<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
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, 1997, or
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _____ to _________.
Commission file number: 0-26208
KERAVISION, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0328942
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
48630 MILMONT DRIVE
FREMONT, CA 94538
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 353-3000
__________________________________
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
__________________________________
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 [_]
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 $77,591,193 as of March 16, 1998.
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 12,667,950 shares of Registrant's Common Stock issued and
outstanding as of March 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document is incorporated by reference in Part III of
this Form 10-K Report: The Proxy Statement for the Registrant's 1998 Annual
Meeting of Stockholders scheduled to be held on May 4, 1998.
<PAGE>
PART I
Item 1. Business
- ------- --------
The Company notes that certain of the statements in this report, including
without limitation statements about the 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
the 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"
as set forth below in this Item 1.
GENERAL
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, which in the
aggregate are believed to affect one-half of the world's population. 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
composed of two thin, half-circles that are inserted into the periphery of the
cornea in a simple outpatient procedure. The KeraVision Ring is made from a
common polymer that has been commonly used in intraocular lenses for cataract
surgery since 1952. The KeraVision Ring is designed to be permanent, however, it
can be removed if desired, resulting in a potentially reversible refractive
procedure. The currently available refractive surgery procedures typically
require irreversible cutting or tissue removal in the central cornea. In
addition to being reversible, other benefits of the KeraVision Ring are expected
to include (i) long-term, convenient correction, (ii) rapid visual recovery,
(iii) predictable results, (iv) a simple, minimally-invasive, out-patient
procedure and (v) a standardized procedure.
The Company's objective is to commercialize the KeraVision Ring technology
for the treatment of common vision problems on a worldwide basis. In the United
States, the Company is currently conducting a Phase III clinical trial for the
treatment of mild myopia (-1.0 to -3.5 diopters). Preliminary results from this
clinical trial indicate that 97% of the patients achieved 20/40 or better
vision, the legal requirement in most states to obtain a driver's license
without corrective lenses. To date, the KeraVision Ring has been well tolerated
in patients. The Company intends to submit a pre-market approval ("PMA")
application to the FDA in mid-1998 to allow for the commercialization of the
KeraVision Ring in the U.S. market.
The Company is also conducting an expanded Phase II trial for moderate
myopia (-3.5 to -5.0 diopters). Preliminary results in this trial indicate that
98% of the patients achieved 20/40 or better vision. The Company has received
permission from the FDA to move to a Phase III trial for moderate myopia as well
as for Myopia in the range of -0.5 to -1.0 diopters.
The Company received approval to affix the CE mark and begin
commercialization in the European Union on the KeraVision Ring for both mild and
moderate myopia in late November 1996. To date, the Company has primarily
concentrated its selling efforts for the KeraVision Ring and related instruments
in France and Germany.
In April 1997, the Company began a feasibility study outside the United
States using KeraVision Ring technology for the treatment of hyperopia. In
addition, the Company continues its research and analysis for the application of
the KeraVision Ring technology for the treatment of astigmatism and other common
vision problems.
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 common vision problems. In the United States an estimated 70 million people
suffer from myopia, and approximately the same number of people
2
<PAGE>
suffer from hyperopia. The most prevalent surgical techniques currently being
used to treat these vision problems are laser assisted in situ keratamileusis
("LASIK"), photorefractive radial keratotomy ("PRK") and radial keratotomy
("RK"). It is estimated that more than one million LASIK and PRK procedures have
been performed worldwide and more than one million RK procedures have been
performed in the United States. An estimated 200,000 laser vision procedures
(LASIK and PRK) were estimated to be performed in the United States in 1997.
Each of these procedures requires irreversible cutting or tissue removal in the
central cornea.
The Company believes that the KeraVision Ring provides the following
benefits for the treatment of myopia:
* LONG-TERM, CONVENIENT CORRECTION. The KeraVision Ring is designed to provide
permanent correction of myopia in a form more convenient than eyeglasses or
contact lenses.
* REVERSIBLE REFRACTIVE EFFECT. The KeraVision Ring can be removed in a
simple, outpatient procedure, if desired. In cases where the KeraVision Ring
has been removed, patients have returned to approximately the same level of
vision as measured prior to insertion of the KeraVision Ring.
* RAPID VISUAL RECOVERY. Clinical trials to date have demonstrated that
significant improvements in vision are achieved within one day after
insertion of the KeraVision Ring.
* PREDICTABLE RESULTS. The Company believes it has developed the ability to
adequately predict the refractive correction that can be achieved using the
KeraVision Ring.
* SIMPLE, MINIMALLY-INVASIVE, OUTPATIENT PROCEDURE. The KeraVision Ring
procedure, which requires a single, small incision and separation of corneal
tissue layers, can typically be performed in less than 15 minutes. The
outpatient procedure, performed using topical anesthesia, results in minimal
trauma to the eye.
* STANDARDIZED PROCEDURE. The KeraVision Ring and related instrumentation have
been designed to standardize the procedure to promote ease of surgery and
consistent outcomes.
Since 1991, the KeraVision Ring technology has been used for the treatment
of myopia in 1,371 patient eyes (excluding commercial procedures conducted in
Europe). Several clinical trials using various designs of the KeraVision Ring
have been conducted in Brazil, the U.S. and Europe. In order to simplify the
surgical technique, the design of the KeraVision Ring was modified from the
original split 360 degree ring to the current configuration which involves two
half-circles. A U.S. Phase II trial for the current KeraVision Ring design was
initiated in May 1995 involving 150 patients who require a myopic correction in
the range of -1.0 to -6.0 diopters.
An interim analysis was performed on the initial 75 patients who had three
months of available follow-up. Based upon the analysis of these data, the
Company proceeded to slightly modify the range of correction achieved with the
current KeraVision Ring design and to separate the indications addressed into
mild myopia (-1.0 to -3.5 diopters) and moderate myopia (-3.5 to -5.0 diopters).
The Company initiated an expanded Phase II trial in November 1996 involving 59
patients to evaluate moderate myopia using two KeraVision Ring sizes. In
December 1996, the Company initiated a Phase III trial at ten clinical sites
involving 360 patients requiring correction for mild myopia.
STRATEGY
The Company's objective is to commercialize the 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. The Company
received approval to commercialize the KeraVision Ring in the European Union
in November 1996 with sales efforts currently
3
<PAGE>
focused 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 and
expects to submit its PMA application to the FDA in mid-1998. 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 approval and launch of potential products under
development for the treatment of other vision problems.
* INCREASE AWARENESS OF THE KERAVISION RING. In developing and testing its
technology, the Company works with a broad range of independent researchers
to expand awareness of the KeraVision Ring technology. The Company also works
with leading surgeons and academic centers in the ophthalmology field in the
design, development and clinical testing of its technology. The Company
believes that these researchers, practitioners and institutions, among
others, have significant influence on the adoption of new technologies and
the development of clinical parameters upon which 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 technology.
* FOCUS INITIAL MARKETING ON SURGEONS. KeraVision is focusing its initial
marketing efforts on opinion leaders and surgeons with active practices in
the ophthalmic community. As part of this strategy, the Company has developed
surgeon training programs utilizing its proprietary instruments to promote
standardized procedures for insertion of the KeraVision Ring. The Company
believes that an emphasis on surgeon training will aid in achieving
successful procedural outcomes and thereby increase market acceptance of the
KeraVision Ring by both ophthalmic surgeons and patients.
* EXPAND APPLICATIONS OF CORE TECHNOLOGY. The Company has products under
development utilizing its core KeraVision Ring technology for the treatment
of other common vision problems, including hyperopia and astigmatism. 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 materials and the development of
new surgical techniques and instruments.
* UTILIZE ADVANCED DEVELOPMENT METHODS. KeraVision seeks to use advanced
scientific and engineering methods in developing the KeraVision Ring
technology or other potential products for different types of vision
impairment. These include the use of sophisticated modeling techniques to
understand the optical, mechanical and biological effects of inserting the
KeraVision Ring or other potential products into the cornea to correct for
myopia, hyperopia, astigmatism or combinations thereof. 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.
* STRENGTHEN PROPRIETARY POSITION. The Company intends to continue to develop
and protect its proprietary KeraVision Ring technology. To date, the Company
has 18 United States and 24 foreign patents issued and has filed applications
for over 180 United States and foreign patents.
BACKGROUND
VISION AND VISION IMPAIRMENT
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 that passes 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 light rays on the retina,
which contains the light-sensitive receptors that transmit the image through the
optic nerve to the brain.
4
<PAGE>
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. 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.
VISION CORRECTION MARKET
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 alone, approximately 140 million people currently use eyeglasses
or contact lenses to correct these common vision problems with over $12 billion
spent for corrective eyewear products annually. It is estimated that over 70
million people are affected by myopia and a similar number are affected by
hyperopia in the United States. Of the 70 million people with myopia, an
estimated 26 million people have low to moderate myopia without significant
astigmatism and are age 21 or older. As many as an estimated twenty-two million
of these 26 million people have mild myopia and require -1.0 to -3.5 diopters of
correction, the range covered by the KeraVision Ring sites currently in Phase
III clinical trials. 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.
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.
The most prevalent surgical techniques that have emerged are LASIK, PRK and
RK. Generally these procedures have been used to treat myopia, however, LASIK
and PRK technologies to treat hyperopia are under development. It is estimated
that over one million refractive procedures have been performed in the United
States.
CURRENT REFRACTIVE SURGERY TECHNIQUES
Current refractive surgery procedures include RK, PRK and LASIK, among
others.
In RK, a diamond knife is used to make from four to eight 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 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,
5
<PAGE>
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.
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.
LASIK involves using an automated cutting device to cut a large corneal
flap, which is then pulled back, and expose the stroma and a laser is used to
remove stromal tissue from the central cornea. The corneal flap is then placed
back on the stromal tissue where it adheres back onto the eye.
Another treatment for myopia currently being investigated in a clinical
trial in the United States is the intraocular Contact Lens or ICL. The ICL
seeks to correct refractive errors by placing a lens inside the eye between the
natural lens and the iris. Currently, the ICL is being studied primarily for
higher ranges of visual correction. The ICL is currently available for sale in
Europe.
QUALITY OF VISION
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.
THE KERAVISION RING AND INSTRUMENTS
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 is a
proprietary device designed to reduce or eliminate the need for corrective
eyewear by reshaping the curvature of the patient's 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
periphery of the cornea creates a flattening of the central cornea, thereby
increasing the number of light rays properly focused on the retina. The
- -----------------
/*/ "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.
6
<PAGE>
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.
The initial design of the KeraVision Ring consisted of an optically clear
split ring made of polymethylmethacrylate ("PMMA"), a clear acrylic that has
been widely used in implantable intraocular lenses since 1952. In order to
simplify the surgical procedure, the Company modified the design of the
KeraVision Ring in 1995 into two, thin half-circles of PMMA, each with an arc
length of 150 degrees. The two half-circles are placed in the periphery of the
cornea at a diameter of approximately eight mm. The Company has extensively
studied the relationship between physical parameters of the KeraVision Ring. As
a result of these studies, the Company believes that a small number of
KeraVision Ring sizes, with minor variations in certain dimensions, can produce
a wide range of corneal curvature change and, therefore, could provide treatment
for a substantial segment of those people with myopia. The Company has
developed KeraVision Rings in five different thicknesses ranging from 0.25 mm to
0.45 mm.
The Company has developed proprietary surgical instruments to be used for
the insertion of the KeraVision Ring. These stainless steel and titanium
instruments includes a marking instrument, a centering guide and a stromal
separator. The Company's instruments have 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 placing the KeraVision Ring
at the right depth. It is believed that the purchase of the Company's
instruments 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 LASIK or PRK 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 15 minutes or less. The procedure is usually performed using
a topical anesthetic. In addition to the KeraVision instruments, the KeraVision
Ring procedure in part employs surgical techniques and ophthalmic surgical
instruments that are widely used by ophthalmic surgeons. The KeraVision Ring
procedure requires a single incision of approximately two mm outside of the
optical zone of the cornea. The incision is located at the top of the eye under
the eyelid. The amount of postoperative discomfort experienced by patients
participating in the KeraVision Ring clinical studies has been relatively modest
and is typically treated with nonprescription pain relievers.
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 one to two sutures which are generally removed within
two to four weeks.
7
<PAGE>
CLINICAL TRIALS
Since 1991, ophthalmic surgeons have utilized the Company's KeraVision Ring
technology for the treatment of myopia in 1,371 patient eyes in clinical trials.
The Company initiated clinical trials using the initial design of the KeraVision
Ring in 1991 in both the United States and Brazil. In September 1994, the
Company completed enrollment of a 90-patient U.S. Phase II myopia trial using
the initial design of the KeraVision Ring. In September 1996, the Company
completed enrollment of the group of 150 U.S. Phase II patients with a modified
KeraVision Ring. In October 1996, the Company received approval to commence a
ten center Phase III clinical trial in the United States and began that trial in
December 1996. The enrollment for the trial was completed in May 1997. In
addition, the Company is conducting two clinical trials in Europe for myopia.
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/.
MYOPIA
In May 1995, the Company commenced a U.S. Phase II trial for the current
KeraVision Ring design. This trial includes six clinical sites and involves 150
patients requiring a myopic correction in the range of -1.0 to -6.0 diopters.
Enrollment was completed in September 1996 for this Phase II trial. An interim
analysis was performed on the initial 75 patients who had three months of
available follow-up. These data were submitted to FDA for review prior to
initiating the Phase III trial for the KeraVision Ring. Based upon the analysis
of the Phase II data, the Company proceeded to slightly modify the range of
correction achieved with the current KeraVision Ring design and to separate the
myopia indication into mild myopia (-1.0 to -3.5 diopters) and moderate myopia
(-3.5 to -5.0 diopters).
A total of 195 patient eyes have been implanted as part of this Phase II
trial. The data from the first 139 Phase II patients (-1.0 to -6.0 diopters)
with twelve months of follow-up indicate that 91% were 20/40 or better, 76% were
20/25 or better and 60% were 20/20 or better. Additionally, 79% of the patients
were within 1.0 diopter of their intended correction. There have been five
events that resulted in the explant of one or both Ring segments: two cases of
infection and three cases related to surgical technique. All of these patients
are stable with no clinically significant consequences. Twenty-seven of the 195
patient eyes underwent removal of the KeraVision Ring due to patient
dissatisfaction related to undercorrection (twelve), visual symptoms including
glare, halos, and other symptoms related to low light conditions (nine) and
induced astigmatism (six).
The Company initiated an expanded Phase II trial in November 1996 to
evaluate moderate myopia (-3.5 to-5.0 diopters) using the revised range of
correction for the two higher Ring sizes. Enrollment of the 59 patients was
completed in February 1997. The three month follow-up data for 58 Phase II
patients with the two higher ring sizes indicate that 98% were 20/40 or better,
83% were 20/25 or better and 57% were 20/20 or better. The predictability of the
refractive effect within 1.0 diopter increased from 46% to 70% for this trial as
compared to the results from initial Phase II trial for the same thicknesses.
There was one case of infection which resulted in the removal of the KeraVision
Ring. The patient has had no clinically significant consequences as a result of
the infection. The Company has submitted the data from this trial to the FDA and
received approval in November 1997 to expand the existing Phase III trial to
include these sizes of the KeraVision Ring.
- ------------------------
/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/ 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.
8
<PAGE>
In December 1996, the Company initiated a Phase III trial at ten clinical
sites involving 360 patients requiring correction for mild myopia (-1.0 to -3.5
diopters). Enrollment was completed for this trial in early May 1997. A total
of 530 patient eyes have been implanted to date. The recently presented data
from the first 244 Phase III patient eyes with three-months of follow-up
indicate that 97% were 20/40 or better, 87% were 20/25 or better, 75% were 20/20
or better and 52% were 20/16 or better. The predictability data indicated that
89% of the patients were within 1.0 diopter of their intended correction. The
early visual recovery data indicates that 88% of the patients were 20/40 or
better and 39% were 20/20 or better by the day following surgery. By the end of
the first week, 90% of the patients were 20/40 or better and 54% were 20/20 or
better. By the end of the first month 97% of the patients were 20/40 or better
and 70% were 20/20 or better. There has been one surgery-related event that
resulted in removal of the Ring. The patient is stable with no clinically
significant consequences as a result. There have been nine removals of the
KeraVision Ring due to patient dissatisfaction related to visual symptoms (six),
overcorrection (two), undercorrection (one).
In anticipation of the KeraVision Ring launch in the European Union, the
Company conducted two European clinical trials. The results from these trials
are comparable with the Company's clinical studies in the United States.
COMPLICATIONS, VISUAL SIDE EFFECTS AND OBSERVATIONS
Although the Company has developed six-year clinical data on the safety and
efficacy of the KeraVision Ring in correcting myopia, it has only limited long-
term safety or efficacy data. The first procedure for the treatment of myopia
using the KeraVision Ring was performed in 1991, and to date 1,371 procedures
have been conducted using the KeraVision Ring technology, with 1,131 procedures
using the modified two half-circle design of the KeraVision Ring. 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
include, among other things: induced astigmatism, infection, decentered
placement and a temporary reduction in central corneal sensation. In addition,
patients undergoing the KeraVision Ring procedure have reported certain visual
side effects. These include glare, haloes and reduced night vision. 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. In
many of the patients, the Company has observed deposits in the stromal channel
next to the KeraVision Ring. Although the Company believes that these deposits
are not complications and do not cause side effects, no assurance can be given
that this will be the case.
HYPEROPIA
Data obtained from laboratory work on eye bank eyes and from finite element
analysis has indicated that a design based on the KeraVision Ring technology may
correct hyperopia. Based on these data and analysis, a potential product for
hyperopia is currently undergoing feasibility testing in a small clinical study,
with twenty patients to date having undergone a procedure to correct hyperopia.
Made from the same material as the product for myopia and using a simple
insertion technique, the early results from this study are promising, but
require more long-term follow-up. In addition, because only twenty patients to
date have received the treatment for hyperopia, additional patients will need to
be treated in order to characterize the range and predictability of correction
prior to moving to a large scale study.
9
<PAGE>
ASTIGMATISM
The Company has studied 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
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, and the Company is pursuing broader experimentation and analysis.
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. The Company
believes that 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.
EUROPE
Upon obtaining the right in November 1996 to market the KeraVision Ring in
European Union countries, the Company commenced a sales and marketing program
concentrated in parts of France, Germany and Austria. As part of this program,
the Company established a European Headquarters in Paris, France. Sales of the
KeraVision Ring in the French market are handled through a small sales office in
France, and a distributor sells the Company's products in Germany and Austria.
Initial sales and marketing efforts have been geared towards initiating a
training program initially involving a small group of ophthalmic surgeons. The
strategy established by the Company was to utilize a core group of KeraVision
trained surgeons to help create the model for future expansion of KeraVision
Ring sales to other surgeons in the same country, and subsequently to expand
into other countries in Europe. Responses to these initial training courses
have been favorable, and over 100 ophthalmic surgeons have been trained in the
procedure thus far.
From information obtained in the course of conducting the training sessions
and from consumer marketing studies, the Company determined that the overall
refractive surgery market in France and Germany was significantly less than that
of the United States, and that the markets in those two countries do not appear
to be growing at a substantial rate, if at all. Part of the lack of growth is
apparently related to the lack of a delivery or referral channel whereby
potential patients can easily reach the ophthalmic surgeon as the first contact
in the channel, rather than the non-surgical ophthalmologists and opticians who
may tend to recommend that a patient not consider refractive surgery. Further,
restrictions on directing broad scale advertising to doctors hinders the
expansion of consumer awareness of refractive surgery.
Because of these factors, the Company has commenced an experimental public
relations effort in Germany which is designed to reach the referral channel for
which the new refractive surgery modalities are available. The Company hopes
that a combined approach involving Company sponsored seminars and the
distribution of informational materials will broaden the distribution channel.
The Company has also initiated a small scale consumer awareness effort to help
increase consumer understanding of KeraVision Ring technology. In addition,
the Company has undertaken to expand sales efforts in other countries on a more
limited basis in order to better understand how refractive surgery is perceived.
To date, limited sales have been achieved in Denmark, the Netherlands and
several other locations in Europe.
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
10
<PAGE>
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.
UNITED STATES
The Company estimates that existing refractive procedure costs in the
United States 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 in the United States, will be competitively
priced with existing refractive surgery procedures.
REIMBURSEMENT
Currently available refractive surgery procedures are generally paid for
directly by consumers receiving treatment, and are generally not reimbursed by
third-party payors. It is anticipated that the KeraVision Ring procedures 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 over 180 pending patent applications worldwide and has been awarded
18 United States patents and 24 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 be issued 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
11
<PAGE>
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. The
Company currently is a party in an interference to determine the priority of
inventions relating to technology for forming corneal channels in which an
implant or implants may be placed. No assurances can be made that the
interference will be resolved favorable to the Company. However, settlement
discussions are in progress and the Company believes the interference may
settle.
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.
MANUFACTURING AND SUPPLY
The KeraVision Ring is currently manufactured to the Company's
specifications by an outside contractor using a computer-controlled machining
process. This process, to which the Company has rights, has been replicated at
the Company's facility and is currently being validated. This process will
require regulatory review and approval, which could result in significant
manufacturing and/or shipping delays. Critical components of the Company's
instruments 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 widely 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
12
<PAGE>
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 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 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.
RESEARCH AND DEVELOPMENT
Company has been engaged in the research and development of the KeraVision
Ring technology since its inception in 1986. The development effort has
incorporated both extensive clinical testing as well as laboratory testing to
determine the effect of various configurations and insertion techniques for
KeraVision Ring technology. Some of the analytical techniques employed include
computer modeling using finite element analysis, optical ray tracing and various
corneal topography measurement instruments. These approaches aid in determining
the expected change in the shape of the cornea, the pattern of light
distribution through the cornea and curvature of the cornea achieved with
various designs. The analytical approaches are used in conjunction with
information determined from both feasibility studies and expanded clinical
trials to determine the best design to move forward in the testing cycle.
The Company has also used these approaches to begin work on potential
products for astigmatism and hyperopia. The Company has begun investigations
into refinements for the existing product for myopia, including myopia
concurrent with high level of astigmatism and potential treatments for slightly
higher levels of myopic correction.
Research and Development expenses, which include clinical and regulatory
expenses, incurred for the years ended December 31, 1995, 1996 and 1997,
respectively, were approximately $6.5 million, $10.9 million and $10.8 million.
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, ICL 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 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. Three companies, Summit
Technology, VISX and Autonomous Technologies have received approval in the
United States to market their products in the United States and are currently
selling their products using PRK 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
13
<PAGE>
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. Pursuant to
the Federal Food, Drug, and Cosmetic Act (the "FDC Act") and other federal
statutes and regulations, the FDA regulates the testing, manufacture, safety,
labeling, storage, record keeping, reporting, approval, sale, distribution,
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.
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 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).
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. The Company's
surgical instruments are the only products for which it will be seeking 510(k)
clearance, however, it may submit 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
preamendment Class III medical device (i.e., one that has been on the market
since a date prior to May 28, 1976) 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
14
<PAGE>
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 obtain FDA approval of an Investigational Device Exemption ("IDE")
application with the FDA 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 preamendment Class III device for which the
FDA has not 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 historically
has taken 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 QSR requirements prior to approval
of a PMA. There can be no assurance that any PMA will receive FDA approval.
Even after approval of a PMA, a new PMA or PMA supplement will be required
for certain modifications to a device, its labeling or its manufacturing
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 some 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 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
15
<PAGE>
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 review.
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.
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 and delay 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 the
QSR requirements for devices. As the developer of the KeraVision Ring, the
Company is must meet certain QSR requirements. The Company would be required to
adhere to additional such QSR 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 QSR
and are subject to periodic inspection by the FDA. 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 approval may be 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.
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
16
<PAGE>
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. 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 harmonize 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 placed on the market and put into service throughout the EU member states
and in Iceland, Liechtenstein 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.
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.
17
<PAGE>
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, Liechtenstein 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.
One member state (Belgium) 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 this country 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 conformity certification under Annex II of the
Directive in October 1996 from a Notified Body and thus achieved the right to
affix the CE marking 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.
Furthermore, there can be no assurance that the Company's Notified Body will
retain its status as a "Notified Body."
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.
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 three prominent ophthalmologists. Additional individuals will be
added to the DSMB, as required. The members of the DSMB are not allowed to 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
18
<PAGE>
Company currently maintains product liability insurance in the amount 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.
EMPLOYEES
As of December 31, 1997, the Company had 95 full-time employees, of whom 54
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 has employment
agreements with only one of its employees.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, and their ages as of December 31,
1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- ------- ---------------------------------------------------------------
<S> <C> <C>
Thomas M. Loarie 51 Chairman of the Board of Directors, Chief Executive Officer
and President,
Darlene E. Crockett-Billig 45 Vice President, Regulatory Affairs, Clinical Research and
Quality Assurance
Mark D. Fischer-Colbrie 41 Vice President, Finance and Administration, Chief Financial
Officer
Edward R. Newill 44 Vice President, U.S. Marketing and Sales
Patrick Sabaria 45 Vice President, Europe
Thomas A. Silvestrini 45 Vice President, Research and Development
Robert P. Wood 39 Vice President, Manufacturing
</TABLE>
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 member of the Executive Committee of the Company, a
director of the Health Industry Manufacturers Association and serves on the
Board of the California Healthcare Institute.
19
<PAGE>
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.
EDWARD R. 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 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 the 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.
20
<PAGE>
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 significant 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 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 clinical trials will be
experienced in long-term use of the KeraVision Ring. 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 United States, most medical devices, including the Company's
KeraVision Ring, must be cleared or approved by the FDA. Securing FDA approvals
and clearances will require the submission to the FDA of extensive clinical data
and supporting information. Current FDA enforcement policy strictly prohibits
the marketing of medical devices for uses other than those for which the product
has been approved or cleared. Product approvals and clearances can be withdrawn
for failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial marketing. 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. Although the Company believes that it
will submit a PMA application to the FDA in mid-1998, there can be no assurance
that such submission will be timely made by the Company or accepted by the FDA
for filing. 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
FDA 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.
21
<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") which includes
extensive testing, control, documentation and other quality assurance procedures
and standards. 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 devices 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 approval may be 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 "BusinessU.S. Government Regulation
and Product Testing" and "BusinessEuropean 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 patients. To date, the Company's product has
been sold primarily in France and Germany, and has thus far received only
limited acceptance and generated only limited revenues. Many surgeons in these
countries and throughout the world may have already invested significant time
and resources in developing expertise in other corrective ophthalmic surgical
techniques, and there are currently no implantable corneal devices being
marketed and sold to treat refractive problems. 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."
The Company's target market is limited to patients who have mild to moderate
myopia without significant astigmatism and there can be no assurance that even
this target population will prefer refractive surgery to current and future
alternatives for visual correction. In addition to the 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.
22
<PAGE>
LACK OF LONG-TERM FOLLOW-UP DATA; COMPLICATIONS AND VISUAL SIDE EFFECTS
The KeraVision Ring technology is relatively new technology. The Company has
therefore 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 first procedure for the treatment of
myopia using the KeraVision Ring was performed in 1991, and to date only 1,371
procedures (excluding commercial procedures conducted in Europe) 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 will
prove to be effective for the predictable treatment of myopia. There can be no
assurance that the clinical trial results are necessarily indicative of long-
term results that will be achieved with the KeraVision Ring in terms of both
safety and efficacy.
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 include,
among other things: induced astigmatism, infection, decentered placement and a
temporary reduction in central corneal sensation. In addition, patients
undergoing the KeraVision Ring procedure have reported certain visual side
effects. These include glare, haloes and other visual symptoms associated with
low-light conditions. Although the Company believes these complications and
visual side effects have been observed in other ophthalmic surgeries and that
the KeraVision Ring complications and visual 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 the Company from
obtaining regulatory approval for its potential products or the acceptance of
the product by patients or ophthalmologists.
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. The Company
currently has 180 pending patent applications worldwide and has been awarded 18
United States patents and 24 foreign patents. 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
23
<PAGE>
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. The Company currently is a party in an
interference to determine the priority of inventions relating to technology for
forming corneal channels in which an implant or implants may be placed. No
assurances can be made that the interference will be resolved favorable to the
Company. However, settlement discussions are in progress and the Company
believes the interference may settle. 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 Company's trade secrets and proprietary know-how will not
otherwise become known or be independently discovered by competitors.
LIMITED SALES OR MARKETING EXPERIENCE
The Company has only recently begun selling product in Europe, primarily in
France and Germany, and there are no implantable corneal devices currently being
marketed and sold to treat refractive problems. The Company intends to market
and sell the KeraVision Ring and related technology through a direct sales force
or a combination of a direct sales force and distributors in certain additional
foreign countries and in the United States if and when required regulatory
authorization is obtained. 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."
INTERNATIONAL SALES AND OPERATIONS RISKS
The Company is currently selling the KeraVision Ring to customers primarily in
France and Germany. 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. 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."
LIMITED 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
24
<PAGE>
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."
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
LASIK, PRK, RK, implantable contact lens ("ICL"), 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 received approval in the United
States to market their products using PRK applications. 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), Autonomous Technologies Corporation (United
States), Chiron-Technolas (Germany), LaserSight, Inc. (United States), Nidek
(Japan) and Schwind (Germany). 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."
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. In this regard, an
individual who was formerly enrolled as a patient in one of the Company's
clinical trials has filed a complaint alleging that he has suffered serious
adverse effects due to his participation in such trial. While the Company has
taken, and intends to continue to take, what it believes are appropriate
precautions to minimize exposure to this and other 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 $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."
25
<PAGE>
FUTURE CAPITAL REQUIREMENTS AND UNCERTAINTY OF FUTURE FUNDING
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 available-for-sale investments
will be sufficient to fund the Company's operations to profitability or through
completion of the current United States Phase III clinical trial for the
KeraVision Ring for the treatment of mild myopia. The Company will need to
raise substantial additional funds for these purposes. The Company may seek
such additional funding through collaborative arrangements with corporate
partners 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."
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.
IMPACT OF YEAR 2000
Based on a recent assessment, the Company determined that it will be required
to modify a very small portion of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company determined that most of its currently employed software already Year
2000 compliant. The Company presently believes, that with the required slight
modifications, the Year 2000 issue will not pose significant operational
problems for its computer systems.
26
<PAGE>
The Company has initiated communications with all of its key suppliers to
determine the extent to which the Company's interface systems are vulnerable to
those third parties' failure to remediate their own Year 2000 issues.
Currently, the Company's key suppliers systems are already Year 2000 compliant.
The Company is currently communicating with smaller suppliers and customers to
determine their exposure to the Year 2000 issue. There can be no guarantee that
the systems of other companies on which the Company's systems rely will be
converted in a timely fashion and would not have an adverse effect on the
Company's systems.
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 $29,000. 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
- ------ -----------------
In July 1997, an interference action was brought in the United States
Patent Trademark Office before the Board of Patent Appeals and Interferences in
the matter of Loomas et. al. vs. Simon et. al., Interference No. 103,973. The
interference involves the issue of the priority of inventions relating to
technology for forming corneal channels in which an implant or implants may be
placed. Settlement discussions are in progress. However, no assurance can be
made that a settlement can be reached and, if not reached, that the interference
will be resolved favorably to the Company.
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, 1997.
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.
<TABLE>
<CAPTION>
CALENDAR YEAR HIGH LOW
- --------------------- ---------- ---------
1997
<S> <C> <C>
First quarter $ 15.00 $ 10.00
Second quarter 10.50 6.75
Third quarter 10.188 7.00
Fourth quarter 8.50 5.125
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
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
- ------ -----------------------
The closing stock price on February 12, 1998 was $5.75. The Company
reported 232 stockholders of record and 4,432 beneficial holders of the
Company's common stock on February 12, 1998.
The Company has not historically paid cash dividends. The Company does not
anticipate paying cash dividends in the foreseeable future.
27
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
(in thousands, except per share data) 1997 1996 1995 1994 1993
- --------------------------------------- ------------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net sales.............................. $ 355 $ 137 $ -- $ -- $ --
Costs and expenses:
Cost of sales and manufacturing 3,701 319 -- -- --
expense..............................
Research and development.............. 10,774 10,888 6,527 5,146 4,300
Selling, general and administrative... 6,405 3,930 1,725 1,262 1,119
------------- ------------- ----------- ----------- ------------
Total costs and expenses............... 20,880 15,137 8,252 6,408 5,419
------------- ------------- ----------- ----------- ------------
Loss from operations................... (20,525) (15,000) (8,252) (6,408) (5,419)
Interest income, net................... 1,129 2,121 1,203 425 423
Other expense.......................... -- -- (57) (114) --
Net loss............................... $(19,396) $(12,879) $(7,106) $(6,097) $(4,996)
============= ============= =========== =========== ============
Basic and diluted net loss per common $(1.55) $(1.04)
share
Basic and diluted pro forma net loss
per common share...................... $(0.89) $(0.96)
Shares used in per share calculation... 12,528 12,342 8,008 6,332
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------- --------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance Sheet Data
Cash, cash equivalents and
available-for-sale investments.......... $ 14,113 $ 32,065 $ 44,703 $ 5,909 $ 11,057
Working capital.......................... 11,820 30,435 43,205 4,935 10,418
Total assets............................. 17,345 35,485 45,919 6,934 11,733
Capital lease obligations, noncurrent.... 850 793 114 210 134
Redeemable convertible preferred stock... -- -- -- 27,844 27,844
Accumulated deficit...................... (62,634) (43,265) (30,403) (23,440) (17,200)
Total stockholders' equity (net capital
deficiency)............................. 12,937 31,765 44,035 (22,144) (16,917)
</TABLE>
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 the 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.
28
<PAGE>
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 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, 1998 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 diopters
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.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net revenues for 1997 increased to $355,000 from $137,000 in 1996 as a
result of increased unit shipments. Fiscal 1997 results include a full year of
commercial shipments to the European Market.
Cost of sales exceeded revenues reflecting currently low production volumes
and certain fiscal costs associated with the Company's higher volume
manufacturing capabilities.
Research and development expenses for the year ended December 31, 1997 were
$10.8 million compared to $10.9 million incurred in the prior year. Research
and development expenses for the most recent year represented 53% of the $20.5
million loss from operations, and in 1996 represented 73% of the $15.0 million
loss from operations. The Company expects research and development expenses to
increase, as clinical trials continue in Europe and the United States.
Selling, general and administrative expenses in 1997 were $6.4 million, an
increase of $2.5 million from 1996. The increase in spending reflects increased
staffing and associated expenses, in addition to increased marketing efforts
related to European commercialization.
The Company recorded $1.1 million of net interest income for the year ended
December 31, 1997, as compared to $2.1 million for the previous year. Interest
income decreased due to lower average cash and investment balances
29
<PAGE>
from period to period. The net loss in 1997 was $19.4 million, an increase of
$6.5 million from the net loss of $12.9 million in 1996. The Company believes
that its net loss could significantly increase in 1998.
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 1996 represented 73% of the $15.0 million loss from operations, and in 1995
represented 79% of the $8.3 million loss from operations.
Selling, 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 a 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.
TAX MATTERS
As of December 31, 1997, the Company had federal, state and French net
operating loss carryforwards of approximately $39.0 million, $8.0 million and
$2.0 million, respectively. The Company also had federal and state research and
experimentation credit carryforwards of approximately $1.0 million and $0.7
million, respectively. The net operating loss and credit carryforwards will
expire at various dates beginning in 2001 through 2012, if not utilized.
Utilization of the net operating loss and credit carryforwards 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 ("FAS 109"),
deferred tax assets and liabilities are based on differences between financial
reporting and tax bases 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 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 earnings history.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements are prepared and presented on a basis
assuming it continues as a going concern. At December 31, 1997, the Company had
an accumulated deficit of $62.6 million and incurred a net loss of $19.4 million
for the year ended December 31, 1997. Management's planned expenditures for
1998 exceed current cash, cash equivalents and available-for-sale investments.
The Company will need to obtain additional funds to continue its research and
development activities, fund operating expenses and pursue regulatory approvals
for its products under development. Management believes that sufficient funds
will be available from additional investors to support planned operations
through December 1998. The Company intends to raise additional funds through
the sale of its equity securities and/or debt financings. 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,
30
<PAGE>
or at all. If the Company is unable to obtain the necessary capital, significant
reductions in spending and the delay or cancellation of planned activities or
more substantial restructuring options may be necessary. In such event, the
Company intends to implement expense reduction plans in a timely manner to
enable the Company to meet its operating cash requirements through at least
December 31, 1998. These actions would have material adverse effects on
the Company's business, results of operations and prospects.
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 $12.3 million in 1996 to
$18.0 million in 1997, reflecting increasing net losses principally related to
increased manufacturing and research and development expenditures. Cash, cash
equivalents and available-for-sale investments were $14.1 million at December
31, 1997 as compared to $32.1 million at December 31, 1996. Capital
expenditures decreased from $1.6 million in 1996 to $0.5 million in 1997,
largely due to the timing of purchasing certain assets. Asset purchases were
largely financed through capital lease arrangements.
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.
IMPACT OF YEAR 2000
Based on a recent assessment, the Company determined that it will be
required to modify a very small portion of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company determined that most of its currently employed software
already Year 2000 compliant. The Company presently believes, that with the
required slight modifications, the Year 2000 issue will not pose significant
operational problems for its computer systems.
The Company has initiated communications with all of its key suppliers to
determine the extent to which the Company's interface systems are vulnerable to
those third parties' failure to remediate their own Year 2000 issues.
Currently, the Company's key suppliers' systems are already Year 2000 compliant.
The Company is currently communicating with smaller suppliers and customers to
determine their exposure to the Year 2000 issue. There can be no guarantee that
the systems of other companies on which the Company's systems rely will be
converted in a timely fashion and would not have an adverse effect on the
Company's systems.
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.
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 4,
1998, and the information included therein is incorporated herein by reference
to the extent detailed below.
31
<PAGE>
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" of 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.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
(a) (1) The following financial statements and Report of Ernst & Young LLP,
Independent Auditors, are filed as part of this report:
Page
----
Reports of Ernst & Young, Independent Auditors 36
Consolidated Balance Sheets at
December 31, 1997 and 1996 37
Consolidated Statements of Operations
Years Ended December 31, 1997, 1996 and 1995 38
Consolidated Statements of Redeemable Convertible
Preferred Stock and Stockholders' Equity Years
Ended December 31, 1997, 1996 and 1995 39
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996, and 1995 40
Notes to Consolidated Financial Statements 41
(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)
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ------------------------------------------------------------------------------------------
<C> <S>
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)
3.4 Amended and Restated Certificate of Incorporation of Registrant (Delaware).(1)
3.5 Bylaws of Registrant (Delaware).(1)
4.1 Preferred Shares Rights Agreement, dated as of August 18, 1997, between Registrant and Bank
Boston, N.A. (7)
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, as amended.(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. (8)
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. (8)
10.15 Promissory Note, dated November 7, 1993, executed by Mark Fischer-Colbrie in favor of the
Registrant and all amendments thereto.(9)
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.(8)
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.(2)(6)
10.21 Distribution Agreement dated as of October 31, 1996 by and between the Registrant and AM Peschke,
a German corporation.(5)(6)
10.22 1997 Employee Stock Option Plan.(2)
10.23 Form of Change of Control Agreement entered into between Registrant and Chief Executive Officer in May
1997.(2)
10.24 Form of Change of Control Agreement entered into between Registrant and its executive officers in May 1997.(2)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See Page 35 of this Report).
27 Financial Data Schedules.
</TABLE>
________________
(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.
33
<PAGE>
(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.
(6) Incorporated by reference to identically numbered exhibits filed in the
Registrant's Form 10-K for the year ended December 31, 1996.
(7) Incorporated by reference to identically numbered exhibit filed in
Registrant's Registration on Form 8-A which became effective on August 25,
1997.
(8) Incorporated by reference to identically numbered exhibit filed in
Registrant's Form 10-K for the year ended December 31, 1996. Supplemental
amendments to promissory notes are attached with this filing.
(9) 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 July 27, 1995.
Supplemental amendments to promissory notes are attached with this filing.
(b) Reports on Form 8-K
None
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 27th day of March 1998.
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 Directors, President and March 27, 1998
- ------------------------------------- Chief Executive Officer (Principal Executive Officer)
(Thomas M. Loarie)
/s/ Mark Fischer-Colbrie Vice President, Finance and Administration, Chief March 27, 1998
- ------------------------------------- Financial Officer, and Assistant Secretary
(Mark Fischer-Colbrie) (Principal Financial and Accounting Officer)
/s/ Charles Crocker Director March 27, 1998
- -------------------------------------
(Charles Crocker)
/s/ John R. Gilbert Director March 27, 1998
- -------------------------------------
(John R. Gilbert)
/s/ Lawrence Lehmkuhl Director March 27, 1998
- -------------------------------------
(Lawrence Lehmkuhl)
/s/ Kshitij Mohan Director March 27, 1998
- -------------------------------------
(Kshitij Mohan)
/s/ Arthur M. Pappas Director March 27, 1998
- -------------------------------------
(Arthur M. Pappas)
/s/ Steven N. Weiss Director March 27, 1998
- -------------------------------------
(Steven N. Weiss)
</TABLE>
35
<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, 1997 and 1996, and the related consolidated statements
of operations, redeemable convertible preferred stock and stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. 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, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
February 5, 1998
San Jose, California
36
<PAGE>
KERAVISION, INC.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
-----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................................. $ 2,574 $ 8,291
Available-for-sale investments............................................................. 11,539 23,774
Prepaid expenses and other current assets.................................................. 1,265 1,297
-------- --------
Total current assets......................................................................... 15,378 33,362
Property and equipment, at cost:
Manufacturing and laboratory equipment..................................................... 3,298 2,795
Office furniture and fixtures.............................................................. 586 559
Leasehold improvements..................................................................... 383 368
-------- --------
4,267 3,722
Accumulated depreciation and amortization.................................................... (2,398) (1,746)
-------- --------
Net property and equipment................................................................. 1,869 1,976
Other assets................................................................................. 98 147
-------- --------
Total assets................................................................................. $ 17,345 $ 35,485
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................... $ 1,089 $ 973
Accrued payroll and related expenses....................................................... 489 424
Accrued clinical trial costs............................................................... 1,211 965
Other accrued liabilities.................................................................. 414 221
Current portion of capital lease obligations............................................... 355 344
-------- --------
Total current liabilities.................................................................... 3,558 2,927
Capital lease obligations.................................................................... 850 793
Commitments and contingencies
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, 12,593,646 and 12,444,802
shares issued and outstanding in 1997 and 1996, respectively.............................. 13 12
Additional paid-in capital................................................................. 76,540 76,114
Deferred compensation...................................................................... (179) (328)
Accumulated deficit........................................................................ (62,634) (43,265)
Notes receivable from stockholders......................................................... (803) (768)
-------- --------
Total stockholders' equity................................................................... 12,937 31,765
-------- --------
Total liabilities and stockholders' equity...................................................
$ 17,345 $ 35,485
======== ========
</TABLE>
See accompanying notes.
37
<PAGE>
KERAVISION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------------------------
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Net sales......................................................... $ 355 $ 137 $ --
Costs and expenses:
Cost of sales and manufacturing expenses...................... 3,701 319 --
Research and development...................................... 10,774 10,888 6,527
Selling, general and administrative........................... 6,405 3,930 1,725
---------------------------------------------------
Total costs and expenses.......................................... 20,880 15,137 8,252
---------------------------------------------------
Operating loss.................................................... (20,525) (15,000) (8,252)
Interest income, net.............................................. 1,129 2,121 1,203
Other income (expense)............................................ -- -- (57)
---------------------------------------------------
Net loss.......................................................... $(19,396) $(12,879) $(7,106)
===================================================
Basic and diluted net loss per common share....................... $(1.55) $(1.04)
Shares used in calculation of net loss per common share........... 12,528 12,342
Basic and diluted pro forma net loss per common share............. $(0.89)
Shares used in calculation of pro forma net loss per share........ 8,008
</TABLE>
See accompanying notes.
38
<PAGE>
KERAVISION, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------- -------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 5,263,026 $ 27,844 2,938,619 $ 2,113
31, 1994
Issuance of common
stock upon exercise
of options, and -- -- 44,477 38
accrued interest
Deferred compensation
expense related to -- -- -- 597
stock option grants
Amortization of
deferred compensation -- -- -- --
Issuance of Series D
preferred stock upon 105,343 553 -- --
exercise of warrants
Issuance of common
stock (including
99,798 shares under
net exercise -- -- 311,380 137
provisions) upon
exercise of warrants
Initial public
offering of common
stock net of -- -- 3,600,000 44,440
issuance costs of
$4.2 million
Redeemable
convertible
preferred stock (5,368,369) (28,397) 5,368,369 28,397
converted to common
stock upon initial
public offering
Reincorporation in -- -- -- (75,710)
Delaware
Securities valuation -- -- -- --
adjustment
Net loss -- -- -- --
BALANCE AT DECEMBER -- -- 12,262,845 12
31, 1995
Issuance of common
stock upon exercise -- -- 181,957 --
of options
Amortization of
deferred compensation -- -- -- --
Forgiveness of notes
receivable from
stockholders, net of -- -- -- --
accrued interest
Translation adjustment -- -- -- --
Securities valuation -- -- -- --
adjustment
Net loss -- -- -- --
-------------------------
BALANCE AT DECEMBER -- -- 12,444,802 12
31, 1996
Issuance of common
stock upon exercise -- -- 148,844 1
of options
Amortization of
deferred compensation -- -- -- --
Accrued interest on
notes receivable -- -- -- --
from stockholders
Translation adjustment -- -- -- --
Securities valuation -- -- -- --
adjustment
Net loss -- -- -- --
BALANCE AT DECEMBER -- $ -- 12,593,646 $ 13
31, 1997
========================== =========================
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL RECEIVABLE TOTAL
PAID-IN DEFERRED ACCUMULATED FROM STOCKHOLDERS'
CAPITAL COMPENSATION DEFICIT STOCKHOLDERS EQUITY
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER
31, 1994 $-- $ (53) $(23,440) $(764) $(22,144)
Issuance of common
stock upon exercise
of options, and
accrued interest -- -- -- (43) (5)
Deferred compensation
expense related to
stock option grants -- (597) -- -- --
Amortization of
deferred compensation
-- 173 -- -- 173
Issuance of Series D
preferred stock upon
exercise of warrants -- -- -- -- --
Issuance of common
stock (including
99,798 shares under
net exercise
provisions) upon -- -- -- -- 137
exercise of warrants
Initial public
offering of common
stock net of
issuance costs of -- -- -- -- 44,440
$4.2 million
Redeemable
convertible
preferred stock
converted to common -- -- -- -- 28,397
stock upon initial
public offering
Reincorporation in
Delaware 75,710 -- -- -- --
Securities valuation
adjustment -- -- 143 -- 143
Net loss
-- -- (7,106) -- (7,106)
BALANCE AT DECEMBER
31, 1995 75,710 (477) (30,403) (807) 44,035
Issuance of common
stock upon exercise
of options 404 -- -- -- 404
Amortization of
deferred compensation
-- 149 -- -- 149
Forgiveness of notes
receivable from
stockholders, net of
accrued interest -- -- -- 39 39
Translation adjustment
Securities valuation -- -- (1) -- (1)
adjustment -- -- 18 -- 18
Net loss
-- -- (12,879) -- (12,879)
------------------------------------------------------------
BALANCE AT DECEMBER
31, 1996 76,114 (328) (43,265) (768) 31,765
Issuance of common
stock upon exercise
of options 426 -- -- -- 427
Amortization of
deferred compensation
-- 149 -- -- 149
Accrued interest on
notes receivable
from stockholders -- -- -- (35) (35)
Translation adjustment
Securities valuation -- -- 1 -- 1
adjustment -- -- 26 -- 26
Net loss
-- -- (19,396) -- (19,396)
BALANCE AT DECEMBER
31, 1997 $76,540 $(179) $(62,634) $(803) $ 12,937
==============================================================
</TABLE>
See accompanying notes.
39
<PAGE>
<TABLE>
<CAPTION>
KERAVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31,
------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(19,396) $(12,879) $(7,106)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 652 448 308
Interest receivable on stockholders' notes.............. (35) (41) (43)
Forgiveness of stockholders' notes...................... -- 80 --
Amortization of deferred compensation................... 149 149 173
Loss on sales of securities and other................... -- -- 60
Changes in operating assets and liabilities:
Prepaid expenses and other current assets............. 32 (1,025) (222)
Accounts payable..................................... 116 528 267
Other accrued liabilities............................ 504 391 479
-------- -------- -------
Total adjustments...................................... 1,418 530 1,022
-------- -------- -------
Net cash used in operating activities.................. (17,978) (12,349) (6,084)
-------- -------- -------
Cash flows from investing activities:
Purchases of available-for-sale investments.............. (20,620) (40,402) (2,970)
Sales of available-for-sale investments.................. 11,408 10,790 3,725
Maturities of available-for-sale investments............. 21,474 5,855 3,990
Capital expenditures..................................... (545) (1,550) (300)
Other assets............................................. 49 (77) 23
-------- -------- -------
Net cash provided by (used in) investing activities.... 11,766 (25,384) 4,468
-------- -------- -------
Cash flows from financing activities:
Principal payments under capital lease obligations....... (427) (156) (96)
Proceeds from sales-leaseback of capital equipment....... 495 1,073 --
Proceeds from issuance of equity securities, net of
repurchases............................................. 427 404 45,168
-------- ------- -------
Net cash provided by financing activities.............. 495 1,321 45,072
-------- -------- -------
Net increase (decrease) in cash and cash equivalents...... (5,717) (36,412) 43,456
Cash and cash equivalents at the beginning of the year.... 8,291 44,703 1,247
-------- -------- -------
Cash and cash equivalents at the end of the year.......... $ 2,574 $ 8,291 $44,703
======== ======== =======
Supplemental disclosures of cash flow information
Cash paid for interest.................................... $ 140 $ 25 $ 34
======== ======== =======
Supplemental disclosures of noncash activities
Deferred compensation related to the issuance of certain
stock options............................................ $ -- $ -- $ 597
======== ========== ======
</TABLE>
See accompanying notes.
40
<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.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income" ("FAS 130"), and Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"). The Company is required to adopt these Statements in fiscal 1998.
FAS 130 establishes new standards for reporting and displaying comprehensive
income and its components. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of these Statements is expected to have
no impact on the Company's financial position, results of operations or cash
flows.
Management's Plans and Financing
The Company's financial statements are prepared and presented on a
basis assuming it continues as a going concern. At December 31, 1997, the
Company had an accumulated deficit of $62.6 million and incurred a net loss of
$19.4 million for the year ended December 31, 1997. Management's planned
expenditures for 1998 exceed current cash, cash equivalents and available-for-
sale investments. The Company will need to obtain additional funds to continue
its research and development activities, fund operating expenses and pursue
regulatory approvals for its products under development. Management believes
that sufficient funds will be available from additional investors to support
planned operations through December 1998. The Company intends to raise
additional funds through the sale of its equity securities and/or debt
financings. 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. If the
Company is unable to obtain the necessary capital, significant reductions in
spending and the delay or cancellation of planned activities or more substantial
restructuring options may be necessary. In such event, the Company intends to
implement expense reduction plans in a timely manner to enable the Company to
meet its operating cash requirements through at least December 31, 1998. These
actions would have material adverse effects on the Company's business, results
of operations and prospects.
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.
41
<PAGE>
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, 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, 1997 and 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 the short-term nature of
the reverse repurchase agreements, the Company generally does not take
possession of the underlying securities.
Management determines the appropriate classification of investments at
the time of purchase and reevaluates such designation as of each balance sheet
date. At December 31, 1997 and 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. In 1997, the Company made sales directly from its French sales
office in addition to sales to the German sales distributor, which represented
approximately 47% of total sales.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" (FAS 128). FAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Due to the
Company's net loss in all periods presented, net loss per share includes only
weighted average shares outstanding. All earnings per share amounts for all
periods have been presented, and where appropriate, restated to conform to the
FAS 128 requirements.
Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 98 ("SAB No. 98") which was issued in February 1998, common and
common equivalent shares issued by the Company for nominal consideration during
any of the periods for which a statement of operations was presented in the
Company's initial public offering
42
<PAGE>
registration statement are required to be included in the calculation of basic
and diluted net loss per share for all such periods in a manner similar to a
stock split. There were no such issuances in 1995.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share for the year ended December 31, 1995 has
been computed as described above and also gives effect, even if antidilutive, to
5,368,369 common equivalent shares from convertible preferred shares that
automatically converted to common shares upon the closing of the Company's
initial public offering (using the as-if-converted method).
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, 1997, the Company's investments were composed of the
following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
GROSS FAIR
COST UNREALIZED GAINS VALUE
------------------ ------------------ ----------------
<S> <C> <C> <C>
Money market instruments............................. $ 2,574 $-- $ 2,574
Certificate of deposit............................... 659 -- 659
U.S. Treasury Bills & other government agency
obligations......................................... 3,003 -- 3,003
Corporate debt securities............................ 7,835 42 7,877
------------------ ------------------ ----------------
14,071 42 14,113
Included in cash & cash equivalents.................. (2,574) (2,574)
------------------ ------------------ ----------------
Included in available for sale investments.......... $11,497 $42 $11,539
================== ================== ================
</TABLE>
The $11,539,000 included in available-for-sale investments matures in
less than one year. During 1997 and 1996 there were no gross realized gains or
losses.
3. CAPITAL LEASE OBLIGATIONS
The Company leases certain office and manufacturing equipment under
capitalized leases which expire in 2001. The total future minimum lease payments
under capital leases as of December 31, 1997 are as follows (in thousands):
Years ended December 31:
<TABLE>
<CAPTION>
<S> <C>
1998.................................... $ 466
1999.................................... 466
2000.................................... 383
2001.................................... 113
-------------
Total minimum lease payments.................... 1,428
Amounts representing interest................... (223)
-------------
Present value of minimum lease payments......... 1,205
Less current portion............................ (355)
-------------
Noncurrent portion.............................. $ 850
=============
</TABLE>
The cost of assets under capital leases at December 31, 1997 and 1996 were
$1,987,000 and $1,492,000 with related accumulated amortization amounting to
$851,000 and $469,000, respectively.
43
<PAGE>
4. COMMITMENTS AND CONTINGENCIES
LEASES
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, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $354
1999........................................................ 262
Total minimum lease payments $616
========
</TABLE>
LEGAL MATTERS
The Company is involved in a claim arising in the ordinary course of
business. The Company believes this matter will be resolved without material
adverse effect on the Company's financial position, results of operations or
cash flows.
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. In August 1997, the Company
adopted the 1997 Stock Plan (the "1997 Plan"). A total of 300,000 shares were
reserved for issuance under the 1997 Plan. Options granted under the 1997 Plan
must be nonstatutory stock options. Options are generally granted at an
exercise price (as determined by the compensation committee) equal to an amount
of not less than the fair value per share on the date of 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
-----------------------------------------------------------------
AGGREGATE
AVAILABLE NUMBER WEIGHTED-AVERAGE EXERCISE
FOR GRANT OF SHARES EXERCISE PRICE PRICE
------------------- ----------------- ------------------- --------------------
<S> <C> <C> <C> <C>
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
Authorized......................... 300,000 -- -- --
Granted............................ (515,342) 515,342 7.86 4,049,417
Canceled........................... 56,116 (59,411) 12.45 (739,954)
Exercised.......................... -- (123,555) 2.13 (263,559)
------------------- ----------------- --------------------
Balance at December 31, 1997 292,150 1,363,605 $ 9.06 $12,349,426
=================== ================= ====================
</TABLE>
Options generally vest over a period of four years, up to a maximum of
5.5 years. Certain options granted in 1995 and 1997 have accelerated vesting
positions. At December 31, 1997 and 1996, approximately 514,656 and 450,064,
respectively, of the outstanding options were exercisable.
The following table summarizes information about options outstanding at December
31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------- -----------------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- ------------------------------------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C>
$1.875-5.75 228,201 1.33 $ 2.71 202,350 $ 2.45
7.375 428,771 9.66 7.38 10,337 7.38
7.50-12.25 351,637 5.25 10.09 180,646 9.63
12.625-15.50 354,996 8.47 14.14 121,323 14.10
$1.875-15.50 1,363,605 6.82 $ 9.06 514,656 $ 7.82
======================= ======================
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). Accordingly, no compensation cost has been recognized
for stock options granted in 1997, 1996 and 1995 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 1997, 1996
and 1995 consistent with the provisions of FAS No. 123, the Company's net loss
and net loss per share would have increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Net loss - as reported (in thousands)................ $(19,396) $(12,879) $(7,106)
Net loss - pro forma (in thousands).................. $(21,414) $(14,227) $(7,578)
Basic and diluted net loss per share - as reported... $ (1.55) $ (1.04) $ (0.89)
Basic and diluted net loss per share - pro forma..... $ (1.71) $ (1.15) $ (0.95)
</TABLE>
45
<PAGE>
Due to FAS No. 123 being applicable only to options granted subsequent
to December 31, 1994, its pro forma effect will not be fully reflected until
1998.
The weighted average fair value of each option granted in 1997, 1996
and 1995 is $6.31, $8.27 and $4.74 respectively, estimated using the Black-
Scholes Multiple option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- --------------- --------------
- --
<S> <C> <C> <C>
Expected volatility.................................................. .8068 .5318 .5318
Risk-free interest rate.............................................. 6.06% 6.04% 5.85%
Weighted-average expected life....................................... 4.53 4.46 4.46
Dividend yield....................................................... -- -- --
</TABLE>
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 25,289 and 15,913 shares in 1997 and 1996,
respectively.
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 1998,
1999 and 2000. 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, 1997, there were no shares of
common stock subject to repurchase.
COMMON STOCK RESERVED FOR ISSUANCE
The Company has reserved shares of common stock for the following at
December 31, 1997:
<TABLE>
<S> <C>
Exercises under the 1987 Stock Option Plan......................................... 407,161
Purchases under the 1995 Employee Stock Purchase Plan.............................. 158,798
Exercises under the 1995 Stock Option Plan......................................... 798,594
Exercises under the 1995 Directors Option Plan..................................... 150,000
Exercises under the 1997 Stock Option Plan......................................... 300,000
Conversion of undesignated preferred stock......................................... 2,000,000
-----------------------
3,814,553
=======================
</TABLE>
STOCKHOLDER RIGHTS PLAN
On August 18, 1997, the Company's Board of Directors adopted a
Stockholders' Rights Plan (the "Rights Plan"). In conjunction with the Rights
Plan, the Board of Directors declared a dividend of one right ("Right") to
purchase one one-hundredth of a share of preferred stock on each share of common
stock. Under the terms of the Rights Plan, the Rights become exercisable only
if a person or group acquires 20% or more of the Company's common stock or
46
<PAGE>
announces a Tender Offer that would result in ownership by a person or group of
20% or more of the Company's common stock, subject to certain exceptions. Each
Right has an exercise price of $60.00 and, in certain circumstances, may become
exercisable or exchangeable for consideration. Each Right, following the time
the Rights become exercisable, may be redeemed for $0.01 at the option of the
Board of Directors.
7. INCOME TAXES
Due to the Company's loss position, there was no provision for income
taxes for the years ended December 31, 1997, 1996 and 1995.
A reconciliation of the income tax provision at the U.S. federal
statutory rate (34%) to the provision for income
tax at the effective tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
---------------------- ---------------------- ----------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax benefit computed at the federal
statutory rate.................................... $(6,595) $(4,379) $(2,416)
Operating losses not utilized...................... 6,595 4,379 2,416
---------------------- ---------------------- ----------------------
$ -- $ -- $ --
====================== ====================== ======================
</TABLE>
As of December 31, 1997, the Company has federal, state and French net
operating loss carryforwards of approximately $39.0 million, $8.0 million and
$2.0 million, respectively, that will expire in fiscal years 2001 through 2012,
if not utilized. The Company also has federal and state research and
experimentation credit carryforwards of approximately $1.0 million and $0.7
million, respectively, that will expire in fiscal years 2001 through 2012, if
not utilized.
Utilization of the net operating loss and credit carryforwards 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:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996
-------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $ 15,186 $ 6,366
Capitalized research costs.................................... 8,772 10,090
Research credit carryforwards................................. 1,535 1,109
Other......................................................... 506 386
-------------------------------------------
Total deferred tax assets..................................... 25,999 17,951
Valuation allowance........................................... (25,999) (17,951)
-------------------------------------------
Net deferred tax assets....................................... $ -- $ --
===========================================
</TABLE>
The deferred tax asset valuation allowance increased $8,048,000,
$5,108,000 and $3,001,000 in 1997, 1996 and 1995, respectively.
47
<PAGE>
KERAVISION, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
10.6 1995 Stock Plan, as amended
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
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
10.22 1997 Employee Stock Option Plan
10.23 Form of Change of Control Agreement entered into between Registrant
and Chief executive officer in May 1997.
10.24 Form of Change of Control Agreements entered into between Registrant
and executive officers in May 1997.
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>
<PAGE>
EXHIBIT 10.6
KERAVISION, INC.
1995 STOCK PLAN
(Adopted June 1, 1995)
(Amended November 1, 1996)
(Amended May 6, 1997)
(Amended February 26, 1998)
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business.
Options granted hereunder may be either Incentive Stock Options (as defined
under Section 422 of the Code) or Nonstatutory Stock Options, at the discretion
of the Board and as reflected in the terms of the written option agreement.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" shall mean the Board or any of its Committees
-------------
appointed pursuant to Section 4 of the Plan.
(b) "Affiliate" shall mean an entity in which the Company owns an
---------
equity interest.
(c) "Applicable Laws" shall have the meaning set forth in Section 4(a)
---------------
below.
(d) "Board" shall mean the Board of Directors of the Company.
-----
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" shall mean the Committee appointed by the Board of
---------
Directors in accordance with Section 4(a) of the Plan, if one is appointed.
(g) "Common Stock" shall mean the Common Stock of the Company.
------------
(h) "Company" shall mean KeraVision, Inc., a Delaware corporation.
-------
(i) "Consultant" shall mean any person who is engaged by the
----------
Company or any Parent, Subsidiary or Affiliate to render consulting services
and is compensated for such consulting services, and any director of the
Company whether compensated for such services or not; provided that if and in
the event the Company registers any class of any equity security pursuant to
Section 12 of the Exchange Act, the term Consultant shall thereafter not
include
<PAGE>
directors who are not compensated for their services or are paid only a
director's fee by the Company.
(j) "Continuous Status as an Employee or Consultant" shall mean the
----------------------------------------------
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Administrator; provided that such leave is for
a period of not more than 90 days or reemployment upon the expiration of such
leave is guaranteed by contract or statute. For purposes of this Plan, a change
in status from an Employee to a Consultant or from a Consultant to an Employee
will not constitute a termination of employment.
(k) "Director" shall mean a member of the Board.
--------
(l) "Employee" shall mean any person, including Named Executives,
--------
Officers and Directors employed by the Company or any Parent, Subsidiary or
Affiliate of the Company. The payment by the Company of a director's fee to a
Director shall not be sufficient to constitute "employment" of such Director by
the Company.
(m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
(n) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
price for such stock as quoted on such system on the date of determination (if
for a given day no sales were reported, the closing bid on that day shall be
used), as such price is reported in The Wall Street Journal or such other
-----------------------
source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the bid and asked prices for the Common Stock or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(o) "Incentive Stock Option" shall mean an Option intended to
----------------------
qualify as an incentive stock option within the meaning of Section 422 of the
Code, as designated in the applicable written option agreement.
-2-
<PAGE>
(p) "Named Executive" shall mean any individual who, on the last
---------------
day of the Company's fiscal year, is the chief executive officer of the
Company (or is acting in such capacity) or among the four highest compensated
officers of the Company (other than the chief executive officer). Such officer
status shall be determined pursuant to the executive compensation disclosure
rules under the Exchange Act.
(q) "Nonstatutory Stock Option" shall mean an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(r) "Officer" shall mean a person who is an officer of the Company
---------
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(s) "Option" shall mean a stock option granted pursuant to the Plan.
------
(t) "Optioned Stock" shall mean the Common Stock subject to an Option.
--------------
(u) "Optionee" shall mean an Employee or Consultant who receives an
--------
Option.
(v) "Parent" shall mean a "parent corporation," whether now or
------
hereafter existing, as defined in Section 424(e) of the Code.
(w) "Plan" shall mean this 1995 Stock Plan.
----
(x) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the
----------
Exchange Act as the same may be amended from time to time, or any successor
provision.
(y) "Share" shall mean a share of the Common Stock, as adjusted in
-----
accordance with Section 14 of the Plan.
(z) "Subsidiary" shall mean a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 14 of
-------------------------
the Plan, the maximum aggregate number of shares that may be optioned and sold
under the Plan is 1,290,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares that were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan. Notwithstanding any other provision of the Plan, shares
issued under the Plan and later repurchased by the Company shall not become
available for future grant under the Plan.
-3-
<PAGE>
4. Administration of the Plan.
---------------------------
(a) Composition of Administrator.
----------------------------
(i) Multiple Administrative Bodies. If permitted by
------------------------------
Rule 16b-3, and by the legal requirements relating to the administration of
incentive stock option plans, if any, of applicable securities laws and the
Code (collectively, the "Applicable Laws"), the Plan may (but need not) be
administered by different administrative bodies with respect to Directors,
Officers who are not directors and Employees who are neither Directors nor
Officers.
(ii) Administration with respect to Directors and Officers.
-----------------------------------------------------
With respect to grants of Options to Employees or Consultants who are also
Officers or Directors of the Company, the Plan shall be administered by (A)
the Board, if the Board may administer the Plan in compliance with Rule 16b-3
as it applies to a plan intended to qualify thereunder as a discretionary plan
and Section 162(m) of the Code as it applies so as to qualify grants of
Options to Named Executives as performance-based compensation, or (B) a
Committee designated by the Board to administer the Plan, which Committee
shall be constituted in such a manner as to permit the Plan to comply with
Rule 16b-3 as it applies to a plan intended to qualify thereunder as a
discretionary plan, to qualify grants of Options to Named Executives as
performance-based compensation under Section 162(m) of the Code and otherwise
so as to satisfy the Applicable Laws.
(iii) Administration with respect to Other Persons. With
--------------------------------------------
respect to grants of Options to Employees or Consultants who are neither
Directors nor Officers of the Company, the Plan shall be administered by (A)
the Board or (B) a Committee designated by the Board, which Committee shall be
constituted in such a manner as to satisfy the Applicable Laws.
(iv) General. If a Committee has been appointed pursuant to
-------
subsection (ii) or (iii) of this Section 4(a), such Committee shall continue
to serve in its designated capacity until otherwise directed by the Board.
From time to time the Board may increase the size of any Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies (however caused) and
remove all members of a Committee and thereafter directly administer the Plan,
all to the extent permitted by the Applicable Laws and, in the case of a
Committee appointed under subsection (ii), to the extent permitted by Rule 16b-
3 as it applies to a plan intended to qualify thereunder as a discretionary
plan, and to the extent required under Section 162(m) of the Code to qualify
grants of Options to Named Executives as performance-based compensation.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(m) of the Plan;
-4-
<PAGE>
(ii) to select the Employees and Consultants to whom Options
may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation, or any vesting
acceleration or waiver of forfeiture restrictions regarding any Option and/or
the shares of Common Stock relating thereto, based in each case on such
factors as the Administrator shall determine, in its sole discretion);
(vii) to determine whether, to what extent and under what
circumstances Common Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the election of
the participant (including providing for and determining the amount, if any,
of any deemed earnings on any deferred amount during any deferral period); and
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(c) Effect of Administrator's Decision. All decisions,
----------------------------------
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. Eligibility.
-----------
(a) Recipients of Grants. Nonstatutory Stock Options may be granted to
--------------------
Employees and Consultants. Incentive Stock Options may be granted only to
Employees, provided, however, that Employees of an Affiliate shall not be
eligible to receive Incentive Stock Options. An Employee or Consultant who has
been granted an Option may, if he or she is otherwise eligible, be granted an
additional Option or Options.
(b) Type of Option. Each Option shall be designated in the written
--------------
option agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of Shares with respect to which Incentive Stock
Options are exercisable for the first time by an Optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
For purposes of
-5-
<PAGE>
this Section 5(b), Incentive Stock Options shall be taken into account in the
order in which they were granted, and the Fair Market Value of the Shares shall
be determined as of the time the Option with respect to such Shares is granted.
(c) No Employment Rights. The Plan shall not confer upon any
--------------------
Optionee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or
her right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board or its approval by the shareholders of the
Company as described in Section 20 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 16 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
However, in the case of an Option granted to an Optionee who, at the time the
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the term of the Option shall be five (5) years from the date of grant thereof or
such shorter term as may be provided in the Option Agreement.
8. Limitation on Grants to Employees. Subject to adjustment as provided
---------------------------------
in this Plan, the maximum number of Shares which may be subject to options
granted to any one Employee under this Plan for any fiscal year of the Company
shall be 250,000.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per Share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be such price as is determined by
the Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant;
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the
date of grant.
-6-
<PAGE>
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the grant of such
Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
per Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of the grant;
(B) granted to a person who, at the time of the grant of such
Option, is a Named Executive of the Company, the per share Exercise Price
shall be no less than 100% of the Fair Market Value on the date of grant;
(C) granted to any person other than a Named Executive, the
per Share exercise price shall be no less than 85% of the Fair Market Value
per Share on the date of grant.
(iii) In the case of an Option granted on or after the effective
date of registration of any class of equity security of the Company pursuant
to Section 12 of the Exchange Act and prior to six months after the
termination of such registration, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
(b) Permissible Consideration. The consideration to be paid for the
-------------------------
Shares to be issued upon exercise of an Option, including the method of
payment, shall be determined by the Administrator (and, in the case of an
Incentive Stock Option, shall be determined at the time of grant) and may
consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares
that (x) in the case of Shares acquired upon exercise of an Option either have
been owned by the Optionee for more than six months on the date of surrender
or were not acquired, directly or indirectly, from the Company, and (y) have a
Fair Market Value on the date of surrender equal to the aggregate exercise
price of the Shares as to which said Option shall be exercised, (5)
authorization from the Company to retain from the total number of Shares as to
which the Option is exercised that number of Shares having a Fair Market Value
on the date of exercise equal to the exercise price for the total number of
Shares as to which the Option is exercised, (6) delivery of a properly
executed exercise notice together with irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds required
to pay the exercise price, (7) delivery of an irrevocable subscription
agreement for the Shares that irrevocably obligates the option holder to take
and pay for the Shares not more than twelve months after the date of delivery
of the subscription agreement, (8) any combination of the foregoing methods of
payment, or (9) such other consideration and method of payment for the
issuance of Shares to the extent permitted under Applicable Laws. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected
to benefit the Company.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the
-7-
<PAGE>
Administrator, including performance criteria with respect to the Company and/or
the Optionee, and as shall be permissible under the terms of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 14 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as an Employee or Consultant. In the
---------------------------------------------------
event of termination of an Optionee's Continuous Status as an Employee or
Consultant, such Optionee may, but only within three (3) months (or such other
period of time, not exceeding six (6) months in the case of a Nonstatutory
Stock Option, as is determined by the Administrator) after the date of such
termination (but in no event later than the date of expiration of the term of
such Option as set forth in the Option Agreement), exercise his or her Option
to the extent that he or she was entitled to exercise it at the date of such
termination. To the extent that the Optionee was not entitled to exercise the
Option at the date of such termination, or if the optionee does not exercise
such Option (which he or she was entitled to exercise) within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding Section 10(b) above,
----------------------
in the event of termination of an Optionee's Continuous Status as an Employee
or Consultant as a result of his or her total and permanent disability (as
defined in Section 22(e)(3) of the Code), he or she may, but only within six
(6) months (or such other period of time not exceeding twelve (12) months as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option) from the
date of such termination (but in no event later than the date of expiration of
the term of such Option as set forth in the Option Agreement), exercise his or
her Option to the extent he or she was entitled to exercise it at the date of
such termination. To the extent that he or she was not entitled to exercise
the Option at the date of termination, or if he does not exercise such Option
(which he was entitled to exercise) within the time specified herein, the
Option shall terminate.
-8-
<PAGE>
(d) Death of Optionee. In the event of the death of an Optionee:
-----------------
(i) during the term of the Option who is at the time of his
death an Employee or Consultant of the Company and who shall have been in
Continuous Status as an Employee or Consultant since the date of grant of the
Option, the Option may be exercised, at any time within six (6) months
following the date of death (but in no event later than the date of expiration
of the term of such Option as set forth in the Option Agreement), by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance but only to the extent of the right to exercise that
would have accrued had the Optionee continued living and remained in
Continuous Status as an Employee or Consultant six (6) months (or such other
period of time as is determined by the Administrator as provided above) after
the date of death, subject to the limitation set forth in Section 5(b); or
(ii) within thirty (30) days (or such other period of time not
exceeding three (3) months as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option being made at the time
of grant of the Option) after the termination of Continuous Status as an
Employee or Consultant, the Option may be exercised, at any time within six
(6) months following the date of death (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement),
by the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of termination.
(e) Rule 16b-3. Options granted to persons subject to Section 16(b)
----------
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
11. Withholding Taxes. As a condition to the exercise of Options granted
-----------------
hereunder, the Optionee shall make such arrangements as the Administrator may
require for the satisfaction of any federal, state, local or foreign withholding
tax obligations that may arise in connection with the exercise, receipt or
vesting of such Option. The Company shall not be required to issue any Shares
under the Plan until such obligations are satisfied.
12. Stock Withholding to Satisfy Withholding Tax Obligations. At the
--------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by one or some combination of the
following methods: (a) by cash payment, or (b) out of Optionee's current
compensation, (c) if permitted by the Administrator, in its discretion, by
surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or less than Optionee's marginal tax rate times the
ordinary income recognized, or (d) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of
-9-
<PAGE>
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date").
Any surrender by an Officer or Director of previously owned Shares to
satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3 and shall be subject to
such additional conditions or restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of the
Administrator;
(d) if the Optionee is an Officer or Director, the election must comply
with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election
is filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
13. Non-Transferability of Options. The Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution. The designation of a
beneficiary by an Optionee will not constitute a transfer. An Option may be
exercised, during the lifetime of the Optionee, only by the Optionee or a
transferee permitted by this Section 13.
14. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustment. Subject to any required action by the shareholders
----------
of the Company, the number of shares of Common Stock covered by each
outstanding Option, the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon
-10-
<PAGE>
cancellation or expiration of an Option, the maximum number of shares of
Common Stock for which Options may be granted to any employee under Section 8
of the Plan, and the price per share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the
Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Administrator, whose
determination in that respect shall be final, binding and conclusive. Except
as expressly provided herein, no issuance by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to an Option.
(b) Corporate Transactions. In the event of the proposed dissolution or
----------------------
liquidation of the Company, the Option will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the
Administrator. The Administrator may, in the exercise of its sole discretion
in such instances, declare that any Option shall terminate as of a date fixed
by the Administrator and give each Optionee the right to exercise his or her
Option as to all of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, the Option shall be assumed or an
equivalent option shall be substituted by such successor corporation or a
parent or subsidiary of such successor corporation, unless the Administrator
determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the Optionee shall have the right to exercise
the Option as to all of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable or the Administrator determines to
terminate the unvested and unexercised option. If the Administrator makes an
Option exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee that the
Option shall be exercisable for a period of thirty (30) days from the date of
such notice, and the Option will terminate upon the expiration of such period.
15. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.
16. Amendment and Termination of the Plan.
--------------------------------------
(a) Amendment and Termination. The Board may amend or terminate
-------------------------
the Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval of
the shareholders of the Company in the manner described in Section 20 of the
Plan:
-11-
<PAGE>
(i) any increase in the number of Shares subject to the Plan,
other than an adjustment under Section 14 of the Plan;
(ii) any change in the designation of the class of persons
eligible to be granted Options;
(iii) any change in the limitation on grants to employees as
described in Section 8 of the Plan or other changes which would
require shareholder approval to qualify options granted hereunder as
performance-based compensation under Section 162(m) of the Code; or
(iv) any revision or amendment requiring shareholder approval
in order to preserve the qualification of the Plan under Rule 16b-3.
(b) Shareholder Approval. If any amendment requiring shareholder
--------------------
approval under Section 13(a) of the Plan is made subsequent to the first
registration of any class of equity securities by the Company under Section 12
of the Exchange Act, such shareholder approval shall be solicited as described
in Section 20 of the Plan.
(c) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee
and the Board, which agreement must be in writing and signed by the Optionee
and the Company.
17. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and
the issuance and delivery of such Shares pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any
of the aforementioned relevant provisions of law.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability
-12-
<PAGE>
in respect of the failure to issue or sell such Shares as to which such
requisite authority shall not have been obtained.
19. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
20. Shareholder Approval.
--------------------
(a) Continuance of the Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months before or after the date
the Plan is adopted. Such shareholder approval shall be obtained in the manner
and to the degree required under applicable federal and state law and the
rules of any stock exchange upon which the Shares are listed.
(b) In the event that the Company registers any class of equity
securities pursuant to Section 12 of the Exchange Act, any required approval
of the shareholders of the Company obtained after such registration shall be
solicited substantially in accordance with Section 14(a) of the Exchange Act
and the rules and regulations promulgated thereunder.
(c) If any required approval by the shareholders of the Plan itself
or of any amendment thereto is solicited at any time otherwise than in the
manner described in Section 20(b) hereof, then the Company shall, at or prior
to the first annual meeting of shareholders held subsequent to the later of
(1) the first registration of any class of equity securities of the Company
under Section 12 of the Exchange Act or (2) the granting of an Option
hereunder to an officer or director after such registration, do the following:
(i) furnish in writing to the holders entitled to vote for the
Plan substantially the same information that would be required (if proxies to
be voted with respect to approval or disapproval of the Plan or amendment were
then being solicited) by the rules and regulations in effect under Section
14(a) of the Exchange Act at the time such information is furnished; and
(ii) file with, or mail for filing to, the Securities and
Exchange Commission four copies of the written information referred to in
subsection (i) hereof not later than the date on which such information is
first sent or given to shareholders.
21. Information to Optionees. The Company shall provide to each Optionee,
------------------------
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company.
-13-
<PAGE>
APPENDIX A
OPTION GRANTS TO FRENCH EMPLOYEES
---------------------------------
This Appendix A to the KeraVision, Inc. 1995 Stock Option Plan (the "Plan")
sets forth special rules under which options shall be granted to individuals who
are employees of KeraVision S.A.R.L. (the "S.A.R.L.") and whose salary is paid
in French currency on the date of the grant. To the extent the rules in this
Appendix A are not consistent with the provisions of the Plan, this Appendix A
shall govern. To the extent that there is no inconsistency between the
provisions of the Plan and this Appendix A, the provisions of the Plan shall
govern. This Appendix A shall be modified as necessary in order for options
granted hereunder to qualify for benefits as provided under French law.
1. Option Price. The purchase price of the shares of stock covered by an
------------
option shall not be less than ninety-five percent (95%) of the closing stock
price on the Nasdaq National Market averaged over a period of twenty (20)
consecutive trading days, ending on the date of grant. The purchase price of an
outstanding stock option cannot be modified except as specifically allowed by
applicable French law.
2. Option Grant Date. An option cannot be granted before twenty (20) daily
-----------------
trading sessions of the Company's Common Stock on the Nasdaq National Market
after an increase in the authorized Capital of KeraVision, Inc. or the
detachment of a coupon giving rise to a dividend on the Common Stock of
KeraVision, Inc.
3. Eligibility.
-----------
(a) Consultants to the S.A.R.L. are eligible to receive option grants
under the Plan only if they have in place on the date of grant a work contract
with the S.A.R.L., the parent corporation or a subsidiary corporation.
(b) An individual who owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of KeraVision, Inc. cannot
participate in the Plan.
4. Stock Limitation. The maximum aggregate number of shares which may be
----------------
optioned and sold under the Plan as set forth in Section 3 of the Plan shall not
exceed one-third (1/3) of the authorized capital of KeraVision, Inc.
-14-
<PAGE>
Exhibit 10.13
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of January 13, 1998, between
KeraVision, Inc. (the "COMPANY") and Thomas M. Loarie (the "PURCHASER").
The Promissory Note ("NOTE") executed by the Purchaser on January 13, 1996,
under which the Purchaser promised to pay to the Company $1,324.11*, plus
interest, on or before January 13, 1998, 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 $87.16, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $1,426.85.
(2) The due date of all principal and interest under the Note is hereby
extended to January 13, 2000.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 5.43% per annum, compounded semi-annually, to 5.62% per annum,
compounded semi-annually.
KERAVISION, INC. THOMAS M. LOARIE
/s/ Mark Fischer-Colbrie /s/Thomas M. Loarie
- ------------------------- ------------------------------
Signature Signature
By: Mark Fischer-Colbrie
--------------------------
Print Name
Title: V.P. Finance & Administration
-----------------------------
- ------------
* The original amount of the Note was $17,947.99, however, on October 24, 1996,
the Company forgave $17,389.27 of the principal owing on the Note thus reducing
the total amount due (including accrued interest) to $1,324.11 as of that date.
<PAGE>
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of January 22, 1998, between
KeraVision, Inc. (the "COMPANY") and Thomas M. Loarie (the "PURCHASER").
The Promissory Note ("NOTE") executed by the Purchaser on January 22, 1996,
under which the Purchaser promised to pay to the Company $540.17++, plus
interest, on or before January 13, 1998, 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 $34.82, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $582.08.
(2) The due date of all principal and interest under the Note is hereby
extended to January 22, 2000.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 5.43% per annum, compounded semi-annually, to 5.62% per annum,
compounded semi-annually.
KERAVISION, INC. THOMAS M. LOARIE
/s/ Mark Fischer-Colbrie /s/ Thomas M. Loarie
- -------------------------- -----------------------------
Signature Signature
By: Mark Fischer-Colbrie
--------------------------
Print Name
Title: V.P. Finance & Administration
-----------------------------
- ------------
++ The original amount of the Note was $13,094.94, however, on October 24,
1996, the Company forgave the entire amount of $13,094.94 of the principal owing
on the Note thus reducing the total amount due (consisting of only accrued
interest) to $540.17 as of that date.
<PAGE>
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of August 1, 1997, between
KeraVision, Inc. (the "COMPANY") and Thomas M. Loarie (the "PURCHASER").
The Promissory Note ("NOTE") executed by the Purchaser on September 26,
1995, under which the Purchaser promised to pay to the Company $176,601.18, plus
interest, on or before September 26, 1997, 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 $19,702.41, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $196,303.59.
(2) The due date of all principal and interest under the Note is hereby
extended to August 1, 1999.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 5.83% per annum, compounded semi-annually, to 5.79% per annum,
compounded semi-annually.
KERAVISION, INC. THOMAS M. LOARIE
/s/ Mark Fischer-Colbrie /s/ Thomas M. Loarie
- -------------------------- -------------------------
Signature Signature
By: Mark Fischer-Colbrie
--------------------
Print Name
Title: V.P. Finance & Administration
-----------------------------
<PAGE>
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of August 1, 1997, between
KeraVision, Inc. (the "COMPANY") and Thomas M. Loarie (the "PURCHASER").
The Promissory Note ("NOTE") executed by the Purchaser on November 7, 1993,
under which the Purchaser promised to pay to the Company $112,500.00, plus
interest, on or before October 21, 1997, 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 $21,974.28, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $134,474.28.
(2) The due date of all principal and interest under the Note is hereby
extended to August 1, 1999.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 4.86% per annum, compounded semi-annually, to 5.79% per annum,
compounded semi-annually.
KERAVISION, INC. THOMAS M. LOARIE
/s/ Mark Fischer-Colbrie /s/ Thomas M. Loarie
- -------------------------- ------------------------
Signature Signature
By: Mark Fischer Colbrie
--------------------
Print Name
Title: V.P. Finance & Administration
-----------------------------
<PAGE>
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of February 16, 1997, between
KeraVision, Inc. (the "COMPANY") and Thomas Merritt Loarie (the "PURCHASER").
The Promissory Note ("NOTE") executed by the Purchaser on April 12, 1993,
under which the Purchaser promised to pay to the Company $79,112.25, plus
interest, on or before February 16, 1997, 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 $12,835.85, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $91,948.10.
(2) The due date of all principal and interest under the Note is extended
to February 16, 1999.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 5.38% per annum, compounded semi-annually, to 5.73% per annum,
compounded semi-annually.
KERAVISION, INC. THOMAS MERRITT LOARIE
/s/ Mark Fischer-Colbrie /s/ Thomas M. Loarie
- --------------------------- ---------------------------
Signature Signature
By: /s/ Mark Fischer-Colbrie
-------------------------
Print Name
Title: V.P. Finance & Administration
------------------------------
<PAGE>
Exhibit 10.14
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of August 1, 1997, between
KeraVision, Inc. (the "COMPANY") and Thomas A. Silvestrini (the "PURCHASER").
The Promissory Note ("NOTE") executed by the Purchaser on September 26,
1995, under which the Purchaser promised to pay to the Company $28,271.44, plus
interest, on or before September 26, 1997, 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 $3,159.09, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $31,425.53.
(2) The due date of all principal and interest under the Note is hereby
extended to August 1, 1999.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 5.83% per annum, compounded semi-annually, to 5.79% 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: V.P. Finance & Administration
-----------------------------
<PAGE>
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of August 1, 1997, between
KeraVision, Inc. (the "COMPANY") and Thomas A. Silvestrini (the "PURCHASER").
The Promissory Note ("NOTE") executed by the Purchaser on November 7, 1993,
under which the Purchaser promised to pay to the Company $112,500.00, plus
interest, on or before October 21, 1997, 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 $21,974.28, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $134,474.28.
(2) The due date of all principal and interest under the Note is hereby
extended to August 1, 1999.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 4.86% per annum, compounded semi-annually, to 5.79% 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: V.P. Finance & Administration
-----------------------------
<PAGE>
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of August 1, 1997, between
KeraVision, Inc. (the "COMPANY") and Mark Fisher-Colbrie (the "PURCHASER").
The Promissory Note ("NOTE") executed by the Purchaser on November 7, 1993,
under which the Purchaser promised to pay to the Company $28,125.00, plus
interest, on or before October 21, 1997, is hereby amended as follows:
(1) On October 24, 1996, the Company forgave $5,000 of the principal amount
of this Note. The Company and the Purchaser hereby agree that the interest due
with respect to the Note as of the date hereof is $5,303.65, which amount is
hereby added to the original principal amount of the Note less the $5,000
forgiveness of principal by the Company, such that the principal as of the date
hereof is $28,428.65.
(2) The due date of all principal and interest under the Note is hereby
extended to August 1, 1999.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 4.86% per annum, compounded semi-annually, to 5.79% per annum,
compounded semi-annually.
KERAVISION, INC. MARK FISHER-COLBRIE
/s/ Thomas M. Loarie /s/ Mark Fischer-Colbrie
- ----------------------- ----------------------------
Signature Signature
By: Thomas M. Loarie
----------------
Print Name
Title: President & CEO
---------------
<PAGE>
EXHIBIT 10.15
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of August 1, 1997, between
KeraVision, Inc. (the "COMPANY") and Mark Fisher-Colbrie (the "PURCHASER").
The Promissory Note ("NOTE") executed by the Purchaser on November 7, 1993,
under which the Purchaser promised to pay to the Company $28,125.00, plus
interest, on or before October 21, 1997, is hereby amended as follows:
(1) On October 24, 1996, the Company forgave $5,000 of the principal amount
of this Note. The Company and the Purchaser hereby agree that the interest due
with respect to the Note as of the date hereof is $5,303.65, which amount is
hereby added to the original principal amount of the Note less the $5,000
forgiveness of principal by the Company, such that the principal as of the date
hereof is $28,428.65.
(2) The due date of all principal and interest under the Note is hereby
extended to August 1, 1999.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 4.86% per annum, compounded semi-annually, to 5.79% per annum,
compounded semi-annually.
KERAVISION, INC. MARK FISHER-COLBRIE
/s/ Thomas M. Loarie /s/ Mark Fischer-Colbrie
- ----------------------- ----------------------------
Signature Signature
By: Thomas M. Loarie
----------------
Print Name
Title: President & CEO
---------------
<PAGE>
Exhibit 10.16
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of January 13, 1998, between
KeraVision, Inc. (the "COMPANY") and Darlene Crockett-Billig (the "PURCHASER").
The Promissory Note ("NOTE") executed by the Purchaser on January 13, 1996,
under which the Purchaser promised to pay to the Company $2,597.47+, plus
interest, on or before January 13, 1998, 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 $170.99, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $2,799.02.
(2) The due date of all principal and interest under the Note is hereby
extended to January 13, 2000.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 5.43% per annum, compounded semi-annually, to 5.62% 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: V.P. Finance & Administration
-----------------------------
- --------------
+ The original amount of the Note was $7,179.20, however, on October 24, 1996,
the Company forgave $4,889.00 of the principal owing on the Note thus reducing
the total amount due (including accrued interest) to $2,597.47 as of that date.
<PAGE>
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of August 1, 1997, between
KeraVision, Inc. (the "COMPANY") and Darlene Crockett-Billig (the "PURCHASER").
The Promissory Note ("NOTE") executed by the Purchaser on September 26,
1995, under which the Purchaser promised to pay to the Company $36,635.63, plus
interest, on or before September 26, 1997, 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 $4,087.23, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $40,722.86.
(2) The due date of all principal and interest under the Note is hereby
extended to August 1, 1999.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 5.83% per annum, compounded semi-annually, to 5.79% 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: V.P. Finance & Administration
-----------------------------
<PAGE>
AMENDMENT OF PROMISSORY NOTE
This Amendment of Promissory Note is made as of August 1, 1997, between
KeraVision, Inc. (the "COMPANY") and Darlene Crockett-Billig (the "PURCHASER").
The Promissory Note ("NOTE") executed by the Purchaser on November 7, 1993,
under which the Purchaser promised to pay to the Company $75,000.00, plus
interest, on or before October 21, 1997, 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 $14,649.52, which amount is hereby
added to the original principal amount of the Note, so that the principal as of
the date hereof is $89,649.52.
(2) The due date of all principal and interest under the Note is hereby
extended to August 1, 1999.
(3) The interest rate of the Note changes as of this Amendment Date from
the original 4.86% per annum, compounded semi-annually, to 5.79% 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: V.P. Finance & Administration
-----------------------------
<PAGE>
EXHIBIT 10.22
KERAVISION, INC.
1997 EMPLOYEE STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1997 Employee Stock Option
--------------------
Plan are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to the Employees and
Consultants of the Company and to promote the success of the Company's business.
Options granted hereunder shall be Nonstatutory Stock Options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" shall mean the Board or any of its Committees
-------------
appointed pursuant to Section 4 of the Plan.
(b) "Affiliate" shall mean an entity in which the Company owns an
---------
equity interest.
(c) "Applicable Laws" shall have the meaning set forth in Section 4(a)
---------------
below.
(d) "Board" shall mean the Board of Directors of the Company.
-----
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" shall mean the Committee appointed by the Board of
---------
Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed.
(g) "Common Stock" shall mean the Common Stock of the Company.
------------
(h) "Company" shall mean KeraVision, Inc., a Delaware corporation.
-------
(i) "Consultant" shall mean any person who is engaged by the Company
----------
or any Parent, Subsidiary or Affiliate to render consulting services and is
compensated for such consulting services, excluding any Officers, Named
Executives and Directors.
(j) "Continuous Status as an Employee or Consultant" shall mean the
----------------------------------------------
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Board; provided that such leave is for a period
of not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute. For purposes of this Plan, a change in
status from an Employee to a Consultant or from a Consultant to an Employee will
not constitute a termination of employment.
(k) "Director" shall mean a member of the Board.
--------
<PAGE>
(l) "Employee" shall mean any person who is employed by the Company or
--------
any Parent, Subsidiary or Affiliate of the Company, excluding any Officers,
Named Executives and Directors. Notwithstanding the foregoing, an Officer who
was not previously employed by the Company and for whom an Option grant is an
inducement essential to the Officer's entering into an employment relationship
or contract with the Company, shall be treated as an Employee for purposes of
the Option grant made to the Officer in connection with commencement of the
Officer's employment with the Company.
(m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
(n) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
price for such stock as quoted on such exchange or system on the date of
determination (if for a given day no sales were reported, the closing bid on
that day shall be used), as such price is reported in The Wall Street Journal
-----------------------
or such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but
not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the bid and asked prices for the Common Stock or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(o) "Named Executive" shall mean any individual who, on the last day
---------------
of the Company's fiscal year, is the chief executive officer of the Company (or
is acting in such capacity) or among the four highest compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.
(p) "Nonstatutory Stock Option" shall mean an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable option
agreement. "Incentive Stock Option" shall mean an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable option agreement.
(q) "Officer" shall mean a person who is appointed or elected by the
-------
Board as an officer of the Company, including but not limited to a person who is
an officer of the Company within the meaning of Section 16 of the Exchange Act
and the rules and regulations promulgated thereunder.
-2-
<PAGE>
(r) "Option" shall mean a stock option granted pursuant to the Plan.
------
(s) "Optioned Stock" shall mean the Common Stock subject to an Option.
--------------
(t) "Optionee" shall mean an Employee or Consultant who receives an
--------
Option.
(u) "Parent" shall mean a "parent corporation," whether now or
------
hereafter existing, as defined in Section 424(e) of the Code.
(v) "Plan" shall mean this 1997 Employee Stock Option Plan.
----
(w) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange
----------
Act as the same may be amended from time to time, or any successor provision.
(x) "Share" shall mean a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
(y) "Subsidiary" shall mean a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 300,000 shares of Common Stock. The Shares may be authorized,
but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan. Notwithstanding any other provision of the Plan, shares
issued under the Plan and later repurchased by the Company shall not become
available for future grant or sale under the Plan.
4. Administration of the Plan.
--------------------------
(a) Composition of Administrator. The Plan shall be administered by
----------------------------
(A) the Board or (B) a Committee designated by the Board, which Committee shall
be constituted in such a manner as to satisfy the legal requirements relating to
the administration of nonstatutory stock option plans, if any, of applicable
securities laws and the Code (collectively, the "Applicable Laws"). If a
Committee has been appointed pursuant to this Section 4(a), such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of any Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies (however caused)
and remove all members of a Committee and thereafter directly administer the
Plan, all to the extent permitted by the Applicable Laws.
-3-
<PAGE>
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, the specific duties delegated by, or
limitations of authority imposed by, the Board to or on such Committee, the
Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(n) of the Plan;
(ii) to select the Employees and Consultants to whom Options may
from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation, or any vesting
acceleration or waiver of forfeiture restrictions regarding any Option and/or
the shares of Common Stock relating thereto, based in each case on such
factors as the Administrator shall determine, in its sole discretion);
(vii) to determine whether, to what extent and under what
circumstances Common Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the election of
the participant (including providing for and determining the amount, if any,
of any deemed earnings on any deferred amount during any deferral period); and
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted.
(c) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options granted under the Plan.
-4-
<PAGE>
5. Eligibility.
-----------
(a) Recipients of Grants. Options may be granted only to Employees
--------------------
and Consultants. An Employee or Consultant who has been granted an Option may,
if Optionee is otherwise eligible, be granted an additional Option or Options.
(b) Type of Option. Each Option shall be designated in the written
--------------
option agreement as a Nonstatutory Stock Option.
(c) No Employment Rights. The Plan shall not confer upon any Optionee
--------------------
any right with respect to continuation of employment or consulting relationship
with the Company, nor shall it interfere in any way with Optionee's right or the
Company's right to terminate Optionee's employment or consulting relationship at
any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by the
------------
Board of Directors. It shall continue in effect for a term of ten (10) years
unless sooner terminated under Section 15 of the Plan.
7. Term of Option. The term of each Nonstatutory Stock Option shall be ten
--------------
(10) years from the date of grant thereof or such shorter term as may be
provided in the Nonstatutory Stock Option Agreement.
8. Exercise Price and Consideration.
--------------------------------
(a) The per Share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the
Administrator, but shall be no less than 85% of the fair market value per Share
on the date of grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator and may consist entirely of (1) cash, (2) check, (3)
promissory note, (4) other Shares of Common Stock which (i) either have been
owned by the Optionee for more than six (6) months on the date of surrender or
were not acquired, directly or indirectly, from the Company, and (ii) have a
fair market value on the date of surrender equal to the aggregate exercise price
of the Shares as to which said Option shall be exercised, (5) authorization from
the Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the Option is exercised; (6) delivery of a properly executed exercise notice
together with irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds required to pay the exercise price,
(7) any combination of such methods of payment, or (8) such other consideration
and method of payment for the issuance of Shares permitted under Applicable
Laws. In making its determination as to the type of consideration to accept,
the Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
-5-
<PAGE>
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Company shall issue (or
cause to be issued) such stock certificate promptly upon exercise of the
Option. No adjustment will be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued, except as
provided in Section 13 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as an Employee or Consultant. In the event
--------------------------------------------------
of termination of an Optionee's Continuous Status as an Employee or Consultant,
such Optionee may, but only within three (3) months (or such other period of
time, not exceeding six (6) months, as is determined by the Administrator) after
the date of such termination (but in no event later than the date of expiration
of the term of such Option as set forth in the Option Agreement), exercise
Optionee's Option to the extent that Optionee was entitled to exercise it at the
date of such termination. To the extent that Optionee was not entitled to
exercise the Option at the date of such termination, or if Optionee does not
exercise such Option (which Optionee was entitled to exercise) within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of Section
----------------------
9(b) above, in the event of termination of an Optionee's Continuous Status as an
Employee or Consultant as a result of Optionee's total and permanent disability
(as defined in Section 22(e)(3) of the Code), Optionee may, but only within six
(6) months (or such other period of time not exceeding twelve (12) months as is
determined by the Administrator) from the date of such termination (but in no
event later than the date of expiration of the term of such Option as set forth
in the Option Agreement), exercise Optionee's Option to the extent Optionee was
entitled to exercise it at the date of such termination. To the extent that
Optionee was not entitled to exercise the Option at the date of termination, or
if Optionee does not exercise such Option
-6-
<PAGE>
(which Optionee was entitled to exercise) within the time specified herein,
the Option shall terminate.
(d) Death of Optionee. In the event of termination of an Optionee's
-----------------
Continuance Status as an Employee or Consultant as a result of the death of an
Optionee:
(i) during the term of the Option, the Option may be exercised,
at any time within six (6) months following the date of death (but in no event
later than the date of expiration of the term of such Option as set forth in
the Option Agreement), by the Optionee's estate or by a person who acquired
the right to exercise the Option by bequest or inheritance, but only to the
extent of the right to exercise the Option that would have accrued had the
Optionee continued living and remained in Continuous Status as an Employee or
Consultant six (6) months (or such other period of time as is determined by
the Administrator as provided above) after the date of death.
(ii) within thirty (30) days (or such other period of time not
exceeding three (3) months as is determined by the Administrator) after the
termination of Continuous Status as an Employee or Consultant, the Option may
be exercised, at any time within six (6) months following the date of death
(but in no event later than the date of expiration of the term of such Option
as set forth in the Option Agreement), by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent of the right to exercise that had accrued at the date of
termination.
10. Withholding Taxes. As a condition to the exercise of Options granted
-----------------
hereunder, the Optionee shall make such arrangements as the Administrator may
require for the satisfaction of any federal, state, local or foreign withholding
tax obligations that may arise in connection with the exercise, receipt or
vesting of such Option. The Company shall not be required to issue any Shares
under the Plan until such obligations are satisfied.
11. Stock Withholding to Satisfy Withholding Tax Obligations. At the
--------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by one or some combination of the
following methods: (a) by cash payment, or (b) out of Optionee's current
compensation, or (c) if permitted by the Administrator, in its discretion, by
surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or less than Optionee's marginal tax rate times the
ordinary income recognized, or (d) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of Shares having
a fair market value equal to the amount required to be withheld. For this
purpose, the fair market value of the Shares to be withheld shall be determined
on the date that the amount of tax to be withheld is to be determined (the "Tax
Date").
-7-
<PAGE>
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
12. Non-Transferability of Options. The Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution. The designation of a
beneficiary by an Optionee will not constitute a transfer. An Option may be
exercised, during the lifetime of the Optionee, only by the Optionee or a
transferee permitted by this Section 12.
13. Adjustments Upon Changes in Capitalization or Merger.
----------------------------------------------------
(a) Adjustments. Subject to any required action by the shareholders
-----------
of the Company, the number of shares of Common Stock covered by each outstanding
Option, and the number of shares of Common Stock which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, and the price per share of Common Stock covered by each such outstanding
Option, shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of issued shares of
Common Stock effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Administrator, whose determination in that
respect shall be final, binding and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option.
(b) Corporate Transactions. In the event of the proposed dissolution
----------------------
or liquidation of the Company, the Option will terminate immediately prior to
the consummation of such proposed action, unless otherwise provided by the
Administrator. The Administrator may,
-8-
<PAGE>
in the exercise of its sole discretion in such instances, declare that any
Option shall terminate as of a date fixed by the Administrator and give each
Optionee the right to exercise Optionee's Option as to all of the Optioned
Stock, including Shares as to which the Option would not otherwise be
exercisable. In the event of a proposed sale of all or substantially all of
the assets of the Company, or the merger of the Company with or into another
corporation, the Option shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless the Administrator determines, in the exercise of
its sole discretion and in lieu of such assumption or substitution, that the
Optionee shall have the right to exercise the Option as to all of the Optioned
Stock, including Shares as to which the Option would not otherwise be
exercisable or the Administrator determines to terminate the unvested and
unexercised option. If the Administrator makes an Option exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee that the Option shall be fully
exercisable for a period of thirty (30) days from the date of such notice, and
the Option will terminate upon the expiration of such period.
14. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may amend or terminate the
-------------------------
Plan from time to time in such respects as the Board may deem advisable
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not adversely affect Options already granted
(except to the extent contemplated by such Options) and such Options shall
remain in full force and effect, unless mutually agreed otherwise between the
Optionee and the Board (or other body then administering the Plan), which
agreement must be in writing and signed by the Optionee and the Company.
-9-
<PAGE>
16. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Administrator shall approve.
19. Information to Optionees. The Company shall provide to each Optionee
------------------------
upon request, during the period for which such Optionee has one or more Options
outstanding, copies of all annual reports and other information which are
provided to all shareholders of the Company.
-10-
<PAGE>
EXHIBIT 10.23
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "Agreement") is made and entered into
effective as of May 6, 1997, by and between Thomas M. Loarie (the "Employee")
and KeraVision, Inc., a Delaware corporation (the "Company").
RECITALS
A. It is expected that another company or other entity may from time to
time consider the possibility of acquiring the Company or that a change in
control may otherwise occur, with or without the approval of the Company's Board
of Directors (the "Board"). The Board recognizes that such consideration can be
a distraction to the Employee, a corporate officer of the Company, and can cause
the Employee to consider alternative employment opportunities. The Board has
determined that it is in the best interests of the Company and its stockholders
to assure that the Company will have the continued dedication and objectivity of
the Employee, notwithstanding the possibility, threat or occurrence of a Change
of Control (as defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its stockholders to provide the Employee with an incentive to continue his or
her employment with the Company.
C. The Board believes that it is imperative to provide the Employee with
certain benefits upon a Change of Control and, under certain circumstances, upon
termination of the Employee's employment in connection with a Change of Control,
which benefits are intended to provide the Employee with financial security and
provide sufficient income and encouragement to the Employee to remain with the
Company notwithstanding the possibility of a Change of Control.
D. To accomplish the foregoing objectives, the Board of Directors has
directed the Company, upon execution of this Agreement by the Employee, to agree
to the terms provided in this Agreement.
E. Certain capitalized terms used in the Agreement are defined in Section
4 below.
In consideration of the mutual covenants contained in this Agreement, and
in consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. At-Will Employment. The Company and the Employee acknowledge that
------------------
the Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason,
including (without
-1-
<PAGE>
limitation) any termination prior to a Change of Control, the Employee shall not
be entitled to any payments or benefits, other than as provided by this
Agreement, or as may otherwise be available in accordance with the terms of
Employee's Employment Agreement with the Company dated January 1, 1997 (the
"Employment Agreement") the Company's established employee plans and written
policies at the time of termination. The terms of this Agreement shall
terminate upon the earlier of (i) the date on which Employee ceases to be
employed as a corporate officer of the Company, other than as a result of an
involuntary termination by the Company without Cause (ii) the date that all
obligations of the parties hereunder have been satisfied, or (iii) two (2) years
after a Change of Control. A termination of the terms of this Agreement
pursuant to the preceding sentence shall be effective for all purposes, except
that such termination shall not affect the payment or provision of compensation
or benefits on account of a termination of employment occurring prior to the
termination of the terms of this Agreement.
2. Stock Options. Subject to Sections 5 and 6 below, in the event of
-------------
a Change of Control and regardless of whether the Employee's employment with the
Company is terminated in connection with the Change of Control, each stock
option granted for the Company's securities (the "Options") held by the Employee
shall become fully vested and immediately exercisable on the effective date of
the transaction by the Option and shall be exercisable to the extent so vested
in accordance with the provisions of the Option Agreement and Plan pursuant to
which such option was granted.
3. Change of Control.
-----------------
(a) Termination Following A Change of Control. Subject to
-----------------------------------------
Section 5 and 6 below, if the Employee's employment with the Company is
terminated at any time within two (2) years after a Change of Control, then
the Employee shall be entitled to receive severance benefits as follows:
(i) Voluntary Resignation. If the Employee voluntarily
---------------------
resigns from the Company (other than as an Involuntary Termination (as defined
below) or if the Company terminates the Employee's employment for Cause (as
defined below)), then the Employee shall not be entitled to receive severance
payments. The Employee's benefits will be terminated under the terms of the
Employee Agreement and the Company's then existing benefit plans and policies
in accordance with such plans and policies in effect on the date of
termination or as otherwise determined by the Board of Directors of the
Company.
(ii) Involuntary Termination. If the Employee's employment is
-----------------------
terminated as a result of an Involuntary Termination other than for Cause, the
Employee shall be entitled to receive the following benefits: (i) severance
payments during the period from the date of the Employee's termination until the
date 18 months after the effective date of the termination (the "Severance
Period") equal to the salary which the Employee was receiving at the time of
such termination, which payments shall be paid during the Severance Period in
accordance with the Company's standard payroll practices; (ii) monthly severance
payments during the Severance Period equal to 1/12th of the
-2-
<PAGE>
Employee's "target bonus" (as defined below) for the fiscal year in which the
termination occurs (or for the prior fiscal year if a target bonus has not yet
been determined for the fiscal year in which the termination occurs); (iii)
continuation of all health and life insurance benefits through the end of the
Severance Period substantially identical to those to which the Employee was
entitled immediately prior to the termination, or to those being offered to
officers of the Company, or a successor corporation, if the Company's benefit
programs are changed during the Severance Period; and (iv) outplacement
services with a total value not to exceed $15,000. For purposes of this
Agreement, the term "target bonus" shall mean the Employee's base salary in
effect on the termination date multiplied by that percentage of such base
salary that is prescribed by the Company under its Executive Bonus Program as
the percentage of such base salary payable to the Employee as a bonus if the
Company pays bonuses at one-hundred percent (100%) of its operating plan.
(iii) Involuntary Termination for Cause. If the Employee's
---------------------------------
employment is terminated for Cause, then the Employee shall not be entitled to
receive severance payments. The Employee's benefits will be terminated under
the Company's then existing benefit plans and policies in accordance with such
plans and policies in effect on the date of termination.
(b) Termination Apart from A Change of Control. In the event the
------------------------------------------
Employee's employment terminates for any reason, either prior to the occurrence
of a Change of Control or after the two year period following the effective date
of a Change of Control, then the Employee shall not be entitled to receive any
severance payments under this Agreement. The Employee's benefits will be
terminated under the terms of the Employment Agreement and the Company's then
existing benefit plans and policies in accordance with such plans and policies
in effect on the date of termination or as otherwise determined by the Board of
Directors of the Company.
4. Definition of Terms. The following terms referred to in this
-------------------
Agreement shall have the following meanings:
(a) Change of Control. "Change of Control" shall mean the
-----------------
occurrence of any of the following events:
(i) Ownership. Any "Person" (as such term is used in
---------
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing twenty
percent (20%) or more of the total voting power represented by the Company's
then outstanding voting securities without the approval of the Board of
Directors of the Company; or
(ii) Merger/Sale of Assets. A merger or consolidation of
---------------------
the Company whether or not approved by the Board of Directors of the Company,
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least fifty
-3-
<PAGE>
percent (50%) of the total voting power represented by the voting securities
of the Company or such surviving entity outstanding immediately after such
merger or consolidation, or the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets.
(iii) Change in Board Composition. A change in the
---------------------------
composition of the Board of Directors of the Company, as a result of which
fewer than a majority of the directors are Incumbent Directors. "Incumbent
Directors" shall mean directors who either (A) are directors of the Company as
of May 6, 1997 or (B) are elected, or nominated for election, to the Board of
Directors of the Company with the affirmative votes of at least a majority of
the Incumbent Directors at the time of such election or nomination (but shall
not include an individual whose election or nomination is in connection with
an actual or threatened proxy contest relating to the election of directors to
the Company).
(b) Cause. "Cause" shall mean (i) gross negligence or willful
-----
misconduct in the performance of the Employee's duties to the Company where such
gross negligence or willful misconduct has resulted or is likely to result in
substantial and material damage to the Company or its subsidiaries, (ii)
repeated unexplained or unjustified absence from the Company, (iii) a material
and willful violation of any federal or state law; (iv) commission of any act of
fraud with respect to the Company; or (v) conviction of a felony or a crime
involving moral turpitude causing material harm to the standing and reputation
of the Company, in each case as determined in good faith by the Board of
Directors of the Company.
(c) Involuntary Termination. "Involuntary Termination" shall
-----------------------
include any termination by the Company other than for Cause and the Employee's
voluntary termination, upon 30 days prior written notice to the Company,
following (i) a material reduction or change in job duties, responsibilities
and requirements inconsistent with the Employee's position with the Company
and the Employee's prior duties, responsibilities and requirements; (ii) any
reduction of the Employee's base compensation (other than in connection with a
general decrease in base salaries for most similarly situated employees of the
successor corporation); or (iii) the Employee's refusal to relocate to a
location more than 50 miles from the Company's current location.
5. Limitation on Payments. In the event that the severance and other
----------------------
benefits provided for in this Agreement to the Employee (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and (ii) but for this Section, would be
subject to the excise tax imposed by Section 4999 of the Code, then the
Employee's benefits under Sections 2 and 3(a)(ii) shall be payable either:
(a) in full, or
-4-
<PAGE>
(b) as to such lesser amount which would result in no portion
of such severance benefits being subject to excise tax under Section 4999 of
the Code, whichever of the foregoing amounts, taking into account the
applicable federal, state and local income taxes and the excise tax imposed by
Section 4999, results in the receipt by the Employee on an after-tax basis, of
the greatest amount of benefits under Sections 2 and 3(a)(ii), notwithstanding
that all or some portion of such benefits may be taxable under Section 4999 of
the Code. Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 5 shall be made in writing by the
Company's independent public accountants (the "Accountants"), whose
determination shall be conclusive and binding upon the Employee and the
Company for all purposes. For purposes of making the calculations required by
this Section 5, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of Section 280G and 4999 of
the Code. The Company and the Employee shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order
to make a determination under this Section. The Company shall bear all costs
the Accountants may reasonably incur in connection with any calculations
contemplated by this Section 5.
6. Certain Business Combinations. In the event it is determined by
-----------------------------
the Board, upon consultation with Company management and the Company's
independent auditors, that the enforcement of any Section of this Agreement,
including, but not limited to, Section 2 hereof, which allows for the
acceleration of vesting of Option shares upon the effective date of a Change of
Control, would preclude accounting for any proposed business combination of the
Company involving a Change of Control as a pooling of interests, and the Board
otherwise desires to approve such a proposed business transaction which requires
as a condition to the closing of such transaction that it be accounted for as a
pooling of interests, then any such Section of this Agreement shall be null and
void. For purposes of this Section 6, the Board's determination shall require
the unanimous approval of the non-employee Board members.
7. 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 the Employee's rights
hereunder shall inure to the benefit of, and be enforceable by, the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
8. Notice. Notices and all other communications contemplated by this
------
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. Mailed notices to the Employee shall be
addressed to the Employee at the
-5-
<PAGE>
home address which the Employee most recently communicated to the Company in
writing. In the case of the Company, mailed notices shall be addressed to its
corporate headquarters, and all notices shall be directed to the attention of
its Secretary.
9. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The 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 the Employee may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified,
------
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision
or of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
---------------
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into
by either party with respect to the subject matter hereof. This Agreement
supersedes any agreement of the same title and concerning similar subject
matter dated prior to the date of this Agreement, and by execution of this
Agreement both parties agree that any such predecessor agreement shall be
deemed null and void.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California without reference to conflict of laws provisions.
(e) Severability. If any term or provision of this Agreement
------------
or the application thereof to any circumstance shall, in any jurisdiction and
to any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and
provisions to circumstances other than those as to which it is held invalid or
unenforceable, and a suitable and equitable term or provision shall be
substituted therefor to carry out, insofar as may be valid and enforceable,
the intent and purpose of the invalid or unenforceable term or provision.
(f) Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement may be settled at the option of either party by
binding arbitration in the County of Contra Costa, California, in accordance
with the rules of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having jurisdiction.
Punitive damages shall not be awarded.
-6-
<PAGE>
(g) Legal Fees and Expenses. The parties shall each bear their
-----------------------
own expenses, legal fees and other fees incurred in connection with this
Agreement.
(h) No Assignment of Benefits. The rights of any person to
-------------------------
payments or benefits under this Agreement shall not be made subject to option
or assignment, either by voluntary or involuntary assignment or by operation
of law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this subsection (h)
shall be void.
(i) Employment Taxes. All payments made pursuant to this
----------------
Agreement will be subject to withholding of applicable income and employment
taxes.
(j) Assignment by Company. The Company may assign its rights
---------------------
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment.
In the case of any such assignment, the term "Company" when used in a section
of this Agreement shall mean the corporation that actually employs the
Employee.
(k) 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.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
KERAVISION, INC. THOMAS M. LOARIE
BY: /s/ Mark Fischer-Colbrie /s/ Thomas M. Loarie
------------------------ ---------------------
TITLE: Vice President, Finance
-----------------------
-7-
<PAGE>
EXHIBIT 10.24
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "Agreement") is made and entered
into effective as of May 6, 1997, by and between (the "Employee") and
KeraVision, Inc., a Delaware corporation (the "Company").
RECITALS
A. It is expected that another company or other entity may from time
to time consider the possibility of acquiring the Company or that a change in
control may otherwise occur, with or without the approval of the Company's Board
of Directors (the "Board"). The Board recognizes that such consideration can be
a distraction to the Employee, a corporate officer of the Company, and can cause
the Employee to consider alternative employment opportunities. The Board has
determined that it is in the best interests of the Company and its stockholders
to assure that the Company will have the continued dedication and objectivity of
the Employee, notwithstanding the possibility, threat or occurrence of a Change
of Control (as defined below) of the Company.
B. The Board believes that it is in the best interests of the
Company and its stockholders to provide the Employee with an incentive to
continue his or her employment with the Company.
C. The Board believes that it is imperative to provide the Employee
with certain benefits upon a Change of Control and, under certain circumstances,
upon termination of the Employee's employment in connection with a Change of
Control, which benefits are intended to provide the Employee with financial
security and provide sufficient income and encouragement to the Employee to
remain with the Company notwithstanding the possibility of a Change of Control.
D. To accomplish the foregoing objectives, the Board of Directors
has directed the Company, upon execution of this Agreement by the Employee, to
agree to the terms provided in this Agreement.
E. Certain capitalized terms used in the Agreement are defined in
Section 4 below.
In consideration of the mutual covenants contained in this Agreement,
and in consideration of the continuing employment of Employee by the Company,
the parties agree as follows:
-1-
<PAGE>
1. At-Will Employment. The Company and the Employee acknowledge
------------------
that the Employee's employment is and shall continue to be at-will, as defined
under applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control, the
Employee shall not be entitled to any payments or benefits, other than as
provided by this Agreement, or as may otherwise be available in accordance with
the terms of the Company's established employee plans and written policies at
the time of termination. The terms of this Agreement shall terminate upon the
earlier of (i) the date on which Employee ceases to be employed as a corporate
officer of the Company, other than as a result of an involuntary termination by
the Company without Cause (ii) the date that all obligations of the parties
hereunder have been satisfied, or (iii) two (2) years after a Change of Control.
A termination of the terms of this Agreement pursuant to the preceding sentence
shall be effective for all purposes, except that such termination shall not
affect the payment or provision of compensation or benefits on account of a
termination of employment occurring prior to the termination of the terms of
this Agreement.
2. Stock Options.
-------------
(a) Hostile Takeover. Subject to Sections 5 and 6 below, in
----------------
the event of a Hostile Takeover and regardless of whether the Employee's
employment with the Company is terminated in connection with the Hostile
Takeover, each stock option granted for the Company's securities (the "Option")
held by the Employee shall become fully vested and immediately exercisable on
the effective date of the transaction and shall be exercisable to the extent so
vested in accordance with the provisions of the Option Agreement and Plan
pursuant to which such Option was granted.
(b) Change of Control. Subject to Sections 5 and 6 below, in the
-----------------
event of a Change of Control and regardless of whether the Employee's employment
with the Company is terminated in connection with the Change of Control, each
Option held by the Employee shall become vested on the effective date of the
transaction as to fifty percent (50%) of the Option shares that have not
otherwise vested as of such date. The Option shares that remain unvested as of
the effective date of the transaction shall thereafter vest at the same rate
(that is, the same number of shares shall vest during each vesting period) that
was in effect prior to the Change of Control, and shall accordingly vest over a
period that is one-half of the total vesting period that would otherwise be then
remaining under the terms of the Option Agreement pursuant to which each such
Option was granted.
3. Change of Control.
-----------------
(a) Termination Following A Change of Control. Subject to
-----------------------------------------
Sections 5 and 6 below, if the Employee's employment with the Company is
terminated at any time within two (2) years after a Change of Control, then the
Employee shall be entitled to receive severance benefits as follows:
(i) Voluntary Resignation. If the Employee voluntarily
---------------------
resigns from the Company (other than as an Involuntary Termination (as defined
below) or if the Company terminates the Employee's employment for Cause (as
defined below)), then the
-2-
<PAGE>
Employee shall not be entitled to receive severance payments. The Employee's
benefits will be terminated under the Company's then existing benefit plans and
policies in accordance with such plans and policies in effect on the date of
termination or as otherwise determined by the Board of Directors of the Company.
(ii) Involuntary Termination. If the Employee's employment
-----------------------
is terminated as a result of an Involuntary Termination other than for Cause,
the Employee shall be entitled to receive the following benefits: (i) severance
payments during the period from the date of the Employee's termination until the
date 12 months after the effective date of the termination (the "Severance
Period") equal to the salary which the Employee was receiving at the time of
such termination, which payments shall be paid during the Severance Period in
accordance with the Company's standard payroll practices; (ii) monthly severance
payments during the Severance Period equal to 1/12th of the Employee's "target
bonus" (as defined below) for the fiscal year in which the termination occurs
(or for the prior fiscal year if a target bonus has not yet been determined for
the fiscal year in which the termination occurs); (iii) continuation of all
health and life insurance benefits through the end of the Severance Period
substantially identical to those to which the Employee was entitled immediately
prior to the termination, or to those being offered to officers of the Company,
or a successor corporation, if the Company's benefit programs are changed during
the Severance Period; (iv) full and immediate vesting of each unvested Option
held by the Employee on the date of termination so that each such option shall
be exercisable in full on the termination date in accordance with the provisions
of the Option Agreement and Plan pursuant to which such option was granted; and
(v) outplacement services with a total value not to exceed $15,000. For purposes
of this Agreement, the term "target bonus" shall mean the Employee's base salary
in effect on the termination date multiplied by that percentage of such base
salary that is prescribed by the Company under its Executive Bonus Program as
the percentage of such base salary payable to the Employee as a bonus if the
Company pays bonuses at one-hundred percent (100%) of its operating plan.
(iii) Involuntary Termination for Cause. If the
---------------------------------
Employee's employment is terminated for Cause, then the Employee shall not be
entitled to receive severance payments. The Employee's benefits will be
terminated under the Company's then existing benefit plans and policies in
accordance with such plans and policies in effect on the date of termination.
(b) Termination Apart from A Change of Control. In the event the
------------------------------------------
Employee's employment terminates for any reason, either prior to the occurrence
of a Change of Control or after the two year period following the effective date
of a Change of Control, then the Employee shall not be entitled to receive any
severance payments under this Agreement. The Employee's benefits will be
terminated under the terms of the Company's then existing benefit plans and
policies in accordance with such plans and policies in effect on the date of
termination or as otherwise determined by the Board of Directors of the Company.
-3-
<PAGE>
4. Definition of Terms. The following terms referred to
-------------------
in this Agreement shall have the following meanings:
(a) Change of Control. "Change of Control" shall mean the
-----------------
occurrence of any of the following events:
(i) Ownership. Any "Person" (as such term is used in
---------
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is
or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing twenty percent
(20%) or more of the total voting power represented by the Company's then
outstanding voting securities without the approval of the Board of Directors of
the Company; or
(ii) Merger/Sale of Assets. A merger or consolidation of
---------------------
the Company whether or not approved by the Board of Directors of the Company,
other than a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets.
(iii) Change in Board Composition. A change in
---------------------------
the composition of the Board of Directors of the Company, as a result of which
fewer than a majority of the directors are Incumbent Directors. "Incumbent
Directors" shall mean directors who either (A) are directors of the Company as
of May 6, 1997 or (B) are elected, or nominated for election, to the Board of
Directors of the Company with the affirmative votes of at least a majority of
the Incumbent Directors at the time of such election or nomination (but shall
not include an individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to the
Company).
(b) Cause. "Cause" shall mean (i) gross negligence or willful
-----
misconduct in the performance of the Employee's duties to the Company where such
gross negligence or willful misconduct has resulted or is likely to result in
substantial and material damage to the Company or its subsidiaries,
(ii) repeated unexplained or unjustified absence from the Company, (iii) a
material and willful violation of any federal or state law; (iv) commission of
any act of fraud with respect to the Company; or (v) conviction of a felony or a
crime involving moral turpitude causing material harm to the standing and
reputation of the Company, in each case as determined in good faith by the Board
of Directors of the Company.
(c) Hostile Takeover. "Hostile Takeover" shall mean a
----------------
transaction or series of transactions that results in any Person becoming the
Beneficial Owner, directly or
-4-
<PAGE>
indirectly, of securities of the Company representing more than 50% of the total
voting power represented by the Company's then outstanding voting securities
without the approval of the Board of Directors of the Company.
(d) Involuntary Termination. "Involuntary Termination" shall
-----------------------
include any termination by the Company other than for Cause and the Employee's
voluntary termination, upon 30 days prior written notice to the Company,
following (i) a material reduction or change in job duties, responsibilities and
requirements inconsistent with the Employee's position with the Company and the
Employee's prior duties, responsibilities and requirements; (ii) any reduction
of the Employee's base compensation (other than in connection with a general
decrease in base salaries for most similarly situated employees of the successor
corporation); or (iii) the Employee's refusal to relocate to a location more
than 50 miles from the Company's current location.
5. Limitation on Payments. In the event that the severance and
----------------------
other benefits provided for in this Agreement to the Employee (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and (ii) but for this Section, would be
subject to the excise tax imposed by Section 4999 of the Code, then the
Employee's benefits under Sections 2 and 3(a)(ii) shall be payable either:
(a) in full, or
(b) as to such lesser amount which would result in no
portion of such severance benefits being subject to excise tax under
Section 4999 of the Code, whichever of the foregoing amounts, taking into
account the applicable federal, state and local income taxes and the excise tax
imposed by Section 4999, results in the receipt by the Employee on an after-tax
basis, of the greatest amount of benefits under Sections 2 and 3(a)(ii),
notwithstanding that all or some portion of such benefits may be taxable under
Section 4999 of the Code. Unless the Company and the Employee otherwise agree in
writing, any determination required under this Section 5 shall be made in
writing by the Company's independent public accountants (the "Accountants"),
whose determination shall be conclusive and binding upon the Employee and the
Company for all purposes. For purposes of making the calculations required by
this Section 5, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of Section 280G and 4999 of the
Code. The Company and the Employee shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 5.
6. Certain Business Combinations. In the event it is
-----------------------------
determined by the Board, upon consultation with Company management and the
Company's independent auditors, that the enforcement of any Section of this
Agreement, including, but not limited to, Section 2 hereof, which allows for the
acceleration of vesting of Option shares upon the
-5-
<PAGE>
effective date of a Hostile Takeover or a Change of Control, would preclude
accounting for any proposed business combination of the Company involving a
Hostile Takeover or a Change of Control as a pooling of interests, and the Board
otherwise desires to approve such a proposed business transaction which requires
as a condition to the closing of such transaction that it be accounted for as a
pooling of interests, then any such Section of this Agreement shall be null and
void. For purposes of this Section 6, the Board's determination shall require
the unanimous approval of the non-employee Board members.
7. 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 the Employee's rights
hereunder shall inure to the benefit of, and be enforceable by, the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
8. Notice. Notices and all other communications contemplated
------
by this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or certified
mail, return receipt requested and postage prepaid. Mailed notices to the
Employee shall be addressed to the Employee at the home address which the
Employee most recently communicated to the Company in writing. In the case of
the Company, mailed notices shall be addressed to its corporate headquarters,
and all notices shall be directed to the attention of its Secretary.
9. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The 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 the Employee may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified,
------
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the other
party shall be considered a waiver of any other condition or provision or of the
same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
---------------
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
supersedes any agreement of the same title and concerning similar subject matter
dated prior to the date of this Agreement, and by
-6-
<PAGE>
execution of this Agreement both parties agree that any such predecessor
agreement shall be deemed null and void.
(d) Choice of Law. The validity, interpretation, construction
-------------
and performance of this Agreement shall be governed by the laws of the State of
California without reference to conflict of laws provisions.
(e) Severability. If any term or provision of this Agreement
------------
or the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and
provisions to circumstances other than those as to which it is held invalid or
unenforceable, and a suitable and equitable term or provision shall be
substituted therefor to carry out, insofar as may be valid and enforceable, the
intent and purpose of the invalid or unenforceable term or provision.
(f) Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement may be settled at the option of either party by
binding arbitration in the County of Contra Costa, California, in accordance
with the rules of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having jurisdiction.
Punitive damages shall not be awarded.
(g) Legal Fees and Expenses. The parties shall each bear
-----------------------
their own expenses, legal fees and other fees incurred in connection with this
Agreement.
(h) No Assignment of Benefits. The rights of any person to
-------------------------
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (h) shall be
void.
(i) Employment Taxes. All payments made pursuant to this
----------------
Agreement will be subject to withholding of applicable income and employment
taxes.
(j) Assignment by Company. The Company may assign its rights
---------------------
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment. In
the case of any such assignment, the term "Company" when used in a section of
this Agreement shall mean the corporation that actually employs the Employee.
(k) 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.
-7-
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
KERAVISION, INC.
By:
------------------------------ ------------------------------------
Title:
---------------------------
-8-
<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 5, 1998, with respect to the
consolidated financial statements of KeraVision, Inc. included in its Annual
Report (Form 10-K) for the year ended December 31, 1997.
/S/ ERNST & YOUNG LLP
San Jose, California
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 2,574 8,291
<SECURITIES> 11,539 23,774
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 15,378 33,362
<PP&E> 4,267 3,722
<DEPRECIATION> (2,398) (1,746)
<TOTAL-ASSETS> 17,345 35,485
<CURRENT-LIABILITIES> 3,558 2,927
<BONDS> 0 0
0 0
0 0
<COMMON> 13 12
<OTHER-SE> 12,924 31,753
<TOTAL-LIABILITY-AND-EQUITY> 17,345 35,485
<SALES> 355 137
<TOTAL-REVENUES> 355 137
<CGS> 0 0
<TOTAL-COSTS> 20,880 15,137
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (19,396) (12,879)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (19,396) (12,879)
<EPS-PRIMARY> (1.55) (1.04)
<EPS-DILUTED> (1.55) (1.04)
</TABLE>
