<PAGE>
As filed with the Securities and Exchange Commission on August 10, 1999
Registration No. 333-82949
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------
KeraVision, Inc.
(Exact name of registrant as specified in its charter)
Delaware 3851 77-0328942
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
48630 Milmont Drive
Fremont, California 94538
(510) 353-3000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------
Thomas M. Loarie
Chairman, President and Chief Executive Officer
KeraVision, Inc.
48630 Milmont Drive
Fremont, California 94538
(510) 353-3000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------
Please send copies of all communications to:
Michael W. Hall, Esq. Peter Lillevand, Esq.
Laura I. Bushnell, Esq. Brett Cooper, Esq.
Latham & Watkins Orrick, Herrington & Sutcliffe LLP
135 Commonwealth Drive 400 Sansome Street
Menlo Park, California 94025 San Francisco, California 94111
(650) 328-4600 (415) 392-1122
Approximate date of commencement of the proposed sale to the public: As soon
as practicable after the effective date of the Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by U.S. federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the registration statement filed with the SEC relating to these securities is +
+effective. This prospectus is not an offer to sell these securities or our +
+solicitation of your offer to buy these securities in any jurisdiction where +
+that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--DATED AUGUST 10, 1999
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Prospectus
, 1999
[LOGO OF KERAVISION]
4,000,000 Shares of Common Stock
- --------------------------------------------------------------------------------
KeraVision: The Offering:
. KeraVision is offering 4,000,000 shares.
. KeraVision is develop-
ing a new category of . The underwriters have an option to purchase an
non-laser vision cor- additional 600,000 shares from KeraVision or an
rection products for existing stockholder to cover over-allotments.
the treatment of common
vision disorders, in- . There is an existing market for our shares. On
cluding myopia (near- July 21, 1999, the last reported sale price of
sightedness), hyperopia our common stock was $22.75 per share.
(farsightedness) and
astigmatism, to offer . Closing: , 1999
an alternative to eye-
glasses, contact lenses
and other vision cor-
rection surgical proce-
dures. Our first prod-
uct, Intacs(TM) corneal
ring segments, has been
approved by the FDA for
correcting mild myopia.
. KeraVision, Inc.
48630 Milmont Drive
Fremont, California 94538
(510) 353-3000
www.keravision.com
. Nasdaq Symbol: KERA
-----------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
--------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to KeraVision:
--------------------------------------------
</TABLE>
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 5.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Prudential Securities
SG Cowen
The undersigned is facilitating Internet distribution.
DLJdirect Inc.
<PAGE>
[Picture of an Intacs(TM) corneal ring segment held on a fingertip]
Intacs(TM) are made from a transparent polymer that has been widely used in
intraocular lenses since 1952.
[Bar chart showing the percentages of patients who achieved vision of 20/40 or
better, 20/25 or better, 20/20 or better and 20/16 or better, following the
Intacs procedure]
53% of KeraVision patients achieved vision of 20/16, 20/12 or 20/10 as measured
at month 12 following Intacs insertion.
[Picture of our Intacs(TM) logo]
Intacs(TM) is the first consumer branded vision correction surgery product.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 12
Dividend Policy.......................................................... 12
Price Range of Common Stock.............................................. 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business................................................................... 21
Management................................................................. 36
Principal Stockholders..................................................... 39
Description of Capital Stock............................................... 41
Underwriting............................................................... 45
Legal Matters.............................................................. 47
Experts.................................................................... 47
Where You Can Find More Information........................................ 48
Index to Financial Statements.............................................. F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information from this prospectus. To fully understand
this offering and its consequences to you, you should also read the more
detailed information and consolidated financial statements contained in this
prospectus and in the documents that we incorporate by reference into this
prospectus. Unless otherwise indicated, all information in this prospectus
assumes no exercise of the over-allotment option to purchase additional shares
of common stock granted to the underwriters. In this prospectus we will refer
to KeraVision, Inc. as "KeraVision," "we," "our" and "us."
KeraVision
Business
KeraVision is developing a new category of non-laser vision correction
products for the treatment of common vision disorders, including myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism, to offer an
alternative to eyeglasses, contact lenses and other vision correction surgical
procedures. Our first product, Intacs(TM) corneal ring segments, based on our
proprietary patented technology, has been approved by the FDA for correcting
mild myopia. Intacs corneal ring segments are the first surgical vision
correction technology to be approved by the FDA that is designed to permanently
correct a patient's vision while providing the option of removability. Intacs
corneal ring segments are composed of two thin half-circles of polymer material
that are inserted into the periphery of the cornea to reshape the curvature of
the cornea to correct vision. The polymer material has been used in intraocular
lenses to treat patients with cataracts since 1952. The Intacs insertion
process is a simple outpatient procedure that typically can be performed in
15 minutes or less. KeraVision believes that the Intacs corneal ring segment
technology is the first technology specifically designed to surgically treat
patients with low degrees of nearsightedness, a group estimated at
approximately 20 million people in the U.S. KeraVision is currently developing
other potential products to treat other vision correction disorders including
higher and lower levels of nearsightedness, as well as farsightedness and
astigmatism.
Recent Developments
Latest Financial Results. On July 15, 1999, we announced that our net sales
for the three months ended June 30, 1999 were $3.9 million compared to net
sales of $112,000 for the comparable 1998 period. This increase primarily
reflected purchases of instruments used to perform the procedure for the
placement of Intacs by the initial group of surgeons who participated in Intacs
training courses during the second quarter of 1999.
FDA Approval and Clinical Results. On April 9, 1999, KeraVision obtained FDA
approval to distribute and sell Intacs corneal ring segments in the United
States for the treatment of mild myopia in the range of -1.0 to -3.0 diopters
in patients who are 21 years of age or older, who have a stable refraction and
who have up to +1.0 diopter of astigmatism. Results from the clinical trials of
Intacs corneal ring segments indicate that 97% of the patients achieved vision
of 20/40 or better, the vision standard in most U.S. states for receiving a
driver's license without the need for corrective lenses. More significantly,
74% of the patients achieved vision of 20/20 or better and 53% achieved vision
of 20/16 or better as measured at 12 months following Intacs placement.
Surgeon Training. As of August 6, 1999 we have trained 319 surgeons to
perform the procedure for the placement of Intacs. In addition, KeraVision has
established sites to train surgeons in Atlanta, Houston, Kansas City,
Minneapolis, San Diego and Santa Monica.
Distribution Partnerships and Salesforce Expansion. In April 1999, we entered
into purchase and distribution agreements with three eye care services
companies that focus on surgical vision correction, including Laser Vision
Centers, Inc., one of the largest providers of vision correction surgery in the
U.S., as well as NovaMed Eyecare, Inc. and ARIS Vision, Inc. Under these
agreements, these companies have agreed to purchase Intacs and related
instrumentation. There are approximately 600 surgeons located throughout the
U.S. who are affiliated with these companies. In addition, since the beginning
of 1999 we have hired 11 direct sales representatives and four manufacturers'
representatives, significantly expanding our salesforce capabilities.
1
<PAGE>
Addition to Management. John Galantic, recently employed by KeraVision, has
agreed to accept the position of Chief Operating Officer of KeraVision pending
his election to this position by our board of directors.
New Product Development. In April 1997, KeraVision began a clinical trial
outside the United States using Intacs technology for the treatment of
hyperopia. With encouraging initial results obtained from 52 patient eyes in
the initial trial, we have initiated a second clinical trial at several
European clinical sites. As of June 30, 1999, 25 additional patient eyes were
enrolled in this expanded study.
Industry Background
The surgical vision correction market has experienced rapid growth since the
introduction of the first laser technology for vision correction in the late
1980's. The majority of this growth is attributable to the introduction of the
laser in-situ keratomileusis, or LASIK, procedure in 1996. LASIK involves
cutting and peeling back a thin layer of corneal tissue, allowing the surgeon
to apply laser pulses directly to the exposed cornea. The laser pulses
permanently remove corneal tissue to alter the shape of the cornea and correct
the patient's vision. As a result of the significantly reduced pain and visual
recovery period associated with this procedure relative to previously
introduced surgical vision correction procedures, the market for refractive
surgery has increased dramatically. The number of surgical vision correction
procedures in the United States has grown from approximately 108,000 procedures
in 1996 to approximately 450,000 procedures in 1998. Furthermore, industry
sources project that the number of surgical vision correction procedures
performed in 1999 will more than double to approximately 950,000. At a typical
price of $2,100 per procedure, based on industry estimates consumers will spend
nearly $2 billion in 1999 on vision correction surgery.
Intacs Technology
We have positioned our Intacs technology to address the growing market for
refractive surgery by offering an alternative to laser-based vision correction.
While laser-based technologies require the permanent removal of corneal tissue,
Intacs can be removed if desired. Patients' refractions return to preoperative
levels by three months following removal, in most instances. We believe that
the Intacs technology offers several potential benefits to patients including:
. long-term, convenient vision correction with predictable results
. rapid visual recovery
. a simple, minimally invasive outpatient procedure with minimal post-
operative pain in most cases
. easy to remove and replace in an outpatient procedure.
Strategy
We intend to commercialize our Intacs technology for the treatment of common
vision problems on a world-wide basis with an initial concentration on the U.S.
market for mild myopia. We began the U.S. product launch of Intacs for mild
myopia following FDA approval in April of this year. The product roll-out
tactics include the training of ophthalmic surgeons and monitoring of the
initial procedures performed by these surgeons, the integration of Intacs into
the practices of these surgeons, including office staff training and
optometrist outreach programs, and a public relations program to increase
consumer awareness of Intacs. The first marketing efforts are focused around
the ophthalmic surgeon and optometrist, to be followed later by additional
consumer awareness programs.
We are currently developing additional products based on our Intacs
technology platform to address other common vision problems, including expanded
ranges of myopia, myopia with higher levels of astigmatism, hyperopia, and pure
astigmatism. By using advanced development methods, including computer
simulations and tissue lab research, our strategy is to broaden our knowledge,
to continue to expand our patent coverage and to commence clinical trials with
the best designs possible to achieve commercialization.
2
<PAGE>
Our principal executive offices are located at:
KeraVision, Inc.
48630 Milmont Drive
Fremont, California 94538
(510) 353-3000
www.keravision.com
Our website is not part of this prospectus. KeraVision, Intacs, the
KeraVision and Intacs logos and keravision.com are registered trademarks or
trademarks of KeraVision, Inc., in the U.S. and in foreign countries. (C)1999
KeraVision, Inc. All rights reserved.
The Offering
<TABLE>
<C> <S>
Common stock offered by KeraVision.................. 4,000,000 shares
Common stock to be outstanding after this offering.. 18,078,476 shares
Use of proceeds..................................... We intend to use the net
proceeds of this offering
for the expansion of our
sales force and marketing
effort associated with
the U.S. launch of
Intacs, the continued
development and clinical
testing of additional
products based on our
Intacs technology, the
prepayment of short-term
debt and for working
capital and general
corporate purposes.
Dividend policy..................................... We intend to retain any
future earnings and we do
not anticipate paying
dividends on our common
stock in the foreseeable
future.
Risk factors........................................ For a discussion of
certain considerations
relevant to an investment
in our common stock, see
"Risk Factors."
Nasdaq National Market symbol....................... KERA
</TABLE>
The number of shares of common stock to be outstanding after this offering is
based on the 14,078,476 shares outstanding at June 30, 1999 and the 4,000,000
shares of common stock being sold by us in this offering and excludes:
. 1,579,778 shares of common stock issuable upon exercise of options
outstanding at June 30, 1999 at a weighted average exercise price of
$7.43 per share and 2,268,719 shares reserved for future grants under our
stock option plans;
. 55,492 shares of common stock issuable upon exercise of a warrant held by
a financial institution with an exercise price of $10.81 per share;
. 2,122,856 shares issuable upon conversion of the shares of Series B
preferred stock outstanding as of June 30, 1999; and
. any shares of common stock that may be sold by us or an existing
stockholder to the underwriters pursuant to the over-allotment option.
3
<PAGE>
Summary Consolidated Financial Data
In the table below, we provide you with summary historical financial data of
KeraVision, Inc. We have prepared this information using the consolidated
financial statements of KeraVision, Inc. for the three years ended December 31,
1998 and the six-month periods ended June 30, 1998 and 1999. The financial
statements for the three years ended December 31, 1998 have been audited. The
financial statements for the six-month periods ended June 30, 1998 and 1999
have not been audited.
When you read this summary historical financial data, it is important that
you read it along with the historical financial statements and related notes in
our annual and interim financial statements included and incorporated by
reference in this prospectus, as well as the section titled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------- ------------------
1996 1997 1998 1998 1999
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net sales................... $ 137 $ 355 $ 835 $ 264 $ 4,381
Costs and expenses:
Cost of sales and
manufacturing expenses.... 319 3,701 4,386 1,949 4,615
Research and development... 10,888 10,774 11,356 6,016 4,201
Selling, general and
administrative............ 3,930 6,405 9,693 3,652 8,171
-------- -------- -------- -------- --------
Total costs and expenses.... 15,137 20,880 25,435 11,617 16,987
-------- -------- -------- -------- --------
Loss from operations........ (15,000) (20,525) (24,600) (11,353) (12,606)
Interest income (expense)
and other, net............. 2,121 1,129 563 179 (315)
-------- -------- -------- -------- --------
Net loss.................... $(12,879) $(19,396) $(24,037) $(11,174) $(12,921)
======== ======== ======== ======== ========
Net loss applicable to
common stockholders........ $(12,879) $(19,396) $(27,414) $(13,785) $(13,697)
======== ======== ======== ======== ========
Basic and diluted net loss
per share applicable to
common stockholders........ $ (1.04) $ (1.55) $ (2.16) $ (1.09) $ (1.05)
======== ======== ======== ======== ========
Shares used in calculation
of net loss per share...... 12,342 12,528 12,686 12,655 13,088
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
December 31, ----------------------
1998 Actual As Adjusted
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data
Cash, cash equivalents and available-for-
sale investments......................... $ 7,728 $ 8,330 $ 87,920
Working capital........................... 4,915 504 84,518
Total assets.............................. 11,184 13,544 93,134
Short-term debt........................... -- 4,424 --
Capital lease obligations, noncurrent..... 821 666 666
Series B redeemable convertible preferred
stock.................................... 17,489 18,265 18,265
Accumulated deficit....................... (90,092) (103,789) (104,665)
Total stockholders' equity (net capital
deficiency).............................. (11,447) (15,984) 68,030
</TABLE>
The as adjusted amounts reflect the issuance by KeraVision of 4,000,000
shares at an assumed offering price of $22.75 per share and the application of
the net proceeds from this offering.
4
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors in evaluating
whether to participate in this offering. You should also consider these risk
factors in conjunction with the other information included or incorporated by
reference in this prospectus. They could materially and adversely affect our
financial condition and results of operation. They could cause the trading
price of our stock to decline, and you might lose all or part of your
investment.
These risks and uncertainties are not the only ones we face. Others that we
do not know about now, or that we do not now think are important, may impair
our business or the trading price of our stock.
KeraVision is incurring operating losses which may result in a substantial
reduction over time of the value of KeraVision shares you purchase in this
offering.
KeraVision has generated only limited revenues to date and has experienced
significant operating losses every year since its inception in 1986. We expect
to continue to experience increasing expenses as we expand our sales and
marketing efforts, and we expect to continue to incur substantial operating
losses until sufficient revenues can be generated to offset these expenses. We
cannot predict the amount of our future operating losses or the length of time
required for us to achieve and sustain profitability.
KeraVision may not be able to execute its business plan if a significant amount
of capital is not available to it in the near future.
KeraVision will be required to commit substantial resources to establish
production, marketing and sales capabilities to successfully commercialize
Intacs. In addition, KeraVision will be required to commit additional resources
to conducting the research and development, clinical studies and regulatory
activities necessary to bring additional products to market. We currently
anticipate that cash from operations and the net proceeds from this offering
will be sufficient to fund KeraVision's operations at least through December
31, 2001.
If this offering is not completed, we will be required to seek other sources
for funding, and we cannot assure you that other sources of funding will be
available when needed or available on terms favorable to KeraVision. If we fail
to obtain sufficient funds, we may need to delay, scale back or eliminate some
or all of our sales and marketing efforts, research and product development
programs, clinical studies or regulatory activities or license third parties to
commercialize products or technologies that we would otherwise seek to develop.
Such actions would adversely affect our business and financial condition.
KeraVision needs market acceptance of Intacs corneal ring segments and other
products to be successful.
KeraVision's future performance depends upon the degree of market acceptance
of Intacs for correction of myopia, and on KeraVision's ability to successfully
manufacture, market, deliver and support Intacs. We cannot assure you that
Intacs corneal ring segments or any future product that KeraVision develops
will achieve or maintain acceptance in their target markets. To be successful,
Intacs corneal ring segments will have to be accepted by ophthalmic surgeons as
well as by patients. Until recently, KeraVision has sold its product primarily
in Canada, France and Germany and generated only limited revenues. KeraVision
has recently begun the sale of Intacs corneal ring segments in the United
States. Many surgeons have already invested significant time and resources in
developing expertise in other corrective ophthalmic surgical techniques and may
be unwilling to devote the time and resources necessary to incorporate the
procedure for Intacs placement into their practices.
We intend to market our products to people whose vision can be corrected with
eyeglasses or contact lenses. We cannot assure you that these persons will
elect to undergo surgical insertion of Intacs when nonsurgical vision-
correction alternatives are available. KeraVision believes that the inability
of some patients to afford the procedure and the psychological aversion of some
patients to refractive surgery may further limit the potential market for
Intacs. The extent of, and rate at which, Intacs corneal ring segments and our
future
5
<PAGE>
products achieve market acceptance and penetration is a function of many
variables including price, safety, efficacy, reliability and sales and
marketing efforts.
We have limited sales and marketing experience and may not be able to
successfully sell or market our products.
We have only sold products in the United States since April 1999, in Canada
since mid-1998 and in Europe since late 1996 and to date have generated only
limited revenues. We recently entered into several distribution agreements and
also plan to sell and market our products through a direct sales force. To
successfully market and sell our products, we will need to develop a sales
force which has established relationships with surgeons and which has consumer
marketing skills. We will need significant resources to recruit and retain
skilled sales management, direct sales persons and distributors. To the extent
that KeraVision has established or enters into distribution arrangements for
the sale of its products, KeraVision is and will be dependent on the efforts of
third parties. We cannot assure you that our sales and marketing efforts will
be successful.
KeraVision has limited manufacturing experience and may be unable to develop
commercial-scale manufacturing capabilities.
To be successful, we must manufacture our products and potential products in
commercial quantities in compliance with regulatory requirements at acceptable
costs. At the present time, we have limited manufacturing experience and
capabilities. We cannot assure you that KeraVision will be able to develop
commercial-scale manufacturing capabilities at acceptable costs or enter into
agreements with third parties with respect to these activities. Production of
commercial-scale quantities will involve technical challenges for us. As we
establish our own commercial-scale manufacturing capability for Intacs corneal
ring segments, we could incur significant scale-up expenses including the need
to expand our facilities and hire additional personnel. We may seek
collaborative arrangements with other companies to manufacture products and
potential products, including Intacs corneal ring segments. If we are dependent
upon third parties for the manufacture of our products, our profit margins and
ability to develop and deliver such products on a timely basis may be adversely
affected. Moreover, we cannot assure you that such third parties will
adequately perform, and any failures by these parties may impair our ability to
deliver products on a timely basis or otherwise impair our competitive
position.
KeraVision may not be able to obtain additional regulatory approvals or
maintain current approvals, which could delay the sale and distribution of
current and future products and adversely affect our revenues.
The research, manufacture, sale and distribution of medical devices,
including KeraVision's current and planned products, is subject to regulations
imposed by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies. Securing regulatory approval for
KeraVision's additional products and new uses of existing products may entail a
lengthy, expensive and uncertain process involving, for example, submission to
the FDA of extensive clinical data and other supporting information. Unless an
exemption applies, each medical device that we wish to market in the U.S. must
receive either "510(k) clearance" or "PMA approval" in advance from the FDA
pursuant to the Federal Food, Drug, and Cosmetic Act. The current PMA approval
for Intacs is limited to mild myopia. A separate PMA approval or PMA supplement
approval supported by clinical data will be required to expand the indications
for use of Intacs to new ranges of myopia, and to hyperopia and astigmatism.
To generate revenue growth, KeraVision must continue to develop, obtain
regulatory approval for, and successfully commercialize new products. The time
frame to develop and successfully commercialize additional products and
modifications of existing products is long and uncertain. Although KeraVision
has received regulatory approval to market Intacs corneal ring segments in the
United States, the European Union and
6
<PAGE>
Canada, we cannot assure you that we will successfully complete our efforts to
secure regulatory approval for this product to be marketed elsewhere.
Furthermore, we cannot assure you that KeraVision will successfully obtain
regulatory approval in the U.S. or elsewhere for marketing our future new or
modified products or indications.
Having received approval from the FDA for the correction of mild myopia,
Intacs are subject to additional post-market testing, extensive record keeping
and other device follow up required by the FDA and other regulatory agencies.
In addition, to the extent KeraVision continues to perform the manufacturing
function, we will be required to adhere to additional FDA requirements for the
manufacture and distribution of Intacs. KeraVision's ongoing compliance with
the Quality System Regulation, labeling and other applicable regulatory
requirements is monitored through periodic inspections by federal and state
agencies, including the FDA, and comparable agencies in other countries.
Current FDA enforcement policy strictly prohibits the marketing of medical
devices for unapproved ("off label") uses. Product approvals can be withdrawn
due to unforeseen safety or effectiveness problems following initial marketing.
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. Any such FDA enforcement actions could have a material
adverse effect on KeraVision's business, financial condition and results of
operations.
KeraVision will need to find a new supplier for the raw material we use in
manufacturing our products.
Our sole supplier of polymethylmethacrylate (PMMA), the polymer raw material
used in manufacturing Intacs, no longer provides the particular material we use
for Intacs, and has notified us that the material may be purchased by special
order only. We currently have what we estimate is at least a three-year supply
of PMMA. We have not yet made arrangements to obtain additional PMMA beyond
this supply. We have stored our current supply of PMMA in two separate
locations. Should the PMMA at either or both of these locations be damaged or
destroyed, our ability to continue to manufacture and distribute Intacs corneal
ring segments or additional products may be seriously impaired. We would be
required to find an alternate source of PMMA or a similar polymer material, or
commence manufacturing the raw material ourselves. We would need to obtain FDA
regulatory approval for the use of new raw materials in any of our products or
to qualify a new PMMA supplier. If we elected to manufacture PMMA ourselves, we
would need to establish manufacturing facilities for this purpose, hire
additional personnel, and obtain additional regulatory approvals, processes
which could take up to several years and require additional expenditures. We
cannot assure you that:
. our supplier will be able to fulfill future special orders for PMMA;
. interruptions in supplies will not occur in the future;
. we will be able to obtain a new source for the supply of PMMA or
establish facilities to manufacture PMMA, both of which would require
approval of additional regulatory submissions; or
. our current supply will last as long as we anticipate.
In the event we are unable to obtain alternative supplies of materials upon
the depletion of our current supply we will experience delays in the production
of Intacs and will need to obtain alternate materials. If we are required to
manufacture Intacs corneal ring segments using alternate materials we will also
be required to obtain FDA approval of this material, a process that could take
several years and cause us to incur substantial costs. Furthermore, we cannot
assure you that we will be able to obtain FDA approval of a new material at
all. Any interruption of supply would have a material adverse effect on
KeraVision's ability to manufacture Intacs corneal ring segments or future
products which could have a material adverse effect on our business, financial
condition or results of operations.
KeraVision may not have the ability to obtain and maintain patents on Intacs
and our technology which could permit others to develop similar products or
more easily compete with our business.
KeraVision's commercial success depends in part on acquiring and maintaining
patent and trade secret protection of Intacs technology, Intacs corneal ring
segments and any other potential products we seek to
7
<PAGE>
develop. We cannot assure you that KeraVision will be successful in obtaining
additional necessary patents or license rights; KeraVision's processes or
products will not infringe patents or proprietary rights of others; or that any
issued patents will provide KeraVision with any competitive advantages or will
withstand challenges by third parties.
KeraVision is aware of ongoing academic research on both solid and injectable
forms of corneal inserts. We cannot assure you that others will not
independently develop similar products or design products that circumvent any
patents used by KeraVision.
In addition, KeraVision could incur substantial costs in defending against
patent litigation or in bringing suits to protect its patents against
infringement. If the outcome of any such litigation is adverse to KeraVision,
our business could be adversely affected.
KeraVision also relies on trade secrets and proprietary knowledge which it
seeks to protect by confidentiality agreements with its employees, consultants,
investigators and advisors. We cannot assure you that these agreements will not
be breached, that KeraVision will have adequate remedies for any breach, or
that competitors will not otherwise discover KeraVision's trade secrets and
proprietary knowledge.
KeraVision may not be able to successfully compete in the highly competitive
field of vision correction.
KeraVision is engaged in a rapidly evolving field. Many public and private
companies, universities and research laboratories engage in activities relating
to research on vision correction alternatives. Our competitors could develop
technologies, procedures or products that are more effective or economical than
those KeraVision is developing or that would render our technology and products
obsolete or noncompetitive.
Most of the other companies in the vision correction market are larger and
better financed than KeraVision. Several companies have received approval to
market their laser systems for refractive surgery in the United States,
including VISX, Summit Technology, Inc. and Nidek, and others may receive
similar approvals in the future.
These companies and institutions represent significant long-term competition
for KeraVision. In comparison to KeraVision, they may have:
. substantially greater resources and better facilities;
. larger research and development staffs and more experience in research
and development;
. more experience in preclinical and human clinical studies;
. more experience obtaining regulatory approval;
. more experience manufacturing medical device products; and
. more experience in marketing, selling and developing a market for medical
device products.
Moreover, several companies are developing other non-laser approaches to
vision correction, including the use of radio frequency energy to reshape the
cornea, phakic intraocular lenses, and the use of enzymes to alter the shape of
the cornea. See "Business--Competition."
Long-term follow-up data may not demonstrate that Intacs are safe and
effective.
The Intacs technology is a relatively new technology, clinical data for which
dates back to 1991. KeraVision has developed only limited long-term clinical
data to date on the safety and efficacy of Intacs in correcting mild myopia.
The FDA is requiring KeraVision to provide data to assess the effects of Intacs
on the corneal endothelium after two years of implantation. If these and other
long-term data show that Intacs are not safe and effective, our ability to
commercialize Intacs may be adversely affected. We cannot assure you that
Intacs will prove to be safe or effective over the long term in correcting
vision. If Intacs fail to perform as anticipated our revenue growth will be
limited.
8
<PAGE>
Complications associated with Intacs may affect KeraVision's ability to gain
market acceptance for Intacs or to obtain additional regulatory approvals.
Some patients who have received Intacs corneal ring segments have experienced
various complications. These complications include infection, shallow
placement, temporary loss of correctable vision, anterior chamber perforation,
overcorrection, reduction in central corneal sensation, difficulty with night
vision, undercorrection, induced astigmatism, blurry vision, double vision,
halos, glare, corneal blood vessels and fluctuating distance vision. We cannot
assure you that these complications or side effects will not be serious or
lasting, will not impair or preclude acceptance of the product by patients or
ophthalmologists, will not preclude KeraVision from obtaining regulatory
approval for additional products or will not cause withdrawal of approval for
Intacs corneal ring segments.
In addition, negative publicity surrounding complications associated with
other surgical vision correction procedures could negatively impact market
acceptance for our product.
Our ability to operate our business may be adversely affected if we are unable
to retain our key personnel or to hire additional key personnel.
Our success depends in large part on our ability to attract and retain key
management, technical, manufacturing, sales and marketing and other operating
personnel. We cannot assure you that KeraVision will be able to attract and
retain the qualified personnel or develop the expertise in these areas as
needed for our business. The loss of the services of one or more members of
these groups or the inability to hire additional personnel and develop
expertise as needed could limit our ability to successfully commercialize
Intacs and additional products. Such persons are in high demand and often
receive competing employment offers.
KeraVision is subject to the risk of product liability litigation, and product
liability insurance may be unavailable.
KeraVision faces a risk of exposure to product liability claims and product
recalls if the use of Intacs corneal ring segments or any future product is
alleged to have resulted in serious adverse effects. We cannot assure you that
the precautions we take with respect to these risks will prevent KeraVision
from incurring significant liability. We also cannot assure you that our
current product liability insurance policies will cover any or all material
liabilities or that the coverage we have obtained will continue to be available
at an acceptable cost, if at all, before or after commercialization of any of
KeraVision's products. 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 KeraVision's business and
financial condition.
Year 2000 computer problems may affect KeraVision's computer systems and its
ability to operate.
The Year 2000 computer problem is caused by the inability of some software
and hardware to handle dates after December 31, 1999. Based on recent
assessments, we have determined that we would be required to replace a small
portion of our software so that those systems will properly utilize dates
beyond December 31, 1999. We have determined that all of our critical business
systems are already Year 2000 compliant.
KeraVision is actively working with critical suppliers of products and
services to determine that the suppliers' operations and the products and
services they provide are Year 2000 compliant and to monitor their progress
toward Year 2000 compliance. However, some of our computer systems or those of
our suppliers could fail or miscalculation could occur, causing disruptions in
our operations, including a temporary inability to process transactions, send
invoices or engage in similar, normal business activities.
We cannot assure you that any system of other companies on which KeraVision's
systems rely will be Year 2000 compliant in a timely fashion and would not have
an adverse effect on KeraVision's systems.
9
<PAGE>
Our stock price could be volatile.
Within the last 12 months our common stock has traded between a range of
$3.31 and $29.63 per share. The market price of our common stock could continue
to fluctuate substantially due to a variety of factors, including:
. quarterly fluctuations in results of our operations;
. our ability to successfully commercialize Intacs corneal ring segments;
. announcements regarding results of regulatory approval filings, clinical
studies or other testing, technological innovations or new commercial
products by KeraVision or our competitors;
. developments concerning government regulations, proprietary rights or
public concern as to the safety of technology;
. market reaction to acquisitions and trends in sales, marketing, and
research and development;
. changes in earnings estimates by analysts;
. loss of key personnel;
. sales of common stock by existing stockholders; and
. economic and political conditions.
The market price for our common stock may also be affected by our ability to
meet analysts' expectations. Any failure to meet such expectations, even
slightly, could have an adverse effect on the market price of our common stock.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to the operating
performance of these companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against the company. If similar litigation were
instituted against us, it could result in substantial costs and a diversion of
our management's attention and resources, which could have an adverse effect on
our business, results of operations and financial condition. See "Price Range
of Common Stock."
Future sales by our current stockholders may cause the market price of our
stock to decline.
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of common stock in the
market after this offering, or the perception that these sales may occur. These
sales also might make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. A registration
statement on Form S-3 is currently on file with the SEC pursuant to which the
holders of our Series B preferred stock may publicly resell the shares of our
common stock that they will receive at the time they convert their shares of
Series B preferred stock.
Forward-looking statements are inherently uncertain.
We have made statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere in this
prospectus that are forward-looking statements. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," and "continue" or similar words. Forward-
looking statements may also use different phrases. Forward-looking statements
address, among other things: (1) our future expectations; (2) projections of
our future results of operations or of our financial condition; or (3) our
"forward-looking" information.
10
<PAGE>
We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or which we do not fully control that could cause actual results to
differ materially from those expressed or implied by our forward-looking
statements, including:
. our incurrence of substantial operating losses for periods longer than
currently expected and need for significant additional capital beyond the
amounts currently anticipated;
. our inability to manage our growth and successfully launch our products
and expand in new and existing markets;
. market acceptance of Intacs and the level of demand for our products;
. compliance with government standards and the obtaining of necessary
approvals;
. changes in general economic and business conditions;
. changes in our business strategies; and
. other factors discussed under "Risk Factors."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to KeraVision from the sale of the 4,000,000 shares of
common stock, at an assumed public offering price of $22.75 per share, are
estimated to be approximately $84,890,000, or $97,721,000 if the underwriters'
over-allotment option is exercised in full and all of the over-allotment shares
are issued and sold by KeraVision, after deducting underwriting fees and
estimated expenses of this offering. We expect to use a significant amount of
the proceeds from this offering for our sales and marketing efforts related to
the U.S. launch of Intacs, the continued development and clinical testing of
products based on the Intacs technology, prepayment of short-term debt
described below, and the remainder for working capital and other general
corporate purposes. Some of the net proceeds may also be used to fund
acquisitions. We have no current plans, agreements or commitments with respect
to any acquisition, and we are not currently engaged in any negotiations with
respect to any such transaction.
We plan to use approximately $5.3 million of the net proceeds from this
offering to prepay short-term debt. At June 30, 1999, the outstanding balance
under our credit facility was $5.0 million (carried at $4.4 million, net of
related discount). These borrowings bear interest at 12.6% per annum, payable
monthly. This loan matures on September 30, 2001. As a result of this
prepayment, we expect to record a charge of approximately $876,000 in the
quarter in which the prepayment is made, which will be reflected as an
extraordinary item. This charge will include the prepayment premium and the
write-off of the remaining discount on the debt related to the fair value of
warrants issued in conjunction with the borrowing.
The amounts and timing of our actual expenditures will depend upon numerous
factors, including the level of our research and development efforts and sales
and marketing activities, and the amount of cash generated by our operations.
The sales and marketing needs directly relate to the market development efforts
required to launch Intacs and to build initial product sales, primarily in the
United States. In addition, we expect to invest significantly in our research
and development activities including patent development and filing costs,
research and development of potential new products and product enhancements,
and costs associated with clinical trials.
The foregoing discussion represents our best estimate of our allocation of
the net proceeds of this offering based upon our current plans and estimates
regarding our anticipated expenditures. Actual expenditures may vary
substantially from these estimates and we may find it necessary or advisable to
reallocate the net proceeds within the above-described categories or for other
purposes. Pending application of the net proceeds as described above, we intend
to invest the net proceeds of this offering in short-term, investment grade,
interest bearing securities.
DIVIDEND POLICY
Common stock. We have never paid cash dividends on our common stock and have
no plans to do so in the foreseeable future. In addition, the terms of our
credit facility and our Series B preferred stock contain restrictions on our
ability to pay cash dividends on our common stock. The declaration and payment
of any dividends in the future will be determined by our board of directors, at
its discretion, and will depend on a number of factors, including our earnings,
capital requirements and overall financial condition.
Series B preferred stock. To date, we have paid dividends on our Series B
preferred stock by issuing additional shares of Series B preferred stock. In
the future, we may elect to pay dividends on the Series B preferred stock in
cash or additional shares of Series B preferred stock.
12
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock has been listed on The Nasdaq National Market since July
1995. The trading symbol for our common stock is "KERA." The following table
sets forth, for the periods indicated, the high and low sales prices for our
common stock as reported on The Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Year Ended December 31, 1997
First Quarter............................................... $15.00 $10.00
Second Quarter.............................................. 10.75 6.63
Third Quarter............................................... 10.63 6.63
Fourth Quarter.............................................. 8.63 5.00
Year Ended December 31, 1998
First Quarter............................................... $ 8.25 $ 4.75
Second Quarter.............................................. 10.63 7.25
Third Quarter............................................... 8.06 3.31
Fourth Quarter.............................................. 14.63 3.69
Year Ended December 31, 1999
First Quarter............................................... $18.50 $10.50
Second Quarter.............................................. 17.50 8.25
Third Quarter (through July 21, 1999)....................... 29.63 15.75
</TABLE>
The last sale price of the common stock on The Nasdaq National Market on July
21, 1999 was $22.75 per share. As of July 7, 1999, the Company had 338
stockholders of record.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company:
. on an actual basis at June 30, 1999, and
. as adjusted to reflect this offering and the use of the net proceeds of
this offering.
You should read this table in conjunction with the consolidated financial
statements and the notes to those statements and the other financial
information included or incorporated by reference in this prospectus. The table
does not include the 1,579,778 shares of common stock issuable upon exercise of
stock options outstanding as of June 30, 1999 at a weighted average exercise
price of $7.43 per share, or the exercise of a warrant covering 55,492 shares
of common stock at an exercise price of $10.81 per share.
<TABLE>
<CAPTION>
At June 30, 1999
----------------------
Actual As Adjusted
(in thousands)
<S> <C> <C>
Short-term debt......................................... $ 4,424 $ --
========= =========
Capital lease obligations, less current portion......... $ 666 $ 666
Series B redeemable convertible preferred stock, $.001
par value; 662,500 shares authorized; 530,714 shares
issued and outstanding actual and as adjusted.......... 18,265 18,265
Stockholders' equity (net capital deficiency):
Common stock, $.001 par value; 30,000,000 shares
authorized; 14,078,476 shares issued and outstanding
actual, and 18,078,476 shares issued and outstanding
as adjusted........................................... 14 18
Additional paid-in capital............................. 89,257 174,143
Accumulated other comprehensive income................. 107 107
Accumulated deficit.................................... (103,789) (104,665)
Notes receivable from stockholders..................... (1,573) (1,573)
--------- ---------
Total stockholders' equity (net capital deficiency).... (15,984) 68,030
--------- ---------
Total capitalization................................ $ 2,947 $ 86,961
========= =========
</TABLE>
14
<PAGE>
DILUTION
Purchasers of the common stock offered hereby will experience immediate and
substantial dilution in the net tangible book value per share of their common
stock. At June 30, 1999, our net tangible book value (deficiency) was
approximately $(16.0) million, or $(1.14) per share of common stock. The net
tangible book value (deficiency) per share is equal to our total tangible
assets less total liabilities and Series B redeemable convertible preferred
stock, divided by the number of shares of common stock outstanding at June 30,
1999. After giving effect to the sale of 4,000,000 shares at an assumed initial
public offering price of $22.75 per share and after deducting underwriting fees
and other expenses of this offering, our pro forma net tangible book value at
June 30, 1999 would have been approximately $68.0 million, or $3.76 per share.
This represents an immediate increase in pro forma net tangible book value of
$4.90 per share to existing stockholders and an immediate and substantial
dilution of $18.99 per share to new investors purchasing shares of common stock
in this offering. Dilution to new investors is determined by subtracting pro
forma net tangible book value per share of common stock after giving effect to
this offering from the price to be paid by new investors in this offering for a
share of common stock. The following table illustrates the per share dilution
to investors in this offering:
<TABLE>
<CAPTION>
Per Share
<S> <C> <C>
Assumed offering price........................................... $22.75
Net tangible book value (deficiency) as of June 30, 1999....... $(1.14)
Increase attributable to new investors in this offering........ 4.90
------
Pro forma net tangible book value after this offering............ 3.76
------
Dilution to new investors in this offering....................... $18.99
======
</TABLE>
The following table summarizes on a pro forma basis as of June 30, 1999,
after giving effect to this offering, the number of shares of common stock
purchased from us, the total consideration paid to us and the average
consideration paid per share by the existing stockholders and by the new
investors in this offering:
. excluding the effect of 978,498 shares issued in connection with the
acquisition of Transcend Therapeutics, Inc. in May 1999; and
. including the effect of 667,295 shares issued in exchange for stockholder
notes receivable of $803,000.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ----------------------
Amount Average Price
Number Percent (in thousands) Percent Per Share
<S> <C> <C> <C> <C> <C>
Existing stockholders... 13,099,978 77% $ 83,766 48% $ 6.39
Investors in this
offering............... 4,000,000 23 91,000 52 22.75
---------- --- -------- ---
Total................. 17,099,978 100% $174,766 100% 10.22
========== === ======== ===
</TABLE>
The foregoing tables are based on the number of shares of common stock
outstanding as of June 30, 1999 and exclude:
. 1,579,778 shares of common stock issuable upon exercise of options
outstanding at June 30, 1999 at a weighted average exercise price of
$7.43 per share and 2,268,719 shares reserved for future grants under our
stock option plans;
. 55,492 shares of common stock issuable upon exercise of a warrant held by
a financial institution with an exercise price of $10.81 per share;
. 2,122,856 shares issuable upon conversion of the Series B preferred
stock; and
. any shares of common stock that may be sold by us or an existing
stockholder to the underwriters pursuant to the over-allotment option.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
In the table below, we provide you with summary historical financial data of
KeraVision, Inc. We have prepared this information using the consolidated
financial statements of KeraVision, Inc. for the five years ended December 31,
1998 and the six-month periods ended June 30, 1998 and 1999. The financial
statements for the five years ended December 31, 1998 have been audited. The
financial statements for the six-month periods ended June 30, 1998 and 1999
have not been audited.
When you read this summary historical financial data, it is important that
you read it along with the historical financial statements and related notes in
our annual and interim financial statements included or incorporated by
reference in this prospectus, as well as the section titled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data
Net sales............... $ -- $ -- $ 137 $ 355 $ 835 $ 264 $ 4,381
Costs and expenses:
Cost of sales and
manufacturing
expenses.............. -- -- 319 3,701 4,386 1,949 4,615
Research and
development........... 5,146 6,527 10,888 10,774 11,356 6,016 4,201
Selling, general and
administrative........ 1,262 1,725 3,930 6,405 9,693 3,652 8,171
------- ------- -------- -------- -------- -------- --------
Total costs and
expenses............... 6,408 8,252 15,137 20,880 25,435 11,617 16,987
------- ------- -------- -------- -------- -------- --------
Loss from operations.... (6,408) (8,252) (15,000) (20,525) (24,600) (11,353) (12,606)
Interest income
(expense) and other,
net.................... 311 1,146 2,121 1,129 563 179 (315)
------- ------- -------- -------- -------- -------- --------
Net loss................ $(6,097) $(7,106) $(12,879) $(19,396) $(24,037) $(11,174) $(12,921)
======= ======= ======== ======== ======== ======== ========
Net loss applicable to
common stockholders.... $(6,097) (7,106) $(12,879) $(19,396) $(27,414) $(13,785) $(13,697)
======= ======= ======== ======== ======== ======== ========
Basic and diluted net
loss per share
applicable to common
stockholders........... $(4.52) $(1.05) $ (1.04) $ (1.55) $ (2.16) $ (1.09) $ (1.05)
======= ======= ======== ======== ======== ======== ========
Shares used in
calculation of net loss
per share.............. 1,348 6,757 12,342 12,528 12,686 12,655 13,088
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------- June 30,
1994 1995 1996 1997 1998 1999
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash, cash equivalents
and available-for-sale
investments............ $5,909 $44,703 $ 32,065 $ 14,113 $ 7,728 $ 8,330
Working capital......... 4,935 43,205 30,435 11,820 4,915 504
Total assets............ 6,934 45,919 35,485 17,345 11,184 13,544
Capital lease
obligations,
noncurrent............. 210 114 793 850 821 666
Series B redeemable
convertible preferred
stock.................. 27,844 -- -- -- 17,489 18,265
Accumulated deficit..... (23,440) (30,403) (43,282) (62,678) (90,092) (103,789)
Total stockholders'
equity (net capital
deficiency)............ (22,144) 44,035 31,765 12,937 (11,447) (15,984)
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Overview
Since its founding in November 1986, KeraVision has been engaged in the
research and development of technologies for surgical correction of vision
disorders. Although KeraVision recorded its first revenues in the quarter ended
December 31, 1996, we expect to continue to incur substantial losses until
sufficient revenues can be generated to offset expenses. Given the
uncertainties in developing a market for a new product, we may not be able to
achieve or sustain significant revenue growth in the foreseeable future.
Furthermore, we expect our overall expenses to increase as our sales and
marketing activities grow.
On April 9, 1999, KeraVision obtained FDA approval to distribute and sell
Intacs in the United States for the treatment of mild myopia in the range of -
1.0 to -3.0 diopters in patients who are 21 years of age or older, who have a
stable refraction and who have up to +1.0 diopter of astigmatism. We are
currently conducting a Phase III clinical trial to expand our approved range of
indication for myopia to include -0.75 to -1.0 diopter and -3.1 to -4.5
diopters. In May 1998, we began limited commercial sales in Canada following
regulatory approval to sell Intacs to treat myopia in the range of -1.0 to -5.0
diopters. In late 1996, we were granted the right to affix the CE mark on
Intacs for myopia which allows KeraVision to sell products to treat myopia 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
Intacs 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 Intacs, must be
cleared or approved by the FDA. Securing FDA approvals and clearances requires
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 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.
We cannot be sure that we will achieve significant revenues from sales of
Intacs corneal ring segments or any other potential products or become
profitable. Although KeraVision has received approval to sell Intacs corneal
ring segments in the United States, the European Union and Canada, we cannot be
sure that Intacs will prove to be safe or effective over the long term in
correcting vision, that Intacs will perform in the manner we anticipate or that
Intacs corneal ring segments or any other product developed by us will be
commercially successful.
Results of Operations
Six Months Ended June 30, 1999 and 1998
Net sales for the six-month period ended June 30, 1999 totaled $4.4 million,
an increase of $4.1 million from $264,000 for the six-month period ended June
30, 1998. The increase in net sales primarily reflected the initial shipment of
instrument kits to surgeons subsequent to their completion of training in the
Intacs placement procedure during the second quarter of 1999. Each kit includes
two sets of proprietary instruments to perform the Intacs placement procedure
and a supply of 18 Intacs corneal ring segments. The predominant portion of the
revenues received from the sale of the kits was attributable to the proprietary
instruments. Significant growth of our net sales will be dependent upon our
ability to sell Intacs corneal ring segments in increasing volumes.
Cost of sales and manufacturing expenses totaled $4.6 million in the 1999
period as compared to $1.9 million in the 1998 period. The increase in cost of
sales and manufacturing expenses reflected higher fixed costs associated with
the establishment of our manufacturing operations and higher variable costs as
a result of higher net sales.
17
<PAGE>
Research and development expenses, which include clinical and regulatory
expenses, for the 1999 period were $4.2 million, which represented a decrease
of $1.8 million from the 1998 period. The decrease was primarily due to reduced
clinical trial costs as a result of the completion of various studies, in
addition to reduced legal expenses related to patents.
Selling, general and administrative expenses were $8.2 million in the 1999
period, which represented an increase of $4.5 million from the 1998 period,
primarily due to increased marketing efforts related to market development in
the U.S. and Canada.
Interest income (expense) and other, net was $(315,000) in the 1999 period,
as compared to $179,000 in the 1998 period. The 1999 amount reflected a lower
level of interest income due to lower cash balances and a higher level of
interest expense reflecting a higher level of borrowings.
The net loss applicable to common stockholders for the 1999 period was $13.7
million versus $13.8 million for the 1998 period. Net loss applicable to common
stockholders included the effect of dividends, including deemed dividends, of
$776,000 and $2.6 million to preferred stockholders for the 1999 and 1998
periods, respectively.
Years Ended December 31, 1998 and 1997
Net sales for 1998 increased to $835,000 from $355,000 in 1997, primarily as
a result of increased unit shipments associated with KeraVision's limited
product launch into the Canadian market.
Cost of sales and manufacturing expenses exceeded revenues in both years
reflecting low production volumes and fixed costs associated with our higher
volume manufacturing capabilities.
Research and development expenses for 1998 were $11.4 million compared to
$10.8 million in 1997. Research and development expenses in both periods
consisted primarily of clinical trial expenses, product development expenses
and patent expenses.
Selling, general and administrative expenses in 1998 were $9.7 million, an
increase of $3.3 million from 1997. The increase in spending reflects increased
staffing and associated expenses, in addition to increased marketing efforts
related to our launch in Canada and in anticipation of our U.S. launch
following FDA regulatory approval.
Interest income (expense) and other, net was $563,000 in 1998 as compared to
$1.1 million for 1997, reflecting lower average cash and investment balances
from period to period.
The net loss in 1998 was $24.0 million, an increase of $4.6 million from the
net loss of $19.4 million in 1997. In 1998, the net loss applicable to common
stockholders was $27.4 million, including the effect of dividends, including
deemed dividends, of $3.4 million to preferred stockholders.
Years Ended December 31, 1997 and 1996
Net sales for 1997 increased to $355,000 from $137,000 in 1996 as a result of
increased unit shipments. Results in 1997 included a full year of commercial
shipments to the European market.
Cost of sales and manufacturing expenses exceeded revenues in both years
reflecting low production volumes and fixed costs associated with KeraVision's
higher volume manufacturing capabilities.
Research and development expenses for 1997 were $10.8 million compared to
$10.9 million in 1996. Research and development expenses in both periods
consisted primarily of clinical trial expenses, product development expenses
and patent expenses.
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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 of Intacs corneal ring segments.
Interest income (expense) and other, net was $1.1 million for 1997, as
compared to $2.1 million for the previous year, reflecting lower cash and
investment balances from period to period.
Tax Matters
As of December 31, 1998, KeraVision had federal, state and foreign net
operating loss carryforwards of approximately $66.3 million, $16.9 million and
$3.7 million, respectively. We also had federal and state research and
experimentation credit carryforwards of approximately $1.3 million and $1.0
million, respectively. The net operating loss and credit carryforwards will
expire at various dates beginning in 1999 through 2018, 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.
KeraVision has not yet evaluated the potential impact of these provisions on
its ability to utilize the net operating loss and credit carryforwards.
Under Statement of Financial Accounting Standards No. 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. We have provided a full valuation allowance against our net deferred
tax assets due to uncertainties surrounding their realization, primarily due to
our lack of an earnings history.
Liquidity and Capital Resources
KeraVision has financed its operations since incorporation primarily through
its initial public offering, private sales of preferred stock, interest income,
equipment financing arrangements and the Transcend acquisition described below.
Cash used in operating activities for the first six months of 1999 increased to
$11.9 million from $9.2 million in the comparable period of the prior year,
reflecting increased selling, general and administrative and manufacturing
expenses. Cash and investments were $8.3 million at June 30, 1999. Capital
expenditures for the first six months of 1999 and 1998 were $809,000 and
$597,000, respectively.
In March 1999, KeraVision entered into a loan agreement providing for
borrowings of $5.0 million. The full amount was advanced on March 25, 1999. The
loan bears interest at 12.6% per annum until KeraVision repays the loan due on
September 30, 2001. KeraVision has the right to prepay the loan subject to a
prepayment penalty of 6.0% of the amount being prepaid on the prepayment date.
Repayment of the loan is secured by KeraVision's assets except for intellectual
property. In connection with the loan, KeraVision granted to the lender
warrants to purchase 55,492 shares of the common stock at an exercise price of
$10.81, the closing price as of March 5, 1999, the date of the loan commitment.
These warrants are exercisable for 7 years from the date of issuance.
KeraVision recorded the fair value of the warrants as additional interest
expense to be amortized over the term of the related debt. The value of
immediately exercisable warrants was determined using a Black-Scholes valuation
model, based on the contractual term of the warrants.
In May 1999, KeraVision completed the acquisition of Transcend Therapeutics,
Inc. and its net cash balance of $8.5 million. Transcend has terminated its
activities as a drug development company and now is a wholly owned subsidiary
of KeraVision. No Transcend employees were retained. Transcend stockholders
received 978,498 shares of KeraVision's common stock. This transaction was
accounted for as an acquisition of assets.
KeraVision expects to continue to incur substantial expenses in support of
additional research and development and sales and marketing activities,
including cost of clinical studies, manufacturing costs, the expansion of its
sales and marketing organization and the support for ongoing administrative
activities. Management's planned expenditures for 1999 exceed current cash,
cash equivalents and available-for-sale investments, and the funds received
from the Transcend acquisition and the March 1999 loan agreement.
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Excluding the proceeds of this offering, management believes that sufficient
funds will be available from sales of its products and from external financing
sources to support planned operations at least through December 1999.
KeraVision may also enter into collaborative arrangements with corporate
partners that could provide KeraVision with additional funding in the form of
equity, debt or license fees in exchange for rights with respect to
KeraVision's technology. There can be no assurance that KeraVision will be able
to raise any additional funds or enter into any such collaborative arrangements
on terms favorable to KeraVision, or at all. If KeraVision is unable to obtain
the necessary additional capital, significant reductions in spending and the
delay or cancellation of planned activities or more substantial restructuring
options may be necessary. In such event, KeraVision intends to implement
expense reduction plans in a timely manner to enable KeraVision to meet its
operating cash requirements at least through December 31, 1999. These actions
would have material adverse effects on KeraVision's business, results of
operations and prospects.
KeraVision'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
KeraVision's research and development programs, changes in the scale, timing,
or cost of KeraVision's commercial manufacturing facility, competitive and
technological advances, the FDA or other regulatory processes, changes in
KeraVision's marketing and distribution strategy, and other factors.
Year 2000
The Year 2000 Issue is the result of computer programs being unable to
correctly recognize dates beyond December 31, 1999. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
Based on recent assessments, we have determined that we would be required to
replace a small portion of our software so that those systems will properly
utilize dates beyond December 31, 1999. We have determined that all of our
critical business systems are already Year 2000 compliant. Assessment, testing
and remediation are proceeding in tandem, and we currently plan to have all
modifications to systems completed and tested by September 1999. These
activities are intended to encompass all major categories of systems in use by
KeraVision, including manufacturing, sales, finance and human resources.
KeraVision is also actively working with critical suppliers of products and
services to determine that the suppliers' operations and the products and
services they provide are Year 2000 compliant or to monitor their progress
toward Year 2000 compliance. We reviewed our product line and determined that
all of the products we have sold and will continue to sell do not require
remediation to be Year 2000 compliant. KeraVision cannot guarantee that any
system of other companies, on which our systems rely and which are not Year
2000 compliant, will be Year 2000 compliant in a timely fashion and would not
have an adverse effect on our systems.
The costs incurred to date related to these programs are less than $17,000.
We currently expect that the total cost of these programs, including both
incremental spending and redeployed resources, will not exceed $60,000. The
total cost estimate does not include potential costs related to any customer or
other claims or the cost of internal software and hardware replaced in the
normal course of business. The total cost estimate is based on the current
assessment of the projects and is subject to change as the projects progress.
Due to the KeraVision's reliance on widely used software packages that have
been certified as Year 2000 compliant, we have not developed a formal
contingency plan for software. Should unforeseen problems surface during our
testing of those packages, we will evaluate our alternatives, such as utilizing
different software packages. We are currently working on developing contingency
plans to increase inventories and raw materials in preparation for the Year
2000. This plan is currently in the development stages and should be finalized
by September 1999.
Based on currently available information, we do not believe that the Year
2000 issue will have a material adverse effect on our financial condition or
overall results of operations; however, we cannot be certain to what extent we
may be affected by such matters. In addition, we cannot guarantee that the
failure to ensure Year 2000 compliance by a supplier or another third party
would not have a material adverse effect on us.
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BUSINESS
General
KeraVision is developing a new category of non-laser vision correction
products for the treatment of common vision disorders, including myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism, to offer an
alternative to eyeglasses, contact lenses and other vision correction surgical
procedures. Our first product, Intacs(TM) corneal ring segments, based on our
proprietary patented technology, has been approved by the FDA for correcting
mild myopia. Intacs corneal ring segments are the first surgical vision
correction technology to be approved by the FDA that is designed to permanently
correct a patient's vision while providing the option of removability. Intacs
corneal ring segments are composed of two thin half-circles of polymer material
that are inserted into the periphery of the cornea to reshape the curvature of
the cornea to correct vision. The polymer material has been used in intraocular
lenses to treat patients with cataracts since 1952. The Intacs insertion
process is a simple outpatient procedure that typically can be performed in
15 minutes or less. KeraVision believes that the Intacs corneal ring segments
technology is the first technology specifically designed to surgically treat
patients with low degrees of nearsightedness, a group estimated at
approximately 20 million people in the U.S. KeraVision is currently developing
other potential products to treat other vision correction disorders including
higher and lower levels of nearsightedness, as well as farsightedness and
astigmatism.
We have positioned our Intacs technology to address the growing market for
refractive surgery by offering an alternative to laser-based vision correction.
While laser-based technologies require the permanent removal of corneal tissue,
Intacs corneal ring segments can be removed if desired. Patients' refractions
return to preoperative levels by three months following removal, in most
instances. We believe that Intacs technology offers several potential benefits
to patients including:
. long-term, convenient vision correction with predictable results
. rapid visual recovery
. a simple, minimally invasive out-patient procedure with minimal post-
operative pain in most cases
. easy to remove and replace in an outpatient procedure.
Recent Developments
Latest Financial Results. On July 15, 1999, we announced that our net sales
for the three months ended June 30, 1999 were $3.9 million compared to net
sales of $112,000 for the comparable 1998 period. This increase primarily
reflected purchases of instruments used to perform the procedure for placement
of Intacs corneal ring segments by the initial group of surgeons who
participated in Intacs training courses during the second quarter of 1999.
FDA Approval and Clinical Results. On April 9, 1999, KeraVision obtained FDA
approval to distribute and sell Intacs in the United States for the treatment
of mild myopia in the range of -1.0 to -3.0 diopters in patients who are 21
years of age or older, who have a stable refraction and who have up to +1.0
diopter of astigmatism. Results from the clinical trials of Intacs corneal ring
segments indicate that 97% of the patients achieved vision of 20/40 or better,
the vision standard in most U.S. states for receiving a driver's license
without the need for corrective lenses. More significantly, 74% of the patients
achieved vision of 20/20 or better and 53% achieved vision of 20/16 or better
as measured at 12 months following Intacs placement.
Surgeon Training. As of August 6, 1999, we have trained 319 surgeons to
perform the procedure for placement of Intacs corneal ring segments. In
addition, KeraVision has established sites to train surgeons in Atlanta,
Houston, Kansas City, Minneapolis, San Diego and Santa Monica.
Distribution Partnerships and Salesforce Expansion. In April 1999, we entered
into purchase and distribution agreements with three eye care services
companies that focus on surgical vision correction, including
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Laser Vision Centers, Inc., one of the largest providers of vision correction
surgery in the U.S., as well as NovaMed Eyecare, Inc. and ARIS Vision, Inc.
Under these agreements, these companies have agreed to purchase Intacs corneal
ring segments and related instrumentation. There are approximately 600 surgeons
located throughout the U.S. who are affiliated with these companies. In
addition, since the beginning of 1999 we have hired 11 direct sales
representatives and four manufacturers' representatives, significantly
expanding our salesforce capabilities.
Addition to Management. John Galantic, recently employed by KeraVision, has
agreed to accept the position of Chief Operating Officer of KeraVision pending
his election to this position by our board of directors.
New Product Development. In April 1997, KeraVision began a clinical trial
outside the United States using Intacs technology for the treatment of
hyperopia. With encouraging initial results obtained from 52 patient eyes in
the initial trial, we have initiated a second clinical trial at several
European clinical sites. As of June 30, 1999, 25 additional patient eyes were
enrolled in this expanded study.
Background
Vision and Vision Impairment
The eye functions much like a camera, incorporating a lens system consisting
of a cornea and a lens that focuses light, the iris which functions as an
aperture that regulates the amount of light that passes through the central
zone of the cornea, and the retina, a light-sensitive surface 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. Nearly all light that reaches the retina
passes through the central portion of the cornea, called 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
KeraVision 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 160 million people currently use eyeglasses
or contact lenses to correct these common vision problems, with over $16
billion spent on corrective eyewear products annually. It is estimated that
over 70 million people of all ages are affected by myopia. Of these, an
estimated 20 million people with mild myopia fall within the currently approved
range of indications for Intacs.
Surgical techniques to correct common vision problems, known as refractive
surgery, or vision correction surgery, include laser assisted in-situ
keratomileusis ("LASIK"), photorefractive keratectomy ("PRK") and radial
keratotomy ("RK"). LASIK is currently the most commonly performed refractive
surgery technique used in the United States. Generally these procedures have
been used to treat myopia; however, laser-based technologies to treat hyperopia
have recently been approved by the FDA, and other procedures are under
development. LASIK and PRK both require the use of a laser system to remove
corneal tissue to achieve a flattening of the cornea to treat nearsightedness,
and a steepening of the cornea to treat farsightedness.
It is estimated that approximately 950,000 laser-based procedures will be
performed in the United States in 1999, a substantial increase over the
estimated 450,000 procedures performed in 1998, the estimated 228,000
procedures performed in 1997, and the estimated 108,000 procedures performed in
1996, the first year after the approval of PRK in late 1995. Each procedure
represents one eye and requires permanent cutting or tissue removal in the
central cornea.
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KeraVision estimates that existing refractive procedure costs in the United
States average $2,100 per eye for a LASIK procedure and $1,800 per eye for a
PRK procedure, with a fairly wide range for each procedure. Ophthalmic surgeons
generally set the prices of refractive surgery procedures performed at their
medical offices. KeraVision anticipates that the procedure for placement of
Intacs corneal ring segments will be competitively priced with existing laser-
based procedures. Consumers generally pay directly for currently available
refractive surgery procedures, including the procedure for placement of Intacs,
and are generally not reimbursed by third-party payors.
Refractive Surgery Techniques
RK, developed in the 1970's, was the first refractive surgical technique for
vision correction. 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. RK results can vary with the skill and experience of
the surgeon and can be relatively unpredictable for patients requiring greater
degrees of correction. In addition, the procedure can result in the instability
of the eye over a period of months to years. Because RK entails making cuts in
or near the optical zone of the eye, unwanted side effects, such as halos,
reduced night vision and other visual distortions may occur.
In both PRK and LASIK, a laser is used to permanently remove tissue within
the central optical zone to reshape the cornea, with the amount of tissue to be
removed based upon the level of intended change sought. In PRK, the top layer
of the central cornea, known as the epithelium, is manually removed to expose
the stromal tissue. The patient is then asked to fixate on a light to minimize
eye movement while the laser removes or ablates tissue from the stromal tissue
in the central area of the cornea. 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 central optical zone, haze, halos, 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 called a microkeratome to
cut a thin corneal flap, which is then pulled back to expose the underlying
stromal tissue. A laser is then used to remove corneal tissue to either flatten
the cornea in the case of myopia or steepen the cornea in the case of hyperopia
to achieve vision correction. The corneal flap is then placed back on the
stromal tissue where it adheres back onto the eye. Primary complications with
this procedure arise from cutting of the corneal flap, including incorrect flap
thickness, as well as haze, halos, reduced night vision and other vision
problems. The LASIK procedure offers several advantages over PRK, including
reduced post-operative pain and a shorter visual recovery time. Both PRK and
LASIK are performed in an outpatient setting under topical anesthetic.
Quality of Vision
The most common measurement of vision utilizes an eye chart. One of the
recent developments in ophthalmology involves the concept of quality of vision.
It has been observed that patients can attain 20/20 vision, as measured with an
eye chart, and still be dissatisfied with their quality of 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, halos, 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 central 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
better analyze the quality of vision beyond the assessment available using
standardized eye charts.
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KeraVision Technology
In response to the perceived market need for an alternative to eyeglasses,
contact lenses and existing laser-based surgical procedures, KeraVision has
developed a proprietary technology to treat a broad range of vision disorders.
Intacs are a proprietary product designed to reduce or eliminate the need for
corrective eyewear by reshaping the curvature of the patient's cornea. Intacs
are inserted between the layers of the corneal stroma through a small incision
made in the periphery of the cornea. The presence of Intacs in the periphery of
the cornea creates a flattening of the central cornea, thereby improving the
focus of light rays onto the retina to correct myopia. The Intacs placement
procedure does not cut or remove tissue from the central optical zone of the
cornea and therefore may reduce the risk of unwanted visual side-effects such
as haze, halos and reduced night vision.
KeraVision believes that Intacs corneal ring segments provide the following
potential benefits for the treatment of myopia:
. Long term, convenient vision correction with predictable results. Intacs
provide a predictable long-term correction of mild myopia in a form more
convenient than eyeglasses or contacts lenses and without the risks
associated with laser alternatives that permanently remove tissue from
the cornea.
. Rapid visual recovery. Patients achieve significant vision improvements
almost immediately. U.S. clinical trials showed that 81% of patients
achieved vision of 20/40 or better within 24 hours and 92% of patients
achieved vision of 20/40 or better within 30 days.
. A simple, minimally invasive outpatient procedure with minimal post-
operative pain in most cases. The Intacs corneal ring segment placement
procedure was designed to promote ease of surgery utilizing standard
instrumentation, with minimal trauma to the eye, and can typically be
performed in less than 15 minutes. Post-operative pain experienced in the
clinical trials was modest in most cases and was typically treated with
only non-prescription pain relievers.
. Easy to remove and replace. Intacs corneal ring segments can be easily
removed in a brief, outpatient procedure. When removed during clinical
trials, the patients' refractions returned to approximately the same
level as measured prior to the Intacs placement by three months following
removal, in most cases.
Strategy
KeraVision's objective is to commercialize Intacs 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:
Expand and promote surgeon acceptance of Intacs
We are developing and implementing a roll-out strategy designed to promote
the use of our Intacs technology by ophthalmic surgeons. As part of this
strategy, we have focused on working with leading surgeons and academic centers
in the design, development and clinical testing of our products. We believe
that these surgeons and institutions influence the awareness and adoption of
new technologies by other surgeons. To promote further physician awareness, we
have devoted significant resources to publishing research papers and presenting
clinical and technical data at major ophthalmology conferences. In addition, to
achieve rapid and broad distribution to the estimated 8,000 ophthalmic surgeons
in the United States, we have established two distinct sales channels
including:
. a direct sales force of 11 people and 4 manufacturers' representatives to
market Intacs directly to independent ophthalmic surgeons, and
. commercial agreements with three leading vision correction surgery
providers who are currently affiliated with approximately 600 ophthalmic
surgeons.
Our surgeon training and skills transfer program is designed to ensure the
standardization of the Intacs placement procedure and reduce the time required
for a surgeon to become proficient in the procedure thereby facilitating the
integration of Intacs in the surgeons' practices.
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Increase consumer awareness and demand for Intacs
We intend to increase awareness and demand for Intacs through the following
initiatives:
. Branding of Intacs. Intacs is the first consumer branded product that
addresses the vision correction surgery market.
. Generating word of mouth referrals. We believe that our emphasis on
providing standardized surgeon training and post-training guidance will
result in higher levels of patient satisfaction and therefore a greater
number of personal referrals.
. Consumer awareness and marketing campaign. Our public relations efforts
have resulted in a significant amount of publicity for Intacs corneal
ring segments including coverage in over 300 television news programs and
over 3,000 newspaper articles in the U.S. since January 1999. We intend
to expand our direct-to-consumer marketing efforts to include regional
consumer advertising which could involve radio, print or television
media.
Expand our existing product portfolio
We intend to develop additional products to treat a broad range of vision
disorders based on our Intacs technology. For example, we are currently
conducting a U.S. Phase III trial for a product to treat myopia in both higher
ranges (-3.1 to -4.5 diopters) and lower ranges (-0.75 to -1.0 diopter). In
addition, we have recently initiated a second feasibility trial outside the
United States for our initial hyperopia product based on the results we
achieved in an earlier trial. We have also successfully treated a small number
of patients with pure astigmatism and are in the early stages of development
with a product designed to treat myopia concurrent with astigmatism greater
than +1.0 diopter. We have designed these products to retain the benefits of
our Intacs technology including maintaining the integrity of the central
optical zone and the option of removability.
Utilize advanced development methods to reduce new product development cycle
time
KeraVision seeks to use advanced scientific and engineering methods, which
include the use of sophisticated modeling techniques, to reduce our new product
development time. These advanced methods improve our ability to understand the
optical, mechanical and biological effects of inserting Intacs or other
potential products into the cornea to correct common vision disorders. We
believe that this approach allows us to improve the design of our existing and
potential products and increase our understanding of product performance prior
to commencing clinical trials.
Strengthen our proprietary position
We intend to continue to aggressively protect our proprietary Intacs
technology and to expand our patent portfolio as we develop additional
products. Our patent strategy involves thoroughly protecting the device,
instrumentation as well as the procedures required to insert Intacs. As of June
30, 1999, KeraVision had 25 U.S. and 51 foreign patents issued and 141 pending
patent applications worldwide. These issued patents and pending patent
applications cover various aspects of Intacs technology, including Intacs
corneal ring segments, methods of use, instruments and related materials, as
well as other vision correction technologies.
Intacs and Instruments
The initial design of Intacs corneal ring segments consisted of an optically
clear split ring made of PMMA. In order to simplify the surgical procedure,
KeraVision modified the design of Intacs corneal ring segments in 1995 into
two, thin half-circles of PMMA, each with an arc measurement of 150 degrees.
The two half-circles are placed in the periphery of the cornea at a diameter of
approximately eight millimeters. KeraVision has extensively studied the
relationship between physical parameters of Intacs and corneal curvature
change. As a result of these studies, KeraVision believes that a small number
of Intacs sizes, with minor variations in their dimensions, can produce a wide
range of corneal curvature change and could provide treatment for a substantial
segment of those people with myopia. KeraVision has developed Intacs corneal
ring segments in six different thicknesses ranging from 0.21 mm to 0.45 mm. At
present, the FDA has approved three of these thicknesses (0.25, 0.30 and 0.35
mm) for commercial use in the U.S.
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KeraVision has developed proprietary surgical instruments to be used for the
insertion of Intacs. These stainless steel and titanium instruments include a
marking instrument, a centering guide and stromal separators. KeraVision's
instruments have been designed to standardize the Intacs placement 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 Intacs at the desired depth. The purchase of
KeraVision's instruments represents a relatively small capital investment
compared to the cost of equipment required for surgeons performing LASIK or PRK
procedures.
The Intacs Corneal Ring Segment Placement Procedure
The placement of Intacs corneal ring segments is a simple, minimally invasive
procedure that can be performed on an outpatient basis typically in 15 minutes
or less. The procedure is usually performed using topical anesthetic eyedrops.
The procedure in part includes surgical techniques and ophthalmic surgical
instruments that are widely used by and familiar to ophthalmic surgeons. The
procedure requires a single incision of less than two millimeters outside of
the central optical zone of the cornea. The incision is located at the top of
the eye under the eyelid.
The Intacs corneal ring segment placement procedure consists of the following
steps. The ophthalmic surgeon uses a guide to mark the geometric center of the
cornea. Using the reference mark, a marking instrument is used to mark the line
of incision on the cornea outside the central optical zone and the location
where the ring segments are to be placed. 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. The surgeon places the centering guide over the eye,
introduces each stromal separator through the small entry incision and rotates
each stromal separator, spreading the layers of the stroma to create a circular
subsurface tunnel in the periphery of the cornea. The surgeon then removes the
stromal separator and the centering guide. Intacs corneal ring segments are
introduced into the tunnel and rotated into place. Patients generally
experience substantial and immediate improvement in vision. The amount of
postoperative pain experienced by patients in Intacs clinical trials has been
minimal for most patients and is typically treated only with nonprescription
pain relievers. Most patients resume their normal activities within two to
three days. In addition, since Intacs corneal ring segments are inserted below
the nerve endings of the cornea, patients do not feel the presence of Intacs in
the eye.
Clinical Trials Results
Myopia. Since 1991, ophthalmic surgeons have utilized Intacs technology for
the treatment of myopia in 1,787 patient eyes in clinical trials conducted in
the United States and throughout the world. KeraVision's clinical trials have
been designed to demonstrate the safety and efficacy of Intacs corneal ring
segments and the safety of the surgical procedure used to insert Intacs. The
safety and efficacy of Intacs corneal ring segments was evaluated using
standard ophthalmic techniques. KeraVision initiated clinical trials using the
initial design of Intacs in 1991 in both the United States and Brazil. In
September 1994, KeraVision completed enrollment of a 90-patient FDA Phase II
myopia trial using the initial design of Intacs. In September 1996, KeraVision
completed enrollment of the group of 150 U.S. Phase II myopia patients with a
modified design of Intacs. In November 1996, KeraVision initiated an expanded
Phase II myopia trial involving 59 patient eyes to evaluate moderate myopia (-
3.5 to -5.0 diopters). In October 1996, KeraVision received FDA approval to
commence a ten-center, 360-patient Phase III clinical trial for myopia in the
United States and began that trial in December 1996. KeraVision completed the
enrollment for the trial in May 1997. Our initial Pre-Market Approval (PMA)
application was based on data from the PMA cohort, a group of 452 patients
enrolled in the Intacs Phase II and Phase III clinical trials. Three
thicknesses (0.25, 0.30 and 0.35mm) of Intacs corneal ring segments were
evaluated. Intacs were successfully placed in 449 eyes out of 454 surgical
attempts. After 12 months of follow-up, data were available for 97.6% of the
PMA cohort patients. In January 1998, KeraVision received FDA approval to
expand the Phase III trial to evaluate three additional thicknesses (0.21,
0.40, and 0.45 mm). This approval permitted KeraVision to implant Intacs
corneal ring segments into one eye of each of
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120 patients (40 patient eyes for each thickness), but required KeraVision to
obtain additional approval from the FDA before implanting the second eye in
those patients or enrolling any additional patients. In 82 of the enrolled 118
patients, KeraVision inadvertently implanted Intacs corneal ring segments into
the patients' second eye prior to obtaining the required approval. On July 8,
1999, KeraVision reported these unauthorized implantations in the patients'
second eye to the FDA in a filing that requested permission to enroll an
additional 240 patients and approval to implant the second eyes of the 118
patients already enrolled. The FDA has not yet responded to KeraVision's
filing. No assurance can be given that the FDA will respond favorably to
KeraVision's request, or that the FDA will not take some action because of the
unauthorized implantations, which could significantly delay the trial and/or
impose substantial additional costs. KeraVision has also conducted two myopia
clinical trials in Europe. The results from these trials are comparable with
KeraVision's clinical trials in the United States. In addition, KeraVision has
begun a trial for myopia in Singapore.
Intacs corneal ring segments have been removed from 39 patient eyes from the
PMA cohort. Intacs corneal ring segments can be easily removed in a brief,
outpatient procedure. The Intacs removal rate for the Phase III trial was 4.3%
as compared to 9.6% from the earlier Phase II trial. Reasons for Intacs
removals included: one for infection, 15 for patient dissatisfaction with
correction achieved (undercorrection, overcorrection or induced astigmatism),
19 for patient dissatisfaction with visual symptoms (glare, halos, difficulty
with night vision, etc.) and four for other reasons. There have been no
clinically significant complications associated with Intacs removal procedures.
The removal results demonstrate that the refractions returned to preoperative
levels by three months following removal, in most instances. Best spectacle-
corrected visual acuity was 20/20 or better in all cases following removal.
The first procedure for the treatment of myopia using Intacs was performed in
1991, and to date more than 1,700 procedures have been conducted using Intacs
corneal ring segment technology in clinical trials. Although KeraVision has
developed eight-year clinical data on the safety and efficacy of Intacs in
correcting myopia, it has limited long-term safety and efficacy data. We cannot
assure you that long-term safety and efficacy data when collected will be
consistent with these clinical trial results and will demonstrate that Intacs
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 Intacs placement procedure, involve
some inherent risk of complications. For the PMA cohort, five patients
experienced safety-related complications for an overall incident rate of 1.1%.
All five patients recovered with no clinically significant effects. Adverse
events include: one infection, one shallow Intacs corneal ring segment
placement, one temporary loss of 2 lines of best corrected visual acuity and
two corneal perforations. During the 12 months of follow up, there was a 4.5%
incidence of removal and a 0.9% incidence of exchange procedures. Other
complications included: overcorrection, reduction in central corneal sensation,
difficulty with night vision, undercorrection, induced astigmatism, blurry
vision, double vision, halos, glare, corneal blood vessels, and fluctuating
distance vision. No patient has had a lasting injury to the eye or sustained
any material loss of best corrected vision. In many patients, deposits have
been observed in the stromal tunnel next to the Intacs corneal ring segments.
In all cases, the deposits were confined to the stromal tunnel with no effect
on patients' vision. Although KeraVision believes that these deposits are not
complications, we cannot assure you that this will be the case on a long-term
basis.
All of these complications have also been observed in connection with other
refractive surgery techniques. Although KeraVision believes these complications
may be mitigated, KeraVision cannot assure you that these or other
complications will not be serious or lasting or will not impair or preclude
KeraVision from retaining existing regulatory approvals or obtaining regulatory
approvals for our products or the acceptance of these products by patients or
ophthalmologists.
Hyperopia. Treatment for correction of hyperopia consists of implanting six
rectangular segments made of PMMA placed in the periphery of the cornea. These
segments steepen the center of the cornea and flatten the periphery. Each
segment is 2.0 mm long and 0.8 mm wide, with a thickness ranging from 0.25 to
0.45 mm. Patients requiring +1.0 to +3.0 diopters of hyperopia correction have
experienced significant improvement in
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their vision. After 12 months following the placement procedure, 50% of
patients achieved vision of 20/20 or better, 93% saw 20/25 or better, and 100%
saw 20/40 or better. Because only a limited number of patients to date have
received the treatment for hyperopia, KeraVision will need to treat additional
patients to characterize the range and predictability of correction prior to
moving to a large scale trial. We have initiated a second feasibility trial at
several additional sites in Europe.
Astigmatism. KeraVision has studied a potential product that uses arc
segments to treat pure astigmatism. This device utilizes the core Intacs
technology for the treatment of myopia and the segments are manufactured from
the same material as Intacs. A similar surgical technique is used to implant
the segments in the eye. In August 1994 and March 1995, KeraVision implanted
arc segments in eight astigmatic patients. Clinical results showed that these
patients exhibited improvement in their vision. KeraVision is pursuing broader
experimentation and analysis, but has not enrolled further patients due to the
perceived smaller size of the potential market compared to the markets for
myopia and hyperopia.
Marketing and Sales
United States
Our U.S. marketing roll-out objective is to gain acceptance of Intacs corneal
ring segments by both ophthalmic surgeons and consumers. We have established
two distribution channels to begin the initial marketing efforts to the
estimated 8,000 ophthalmic surgeons, of which an estimated 2,000 are currently
performing refractive surgery. The first channel is our direct sales force. We
have recently added 11 refractive surgery business specialists and 4
manufacturers' representatives to market directly to ophthalmic surgeons. These
specialists and representatives have extensive backgrounds in both the sales of
ophthalmic products and in new product introductions. The second channel
involves the use of newly-created Refractive Surgery Provider Groups. These
groups have emerged primarily to market laser-based refractive surgery
procedures. We have signed purchasing or distribution agreements with Laser
Vision Centers, Inc., NovaMed Eyecare, Inc. and ARIS Vision giving us access to
approximately 600 ophthalmic surgeons affiliated with these organizations.
Surgeon Acceptance. Our marketing program for ophthalmic surgeons involves
several key elements, including a Skills Transfer Program and a Practice
Integration Program.
We believe our success depends on well-trained surgeons to ensure successful
outcomes from their first patients onward. High levels of patient satisfaction
will develop the critical mass of patients required to start and sustain the
word-of-mouth process, an established driver of refractive procedure volume
growth. Prior to performing the Intacs corneal ring segment placement
procedure, ophthalmologists are required to go through KeraVision Surgeon
Training. Our training program is guided by six leading ophthalmologists who
are part of the KeraVision's Senior Training Faculty and are highly experienced
with the Intacs technology. The classes include a comprehensive lecture and a
surgical wet lab that can accommodate up to 20 ophthalmologists. A detailed
training manual is provided to each of the program attendees. Following the
initial training, we provide experienced personnel to provide on-site guidance
for the ophthalmologists through their first series of procedures. Through June
30, 1999, we have trained 243 surgeons, including both primary doctors and
their associates.
KeraVision's marketing program includes significant post-training efforts to
ensure rapid integration of Intacs into each surgeon's practice. Our
integration process includes education of the office staff, development of
patient education materials, including brochures and videos and seminars with
optometrists in the region.
Prior to attending the training sessions, doctors are required to purchase an
initial kit consisting of two instrument sets, a vacuum system and 18 Intacs
corneal ring segments for a total price of $45,000. If desired, the
instrumentation may be leased at a cost slightly less than $1,000 per month. We
intend to derive our initial revenues from kit sales while working to build
underlying procedure volumes to maintain and grow future revenues.
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Consumer Acceptance. In addition to personal referrals, we intend to increase
awareness of Intacs corneal ring segments through several other approaches.
First, we have engaged in a public relations strategy that has resulted in
coverage on over 300 TV news programs and 3,000 print articles since January
1999. Second, many ophthalmic practices currently use extensive marketing
efforts to market laser procedures. We believe that practices which integrate
Intacs corneal ring segments will use their own resources to advertise and
perform other activities to build procedure volume. Third, we may elect to
conduct co-operative advertising in conjunction with these practices. Fourth,
once there is a sufficient number of doctors trained and an adequate level of
interest in Intacs corneal ring segments established within a region, we
believe that a regional consumer marketing campaign can then be used to
increase further market acceptance. Part of our strategy is to create the
Intacs brand, which is the first branded product within the refractive surgery
market. The development of a brand identity can facilitate consumer adoption by
allowing consumers to ask for the product by name, enabling focused advertising
and fostering general awareness.
Our initial marketing effort will focus on the estimated 20 million Americans
who are within the treatment range of our first product. The number of people
in this range could potentially represent 40 million procedures. The current
market for refractive surgery procedures in the United States is estimated to
be 950,000 in 1999. It is estimated that as much as 20% of these procedure
volumes are within the currently approved Intacs range of correction. Our
efforts have focused on enhancing consumer awareness, thus increasing the
volume of Intacs placement procedures to drive sales of Intacs corneal ring
segments. We are also seeking to expand the market for refractive surgery to
reach those consumers who have an interest in refractive surgery but are
concerned with other vision correction surgical procedures that do not allow
for the option of removal and placement.
Canada
KeraVision received approval in Canada in May 1998 to sell Intacs for the
treatment of myopia in the range of -1.0 to -5.0 diopters of correction, along
with related instruments. KeraVision focused its initial marketing efforts on
developing seven sites to become proficient in the Intacs corneal ring segment
placement procedure, to be able to discuss the Canadian experience with Intacs
corneal ring segments and to potentially serve as training centers. KeraVision
then formally announced the product launch in October 1998. KeraVision targeted
the Vancouver area for the purpose of training a high percentage of the
refractive surgeons in the region and testing the effect of consumer
advertising on patient flow to those centers.
Europe/Other
Upon obtaining the right in November 1996 to market Intacs corneal ring
segments in European Union countries, KeraVision commenced a sales and
marketing program concentrated in parts of France, Germany and Austria. As part
of this program, KeraVision established a European headquarters in Paris,
France. A small sales office in France handles sales of Intacs corneal ring
segments in the French market. A distributor sells KeraVision's products in
Germany and Austria.
From information obtained in the course of conducting the training sessions
and from consumer marketing studies, KeraVision determined that the overall
refractive surgery market in France and Germany was significantly less than
that of the United States on a per capita basis, and that the refractive
surgery markets in those countries do not appear to be growing at a substantial
rate, if at all. This lack of growth may be related in part to the lack of a
delivery or referral channel whereby potential patients can easily reach the
ophthalmic surgeon, rather than the non-surgical ophthalmologists and opticians
who may tend to recommend that a patient not consider refractive surgery.
Further, restrictions on direct broad scale advertising hinders the expansion
of consumer awareness of refractive surgery. It is expected that because of
these and other factors the refractive surgery market and the market for Intacs
corneal ring segments will be slow to develop in Europe. KeraVision, however,
is seeking to expand its reach to other European countries by adding additional
distributors. KeraVision has concluded or is near completion of agreements with
distributors in Spain, Switzerland, the Benelux region, Greece, and the United
Kingdom. KeraVision has also updated its agreement with its Italian
distributor. KeraVision has completed distribution agreements with companies in
Israel, South Africa and Mexico.
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Asia
In July 1998, KeraVision commenced our first clinical trial in Asia, with the
initiation of a myopia trial in Singapore. We have signed a distribution
agreement with a South Korean distributor to begin the work on product
registration in South Korea. We are reviewing our plans for expanding into
other areas in the Pacific Rim.
Patents and Proprietary Rights
One of KeraVision's primary strategies has been to develop a strong
proprietary patent position with respect to Intacs technology. As of June 30,
1999, KeraVision had 141 pending patent applications worldwide and had been
awarded 25 United States patents and 51 foreign patents. These issued patents
and pending patent applications cover various aspects of Intacs technology,
including Intacs corneal ring segments, methods of use, instruments and related
materials, as well as other vision correction technologies. The expiration
dates of the United States issued patents range from 2002 to 2016. KeraVision's
policy is to protect its technology by, among other things, filing patent
applications relating to important aspects of its Intacs technology and other
vision correction technology. KeraVision has entered into confidentiality
agreements with its contract manufacturers to protect the proprietary nature of
its technology.
Manufacturing
KeraVision manufactures Intacs in its facility in Fremont, California using a
computer-controlled machining process. KeraVision has limited volume
manufacturing capacity and is building experience in manufacturing medical
devices and other products. To be successful, we must manufacture our products
and potential products in commercial quantities in compliance with regulatory
requirements at acceptable costs. Production of commercial-scale quantities
will involve technical challenges for us. As we establish our own commercial-
scale manufacturing capability for Intacs corneal ring segments, we could incur
significant scale-up expenses including the need to expand our facilities and
personnel. KeraVision may seek collaborative arrangements with other companies
to manufacture products and potential products, including Intacs. The
manufacturer of KeraVision's potential products will be subject to periodic
inspection by regulatory authorities. Any such operations must undergo
compliance inspections conducted by the FDA and equivalent inspections
conducted by state and foreign officials. We cannot assure you that any
KeraVision manufacturer will be able to successfully pass these inspections on
a timely basis or at all. In addition, we cannot assure you that KeraVision
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. In many cases, instruments and other purchased materials
critical for production are sole-sourced.
KeraVision has several sole-sources for sterilization, tools and equipment,
the PMMA raw material and other elements necessary to manufacture Intacs and
the related instrumentation. If we are dependent upon third parties for the
manufacture of our products, our profit margins and ability to develop and
deliver such products on a timely basis may be adversely affected. Moreover, we
cannot assure you that such third parties will adequately perform, and any
failures by these parties may impair our ability to deliver products on a
timely basis or otherwise impair our competitive position.
Intacs are made from PMMA, a polymer widely used in implantable intraocular
lenses since 1952. PMMA cast sheet is purchased from a sole supplier and is
stored at KeraVision prior to release to production. KeraVision believes it
could develop the capability over a significant time period to manufacture PMMA
cast sheet internally if this sole-source were to become unavailable. Any
change in materials used for Intacs would require additional testing,
regulatory review and approval, which could result in significant manufacturing
and shipping delays. See "Risk Factors--KeraVision will need to find a new
supplier for the raw material we use in manufacturing our products."
Research and Development
KeraVision has been engaged in the research and development of Intacs
technology since its inception in 1986. The development effort has incorporated
both extensive clinical testing as well as laboratory testing to
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determine the effect of various configurations and insertion techniques for
Intacs 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. For the three years ended
December 31, 1998, our expenditures for research and development were
approximately $10.9 million, $10.8 million, and $11.4 million, respectively.
KeraVision has also used these approaches to begin work on potential products
for astigmatism and hyperopia. KeraVision has begun investigations into
refinements for the existing product for myopia, including myopia concurrent
with high level of astigmatism and potential treatments for higher and lower
levels of myopic correction.
Competition
Intacs corneal ring segments compete with other treatments for refractive
problems, including eyeglasses, contact lenses, and other refractive surgery
procedures such as PRK and LASIK. In addition, other refractive surgery
technologies are currently under development, including the intraocular contact
lens ("ICL"), radio frequency keratoplasty ("RFK"), and "refractive"
intraocular lenses. The ICL seeks to correct refractive errors by placing a
lens inside the eye between the natural lens and the iris. The ICL is currently
available for sale in Europe. RFK uses radio-frequency energy to change the
shape of the cornea. Currently, this treatment has been approved for use in
Canada but has not been approved for use in the United States. Refractive
intraocular lenses ("IOL") involve the placement of an intraocular lens behind
the cornea for the correction of vision problems. 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 Intacs corneal ring segments or
which would otherwise render Intacs corneal ring segment technology obsolete.
Other companies, most of which are larger and better financed than
KeraVision, are engaged in the refractive surgery market. Several companies,
including Summit Technology, Inc., VISX and Nidek, Inc. have received approval
to market their products in the United States. In addition to Summit
Technologies and VISX, there are a number of other large entities that
currently market and sell laser systems overseas for use in refractive surgery,
several of whom are seeking to obtain approval with the FDA to sell their
products in the United States.
KeraVision'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 KeraVision 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.
Government Regulation
FDA's Premarket Clearance and Approval Requirements. Unless an exemption
applies, each medical device that we wish to market in the U.S. must receive
either "510(k) clearance" or "PMA approval" in advance from the U.S. Food and
Drug Administration pursuant to the Federal Food, Drug, and Cosmetic Act. The
FDA's 510(k) clearance process usually takes from four to 12 months, but it can
last longer. The process of obtaining PMA approval is much more costly, lengthy
and uncertain and generally takes from one to three years or even longer.
The FDA decides whether a device must undergo either the 510(k) clearance or
PMA approval process based upon statutory criteria. These criteria include the
level of risk that the agency perceives is associated with the device and a
determination whether the product is a type of device that is similar to
devices that are already
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legally marketed. Devices deemed to pose relatively less risk are placed in
either class I or II, which requires the manufacturer to submit a premarket
notification requesting 510(k) clearance, unless an exemption applies. The
premarket notification must demonstrate that the proposed device is
"substantially equivalent" in intended use and in safety and effectiveness to a
legally marketed "predicate device" that is either in class I, class II, or is
a "preamendment" class III device (i.e., one that was in commercial
distribution before May 28, 1976) for which the FDA has not yet decided whether
to require PMA approval.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance. The FDA
requires each manufacturer to make this determination in the first instance,
but the FDA can review any such decision. If the FDA disagrees with a
manufacturer's decision not to seek a new 510(k) clearance, the agency may
retroactively require the manufacturer to submit a premarket notification
requiring 510(k) clearance. The FDA also can require the manufacturer to cease
marketing and/or recall the modified device until 510(k) clearance is obtained.
Devices deemed by the FDA to pose the greatest risk, such as life-sustaining,
life-supporting or implantable devices, or devices deemed not substantially
equivalent to a legally marketed predicate device, are placed in class III.
Intacs are regulated by the FDA as a class III device. Such devices are
required to undergo the PMA approval process in which the manufacturer must
prove the safety and effectiveness of the device to the FDA's satisfaction. A
PMA application must provide extensive preclinical and clinical trial data and
also information about the device and its components regarding, among other
things, manufacturing and labeling.
Upon submission, the FDA determines if the PMA application is sufficiently
complete to permit a substantive review, and, if so, the application is
accepted for filing. The FDA then commences an in-depth review of the PMA
application. The review time is often significantly extended as a result of the
FDA asking for more information or clarification of information already
provided. The FDA also may respond with a "not approvable" determination based
on deficiencies in the application and require additional clinical trials that
are often expensive and time consuming and can delay approval for months or
even years. During the review period, an FDA advisory committee, typically a
panel of clinicians, likely will be convened to review the application and
recommend to the FDA whether, or upon what conditions, the device should be
approved. Although the FDA is not bound by the advisory panel decision, the
panel's recommendation is important to the FDA's overall decision making
process.
If the FDA's evaluation of the PMA application is favorable, the FDA
typically issues an "approvable letter" requiring the applicant's agreement to
specific conditions (e.g., changes in labeling) or specific additional
information (e.g., submission of final labeling) in order to secure final
approval of the PMA application. Once the approvable letter is satisfied, the
FDA will issue a PMA for the approved indications, which can be more limited
than those originally sought by the manufacturer. The PMA can include
postapproval conditions that the FDA believes necessary to ensure the safety
and effectiveness of the device including, among other things, restrictions on
labeling, promotion, sale and distribution. Failure to comply with the
conditions of approval can result in material adverse enforcement action,
including the loss or withdrawal of the approval.
After the approval of a PMA, a new PMA or PMA supplement is required in the
event of a modification to the device, its labeling or its manufacturing
process. Supplements to a PMA application often require the same type of
information as a premarket approval application, except that the supplement is
limited to the information needed to support any changes from the product
covered by the original PMA application, and may not require the submission of
clinical data or the convening of an advisory committee. A new PMA or PMA
supplement will be required to expand the Intacs approval beyond mild myopia to
new ranges of myopia, and to hyperopia and astigmatism.
A clinical trial may be required in support of a 510(k) submission or PMA
application. Such trials generally require an Investigational Device Exemption
application approved in advance by the FDA for a
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limited number of patients, unless the product is deemed a nonsignificant risk
device eligible for more abbreviated IDE requirements. The IDE application must
be supported by appropriate data, such as animal and laboratory testing
results. Clinical trials may begin if the IDE application is approved by the
FDA and the appropriate institutional review boards at the clinical trial
sites.
Pervasive and Continuing FDA Regulation. A number of regulatory requirements
apply to marketed devices, including Intacs. These requirements include
labeling regulations, the Quality System Regulation (which requires
manufacturers to follow elaborate design, testing, control, documentation and
other quality assurance procedures), the Medical Device Reporting regulation
(which requires that manufacturers report to the FDA certain types of adverse
events involving their products), and the FDA's general prohibition against
promoting products for unapproved or "off label" uses. Class II devices also
can have special controls such as performance standards, postmarket
surveillance, patient registries, and FDA guidelines that do not apply to class
I devices.
Other Regulation
KeraVision 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 Intacs or
KeraVision's potential products that may be more restrictive or that may
otherwise alter or affect KeraVision's research and development programs. We
cannot assure you that KeraVision will not be required to incur significant
costs to comply with these laws and regulations in the future or that such laws
and regulations will not have a materially adverse effect upon KeraVision's
ability to do business. KeraVision is unable to predict whether any agency will
adopt any regulation that would have a material adverse effect on KeraVision's
operations.
All of the above described government regulation and product approval risks
apply to Intacs corneal ring segments and will apply to any future potential
product of KeraVision. Government regulation may become more restrictive in the
future. We cannot assure you that KeraVision 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
KeraVision's ability to conduct business.
European Government Regulation and Product Testing
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. As KeraVision begins to sell products in additional foreign
markets it will be required to obtain an FDA export permit and comply with
foreign regulations for each of these markets. A delay in obtaining the
necessary approvals or failing to comply with regulatory requirements could
have a material adverse effect on KeraVision's business, financial condition
and results of operations.
The regulatory environment in Europe for medical devices differs
significantly from that in the United States. A total of 19 European countries
are grouped in a union with the objective of establishing a single market
without internal borders among the member countries and eliminating divergent
national requirements. The members of the European Union include Austria,
Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
The Netherlands, Portugal, Spain, Sweden, the United Kingdom, Iceland, Norway,
Switzerland and Lichtenstein.
Products that comply with the requirements of a specified EC medical
directive are entitled to bear CE marking. Since July 14, 1998, all commercial
medical device products have been required to bear CE marking. It is illegal to
market these products in the European Union without a CE marking.
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To obtain a CE marking, the product must be assessed and found to conform to
the applicable directive. This assessment is carried out by the manufacturer,
in most cases with the assistance of a third party certification organization
known as a "notified body." The notified body assessment may consist of an
audit of the manufacturer's quality system or specific testing of the product.
A manufacturer can sell a product throughout the European Union once it secures
an assessment by a notified body in one of the European Union countries.
The European Union has adopted two directives to regulate medical devices,
including the "Active Implantable Medical Devices Directive" ("AIMDD") and the
"Medical Devices Directive," ("MDD") and has proposed a third directive, the
"In Vitro Diagnostic Directive," ("IVDD") to harmonize the regulatory
requirements for medical devices.
Medical devices such as Intacs are regulated under the MDD. A manufacturer
may affix CE marking after a determination that the product complies with the
essential requirements of this 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. Intacs have 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 any
undesirable side effects of the device constitute an acceptable medical risk
when weighed against the intended 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 various control schemes. KeraVision obtained
qualification of its processes as a full quality system. Approval of
KeraVision's full quality system has been achieved through ISO 9001 and
EN 46001 certification by an approved notified body. The full quality system
encompasses the organizational structure, responsibilities, procedures,
processes and resources necessary to assure quality assurance in design,
development, production, installation and servicing of its medical devices.
The Medical Devices Directive also covers the instrumentation supplied by
KeraVision for the purpose of implanting Intacs. These instruments are
classified as Class I and therefore are not subject to full quality assurance
system requirements.
Once a manufacturer has satisfactorily completed the regulatory compliance
tasks required by the directive and received a favorable decision from the
notified body, it may affix CE marking to its product. Based on the current
regulatory laws, no additional premarket approvals in the individual European
Union countries 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 directives must be transposed into national law in order to be applied.
All member states of the European Union have completed this transposition. This
transposition process has not created significant differences among the member
states of the European Union 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.
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KeraVision obtained conformity certification under Annex II of the MDD in
October 1996 from a notified body and thus achieved the right to affix the CE
marking to Intacs corneal ring segments 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 KeraVision's notified body will retain its
status as a "notified body."
Data and Safety Monitoring Board
KeraVision has established an independent Data and Safety Monitoring Board to
serve in a medical monitoring capacity and to review the collective safety and
efficacy data generated from KeraVision's various clinical trials. In addition,
the members of the Monitoring Board examine representative patients from the
United States investigational sites, provide medical advice to the clinical
investigators, review any safety-related complications and provide suggested
guidelines for patient management to the investigators. The Monitoring Board
currently consists of three prominent ophthalmologists. Additional individuals
will be added to the Monitoring Board, as required. The members of the
Monitoring Board are not allowed to be clinical investigators for Intacs.
Employees
As of June 30, 1999, KeraVision had 140 full-time employees consisting of 51
in manufacturing, 38 in research and development, 36 in sales and marketing,
and 15 in general and administration. KeraVision also has contracts with
outside consultants. KeraVision considers relations with its employees to be
good. None of KeraVision's employees is covered by a collective bargaining
agreement.
KeraVision and its business strategy depends in large part on the ability of
KeraVision to attract and retain key management, technical, manufacturing,
sales and marketing and other operating personnel. KeraVision 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. 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 KeraVision. KeraVision has an employment agreement with only
one of its employees.
Properties
KeraVision's primary facilities occupy a total of approximately 40,000 square
feet of space in two locations in Fremont, California. The facilities are
subject to leases which expire in December 1999 for the 13,000 square feet
facility, and July 2004 for the 27,000 square feet facility. The larger
facilities house the manufacturing, R&D and administrative departments. The
smaller facility houses the sales and marketing, regulatory and clinical
departments. The current monthly rent is approximately $41,000. KeraVision'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
July 2001. The current monthly rent is approximately $4,500. KeraVision
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.
Legal Proceedings
There are no material legal proceedings to which KeraVision is a party or of
which any of its property is the subject.
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<PAGE>
MANAGEMENT
Directors and Officers of KeraVision
The following table sets forth certain information concerning our directors
and executive officers:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Thomas M. Loarie/2/ ...... 53 Chairman of the Board, Chief Executive Officer
and President
Darlene E. Crockett- Vice President, Regulatory Affairs and Clinical
Billig................... 46 Research
Mark D. Fischer-Colbrie... 43 Vice President, Finance and Administration, and
Chief Financial Officer
David Heniges............. 55 Vice President, Europe
Richard Meader............ 53 Vice President, Quality Assurance
Edward R. Newill.......... 46 Vice President, North American Marketing and
Sales
Thomas A. Silvestrini..... 47 Vice President, Research and Development
Michael A. Taylor......... 49 Vice President, Corporate Relations
Robert P. Wood............ 40 Vice President, Manufacturing
Charles Crocker/1/,/5/ ... 60 Director
Lawrence A.
Lehmkuhl/1/,/5/ ......... 62 Director
Kshitij Mohan/3/ ......... 54 Director
Arthur M. Pappas/3/,/4/ .. 51 Director
Peter L. Wilson/3/,/4/ ... 54 Director
</TABLE>
- ---------------------
/1/Term on board expires in 2000.
/2/Term on board expires in 2001.
/3/Term on board expires in 2002.
/4/Member of Audit Committee.
/5/Member of Compensation Committee.
Thomas M. Loarie has served as President, Chief Executive Officer and
Chairman of the board of directors of KeraVision 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, now Baxter International, a manufacturer of healthcare products,
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 American Heyer-Schulte's international
business. Mr. Loarie holds a B.S. degree in engineering from the University of
Notre Dame and has completed graduate work in business administration at the
Universities of Chicago and Minnesota. Mr. Loarie also serves as a director of
the Health Industry Manufacturers Association and of the California Healthcare
Institute.
Darlene E. Crockett-Billig has served as Vice President, Regulatory Affairs
and Clinical Research of KeraVision 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
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<PAGE>
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 KeraVision 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.
David Heniges has served as Vice President, Europe of KeraVision since July
1998. Mr. Heniges was most recently Vice President Global Marketing for Baxter
International's Cardiovascular Surgery Division. Prior to that position, Mr.
Heniges was Vice President Worldwide Business Development for IOLAB, a division
of Johnson & Johnson. Mr. Heniges worked for Johnson & Johnson for 23 years.
Mr. Heniges received his B.S. in Sociology with a minor in Science from Oregon
State University.
Richard Meader has served as Vice President, Quality Assurance of KeraVision
since September 1998. Prior to that time, Mr. Meader was most recently Vice
President Regulatory and Quality Affairs for B. Braun/McGaw Inc. During his 23-
year tenure with B. Braun/McGaw Inc., Mr. Meader was responsible for
introducing the company's Total Quality Management program and instituting
efficiencies that reduced quality related costs. Mr. Meader received his B.S.
in Chemistry from the University of California Los Angeles.
Edward R. Newill has served as Vice President, North American Marketing and
Sales of KeraVision since May 1996. Mr. Newill has 20 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
in International Management from American Graduate School of International
Management.
Thomas A. Silvestrini has served as Vice President, Research and Development
of KeraVision since July 1990. Prior to joining KeraVision, 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.
Michael A. Taylor has served as Vice President, Corporate Relations since
June 1999. He directed KeraVision's communications programs as an outside
consultant starting in 1993. Prior to joining KeraVision, Mr. Taylor served as
Vice President, Corporate Relations for American Medical International, Inc. He
earlier served as a press aide to a member of Congress and as a newspaper
reporter. Mr. Taylor holds a B.A. in journalism from Central Oklahoma State
University.
Robert P. Wood has served as Vice President, Manufacturing of KeraVision
since April 1996. From 1994 to 1996, Mr. Wood was Operations Manager of
Allergan, Inc.'s Waco, Texas 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.
Charles Crocker has served as a director of KeraVision since January 1987.
Mr. Crocker served as Chairman of the Board of BEI Electronics, Inc. from 1974
to September 1997. Since September 1997, Mr. Crocker has served as Chairman,
President and CEO of BEI Technologies, Inc., a diversified electronics company
specializing in electronic sensors and motion control products, and as Chairman
of the Board of BEI Medical Systems Company (formerly BEI Electronics, In.), a
medical device company specializing in
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<PAGE>
diagnostic and therapeutic products for the women's healthcare market. He has
been President of Crocker Capital, a private venture capital firm, since 1985.
Mr. Crocker holds a B.S. degree from Stanford University and a M.B.A. from the
University of California at Berkeley. Mr. Crocker also serves as a director of
Fiduciary Trust Company International and Pope & Talbot, Inc.
Lawrence A. Lehmkuhl has served as a director of KeraVision since August
1992. From 1985 to 1994, Mr. Lehmkuhl was the Chairman, President and Chief
Executive Officer of St. Jude Medical, Inc., a medical device manufacturer.
Prior to 1985, Mr. Lehmkuhl spent 18 years in management positions with
American Hospital Supply Corporation. Mr. Lehmkuhl holds a B.B.A. from the
University of Iowa. Mr. Lehmkuhl is also a director of Nutrition Medical, Inc.
Kshitij Mohan has served as a director of KeraVision since January 1997. From
1995 to present, Dr. Mohan has served as Corporate Vice President for research
and technical services at Baxter International Inc. Dr. Mohan previously served
as a director of device evaluation at the Food and Drug Administration's Center
for Devices and Radiological Health. Dr. Mohan holds a B.S. in Physics from
Patna University, a M.S. in Physics from University of Colorado, and a Ph.D. in
Physics from Georgetown University. Dr. Mohan also serves as a director of the
Health Industry Manufacturers Association.
Arthur M. Pappas has served as a director of KeraVision since January 1997.
Mr. Pappas is Chairman and Chief Executive Officer of A.M. Pappas & Associates,
LLC, an international consulting, investment and venture company that works
with early to mid-stage life science companies, technologies and products.
Prior to founding A.M. Pappas & Associates in 1994, he was a director on the
main board of Glaxo Holdings plc with executive responsibilities for operations
in Asia Pacific, Latin America, and Canada. In this capacity, he was Chairman
and Chief Executive Officer of Glaxo Far East (Pte) Ltd. and Glaxo Latin
America Inc., as well as Chairman of Glaxo Canada Inc. He has held various
senior executive positions with Abbott Laboratories International Ltd., Merrell
Dow Pharmaceuticals, and the Dow Chemical Company, in the United States and
internationally. Mr. Pappas received a B.S. in biology from Ohio State
University and an M.B.A. in finance from Xavier University. Mr. Pappas also
serves as a director of Quintiles Transnational Corp., GeneMedicine Inc.,
Embrex Inc., and AtheroGenics Inc.
Peter L. Wilson has served as a director of KeraVision since August 1998. Mr.
Wilson is currently President and Chief Executive Officer of Patent Education
Systems. He is the former President of Procter & Gamble's Richardson Vicks USA.
In 1972, Mr. Wilson joined the marketing department of Richardson Vicks/Merrell
Pharmaceuticals, rising to President and General Manager of the Vidal Sassoon
Division in 1984 and President and General Manager of the Personal Care
Division in 1986. He was appointed president of Richardson Vicks in 1990. Mr.
Wilson holds a B.S. in Geology from Princeton University and an M.B.A. from
Columbia University.
In addition, John Galantic has agreed to accept the position of Chief
Operating Officer of KeraVision pending his election to this position by the
board of directors. In connection with his employment in July 1999, he was
granted an option to purchase 120,000 shares of common stock, which option
vests over four years, and a grant of 11,034 shares of restricted stock, which
shares are subject to vesting over two years. From January 1997 to July 1999,
Mr. Galantic was General Manager of SmithKline Beecham Consumer Healthcare,
Belgium. From April 1993 to December 1996, he was Director of Category
Management on a global basis for SmithKline Beecham's respiratory and smoking
cessation products. Prior to April 1993, Mr. Galantic spent seven years at
Proctor & Gamble in a variety of marketing and sales assignments in both the
U.S. and Europe.
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<PAGE>
PRINCIPAL STOCKHOLDERS
We have described the "beneficial ownership" of KeraVision's common stock in
the following table according to the Securities and Exchange Commission's
rules. Those rules treat a stockholder as owning any shares covered by a stock
option, warrant or other convertible security that the stockholder could
exercise or convert within 60 days after the date of this prospectus, even if
they have not actually been exercised or converted. Such shares, however, are
not deemed outstanding for the purposes of computing the percentage ownership
of each other person.
Common stock
The following table sets forth the beneficial ownership of KeraVision's
common stock as of June 30, 1999 for:
. each person who is known by KeraVision to beneficially own more than five
percent of our common stock;
. each of our directors and named executive officers;
. all directors and executive officers as a group.
Unless otherwise indicated in the table, the address of each stockholder
identified in the table is 48630 Milmont Drive, Fremont, California 94538. Each
percent of ownership assumes that, in addition to the 14,078,476 shares
actually outstanding on June 30, 1999, any shares of common stock covered by an
option, warrant or other convertible security owned by the stockholder that
could be issued within 60 days, but no other stockholder, were also
outstanding. Information with respect to beneficial ownership provided in the
following table is based upon information furnished by each director and
officer or contained in filings made with the Securities and Exchange
Commission.
39
<PAGE>
<TABLE>
<CAPTION>
Number
beneficially Percent held
Name and Address held
<S> <C> <C>
Goldman Sachs & Co.................................. 1,454,139 10.3%
85 Broad Street
New York, NY 10004
Entities affiliated with Donaldson, Lufkin &
Jenrette, Inc.(1) ................................. 1,649,070 10.5%
3000 Sand Hill Road
Menlo Park, CA 94025
Sprout Capital VIII, L.P(2)......................... 1,347,264 8.7%
3000 Sand Hill Road
Menlo Park, CA 94025
Charles Crocker(3).................................. 176,943 1.3%
Darlene E. Crockett-Billig(4)....................... 141,037 1.0%
Mark Fischer-Colbrie(5)............................. 104,118 *
Lawrence A. Lehmkuhl(6)............................. 27,000 *
Thomas M. Loarie.................................... 491,733 3.5%
Kshitij Mohan(7).................................... 5,000 *
Edward R. Newill.................................... 1,834 *
Arthur M. Pappas(8)................................. 27,000 *
Thomas A. Silvestrini(9)............................ 200,867 1.4%
Peter L. Wilson(10)................................. 14,500 *
All directors and officers as a group
(14 persons)(11)................................... 1,221,877 8.6%
</TABLE>
- ---------------------
* Less than 1%
(1) Includes shares issuable upon the conversion of Series B preferred stock
held by DLJ Capital Corporation, Sprout Capital VIII, L.P., Sprout CEO
Fund, L.P., Sprout Venture Capital, L.P. and DLJ ESC II, L.P. DLJ Capital
Corporation is the managing general partner of Sprout Capital VIII, L.P.,
and the general partner of the Sprout CEO Fund, L.P. and Sprout Venture
Capital, L.P. Donaldson, Lufkin & Jenrette, Inc. directly owns all of the
capital stock of DLJ Capital Corporation and is the ultimate parent of the
manager of DLJ ESC II, L.P., and, as such, may be deemed to beneficially
own indirectly all the shares held by DLJ Capital Corporation and DLJ ESC
II, L.P. As of March 31, 1999, the Equitable Companies Incorporated
beneficially owned directly and indirectly, 71.3% of Donaldson, Lufkin &
Jenrette, and, as such, may be deemed to beneficially own indirectly the
shares held by DLJ Capital Corporation and DLJ ESC II, L.P. Sprout
Capital VIII, L.P. may elect to fund up to 600,000 shares of common stock
of the underwriters' over-allotment option. In the event the over-allotment
is exercised in full and Sprout Capital VIII, L.P. sells 600,000 shares of
common stock pursuant thereto, the entities affiliated with Donaldson,
Lufkin & Jenrette, Inc. would beneficially own 1,049,070 shares of common
stock after this offering, or 5.3%.
(2) Sprout Capital VIII, L.P. may elect to fund up to 600,000 shares of common
stock of the underwriters' over-allotment option. In the event the over-
allotment option is exercised in full and Sprout Capital VIII, L.P. sells
600,000 shares of common stock pursuant thereto, Sprout Capital VIII, L.P.
would beneficially own 747,264 shares of common stock after this offering,
or 3.8%. Kathleen D. LaPorte, General Partner of the Sprout Group, was a
director of KeraVision until July 12, 1999.
(3) Shares attributable to Mr. Crocker include 55,215 shares held by Fund FBO
Charles Crocker. Includes 10,000 shares issuable upon options exercisable
within 60 days.
(4) Includes 31,267 shares issuable upon options exercisable within 60 days.
(5) Includes 27,501 shares issuable upon options exercisable within 60 days.
(6) Includes 10,000 shares issuable upon options exercisable within 60 days.
(7) Represents 5,000 shares issuable upon options exercisable within 60 days.
(8) Includes 5,000 shares issuable upon options exercisable within 60 days.
(9) Includes 2,975 shares issuable upon options exercisable within 60 days.
(10) Includes 2,500 shares issuable upon options exercisable within 60 days.
(11) Shares attributable to directors and officers as a group include 126,088
shares issuable upon options exercisable within 60 days.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the material terms of the capital stock of
KeraVision is qualified by reference to the amended and restated certificate of
incorporation of KeraVision, the certificate of designation of rights,
preferences and privileges of Series A participating preferred stock, the
certificate of designation of rights, preferences and privileges of Series B
redeemable convertible preferred stock and the Preferred Shares Rights
Agreement, dated as of August 18, 1997. See "Where You Can Find More
Information."
The authorized capital stock of KeraVision currently consists of 30,000,000
shares of common stock, par value $0.001 per share, and 2,000,000 shares of
preferred stock, par value $0.001 per share. Each share of KeraVision common
stock trades with KeraVision rights. See "--Stockholder Rights Plan." As of
June 30, 1999, there were outstanding 14,078,476 shares of KeraVision common
stock, no shares of KeraVision Series A preferred stock and 530,714 shares of
KeraVision Series B preferred stock.
KeraVision Common Stock
Holders of KeraVision common stock are entitled to receive dividends or
distributions that are lawfully declared by the KeraVision board, to have
notice of any authorized meeting of stockholders, and to one vote for each
share of KeraVision common stock on all matters which are properly submitted to
a vote of KeraVision stockholders. As a Delaware corporation, KeraVision is
subject to statutory limitations on the declaration and payment of dividends.
In the event of a liquidation or other dissolution of KeraVision, holders of
KeraVision common stock will have the right to a ratable portion of the assets
that remain after the full payment of amounts owed to KeraVision's creditors,
the payment of all KeraVision liabilities and the aggregate liquidation
preferences of any outstanding shares of KeraVision preferred stock. The
holders of KeraVision common stock have no conversion, redemption, preemptive
or cumulative voting rights. All outstanding shares of KeraVision common stock
are, and the shares of KeraVision common stock proposed to be issued in this
offering will be, validly issued, fully paid and non-assessable.
KeraVision Preferred Stock
KeraVision's charter authorizes the KeraVision board to issue preferred stock
in one or more series, to establish the number of shares in any Series and to
set the designation, preferences, rights, qualifications and restrictions on
each series of preferred stock.
Series A Participating Preferred Stock
In connection with the adoption of the rights plan, the KeraVision board has
designated 30,000 shares of preferred stock as Series A participating preferred
stock. The Series A preferred shares purchasable upon exercise of the
KeraVision Rights will not be redeemable. Each share of Series A preferred
stock will be entitled to an aggregate dividend of 1,000 times the dividend
declared per KeraVision common share. If KeraVision is liquidated, the holders
of the Series A preferred shares will be entitled to a preferential liquidation
payment equal to accrued but unpaid dividends plus the greater of $1,000 per
share and 1,000 times the aggregate per share amount to be distributed to the
holders of KeraVision common stock. Each Series A preferred share will have
1,000 votes, voting together with the holders of the KeraVision common stock,
except as required by law or the certificate of designation relating to the
Series A preferred stock. In a merger, consolidation or other transaction in
which KeraVision common stock is changed or exchanged, each Series A preferred
share will be entitled to receive 1,000 times the amount received per share of
KeraVision common stock. These rights are protected by customary anti-dilution
provisions. Because of the nature of the dividend, liquidation and voting
rights of the Series A preferred shares, the value of the one one-thousandth
interest in a share of Series A preferred stock purchasable upon exercise of
each KeraVision right should approximate the value of one share of common
stock.
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<PAGE>
Series B Preferred Stock
KeraVision's board of directors designated 662,500 shares of preferred stock
as Series B convertible preferred stock. The Series B preferred stock is
entitled to receive preferential quarterly dividends at the rate of seven
percent per annum. These quarterly dividends are payable, at the election of
KeraVision, in either cash or additional shares of Series B preferred stock. No
dividends may be paid to the holders of KeraVision common stock, other than
dividends paid in KeraVision common stock, until all accrued but unpaid
dividends have been paid to the holders of the Series B preferred stock. As of
June 30, 1999, there were accrued dividends in the amount of $297,200,
calculated at a rate of $2.24 per share of Series B preferred stock per annum,
which will be paid in the form of 6,671 additional shares of Series B preferred
stock. The preferential nature of the Series B preferred shares may impair
KeraVision's ability to pay dividends on its common stock in the future.
Each Series B preferred share is convertible at the option of the holder into
four shares of common stock at $8.00 per share. The Series B preferred shares
are convertible at KeraVision's option after June 12, 2000 if the price of its
common stock exceeds $16.00 per share. The conversion rate is subject to
adjustment in the event of circumstances which are described in the certificate
of designation relating to the Series B preferred shares, including:
. if the then-current value of the common stock is below $8.00 per share on
June 12, 2000;
. If KeraVision issues additional stock, with limited exceptions such as
stock issued in connection with employee stock option plans, stock issued
upon the conversion of Series B preferred stock and various financing
transactions, without consideration or for less than the conversion rate
then in effect; or
. if KeraVision executes a stock split.
The rate of conversion of Series B preferred shares to shares of common stock
has no maximum limit. As a result, the conversion of the Series B preferred
shares into common stock may cause the interest of the holders of KeraVision
common stock to be diluted.
The Series B preferred shares are redeemable at the option of the holders
after June 12, 2003 for $32.00 per share plus all accrued and unpaid dividends.
Holders of the Series B shares are entitled to have notice of any authorized
meeting of stockholders. At a meeting of stockholders, holders of the Series B
preferred stock are entitled to vote together with holders of KeraVision common
stock on all matters upon which holders of KeraVision common stock are entitled
to vote. Each share of Series B preferred stock is entitled to one vote for
each share of KeraVision common stock into which a share of Series B preferred
stock is convertible. In addition, so long as there are 300,000 shares of
Series B preferred stock outstanding, the holders of Series B preferred shares
are entitled to elect one member of the KeraVision board.
The holders of Series B preferred stock received registration rights for
shares of our common stock, into which the preferred stock is convertible. A
registration statement on Form S-3 is currently on file with the SEC pursuant
to which the holders of our Series B preferred stock may publicly resell the
shares of our common stock that they will receive at the time they convert
their shares of Series B preferred stock.
Certain Anti-Takeover, Limited Liability and Indemnification Provisions
Delaware Anti-Takeover Law. We are a Delaware corporation subject to Section
203 of the Delaware General Corporation Law ("DGCL"). Under Section 203,
certain "business combinations" between a Delaware corporation whose stock
generally is publicly traded or held of record by more than 2,000 stockholders
and an "interested stockholder" are prohibited for a three-year period
following the date that such stockholder became an interested stockholder,
unless (i) the corporation has elected in its certificate of incorporation not
to be governed by Section 203 (we have not made such an election), (ii) the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder was
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<PAGE>
approved by the board of directors of the corporation before such stockholder
became an interested stockholder, (iii) upon consummation of the transaction
that made such stockholder an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the commencement of the transaction (excluding voting stock
owned by directors who are also officers or held in employee benefit plans in
which the employees do not have a confidential right to tender stock held by
the plan in a tender or exchange offer) or (iv) the business combination is
approved by the board of directors of the corporation and authorized at a
meeting by two-thirds of the voting stock which the interested stockholder did
not own. The three-year prohibition also does not apply to certain business
combinations proposed by an interested stockholder following the announcement
or notification of certain extraordinary transactions involving the corporation
and a person who had not been an interested stockholder during the previous
three years or who became an interested stockholder with the approval of a
majority of the corporation's directors. The term "business combination" is
defined generally to include mergers or consolidations between a Delaware
corporation and an interested stockholder, transactions with an interested
stockholder involving the assets or stock of the corporation or its majority-
owned subsidiaries, and transactions which increase an interested stockholder's
percentage ownership of stock. The term "interested stockholder" is defined
generally as a stockholder who becomes a beneficial owner of 15% or more of a
Delaware corporation's voting stock, together with the affiliates or associates
of that stockholder.
Limitation of Officer and Director Liability and Indemnification
Arrangements Our Amended and Restated Certificate of Incorporation provides
that an officer or director of ours will not be personally liable to us or our
stockholders for monetary damages for any breach of his fiduciary duty as an
officer or director, except in certain cases where liability is mandated by the
DGCL. The provision has no effect on any non-monetary remedies that may be
available to us or our stockholders, nor does it relieve us or our officers or
directors from compliance with federal or state securities laws. The
certificate also generally provides that we shall indemnify, to the fullest
extent permitted by law, any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit,
investigation, administrative hearing or any other proceeding by reason of the
fact that he is or was a director or officer of ours, or is or was serving at
our request as a director, officer, employee or agent of another entity,
against expenses incurred by him in connection with such proceeding. An officer
or director shall not be entitled to indemnification by us if (i) the officer
or director did not act in good faith and in a manner reasonably believed to be
in, or not opposed to, our best interests, or (ii) with respect to any criminal
action or proceeding, the officer or director had reasonable cause to believe
his conduct was unlawful.
Transfer Agent and Registrar
Boston EquiServe, L.P. is the transfer agent and registrar for the common
stock.
Stockholder Rights Plan
The KeraVision board has adopted a rights plan. The rights plan is designed
to help our board maximize stockholder value in the event of a change of
control of KeraVision and otherwise to resist actions that the board considers
likely to injure our stockholders. KeraVision believes that the rights plan
will permit us to develop our business and foster our long-term growth without
disruptions caused by the threat of a takeover not deemed by our board to be in
our stockholder's best interests. Generally, the rights plan will encourage any
potential acquirer to negotiate directly with our board. As a result, the
rights plan may have the effect of deterring third parties from making
proposals involving an acquisition or change of control of KeraVision, although
such proposals, if made, might be considered desirable and beneficial by a
majority of our stockholders. The rights plan could have the further anti-
takeover effect of making it more difficult for third parties to acquire a
majority of our common stock or to cause the replacement of our board.
In August 1997, the KeraVision board declared a dividend of one preferred
share purchase right for each outstanding share of common stock. Each
KeraVision right entitles the holder to purchase one one-thousandth
43
<PAGE>
of a share of Series A preferred stock, at a price of $60.00 per share. The
KeraVision rights are not now exercisable, and may never be exercisable. The
KeraVision rights will expire on the earlier of (i) August 17, 2007, unless
extended, or (ii) their redemption or exchange as described below. Until a
KeraVision right is exercised, it confers no rights to a stockholder.
In general, until the KeraVision rights are exercisable, redeemed or
exchanged, each KeraVision Right will trade together with and cannot be
separated from the underlying share of common stock on which the right was
declared.
The KeraVision rights will separate from the common stock if there is a
"distribution date." A distribution date would occur on the tenth day after the
earlier of (i) a public announcement that someone has obtained the right to
acquire beneficial ownership of 20% or more of the outstanding shares of
KeraVision common stock or (ii) the commencement or public announcement of a
tender offer that would result in someone acquiring such ownership. If a
distribution date occurs, the KeraVision rights would become exercisable and
separately tradeable, and KeraVision would issue certificates for the
KeraVision rights as soon as possible. Any KeraVision rights which belong to an
acquiring person are null and void.
KeraVision rights will attach to and be evidenced by each share of KeraVision
common stock which is issued prior to a distribution date. Accordingly, the
shares of KeraVision common stock issued by KeraVision in this offering, will
evidence the related KeraVision rights and certificates representing these
shares will contain a notation incorporating the rights plan by reference.
The amount of Series A preferred stock that the holder of a KeraVision right
is entitled to receive upon exercise of the KeraVision right and the purchase
price payable upon exercise of the KeraVision right are both subject to
adjustment.
The KeraVision board may redeem the KeraVision rights in whole, but not in
part, at a redemption price of $0.01 per KeraVision right, at any time before a
distribution date. After a distribution date, the KeraVision rights may be
redeemed only in very limited circumstances.
44
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an Underwriting Agreement
dated , 1999, the underwriters named below (the "underwriters"), who are
represented by Donaldson, Lufkin & Jenrette Securities Corporation, Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, Prudential
Securities Incorporated, and SG Cowen Securities Corporation, have severally
agreed to purchase from us the respective numbers of shares of common stock set
forth opposite their names below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation..................
Dain Rauscher Wessels................................................
Prudential Securities Incorporated...................................
SG Cowen Securities Corporation......................................
---------
Total.............................................................. 4,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of certain legal
matters and to certain other conditions. The underwriters are obligated to
purchase and accept delivery of all the shares of common stock offered hereby
(other than those shares covered by the over-allotment option described below)
if any are purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the public offering price set forth on the cover
page of this prospectus and in part to certain dealers (including the
underwriters) at such price less a concession not in excess of $ per share.
The underwriters may allow, and such dealers may re-allow, to certain other
dealers a concession not in excess of $ per share. After the initial
offering of the common stock, the public offering price and other selling terms
may be changed by the representatives of the underwriters at any time without
notice.
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in this offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect Inc. for sale to its
brokerage account holders.
The following table shows the underwriting fees we will pay to underwriters
in connection with this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares of our common stock.
<TABLE>
<CAPTION>
Paid by
KeraVision
-----------------
No Full
Exercise Exercise
<S> <C> <C>
Per share..................................................... $ $
Total......................................................... $ $
</TABLE>
We will pay the offering expenses, estimated to be $650,000.
Either KeraVision or an existing stockholder will grant to the underwriters
an option, exercisable for 30 days from the date of this prospectus, to
purchase up to an additional 600,000 shares of our common stock at the public
offering price less the underwriting fees. The underwriters may exercise their
option solely to cover over-allotments, if any, made in connection with this
offering. To the extent that the underwriters exercise their option, each
underwriter will become obligated, subject to conditions, to purchase a number
of additional shares of our common stock approximately proportionate to that
underwriter's initial purchase commitment.
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments that the underwriters may be required to make in respect
to those liabilities.
45
<PAGE>
Each of KeraVision, our executive officers and directors and certain
stockholders will agree, subject to certain exceptions, not to
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock
for a period of 90 days after the date of this prospectus without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation. During
such 90-day period, KeraVision may grant stock options pursuant to KeraVision's
existing stock option plan and may issue shares of common stock upon the
exercise of an option or warrant or the conversion of a security outstanding as
of the date of this prospectus. In addition, during such 90-day period,
KeraVision has also agreed not to file any registration statement with respect
to, and each of its executive officers, directors and certain stockholders of
KeraVision has agreed not to make any demand for, or exercise any right with
respect to, the registration of any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
Our shares of common stock are listed on The Nasdaq National Market under the
symbol "KERA."
The shares of common stock offered hereby may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and observe any restrictions
relating to the offering and the distribution of this prospectus. This
prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any shares of common stock offered hereby in any jurisdiction in which
such an offer or a solicitation is unlawful.
Sprout Capital VIII, L.P., Sprout Capital VI, L.P., Sprout CEO Fund, L.P.,
Sprout Venture Capital, L.P., DLJ ESC II, L.P. and DLJ Capital Corporation
(collectively, the "Sprout Entities") are affiliates of Donaldson, Lufkin &
Jenrette Securities Corporation, one of the underwriters. As described under
"Principal Stockholders," the Sprout Entities beneficially own an aggregate of
1,649,070 shares of the outstanding common stock as of June 30, 1999, which
represent more than 10% of the outstanding common stock. Of these shares
approximately 680,000 are expected to become subject to a voting trust
agreement prior to the completion of the offering and are expected to be held
and voted by an independent third party, as voting trustee. Sprout Capital
VIII, L.P. may elect to fund up to 600,000 shares of common stock of the
underwriters' over-allotment option. In the event the over-allotment is
exercised in full and Sprout Capital VIII, L.P. sells 600,000 shares of common
stock pursuant thereto, the Sprout Entities would beneficially own 1,049,070
shares of common stock after the offering, or 5.3%.
The underwriters and dealers may engage in passive market making transactions
in the common stock in accordance with Rule 103 of Regulation M promulgated by
the Securities and Exchange Commission. In general, a passive market maker may
not bid for or purchase shares of common stock at a price that exceeds the
highest independent bid. In addition, the net daily purchases made by any
passive market maker generally may not exceed 30% of its average daily trading
volume in the common stock during a specified two month prior period, or 200
shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market making may stabilize or maintain the market price of the
common stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
46
<PAGE>
In connection with this offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of KeraVision's common
stock. Specifically, the underwriters may over-allot the offering, creating a
syndicate short position. The underwriters may bid for and purchase shares of
common stock in the open market to cover such syndicate short position or to
stabilize the price of the common stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members and selected
dealers if they repurchase previously distributed common stock in syndicate
covering transactions, in stabilizing transactions or otherwise. These
activities may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
LEGAL MATTERS
The validity of the common stock being offered will be passed upon for
KeraVision by Latham & Watkins, Menlo Park, California. Orrick, Herrington &
Sutcliffe LLP, San Francisco, California has acted as counsel for the
underwriters in connection with this offering.
EXPERTS
Ernst & Young LLP, independent auditors, have audited KeraVision's
consolidated financial statements as of December 31, 1998 and 1997, and for
each of the three years in the period ended December 31, 1998. These
consolidated financial statements have been included in this prospectus in
reliance on the report of Ernst & Young LLP, independent auditors, given on
their authority as experts in accounting and auditing.
47
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Available Information
KeraVision files annual, quarterly and special reports, as well as
registration and proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any document filed with the SEC by
KeraVision, including this registration statement on Form S-3 and exhibits, at
the Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 or
at the SEC's Regional Offices located at 7 World Trade Center, Suite 1300, New
York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You can get further information from the SEC's
Public Reference Room by calling 1-800-SEC-0330. The SEC also maintains a web
site at http://www.sec.gov which contains reports, registration statements and
other information regarding registrants like KeraVision that file
electronically with the SEC.
This prospectus is part of a registration statement on Form S-3 filed by
KeraVision with the SEC under the Securities Act of 1933 with respect to this
offering of common stock. As permitted by the SEC, this prospectus, which
constitutes part of the registration statement on Form S-3, does not contain
all of the information in the registration statement filed with the SEC. For a
fuller understanding of this offering, you can look at the complete
registration statement on Form S-3 which may be obtained from the locations
described above.
Incorporation by Reference
The SEC allows us to "incorporate by reference" the information we file with
the SEC, which means that we can disclose important information to you by
referring you to documents we filed with the SEC. We incorporate by reference
the documents listed below, and all documents subsequently filed by us with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934 prior to the termination of the offering. The information we incorporate
by reference is part of this prospectus, and any later information that
KeraVision files with the SEC will automatically update and supersede this
information.
The documents KeraVision incorporates by reference are:
1. KeraVision's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, as amended on May 3, 1999;
2. KeraVision's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999;
3. KeraVision's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999;
4. KeraVision's Current Report on Form 8-K filed on January 14, 1999;
5. KeraVision's Current Report on Form 8-K filed on February 10, 1999;
6. KeraVision's Current Report on Form 8-K filed on February 18, 1999;
7. KeraVision's Current Report on Form 8-K filed on April 19, 1999;
8. KeraVision's Current Report on Form 8-K filed on April 30, 1999;
9. KeraVision's Current Report on Form 8-K filed on June 11, 1999;
10. KeraVision's Current Report on Form 8-K filed on July 1, 1999;
11. KeraVision's Current Report on Form 8-K filed on July 20, 1999;
12. KeraVision's Amended Current Report on Form 8-K/A filed on August 3,
1999; and
13. The description of KeraVision's common stock set forth in its
registration statement on Form 8-A filed with the Commission on June
27, 1995.
Documents incorporated by reference are available from KeraVision without
charge, excluding all exhibits except those that have been specifically
incorporated by reference in this Prospectus. You may obtain documents
incorporated by reference by requesting them in writing or by telephone from
KeraVision, 48630 Milmont Drive, Fremont, California 94538 (telephone 510-353-
3000); attention: Investor Relations. Our internet address is
www.keravision.com.
48
<PAGE>
KERAVISION, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Net Capital Deficiency)........................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Unaudited Condensed Consolidated Balance Sheets.......................... F-17
Unaudited Condensed Consolidated Statements of Operations................ F-18
Unaudited Condensed Consolidated Statements of Cash Flows................ F-19
Notes to Unaudited Condensed Consolidated Financial Statements........... F-20
</TABLE>
F-1
<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, 1998 and 1997, and the related consolidated statements
of operations, redeemable convertible preferred stock and stockholders' equity
(net capital deficiency), and cash flows for each of the three years in the
period ended December 31, 1998. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of KeraVision, Inc. at December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
February 3, 1999,
except for Note 9,
as to which the date
is March 25, 1999
San Jose, California
F-2
<PAGE>
KERAVISION, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 1,449 $ 2,574
Available-for-sale investments........................... 6,279 11,539
Prepaid expenses and other current assets................ 1,508 1,265
-------- --------
Total current assets....................................... 9,236 15,378
Property and equipment, at cost:
Manufacturing and laboratory equipment................... 3,709 3,298
Office furniture and fixtures............................ 597 586
Leasehold improvements................................... 636 383
-------- --------
4,942 4,267
Accumulated depreciation and amortization.................. (3,102) (2,398)
-------- --------
Net property and equipment............................... 1,840 1,869
Other assets............................................... 108 98
-------- --------
Total assets............................................... $ 11,184 $ 17,345
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
Current liabilities:
Accounts payable......................................... $ 1,742 $ 1,089
Accrued payroll and related expenses..................... 581 489
Accrued clinical trial costs............................. 1,282 1,211
Other accrued liabilities................................ 204 414
Current portion of capital lease obligations............. 512 355
-------- --------
Total current liabilities.................................. 4,321 3,558
Capital lease obligations.................................. 821 850
Redeemable convertible series B preferred stock, no par
value:
Authorized shares--662,500;
Issued and outstanding shares--562,500 at December 31,
1998, aggregate liquidation preference of $20,520....... 17,489 --
Commitments and contingencies
Stockholders' equity (net capital deficiency):
Preferred stock, par value $.001, 2,000,000 shares
authorized, none issued and outstanding................. -- --
Common stock, par value $.001, 30,000,000 shares
authorized,
12,776,920 and 12,593,646 shares issued and outstanding
in
1998 and 1997, respectively............................. 13 13
Additional paid-in capital............................... 80,162 76,540
Deferred compensation.................................... (30) (179)
Accumulated other comprehensive income................... 109 44
Accumulated deficit...................................... (90,092) (62,678)
Notes receivable from stockholders....................... (1,609) (803)
-------- --------
Total stockholders' equity (net capital deficiency)........ (11,447) 12,937
-------- --------
Total liabilities and stockholders' equity (net capital
deficiency)............................................... $ 11,184 $ 17,345
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
KERAVISION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
<S> <C> <C> <C>
Net sales....................................... $ 835 $ 355 $ 137
Costs and expenses:
Cost of sales and manufacturing expenses....... 4,386 3,701 319
Research and development....................... 11,356 10,774 10,888
Selling, general and administrative............ 9,693 6,405 3,930
-------- -------- --------
Total costs and expenses........................ 25,435 20,880 15,137
-------- -------- --------
Operating loss.................................. (24,600) (20,525) (15,000)
Interest income, net............................ 563 1,129 2,121
-------- -------- --------
Net loss........................................ (24,037) (19,396) (12,879)
-------- -------- --------
Preferred stock dividends:
Redeemable convertible series B................ (846) -- --
Deemed dividend (Note 5)....................... (2,531) -- --
-------- -------- --------
Net loss applicable to common stockholders...... $(27,414) $(19,396) $(12,879)
======== ======== ========
Basic and diluted net loss per share applicable
to common stockholders......................... $ (2.16) $ (1.55) $ (1.04)
Shares used in calculation of basic and diluted
net loss per share............................. 12,686 12,528 12,342
</TABLE>
See accompanying notes.
F-4
<PAGE>
KERAVISION, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Redeemable Convertible Accumulated
Preferred Stock Common Stock Additional Other
----------------------- ----------------- Paid-In Deferred Comprehensive Comprehensive Accumulated
Shares Amount Shares Amount Capital Compensation Income/(loss) Income Deficit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1995............. -- $ -- 12,262,845 $12 $75,710 $ (477) $ -- $-- $ (30,403)
Issuance of
common stock upon
exercise of
options.......... -- -- 181,957 -- 404 -- -- -- --
Amortization of
deferred
compensation..... -- -- -- -- -- 149 -- -- --
Forgiveness of
notes receivable
from
stockholders, net
of accrued
interest......... -- -- -- -- -- -- -- -- --
Comprehensive
income (loss): -- --
Net loss......... -- -- -- -- -- -- (12,879) -- (12,879)
--------
Other
comprehensive
income (loss),
net of tax: -- --
Change in
unrealized gain
on available-
for-sale
securities, net
of
reclassification
adjustments..... -- -- -- -- -- -- 18 -- --
Foreign currency
translation
adjustments..... -- -- -- -- -- -- (1) -- --
--------
Other
comprehensive
income.......... -- -- -- -- -- -- 17 17 --
--------
Comprehensive
income (loss).... -- -- -- -- -- -- $(12,862) --
----------- ----------- ---------- --- ------- ------ ======== ---- ---------
Balance at
December 31, 1996 -- -- 12,444,802 12 76,114 (328) 17 (43,282)
Issuance of
common stock upon
exercise of
options.......... -- -- 148,844 1 426 -- -- -- --
Amortization of
deferred
compensation..... -- -- -- -- -- 149 -- -- --
Accrued interest
on notes
receivable from
stockholders..... -- -- -- -- -- -- -- -- --
Comprehensive
income (loss): -- --
Net loss......... -- -- -- -- -- -- (19,396) -- (19,396)
--------
Other
comprehensive
income, net of
tax: -- --
Change in
unrealized gain
on available-
for-sale
securities, net
of
reclassification
adjustments..... -- -- -- -- -- -- 26 -- --
Foreign currency
translation
adjustments..... -- -- -- -- -- -- 1 -- --
--------
Other
comprehensive
income.......... -- -- -- -- -- -- 27 27 --
--------
Comprehensive
income (loss).... -- -- -- -- -- -- $(19,369) -- --
----------- ----------- ---------- --- ------- ------ ======== ---- ---------
Balance at
December 31,
1997............. -- -- 12,593,646 13 76,540 (179) 44 (62,678)
Issuance of
common stock upon
exercise of
options.......... -- -- 183,274 -- 598 -- -- -- --
Issuance of
redeemable
convertible
series B
preferred stock,
net of issuance
costs............ 562,500 14,112 -- -- 2,531 -- -- -- --
Accretion of
dividends on
preferred stock.. -- 150 -- -- -- -- -- -- (150)
Dividends on
preferred stock
to be
distributed...... -- 696 -- -- -- -- -- -- (696)
Dividends on
series B
preferred stock
issuance related
to deemed
dividend (Note
5)............... -- 2,531 -- -- -- -- -- -- (2,531)
Amortization of
deferred
compensation..... -- -- -- -- -- 149 -- -- --
Issuance of
stockholder
notes............ -- -- -- -- -- -- -- -- --
Forgiveness of
notes receivable
from
stockholders, net
of accrued
interest......... -- -- -- -- -- -- -- -- --
Accrued interest
on notes
receivable from
stockholders..... -- -- -- -- -- -- -- -- --
Compensation
expense related
to employee stock
activity......... -- -- -- -- 493 -- -- -- --
Comprehensive
income (loss): -- --
Net loss......... -- -- -- -- -- -- (24,037) -- (24,037)
--------
Other
comprehensive
income (loss),
net of tax: -- --
Change in
unrealized gain
on available-
for-sale
securities, net
of
reclassification
adjustments..... -- -- -- -- -- -- (42) -- --
Foreign currency
translation
adjustments..... -- -- -- -- -- -- 107 -- --
--------
Other
comprehensive
income.......... -- -- -- -- -- -- 65 65 --
--------
Comprehensive
income (loss).... -- -- -- -- -- -- $(23,972) -- --
----------- ----------- ---------- --- ------- ------ ======== ---- ---------
Balance at
December 31,
1998............. 562,500 $ 17,489 12,776,920 $13 $80,162 $ (30) $109 $ (90,092)
=========== =========== ========== === ======= ====== ==== =========
<CAPTION>
Total
Notes Stockholders'
Receivable Equity
From (net capital
Stockholders deficiency)
<S> <C> <C>
Balance at
December 31,
1995............. $ (807) $ 44,035
Issuance of
common stock upon
exercise of
options.......... -- 404
Amortization of
deferred
compensation..... -- 149
Forgiveness of
notes receivable
from
stockholders, net
of accrued
interest......... 39 39
Comprehensive
income (loss):
Net loss......... -- (12,879)
Other
comprehensive
income (loss),
net of tax:
Change in
unrealized gain
on available-
for-sale
securities, net
of
reclassification
adjustments..... -- 18
Foreign currency
translation
adjustments..... -- (1)
Other
comprehensive
income.......... -- --
Comprehensive
income (loss).... -- --
------------ -------------
Balance at
December 31, 1996 (768) 31,765
Issuance of
common stock upon
exercise of
options.......... -- 427
Amortization of
deferred
compensation..... -- 149
Accrued interest
on notes
receivable from
stockholders..... (35) (35)
Comprehensive
income (loss):
Net loss......... -- (19,396)
Other
comprehensive
income, net of
tax:
Change in
unrealized gain
on available-
for-sale
securities, net
of
reclassification
adjustments..... -- 26
Foreign currency
translation
adjustments..... -- 1
Other
comprehensive
income.......... -- --
Comprehensive
income (loss).... -- --
------------ -------------
Balance at
December 31,
1997............. (803) 12,937
Issuance of
common stock upon
exercise of
options.......... -- 598
Issuance of
redeemable
convertible
series B
preferred stock,
net of issuance
costs............ -- 2,531
Accretion of
dividends on
preferred stock.. -- (150)
Dividends on
preferred stock
to be
distributed...... -- (696)
Dividends on
series B
preferred stock
issuance related
to deemed
dividend (Note
5)............... -- (2,531)
Amortization of
deferred
compensation..... -- 149
Issuance of
stockholder
notes............ (776) (776)
Forgiveness of
notes receivable
from
stockholders, net
of accrued
interest......... 46 46
Accrued interest
on notes
receivable from
stockholders..... (76) (76)
Compensation
expense related
to employee stock
activity......... -- 493
Comprehensive
income (loss):
Net loss......... -- (24,037)
Other
comprehensive
income (loss),
net of tax:
Change in
unrealized gain
on available-
for-sale
securities, net
of
reclassification
adjustments..... -- (42)
Foreign currency
translation
adjustments..... -- 107
Other
comprehensive
income.......... -- --
Comprehensive
income (loss).... -- --
------------ -------------
Balance at
December 31,
1998............. $(1,609) $(11,447)
============ =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
KERAVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(24,037) $(19,396) $(12,879)
Adjustments to reconcile net loss to net cash
used in operating
activities:
Depreciation and amortization.................. 704 652 448
Issuance of stockholders' notes receivable..... (776) -- --
Interest receivable on stockholders' notes..... (76) (35) (41)
Expenses related to employee stock activity,
including amortization of deferred
compensation.................................. 688 149 229
Changes in operating assets and liabilities:
Prepaid expenses and other current assets.... (115) 32 (1,025)
Accounts payable............................. 653 116 528
Other accrued liabilities.................... (47) 504 391
-------- -------- --------
Net cash used in operating activities......... (23,006) (17,978) (12,349)
-------- -------- --------
Cash flows from investing activities:
Purchases of available-for-sale investments..... (22,214) (20,620) (40,402)
Sales of available-for-sale investments......... 25,210 11,408 10,790
Maturities of available-for-sale investments.... 2,201 21,474 5,855
Capital expenditures............................ (675) (545) (1,550)
Other assets.................................... (10) 49 (77)
-------- -------- --------
Net cash provided by (used in) investing
activities................................... 4,512 11,766 (25,384)
-------- -------- --------
Cash flows from financing activities:
Principal payments under capital lease
obligations.................................... (480) (427) (156)
Proceeds from sales-leaseback of capital
equipment...................................... 608 495 1,073
Proceeds from issuance of equity securities, net
of repurchases................................. 598 427 404
Proceeds from issuance of redeemable convertible
Series B
preferred stock, net of issuance costs......... 16,643 -- --
-------- -------- --------
Net cash provided by financing activities.... 17,369 495 1,321
-------- -------- --------
Net decrease in cash and cash equivalents........ (1,125) (5,717) (36,412)
Cash and cash equivalents at the beginning of the
year............................................ 2,574 8,291 44,703
-------- -------- --------
Cash and cash equivalents at the end of the
year............................................ $ 1,449 $ 2,574 $ 8,291
======== ======== ========
Supplemental disclosure of non-cash financing
activities:
Accrued and deemed dividends related to preferred
stock........................................... $ 3,227 $ -- $ --
======== ======== ========
Accretion related to preferred stock............. $ 150 $ -- $ --
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid for interest........................... $ 123 $ 140 $ 25
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<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 Intacs corneal ring segments, 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 Intacs or the instruments.
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, 1998, the Company had
an accumulated deficit of $90.0 million and incurred a net loss of $24.0
million for the year then ended.
On December 23, 1998, the Company announced that it had entered into a
definitive merger agreement to acquire Transcend Therapeutics, Inc. (Nasdaq:
TSND) and its anticipated net cash balance of about $8 million (see Note 8). In
March 1999, the Company entered into a senior term loan agreement providing for
borrowings of $5,000,000, which was advanced on March 25, 1999 (see Note 9--
Subsequent Events).
Management's planned expenditures for 1999 exceed current cash, cash
equivalents and available-for-sale investments and the funds from the Transcend
acquisition and the senior term loan. 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 1999. The
Company intends to raise additional funds through the sale of its equity
securities and/or debt financing. 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 additional
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 manage operating cash requirements
through December 31, 1999. These actions would have material adverse effects on
the Company's business, results of operations, and prospects.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 establishes standards for the
F-7
<PAGE>
KERAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements and is effective for fiscal years
beginning after December 15, 1997. The Company adopted FAS 130 in 1998. The
impact to the Company as a result of the adoption of FAS 130 was immaterial as
there was no significant difference between the Company's net loss reported and
the comprehensive net loss under FAS 130 for the periods presented.
Segment Information
The Company operates in one business segment, which is the development,
production and marketing of medical products for the treatment of common vision
problems. The Chief Executive Officer has been identified as the Chief
Operating Decision Maker (CODM) because he has final authority over resource
allocation decisions and performance assessment. The CODM does not receive
discrete financial information about individual components or geographical
information.
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.
Concentration of Credit Risk and Other Risks
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents, short-term investments
and accounts receivables. The Company was founded to develop and commercialize
proprietary medical products for the treatment of common vision problems. The
Company generally does not require collateral. The Company maintains allowances
for credit losses, and such losses have been within management's expectations.
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.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," the Company continually reviews long-lived assets to assess
recoverability based upon undiscounted cash flow analysis. Impairments, if any,
are recognized in operating results in the period in which a permanent
diminuation in value is determined.
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
F-8
<PAGE>
KERAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998 and 1997, 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, 1998 and 1997, 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 (net capital
deficiency). 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. The Company
provides allowances for estimated bad debts and sales returns, which have not
been material to date. Customers do not have significant return privileges.
Product sales in 1997 were composed principally of sales to the European market
through the Company's French sales office and German distributor. In 1998,
approximately 51% of the Company's sales were generated from its limited
product launch into the Canadian market, and the balance of the sales were in
Europe.
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.
Advertising Expenses
The cost of advertising is recorded as an expense when incurred. Advertising
costs for the years ended December 31, 1998 were $1.7 million. Advertising
expenses for the years ended December 31, 1997, and 1996 were immaterial.
Accounting for Employee Stock Options
The Company accounts for stock-based compensation issued to employees and
directors, including outside directors, using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB Opinion No. 25). No grants were made to outside
directors subsequent to December 15, 1998. The Company's policy is to grant
options with an exercise price equal to the
F-9
<PAGE>
KERAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
fair market value of the Company's common stock on the date of the grant.
Accordingly, no compensation cost, other than the compensation discussed in
Note 6, has been recognized in the Company's statements of operations. The
Company provides additional pro forma disclosures as required under Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (FAS 123) (see Note 6).
Income Taxes
Income taxes are calculated under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under
FAS 109, the liability method is used in accounting for income taxes, which
includes the effects of temporary differences between financial and taxable
amounts of assets and liabilities.
2. Investments
At December 31, 1998, the Company's investments were composed of the
following (in thousands):
<TABLE>
<CAPTION>
Gross Estimated
Unrealized Fair
Cost Gains Value
<S> <C> <C> <C>
Money market instruments........................ $ 215 $ -- $ 215
Certificates of deposit......................... 165 -- 165
Auction rate preferred.......................... 1,875 -- 1,875
Corporate debt securities....................... 4,859 2 4,861
------ ----- ------
Available-for-sale investments.................. 7,114 2 7,116
Included in cash and cash equivalents........... (837) -- (837)
------ ----- ------
Included in available-for-sale investments...... $6,277 $ 2 $6,279
====== ===== ======
</TABLE>
The $7,116,000 included in available-for-sale investments matures in less
than one year. During 1998, 1997 and 1996 there were no gross realized gains or
losses.
At December 31, 1997, the Company's investments were composed of the
following (in thousands):
<TABLE>
<CAPTION>
Gross Estimated
Unrealized Fair
Cost Gains Value
<S> <C> <C> <C>
Money market instruments..................... $ 2,574 $ -- $ 2,574
Certificates of deposit...................... 659 -- 659
U.S treasury bills & other governmental
agency obligations.......................... 3,003 -- 3,003
Corporate debt securities.................... 7,835 42 7,877
------- ----- -------
14,071 42 14,113
Included in cash and 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.
F-10
<PAGE>
KERAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Capital Lease Obligations
The Company leases certain office and manufacturing equipment under
capitalized leases which expire in 2002. The total future minimum lease
payments under capital leases as of December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended December 31:
<S> <C>
1999............................................................. $ 646
2000............................................................. 563
2001............................................................. 233
2002............................................................. 150
------
Total minimum lease payments..................................... 1,592
Amounts representing interest.................................... (259)
------
Present value of minimum lease payments.......................... 1,333
Less current portion............................................. (512)
------
Noncurrent portion............................................... $ 821
======
</TABLE>
The cost of assets under capital leases at December 31, 1998 and 1997 were
$2,552,000 and $1,987,000 with related accumulated amortization amounting to
$1,293,000 and $851,000, respectively.
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, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................... $261
2000............................................................... --
----
Total minimum lease payments....................................... $261
====
</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
On June 12, 1998, the Company issued 562,500 shares of the Company's series B
redeemable convertible preferred stock (the "Series B Shares") at $32.00 per
share. The series B shares are entitled to receive quarterly dividends at the
rate of seven percent (7%) per annum, payable, at the election of the Company,
in either cash or additional series B shares, as described in the Certificate
of Designation of Rights, Preferences and Privileges of series B convertible
preferred stock (the "Certificate of Designation"). Each series B share is
immediately convertible, at the option of the holders, into four shares of
common stock at $8.00 per share. The series B shares are convertible at the
Company's option, at the applicable conversion rate which is currently $8.00
per share, after two years if the price of the Company's common stock exceeds
$16.00 per share. The
F-11
<PAGE>
KERAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
conversion rate is subject to adjustment in the event of certain circumstances
described in the Certificate of Designation, including if the then-current
value of the common stock is below $8.00 per share on June 12, 2000. The series
B shares are redeemable, at $32 per share, at the option of the holders after
five (5) years. The cumulative quarterly dividends as of December 31, 1998 were
approximately $696,000. For the year ended December 31, 1998, preferred
dividends of $696,000, accretion of $150,000 and the deemed dividends,
representing the difference, at the date of issuance, between the market value
of the Company's common stock of $9.125 at June 12, 1998 and the conversion
price of the Company's series B convertible preferred stock of $2.5 million are
added to the net loss to arrive at net loss applicable to common stockholders.
The difference between the carrying value of the preferred stock and the
aggregate redemption value is being accreted as preferred stock dividends over
the five year redemption period.
Upon any liquidation, dissolution or winding up of the Company, no
distribution shall be made to the holders of shares of stock ranking junior to
the series B convertible preferred stock unless, prior thereto, the holders of
shares of series B convertible preferred stock have received an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment, plus an amount equal to $32 per share
and in the event such payment is made on or before June 12, 2000, an amount
equal to $4.48 per share, less (i) the accrued dividends and (ii) dividends
previously paid. Preferred stockholders are additionally entitled to any
dividends distributed to common stockholders.
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.
In October 1998, the board of directors authorized the Company to offer all
employees the opportunity to cancel certain previously granted options in
exchange for new options with four year vesting and fair market value prices of
$5.938. The repriced options may not be exercised prior to October 28, 1999. In
connection with this offer, options to purchase 410,977 shares of common stock
with a weighted-average price of $11.72 were exchanged for 328,781 new options.
F-12
<PAGE>
KERAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information relative to stock option activity under all plans is as follows:
<TABLE>
<CAPTION>
Outstanding Options
--------------------------------
Weighted-
Average Aggregate
Available Number Exercise Exercise
for Grant of Shares Price Price
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
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
Authorized....................... 590,000 -- -- --
Granted, including 328,781
repriced options................ (892,131) 949,731 6.14 5,859,373
Canceled......................... 601,164 (679,204) 11.36 (7,712,820)
Exercised........................ -- (152,556) 2.72 (415,491)
-------- --------- -----------
Balance at December 31, 1998....... 591,183 1,481,576 $ 6.80 $10,080,488
======== ========= ===========
</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, 1998 and 1997, approximately 284,926 and 514,656,
respectively, of the outstanding options were exercisable.
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------ -----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices 12/31/98 Life Price 12/31/98 Price
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.875 - 5.438 492,089 8.19 $ 4.77 107,070 $ 3.82
5.75 - 6.25 374,981 8.49 5.97 3,411 5.96
7.125 - 8.75 440,169 7.05 7.74 131,645 8.25
9.125 - 15.50 174,337 8.78 11.97 42,800 13.01
--------- -------
$1.875 - 15.50 1,481,576 8.00 $ 6.80 284,926 $ 7.27
========= =======
</TABLE>
F-13
<PAGE>
KERAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has adopted the disclosure-only provisions of FAS 123.
Accordingly, no compensation cost has been recognized for stock options granted
in 1998, 1997 and 1996 with exercise prices equal to the fair value of the
Company's common stock on the date of grant. Had compensation cost for the
Company's stock option plans and employee stock purchase plan described below
been determined based on the fair value at the grant date for awards in 1998,
1997 and 1996 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>
1998 1997 1996
<S> <C> <C> <C>
Net loss applicable to common stockholders--as
reported
(in thousands)............................... $(27,414) $(19,396) $(12,879)
Net loss applicable to common stockholders--
pro forma
(in thousands)............................... $(28,947) $(21,414) $(14,227)
Basic and diluted net loss per share--as
reported..................................... $ (2.16) $ (1.55) $ (1.04)
Basic and diluted net loss per share--pro
forma........................................ $ (2.28) $ (1.71) $ (1.15)
</TABLE>
Due to FAS No. 123 being applicable only to options granted subsequent to
December 31, 1994, its pro forma effect was not fully reflected until 1998.
The weighted average fair value of each option granted in 1998, 1997 and 1996
is $2.87, $6.31 and $8.27 respectively, estimated using the Black-Scholes
Multiple option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Expected volatility..................................... .8669 .8068 .5318
Risk-free interest rate................................. 5.02% 6.06% 6.04%
Weighted-average expected life.......................... 4.60 4.53 4.46
Dividend yield.......................................... -- -- --
</TABLE>
Deferred and Other 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. In connection with the modification of certain
employee stock arrangements and the forgiveness of employee notes receivable,
the Company recorded compensation expense of $539,000 in 1998.
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 30,718 and 25,289 shares in 1998 and 1997, 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 1999, 2000
and 2001.
F-14
<PAGE>
KERAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998, 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, 1998:
<TABLE>
<S> <C>
Exercises under the 1987 Stock Option Plan........................ 242,558
Purchases under the 1995 Employee Stock Purchase Plan............. 128,080
Exercises under the 1995 Stock Option Plan........................ 1,283,720
Exercises under the 1995 Directors Option Plan.................... 150,000
Exercises under the 1997 Stock Option Plan........................ 396,461
Conversion of Redeemable Convertible Series B preferred stock..... 2,650,000
Conversion of undesignated preferred stock........................ 2,000,000
---------
6,850,819
=========
</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 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, 1998, 1997 and 1996.
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,
-------------------------
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Income tax benefit computed at the federal
statutory rate................................ $(8,173) $(6,595) $(4,379)
Operating losses not utilized.................. 8,173 6,595 4,379
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
As of December 31, 1998, the Company has federal, state and French net
operating loss carryforwards of approximately $66.3 million, $16.9 million and
$3.7 million, respectively, that will expire in fiscal years 1999 through 2018,
if not utilized. The Company also has federal and state research and
experimentation credit carryforwards of approximately $1.3 million and $1.0
million, respectively, that will expire in fiscal years 2002 through 2018, if
not utilized.
F-15
<PAGE>
KERAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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,
------------------
1998 1997
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 25,109 $ 15,186
Capitalized research costs.............................. 7,556 8,772
Research credit carryforwards........................... 1,901 1,535
Other................................................... 368 506
-------- --------
Total deferred tax assets............................... 34,934 25,999
Valuation allowance..................................... (34,934) (25,999)
-------- --------
Net deferred tax assets................................. $ -- $ --
======== ========
</TABLE>
The deferred tax asset valuation allowance increased $8,935,000, $8,048,000
and $5,108,000 in 1998, 1997 and 1996, respectively.
8. Recent Acquisitions (unaudited)
On May 28, 1999, pursuant to an Agreement and Plan of Reorganization dated as
of December 22, 1998 (the "Merger Agreement"), by and among the Company and
Transcend Therapeutics, Inc., ("Transcend"), the Company acquired all of the
capital stock of Transcend (the "Merger"). Transcend's only material asset is a
net cash balance of $8.5 million.
Pursuant to the terms of the Merger Agreement, at the effective time of the
Merger, each outstanding share of Transcend common stock was converted into the
right to receive 0.16486 shares of KeraVision common stock (the "Merger
Shares"). Transcend stockholders received approximately 978,498 shares of
KeraVision common stock. Transcend has terminated its activities as a drug
development company and now is a wholly owned subsidiary of the Company. No
Transcend employees were retained. The Merger Shares are registered under the
Securities Act of 1933 on a registration statement on Form S-4.
9. Subsequent Events
In March 1999, KeraVision entered into a senior term loan agreement providing
for borrowings of $5,000,000, which were advanced on March 25, 1999. Borrowings
under the loan are secured by substantially all of KeraVision's assets except
for intellectual property. In connection with the loan, KeraVision granted to
the lender warrants to purchase 55,492 shares of the common stock at an
exercise price of $10.8125, the closing price as of March 5, 1999, the date of
the loan commitment. The respective warrants are exercisable for 7 years from
the date of issuance. The Company will record the fair value of the warrants as
additional interest expense to be amortized over the term of the related debt.
The value of the immediately exercisable warrants will be determined using a
Black Scholes valuation model, based on the contractual term of the warrants.
F-16
<PAGE>
KERAVISION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 8,164 $ 1,449
Available-for-sale investments....................... 166 6,279
Accounts receivable, net............................. 1,144 365
Inventory............................................ 1,140 427
Prepaid expenses and other current assets............ 487 716
-------- -------
Total current assets................................... 11,101 9,236
Property and equipment, at cost:
Manufacturing and laboratory equipment............... 4,448 3,709
Office furniture and fixtures........................ 607 597
Leasehold improvements............................... 696 636
-------- -------
5,751 4,942
Accumulated depreciation and amortization.............. (3,408) (3,102)
-------- -------
Net property and equipment........................... 2,343 1,840
Other assets........................................... 100 108
-------- -------
Total assets........................................... $ 13,544 $11,184
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable..................................... $ 2,785 $ 1,742
Accrued payroll and related expenses................. 773 581
Accrued clinical trial costs......................... 1,176 1,282
Other accrued liabilities............................ 899 204
Current portion of capital lease obligations......... 540 512
Short-term debt...................................... 4,424 --
-------- -------
Total current liabilities.............................. 10,597 4,321
Capital lease obligations.............................. 666 821
Redeemable convertible series B preferred stock........ 18,265 17,489
Commitments and contingencies
Stockholders' equity:
Common stock......................................... 14 13
Additional paid-in capital........................... 89,257 80,162
Deferred compensation................................ -- (30)
Accumulated other comprehensive income............... 107 109
Accumulated deficit.................................. (103,789) (90,092)
Notes receivable from stockholders................... (1,573) (1,609)
-------- -------
Total stockholders' equity (net capital deficiency).... (15,984) (11,447)
-------- -------
Total liabilities and total stockholders' equity (net
capital deficiency)................................... $ 13,544 $11,184
======== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-17
<PAGE>
KERAVISION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1999 1998
<S> <C> <C>
Net sales......................................... $ 4,381 $ 264
Costs and expenses:
Cost of sales and manufacturing expenses......... 4,615 1,949
Research and development......................... 4,201 6,016
Selling, general and administrative.............. 8,171 3,652
------------ ------------
Total costs and expenses.......................... 16,987 11,617
------------ ------------
Operating loss.................................... (12,606) (11,353)
Interest income and other, net.................... (5) 241
Interest expense.................................. (310) (62)
------------ ------------
Net loss.......................................... (12,921) (11,174)
Dividends on redeemable convertible Series B
preferred stock.................................. (776) (2,611)
------------ ------------
Net loss applicable to common stockholders........ $ (13,697) $ (13,785)
============ ============
Basic and diluted net loss per share applicable to
common stockholders.............................. $ (1.05) $ (1.09)
============ ============
Shares used in calculation of basic and diluted
net loss per share............................... 13,088 12,655
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-18
<PAGE>
KERAVISION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------
June 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(12,921) $(11,174)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................. 306 345
Amortization of debt discount............................ 85 --
Issuance of stockholders' notes.......................... -- (251)
Payment on stockholders' notes........................... 36 --
Forgiveness of stockholders' notes....................... -- 45
Amortization of deferred compensation.................... 30 74
Changes in operating assets and liabilities:
Accounts receivable.................................... (779) (10)
Inventory.............................................. (713) (2)
Prepaid expenses and other current assets.............. 229 364
Accounts payable....................................... 1,043 1,544
Other accrued liabilities.............................. 779 (104)
-------- --------
Net cash used in operating activities................... (11,905) (9,169)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale investments............... (297) (17,226)
Sales of available-for-sale investments................... 6,410 12,572
Maturities of available-for-sale investments.............. -- 2,201
Capital expenditures...................................... (809) (597)
Other assets.............................................. 8 --
-------- --------
Net cash provided by (used in) investing activities..... 5,312 (3,050)
-------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations........ (259) (221)
Proceeds from sales-leaseback of capital equipment........ 132 180
Proceeds from issuance of short-term debt and warrants.... 5,000 --
Proceeds from issuance of equity securities, net of
repurchases.............................................. 8,435 268
Proceeds from issuance of redeemable convertible Series B
shares................................................... -- 18,000
Fees incurred to obtain additional financing.............. -- (1,320)
-------- --------
Net cash provided by financing activities............... 13,308 16,907
-------- --------
Net increase in cash and cash equivalents.................. 6,715 4,688
Cash and cash equivalents at the beginning of the period... 1,449 2,574
-------- --------
Cash and cash equivalents at the end of the period......... $ 8,164 $ 7,262
======== ========
Supplemental disclosure of non-cash financing activities:
Accrued dividends to preferred stock....................... $ 708 $ 2,597
======== ========
Accretion related to preferred stock....................... $ 68 $ 14
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-19
<PAGE>
KERAVISION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. Basis of Presentation
The accompanying unaudited condensed financial statements of KeraVision, Inc.
(the "Company" or "KeraVision"), have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X. The
balance sheet as of June 30, 1999, the statements of operations and cash flows
for the six-month periods ended June 30, 1999 and 1998 are unaudited but
include all adjustments (consisting only of normal recurring adjustments) which
the Company considers necessary for a fair presentation of the financial
position at such date and the operating results and cash flows for those
periods. Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information normally included in financial statements and related
footnotes prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying financial statements
should be read in conjunction with the Company's annual financial statements
and notes thereto included separately herein. The accompanying condensed
consolidated balance sheet at December 31, 1998 is derived from audited
financial statements at that date.
Results for the six-months ended June 30, 1999 and 1998 are not necessarily
indicative of results for any other interim period or for any year.
2. 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 June 30, 1999, the Company had an
accumulated deficit of $103.8 million and incurred a net loss of $12.9 million
for the six months then ended.
In March 1999, the Company entered into a senior term loan agreement
providing for borrowings of $5,000,000, which was advanced on March 25, 1999.
In May 1999, the Company completed an acquisition of Transcend Therapeutics,
Inc. and its net cash balance of $8.5 million. Transcend has terminated its
activities as a drug development company and now is a wholly owned subsidiary
of the Company. No Transcend employees were retained. Transcend stockholders
received 978,498 shares of the Company's common stock. This transaction was
accounted for as an acquisition of assets.
Management's planned expenditures for 1999 exceed current cash, cash
equivalents and available-for-sale investments and the funds received from the
Transcend acquisition and the senior term loan. The Company will need to obtain
additional funds to continue its research and development activities, fund
operating expenses, initiate sales and marketing activities in the U.S. for its
approved products and pursue regulatory approvals for its products under
development. Management believes that sufficient funds will be available from
sales of the Company's products and from financing from additional investors to
support planned operations through December 1999. 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 additional 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 December 31,
1999. These actions would have material adverse effects on the Company's
business, results of operations and prospects.
F-20
<PAGE>
KERAVISION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Net Loss Per Common Share
Net loss per common share is computed based on the weighted average number of
common shares outstanding and excludes common stock equivalents as their effect
would be antidilutive. For the period ended June 30, 1999 dividends and
accretion related to the redeemable preferred stock are added to the net loss
to arrive at net loss applicable to common stockholders. Options and warrants
to purchase 1,579,778 and 55,492 shares of common stock were outstanding at
June 30, 1999 but were not included in the computation of diluted net income
per share as the Company incurred a net loss in the periods presented and the
effect of the securities would have been anti-dilutive.
4. Inventory
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out method. The Company's inventory was composed of the
following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Raw materials........................................ $ 614 $182
Finished goods....................................... 526 245
------ ----
Total.............................................. $1,140 $427
====== ====
</TABLE>
5. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management believes that all of the assumptions used in the
preparation of these unaudited condensed consolidated financial statements are
reasonable and have a reasonable basis. Actual results could differ from these
estimates.
6. Issuance of Debt
In March 1999, the Company entered into a senior term loan agreement
providing for borrowings of $5,000,000, which were advanced on March 25, 1999.
The loan bears interest at 12.6% per year until the Company repays the loan on
September 30, 2001. Borrowings under the loan are secured by substantially all
of the company's assets except for intellectual property. In conjunction with
the loan, the Company granted to the lender warrants to purchase 55,492 shares
of the common stock at an exercise price of $10.8125, the closing price as of
March 5, 1999, the date of the loan commitment. The respective warrants are
exercisable for 7 years from the date of issuance. The Company recorded the
fair value of the warrants as additional interest expense to be amortized over
the term of the related debt. The value of the immediately exercisable warrants
was determined using a Black Scholes valuation model, based on the contractual
term of the warrants.
F-21
<PAGE>
KERAVISION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss............................................. $(12,921) $(11,174)
Change in unrealized gain on available-for-sale
investments......................................... -- (35)
Foreign currency translation adjustment.............. -- (10)
-------- --------
Total comprehensive income (loss).................. $(12,921) $(11,219)
======== ========
</TABLE>
Accumulated other comprehensive income presented in the accompanying
consolidated condensed balance sheets consists of the accumulated net
unrealized gain on available-for-sale investments.
8. Recent Acquisitions
On May 28, 1999, pursuant to an Agreement and Plan of Reorganization dated as
of December 22, 1998 (the "Merger Agreement"), by and among and Transcend
Therapeutics, Inc. ("Transcend"), the Company acquired all of the capital stock
of Transcend (the "Merger"). This transaction was accounted for as an
acquisition of assets. Transcend's only material asset is a net cash balance of
$8.5 million.
Pursuant to the terms of the Merger Agreement, at the effective time of the
Merger, each outstanding share of Transcend common stock was converted into the
right to receive 0.16486 shares of KeraVision common stock (the "Merger
Shares"). Transcend stockholders received approximately 978,498 shares of
KeraVision common stock. Transcend has terminated its activities as a drug
development company and now is a wholly owned subsidiary of the Company. No
Transcend employees were retained. The Merger Shares are registered under the
Securities Act of 1933 on a registration statement on Form S-4.
F-22
<PAGE>
[Magnified 3-dimensional view of cornea showing the Intacs in place in the
eye]
Intacs are placed in the periphery of the cornea at two-thirds depth.
[Picture of our Intacs(TM) corneal ring segments for our hyperopia product
held on a fingertip]
Intacs for potentially treating hyperopia are currently undergoing
feasibility studies outside the United States.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
, 1999
[LOGO OF KERAVISION]
4,000,000 Shares of Common Stock
----------------------
PROSPECTUS
----------------------
Donaldson, Lufkin & Jenrette
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Prudential Securities
SG Cowen
------------
DLJdirect, Inc.
- -------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as
to matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of KeraVision
have not changed since the date hereof.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses, all of which will be
borne by the registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 29,293
NASD Filing Fee.................................................... 12,460
Nasdaq National Market Listing Fee................................. 17,500
Transfer Agent Fees................................................ 3,750
Accounting Fees and Expenses....................................... 150,000
Legal Fees and Expenses............................................ 235,000
Printing and Mailing Expenses...................................... 150,000
Miscellaneous...................................................... 51,997
--------
Total............................................................ $650,000
========
</TABLE>
Item 15. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
("Section 145") permits a Delaware corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending,
or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by or in the right of
the corporation) by reason of the fact that such person is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such person in
connection with such action, suit, or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful.
In the case of an action by or in the right of the corporation, Section 145
permits the corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that such person is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interest of the corporation. No indemnification
may be made in respect of any claim, issue, or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to
the extent that the Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
To the extent that a present or former director or officer of a corporation
has been successful on the merits or otherwise in defense of any action, suit
or proceeding referred to in the preceding two paragraphs, Section 145
requires that such person be indemnified against expenses (including
attorneys' fees) actually and reasonably
II-1
<PAGE>
incurred by such person in connection therewith; and that indemnification
provided by, or granted pursuant to, Section 145 shall not be deemed exclusive
of any other rights to which those seeking indemnification may be entitled.
Section 145 provides that expenses (including attorneys' fees) incurred by
an officer or director in defending any civil, criminal, administrative, or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of any undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in Section 145.
Section 145 further empowers the corporation to purchase and maintain
insurance on behalf of any person who is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising our
of his status as such, whether or not the corporation would have the power to
indemnify him against such liabilities under Section 145.
The Registrant's Amended and Restated Certificate of Incorporation limits
the liability of directors for monetary damages arising from breach of their
fiduciary duty to the maximum extent permitted by the Delaware General
Corporate Law ("the Law") and provides for the indemnification of directors,
officers and employees of the Registrant to the fullest extent permitted by
the Law.
The Registrant's Amended and Restated Bylaws also provide that Registrant
shall indemnify its directors and officers to the fullest extent permitted by
the Law, including circumstances in which indemnification is otherwise
discretionary under the Law.
The Registrant has entered into indemnification agreements with its
directors containing provisions which are in some respects broader than the
specific indemnification provisions contained in the Law. The indemnification
agreements may require the Registrant to indemnify its directors against
certain liabilities that may arise by reason of their status or service as
directors (other than liabilities arising from willful misconduct of a
culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
director's insurance if available on reasonable terms.
The Registrant believes that the limitation provision in its Amended and
Restated Certificate of Incorporation and the indemnification provisions in
its Amended and Restated Certificate of Incorporation, Amended and Restated
Bylaws and indemnification agreements will facilitate the Registrant's ability
to continue to attract and retain qualified individuals to serve as directors
of the Registrant. It is the opinion of the Securities and Exchange Commission
that indemnification provisions such as those contained in the Certificate,
the Bylaws and these agreements have no effect on a directors' or officers'
ability under the federal securities laws. The Registrant has also obtained
directors' and officers' liability insurance covering, subject to exceptions,
actions taken by the Registrant's directors and officers in their capacities
as such.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
The following exhibits are filed herewith or incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit
Number Description
<C> <S>
1.1 Underwriting Agreement
4.1 Preferred Shares Rights Agreement, dated as of August 18, 1997,
between Registrant and Bank Boston, N.A. (Filed as Exhibit 4.1 to
Registrant's registration statement on Form 8-A, filed with the SEC on
August 25, 1997 and incorporated by reference herein)
5.1 Opinion of Latham & Watkins as to the legality of the securities being
registered
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of Latham & Watkins (included in Exhibit 5.1)
23.3 Consent of Ernst & Young LLP, independent auditors
**24.1 Power of Attorney
**27.1 Financial Data Schedule
</TABLE>
- ---------------------
**previously filed
Item 17. Undertakings
A. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
B. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
C. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 2
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fremont, State of California, on
August 10, 1999.
KeraVision, Inc.
/s/ Thomas M. Loarie
By: _________________________________
Thomas M. Loarie
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas M. Loarie President, Chief Executive August 10, 1999
______________________________________ Officer and Chairman of
Thomas M. Loarie the board of directors
(Principal Executive
Officer)
/s/ Mark Fischer-Colbrie Vice President Finance and August 10, 1999
______________________________________ Administration and Chief
Mark Fischer-Colbrie Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
* Director August 10, 1999
______________________________________
Charles Crocker
* Director August 10, 1999
______________________________________
Lawrence A. Lehmkuhl
Director
______________________________________
Kshitij Mohan, Ph.D.
* Director August 10, 1999
______________________________________
Arthur M. Pappas
Director
______________________________________
Peter Wilson
</TABLE>
<TABLE>
<S> <C>
*By: /s/ Mark Fischer-Colbrie
-------------------------------
Mark Fischer-Colbrie, Attorney-
in-Fact
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
<C> <S>
1.1 Underwriting Agreement
4.1 Preferred Shares Rights Agreement, dated as of August 18, 1997,
between Registrant and Bank Boston, N.A. (Filed as Exhibit 4.1 to
Registrant's registration statement on Form 8-A, filed with the SEC on
August 25, 1997 and incorporated by reference herein)
5.1 Opinion of Latham & Watkins as to the legality of the securities being
registered
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of Latham & Watkins (included in Exhibit 5.1)
23.3 Consent of Ernst & Young LLP, independent auditors
**24.1 Power of Attorney
**27.1 Financial Data Schedule
</TABLE>
- ---------------------
**previously filed
<PAGE>
EXHIBIT 1.1
OH&S DRAFT
AUGUST 6, 1999
4,000,000 Shares
KERAVISION, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
August ___, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
DAIN RAUSCHER WESSELS,
a division of Dain Rauscher Incorporated
PRUDENTIAL SECURITIES INCORPORATED
SG COWEN SECURITIES CORPORATION
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
KeraVision, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell to the several underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 4,000,000 shares of the common stock, par value
$.001 per share of the Company (the "Firm Shares"). The Company also proposes
to issue and sell to the several Underwriters, and certain stockholders of the
Company named in Schedule II hereto (the "Selling Stockholders") severally
propose to sell to the several Underwriters, not more than an additional 600,000
shares of its common stock, par value $.001 per share (the "Additional Shares")
if requested by the Underwriters as provided in Section 2 hereof, of which
_____________ shares are to be issued and sold by the Company and ___________
shares are to be sold by the Selling Stockholders, each Selling Stockholder
selling the amount set forth opposite such Selling Stockholder's name in
Schedule II hereto. The Firm Shares and the Additional Shares are hereinafter
referred to collectively as the "Shares". The shares of common stock of the
Company to be outstanding after giving effect to the sales contemplated hereby
are hereinafter referred to as the "Common Stock". The Company and the Selling
Stockholders are hereinafter sometimes referred to collectively as the
"Sellers."
<PAGE>
SECTION 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-3, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act and including all documents incorporated by reference in such
registration statement, is hereinafter referred to as the "Registration
Statement"; and the prospectus in the form first used to confirm sales of
Shares, including all documents incorporated by reference therein, is
hereinafter referred to as the "Prospectus". If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering additional shares of Common Stock (a
"Rule 462(b) Registration Statement"), then, unless otherwise specified, any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462(b) Registration Statement. The terms "Supplement" and "Amendment"
or "Amend" as used in this Agreement with respect to the Registration Statement
or the Prospectus shall include all documents subsequently filed by the Company
with the Commission pursuant to the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission thereunder (collectively, the
"Exchange Act") that are deemed to be incorporated by reference in the
Prospectus.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements . On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
at a price per Share of $______ (the "Purchase Price") the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) the Company agrees to
issue and sell ______________ Additional Shares, (ii) each Selling Stockholder
agrees, severally and not jointly, to sell the number of Additional Shares set
forth opposite such Selling Stockholder's name in Schedule II hereto and (iii)
the Underwriters shall have the right to purchase, severally and not jointly, up
to 600,000 Additional Shares from the Company and the Selling Stockholders at
the Purchase Price. Additional Shares may be purchased solely for the purpose
of covering over-allotments made in connection with the offering of the Firm
Shares. The Underwriters may exercise their right to purchase Additional Shares
in whole or in part from time to time by giving written notice thereof to the
Company within 30 days after the date of this Agreement. You shall give any
such notice on behalf of the Underwriters and such notice shall specify the
aggregate number of Additional Shares to be purchased pursuant to such exercise
and the date for payment and delivery thereof, which date shall be a business
day (i) no earlier than two business days after such notice has been given (and,
in any event, no earlier than the Closing Date (as hereinafter defined)) and
(ii) no later than ten business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Company and the Selling Stockholders the
number of Additional Shares (subject to such adjustments to eliminate fractional
shares as you may determine) which bears the same proportion to the total number
of Additional Shares to be purchased from the Company
2
<PAGE>
and the Selling Stockholders as the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I bears to the total number of Firm Shares.
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 90 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, during such period (i) the Company may grant stock options
pursuant to the Company's existing stock option plan and (ii) the Company may
issue shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof. The Company also
agrees not to file any registration statement with respect to any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock for a period of 90 days after the date of the Prospectus
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. In addition, each Selling Stockholder agrees that, for a period of
90 days after the date of the Prospectus without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, it will not make any demand
for, or exercise any right with respect to, the registration of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock. The Company shall, prior to or concurrently with the execution
of this Agreement, deliver an agreement executed by (i) each Selling
Stockholder, (ii) each of the directors and officers of the Company who is not a
Selling Stockholder and (iii) each stockholder listed on Annex I hereto to the
effect that such person will not, during the period commencing on the date such
person signs such agreement and ending 90 days after the date of the Prospectus,
without the prior written consent of Donaldson, Lufkin & Jenrette Corporation,
(A) engage in any of the transactions described in the first sentence of this
paragraph or (B) make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock.
SECTION 3. Terms of Public Offering. The Sellers are advised by you
that the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Shares shall be delivered by or on behalf of the Sellers, with any transfer
taxes thereon duly paid by the respective Sellers, to Donaldson, Lufkin &
Jenrette Securities Corporation through the facilities of The Depository Trust
Company ("DTC"), for the respective accounts of the several Underwriters,
against payment to the Sellers of the Purchase
3
<PAGE>
Price therefore by wire transfer of Federal or other funds immediately available
in New York City. The certificates representing the Shares shall be made
available for inspection not later than 9:30 A.M., New York City time, on the
business day prior to the Closing Date or the applicable Option Closing Date, as
the case may be, at the office of DTC or its designated custodian (the
"Designated Office"). The time and date of delivery and payment for the Firm
Shares shall be 9:00 A.M., New York City time, on ________, 1999 or such other
time on the same or such other date as Donaldson, Lufkin & Jenrette Securities
Corporation and the Company shall agree in writing. The time and date of
delivery and payment for the Firm Shares are hereinafter referred to as the
"Closing Date". The time and date of delivery and payment for any Additional
Shares to be purchased by the Underwriters shall be 9:00 A.M., New York City
time, on the date specified in the applicable exercise notice given by you
pursuant to Section 2 or such other time on the same or such other date as
Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree
in writing. The time and date of delivery and payment for any Additional Shares
are hereinafter referred to as the "Option Closing Date".
The documents to be delivered on the Closing Date or any Option
Closing Date on behalf of the parties hereto pursuant to Section 9 of this
Agreement shall be delivered at the offices of Orrick, Herrington & Sutcliffe
LLP, 400 Sansome Street, San Francisco, California 94111 and the Shares shall be
delivered at the Designated Office, all on the Closing Date or such Option
Closing Date, as the case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you four (4) signed copies of the Registration
Statement as filed with the Commission and of each amendment to it, including
all exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits but including documents incorporated therein
by reference, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall
be satisfactory to you, and to file the Prospectus in such form with the
Commission within the
4
<PAGE>
applicable period specified in Rule 424(b) under the Act; during the period
specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
and any documents incorporated therein by reference as such Underwriter or
dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon
as practicable an earnings statement covering the twelve-month period ending
September 30, 2000 that shall satisfy the provisions of Section 11(a) of the
Act, and to advise you in writing when such statement has been so made
available.
5
<PAGE>
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and any Selling Stockholder's counsel (in
addition to the Company's counsel) in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
all costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and disbursements of counsel for the Underwriters in connection with the
review and clearance of the offering of the Shares by the National Association
of Securities Dealers, Inc., (vi) all costs and expenses incident to the listing
of the Shares on the Nasdaq National Market, (vii) the cost of printing
certificates representing the Shares, (viii) the costs and charges of any
transfer agent, registrar and/or depositary, and (ix) all other costs and
expenses incident to the performance of the obligations of the Company and the
Selling Stockholders hereunder for which provision is not otherwise made in this
Section. The provisions of this Section shall not supersede or otherwise affect
any agreement that the Company and the Selling Stockholders may otherwise have
for allocation of such expenses among themselves.
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by
6
<PAGE>
10:00 P.M., New York City time, on the date of this Agreement and to pay to the
Commission the filing fee for such Rule 462(b) Registration Statement at the
time of the filing thereof or to give irrevocable instructions for the payment
of such fee pursuant to Rule 111(b) under the Act.
SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 P.M., New York City time, on the date of this Agreement; and no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) Each document, if any, filed or to be filed pursuant to the
Exchange Act and incorporated by reference in the Prospectus complied or will
comply when so filed in all material respects with the Act and the Exchange Act;
(ii) The Registration Statement (other than any Rule 462(b) Registration
Statement to be filed by the Company after the effectiveness of this Agreement),
when it became effective, did not contain and, as amended, if applicable, will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, (iii) the Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement) and the Prospectus comply and, as amended or supplemented, if
applicable, will comply in all material respects with the Act, (iv) if the
Company is required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, such Rule 462(b) Registration Statement and any
amendments thereto, when they become effective (A) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(B) will comply in all material respects with the Act and (v) the Prospectus
does not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in the Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein. The parties hereto acknowledge that for
purposes of this Agreement, including this Section 6(b) and Section 8 hereof,
the only written information furnished to the Sellers by any Underwriter
expressly for use in the Registration Statement or any preliminary prospectus or
the Prospectus is the information contained under the caption "Underwriting" in
the Prospectus in the table in the first paragraph, and in the third, fourth,
thirteenth and fourteenth paragraphs of such section.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
7
<PAGE>
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in any preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(d) Each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and has the corporate power and
authority to carry on its business as described in the Prospectus and to own,
lease and operate its properties, and each is duly qualified and is in good
standing as a foreign corporation authorized to do business in each jurisdiction
in which the nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so qualified would
not have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
(f) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been duly
authorized and validly issued and are fully paid, non-assessable and not subject
to any preemptive or similar rights; and the Shares to be issued and sold by the
Company have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights, except for the right of
first offer of the holders of the Company's Series B preferred stock (which
rights have been waived).
(g) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(i) Neither the Company nor any of its subsidiaries is in violation of
its respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound.
8
<PAGE>
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or (iv) result
in the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization.
(k) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is or could be a
party or to which any of their respective property is or could be subject that
are required to be described in the Registration Statement or the Prospectus and
are not so described; nor are there any statutes, regulations, contracts or
other documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not so described or filed as required.
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a material adverse effect on the business, prospects, financial
condition or results of operation of the Company and its subsidiaries, taken as
a whole.
(m) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other approvals
(each, an "Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. Each such Authorization is valid and in full
force and effect and each of the Company and its subsidiaries is in compliance
with all the terms and conditions thereof and with the rules and regulations of
the authorities and governing bodies having jurisdiction with respect thereto;
and no event has occurred (including, without limitation, the receipt of any
notice from any authority or governing body) which allows or, after notice or
lapse of time or both, would allow, revocation, suspension or termination of any
such
9
<PAGE>
Authorization or results or, after notice or lapse of time or both, would result
in any other impairment of the rights of the holder of any such Authorization;
and such Authorizations contain no restrictions that are burdensome to the
Company or any of its subsidiaries; except where such failure to be valid and in
full force and effect or to be in compliance, the occurrence of any such event
or the presence of any such restriction would not, singly or in the aggregate,
have a material adverse effect on the business, prospects, financial condition
or results of operations of the Company and its subsidiaries, taken as a whole.
(n) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any Authorization, any related constraints on operating activities and
any potential liabilities to third parties) which would, singly or in the
aggregate, have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(o) This Agreement has been duly authorized, executed and delivered by
the Company.
(p) Ernst & Young LLP are independent public accountants with respect
to the Company and its subsidiaries as required by the Act.
(q) The consolidated financial statements included or incorporated by
reference in the Registration Statement and the Prospectus (and any amendment or
supplement thereto), together with related schedules and notes, present fairly
in all material respects the consolidated financial position, results of
operations and changes in financial position of the Company and its subsidiaries
on the basis stated therein at the respective dates or for the respective
periods to which they apply; such statements and related schedules and notes
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; the supporting schedules, if any, included in the Registration
Statement present fairly in all material respects in accordance with generally
accepted accounting principles the information required to be stated therein;
and the other financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are, in all material respects, accurately presented and prepared on a
basis consistent with such financial statements and the books and records of the
Company.
(r) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(s) Except for rights of parties to the Information and Registration
Rights Agreement dated November 19, 1992 and the Investor Rights Agreement dated
June 12, 1998 (which rights have been waived) or as otherwise disclosed in the
Registration Statement, there are no contracts, agreements or understandings
between the Company and any person granting such person the right to require the
Company to file a registration statement under the Act with
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respect to any securities of the Company or to require the Company to include
such securities with the Shares registered pursuant to the Registration
Statement.
(t) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development which
would be reasonably likely to result in a prospective material adverse change in
the condition, financial or otherwise, or the earnings, business, management or
operations of the Company and its subsidiaries, taken as a whole, (ii) there has
not been any material adverse change or any development which would be
reasonably likely to result in a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
(u) The Company and its subsidiaries do not own any real property. The
Company and its subsidiaries have good and marketable title to all personal
property owned by them which is material to the business of the Company and its
subsidiaries, taken as a whole, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or such
as do not materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries, taken as a whole, in each case except as described
in the Prospectus.
(v) The Company and its subsidiaries own or possess adequate
licenses or other rights to use all patents, trademarks, service marks, trade
names, copyrights, mask works, technology and know-how necessary to conduct
the business now or proposed to be conducted by them as described in the
Prospectus and the Company has not received any notice of infringement of or
conflict with (and knows of no such infringement of or conflict with) asserted
rights of others with respect to any patents, trademarks, service marks, trade
names, copyrights, mask works, technology or know-how which could result in
any material adverse effect upon the Company and its subsidiaries, taken as a
whole; and the Company's discoveries, inventions, products or processes
referred to in the Prospectus do not, to the knowledge of the Company and its
subsidiaries, infringe or conflict with any right or patient, or any
discovery, invention, product or process which is the subject of a patent
application known to the Company and its subsidiaries, which infringement or
conflict could result in any material adverse effect upon the Company and its
subsidiaries, taken as a whole.
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(w) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; and neither the Company nor any of its subsidiaries (i) has received
notice from any insurer or agent of such insurer that substantial capital
improvements or other material expenditures will have to be made in order to
continue such insurance or (ii) has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers at a cost that would not
have a material adverse effect on the business, prospects, financial conditions
or results of operations of the Company and its subsidiaries, taken as a whole.
(x) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors, officers,
shareholders, customers or suppliers of the Company or any of its subsidiaries
on the other hand, which is required by the Act to be described in the
Registration Statement or the Prospectus which is not so described.
(y) There is no (i) significant unfair labor practice complaint,
grievance or arbitration proceeding pending or, to the Company's best knowledge,
threatened against the Company or any of its subsidiaries before the National
Labor Relations Board or any state or local labor relations board, (ii) strike,
labor dispute, slowdown or stoppage pending or, to the Company's best knowledge,
threatened against the Company or any of its subsidiaries or (iii) union
representation question existing with respect to the employees of the Company
and its subsidiaries, except for such actions specified in clause (i), (ii) or
(iii) above, which, singly or in the aggregate, would not have a material
adverse effect on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole. To the best of
the Company's knowledge, no collective bargaining organizing activities are
taking place with respect to the Company or any of its subsidiaries.
(z) All material tax returns required to be filed by the Company and
each of its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good faith, and all material taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
due pursuant to such returns or pursuant to any assessment received by the
Company or any of its subsidiaries have been paid, other than those being
contested in good faith and for which adequate reserves have been provided.
(aa) The Company has reviewed its operations and the operations of its
subsidiaries and any third parties with which the Company or any of its
subsidiaries has a material relationship to evaluate the extent to which the
business or operations of the Company or any of its subsidiaries will be
affected by the Year 2000 Problem (as defined below). As a result of such
review, the Company has no reason to believe, and does not believe, that the
Year 2000 Problem will have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. The "Year 2000 Problem" as used herein means any
risk that the computer hardware or software used in the receipt, transmission,
storage, retrieval, retransmission or other utilization of data or in the
operation of mechanical or electrical systems of any kind will not, in the case
of dates or time periods occurring after December 31, 1999, function at least as
effectively as in the case of dates or time periods occurring prior to January
1, 2000.
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(bb) The Company and its subsidiaries have received all Authorizations
from the Food and Drug Administration ("FDA") and from foreign regulatory
commissions, in each case necessary for the business of the Company and its
subsidiaries as currently conducted and as described in the Registration
Statement and the Prospectus. To the Company's knowledge, all such
Authorizations have been duly and validly issued and are in full force and
effect and neither the Company nor any of its subsidiaries has been informed by
the FDA or any foreign regulatory commission or is otherwise aware that it is in
violation of any of the terms and conditions of any such Authorizations, except
for (i) any violation which, singly or in the aggregate, would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole or
(ii) any violation that is discussed in the Registration Statement and
Prospectus.
(cc) Any documents which at the date hereof are incorporated by
reference in the Registration Statement, the Prospectus or any amendment or
supplement thereto, or any preliminary prospectus (the "Incorporated Documents")
were filed in a timely manner and, when they were filed (or, if any amendment
with respect to any such document was filed, when such amendment was filed),
conformed with the requirements of the Securities Exchange Act of 1934 (the
"Exchange Act") and did not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading.
(dd) The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act and is listed on The Nasdaq National Market, and the Company has
taken no action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from The Nasdaq National Market, nor has the Company received any
notification that the Commission or the National Association of Securities
Dealers, Inc. ("NASD") is contemplating terminating such registration or
listing.
(ee) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be deemed to
be a representation and warranty by the Company to the Underwriters as to the
matters covered thereby.
SECTION 7. Representations and Warranties of the Selling Stockholders.
Each Selling Stockholder represents and warrants to each Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the Shares to be
sold by such Selling Stockholder pursuant to this Agreement and has, and on the
Closing Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests, equities and
claims whatsoever.
(b) The Shares to be sold by such Selling Stockholder have been duly
authorized and are validly issued, fully paid and non-assessable.
(c) Such Selling Stockholder has, and on the Closing Date will have,
full legal right, power and authority, and all authorization and approval
required by law, to enter into this Agreement, the Custody Agreement signed by
such Selling Stockholder and ______________,
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as Custodian, relating to the deposit of the Shares to be sold by such Selling
Stockholder (the "Custody Agreement") and the Power of Attorney of such Selling
Stockholder appointing certain individuals as such Selling Stockholder's
attorneys-in-fact (the "Attorneys") to the extent set forth therein, relating to
the transactions contemplated hereby and by the Registration Statement and the
Custody Agreement (the "Power of Attorney") and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder in the manner provided
herein and therein.
(d) This Agreement has been duly authorized, executed and delivered by
or on behalf of such Selling Stockholder.
(e) The Custody Agreement of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding agreement of such Selling Stockholder, enforceable in accordance
with its terms.
(f) The Power of Attorney of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding instrument of such Selling Stockholder, enforceable in accordance
with its terms, and, pursuant to such Power of Attorney, such Selling
Stockholder has, among other things, authorized the Attorneys, or any one of
them, to execute and deliver on such Selling Stockholder's behalf this Agreement
and any other document that they, or any one of them, may deem necessary or
desirable in connection with the transactions contemplated hereby and thereby
and to deliver the Shares to be sold by such Selling Stockholder pursuant to
this Agreement.
(g) Upon delivery of and payment for the Shares to be sold by such
Selling Stockholder pursuant to this Agreement, good and clear title to such
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.
(h) The execution, delivery and performance of this Agreement and the
Custody Agreement and Power of Attorney of such Selling Stockholder by or on
behalf of such Selling Stockholder, the compliance by such Selling Stockholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (i) require any consent,
approval, authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under the securities
or Blue Sky laws of the various states), (ii) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
organizational documents of such Selling Stockholder, if such Selling
Stockholder is not an individual, or any indenture, loan agreement, mortgage,
lease or other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder or any property of such Selling
Stockholder is bound or (iii) violate or conflict with any applicable law or any
rule, regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over such Selling Stockholder or any property
of such Selling Stockholder.
(i) The information in the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relates to such Selling
Stockholder does not, and will not on the Closing Date, contain any untrue
statement of a material fact or omit to state any
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material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(j) At any time during the period described in Section 5(d), if there
is any change in the information referred to in Section 7(i), such Selling
Stockholder will immediately notify you of such change.
(k) Each certificate signed by or on behalf of such Selling
Stockholder and delivered to the Underwriters or counsel for the Underwriters
shall be deemed to be a representation and warranty by such Selling Stockholder
to the Underwriters as to the matters covered thereby.
SECTION 8. Indemnification. (a) The Sellers, severally and not
jointly, agree to indemnify and hold harmless each Underwriter, its directors,
its officers and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act from and
against any and all losses, claims, damages, liabilities and judgments
(including, without limitation, any legal or other expenses incurred in
connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter who failed to deliver a Prospectus, as then
amended or supplemented, (so long as the Prospectus and any amendment or
supplement thereto was provided by the Company to the several Underwriters in
the requisite quantity and on a timely basis to permit proper delivery on or
prior to the Closing Date) to the person asserting any losses, claims, damages,
liabilities or judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in such preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in the Prospectus, as so amended or supplemented, and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person. Notwithstanding the foregoing, the
aggregate liability of any Selling Stockholder pursuant to this Section 8(a)
shall be limited to an amount equal to the total proceeds (before deducting
underwriting discounts and commissions and expenses) received by such Selling
Stockholder from the Underwriters for the sale of the Shares sold by such
Selling Stockholder hereunder.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Stockholder and each person, if any, who controls such
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Selling Stockholder within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act to the same extent as the foregoing indemnity from the Sellers
to such Underwriter but only with reference to information relating to such
Underwriter furnished in writing to the Company by such Underwriter through you
expressly for use in the Registration Statement (or any amendment thereto), the
Prospectus (or any amendment or supplement thereto) or any preliminary
prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "indemnifying party") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for (i) the fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) for all Underwriters, their officers and
directors and all persons, if any, who control any Underwriter within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act, (ii)
the fees and expenses of more than one separate firm of attorneys (in addition
to any local counsel) for the Company, its directors, its officers who sign the
Registration Statement and all persons, if any, who control the Company within
the meaning of either such Section and (iii) the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for all
Selling Stockholders and all persons, if any, who control any Selling
Stockholder within the meaning of either such Section, and all such fees and
expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Underwriters, their officers and directors and such
control persons of any Underwriters, such firm shall be designated in writing by
Donaldson, Lufkin & Jenrette Securities Corporation. In the case of any such
separate firm for the Company and such directors, officers and control persons
of the Company, such firm shall be designated in writing by the Company. In the
case of any such separate firm for the Selling Stockholders and such control
persons of any Selling Stockholders, such firm shall be designated in writing by
the Attorneys. The indemnifying party shall indemnify and hold harmless the
indemnified party from and against any and all losses, claims, damages,
liabilities and judgments
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by reason of any settlement of any action (i) effected with its written consent
or (ii) effected without its written consent if the settlement is entered into
more than twenty business days after the indemnifying party shall have received
a request from the indemnified party for reimbursement for the fees and expenses
of counsel (in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement or compromise of, or consent to the entry of
judgment with respect to, any pending or threatened action in respect of which
the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 8
is unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 8(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(d)(i) above but also the
relative fault of the Sellers on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Sellers, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Sellers on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Selling Stockholders on the one hand or the Underwriters on the other hand and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any
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matter, including any action, that could have given rise to such losses, claims,
damages, liabilities or judgments. Notwithstanding the provisions of this
Section 8, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Shares underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 8(d) are several in proportion to the
respective number of Shares purchased by each of the Underwriters hereunder and
not joint.
(e) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(f) Each Selling Stockholder hereby designates KeraVision, Inc., 48630
Milmont Drive, Fremont, California 94538, as its authorized agent, upon which
process may be served in any action which may be instituted in any state or
federal court in the State of New York by any Underwriter, any director or
officer of any Underwriter or any person controlling any Underwriter asserting a
claim for indemnification or contribution under or pursuant to this Section 8,
and each Selling Stockholder will accept the jurisdiction of such court in such
action, and waives, to the fullest extent permitted by applicable law, any
defense based upon lack of personal jurisdiction or venue. A copy of any such
process shall be sent or given to such Selling Stockholder, at the address for
notices specified in Section 12 hereof.
SECTION 9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated
the Closing Date, signed by Thomas M. Loarie and Mark D. Fischer-Colbrie, in
their capacities as the President and Chief Executive Officer and Vice
President, Finance and Administration and Chief Financial Officer of the
Company, confirming the matters set forth in Sections 6(t), 9(a) and 9(b) and
that the Company has complied with all of the agreements and satisfied all of
the conditions herein contained and required to be complied with or satisfied by
the Company on or prior to the Closing Date.
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(d) Since the respective dates as of which information is given in
the Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development which would be
reasonably likely to result in a prospective change in the condition, financial
or otherwise, or the earnings, business, management or operations of the Company
and its subsidiaries, taken as a whole, (ii) there shall not have been any
change or any development which would be reasonably likely to result in a
prospective change in the capital stock or in the long-term debt of the Company
or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) All the representations and warranties of each Selling
Stockholder contained in this Agreement shall be true and correct on the Closing
Date with the same force and effect as if made on and as of the Closing Date and
you shall have received on the Closing Date a certificate dated the Closing Date
from each Selling Stockholder to such effect and to the effect that such Selling
Stockholder has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by
such Selling Stockholder on or prior to the Closing Date.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Latham & Watkins, counsel for the Company, to the effect that:
(i) the Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus. Based solely on
certificates from public officials, such counsel confirms that the Company
is qualified to do business in the following States: [_____________];
(ii) Transcend Therapeutics, Inc. has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
State of Delaware, with corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus. Based solely on certificates from public officials, such
counsel confirms that Transcend Therapeutics, Inc. is qualified to do
business in the following States: [_______________];
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(iii) the Shares to be issued and sold by the Company pursuant to
the Underwriting Agreement have been duly authorized and, when issued to
and paid for by you and the other Underwriters in accordance with the terms
of the Underwriting Agreement, will be validly issued, fully paid and non-
assessable and free of preemptive, or to the knowledge of such counsel,
similar rights that entitle or will entitle any person to acquire any
Shares from the Company upon issuance thereof by the Company;
(iv) all of the outstanding shares of capital stock of Transcend
Therapeutics, Inc. have been duly authorized and validly issued and are
fully paid and non-assessable;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(vii) the Registration Statement has become effective under the Act
and, to the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued under the Act
and no proceedings for that purpose are, to the best knowledge of such
counsel, pending before or contemplated by the Commission and any required
filing of the Prospectus pursuant to Rule 424(b) under the Act has been
made in accordance with Rule 424(b) and 430A under the Act;
(viii) the issuance and sale of the Shares by the Company pursuant to
the Underwriting Agreement will not result in the violation by the Company
of its certificate of incorporation or bylaws or any federal or California
statute, rule or regulation known to such counsel to be applicable to the
Company (other than federal or state securities laws) or in the breach of
or a default under any of the agreements filed as an exhibit to the
Company's Form 10-K/A for the year ended December 31, 1998 or court and
administrative orders, writs, judgments and decrees specifically identified
to such counsel by an officer of the Company as being material to the
Company; and to the best of such counsel's knowledge, no consent, approval,
authorization or order of, or filing with, any federal or California court
or governmental agency or body is required for the consummation of the
issuance and sale of the Shares by the Company pursuant to the Underwriting
Agreement, except such as have been obtained under the Act and such as may
be required under state securities laws in connection with the purchase and
distribution of such Shares by the Underwriters;
20
<PAGE>
(ix) the statements set forth under the captions "Description of
Capital Stock" and "Underwriting" in the Prospectus, insofar as such
statements constitute a summary of legal matters, are accurate in all
material respects;
(x) to the best of such counsel's knowledge, there are no statutes
or legal or governmental proceedings pending to which the Company or any of
its subsidiaries is a party or is threatened to be made a party or to which
any of their respective property is subject that are required to be
described in the Prospectus that are not described as required, or
contracts or documents of a character required to be described in the
Registration Statement or Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required;
(xi) the Registration Statement, the Prospectus comply as to form in
all material respects with the requirements for registration statements on
Form S-3 under the Act and the rules and regulations of the Commission
thereunder; it being understood, however, that such counsel need not
express any opinion with respect to the financial statements, schedules or
other financial data included or incorporated by reference in, or omitted
from, the Registration Statement or the Prospectus. Each document filed
pursuant to the Exchange Act and incorporated by reference in the
Prospectus (except for financial statements and other financial data
included therein as to which no opinion need be expressed) complied in all
material respects when so filed as to form with the Act and the Exchange
Act. In passing upon the compliance as to form of the Registration
Statement and the Prospectus, such counsel may assume that the statements
made and incorporated by reference therein are correct and complete.
(xii) the Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended;
(xiii) to the best of such counsel's knowledge and except as otherwise
set forth in the Prospectus, there are no contracts, agreements or
understandings between the Company and any person granting such person the
right to require the Company to file a registration statement under the Act
with respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the
Registration Statement, except as set forth in the Investors' Rights
Agreement dated June 12, 1998 (which rights have been waived or expired)
and the Information and Registration Rights Agreement dated November 19,
1992; and
(xiv) in addition, such counsel shall state that it has participated
in conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company, and
representatives of the underwriters, at which the contents of the
Registration Statement and the Prospectus and related matters were
discussed and, although such counsel does not pass upon, and does not
assume any responsibility for, the accuracy, completeness or fairness of
the statements contained or incorporated by reference in the Registration
Statement and the Prospectus
21
<PAGE>
and has not made any independent check or verification thereof, during the
course of such participation, no facts came to such counsel's attention
that cause such counsel to believe that the Registration Statement, at the
time it became effective, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the
Prospectus (including the documents incorporated by reference therein), as
of its date or as of the date hereof contained an untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; except that such counsel need express no belief with
respect to the financial statements, schedules and other financial and
statistical data included or incorporated by reference in, or omitted from,
the Registration Statement or the Prospectus.
The opinion of Latham & Watkins described in Section 9(f) above shall
be rendered to you at the request of the Company and shall so state therein.
(g) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of _______________, counsel for the Selling Stockholders, to the effect that:
(i) This Agreement has been duly authorized, executed and delivered
by or on behalf of each Selling Stockholder;
(ii) each Selling Stockholder is the lawful owner of the Shares to be
sold by such Selling Stockholder pursuant to this Agreement and has good and
clear title to such Shares, free of all restrictions on transfer, liens,
encumbrances, security interests, equities and claims whatsoever;
(iii) each Selling Stockholder has full legal right, power and
authority, and all authorization and approval required by law, to enter into
this Agreement and the Custody Agreement and the Power of Attorney of such
Selling Stockholder and to sell, assign, transfer and deliver the Shares to be
sold by such Selling Stockholder in the manner provided herein and therein;
(iv) the Custody Agreement of each Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding agreement of such Selling Stockholder, enforceable in accordance
with its terms;
(v) the Power of Attorney of each Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding instrument of such Selling Stockholder, enforceable in accordance
with its terms, and, pursuant to such Power of Attorney, such Selling
Stockholder has, among other things, authorized the Attorneys, or any one of
them, to execute and deliver on such Selling Stockholder's behalf this Agreement
and any other document they, or any one of them, may deem necessary or desirable
in connection with the transactions contemplated hereby and thereby and to
deliver the Shares to be sold by such Selling Stockholder pursuant to this
Agreement;
22
<PAGE>
(vi) upon delivery of and payment for the Shares to be sold by each
Selling Stockholder pursuant to this Agreement, good and clear title to such
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever; and
(vii) the execution, delivery and performance of this Agreement and
the Custody Agreement and Power of Attorney of each Selling Stockholder by such
Selling Stockholder, the compliance by such Selling Stockholder with all the
provisions hereof and thereof and the consummation of the transactions
contemplated hereby and thereby will not (A) require any consent, approval,
authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under the securities
or Blue Sky laws of the various states), (B) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
organizational documents of such Selling Stockholder, if such Selling
Stockholder is not an individual, or any indenture, loan agreement, mortgage,
lease or other agreement or instrument to which such Selling Stockholder is a
party or by which any property of such Selling Stockholder is bound or (C)
violate or conflict with any applicable law or any rule, regulation, judgment,
order or decree of any court or any governmental body or agency having
jurisdiction over such Selling Stockholder or any property of such Selling
Stockholder.
The opinion of ________________ described in Section 9(g) above shall
be rendered to you at the request of the Selling Stockholders and shall so state
therein.
(h) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Morrison & Foerster LLP special intellectual property counsel for the
Company, to the effect set forth in Annex II hereto.
(i) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Hogan & Hartson, special regulatory counsel for the Company, to the effect
set forth in Annex III hereto.
(j) You shall have received on the Closing Date an opinion, dated
the Closing Date, of Orrick, Herrington & Sutcliffe LLP, counsel for the
Underwriters, as to the matters referred to in Sections 9(f)(iv), 9(f)(vi) (but
only with respect to the Company), 9(f)(ix) (but only with respect to the
statements under the caption "Description of Capital Stock" and "Underwriting")
and 9(f)(xvii).
In giving such opinions with respect to the matters covered by Section
9(f)(xvii), Latham & Watkins and Orrick, Herrington & Sutcliffe LLP may state
that their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any amendments or
supplements thereto and review and discussion of the contents thereof, but are
without independent check or verification except as specified.
(k) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the case
may be, in form and substance satisfactory to you, from Ernst & Young LLP,
independent public accountants, containing the information and statements of the
type ordinarily included in accountants' "comfort letters" to
23
<PAGE>
Underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus.
(l) The Company shall have delivered to you the agreements specified
in Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(m) The Shares shall have been duly listed for quotation on the
Nasdaq National Market.
(n) The Company and the Selling Stockholders shall not have failed on
or prior to the Closing Date to perform or comply with any of the agreements
herein contained and required to be performed or complied with by the Company or
the Selling Stockholders, as the case may be, on or prior to the Closing Date.
(o) You shall have received on the Closing Date, a certificate of
each Selling Stockholder who is not a U.S. Person (as defined under applicable
U.S. federal tax legislation) to the effect that such Selling Stockholder is not
a U.S. Person, which certificate may be in the form of a properly completed and
executed United States Treasury Department Form W-8 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the
Closing Date by you by written notice to the Sellers if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its
24
<PAGE>
monetary or fiscal affairs which in your opinion has a material adverse effect
on the financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each non-
defaulting Underwriter shall be obligated severally, in the proportion which the
number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 10 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to
you, the Company and the Selling Stockholders for purchase of such Firm Shares
are not made within 48 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter, the Company or
the Selling Stockholders. In any such case which does not result in termination
of this Agreement, either you or the Sellers shall have the right to postpone
the Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. If, on an Option Closing
Date, any Underwriter or Underwriters shall fail or refuse to purchase
Additional Shares and the aggregate number of Additional Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Additional Shares to be purchased on such date, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
such Additional Shares or (ii) purchase not less than the number of Additional
Shares that such non-defaulting Underwriters would have been obligated to
purchase on such date in the absence of such default. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of any such Underwriter under this Agreement.
SECTION 11. Agreements of the Selling Stockholders. Each Selling
Stockholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by such Selling
Stockholder to the Underwriters.
(b) To do and perform all things to be done and performed by such
Selling Stockholder under this Agreement prior to the Closing Date and to
satisfy all conditions
25
<PAGE>
precedent to the delivery of the Shares to be sold by such Selling Stockholder
pursuant to this Agreement.
SECTION 12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to
KeraVision, Inc., 48630 Milmont Drive, Fremont, California 94538, Attention:
Thomas M. Loarie, (ii) if to the Selling Stockholders, to [NAME OF ATTORNEY-IN-
FACT] c/o [ADDRESS OF ATTORNEY-IN-FACT] and (iii) if to any Underwriter or to
you, to you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park
Avenue, New York, New York 10172, Attention: Syndicate Department, or in any
case to such other address as the person to be notified may have requested in
writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Stockholders and the
several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, any Selling Stockholder or any person controlling such Selling
Stockholder, (ii) acceptance of the Shares and payment for them hereunder and
(iii) termination of this Agreement.
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to
reimburse the several Underwriters for all out-of-pocket expenses (including the
fees and disbursements of counsel) incurred by them. Notwithstanding any
termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the fees
disbursements of counsel) incurred by them in connection with enforcing their
rights hereunder (including, without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the Selling
Stockholders, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
26
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
KERAVISION, INC.
By:___________________________________________
Title:
THE SELLING STOCKHOLDERS NAMED IN SCHEDULE II
HERETO, ACTING SEVERALLY
By____________________________________________
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
DAIN RAUSCHER WESSELS,
a division of Dain Rauscher Incorporated
PRUDENTIAL SECURITIES INCORPORATED
SG COWEN SECURITIES CORPORATION
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By________________________________________________
27
<PAGE>
SCHEDULE I
----------
<TABLE>
<CAPTION>
Number of Firm Shares to
Underwriters be Purchased
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............
Prudential Securities Incorporated..............................
Dain Rauscher Wessels...........................................
SG Cowen Securities Corporation.................................
[Names of other Underwriters]
_________
Total.......................................................... 4,000,000
</TABLE>
<PAGE>
SCHEDULE II
-----------
Selling Stockholders
--------------------
<TABLE>
<CAPTION>
Number of Additional
Name Shares Being Sold
<S> <C>
..........................................................
..........................................................
..........................................................
..........................................................
________
Total................
</TABLE>
<PAGE>
Annex I
Sprout Capital VIII, L.P.
DLJ Capital Corporation
The Sprout CEO Fund, L.P.
Sprout Venture Capital, L.P.
DLJ ESC II, L.P.
Johnson & Johnson Development Corporation
A-1
<PAGE>
Annex II
You shall have received on the Closing Date an opinion (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, of Morrison &
Foerster LLP, special intellectual property counsel for the Company, to the
effect that (1) such counsel is familiar with the Intellectual Property used by
the Company and its subsidiaries in their business and the manner of such use
and has read the Registration Statement and the Prospectus, including
particularly the portions of the Registration Statement and the Prospectus
referring to any Intellectual Property, and (2) such counsel is of the opinion
that:
(i) the statements in the Registration Statement and Prospectus
under the caption "Business - Patents and Proprietary Rights," are, to such
counsel's knowledge, accurate and complete statements or summaries of the
matters set forth therein;
(ii) to such counsel's knowledge, there are no legal or governmental
proceedings other than patent applications pending, relating to patent
rights of the Company to which the Company is a party, and, to such
counsel's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or others;
(iii) to such counsel's knowledge, the Company has not received any
communication in which it is alleged that the Company is infringing or
violating the patent rights of third parties; and
(iv) to such counsel's knowledge, there appear to be no patents held
by third parties that would prevent the Company from manufacturing and
selling, in the United States and abroad, the Intacs corneal ring segments
(as described in the Registration Statement and Prospectus) and the related
surgical instruments set forth in Exhibit __ attached hereto, as the Intacs
corneal ring segments and such surgical instruments are described in, and
as of the respective dates of, those patent applications set forth in
Exhibit __ attached hereto.
(v) in addition, such counsel shall state that nothing has come to
such counsel's attention that leads them to believe that the statements in
the Patents Paragraphs, in (a) the Registration Statement, at the time it
became effective or on the date hereof, contained or contain an untrue
statement of a material fact with respect to patent rights of the Company
or omit or omitted to state a material fact with respect to patent rights
of the Company required to be stated therein or necessary to make the
statements therein not misleading, or (b) the Prospectus, as of the date of
the Prospectus or on the date hereof, contained or contain an untrue
statement of a material fact with respect to patent rights of the Company
or omitted or omit to state a material fact with respect to patent rights
of the Company required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading (it being understood that such counsel has not
participated in the negotiation of or reviewed the Company's license
agreements and have not undertaken any independent investigation as to
whether the Company is infringing any patents or other rights of others or
whether the Company owns or possesses sufficient licenses or other rights
to use all patents or other rights necessary for the conduct of the
Company.
Annex II-1
<PAGE>
The opinion of such counsel shall be rendered to you at the request of
the Company and shall so state therein.
Annex II-2
<PAGE>
Annex III
You shall have received on the Closing Date an opinion (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, of Hogan &
Hartson L.L.P., special regulatory counsel for the Company, to the effect that
(1) such counsel has read the Registration Statement and the Prospectus,
including particularly the portions of the Registration Statement and the
Prospectus referring to the FDA, and (2) such counsel is of the opinion that:
(i) the statements in the Prospectus under the captions "Risk
Factors -KeraVision may not be able to obtain additional regulatory
approvals or maintain current approvals, which could delay the sale and
distribution of current and future products and adversely affect our
revenues," and "Business - Government Regulation," insofar as such
statements purport to summarize applicable provisions of the FDC Act and
the regulations promulgated thereunder, are accurate summaries in all
materials respects of the provisions purported to be summarized under such
captions in the Prospectus;
(ii) there are no FDA enforcement actions or proceedings pending or,
to such counsel's knowledge, threatened against the Company; and
(iii) during the course of preparation of the Registration Statement,
such counsel participated in certain discussions with certain officers and
employees of the Company as to the FDA regulatory matters dealt with under
the captions "Risk Factors - KeraVision may not be able to obtain
additional regulatory approvals or maintain current approvals, which could
delay the sale and distribution of current and future products and
adversely affect our revenues." and "Business - Government Regulation" in
the Prospectus. While such counsel has not undertaken to determine
independently, and such counsel does not assume any responsibility for, the
accuracy, completeness, or fairness of the statements under the above-
referenced captions in the Prospectus, such counsel may state on the basis
of these discussions and such counsel's activities as special FDA
regulatory counsel to the Company in connection with such counsel's review
of the statements contained in such captioned sections that no facts have
come to such counsel's attention that cause such counsel to believe that
the statements in the Prospectus under the captions "Risk Factors -
KeraVision may not be able to obtain additional regulatory approvals or
maintain current approvals, which could delay the sale and distribution of
current and future products and adversely affect our revenues." and
"Business - Government Regulation," insofar as such statements relate to
FDA regulatory matters, at the time the Registration Statement became
effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, or as of the date hereof, contains
an untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
The opinion of such counsel shall be rendered to you at the request of
the Company and shall so state therein.
Annex III-3
<PAGE>
Exhibit 5.1
[LETTERHEAD OF LATHAM & WATKINS]
August 10, 1999
KeraVision, Inc.
48630 Milmont Drive
Fremont, California 94538
Re: Registration Statement on Form S-3, File No. 333-82949;
4,600,000 Shares of Common Stock, par value $0.001 per share
------------------------------------------------------------
Ladies and Gentlemen:
In connection with the registration by KeraVision, Inc., a Delaware
corporation (the "Registrant"), of 4,600,000 shares of common stock of the
Registrant, par value $0.001 per share (the "Shares"), under the Securities Act
of 1933, as amended (the "Act"), on that certain registration statement on Form
S-3 filed with the Securities and Exchange Commission (the "Commission") on July
15, 1999 (File No. 333-82949), as amended by Amendment No. 1 and Amendment No. 2
filed with the Commission on July 22, 1999 and August 10, 1999, respectively,
(the "Registration Statement"), you have requested our opinion with respect to
the matters set forth below.
In our capacity as your counsel in connection with such registration,
we are familiar with the proceedings taken and proposed to be taken by the
Company in connection with the authorization, issuance and sale of the Shares,
and for the purposes of this opinion, have assumed such proceedings will be
timely completed in the manner presently proposed. In addition, we have made
such legal and factual examinations and inquiries, including an examination of
originals or copies certified or otherwise identified to our satisfaction of
such documents, corporate records and instruments, as we have deemed necessary
or appropriate for purposes of this opinion.
<PAGE>
August 10, 1999
Page 2
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity to authentic original documents of all documents submitted to us as
copies.
We are opining herein as to the effect on the subject transaction only
of the General Corporation Law of the State of Delaware, including statutory and
reported decisional law thereunder and we express no opinion with respect to the
applicability thereto, or the effect thereon, of any other laws.
Subject to the foregoing, it is our opinion that the Shares have been
duly authorized, and, upon issuance, delivery and payment therefor in the manner
contemplated by the Registration Statement, will be validly issued, fully paid
and nonassessable.
We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm contained under the
heading "Legal Matters".
Very truly yours,
/s/ Latham & Watkins
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 3, 1999, except for Note 9, as to which
the date is March 25, 1999, in the Amendment No. 2 to the Registration
Statement (Form S-3 No. 333-82949) and related Prospectus of KeraVision, Inc.
for the registration of 4,600,000 shares of its common stock.
/s/ Ernst & Young LLP
San Jose, California
August 9, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in Amendment No. 2 to the
Registration Statement (Form S-3 No. 333-82949) of KeraVision, Inc. for the
registration of 4,600,000 shares of its common stock, of our report dated March
3, 1999, with respect to the financial statements of Transcend Therapeutics,
Inc. included in the Current Report on Form 8-K/A date May 28, 1999 of
KeraVision, Inc. filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Boston, Massachusetts
August 9, 1999
