in the accompanying balance sheets
includes the following amounts under capital leases:
December 31
1999 1998
------------------------------
Cost $665,499 $ 665,499
Less accumulated amortization (660,432) (575,436)
------------------------------
$ 5,067 $ 90,063
==============================
F-15
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
3. Capital and Operating Leases (continued)
Future minimum lease payments required under capital leases together with the
present value of the net future minimum lease payments at December 31, 1999 are
as follows:
Year ending December 31:
2000 $ 14,178
----------
Total minimum lease payments 14,178
Less amount representing interest -
----------
Present value of net minimum payments 14,178
Less current portion (14,178)
----------
Capital lease obligations, net of current portion $ -
==========
F-16
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
4. Long-Term Debt
During 1996, the Company entered into an equipment loan agreement which provided
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 $-0- and
$1,138,293 in 1999 and 1998, respectively, under this agreement.
<TABLE>
<CAPTION>
December 31
1999 1998
---------------------------------
<S> <C> <C>
10.65% note payable for equipment loan, due in monthly installments
of $26,495 through February 2000, and $138,962 due April 2000 $ 164,051 $ 430,881
10.65% note payable for equipment loan, due in monthly installments
of $12,082 through November 2000, and $63,879 due January 2001 168,001 268,585
10.65% note payable for equipment loan, due in monthly installments
of $49,636 through February 2001, and $262,439 due April 2001 793,497 1,196,551
10.90% note payable for equipment loan, due in monthly installments
of $35,507 through August 2001, and $186,943 due October 2001 714,700 974,044
10.20% note payable for equipment loan, due in monthly installments of
$21,510 through January 2002, $35,507 due February 2002, and
$113,248 due April 2002 527,597 670,756
10.15% note payable for equipment loan, due in monthly installments
of $11,443 through May 2002, and $60,976.71 due July 2002 304,172 382,448
---------------------------------
2,672,018 3,923,265
Less current portion (1,398,098) (1,251,247)
---------------------------------
Long-term debt, net of current portion $1,273,920 $2,672,018
=================================
</TABLE>
Aggregate maturities of long-term are as follows:
2000 $1,398,098
2001 1,025,633
2002 248,287
------------
$2,672,018
============
F-17
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
5. License and Development Agreement
On April 2, 1999, the Company entered into a License and Development Agreement
("License Agreement") with Amira Medical ("Amira"). Under the License Agreement,
the companies have formed a strategic alliance to jointly develop a new
generation of home glucose monitoring tests utilizing interstitial fluid
("ISF"). Products to be developed will combine the Company's ISF collection
technology with Amira's glucose measurement technologies. Both the Company and
Amira will contribute resources to the development of the product, which will be
manufactured by the Company and commercialized by Amira. As part of each party's
contribution to the development process, each party shall independently bear the
costs and contribute the resources necessary for the development activities for
which each party is responsible. In the event Integ exhausts its resources,
Amira will lend Integ minimum funding required to retain listing on one of
NASDAQ's markets. Any such loan will be unsecured. (See Note 12 for further
developments related to this agreement.)
In connection with the License Agreement, the Company and Amira entered into an
Option Agreement dated as of April 2, 1999, pursuant to which Amira granted to
the Company, an option, exercisable at a future date, to merge under certain
circumstances with a wholly-owned, newly formed subsidiary of Amira for a total
consideration of 2 million shares of Amira common stock and $20 million cash,
subject to certain conditions. The Option Agreement was entered into as a
condition and inducement to the Company's and Amira's willingness to enter into
the License Agreement.
6. Redeemable Convertible Preferred Stock and Preferred Stock
Series A, B, C, D and E Convertible Preferred Shares issued in 1995 were
automatically converted three shares of preferred into two shares of common
stock upon the closing of the public offering of the Company's securities on
July 1, 1996.
F-18
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
7. Reverse Stock Split
On April 24, 1996, the Board of Directors approved a reverse stock split of
2-for-3 for the Company's common stock. Accordingly, all share, per share,
weighted average share, and stock option information was restated to reflect the
split. The reverse stock split impacted the conversion prices of the preferred
stock and the numbers of shares of common stock into which the preferred stock
would convert but had no effect upon the numbers of preferred stock warrants and
shares of preferred stock issued and outstanding. Accordingly, all preferred
stock and preferred stock price amounts have not been adjusted for the reverse
stock split.
8. Stock Options and Warrants
Stock Options and Restricted Stock Grant
The Company has 1990, 1991 and 1994 stock option plans which provide for the
issuance of incentive and nonqualified stock options and restricted stock grants
to employees and consultants. Under the plans, the exercise price of options
granted is determined by the Company's Board of Directors, but incentive stock
options must be granted at exercise prices greater than or equal to the fair
market value of the Company's stock as of the grant date. A total of 3,213,333
shares of the Company's common stock have been reserved for issuance under all
three plans as of December 31, 1999.
During 1998, the Company repriced all outstanding employee options and those
held by consultants who were actively engaged in consulting activities as of
September 22, 1998 to an exercise price of $.81 per share. The Company valued
the repricing of the consultant options at $35,425 and is recognizing the
expense over the vesting period of the options.
F-19
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
8. Stock Options and Warrants (continued)
Options outstanding were granted as follows:
<TABLE>
<CAPTION>
Shares Plan Non-Plan Weighted Average
Available Options Options Exercise
for Grant Outstanding Outstanding Price Per Share
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 863,556 1,159,778 42,993 $4.66
Granted at market price (618,625) 618,625 - 6.26
Exercised - (47,953) - 0.84
Canceled 15,483 (15,483) - 3.01
-----------------------------------------------------
Balance at December 31, 1997 260,414 1,714,967 42,993 5.34
Shares reserved 1,000,000 - - -
Granted at market price (922,012) 922,012 - 1.54
Exercised - (166,923) - 0.98
Canceled 922,504 (922,504) - 5.93
-----------------------------------------------------
Balance at December 31, 1998 1,260,906 1,547,552 42,993 3.06
Granted at market price (677,240) 677,240 - 1.71
Exercised - (89,330) - 0.13
Canceled 112,224 (112,224) - 2.20
-----------------------------------------------------
Balance at December 31, 1999 695,890 2,023,238 42,993 $2.89
=====================================================
</TABLE>
F-20
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
8. Stock Options and Warrants (continued)
The following table summarizes information about the stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.00 - $ 2.99 1,606,649 7.89 years $1.30 619,922 $ .92
3.00 - 8.99 140,750 3.72 years 5.42 119,707 5.36
9.00 - 11.00 318,832 3.50 years 9.77 280,749 9.78
------------------- --------------------
2,066,231 6.90 years $2.89 1,020,378 $3.88
=================== ====================
</TABLE>
During 1991 and 1993, the Company granted options outside the plans to purchase
42,993 shares of the Company's common stock at $.83 per share to Medical
Innovation Fund ("MIF"), a significant shareholder of the Company (see Note 11).
Options outstanding expire at various dates during the period from October 2000
through December 2009. The number of options exercisable as of December 31,
1999, 1998 and 1997 was 1,020,378, 703,093 and 710,982, respectively, at
weighted average prices of $3.88, $3.00 and $3.92 per share, respectively.
The weighted average grant date fair value of options granted at market prices
during the years ended December 31, 1999, 1998 and 1997 was $1.93, $1.43 and
$4.92 per share, respectively. The weighted average grant date fair value of
options granted below market prices during the years ended December 31, 1995 and
1996 was $4.01 and $6.93 per share, respectively.
F-21
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
8. Stock Options and Warrants (continued)
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, if the exercise price of the Company's employee
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net loss per share is required by Statement 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of Statement 123. The fair value for these
options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for 1999, 1998 and
1997: risk free interest rates of 5.60%, 5.31% and 6.33%, respectively; no
dividend yield; volatility factor of the expected market price of the Company's
common stock of .560, 1.047 and .656, respectively; and a weighted-average life
of the option of 10 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
F-22
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
8. Stock Options and Warrants (continued)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
1999 1998 1997
---------------------------------------------
Pro forma net loss $(8,530,183) $(12,151,311) $(13,535,200)
Pro forma net loss per common
share-basic and diluted $(.88) $(1.28) $(1.45)
The pro forma effect on net loss for 1997, 1998 and 1999 is not representative
of the pro forma effect on net loss in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to 1995.
During 1995 and 1996, options were granted to purchase a total of 433,710 shares
of the Company's common stock at exercise prices below the current market price.
The Company recognized $960,208 and $56,329 during the years ended 1995 and
1996, respectively, as deferred compensation for the excess of the deemed value
of the underlying common stock over the aggregate exercise price of such
options. The deferred compensation is amortized ratably over the vesting period
of the options. For the years ended 1996, 1997 and 1998, $477,076, $314,096 and
$225,365, respectively, was expensed.
During 1996, the Company granted 30,000 options to certain advisors of the
Company. In accordance with FASB 123, the Company recognized $179,600 as
deferred compensation. The deferred compensation is amortized ratably over the
vesting period of the options. In 1996, 1997 and 1998, $65,279, $87,835 and
$26,486 was charged to expense, respectively.
F-23
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
8. Stock Options and Warrants (continued)
Unamortized deferred compensation at December 31, 1999 is related to the other
options granted for services and is expected to be charged to operations as
follows:
2000 $23,071
2001 15,220
2002 12,840
2003 9,193
2004 9,193
Thereafter 7,537
----------
$77,054
==========
Warrants
In connection with the sale of Series C Convertible Preferred Stock during 1992
and 1993, the Company issued warrants to the holders for the purchase of 46,665
shares (including warrants for 13,333 shares issued to MIF (see Note 11), and
warrants for 17,778 shares issued to Artesian Capital Limited Partnership) of
its common stock exercisable immediately at a price of $3.75 per share. These
MIF and Artesian Capital Limited Partnership warrants were exercised in 1997,
and 8,888 of the remaining warrants were exercised and 6,666 expired at various
dates during the period from January 1998 through May 1998. During May 1994, the
Company issued warrants which expired during May 1999 to a
consultant/stockholder for the purchase of 6,666 shares of common stock
exercisable immediately at a price of $4.13 per share. The value of these
warrants was determined to be $24,000, based on the value of the services
received, and was expensed. In addition, during March and December of 1994 and
June 1995, the Company issued warrants for the purchase of 159,042 shares of
Series D Convertible Preferred Stock (convertible into 106,027 shares of common
stock at $4.13 per share) to MIF II, exercisable immediately at $2.75 per share
(see Note 11). Warrants for the purchase of 27,273 shares expired during
February 1999, warrants for the purchase of 108,085 shares expire during
December 2004, and warrants for the purchase of 23,684 shares expire during June
2005.
F-24
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
8. Stock Options and Warrants (continued)
In connection with the bridge loan arrangement during January 1995, the Company
issued warrants to investors for the purchase of 429,630 shares of Series E
Convertible Preferred Stock, Class 2, at $3.375 per share (convertible into
286,414 shares of common stock at $5.06 per share). These warrants expire in
January 2005. The value of these warrants was determined to be $179,800 based on
the difference between the stated interest rate and the Company's estimated
effective borrowing rate for the term of the notes and was expensed as
additional interest expense during 1995.
In consideration of the equipment loan agreement discussed in Note 4, the
Company has agreed to issue warrants for the purchase of common stock equal to
8.8% of the total dollar value of the credit line available under the agreement.
The value of these warrants was determined to be $874,416 and was expensed over
the term of the loan agreement. Each warrant is exercisable initially at $6.00
per share or, subsequent to any equity financing, at 80% of the per share price
of each subsequent financing, if such occurs. Warrants for the purchase of
18,318, 34,689 and 94,390 shares of common stock were issued in 1996, 1997 and
1998, respectively. The weighted average exercise price of these warrants was
$7.45. These warrants expire in December 2003.
9. Employee Stock Purchase Plan
The 1997 Employee Stock Purchase Plan (the Purchase Plan), as approved by the
shareholders on June 4, 1997, is a qualified plan pursuant to Internal Revenue
Code Section 423. The Purchase Plan allows eligible employees an opportunity to
purchase an aggregate of 300,000 shares of the Company's common stock through a
series of annual offerings for each calendar year (except for the initial
purchase period of the Purchase Plan which was for a six month period beginning
July 1, 1997). Payroll deductions between 1% and 10% of an employee's eligible
compensation may be used to purchase stock at a price per share equal to 85% of
the lesser of the fair market value of the Company's common stock at the
beginning or end of each purchase period. Under terms of the Purchase Plan, no
participant may acquire more than 10,000 shares of the Company's common stock or
more than $10,000 in aggregate fair market value of common stock (as determined
at the beginning of each purchase period) during any purchase period. Common
shares sold to employees under the Purchase Plan in 1998 and 1999 totaled 44,428
and 58,590, respectively.
F-25
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
10. Income Taxes
The Company has incurred net operating losses since inception. As of December
31, 1999, the Company had net operating losses (NOL) and research and
development tax credit carryforwards of approximately $17,203,000 and
$1,079,000, respectively, available to offset its future income tax liability.
The NOL and tax credit carryforwards begin to expire in the year 2005. No
benefit has been recorded for such loss carryforwards, and utilization in future
years may be limited, if significant ownership changes have occurred.
Components of deferred tax assets at December 31 are as follows:
December 31
1999 1998
--------------------------------
Net operating loss and credit carryforward $ 7,444,000 $ 6,530,000
Start-up costs 11,284,000 9,025,000
Valuation allowance (18,728,000) (15,555,000)
--------------------------------
Net deferred tax assets $ -- $ --
================================
11. Related Party Transactions
Laboratory and office furniture and equipment used by the Company with an
original cost of approximately $801,000 as of December 31, 1998 and 1999 are
leased under sublease arrangements with FIM, Inc. and FIM II, Inc., both
entities related to the Company through MIF and MIF II, which are significant
shareholders of the Company. These leases are accounted for as capital leases
for financial statement purposes. In addition, MIF and MIF II have guaranteed
future lease payments, of which approximately $12,760 is payable as of December
31, 1999. In consideration of such guarantee by MIF, the Company issued
nonqualified options to MIF for the purchase of 42,993 shares of common stock
exercisable immediately at a price of $.83 per share. Options for 30,523 shares
expire during May 2001 and options for 12,470 shares expire during April 2003.
The value of these options was determined to be $20,878 based on the difference
between the stated interest rate and the Company's estimated effective
F-26
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
11. Related Party Transactions (continued)
borrowing rate for the term of the lease and was fully amortized by December 31,
1998. In consideration of such guarantee by MIF II, the Company issued warrants
to MIF II for the purchase of 131,769 shares of Series D Convertible Preferred
Stock exercisable immediately at a price of $2.75 per share which are
convertible into 87,845 shares of common stock at $4.13 per share. These
warrants expire during the period from December 2004 through June 2005. The
value of these warrants was determined to be $83,962 based on the difference
between the stated interest rate and the Company's estimated effective borrowing
rate for the term of the lease. Approximately $15,304, $18,267 and $22,689 was
charged to interest expense during the years ended December 31, 1999, 1998 and
1997, respectively, and the remainder will be amortized over the term of the
lease.
In consideration of the bridge loan arrangement during January 1995 discussed in
Note 8, the Company issued to MIF II warrants for the purchase of 222,222 shares
of Series E Convertible Preferred Stock, Class 2, exercisable immediately at a
price of $3.375 per share and convertible into 148,148 shares of common stock at
$5.06 per share. The value of these warrants was determined to be $93,000 of the
$179,800 total discussed in Note 8. These warrants expire during January 2005.
From inception through December 31, 1995, the Company made payments under
consulting agreements with two directors, one of which is a limited partner of
MIF's general partner, and one shareholder. In 1995, the total expense under
these agreements was $129,000. In 1997, 1998 and 1999, the Company made payments
under a consulting agreement with a director who is a limited partner of MIF's
general partner totaling $81,000 per year.
Beginning in September 1999, the Company subleased office space and provided
certain administrative services to a company whose principals include several
directors and shareholders. Total sublease rental received in 1999 was
approximately $66,000.
F-27
<PAGE>
Integ Incorporated
(A Development Stage Company)
Notes to Financial Statements (continued)
12. Subsequent Event
On February 16, 2000, the Company and Amira entered into a preferred stock
purchase agreement which is intended to provide funding to Integ at its current
operational level for the continued development of the LifeGuide System through
2000. Under the agreement, Amira will provide Integ with up to $5,600,000 in
funding through the purchase of Integ Series B Preferred Stock. Should the
Company exercise its option to merge with Amira in the future, the Series B
Preferred Stock will not participate in the merger considerations. As part of
the agreement, the Company will hold $1,500,000 of its existing cash in reserve.
F-28
<PAGE>
Integ Incorporated
Index of Exhibits
-----------------
Annual Report on Form 10-K
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ ----------- ------
<S> <C> <C>
23 Consent of Ernst & Young LLP Filed Electronically
24 Powers of Attorney Filed Electronically
27 Financial Data Schedules Filed Electronically
99.1 Cautionary Statement for Purposes of the "Safe Harbor" Filed Electronically
Provisions of the Private Securities Litigation Reform
Act of 1995
</TABLE>
<PAGE>
Exhibit 23
----------
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-08617) pertaining to the Integ Incorporated 1990 Incentive and Stock
Option Plan, the 1991 Incentive and Stock Option Plan, and the 1996 Directors'
Stock Option Plan, Registration Statement (Form S-8 No. 333-66225) pertaining to
the 1994 Long-Term Incentive and Stock Option Plan, and Registration Statement
(Form S-8 No. 333-42921) pertaining to the 1997 Employee Stock Purchase Plan of
our report dated February 17, 2000, with respect to the financial statements of
Integ Incorporated, included in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 27, 2000
<PAGE>
Exhibit 24
----------
Powers of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Susan L. Critzer as his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of Integ Incorporated for the
fiscal year ended December 31, 1999 and all amendments to such Annual Report on
Form 10-K, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute, may lawfully do or cause to be done by virtue hereof.
Signatures Position Date
- --------------------------------------------------------------------------------
/s/ Mark B. Knudson, Ph.D
- -------------------------------
Mark B. Knudson,Ph.D Chairman of the Board March 17, 2000
/s/ Frank B. Bennett
- -------------------------------
Frank B. Bennett Director March 17, 2000
/s/ Robert S. Nickoloff
- -------------------------------
Robert S. Nickoloff Director March 17, 2000
/s/ Walter L. Sembrowich, Ph.D
- -------------------------------
Walter L. Sembrowich, Ph.D Director March 17, 2000
/s/ Winston R. Wallin
- -------------------------------
Winston R. Wallin Director March 17, 2000
<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 TWELVE MONTHS ENDED DECEMBER
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,953,270
<SECURITIES> 0
<RECEIVABLES> 0
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<INVENTORY> 0
<CURRENT-ASSETS> 3,217,694
<PP&E> 8,498,173
<DEPRECIATION> 3,088,449
<TOTAL-ASSETS> 8,635,997
<CURRENT-LIABILITIES> 1,924,149
<BONDS> 1,273,920
0
0
<COMMON> 97,286
<OTHER-SE> 5,340,642
<TOTAL-LIABILITY-AND-EQUITY> 8,635,997
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,503,230
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 682,135
<INCOME-PRETAX> (7,844,378)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,844,378)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (7,844,378)
<EPS-BASIC> ($.81)
<EPS-DILUTED> ($.81)
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<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 Strategic Alliance and
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. Under the terms of the strategic alliance, the
Company and Amira are jointly responsible for the development of the LifeGuide
System. The Company and Amira submitted clinical protocols to the FDA for review
and the FDA requested modifications to the protocol submitted. Prior to
initiating clinical trials, the Company expects to conduct additional
pre-clinical trials to confirm the protocol additions and to verify system
performance and intended use. The studies, in addition to a decision to evaluate
additional product changes before clinical trials to improve user features will
delay initiation of clinical trials beyond second quarter 2000. 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.
Dependence on Amira for Continued Funding; 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 December 31, 1999, the
Company had an accumulated deficit of $49.4 million. Net losses for the years
ended December 31, 1997, 1998 and 1999 were approximately $11,564,000,
$11,086,000 and $7,844,000, respectively, and the Company expects such losses to
continue through 2000 and to increase at least through the end of 1999. In
February 2000, the Company announced that Amira agreed to provide funding of up
to $5.6 million through purchases of Series B Preferred Stock for continued
LifeGuide System development during the year 2000. Commencing April 2000, the
Company will be dependent upon sales of Series B Preferred Stock to Amira to
meet its operating expenses. The Company will receive a fixed percentage of
profit over its costs up to a certain cap in producing the LifeGuide Key, which
is not based upon the price that the LifeGuide System may sell at. In
consideration of entering into the strategic alliance with Amira, the Company
received an option to require Amira to acquire the Company upon the occurrence
of certain circumstances. In the event that the Company is not able to exercise
the option, there would be a material adverse effect on the Company's results of
operations, business and financial condition.
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<PAGE>
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. Amira will also fund
any additional equipment and tooling required to produce the LifeGuide System.
It is unlikely that the Company will be able to sell a sufficient number of
LifeGuide Keys to Amira to meet its operating expense or to attain
profitability.
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.
Limited Clinical Testing Experience; Uncertainty of Obtaining FDA Clearance or
Approval
Testing of the LifeGuide System has been performed on prototypes solely
by Company and Amira personnel under controlled circumstances. The FDA has
informed the Company and Amira that a Premarket Approval application (PMA) is
the most likely submission which will be required to permit commercialization of
the LifeGuide System in the United States. Under the strategic alliance, Amira
is responsible for obtaining FDA approval. There can be no assurance that the
Company and Amira 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. Amira has limited 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.
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<PAGE>
Lack of Manufacturing Capability; Dependence on Suppliers
The Company's LifeGuide System is still in development. To be
successful, LifeGuide System must be manufactured 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 Amira 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. Under the terms of the strategic alliance, if the Company were to
breach the Development Agreement, it will be deemed to have granted to Amira an
exclusive license to all of the Company's technology relating to ISF developed
after the date of the strategic alliance and a coexclusive license to the
Company's tehnology relating to ISF developed prior to the date of the strategic
alliance. 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.
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 LifeGuide Key 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
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<PAGE>
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 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.
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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