<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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Commission file number 0-26208
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KERAVISION, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0328942
(State of Incorporation) (I.R.S. Employer
Identification No.)
48630 MILMONT DRIVE
FREMONT, CA 94538
(Address of principal executive offices)
(510) 353-3000
(Registrant's telephone number)
================================================================================
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
As of August 4, 1997 there were 12,554,418 shares of Common Stock
outstanding.
<PAGE>
INDEX
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Page
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PART I. FINANCIAL INFORMATION (unaudited)
Item 1. Condensed Consolidated Balance Sheets
as of June 30, 1997 and December 31, 1996....................3
Condensed Consolidated Statements of Operations
for the three-month and six-month period ended
June 30, 1997 and 1996.......................................4
Condensed Consolidated Statements of Cash Flows
for the six-month period ended June 30, 1997 and 1996........5
Notes to Condensed Consolidated Financial Statements.........6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................10
Item 2. Changes in Securities.......................................10
Item 3. Defaults upon Senior Securities.............................10
Item 4. Submission of Matters to a Vote of Security Holders.........10
Item 5. Other Items.................................................10
Item 6. Exhibits and Reports on Form 8-K............................10
SIGNATURES..................................................................11
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
KERAVISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(Unaudited) (Note 1)
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents .................. $ 7,388 $ 8,291
Available-for-sale investments ............. 15,993 23,774
Other current assets ....................... 1,634 1,297
-------- --------
Total current assets ............................ 25,015 33,362
Property and equipment, at cost:
Manufacturing and laboratory equipment ..... 3,177 2,795
Office furniture and fixtures .............. 557 559
Leasehold improvements ..................... 383 368
-------- --------
4,117 3,722
Accumulated depreciation and amortization ....... (2,074) (1,746)
-------- --------
Property and equipment, net ................ 2,043 1,976
Prepaid expenses and other assets ............... 148 147
-------- --------
Total assets .................................... $ 27,206 $ 35,485
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable ........................... $ 978 $ 973
Accrued payroll and related expenses ....... 440 424
Accrued clinical trial costs ............... 1,375 965
Other accrued liabilities .................. 223 221
Current portion of capital lease obligations 290 344
-------- --------
Total current liabilities ....................... 3,306 2,927
Capital lease obligations ....................... 1,141 793
Commitments
Stockholders' equity:
Preferred stock ............................ -- --
Common stock ............................... 12 12
Additional paid-in capital ................. 76,394 76,114
Deferred compensation ...................... (254) (328)
Accumulated deficit ........................ (52,625) (43,265)
Notes receivable from stockholders ......... (768) (768)
-------- --------
Total stockholders' equity ...................... 22,759 31,765
-------- --------
Total liabilities and total stockholders' equity $ 27,206 $ 35,485
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
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<PAGE>
KERAVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data; unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ...................................... $ 114 $ -- $ 170 $ --
Costs and expenses:
Cost of sales ............................. 974 -- 1,744 --
Research and development .................. 3,033 2,843 5,406 5,029
General and administrative ................ 1,700 865 3,079 1,523
-------- -------- -------- --------
Total costs and expenses ....................... (5,707) (3,708) (10,229) (6,552)
-------- -------- -------- --------
Operating loss ................................. (5,593) (3,708) (10,059) (6,552)
Interest income, net ........................... 295 548 668 1,094
-------- -------- -------- --------
Net Loss ....................................... $ (5,298) $ (3,160) $ (9,391) $ (5,458)
======== ======== ======== ========
Net loss per share ............................. $ (0.42) $ (0.26) $ (0.75) $ (0.44)
======== ======== ======== ========
Shares used in calculation of net loss per share 12,532 12,313 12,495 12,290
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
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<PAGE>
KERAVISION, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities: $ (9,391) $ (5,458)
Net Loss ..................................................................
Adjustments to reconcile net loss to net cash used in operating activities: 328 108
Depreciation and amortization ......................................... 74 74
Amortization of deferred compensation ................................. (338) (77)
Other assets .......................................................... 5 232
Accounts payable ...................................................... 428 149
Accrued liabilities ................................................... ---------- ---------
497 486
Total adjustments ................................................... ---------- ---------
(8,894) (4,972)
Net cash used in operating activities ............................... ---------- ---------
Cash flows from investing activities: (15,493) (33,355)
Purchases of available-for-sale investments ............................... 7,156 4,073
Sales of available-for-sale investments ................................... 16,149 --
Maturities of available-for-sale investments .............................. (395) (381)
Capital expenditures ...................................................... ---------- ---------
7,417 (29,663)
Net cash provided by (used in) investing activities ................. ---------- ---------
Cash flows from financing activities: (201) (45)
Principal payments under capital lease obligations ........................ 495 --
Proceeds from sales-leaseback of capital equipment ........................ 280 232
Proceeds from issuance of equity securities, net of repurchases............ ---------- ---------
574 187
Net cash provided by (used in) financing activities.................. ---------- ---------
(903) (34,448)
Net increase (decrease) in cash and cash equivalents .........................
8,291 44,703
Cash and cash equivalents at the beginning of the period ..................... ---------- ----------
$ 7,388 $ 10,255
Cash and cash equivalents at the end of the period ........................... ========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
-5-
<PAGE>
KERAVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of KeraVision,
Inc. (the "Company" or "KeraVision"), have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X. The
balance sheet as of June 30, 1997, the statements of cash flows for the six-
month periods ended June 30, 1997 and 1996 and the statements of operations for
the three and six-month periods ended June 30, 1997 and 1996 are unaudited but
include all adjustments (consisting only of normal recurring adjustments) which
the Company considers necessary for a fair presentation of the financial
position at such date and the operating results and cash flows for those
periods. Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information normally included in financial statements and related
footnotes prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's annual report and Form 10-K for the year ended December 31,
1996. The accompanying condensed consolidated balance sheet at December 31, 1996
is derived from audited financial statements at that date.
Results for any interim period are not necessarily indicative of results
for any other interim period of for the entire year.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted-average number of shares
of common stock outstanding during the periods presented. Common equivalent
shares are excluded from the computation as their effect is antidilutive. In
February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which is required to be adopted by December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. It is expected that there will be no impact on
the Company from the adoption of Statement No. 128.
3. AVAILABLE-FOR-SALE INVESTMENTS
The Company's available-for-sale investments at June 30, 1997 were composed
of the following (in thousands):
<TABLE>
<CAPTION>
Gross Estimated
Unrealized Fair
Cost Gains Value
--------- ---------- ----------
<S> <C> <C> <C>
Certificate of deposit $ 655 -- $ 655
U.S. Treasury bills & other government
agency obligations 4,002 -- 4,002
Reverse repurchase agreements 284 -- 284
Corporate debt securities 10,995 $ 57 11,052
-------- -------- --------
Available-for-sale investments $ 15,936 $ 57 $ 15,993
======== ======== ========
</TABLE>
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<PAGE>
All available-for-sale investments mature within one year. Gross realized
and unrealized gains/losses were not significant during the periods ended June
30, 1997 and 1996.
4. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from theses estimates.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I -- Item 1 of this
Quarterly Report and the audited financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report and Form 10-K for the year
ended December 31, 1996.
OVERVIEW
Since its founding in November 1986, the Company has been engaged in the
research and development of the KeraVision Ring and related technology. The
Company began selling its products in Europe in December 1996 and has recorded
low levels of revenue to date. The Company expects to continue to incur
substantial losses at least through the year ending December 31, 1998 and until
sufficient revenue and margin can be generated to offset expenses. Given the
uncertainties in developing a market for a new product, revenues may not
increase significantly in the foreseeable future. Furthermore, the Company
expects its expenses in all categories to increase as its clinical and other
activities increase.
The Company is currently conducting a Phase III trial for the KeraVision
Ring in the United States for myopia in the range of -1.0 to -3.5 diopters and a
Phase II trial for myopia in the range of -3.5 to -5.0 diopters. The Company was
granted the right to affix the CE mark on the KeraVision Ring for myopia which
allows the Company to sell product in the range of -1.0 to -5.0 diopters in
European Union countries. To date, sales efforts have been concentrated in
Germany and France.
The research, manufacture, sale and distribution of medical devices such as
the KeraVision Ring are subject to numerous regulations imposed by governmental
authorities, principally the FDA and corresponding state and foreign agencies.
The regulatory process is lengthy, expensive and uncertain. Prior to commercial
sale in the United States, the KeraVision Ring must be 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 the European Union.
There can be no assurance that the Company's research and development
efforts will be successfully completed, and until the development and testing
processes for the KeraVision Ring are complete, there can be no assurance that
the KeraVision Ring will perform in the manner anticipated. Although the Company
does have approval to sell product in the European Union, there can be no
assurance that the KeraVision Ring will prove to be safe or effective over the
long term in correcting vision, that the product will be approved for marketing
by the FDA or other government agencies or that the KeraVision Ring or any other
product developed by the Company will be commercially successful, successfully
marketed or achieve market acceptance. There can be no assurance that the
Company will ever achieve either significant revenues from sales of the
KeraVision Ring or any other potential products or profitable operations.
-7-
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 and 1996
The Company recorded net revenues of $114,000 from European sales of the
Company's KeraVision Ring for treating nearsightedness for the quarter ended
June 30, 1997. The Company made its first shipment in late 1996; therefore, no
revenues are reflected in the second quarter of the previous year. Sales were
concentrated in Germany and France where the Company has focused its market
development efforts following European Union approval of the KeraVision Ring in
November 1996.
Research and development expenses, which include clinical and regulatory
expenses, for the three-month period ended June 30, 1997 were $3.0 million, an
increase of $0.2 million from the three-month period ended June 30, 1996. The
increase is attributable to increased activities related to clinical trials,
additional staffing and continued investments in research and development.
Management expects research and development expenses to continue to increase, as
clinical trials continue in Europe and the United States.
General and administrative expenses of $1.7 million were incurred in the
three-month period ended June 30, 1997, an increase of $0.8 million from the
$0.9 million incurred in the comparable prior year period. The increase was
primarily the result of increased expenses associated with marketing efforts and
the preparation to support European commercialization.
The Company recorded $0.3 million of net interest income for the three-
month period ended June 30, 1997, as compared to $0.5 million for the previous
year. Interest income decreased due to lower average cash and investment
balances from period to period. The net loss of $5.3 million for the three-month
period ended June 30, 1997, increased $2.1 million from the $3.2 million
reported in the comparable prior year period. The Company believes that its net
loss will significantly increase in future periods.
Six Months Ended June 30, 1997 and 1996
Research and development expenses for the six-month period ended June 30,
1997 were $5.4 million, an increase of $0.4 million from the comparable six-
month period in the prior year. This 8% increase was due to higher expenses
related to clinical study, staffing and continued investments in research and
development.
General and administrative expenses for the six-month periods ended June
30, 1997 and 1996 were $3.1 million and $1.5 million, respectively. Consistent
with the three-month comparison, the increase in general and administrative
expenses is primarily the result of increased marketing efforts relating to the
preparation for potential future European commercialization.
The Company recorded $0.7 million of net interest income for the six-month
period ended June 30, 1997, as compared to $1.1 million for the same period in
1996. Interest income decreased due to lower average cash and investment
balances. The net loss for the six-month period ended June 30, 1997 was $9.4
million, an increase of $3.9 million over the loss of $5.5 million in the same
period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since incorporation primarily
through its initial public offering, private sales of preferred stock, interest
income and equipment financing arrangements. The Company completed an initial
public offering on August 2, 1995, from which it realized net proceeds (after
underwriting discounts and expenses) of $44.4 million. Prior to the initial
public offering the Company had raised approximately $29.5 million from the sale
of preferred stock, related warrants and common stock. Cash used in operating
activities for the first six months of 1997 has increased to $8.9 million from
$5.0 million in the same period of the prior year, reflecting increasing net
losses principally related to increased manufacturing and research and
development expenditures. Cash, cash equivalents and available-for-sale
investments were $23.4 million at June 30, 1997. Capital expenditures for the
first six months of 1997 were $0.4 million.
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<PAGE>
The Company expects to continue to incur substantial expenses in support of
additional research and development activities, including costs of clinical
studies, manufacturing costs, the expansion of sales and marketing organization
and the support for ongoing administrative activities. The Company anticipates
that the existing cash, cash equivalents and available-for-sale investments will
enable it to maintain its current 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.
FORWARD LOOKING STATEMENTS
The Company notes that certain of the foregoing statements in this report
are forward looking and that actual results may differ materially due to a
variety of factors including, but not limited to, (i) slower than anticipated
market acceptance of the KeraVision Ring and challenges associated with creating
a market for a new product in the European Union, (ii) significant unforeseen
delays in the FDA or foreign regulatory approval process, (iii) determinations
by the FDA or foreign regulatory bodies that the clinical data collected are
insufficient to support safety and efficacy of the KeraVision Ring, (iv) the
FDA's failure to schedule advisory review panels, (v) changes in FDA or foreign
regulatory review guidelines, procedures, regulations or administrative
interpretations, (vi) complications relating to the KeraVision Ring or the
surgical procedure, (vii) competitive products and technology, and (viii) other
risk factors described under the heading "Risk Factors Affecting the Company,
its Business and its Stock Price" set forth in Item 1 of the Company's Form 10-K
for the year ended December 31, 1996 and in other filings made with the
Securities and Exchange Commission.
-9-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1. The 1997 Annual Meeting of Stockholders of the Company was held pursuant to
notice at 9:30 a.m., Pacific time on May 6, 1997 at the Company's offices in
Fremont, California. There were present at the meeting, in person or represented
by the proxy, the holders of 11,042,812 shares of Common Stock. The matters
voted on at the meeting and the votes cast are as follows:
(a) As listed below, all of Management's nominees for Class II Directors
were elected at the meeting:
<TABLE>
<CAPTION>
No. of Common No. of Common
Name of Nominee Votes in Favor Votes Withheld
- --------------- -------------- --------------
<S> <C> <C>
Charles Crocker 11,024,607 18,205
Lawrence A.Lehmkuhl 11,024,307 18,505
</TABLE>
(b) The appointment of Ernst & Young LLP as independent public accounts
of the Company for the fiscal year ending December 31, 1997 was ratified and
approved with 11,020,255 Common shares voting in favor, 2,283 Common shares
voting against and 20,274 Common shares abstaining.
ITEM 5. OTHER ITEMS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule (filed via the EDGAR system)
(b) Reports on Form 8-K: None
-10-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KERAVISION, INC.
/s/Mark Fischer-Colbrie
-----------------------
Mark Fischer-Colbrie
Vice President, Finance and Administration and
Chief Financial Officer
(Principal Financial and Accounting Officer)
August 6, 1997
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,388
<SECURITIES> 15,993
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,015
<PP&E> 4,117
<DEPRECIATION> 2,074
<TOTAL-ASSETS> 27,206
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 22,747
<TOTAL-LIABILITY-AND-EQUITY> 27,206
<SALES> 114
<TOTAL-REVENUES> 114
<CGS> 0
<TOTAL-COSTS> 5,707
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,298)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,298)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
