<PAGE>
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, 1997,
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 October 30, 1997 there were 12,559,168 shares of Common Stock
outstanding.
<PAGE>
INDEX
-----
Page
----
PART I. FINANCIAL INFORMATION (unaudited)
Item 1. Condensed Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996.........................3
Condensed Consolidated Statements of Operations
for the three-month and nine-month period ended
September 30, 1997 and 1996......................................4
Condensed Consolidated Statements of Cash Flows
for the nine-month period ended September 30,
1997 and 1996....................................................5
Notes to Condensed Consolidated 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...............................................10
Item 2. Changes in Securities...........................................10
Item 3. Defaults upon Senior Securities.................................10
Item 4. Submission of Matters to a Vote of Security Holders.............10
Item 5. Other Items.....................................................10
Item 6. Exhibits and Reports on Form 8-K................................10
SIGNATURES...................................................................12
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
KERAVISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------------------------
(Unaudited) (Note 1)
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 3,582 $ 8,291
Available-for-sale investments....................................................... 15,496 23,774
Other current assets................................................................. 1,614 1,297
-------- --------
Total current assets................................................................... 20,692 33,362
Property and equipment, at cost:
Manufacturing and laboratory equipment............................................... 3,270 2,795
Office furniture and fixtures........................................................ 559 559
Leasehold improvements............................................................... 383 368
-------- --------
4,212 3,722
Accumulated depreciation and amortization.............................................. (2,238) (1,746)
-------- --------
Property and equipment, net.......................................................... 1,974 1,976
Prepaid expenses and other assets...................................................... 158 147
-------- --------
Total assets........................................................................... $ 22,824 $ 35,485
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 991 $ 973
Accrued payroll and related expenses................................................. 554 424
Accrued clinical trial costs......................................................... 1,409 965
Other accrued liabilities............................................................ 261 221
Current portion of capital lease obligations......................................... 347 344
-------- --------
Total current liabilities.............................................................. 3,562 2,927
Capital lease obligations.............................................................. 992 793
Commitments
Stockholders' equity:
Preferred stock...................................................................... -- --
Common stock......................................................................... 13 12
Additional paid-in capital........................................................... 76,425 76,114
Deferred compensation................................................................ (216) (328)
Accumulated deficit.................................................................. (57,184) (43,265)
Notes receivable from stockholders................................................... (768) (768)
-------- --------
Total stockholders' equity............................................................. 18,270 31,765
-------- --------
Total liabilities and total stockholder's equity....................................... $ 22,824 $ 35,485
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
3
<PAGE>
KERAVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales......................................................... $ 91 $ -- $ 261 $ --
Costs and expenses:
Cost of sales.................................................. 843 -- 2,588 --
Research and development....................................... 2,596 2,984 8,002 8,013
Selling, general and administrative............................ 1,485 1,013 4,563 2,536
------------ ------------ ------------ ------------
Total costs and expenses.......................................... 4,924 3,997 15,153 10,549
------------ ------------ ------------ ------------
Operating loss.................................................... (4,833) (3,997) (14,892) (10,549)
Interest income, net.............................................. 264 536 932 1,630
------------ ------------ ------------ ------------
Net Loss......................................................... $ (4,569) $(3,461) $(13,960) $ (8,919)
============ ============ ============ ============
Net loss per share................................................ $ (0.36) $ (0.28) $ (1.12) $ (0.72)
============ ============ ============ ============
Shares used in calculation of net loss per share.................. 12,555 12,357 12,515 12,312
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
4
<PAGE>
KERAVISION, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
September 30, 1997 September 30, 1996
----------------------- ----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss.......................................................... $(13,960) $ (8,919)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................... 492 261
Amortization of deferred compensation........................... 112 112
Other current assets............................................ (317) (325)
Accounts payable................................................ 18 157
Accrued liabilities............................................. 614 327
-------- --------
Total adjustments............................................. 919 532
-------- --------
Net cash used in operating activities (13,041) (8,387)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale investments....................... (19,428) (36,886)
Sales of available-for-sale investments........................... 9,139 9,146
Maturities of available-for-sale investments...................... 18,608 --
Capital expenditures............................................... (490) (661)
Other assets...................................................... (11) (65)
-------- --------
Net cash provided by (used in) investing activities........... 7,818 (28,466)
-------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations................ (293) (73)
Proceeds from sales-leaseback of capital equipment................ 495 --
Proceeds from issuance of equity securities, net of repurchases 312 277
-------- --------
Net cash provided by (used in) financing activities........... 514 204
-------- --------
Net increase (decrease) in cash and cash equivalents............... (4,709) (36,649)
Cash and cash equivalents at the beginning of the period........... 8,291 44,703
-------- --------
Cash and cash equivalents at the end of the period................. $ 3,582 $ 8,054
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
5
<PAGE>
KERAVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of
KeraVision, Inc. (the "Company" or "KeraVision"), 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, 1997, the statements of cash flows
for the nine-month periods ended September 30, 1997 and 1996 and the statements
of operations for the three and nine-month periods ended September 30, 1997 and
1996 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 and Form 10-K for the
year ended December 31, 1996. The accompanying condensed consolidated balance
sheet at December 31, 1996 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. In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings per Share", which is required to be adopted
by December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. It is expected that
there will be no impact on the Company from the adoption of Statement No. 128.
3. AVAILABLE-FOR-SALE INVESTMENTS
The Company's available-for-sale investments at September 30, 1997
were composed of the following (in thousands):
Gross Estimated
Unrealized Fair
Cost Gains Value
--------------------------------------------
Certificate of deposit $ 655 -- $ 655
U.S. Treasury bills & other
government agency
obligations 3,002 -- 3,002
Corporate debt securities 11,773 $66 11,839
--------------------------------------------
Available-for-sale
investments $15,430 $66 $15,496
============================================
All available-for-sale investments mature within one year. Gross realized and
unrealized gains/losses were not significant during the periods ended September
30, 1997 and 1996.
6
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
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, 1996.
OVERVIEW
Since its founding in November 1986, the Company has been engaged in
the research and development of the KeraVision Ring and related technology. The
Company began selling its products in Europe in December 1996 and has recorded
low levels of revenue to date. The Company expects to continue to incur
substantial losses at least through the year ending December 31, 1998 and until
sufficient revenue and margin can be generated to offset expenses. Given the
uncertainties in developing a market for a new product, revenues may not
increase significantly in the foreseeable future. Furthermore, the Company
expects its expenses in all categories to increase as its clinical and other
activities increase.
The Company is currently conducting a Phase III trial for the
KeraVision Ring in the United States for myopia in the range of -1.0 to -3.5
diopters and a Phase II trial for myopia in the range of -3.5 to -5.0 diopters.
The Company was granted the right to affix the CE mark on the KeraVision Ring
for myopia which allows the Company to sell product in the range of -1.0 to -5.0
diopters in European Union countries. To date, sales efforts have been
concentrated in Germany and France.
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, the KeraVision Ring must be
approved by the FDA. Securing FDA approvals 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. After approvals have
been given, product approvals can be withdrawn for failure to comply with
regulatory standards or for the occurrence of unforeseen problems following
initial marketing. Foreign governments or agencies also have review processes
for medical devices which present many of the same risks. The right to affix the
CE mark can be withdrawn, resulting in an inability to sell products in the
European Union.
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. Although the Company
does have approval to sell product in the European Union, 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 other government agencies or that the KeraVision Ring or any other
product developed by the Company will be commercially successful, 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.
7
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The Company recorded net revenues of $91,000 from European sales of
the Company's KeraVision Ring for treating nearsightedness for the quarter ended
September 30, 1997. The Company made its first shipment in late 1996; therefore,
no revenues are reflected in the third quarter of the previous year. Sales were
concentrated in Germany and France where the Company has focused its market
development efforts following European Union approval of the KeraVision Ring in
November 1996.
Cost of sales exceeded revenues, reflecting currently low production
volumes and certain fixed costs associated with the Company's higher volume
manufacturing capabilities.
Research and development expenses, which include clinical and
regulatory expenses, for the three-month period ended September 30, 1997 were
$2.6 million, a decrease of $0.4 million from the three-month period ended
September 30, 1996. The decrease is attributable to the expenses from
manufacturing and production which are now part of cost of sales and which were
included in the research and development expenses in September 30, 1996 when the
Company was still a development stage company. Management expects research and
development expenses to continue to increase, as clinical trials continue in
Europe and the United States.
Selling, general and administrative expenses of $1.5 million were
incurred in the three-month period ended September 30, 1997, an increase of $0.5
million from the $1.0 million incurred in the comparable prior year period. The
increase was primarily the result of increased expenses associated with
marketing efforts to support European commercialization.
The Company recorded $0.3 million of net interest income for the
three-month period ended September 30, 1997, as compared to $0.5 million for the
previous year. Interest income decreased due to lower average cash and
investment balances from period to period. The net loss of $4.6 million for the
three-month period ended September 30, 1997, increased $1.1 million from the
$3.5 million reported in the comparable prior year period. The Company believes
that its net loss may significantly increase in future periods.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The Company recorded net revenue of $261,000 from European sales in
the nine month period ended September 30, 1997 as compared to no revenue for the
comparable prior year period when the Company was in the development stage.
Research and development expenses for the nine-month period ended
September 30, 1997 were $8.0 million. Research and development expenses remained
consistent as compared to the same period of the prior year. The manufacturing
and production expenses, which are now part of cost of sales, were included in
the research and development expenses in September 30, 1996 when the Company was
still a development stage company. Management expects research and development
expenses to continue to increase, as clinical trials continue in Europe and the
United States.
Selling, general and administrative expenses for the nine-month
periods ended September 30, 1997 and 1996 were $4.6 million and $2.5 million,
respectively. Consistent with the three-month comparison, the increase in
general and administrative expenses is primarily the result of increased
marketing efforts related to European commercialization.
The Company recorded $0.9 million of net interest income for the nine-
month period ended September 30, 1997, as compared to $1.6 million for the same
period in 1996. Interest income decreased due to lower average cash and
investment balances. The net loss for the nine-month period ended September 30,
1997 was $14.0 million, an increase of $5.1 million over the loss of $8.9
million in the same period of the prior year.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since incorporation primarily
through its initial public offering, private sales of preferred stock, interest
income and equipment financing arrangements. 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. Prior to the initial
public offering the Company had raised approximately $29.5 million from the sale
of preferred stock, related warrants and common stock. Cash used in operating
activities for the first nine months of 1997 has increased to $13.0 million from
$8.4 million in the same period of the prior year, reflecting increasing net
losses principally related to increased manufacturing and research and
development expenditures. Cash, cash equivalents and available-for-sale
investments were $19.1 million at September 30, 1997. Capital expenditures for
the first nine months of 1997 were $0.5 million.
The Company expects to continue to incur substantial expenses in
support of additional research and development activities, including costs of
clinical studies, manufacturing costs, the expansion of sales and marketing
organization and the support for ongoing administrative activities. The Company
anticipates that the existing cash, cash equivalents and available-for-sale
investments will enable it to maintain its current operations for at least the
next 12 months.
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 commercial manufacturing facility,
competitive and technological advances, the FDA or other regulatory processes,
changes in the Company's marketing and distribution strategy, and other factors.
As a result, the 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 on terms
favorable to the Company, or at all.
STOCKHOLDER RIGHTS PLAN
On August 18, 1997, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of Common Stock of the Company. The dividend was paid on September 8, 1997
to stockholders of record as of the close of business on that date. Each Right
entitles the registered holder to purchase from the Company one one-thousandth
of a share of Series A Participating Preferred Stock of the Company, subject to
adjustment, at a price of $60.00 per share, also subject to adjustment. The
stockholder rights plan is designed to deter coercive or unfair takeover tactics
and to prevent an acquiring entity from gaining control of the Company without
offering a fair price to all of the Company's shareholders.
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) slower than anticipated
market acceptance of the KeraVision Ring and challenges associated with creating
a market for a new product in the European Union, (ii) significant unforeseen
delays in the FDA or foreign regulatory approval process, (iii) determinations
by the FDA or foreign regulatory bodies that the clinical data collected are
insufficient to support safety and efficacy of the KeraVision Ring, (iv) the
FDA's failure to schedule advisory review panels, (v) changes in FDA or foreign
regulatory review guidelines, procedures, regulations or administrative
interpretations, (vi) complications relating to the KeraVision Ring or the
surgical procedure, (vii) competitive products and technology and (viii) 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 10-K
for the year ended December 31, 1996 and in other filings made with the
Securities and Exchange Commission.
9
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The rights, privileges and preferences of the Company's Preferred
Share Purchase Rights are described in the Company's Registration Statement on
Form 8-A filed with Securities and Exchange Commission on August 25, 1997.
In connection with its initial public offering, the Company filed a
Registration Statement on Form S-1, SEC File No. 3333-00436 (the "Registration
------------
Statement"), which was declared effective by the Commission on August 2, 1995.
- ---------
Pursuant to the Registration Statement, the Company registered 3,600,000 shares
of its Common Stock. The offering commenced on August 2, 1995 and did not
terminate until all of the registered shares had been sold. The aggregate
offering price of the registered shares was $48,600,000. The managing
underwriters of the offering were Goldman, Sachs & Co. and Cowen & Company.
From August 2, 1995 to September 30, 1997, the Company incurred the
following expenses in connection with the offering:
Underwriting discounts and commissions $ 3,402,000
Other Expenses $ 757,922
Total Expenses $ 4,159,922
All of such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after deducting the total
expenses above were $44,440,078. From August 2, 1995 to offering proceeds,
September 30, 1997, in direct or the Company used such indirect payments net to
others, as follows:
Purchase and installment of machinery and equipment $ 1,653,488
Working capital $27,337,579
Total $28,991,067
Each of such amounts is a reasonable estimate of the application of
the net offering proceeds. This use of proceeds does not represent a material
change in the use of proceeds described in the prospectus of the Registration
Statement.
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.
10
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.1(1) Preferred Shares Rights Agreement, dated as of August 18,
1997, between KeraVision, Inc. and BankBoston, N.A.,
including the Certificate of Designation of Rights,
Preferences and Privileges of Series A Participating
Preferred Stock, the form of Rights certificate and the
Summary of Rights attached thereto as Exhibits A, B and
C, respectively.
27.1 Financial Data Schedule (filed via the EDGAR system)
(b) Reports on Form 8-K: None
____________________
(1) Incorporated by reference to identically numbered exhibit filed in response
to Item 2, "Exhibits," of the Company's Registration on Form 8-A which
became effective on August 25, 1997.
11
<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 12, 1997
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,582
<SECURITIES> 15,496
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,692
<PP&E> 4,212
<DEPRECIATION> 2,238
<TOTAL-ASSETS> 22,284
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 18,257
<TOTAL-LIABILITY-AND-EQUITY> 22,824
<SALES> 91
<TOTAL-REVENUES> 91
<CGS> 0
<TOTAL-COSTS> 4,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,569)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,569)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
