<PAGE>
Total Number of Pages: 12
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1996,
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________
Commission file number 0-26208
================================================================================
KERAVISION, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0328942
(State of Incorporation) (I.R.S. Employer
Identification No.)
48630 MILMONT DRIVE
FREMONT, CA 94538
(Address of principal executive offices)
(510) 353-3000
(Registrant's telephone number)
================================================================================
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of November 1, 1996, there were 12,428,351 shares of Common Stock
outstanding.
<PAGE>
INDEX
-----
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Balance Sheets as of September 30, 1996
and December 31, 1995...................................... 3
Condensed Statements of Operations for the
three months and nine months ended September 30, 1996
and 1995................................................... 4
Condensed Statements of Cash Flows for the
nine months ended September 30, 1996 and 1995.............. 5
Notes to Condensed Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 9
Item 2. Changes in Securities...................................... 9
Item 3. Defaults upon Senior Securities............................ 9
Item 4. Submission of Matters to a Vote of Security Holders........ 9
Item 5. Other Items................................................ 9
Item 6. Exhibits and Reports on Form 8-K........................... 9
SIGNATURES................................................................... 10
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
KERAVISION, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
(Unaudited) (Note 1)
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 8,054 $ 44,703
Short-term investments................. 27,709 --
Prepaid expenses...................... 597 272
-------- --------
Total current assets.................... 36,360 44,975
Property and equipment, at cost:
Manufacturing and laboratory equipment 2,151 1,596
Office furniture and fixtures......... 430 362
Leasehold improvements................ 252 214
-------- --------
2,833 2,172
Accumulated depreciation and
amortization........................... (1,559) (1,298)
-------- --------
Net property and equipment............ 1,274 874
Other assets............................ 135 70
-------- --------
Total assets............................ $ 37,769 $ 45,919
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 602 $ 445
Accrued payroll and related expenses.. 363 124
Accrued clinical trial costs.......... 965 779
Other accrued liabilities............. 218 316
Current portion of capital lease
obligations.......................... 106 106
-------- --------
Total current liabilities............... 2,254 1,770
Capital lease obligations............... 41 114
Commitments
Stockholders' equity:
Preferred stock....................... -- --
Common stock.......................... 12 12
Additional paid-in capital............ 75,987 75,710
Deferred compensation................. (365) (477)
Deficit accumulated during the (39,353) (30,403)
development stage....................
Notes receivable from stockholders.... (807) (807)
-------- --------
Total stockholders' equity.............. 35,474 44,035
-------- --------
Total liabilities and total
stockholders' equity................... $ 37,769 $ 45,919
</TABLE> ======== ========
See accompanying notes.
-3-
<PAGE>
KERAVISION, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands except per share data; unaudited)
<TABLE>
<CAPTION>
Period from
November 6, 1986
THREE MONTHS NINE MONTHS (Date of
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, Incorporation) to
------------------- --------------------- September 30,
1996 1995 1996 1995 1996
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development............. $ 2,984 $ 1,615 $ 8,013 $ 4,634 $ 34,041
General and administrative........... 1,013 436 2,536 1,175 9,449
------- ------- -------- ------- --------
Loss from operations.................... (3,997) (2,051) (10,549) (5,809) (43,490)
Interest income, net.................... 536 413 1,630 552 4,415
Other income (expense).................. -- 3 -- (57) (171)
------- ------- -------- ------- --------
Net Loss................................ $(3,461) $(1,635) $ (8,919) $(5,314) $(39,246)
======= ======= ======== ======= ========
Net loss per share...................... $ (0.28) $ (0.72)
======= ========
Shares used in calculation of net loss
per share.............................. 12,357 12,312
Pro forma net loss per share............ $(0.15) $ (0.58)
======= ======
Shares used in calculation of pro forma
net loss per share..................... 11,014 9,198
</TABLE>
See accompanying notes.
-4-
<PAGE>
KERAVISION, INC.
CONDENSED STATEMENT OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS NINE MONTHS NOVEMBER 6, 1986
ENDED ENDED (DATE OF INCORPORATION)
SEPTEMBER 30, SEPTEMBER 30, TO SEPTEMBER 30,
1996 1995 1996
-------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss................................................. $ (8,919) $(5,314) $(39,246)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.......................... 261 232 1,755
Interest receivable on stockholders' notes............. -- -- (145)
Amortization of deferred compensation.................. 112 136 652
Loss on sales of securities and other.................. -- 60 244
Prepaid expenses....................................... (325) (391) (597)
Accounts payable....................................... 157 310 602
Accrued liabilities.................................... 327 795 1,546
-------- ------- --------
Total adjustments.................................... 532 1,142 4,057
-------- ------- --------
Net cash used in operating activities................ (8,387) (4,172) (35,189)
-------- ------- --------
Cash flows from investing activities:
Purchases of short-term investments...................... (36,886) (2,970) (47,740)
Sales of short-term investments.......................... 9,146 3,671 15,836
Maturities of short-term investments..................... -- 3,990 3,990
Capital expenditures..................................... (661) (70) (2,610)
Other assets............................................. (65) 15 (289)
-------- ------- --------
Net cash provided by (used in) investing
activities.......................................... (28,466) 4,636 (30,813)
-------- ------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations....... (73) (72) (383)
Proceeds from sales-leaseback of capital equipment....... -- -- 271
Proceeds from issuance of equity securities,
net of repurchases..................................... 277 45,167 72,418
Proceeds from issuance of notes payable.................. -- -- 1,750
-------- ------- --------
Net cash provided by (used in) financing activities.. 204 45,095 74,056
-------- ------- --------
Net increase (decrease) in cash and cash equivalents...... (36,649) 45,559 8,054
Cash and cash equivalents at the beginning of the period.. 44,703 1,247 --
-------- ------- --------
Cash and cash equivalents at the end of the period........ $ 8,054 $46,806 $ 8,054
======== ======= ========
</TABLE>
See accompanying notes.
-5-
<PAGE>
KERAVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of KeraVision, Inc.
(the "Company" or "KeraVision"), a development stage company, have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. The balance sheet as of September 30, 1996, the statements of
cash flows for the nine-month periods ended September 30, 1996 and 1995 and the
statements of operations for the three-and nine-month periods ended September
30, 1996 and 1995 are unaudited but include all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such date and the operating results
and cash flows for those periods. Although the Company believes that the
disclosures in these financial statements are adequate to make the information
presented not misleading, certain information normally included in financial
statements and related footnotes prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The accompanying
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's annual report to stockholders and
Form 10-K for the year ended December 31, 1995. The accompanying condensed
balance sheet at December 31, 1995 is derived from audited financial statements
at that date.
Results for any interim period are not necessarily indicative of results for
any other interim period or for the entire year.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted-average number of shares of
common stock outstanding during the periods presented. Common equivalent shares
are excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent shares (stock options, warrants, convertible notes
and preferred stock) issued during the 12-month period prior to the Company's
initial public offering have been included in the calculation as if they were
outstanding for all periods through July 31, 1995 using the treasury stock
method for stock options and warrants and the if-converted method for
convertible preferred stock. Historical net loss per share calculated on this
basis is $0.18 for the three months and $1.05 for the nine months ended
September 30, 1995. Pro forma net loss per share for the three-and nine-months
ended September 30, 1995, has been computed as described above and also gives
effect to the conversion of redeemable convertible preferred shares not included
above that automatically converted into common shares upon completion of the
Company's initial public offering (using the if-converted method) from the
original date of issuance.
3. SHORT-TERM INVESTMENTS
The Company's short-term investments at September 30, 1996, classified as
available-for-sale securities, were composed of the following (in thousands):
Estimated Fair
Value
--------------
U.S. Government Obligations $14,167
Corporate Debt Securities 9,042
Municipal Investments 4,500
========
$27,709
All short-term investments mature within one year. Gross realized and
unrealized gains/losses were not significant during the three and nine month
periods ended September 30, 1996 and 1995.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I -- Item 1 of this
Quarterly Report and the audited financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report and Form 10-K for the year
ended December 31, 1995.
OVERVIEW
Since its founding in November 1986, the Company has been engaged in the
research and development of the Intrastromal Corneal Ring (the "KeraVision
Ring") and related technology. The Company has generated no revenues from the
sales of products and therefore has been unprofitable since inception and is
considered to be a development stage company. For the period from incorporation
to September 30, 1996, KeraVision has incurred cumulative net losses of $39.2
million. The Company does not expect to generate significant revenues in either
1996 or 1997 and expects to continue to incur substantial losses through at
least the year ending December 31, 1997. Furthermore, the Company expects its
expenses in all categories to increase as its clinical and other activities
increase.
The research, manufacture, sale and distribution of medical devices such as
the KeraVision Ring are subject to numerous regulations imposed by governmental
authorities, principally the FDA and corresponding state and foreign agencies.
The regulatory process is lengthy, expensive and uncertain. Prior to commercial
sale in the United States, most medical devices, including the Company's
KeraVision Ring, must be cleared or approved by the FDA. Securing FDA approvals
and clearances will require the submission to the FDA of extensive clinical data
and supporting information. Current FDA enforcement policy strictly prohibits
the marketing of medical devices for uses other than those for which the product
has been approved or cleared. Product approvals and clearances can be withdrawn
for failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial marketing. Foreign governments also have review
processes for medical devices which present many of the same risks.
The Company has recently received FDA approval to initiate a Phase III
clinical trial of its KeraVision Ring. Currently, the Company is conducting
Phase II clinical trials. The Company does not believe it will be able to
complete development of, obtain regulatory approval for and begin commercial
sales of the KeraVision Ring in Europe before late 1996 or early 1997, or in the
United States before late 1999, if ever. There can be no assurance that the
Company's research and development efforts will be successfully completed, and
until the development and testing processes for the KeraVision Ring are
complete, there can be no assurance that the KeraVision Ring will perform in the
manner anticipated. There can be no assurance that the KeraVision Ring will
prove to be safe or effective over the long term in correcting vision, that the
product will be approved for marketing by the FDA or any other government agency
or that the KeraVision Ring or any other product developed by the Company will
be commercially successful, will be successfully marketed or achieve market
acceptance. There can be no assurance that the Company will ever achieve either
significant revenues from sales of the KeraVision Ring or any other potential
products or ever achieve profitable operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Research and development expenses, which include clinical and regulatory
expenses, for the three-month period ended September 30, 1996 were $3.0 million,
an increase of $1.4 million from the three-month period ended September 30,
1995. The increase is attributable to increased activities related to clinical
trials, additional staffing and continued investments in research and
development. Management expects research and development expenses to continue
to increase, as clinical trials continue in Europe and the United States.
General and administrative expenses of $1.0 million were incurred in the
three-month period ended September 30, 1996, an increase of $0.6 million from
the $0.4 million incurred in the comparable prior year period. The increase was
primarily the result of increased expenses associated with marketing efforts,
preparation for future European commercialization and hiring of personnel.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
RESULTS OF OPERATIONS (CONTINUED)
The Company recorded $0.5 million of net interest income for the three months
ended September 30, 1996, as compared to $0.4 million for the previous year.
Interest income increased due to the short-term investment of net proceeds from
the Company's initial public offering completed on August 2, 1995. The net loss
of $3.5 million for the three-month period ended September 30, 1996, increased
$1.8 million from the $1.6 million reported in the comparable prior year period.
The Company believes that its net loss will significantly increase in future
periods.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Research and development expenses for the nine-month period ended September
30, 1996 were $8.0 million, an increase of $3.4 million from the comparable
nine-month period in the prior year. This 73% increase was due to higher
expenses related to clinical trials, additional staffing and continued
investments in research and development. Research and development expenses
represent 76% of the loss from operations of $10.5 million in the nine-month
period ended September 30, 1996 and 80% of the loss from operations of $5.8
million for the prior-year period.
General and administrative expenses for the nine-month periods ended September
30, 1996 and 1995 were $2.5 million and $1.2 million, respectively. Consistent
with the three-month comparison, the increase in general and administrative
expenses is primarily the result of increased marketing efforts relating to the
preparation for potential future European commercialization and the hiring of
personnel.
The Company recorded $1.6 million of net interest income for the nine-month
period ended September 30, 1996, as compared to $0.6 million for the same period
in 1995. Interest income increased due to the short-term investment of proceeds
from the initial public offering completed on August 2, 1995. The net loss for
the nine-month period ended September 30, 1996 was $8.9 million, an increase of
$3.6 million over the loss of $5.3 million in the same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since incorporation primarily through
its initial public offering, private sales of preferred stock and interest
income. The Company completed an initial public offering on August 2, 1995,
from which it realized net proceeds (after underwriting discounts and expenses)
of $44.4 million. Through June 30, 1995 the Company had raised approximately
$29.5 million from the sale of preferred stock, related warrants and common
stock. The Company's capital equipment expenditures have aggregated since
inception to $2.6 million through September 30, 1996. Cash used to fund
operating activities since incorporation is $35.2 million. Cash used in
operating activities for the first nine months of 1996 has increased to $8.4
million from $4.2 million in the same period of the prior year, reflecting
increasing net losses principally related to increased research and development
expenditures. Cash, cash equivalents and short-term investments were $35.8
million at September 30, 1996.
In September 1996, the Company entered into a $2 million lease line. There
were no borrowings under this lease line during the quarter.
The Company expects to continue to incur substantial expenses in support of
additional research and development activities, including costs of clinical
studies, production costs, the establishment of a sales and marketing
organization and the support for ongoing administrative activities. The Company
anticipates that the existing cash, cash equivalents and short-term investments
will enable it to maintain its current and planned operations through 1997.
The Company's cash requirements may vary materially from those now planned
because of results of research, development, and clinical testing, establishment
of relationships with strategic partners, changes in focus and direction of the
Company's research and development programs, changes in the scale, timing, or
cost of the Company's manufacturing facility, competitive and technological
advances, the FDA or other regulatory processes, changes in the Company's
marketing and distribution strategy, and other factors. The
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Company may need to raise additional funds in the form of equity or debt
financing to fund its future operations. The Company may also enter into
collaborative arrangements with corporate partners that could provide the
Company with additional funding in the form of equity, debt or license fees in
exchange for the Company's rights with respect to certain markets or technology.
There can be no assurance that the Company will be able to raise any additional
funds or enter into any such collaborative arrangements, in either case on
favorable terms or at all.
FORWARD LOOKING STATEMENTS
The Company notes that certain of the foregoing statements in this report are
forward looking and that actual results may differ materially due to a variety
of factors including, but not limited to, (i) significant unforeseen delays in
the FDA or foreign regulatory approval process (ii) determinations by the FDA or
foreign regulatory bodies that the clinical data collected are insufficient to
support safety and efficacy of the KeraVision Ring, (iii) the FDA's failure to
schedule advisory review panels, (iv) changes in FDA or foreign regulatory
review guidelines, procedures, regulations or administrative interpretations,
(v) complications relating to the KeraVision Ring or the surgical procedure,
(vi) competitive products and technology, and (vii) other risk factors described
under the heading "Risk Factors Affecting the Company, its Business and its
Stock Price" set forth in Item 1 of the Company's Form 10K for the year ended
December 31, 1995 and in other filings made with the Securities and Exchange
Commission.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER ITEMS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See exhibit index on page 11.
(b) Reports on Form 8-K: None
-9-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KERAVISION, INC.
/s/Mark Fischer-Colbrie
-----------------------
Mark Fischer-Colbrie
Vice President, Finance and Administration
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 4, 1996
-10-
<PAGE>
EXHIBIT INDEX
-------------
EXHIBITS PAGE NUMBER
- -------- -----------
11.1 Statement computation of net income (loss) per share 12
27 Financial Data Schedule
-11-
<PAGE>
EXHIBIT 11.1
KERAVISION, INC.
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months
Three Months Ended
Ended September September 30,
30, 1996 1996
--------------- -------------
Net Loss.................................. $(3,461) $(8,919)
============== =============
Shares used in computation of net loss per
share:
Weighted average common shares
outstanding............................. 12,357 12,312
============== =============
Net loss per share........................ $ (0.28) $ (0.72)
============== =============
Nine Months
Three Months Ended
Ended September September 30,
30, 1996 1996
--------------- -------------
Net Loss.................................. $(1,635) $(5,314)
============== =============
Shares used in calculation of pro forma net
loss per share:
Weighted average shares of common stock
outstanding............................. 5,665 3,849
Shares related to Staff Accounting
Bulletins Nos. 55, 64 and 83:
Stock option grants................... 84 84
Issuances of common stock............. 2 2
Preferred stock on an as-if converted
basis................................... 5,263 5,263
--------------- -------------
11,014 9,198
============== =============
Pro forma net loss per share.............. $ (0.15) $ (0.58)
============== =============
-12-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 8,054 8,054
<SECURITIES> 27,709 27,709
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 36,360 36,360
<PP&E> 2,833 2,833
<DEPRECIATION> 1,559 1,559
<TOTAL-ASSETS> 37,769 37,769
<CURRENT-LIABILITIES> 2,254 2,254
<BONDS> 0 0
0 0
0 0
<COMMON> 12 12
<OTHER-SE> 35,462 35,462
<TOTAL-LIABILITY-AND-EQUITY> 37,769 37,769
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 3,997 10,549
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (3,461) (8,919)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,461) (8,919)
<EPS-PRIMARY> $(0.28) $(0.72)
<EPS-DILUTED> $(0.28) $(0.72)
</TABLE>
