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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 1996, or
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[_] 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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
48630 MILMONT DRIVE
FREMONT, CA 94538
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 353-3000
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
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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 than 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
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Indicate by check mark 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. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant based upon the closing sale price of the Registrant's Common Stock on
the Nasdaq National Market was approximately $76,268,169 as of March 17, 1997.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
There were 12,482,624 shares of Registrant's Common Stock issued and
outstanding as of March 17, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference in Part III
of this Form 10-K Report: the Proxy Statement for the Registrant's 1997 Annual
Meeting of Stockholders scheduled to be held on May 6, 1997.
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PART I
ITEM 1. BUSINESS
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The Company notes that certain of the statements in this report, including
without limitation statements about timing of FDA approval, are forward looking.
Actual results may differ materially due to a variety of factors including, but
not limited to (i) significant unforeseen delays in the 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 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 below in this Item 1.
GENERAL
KeraVision, Inc. ("KeraVision" or the "Company") was founded in 1986 to
develop and commercialize proprietary medical products for the treatment of
common vision problems, including myopia (nearsightedness), hyperopia
(farsightedness) and astigmatism. The Company's initial product, the KeraVision
Ring, is designed to reduce or eliminate the need for eyeglasses or contact
lenses to correct myopia by reshaping the curvature of the cornea of the eye.
The KeraVision Ring is made from a material that has been safely used in the eye
for over forty years. The KeraVision Ring is composed of two, thin, half-circles
that are inserted into the cornea in a simple outpatient procedure. The
KeraVision Ring is designed to be able to be removed if necessary or desirable,
resulting in a potentially reversible refractive procedure. The Company believes
that the KeraVision Ring may provide certain benefits as compared to other
refractive surgery procedures which require irreversible cutting or ablation of
the central cornea.
The Company's objective is to commercialize the KeraVision Ring technology for
the treatment of common vision problems on a worldwide basis. To meet this
objective, the Company intends, among other things, to commercialize the
KeraVision Ring for the treatment of myopia, increase awareness of the
KeraVision Ring technology within the ophthalmic community, utilize advanced
development methods, implement a controlled product launch emphasizing surgeon
training and standardization of surgical instruments, techniques and procedures,
and develop new products for the treatment of other common vision problems.
After obtaining the required regulatory approvals in Europe in late 1996,
including ISO 9001 certification of the quality system and the right to affix
the CE Mark on the KeraVision Ring, the Company began sales in France and
Germany in December. Also in December 1996, the Company commenced a U.S. Phase
III clinical trial using the KeraVision Ring for the treatment of myopia in the
range of -1.0 to -3.5 diopters. Enrollment began for an expanded U.S. Phase II
trial for myopia in the range of -3.5 to -5.0 diopters. The enrollment for the
Phase II trial was recently completed.
Vision impairment is a common worldwide healthcare problem. The Company
estimates that over one-half of the world's population suffers from common
vision problems such as myopia, hyperopia or astigmatism. In the United States,
approximately 140 million people currently use some form of eyewear to correct
for the refractive errors that cause common vision problems and an estimated 70
million people suffer from myopia. The most prevalent surgical techniques that
have emerged in response to this need are radial keratotomy ("RK"),
photorefractive keratectomy ("PRK") and Laser assisted in situ keratamileusis
("LASIK") It is estimated that a total of more than one million RK procedures
have been performed in the United States, most of which have occurred since
1989. Surgeons have used PRK, a more recently developed refractive surgery
technique, in an estimated 1,000,000 procedures to date worldwide, with an
estimated 70,000 procedures occurring in the United States where the procedure
received FDA approval in late 1995.
Utilizing the Company's proprietary instruments, an ophthalmic surgeon
positions the KeraVision Ring between layers of the corneal tissue through a
small incision in the periphery of the cornea. Although the KeraVision Ring is
still undergoing investigational clinical studies and has just begun
commercialization in Europe, the Company believes that the KeraVision Ring may
provide the following potential benefits for the treatment of myopia:
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. Long-term, convenient correction. The Company believes the KeraVision Ring
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offers the potential to provide long-term correction of myopia in a form
more convenient than eyeglasses or contact lenses.
. Rapid and predictable results. Limited clinical trials have demonstrated
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that significant improvements in visual acuity may be achieved within one
day after insertion of the KeraVision Ring. The Company believes it has
developed the ability to predict the refractive correction that can be
achieved using varying sizes of KeraVision Rings.
. Reversible refractive effect. The KeraVision Ring can be removed in a
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simple, outpatient procedure, if necessary or desired. Of the 763 total
number of sighted patient eyes implanted, 69 patient eyes have had their
KeraVision Ring products removed to date. These limited clinical results
indicate that in cases where the KeraVision Ring has been removed, the
patients have returned to approximately the same level of vision measured
prior to insertion of the KeraVision Ring.
. Minimally invasive outpatient procedure. The KeraVision Ring procedure,
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which requires a single small incision, results in minimal trauma to corneal
tissue and can typically be performed in less than 20 minutes on an
outpatient basis.
. Simple and standardized procedure. The KeraVision Ring and related
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instrumentation are designed to standardize the KeraVision Ring procedure to
promote ease of surgery and consistent surgical outcomes.
Since 1991, ophthalmic surgeons have utilized the Company's KeraVision Ring
for the treatment of myopia in 778 patient eyes (763 sighted and 15 non-
sighted). Significant clinical trials initiated to date are described in the
following paragraphs.
In October 1996, the Company received FDA approval to initiate a Phase III
trial on the KeraVision Ring involving 360 patients at up to 10 clinical centers
for myopia in the range of -1.0 to -3.5 diopters. All centers received
Institutional Review Board approval. Enrollment for the Phase III trial was
initiated in December 1996 and is currently ongoing. The Company also received
permission to expand a Phase II clinical trial to cover 60 patient eyes with
myopia in the range of -3.5 to -5.0 diopters; enrollment for this trial was
recently completed.
In June 1996, the Company initiated the MECCA (Multi-center European Corneal
Clinical Assessment) trial in Europe with the KeraVision Ring. The MECCA trial
involves 10 European clinical centers located in France, Germany and Austria for
myopia in the range of -1.0 to -5.0. To date, 110 eyes have received the
KeraVision Ring.
In October 1995, the Company began a European trial with the KeraVision Ring.
The trial is being conducted at two ophthalmic clinical centers located in
England and France. To date, 76 eyes have received the KeraVision Ring under
this study.
In April 1995, the Company commenced enrollment in a second Phase II clinical
trial in the United States using a modification of an earlier version the
KeraVision Ring. This modification uses two half circles of the KeraVision Ring
instead of the single split 360 degree ring. The Company believes this
modification simplifies the surgical technique. This study was conducted at six
clinical centers and enrollment for the 150 patients was completed in September
1996. At the October 1996 American Academy of Ophthalmology (AAO) meeting, data
was presented on the first 99 patients with three months of follow-up indicating
that 96% of the patients had achieved an uncorrected visual acuity of 20/40 or
better.
In September 1994, the Company completed enrollment of 90 patients in the
Company's first United States Phase II clinical trial for the treatment of
myopia with the 360u split ring, previous design of the KeraVision Ring. As
reported at the American Society for Cataract and Refractive Surgeons (ASCRS) in
April 1995, 85% of the patients with this design of the KeraVision Ring achieved
an uncorrected visual acuity of 20/40 or better.
The Company conducted its first sighted-eye clinical study on myopic patients
using the 360u split KeraVision Ring beginning in October 1991. Prior to the
insertion of the KeraVision Ring, all 10 patients had visual acuities in the
range of 20/200 to 20/400. Nine patients in the study achieved visual acuity of
20/40 or better using the KeraVision Ring. The clinical investigator recently
reported that the nine patients have maintained this improved visual acuity over
the four years following the surgeries. One patient had the KeraVision Ring
removed as a result of
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the KeraVision Ring having been inserted too deeply within the cornea. The
patient later returned to his pre-operative level of vision.
In 1994, the Company conducted a small feasibility study in Brazil for the
treatment of astigmatism using a variation on the KeraVision Ring designed to
address this vision problem. Vision improvement has been observed for these
initial patients.
One of the Company's primary strategies has been to develop a strong
proprietary patent position with respect to the KeraVision Ring technology. The
Company has 35 patents approved and has filed for an additional 173 patents. As
its research, development and clinical studies proceed, the Company intends to
continue its practice of seeking patent protection for its technology.
The KeraVision Ring will require additional clinical studies and significant
investment of capital prior to commercialization in locations outside Europe.
The Company does not expect to receive FDA regulatory approval to commercialize
the KeraVision Ring before 1999, if at all. 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 or
that the KeraVision Ring or any other product developed by the Company will be
commercially successful.
STRATEGY
The Company's objective is to commercialize its core KeraVision Ring
technology for the treatment of common vision problems on a worldwide basis.
KeraVision's business strategy for achieving this objective includes the
following key elements:
Commercialize the Keravision Ring for Treatment of Myopia
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The Company received approval to commercialize the KeraVision Ring in the
European Union in late 1996. The initial sales efforts are concentrated in
France and Germany. The Company received approval from the FDA in late 1996 to
commence a Phase III clinical trial in the United States. The Company does not
expect to receive FDA regulatory approval to commercialize the KeraVision Ring
before 1999, if at all. By focusing on the approval and commercialization of
the KeraVision Ring for myopia, the Company seeks to establish a scientific,
technical, regulatory and marketing platform to facilitate the more expeditious
approval and launch of potential products under development for the treatment of
other vision problems.
Increase Awareness among Ophthalmic Surgeons of the Keravision Ring as an
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Alternative Vision Correction Technology
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In developing and testing its technology, the Company works with a broad range
of independent researchers to expand awareness of the KeraVision Ring and advise
the Company on the design of its products. The Company works with leading
surgeons and academic centers in the ophthalmology field in the development and
clinical testing of its technology. The Company believes that these
practitioners and institutions, among others, may have significant influence on
the adoption of new technologies and the development of clinical parameters upon
which the outcomes of these technologies are analyzed. In addition, the Company
dedicates significant resources to the publication of research papers, the
presentation of clinical and technical data at major ophthalmology conferences,
and the review of KeraVision Ring clinical data with leading ophthalmologists.
Through these activities, the Company seeks to disseminate accurate clinical
information, and foster awareness of the KeraVision Ring
Utilize Advanced Development Methods
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KeraVision seeks to use advanced scientific and engineering methods to reduce
the cycle time in developing KeraVision Ring or other potential products for
different types of vision impairment. These include the use of
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sophisticated modeling techniques to understand the optical, mechanical and
biological effects of inserting KeraVision Rings or other potential products
into the cornea to correct for myopia, astigmatism, hyperopia or combinations of
these indications. Currently utilized techniques include finite element
analysis, a mathematical model that analyzes the effects of the KeraVision Ring
on the shape of the cornea; optical ray trace methods, which analyze the effects
of the KeraVision Ring on light passing through the cornea; and corneal
topography, which measures the effects of the KeraVision Ring on the surface and
curvature of the cornea. In addition, KeraVision Ring designs are analyzed using
a computerized nutritional diffusion model to determine whether the flow of
biologic nutrients inside the cornea is impaired by the presence of the device.
Through these methods, the Company is able to develop models for understanding
the potential effectiveness of the KeraVision Ring and to utilize this
information to facilitate product development. The Company believes that this
approach allows it to improve the design of its potential products and increase
its understanding of potential product performance prior to commencing clinical
trials.
Implement Orderly Marketing Rollout in Target Markets
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The Company has developed surgeon training programs utilizing its proprietary
instrument set to promote standardized procedures for insertion of the
KeraVision Ring. The Company believes the continued emphasis on surgeon
training will allow for the orderly commercial launch of its KeraVision Ring and
will increase market acceptance of the KeraVision Ring by both ophthalmic
surgeons and patients.
Because it believes the ophthalmic surgery market is highly concentrated, the
Company intends to market its potential products, if and when required
regulatory approvals are obtained, through a direct sales force or a combination
of a direct sales force and distributors. In selected markets, the Company may
seek strategic partners to assist in regulatory and marketing activities.
KeraVision intends to focus its initial marketing efforts, on ophthalmic
surgeons whom it identifies as highly respected opinion leaders within the
ophthalmic community, and on those ophthalmic surgeons with high-volume
practices. In France, the Company has established a direct sales force while in
Germany, the Company uses a distributor.
The Company has only recently began sales in Europe, primarily with a stocking
order to its German distributor. Establishing sufficient marketing and sales
capability will require significant resources. There can be no assurance that
the Company will be able to recruit and retain skilled sales management, direct
salespersons or distributors, or that the Company's sales effort will be
successful. To the extent that the Company enters into distribution
arrangements for the sale of its products, the Company will be dependent on the
efforts of third parties. There can be no assurance that such efforts will be
successful.
Develop New Products for the Treatment of Additional Vision Correction
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Problems
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The Company has products under development utilizing its core KeraVision Ring
technology for the treatment of other common vision problems, including
astigmatism and hyperopia. In each target application, the Company seeks to
preserve the potential advantages of its technology as a refractively reversible
procedure that does not interfere with the central cornea. The Company is
currently working to expand the potential applications of its core KeraVision
Ring technology, including the development of new designs, the use of new
biomaterials and the development of new surgical techniques and instruments.
Although the Company is working to expand potential applications of its
KeraVision Ring technology, the Company has concentrated its efforts primarily
on the development of the KeraVision Ring for the correction of myopia and will
be dependent upon the successful development of that potential product to
generate revenues. The Company has performed only limited research and testing
on other applications of the KeraVision Ring technology. There can be no
assurance that the KeraVision Ring technology will prove safe and effective in
vision correction, or that if proven safe and effective, the technology will be
successfully commercialized.
BACKGROUND
Vision and Vision Impairment
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The eye functions much like a camera, incorporating a lens system (the cornea
and the lens) that focuses light, an aperture system (the iris) that regulates
the amount of light passing through the central zone of the cornea, and a light-
sensitive surface (the retina) that, like film, records the image. The cornea,
lens and iris operate to focus
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light rays on the retina, which contains the light-sensitive receptors that
transmit the image through the optic nerve to the brain. Nearly all light that
reaches the retina passes through the central portion of the cornea (the
"optical zone"). Approximately 75% of the refractive, or focusing, power of
the eye is provided by the curvature of the cornea.
Most common refractive problems result from an inability of the optical system
to focus images on the retina properly. This inability to focus is known as a
refractive error. For instance, in the myopic (nearsighted) eye, light rays
focus in front of the retina when the curvature of the cornea is too steep.
People with myopia see nearby objects clearly, but distant objects appear
blurry. Conversely, in the hyperopic (farsighted) eye, light rays focus behind
the retina when the curvature of the cornea is too flat. People with hyperopia
see distant objects clearly, but may need correction so that nearby objects do
not appear blurry. In the astigmatic eye, the curvature of the cornea is not
uniform. This lack of uniform curvature makes it difficult for a person to
focus clearly on an object.
Vision Correction Market
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In the United States alone, approximately 140 million people currently use
eyeglasses or contact lenses to correct common vision problems such as myopia,
hyperopia and astigmatism, with over $12 billion spent for total corrective
eyewear products annually. The largest market segment is myopia, which afflicts
over 70 million people in the United States. Market research in the United
States has shown that many people using corrective eyewear are seeking long-
term, more convenient vision correction. In response, ophthalmic surgeons and
medical researchers have sought to develop alternatives to eyeglasses and
contact lenses to correct refractive errors. Their efforts have resulted in the
emergence of the field of refractive surgery.
Refractive surgery changes the cornea's refractive power by altering the
curvature of the cornea, so that light passing through the eye can be properly
focused on the retina, thereby improving vision. Of the 70 million people with
myopia, an estimated 22 million patients in the age range of 25 to 54 have low
to moderate myopia without significant astigmatism. The Company views this age
group as the primary population for refractive surgery because of a lack of
refractive stability in younger patients, and a possible preference for
eyeglasses and contact lenses among older patients. In addition to age and
degree of myopia, the Company believes that the potential market for the
KeraVision Ring may be further limited by the inability of some patients to
afford the procedure, the psychological aversion of some patients to refractive
surgery or other factors. The Company also expects that the market will be
affected by the relative attractiveness and affordability of other refractive
surgical techniques.
One common refractive surgery technique in the United States is RK. It is
estimated that a total of more than one million RK procedures have been
performed in the United States, most of which have occurred since 1989. In
addition, PRK, a more recently developed refractive surgery technique, has been
used in an estimated one million procedures to date worldwide, with an estimated
70,000 occurring in the United States where the procedure was approved by the
FDA in the fall of 1995.
The Company's future performance will depend to a substantial degree upon
market acceptance of, and the Company's ability to successfully manufacture,
market, deliver and support, the KeraVision Ring and related products. The
extent of, and rate at which, market acceptance and penetration are achieved by
the KeraVision Ring and future products is a function of many variables
including, but not limited to, price, safety, efficacy, reliability and
marketing and sales efforts, as well as general economic conditions affecting
purchasing patterns. To be successful, the Company's KeraVision Ring will have
to be accepted by ophthalmic surgeons, other groups in the referral channel as
well as myopic patients. Many of ophthalmic surgeons may have already invested
significant time and resources in developing expertise in other corrective
ophthalmic surgical techniques. Accordingly, there can be no assurance that the
KeraVision Ring or any future product will achieve or maintain acceptance in
their target markets. Similar risks may confront other products developed by
the Company in the future.
Current Refractive Surgery Techniques
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Current refractive surgery procedures include RK, PRK, ALK and LASIK, among
others. In RK, a diamond knife is used to make from four to 32 radial incisions
that penetrate beyond 90% of the depth of the cornea. The procedure is
generally conducted using topical anesthesia in an outpatient setting. As the
incisions heal, the curvature of the cornea is altered and vision may be
improved. Although additional operations may be performed to attempt to improve
the vision for those whose vision is undercorrected, the RK procedure is
considered to be refractively irreversible. RK results can vary with the skill
and experience of the surgeon and can be relatively
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unpredictable for patients requiring greater degrees of correction. Because RK
entails making cuts in or near the optical zone of the eye, unwanted side
effects, such as haloes, reduced night vision and other visual distortions may
occur. In addition, data from the Prospective Evaluation of Radial Keratotomy
("PERK") 10-year study, funded by the National Eye Institute and completed in
1994, indicate that a significant percentage of those undergoing RK did not
achieve a stable result as measured over a ten-year period, with a shift towards
hyperopia occurring over time. The PERK data, however, did indicate that 85% of
patients undergoing the procedure achieved visual acuity/1/ of 20/40 or better.
In addition, it is believed the RK technique has improved since the PERK study
commenced. The use of RK is not regulated by the FDA because it is considered a
surgical procedure.
PRK is a refractive surgery technique in which a laser is used to irreversibly
remove tissue within the optical zone to reshape the cornea, with the amount of
tissue to be removed based upon the level of intended change sought. Typically,
the top layer of the central cornea (the epithelium) is manually removed. The
patient is then asked to fixate on a light to minimize eye movement while the
laser removes or ablates tissue from the central cornea. The procedure, the
results of which can be dependent on the variability of the laser beam and
individual patient wound healing responses, is conducted in an outpatient
setting using topical anesthetic, although postoperative pain may require the
prescription of narcotics for the first few days following the procedure. While
vision improvement is achieved, PRK depends in part on a healing response to
reach the desired level of flattening of the cornea, which generally occurs over
a three-month period, although the cornea may continue to reshape itself over a
12- to 15-month period. The equipment required to conduct this procedure is
significantly more expensive than the equipment required for use in RK. Because
PRK, like RK, surgically alters tissue in the optical zone, haze, haloes,
reduced night vision and other vision problems have been observed in patients
who have undergone the PRK procedure.
ALK, a currently available procedure, involves using an automated cutting
device to cut and pull back a large corneal flap and to shave away a portion of
the exposed underlying stromal bed. LASIK combines elements of ALK and PRK.
The created corneal flap is turned back to expose the stroma and photoablation,
removal of tissue using a laser, is performed directly in the stromal bed. In
both ALK and LASIK, one of the more serious complications observed to date has
been irregular astigmatism related to improper repositioning of the corneal flap
and loss of the flap itself.
Quality of Vision
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The most common measurement of visual acuity utilizes an eye chart to assess
vision. One of the recent developments in ophthalmology involves the concept of
quality of vision. It has been observed that a patient can attain visual acuity
of 20/20, as measured with an eye chart, and still be dissatisfied with the
quality of his vision. This issue may play a role in the future in modifying
current refractive surgery techniques, which are known to affect the smooth
shape of the cornea and to create corneal scarring in ways that may induce
unwanted visual aberrations. Typical vision complaints include haze, haloes,
reduced night vision and other visual distortions. At the current time, most
assessments attribute undesirable visual side-effects of refractive procedures
either to a disturbance of corneal tissue within the optical zone or to the
interruption or distortion of the smooth shape of the cornea. New measurement
techniques, including corneal topography, contrast sensitivity and night-vision
testing, are emerging to analyze more fully the quality of vision beyond the
assessment available using standardized visual acuity charts.
KERAVISION'S RING AND INSTRUMENT SET
In response to the perceived market need for a less traumatic, more
predictable and refractively reversible procedure, KeraVision has developed the
KeraVision Ring for the long-term treatment of myopia. The KeraVision Ring
procedure does not cut or remove tissue from the optical zone of the cornea and
therefore may reduce the risk of unwanted visual side-effects such as haze,
haloes and reduced night vision. However, because the KeraVision Ring procedure
entails an incision in the periphery of the cornea and some disturbance of
corneal tissue, certain of these
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/1/ "Visual acuity" is an assessment of the eye's ability to distinguish the
shape and details of an object at a specified distance (usually 20 feet). A
visual acuity test typically takes the form of a chart with rows of letters,
each row being smaller than the last, and each having a designated distance at
which it should be legible to a normal eye with no refractive error. The
results are reported as a fraction that compares the individual's successful
testing distance to normal (such as 20/20, 20/40, etc.) The numerator is the
individual's actual testing distance, and the denominator is the distance at
which a normal eye can see the visual acuity chart letter. For example, visual
acuity of 20/40 means that the individual must be 20 feet from an object in
order to see it with the same clarity as seen by a normal eye at a distance of
40 feet.
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visual side effects can result from the insertion of a KeraVision Ring. In
addition, some patients with large pupils may experience some of these side
effects.
The KeraVision Ring is a proprietary device designed to reduce or eliminate
the need for corrective eyewear in people suffering from myopia by reshaping the
curvature of the cornea. The KeraVision Ring is inserted between the layers of
the corneal stroma through a small incision made in the periphery of the cornea.
The presence of the KeraVision Ring in the eye causes a flattening of the
central cornea, thereby increasing the number of light rays properly focused on
the retina.
The KeraVision Ring consists of two, thin half-circles, each with an arc
length of 150 degrees, placed in the cornea at a diameter of approximately eight
millimeters ("mm"). It is made of polymethylmethacrylate ("PMMA"), a clear
acrylic that has been widely used in implantable intraocular lenses since 1952.
The Company has extensively studied the relationship between physical parameters
of the KeraVision Ring. As a result of these studies, the Company believes that
relatively few KeraVision Ring sizes, with minor variations in certain
dimensions, can produce a wide range of corneal curvature change and, therefore,
provide treatment for a substantial segment of those people with myopia. The
Company is currently developing KeraVision Rings in five different thicknesses
ranging from 0.25 mm to 0.45 mm.
The KeraVision Ring has over time undergone some modifications. One
modification involved changing from a 360u split ring to the current use of the
two half-circles. The current Phase II trials, Phase III trials and European
trials and European sales are all utilizing this modification.
The Company has developed a set of proprietary surgical instruments to be used
for the insertion of the KeraVision Ring. This set of stainless steel and
titanium instruments includes a marking instrument, a centering guide and a
stromal separator. The Company's instrument set has been designed to standardize
the KeraVision Ring procedure and reduce the variability associated with
differing levels of surgical skill by, among other things, showing the surgeon
where to make the corneal incision and aiding the surgeon in implanting the
KeraVision Ring at the right depth. It is estimated that the Company's
instrument set will represent a small capital investment for ophthalmic
surgeons, similar to that required for surgeons performing RK procedures and
substantially less than that required for surgeons performing PRK or LASIK
procedures.
THE KERAVISION RING INSERTION PROCEDURE
The Company believes that insertion of the KeraVision Ring is a relatively
simple, minimally invasive procedure that can be performed on an outpatient
basis in typically 20 minutes or less. The procedure is typically performed
using a topical anesthetic. In addition to the KeraVision instrument set, the
KeraVision Ring procedure in part employs surgical techniques and ophthalmic
surgical instruments that are widely used by ophthalmic surgeons. The Company
has developed a training program to assist the ophthalmic surgeon in achieving
consistent results. The KeraVision Ring procedure requires a single incision of
approximately two millimeters outside of the optical zone of the cornea. The
incision placement is beneath the eyelid. The amount of discomfort experienced
by patients participating in the KeraVision Ring clinical studies has been
relatively modest.
The KeraVision Ring insertion procedure consists of the following steps.
First, the ophthalmic surgeon uses the marking instrument to mark the line of
incision on the cornea outside the optical zone. A small entry incision is then
made to approximately two-thirds of the depth of the cornea and the layers of
the stroma at the bottom of the incision are separated. The stroma, which
comprises 90% of the cornea, consists of 500 to 700 overlapping layers of tissue
that can be easily separated. Next, the surgeon places the centering guide over
the eye, introduces the stromal separator through the small entry incision and
rotates the stromal separator, spreading the layers of the stroma to create a
circular subsurface channel in the periphery of the cornea. The surgeon removes
the stromal separator and the centering guide. The KeraVision Ring is introduced
into the channel and rotated into place. Finally, the entry incision is
typically closed with two sutures which are generally removed within four weeks.
POTENTIAL BENEFITS OF THE KERAVISION RING
Although the KeraVision Ring is currently undergoing investigational clinical
studies, the Company believes that the KeraVision Ring may provide the following
potential benefits for the treatment of myopia:
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. Long-term, convenient correction. The KeraVision Ring is designed for
--------------------------------
long-term correction of myopia that may present a more convenient solution
than eyeglasses or contact lenses. Correction for myopia has remained
stable for over five years in the initial sighted-eye trial. In the most
recent United States Phase II clinical trial, 96% of the 99 patients who had
reached the three month mark had visual acuity of 20/40 or better.
. Rapid and predictable results. Although preliminary and limited in scope,
-----------------------------
initial clinical trials in many myopic patients have demonstrated
significant improvement in vision within one day after insertion of the
KeraVision Ring. The Company believes that it has developed the ability to
predict the refractive correction that can be achieved using varying sizes
of KeraVision Rings.
. Reversible refractive effect. The KeraVision Ring can be removed in a
----------------------------
simple, outpatient procedure, if necessary or desired. Of the 763 total
number of sighted implant patients, 69 patients have had their KeraVision
Ring products removed to date. These limited clinical results indicate that
in cases where the KeraVision Ring has been removed, the patients have
returned within a few months to approximately the same level of vision
measured prior to insertion of the KeraVision Ring.
. Minimally invasive outpatient procedure. The KeraVision Ring procedure can
---------------------------------------
typically be performed in less than 20 minutes on an outpatient basis. The
procedure requires a single, small incision resulting in minimal trauma to
corneal tissue. The amount of discomfort experienced by patients
participating in the KeraVision Ring clinical studies has been relatively
modest.
. Simple and standardized procedure. The KeraVision Ring and related
---------------------------------
instrumentation are designed to standardize the KeraVision Ring procedure to
allow ophthalmic surgeons to perform the procedure easily and to promote
consistent surgical outcomes.
CLINICAL STUDIES
Since 1991, ophthalmic surgeons have utilized the Company's KeraVision Ring
technology for the treatment of myopia in 778 patient eyes, including 15
nonfunctional eyes and 763 sighted eyes. The Company initiated clinical trials
of its KeraVision Ring in 1991 in both the United States and Brazil. In
September 1994, the Company completed enrollment in a 90-patient Phase II myopia
trial in the United States. In October 1995 the Company completed enrollment of
the initial group of 75 Phase II patients with the modified KeraVision Ring.
Enrollment for the second series of patients was completed in September 1996. In
October 1996, the Company received approval to commence a 10 center Phase III
clinical trial in the United States and began that trial in December. In
addition, the Company is conducting two clinical trials in Europe.
The Company's clinical trials have been designed to demonstrate the safety and
efficacy of the KeraVision Ring and the safety of the surgical procedure used to
insert the KeraVision Ring. Safety of the KeraVision Ring is evaluated using
standard ophthalmic techniques. Efficacy of the KeraVision Ring is evaluated
using standard ophthalmic measurements, including uncorrected visual acuity/2/,
best corrected visual acuity/3/, keratometry/4/ and refraction/5/.
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 the United States before late 1999, if ever.
- ------------------------------------
/2/ Uncorrected visual acuity defines how well a person can see without the aid
of eyeglasses or contact lenses.
/3/ Best corrected visual acuity refers to the highest degree of acuity that an
individual is capable of achieving with the assistance of eyeglasses or
contact lenses.
/4/ Keratometry is a clinical test used to measure the curvature of the surface
of the cornea with the use of an optical instrument, the keratometer.
Keratometry readings are an objective measurement and are used clinically
to measure changes in corneal curvature.
/5/ The term "refraction," in the context of ophthalmic measurement, refers
to the specific tests used to measure an individual's refractive error and
to determine the best corrective lenses to be prescribed. A series of test
lenses of increasing power are used to determine how much correction is
needed for an individual to attain the sharpest, clearest vision.
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Myopia
------
Nonfunctional Eye Studies
-------------------------
Brazil. Clinical studies in nonfunctional human eyes commenced in March 1991
------
in Brazil to determine the feasibility of using the KeraVision Ring to alter
corneal curvature and to evaluate the safety of inserting a KeraVision Ring of a
specific thickness and diameter into a human cornea. KeraVision Rings were
inserted into one eye of each of three patients during the period from March to
May 1991. The three surgeries and postoperative courses proceeded without any
observed significant complications. For each patient, central corneal
flattening was achieved, demonstrating the potential feasibility of utilizing
the KeraVision Ring to treat myopia.
In August 1991, the KeraVision Ring was removed from one patient to observe
the effects of ring removal on corneal curvature. The KeraVision Ring was
easily removed from the patient in a brief, outpatient procedure. After removal
of the KeraVision Ring, the cornea returned to its original curvature, and no
complications were observed during or following the removal procedure. The
investigator has reported that the patients are continuing to safely tolerate
the KeraVision Ring and there have been no clinically significant safety issues
observed over the five year follow-up period.
United States. In May 1991, the FDA granted approval of the Company's
-------------
Investigational Device Exemption ("IDE") application to begin its United
States Phase I clinical study to evaluate the KeraVision Ring in ten patients
with nonfunctional eyes. The purpose of the study was to demonstrate the long-
term safety of the KeraVision Ring, as well as the feasibility of utilizing the
keravision ring technology to flatten the central cornea. In July 1991,
KeraVision Rings were inserted into the nonfunctional eyes of patients at the
Bethesda Eye Institute, St. Louis University. These surgeries proceeded without
any significant complications. For each patient, central corneal flattening was
achieved, demonstrating the potential feasibility of utilizing the KeraVision
ring to treat myopia. In addition, the changes in corneal curvature induced by
the keravision ring remained stable throughout each patient's implant period,
indicating the potential for long-term stability of the correction.
Pursuant to the Phase I clinical protocol, the KeraVision Ring was removed
from five patients in August 1992, one year after implant, to evaluate the ease
of removal and observe the effects of removal on corneal curvature. The
KeraVision Rings were removed in brief, outpatient procedures. After removal of
the KeraVision Ring, each patient's cornea returned to its pre-implant
curvature. No complications were observed during or following the removal
procedure, demonstrating the ability to remove the KeraVision Ring safely and
easily from patients after an extended implant period. The KeraVision Ring
continued to be safely tolerated and there have been no medically significant
complications. Additionally, the curvature changes induced by the KeraVision
Ring have continued to remain stable during the five year follow-up period.
Sighted Eye Studies
-------------------
Brazil. In October 1991, KeraVision initiated a clinical trial Brazil to
------
evaluate the KeraVision ring for the treatment of myopia in ten sighted eye
patients. The purpose of the study was to evaluate the efficacy of the
KeraVision ring for treatment of myopia, the stability of the correction
achieved and to provide additional safety data. The trial was conducted
utilizing KeraVision Rings having a thickness of 0.30 mm. The KeraVision Rings
were implanted during the period from October to December 1991. One patient in
the study had the ring removed when astigmatism developed as a result of the
KeraVision Ring having been inserted too deeply within the cornea. The patient
has since returned to her pre-operative level of vision. The Company believes
that the complication resulting from surgical technique in this study is
avoidable through physician training and refinements in the recommended surgical
procedures, which it has implemented.
Patients in the Brazilian study had uncorrected visual acuities ranging from
20/200 to 20/400 pre-operatively and required myopic corrections ranging from -
2.5 to -4.5 diopters. On the first day after surgery, all patients had
uncorrected visual acuities of 20/40 or better. The nine patients remaining in
the study have continued to demonstrate this level of visual acuity through the
four year examination. In addition, the best corrected visual acuity for these
patients has remained 20/20 or better for the duration of the study period. The
clinical investigator reports that all nine implant patients are continuing to
safely tolerate the KeraVision Ring during the four year follow-up period.
9
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United States. In February 1993, the Company received FDA approval to proceed
-------------
with a Phase II clinical study of the KeraVision Ring in myopic patients. The
trial includes a total of 90 patients who required myopic corrections ranging
from -1.0 to -7.0 diopters. KeraVision Rings with five thicknesses, ranging
from 0.25 mm to 0.45 mm, were utilized in the trial. Enrollment in the Phase II
trial was completed in September 1994. A total of 125 patient eyes have been
implanted. As reported at the American Society for Cataract and Refractive
Surgeons in June 1996, 88% of the first group of 81 patients implanted with the
KeraVision Ring had achieved uncorrected visual acuity of 20/40 or better.
Twenty of the 125 patient eyes that were implanted have had the KeraVision
Ring removed. Of the 20 patient eyes where the KeraVision Ring has been
removed, seven patients requested removal of their KeraVision Rings because they
were not satisfied with the correction achieved. The other 13 KeraVision Rings
were removed due to potential safety-related considerations arising from the
surgical procedure used to implant the original 360u split ring design of the
KeraVision Ring. The KeraVision Rings were easily removed from the 20 patient
eyes in brief outpatient procedures performed under topical anesthesia. There
have been no complications observed as a result of removing the KeraVision
Rings. The data indicate that the 20 individuals who had their KeraVision Rings
removed have all returned generally to the same level of vision measured prior
to implantation of the KeraVision Rings, thereby demonstrating the potential of
the KeraVision Ring to have a reversible refractive effect. All individuals
have maintained their preoperative best corrected visual acuity of 20/20 or
better.
In May 1995, the Company commenced a second United States Phase II clinical
trial involving 150 patients at six clinical centers to evaluate an alternative
design of the KeraVision Ring. The alternative design consists of two half
circles which are 150u in length, rather than a split ring. The Company
believes that this modification to the KeraVision Ring simplifies surgical
procedure and reduces complications observed with the full 360u ring. In October
1995, the Company completed enrollment of the first 75 patients of this 150
patient Phase II clinical trial. The results from this initial series were
submitted to FDA as part of the Phase III application. Enrollment was completed
in September 1996 for this trial. Eighteen of the 150 patients had the
KeraVision Ring removed. Fifteen patients had the KeraVision Ring removed
because they were not satisfied with the correction achieved. One patient had
the KeraVision Ring removed as a result of an error in surgical technique and
two patients had the KeraVision Ring removed due to a surgery-related
infection. After removal, the infection cleared with no further complications.
The KeraVision Ring was easily removed from each of these patients and each
patient has generally returned to the same level of vision measured prior to the
insertion of the KeraVision Ring. At the October 1996 American Academy of
Ophthalmology meeting, data on the first 99 patients in this series was
presented indicating that 96% of the patients had achieved an uncorrected visual
acuity of 20/40 or better at the three month point.
In October 1996, the Company received FDA approval to proceed with a Phase III
clinical trial involving 360 myopic patients at up to 10 ophthalmic clinical
centers. All centers have received Institutional Review Board approval.
Enrollment in the Phase III trial was initiated in December 1996. To date, 124
patients have been enrolled. There have been no Phase III patients who have had
the KeraVision Ring removed.
Europe. In October 1995, the Company began a clinical trial in Europe using
------
the modified design to the KeraVision Ring. The trial was conducted in Brest,
France and Manchester, England. A total of 47 myopic patients have been
enrolled in this trial. Enrollment was completed in November 1996. A total of
76 patient eyes have been implanted. At the October 1996 International Society
of Refractive Surgery meeting, data on the first 33 patients in this study was
presented indicating that 100% of the patients had achieved an uncorrected
visual acuity of 20/40 or better. Of the 76 patient eyes, 6 patients had the
KeraVision Ring removed. Four patients had the KeraVision Ring removed because
they were not satisfied with the correction achieved and two patients had the
KeraVision Ring removed due to potential safety consideration related to the
surgical technique. All of these patients who had their KeraVision Rings
removed returned generally to their same pre-operative level of vision.
In June 1996, the Company initiated the MECCA trial in Europe also using the
modified design to the KeraVision Ring. This trial is being performed in 10
European ophthalmic centers located in France, Germany and Austria. Currently,
78 myopic patients have been enrolled in this trial with total of 110 patient
eyes having been implanted. Three of the 110 patient eyes have had the
KeraVision Ring removed. Two patients had the KeraVision Ring removed because
they were not satisfied with the visual outcome and one patient had the
KeraVision Ring removed due to a potential safety consideration related to the
surgical technique. All of these patients who had their KeraVision Rings removed
returned generally to their same pre-operative level of vision.
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Astigmatism
-----------
Brazil. The Company is developing a potential product that uses arc segments
------
of the KeraVision Ring to treat astigmatism. This device utilizes the core
technology for the treatment of myopia and the segments are manufactured from
the same PMMA material as the KeraVision Ring. A similar surgical technique is
employed to implant the segments in the eye. In August 1994 and March 1995, arc
segments were implanted in eight astigmatic patients. Clinical results showed
that the patients exhibited improvement in their visual acuity after the
implantation of arc segments. The company intends to continue evaluating the
arc segments for the treatment of astigmatism.
Complications and Visual Side Effects
-------------------------------------
The Company has developed only limited clinical data to date on the safety and
efficacy of the KeraVision Ring in correcting myopia, and has not yet developed
any long-term safety or efficacy data. The KeraVision Ring technology is
relatively new technology. The first procedure for the treatment of myopia
using the KeraVision Ring was performed in 1991, and to date 778 procedures have
been conducted using the KeraVision Ring technology. with 590 procedures using
the two half circle design of the KeraVision Ring. The KeraVision Ring is in
United States Phase II and Phase III clinical trials, and it cannot yet be
determined if the KeraVision Ring technology will prove to be effective for the
predictable treatment of myopia or other common vision problems. There can be
no assurance that the initial clinical trial results are necessarily indicative
of future clinical trial results. Because KeraVision has conducted only limited
clinical studies to date, there can be no assurance that long-term safety and
efficacy data when collected will be consistent with these clinical trial
results and will demonstrate that the KeraVision Ring can be used safely and
successfully to treat myopia in a broad segment of the population or on a long-
term basis.
All surgical procedures, including the KeraVision Ring procedure, involve some
inherent risk of complications. Certain complications have been observed in a
small number of patients who have received the KeraVision Ring, but no patient
has suffered any serious or lasting injury to the eye or any material loss of
either uncorrected or best corrected visual acuity. The complications observed
to date with the KeraVision Ring appear to be primarily related to the surgical
technique. The complications include, among other things: induced astigmatism
and a temporary reduction in central corneal sensation. In addition, there have
been some patients who have had their KeraVision Rings removed due to a surgery-
related infection.
In addition, patients undergoing the KeraVision Ring procedure have reported
certain visual side effects. These include glare, haloes and reduced night
vision. However, central corneal haze has not been observed in patients
receiving the KeraVision Ring. The Company believes that these visual side
effects are primarily related to the surgery used to insert the KeraVision Ring
and the size of patient's pupil. The preliminary clinical results have suggested
that as the surgical incision heals, the incidence of some of these visual side
effects may decrease. All of these complications and visual side effects have
also been observed in connection with other ophthalmic surgeries. Although the
Company believes these complications and side effects may be mitigated, no
assurance can be given that these or other complications or side effects will
not be serious or lasting or will not impair or preclude its obtaining
regulatory approval for its potential products or the acceptance of the product
by patients or ophthalmologists.
OTHER PRODUCTS UNDER DEVELOPMENT
In addition to its potential products for the treatment of myopia and
astigmatism, the Company is currently developing KeraVision Ring technology for
the treatment of hyperopia. This work is in its initial stages. Data obtained
from laboratory work on eye bank eyes and from finite element analysis has
indicated that hyperopia may be corrected with a device based on the KeraVision
Ring technology. In addition, corneal topographical analysis of these corrected
eye bank eyes has indicated that the cornea is smooth with an optical surface
that may allow for good vision.
The Company is also conducting preliminary research on the use of KeraVision
Ring technology to treat combinations of astigmatism and either hyperopia or
myopia. Early laboratory eye-bank eye testing and finite element analysis have
been encouraging, and the Company is pursuing broader experimentation and
analysis.
11
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MARKETING AND SALES
The primary market for the KeraVision Ring is the ophthalmic surgery market.
There are approximately 16,000 ophthalmic surgeons in the United States,
Germany, France, the United Kingdom, Italy and Japan. Cataract surgery, with an
intraocular lens replacement, is the most prevalent form of ophthalmic surgery,
with over two million procedures being performed annually in the United States,
Germany, France, the United Kingdom, Italy and Japan. Increased consumer
interest in corneal refractive surgery, improved visual results of emerging
refractive surgery techniques, and reduced reimbursement rates for cataract
surgery are providing incentives for ophthalmic surgeons to enter the corneal
surgery market.
The Company currently has limited sales or marketing organization or
experience. Because the ophthalmic surgery market is highly concentrated, the
Company expects to market its products through a direct sales force, or a
combination of a direct sales force and distributors, in the United States and
Europe. In other selected foreign markets, including parts of the Pacific Rim,
the Company expects to seek a strategic partner to assist in regulatory approval
and marketing activities. Medical investigators have presented the KeraVision
Ring technology as an investigational device at various professional meetings
and symposia, in the United States, Europe, and Asia and the Company expects
continued demonstrations of its technology at scientific and ophthalmic
conferences worldwide. As Company has received regulatory approval to
commercialize the KeraVision Ring in Europe, the Company has developed
comprehensive physician training programs to ensure proper education and
training for performing KeraVision Ring procedures. The Company anticipates
that most ophthalmic surgeons will be able to perform the KeraVision Ring
procedure after participating in its training course.
The Company estimates that existing refractive procedure costs range from
$1,000 to $2,500 per eye for a PRK procedure, and $700 to $1,500 per eye for RK.
The Company anticipates that the KeraVision Ring procedure, if approved for
marketing, will be competitively priced with existing refractive surgery
procedures.
The Company commenced sales of the KeraVision Ring in France and Germany in
December 1996. The Company expects to sell the KeraVision Ring and any
potential products to customers outside of the United States until such time, if
ever, the Company receives approval for sales in the United States. In
addition, the Company may begin manufacturing or operating activities outside of
the United States. A number of risks are inherent in international
transactions. International sales and operations may be limited or disrupted by
the imposition of the regulatory approval process, government controls, export
license requirements, political instability, price controls, trade restrictions,
changes in tariffs or difficulties in staffing and managing international
operations. Foreign regulatory agencies have or may establish product standards
different from those in the United States and any inability to obtain foreign
regulatory approvals on a timely basis could have an adverse effect on the
Company's international business and its financial condition and results of
operations. Additionally, the Company's business, financial condition and
results of operations may be adversely affected by fluctuations in currency
exchange rates, increases in duty rates and difficulties in obtaining export
licenses. There can be no assurance that the Company will be able to
successfully commercialize the KeraVision Ring or any future product in any
foreign market.
Establishing sufficient marketing and sales capabilities will require
significant resources. There can be no assurance that the Company will be able
to recruit and retain skilled sales management, direct salespersons or
distributors, or that the Company's sales effort will be successful. To the
extent the Company enters into distribution arrangements for the sale of its
products, the Company will be dependent on efforts of third parties. There can
be no assurance that such efforts will be successful.
REIMBURSEMENT
Currently available refractive surgery procedures, such as RK and PRK, are
generally paid for directly by consumers receiving treatment, and are generally
not reimbursed by third-party payors. It is anticipated that PRK and KeraVision
Ring procedures, if approved, will also be paid for directly by consumers. The
Company believes that the successful development and commercialization of the
KeraVision Ring will not be dependent upon the availability of third-party
reimbursement.
PATENTS AND PROPRIETARY RIGHTS
One of the Company's primary strategies has been to develop a strong
proprietary patent position with respect to the KeraVision Ring technology. The
Company has 173 pending patent applications worldwide and has been
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awarded 16 United States patents and 19 foreign patents. These issued and
pending patents cover various aspects of the Company's KeraVision Ring
technology, including the KeraVision Ring, methods of use, instruments and
related materials and other vision correction technology. The expiration dates
of the United States issued patents range from 2002 to 2015. The Company's
policy is to protect its technology by, among other things, filing patent
applications relating to important aspects of its KeraVision Ring technology and
other vision correction technology. There can be no assurance that patents will
issue on the Company's pending or future patent applications.
The Company will continue to depend substantially on its proprietary
technological expertise with respect to the KeraVision Ring and any other
potential products. In addition, the commercial success of the Company will
depend in part on acquiring and maintaining patent and trade secret protection
with respect to the KeraVision Ring technology, the KeraVision Ring and any
other potential products the Company seeks to develop. The Company is seeking
and expects to continue to seek patents on innovations related to its products
under development. There can be no assurance that the Company will be
successful in obtaining necessary patents or license rights, that the Company's
patent applications will result in the issuance of patents, that the Company
will develop additional proprietary technology that is patentable, that any
issued patents will provide the Company with any competitive advantages or will
withstand challenges by third parties or that patents of others will not have an
adverse effect on the Company. A large healthcare company with refractive
surgery products and substantial resources holds a recently issued United States
patent covering a method for changing the curvature of the cornea by inserting
in the cornea a solid ring. Because this method requires the use of a solid
ring, it necessitates a continuous 360/degree/ incision around the entire
central zone of the cornea. A major United States university holds two United
States patents, one issued in 1992 and the other in 1994, covering a method for
changing the curvature of the cornea by injecting hydrogel material into
separated layers of the corneal tissue. The Company believes the university may
be seeking to commercialize this technology and may have sold or licensed this
technology to a large corporation. There can be no assurance that others will
not independently develop similar products, duplicate the Company's products or
design products that circumvent any patents used by the Company. No assurance
can be given that the Company's processes or products will not infringe patents
or proprietary rights of others or that any licenses required under any such
patents or proprietary rights would be made available on terms acceptable to the
Company, if at all. If the Company does not obtain such licenses, it could
encounter delays in product introductions while it attempts to design around
such patents, or it could find that the development, manufacture or sale of
products requiring such licenses could be enjoined. In addition, the Company
could incur substantial costs in defending itself in suits brought against the
Company on such patents or in bringing suits to protect the Company's patents
against infringement. If the outcome of any such litigation is adverse to the
Company, the Company's business could be adversely affected. To determine the
priority of inventions, the Company may have to participate in proceedings
before the U.S. Patent and Trademark Office, which could result in substantial
cost to the Company and/or be decided adversely to the Company.
Except as noted above, the Company is not aware of any other commercial
entity involved in intrastromal corneal ring development, although it is aware
of ongoing academic research on both solid and injectable forms of corneal
inserts. The Company believes that there appear to be no patents held by others
that would prevent the Company from manufacturing and selling, in the United
States and abroad, the KeraVision Ring and related surgical instruments as they
currently exist.
The Company also relies upon unpatented proprietary technology, and no
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to or
disclose the Company's proprietary technology or that the Company can
meaningfully protect its rights in such unpatented proprietary technology.
The Company's policy is to require each of its employees, consultants,
investigators and advisors to execute a confidentiality agreement upon the
commencement of an employment or consulting relationship with the Company.
These agreements generally provide that all inventions conceived by the
individual and all confidential information developed or made known to the
individual during the term of the relationship shall be the exclusive property
of the Company and shall be kept confidential and not disclosed to third parties
except in specified circumstances. There can be no assurance, however, that
these agreements will provide meaningful protection for the Company's
proprietary information in the event of unauthorized use or disclosure of such
information.
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MANUFACTURING AND SUPPLY
The KeraVision Ring is currently manufactured to the Company's specifications
by an outside contractor using a computer-controlled machining process. The
Company has rights to the machining process, which can be transferred to
KeraVision's facilities if desired. Any such change would require regulatory
review and approval, which could result in significant manufacturing and/or
shipping delays. Critical components of the Company's instrument set are
currently manufactured by the Company at its facility. The Company has entered
into confidentiality agreements with its contract manufacturers in order to
protect the proprietary nature of its technology. There can be no assurance that
the Company will be able to develop clinical or commercial-scale manufacturing
capabilities at acceptable costs or enter into agreements with third parties
with respect to these activities.
The KeraVision Ring is made from PMMA, a clear acrylic used in implantable
intraocular lenses since 1952. PMMA cast sheet is purchased from a sole
supplier and is stored at the Company prior to release to the machining vendor,
but the Company believes it can manufacture PMMA cast sheet internally if this
sole source were to become unavailable. Any such change would require
regulatory review and approval, which could result in significant manufacturing
and/or shipping delays. To date, the Company has experienced no material delays
or problems in dealing with its single-source supplier of PMMA cast sheet.
KeraVision Rings made at machining vendors are received by the Company for
finishing, cleaning, quality inspection and packaging. The KeraVision Ring is
sterilized at an independent contract sterilization facility.
The vendors for machining and sterilization are single-source suppliers.
Since the Company is dependent upon third parties for the manufacture of its
products, the Company's profit margins and its ability to develop and deliver
such products on a timely basis may be adversely affected. Moreover, there can
be no assurance that such parties will adequately perform and any failures by
third parties may delay the submission of products for regulatory approval,
impair the Company's ability to deliver products on a timely basis, or otherwise
impair the Company's competitive position.
The Company has limited volume manufacturing capacity and is building
experience in manufacturing medical devices and other products. To be
successful, the Company's proposed products must be manufactured in commercial
quantities in compliance with regulatory requirements at acceptable costs.
Production in clinical or commercial-scale quantities may involve technical
challenges for the Company. Establishing its own manufacturing capabilities may
require significant scale-up expenses and additions to facilities and personnel.
The Company may consider seeking collaborative arrangements with other companies
to manufacture certain of its potential products, including the KeraVision Ring.
In addition, the manufacturer of the Company's potential products will be
subject to periodic inspection by regulatory authorities. Any such operations
must undergo GMP compliance inspections conducted by the FDA and equivalent
inspections conducted by state and foreign officials. There can be no assurance
that the Company will be able to successfully pass these inspections on a timely
basis or at all. Delays in receipt of or failure to receive such approvals or
loss of previously received approvals would have a material adverse effect on
the Company's business, financial condition and results of operations. There
can be no assurance that the Company will be able to develop clinical or
commercial-scale manufacturing capabilities at acceptable costs or enter into
agreements with third parties with respect to these activities. If the Company
is dependent upon third parties for the manufacture of its proposed products,
then the Company's profit margins and its ability to develop and deliver such
products on a timely basis may be adversely affected. Moreover, there can be no
assurance that such parties will adequately perform and any failures by third
parties may delay the submission of products for regulatory approval, impair the
Company's ability to deliver products on a timely basis, or otherwise impair the
Company's competitive position.
COMPETITION
If approved by the FDA and other regulatory authorities, the KeraVision Ring
will compete with other treatments for refractive problems, including
eyeglasses, contact lenses, other refractive surgery procedures (such as RK),
and other technologies under development, such as PRK, LASIK, ALK and refractive
intraocular lenses. Significant competitive factors in the industry include
efficacy of vision correction, safety, reliability, convenience and price. The
healthcare field is characterized by extensive research and rapid technological
change. At any time, competitors may develop and bring to market new products
or surgical techniques with vision correction capabilities
14
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superior to those of the KeraVision Ring or which would otherwise render the
KeraVision Ring technology obsolete.
Other companies, most of which are larger and better financed than KeraVision,
are engaged in refractive surgery research. Two companies, Summit Technology
and VISX, have received approval to market their products in the United States
and are currently selling PRK systems in the United States and in other
countries around the world. In addition to Summit Technology and VISX, there
are a number of other large entities that currently market and sell laser
systems overseas for use in refractive surgery, including Aesculap-Meditec GmBH
(Germany), Chiron-Technolas (Germany) Nidek (Japan), and Schwind (Germany).
Furthermore, a large healthcare company with refractive surgery products and
substantial resources holds a recently issued United States patent covering a
method for changing the curvature of the cornea by inserting in the cornea a
solid ring. Because this method requires the use of a solid ring, it
necessitates a continuous 360/degree/ incision around the entire central zone of
the cornea. A major United States university holds two United States patents,
one issued in 1992 and the other in 1994, covering a method for changing the
curvature of the cornea by injecting hydrogel material into separated layers of
the corneal tissue. The Company believes the university may be seeking to
commercialize this technology and may have sold or licensed this technology to a
large corporation. Except as noted above, the Company is not aware of any other
commercial entity involved in intrastromal corneal ring development, although it
is aware of ongoing academic research on both solid and injectable forms of
corneal inserts.
Many of these companies and institutions have substantially greater financial,
technical and human resources than the Company and may be better equipped to
develop, manufacture and market such systems. In addition, many of these
companies and institutions have extensive experience in preclinical testing and
human clinical studies. Certain of these companies and institutions may develop
and introduce products or processes competitive with or superior to those of the
Company. Furthermore, if the Company is permitted to commence commercial sales
of products, it will also be competing with respect to manufacturing efficiency
and marketing capabilities, areas in which the Company has no experience.
Finally, the Company intends to market its proposed products to people whose
vision can be corrected with eyeglasses or contact lenses. There can be no
assurance that these persons will elect to undergo surgical insertion of the
KeraVision Ring when such nonsurgical vision-correction alternatives are
available.
The Company's competition will be determined in part by those refractive
surgery products that are ultimately approved for sale by regulatory
authorities. The relative speed at which the Company is able to develop its
potential products, complete the necessary governmental and regulatory approval
processes for those products and manufacture and market commercial quantities of
the products will be important competitive factors.
U.S. GOVERNMENT REGULATION AND PRODUCT TESTING
The Company's potential products are subject to regulation by numerous
governmental authorities in the United States and other countries. In the
United States, medical devices are subject to rigorous FDA review. The Federal
Food, Drug, and Cosmetic Act (the "FDC Act") and other federal statutes and
regulations govern or influence the testing, manufacture, safety, labeling,
storage, record keeping, reporting, approval, advertising and promotion of such
products. Noncompliance with applicable requirements can result in fines,
recall, injunction or seizure of products, total or partial suspension of
production, withdrawal of approval or refusal to approve product approval
applications or allow the Company to enter into supply contracts, and criminal
prosecution. Changes in existing requirements or adoption of new requirements
could have a material adverse effect on the Company's business, financial
condition and results of operation.
Pursuant to the FDC Act, the FDA regulates the manufacture, distribution,
study and approval of medical devices in the United States. Medical devices are
classified into one of three classes (Class I, II or III) on the basis of the
controls necessary to reasonably assure their safety and effectiveness. Safety
and effectiveness can reasonably be assured for Class I devices through general
controls [e.g., labeling, premarket notification and adherence to the Quality
System Regulation/Good Manufacturing Practices] and for Class II devices through
the use of additional special controls (e.g., performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, Class III
devices are those which must receive premarket approval by the FDA to ensure
their safety and effectiveness (e.g., life-sustaining, life-supporting and
implantable devices, or new devices which have been found not to be
substantially equivalent to legally marketed devices). The Company's KeraVision
Ring is considered a Class III device and will require a PMA as will Company
products under development for treatment of myopia, hyperopia and astigmatism.
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<PAGE>
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a Pre-Market Approval ("PMA") application. While the Company
currently has no products for which it is seeking 510(k) clearance, it may file
510(k)s with respect to future potential products. A 510(k) clearance will be
granted (a) to a product if the submitted information establishes that the
proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device, or (b) to a Class III medical device for which the FDA
has not called for PMAs. The FDA has recently been requiring a more rigorous
demonstration of substantial equivalence. It generally takes four to 12 months
from submission to obtain 510(k) premarket clearance, but may take longer. The
FDA may determine that the proposed device is not substantially equivalent, or
that additional data is needed, before a substantial equivalence determination
can be made. A "not substantially equivalent" determination, or a request for
additional information, could delay the market introduction of new products, if
any, that fall into this category and could have a materially adverse effect on
the Company's business, financial condition and results of operations. There
also can be no assurance that the Company will obtain 510(k) premarket clearance
within the above time frames, if at all, for any of the devices for which it may
file a 510(k). Modifications or enhancements of any product that has been
cleared through the 510(k) process that could significantly affect safety or
effectiveness will require new 510(k) submissions.
If human clinical trials of a device are required, and the device presents a
"significant risk," the manufacturer or the distributor of the device will
have to file an IDE application with the FDA, and receive FDA approval of that
IDE, prior to commencing human clinical trials. An IDE application must be
supported by data, typically including the results of animal and laboratory
testing. If an IDE application is approved, human clinical trials may begin at
a specified number of investigational sites with a maximum number of patients,
as approved by the FDA. FDA regulations govern many important aspects of the
clinical investigation of medical products, and require, among other things,
obtaining informed consent from clinical subjects, and securing the approval for
the clinical protocol from an institutional review board ("IRB"). An IRB will
consider, among other things, ethical facts, the safety of patients and the
possible liability of the institution at which the study will be conducted.
Sponsors of clinical trials are permitted to sell investigational devices
distributed in the course of the study provided such compensation does not
exceed the recovery of the costs of manufacture, research, development and
handling. The Company has received FDA approval of an IDE application for its
Phase I, II and III trials for the treatment of myopia with the KeraVision Ring.
A PMA must be filed if the proposed device is not substantially equivalent to
a legally marketed device or to a Class III device for which the FDA has called
for PMAs. A PMA must be supported by extensive data, including preclinical and
clinical trial data, to demonstrate the safety and efficacy of the device. The
Company's KeraVision Ring is considered a Class III device and will require a
PMA as will Company products under development for treatment of myopia,
hyperopia and astigmatism.
Upon receipt of a PMA, the FDA makes a threshold determination as to whether
the application is sufficiently complete to permit a substantive review. If the
FDA determines that the PMA is sufficiently complete to permit a substantive
review, the FDA will "file" the application. Once the submission is filed,
the FDA begins review of the PMA. An FDA review of a PMA generally takes
between one to two years from the date that the PMA is accepted, but may take
significantly longer. The review time is often significantly extended by the
FDA asking for more information or clarification of information already provided
in the submission. During the review period, an advisory committee, typically a
panel of clinicians, will likely be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing
facility to ensure compliance with the FDA's GMP requirements prior to approval
of a PMA. There can be no assurance that any PMA will receive FDA approval.
New PMAs or PMA supplements are required for certain modifications to a device
that is approved through the PMA process. Supplements to a PMA often require
submission of the same type of information as a PMA, except that the supplement
is limited to information needed to support any changes from the product covered
by the original PMA, and may not require the submission of clinical data or the
convening of any advisory committees and corresponding review.
The PMA process can be expensive, uncertain and lengthy, frequently requiring
from one to several years, and many devices for which PMA approval has been
sought by other companies have never been approved for marketing. There can be
no assurance that the Company will be able to obtain necessary regulatory
approvals or clearances on a timely basis or at all, and delays in receipt of or
failure to receive such approvals, the loss of previously received
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<PAGE>
approvals, or failure to comply with existing or future regulatory requirements
will have a material adverse effect on the Company's business, financial
condition and results of operation.
In addition, the FDA may require extensive post-marketing testing and
surveillance to monitor the effects of approved products or place conditions on
any approvals that could restrict the commercial applications of such products.
Product approvals may be withdrawn if compliance with regulatory standards is
not maintained or if problems occur following initial marketing. In addition,
delays imposed by the governmental approval process may materially reduce the
period during which the Company may have the exclusive right to exploit patented
products or technologies.
Before the KeraVision Ring can be commercialized in the United States, the
Company must undergo a series of approval processes that are sequential in
nature. In general terms, the Company must (i) generate biocompatibility and
long-term preclinical safety data; (ii) conduct under an IDE a clinical study
involving nonfunctional human eyes; and (iii) conduct under an IDE a phased
series of clinical studies using sighted human eyes. The Company must submit the
data from these studies to the FDA in a PMA for objective and scientific
evaluation of the data.
In order to meet FDA requirements for the KeraVision Ring for the treatment of
myopia, KeraVision is conducting clinical trials in three phases and has
recently begun Phase III for one range of indication and completed enrollment in
Phase II for another range of indication. The Company may begin
commercialization of the KeraVision Ring in the United States only after the
receipt of PMA approval from the FDA, which the Company expects will take at
least two years from the present time.
The results of the preclinical and clinical studies on medical devices such as
the Company's KeraVision Ring are submitted to the FDA in the form of a PMA
application for approval to commence commercial sales. There can be no
assurance that the safety or efficacy data in the PMA will be deemed
sufficiently complete and adequate by the FDA. If not, a final determination by
FDA regarding approval of the device could be delayed while additional trials
are performed. Such trials could add significant new costs to the program,
which would materially and adversely affect the Company's business, financial
condition and results of operation. Continued compliance with all FDA
requirements and conditions in an approved application, including product
specification, manufacturing process, labeling and promotional material and
record keeping and reporting requirements, is necessary for all products.
Failure to comply, or the occurrence of unanticipated adverse effects during
commercial marketing, could lead to the need for product recall or other FDA-
initiated action, which could delay further marketing until the products are
brought into compliance.
Any products manufactured or distributed by the Company pursuant to a
premarket clearance notification or an approved PMA are subject to pervasive and
continuing regulation by the FDA, including recordkeeping requirements and
reporting of adverse experiences associated with the use of the devices.
Labeling and promotional activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved uses.
The FDC Act requires the Company (and its contract manufacturers) to
manufacture its products in registered establishments and in accordance with
current GMP regulations for devices. As the developer of the KeraVision Ring,
the Company is required to meet certain current GMP requirements. In the event
that the Company were to manufacture the KeraVision Ring, the Company would be
required to adhere to additional GMP requirements for the development and
distribution of the KeraVision Ring. The Company will be required to engage in
extensive recordkeeping and reporting and possibly to conduct extensive post-
market surveillance or other device follow-up. To supply products for use in
the United States, foreign manufacturing establishments must also comply with
GMP regulations and are subject to periodic inspection by the FDA. These
regulations impose certain procedural and documentation requirements upon the
Company with respect to manufacturing and quality assurance activities. The
Company's manufacturing facilities will be subject to periodic inspections by
the FDA and the Food and Drug Branch of the California Department of Health
Services. The Company's products also will be subject to regulation by state
and foreign government agencies.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements. Export sales of investigational devices that have
not received FDA marketing clearance generally are subject to FDA
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<PAGE>
export permit requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company is also subject to regulation by the Occupational Safety and
Health Administration and the Environmental Protection Agency and to regulation
under the Toxic Substances Control Act, the Resource Conservation and Recovery
Act, the National Environmental Policy Act and other regulatory statutes, and
may in the future be subject to other federal, state or local regulations. In
addition, new or modified regulations may be promulgated governing the Company's
potential products that may be more restrictive or that may otherwise alter or
affect the Company's research and development programs. There can be no
assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations in the future or that such laws and
regulations will not have a materially adverse effect upon the Company's ability
to do business. Recently, the FDA has pursued a more rigorous enforcement
program to ensure that regulated businesses, such as the Company, comply with
applicable laws and regulations. The Company is unable to predict whether any
agency will adopt any regulation that would have a material adverse effect on
the Company's operations.
All of the above described government regulation and product approval risks
apply to the KeraVision Ring and will apply to any future potential product of
the Company. Government regulation may become more restrictive in the future.
There can be no assurance that the Company will not be required to incur
significant costs to comply with such laws and regulations in the future or that
such laws and regulations will not have a material adverse effect upon the
Company's ability to conduct business.
EUROPEAN GOVERNMENT REGULATION AND PRODUCT TESTING
The regulatory environment in Europe for medical devices differs significantly
from that in the United States. A total of 15 European countries are grouped in
a union (the "European Union," or "EU") with the objective of establishing a
single market without internal borders among the member countries and
eliminating divergent national requirements. The members of the EU include
Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, The Netherlands, Portugal, Spain, Sweden and the United Kingdom.
The EU has adopted two directives dealing with medical devices, including the
"Active Implantable Medical Devices Directive" and the "Medical Devices
Directive," and has proposed a third directive, the "In Vitro Diagnostic
Medical Devices Directive," to standardize the regulatory requirements for
medical devices.
Products that comply with the requirements of a specified medical directive
will be entitled to bear CE marking, which indicates that the product conforms
with all applicable provisions of the appropriate directive and that the product
may be sold throughout the EU member states and in Iceland and Norway. The
method of assessing conformity varies depending on the class of the product, but
normally involves some combination of a manufacturer's self-assessment and a
third-party (a "Notified Body") assessment, which may consist of an audit of
the manufacturer's quality system and/or specific testing of the product. An
assessment by a Notified Body in only one EU member country will be required in
order for a manufacturer to be able to sell the product throughout the EU.
After June 14, 1998 all commercial medical device products will be required to
bear a CE marking. It will then be illegal to market such products in the EU
without CE marking.
Medical devices such as the Company's KeraVision Ring are regulated under the
Medical Devices Directive (Council Directive 93/42/EEC of 14 June 1993, or the
"Directive"). A manufacturer may affix CE marking after a determination that
the product complies with the essential requirements of the Directive and
completion of the appropriate conformity assessment procedure as specified by
the Directive. The conformity assessment requirements are based upon a given
product's classification within the Directive. Products within the scope of the
Directive are grouped within four classes: Class I, IIA, IIB and III. A product
with a higher classification is considered to have higher risk, and will
therefore be subject to more controls in order to obtain CE marking. The
KeraVision Ring has been designated as a Class IIB device. Essential
requirements under the Directive include substantiating that the device meets
the manufacturer's performance claims and that undesirable side effects of the
device, if any, constitute an acceptable medical risk when weighed against the
intended performance (or benefits) of the device.
There are two basic options for assessing conformity of devices designated as
Class IIB. The first option allows a manufacturer to seek a decision from the
Notified Body that the processes employed in the design and manufacture of a
device qualify as a full quality system. Alternatively, manufacturers can seek
product certification based on certain control schemes. The Company obtained
qualification of its processes as a full quality system.
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The instrumentation supplied by the Company for the purpose of implanting the
KeraVision Ring is also covered by the Directive. These instruments are
classified lower than the KeraVision Ring as Class I and therefore are subject
to fewer requirements.
Once a manufacturer has satisfactorily completed the regulatory compliance
tasks required by the Directive and received a favorable decision from the
Notified Body, it is eligible to affix CE marking to its product. CE marking
will allow the product to be placed on the market in the 15 countries of the EU
and Iceland and Norway. Based on the current regulatory laws, no additional
premarket approvals in the individual countries listed above are required.
Custom-made devices and devices intended for clinical investigation do not bear
CE marking and are subject to particular requirements under the Directive.
Manufacturers are required to report serious adverse incidents concerning CE-
marked devices to the authorities of the countries where the incidents take
place. If such incidents occur, the manufacturer may have to take remedial
action, perhaps including withdrawal of the product from the European market.
The Directive must be transposed into national law in order to be applied.
Some member states of the EU have not yet completed this transposition. This
fact does not in itself create an obstacle to placing a CE-marked medical device
on the market of a country that has failed to transpose the Directive, but it
may result in practical complications and delays in those countries with respect
to product introduction, marketing and sales. This transposition process has
not created significant differences among the member states of the EU with
respect to compliance with the essential requirements and the conformity
assessment process. However, meaningful differences have emerged in at least
the following areas: authorities' evaluation of proposed clinical investigation,
notification of products and activities, handling of adverse event reporting and
language requirements for labels and instructions for use. As the Directive
does not cover distribution practices, healthcare financing and purchasing, it
is expected that there will be significant regulatory variances from country to
country in these areas. No assurances can be given that the transposition of
the Directive into national law will be completed by member countries in a
timely fashion, or at all, or that the failure to complete such transposition or
variations in national law will not materially and adversely affect the Company.
The Company obtained ISO 9001 certification in October 1996 and was granted
the permission from a Notified Body to affix the CE mark to the KeraVision Ring
in November 1996. The right to affix the CE mark can be withdrawn by the
Notified Body and no assurance can be given that it will be obtained again in a
timely fashion or at all.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements. Export sales of investigational devices that have
not received FDA marketing clearance generally are subject to FDA export permit
requirements. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations.
SCIENTIFIC AND MEDICAL ADVISORY BOARD
KeraVision established a Scientific and Medical Advisory Board (the "SMAB")
in 1987 to provide advice to the Company in the areas of ophthalmic research,
medical advice, and oversight to the development of the KeraVision Ring
technology. There are currently members from several countries, including
ophthalmic surgeons from the United States, South America, Europe and Japan, and
scientists specializing in optics, corneal physiology and tissue modeling. The
SMAB meets semiannually to review data, review technological advances and to
advise on research strategies. Some SMAB members currently have, or have had,
consulting and/or research agreements with the Company relating to research work
on the KeraVision Ring or related technology.
DATA AND SAFETY MONITORING BOARD
The Company has established an independent Data and Safety Monitoring Board
(the "DSMB") to serve in a medical monitoring capacity and to review the
collective safety and efficacy data generated from the Company's various
clinical trials. In addition, the members of the DSMB examine representative
patients from the United States investigational sites, provide medical advice to
the clinical investigators, review any complications and provide suggested
guidelines for patient management to the investigators. The DSMB currently
consists of two
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prominent ophthalmologists, who are corneal specialists. Additional individuals
will be added to the DSMB, as required. The members of the DSMB are not and will
not be clinical investigators for the KeraVision Ring.
PRODUCT LIABILITY
The testing, manufacture, marketing and sale of medical devices entail the
inherent risk of liability claims or product recalls. As a result, the Company
faces a risk of exposure to product liability claims and/or product recalls in
the event that the use of its KeraVision Ring or other future potential products
are alleged to have resulted in adverse effects. While the Company has taken,
and intends to continue to take, what it believes are appropriate precautions to
minimize exposure to product liability claims, there can be no assurance that it
will avoid significant liability. The Company currently maintains, product
liability insurance in the amount of $2.0 million per claim with an annual
aggregate limit of $4.0 million. There can be no assurance that adequate
insurance coverage will continue to be available at an acceptable cost, if at
all, before or after commercialization of any of its products. Consequently, a
product liability claim, product recall or other claims with respect to
uninsured liabilities or in excess of insured liabilities could have a material
adverse effect on the business or financial condition of the Company.
RESEARCH AND DEVELOPMENT EXPENSES
The Company's research and development expenses for the years ended December
31, 1994, 1995 and 1996 were approximately $5.1 million, $6.5 million and $10.9
million, respectively.
EMPLOYEES
As of March 17, 1997, the Company had 83 full-time employees, of whom 47 are
engaged in, or directly support, the Company's research and development
activities. The Company also has contracts with outside consultants. The
Company considers relations with its employees to be good. None of the
Company's employees is covered by a collective bargaining agreement.
The success of the Company and of its business strategy is dependent in large
part on the ability of the Company to attract and retain key management,
scientific and operating personnel. Such persons are in high demand and are
often subject to competing employment offers. The Company will need to develop
expertise and add skilled personnel or retain consultants in such areas as
research and development, clinical testing, government approvals, sales,
marketing and manufacturing in the future. There can be no assurance that the
Company will be able to attract and retain the qualified personnel or develop
the expertise needed for its business. The Company currently has a small
research and management group with limited operating experience. The loss of
the services of one or more members of the research or management group or the
inability to hire additional personnel and develop expertise as needed could
have a material adverse effect on the Company. The Company does not have
employment agreements with any of its employees.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, and their ages as of March 17, 1997,
are as follows:
NAME AGE POSITION
- ------------------------- -- ------------------------------------------
Thomas M. Loarie 50 Chairman of the Board of Directors, Chief
Executive Officer and President,
Darlene E. Crockett-Billig 44 Vice President, Regulatory Affairs,
Clinical Research and Quality Assurance
Mark D. Fischer-Colbrie 40 Vice President, Finance and
Administration, Chief Financial Officer
Edward R. Newill 43 Vice President, U.S. Marketing and Sales
Patrick Sabaria 44 Vice President, Europe
Thomas A. Silvestrini 44 Vice President, Research and Development
Robert P. Wood 38 Vice President, Manufacturing
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Thomas M. Loarie has served as President, Chief Executive Officer and Chairman
of the Board of Directors of the Company since September 1987. From 1985 until
joining KeraVision, Mr. Loarie served as President of ABA BioManagement, a
management service firm specializing in medical technology start-ups, and from
1984 to 1985 he served as President of Novacor Medical Corporation, a
manufacturer of cardiovascular implants. Prior to 1984, Mr. Loarie held
management positions in four divisions of American Hospital Supply Corporation,
a manufacturer of healthcare products (now Baxter International), serving most
recently as President of the American Heyer-Schulte Division, where he was
responsible for bringing several new implantable devices to the markets of
neurosurgery, oncology, urology, plastic surgery and wound management as well as
rebuilding the company's international business. Mr. Loarie holds a B.S. degree
in engineering from the University of Notre Dame and has completed graduate work
in business administration at the Universities of Chicago and Minnesota. Mr.
Loarie also serves as a director of the Health Industry Manufacturers
Association.
Darlene E. Crockett-Billig has served as Vice President, Regulatory Affairs
Clinical Research and Quality Assurance of the Company since February 1988.
From 1986 to 1988, she served as Regulatory Affairs Manager for CooperVision
Ophthalmic Products, an ophthalmic device manufacturer, where she was
responsible for all FDA submissions, product approval strategies and regulatory
compliance. Prior to that time, Ms. Crockett-Billig spent ten years in
management and laboratory supervision positions with Miles Laboratories and
Medtronic, Inc., two healthcare products manufacturers. Ms. Crockett-Billig
received her B.A. in Biology from Augustana College and her M.B.A. from the
College of St. Thomas (Minnesota).
Mark D. Fischer-Colbrie has served as Vice President, Finance and
Administration and Chief Financial Officer of the Company since March 1992.
From 1983 to 1992, Mr. Fischer-Colbrie held several senior financial positions,
most recently as Vice President, Controller, at Maxtor Corporation, a
manufacturer of computer disk drives. Prior to 1983, he worked for four years
with a subsidiary of Xerox Corp. in accounting and finance. Mr. Fischer-Colbrie
holds a B.A. from Stanford University and an M.B.A. in Finance and Marketing
from the University of California at Berkeley.
Ted Newill has served as Vice President, Marketing and Sales since May 1996.
Mr. Newill has 18 years of international experience in a broad range of surgical
specialties including plastic surgery, which like vision correction surgery is
consumer-based and non-reimbursed by insurers. Mr. Newill held management
positions with Mentor from 1990 to 1996. Mr. Newill holds a B.S. in General
Business from Miami University and a Masters International Management from
American Graduate School of International Management.
Patrick Sabaria has served as Vice President, Europe since April 1996. Mr.
Sabaria held various management positions with Johnson & Johnson from 1982 to
1996, most recently as European Managing Director. Mr. Sabaria holds a Masters
of Science from Nice and an AEP from European Institute of Business
Administration.
Thomas A. Silvestrini has served as Vice President, Research and Development
of the Company since July 1990. Prior to joining the Company, Mr. Silvestrini
spent 12 years in senior management and project positions including Manager of
Research and Development, Project Leader, and Senior Research Scientist with the
Corporate Research Center of the Hospital Products Group for the Pfizer
Corporation, a manufacturer of healthcare products. He has received 11 patents
for medical devices and has an additional 12 patents pending. Mr. Silvestrini
received his B.S. in Chemical Engineering and his M.S. in Organic Chemistry from
the University of Minnesota.
Robert P. Wood has served as Vice President, Manufacturing since April 1996.
From 1994 to 1996 Mr. Wood was operations manager of Allergan, Inc.'s medical
device and pharmaceutical facility. From 1987 to 1994 Mr. Wood held management
positions with Abbott Laboratories. Mr. Wood holds a B.S., in mechanical
engineering from Texas A&M University.
Each executive officer serves at the sole discretion of the Board of
Directors.
FORWARD LOOKING STATEMENTS
The Company notes that certain of the foregoing statements in this report,
including without limitation statements about timing of FDA approval, are
forward looking. Actual results may differ materially due to a variety of
factors including, but not limited to (i) significant unforeseen delays in the
regulatory approval, (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 regulatory review
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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 below in this Item 1.
RISK FACTORS AFFECTING THE COMPANY, ITS BUSINESS AND ITS STOCK PRICE
Early Stage of Product Development; Operating Losses; Uncertainty of Product
----------------------------------------------------------------------------
Development and Future Revenue. KeraVision, founded in 1986, has only recently
- ------------------------------
completed development of one product for sale in Europe, has generated only
limited revenues to date and is continuing to develop its products for the
united states market. Accordingly, the Company is subject to the uncertainties
and risks associated with any company developing products and beginning its
sales efforts. The Company has experienced significant operating losses every
year since its incorporation. Such losses have resulted principally from costs
incurred in research and development and clinical trials for the KeraVision
Ring. The Company expects to incur substantial and increasing operating losses
for at least the next year and until sufficient revenue and margin can be
generated to offset expenses. The amount of net losses and the time required by
the Company to reach profitability are highly uncertain. There can be no
assurance that the Company will be able to generate product revenue or achieve
profitability on a sustained basis or at all.
To obtain shipment revenues, the Company, alone or with others, must
successfully develop, obtain regulatory approval for, manufacture and market
products. The time frame for achievement of market success for any products and
potential products is long and uncertain. The Company has only recently begun
enrollment of patients for its United States Phase III clinical trials for its
first product, the KeraVision Ring. The KeraVision Ring will require additional
clinical studies and significant investment of capital prior to
commercialization in the United States. Although the Company has received
approval to market one product in the European Union, there can be no assurance
that the Company's research and development efforts will be successfully
completed and there can be no assurance that the KeraVision Ring will perform in
the manner anticipated, or that results observed in animal, eye-bank or human
nonfunctional and sighted-eye testing will be experienced in long-term use of
the KeraVision Ring in human sighted eyes. 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.
Government Regulation and Need for Product Approvals. The research,
----------------------------------------------------
manufacture, sale and distribution of medical devices such as the KeraVision
Ring is subject to regulations imposed by numerous 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
U.S., 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. FDA approval will be required for
commencement of any additional clinical studies for other product indications,
which must be conducted prior to applying for FDA approval to market the
KeraVision Ring in the United States. The Company cannot predict with certainty
when it might first submit a Premarket Approval ("PMA") application to the FDA.
Similarly, the Company cannot predict when, if at all, it will obtain FDA
approvals to market the KeraVision Ring in the United States. Failure to obtain
required FDA or non-European regulatory agency approvals would prevent the
Company from marketing the KeraVision Ring in the jurisdiction regulated by such
agency.
Significant unforeseen delays in the approval process could occur as a result
of determinations by the FDA that the clinical data collected are insufficient
to support the safety and efficacy of one or more of the devices for their
intended uses, the FDA's failure to schedule advisory review panels, changes in
review guidelines, FDA procedures, regulations or administrative
interpretations. Delays in obtaining requisite regulatory approvals, or the
failure to obtain required clearances or approvals in the United States and
other countries, would adversely affect or prevent the marketing of the
KeraVision Ring, impair the Company's ability to generate funds from operations,
and may furnish a competitive advantage to other companies that compete with the
Company. The Company may also be required to demonstrate that the KeraVision
Ring represents an improved form of treatment over existing alternatives and/or
that the expected benefits of the KeraVision Ring outweigh any of the risks
associated with its use. There can be no assurance that the Company will be able
to obtain required approvals or clearances in the United States or certain
foreign countries for the intended use of the KeraVision Ring or any other of
its potential products.
22
<PAGE>
If the KeraVision Ring is approved for the correction of myopia, it may be
subject to additional post-market testing and surveillance programs required by
the regulatory agencies. As the developer of the KeraVision Ring, the Company
is required to meet the Quality System Regulation ("QSR"). In the event that
the Company were to manufacture the KeraVision Ring, the Company would be
required to adhere to additional FDA requirements for the development and
distribution of the KeraVision Ring. The Company will be required to engage in
extensive recordkeeping and reporting, and possibly to conduct extensive post-
market surveillance or other device follow-up. Ongoing compliance with the QSR,
labeling and other applicable regulatory requirements are monitored through
periodic inspections by state and federal agencies, including the FDA, and
comparable agencies in other countries. In addition, regulatory approval of
prices is generally required in many foreign countries. Failure to comply with
the applicable regulatory requirements can, among other things, result in fines,
injunctions, civil penalties, suspensions or withdrawal of regulatory approvals,
product recalls, product seizures, including cessation of manufacturing and
sales, operating restrictions and criminal prosecution, and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements. Export sales of investigational devices that have
not received FDA marketing clearance generally are subject to FDA export permit
requirements. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations.
All of the above described government regulation and product approval risks
will apply to the KeraVision Ring and any future potential product of the
Company. Government regulation may become more restrictive in the future.
There can be no assurance that the Company will not be required to incur
significant costs to comply with such laws and regulations in the future or that
such laws and regulations will not have a material adverse effect upon the
Company's ability to conduct business. See "Business--U.S. Government
Regulation and Product Testing" and "Business--European Government Regulation
and Product Testing."
Need for Market Acceptance of the KeraVision Ring and Other Products;
---------------------------------------------------------------------
Limitations on Potential Market. The Company's future performance will depend
- -------------------------------
to a substantial degree upon market acceptance of, and the Company's ability to
successfully manufacture, market, deliver and support, the KeraVision Ring and
related products. The extent of, and rate at which, market acceptance and
penetration are achieved by the KeraVision Ring and future products is a
function of many variables including, but not limited to, price, safety,
efficacy, reliability and marketing and sales efforts, as well as general
economic conditions affecting purchasing patterns. To be successful, the
Company's KeraVision Ring will have to be accepted by ophthalmic surgeons as
well as myopic patients. Many of these surgeons may have already invested
significant time and resources in developing expertise in other corrective
ophthalmic surgical techniques. Accordingly, there can be no assurance that the
KeraVision Ring or any future product will achieve or maintain acceptance in
their target markets. Similar risks may confront other products developed by
the Company in the future. See "Business--Marketing and Sales" and
"Business--Manufacturing and Supply."
Of the 70 million myopic people in the United States, an estimated 22 million
patients in the age range of 25 to 54 have low to moderate myopia without
significant astigmatism are the Company's target market. The Company views this
age group as the primary population for refractive surgery because of a lack of
refractive stability in younger patients, and a possilbe preference for
eyeglasses and contact lenses amount older patients. In addition to age and
degree of myopia, the Company believes that the potential market for the
KeraVision Ring may be further limited by the inability of some patients to
afford the procedure and the psychological aversion of some patients to
refractive surgery. The Company also expects that the market will be affected
by the relative attractiveness and affordability of other refractive surgical
techniques.
Lack of Long-Term Follow-Up Data; Complications and Visual Side Effects. The
-----------------------------------------------------------------------
Company has developed only limited clinical data to date on the safety and
efficacy of the KeraVision Ring in correcting myopia, and has not yet developed
any long-term safety or efficacy data. The KeraVision Ring technology is
relatively new technology. The first procedure for the treatment of myopia using
the KeraVision Ring was performed in 1991, and to date only 778 procedures have
been conducted. The KeraVision Ring is in United States Phase II and Phase III
clinical trials, and it cannot yet be determined if the KeraVision Ring
technology will prove to be effective for the predictable treatment of myopia or
other common vision problems. There can be no assurance that the initial
clinical trial
23
<PAGE>
results are necessarily indicative of future clinical trial results. Because
KeraVision has conducted only limited clinical studies to date, there can be no
assurance that long-term safety and efficacy data when collected will be
consistent with these clinical trial results and will demonstrate that the
KeraVision Ring can be used safely and successfully to treat myopia in a broad
segment of the population or on a long-term basis.
All surgical procedures, including the KeraVision Ring procedure, involve some
inherent risk of complications. Certain complications have been observed in a
small number of patients who have received the KeraVision Ring, but no patient
has suffered any serious or lasting injury to the eye or any material loss of
either uncorrected or best corrected visual acuity. The complications observed
to date with the KeraVision Ring appear to be related to surgical technique.
The complications include, among other things: induced astigmatism and a
temporary reduction in central corneal sensation. Furthermore, there have been
four patients who had their KeraVision Rings removed due to a surgery-related
infection. In addition, patients undergoing the KeraVision Ring procedure have
reported certain visual side effects. These include glare, haloes and reduced
night vision. The Company believes that these visual side effects are primarily
related to the surgery used to insert the KeraVision Ring. No assurance can be
given that these complications or side effects will not be serious or lasting or
will not impair or preclude the Company from obtaining regulatory approval for
its potential products.
Reliance on a Single Product. The Company has concentrated its efforts
----------------------------
primarily on the development of the KeraVision Ring for the correction of myopia
and will be dependent upon the successful development of that product to
generate revenues. The Company has performed only limited research on other
applications of the KeraVision Ring technology. There can be no assurance that
the KeraVision Ring technology will prove safe and effective in vision
correction, or that if proven safe and effective, the technology will be
successfully commercialized.
Dependence on Patents and Proprietary Technology. The Company has depended
------------------------------------------------
and will continue to depend substantially on its technological expertise in the
development and manufacture of the KeraVision Ring and any other potential
products. In addition, the commercial success of the Company will depend in
part on acquiring and maintaining patent and trade secret protection with
respect to the KeraVision Ring technology, the KeraVision Ring and any other
potential products the Company seeks to develop. There can be no assurance that
the Company will be successful in obtaining necessary patents or license rights,
that the Company's patent applications will result in the issuance of patents,
that the Company will develop additional proprietary technology that is
patentable, that any issued patents will provide the Company with any
competitive advantages or will withstand challenges by third parties or that
patents of others will not have an adverse effect on the Company. A large
healthcare company with refractive surgery products and substantial resources
holds a recently issued United States patent covering a method for changing the
curvature of the cornea by inserting a solid ring in the cornea. Because this
method requires the use of a solid ring, it necessitates a continuous
360/degree/ incision around the entire central zone of the cornea. A major
United States university holds two United States patents, one issued in 1992 and
the other in 1994, covering a method for changing the curvature of the cornea by
injecting hydrogel material into separated layers of the corneal tissue. The
Company believes the university may be seeking to commercialize this technology.
The Company does not believe it is infringing any of such patents. Except as
noted above, the Company is not aware of any other commercial entity involved in
intrastromal KeraVision Ring development, although it is aware of ongoing
academic research on both solid and injectable forms of corneal inserts. There
can be no assurance that others will not independently develop similar products,
duplicate the Company's products or design products that circumvent any patents
used by the Company. No assurance can be given that the Company's processes or
products will not infringe patents or proprietary rights of others or that any
licenses required under any such patents or proprietary rights would be made
available on terms acceptable to the Company, if at all. If the Company does not
obtain such licenses, it could encounter delays in product introductions while
it attempts to design around such patents, or it could find that the
development, manufacture or sale of products requiring such licenses could be
enjoined. In addition, the Company could incur substantial costs in defending
itself in suits brought against the Company on such patents or in bringing suits
to protect the Company's patents against infringement. If the outcome of any
such litigation is adverse to the Company, the Company's business could be
adversely affected. To determine the priority of inventions, the Company may
have to participate in proceedings before the U.S. Patent and Trademark Office,
which could result in substantial cost to the Company and/or be decided
adversely to the Company. See "Business--Patents and Proprietary Rights" and
"Business--Competition."
The Company also relies on trade secrets and proprietary know-how which it
seeks to protect by confidentiality agreements with its employees, consultants,
investigators and advisors. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, or that the
24
<PAGE>
Company's trade secrets and proprietary know-how will not otherwise become known
or be independently discovered by competitors.
Intense Competition and Rapid Technological Change. The Company is engaged in
--------------------------------------------------
a rapidly evolving field. There are many companies, both public and private,
universities and research laboratories engaged in activities relating to
research on vision correction alternatives, including RK, PRK, Laser in situ
Keratomileusis ("LASIK"), Automated Lamellar Keratoplasty ("ALK") and
refractive intraocular lenses. Competition from these companies, universities
and laboratories is intense and expected to increase. Two companies, Summit
Technology and VISX, have conducted Phase III clinical studies in the United
States to evaluate PRK for the treatment of myopia. Both companies have
received approval to market their products in the United States. In addition to
Summit Technology and VISX, there are a number of other entities that currently
market and sell laser systems overseas for use in refractive surgery, including
Aesculap-Meditec GmBH (Germany), Chiron-Technolas (Germany), Nidek (Japan) and
Schwind (Germany). Furthermore, a large healthcare company with refractive
surgery products and substantial resources holds a recently issued United States
patent covering a method for changing the curvature of the cornea by inserting a
solid ring in the cornea. Because this method requires the use of a solid ring,
it necessitates a continuous 360/degree/ incision around the entire central zone
of the cornea. A major United States university holds two United States patents,
one issued in 1992 and the other in 1994, covering a method for changing the
curvature of the cornea by injecting hydrogel material into separated layers of
the corneal tissue. The Company believes the university may be seeking to
commercialize this technology and may have sold or licensed this technology to a
large corporation. Except as noted above, the Company is not aware of any other
commercial entity involved in intrastromal KeraVision Ring development, although
it is aware of ongoing academic research on both solid and injectable forms of
corneal inserts. Many of these companies and institutions have substantially
greater resources, research and development staffs, facilities, experience in
research and development, obtaining regulatory approval and manufacturing and
marketing medical device products than the Company, and represent significant
long-term competition for the Company. In addition to those mentioned above,
other recently developed technologies or procedures are, or may in the future
be, the basis of competitive products. There can be no assurance that the
Company's competitors will not succeed in developing technologies, procedures or
products that are more effective or economical than those being developed by the
Company or that would render the Company's technology and proposed product
obsolete or noncompetitive. Furthermore, if the Company is permitted to commence
commercial sales of products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which the Company
has no experience. Finally, the Company intends to market its proposed products
to people whose vision can be corrected with eyeglasses or contact lenses. There
can be no assurance that these persons will elect to undergo surgical insertion
of the KeraVision Ring when such non-surgical vision-correction alternatives are
available. See "Business--Competition."
No Manufacturing Experience; Dependence on Third Parties. The Company has
--------------------------------------------------------
limited volume manufacturing capacity and experience in manufacturing medical
devices or other products. To be successful, the Company's products and
potential products must be manufactured in commercial quantities in compliance
with regulatory requirements at acceptable costs. Production of commercial-
scale quantities may involve technical challenges for the Company. Establishing
its own manufacturing capabilities would require significant scale-up expenses
and additions to facilities and personnel. The Company may consider seeking
collaborative arrangements with other companies to manufacture certain of its
products and potential products, including the KeraVision Ring. In addition,
the manufacturer of the Company's products and potential products will be
subject to periodic inspection by regulatory authorities. Any such operations
must undergo QSR compliance inspections conducted by the FDA and equivalent
inspections conducted by state and foreign officials. There can be no assurance
that the Company will be able to obtain necessary regulatory approvals on a
timely basis or at all. Delays in receipt of or failure to receive such
approvals or loss of previously received approvals would have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to develop commercial-
scale manufacturing capabilities at acceptable costs or enter into agreements
with third parties with respect to these activities. When the Company is
dependent upon third parties for the manufacture of its products and proposed
products, then the Company's profit margins and its ability to develop and
deliver such products on a timely basis may be adversely affected. Moreover,
there can be no assurance that such parties will adequately perform and any
failures by third parties may delay the submission of products for regulatory
approval, impair the Company's ability to deliver products on a timely basis, or
otherwise impair the Company's competitive position. See "Business--
Manufacturing and Supply."
No Sales or Marketing Experience. The Company has only recently begun selling
--------------------------------
product in Europe and there are no implantable corneal devices currently being
marketed and sold to treat refractive problems. The Company
25
<PAGE>
intends to market and sell the KeraVision Ring and related technology in the
United States and certain foreign countries, if and when required regulatory
authorization is obtained, through a direct sales force or a combination of a
direct sales force and distributors. Establishing sufficient marketing and sales
capability will require significant resources. There can be no assurance that
the Company will be able to recruit and retain skilled sales management, direct
salespersons or distributors, or that the Company's sales effort will be
successful. To the extent that the Company enters into distribution arrangements
for the sale of its products, the Company will be dependent on the efforts of
third parties. There can be no assurance that such efforts will be successful.
See "Business--Marketing and Sales."
Risk of Product Liability Litigation; Potential Unavailability of Insurance.
---------------------------------------------------------------------------
The testing, manufacture, marketing and sale of medical devices entail the
inherent risk of liability claims or product recalls. As a result, the Company
faces a risk of exposure to product liability claims and/or product recalls in
the event that the use of its KeraVision Ring or other future potential products
are alleged to have resulted in serious adverse effects. While the Company has
taken, and intends to continue to take, what it believes are appropriate
precautions to minimize exposure to product liability claims, there can be no
assurance that it will avoid significant liability. The Company currently
maintains, product liability insurance in the amount of $2.0 million per claim
with an annual aggregate limit of $4.0 million. There can be no assurance that
adequate insurance coverage will continue to be available at an acceptable cost,
if at all, before or after commercialization of any of its products.
Consequently, a product liability claim, product recall or other claims with
respect to uninsured liabilities or in excess of insured liabilities could have
a material adverse effect on the business or financial condition of the Company.
See "Business--Product Liability Insurance."
Future Capital Requirements and Uncertainty of Future Funding. The Company
-------------------------------------------------------------
expects that its current cash, cash equivalents and short-term investments will
be sufficient to fund the Company's operations through at least the next 12
months. However, the Company will be required to commit substantial resources
to conduct the research and development, clinical studies and regulatory
activities necessary to bring any potential medical device products to market
and to establish production, marketing and sales capabilities. There can be no
assurance that the Company's current cash, cash equivalents and short-term
investments will be sufficient to fund the Company's operations to profitability
or through completion of the United States Phase III clinical trial for the
KeraVision Ring for the treatment of myopia. The Company may need to raise
substantial additional funds for these purposes. The Company may seek such
additional funding through collaborative arrangements and through public or
private debt or equity financings. Any additional equity financing may be
dilutive to stockholders, and any debt financing, if available, may involve
restrictions on the Company's ability to pay dividends on its capital stock or
the manner in which the Company conducts its business. The Company currently
has no commitments for any additional financings, and there can be no assurance
that any such financings, if needed, will be available to the Company or that
adequate funds for the Company's operations, whether from the Company's
revenues, financial markets, collaborative or other arrangements with corporate
partners or from other sources, will be available when needed or on terms
attractive to the Company. The inability to obtain sufficient funds may require
the Company to delay, scale back or eliminate some or all of its research and
product development programs, clinical studies and/or regulatory activities or
to license third parties to commercialize products or technologies that the
Company would otherwise seek to develop itself.
Dependence on Sole Source Supplier. The raw material used in manufacturing
----------------------------------
the KeraVision Ring is currently purchased from a single source. Although the
Company has not experienced difficulty acquiring this material for the
manufacture of its products for clinical trials, no assurance can be given that
interruptions in supplies will not occur in the future or that the Company would
not have to obtain substitute vendors, which would require additional regulatory
submissions. Any such interruption of supply could have a material adverse
effect on the Company's ability to manufacture its products which could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Business--Manufacturing and Supply."
International Sales and Operations Risks. The Company initially plans to sell
----------------------------------------
the KeraVision Ring and any future products to customers outside of the United
States. In addition, the Company may begin manufacturing or operating
activities outside of the United States. A number of risks are inherent in
international transactions. International sales and operations may be limited
or disrupted by the imposition of the regulatory approval process, government
controls, export license requirements, political instability, price controls,
trade restrictions, changes in tariffs or difficulties in staffing and managing
international operations. Foreign regulatory agencies have or may establish
product standards different from those in the United States and any inability to
obtain foreign regulatory approvals on a timely basis could have an adverse
effect on the Company's international business and its financial
26
<PAGE>
condition and results of operations. Additionally, the Company's business,
financial condition and results of operations may be adversely affected by
fluctuations in currency exchange rates, increases in duty rates and
difficulties in obtaining export licenses. The impact of future exchange rate
fluctuations cannot be predicted adequately. To date, the Company has not found
it necessary to hedge the risk associated with fluctuations in exchange rates.
However, it is possible that the Company may undertake such transactions in the
future. There can be no assurance that any hedging techniques implemented by the
Company will be successful or that the Company's results of operations will not
be materially adversely affected by exchange rate fluctuations. There can be no
assurance that the Company will be able to successfully commercialize the
KeraVision Ring or any future product in any foreign market. See "Business--
Marketing and Sales."
Dependence on and Need for Additional Key Personnel. The success of the
---------------------------------------------------
Company and of its business strategy is dependent in large part on the ability
of the Company to attract and retain key management, scientific and operating
personnel. Such persons are in high demand and are often subject to competing
employment offers. The Company will need to develop expertise and add skilled
personnel or retain consultants in such areas as research and development,
clinical testing, government approvals, sales, marketing and manufacturing in
the future. There can be no assurance that the Company will be able to attract
and retain the qualified personnel or develop the expertise needed for its
business. The Company currently has a small research and management group with
limited operating experience. The loss of the services of one or more members
of the research or management group or the inability to hire additional
personnel and develop expertise as needed could have a material adverse effect
on the Company.
Possible Volatility of Stock Price. The market prices for securities of
----------------------------------
medical device companies have been highly volatile. Announcements regarding the
results of regulatory approval filings, clinical studies or other testing,
technological innovations or new commercial products by the Company or its
competitors, government regulations, developments concerning proprietary rights
or public concern as to safety of technology have historically had, and are
expected to continue to have, a significant impact on the market prices of the
stocks of medical device companies. The trading price of the Common Stock could
also be subject to significant fluctuations in response to variations in
operating results.
ITEM 2. PROPERTIES
- -------------------
KeraVision's manufacturing, laboratory and administrative facilities occupy
approximately 40,000 square feet of space in Fremont, California. The facility
is subject to a lease which expires in 1999. The current monthly rent is
approximately $18,000. In addition, the Company occupies approximately 12,886
square feet of space in another facility located in Fremont, California. The
facility is subject to a lease which expires in 1999. The current monthly rent
is approximately $10,900. The Company's European sales facilities occupy
approximately 3,300 square feet of space in Chatenay-Malabry, France. The
facility is subject to a lease which expires in 1999. The current monthly rent
is approximately $4,500. The Company believes that this space is adequate for
its immediate needs, and that it will be able to renew its lease or obtain
additional space as necessary.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
There is no material legal proceeding to which the Company is a party or to
which any of its properties are subject. No material legal proceedings were
terminated in the year ended December 31, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter for the fiscal year ended December 31, 1996.
27
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
- -------------------------------------------------------------------------
MATTERS
- -------
The following table sets forth, for the periods indicated, the high and
low trading prices for the Company's common stock as reported on the Nasdaq
National Market following the Company's initial public offering in July 1995.
CALENDAR YEAR HIGH LOW
---------------- ------ --------
1996
First quarter $14.25 $10.875
Second quarter 18.00 12.00
Third quarter 16.75 13.50
Fourth quarter 17.50 13.50
1995
Third quarter 13.75 10.00
Fourth quarter 13.00 9.00
Only six quarters are presented above as, prior to the initial public
offering in July 1995, there was no established public trading market for the
Company's common stock.
The closing stock price on February 27, 1997 was $12.25. The Company
reported 240 stockholders of record and 2,000 beneficial holders of the
Company's common stock on February 27, 1997.
The Company has not historically paid cash dividends. The Company does not
anticipate paying cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following table summarizes selected consolidated financial information
for each of the five years ended December 31.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(in thousands, except per share data) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales............................... $ 137 $ -- $ -- $ -- $ --
Costs and expenses:
Cost of sales.......................... 319 -- -- -- --
Research and development............... 10,888 6,.527 5,146 4,300 2,859
General and administrative............. 3,930 1,725 1,262 1,119 986
-------- -------- -------- -------- --------
Total costs and expenses................ 15,137 8,252 6,408 5,419 3,845
-------- -------- -------- -------- --------
Loss from operations.................... (15,000) (8,252) (6,408) (5,419) (3,845)
Interest income, net.................... 2,121 1,203 425 423 342
Other expense........................... -- (57) (114) -- --
-------- -------- -------- -------- --------
Net loss................................ $(12,879) $ (7,106) $ (6,097) $ (4,996) $ (3,503)
======= ======== ======== ======== ========
Net loss per share...................... $(1.04)
Pro forma net loss per share............ $(0.71) $(0.74)
Shares used in per share calculation.... 12,342 9,964 8,288
DECEMBER 31,
(in thousands) 1996 1995 1994 1993 1992
- ---------------------------------------- -------- -------- -------- -------- ---------
BALANCE SHEET DATA
Cash, cash equivalents and short-term
investments............................ $ 32,065 $ 44,703 $ 5,909 $ 11,057 $ 15,683
Working capital......................... 30,435 43,205 4,935 10,418 15,350
Total assets............................ 35,485 45,919 6,934 11,733 16,387
Capital lease obligations, noncurrent... 793 114 210 134 166
Redeemable convertible preferred stock.. -- -- 27,844 27,844 27,857
Accumulated deficit..................... (43,265) (30,403) (23,440) (17,200) (12,204)
Total stockholders' equity (net capital
deficiency)............................ 31,765 44,035 (22,144) (16,917) (11,999)
</TABLE>
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in the Annual Report and this
Form 10K.
The Company notes that certain of the statements in this report, including
without limitation statements about timing of FDA approval, are forward looking.
Actual results may differ materially due to a variety of factors including, but
not limited to (i) significant unforeseen delays in the 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 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.
OVERVIEW
Since its founding in November 1986, the Company has been engaged in the
research and development of the KeraVision Ring and related technology.
Although the Company began stocking shipments to a distributor and recorded its
first revenue in the quarter ended December 31, 1996, the Company expects to
continue to incur substantial losses at least through the year ending December
31, 1997 and until sufficient revenue and margin can be generated to offset
expenses. Given the uncertainties in developing a new market, revenues may not
significantly accelerate 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 in
European Union countries.
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. After approvals have been given, product approvals
and clearances 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 European countries.
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, 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.
29
<PAGE>
YEARS ENDED DECEMBER 31, 1996 AND 1995
The Company recorded its first revenues in the quarter ended December 31,
1996. Net revenues totaled $137,000 for the year ended December 31, 1996.
Primarily all of 1996 product sales were composed of stocking sales to a German
distributor.
Research and development expenses, which include clinical and regulatory
expenses, for the year ended December 31, 1996 were $10.9 million, an increase
of $4.4 million from the $6.5 million incurred in the prior year. The increase
in research and development expense is primarily due to increased costs
associated with expanded clinical studies along with an increase in
manufacturing development costs and other final development expenses to prepare
for product launch in late December 1996. Research and development expenses for
the most recent year represented 73% of the $15.0 million loss from operations,
and in 1995 represented 79% of the $8.3 million loss from operations. The
Company expects research and development expenses to continue to increase, as
clinical trials continue in Europe and the United States.
General and administrative expenses in 1996 were $3.9 million, an increase
of $2.2 million from 1995. The increase in spending reflects increased staffing
and associated expenses, costs associated with the set-up of an European
headquarters and additional expenses for the marketing and sales launch of the
KeraVision Ring in Europe.
The Company recorded $2.1 million of net interest income for the year ended
December 31, 1996, as compared to $1.2 million for the previous year. Interest
income increased due to the short-term investment of net proceeds of $44.4
million from the Company's initial public offering completed on August 2, 1995,
in addition to funds being invested over the full year of 1996. The net loss in
1996 was $12.9 million, an increase of $5.8 million from the net loss of $7.1
million in 1995. The Company believes that its net loss could significantly
increase in 1997.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Research and development expenses, which include clinical and regulatory
expenses, for the year ended December 31, 1995 were $6.5 million, an increase of
$1.4 million from the $5.1 million incurred in the prior year. The higher
expense level was due primarily to higher clinical study, patent and quality
assurance costs, partially offset by lower outside research expenses. Research
and development expenses for the most recent year represented 79% of the loss
from operations of $8.3 million in 1995 and 80% of the loss from operations of
$6.4 million in 1994.
General and administrative expenses in 1995 were $1.7 million, an increase
of $0.5 million from 1994, primarily as the result of increased expenses
associated with marketing efforts, the hiring of personnel, and operating as a
public company.
The Company recorded $1.2 million of net interest income for the year ended
December 31, 1995, as compared to $0.4 million for the previous year. Interest
income increased due to the short-term investment of net proceeds of $44.4
million from the Company's initial public offering completed on August 2, 1995.
The net loss in 1995 was $7.1 million, an increase of $1.0 million from the net
loss of $6.1 million in 1994.
TAX MATTERS
As of December 31, 1996, the Company had federal and state net operating
loss carryforwards of approximately $18 million and $4 million, respectively.
The Company also had federal and state research and experimentation credits of
approximately $0.7 million and $0.6 million, respectively. The net operating
loss and credit carryforwards will expire at various dates beginning in 2003
through 2011 if not utilized. Utilization of the net operating losses and
credits may be subject to a substantial annual limitation due to the "change of
ownership" rules provided by the Internal Revenue Code and similar state tax
provisions. The Company believes that the annual limitation , if any, will not
be material.
Under Statement of Financial Accounting Standards No. 109 (SFAS 109),
deferred tax assets and liabilities are based on differences between financial
reporting and tax basis of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company has
30
<PAGE>
provided a full valuation allowance against its net deferred tax assets due to
uncertainties surrounding their realization, primarily due to the Company's lack
of an earning history.
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 of its Common Stock 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 has increased from $6.1 million in 1995 to
$12.3 million in 1996, reflecting increasing net losses principally related to
increased research and development expenditures. Cash, cash equivalents and
short-term investments were $32.1 million at December 31, 1996 as compared to
$44.7 million at December 31, 1995. Capital expenditures increased from $0.3
million in 1995 to $1.6 million in 1996, but were largely financed through
capital lease arrangements. As of December 31, 1996, the Company has $920,000
available on its lease line.
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 establishment of a sales and marketing
organization and the support for ongoing administrative activities. The Company
anticipates that existing cash, cash equivalents and short-term investments will
enable it to maintain its current and planned 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
See Item 14(a) for an index to financial statements and supplementary
information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
31
<PAGE>
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file a definitive proxy statement within 120 days
after the end of its fiscal year pursuant to Regulation 14A (the "Proxy
Statement") for its annual meeting of stockholders scheduled to be held May 6,
1997, and the information included therein is incorporated herein by reference
to the extent detailed below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information with respect to the Registrant's directors required by
this Item is incorporated by reference from the information under the caption
"Election of Directors--Board of Directors" in the Registrant's Proxy Statement.
Information as to the Registrant's executive officers is set forth in
"Item 1 -- Business -- Executive Officers of the Company" in this Annual Report
on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information required by this Item is incorporated by reference from
the information under the caption "Executive Compensation" in the Registrant's
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information required by this Item is incorporated by reference from
the information under the caption "Common Stock Ownership of Certain Beneficial
Owners and Management" in the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information required by this Item is incorporated by reference from
the information under the caption "Certain Relationships and Related
Transactions" in the Registrant's Proxy Statement.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------- ---------------------------------------------------------------
<TABLE>
<CAPTION>
(a) (1) The following financial statements and Report of Ernst & Young
LLP, Independent Auditors, are filed as part of this report:
<S> <C>
Page
----
Reports of Ernst & Young,
Independent Auditors.................................................... 37
Consolidated Balance Sheets at
December 31, 1996 and 1995.............................................. 38
Consolidated Statements of
Operations Years ended December 31,
1996, 1995 and 1994..................................................... 39
Consolidated Statements of
Redeemable Convertible Preferred Stock
and Stockholders' Equity Years
ended December 31, 1996, 1995 and 1994.................................. 40
Consolidated Statements of
Cash Flows Years ended December 31,
1996, 1995, and 1994.................................................... 41
Notes to Consolidated Financial Statements............................... 42
(2) Financial Statement Schedules
Schedules have been omitted because the information required to
be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of
Regulation S-K)
</TABLE>
EXHIBIT
NUMBER
- ------- DESCRIPTION
----------------------------------------
2.1 Agreement and Plan of Merger by and between KeraVision, Inc., a
Delaware corporation, and KeraVision, Inc., a California
corporation.(1)
3.1 Amended and Restated Certificate of Incorporation of Registrant
(California).(1)
3.2 Bylaws of Registrant.(1)
3.3 Certificate of Incorporation of Registrant.(1)
33
<PAGE>
3.4 Amended and Restated Certificate of Incorporation of Registrant
(Delaware).(1)
3.5 Bylaws of Registrant (Delaware).(1)
10.1 Form of Indemnification Agreements for directors and officers
(California).(1)
10.2 Form of Indemnification Agreements for directors and officers
(California).(1)
10.3 1987 Stock Purchase Plan and forms of agreements thereunder.(1)(2)
10.4 1987 Stock Option Plan and forms of agreements thereunder.(1)(2)
10.5 1995 Employee Stock Purchase Plan and form of subscription agreement.
(1)(2)
10.6 1995 Stock Plan and forms of agreements thereunder.(1)(2)
10.7 1995 Directors' Option Plan and form of subscription agreement.(4)(2)
10.8 401(k) Plan.(1)(2)
10.9 Fremont Office Lease dated August 20, 1993.(1)
10.10 Kilmer License Agreement, dated December 31, 1992.(1)
10.11 Manufacturing Agreement dated October 1, 1992.(1)(3)
10.12 Form of Warrant for Series D Preferred Stock between Registrant and
certain holders of Common Stock of Registrant.(1)
10.13 Promissory Notes, dated January 29, 1988, March 8, 1988, March 8,
1989, October 30, 1991, April 12, 1993 and November 7, 1993,
executed by Thomas Loarie in favor of the Registrant and
all amendments thereto.
10.14 Promissory Notes, dated September 17, 1990, October 30, 1991,
October 30, 1991, and November 7, 1993, executed by Thomas
Silvestrini in favor of the Registrant and all amendments thereto.
10.15 Promissory Note, dated November 7, 1993, executed by Mark
Fischer-Colbrie in favor of the Registrant and all amendments
thereto.(1)
10.16 October 30, 1991, and November 7, 1993, executed by Darlene Crockett-
Billig in favor of the Registrant and allamendments thereto.
10.17 Consulting Agreement dated January 19, 1994 between the Registrant
and John R. Gilbert, and all amendments thereto.(1)
10.18 Information and Registration Rights Agreement between the Registrant
and holders of the Preferred Stock of the Registrant, dated as of
November 19, 1992.(1)
10.19 Consulting Agreement dated January 1, 1996 between the Registrant
and John R. Gilbert(4)
10.20 Employment Agreement dated January 1997 between the Registrant and
Thomas M. Loarie
10.21 Distribution Agreement dated as of October 31, 1996 by and between the
Registrant and AM Peschke, a German corporation(5)
11.1 Statement regarding computation of net loss per share.
13.1 1996 Annual Report to Stockholders.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See Page 35 of this Report).
27 Financial Data Schedule.
- ----------------
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits," of the Registrant's Registration
Statement on Form S-1 and Amendment No. 1, Amendment No. 2 and Amendment
No. 3 thereto (File No. 33-92880), which became effective on July 27, 1995.
(2) Management contract or compensatory plan or arrangement.
(3) Confidential treatment has been granted with respect to certain portions of
this Exhibit by the Securities and Exchange Commission by order dated July
27, 1995.
(4) Incorporated by reference to identically numbered exhibits filed in
response to the 16(a), Exhibits of the Registrants Annual Report on Form
10-K for the year ended December 31, 1995.
(5) Confidential treatment has been sought with respect to certain portions of
this Exhibit.
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter ended December 31,
1996.
34
<PAGE>
SIGNATURES
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 in the City of Menlo
Park, California on this 28th day of March 1997.
KERAVISION, INC.
By: /s/ Mark Fischer-Colbrie
------------------------
Mark Fischer-Colbrie
Vice President, Finance and
Administration, Chief Financial Officer and Assistant Secretary
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Thomas M. Loarie and Mark Fischer-
Colbrie, jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- -------------------------------- --------------
<S> <C> <C>
/s/ Thomas Loarie Chairman of the Board of March 28, 1997
- ----------------------------- Directors, President and Chief
(Thomas M. Loarie) Executive Officer (Principal
Executive Officer)
/s/ Mark Fischer-Colbrie Vice President, Finance and March 28, 1997
- ----------------------------- Administration, Chief Financial
(Mark Fischer-Colbrie) Officer, and Assistant
Secretary (Principal Financial
and Accounting Officer)
/s/ Charles Crocker Director March 28, 1997
- -----------------------------
(Charles Crocker)
/s/ John R. Gilbert Director March 28, 1997
- -----------------------------
(John R. Gilbert)
/s/ Lawrence Lehmkuhl Director March 28, 1997
- -----------------------------
(Lawrence Lehmkuhl)
/s/ Kshitij Mohan Director March 28, 1997
- -----------------------------
(Kshitij Mohan)
/s/ Arthur M. Pappas Director March 28, 1997
- -----------------------------
(Arthur M. Pappas)
/s/ Steven N. Weiss Director March 28, 1997
- -----------------------------
(Steven N. Weiss)
</TABLE>
35
<PAGE>
KERAVISION, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
<S> <C> <C>
10.13 Promissory Notes, dated January 29, 1988, March 8, 1988, March 8, 1989,
October 30, 1991, April 12, 1993 and November 7, 1993, executed by
Thomas Loarie in favor of the Registrant and all amendments thereto
10.14 Promissory Notes, dated September 17, 1990, October 30, 1991,
October 30, 1991 and November 7, 1993, executed by Thomas
Silvestrini in favor of the Registrant and all amendments thereto
10.16 Promissory Notes, dated March 8, 1988, March 8, 1988, March 8,
1989, October 30, 1991, and November 7, 1993, executed by
Darlene Crockett-Billig in favor of the Registrant and all amendments
thereto
10.20 Employment Agreement dated January 1, 1997 between Registrant and
Thomas M. Loarie
10.21 Distribution Agreement dated as of October 31, 1996 by and between the
Registrant and AM Peschke a German Corporation
11.1 Statement regarding computation of net loss per share
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (See Page 35 of this Report)
27 Financial Data Schedule
</TABLE>
36
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
KeraVision, Inc.
We have audited the accompanying consolidated balance sheets of KeraVision,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of operations, redeemable convertible preferred stock and stockholders' equity
(net capital deficiency), and cash flows for each of the three years in the
period ended December 31, 1996. 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 generally accepted auditing
standards. 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 consolidated financial position of KeraVision,
Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
February 6, 1997
San Jose, California
37
<PAGE>
KERAVISION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
-----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 8,291 $ 44,703
Available for sale investments........ 23,774 --
Prepaid expenses and other current 1,297 272
assets............................... -------- --------
Total current assets.................... 33,362 44,975
Property and equipment, at cost:
Manufacturing and laboratory equipment 2,795 1,596
Office furniture and fixtures......... 559 362
Leasehold improvements................ 368 214
-------- --------
3,722 2,172
Accumulated depreciation and (1,746) (1,298)
amortization........................... -------- --------
Net property and equipment............ 1,976 874
Other assets............................ 147 70
-------- --------
Total assets............................ $ 35,485 $ 45,919
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 973 $ 445
Accrued payroll and related expenses.. 424 124
Accrued clinical trial costs.......... 965 779
Other accrued liabilities............. 221 316
Current portion of capital lease 344 106
obligations.......................... -------- --------
Total current liabilities............... 2,927 1,770
Capital lease obligations............... 793 114
Commitments
Stockholders' equity:
Preferred stock, par value $.001,
2,000,000 shares authorized, none
issued and outstanding............... -- --
Common stock, par value $.001,
30,000,000 shares authorized,
12,444,802 and 12,262,845 shares
issued and outstanding in 1996 and
1995, respectively................... 12 12
Additional paid-in capital............ 76,114 75,710
Deferred compensation................. (328) (477)
Accumulated deficit................... (43,265) (30,403)
Notes receivable from stockholders.... (768) (807)
-------- --------
Total stockholders' equity.............. 31,765 44,035
-------- --------
Total liabilities and stockholders'
equity................................. $ 35,485 $ 45,919
======== ========
</TABLE>
See accompanying notes.
38
<PAGE>
KERAVISION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED
DECEMBER 31,
----------------------------------
1996 1995 1994
----------------------------------
Net sales........................... $ 137 $ -- $ --
Costs and expenses:
Cost of sales..................... 319 -- --
Research and development.......... 10,888 6,527 5,146
General and administrative........ 3,930 1,725 1,262
----------------------------------
Total costs and expenses............ 15,137 8,252 6,408
----------------------------------
Operating loss...................... (15,000) (8,252) (6,408)
Interest income, net................ 2,121 1,203 425
Other income (expense).............. -- (57) (114)
----------------------------------
Net loss............................ $(12,879) $(7,106) $ 6,097
==================================
Net loss per share.................. $ (1.04)
Shares used in calculation of net
loss per share..................... 12,342
Pro forma net loss per share........ $ (1.71) $ (0.74)
Shares used in calculation of
pro forma net loss per share....... 9,964 8,288
See accompanying notes.
39
<PAGE>
KERAVISION, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------- ------------------ PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
------------------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 5,263,026 $27,844 1,057,716 $1,156 -- $(158) $(17,200)
Issuance of common stock upon
exercise of options, and accrued
interest -- -- 24,692 21 -- -- --
Exercise of warrants to purchase
1,497,490 shares of common stock -- -- 1,497,490 936 -- -- --
Exchange of 430,465 warrants for
358,721 shares of common stock 358,721 -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- 105 --
Securities valuation adjustment -- -- -- -- -- -- (143)
Net loss -- -- -- -- -- -- (6,097)
-------------------- --------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 5,263,026 27,844 2,938,619 2,113 -- (53) (23,440)
Issuance of common stock upon
exercise of options, and accrued
interest -- -- 44,477 38 -- -- --
Deferred compensation expense
related to stock option grants -- -- -- 597 -- (597) --
Amortization of deferred
compensation -- -- -- -- -- 173 --
Issuance of Series D preferred
stock upon exercise of warrants 105,343 553 -- -- -- -- --
Issuance of common (including
99,798 shares under net exercise
provisions) upon exercise of
warrants -- -- 311,380 137 -- -- --
Initial public offering of common
stock net of issuance costs of
$4.2 million -- -- 3,600,000 44,400 -- -- --
Redeemable Convertible Preferred
stock converted to common stock
upon initial public offering (5,368,369) (28,397) 5,368,369 28,397 -- -- --
Reincorporation in Delaware -- -- -- (75,710) 75,710 -- --
Securities valuation adjustment -- -- -- -- -- -- 143
Net loss -- -- -- -- -- -- (7,106)
--------------------- -------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 -- -- 12,262,845 12 75,710 (477) (30,403)
Issuance of common stock upon
exercise of options -- -- 181,957 -- 404 -- --
Amortization of deferred
compensation -- -- -- -- -- 149 --
Forgiveness of notes receivable
from stockholders, net of
accrued interest -- -- -- -- -- -- --
Translation adjustment -- -- -- -- -- -- (1)
Securities valuation adjustment -- -- -- -- -- -- 18
Net loss -- -- -- -- -- -- (12,879)
--------------------- -------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 -- $ -- 12,444,802 $12 $76,114 $(328) $(43,265)
==================== ===================================================================
</TABLE>
<TABLE>
<CAPTION>
NOTES TOTAL
RECEIVABLE STOCKHOLDERS' EQUITY
FROM STOCKHOLDERS NET CAPITAL DEFICIENCY
--------------------------------------------------------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1993 $(715) $(16,917)
Issuance of common stock upon
exercise of options, and accrued
interest (49) (28)
Exercise of warrants to purchase
1,497,490 shares of common stock -- 936
Exchange of 430,465 warrants for
358,721 shares of common stock -- --
Amortization of deferred
compensation -- 105
Securities valuation adjustment -- 143
Net loss -- (6,097)
--------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 (764) (22,144)
Issuance of common stock upon
exercise of options, and accrued
interest (43) (5)
Deferred compensation expense
related to stock option grants -- --
Amortization of deferred
compensation -- 173
Issuance of Series D preferred
stock upon exercise of warrants -- --
Issuance of common (including
99,798 shares under net exercise
provisions) upon exercise of
warrants -- 137
Initial public offering of common
stock net of issuance costs of
$4.2 million -- 44,440
Redeemable Convertible Preferred
stock converted to common stock
upon initial public offering -- 28,397
Reincorporation in Delaware -- --
Securities valuation adjustment -- 143
Net loss -- (7,106)
--------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 (807) 44,035
Issuance of common stock upon
exercise of options -- 404
Amortization of deferred
compensation -- 149
Forgiveness of notes receivable
from stockholders, net of
accrued interest 39 39
Translation adjustment -- (1)
Securities valuation adjustment -- 18
Net loss -- (12,879)
--------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $(768) $31,765
==============================================================
</TABLE>
See accompanying notes.
40
<PAGE>
KERAVISION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31,
----------------------------------
1996 1995 1994
----------------------------------
Cash flows from operating activities:
Net loss............................... $(12,879) $(7,106) $(6,097)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization........ 448 308 281
Interest receivable on stockholders'
notes............................... (41) (43) (49)
Forgiveness of stockholders' notes... 80 -- --
Amortization of deferred compensation 149 173 105
Loss on sales of securities and other -- 60 114
Prepaid expenses and other current
assets.............................. (1,025) (222) (17)
Accounts payable..................... 528 267 (53)
Other accrued liabilities............ 391 479 349
-------- ------- -------
Total adjustments.................. 530 1,022 730
-------- ------- -------
Net cash used in operating
activities........................ (12,349) (6,084) (5,367)
-------- ------- -------
Cash flows from investing activities:
Purchases of available-for-sale
investments........................... (40,402) (2,970) (7,884)
Sales of available-for-sale investments 10,790 3,725 2965
Maturities of available-for-sale
investments........................... 5,855 3,990 --
Capital expenditures................... (1,550) (300) (602)
Other assets........................... (77) 23 (11)
-------- ------- -------
Net cash provided by (used in)
investing activities.............. (25,384) 4,468 (5,532)
-------- ------- -------
Cash flows from financing activities:
Principal payments under capital lease
obligations........................... (156) (96) (68)
Proceeds from sales-leaseback of
capital equipment..................... 1,073 -- 200
Proceeds from issuance of equity
securities, net of repurchases........ 404 45,168 957
-------- ------- -------
Net cash provided by financing 1,321 45,072 1,089
activities........................ -------- ------- -------
Net increase (decrease) in cash and
cash equivalents....................... (36,412) 43,456 (9,810)
Cash and cash equivalents at the
beginning of the period................ 44,703 1,247 11,057
-------- ------- -------
Cash and cash equivalents at the end of
the period............................. $ 8,291 $44,703 $ 1,247
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest.................. $ 25 $ 34 $ 27
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH
ACTIVITIES
Deferred compensation related to the
issuance of certain stock options...... $ -- $ 597 $ --
======== ======= =======
See accompanying notes.
41
<PAGE>
KERAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
KeraVision, Inc. ("KeraVision" or the "Company") was incorporated
on November 6, 1986 in the State of California and reincorporated in the State
of Delaware on July 25, 1995. On August 2, 1995, the Company completed its
initial public offering ("IPO") by issuing 3,600,000 shares of common stock in
exchange for net proceeds of $44.4 million.
The Company was founded to develop and commercialize proprietary
medical products for the treatment of common vision problems. On December 23,
1986, the Company acquired certain equipment and patent rights from Kera
Associates, a partnership, in exchange for 425,000 shares of the Company's
common stock issued to the former partners of Kera Associates. The assets were
recorded at the predecessor's cost basis. As part of the transaction with Kera
Associates, the Company acquired the exclusive license, existing between Kera
Associates and an outside third party, to develop and market the licensor's
"proprietary rights," as defined, relating to the development of certain
instruments used in the insertion of the KeraVision Ring, the Company's initial
potential product. The term of the license agreement will continue until the
expiration of the last expiring patent then existing or developed thereafter by
the licensor relating to the proprietary rights. Royalties are payable based
upon sales of the KeraVision Ring or the instruments.
The Company has devoted substantially all of its efforts and resources
since 1986 to research and development related to its vision enhancement
technology. In December 1996, the Company recorded its initial revenues from
sales of its ocular rings and therefore is no longer considered to be in the
development stage.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. Significant intercompany transactions
and balances have been eliminated in consolidation.
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 these estimates.
DEPRECIATION AND AMORTIZATION
Depreciation is provided on a straight-line basis over assets'
estimated useful lives of three to five years. Assets acquired under capital
leases are amortized on a straight-line basis over the lesser of the assets'
useful life or the term of the lease.
CASH, CASH EQUIVALENTS, AND AVAILABLE FOR SALE INVESTMENTS
The Company considers all highly liquid investments with a maturity of
three months or less from the date of purchase to be cash equivalents. All other
liquid investments are classified as available for sale and consist primarily of
short-term investment grade securities, substantially all of which mature within
the next twelve months. The Company is exposed to credit risk in the event of
default by the financial institutions or issuers of investments only to the
extent recorded on the balance sheet. At December 31, 1996, the Company's
liquid assets were composed of deposits with banks and investments in U.S.
Government securities, corporate debt securities, certificates of deposits,
auction market preferred stocks and money market funds. Investments include
reverse repurchase agreements with major financial institutions. Due to their
short-term nature of the reverse repurchase agreements, the Company generally
does not take possession of the underlying securities. at December 31, 1995,
cash and cash equivalents consisted of deposits with banks and investments in
money market funds.
42
<PAGE>
Management determines the appropriate classification of securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. At December 31, 1996, all debt and equity securities are designated as
available-for-sale. Available-for-sale securities are carried at fair value as
determined by reference to quoted market prices, with the unrealized gains and
losses reported in stockholders' equity. The amortized cost of debt securities
in this category is adjusted for the amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other-than-
temporary, if any, on available-for-sale securities are included in other
expense. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income.
REVENUE RECOGNITION
The Company recognizes revenues from product sales upon shipment.
Product sales in 1996 were composed principally of sales to a German
distributor.
NET LOSS PER SHARE
Except as noted below, net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
from stock options, redeemable convertible preferred stock and warrants have
been 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 issued during the period beginning 12 months
prior to the filing of the initial public offering at prices substantially below
the public offering price have been included in the calculation as if they were
outstanding for all periods through July 31, 1995 (using the treasury stock
method and the initial public offering price for stock options and warrants and
the if-converted method for preferred stock). Historical net loss per share
calculated on this basis for 1995 and 1994 is ($1.03) and ($2.02),
respectively. Pro forma net loss per share for 1995 and 1994 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.
ACCOUNTING FOR EMPLOYEE STOCK OPTIONS
The Company accounts for its stock options granted to employees using
the intrinsic value method and thus recognizes no compensation expense for
options granted with exercise prices equal to the fair market value of the
Company's common stock on the date of grant.
2. INVESTMENTS
At December 31, 1996 the Company's investments were composed of the
following (in thousands):
<TABLE>
<CAPTION>
GROSS ESTIMATED
UNREALIZED FAIR
COST GAINS VALUE
------------------------------------------------
<S> <C> <C> <C>
Money market instruments............ $ 2,472 $ 2,472
Certificate of deposit.............. 2,059 2,059
U.S. Treasury Bills & other
government agency obligations...... 10,486 10,486
Reverse repurchase agreements....... 4,459 4,459
Corporate debt securities........... 9,581 18 9,599
Auction rate preferred stocks....... 2,000 2,000
-------------------------------------------------
31,057 18 31,075
Included in cash & cash equivalents. (7,301) (7,301)
Included in available for sale
investments........................ $23,756 $18 $23,774
================================================
</TABLE>
Of the $23,774,000 included in available for sale investments a total of
$22,773,000 matures in less than one year and the remainder matures between one
and three years.
During 1996 there were no gross realized gains or losses. In 1995, gross
realized losses from sales of available-for-sale securities was $60,000.
43
<PAGE>
3. CAPITAL LEASE OBLIGATIONS
The Company leases certain office and manufacturing equipment under
capitalized leases which expire in 2000. The total future minimum lease payments
under capital leases as of December 31, 1996 are as follows (in thousands):
Years ended December 31:
1997................. $399
1998................. 318
1999................. 318
2000................. 391
--------
Total minimum lease payments........... 1,426
Amounts representing interest.......... (289)
--------
Present value of minimum lease payments 1,137
Less current portion................... (344)
--------
Noncurrent portion..................... $ 793
========
The cost of assets under capital leases at December 31, 1996 and 1995 were
$1,492,000 and $412,000 with related accumulated amortization amounting to
$469,000 and $237,000, respectively.
4. COMMITMENTS
The Company rents office facilities under operating lease agreements which
expire at various dates through 1999. The facility lease agreement provides for
an option for the Company to extend the lease for an additional five years.
Aggregate annual rental commitments under noncancelable operating leases as of
December 31, 1996 are shown as follows (in thousands):
1997........................... $354
1998........................... 354
1999........................... 262
-------
Total minimum lease payments... $970
=======
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
All outstanding shares of redeemable convertible preferred stock
automatically converted into shares of common stock upon completion of the IPO.
At such time the Company filed an Amended Certificate of Incorporation to delete
references to Series A, B, C, D and E Preferred Stock and authorized 2,000,000
shares of undesignated Preferred stock.
6. STOCKHOLDERS' EQUITY
STOCK OPTIONS
In June 1995, the Company adopted the 1995 Stock Plan (the "1995 Plan")
and the 1995 Directors' Option Plan (the "Directors' Plan"). A total of 800,000
and 150,000 shares were reserved for issuance under the 1995 Plan and the
Directors Plan, respectively. Options outstanding under the Company's 1987
Stock Plan continue to be governed by such Plan. Common stock options may be
granted to employees, consultants and directors. Options granted under the 1995
Plan may be either incentive stock options or nonstatutory stock options,
determined at the compensation committees discretion. Options granted under the
Directors' Plan must be nonstatutory options. Options are generally granted at
an exercise price of not less than the fair value per share on the date of grant
(as determined by the compensation committee) and become exercisable pursuant to
the applicable terms of the grant. The term of any option shall not be greater
than ten years from the date of grant.
44
<PAGE>
Information relative to stock option activity under all plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------------------------
WEIGHTED- AGGREGATE
AVAILABLE NUMBER AVERAGE EXERCISE
FOR GRANT OF SHARES EXERCISE PRICE PRICE
----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 188,228 515,572 $ 1.47 $ 759,187
Granted....................... (27,600) 27,600 2.39 66,000
Authorized.................... 210,000 -- -- --
Canceled...................... 39,908 (39,908) 1.64 (65,366)
Exercised..................... -- (24,692) 0.83 (20,499)
------------------------- -------------
Balance at December 31, 1994 410,536 478,572 1.54 739,322
Authorized.................... 950,000 -- --
Granted....................... (388,400) 388,400 8.27 3,211,200
Canceled...................... 15,725 (15,725) 4.34 (68,282)
Exercised..................... -- (44,477) 0.86 (38,145)
Expired in 1987 Plan.......... (111,361) -- -- --
------------------------- -------------
Balance at December 31, 1995 876,500 806,770 4.76 3,844,095
Granted....................... (463,500) 463,500 13.85 6,421,700
Canceled...................... 38,376 (72,996) 9.93 (724,720)
Exercised..................... -- (166,045) 1.43 (237,553)
------------------------- -------------
Balance at December 31, 1996 451,376 1,031,229 $ 9.02 $9,303,522
========================= =============
</TABLE>
Options generally vest over a period of four years. Certain options
granted in 1995 have accelerated vesting positions. At December 31, 1996 and
1995 approximately 450,064 and 348,847, respectively, of the outstanding options
were exercisable.
The following table summarizes information about options outstanding at December
31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------- -------------------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER OUTSTANDING CONTRACTUAL AVERAGE NUMBER EXERCISABLE AVERAGE
RANGE OF EXERCISE PRICES AT 12/31/96 LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.875 263,590 1.25 $1.875 231,595 $1.875
3.75-5.00 81,326 3.12 4.168 46,714 4.02
8.75 186,720 3.36 8.75 112,000 8.75
11.50-15.50 499,593 9.35 13.69 59,755 13.19
---------------------- ----------------------
$1.875-15.50 1,031,229 5.70 $ 9.02 450,064 $ 5.31
====================== ======================
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, no compensation cost has been
recognized for stock options granted in 1995 and 1996 with exercise prices equal
to the fair value of the Company's common stock on the date of grant. Had
compensation cost for the Company's stock option and purchase plans been
determined based on the fair value at the grant date for awards in 1996 and 1995
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per share would have been increased to the pro forma amounts indicated
below:
1996 1995
----------------------
Net loss - as reported (in
thousands)..................... $(12,879) $(7,106)
Net loss - pro forma (in
thousands)..................... $(14,227) $(7,578)
Net loss per share - as reported $ (1.04) $ (0.71)
Net loss per share - pro forma.. $ (1.15) $ (0.76)
Due to SFAS No. 123 being applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1998.
45
<PAGE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes Multiple option-pricing model with the following
weighted-average assumptions used for grants:
1996 1995
-------------------
Expected volatility.................... .5318 .5318
Risk-free interest rate................ 6.04% 5.85%
Weighted-average expected life......... 4.46 4.46
Dividend yield......................... -- --
Weighted-average fair value of options
granted............................... $ 8.27 $ 4.74
DEFERRED COMPENSATION
For certain options granted prior to December 31, 1995, the Company
recognized as deferred compensation the excess of the deemed value for financial
reporting purposes of the common stock issuable upon the exercise of such
options over the aggregate exercise price of such options. Deferred
compensation of $597,000 recorded in 1995 is being amortized ratably over the
vesting period of such options.
STOCK PURCHASE PLAN
In June 1995, the Company adopted the 1995 Employee Stock Purchase
Plan (the "Purchase Plan") and reserved 200,000 shares for issuance. The
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions at a price equal to the lower of 85% of the fair market value
of the Company's common stock at the beginning or end of the applicable offering
period. Employees purchased 15,913 shares in 1996 and there were no purchases
under the Purchase Plan in 1995.
Under the Company's predecessor plan (the "1987 Purchase Plan"), the
Company sold 217,193, 105,533, and 346,302 shares of common stock at $1.875,
$0.375, and $0.625 per share, respectively, to employees in exchange for notes
that bear interest at 3.7% to 7.4% and are payable at various dates in 1997,
1998 and 1999. The Company has the option to repurchase unvested shares, upon
termination of employment, at the original issuance price per share. Shares vest
over a period of four years. At December 31, 1996, an aggregate of 38,218 shares
of common stock were subject to repurchase.
WARRANTS
In 1995, warrants to purchase 105,343 shares of Series D redeemable
convertible preferred stock at $5.25 per share were exercised. Pursuant to the
terms of such warrants, upon exercise the warrantholders also received the right
to purchase for $0.025 per warrant, an additional warrant entitling them to
purchase three shares of common stock at $0.625 per share. The Company issued
311,380 shares of common stock (including 99,798 shares under net exercise
provisions) pursuant to the exercise of these warrants in 1995.
COMMON STOCK RESERVED FOR ISSUANCE
The Company has reserved shares of common stock for the following at
December 31, 1996:
Purchases under the 1995 Employee Stock
Purchase Plan.......................... 184,087
Exercises under the 1995 Stock Option
Plan................................... 798,594
Exercises under the 1995 Directors
Option Plan............................ 150,000
Exercises under the 1987 Stock Option
Plan................................... 534,011
Conversion of undesignated preferred
stock.................................. 2,000,000
------------
3,666,692
============
7. INCOME TAXES
Due to the Company's loss position, there was no provision for income
taxes for the years ended December 31, 1996, 1995 and 1994. A reconciliation of
the income tax provision at the U.S. federal statutory rate (34%) to the
expected income tax benefit at the effective tax rate is as follows:
46
<PAGE>
YEARS ENDED DECEMBER 31,
1996 1995 1994
-----------------------------------
(IN THOUSANDS)
Income tax benefit computed at the
federal statutory rate................. $(4,379) $(2,416) $(2,073)
Operating losses not utilized.......... 4,379 2,416 2,073
-----------------------------------
$ -- $ -- $ --
===================================
As of December 31, 1996, the Company has federal and state net operating
loss carryforwards of approximately $18,000,000 and $4,000,000, respectively,
that will expire in the fiscal years 1997 through 2011, if not utilized. The
Company also has federal and state research and experimentation credits of
approximately $700,000 and $600,000, respectively, that will expire in the
fiscal years 2003 through 2011, if not utilized.
Utilization of these net operating losses and credits may be subject to
an annual limitation due to ownership change limitations provided by the
Internal Revenue Code and similar state tax provisions. The Company believes the
annual limitation, if any, will not be material.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets are as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---------------------------------------
(IN THOUSANDS)
Deferred tax assets:
Capitalized research costs......... $ 10,090 $ 9,621 $ 7,141
Net operating loss carryforwards... 6,366 2,104 1,785
Research credit carryforwards...... 1,109 861 693
Other.............................. 386 257 223
---------------------------------------
Total deferred tax assets.......... 17,951 12,843 9,842
Valuation allowance................ (17,951) (12,843) (9,842)
---------------------------------------
Net deferred tax assets............ $ -- $ -- $ --
=======================================
The deferred tax asset valuation allowance increased $5,108,000,
$3,001,000 and $2,616,000 in 1996, 1995 and 1994, respectively.
47
<PAGE>
Exhibit 10.13
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of January 22, 1996, between
KeraVision, Inc. (the "Company") and Thomas Merritt Loarie (the "Purchaser").
The Promissory Note ("Note") executed by the Purchaser on January 22, 1993,
under which the Purchaser promised to pay to the Company $11,519.09, plus
interest, on or before January 22, 1996, is hereby amended as follows:
(1) The Company and the Purchaser hereby agree that the interest due with
respect to the Note as of the date hereof is $1,575.85, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $13,094.94.
(2) The due date of all principal and interest under the Note is extended
to January 13, 1998.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 4.32% per annum, compounded semi-annually, to 5.43% per annum,
compounded semi-annually.
KERAVISION, INC. THOMAS MERRITT LOARIE
/s/ Mark Fischer-Colbrie /s/ Thomas Merrill Loarie
____________________________________ _________________________________
Signature Signature
Mark Fischer-Colbrie
By:_________________________________
Print Name
VP Finance, CFO
Title:______________________________
<PAGE>
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of September 9, 1996, between
KeraVision, Inc. (the "Company") and Thomas M. Loarie (the "Purchaser").
The Promissory Note ("Note") executed by the Purchaser on September 1,
1993, under which the Purchaser promised to pay to the Company $17,395.87, plus
interest, on or before September 9, 1996, is hereby amended as follows:
(1) The Company and the Purchaser hereby agree that the interest due with
respect to the Note as of the date hereof is $2,119.92, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $19,515.79.
(2) The due date of all principal and interest under the Note is extended
to September 1, 1998.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 3.87% per annum, compounded semi-annually, to 5.93% per annum,
compounded semi-annually.
KERAVISION, INC. THOMAS M. LOARIE
/s/ Mark Fischer-Colbrie /s/ Thomas M. Loarie
____________________________________ _________________________________
Signature Signature
Mark Fischer-Colbrie
By:_________________________________
Print Name
VP Finance, CFO
Title:______________________________
<PAGE>
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of January 13, 1996, between
KeraVision, Inc. (the "Company") and Thomas Merritt Loarie (the "Purchaser").
The Promissory Note ("Note") executed by the Purchaser on January 13, 1993,
under which the Purchaser promised to pay to the Company $15,788.12, plus
interest, on or before January 13, 1996, is hereby amended as follows:
(1) The Company and the Purchaser hereby agree that the interest due with
respect to the Note as of the date hereof is $2,159.87, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $17,947.99.
(2) The due date of all principal and interest under the Note is extended
to January 13, 1998.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 4.32% per annum, compounded semi-annually, to 5.43% per annum,
compounded semi-annually.
KERAVISION, INC. THOMAS MERRITT LOARIE
/s/ Mark Fischer-Colbrie /s/ Thomas M. Loarie
____________________________________ _________________________________
Signature Signature
Mark Fischer-Colbrie
By:_________________________________
Print Name
VP Finance, CFO
Title:______________________________
<PAGE>
Exhibit 10.14
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of July 15, 1996, between
KeraVision, Inc. (the "Company") and Thomas L. Silvestrini (the "Purchaser").
The Promissory Note ("Note") executed by the Purchaser on July 15, 1994,
under which the Purchaser promised to pay to the Company $17,844.69, plus
interest, on or before July 15, 1996, is hereby amended as follows:
(1) The Company and the Purchaser hereby agree that the interest due with
respect to the Note as of the date hereof is $2,064.75, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $19,909.44.
(2) The due date of all principal and interest under the Note is extended
to July 15, 1998.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 5.55% per annum, compounded semi-annually, to 5.95% per annum,
compounded semi-annually.
KERAVISION, INC. THOMAS A. SILVESTRINI
/s/Mark Fischer-Colbrie /s/Thomas A. Silvestrini
____________________________________ _________________________________
Signature Signature
By: Mark Fischer-Colbrie
_________________________________
Print Name
Title: VP Finance, CFO
______________________________
<PAGE>
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of July 15, 1996, between
KeraVision, Inc. (the "Company") and Thomas L. Silvestrini (the "Purchaser").
The Promissory Note ("Note") executed by the Purchaser on July 15, 1994,
under which the Purchaser promised to pay to the Company $27,611.69, plus
interest, on or before July 15, 1996, is hereby amended as follows:
(1) The Company and the Purchaser hereby agree that the interest due with
respect to the Note as of the date hereof is $3,194.85, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $30,806.54.
(2) The due date of all principal and interest under the Note is extended
to July 15, 1998.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 5.55% per annum, compounded semi-annually, to 5.95% per annum,
compounded semi-annually.
KERAVISION, INC. THOMAS A. SILVESTRINI
/s/ Mark Fischer-Colbrie /s/Thomas A. Silvestrini
____________________________________ _________________________________
Signature Signature
By: Mark Fischer-Colbrie
_________________________________
Print Name
Title: VP Finance, CFO
______________________________
<PAGE>
Exhibit 10.16
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of February 8, 1996, between
KeraVision, Inc. (the "Company") and Darlene Crockett-Billig (the "Purchaser").
The Promissory Note ("Note") executed by the Purchaser on February 8, 1994,
under which the Purchaser promised to pay to the Company $2,312.74, plus
interest, on or before February 8, 1996, is hereby amended as follows:
(1) The Company and the Purchaser hereby agree that the interest due with
respect to the Note as of the date hereof is $285.66, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $2,598.40.
(2) The due date of all principal and interest under the Note is extended
to February 8, 1998.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 4.19% per annum, compounded semi-annually, to 5.25% per annum,
compounded semi-annually.
KERAVISION, INC. DARLENE CROCKETT-BILLIG
/s/ Mark Fischer-Colbrie /s/Darlene Crockett-Billig
____________________________________ _________________________________
Signature Signature
By: Mark Fischer-Colbrie
_________________________________
Print Name
Title: VP Finance, CFO
______________________________
<PAGE>
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of February 8, 1996, between
KeraVision, Inc. (the "Company") and Darlene Crockett-Billig (the "Purchaser").
The Promissory Note ("Note") executed by the Purchaser on February 8, 1994,
under which the Purchaser promised to pay to the Company $4,638.14, plus
interest, on or before February 8, 1996, is hereby amended as follows:
(1) The Company and the Purchaser hereby agree that the interest due with
respect to the Note as of the date hereof is $374.46, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $5,012.60.
(2) The due date of all principal and interest under the Note is extended
to February 8, 1998.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 3.92% per annum, compounded semi-annually, to 5.25% per annum,
compounded semi-annually.
KERAVISION, INC. DARLENE CROCKETT-BILLIG
/s/ Mark Fischer-Colbrie /s/Darlene Crockett-Billig
____________________________________ _________________________________
Signature Signature
By: Mark Fischer-Colbrie
_________________________________
Print Name
Title: VP Finance, CFO
______________________________
<PAGE>
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of January 13, 1996, between
KeraVision, Inc. (the "Company") and Darlene Crockett-Billig (the "Purchaser").
The Promissory Note ("Note") executed by the Purchaser on January 13, 1993,
under which the Purchaser promised to pay to the Company $6,315.25, plus
interest, on or before January 13, 1996, is hereby amended as follows:
(1) The Company and the Purchaser hereby agree that the interest due with
respect to the Note as of the date hereof is $863.95, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $7,179.20.
(2) The due date of all principal and interest under the Note is extended
to January 13, 1998.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 4.32% per annum, compounded semi-annually, to 5.43% per annum,
compounded semi-annually.
KERAVISION, INC. DARLENE CROCKETT-BILLIG
/s/ Mark Fischer-Colbrie /s/Darlene Crockett-Billig
____________________________________ _________________________________
Signature Signature
By: Mark Fischer-Colbrie
_________________________________
Print Name
Title: VP Finance, CFO
______________________________
<PAGE>
Exhibit 10.20
KERAVISION, INC.
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement") is dated as of January 1,
---------
1997, by and between Thomas M. Loarie ("Employee") and KeraVision, Inc., a
--------
Delaware corporation (the "Company").
-------
1. TERM OF AGREEMENT. This Agreement shall commence on the date
-----------------
hereof and shall have a term of three (3) years (the "Original Term"). This
-------------
Agreement shall be automatically renewable for one (1) year periods after the
expiration of the Original Term, unless otherwise terminated. This Agreement may
be terminated by either party, with or without cause, at the end of the then
current term with six (6) months advance written notice to the other party.
2. DUTIES.
------
(a) POSITION. Employee shall be employed as Chief Executive
Officer and Chairman of the Board of Directors of the Company. In such capacity
he shall report to and be subject to the direction and control of the Company's
Board of Directors.
(b) OBLIGATIONS TO THE COMPANY. Employee agrees to the best of
--------------------------
his ability and experience that he will at all times loyally and conscientiously
perform all of the duties and obligations required of and from Employee pursuant
to the express and implicit terms hereof, and to the reasonable satisfaction of
the Company. During the term of Employee's employment relationship with the
Company, Employee further agrees that he will devote all of his business time
and attention to the business of the Company, the Company will be entitled to
all of the benefits and profits arising from or incident to all such work
services and advice, Employee will not render commercial or professional
services of any nature to any person or organization, whether or not for
compensation, without the prior written consent of the Company's Board of
Directors, and Employee will not directly or indirectly engage or participate in
any business that is competitive in any manner with the business of the Company.
Nothing in this Agreement will prevent Employee from accepting speaking or
presentation engagements in exchange for honoraria or from serving on boards of
charitable organizations, or from owning no more than one percent (1%) of the
outstanding equity securities of a corporation whose stock is listed on a
national stock exchange. Employee will comply with and be bound by the Company's
operating policies, procedures and practices from time to time in effect during
the term of Employee's employment.
3. AT-WILL EMPLOYMENT. The Company and Employee acknowledge that
------------------
Employee's employment is and shall continue to be at-will, as defined under
applicable law, and that Employee's employment with the Company may be
terminated by either party at any time for any or no reason. If Employee's
employment terminates for any reason, Employee shall not be entitled to any
payments, benefits, damages, award or compensation other than as provided in
this Agreement. The rights and duties created by this Section 3 may not be
modified in any way except by a written agreement executed by the Board of
Directors of the Company and Employee.
<PAGE>
4. COMPENSATION. For the duties and services to be performed by
------------
Employee hereunder, the Company shall pay Employee, and Employee agrees to
accept, the salary, stock options, bonuses and other benefits described below in
this Section 4.
(a) SALARY. Employee shall receive a monthly salary of $20,834
------
which is equivalent to $250,000 on an annualized basis (the "Base Salary").
Employee's Base Salary will be payable in two equal payments per month pursuant
to the Company's normal payroll practices. The Base Salary shall be reviewed
annually by the Company's Board of Directors or its Compensation Committee, and
any increase will be effective as of the date determined appropriate by the
Board of Directors or its Compensation Committee.
(b) STOCK OPTIONS AND OTHER INCENTIVE PROGRAMS. In connection
------------------------------------------
with the execution of this Agreement, the Board of Directors shall grant to
Employee an option to purchase 7,827 shares of the Company's Common Stock (the
"Shares") which number of shares is intended to maintain Employee's
------
percentage ownership of the Company at the January 1, 1996 level. The option
shall be granted with an exercise price equal to the fair market value on the
date of the grant. The option shares will vest at the rate of 1/16 of the
original number of shares on each three month anniversary of the grant date.
Vesting will depend on Employee's continued employment with the Company. The
option will be an incentive stock option to the maximum extent allowed by the
Internal Revenue Code of 1986, as amended, and will be subject to the terms of
the Company's 1995 Stock Option Plan and the Stock Option Agreement between
Employee and the Company. Subject to the discretion of the Company's Board of
Directors, Employee shall be eligible to receive additional grants of stock
options from time to time in the future, on such terms and subject to such
conditions as the Board of Directors shall determine as of the date of any such
grant.
(c) BONUSES. Employee shall be eligible to receive an annual
-------
cash bonus of up to fifty percent (50%) of the Base Salary. Such bonus shall be
based on achievement of approved corporate and individual performance objectives
established by Employee and agreed to by the Board or its Compensation
Committee. Thereafter, Employee shall be eligible for such incentive
compensation or bonus as shall be determined by the Board of Directors or its
Compensation Committee.
(d) ADDITIONAL BENEFITS. Employee shall be eligible to
-------------------
participate in the Company's employee benefit plans of general application,
including without limitation, those plans covering medical, disability and life
insurance in accordance with the rules established for individual participation
in any such plan and under applicable law. Employee shall be eligible for
vacation and sick leave in accordance with the policies in effect during the
term of this Agreement and will receive such other benefits as the Company
generally provides to its other employees of comparable position and experience.
In addition, the Company shall provide the following benefits to Employee at the
Company's expense:
(i) an annual physical examination, with Employee's agreement
that the doctor performing such examination shall provide a copy of the
examination report to the Compensation Committee of the Board of Directors;
<PAGE>
(ii) a split-dollar life insurance policy with a face value of
$1,000,000;
(iii) a disability insurance benefit that provides a salary
continuation benefit to Employee of $3,460 per month, which benefit shall be in
addition to the standard disability benefit of up to $6,000 per month in salary
continuation already provided by the Company;
(iv) a business-related perquisites allowance of $15,000 per
year which is intended to cover expenses such as financial consultation and
advice, income tax preparation and a car allowance; and
(v) the reimbursement of attorneys' fees and expenses incurred
by Employee in connection with the negotiation and execution of this Agreement,
up to a maximum of $5,000.
(e) REIMBURSEMENT OF EXPENSES. Employee shall be authorized to
-------------------------
incur on behalf and for the benefit of, and shall be reimbursed by, the Company
for reasonable expenses, provided that such expenses are substantiated in
accordance with Company policies.
5. TERMINATION OF EMPLOYMENT AND SEVERANCE BENEFITS.
------------------------------------------------
(a) TERMINATION OF EMPLOYMENT. This Agreement may be terminated
-------------------------
during its Original Term (or any extension thereof) upon the occurrence of any
of the following events:
(i) The Company's determination in good faith that it is
terminating Employee for Cause (as defined in Section 6 below) ("Termination for
---------------
Cause");
- -----
(ii) The Company's determination that it is terminating
Employee without Cause, which determination may be made by the Company at any
time at the Company's sole discretion, for any or no reason ("Termination
-----------
Without Cause"); or
- -------------
(iii) The effective date of a written notice sent to the
Company from Employee stating that Employee is electing to terminate his
employment with the Company ("Voluntary Termination").
---------------------
(b) SEVERANCE BENEFITS. Employee shall be entitled to receive
------------------
severance benefits upon termination of employment only as set forth in this
Section 5(b):
(i) VOLUNTARY TERMINATION. If Employee's employment
---------------------
terminates by Voluntary Termination, then Employee shall not be entitled to
receive payment of any severance benefits. Employee will receive payment(s) for
all salary and unpaid vacation accrued as of the date of Employee's termination
of employment and Employee's benefits will be continued under the Company's then
existing benefit plans and policies in accordance with such plans and policies
in effect on the date of termination and in accordance with applicable law.
(ii) INVOLUNTARY TERMINATION. If Employee's employment is
-----------------------
terminated as a result of an Involuntary Termination other than for Cause (as
defined below) and other than by reason of Employee's Voluntary Termination,
Employee will be entitled to receive payment of severance benefits equal to
Employee's regular monthly salary for the lesser of (i)
<PAGE>
eighteen (18) months or (ii) until Employee commences employment with another
Company at a comparable base salary, (the "Severance Period"). Such payments
-----------------
shall be made ratably over the Severance Period according to the Company's
standard payroll schedule. Employee will also be entitled to receive payment on
the date of termination of any bonus that has accrued as of such date of the
year of termination. Health insurance benefits with the same coverage provided
to Employee prior to the termination (e.g. medical, dental, optical, mental
health) and in all other respects significantly comparable to those in place
immediately prior to the termination will be provided at the Company's cost over
the Severance Period pursuant to the coverage continuation provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). Employee shall
be responsible for the timely and effect election of his COBRA continuation
benefits. In addition, Employee will be entitled to receive at the Company's
expense, out placement services with a total value not to exceed $20,000.
(iii) TERMINATION FOR CAUSE. If Employee's employment is
---------------------
terminated for Cause, then Employee shall not be entitled to receive payment of
any severance benefits. Employee will receive payment(s) for all salary and
unpaid vacation accrued as of the date of Employee's termination of employment
and Employee's benefits will be continued under the Company's then existing
benefit plans and policies in accordance with such plans and policies in effect
on the date of termination and in accordance with applicable law.
6. DEFINITION OF INVOLUNTARY TERMINATION. For purposes of this
-------------------------------------
Agreement, "Involuntary Termination" shall include any termination by the
Company other than for Cause and Employee's voluntary termination, upon thirty
(30) days prior written notice to the Company, following: (i) the assignment of
any duties, or the removal from on reduction or limitation of duties or
responsibilities which in any case is a significant change in position, title,
organization level, duties, responsibilities, compensation and status with the
Company; (ii) a substantial reduction of the facilities and perquisites provided
to Employee (including office space and location); (iii) a reduction in
Employee's Base Salary (other than in connection with a general decrease in base
salaries for officers of the Company); (iv) a material reduction in the kind or
level of employee benefits with the result that the overall benefits package is
significantly reduced; or (v) the failure of the Company to obtain the
assumption of this Agreement by any successors.
7. DEFINITION OF CAUSE. For purposes of this Agreement, "Cause" for
-------------------
Employee's termination will exist at any time after the happening of one or more
of the following events, in each case as determined in good faith by the
Company's Board of Directors:
(a) Employee's gross negligence or willful misconduct in
performance of his duties hereunder where such gross negligence or unique
misconduct has resulted or is likely to result in substantial and material
damage to the Company or any of its subsidiaries;
(b) Employee's repeated or unjustified absence from the
Company;
(c) Employee's material and willful violation of any federal or
state law;
<PAGE>
(d) The commission of any act of fraud by Employee with respect
to the Company;
(e) Employee's conviction of a felony or a crime involving
moral turpitude causing material harm to the standing and reputation of the
Company; or
(f) Employee's incurable material breach of any element of the
Company's Confidential Information and Invention Assignment Agreement, including
without limitation, Employee's theft or other misappropriation of the Company's
proprietary information.
8. CONFIDENTIALITY AGREEMENT. Employee has signed a Confidential
-------------------------
Information and Invention Assignment Agreement (the "Confidentiality Agreement")
-------------------------
in the form attached hereto as Exhibit A. Employee hereby represents and
---------
warrants to the Company that he has complied with all obligations under the
Confidentiality Agreement and agrees to continue to abide by the terms of the
Confidentiality Agreement and further agrees that the provisions of the
Confidentiality Agreement shall survive any termination of this Agreement or of
Employee's employment relationship with the Company.
9. NONCOMPETITION COVENANT. Employee hereby agrees that he shall
-----------------------
not, during the term of his employment pursuant to this Agreement and the
Severance Period, if applicable, without the prior written consent of the
Company's Board of Directors, carry on any business or activity (whether
directly or indirectly, as a partner, shareholder, principal, agent, director,
affiliate, employee or consultant) which is competitive with the business
conducted by the Company (as conducted now or during the term of Employee's
employment), nor engage in any other activities that conflict with Employee's
obligations to the Company.
10. NONSOLICITATION COVENANT. Employee hereby agrees that he shall
------------------------
not, during the term of his employment pursuant to this Agreement and for twelve
(12) months after the end of the Severance Period, if applicable, do any of the
following without the prior written consent of the Company's Board of Directors:
(a) SOLICIT BUSINESS. Solicit or influence or attempt to
----------------
influence any client, customer or other person either directly or indirectly, to
direct his or its purchase of the Company's products and/or services to any
person, firm, corporation, institution or other entity in competition with the
business of the Company; and
(b) SOLICIT PERSONNEL. Solicit or influence or attempt to
-----------------
influence any person employed by the Company to terminate or otherwise cease his
employment with the Company or become an employee of any competitor of the
Company. This Section 10(b) is to be read in conjunction with Section [ __ ] of
the Confidential Information and Invention Assignment Agreement executed by
Employee.
11. CONFLICTS. Employee represents that his performance of all the
---------
terms of this Agreement will not breach any other agreement to which Employee is
a party. Employee has not, and will not during the term of this Agreement, enter
into any oral or written agreement in conflict with any of the provisions of
this Agreement. Employee further represents that he is
<PAGE>
entering into or has entered into an employment relationship with the Company of
his own free will.
12. SUCCESSORS. Any successor to the Company (whether direct or
----------
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company's business and/or assets
shall assume the obligations under this Agreement and agree expressly to perform
the obligations under this Agreement in the same manner and to the same extent
as the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of Employee's rights hereunder
shall inure to the benefit of, and be enforceable by, Employee's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
<PAGE>
13. MISCELLANEOUS PROVISIONS.
(a) NO DUTY TO MITIGATE. Employee shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor, except as otherwise
provided in this Agreement, shall any such payment be reduced by any earnings
that Employee may receive from any other source.
(b) AMENDMENTS AND WAIVERS. Any term of this Agreement may be
----------------------
amended or waived only with the written consent of the parties.
(c) SOLE AGREEMENT. This Agreement, including any Exhibits
--------------
hereto, constitutes the sole agreement of the parties and supersedes all oral
negotiations and prior writings with respect to the subject matter hereof.
(d) NOTICES. Any notice required or permitted by this Agreement
-------
shall be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by a nationally-recognized delivery service (such as Federal
Express or UPS), or forty-eight (48) hours after being deposited in the U.S.
mail as certified or registered mail with postage prepaid, if such notice is
addressed to the party to be notified at such party's address as set forth below
or as subsequently modified by written notice.
(e) CHOICE OF LAW. The validity, interpretation, construction
-------------
and performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.
(f) SEVERABILITY. If one or more provisions of this Agreement
------------
are held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the parties cannot
reach a mutually agreeable and enforceable replacement for such provision, then
(i) such provision shall be excluded from this Agreement, (ii) the balance of
the Agreement shall be interpreted as if such provision were so excluded and
(iii) the balance of the Agreement shall be enforceable in accordance with its
terms.
(g) COUNTERPARTS. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
(h) ARBITRATION. Any dispute or claim arising out of or in
-----------
connection with this Agreement shall be finally settled by binding arbitration
in San Jose, California in accordance with the rules of the American Arbitration
Association by one arbitrator appointed in accordance with said rules. The
arbitrator shall apply California law, without reference to rules of conflicts
of law or rules of statutory arbitration, to the resolution of any dispute.
Judgment on the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. Notwithstanding the foregoing, the parties may
apply to any court of competent jurisdiction for preliminary or interim
equitable relief, or to compel arbitration in accordance with this paragraph,
without breach of this arbitration provision. This Section 13(h) shall not apply
to the Confidentiality Agreement.
(i) ADVICE OF COUNSEL. EACH PARTY TO THIS AGREEMENT
-----------------
ACKNOWLEDGES THAT, IN EXECUTING THIS AGREEMENT, SUCH PARTY HAS HAD THE
OPPORTUNITY TO SEEK THE ADVICE OF INDEPENDENT LEGAL COUNSEL, AND HAS READ AND
UNDERSTOOD ALL OF THE TERMS AND PROVISIONS OF THIS AGREEMENT. THIS AGREEMENT
SHALL NOT BE CONSTRUED AGAINST ANY PARTY BY REASON OF THE DRAFTING OR
PREPARATION HEREOF.
[Signature Page Follows]
<PAGE>
The parties have executed this Agreement the date first written above.
KERAVISION, INC.
By: /s/ John Gilbert
----------------
Title: Vice Chairman
Address: 48630 Milmont Drive
Fremont, CA 94538
THOMAS M. LOARIE
Signature: /s/ Thomas M. Loarie
--------------------
Address: 2485 Holly Oak Drive
Danville, CA 94506
<PAGE>
EXHIBIT A
---------
CONFIDENTIAL INFORMATION AND
INVENTION ASSIGNMENT AGREEMENT
<PAGE>
Exhibit 10.21
DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT (the "Agreement"), agreed to as of this 31st
---------
day of October, 1996 (the "Effective Date"), is entered into by and between
--------------
KERAVISION, INC., a Delaware corporation ("KeraVision"), having a principal
----------
place of business at 48630 Milmont Drive, Fremont, CA 94538-7353, and AM PESCHKE
GMBH, a German corporation ("AMP") having a principal place of business at
---
Saldorferstrasse 5 90429 Nuremberg, Germany.
BACKGROUND
----------
WHEREAS, KeraVision and AMP have held discussions regarding distribution
of KeraVision myopia-related products in Germany, KeraVision and AMP intend to
enter into a Distribution Agreement based upon the principal terms set forth
below.
AGREEMENT
---------
SECTION 1: CERTAIN DEFINITIONS
The following definitions shall apply to the terms used in this
Agreement:
"Competitive Products" shall mean implantable devices, chemicals, or
--------------------
drugs used for corneal reshaping.
"Confidential Information" shall mean any information relating to or
------------------------
disclosed in the course of this Agreement, which is or should be reasonably
understood to be confidential or proprietary to the disclosing party, including,
but not limited to know-how, trade secrets, technical processes and formulas,
product designs, sales, cost and other unpublished financial information,
product and business plans, projections, and marketing data. "Confidential
Information" shall not include information which: (i) is known to the recipient
on the Effective Date directly or indirectly from a source other than one having
an obligation of confidentiality to the providing party; (ii) hereafter becomes
known (independently of disclosure by the providing party) to the recipient
directly or indirectly from a source other than one having an obligation of
confidentiality to the providing party; (iii) becomes publicly known or
otherwise ceases to be secret or confidential, except through a breach of this
Agreement by the recipient; or (iv) is or was independently developed by the
recipient without use of or reference to the providing party's confidential
information, as shown by evidence in the recipient's possession.
"Intellectual Property Rights" shall mean and include all patents,
----------------------------
copyrights, trademarks, trade names and other proprietary rights or applications
therefor in any country which KeraVision may at any time own rights in, adopt,
use, or register with respect to the KeraVision Products or the business of
KeraVision.
[*] = CONFIDENTIAL TREATMENT REQUESTED
-1-
<PAGE>
"KeraVision Products" shall mean the myopia-related products developed
-------------------
and owned by KeraVision prior to the Effective Date of this Agreement, including
related instrumentation, and as set forth in Exhibit A attached hereto.
---------
"Net Revenue" shall mean gross receipts for distribution, including
-----------
sale, licensing, or otherwise, by AMP, less: (i) discounts; (ii) applicable
taxes, and (iii) credits for returns, and shall not include any other source of
revenue or fees, including any fees for physician training.
"Territory" shall mean the geographic territory of [*].
---------
SECTION 2: APPOINTMENT OF AMP
2.1 Appointment. Subject to the terms and conditions of this
-----------
Agreement, KeraVision appoints AMP as its non-exclusive (subject to the
Exclusivity Period, defined below), distributor and reseller for the KeraVision
Products in the Territory. KeraVision may select AMP to sell future KeraVision
Products related to other indications, including hyperopia and astigmatism,
contingent upon performance, future revenue forecasts and other factors as
determined by KeraVision.
2.2 Exclusivity Period. KeraVision agrees that the appointment of AMP
------------------
shall be: (i) exclusive for a period extending from the Effective Date of this
Agreement and for [*] thereafter ("Exclusivity Period"); and (ii) co-exclusive
------------------
with KeraVision for a period of [*] extending from the termination of the
Exclusivity Period to the end of the Term of this Agreement ("Co-Exclusivity
--------------
Period"); provided, however, that this Agreement is not previously terminated
- ------ -----------------
pursuant to the termination provisions, as stated below.
2.3 Reservation of Rights. KeraVision expressly reserves the ability
---------------------
to change or delete from the definition of KeraVision Products, and to change or
terminate the level or type of service or support that KeraVision makes
available to AMP.
SECTION 3: PRICING; ACCEPTANCE
3.1 Price of Products. KeraVision Products will be sold to AMP at a
-----------------
discount from KeraVision's US dollar international list price, of: (i) [*]
during the Exclusivity Period; and (ii) [*] during the Co-Exclusivity Period.
KeraVision will not change its international list price more [*] during the Term
of this Agreement. AMP shall submit purchase orders in writing to KeraVision,
specifying the desired KeraVision Product, quantity, and proposed delivery date
and location.
3.2 Acceptance. KeraVision will acknowledge its acceptance of each
----------
purchase order it receives from AMP by issuing an invoice for such ordered
KeraVision Products.
[*] = CONFIDENTIAL TREATMENT REQUESTED
-2-
<PAGE>
3.3 Payment Terms. Payments shall be due, in U.S. currency by check
-------------
or wired transfer, by AMP within [*] from the invoice date. A late fee shall
apply to any unpaid invoice amount at an interest rate of the lower of: (i) [*]
or (ii) the highest interest rate permitted by law.
3.4 Reports. Within ten (10) days after the end of each quarter, AMP
-------
will provide to KeraVision a written report showing, for the time periods
KeraVision reasonably requests: (i) AMP's sales of the KeraVision Products by
dollar volume, both in the aggregate and segmented by product; (ii) forecasts of
AMP's anticipated orders for the KeraVision Products [*]; and (iv) AMP's current
inventory levels of the KeraVision Products, both in the aggregate and by
product. AMP shall retain all such reports and records, and contracts and
accounts relating to the distribution, promotion and sale of the KeraVision
Products, for at least three (3) years after termination of this Agreement, and
will permit examination thereof by authorized representatives of KeraVision at
all reasonable times.
3.5 Preconditions to Closing. Prior to execution of this Agreement,
------------------------
AMP shall provide to KeraVision a copy [*] for AMP. In addition, AMP agrees to
continue to provide to KeraVision such information annually.
3.6 Taxes, Tariffs, Fees. KeraVision's prices and fees do not include
--------------------
any national, state or local sales, use, value-added or other taxes, customs,
duties, or similar tariffs or fees which KeraVision may be required to pay or
collect upon the delivery of the KeraVision Products or upon collection of the
prices and fees, or otherwise. Should any tax or levy be made, AMP agrees to pay
such tax or levy and indemnify KeraVision for any claim for such tax or levy
demanded. AMP agrees to provide KeraVision with appropriate resale certificate
numbers and other documentation satisfactory to the applicable taxing
authorities in the Territory to substantiate any claim of exemption from any
such taxes or fees.
3.7 Terms of Sale. Unless otherwise specified by KeraVision, all
-------------
prices for the KeraVision Products are F.O.B. KeraVision's United States
facility in Fremont, California. Title and risk of loss pass to AMP when
KeraVision Products leave KeraVision's manufacturing facility. AMP shall be
solely responsible for the payment of all freight and insurance and other costs,
expenses, fees, duties, imports and charges of whatsoever kind or nature arising
from the shipment, delivery and importation of the KeraVision Products into the
Territory. AMP warrants that it will comply in all respects with any
restrictions set forth in the export license for every KeraVision Product
purchased hereunder.
[*] = CONFIDENTIAL TREATMENT REQUESTED
-3-
<PAGE>
SECTION 4: AMP OBLIGATIONS
4.1 General Obligations of AMP. AMP shall use its best efforts to
--------------------------
vigorously promote and sell the KeraVision Products in the Territory during the
Term of this Agreement. AMP will employ on its own behalf an appropriate number
of specialized, trained and qualified sales personnel whose main function will
be the promotion and sale of the KeraVision Products in the Territory. AMP
agrees to purchase all of its requirements for KeraVision Products directly from
KeraVision. AMP has no authority to appoint an associate distributor or sub-
distributor of the KeraVision Products without written authorization of
KeraVision.
4.2 Performance Minimums. AMP agrees that its total cumulative Net
--------------------
Revenue for the KeraVision Products shall be as set forth in Exhibit A attached
hereto. Failure to meet such total cumulative Net Revenue minimums shall be
considered a material breach of this Agreement. Should KeraVision require a
product recall or product withdrawal of KeraVision Product, the performance
minimums will be adjusted to reflect the withdrawal of such KeraVision product
from the market.
4.3 Noncompetition. During the term of the Agreement, AMP will not
--------------
sell or distribute in the Territory any Competitive Products.
4.4 Inventory. AMP will store the KeraVision Products under secure
---------
conditions and at temperatures and other physical conditions as shall be
provided to AMP from time to time. AMP will ship the KeraVision Products to
AMP's customers from its inventory of KeraVision Products on a first-in, first-
out basis [*].
4.5 Compliance with Medical Device Laws. AMP will, at all times
-----------------------------------
during the Term of this Agreement, strictly comply with all applicable laws of
the Territory governing the distribution, promotion, marketing, and sale of the
KeraVision Products in the Territory. AMP will comply with all necessary
government and regulatory requirements to import, market, and distribute the
KeraVision Products in the Territory, including without limitation, performing
all necessary actions to allow KeraVision to maintain the CE mark for the
KeraVision Products as outlined in the Medical Device Directive, including
meeting the requirements of the ISO 9001 and EN 46001 standards. These actions
include, but are not limited to, specific requirements for traceability,
vigilance and complaint handling, together with additional items as listed in
Exhibit B attached hereto. AMP agrees not to sell or distribute the KeraVision
Products in the Territory until such time as all product licenses and approvals
required by the laws and regulations of the Territory have been obtained. AMP
will obtain, and pay premiums and all costs associated with, product liability
insurance in an amount sufficient to satisfy local laws and commercial
practices. AMP shall comply promptly with any recalls for KeraVision Products
issued by KeraVision or by any applicable regulatory authorities.
[*] = CONFIDENTIAL TREATMENT REQUESTED
-4-
<PAGE>
4.6 Defective Products. AMP will alert KeraVision to any defects in
------------------
any of the KeraVision Products within thirty (30) days of delivery of such
KeraVision Products to AMP. AMP may return defective KeraVision Products to
KeraVision at KeraVision's cost if AMP receives a written return authorization
from KeraVision. If KeraVision agrees, upon inspection, that the KeraVision
Products are defective, or otherwise authorizes the destruction of defective
KeraVision Products, KeraVision will, at its sole option, provide replacement
KeraVision Products to AMP or refund the purchase price of the KeraVision
Products to AMP.
4.7 Translations. AMP shall be responsible, at its sole expense, for
------------
complete and accurate translations of all packaging, promotional, labeling, and
other materials provided by KeraVision used by AMP in the promotion, marketing,
or sale of the KeraVision Products from English into German, subject to
KeraVision's review and approval. All translated materials will be subject to
review by KeraVision for accuracy and compliance. AMP will be solely
responsible for assuring that the German translations comply in all material
respects with applicable laws and regulations of the Territory.
4.8 Training. AMP will train, in cooperation with KeraVision pursuant
--------
to Section 7 hereto, and maintain a sufficient number of capable technical and
sales personnel, as appropriate, having sufficient knowledge of the industry,
KeraVision Products, and products competitive with the KeraVision Products so as
to: (i) properly inform customers concerning the features, capabilities, and
appropriate usage of the KeraVision Products and, if necessary, explain in
detail to its customers the differences between the KeraVision Products and
competitive products; (ii) support the KeraVision Products in accordance with
any obligations under this Agreement; (iii) otherwise carry out the obligations
and responsibilities of AMP under this Agreement; and (iv) be conversant with
the technical language conventional to the KeraVision Products and similar
products in general. All surgeon training programs must be reviewed and approved
by KeraVision. Nothing herein will give rise to the creation of any labor
relation by and between KeraVision and AMP's employees.
4.9 Performance Obligations. AMP understands, acknowledges, and
-----------------------
agrees that the continued maintenance of an image of excellence and high level
of ethical marketing of the KeraVision Products is essential to the continued
success of both parties hereto. Accordingly, AMP agrees that it shall, at all
times: (i) conduct business in a manner that reflects favorably at all times on
the KeraVision Products and the good name, goodwill, and reputation of
KeraVision; (ii) avoid deceptive, misleading or unethical practices that are or
might be detrimental to KeraVision, the KeraVision Products, or the public,
including without limitation the making or offering of any payment to any
government official for the purpose of influencing any act or decision of such
official in furtherance of this Agreement; (iii) make no false or misleading
representations, either orally or in any written materials, with regard to
-5-
<PAGE>
KeraVision or the KeraVision Products; (iv) not publish or employ, or cooperate
in the publication or employment of, any misleading or deceptive advertising
material with regard to KeraVision or the KeraVision Products; (v) make no
representations, warranties or guarantees to customers or to the trade with
respect to the specifications, indications, capabilities, or features of the
KeraVision Products that are inconsistent with the literature distributed by
KeraVision; and (vi) not enter into any contract or engage in any practice
detrimental to the interests of KeraVision in the KeraVision Products. Violation
of any of the provisions in this Section 4.9 shall constitute a material breach
of this Agreement.
SECTION 5: KERAVISION OBLIGATIONS
5.1 Availability of KeraVision Products. KeraVision reserves the
-----------------------------------
right at any time to discontinue the manufacture, supply or sale of any of the
KeraVision Products, to make changes in materials or design, or to add
improvements to any of the KeraVision Products, all without incurring any
liability.
5.2 Marketing Assistance. KeraVision shall provide to AMP camera-
--------------------
ready artwork in the English-language text.
5.3 Buy Back of KeraVision Products. Upon termination of this
-------------------------------
Agreement, other than for breach by AMP, KeraVision is obligated to repurchase
any and all inventory of the KeraVision Products which are, in KeraVision's sole
determination, in undamaged and resalable condition. KeraVision will buy such
inventory from AMP, and AMP shall promptly sell to KeraVision, at AMP's actual
cost.
SECTION 6: OWNERSHIP; INTELLECTUAL PROPERTY RIGHTS
6.1 Ownership. The KeraVision Intellectual Property Rights for the
---------
KeraVision Products, and all translations thereof, shall remain the sole
property and under the sole ownership of KeraVision. AMP acknowledges and
agrees that KeraVision owns and retains all trademarks, trade names, logos,
designations, copyrights and other proprietary rights in or associated with the
KeraVision Products, and agrees that it will not at any time during or after the
Term of this Agreement to assert or claim any interest in or do anything that
may adversely affect the validity of any KeraVision trademark, patent, or other
intellectual property right belonging to or licensed to KeraVision, including,
without limitation, any act or assistance to any act which may infringe or lead
to the infringement of any of KeraVision's intellectual property rights.
6.2 KeraVision Trademarks. During the Term of this Agreement, AMP is
---------------------
authorized to use the KeraVision trademarks solely in connection with AMP's
advertisement, promotion, and sale of the KeraVision Products. AMP's use of the
KeraVision trademarks will be in accordance at all times with KeraVision's
policies and guidelines then in effect and as provided to AMP by KeraVision from
time to time. AMP agrees not to attach any additional trademarks, trade names,
logos or designations to any of the KeraVision Products, or packaging, labeling,
advertising, or marketing materials of any kind therefor without the express
written consent of KeraVision. AMP agrees not to use the KeraVision trademarks
in connection with any third party products. AMP agrees
-6-
<PAGE>
that it will not at any time during or after the Term of this Agreement assert
or claim any interest in or do anything that may adversely affect the validity
of any KeraVision trademarks, or other Intellectual Property Rights belonging to
or licensed to KeraVision (including, without limitation, any act or assistance
to any act which may infringe or lead to the infringement of any of KeraVision's
Intellectual Property Rights.) AMP agrees that any description, publication,
advertising, promotional materials, exhibits, video or image of the KeraVision
Products must include the KeraVision logo and be identified as KeraVision
Products.
6.3 Proprietary Notice. AMP will include on each of the KeraVision
------------------
Products that it distributes, markets, and/or sells, and on all container
therefor, all trademark, copyright, and other notices of proprietary rights
included by KeraVision or as directed by KeraVision on such KeraVision Products.
AMP agrees not to alter, erase, deface, or overprint any such notice on anything
provided by KeraVision.
6.4 Assistance. AMP shall promptly notify KeraVision: (i) of any
----------
claims or objections that its use of any Intellectual Property Rights in
connection with the marketing or sale of the KeraVision Products may or will
infringe the names, or other proprietary rights of another person or entity;
(ii) of any and all infringements, imitations, illegal use, or misuse, by any
person or entity, of KeraVision's Intellectual Property Rights which come to its
attention. AMP agrees to assist KeraVision, at KeraVision's expense, in
protecting and enforcing throughout the Territory KeraVision's Intellectual
Property Rights.
SECTION 7: TRAINING OBLIGATIONS
KeraVision will train AMP's training and sales representatives during
training sessions, [*]. The location and terms of such training are to be
determined at KeraVision's sole discretion.
SECTION 8: CONFIDENTIALITY
Each party hereto agrees not to use any Confidential Information of the
other party for any purpose, other than to enforce its rights and perform its
obligations hereunder, or disclose any Confidential Information of the other
party to any third party for any purpose. Each party hereto shall use the same
degree of care, but no less than reasonable care, to avoid disclosure or use of
the Confidential Information of the other party as such party employs with
respect to its own Confidential Information of like importance.
SECTION 9: REPRESENTATIONS AND WARRANTIES
9.1 Representations and Warranties by KeraVision. KeraVision warrants
--------------------------------------------
and represents that, for a period of [*] KeraVision Products that the KeraVision
Products will
[*] = CONFIDENTIAL TREATMENT REQUESTED
-7-
<PAGE>
comply with the relevant specifications in effect at the time of AMP's
acceptance of the KeraVision Products.
9.2 Representations and Warranties by AMP. AMP warrants and
-------------------------------------
represents that it has the authority to enter into this Agreement, and to
perform the services set forth in this Agreement.
9.3 No Other Warranties. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN
THE DISTRIBUTION AGREEMENT, AND THE FULLEST EXTENT PERMITTED BY LAW, KERAVISION
MAKES NO FURTHER REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT
TO THE KERAVISION PRODUCTS AND DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-
INFRINGEMENT WITH RESPECT TO SUCH KERAVISION PRODUCTS.
SECTION 10: INDEMNIFICATION
10.1 Indemnification by KeraVision. KeraVision agrees to indemnify,
-----------------------------
defend and hold AMP harmless from and against any and all liabilities,
obligations, losses, claims, damage, suit, proceeding, cost, charges or other
expenses (including but not limited to reasonable attorneys' fees and court
costs) which arise out of or result from the manufacture of KeraVision Products
by KeraVision; provided, however, that such indemnification shall not
-----------------
apply to any liabilities, obligations, losses, claims, damage, cost or
charges which arise out of or result from any claim made by any person based
upon modifications to the KeraVision Product made by any entity other than
KeraVision.
10.2 Indemnification by AMP. AMP agrees to indemnify, defend and hold
----------------------
KeraVision and its successors, assigns, agents, officers, directors and
employees, harmless from and against any and all liabilities, obligations,
losses, claims, damage, suit, proceeding, cost, charges or other expenses of
every kind and character (including but not limited to reasonable attorneys'
fees and court costs) which arise out of or result from : (i) negligence or
wrongful acts of employees or contractors of AMP; or (ii) any breach or alleged
breach (other than a breach alleged by KeraVision) of any representation or
warranty by AMP; or (iii) the marketing, promotion, distribution, and sale of
the KeraVision Products.
10.3 Conditions Precedent to Indemnification. The obligations of one
---------------------------------------
party to indemnify the other party will be conditioned upon the indemnified
party: (i) providing the indemnifying party with prompt notice of any such
claim; (ii) allows the indemnifying party sole control over the defense and
settlement of such claim; (iii) provides the indemnifying party with the
information and assistance necessary for such defense and settlement of such
claims; and (iv) does not enter into any settlement with respect to such claim.
-8-
<PAGE>
10.4 Infringement. In the event that KeraVision receives notification
------------
that the KeraVision Product may infringe any patent, copyright, trademark, or
trade secret of a third party, KeraVision's sole liability will be to either
modify the KeraVision Product, or obtain a license to such rights as may be
required to make the KeraVision Product non-infringing. If none of the foregoing
alternatives are available to KeraVision, KeraVision shall have the right to
request that AMP discontinue the alleged infringing activity and terminate this
Agreement. THIS SECTION SETS FORTH KERAVISION'S SOLE LIABILITY, AND AMP'S SOLE
REMEDY, FOR BREACH OF ANY THIRD PARTY INTELLECTUAL PROPERTY RIGHTS BY KERAVISION
PRODUCTS.
10.5 Limitation of Liability. THE PROVISIONS OF THIS ARTICLE 10 SET
-----------------------
FORTH THE ENTIRE LIABILITY OF KERAVISION AND THE SOLE REMEDIES OF AMP WITH
RESPECT TO ANY CLAIMS ARISING OUT OF KERAVISION'S MANUFACTURE OF THE KERAVISION
PRODUCTS. IN NO EVENT SHALL KERAVISION BE LIABLE WITH RESPECT TO ANY SUBJECT
MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR
OTHER LEGAL OR EQUITABLE THEORY FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL,
PUNITIVE OR OTHER DAMAGES, INCLUDING COST OF PROCUREMENT OF SUBSTITUTE GOODS,
TECHNOLOGY OR SERVICES, SUFFERED BY AMP OR ANY OF ITS CUSTOMERS ARISING OUT OF
OR RELATED TO THE DISTRIBUTION, PROMOTION, MARKETING, SALE OR USE OF THE
KERAVISION PRODUCTS IN THE TERRITORY.
SECTION 11: TERM AND TERMINATION
11.1 Term. The term of the Distribution Agreement will [*] (the
----
"Term"), unless previously terminated by one of the parties.
----
11.2 Termination. Either party may terminate the Distribution
-----------
Agreement in the event: (i) the other party breaches any material provision of
the Distribution Agreement and does not remedy such breach within thirty (30)
days following notice of such breach from the Terminating Party; (ii) mutual
agreement with the other party; or (iii) the other party enters bankruptcy
proceedings, becomes insolvent, or otherwise becomes generally unable to meet
its obligations under this Agreement. In addition, KeraVision may immediately
terminate the Agreement without notice, in the event that: (i) AMP sells a
majority of its outstanding shares of stock to any third party, (ii) AMP merges
with or into any third party in a transaction in which AMP is not the surviving
entity or in which AMP becomes a wholly or majority owned subsidiary of such
third party, (iii) AMP has a change of at least one-half of its directors, (iv)
AMP sells all or substantially all of its assets.
11.3 Effect Of Termination. Upon expiration or termination of the
---------------------
Distribution Agreement: (i) subject to the provisions of Section 11.4 hereto,
all rights and obligations of the parties shall cease; (ii) AMP shall promptly
sell at its cost to KeraVision all
[*] = CONFIDENTIAL TREATMENT REQUESTED
-9-
<PAGE>
KeraVision Products then in AMP's inventory; (iii) AMP shall promptly transfer
to KeraVision all copies of sales materials and Confidential Information in
written, recorded, or other tangible form then in AMP's possession, and all
other materials that were supplied to AMP by KeraVision during the Term of the
Distribution Agreement; and (iv) AMP shall use its best efforts to effect the
assignment, return, or other transfer of any and all licenses, registrations,
and the like relating to the KeraVision Products, to KeraVision, or to any third
party as directed by KeraVision.
11.4 Survival. Upon expiration or termination of this Agreement, the
--------
provisions of Sections 1, 3.3, 3.6, 5.3 (as stated), 6.1, 8, 9, 10, 11.3, 11.4,
and 12 shall survive and remain enforceable.
11.5 [*] This assistance will include, among other things, transfer of
customer lists and all records and information related to sale of KeraVision in
the Territory. In addition, AMP will work jointly with KeraVision to ensure
that there will be no conflicts between AMP and KeraVision in the marketplace at
and after the time of transition of such business from AMP to KeraVision. [*]
11.6 No Damages for Termination. KERAVISION SHALL NOT BE LIABLE TO
--------------------------
AMP, OR ANY OF AMP'S EMPLOYEES OR AGENTS, FOR DAMAGES OF ANY KIND, INCLUDING
DIRECT, INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, ON ACCOUNT OF
THE TERMINATION OR EXPIRATION OF THIS AGREEMENT IN ACCORDANCE WITH THIS ARTICLE
11. AMP WAIVES ANY RIGHTS IT MAY HAVE TO RECEIVE ANY COMPENSATION OR REPARATIONS
ON TERMINATION OR EXPIRATION OF THIS AGREEMENT UNDER THE LAW OF THE TERRITORY OR
OTHERWISE, OTHER THAN AS EXPRESSLY PROVIDED HEREIN. KeraVision shall not be
liable to AMP on account of termination or expiration of this Agreement for
reimbursement or damages for the loss of goodwill, prospective profits or
anticipated income, or on account of any expenditures, investments, leases or
commitments made by AMP or for any other reason whatsoever. AMP acknowledges
that it has no expectations and has received no assurances from KeraVision that
any investment by AMP in the distribution, promotion or sale of the KeraVision
Products will be recovered or recouped or that AMP will obtain any anticipated
amount of profits by virtue of this Agreement. THE PARTIES ACKNOWLEDGE THAT THIS
SECTION 11.6 HAS BEEN INCLUDED AS A MATERIAL INDUCEMENT FOR KERAVISION TO ENTER
INTO THIS AGREEMENT AND THAT KERAVISION WOULD NOT HAVE ENTERED INTO THIS
AGREEMENT BUT FOR THE LIMITATIONS OF LIABILITY AS SET FORTH HEREIN.
[*] = CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
SECTION 12: MISCELLANEOUS
12.1 Controlling Law; Language. Except with respect to Section 3.6
-------------------------
(Retail Pricing), in which event this Agreement will be governed by the laws of
Germany), this Agreement and the performance of the parties thereunder shall be
construed in accordance with and governed by the laws of the State of
California, as applied to agreements between California residents to be
performed entirely within California. The English-language version of the
Distribution Agreement shall be the controlling version.
12.2 Successors and Assigns. The Distribution Agreement and the rights
----------------------
and obligations arising thereunder shall be binding upon and inure to the
benefit of the parties and to their respective successors and assigns. AMP shall
not assign any of its rights or obligations under the Distribution Agreement
without the prior written consent of KeraVision. Any unauthorized assignment
shall be null and void.
12.3 Confidentiality of Agreement. Each party agrees to keep the terms
----------------------------
of this Agreement confidential.
12.4 Independent Contractors. Performance by the parties under this
-----------------------
Agreement shall be as independent contractors. Nothing contained herein or done
in pursuance of this Agreement shall constitute the parties entering upon a
joint venture orpartnership, or shall constitute either party the agent for the
other for any purpose or in any sense whatsoever.
12.5 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which when executed shall be deemed to be an original, but
all of which taken together shall constitute one and the same instrument
12.6 Notices. All notices required to be sent by either party under
-------
this Agreement shall be deemed given: (i) when sent by confirmed facsimile or
telecopy; (ii) one business day, after being sent by commercial overnight
courier with written verification of receipt; or (iii) when received after being
mailed postage prepaid by certified or registered mail, return receipt
requested, to the party to be notified, at the respective addresses set forth
below, or at such other address which may hereinafter be designated in writing:
KeraVision: 48630 Milmont Drive
Fremont, CA 94538-7353
Attention: Thomas M. Loarie
Phone: (510) 353-3000
Fax: (510) 353-3030
-11-
<PAGE>
AMP: Saldorferstrasse 5
90429 Nuremberg, Germany
Attention: Rudolf G. Peschke
Phone: 011-49-911/ 26 46 00
Fax: 011-49-911/ 26 34 02
12.7 Amendment. This Agreement may be amended or supplemented only by
---------
a writing that refers specifically to this Agreement and is signed by duly
authorized representatives of both parties.
12.8 Waiver. Except as otherwise provided in this Agreement, any
------
failure of any of the parties to comply with any obligation, covenant, agreement
or condition herein may be waived by the party entitled to the benefit thereof
only by a written instrument signed by the party granting such waiver, but such
waiver or failure to insist upon strict compliance with such obligation,
representation, warranty, covenant, agreement or condition shall not operate as
a waiver of, or estoppel with respect to, any subsequent or other failure.
12.9 Entire Agreement. This Agreement, and the Exhibits hereto, all
----------------
of which are incorporated by this reference, constitute the entire agreement and
understanding between the parties with respect to its and their subject matter
and may not be contradicted by evidence of any prior or contemporaneous oral or
written agreement.
12.10 Severability and Counterparts. If any provision of this
-----------------------------
Agreement is found to be invalid or unenforceable by a court of competent
jurisdiction, such provision shall be severed from the remainder of this
Agreement, which will remain in full force and effect. This Agreement may be
signed in counterparts, which together constitute one instrument.
12.11 Waiver of Termination Compensation. Upon Termination of this
----------------------------------
Agreement for any reason whatsoever, KeraVision shall not be liable for, and AMP
hereby waives, all right to compensation and all claims of any kind whether on
account of the loss by AMP of present or prospective profits, or anticipated
orders, or expenditures, investments, or commitments made in connection with
this Agreement, goodwill created, or on account of any other cause whatsoever.
-12-
<PAGE>
This Agreement is hereby agreed to and acknowledged by:
KERAVISION, INC. AM PESCHKE
By: /s/ P Sabaria By: /s/ R. G. Peschke
------------- ------------------
Name: P. Sabaria Name: R. G. Peschke
Title: Vice President - Europe Title: General Manager
Date: 12/11/96 Date: 11/14/1996
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<PAGE>
EXHIBIT A
---------
KERAVISION PRODUCTS; MINIMUM COMMITMENTS
I. KeraVision Products
-------------------
KeraVision Ring or the Instrastomal Corneal Ring Segments (ICRS) for
the treatment of myopia.
KeraVision Manufactured Instruments (including but limited to)
[*]
II. Minimum Commitments
-------------------
Cumulative Net Revenue Target Year Ending
- ----------------------------- -----------
[*]
[*] = CONFIDENTIAL TREATMENT REQUESTED
i
<PAGE>
EXHIBIT B
---------
CE MARK COMPLIANCE REQUIREMENTS
1. Maintain a system ensuring retention of product distribution records.
Distribution records shall ensure traceability of the product to the consignee
and ensure that KVI has access to all records after the contract expires, or at
any time during the term of the Agreement with reasonable access by KeraVision's
authorized third party.
2. Notification of product complaints to the appropriate KeraVision
representative. Notification of product complaints and vigilance reporting to
KeraVision within the appropriate timeframe to ensure KeraVision's timely
notification to the Competent Authority.
3. Comply and assist with all recall and field advisory actions.
4. Comply and assist with all keravision requirements in placing a purchase
order to KeraVision for KeraVision to be able to initiate a sales order
acknowledgment.
5. Notification of contacts with regulatory agencies regarding KeraVision
products.
6. KeraVision reserves the right to have a third party audit AMP to ensure
that AMP is maintaining compliance with the requirements for maintaining the CE
mark.
i
<PAGE>
EXHIBIT 11.1
KERAVISION, INC.
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
1996 1995 1994
------------------------------
Net Loss................................ $(12,879) $(7,106) $(6,097)
==============================
Historical Net Loss per Share:
- -----------------------------
Shares used in computation of net loss
per share:
Weighted average common shares
outstanding........................... 12,342 6,829 1,467
Shares related to Staff Accounting
Bulletins Nos. 55, 64 and 83:
Stock option grants.................. -- 49 84
Issuances of common stock............ -- 1 1,474
------------------------------
12,342 6,879 3,025
==============================
Historical net loss per share........... $ (1.04) $ (1.03) $ (2.02)
==============================
Pro forma Net Loss per Share:
- ----------------------------
Shares used in computation of
proforma net loss per share:
Historical weighted average common
shares per above................... 6,879 3,025
Assumed conversion of convertible
preferred stock as of beginning
of year........................... 3,085 5,263
-------------------------------
9,964 8,288
==============================
Pro forma net loss per share......... $ (0.71) $ (0.74)
==============================
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-00436) pertaining to the 1995 Director's Stock Option Plan, the
1995 Employee Stock Purchase Plan, the 1995 Stock Option Plan and the 1987
Stock Option Plan of our report dated February 6, 1997, with respect to the
consolidated financial statements of KeraVision, Inc. included in its Annual
report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
San Jose, California
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 8,291 44,703
<SECURITIES> 23,774 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 33,362 44,975
<PP&E> 3,722 2,172
<DEPRECIATION> 1,746 1,298
<TOTAL-ASSETS> 35,485 45,919
<CURRENT-LIABILITIES> 2,927 1,770
<BONDS> 0 0
0 0
0 0
<COMMON> 12 12
<OTHER-SE> 31,753 44,023
<TOTAL-LIABILITY-AND-EQUITY> 35,485 45,919
<SALES> 137 0
<TOTAL-REVENUES> 137 0
<CGS> 319 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 14,818 8,252
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (12,879) (7,106)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (12,879) (7,106)
<EPS-PRIMARY> (1.04) (0.71)
<EPS-DILUTED> (1.04) (0.71)
</TABLE>
