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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-77583
KERAVISION, INC.
2,500,000 SHARES OF COMMON STOCK
PROSPECTUS
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TRANSCEND THERAPEUTICS, INC.
PROXY STATEMENT
FOR
SPECIAL MEETING OF
STOCKHOLDERS
OF TRANSCEND THERAPEUTICS, INC.
Transcend Therapeutics, Inc. has agreed to be acquired in a merger by
KeraVision, Inc., a developer of medical devices for vision correction. This
merger requires the approval of Transcend's stockholders.
Transcend is holding a special meeting of its stockholders to vote on an
agreement and plan of reorganization previously signed by the two companies.
Transcend's board of directors is soliciting proxies from its stockholders to
be voted at the special meeting. This proxy statement contains information
Transcend's board is required to provide in order to solicit your proxy.
This document also constitutes a prospectus for the shares of KeraVision's
common stock expected to be issued to Transcend's stockholders in the merger.
If the merger occurs, each Transcend stockholder will receive a fraction of a
share of KeraVision's common stock for each share of Transcend common stock
they own. The fraction of a share is currently expected to be worth between
$1.62 and $1.75 when issued.
We cannot now determine how much KeraVision common stock will be issued
for each share of Transcend common stock; it will be determined three days
before the meeting.
You can get a current estimate of the exchange ratio by calling 1-888-277-
7772. KeraVision's common stock trades on the Nasdaq National Market under the
symbol "KERA." Transcend's common stock trades on the Nasdaq SmallCap Market
under the symbol "TSND." The date of the prospectus contained in this document
is May 5, 1999.
Please see "Risk Factors" beginning on page 5. The risk factors describe
material risks involved in approving the merger and becoming a holder of
KeraVision's common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the merger or the KeraVision common
stock to be issued under this proxy statement/ prospectus or determined if
this proxy statement/prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
This proxy statement/prospectus and a proxy card are being mailed beginning May
7, 1999.
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TABLE OF CONTENTS FOR
PROXY STATEMENT/PROSPECTUS
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QUESTIONS AND ANSWERS..................................................... 1
SUMMARY................................................................... 3
What the companies do................................................... 3
Transcend's reasons for the merger...................................... 3
KeraVision's reasons for the merger..................................... 3
Transcend has received a fairness opinion from its financial advisor.... 3
Transcend and KeraVision have signed a merger agreement................. 4
Affiliates of Transcend have agreed to approve the merger............... 4
You have appraisal rights............................................... 4
Your rights as a stockholder will change................................ 4
RISK FACTORS.............................................................. 5
COMPARATIVE PER SHARE DATA................................................ 11
MARKET PRICE DATA AND DIVIDEND POLICY..................................... 12
SELECTED HISTORICAL FINANCIAL INFORMATION................................. 13
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............... 15
THE SPECIAL MEETING OF TRANSCEND STOCKHOLDERS............................. 18
Purpose of the Special Meeting.......................................... 18
Record Date and Outstanding Shares...................................... 18
Voting of Proxies....................................................... 18
Vote Required........................................................... 18
It Is Very Unlikely that the Merger Will Not Be Approved................ 19
Quorum; Abstentions..................................................... 19
Solicitation of Proxies; Expenses....................................... 19
Accountants............................................................. 19
THE MERGER................................................................ 20
Background of the Merger................................................ 20
Transcend's Reasons for the Merger...................................... 21
KeraVision's Reasons for the Merger..................................... 22
Recommendation of the Transcend Board................................... 23
Opinion of Transcend's Financial Advisor................................ 23
Historical Share Price Analysis--Transcend.............................. 24
Absence of Ongoing Business of Transcend................................ 25
Book Value of Transcend................................................. 25
Premiums in Recent Merger Transactions.................................. 25
Historical Share Price Analysis--KeraVision............................. 26
Discounted Earnings Analysis--KeraVision................................ 26
Benefits of the Merger to Transcend's Affiliates........................ 27
Affiliates of Transcend Have Agreed to Approve the Merger............... 28
Affiliates of Transcend Have Agreed Not to Sell Any KeraVision Stock for
Six Months After the Merger............................................ 28
Transcend has Deposited $7 Million in an Escrow Account to Assure the
Merger Will Close...................................................... 28
Material Federal Income Tax Considerations.............................. 29
Anticipated Purchase Accounting Treatment............................... 30
You Have Appraisal Rights if You Do Not Wish to Receive KeraVision
Shares in the Merger................................................... 30
THE MERGER AGREEMENT...................................................... 32
General................................................................. 32
What You Will Receive in the Merger..................................... 32
Examples of Exchange Ratio Formula Results.............................. 33
No Fractional Shares of KeraVision Stock Will Be Issued................. 34
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Transcend Options and Warrants Will Be Cancelled....................... 34
Stock Ownership Following the Merger................................... 35
Conversion of Shares; Procedures for Exchange of Certificates.......... 35
Effect on Stock Certificates........................................... 35
No Solicitation by Transcend of Other Potential Acquirers.............. 35
Representations, Warranties and Covenants of Transcend and KeraVision.. 35
Employment Matters..................................................... 36
Updates to Net Cash.................................................... 36
Indemnification and Insurance.......................................... 36
Conditions that Must Be Met for the Merger to Close.................... 37
Termination of the Merger and Merger Agreement......................... 37
Termination Fee........................................................ 37
Expenses............................................................... 37
KERAVISION, INC. ........................................................ 38
Business............................................................... 38
Employees.............................................................. 54
Properties............................................................. 54
Legal Proceedings...................................................... 54
KeraVision Management's Discussion and Analysis........................ 54
MANAGEMENT OF KERAVISION................................................. 60
Board of Directors..................................................... 60
Executive Officers of KeraVision....................................... 62
Director Compensation.................................................. 63
Board Meetings and Committees.......................................... 63
Compensation Committee Report.......................................... 65
Executive Compensation................................................. 67
Performance Graph...................................................... 70
Certain Relationships and Related Transactions......................... 71
Compliance with Section 16(a) of the Securities Exchange Act of 1934... 73
TRANSCEND THERAPEUTICS, INC.............................................. 74
Business............................................................... 74
Properties............................................................. 75
Legal Proceedings...................................................... 75
Transcend Management's Discussion and Analysis......................... 75
SECURITY OWNERSHIP....................................................... 77
KeraVision............................................................. 77
Transcend.............................................................. 80
DESCRIPTION OF KERAVISION CAPITAL STOCK.................................. 82
KeraVision Common Stock................................................ 82
KeraVision Preferred Stock............................................. 82
COMPARISON OF CAPITAL STOCK AND RIGHTS OF HOLDERS OF KERAVISION COMMON
STOCK AND TRANSCEND COMMON STOCK........................................ 84
EXPERTS.................................................................. 85
LEGAL MATTERS............................................................ 86
WHERE YOU CAN FIND MORE INFORMATION...................................... 86
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS............................... 86
INDEX TO FINANCIAL STATEMENTS............................................ F-1
ANNEX A--AGREEMENT AND PLAN OF MERGER.................................... A-1
ANNEX B--OPINION OF FINANCIAL ADVISOR TO TRANSCEND....................... B-1
ANNEX C--SECTION 262 OF THE DCGL......................................... C-1
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QUESTIONS AND ANSWERS
Q: Why am I receiving these materials?
A: Transcend's board of directors has approved the acquisition of Transcend
by KeraVision in the merger. The merger now requires the approval of
Transcend's stockholders. We are sending you these materials to help you decide
whether to approve the merger.
Q: Why is Keravision acquiring Transcend?
A: In brief, Transcend has a significant amount of cash it originally
obtained to develop a drug based on Procysteine. Procysteine has since been
shown to be ineffective in treating its targeted disease. KeraVision wishes to
acquire Transcend for its cash, and use that cash in its business of developing
and marketing medical devices for vision correction.
Q: How did Transcend arrive at its decision to be acquired?
A: Transcend's board of directors conducted an in-depth review of
alternatives for Transcend's potential future business. The review included
discussions with other potential acquirers and the advice of EVEREN Securities,
Inc., an investment banking firm engaged for this purpose. EVEREN delivered an
opinion to Transcend's board that the terms of the merger are fair to
Transcend's stockholders from a financial point of view. EVEREN's opinion is
attached to this proxy statement/prospectus as Annex B.
Q: What will I receive in the merger?
A: You will receive shares of KeraVision's common stock, which is publicly
traded on Nasdaq under the symbol "KERA." The value of the total number of
shares that KeraVision will issue to all Transcend's stockholders will
represent a 20 to 30 percent premium over Transcend's net cash.
Q: How much Keravision common stock will I receive?
A: You will receive a fraction of a share of KeraVision's common stock,
which we expect to be worth between $1.62 and $1.75, for each share of
Transcend's common stock you own. We will not know until three days before the
merger the actual fraction of a share of KeraVision's common stock that you
will receive for each share of Transcend common stock. We call this fraction
the "exchange ratio." We plan on completing the merger the day of the meeting.
Accordingly, we expect to be able to provide the exchange ratio to you three
days prior to the meeting. The final calculation of the exchange ratio depends
partly on an average of the closing prices of KeraVision's common stock during
the ten-day period ending three days before the merger occurs. The exchange
ratio also depends on how much net cash Transcend has at the time of the merger
and how many shares of Transcend's common stock are outstanding when the merger
closes. See "The Merger Agreement--What You Will Receive in The Merger."
Q: How can I find out the exchange ratio before voting?
A: Call the toll-free number Transcend has established for this purpose, 1-
888-277-7772, and ask for the exchange ratio. If you call before the exchange
ratio has been calculated, you will get an estimate. If you call after it has
been calculated, you will get the final exchange ratio.
Q: What do I need to do now?
A: Read this document. Then complete your proxy card and indicate how you
want to vote. Sign and mail the proxy card in the enclosed return envelope as
soon as possible. You should complete, sign and return
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your proxy even if you currently expect to attend the special meeting and vote
in person. Mailing in a proxy now will not prevent you from later canceling or
"revoking" your proxy right up to the day of the special meeting. And you will
ensure that your shares get voted if you later find you are unable to attend.
Q: What do I do if I want to change my vote?
A: Just mail in a later-dated, signed proxy card before the special meeting
or attend the special meeting in person and sign a new proxy card or vote in
person.
Q: If my broker holds my shares in "street name," will my broker vote my
shares for me?
A: Your broker will vote your shares only if you tell the broker how to
vote. To do so, follow the directions your broker provides. Without
instructions, your broker will not vote your shares.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed, KeraVision will send you instructions
for exchanging your stock certificates.
Q: When do you expect the merger to occur?
A: We intend to complete the merger on May 28, 1999, after the special
meeting.
Q: What are the tax consequences to me of the merger?
A: We expect the merger to be a taxable event for you for federal income tax
purposes.
If you have other questions, you should contact:
Transcend Therapeutics, Inc.
c/o Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Patrick Toher, Esq.
Phone: (617) 526-6000
Fax: (617) 526-5000
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SUMMARY
This summary highlights information from this proxy statement/prospectus. To
fully understand the proposed merger and its consequences to you, you should
also read the more detailed information and financial statements contained in
this proxy statement/prospectus, and the accompanying appendices.
What the companies do
KeraVision, Inc.
48630 Milmont Drive
Fremont, California 94538
(510) 353-3000
Nasdaq stock symbol: KERA
KeraVision, founded in 1986, is creating a new category of non-laser vision
correction products that are designed especially for low to moderate myopia
(nearsightedness) and low to moderate hyperopia (farsightedness). These
products are potential alternatives to eyeglasses, contact lenses and vision
correction surgeries that permanently alter the eye's central optical zone. The
initial product is KeraVision Intacs(TM) for myopia, part of a technology
platform that KeraVision believes will potentially treat the most common forms
of vision problems.
Transcend Therapeutics, Inc.
738 Main Street
Suite 431
Waltham, MA 02451
Nasdaq stock symbol: TSND
Transcend was formed in 1992. Its activities have concentrated on developing
a compound, Procysteine, for use in treating Acute Respiratory Distress
Syndrome. In March 1998, Transcend suspended its clinical trial of Procysteine
following the recommendation of an independent safety monitoring board. In
August 1998, after further review of data from the trial, Transcend abandoned
its efforts in this area. In December 1998, Transcend commenced winding down
its operations.
Transcend's reasons for the merger (page 21)
Transcend's board of directors approved the merger for a number of reasons,
including:
. A study has shown that Procysteine and Transcend's other glutathione
repleting compounds have little remaining value;
. It would take significant time and money to try to restart Transcend's
drug development business by in-licensing new products, because the
acquisition costs would be high and there are a limited number of
opportunities that involve acceptable development risks;
. The acquisition of Transcend at a premium to its net cash by a public-
traded company is preferable to liquidating Transcend because of the
costs and delays involved in liquidation; and
. The opinion of EVEREN Securities, Inc., Transcend's financial advisor,
that the consideration to be paid to you in the merger is fair.
KeraVision's reasons for the merger (page 22)
KeraVision's board of directors believes the merger will benefit KeraVision
primarily because:
. Transcend's net cash of approximately $8 million will enable KeraVision
to continue developing its products and conducting clinical trials and
will assist in financing the launching of its products in Europe, Canada
and in the United States.
. The merger provides KeraVision a source of cash on terms that are more
favorable than current financing options.
Transcend has received a fairness opinion from its financial advisor (page 23)
Transcend retained EVEREN Securities, Inc. as its exclusive financial
advisor and agent in connection with the proposed merger to render an opinion
to the board of directors of Transcend as to
whether the consideration to be paid to you was fair. EVEREN has delivered an
opinion that the
transaction is fair to you from a financial point of view. EVEREN based its
opinion on a number of factors, with the principal factor being the value of
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the consideration you would receive for each of your shares of Transcend common
stock. A complete copy of EVEREN's opinion is attached as Annex B to this
document.
Transcend and KeraVision have signed a merger agreement (Annex A)
Transcend and KeraVision signed an agreement and plan of reorganization on
December 22, 1998. You should read the agreement carefully; it describes your
rights in the merger. A copy of the agreement is included as Annex A and a
summary of its terms begins on page 32.
Affiliates of Transcend have agreed to approve the merger (page 28)
Some of Transcend's principal stockholders have signed voting agreements
with KeraVision that require these stockholders to vote in favor of the
KeraVision merger and against any other acquisition transaction. Together,
these stockholders own approximately 51 percent of Transcend's common stock,
which is enough shares to provide the majority vote needed to approve the
merger. The agreements expire when the merger with KeraVision has been approved
or three months after the merger agreement terminates, whichever comes first.
You have appraisal rights (page 30)
You are entitled to appraisal rights under the laws of Delaware if you
follow the procedures established by those laws. These procedures are described
beginning on page 30.
Your rights as a stockholder will change (page 82)
When the merger is completed, your rights as a KeraVision stockholder will
be determined by Delaware law and by KeraVision's amended and restated
certificate of incorporation and bylaws. As a holder of KeraVision common
stock, your ability to elect members of the KeraVision board of directors may
be reduced in comparison to your ability to elect members of the Transcend's
board of directors. Directors of KeraVision may be more easily removed from
office than directors of Transcend. KeraVision has established a stockholders
rights plan that may have the effect of deterring a potential acquirer from
making an offer to purchase the outstanding KeraVision common stock.
Approximately 530,000 shares of KeraVision series B preferred stock
currently are outstanding. Holders of KeraVision series B shares are entitled
to vote on all matters upon which holders of KeraVision common stock are
entitled to vote. Holders of series B preferred shares are entitled to four
votes per share. Holders of series B shares are entitled elect one member of
the KeraVision board of directors so long as 300,000 series B shares remain
outstanding.
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RISK FACTORS
You should carefully consider the following risk factors in evaluating
whether to approve the merger agreement and the acquisition. You should also
consider these risk factors in conjunction with the other information included
in this proxy statement/prospectus.
You may receive fewer KeraVision shares than you expected at the time you
executed your proxy.
Because the price of KeraVision's common stock will change, you may receive
considerably fewer shares of KeraVision stock than you expect. When the merger
occurs, your shares of Transcend common stock will be converted to a number of
shares of KeraVision common stock that is not yet known. You will receive a
fraction of a share of KeraVision common stock for each share of Transcend
common stock you own which is based in part upon the average closing price of
KeraVision common stock during the 10-day period ending three days before the
merger closes.
KeraVision is incurring operating losses which may result in a substantial
reduction over time of the value of KeraVision shares you receive in the
merger.
KeraVision has generated only limited revenues to date and has experienced
significant operating losses every year since 1986. KeraVision expects to incur
substantial and increasing operating losses for at least the next year and
until sufficient revenue and margin can be generated to offset expenses,
including increasing expenses for sales and marketing efforts. KeraVision
cannot predict the amount of net losses and the time required for it to reach
profitability. KeraVision is still developing products for sale in the United
States market and is subject to the uncertainties and risks associated with
developing products and beginning sales efforts. As a result, KeraVision's
future operating losses may be even greater than we currently anticipate.
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 in order to bring KeraVision
Intacs to market. KeraVision will be required to commit additional resources to
conducting the research and development, clinical studies and regulatory
activities necessary to bring any other medical device products to market. We
do not anticipate that KeraVision's current cash, cash equivalents and short-
term investments or financing plans will be sufficient to fund KeraVision's
operations to profitability. KeraVision will need to raise substantial
additional funds for this purpose. KeraVision may seek such additional funding
through collaborative arrangements and through public or private debt or equity
financings. Any additional equity financing will be dilutive to you as a
stockholder to the extent you do not participate in the financing, and any debt
financing, if available, may restrict KeraVision's future ability to pay
dividends on its capital stock or the manner in which KeraVision conducts its
business. KeraVision currently has no commitments for any additional
financings, and we cannot assure you that any such financings will be
available. Nor can we assure you that funds from these financings will be
available when needed or available on terms favorable to KeraVision. If
KeraVision fails to obtain sufficient funds, it may need to delay, scale back
or eliminate some or all of its research and product development programs,
clinical studies or regulatory activities or license third parties to
commercialize products or technologies that it would otherwise seek to develop
itself. Such actions would adversely affect KeraVision's business and financial
condition.
KeraVision needs market acceptance of KeraVision Intacs and other products to
be successful.
KeraVision's future performance depends, to a substantial extent, upon the
degree of market acceptance of KeraVision Intacs for correction of myopia, and
on KeraVision's ability to successfully manufacture, market,
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deliver and support KeraVision Intacs. We cannot assure you that KeraVision
Intacs or any future product that KeraVision develops will achieve or maintain
acceptance in their target markets. To be successful KeraVision Intacs will
have to be accepted by ophthalmic surgeons as well as by patients. To date,
KeraVision has sold its product primarily in Canada, France and Germany, and
has so far received only limited acceptance and generated only limited
revenues. KeraVision has only recently begun the sale of KeraVision Intacs in
the United States. Many surgeons in these countries and elsewhere have already
invested significant time and resources in developing expertise in other
corrective ophthalmic surgical techniques. KeraVision intends to market its
proposed 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 KeraVision Intacs when such nonsurgical vision-correction
alternatives are available. The extent of, and rate at which, KeraVision Intacs
and future products achieve market acceptance and penetration is a function of
many variables including price, safety, efficacy, reliability and marketing and
sales efforts. Similar risks may confront other products KeraVision develops in
the future.
The development of KeraVision's products and KeraVision's future revenue are
uncertain and may not be successful.
KeraVision Intacs will require a significant investment of capital before
commercialization in the United States. To obtain revenues KeraVision must,
alone or with others, successfully manufacture and market KeraVision Intacs and
successfully develop, obtain regulatory approval for, manufacture and market
other products. The time frame for any products and potential products,
including KeraVision Intacs, to succeed in the market is long and uncertain.
Although KeraVision has received approval to market KeraVision Intacs in the
United States, the European Union and Canada, we cannot assure you that
KeraVision will successfully complete its research and development efforts for
this or other products to be marketed elsewhere. Nor can we assure you that
KeraVision Intacs will perform in the manner anticipated, or that we will
experience the results observed in animal, eye-bank or human nonfunctional and
sighted-eye testing in long-term use of KeraVision Intacs. We also cannot
assure you that KeraVision Intacs will prove to be safe or effective over the
long term in correcting vision. If KeraVision Intacs fails to perform as
anticipated our business and financial condition will be jeopardized.
Compliance with governmental standards applicable to KeraVision and its
products may prove too burdensome and costly for KeraVision to operate
profitably.
Having received approval from the FDA for the correction of myopia,
KeraVision Intacs is subject to additional post-market testing and surveillance
programs required by regulatory agencies. KeraVision is also required to engage
in extensive record keeping and reporting, and to conduct extensive post-market
surveillance or other device follow-up. In addition, KeraVision expects to
manufacture KeraVision Intacs internally and will accordingly be required to
adhere to additional FDA requirements for the manufacture and distribution of
KeraVision Intacs. KeraVision's ongoing compliance with the government's
quality system regulation, labeling and other applicable regulatory
requirements is monitored through periodic inspections by state and federal
agencies, including the FDA, and comparable agencies in other countries.
Failure to comply with the applicable regulatory requirements can, among other
things, result in fines, injunctions, civil penalties, suspensions or
withdrawal of regulatory approvals, product recalls, product seizures,
including cessation of manufacturing and sales, operating restrictions and
criminal prosecution, and the occurrence of any of these events could have a
material adverse effect on KeraVision's business, financial condition and
results of operations.
KeraVision may not be able to obtain necessary regulatory approvals in a timely
manner, which would delay the sale and distribution of KeraVision Intacs or
future products and adversely affect our revenues.
As the manufacturer of KeraVision Intacs and potential products,
KeraVision's operations must undergo quality service regulation compliance
inspections conducted by the FDA and equivalent inspections conducted by state
and foreign officials. Third parties manufacturing KeraVision instrumentation
may similarly be
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affected. We cannot assure you that KeraVision or these third parties will be
able to obtain necessary regulatory approvals of their manufacturing operations
in a timely manner or at all. Delays in receipt of, failure to receive or loss
of previously received approvals would have a material adverse effect on
KeraVision's business, financial condition and results of operations.
KeraVision may not obtain the approvals necessary for the sale of its products
in foreign markets which would prevent the sale of products in these markets.
KeraVision's success depends in part on its ability to develop and market
its products in markets outside the United States. Although we have received
approvals for the sale of our products in some of these markets, we cannot
assure you that we will obtain the requisite approvals of foreign countries for
the sale of our products in new foreign markets. Even if we ultimately obtain
these approvals, doing so may take longer, and the licensing requirements may
be more restrictive, than we anticipate. As a result, the sale of our products
in additional foreign markets may be delayed or prevented and our financial
condition and results of operations may be adversely affected.
The cost of KeraVision Intacs and the availability of other established vision
correction products may limit the potential market for KeraVision Intacs which
may impact KeraVision's ability to realize revenues.
KeraVision's target market for KeraVision Intacs currently is limited to
healthy patients who have mild to moderate myopia without significant
astigmatism and are generally over the age of 21. We cannot assure you that
even this target population will prefer refractive surgery to current and
future alternatives for visual correction. 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 KeraVision Intacs. KeraVision also expects that the relative
attractiveness and affordability of other refractive surgical techniques will
affect the market.
Long-term follow-up data may not demonstrate that KeraVision Intacs is safe.
The KeraVision Intacs technology is a relatively new technology. KeraVision
has developed only limited clinical data to date on the safety and efficacy of
KeraVision Intacs in correcting myopia, and KeraVision has not yet developed
any long-term safety or efficacy data. KeraVision cannot yet determine if
KeraVision Intacs will prove to be effective for the predictable treatment of
myopia. We cannot assure you that the clinical trial results of KeraVision
Intacs are necessarily indicative of the degree of safety or efficacy that
KeraVision Intacs will achieve in the long term.
Complications and visual side effects associated with KeraVision Intacs may
affect KeraVision's ability to obtain regulatory approval or gain market
acceptance for KeraVision Intacs.
Although no patient has suffered any serious or lasting injury to the eye or
any material loss of vision, some patients who have received KeraVision Intacs
have experienced various complications. These complications include induced
astigmatism, infection, decentered placement and a reduction in central corneal
sensation. In addition, patients undergoing the KeraVision Intacs procedure
have reported various visual side effects. These include glare, haloes and
other visual symptoms associated with low-light conditions. We cannot assure
you that these complications or side effects will not be serious or lasting or
will not impair or preclude acceptance of the product by patients or
ophthalmologists or preclude KeraVision from obtaining regulatory approval for
its potential products.
KeraVision's ability to operate its business may be adversely affected if is
unable to retain its key personnel or to hire additional key personnel.
KeraVision's success depends in large part on its ability to attract and
retain key management, scientific and operating personnel. We cannot assure you
that KeraVision will be able to attract and retain the qualified personnel
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or develop the expertise needed for its business. KeraVision currently has a
small research and management group. 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 limit KeraVision's ability to
maximize the potential of KeraVision Intacs and develop new products. Such
persons are in high demand and often receive competing employment offers.
KeraVision also will need to develop expertise and add skilled personnel or
retain consultants in such areas as clinical testing, government approvals,
sales, and marketing and manufacturing.
KeraVision has limited manufacturing experience and may be unable to develop
commercial-scale manufacturing capabilities.
KeraVision has limited ability to manufacture a large volume of products and
limited experience in manufacturing medical devices or other products. 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. To be successful, KeraVision
must manufacture its 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 KeraVision.
In addition, if KeraVision established its own commercial-scale manufacturing
capability, it would incur significant scale-up expenses including the need to
expand its facilities and hire additional personnel. KeraVision may seek
collaborative arrangements with other companies to manufacture products and
potential products, including KeraVision Intacs. If we are dependent upon third
parties for the manufacture of our products and proposed products, then 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
parties will adequately perform, and any failures by third parties may impair
our ability to deliver products on a timely basis or otherwise impair our
competitive position.
KeraVision has limited sales and marketing experience and may not be able to
successfully sell or market its products.
KeraVision has only sold products in the United States since April 1999, in
Canada since mid-1998 and Europe since late-1996. KeraVision has recently
entered into additional distribution agreements and also plans to market and
sell its products through a direct sales force. We cannot assure you that
KeraVision's sales effort will be successful. To successfully market and sell
its products, KeraVision will need to hire a sales force that has established
relationships with physicians. KeraVision also needs to hire personnel with
consumer marketing skills. KeraVision will need significant resources to
recruit and retain skilled sales management, direct sales persons or
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 such
efforts will be successful.
KeraVision may not be able to successfully compete in the highly competitive
field of research and development of vision correction alternatives.
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. We cannot assure you that
KeraVision's competitors will not succeed in developing technologies,
procedures or products that are more effective or economical than those
KeraVision is developing or that would render its technology and proposed
products obsolete or noncompetitive.
Other companies, most of which are larger and better financed than
KeraVision, are engaged in the refractive surgery market. Four companies have
received approval to market their products in the United States. In addition, a
number of other large entities currently market and sell laser systems overseas
for use in refractive surgery, including Bausch and Lomb, Aesculap-Meditec,
GmbH and Schwind, several of whom are seeking to obtain FDA approval to sell
their products in the United States. See "KeraVision, Inc.--Business--
Competition." Moreover, several companies are developing other non-laser
approaches to vision correction, including the use of radio-frequency energy to
reshape the cornea.
8
<PAGE>
These companies and institutions represent significant long-term competition
for KeraVision. In comparison to KeraVision, they have:
. substantially greater resources;
. larger research and development staffs;
. better facilities;
. more experience in research and development;
. more experience in preclinical and human clinical studies
. more experience obtaining regulatory approval; and
. more experience manufacturing and marketing medical device products.
KeraVision is subject to the risk that product liability litigation and
insurance may be unavailable.
KeraVision faces a risk of exposure to product liability claims or product
recalls if the use of KeraVision Intacs or other future potential 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 cannot assure you that our current
product liability insurance policies will cover 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 or
financial condition. See "KeraVision, Inc.--Business--Product Liability."
KeraVision depends on one supplier who will discontinue manufacturing raw
material needed by KeraVision and additional supplies may not be available.
KeraVision currently purchases the raw material used in manufacturing
KeraVision Intacs from a single source. This sole-source supplier has given
KeraVision notice that it will discontinue its manufacture of the particular
material KeraVision uses. KeraVision has agreed to purchase a significant
amount of this material, which we anticipate will provide us with a three year
supply and will be delivered over the next twelve months. We cannot assure you
that:
. the supplier will timely deliver the raw material;
. interruptions in supplies will not occur in the future;
. KeraVision will not have to obtain substitute vendors, which would
require additional regulatory submissions; or
. this supply will last as long as we anticipate.
We have been informed that our supplier will be able to make available an
additional five year supply of material beyond the supplies we have agreed to
purchase. As a result, we have not made arrangements to obtain an alternate
supply of material. 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 KeraVision Intacs and will need to obtain alternate
materials. If we are required to manufacture KeraVision Intacs 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 KeraVision Intacs or
future products which could have a material adverse effect on its business,
financial condition or results of operations.
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. KeraVision is actively
working with critical suppliers of products and services
9
<PAGE>
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 KeraVision's or its suppliers' computer systems
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 and which are not Year 2000 compliant, will be year
2000 compliant in a timely fashion and would not have an adverse effect on
KeraVision's systems.
KeraVision may not have the ability to obtain and maintain patents on
KeraVision Intacs and its 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 KeraVision Intacs technology, KeraVision
Intacs and any other potential products it seeks to 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 duplicate KeraVision Intacs 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,
its business could be adversely affected.
KeraVision also relies on trade secrets and proprietary know-how 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 know-how.
10
<PAGE>
COMPARATIVE PER SHARE DATA
The following table contains historical per share data of KeraVision and
Transcend and combined per share data on an unaudited pro forma basis after
giving effect to the merger as a purchase of assets. You should read this data
in conjunction with the selected financial information starting on page 13 and
the separate historical financial statements and related notes. The following
data does not necessarily indicate the operating results or financial position
that would have occurred if the merger had been consummated at the beginning of
the periods presented, nor is it necessarily indicative of future operating
results or financial position.
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
------------
<S> <C>
Historical--KeraVision
Basic and diluted net loss per common share.................. $ (2.16)
Book value (deficit) per share (at period end)............... $ (0.90)
Historical--Transcend
Basic and diluted net loss per common share.................. $ (1.23)
Book value per share (at period end)......................... $ 1.48
Pro Forma Combined
Basic and diluted net loss per common share.................. $ (2.02)
Book value (deficit) per share (at period end)............... $ (0.29)
Pro Forma Combined Equivalent Transcend
shares using exchange ratio of 0.1552:
Basic and diluted net loss per common share.................. $ (0.31)
Book value (deficit) per share (at period end)............... $ (0.04)
</TABLE>
Historical book value (deficit) per share is computed by dividing total
stockholders' equity, or net capital deficiency, by the number of shares
outstanding at December 31, 1998. Pro forma combined net loss per share is
computed by dividing KeraVision's net loss applicable to common stockholders
for the year ended December 31, 1998 by KeraVision's weighted average common
shares outstanding for the year plus approximately 918,000 shares of KeraVision
common stock estimated to be issued in exchange for all of the outstanding
Transcend common stock at the closing of the merger as of April 30, 1999. To
the extent that the market price of KeraVision's common stock increases, the
actual number of shares of KeraVision common stock issued will decrease. To the
extent KeraVision's market price decreases, the number of shares of KeraVision
common stock issued will increase.
Pro forma combined book value (deficit) per share is computed by dividing
the sum of stockholder's equity, or net capital deficiency, of KeraVision at
December 31, 1998 plus the estimated Transcend net cash assets to be acquired
by the outstanding shares of KeraVision common stock at December 31, 1998 plus
approximately 918,000 shares of KeraVision common stock estimated to be issued
in connection with the merger.
Pro forma combined equivalent Transcend amounts are calculated by
multiplying the pro forma amounts by the estimated exchange ratio of 0.16,
based on the average closing sale price of KeraVision common stock for the ten-
day period ended April 30, 1999, and 5,922,036 shares of Transcend common stock
outstanding.
11
<PAGE>
MARKET PRICE DATA AND DIVIDEND POLICY
<TABLE>
<CAPTION>
Transcend
KeraVision, Therapeutics,
Inc. Common Inc. Common
Stock Stock*
--------------- --------------
High Low High Low
------ -------- ------- ------
<S> <C> <C> <C> <C>
1997
First Quarter.................................. $15.00 $ 10.800 -- --
Second Quarter................................. 10.75 6.63 -- --
Third Quarter.................................. 10.63 6.63 $ 10.13 $ 7.63
Fourth Quarter................................. 8.63 5.00 9.00 6.50
1998
First Quarter.................................. $ 8.25 $ 4.75 $ 8.13 $ 2.00
Second Quarter................................. 10.63 7.25 3.88 0.75
Third Quarter.................................. 8.06 3.31 1.56 0.69
Fourth Quarter................................. 14.63 3.69 1.25 0.50
1999
First Quarter.................................. $18.50 $ 10.50 $ 1.50 $ 1.19
Second Quarter (through April 30, 1999)........ 17.50 8.88 1.50 1.28
</TABLE>
- --------
* Transcend's common stock began trading on the Nasdaq National Market on July
2, 1997 and was transferred to the Nasdaq SmallCap Market on April 20, 1999.
KeraVision has not historically paid cash dividends and does not anticipate
paying cash dividends in the foreseeable future. Similarly, Transcend has not
historically paid cash dividends.
The first two columns of the following table show the closing sale price per
share of both KeraVision's and Transcend's common stock on the Nasdaq National
Market on December 22, 1998, the last trading day before the public
announcement of the proposed merger, and on December 31, 1998. The third column
shows the estimated per share equivalent price of Transcend common stock that
would have been paid based on the price of KeraVision common stock quoted on
those dates.
<TABLE>
<CAPTION>
Transcend
KeraVision, Inc. Therapeutics, Inc. Estimated Equivalent
Common Stock Common Stock Transcend Per Share Price
---------------- ------------------ -------------------------
<S> <C> <C> <C>
December 22, 1998....... $ 11.50 $ 0.56 $ 1.74
December 31, 1998....... $ 14.31 $ 1.25 $ 1.75
</TABLE>
The estimated equivalent per share price of a share of Transcend common
stock represents 0.1222 shares of KeraVision common stock when KeraVision's
common stock is $14.313 per share and 0.1513 shares of KeraVision common stock
when KeraVision's common stock is $11.50 per share. These numbers are given as
examples only. The actual fraction of a share of KeraVision common stock you
will receive, called the exchange ratio, depends on three factors: the average
closing price of KeraVision common stock for the ten trading days ending on the
third trading day before the merger closes, the number of shares of Transcend
common stock outstanding when the merger closes and Transcend's net cash when
the merger closes, all of which may vary. The exchange ratio is described in
more detail under the heading "The Merger Agreement--What You Will Receive in
the Merger."
The last trading price of Transcend's common stock on the Nasdaq SmallCap
Market on April 30, 1999 was $1.28. The closing price of KeraVision's common
stock on the Nasdaq National Market on April 30, 1999 was $9.22.
12
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected historical annual financial information for
KeraVision and Transcend has been derived from their respective audited
historical consolidated financial statements. You should read this information
in conjunction with the consolidated financial statements and related notes,
included in this proxy statement/prospectus.
KERAVISION SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net sales..................... $ -- $ -- $ 137 $ 355 $ 835
Costs and expenses:
Cost of sales and
manufacturing expense....... -- -- 319 3,701 4,386
Research and development..... 5,146 6,527 10,888 10,774 11,356
Selling, general and
administrative.............. 1,262 1,725 3,930 6,405 9,693
------- ------- -------- -------- --------
Total costs and expenses...... 6,408 8,252 15,137 20,880 25,435
------- ------- -------- -------- --------
Loss from operations.......... (6,408) (8,252) (15,000) (20,525) (24,600)
Interest income, net.......... 425 1,203 2,121 1,129 563
Other expense................. (114) (57) -- -- --
------- ------- -------- -------- --------
Net loss...................... $(6,097) $(7,106) $(12,879) $(19,396) $(24,037)
======= ======= ======== ======== ========
Net loss applicable to common
stockholders................. $(6,097) $(7,106) $(12,879) $(19,396) $(27,414)
======= ======= ======== ======== ========
Basic and diluted net loss per
share applicable to common
stockholders................. $ (4.52) $ (1.05) $ (1.04) $ (1.55) $ (2.16)
Shares used in calculation of
net loss per share........... 1,348 6,757 12,342 12,528 12,686
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands)
<S> <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
Working capital............. 4,935 43,205 30,435 11,820 4,915
Total assets................ 6,934 45,919 35,485 17,345 11,184
Capital lease obligations,
noncurrent................. 210 114 793 850 821
Redeemable convertible
preferred stock............ 27,844 -- -- -- 17,489
Accumulated deficit......... (23,440) (30,403) (43,282) (62,678) (90,092)
Total stockholders' equity
(net capital deficiency)... (22,144) 44,035 31,765 12,937 (11,447)
</TABLE>
13
<PAGE>
TRANSCEND SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
January 1, 1993
(commencement
Year Ended December 31, of operations)
------------------------------------------- to December 31,
1994 1995 1996 1997 1998 1998
------- ------- ------- ------- ------- ---------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Research and development
contract revenue and
license fees........... $ -- $ -- $ -- $ 5,000 $ -- $ 11,095
Operating expenses:
Research and
development........... 2,627 2,739 1,968 4,510 3,439 19,780
General
administration........ 1,115 1,645 1,834 3,339 4,038 13,596
Loss on impairment and
disposition of
assets................ -- -- -- -- 365 365
------- ------- ------- ------- ------- --------
Total operating
expenses.............. 3,742 4,384 3,802 7,849 7,842 33,741
------- ------- ------- ------- ------- --------
Loss from operations.... (3,742) (4,384) (3,802) (2,849) (7,842) (22,646)
Other income (expense).. 139 (66) (325) 588 713 1,049
------- ------- ------- ------- ------- --------
Net loss................ (3,603) (4,450) (4,127) (2,261) (7,129) $(21,597)
------- ------- ------- ------- ------- ========
Accretion of
nonconvertible
redeemable preferred
stock.................. (1,111) (1,481) (5,080) (178) --
------- ------- ------- ------- -------
Net loss to common
stockholders........... $(4,714) $(5,931) $(9,207) $(2,439) $(7,129)
======= ======= ======= ======= =======
Net loss per common
share--basic and
diluted................ $ (7.77) $(11.94) $ (0.75) $ (1.23)
======= ======= ======= =======
Weighted average common
shares outstanding..... 763 771 3,267 5,777
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.... $ 3,461 $ 1,276 $ 640 $ 10,989 $ 2,643
Funds held in escrow......... -- -- -- -- 7,010
Restricted cash.............. -- -- -- 5,805 --
Working capital.............. 3,136 733 96 15,320 8,763
Total assets................. 4,257 1,866 1,566 17,426 9,748
Senior secured convertible
notes....................... -- 2,000 -- -- --
Redeemable preferred stock... 8,100 9,581 20,176 -- --
Deficit accumulated during
the development stage....... (3,631) (8,081) (19,719) (21,980) (29,109)
Total stockholders' equity
(deficit)................... (4,368) (10,297) (19,235) 15,766 8,769
</TABLE>
Revenue for 1997 consists of a one-time license fee of $5 million. Accretion
of nonconvertible redeemable preferred stock for 1996 includes approximately $4
million of additional accretion relating to an exchange of Transcend series C
convertible preferred stock in September 1996. See Note 2 of Notes to Financial
Statements for information concerning the computation of net loss per common
share basic and diluted.
14
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
We have prepared the following unaudited pro forma condensed combined
financial statements to give effect to the merger as a purchase of assets.
The unaudited pro forma condensed combined balance sheet as of December 31,
1998, gives effect to the merger as if it had occurred on that date. The shares
being issued by KeraVision will be recorded at the fair value of the net
monetary assets acquired, essentially cash less liabilities, less the estimated
KeraVision merger costs, which will be reflected as issuance costs. Management
of KeraVision believes that the amounts assigned to the shares issued are
appropriate given Transcend will be a non-operating company at the date the
merger is consummated. KeraVision also believes that the use of the fair value
of the net cash assets is more appropriate than the value of the shares issued
in the merger. KeraVision is not acquiring any goodwill, technology or other
intangibles in the merger, which essentially represents a financing
transaction.
The unaudited pro forma condensed combined balance sheet includes pro forma
adjustments to the historical Transcend information for wind-up activities
through the estimated date of the closing of the merger in May 1999, of
approximately $0.7 million.
We have not presented pro forma information pertaining to results of
operations because the Transcend business will not be continued by KeraVision
and because Transcend will represent a non-operating company at the date the
merger is consummated. KeraVision management does not believe the acquisition
of Transcend will have any effect on its on-going operations, and information
pertaining to combined pro forma operations would not be meaningful.
We have presented the unaudited pro forma condensed combined financial
information for illustrative purposes only. This information does not
necessarily indicate the financial position that would have actually been
reported had the merger occurred at the date presented, nor does it necessarily
indicate future financial position or results of operations. The unaudited pro
forma condensed combined balance sheet is based on the historical financial
statements of KeraVision and Transcend included elsewhere in this proxy
statement/prospectus, and should be read in conjunction with those historical
financial statements.
15
<PAGE>
KERAVISION AND TRANSCEND
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Historical
-------------------- Pro Forma References Proforma
KeraVision Transcend Adjustments (Note 2) Combined
---------- --------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents,
including funds held
in escrow............ $ 1,449 $ 9,653 $ (674) (A)
(979) (B) $ 9,449
Available-for-sale
investments.......... 6,279 -- -- 6,279
Prepaid expenses and
other current
assets............... 1,508 95 (95) (C) 1,508
-------- ------- -------- --------
Total current assets.... 9,236 9,748 (1,748) 17,236
Property and equipment,
net.................... 1,840 -- -- 1,840
Other assets............ 108 -- -- 108
-------- ------- -------- --------
Total assets............ $ 11,184 $ 9,748 $ (1,748) $ 19,184
======== ======= ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and
accrued expenses..... $ 1,742 $ 979 $ (979) (B) $ 1,742
Accrued payroll and
related expenses..... 581 -- -- 581
Accrued clinical trial
costs................ 1,282 -- -- 1,282
Other accrued
liabilities.......... 204 -- 500 (D) 704
Current portion of
capital lease
obligations.......... 512 -- -- 512
-------- ------- -------- --------
Total current
liabilities............ 4,321 979 (479) 4,821
Capital lease
obligations............ 821 -- -- 821
Redeemable convertible
series B preferred
stock.................. 17,489 -- -- 17,489
Stockholders' equity
(net capital
deficiency):
Common stock.......... 13 59 (59) (E)
1 (F) 14
Additional paid-in
capital.............. 80,162 38,083 (38,083) (E)
7,499 (F) 87,661
Deferred
compensation......... (30) (264) 264 (E) (30)
Accumulated deficit... (90,092) -- -- (90,092)
Accumulated other
comprehensive
income............... 109 -- -- 109
Deficit accumulated
during the
development stage.... -- (29,109) 29,109 (E) --
Notes receivable from
stockholders......... (1,609) -- -- (1,609)
-------- ------- -------- --------
Total stockholders'
equity (net capital
deficiency)............ (11,447) 8,769 (1,269) (3,947)
-------- ------- -------- --------
Total liabilities and
stockholders' equity
(net capital
deficiency)............ $ 11,184 $ 9,748 $ (1,748) $ 19,184
======== ======= ======== ========
</TABLE>
The accompanying notes to the unaudited pro forma
condensed balance sheet are an integral part of this statement.
16
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
Note 1
We estimate the total consideration to be issued to Transcend stockholders
in the proposed merger to be approximately $10.2 million, payable in KeraVision
common stock which will be approximately 918,000 shares. The shares are
calculated as follows: the net cash to be acquired in the transaction of $8.0
million, plus the premium of approximately $2.2 million (28%) divided by the
ten-day average closing price of KeraVision's common stock for the period ended
April 30, 1999 ($11.11).
KeraVision expects that its merger related costs will be approximately $0.5
million. These merger related costs and the merger premium will be recorded as
common stock issuance costs, resulting in the recording of the KeraVision stock
at an amount equal to the net cash assets acquired. The estimated merger
premium and total consideration were computed using the ten-day average closing
price of KeraVision's common stock for the period ended April 30, 1999.
Note 2
The pro forma condensed combined balance sheet includes adjustments
necessary to give effect to the merger as if it had occurred on December 31,
1998 and to reflect cash acquired and liabilities assumed, including the
elimination of Transcend's equity accounts and the allocation of the merger
premium to additional paid in capital.
(A) Reflects reduction of Transcend's cash for wind up costs through the
estimated closing date of the merger.
(B) Estimated decrease in accounts payable and accrued expenses through
the merger date.
(C) Write-off of Transcend miscellaneous assets acquired in the merger,
which will not be utilized by KeraVision. Such assets are expected to be
sold or abandoned prior to the closing date.
(D) Estimated merger related costs to be paid by KeraVision. The
estimated merger costs include amounts related to attorney fees, accounting
fees and printing costs.
(E) Elimination of Transcend equity accounts.
(F) Issuance of approximately 918,000 shares of KeraVision common stock
to purchase all Transcend common stock as discussed in Note 1. The shares
to be issued have been recorded at an amount equal to the fair value of the
net cash assets acquired (approximately $8 million) less merger-related
issuance costs of approximately $0.5 million as follows:
<TABLE>
<S> <C>
Transcend cash at December 31, 1998.......................... $9,653,000
Less existing Transcend accounts payable and accrued expenses
at December 31, 1998 (including severance and transaction
costs)...................................................... (979,000)
Less other Transcend operating expenses and wind up costs
through the estimated closing date in May 1999.............. (674,000)
----------
Net cash assets acquired..................................... 8,000,000
Less KeraVision transaction expenses......................... (500,000)
----------
Net cash acquired in the transaction......................... $7,500,000
==========
</TABLE>
The KeraVision equity will be recorded at the amount of the net asset
acquired. The net cash acquired in the transaction will be recorded as common
stock at $918 par value and additional paid-in capital of $7,499,082.
17
<PAGE>
THE SPECIAL MEETING OF TRANSCEND STOCKHOLDERS
We are sending this proxy statement/prospectus to stockholders of Transcend
as part of the solicitation of proxies by the board of directors of Transcend
to be used at a special meeting of stockholders to be held on May 28, 1999 at
8:00 a.m., local time, at the offices of Hale and Dorr LLP, 60 State Street,
Boston, Massachusetts. This proxy statement/prospectus is first being mailed to
Transcend's stockholders on or about May 7, 1999.
Purpose of the Special Meeting
Transcend is holding the special meeting to vote on a proposal to approve
the acquisition of Transcend by KeraVision, a developer of medical devices for
vision correction located in Fremont, California. Specifically, you will be
asked to approve an agreement and plan of reorganization that the companies
signed in December 1998. Transcend's management does not expect any other
matters to come before the special meeting.
Record Date and Outstanding Shares
Transcend's board of directors has fixed April 29, 1999 as the "record date"
for the special meeting. This means that persons who were record holders of
Transcend's common stock at the close of business on that date may vote at the
special meeting or at any postponement or adjournment of the special meeting.
On the record date, there were approximately 30 stockholders of record holding
a total of approximately 5,922,036 shares of Transcend common stock. Except the
stockholders listed in the table found under "Security Ownership--Transcend,"
Transcend does not know of any stockholders that beneficially owned on the
record date more than five percent of Transcend's outstanding common stock.
Voting of Proxies
Included with this proxy statement/prospectus is a proxy card that you may
fill out and return to have your shares voted for you at the special meeting
without attending in person. If you properly complete, sign and return the
proxy, the persons named in the proxy (called "proxy holders") will vote your
shares for you at the special meeting according to the instructions you give
them, unless you later revoke your proxy as described below.
If you sign and return your proxy and later decide, any time before the vote
is taken at the special meeting, that you want to cancel or "revoke" your
proxy, you can do so in one of three ways. First, you can come to the special
meeting, indicate that you want to revoke your proxy and then vote in person.
Second, you can complete, sign and return another proxy bearing a later date.
Finally, you can send Transcend a written notice that you want to revoke your
proxy. All written notices of revocation and other communications regarding
your proxy should be sent to: Transcend Therapeutics, Inc., c/o Hale and Dorr
LLP, 60 State Street, Boston, MA 02109, Attention: Patrick Toher, Esq. Keep in
mind that attending the special meeting, by itself, will not revoke your proxy.
Vote Required
Approval of the proposed merger requires the affirmative vote of holders of
a majority of the shares of Transcend common stock outstanding on the record
date. Every stockholder of record on the record date may cast one vote, in
person or by proxy, for each of their shares of Transcend common stock. Shares
that abstain from voting on a particular matter, and shares held in "street
name" by brokers or nominees who indicate on their proxies that they do not
have discretionary authority to vote such shares on the matter will constitute
votes against the transaction.
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<PAGE>
It Is Very Unlikely That The Merger Will Not Be Approved
Stockholders affiliated with Transcend who owned approximately 51 percent of
the shares of Transcend's common stock outstanding on the record date have
entered into voting agreements with KeraVision. These stockholders alone hold
enough shares to approve the proposed merger, and the voting agreements require
them to vote all their shares of common stock in favor of the merger at any
meeting of stockholders. These stockholders have also given the board of
directors of KeraVision irrevocable proxies to vote their shares for them in
favor of the acquisition at the any meeting of stockholders held to vote on the
merger.
Quorum; Abstentions
The presence of the holders of a majority of the shares of Transcend common
stock that were outstanding on the record date is needed for a quorum at the
special meeting. Shares of common stock represented in person or by proxy,
including shares that abstain or do not vote on one or more of the matters
presented for stockholder approval, will count in determining whether a quorum
is present at the special meeting.
Solicitation of Proxies; Expenses
In general, Transcend and KeraVision will each pay their own costs and
expenses incurred in connection with the merger. However, they will share
equally the fees and expenses, other than legal and accounting fees, incurred
in printing, filing and mailing this proxy statement/prospectus.
Transcend may reimburse brokerage firms and other persons representing
beneficial owners of Transcend common stock for their expenses in forwarding
solicitation materials to such beneficial owners. Directors or officers of
Transcend may supplement the original solicitation of proxies by mail with
telephone, facsimile or personal solicitation, without payment of additional
compensation.
Accountants
Representatives of Ernst & Young LLP, Transcend's independent auditors for
fiscal 1998 and the current year, are not currently expected to attend the
special meeting.
19
<PAGE>
THE MERGER
Background of the Merger
The terms and conditions of the merger are the result of arm's length
negotiations between representatives of Transcend and representatives of
KeraVision. This is a summary of these negotiations.
In August 1998, Transcend abandoned its work with Procysteine for use in the
treatment of ARDS after having carefully evaluated clinical data from its
suspended clinical trials. Transcend concluded it must find a new use for the
financial resources it had obtained to develop and market Procysteine. At a
meeting on August 19, 1998, Transcend's board authorized Transcend's management
to find a potential acquirer in order to increase the value of Transcend stock.
On August 20, 1998, Transcend engaged EVEREN Securities as the financial
advisor to help identify and evaluate potential acquirers.
During the months of August, September and October of 1998, B. Nicholas
Harvey, President and Chief Executive Officer of Transcend, and representatives
from EVEREN participated in discussions with a significant number of other
companies regarding a possible acquisition of Transcend. These discussions
reached various stages of maturity, some accompanied by meetings with key
executives, the signing of confidentiality agreements and the preparation of
preliminary term sheets. On September 29, 1998, representatives of two
potential acquirers made presentations to Transcend's board of directors. One
of the companies was a publicly held medical device company and the other was a
publicly held pharmaceutical services company. Shortly after, the first of
these companies accepted a tender offer from a third party. Discussions with
the second of these companies were discontinued when the parties were unable to
agree on a significant number of business and legal terms.
In early October 1998, Mr. Harvey received a telephone call from Philippe
Chambon, one of Transcend's directors and a general partner of the Sprout
Group. The Sprout Group and affiliated entities own approximately six percent
of the Transcend common stock and acquired $12 million of KeraVision's series B
convertible preferred stock in June 1998. Mr. Chambon suggested KeraVision as a
possible acquirer and indicated that a representative from KeraVision would be
calling Mr. Harvey. On October 9, 1998, Mr. Harvey received a telephone call
from Mark Fischer-Colbrie, KeraVision's Vice President of
Finance/Administration and Chief Financial Officer. Mr. Fischer-Colbrie
suggested that he and Mr. Harvey meet to discuss the possibility of an
acquisition of Transcend by KeraVision. On October 14, 1998, Mr. Harvey
arranged for Ryan Duncan, then an investment banker from EVEREN, to send Mr.
Fischer-Colbrie a list of major negotiating items for any possible transaction
between Transcend and KeraVision.
On October 15, 1998, Mr. Harvey and Mr. Duncan met with Mr. Fischer-Colbrie
and Thomas Loarie, KeraVision's Chairman and Chief Executive Officer at
KeraVision's corporate offices in Fremont, California. The parties exchanged
information and continued their discussion regarding a potential transaction.
For the remainder of October and during the first week of November, Transcend
and KeraVision continued to discuss the price and other terms of a possible
acquisition of Transcend by KeraVision. At the same time, each conducted an
investigation of the other's business, primarily by reviewing publicly
available information.
On November 12, 1998, Gerard Moufflet, a director of Transcend and a
Managing Director of Advent International, a principal stockholder of
Transcend, met with Mr. Loarie, Mr. Fischer-Colbrie and other key members of
KeraVision's management team in Fremont, California to exchange information and
continue discussions.
During November 1998, discussions continued with other potential acquirers,
including KeraVision. On November 14, 1998, Transcend's board of directors met
and reviewed the status of the discussions then in progress with KeraVision and
two other companies, both publicly held pharmaceutical developers. The board
established an order of priority that placed KeraVision as the highest priority
potential acquirer and authorized Transcend to enter into a "no-shop" agreement
with KeraVision, if negotiations progressed favorably. The
20
<PAGE>
board assigned KeraVision the highest priority because it had offered a minimum
premium over net cash at least equal to the other potential acquirers. Further,
the board felt that an investment in the common stock of KeraVision offered
better potential for share price appreciation than the other two companies. The
other two companies discontinued discussions on learning later of KeraVision's
position as the highest priority potential acquirer.
In the latter part of November, Messrs. Harvey and Moufflet, in consultation
with other directors of Transcend, reached agreement with Messrs. Loarie and
Fischer-Colbrie on the general financial terms of the transaction. The terms
were summarized in a non-binding letter of intent dated November 24, 1998. On
November 30, 1998, the parties signed a confidentiality agreement. The
agreement included the "no-shop" provision previously authorized by Transcend's
board, which restricted Transcend's ability to enter into discussions with any
other party concerning a strategic transaction until after December 20, 1998.
Before November 30, 1998, Transcend had been involved in discussions with other
companies regarding potential strategic transactions, but none of these
discussions resulted in any transactions.
On December 2, 3 and 4, Transcend and its representatives conducted on-site
business and financial due diligence at KeraVision's principal offices in
Fremont, California. In addition, Transcend engaged additional advisors to
review the commercial and regulatory aspects of KeraVision's business. In early
December 1998, The Venture Law Group, KeraVision's outside counsel at that
time, delivered initial drafts of the legal documents for the proposed merger
to Hale and Dorr LLP, Transcend's outside counsel. Between December 11 and
December 22, Transcend, KeraVision and their respective counsel negotiated the
terms of the acquisition documents.
On December 21, 1998, at a special meeting of Transcend's board of
directors, Mr. Harvey, representatives from Hale and Dorr and EVEREN reviewed
with the board the proposed terms of the acquisition agreements, and responded
to questions and comments from the board. Representatives of EVEREN reviewed
their financial analysis of the proposed merger and delivered an oral opinion
(subsequently confirmed in writing) that the merger was fair to Transcend
stockholders from a financial point of view. Representatives of Hale and Dorr
reviewed the fiduciary duties of the members of the board of directors with
respect to the proposed transaction. After considering these presentations, the
board of directors determined to adopt a resolution approving the merger
agreement and declaring its advisability.
Transcend later extended the term of the "no-shop" agreement from December
20, 1998 to the close of business on December 22, 1998. The relevant parties
signed the agreement and plan of reorganization, a related escrow agreement and
the stockholder voting agreements on December 22, 1998.
Transcend's Reasons for the Merger
In August 1998, Transcend abandoned its work with Procysteine for use in the
treatment of acute respiratory distress syndrome after having carefully
evaluated clinical data from its clinical trials. Procysteine had been
Transcend's lead product candidate. Its development had been the focus of
Transcend's development and financing efforts and of Transcend's collaboration
with Boehringer Ingelheim, a German pharmaceutical company. Transcend had other
compounds in its portfolio, but none were at a stage of development
sufficiently advanced to justify committing to any of them the cash Transcend
had obtained to develop Procysteine.
Transcend concluded it must redirect its resources, understanding that
finding their full value might involve a departure from the field of drug
development. At the same time, Transcend sought to use its experience in the
healthcare field generally to identify the best opportunity for its future
business. In August 1998, Transcend's management began a concerted effort to
identify such an opportunity. As part of this effort, Transcend retained EVEREN
Securities, Inc. to help identify and evaluate opportunities. EVEREN was the
lead underwriter of Transcend's 1997 public offering. As part of its investment
banking business, EVEREN is regularly engaged in the valuation of businesses
and securities in connection with mergers and acquisitions, private placements
and valuations for corporate and other purposes.
21
<PAGE>
In the course of its efforts, Transcend's board of directors considered and
evaluated options for Transcend's future business that included:
. in-licensing promising compounds for development as pharmaceuticals;
. acquiring other businesses;
. merging with a company in the drug development industry;
. merging with a company in the general medical field; and
. dissolving Transcend.
After in-depth discussions regarding these options, both internally and
with potential acquirers, Transcend's board of directors determined that the
proposed acquisition by KeraVision was in the best interests of Transcend's
stockholders. This was based on a number of factors, including:
. that Procysteine and Transcend's glutathione patent estate had no
significant value following an analysis of data from the phase III study
which showed a lower incidence of mortality in patients receiving a
placebo;
. that Transcend's drug development business could not be readily restarted
in a timely fashion by in-licensing new products because of high
acquisition costs and a limited number of opportunities that involved
acceptable development risks;
. the belief that an acquisition of Transcend at a premium to its net cash
by a public-traded company was better for Transcend's stockholders than
liquidating Transcend because of the costs and delays involved in
liquidating a Delaware corporation;
. the information and financial data compiled by EVEREN; and
. the opinion of EVEREN that the consideration to be paid in the merger was
fair to Transcend's stockholders.
Transcend's board of directors also considered potentially negative factors
in its deliberations, including:
. that KeraVision had not yet received FDA approval to market and sell its
products in the United States;
. that KeraVision will require substantial additional funds to finish
developing and commercializing its products;
. that the number of shares of KeraVision common stock to be received by
Transcend's stockholders would depend on future performance of
KeraVision's common stock; and
. the other risks described above under "Risk Factors."
In evaluating the wide variety of factors considered, the board of
directors did not find it practicable to objectively quantify or otherwise
assign comparative weight to any factor. However, after taking into account
all of the factors, Transcend's board of directors concluded the proposed
acquisition and the terms of the agreement are fair to, and in the best
interests of, Transcend's stockholders. The board's decision to proceed with
the transaction, and to recommend its approval by Transcend's stockholders,
was unanimous, with the exception of Mr. Chambon who abstained from voting on
the transaction because of his position as a general partner of the Sprout
Group, a stockholder of both Transcend and KeraVision.
KeraVision's Reasons for the Merger
KeraVision's board of directors determined that the merger will benefit
KeraVision. Transcend's net cash of approximately $8 million will enable
KeraVision to continue developing its products, conducting clinical trials and
launching its products in Europe, Canada and the United States. KeraVision's
board approved the
22
<PAGE>
merger because the merger provides KeraVision a source of cash on terms that
are favorable to current financing options primarily because:
. KeraVision's stock price had remained low despite the favorable news that
the FDA had accepted KeraVision Intacs application for filing;
. KeraVision had found that the secondary market and the high yield debt
market were not open to KeraVision;
. KeraVision found that the only financial institution funding available
required KeraVision to accept excessive restrictions and costs;
. any placement of shares would require discounts to market, dividends and
conversion features entailing the risk to KeraVision's stockholders of
significant dilution; and
. due to the timing of the merger, KeraVision's stock would have a chance
to appreciate based on news of the FDA advisory panel's recommendation of
approval, increasing the potential that KeraVisiion would be required
under the merger agreement to issue fewer shares to Transcend
stockholders.
Recommendation of the Transcend Board
The Transcend board of directors recommends that you vote FOR adoption of
the merger agreement and approval of the merger. The Transcend board has
approved the merger agreement by unanimous vote, with one director abstaining.
Mr. Chambon abstained from voting on the transaction because of his position as
a general partner of the Sprout Group, a stockholder of both Transcend and
KeraVision.
Opinion of Transcend's Financial Advisor
Transcend retained EVEREN as its exclusive financial advisor and agent in
connection with its merger with KeraVision to render an opinion as to whether
the consideration to be paid Transcend stockholders in the merger was fair,
from a financial point of view. EVEREN did not determine the consideration to
be received in the merger. KeraVision and Transcend made the determination
through arms length negotiation. Transcend engaged EVEREN to provide its
recommendation regarding the consideration to be received in the merger. EVEREN
delivered its opinion to Transcend on December 21, 1998. EVEREN based its
opinion on a number of factors, with the principal factor being the value of
the consideration to be received for each share of Transcend common stock.
EVEREN assumed that Transcend stockholders would receive $1.72 in value per
share of Transcend common stock, paid in the form of KeraVision common stock.
Under its arrangement with EVEREN, Transcend may request that EVEREN reissue
its opinion regarding the transaction. However, as long as the per-share value
payable to its stockholders in the transaction is no less than $1.62, and
assuming no material adverse change in KeraVision's financial condition or
business, Transcend does not expect to request a reissued opinion.
Transcend selected EVEREN as an advisor because of its expertise and
reputation as a nationally recognized investment banking firm. EVEREN, as part
of its investment banking business, regularly engages in the valuation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwriting, competitive bidding, secondary distributions of listed
and unlisted securities, private placements and valuations for corporate and
other purposes.
On December 21, 1998, during a telephonic meeting of the board of directors
of Transcend, EVEREN rendered its opinion that, as of the date of such opinion,
the consideration to be paid to Transcend stockholders in the merger was fair
from a financial point of view to Transcend stockholders.
In arriving at its opinion, EVEREN, among other things:
. reviewed the draft merger agreement between Transcend and KeraVision in
substantially final form;
23
<PAGE>
. reviewed Transcend's publicly available historical financial statements
for recent periods and other relevant financial and operating data that
EVEREN obtained from published sources and Transcend's management;
. met with members of Transcend's senior management to discuss its
operations, financial statements and projections and future prospects;
. considered KeraVision's publicly available historical financial
statements for recent periods and other relevant financial and operating
data that EVEREN obtained from published sources and KeraVision
management;
. met with members of KeraVision's management to discuss KeraVision's
operations, financial statements and future prospects;
. reviewed publicly available financial data and stock market performance
data of other ophthalmic and medical device manufacturers that EVEREN
deemed comparable to KeraVision;
. reviewed the price premiums of recent mergers and acquisitions that
EVEREN deemed generally comparable to the merger;
. reviewed the historical stock prices and reported traded volumes of
Transcend's and KeraVision's common shares; and
. conducted such other studies, analyses, inquiries and investigations as
EVEREN deemed appropriate.
EVEREN did not conduct a physical inspection of any of the assets,
properties or facilities of either Transcend or KeraVision, and did not make or
obtain, and was not furnished with, any independent evaluation or appraisal of
any of such assets, properties, facilities, liabilities or contingencies of
Transcend or KeraVision. EVEREN assumed and relied upon, without independent
investigation, the accuracy and completeness of the financial and other
information that was publicly available or provided to it by Transcend and
KeraVision senior management, and did not independently attempt to verify any
of such information. EVEREN also assumed that all of the conditions to the
merger would be satisfied and that the merger would be consummated on a timely
basis. No limitations were imposed by Transcend upon EVEREN with respect to the
scope of its investigation, nor were any specific instructions given to EVEREN
in connection with its fairness opinion.
In connection with its analyses, EVEREN assumed that the financial
projections which it reviewed were reasonably prepared using assumptions
reflecting the best currently available estimates and judgments of the future
financial performance of Transcend and KeraVision. EVEREN's opinion was based
upon market, economic, financial and other conditions as they existed on the
date of the opinion. Any subsequent material change in conditions would require
a reevaluation of the opinion.
For purposes of its opinion, EVEREN assumed that the merger would be
accounted for as a purchase, and all of Transcend's outstanding in-the-money
warrants and options would be exercised prior to the closing of the merger.
The following is a summary of the material financial analyses used by EVEREN
in connection with its written opinion provided to Transcend's board of
directors.
Historical Share Price Analysis--Transcend
EVEREN analyzed the historical trading prices and volumes of Transcend's
common stock since Transcend's July 1997 initial public offering. As the table
below illustrates, the analysis indicated that the merger consideration of
$1.72 per share represented a premium of 207% to the closing trade price of
$0.56 on December 15, 1998, and a premium of 197% to the average stock price
during the previous 30-day period of $0.58. The analysis also indicated that,
during the past six months, 73% of Transcend's total volume traded at a per
share price between $0.70 and $0.90, and less than 2% of the total volume
traded at a per share price of $1.72.
24
<PAGE>
Summary of Results
<TABLE>
<S> <C>
Assumed merger consideration value per Transcend share........... $1.72
Resulting premium to closing trade price of $0.56 on December 15,
1998............................................................ 207%
Resulting premium to previous 30-day average stock price of
$0.58........................................................... 197%
Total volume traded at $0.70 per share or below during previous
six months...................................................... 73%
Total volume traded between $0.70 and $0.90 per share during
previous six months............................................. 15%
Total volume traded at a per share price of $1.72 or greater
during previous six months...................................... less than 2%
</TABLE>
Absence of Ongoing Business of Transcend
Presently, Transcend has not initiated any new operations and has continued
to close down its remaining operations. As such, Transcend, as currently
constituted, presents no prospects of increasing shareholder value.
Book Value of Transcend
EVEREN compared the assumed merger consideration of $1.72 per share to
Transcend's estimated net cash balance, or book value, at the estimated closing
of the merger of $8,187,623, or $1.38 per share. The estimated net cash balance
at closing gives effect to costs associated with the winding down of
Transcend's current operations, including estimated transaction costs. The
analysis indicated, as presented below, that the merger consideration of $1.72
per share represents a premium of 25% to Transcend's estimated net cash per
share at closing.
Summary of Results
<TABLE>
<S> <C>
Assumed merger consideration value per Transcend share.................... $1.72
Transcend's estimated net cash per share at closing....................... $1.38
Resulting premium to estimated net cash per share at closing.............. 25%
</TABLE>
Premiums in Recent Merger Transactions
EVEREN analyzed mergers and acquisitions since January 1, 1997 with
aggregate values between $5 million to $20 million. These transactions
included, among others, Verdant Brands/Consep (December 1998), Meridian
Diagnostics/Gull Laboratories (November 1998), SPS Technologies/Magnetic
Technologies (December 1997) and Vital Signs/Marquest Medical Products (June
1997). The following table summarizes EVEREN's observations on the
premiums/discounts to the closing trade prices paid in these transactions.
Summary of Results
<TABLE>
<CAPTION>
Premium/(Discount)
to Closing Trade
Price
------------------
Comparable Group
High / Median /
Low Transcend
------------------ ---------
<S> <C> <C>
Four weeks prior to announcement date.............. 73% / 14% / (54%) 150%
One week prior to announcement date................ 76% / 20% / (20%) 206%
</TABLE>
The analysis indicated that the merger consideration of $1.72 per share
represented a 150% premium to Transcend's closing trade price four weeks prior
to the date of the opinion and a 206% premium to its closing trade price one
week prior to such date.
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<PAGE>
Historical Share Price Analysis--KeraVision
EVEREN analyzed the historical trading prices and volumes of KeraVision's
common stock since KeraVision's July 1995 initial public offering. Pursuant to
the merger agreement, and assuming a KeraVision stock price of $10.38,
Transcend shareholders would receive an aggregate of 984,771 shares of
KeraVision common stock in exchange for net cash of $8,187,623. The resulting
implied purchase price of $8.31 per KeraVision share represents a 20% discount
to the current market price of $10.38 per share and a 38% discount to
KeraVision's IPO price of $13.50 per share.
Summary of Results
<TABLE>
<S> <C>
Implied purchase price per KeraVision share............................... $8.31
Resulting discount to KeraVision market price of $10.38 per share......... 20%
Resulting discount to KeraVision IPO price of $13.50 per share............ 38%
</TABLE>
Discounted Earnings Analysis--Keravision
EVEREN analyzed the projections for KeraVision provided in an October 23,
1998 Goldman Sachs research report and guidance on these projections from the
management of KeraVision. To derive an implied value for KeraVision, EVEREN
used the projected, fully-taxed 2001 and 2002 earnings ($0.71 and $1.03 per
share, respectively) and applied a range of P/E multiples from 25x -- 35x,
which EVEREN deemed appropriate for rapidly growing medical technology
companies. EVEREN applied a discount range of 25%-- 35%, a range EVEREN deemed
appropriate for a development stage company with significant financing and
commercialization risk and limited liquidity. EVEREN also assumed a $25 million
financing at $10.00 per share to fund KeraVision's domestic launch of
KeraVision Intacs in 1999. As the tables below illustrate, the analysis
indicated that, at the midpoints of the P/E multiple range (30x) and discount
range (30%) for projected earnings in 2001 and 2002, KeraVision's implied
present value is $9.73 per share and $10.84 per share, respectively. The
implied purchase price per KeraVision share of $8.31 represents discounts of
15% and 23%, respectively, to KeraVision's implied value under this
methodology.
Present Value of KeraVision Stock Based on 2001 EPS Estimate of $0.71
<TABLE>
<CAPTION>
Price /Earnings Ratio
---------------------
Discount Rate 25x 30x 35x
------------- ------ --- ------
<S> <C> <C> <C>
25% $9.12 $10.95 $12.77
30% $8.11 $ 9.73* $11.36
35% $7.24 $ 8.69 $10.14
- --------
* Implied purchase price per KeraVision share of $8.31 represents a 15%
discount to $9.73.
Present Value of KeraVision Stock
Based on 2002 EPS Estimate of $1.03
<CAPTION>
Price /Earnings Ratio
---------------------
Discount Rate 25x 30x 35x
------------- ------ --- ------
<S> <C> <C> <C>
25% $10.50 $12.68 $14.79
30% $ 9.03 $10.84* $12.65
35% $ 7.77 $ 9.32 $10.87
</TABLE>
- --------
* Implied purchase price per KeraVision share of $8.31 represents a 23%
discount to $10.84.
26
<PAGE>
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying EVEREN's opinion. In arriving at its fairness determination, EVEREN
considered the results of all such analyses. No company or transaction used in
the above analyses as a comparison is directly comparable to Transcend,
KeraVision or to the contemplated merger. The analyses were prepared solely for
purposes of EVEREN providing its opinion to Transcend's board of directors as
to the fairness, from a financial point of view, of the merger consideration to
be received by Transcend stockholders and do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may
be sold. Analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. Such analyses are inherently subject
to uncertainty, being based upon numerous factors or events beyond the control
of EVEREN. As described above, EVEREN's opinion to Transcend's board of
directors was one of many factors taken into consideration in making the
determination to approve the merger. The foregoing summary does not purport to
be a complete description of the analyses performed by EVEREN and is qualified
by reference to the written opinion of EVEREN set forth as Annex B to this
proxy statement/prospectus.
Previously, EVEREN acted as Transcend's lead manager in connection with
Transcend's initial public offering, for which it received customary
compensation. EVEREN is serving as financial advisor to Transcend in connection
with the merger and will receive a success fee upon its completion. In the
ordinary course of business, EVEREN provides research coverage on Transcend.
EVEREN also acts as a market maker and broker in Transcend common stock, for
which it receives customary compensation. EVEREN provides a full range of
financial advisory and securities services and, in the course of its normal
trading activities, may from time to time effect transactions and hold
securities, including derivative securities, of Transcend or KeraVision for its
own account and for the account of customers.
In an engagement letter dated August 20, 1998, Transcend agreed to pay
EVEREN an aggregate cash fee of $325,000 plus reimbursement of out-of-pocket
expenses. Of such fee,
. $50,000 was paid to EVEREN upon execution of the engagement letter;
. $50,000 was paid to EVEREN upon the execution of the merger agreement;
. $150,000 was paid to EVEREN upon the delivery of the opinion to
Transcend's board of directors; and
. the remaining $75,000 of the fee will be payable at the closing of the
merger.
Benefits of the Merger to Transcend's Affiliates
Members of Transcend's management and board of directors may have interests
in the proposed transaction that are in addition to their interests as
stockholders of Transcend generally. The board of directors of Transcend was
aware of these interests and considered them, among other matters, in approving
the merger and the merger documents.
Indemnification and Insurance. The merger agreement requires Transcend to
indemnify its current directors and officers, under the terms described in
Transcend's current certificate of incorporation, for acts and, omissions
occurring before the merger closes. After the closing, Transcend, as a
subsidiary of KeraVision, must continue to indemnify these former officers and
directors under the same terms for five years. The acquisition agreement also
provides that, for five years after the closing, either KeraVision and/or
Transcend will keep in place Transcend's current directors' and officers'
liability insurance policy.
Mr. Harvey Will Receive a Change-of-Control Bonus. In October 1998,
Transcend entered into an agreement with Mr. Harvey, its President and Chief
Executive Officer, providing benefits conditioned upon the closing of a merger,
sale of assets or other similar form of acquisition transaction involving
Transcend. The proposed acquisition by KeraVision would be such a transaction.
The benefits were payable, with some
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variations, regardless of whether Transcend was the acquirer or the target in
the transaction, and regardless of whether Mr. Harvey was to stay employed
after the transaction. The benefits consisted of:
. a bonus of $200,000 when the transaction closed, if the consideration
paid to stockholders represented more than a 15% premium over Transcend's
net cash, as will be the case in the proposed merger or a bonus of
$100,000 when the transaction closed, if the consideration paid to
stockholders represented less than a 15% premium over Transcend's net
cash;
. a $180,000 lump sum severance payment if Mr. Harvey did not remain an
employee of Transcend or the acquirer after the transaction, as will be
the case in the proposed merger or a $90,000 lump sum payment if Mr.
Harvey remained an employee of Transcend or the acquirer after the
transaction, and an additional $90,000 lump sum severance payment if Mr.
Harvey remained an employee after the transaction but his employment were
to terminate in the first year after the transaction, which payment would
be made from an escrow established for this purpose;
. a $29,000 payment, constituting Mr. Harvey's accrued vacation pay through
March 31, 1999; and
. continued equivalent health benefits until the first anniversary of the
merger or such time as Mr. Harvey secured other employment, whichever
were to occur first.
An Affiliate of One of Transcend's Directors is a Stockholder of
KeraVision. Philippe Chambon, a director of Transcend, is a general partner of
the Sprout Group, which owns approximately six percent of Transcend's
outstanding common stock. In June 1998, the Sprout Group and affiliated
entities purchased $12 million of KeraVision's series B convertible preferred
stock. The Sprout Group and, indirectly, Mr. Chambon may receive a benefit in
addition to any received by Transcend's other stockholders to the extent the
transaction positively impacts KeraVision's financial condition. Because of his
affiliation with the Sprout Group, Mr. Chambon abstained from voting as a
director on the transaction.
Affiliates of Transcend Have Agreed to Approve the Merger
Some of Transcend's principal stockholders, who together own approximately
51% of Transcend's common stock, have signed voting agreements with KeraVision.
Together, these stockholder own enough shares to provide the majority vote
needed to approve the merger. The voting agreements apply to any votes by
Transcend's stockholders on an acquisition transaction involving Transcend.
They require the stockholders to vote in favor of the KeraVision merger and
against any other acquisition transaction. While the agreements are in effect,
the stockholders may not transfer their shares of Transcend common stock. The
agreements expire when the merger with KeraVision has been approved or three
months after the merger agreement terminates, whichever comes first.
The same stockholders have also signed irrevocable proxies that give
KeraVision's board of directors the right to vote the stockholders' shares
whenever an acquisition transaction involving Transcend is presented to
Transcend's stockholders for vote. The proxies may not be revoked until the
voting agreements expire.
Affiliates of Transcend Have Agreed Not to Sell Any KeraVision Stock for Six
Months After the Merger
Some of Transcend's principal stockholders, who together own approximately
51 percent of Transcend's outstanding common stock, have signed affiliate
agreements with KeraVision. These agreements prohibit the stockholders from
selling any KeraVision common stock for six months after the acquisition
closes. The agreements also prohibit granting options, making agreements to
sell and effecting other similar sales-related transactions. The agreements
apply to shares of KeraVision common stock the stockholders owned before,
receive in or acquire after the merger.
Transcend Has Deposited $7 Million in an Escrow Account to Assure the Merger
Will Close
The merger cannot close unless Transcend has net cash of at least $7
million. As a condition to signing the merger agreement, KeraVision required
Transcend to enter into an escrow agreement. The escrow
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agreement required Transcend to place the $7 million in an interest-bearing
account pending completion of the merger or termination of the merger
agreement.
Material Federal Income Tax Considerations
The following summarizes the material United States federal income tax
considerations generally applicable to holders of Transcend common stock who
exchange their Transcend common stock solely for KeraVision common stock in the
proposed transaction. This summary is based on the opinion of Hale and Dorr
LLP, counsel to Transcend.
The discussion below and the opinion of Hale and Dorr LLP are based on
current provisions of the Internal Revenue Code, currently applicable U.S.
Treasury regulations and judicial and administrative decisions and rulings. The
opinion of Hale and Dorr LLP is based on the facts, representations and
assumptions it contains or references, including representations contained in
certificates of officers of Transcend and KeraVision. The opinion is not
binding on the Internal Revenue Service or the courts. The IRS or the courts
may take a contrary view. No ruling from the IRS has been or will be sought.
Future legislative, judicial or administrative changes or interpretations could
alter or modify the statements and conclusions contained in this discussion,
and any such changes or interpretations could be retroactive and could affect
the tax consequences to the stockholders of Transcend.
You should consult your tax advisor about the particular tax consequences to
you of the merger.
The discussion below and the opinion of Hale and Dorr LLP are not intended
to deal with all aspects of federal income taxation that may affect particular
stockholders in light of their individual circumstances, and is not intended
for stockholders subject to special treatment under the federal income tax law,
such as stockholders who hold their stock as part of a hedge, appreciated
financial position, straddle or conversion transaction, stockholders who do not
hold their stock as capital assets and stockholders who have acquired their
stock by exercising employee options or otherwise as compensation. In addition,
the discussion below and the opinion do not consider the effect of any
applicable state, local or foreign tax laws.
Treatment of Transcend Common Stock. Hale and Dorr LLP has rendered an
opinion to Transcend, attached as Exhibit 8.1 to the registration statement
containing this proxy statement/prospectus, that the merger will not constitute
a tax-deferred "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code. Accordingly, a Transcend stockholder will recognize gain
or loss equal to the amount by which the fair market value of the KeraVision
common stock received by such holder in the merger, or, in the case of a holder
who exercises dissenters' appraisal rights, equal to the amount by which the
cash received in exercising such rights, exceeds or is less than the holder's
adjusted basis for the shares of Transcend common stock surrendered. Gain or
loss must be computed separately for blocks of Transcend common stock acquired
at different times and for different amounts. Such gain or loss will be long-
term capital gain or loss if the shares of Transcend common stock have been
held for more than one year. A Transcend stockholder's adjusted tax basis in
the KeraVision common stock received in the merger will equal the fair market
value of such shares.
The receipt of consideration in the merger or by exercising appraisal rights
may be subject to "backup withholding" at a 31% rate. Backup withholding
generally applies only if the holder:
. fails to furnish his or her social security or other taxpayer
identification number (TIN) within a reasonable time after it is
requested;
. furnishes an incorrect TIN;
. is notified by the IRS that he or she has failed to report properly
interest or dividends; or
. in some cases, fails to provide a certified statement that the TIN
provided is the correct number and that he or she is not subject to
backup withholding.
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A successful challenge of the taxable status of the merger would result in a
Transcend stockholder not recognizing gain or loss with respect to Transcend
common stock surrendered in the merger. It would also cause a stockholder's
aggregate tax basis in the KeraVision common stock received to be equal to the
stockholder's aggregate tax basis in the Transcend common stock surrendered,
and the stockholder's holding period for the KeraVision stock would include the
holding period of the Transcend stock.
Anticipated Purchase Accounting Treatment
We expect the merger to be accounted for as a purchase of assets. KeraVision
will record the acquired net monetary assets of Transcend, principally cash
less liabilities, at fair value as of the closing date. The issuance of the
KeraVision common stock will be recorded at an amount equal to the acquired
Transcend net monetary assets less the estimated KeraVision merger costs, which
will be reflected as issuance costs.
You Have Appraisal Rights if You Do Not Wish to Receive KeraVision Shares in
the Merger
You are entitled to appraisal rights under Section 262 of the General
Corporation Law of the State of Delaware. Briefly, this means that, instead of
accepting the KeraVision stock to be issued in the merger, you may demand the
fair value of your shares as determined by a Delaware court. However, to do so,
you must comply with the conditions established by Section 262, which are
complex.
The following discussion is only a summary of those conditions. If you are
considering exercising appraisal rights, you should also read the copy of
Section 262 which we have provided at Annex C. If you fail to comply with the
conditions described below or in Section 262, you may lose your appraisal
rights.
Here are some of the requirements for preserving and exercising appraisal
rights:
. You must own the shares of Transcend's common stock for which you demand
appraisal on the date you deliver the demand for appraisal described
below.
. You must continue to own those shares through the closing of the
acquisition of Transcend by KeraVision.
. Before the vote is taken at the special meeting, you must deliver a
properly executed written demand for appraisal of your shares to
Transcend. The demand will be sufficient if you sign it, and it
reasonably informs Transcend of your identity and your intent to demand
an appraisal of your shares. Any written demands should be sent to:
Transcend Therapeutics, Inc.
c/o Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Patrick Toher, Esq.;
. You must NOT have voted in favor of the proposed merger, either in
person, by proxy or by written consent. You can meet this requirement by
either not voting or by voting against the merger.
Important: You must separately comply with each of the last two
requirements listed above. Under Delaware law, to not vote in favor of
the proposed transaction, or to vote against it, is not considered a
written demand for appraisal of your shares.
. You must file a petition for appraisal of your shares in the Delaware
Court of Chancery, as more fully described below, within 120 days after
the closing of the merger.
. Within 20 days after you file your petition with the Delaware Court of
Chancery, you must send a copy of it to Transcend. Send it to the same
address to which your written demand is sent (see the third bullet point
above).
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. You must satisfy the other conditions described more fully below and in
Annex C.
Availability of Information About Other Dissenting Stockholders. Within 120
days after the closing of the proposed transaction, if you have complied with
the conditions for appraisal of your shares, you may request in writing, and
Transcend will send you, a statement of the number of Transcend's shares not
voted in favor of the transaction, the number of shares for which Transcend has
receive a written demand for appraisal and the number of stockholders who own
those shares. Transcend is required to mail this statement to you within 10
days after receiving your request or within 10 days after the special meeting,
whichever is later. You should send any such request to the same address to
which your written demand is sent (see the third bullet point above).
What You Would Receive by Exercising Appraisal Rights. If you intend to
demand an appraisal of your shares, keep in mind that the fair value of your
shares as determined under Delaware law could be more than, the same as or less
than the value of the KeraVision common stock you would receive if you did not
demand an appraisal of your shares. Section 262 requires the fair value of your
Transcend common shares to be determined exclusive of any element of value
arising from the accomplishment or expectation of the merger. A discussion of
the other factors considered by the Delaware Court of Chancery in appraising
your shares is beyond the scope of this summary.
Expenses of the Appraisal Proceeding. The cost of the appraisal proceeding
may be determined by the court and allocated among the parties to the
proceeding as the court deems equitable. Also, on application by a dissenting
stockholder, the court may order that all or a portion of the expenses incurred
in the appraisal proceeding by all dissenting stockholders be charged pro rata
against the value of all shares of stock entitled to appraisal.
Termination of Rights as a Stockholder. If you properly demand appraisal of
your shares, you will lose your right to vote those shares on any matter or to
receive payment of dividends or other distributions on such shares. Keep in
mind, however, Transcend has never paid, and does not now anticipate paying,
any dividends on its shares of common stock.
Withdrawal of a Demand for Appraisal. You may withdraw a demand for
appraisal, and accept the consideration received by other stockholders of
Transcend, at any time within 60 days after the closing of the acquisition.
After this 60-day period has passed, you may not withdraw your demand for
appraisal unless Transcend consents to the withdrawal. If you take all the
other actions required to exercise your appraisal rights but fail to file a
petition in the Delaware Court within 120 days after the transaction closes,
you will lose your appraisal rights. However, you will then be entitled to
receive the consideration the other stockholders of Transcend receive in the
transaction.
The failure to take any step required to preserve or exercise appraisal
rights may result in the loss of those rights. In view of the complexity of
exercising appraisal rights under Delaware law, stockholders who are
considering exercising such rights should consult with their legal advisors.
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THE MERGER AGREEMENT
The following is a summary of the material provisions of the merger
agreement, a copy of which is attached as Annex A to this proxy
statement/prospectus. However, the following is only a summary. You should
read the more detailed information in the agreement itself.
General
The merger agreement provides for the merger of a wholly owned subsidiary
of KeraVision with and into Transcend. As a result of the merger, KeraVision's
subsidiary will cease to exist, Transcend will become a wholly owned
subsidiary of KeraVision and the former stockholders of Transcend will become
stockholders of KeraVision. The merger will become effective on the filing of
a certificate of merger with the Delaware Secretary of State. We expect the
filing to take place the day after the meeting.
What You Will Receive in the Merger
When the merger closes, each share of Transcend common stock you then own
will be converted into the right to receive a fraction of a share of
KeraVision common stock. We expect the value of the fractional share to be
between $1.62 and $1.75, but we cannot now determine what the actual fraction
will be. It will be determined under an exchange ratio formula three business
days before the stockholders' meeting. Since we anticipate closing the merger
on the day of the meeting, we anticipate that we will be able to provide you
with the final exchange ratio three business days before the meeting. You may
obtain a current estimate of the exchange ratio, or within three business days
of the meeting, the actual exchange ratio, by calling 1-888-277-7772.
Regardless of KeraVision's stock price and the resulting exchange ratio, we do
not expect to resolicit your proxy before the closing.
The exchange ratio formula. The exchange ratio formula consists of the
following four-step calculation:
1. Determine Transcend's net cash. Transcend's net cash will be its cash
balances minus any current liabilities and other liabilities agreed to
by KeraVision in the merger agreement.
2. Add a premium to Transcend's net cash. A premium of 20% to 30% will be
added to Transcend's net cash. The actual premium will depend on the
average closing price of KeraVision's common stock over the ten trading
days ending on May 24, 1999.
. If the ten-day average is $9.06 or less, the premium added to
Transcend's net cash will be 20%.
. If the ten-day average is more than $11.63, the premium added to
Transcend's net cash will be 30%.
. If the ten-day average is between $9.06 and $11.63, the premium
will be proportionately set between 20% and 30%. For example, a
ten-day average that is half way between $9.06 and $11.63 will
result in a 25% premium.
3. Divide by the number of outstanding shares of Transcend common
stock. Transcend's net cash, plus the premium, will be divided by the
number of shares of Transcend common stock outstanding to derive a per-
share value for Transcend's common stock in the merger.
4. Divide by the per-share value of the KeraVision common stock. Finally,
the value assigned to each Transcend share will be divided by the
average closing price of KeraVision's common stock over the ten trading
days ending three trading days before the closing of the merger. The
result will be the final exchange ratio.
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Three variables may affect what you receive. This exchange ratio formula for
the merger involves three variables:
. the average closing price of KeraVision's common stock over the ten
trading days ending three trading days before the close of the merger;
. Transcend's net cash; and
. the number of shares of Transcend common stock outstanding when the
merger occurs.
Of these three variables, the first is the one most likely to change from our
current estimate. Each of the three variables is discussed below.
Variations in the average closing price of KeraVision's common stock. The
average closing price of KeraVision's common stock over the ten trading days
ending three trading days before the merger may significantly affect what you
receive in the merger. The effect of this ten-day average differs depending on
whether it is above, below or within a range of $9.06 to $11.63. First, if the
ten-day average is inside this range, both the number and total value of the
KeraVision stock you receive will increase or decrease in proportion to an
increase or decrease in the ten-day average. Second, if the ten-day average is
above $11.63, the stock you receive will be worth $1.75 times the number of
shares of Transcend common stock you surrender, regardless of the ten-day
average. But the actual number of shares of KeraVision common stock you receive
will decrease, without limit, as the ten-day average increases. Third, if the
ten-day average is below $9.06, the stock you receive will be worth $1.62 times
the number of shares of Transcend common stock you own, regardless of the ten-
day average. But the actual number of shares of KeraVision common stock you
receive will increase, without limit, as the ten-day average decreases.
Transcend does not have the right to terminate the agreement based solely on a
decrease in the trading price of KeraVision's common stock.
Variations in Transcend's net cash. In general, the higher Transcend's net
cash is, the greater the number and value of the shares of KeraVision common
stock you will receive. But we do not expect Transcend's net cash to vary
significantly from the current estimate of $8 million. This is because
Transcend has ceased all but nominal business operations and does not
anticipate expenses that would materially affect its estimated net cash.
Variations in the number of shares of Transcend's common stock
outstanding. The higher the number of shares of Transcend common stock
outstanding when the merger closes, the lower the number and value of the
shares of KeraVision common stock you will receive. But as with net cash, we do
not expect this number to vary significantly from 5,935,426, which is the
5,922,036 shares outstanding on April 22, 1999 plus the 13,390 shares we expect
will be issued on exercise of outstanding in-the-money stock options.
Examples of Exchange Ratio Formula Results
If Transcend's net cash equals $8 million and 5,935,426 shares of Transcend
common stock are outstanding, then the exchange ratio will equal the amount
specified below for each of the ten-day average closing price values listed in
the far left column.
<TABLE>
<CAPTION>
Implied
Value of
KeraVision 10-Day Premium Added to Exchange Transcend
Closing Price Value Transcend's Net Cash Ratio Common Stock
------------------- -------------------- -------- ------------
<S> <C> <C> <C>
$ 4.00 20.00% 0.4044 $1.62
$ 4.50 20.00% 0.3594 $1.62
$ 5.00 20.00% 0.3235 $1.62
$ 5.50 20.00% 0.2941 $1.62
$ 6.00 20.00% 0.2696 $1.62
$ 6.50 20.00% 0.2488 $1.62
$ 7.00 20.00% 0.2311 $1.62
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Implied
Value of
KeraVision 10-Day Premium Added to Exchange Transcend
Closing Price Value Transcend's Net Cash Ratio Common Stock
------------------- -------------------- -------- ------------
<S> <C> <C> <C>
$ 7.50 20.00% 0.2157 $1.62
$ 8.00 20.00% 0.2022 $1.62
$ 8.50 20.00% 0.1903 $1.62
$ 9.00 20.00% 0.1797 $1.62
$ 9.50 21.61% 0.1725 $1.64
$10.00 23.45% 0.1664 $1.66
$10.50 25.29% 0.1608 $1.69
$11.00 27.13% 0.1558 $1.71
$11.50 28.97% 0.1512 $1.74
$12.00 30.00% 0.1460 $1.75
$12.50 30.00% 0.1402 $1.75
$13.00 30.00% 0.1348 $1.75
$13.50 30.00% 0.1298 $1.75
$14.00 30.00% 0.1252 $1.75
$14.50 30.00% 0.1208 $1.75
$15.00 30.00% 0.1168 $1.75
$15.50 30.00% 0.1130 $1.75
$16.00 30.00% 0.1095 $1.75
$16.50 30.00% 0.1062 $1.75
$17.00 30.00% 0.1031 $1.75
$17.50 30.00% 0.1001 $1.75
$18.00 30.00% 0.0973 $1.75
$18.50 30.00% 0.0947 $1.75
$19.00 30.00% 0.0922 $1.75
$19.50 30.00% 0.0899 $1.75
$20.00 30.00% 0.0876 $1.75
$20.50 30.00% 0.0855 $1.75
$21.00 30.00% 0.0834 $1.75
$21.50 30.00% 0.0815 $1.75
$22.00 30.00% 0.0796 $1.75
$22.50 30.00% 0.0779 $1.75
$23.00 30.00% 0.0762 $1.75
$23.50 30.00% 0.0746 $1.75
$24.00 30.00% 0.0730 $1.75
$24.50 30.00% 0.0715 $1.75
$25.00 30.00% 0.0701 $1.75
</TABLE>
No Fractional Shares of KeraVision Stock Will Be Issued
KeraVision will not issue fractional shares of common stock in connection
with the merger. After aggregating all fractional shares of KeraVision common
stock, if any, that otherwise would be received by a Transcend stockholder,
KeraVision's share exchange agent will pay in cash the amount, without
interest, determined by multiplying any such fraction by the same ten-day
average closing price for KeraVision common stock used in the exchange ratio
formula.
Transcend Options and Warrants Will Be Cancelled
When the merger closes, all options and warrants to purchase Transcend
common stock then outstanding will be cancelled.
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Stock Ownership Following the Merger
Based on the number of shares of KeraVision common stock outstanding on
April 22, 1999, and after adding the number of additional shares of KeraVision
common stock expected to be issued in the merger, the former holders of
Transcend common stock would hold less than 20 percent of KeraVision's total
outstanding common stock.
Conversion of Shares; Procedures for Exchange of Certificates
Promptly after the merger closes, the exchange agent selected by KeraVision
will mail to the registered holders of Transcend common stock a letter of
transmittal to accompany the Transcend stock certificates that will be
surrendered to the exchange agent and instructions for surrendering Transcend
stock certificates. On surrender of a Transcend stock certificate to the
exchange agent, together with a letter of transmittal, the holder of the
Transcend stock certificate will receive a certificate for the shares of
KeraVision common stock into which their Transcend common stock were converted,
along with cash in lieu of any fractional shares. The surrendered Transcend
stock certificates will be cancelled.
If any Transcend stock certificate has been lost, stolen or destroyed,
KeraVision may require the owner of that stock certificate to provide an
appropriate affidavit and to deliver a bond in such sum as KeraVision may
reasonably direct as indemnity against any claim that may be made against the
exchange agent, KeraVision or Transcend with respect to the stock certificate.
You should not surrender your Transcend stock certificates for exchange
until you receive a letter of transmittal from KeraVision's exchange agent.
Effect on Stock Certificates
When the merger closes, all shares of Transcend common stock outstanding
will automatically be canceled and the holders of shares of Transcend common
stock will no longer have any rights as stockholders of Transcend. Stockholders
of Transcend will not be able to transfer shares of Transcend common stock
after the merger closes. If a stockholder presents a Transcend stock
certificate to the exchange agent or to Transcend or KeraVision after the
merger closes, the certificate will be canceled and will be exchanged as
described above.
No Solicitation by Transcend of Other Potential Acquirers
Transcend has agreed that it and its officers, directors, employees and
other agents will not take any action to initiate or encourage any inquiries or
proposals that could reasonably be expected to lead to a transaction for the
sale of 35% or more of Transcend's outstanding capital stock or the sale of
substantially all of its assets. Transcend must notify KeraVision on learning
that any person is proposing any such transaction. Transcend's board, in
exercising its fiduciary duty under Delaware law, could be required in some
circumstances to decline to complete the merger if the board determines that it
is no longer in the best interests of Transcend's stockholders. Such a
determination would be a breach of the merger agreement. The board does not
currently anticipate any circumstances that would result in a determination not
to complete the merger.
Representations, Warranties and Covenants of Transcend and KeraVision
The merger agreement contains representations and warranties by both parties
that are customary for the proposed transaction.
Covenants by Transcend
Until the merger closes, Transcend has agreed to carry on its business in a
manner consistent with the winding down of its business and to promptly notify
KeraVision of any material event involving its business or operations. In
addition, until the merger closes Transcend will need KeraVision's permission
to:
. waive any stock repurchase rights, amend the period of exercisability of
options or restricted stock, reprice options granted under any stock
plans, or authorize cash payments in exchange for any options granted
under any stock plans;
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. grant any severance or termination pay to any officer or employee except
under any written agreements currently outstanding or policies existing;
or pay any special remuneration to any director or employee;
. declare or pay any dividends on, or make any other distributions in
respect of, any of its capital stock or split, combine or reclassify any
capital stock;
. acquire or redeem any shares of its capital stock;
. acquire or dispose of any business or significant assets or enter into
any joint ventures, strategic partnerships or alliances;
. make any payments individually in excess of $25,000 or in the aggregate
in excess of $50,000;
. amend or enter into any contract or waive any material rights or claims
under any contract;
. engage in any action with the intent to adversely affect any of the
transactions contemplated by the merger agreement; or
. take specified actions that would affect Transcend's tax status or
accounting procedures or take any other actions that would increase the
tax liability of Transcend or KeraVision.
Covenants by KeraVision
Until the merger closes, KeraVision has agreed not to:
. declare, set aside or pay any dividends on or make any other
distributions on any of its capital stock, except for the payment of
dividends to the holders of KeraVision's series B convertible preferred
stock; or
. split, combine or reclassify any capital stock or issue or authorize the
issuance of any other securities in respect of in lieu of or in
substitution for any KeraVision capital stock.
Employment Matters
KeraVision does not intend to offer employment to any employees of
Transcend, and the merger agreement does not create any right for any person
other than Transcend and KeraVision, including rights of continued employment
or benefits with Transcend. Except for costs and liabilities that are included
in the calculation of Transcend's net cash, Transcend has represented that
there are no costs arising from the termination of its employees.
Updates to Net Cash
Within fifteen (15) days of the end of each month until the closing of the
merger, Transcend will provide KeraVision a statement of net cash, certified by
its President, as of the last day of the month just ended. Transcend will also
provide KeraVision a final statement of net cash on the day the merger closes.
KeraVision may have its independent auditors review these updates.
Indemnification and Insurance
After the merger closes, KeraVision will maintain the provisions of
Transcend's certificate of incorporation or bylaws that indemnify Transcend's
former officers and directors for five years. KeraVision will also maintain
directors' and officers' liability insurance covering those persons who are
currently covered by Transcend's directors' and officers' liability insurance
policy on terms comparable to those applicable to the current directors and
officers of Transcend. KeraVision is not required to spend over 125% of the
annual premium currently paid by Transcend for such coverage.
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Conditions That Must Be Met for the Merger to Close
The parties will complete the merger only if several conditions, including
the following, are met:
. the merger agreement and the merger are approved by Transcend's
stockholders; and
. the shares of KeraVision common stock to be issued in the merger are
authorized for listing on Nasdaq.
No significant regulatory compliance relates to the merger and no regulatory
approvals are required for the merger.
Termination of the Merger and Merger Agreement
KeraVision and Transcend can jointly agree to abandon the merger at any time
before the merger closes, even after approval by Transcend stockholders. Also,
either party alone may terminate the merger agreement if the merger does not
close by May 31, 1999 or the other party materially breaches the merger
agreement and does not cure the breach within thirty days. KeraVision alone may
terminate the merger agreement at any time before the special meeting under the
circumstances described below.
Termination Fee
KeraVision can terminate the merger agreement, and Transcend must pay
KeraVision a $500,000 termination fee, if Transcend's stockholders fail to
approve the merger unless the failure is the result of a material adverse
change to KeraVision. KeraVision may also terminate the agreement and receive
the termination fee if Transcend breaches the merger agreement in any of the
following ways:
. Transcend's board of directors withdraws or modifies in a manner adverse
to KeraVision its recommendation to approve the merger;
. a third party makes an acquisition proposal for Transcend common stock
other than a tender or exchange offer and Transcend does not issue a
press release announcing its opposition within five days after KeraVision
asks Transcend to do so;
. Transcend's board of directors approves or recommends another acquisition
proposal;
. Transcend signs a letter of intent accepting an acquisition proposal by a
party other than KeraVision;
. a third party commences a tender or exchange offer for Transcend common
stock and Transcend does not send a letter to its stockholders
recommending rejection of the offer within ten business days; or
. Transcend breaches its obligations to hold a stockholders' meeting to
vote on the merger agreement or solicits acquisition proposals from
parties other than KeraVision.
Expenses
All fees and expenses incurred in connection with the merger agreement and
the other related agreements will generally be paid by the party incurring such
expenses whether or not the merger closes. However, KeraVision and Transcend
will share equally all fees and expenses, other than legal and accounting fees,
incurred in printing and filing this proxy statement/prospectus.
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KERAVISION, INC.
Business
General
KeraVision was founded in 1986 to develop and commercialize proprietary
medical products for the treatment of common vision problems, including myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism, which in the
aggregate are believed to affect one-half of the world's population.
KeraVision's initial product, KeraVision Intacs(TM) are designed to reduce or
eliminate the need for eyeglasses or contact lenses to correct myopia by
reshaping the curvature of the cornea of the eye. KeraVision Intacs is composed
of two thin, half-circles that are inserted into the periphery of the cornea in
a simple outpatient procedure. KeraVision Intacs is made from a polymer that
has been used in intraocular lens replacements for cataract surgery since 1952.
KeraVision Intacs is designed to be permanent; however, it can be removed if
desired and the shape of the eye returns typically to its original curvature.
The currently available refractive surgery procedures typically require
irreversible cutting or tissue removal in the central cornea. Other potential
benefits of KeraVision Intacs are expected to include:
. long-term, convenient correction,
. rapid visual recovery,
. predictable results,
. a simple, minimally-invasive, out-patient procedure.
Recent Developments
First Quarter Results. On April 22, 1999, KeraVision reported revenues of
$472,000 for the quarter ended March 31, 1999, compared to revenues of $152,000
for the quarter ended March 31, 1998. KeraVision reported a net loss for the
first quarter of 1999 of $7.3 million compared to a net loss of $5.5 million
for the first quarter of 1998. This increase reflects increased staffing and
associated expenses, in addition to increased marketing efforts related to
sales in Canada and the planned launch in the U.S. The net loss per share
applicable to common shareholders was 60 cents per share for the first quarter
of 1999 compared to 44 cents per share for the first quarter of 1998. The per
share calculation includes the effect of a preferred stock dividend and related
accretion in the amount of $411,000 to holders of series B preferred stock.
FDA approval. On April 9, 1999 KeraVision obtained FDA approval to
distribute and sell KeraVision Intacs in the United States for the treatment of
myopia in the range of -1.0 to -3.0 diopters of correction in patients over 21
years old. The FDA approval is conditioned upon post-market surveillance
consisting of monitoring a limited number of patients who participated in the
Phase III clinical trial for a period of two years. Results from the Phase III
clinical trial of KeraVision Intacs indicate that 97% of the patients achieved
20/40 or better vision, 87% were 20/25 or better, 70% were 20/20 or better and
53% were 20/16 or better.
Prior to granting this approval, the FDA had accepted for filing
KeraVision's application to sell KeraVision Intacs in August 1998. On January
12, 1999, the relevant FDA advisory panel unanimously recommended that the FDA
approve KeraVision's application with conditions. These conditions related to
labeling changes and the post-market surveillance study. In February 1999, the
FDA deemed KeraVision's application "approvable."
We have also applied for FDA clearance of our pending 510(k) pre-market
approval application for some of the surgical instruments which are used in the
KeraVision Intacs procedure. Upon receipt of this approval we plan to commence
commercialization of KeraVision Intacs in the United States. We have taken the
following steps to prepare for this commercialization:
Surgeon training. We have established sites to train surgeons in the
KeraVision Intacs treatment. These sites are located in Atlanta, Houston,
Kansas City, San Diego, Santa Monica, and St. Louis. Each site is headed
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by an ophthalmic surgeon who will lead the training. We have established
relationships with eye care services companies to provide surgical support
services for KeraVision's surgical training course in over 20 vision correction
surgery centers in the United States. To promote optimum clinical results, we
will proctor surgeons once they return home and begin performing the Intacs
treatment.
Sales team. We have hired 11 direct sales representatives and four
manufacturers' representatives. Their initial focus will be on the vision
correction surgery markets where excimer laser procedures have already gained
acceptance.
Market development. We are testing a multi-media advertising campaign in a
Canadian market and, if it is successful, may use this campaign in the United
States. As surgeons are trained in the KeraVision Intacs treatment, we intend
to help create consumer awareness through locally-oriented advertising and
publicity activities.
Distribution and Sales. In April 1999, we entered into additional purchase
and distribution agreements with several eye care services companies that
specialize in vision correction. These companies have agreed to purchase
KeraVision Intacs and related instrumentation for use in vision correction
surgery centers in the United States.
In Canada, KeraVision received approval in May 1998 to sell KeraVision
Intacs for the range of -1.0 to -5.0 diopters of correction, as well as the
related instrument set. KeraVision began commercialization of KeraVision Intacs
in the European Union for both mild and moderate myopia in December 1996, after
receiving the right to affix the CE Mark and the certification of KeraVision's
ISO 9001 quality system in November 1996. To date, KeraVision has primarily
concentrated its selling efforts for KeraVision Intacs and related instruments
in Canada, France and Germany.
In Singapore, KeraVision began a clinical trial in July 1998 with the
objective of obtaining approval to sell product there after sufficient analysis
has been completed. KeraVision is also investigating other regions of Asia for
potential future commercialization opportunities.
In April 1997, KeraVision began a feasibility study outside the United
States using KeraVision Intacs technology for the treatment of hyperopia. With
encouraging initial results obtained from 40 patients, KeraVision is seeking to
expand its feasibility study to up to three European clinical centers. Nine
patients have been enrolled in the expanded study.
Sales and Marketing
Vision impairment is a common worldwide healthcare problem. 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,
approximately 140 million people currently use some form of eyewear to correct
for common vision problems, and an estimated 70 million people suffer from
myopia. Glasses and contacts are the most prevalent techniques to correct
vision. Surgical techniques to correct common vision problems, known as
refractive surgery, include laser assisted in situ keratomileusis ("LASIK"),
photo-refractive keratectomy ("PRK") and radial keratotomy ("RK"). LASIK and
PRK both require the use of a laser system to remove corneal tissue to achieve
flattening of the cornea. It is estimated more than 350,000 laser-based
treatments were performed in 1998, a substantial growth from the estimated
80,000 procedures performed in 1996, the first year after the approval of PRK
in late 1995. Each of these procedures requires irreversible cutting or tissue
removal in the central cornea.
KeraVision believes that KeraVision Intacs may provide the following
potential benefits for the treatment of myopia:
. Long-term, Convenient Correction. KeraVision designed KeraVision Intacs
to provide permanent correction of myopia in a form more convenient than
eyeglasses or contact lenses;
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. Removable, Replaceable Product. KeraVision Intacs can be removed in a
simple, outpatient procedure, if desired. In cases where KeraVision
Intacs has been removed, patients typically have returned to
approximately the same level of vision as measured prior to insertion of
KeraVision Intacs;
. Rapid Visual Recovery. Clinical trials to date have demonstrated that
significant improvements in vision are achieved within one day after
insertion of KeraVision Intacs;
. Predictable Results. KeraVision believes it has developed the ability to
adequately predict the correction that can be achieved using KeraVision
Intacs;
. Simple, Minimally-Invasive, Outpatient Procedure. The KeraVision Intacs
procedure, which requires a single, small incision and separation of
corneal tissue layers, can typically be performed in less than 15
minutes. The outpatient procedure, performed using topical anesthesia,
results in minimal trauma to the eye; and
. Standardized Procedure. KeraVision designed KeraVision Intacs and related
instrumentation to standardize the procedure to promote ease of surgery
and consistent outcomes.
Strategy
KeraVision's objective is to commercialize KeraVision 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:
. Commercialize KeraVision Intacs for Treatment of Myopia. KeraVision
received approval to commercialize KeraVision Intacs in the European
Union in November 1996 with sales efforts focused in France and Germany.
KeraVision received approval from the FDA in late 1996 to commence a
Phase III clinical trial in the United States and had its premarket
approval application accepted for filing by the FDA in August 1998. On
April 9, 1999, KeraVision received FDA approval to sell and distribute
KeraVision Intacs in the United States for the treatment of myopia. In
Canada, KeraVision received approval to sell KeraVision Intacs and
related instrumentation in May 1998. By focusing on the approval and
commercialization of KeraVision Intacs for myopia, KeraVision seeks to
establish a scientific, technical, regulatory and marketing platform to
facilitate the approval and launch of potential products under
development for the treatment of other vision problems.
. Increase Awareness of KeraVision Intacs. In developing and testing its
technology, KeraVision works with a broad range of independent
researchers to expand awareness of KeraVision Intacs technology.
KeraVision also works with leading surgeons and academic centers in the
ophthalmology field in the design, development and clinical testing of
its technology. KeraVision believes that these researchers, practitioners
and institutions, among others, have significant influence on the
adoption of new technologies and the development of clinical parameters
upon which these technologies are analyzed. In addition, KeraVision
dedicates significant resources to the publication of research papers,
the presentation of clinical and technical data at major ophthalmology
conferences, and the review of KeraVision Intacs clinical data with
leading ophthalmologists. Through these activities, KeraVision seeks to
disseminate accurate clinical information and foster awareness of
KeraVision Intacs technology.
. Focus Initial Marketing on Surgeons. KeraVision is focusing its initial
marketing efforts on opinion leaders and surgeons with active practices
in the ophthalmic community. As part of this strategy, KeraVision has
developed surgeon training programs utilizing its proprietary instruments
to promote standardized procedures for insertion of KeraVision Intacs.
KeraVision believes that an emphasis on surgeon training will aid in
achieving successful procedural outcomes and thereby increase market
acceptance of KeraVision Intacs by both ophthalmic surgeons and patients.
. Expand Applications of Core Technology. KeraVision has products under
development utilizing its core KeraVision Intacs technology for the
treatment of other common vision problems, including hyperopia and
astigmatism. In each target application, KeraVision seeks to preserve the
potential advantages of its technology as a refractive procedure that
does not interfere with the central cornea. KeraVision is currently
working to expand the potential applications of its core KeraVision
Intacs
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technology, including the development of new designs, the use of new
materials and the development of new surgical techniques and instruments.
. Utilize Advanced Development Methods. KeraVision seeks to use advanced
scientific and engineering methods in developing KeraVision Intacs
technology or other potential products for different types of vision
impairment. These include the use of sophisticated modeling techniques to
understand the optical, mechanical and biological effects of inserting
KeraVision Intacs or other potential products into the cornea to correct
for myopia, hyperopia, astigmatism or combinations of each. KeraVision
believes that this approach allows it to improve the design of its
potential products and increase its understanding of potential product
performance prior to commencing clinical trials.
. Strengthen Proprietary Position. KeraVision intends to continue to
develop and protect its proprietary KeraVision Intacs technology. To
date, KeraVision has 18 United States and 24 foreign patents issued and
has filed applications for over 180 United States and foreign patents.
Background
Vision and Vision Impairment. The eye functions much like a camera,
incorporating a lens system consisting of a cornea and a lens that focuses
light, the iris which functions as an aperture system 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 140
million people currently use eyeglasses or contact lenses to correct these
common vision problems, with over $12 billion spent for corrective eyewear
products annually. It is estimated that over 70 million people are affected by
myopia. Of the 70 million people with myopia, an estimated 26 million people
have low to moderate myopia without significant astigmatism and are age 21 or
older. As many as an estimated 22 million of these 26 million people have mild
myopia and require -1.0 to -3.5 diopters of correction, the range covered by
KeraVision Intacs application. In addition to age and degree of myopia,
KeraVision believes that the potential market for KeraVision Intacs may be
further limited by the inability of some patients to afford the procedure, the
psychological aversion of some patients to refractive surgery, the acceptance
of other refractive surgery techniques or other factors.
Market research in the United States has shown that people using corrective
eyewear would like to achieve long-term, more convenient vision correction. In
response, ophthalmic surgeons and medical researchers have sought to develop
alternatives to eyeglasses and contact lenses to correct refractive errors.
Their efforts have resulted in the emergence of the field of refractive
surgery.
The most prevalent surgical techniques that have emerged are LASIK, PRK and
RK. Generally these procedures have been used to treat myopia; however, laser-
based technologies to treat hyperopia have recently been approved by the FDA,
and other procedures are under development.
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Although the target market is potentially large, it is estimated that over
50% of that group have completed another refractive surgery or are currently
outside the range of correction provided by KeraVision Intacs.
Current Refractive Surgery Techniques. Current refractive surgery procedures
include PRK, LASIK and RK, among others. PRK is a refractive surgery technique
in which a laser is used to irreversibly remove tissue within the optical zone
to reshape the cornea, with the amount of tissue to be removed based upon the
level of intended change sought. Typically, the top layer of the central
cornea, known as the epithelium, is manually removed. The patient is then asked
to fixate on a light to minimize eye movement while the laser removes or
ablates tissue from the central cornea. The procedure, the results of which can
be dependent on the variability of the laser beam and individual patient wound
healing response, is conducted in an outpatient setting using topical
anesthetic, although postoperative pain may require the prescription of
narcotics for the first few days following the procedure. While vision
improvement is achieved, PRK depends in part on a healing response to reach the
desired level of flattening of the cornea, which generally occurs over a three-
month period, although the cornea may continue to reshape itself over a 12- to
15-month period. The equipment required to conduct this procedure is
significantly more expensive than the equipment required for use in RK. Because
PRK, like RK, surgically alters tissue in the optical zone, haze, haloes,
reduced night vision and other vision problems have been observed in patients
who have undergone the PRK procedure.
LASIK, estimated to be the most common refractive surgery technique used in
the United States, involves using an automated cutting device called a
microkeratome to cut a large corneal flap, which is then pulled back to expose
the underlying tissue called the stroma. A laser is used to remove stromal
tissue from the central cornea. The corneal flap is then placed back on the
stromal tissue where it adheres back onto the eye. With the removal of the
corneal tissue, the cornea is flattened, thereby achieving correction for
myopia. Primary complications with this procedure arise from cutting of the
corneal flap, including incorrect flap thickness.
In RK, a diamond knife is used to make from four to eight radial incisions
that penetrate beyond 90% of the depth of the cornea. The procedure is
generally conducted using topical anesthesia in an outpatient setting. As the
incisions heal, the curvature of the cornea is altered and vision may be
improved. Although additional operations may be performed to attempt to improve
the vision for those whose vision is undercorrected, the RK procedure is
considered to be refractively irreversible. RK results can vary with the skill
and experience of the surgeon and can be relatively unpredictable for patients
requiring greater degrees of correction. Because RK entails making cuts in or
near the optical zone of the eye, unwanted side effects, such as haloes,
reduced night vision and other visual distortions may occur. In addition, data
from the Prospective Evaluation of Radial Keratotomy ("PERK") 10-year study,
funded by the National Eye Institute and completed in 1994, indicate that a
significant percentage of those undergoing RK did not achieve a stable result
as measured over a ten-year period, with a shift towards hyperopia occurring
over time. The PERK data, however, did indicate that 85% of patients undergoing
the procedure achieved visual acuity of 20/40 or better vision. In addition, it
is believed the RK technique has improved since the PERK study commenced.
Another treatment for myopia currently being investigated in a phase III
clinical trial in the United States is the Intraocular Contact Lens or ICL. The
ICL seeks to correct refractive errors by placing a lens inside the eye between
the natural lens and the iris. The ICL is currently available for sale in
Europe.
Another potential treatment for vision correction is Radio Frequency
Keratoplasmy (RFK), which 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.
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 a patient can attain 20/20 vision,
as measured with an eye chart, and still be dissatisfied with the quality of
his vision. This issue may play a role in the future in modifying current
refractive surgery techniques, which are known to affect the smooth shape of
the cornea and to create corneal scarring in ways that may induce unwanted
visual aberrations. Typical vision complaints include haze, haloes, reduced
night vision and other visual distortions. At the current time, most
assessments attribute undesirable visual side-effects of refractive procedures
either to a disturbance of corneal tissue within the optical zone or to the
interruption or distortion of the smooth shape of
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the cornea. New measurement techniques, including corneal topography, contrast
sensitivity and night-vision testing, are emerging to analyze more fully the
quality of vision beyond the assessment available using standardized eye
charts.
KeraVision Intacs and Instruments
In response to the perceived market need for a predictable, refractively
reversible procedure, KeraVision has developed KeraVision Intacs for the long-
term treatment of myopia. KeraVision Intacs is a proprietary product designed
to reduce or eliminate the need for corrective eyewear by reshaping the
curvature of the patient's cornea. KeraVision Intacs is inserted between the
layers of the corneal stroma through a small incision made in the periphery of
the cornea. The presence of KeraVision Intacs in the periphery of the cornea
creates a flattening of the central cornea, thereby increasing the number of
light rays properly focused on the retina. The KeraVision Intacs procedure does
not cut or remove tissue from the optical zone of the cornea and therefore may
reduce the risk of unwanted visual side-effects such as haze, haloes and
reduced night vision.
The initial design of KeraVision Intacs consisted of an optically clear
split ring made of polymethylmethacrylate ("PMMA"), a clear acrylic that has
been widely used in implantable intraocular lenses since 1952. In order to
simplify the surgical procedure, KeraVision modified the design of KeraVision
Intacs in 1995 into two, thin half-circles of PMMA, each with an arc length of
150 degrees. The two half-circles are placed in the periphery of the cornea at
a diameter of approximately eight millimeters. KeraVision has extensively
studied the relationship between physical parameters of KeraVision Intacs and
corneal curvature change. As a result of these studies, KeraVision believes
that a small number of KeraVision Intacs sizes, with minor variations in their
dimensions, can produce a wide range of corneal curvature change and,
therefore, could provide treatment for a substantial segment of those people
with myopia. KeraVision has developed KeraVision Intacs in six different
thicknesses ranging from 0.21 mm to 0.45 mm.
KeraVision has developed proprietary surgical instruments to be used for the
insertion of KeraVision Intacs. These stainless steel and titanium instruments
include a marking instrument, a centering guide and a stromal separator.
KeraVision's instruments have been designed to standardize the KeraVision
Intacs 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 KeraVision Intacs at the
right depth. It is believed that the purchase of KeraVision's instruments will
represent a small capital investment for ophthalmic surgeons, similar to that
required for surgeons performing RK procedures and substantially less than that
required for surgeons performing LASIK or PRK procedures.
The KeraVision Intacs Insertion Procedure
KeraVision believes that insertion of KeraVision Intacs is a relatively
simple, minimally invasive procedure that can be performed on an outpatient
basis in typically 15 minutes or less. The procedure is usually performed using
topical anesthetic eyedrops. In addition to the KeraVision instruments, the
KeraVision Intacs procedure in part employs surgical techniques and ophthalmic
surgical instruments that are widely used by ophthalmic surgeons. The
KeraVision Intacs procedure requires a single incision of less than two
millimeters outside of the optical zone of the cornea. The incision is located
at the top of the eye under the eyelid. The amount of postoperative discomfort
experienced by patients participating in KeraVision Intacs clinical studies has
been relatively modest and is typically treated with nonprescription pain
relievers.
The KeraVision Intacs insertion procedure consists of the following steps.
First, 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 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. Next, the surgeon places the centering guide over the eye,
introduces the stromal separator through the small entry incision and rotates
the stromal separator, spreading the layers of the stroma to create a circular
subsurface channel in the periphery of the cornea. The surgeon removes the
stromal separator and the centering guide.
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KeraVision Intacs is introduced into the channel and rotated into place.
Finally, the entry incision is typically closed with one to two sutures which
are generally removed within two weeks.
Clinical Trials Results
Since 1991, ophthalmic surgeons have utilized KeraVision Intacs technology
for the treatment of myopia in 1,700 patient eyes in clinical trials conducted
in the United States and throughout the world. KeraVision initiated clinical
trials using the initial design of KeraVision Intacs in 1991 in both the United
States and Brazil. In September 1994, KeraVision completed enrollment of a 90-
patient United States Phase II myopia trial using the initial design of
KeraVision Intacs. In September 1996, KeraVision completed enrollment of the
group of 150 United States Phase II patients with a modified KeraVision Intacs.
In October 1996, KeraVision received approval to commence a ten-center Phase
III clinical trial in the United States and began that trial in December 1996.
KeraVision completed the enrollment for the trial in May 1997. KeraVision
expanded the Phase III trial to cover a greater range of myopia and has begun
limited enrollment for the expanded ranges. In addition, KeraVision has
conducted clinical trials in Europe for myopia and has begun a trial for myopia
in Singapore.
KeraVision's clinical trials have been designed to demonstrate the safety
and efficacy of KeraVision Intacs and the safety of the surgical procedure used
to insert KeraVision Intacs. Safety of KeraVision Intacs is evaluated using
standard ophthalmic techniques.
Myopia. In May 1995, KeraVision commenced a United States Phase II trial for
the current KeraVision Intacs design. This trial included six clinical sites
and involved 150 patients requiring a myopic correction in the range of -1.0 to
- -6.0 diopters. KeraVision completed enrollment in September 1996 for this Phase
II trial. KeraVision performed an interim analysis on the initial 75 patients
who had three months of available follow-up. KeraVision submitted this data to
the FDA for review prior to initiating the Phase III trial for KeraVision
Intacs. Based upon the analysis of the Phase II data, KeraVision proceeded to
slightly modify the range of correction achieved with the current KeraVision
Intacs design and to separate the myopia indication into mild myopia (-1.0 to -
3.5 diopters) and moderate myopia (-3.5 to -5.0 diopters).
KeraVision implanted a total of 195 patient eyes as part of this Phase II
trial. The data from the first 139 Phase II patients (-1.0 to -6.0 diopters)
with twelve months of follow-up indicated that 91% were 20/40 or better, 76%
were 20/25 or better and 60% were 20/20 or better. Additionally, 79% of the
patients were within 1.0 diopter of their intended correction. Five surgically-
related events resulted in the removal of one or both Intacs segments as of the
twelve month point: two cases of infection and three cases related to surgical
technique. All of these patients are stable with no clinically significant
consequences. In total, 31 of the 195 patient eyes underwent removal of
KeraVision Intacs by the twelve month point due to patient dissatisfaction
related to undercorrection (eleven), visual symptoms including glare, halos,
and other symptoms related to low light conditions (nine), induced astigmatism
(ten) and cosmetic reasons (one).
KeraVision initiated an expanded Phase II trial in November 1996 to evaluate
moderate myopia (-3.5 to -5.0 diopters) using the revised performance criteria
for two thicker Intacs sizes. Enrollment of the 59 patients was completed in
February 1997. The three month follow-up data for 58 Phase II patients with the
two higher ring sizes indicated that 98% were 20/40 or better, 83% were 20/25
or better and 57% were 20/20 or better. The predictability of the refractive
effect within 1.0 diopter increased from 46% to 70% for this trial as compared
to the results from initial Phase II trial for the same thicknesses. Two
surgically related events resulted in the removal of one or both Intacs
segments: one case of infection and one case related to surgical technique.
Both patients are stable with no clinically significant consequences. Seven
patient eyes underwent removal of KeraVision Intacs due to patient
dissatisfaction: one removal related to under-correction, three removals
related to visual symptoms, two removals related to induced astigmatism and one
removal related to cosmetic reasons. KeraVision submitted the three month
follow-up data from this trial to the FDA and received approval in November
1997 to expand the existing Phase III trial to include these sizes of
KeraVision Intacs.
In December 1996, KeraVision initiated a Phase III trial at ten clinical
sites involving 360 patients, for a total of 595 patient eyes, requiring
correction for mild myopia (-1.0 to -3.5 diopters). Enrollment was
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completed for this trial in early May 1997. The recently presented data from
the first 410 Phase III patient eyes with twelve months of follow-up indicate
that 97% were 20/40 or better, 87% were 20/25 or better, 74% were 20/20 or
better and 53% were 20/16 or better. The predictability data indicated that 89%
of the patients were within 1.0 diopter of their intended correction. There
have been 26 removals of KeraVision Intacs from the 595 patient eyes included
in this Phase III trial. There was one postoperative adverse event reported in
which a subject had a best spectacle corrected visual acuity loss of ten or
more letters at two consecutive exams. The investigator is currently monitoring
this subject. Three removals were for personal reasons. Twenty-three KeraVision
Intacs were removed due to patient dissatisfaction with the correction achieved
although some of these patients achieved 20/40 vision or better.
In anticipation of the launch of KeraVision Intacs in the European Union,
KeraVision conducted two European clinical trials. The results from these
trials are comparable with KeraVision's clinical studies in the United States.
Complications, Visual Side Effects and Observations. Although KeraVision has
developed seven-year clinical data on the safety and efficacy of KeraVision
Intacs in correcting myopia, it has only limited long-term safety or efficacy
data. KeraVision performed the first procedure for the treatment of myopia
using KeraVision Intacs in 1991, and to date KeraVision has conducted more than
1,700 procedures using KeraVision Intacs technology in clinical trials. 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
KeraVision 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 KeraVision Intacs procedure, involve
some inherent risk of complications. KeraVision has observed complications in a
small number of patients who have received KeraVision Intacs, but no patient
has suffered any serious or lasting injury to the eye or any material loss of
either uncorrected or best corrected visual acuity. The complications include,
among other things: induced astigmatism, infection, decentered placement and a
reduction in central corneal sensation. In addition, patients undergoing
KeraVision Intacs procedure have reported visual side effects. These include
glare, haloes and reduced night vision. All of these complications and visual
side effects have also been observed in connection with other refractive
surgeries. Although KeraVision believes these complications and side effects
may be mitigated, KeraVision cannot assure you that these or other
complications or side effects will not be serious or lasting or will not impair
or preclude KeraVision from obtaining regulatory approval for its potential
products or the acceptance of these products by patients or ophthalmologists.
In many patients, KeraVision has observed deposits in the stromal channel next
to KeraVision Intacs. Although KeraVision believes that these deposits are not
complications and do not cause side effects, we cannot assure you that this
will be the case.
Hyperopia. Data obtained from laboratory work on eye bank eyes and from
finite element analysis has indicated that a design based on KeraVision Intacs
technology may correct hyperopia. Based on these data and analysis, KeraVision
is testing the feasibility of a potential product for hyperopia in a small
clinical study, with 40 patients to date having undergone a procedure to
correct hyperopia. Made from the same material as KeraVision Intacs for myopia
and using a simple insertion technique, the early results from this study are
promising, but require more long-term follow-up. In addition, because only a
limited number of patients to date have received the treatment for hyperopia.
KeraVision will need to treat additional patients in order to characterize the
range and predictability of correction prior to moving to a large scale study.
Work has begun in one clinical center, with nine patients having been enrolled.
KeraVision intends to do further characterization in up to three European
clinical centers in the near future.
Astigmatism. KeraVision has studied a potential product that uses arc
segments of KeraVision Intacs to treat astigmatism. This device utilizes the
core technology for the treatment of myopia and the segments are manufactured
from the same material as KeraVision Intacs. A similar surgical technique is
employed 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 the patients exhibited improvement in their vision after
the implantation of arc segments. KeraVision is pursuing broader
experimentation and analysis, but has not enrolled further patients due to the
perceived smaller size of the potential market.
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Marketing and Sales
Europe. Upon obtaining the right in November 1996 to market KeraVision
Intacs 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 KeraVision Intacs 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
KeraVision Intacs will be slow to develop in Europe. KeraVision, however, is
seeking to expand its reach to other countries by adding additional
distributors.
Canada. KeraVision received approval in Canada to sell KeraVision Intacs for
the treatment of myopia in the range of -1.0 to -5.0 diopters of correction,
along with related instruments, in May 1998. KeraVision focused its initial
marketing efforts on developing seven sites to become proficient in KeraVision
Intacs procedure, to be able to discuss the Canadian experience with KeraVision
Intacs and to potentially serve as training centers. KeraVision then formally
announced the product launch in October 1998. KeraVision's next goal is to
target a specific region of Canada for the purpose of training a high
percentage of the refractive surgeons in the region and then to test the effect
of consumer advertising on patient flow to those centers. KeraVision has hired
a direct sales force to facilitate the Canadian sales process.
United States. The primary market for KeraVision Intacs is the ophthalmic
surgery market. There are approximately 8,000 ophthalmic surgeons in the United
States. Cataract surgery, with an intraocular lens replacement, is the most
prevalent form of ophthalmic surgery, with an estimated more than 1.5 million
procedures being performed annually in the United States. KeraVision believes
that increased consumer interest in corneal refractive surgery, improved visual
results of emerging refractive surgery techniques and reduced reimbursement
rates for cataract surgery are providing incentives for ophthalmic surgeons to
enter the refractive surgery market. It is estimated that there are over 2,000
ophthalmic surgeons performing refractive surgery in the United States.
KeraVision estimates that existing refractive procedure costs in the United
States average $2,100 per eye for a LASIK procedure, $800 per eye for a RK
procedure and $1,800 per eye for a PRK procedure, with a fairly wide range for
each procedure. KeraVision anticipates that the KeraVision Intacs procedure, if
approved for marketing in the United States, will be competitively priced with
existing laser-based procedures. It is estimated that over 350,000 laser-based
procedures were performed in 1998.
KeraVision currently has limited sales or marketing organization or
experience. Because the ophthalmic surgery market is highly concentrated,
KeraVision expects to market its products through a direct sales force, or a
combination of a direct sales force and distributors, in the United States and
Europe. In other selected foreign markets, including parts of the Pacific Rim,
KeraVision may seek a strategic partner to assist in regulatory approval and
marketing activities. Medical investigators have presented KeraVision Intacs
technology as an investigational device at various professional meetings and
symposia in the United States, Europe and Asia. KeraVision expects continued
demonstrations of its technology at scientific and ophthalmic conferences
worldwide.
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No Reimbursement
Consumers receiving treatment generally pay directly for currently available
refractive surgery procedures and are generally not reimbursed by third-party
payers. We anticipate that consumers will also pay directly for KeraVision
Intacs procedures. KeraVision believes that the successful development and
commercialization of KeraVision Intacs will not depend upon the availability of
third-party reimbursement.
Patents and Proprietary Rights
One of KeraVision's primary strategies has been to develop a strong
proprietary patent position with respect to KeraVision Intacs technology.
KeraVision has over 180 pending patent applications worldwide and has been
awarded 24 United States patents and 38 foreign patents. These issued and
pending patents cover various aspects of KeraVision Intacs technology,
including KeraVision Intacs, methods of use, instruments and related materials
and other vision correction technology. The expiration dates of the United
States issued patents range from 2002 to 2015. KeraVision's policy is to
protect its technology by, among other things, filing patent applications
relating to important aspects of its KeraVision Intacs technology and other
vision correction technology.
Manufacturing and Supply
KeraVision manufactures KeraVision Intacs in its facility in Fremont
California using a computer-controlled machining process. This process will
require continued regulatory review and approval from both foreign and United
States government agencies, which could result in significant manufacturing and
shipping delays. Third-party suppliers manufacture critical components of
KeraVision's instruments to KeraVision's specifications. In many cases,
instruments and other purchased materials critical for production are sole-
sourced. KeraVision has entered into confidentiality agreements with its
contract manufacturers in order to protect the proprietary nature of its
technology. 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.
KeraVision Intacs is made from PMMA, a clear acrylic widely used in
implantable intraocular lenses since 1952. PMMA cast sheet is purchased from a
sole supplier and is stored at 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. As a result of the notification that its supplier has
discontinued its manufacture of the particular material used by KeraVision,
KeraVision has agreed to purchase a significant supply of the PMMA cast sheet
stock which is expected to be delivered over the next 12 months. Any change in
materials used for KeraVision Intacs would require additional testing,
regulatory review and approval, which could result in significant manufacturing
and shipping delays. KeraVision sterilizes KeraVision Intacs at a sole-sourced
independent contract sterilization facility.
KeraVision has several sole-sources for sterilization, tools and equipment,
PMMA and other elements necessary to manufacture KeraVision Intacs and the
related instrumentation. Since KeraVision is dependent upon third parties for
the manufacture of its products, KeraVision's profit margins and its ability to
develop and deliver such products on a timely basis may be adversely affected
by the lack of alternative sources of supply. Moreover, we cannot assure you
that our sole suppliers will adequately perform and any failures by third
parties may delay the submission of products for regulatory approval, impair
KeraVision's ability to deliver products on a timely basis, or otherwise impair
KeraVision's competitive position.
KeraVision has limited volume manufacturing capacity and is building
experience in manufacturing medical devices and other products. To be
successful, KeraVision's proposed products must be manufactured in commercial
quantities in compliance with regulatory requirements at acceptable costs.
Production in clinical or commercial-scale quantities may involve technical
challenges for KeraVision. Establishing its own manufacturing capabilities may
require significant scale-up expenses and additions to facilities and
personnel. KeraVision may consider seeking collaborative arrangements with
other companies to manufacture some of its
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potential products, including KeraVision 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 KeraVision will be able to successfully
pass these inspections on a timely basis or at all.
Research and Development
KeraVision has been engaged in the research and development of KeraVision
Intacs technology since its inception in 1986. The development effort has
incorporated both extensive clinical testing as well as laboratory testing to
determine the effect of various configurations and insertion techniques for
KeraVision 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.
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 slightly
higher levels of myopic correction.
Competition
KeraVision Intacs competes with other treatments for refractive problems,
including eyeglasses, contact lenses, other refractive surgery procedures such
as PRK, LASIK, RK, the ICL, RFK and "refractive" intraocular lenses. Refractive
intraocular lenses involve the placement of an intraocular lens 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 KeraVision Intacs or which would otherwise render
KeraVision Intacs technology obsolete.
Other companies, most of which are larger and better financed than
KeraVision, are engaged in the refractive surgery market. Four companies,
Summit Technology, VISX, Autonomous Technologies and Nidek, Inc. have received
approval to market their products in the United States. Summit Technology
recently purchased Autonomous Technologies. In addition to Summit Technology
and VISX, there are a number of other large entities that currently market and
sell laser systems overseas for use in refractive surgery, including Bausch and
Lomb, Aesculap-Meditec, GmbH and Schwind, several of whom are seeking to obtain
approval with the FDA to sell their products in the Unites 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.
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United States Government Regulation and Product Testing
KeraVision's potential products are subject to regulation by numerous
governmental authorities in the United States and other countries. In the
United States, medical devices are subject to rigorous FDA review. Pursuant to
the Federal Food, Drug, and Cosmetic Act and other federal statutes and
regulations, the FDA regulates the
. testing;
. manufacture;
. safety;
. labeling;
. storage;
. record keeping;
. reporting;
. approval;
. sale;
. distribution;
. advertising; and
. promotion of medical devices.
Noncompliance with applicable requirements can result in:
. fines;
. recall;
. injunction or seizure of products;
. total or partial suspension of production;
. withdrawal of approval or refusal to approve product approval
applications or allow KeraVision to enter into supply contracts; and
. criminal prosecution.
The FDA also has the authority to request repair, replacement or refund of
the cost of any device manufactured and distributed by KeraVision. Changes in
existing requirements or adoption of new requirements could have a material
adverse effect on KeraVision's business, financial condition and results of
operation.
Medical devices are classified into one of three classes, Class I, II or
III, on the basis of the controls necessary to reasonably assure their safety
and effectiveness. Safety and effectiveness can reasonably be assured for Class
I devices through general controls including labeling, premarket notification
and adherence to the Quality System Regulation and for Class II devices through
the use of additional special controls including performance standards,
postmarket surveillance, patient registries, and FDA guidelines. Generally,
Class III devices are those which must receive premarket approval by the FDA to
ensure their safety and effectiveness. Class III devices include life-
sustaining, life-supporting and implantable devices, or new devices which have
been found not to be substantially equivalent to legally marketed devices.
510(k) Pre-Market Notification Process. Before a new device can be
introduced to the market, the manufacturer generally must obtain FDA clearance
through either a 510(k) premarket notification or a premarket approval
application. KeraVision's surgical instruments are the only products for which
it will be
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seeking 510(k) clearance; however, KeraVision may submit 510(k)s with respect
to future potential products. The FDA will grant a 510(k) clearance to a
product if the submitted information establishes that the proposed device is
"substantially equivalent" (a) to a legally marketed Class I or Class II
medical device, or (b) to a preamendment Class III medical device. A pre-
amendment device is one that has been on the market since a date prior to May
28, 1976 for which the FDA has not called for premarket approval applications.
The FDA has recently been requiring a more rigorous demonstration of
substantial equivalence. It generally takes four to 12 months from submission
to obtain 510(k) premarket clearance, but may take longer. The FDA may
determine that the proposed device is not substantially equivalent, or that
additional data is needed before a substantial equivalence determination can be
made. A "not substantially equivalent" determination, or a request for
additional information, could delay the market introduction of new products, if
any, that fall into this category and could have a materially adverse effect on
KeraVision's business, financial condition and results of operations. We cannot
assure you that KeraVision will obtain 510(k) premarket clearance within the
above time frames, if at all, for any of the devices for which it may file a
510(k). If KeraVision modifies or enhances any product that has been cleared
through the 510(k) process in a manner that could significantly affect safety
or effectiveness it must submit new 510(k) submissions.
Pre-Market Approval Process. A manufacturer must file a premarket approval
application if the proposed device is not substantially equivalent to a legally
marketed Class I or II device or to a preamendment Class III device for which
the FDA has not called for premarket approval applications. A premarket
approval application must be supported by valid scientific evidence, which
typically includes extensive data, including preclinical and clinical trial
data, to demonstrate the safety and efficacy of the device. KeraVision Intacs
is considered a Class III device and required a premarket approval application,
as will other KeraVision products under development for the treatment of
myopia, hyperopia and astigmatism.
Upon receipt of a premarket approval application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to permit
a substantive review. If the FDA determines that the premarket approval
application is sufficiently complete to permit a substantive review, the FDA
will accept the application for filing. Once the submission is filed, the FDA
begins review of the premarket approval application. An FDA review of a
premarket approval application historically has taken between one to two years
from the date that the premarket approval application is accepted for filing,
but may take significantly longer. The FDA often significantly extends the
review time to ask for more information or clarification of information already
provided in the submission. During the review period, an advisory committee,
typically a panel of clinicians, is convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing
facility to ensure compliance with the FDA's Quality System Regulation
requirements prior to approval of a premarket approval application.
Even after approval of a premarket approval application, the FDA may require
a new premarket approval application or premarket approval application
supplement for modifications to a device, its labeling or its manufacturing
process. Supplements to a premarket approval application often require
submission of the same type of information as a premarket approval application,
except that the supplement is limited to information needed to support any
changes from the product covered by the original premarket approval
application, and may not require the submission of clinical data or the
convening of any advisory committees and corresponding review.
The premarket approval application process can be expensive, uncertain and
lengthy, frequently requiring from one to several years, and some devices for
which premarket approval application approval has been sought by other
companies have never been approved for marketing.
In addition, the FDA may require extensive post-marketing testing and
surveillance to monitor the effects of approved products or place conditions on
any approvals that could restrict the commercial applications of such products.
The FDA may withdraw product approvals if compliance with regulatory standards
is not maintained or if problems occur following initial marketing. In
addition, delays imposed by the governmental
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approval process may materially reduce the period during which KeraVision may
have the exclusive right to exploit patented products or technologies.
Clinical Trials. Before future KeraVision products can be commercialized in
the United States, KeraVision may be required to undergo a series of approval
processes that are sequential in nature. If these approval processes are
applicable, KeraVision generally must:
. generate biocompatibility and long-term preclinical safety data;
. conduct under an investigational device exemption a clinical study
involving nonfunctional human eyes; and
. conduct under an investigational device exemption a phased series of
clinical studies using sighted human eyes.
KeraVision must submit the data from these studies to the FDA in a premarket
approval application for review.
If human clinical trials of a device are required, and the device presents a
"significant risk," the manufacturer or the distributor of the device will have
to obtain FDA approval of an investigational device exemption application with
the FDA prior to commencing human clinical trials. An application must be
supported by data, typically including the results of animal and laboratory
testing. If the FDA approves an investigational device exemption application,
human clinical trials may begin at a specified number of investigational sites
with a maximum number of patients, as approved by the FDA. FDA regulations
govern many important aspects of the clinical investigation of medical
products, and require, among other things, obtaining informed consent from
clinical subjects, and securing the approval for the clinical protocol from an
institutional review board. A review board will consider, among other things,
ethical facts, the safety of patients and the possible liability of the
institution at which the study will be conducted. Sponsors of clinical trials
are permitted to sell investigational devices distributed in the course of the
study provided such compensation does not exceed the recovery of the costs of
manufacture, research, development and handling. KeraVision received FDA
approval of an investigational device exemption application for its phase I, II
and III trials for the treatment of myopia with KeraVision Intacs.
Having received FDA approval for KeraVision Intacs, KeraVision must maintain
compliance with all FDA requirements and conditions in its approved
application, including post-market surveillance requirements, product
specification, manufacturing process, labeling and promotional material and
record keeping and reporting requirements. Failure to comply, or the occurrence
of unanticipated adverse effects during commercial marketing, could lead to the
need for product recall or other FDA initiated action, which could delay
further marketing until the products are brought into compliance.
Other Regulatory Requirements. Any products manufactured or distributed by
KeraVision pursuant to a pre-market clearance notification or an approved
premarket approval application are subject to pervasive and continuing
regulation by the FDA, including recordkeeping requirements and reporting of
adverse experiences associated with the use of the devices. Labeling and
promotional activities are subject to scrutiny by the FDA and by the Federal
Trade Commission. The FDA actively enforces regulations prohibiting marketing
of products for unapproved uses.
The FDC Act requires KeraVision and its contract manufacturers to
manufacture its products in registered establishments and in accordance with
the Quality System Regulation requirements for devices. The Quality System
Regulation (21 CFR Part 820, Medical Devices, Current Good Manufacturing
Practice) as promulgated by the FDA establishes the current good manufacturing
requirements necessary in the design, manufacture and distribution of medical
devices to assure product safety and efficacy. As the developer of KeraVision
Intacs, KeraVision must meet the applicable Quality System Regulation
requirements. KeraVision is also required to adhere to additional Quality
System Regulation requirements for the distribution of KeraVision Intacs.
KeraVision will be required to engage in extensive recordkeeping and reporting
and to conduct extensive post-market surveillance or other device follow-up. To
supply products for use in the United States, foreign
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manufacturing establishments must also comply with Quality System Regulation
and are subject to periodic inspection by the FDA. KeraVision's manufacturing
facilities will be subject to periodic inspections by the FDA and the Food and
Drug Branch of the California Department of Health Services. KeraVision's
products are also subject to regulation by state and foreign government
agencies.
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 KeraVision's
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 KeraVision Intacs 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 15 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 and the United Kingdom.
Products that comply with the requirements of a specified medical directive
will be 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.
To obtain a CE marking, the product must be assessed and found to conform to
the applicable directive. The method of assessing conformity depends on the
class of the product, but normally involves some combination of a
manufacturer's self-assessment and a third party assessment conducted by 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 dealing with medical devices,
including the "Active Implantable Medical Devices Directive" and the "Medical
Devices Directive," and has proposed a third directive, the "In Vitro
Diagnostic Medical Devices Directive," to harmonize the regulatory requirements
for medical devices.
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Medical devices such as KeraVision Intacs are regulated under the Medical
Devices Directive. 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. KeraVision
Intacs has been designated as a Class IIB device. Essential requirements under
the directive include substantiating that the device meets the manufacturer's
performance claims and that 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
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 KeraVision Intacs. These instruments
are classified as Class I and therefore are subject to fewer requirements than
KeraVision Intacs.
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, Iceland, Liechtenstein or Norway are required. Custom-made
devices and devices intended for clinical investigation do not bear CE marking
and are subject to particular requirements under the Directive. Manufacturers
are required to report serious adverse incidents concerning CE marked devices
to the authorities of the countries where the incidents take place. If such
incidents occur, the manufacturer may have to take remedial action, perhaps
including withdrawal of the product from the European market.
The directive must be transposed into national law in order to be applied.
One member state of the European Union, Belgium, has not yet completed this
transposition. This fact does not in itself create an obstacle to placing a CE-
marked medical device on the Belgian market, but it may result in practical
complications and delays in this country with respect to product introduction,
marketing and sales. This transposition process has not created significant
differences among the member states of the 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. We cannot assure you that the transposition of the
directive into national law will be completed by member countries in a timely
fashion, or at all, or that the failure to complete such transposition or
variations in national law will not materially and adversely affect KeraVision.
KeraVision obtained conformity certification under Annex II of the directive
in October 1996 from a notified body and thus achieved the right to affix the
CE marking to KeraVision Intacs 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."
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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 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 KeraVision
Intacs.
Employees
As of April 22, 1999, KeraVision had 135 full-time employees, of whom 42 are
engaged in, or directly support, KeraVision's research and development
activities. 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, scientific and 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. KeraVision currently has a small research and management group with
limited operating experience. The loss of the services of one or more members
of the research or management group or the inability to hire additional
personnel and develop expertise as needed could have a material adverse effect
on KeraVision. KeraVision has an employment agreement with one of its
employees.
Properties
KeraVision's primary manufacturing, R&D and administrative 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 1999.
The current monthly rent is approximately $29,000. 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 1999. 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.
KeraVision Management's Discussion and Analysis
Overview
Since its founding in November 1986, KeraVision has been engaged in the
research and development of KeraVision Intacs and related technology. Although
KeraVision recorded its first revenue in the quarter ended December 31, 1996,
it expects to continue to incur substantial losses at least through the year
ending December 31, 1999 and until sufficient revenue and margin can be
generated to offset expenses. Given the uncertainties in developing a new
market, revenues may not significantly accelerate in the forseeable future.
Furthermore, KeraVision expects its overall expenses to increase as its sales
and marketing activities grow.
On April 9, 1999, KeraVision obtained FDA approval to distribute and sell
KeraVision Intacs in the United States for the treatment of myopia in the range
of -1.0 to -3.0 diopters of correction for patients over 21 years old. Prior to
receiving this approval, KeraVision's pre-market approval application to sell
Intacs, was deemed "approvable" by the FDA on February 16, 1999. On January 12,
1999, the Ophthalmic Devices Panel of the FDA unanimously recommended approval
with conditions for KeraVision to sell its initial product,
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<PAGE>
Intacs, in the range of -1.0 to -3.5 diopters. KeraVision has enrolled a
limited number of patients in the range of -0.5 and -1.0 diopters and -3.5 to -
5.0 diopters in a Phase III trial. In May 1998, KeraVision received regulatory
approval in Canada to sell KeraVision Intacs in the range of -1.0 to -5.0
diopters; we have subsequently begun limited commercial sales in Canada. In
late 1996, we were granted the right to affix the CE mark on KeraVision Intacs
for myopia which allows KeraVision to sell products 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
KeraVision 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 KeraVison Intacs,
must be cleared or approved by the FDA. Securing FDA approvals and clearances
required 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.
Until the development and testing processes for KeraVision Intacs are fully
complete, we cannot be sure that KeraVision Intacs will perform in the manner
we anticipate. Although KeraVision does have approval to sell products in the
United States, the European Union and Canada, we cannot be sure that KeraVision
Intacs will prove to be safe or effective over the long term in correcting
vision or that KeraVision Intacs or any other product developed by us will be
commercially successful, will be successfully marketed or achieve market
acceptance. As a result, we cannot be sure that we will ever achieve either
significant revenues from sales of KeraVision Intacs or any other potential
products or ever achieve profitable operations.
Years ended December 31, 1998 and 1997
Net revenues 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. Sales to customers in Canada
represented 51% of net sales in 1998.
Cost of sales exceeded revenues reflecting currently low production volumes
and fixed costs associated with our higher volume manufacturing capabilities.
Research and development expenses for the year ended December 31, 1998 were
$11.4 million compared to $10.8 million incurred in the prior year. Research
and development expenses in 1998 represented 46% of the $24.6 million loss from
operations, and in 1997 represented 53% of the $20.5 million loss from
operations. We expect research and development expenses to remain relatively
stable as studies are completed and replaced with new indications.
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 limited launch in Canada and a pending U.S. launch dependent on
FDA regulatory approval.
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<PAGE>
KeraVision recorded $563,000 of net interest income for the year ended
December 31, 1998, as compared to $1.1 million for the previous year. Interest
income decreased due to 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. The net loss per share applicable to common
stockholders was $2.16. This per share calculation includes the effect of a
deemed dividend of $2.5 million, in addition to the effect of a dividend of
$846,000 to preferred stockholders as part of the series B redeemable
convertible preferred stock financing. We believe that our net loss could
significantly increase in future periods.
Years ended December 31, 1997 and 1996
Net revenues for 1997 increased to $355,000 from $137,000 in 1996 as a
result of increased unit shipments. 1997 results include a full year of
commercial shipments to the European Market.
Cost of sales exceeded revenues reflecting currently low production volumes
and fixed costs associated with KeraVision's higher volume manufacturing
capabilities.
Research and development expenses for the year ended December 31, 1997 were
$10.8 million compared to $10.9 million incurred in the prior year. Research
and development expenses for the most recent year represented 53% of the $20.5
million loss from operations, and in 1996 represented 73% of the $15.0 million
loss from operations.
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.
We recorded $1.1 million of net interest income for the year ended December
31, 1997, as compared to $2.1 million for the previous year. Interest income
decreased due to lower average cash and investment balances from period to
period. The net loss in 1997 was $19.4 million, an increase of $6.5 million
from the net loss of $12.9 million in 1996.
Tax Matters
As of December 31, 1998, KeraVision had federal, state and French 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 currently utilize the net operating loss and credit
carryforwards.
Under Statement of Financial Accounting Standards No. 109 ("FAS 109"),
deferred tax assets and liabilities are based on differences between financial
reporting and tax bases of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. 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
and equipment financing arrangements. On June 12, 1998, we completed the sale
of series B convertible preferred stock with net proceeds to KeraVision of
$16.6 million. Cash used in operating activities for 1998 has increased to
$23.0 million from $18.0 million in the prior year, reflecting increased
selling, general and administrative, research and development and increased
negative gross
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margins. Cash, cash equivalents and available-for-sale investments were $7.7
million at December 31, 1998. Capital expenditures for 1998 and 1997 were $0.7
million and $0.5 million, respectively.
On December 23, 1998 we announced that we had entered into a definitive
merger agreement to acquire Transcend and its anticipated net cash balance of
about $8 million. The transaction will be accounted for as an acquisition of
assets. Under the agreement, Transcend will wind down its operations as a drug
development company and no Transcend employees will be retained after the
closing of the transaction. According to the terms of the agreement, Transcend
will become a wholly owned subsidiary of KeraVision. We anticipate that
Transcend stockholders will receive shares of KeraVision common stock with a
value equal to the amount of net cash of Transcend as of the closing date plus
a premium of 30 percent. Stockholders holding 51% of Transcend's outstanding
common stock have agreed to vote in favor of the merger. In addition,
KeraVision will be entitled to a breakup fee of $500,000 if the agreement is
terminated for reasons specified in the merger agreement.
In March 1999, KeraVision entered into a senior term loan agreement
providing for borrowings of $5,000,000. The full amount was advanced on March
25, 1999. The loan bears interest at 11.75% per year until Keravision repays
the loan on September 30, 2001. KeraVision has the right to prepay the loan
subject to prepayment penalty of 6% of the current outstanding principal.
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
$10.8125, 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.
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 to be
received from the Transcend acquisition and the senior term loan. Management
believes that sufficient funds will be available from additional investors to
support planned operations through December 1999. KeraVision intends to raise
additional funds through the sale of its equity securities and/or debt
financings. KeraVision may also enter into collaborative arrangements with
corporate partners that could provide additional funding in the form of equity,
debt or license fees in exchange for the KeraVision rights with respect to
markets or technology. We cannot assure you that KeraVision will be able to
raise any additional funds or enter into any such collaborative arrangements on
favorable terms or at all. If we are 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, we intend to implement expense reduction plans in a timely
manner to enable KeraVision to meet its operating cash requirements through
December 31, 1999. These actions would have material adverse effects on our
business, results of operations and prospects.
Our 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 our
research and development programs, changes in the scale, timing, or cost of our
commercial manufacturing facility, competitive and technological advances, the
FDA or other regulatory processes, changes in our 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.
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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 mid-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 $5,000.
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 estimated 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 mid-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.
Euro
We do not presently expect that the introduction and use of the Euro will
materially affect KeraVision's foreign exchange or will result in any material
increase in costs to us. While KeraVision will continue to evaluate the impact
of the Euro introduction over time, based on currently available information,
we do not believe that the introduction of the Euro currency will have a
material adverse effect on our financial condition or overall trends in results
of operations.
Market Risk Disclosure
Interest Rate Risk. Our exposure to market risk for changes in interest
rates relates primarily to our investment portfolio and long-term debt
obligations. KeraVision does not use derivative financial instruments in its
investment portfolio. We place our investments with high credit quality issuers
and, by policy, limit the amount of credit exposure to any one issuer. As
stated in our policy, KeraVision is averse to principal loss and seeks to
ensure the safety and preservation of its invested funds by limiting default
risk, market risk, and reinvestment risk.
We mitigate default risk by investing in only the safest and highest credit
quality securities. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity.
KeraVision has no cash flow exposure due to rate changes for long-term debt
obligations. We primarily enter into debt obligations to support general
corporate purposes including capital expenditures and working capital needs.
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The table below presents principal amounts and related weighted average
interest rates by year of maturity for our investment portfolio and debt
obligations. All investments mature, by policy, in one year or less.
<TABLE>
<CAPTION>
Fair Value
(In thousands) 1999 2000 2001 2002 2003 Total 12/31/98
- ------------------------ ------ ----- ----- ----- ----- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash equivalents
Fixed rate............ $1,449 $ -- $ -- $ -- $ -- $ 1,449 $ 1,449
Average interest
rate................. 2.87%
Available-for-sale
investments
Fixed rate............ 6,279 -- -- -- -- 6,279 6,279
Average interest
rate................. 5.3%
Total investments
Securities............ 7,728 -- -- -- -- 7,728 7,728
Average interest
rate................. 4.85%
Long-Term Debt:
Fixed rate............ 646 563 233 150 -- 1,592 1,592
Average interest
rate................. 13.93% 13.94% 16.47% 17.77%
</TABLE>
Foreign Currency Risk. We transact business in French Francs, German Deutsch
Marks and Canadian dollars. Transactions in foreign currency are minimal and do
not have a material impact on our financial statements.
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MANAGEMENT OF KERAVISION
Board of Directors
The KeraVision board of directors consists of eight members, seven of whom
are divided into three classes, with two directors in each class, and one
unclassified member. Class I consists of three directors who are serving a
three-year term expiring at this years annual meeting of KeraVision
stockholders. Class II consists of two directors who are serving a three-year
term expiring at the annual meeting of KeraVision stockholders to be held in
2000. Class III consists of two directors who are serving a three-year term
expiring at the annual meeting of KeraVision stockholders to be held in 2001.
The unclassified director will be elected by the holders of series B preferred
stock and will serve a one year term expiring at the annual meeting of
stockholders to be held in 2000. In each case, a director serves for the
designated term and until his or her respective successor is elected and
qualified.
The following table sets forth the age, principal occupation, year since
they became board members and class with respect to the directors of KeraVision
as of April 22, 1999:
<TABLE>
<CAPTION>
Director
Name of Director Age Principal Occupation Since Class
---------------- --- -------------------- -------- -----
<C> <C> <S> <C> <C>
Kshitij Mohan........... 54 Corporate Vice President for research 1997 I
and technical services at Baxter
International, Inc.
Arthur M. Pappas........ 51 Founder of A.M. Pappas & Associates 1997 I
Peter Wilson............ 54 Former President of Procter & Gamble's 1998 I
Richardson Vicks USA
Charles Crocker......... 60 Chairman, President and CEO of BEI 1987 II
Technologies, Inc.
Lawrence A. Lehmkuhl.... 61 Former Chairman, President and Chief 1992 II
Executive Officer of St. Jude Medical,
Inc.
John R. Gilbert......... 62 Vice-Chairman of the board of 1992 III
directors of the Company
Thomas M. Loarie........ 52 President, Chief Executive Officer and 1987 III
Chairman of the board of directors of
KeraVision
Kathleen D. La Porte.... 37 General Partner of the Sprout Group 1998 N/A
</TABLE>
Information concerning the business experience of Mr. Loarie is provided
below under the heading "--Executive Officers of KeraVision."
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 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 of Glaxo Far East (Pte) Ltd. And Glaxo Latin America Inc.,
as well as
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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
is a director of publicly-traded Quintiles Transnational Corp., a leading full-
service drug development organization; GeneMedecine Inc., a gene therapy
research company; Embrex Inc., a research and development company specializing
in poultry in-the-egg delivery systems. He is also a director of privately-held
AtheroGenics Inc. Mr. Pappas received a BS in biology from Ohio State
University and an MBA in finance from Xavier University.
Peter Wilson has served as a director of KeraVision since August 1998. 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 hods a BS in Geology from Princeton University and an MBA from Columbia
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. As of September 1997, Mr. Crocker serves 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, Inc., a
medical device company specializing in 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
Standford University and a M.B.A. from the University of California at
Berkeley. Mr. Crocker also serves as a Director of BEI Technologies, Inc., BEI
Medical Systems Company, Inc., 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.
John R. Gilbert has served as a director of KeraVision since April 1992. Mr.
Gilbert retired from a 30-year career at Johnson & Johnson, where he served as
Vice Chairman of IOLAB Corporation and Vice President of Johnson & Johnson
International. From 1981 to 1987, Mr. Gilbert was President of IOLAB
Corporation, an international manufacturer and distributor of ophthalmic
products. Mr. Gilbert holds a B.S. degree in Industrial Technology from Texas
A&M University.
Kathleen D. La Porte has served as a director of KeraVision since June 1998.
Ms. La Porte is a General Partner of the Sprout Group, a venture capital
affiliate of Donaldson & Jenrette Securities Corp. Prior to joining Sprout in
1993, Ms. La Porte was a Principal at Asset Management Company, a venture
capital firm focused on early stage investments. Prior to joining Asset
Management Company, Ms. La Porte was a Financial Analyst at the First Boston
Corporation. She holds BS in biology from Yale University and an MBA from
Stanford University.
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Executive Officers of KeraVision
The current executive officers of KeraVision are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Thomas M. Loarie........ 52 Chairman of the board of directors, Chief
Executive Officer and President,
Darlene E. Crockett- 46 Vice President, Regulatory Affairs and Clinical
Billig................. Research
Mark D. Fischer- 42 Vice President, Finance and Administration,
Colbrie................ Chief Financial Officer
David Heniges........... 45 Vice President, Europe
Richard Meader.......... 53 Vice President, Quality Assurance
Edward R. Newill........ 45 Vice President, North American Marketing and
Sales
Thomas A. Silvestrini... 46 Vice President, Research and Development
Robert P. Wood.......... 40 Vice President, Manufacturing
</TABLE>
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 KeraVision's international business. Mr.
Loarie holds a B.S. degree in engineering from the University of Notre Dame and
has completed graduate work in business administration at the Universities of
Chicago and Minnesota. Mr. Loarie also serves as a member of the Executive
Committee of KeraVision, a director of the Health Industry Manufacturers
Association and serves on the Board 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 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 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.
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Richard Meader has served as Vice President Quality Assurance since
September 1998. 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, Marketing and Sales since
May 1996. Mr. Newill has 18 years of international experience in a broad range
of surgical specialties including plastic surgery, which like vision
correction surgery is consumer-based and non-reimbursed by insurers. Mr.
Newill held management positions with Mentor from 1990 to 1996. Mr. Newill
holds a B.S. in General Business from Miami University and a Masters
International Management from American Graduate School of International
Management.
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.
Robert P. Wood has served as Vice President, Manufacturing since April
1996. From 1994 to 1996, Mr. Wood was operations manager of Allergan, Inc.'s
medical device and pharmaceutical facility. From 1987 to 1994 Mr. Wood held
management positions with Abbott Laboratories. Mr. Wood holds a B.S., in
mechanical engineering from Texas A&M University.
Each executive officer serves at the sole discretion of the board of
directors.
Director Compensation
KeraVision currently pays each director who is not an employee $1,000 for
each meeting attended of the board of directors, $500 if attended by
telephone, an annual retainer of $12,000 and reimburses each director for out-
of-pocket expenses incurred in connection with their attendance at meetings of
the board of directors. Nonemployee directors participate in KeraVision's 1995
Director Stock Option Plan, pursuant to which these directors are
automatically granted options to purchase shares of KeraVision common stock on
the terms and conditions set forth in the plan. The following table sets forth
the details of the compensation paid each director in 1998.
<TABLE>
<CAPTION>
Number of
Payments Securities Exercise
for Underlying Price of
Name of Director Meetings Options Options
- ---------------- -------- ---------- --------
<S> <C> <C> <C>
Charles Crocker.................................... $22,500 2,500 $7.813
John R. Gilbert.................................... $20,000 2,500 $7.813
Kathleen D. La Porte............................... $ 9,500 7,500 $9.125
Lawrence A. Lehmkuhl............................... $20,000 2,500 $7.813
Kshitij Mohan...................................... $19,500 2,500 $7.813
Arthur M. Pappas................................... $20,000 2,500 $7.813
Peter Wilson....................................... $ 9,500 7,500 $7.125
Steven N. Weiss(1)................................. $13,500 2,500 $7.813
</TABLE>
(1) Mr. Weiss resigned from the KeraVision board of directors on July 31,
1998.
Board Meetings and Committees
The KeraVision board has two standing committees, an audit committee and a
compensation committee.
63
<PAGE>
The audit committee currently consists of directors Pappas and La Porte. The
audit committee reviews KeraVision's internal controls and meets periodically
with management and the independent auditors.
The compensation committee currently consists of directors Crocker and
Lehmkuhl. The compensation committee is responsible for setting and
administering the policies for executive compensation and short-term and long-
term incentive programs.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 1998, none of KeraVision's executive
officers served on the board of any entities whose directors or officers serve
on KeraVision's compensation committee. No current or former executive officer
or employee of KeraVision serves on the committee.
64
<PAGE>
Notwithstanding anything to the contrary set forth in any of KeraVision's
previous filings under the Securities Act, or the Exchange Act, that might
incorporate future filings, including this proxy statement/ prospectus, in
whole or in part, the following Compensation Committee Report and the
Performance Graph included below shall not be incorporated by reference into
any such filings.
COMPENSATION COMMITTEE REPORT
The following is a report of the Compensation Committee of the Board of
Directors describing the compensation policies applicable to the Company's
executive officers during the year ended December 31, 1998. The Committee
recommends salaries, incentives and other forms of compensation for directors,
officers and other employees of the Company, administers our various incentive
compensation and benefit plans (including stock plans) and recommends policies
relating to such incentive compensation and benefit plans. Executive officers
who are also directors have not participated in deliberations or decisions
involving their own compensation.
Compensation Policy
The Company's executive officer compensation philosophies are designed to
attract, motivate and retain senior management by providing an opportunity for
competitive, performance-based compensation. Executive officer compensation
consists of competitive base salaries and stock-based incentive opportunities
in the form of options to purchase the Company's Common Stock. The Company
currently does not contribute to any retirement programs on behalf of its
employees, including executive officers.
Base Salaries for 1998
Base salaries are set to correspond approximately with the mean of salaries
offered individuals with similar job responsibilities at comparable companies,
including companies in a similar geographic location, and to maintain a close
relationship to the company's performance. In establishing compensation
guidelines with respect to base salary, the Company utilized three outside data
sources for like companies, as provided by a bioscience salary survey, a
venture capital firm salary survey and a review of proxy statements by an
outside service. In addition, a compensation consultant reviewed the Company's
plans. Based on the result of the salary survey, the compensation committee
granted salary increases commensurate with the ranges listed for bioscience
companies.
Bonus Plan for 1998
The bonuses paid in 1998 were earned as part of the 1997 bonus plan which
listed specific objectives to be achieved. These objectives included revenue
goals, status of progress with the FDA, status of new product development and
infrastructure development in several areas. The Compensation Committee
assessed performance to those 1997 objectives and determined the appropriate
percentage of completion of goals.
Stock Option Awards for 1998
The Company's 1995 Stock Option Plan provides for the issuance of stock
options to officers and employees of the Company to purchase shares of the
Company's Common Stock at an exercise price equal to the fair market value of
such stock on the date of grant. The Company's stock options typically vest
ratably over a period of four years. Stock options are granted to the Company's
executive officers and other employees both as a reward for past individual and
corporate performance and as an incentive for future performance. The Company
believes that stock-based performance compensation arrangements are essential
in aligning the interests of management and its stockholders in enhancing the
value of the Company's equity. In 1998, stock option grants of 15,000 shares
for each officer were made and the vesting was tied to the achievement of a
specific stock price as a mechanism for increasing performance.
65
<PAGE>
Vesting is designed to encourage the creation of stockholder value over the
long-term, as no benefit is realized from a stock option grant unless the price
of the Common Stock rises over a number of years and the option holder is
actively employed at the time of vesting. In October 1998, the Company's board
of directors reviewed employees' outstanding options and determined that many
employees of the Company held options at exercise prices that exceeded the
closing price of the Common Stock, which limited the options' effectiveness as
a long-term incentive and as a tool for employee retention. Accordingly, the
board approved an option exchange program, whereby employees were permitted to
voluntarily exchange options held for new options on a four-for-five basis with
a new exercise price of $5.938, the closing price of KeraVision's Common Stock
on October 28, 1998. The new options cannot be exercised until October 28,
1999; one year after the program became effective. As an added long-term
incentive, employees participating in the exchange program that leave
KeraVision prior to the one year lock-up will forfeit their repriced shares.
The forfeited shares will be returned back into the stock plan. In addition to
other non-executive employees, Mr. Thomas M. Loarie, Edward R. Newill and
Thomas A. Silvestrini elected to participate in the October exchange program.
Compensation of the Chief Executive Officer
The compensation for Thomas M. Loarie, KeraVision's Chief Executive Officer,
consisted of a base salary, an annual bonus, stock option grants and employee
benefits provided to all salaried employees that are usual and custom for the
position.
The Committee determined Mr. Loarie's salary based on a number of factors,
including comparative salaries of CEO's of medical companies in KeraVision's
peer group, the CEO's individual performance and KeraVision's performance as
measured against the stated objectives. The CEO's salary was compared to three
outside data sources for like companies, as provided by a bioscience salary
survey, a venture capital firm salary survey and a review of proxy statements
by an outside service. In addition, a compensation consultant reviewed
KeraVision's plans. Based on the results of the salary survey, the CEO's salary
was not increased in 1998.
Mr. Loarie's 1998 bonus payment of $22,500 reflects KeraVision's achievement
of the bonus goals set in the 1997 bonus plan. The bonus reflects the
achievement of objectively measured, qualitative goals under the bonus plan as
reviewed and approved by the Committee. As with other executives, size of
option grants is also based on a review of competitive survey data. The stock
option grant of 15,000 shares, given in equal amounts to all of the officers of
the company has a fixed vesting schedule beginning in May 2003 unless a
specific stock price point is achieved earlier. See "Executive Compensation--
Summary Compensation Table."
Deductibility of Executive Compensation
The Committee has considered the impact of Section 162(m) of the Internal
Revenue Code adopted under the Omnibus Budget Reconciliation Act of 1993, which
disallows a deduction for any publicly held corporation for individual
compensation exceeding $1 million in any taxable year for the CEO and four
other most highly compensated executive officers, unless this compensation
meets the requirements for the "performance-based" exception to the general
rule. Since the cash compensation paid by the Company to each of its executive
officers is expected to be well below $1 million and the Company believes that
options granted under the Company's 1987 and 1995 Stock Option Plans will meet
the requirements for qualifying as performance-based, the Committee believes
that this section will not affect the tax deductions available to us. It will
be the Committee's policy to qualify, to the extent reasonable, the executive
officers' compensation for deductibility under applicable tax law.
SUBMITTED BY THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
Charles Crocker
Lawrence A. Lehmkuhl
66
<PAGE>
Executive Compensation
The following table shows the compensation received by the KeraVision's
Chief Executive Officer and the four most highly compensated executive officers
of KeraVision for 1998, and the compensation received by each such individual
for 1997 and 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------- ---------------------
Securities Underlying
Year Salary Bonus Options All Other
---- ---------- --------- --------------------- ---------
<S> <C> <C> <C> <C> <C>
Thomas M. Loarie........ 1998 $250,000 $22,500 111,261 $ --
Chief Executive Officer
and President 1997 $250,000 $26,446 80,327 --
1996 $309,272 -- -- $50,000
Thomas A. Silvestrini... 1998 $178,904 $14,175 40,600 $17,500
Vice President 1997 $175,000 $14,879 34,000 --
1996 $181,757 -- -- $12,500
Edward R. Newill........ 1998 $155,391 $11,025 63,000 --
Vice President 1997 $149,692 $ 8,264 40,100 --
1996 $ 91,577 -- 60,000 --
Darlene E. Crockett-
Billig................. 1998 $148,235 $12,180 15,000 $14,500
Vice President 1997 $145,000 $12,220 28,200 --
1996 $143,481 -- -- $12,500
Mark Fischer-Colbrie.... 1998 $ 138,012 $ 16,000 15,000 $13,500
Vice President 1997 $135,000 $ 10,928 26,300 --
1996 $125,926 -- -- $ 5,000
</TABLE>
- --------
Compensation amounts provided for Mr. Loarie, Mr. Newill, Ms. Crockett-
Billig and Mr. Fischer-Colbrie include amounts earned but deferred at the
election of the executive under KeraVision's 401(k) Plan.
The column entitled "Securities Underlying Options" reflects the issuance of
incentive stock options granted under KeraVision's 1987 and 1995 Stock Option
Plans, of which 6.25% are exercisable at the end of each three-month period
from the grant date. The maximum term of each option under the 1987 plan is
five years from the date of grant and under the 1995 plan is ten years from the
date of grant. The exercise price is equal to the market value of the stock on
the grant date.
Compensation categorized as "All Other" represents forgiveness of
outstanding principal on promissory notes owed to KeraVision.
Salary amounts paid to Mr. Loarie, Mr. Silvestrini, Ms. Crockett-Billig and
Mr. Fischer-Colbrie in 1996 reflect retroactive compensation adjustments made
by KeraVision's board of directors in that year.
Stock option grants to Mr. Loarie, Mr. Silvestrini and Mr. Newill for 1998
do not include options granted in connection with KeraVision's October
repricing program. See "Option Grants During Year Ended December 31, 1998"
table.
67
<PAGE>
The following tables provide information for the named executive officers
with respect to grants of options to purchase KeraVision common stock made in
the year ended December 31, 1998 and the value of all options held by these
executive officers on December 31, 1998. The percentage of the total options
granted to KeraVision employees during 1998 is based on an aggregate total of
621,131 options granted to employees in 1998 under KeraVision's 1995 Stock
Plan. Potential realizable values are reported net of the option exercise
price, but before taxes associated with the exercise, if any. These amounts
represent assumed rates of appreciation only, in accordance with regulations of
the Commission. Actual gains, if any, on stock option exercises and common
stock holdings are dependent on the future performance of the common stock and
overall market conditions, as well as executives continued employment through
the vesting period. There is no assurance that the amounts reflected would be
realized.
Option Grants During Year Ended December 31, 1998
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of
Securities Options Stock Price Appreciation
Underlying Granted to Exercise or for Option Term
Options Employees during Base Price Expiration ------------------------
Name Granted Year ($/Sh) Date 5% ($) 10% ($)
---- ---------- ---------------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Darlene Crockett-
Billig................. 15,000(2) 2.41% $5.438 8/3/2008 $ 51,299 $ 130,002
Mark Fischer-Colbrie.... 15,000(2) 2.41% $5.438 8/3/2008 51,299 130,002
Thomas M. Loarie........ 15,000(2) 2.41% $5.438 8/3/2008 51,299 130,002
Thomas M. Loarie........ 32,000(1) 5.15% $5.938 5/10/2000 119,500 302,837
Thomas M. Loarie........ 64,261(1) 10.35% $5.938 10/28/2008 239,975 608,143
Edward R. Newill........ 15,000(2) 2.41% $5.438 8/3/2008 51,299 130,002
Edward R. Newill........ 48,000(1) 7.73% $5.938 10/28/2008 179,250 454,255
Thomas A. Silvestrini... 15,000(2) 2.41% $5.438 8/3/2008 51,299 130,002
Thomas A. Silvestrini... 25,600(1) 4.12% $5.938 5/10/2000 95,600 242,269
</TABLE>
- --------
(1) Reflects options granted in connection with KeraVision's October repricing
program. These options become exercisable on October 28, 1999 and will be
forfeited if the employee leaves KeraVision prior to that date. See
"Compensation Committee Report--Stock Option Awards for 1998."
(2) These options were granted under the 1995 Stock Plan at an exercise price
equal to the fair market value of KeraVision's common stock on the date of
grant. Options will become exercisable, if not accelerated pursuant to the
provisions described below, at the rate of 25% of the original number of
option shares on each of the following dates: May 3, 2003, August 3, 2003,
November 3, 2003 and February 3, 2004. The options exercisability can be
accelerated in part, with the balance to become exercisable in four equal
six-month increments, in the event that the closing price of KeraVision's
common stock is at least $22.00 per share, as determined by the daily
closing price on Nasdaq, for a period of 20 consecutive trading days (the
"Initial Period") and for each of the five business days (the "Final
Period") commencing on the first business day following public disclosure
of KeraVision's earnings release for the fiscal quarter in which occur the
majority of the days in the Initial Period. Exercisability will commence on
the first business day following completion of the Final Period. Twenty-
five percent of the total number of shares subject to each option shall
vest and become exercisable on the first business day following completion
of the Final Period, and 25% of the remaining balance of such shares shall
vest and become exercisable on each 6-month anniversary of such date
thereafter, for long as the option holder remains an employee of, or
consultant to, KeraVision.
68
<PAGE>
Aggregated Option Exercises in the Year Ended
December 31, 1998 and Year-End Option Values
<TABLE>
<CAPTION>
Number of Value of
Securities Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Shares December 31, 1998 December 31, 1998
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
---- ----------- -------- --------------------- -----------------
<S> <C> <C> <C> <C>
Darlene Crockett-
Billig................. 20,526 $255,302 27,362/ 47,838 $154,637/$352,155
Mark Fischer-Colbrie.... 23,228 288,910 24,044/ 45,256 $136,017/$335,341
Thomas M. Loarie........ 49,500 615,681 -- /111,261 $ 0/$939,311
Edward R. Newill........ -- -- -- /103,100 $ 0/$813,339
Thomas A. Silvestrini... -- -- 2,125/ 72,475 $ 14,743/$568,674
</TABLE>
The value of exercised in-the-money options is based upon the fair market
value of KeraVision common stock, which was $14.313, as reported on the Nasdaq
National Market at the close of business on December 31, 1998.
Option Exchange Programs
On October 28, 1998, KeraVision gave employees who held options to purchase
KeraVision common stock at prices above the October 28, 1998 market closing
price of $5.938 the opportunity to exchange those options on a four-for-five
basis for new options with an exercise price of $5.938. The following table
sets forth, as to all executive officers of KeraVision, information with
respect to the repricing of all such officer's options since January 1, 1989.
For further information with respect to these option exchanges, see
"Compensation Committee Report--Stock Option Awards in 1998."
Ten Year Option Repricing Table
<TABLE>
<CAPTION>
Length of
Original
Number of Option
Securities Term Remaining
Underlying Market price of Exercise Price (in years)
Options Stock at Time at Time of New at date of
Repriced or of Repricing or Repricing or Exercise Repricing or
Name Date Amended Amendment Amendment Price Amendment
---- -------- ----------- --------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Thomas M. Loarie........ 10-28-98 32,000 $5.938 $ 8.75 $5.938 0.70
10-28-98 6,261 $5.938 $ 12.25 $5.938 8.40
10-28-98 11,600 $5.938 $ 7.375 $5.938 8.10
10-28-98 46,400 $5.938 $ 7.375 $5.938 8.10
Edward R. Newill........ 10-28-98 48,000 $5.938 $ 15.25 $5.938 7.70
Thomas A. Silvestrini... 10-28-98 25,600 $5.938 $ 8.75 $5.938 0.70
Robert P. Wood.......... 10-28-98 40,000 $5.938 $12.625 $5.938 7.70
</TABLE>
69
<PAGE>
Performance Graph
The following graph compares the cumulative total KeraVision stockholder
return, assuming reinvestment of all dividends, for KeraVision's common stock
at July 28, 1995, the date on which our common stock was first registered under
Section 12 of the Securities Exchange Act of 1934, and December 31, 1995, 1996,
1997 and 1998, to the cumulative return over such period of the U.S. Index for
the Nasdaq National Market and the S&P Health Care Composite Index. The graph
assumes that $100 was invested on July 28, 1995 in KeraVision's common stock
and in each of the comparative indices. The graph further assumes that the $100
amount was initially invested in KeraVision's common stock at a price per share
of $13.50. The stock price performance on the following graph is not
necessarily indicative of future stock price performance.
Comparison of Total Return
Comparison of 41 month cumulative total return
among KeraVision, Inc., the NASDAQ Stock Market (U.S.) Index
and the S&P Health Care Sector Index
[PERFORMANCE GRAPH APPEARS HERE]
70
<PAGE>
Certain Relationships and Related Transactions
KeraVision has issued common stock to some of its executive officers in
exchange for promissory notes. The shares were issued pursuant to restricted
stock purchase agreements under KeraVision's 1987 stock purchase plan at the
fair market value of the common stock of KeraVision on the date of grant. The
following table sets forth the details of these transactions.
<TABLE>
<CAPTION>
Maximum Amount
Amount of Date Interest Indebtedness Outstanding
Name of Debtor Shares Issued Issued Rate Since 1/1/98 4/22/99
-------------- ------------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Thomas M. Loarie 29,800 1/29/88 5.93% $ 764.15 $ 764.15
Thomas M. Loarie 20,000 3/8/88 5.62% 195.94 $ 195.94
Thomas M. Loarie 30,000 3/8/89 5.62% 1,505.42 $ 1,505.42
Thomas M. Loarie 212,685 10/30/91 5.79% 212,848.09 $212,848.09
Thomas M. Loarie 42,193 4/12/93 5.73% 102,469.02 $102,469.02
Thomas M. Loarie 60,000 11/7/93 5.79% 145,807.79 $145,807.79
Thomas A. Silvestrini 34,048 10/30/91 5.79% 52,334.48 $ 34,074.08
Thomas A. Silvestrini 23,447 10/30/91 5.95% 22,952.18 $ 22,952.18
Thomas A. Silvestrini 60,000 11/7/93 5.79% 145,807.79 $145,807.79
Darlene Crockett-
Billig 12,000 3/8/89 5.62% 3,422.50 $ 62.27
Darlene Crockett-
Billig 44,121 10/30/91 5.79% 43,203.85 $ 32,064.08
Darlene Crockett-
Billig 40,000 11/7/93 5.79% 97,205.20 $ 97,205.20
Mark Fischer-Colbrie 15,000 11/7/93 5.79% 30,357.70 $ 16,854.70
</TABLE>
In June 1998, the board of directors forgave principal in the following
amounts:
. $17,500 owed to KeraVision by Mr. Silvestrini;
. $14,500 owed to KeraVision by Ms. Crockett-Billig; and
. $13,500 owed to KeraVision by Mr. Fischer-Colbrie.
In October 1996, the board of directors forgave principal in the following
amounts:
. $50,000 owed to KeraVision by Mr. Loarie;
. $12,500 owed to KeraVision by Mr. Silvestrini;
. $5,000 owed to KeraVision by Mr. Fischer-Colbrie; and
. $12,500 owed to KeraVision by Ms. Crockett-Billig.
On April 1, 1998, KeraVision entered into the following full-recourse
promissory notes. The loans were made to enable the employee to fund cash
payments of alternative minimum tax generated by the exercise of expiring
options.
<TABLE>
<CAPTION>
Maximum
Interest Indebtedness Amount Outstanding
Name of Debtor Rate Since 1/1/98 as of 4/22/99
-------------- -------- ------------ ------------------
<S> <C> <C> <C>
Thomas M. Loarie 5.62% $57,665.76 $57,665.76
Thomas M. Loarie 5.62% 20,525.10 $20,525.10
Thomas A. Silvestrini 5.62% 86,267.32 $86,267.32
Mark Fischer-Colbrie 5.62% 98,696.67 $98,696.67
</TABLE>
On September 1, 1998, KeraVision entered into the following full-recourse
promissory notes. The proceeds of the loans were used to replace prior debt
incurred by the holder in connection with payments made to exercise expiring
options.
71
<PAGE>
<TABLE>
<CAPTION>
Maximum
Interest Indebtedness Amount Outstanding
Name of Debtor Rate Since 1/1/99 as of 4/22/99
-------------- -------- ------------ ------------------
<S> <C> <C> <C>
Thomas M. Loarie 5.35% 298,069.55 $298,069.55
Darlene Crockett-Billig 5.35% 84,568.07 $ 84,568.07
Thomas A. Silvestrini 5.35% 77,689.10 $ 77,689.10
Mark Fischer-Colbrie 5.35% 72,578.92 $ 72,578.92
</TABLE>
In January 1998, KeraVision entered into a contract with A.M. Pappas &
Associates, LLC to plan for a clinical trial in Singapore. For the year ended
December 31, 1998, KeraVision paid A.M. Pappas & Associates, LLC $77,663.
In May 1997, KeraVision entered into change of control agreements with each
of its executive officers. These agreements are intended to provide for
continuity of employment in the event of a change of control, which includes
the following events:
. acquisition by any person of 20 percent or more of KeraVision;
. reorganization, merger or consolidation of KeraVision; and
. a change in the composition of the board resulting in fewer than a
majority of the directors being incumbent drectors. Incumbent
directors are those directors which were directors as of May 6, 1997
or are elected to the board with the affirmative vote of at least a
majority of the incumbent directors.
In the event that during the two year period following a change of control,
KeraVision terminates an executive's employment without cause, or the executive
terminates his employment as a result of an involuntary termination, the
executive would receive the following benefits:
. severance payments equal to the salary the executive was receiving at
the time of termination in accordance with KeraVision's payroll
schedule;
. monthly severance payments equal to one-twelfth of the employee's
base salary;
. the continuation of health and life insurance benefits; and
. outplacement services with a value not to exceed $15,000.
With respect to the change of control agreement with Mr. Loarie, these
benefits will continue for eighteen months from the date of his termination.
With respect to the other executives, these benefits will continue for twelve
months from the date of the executive's termination.
In the event of a change of control of KeraVision, Mr. Loarie's stock
options will become fully vested and 50% of the other executives' stock options
will become fully vested so long as the acceleration of vesting of options does
not preclude a pooling of interests for the proposed transaction. The
agreements provide that any benefits received from KeraVision constituting
"parachute payments" within the meaning of section 280G of the Code that would
subject the executive to the excise tax imposed by Section 4999 of the Code may
be payable in a manner that does not result in the benefits being subject to an
excise tax.
In January 1997, the Company entered into a three-year employment agreement
with Thomas M. Loarie. Pursuant to the terms of the agreement, Mr. Loarie is
entitled to receive:
. an annual base salary of $250,000;
. an option to purchase 7,827 shares of common stock;
. a performance bonus of up to 50% of base salary;
72
<PAGE>
. medical, disability and life insurance;
. vacation and sick leave;
. a business expense allowance of up to $15,000 per year, and
. 18 months base salary compensation in the event of involuntary
termination of employment.
In January 1996, KeraVision entered into a consulting agreement with John R.
Gilbert, one of KeraVision's directors. This agreement provides for an annual
consulting fee of $80,000 to be paid to Mr. Gilbert. For the year ended
December 31, 1998, KeraVision paid Mr. Gilbert $73,333.
KeraVision has entered into separate indemnification agreements with each of
its directors and executive officers that may require KeraVision, to indemnify
them against liabilities that may arise by reason of their status or services
as director or officer and to advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified.
The terms of the transactions described above were negotiated at arms length
so that the terms were as favorable to KeraVision as could have been obtained
from an unaffiliated third party.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires KeraVision's
directors and executive officers, and persons who own more than ten percent of
a registered class of KeraVision's equity securities to file with the
Commission initial reports of ownership and reports of changes in ownership of
common stock and other equity securities of KeraVision. Officers, directors and
greater than ten percent stockholders are required by the Commission's
regulations to furnish KeraVision with copies of all Section 16(a) forms they
file. To KeraVision's knowledge, all of these filing requirements have been
satisfied with the following exception: Mr. Gilbert was late in filing a Form 4
in connection with an open market purchase. In making this statement,
KeraVision has relied solely upon review of the copies of such reports
furnished to KeraVision and written representations from its officers and
directors that no other reports were required.
73
<PAGE>
TRANSCEND THERAPEUTICS, INC.
Business
Transcend was formed in December 1992 by two affiliates of Baxter
International, Inc., Nestle S.A. and several venture capital firms for the
purpose of developing pharmaceuticals based on a group of glutathione-repleting
compounds. When formed, Transcend received from its founding stockholders and
from Cornell Research Foundation patents, patent applications and licenses for
those compounds. Since formation, Transcend's activities have concentrated for
the most part on developing one of those compounds, Procysteine, for use as an
intracellular glutathione-repleting agent for the treatment of acute
respiratory distress syndrome. ARDS is a disorder characterized by severe lung
dysfunction. It is a devastating complication of conditions associated with
massive acute inflammation, such as severe infection, multiple traumatic injury
and extensive burns, and has a mortality rate of about 40 percent.
By the second quarter of 1996, Transcend had completed testing of
Procysteine for use intravenously in animals and limited testing in humans. The
results of both were sufficiently positive for Transcend to begin what is
referred to in the drug development field as a phase III clinical trial. This
trial involves a large number of patients and is usually the last step required
in the regulatory approval process for the developer to submit a new drug
application to the U.S. Food and Drug Administration and other similar foreign
drug regulation authorities.
Transcend began its phase III clinical trial of Procysteine for intravenous
use in treating patients with ARDS in March 1997. In March 1998, Transcend
suspended the clinical trial following the recommendation of an independent
safety monitoring board. In the development process, a safety monitoring board
is established to review trial data from time to time to make sure the drug
meets safety criteria. In its March 1998 review, the safety monitoring board
had found that the incidence of all-cause mortality in patients receiving a
placebo was lower than in patients receiving Procysteine. Transcend then
conducted its own preliminary review of the data and, in May 1998, ended the
trial because it could not find a clear explanation of the lower mortality
observed in the placebo group. Transcend finally compiled and reviewed all of
the trial data available, including some that had previously been sealed as
part of the protocol maintaining the impartial nature of the tests. Transcend
found evidence that intravenous Procysteine was not effective in the treatment
of ARDS and, in August 1998, abandoned its efforts in this area.
In August 1998, Transcend's Chief Executive Officer and Chief Scientific
Officer resigned and Nicholas Harvey, then Transcend's Senior Vice President
and Chief Financial Officer, was appointed as President, a director and interim
Chief Executive Officer. Since August 1998, Transcend has been reducing its
staff and currently employs two persons, one of whom is Mr. Harvey. During the
same period, Transcend has been pursuing various strategic alternatives with
respect to its business, including strategic alliances and the sale or merger
of the company. The proposed merger is the result of these efforts.
Prior to the termination of its development efforts, Transcend had received
financial backing from a variety of sources. In April 1994, a group of venture
capital institutions invested approximately $6.5 million in Transcend's
preferred stock. Through July 1997, these same investors purchased additional
rounds of preferred stock. In February 1997, Boehringer Ingelheim International
GmbH ("BI") paid Transcend a $5 million license fee when the two parties
entered into a Development and License Agreement for the worldwide development
and marketing of Procysteine. In July 1997, Transcend completed an initial
public offering that resulted in net proceeds of $15.7 million (net of
approximately $2.3 million in underwriting discounts, commissions and offering
costs). BI had purchased $5 million of the shares sold in the offering and
Transcend had agreed that this money and the $5 million license fee would be
used only in the development of Procysteine for use in the treatment of ARDS.
In March 1999, BI and Transcend agreed to terminate their collaboration. BI
released the restrictions on the remainder of the cash BI had invested in
Transcend in return for the right to use all clinical data obtained in the
trials. Also in March 1999, Transcend signed a letter agreement assigning its
residual patent estate and its rights and obligations under various license
agreements to MassTrace, Inc., a privately held diagnostics and pharmaceutical
development tools company.
74
<PAGE>
Properties
Currently, Transcend's only material property is its net cash. Transcend
has no rights in any real property. As part of winding down operations,
Transcend vacated its office space in Cambridge, Massachusetts in December
1998, and the lease for this space has terminated.
Legal Proceedings
Transcend is not a party to any material legal proceedings.
Transcend Management's Discussion and Analysis
Results of Operation--Fiscal 1998 Compared to Fiscal 1997
Transcend earned no revenues in the year ended December 31, 1998 and
revenues of $5.0 million, consisting of a non-refundable, non-creditable
licensing fee received under the BI Agreement, in the year ended December 31,
1997.
Transcend's total operating expenses for the years ended December 31, 1998
and 1997 were $7.8 million in each year. Research and development expenses for
the years ended December 31, 1998 and 1997 were $3.4 million and $4.5 million,
respectively. Research and development expenses decreased in 1998 from 1997
due to the suspension and subsequent termination of Transcend's Phase III
clinical trial, which was terminated in August 1998. General and
administrative expenses for the years ended December 31, 1998 and 1997 were
$4.0 million and $3.3 million, respectively. General and administrative
expenses increased in 1998 from 1997 due primarily to termination costs
associated with an employee reduction plan and other exit costs related to the
restructuring of Transcend's operations. Of the $4.0 million of general and
administrative expenses incurred during the year ended December 31, 1998,
approximately $1.0 million related to the employee reduction plan in the third
and fourth quarters of 1998 including possible incentive bonuses, payment of
which was contingent on finding a suitable merger and/or acquisition candidate
for Transcend. Additionally, the company incurred professional, legal and
accounting fees related to the merger of approximately $0.4 million through
December 31, 1998.
Other income for the years ended December 31, 1998 and 1997 consists of
interest income. Interest income for the years ended December 31, 1998 and
1997 were $713,000 and $588,000 respectively. Interest income increased in
1998 as compared to 1997 primarily due to higher average cash balances
available for investment following receipt of the $5.0 million BI license fee
and $15.7 million of net proceeds from Transcend's initial public offering in
July 1997.
In the fourth quarter of 1998, following a clinical hold order by the FDA
on human clinical testing of oral Procysteine for the treatment of amyotrophic
lateral sclerosis, management ceased all development activities related to
Procysteine and determined that Transcend's patents and licenses related to
Procysteine had declined in value. Management assessed the fair value of the
patents and licenses, and concluded that there would be no future cash flows
from these assets. Accordingly, Transcend recognized an impairment loss of
approximately $286,000, which represented the carrying value of the patents
and licenses at the time of the assessment. In the third and fourth quarters
of 1998, Transcend recognized an aggregate impairment loss of $79,000 related
to a write-down of property and equipment. A decision was made by management
to dispose of all of Transcend's property and equipment as a result of
Transcend's change in operational objectives. As a result, the projected
future cash flows from the property and equipment were less than the carrying
value of the assets, and an impairment loss was recognized to record the
property and equipment at its fair value. As of December 31, 1998, Transcend
has disposed of all of its property and equipment.
Net loss for the years ended December 31, 1998 and 1997 were $7.1 million
and $2.3 million, respectively.
75
<PAGE>
Results of Operations--Fiscal 1997 Compared to Fiscal 1996
Transcend earned revenues of $5.0 million consisting of a non-refundable,
non-creditable licensing fee received under the BI agreement in the year ended
December 31, 1997 and no revenues in the year ended December 31, 1996.
Transcend's total operating expenses for the years ended December 31, 1997
and 1996 were $7.8 million and $3.8 million, respectively. Research and
development expenses for the years ended December 31, 1997 and 1996 were $4.5
million and $2.0 million, respectively. Research and development expenses
increased in 1997 from 1996 due to expenditures associated with Transcend's
ongoing Phase III clinical trial which commenced in the second quarter of 1997.
General and administrative expenses for the years ended December 31, 1997 and
1996 were $3.3 million and $1.8 million, respectively. General and
administrative expenses increased in 1997 from 1996 due primarily to higher
compensation expenses and recruiting costs, costs associated with the
transition of Transcend's operations from a private entity to a publicly traded
company, and professional fees related to the BI agreement.
Other income and expenses for the years ended December 31, 1997 and 1996
consists of interest income and interest expense. Interest income for the years
ended December 31, 1997 and 1996 were $588,000 and $30,000, respectively.
Interest income increased in 1997 as compared to 1996 primarily due to higher
cash balances available for investment following receipt of the $5.0 million BI
license fee and $15.7 million of net proceeds from Transcend's initial public
offering in July 1997. Transcend incurred interest expense of $355,000 in the
year ended December 31, 1996 on outstanding senior secured convertible term
notes, payable in shares of Transcend Series A and Series B convertible
preferred stock. There were no senior secured convertible notes outstanding in
1997.
Net loss for the years ended December 31, 1997 and 1996 were $2.3 million
and $4.1 million, respectively.
Liquidity and Capital Resources
Since its inception through December 31, 1998, Transcend has financed its
operations primarily with $30 million from the sale of equity securities, $11
million in contract research and license fee payments, and $1.6 million in
interest income.
Transcend had cash and cash equivalents of approximately $9.7 million at
December 31, 1998, compared to $16.8 million at December 31, 1997.
Although Transcend took steps in the third and fourth quarters of 1998 to
reduce its cost of operations including reducing its staff to two persons at
March 31, 1999 (including its President and CEO) and terminating its facilities
lease, Transcend expects negative cash flows from operations to continue for
the foreseeable future. Transcend estimates that after payment of expected
costs for winding down its business as required by the merger agreement signed
on December 22, 1998 with KeraVision, legal and accounting fees related to the
merger and related expenses, Transcend will have an anticipated net cash
balance of about $8 million by the end of the first quarter of 1999. On
December 22, 1998, Transcend placed $7 million in an escrow account with a
third-party escrow agent as required by KeraVision in connection with the
merger agreement.
Transcend's actual working capital requirements will depend upon numerous
factors, some of which are beyond Transcend's control, including any
unanticipated costs in winding down its business, and closing out the phase III
study. In addition, if the proposed merger with KeraVision is not consummated,
there can be no assurance that Transcend will be successful in implementing any
other strategic option with respect to its business in a timely manner or at
all.
76
<PAGE>
SECURITY OWNERSHIP
We have described the "beneficial ownership" of KeraVision's and Transcend's
common stock in the following tables according to the 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
within 60 days after the date of this proxy statement/prospectus, even if they
have not actually been exercised. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of each
other person. Except as described below, the stockholder listed is the only
person who has the authority to decide how to vote the shares they own, and if
and when to sell those shares, subject to community property laws where
applicable.
KeraVision
The following table sets forth the beneficial ownership of KeraVision's
common stock as of April 22, 1999 and the anticipated ownership of KeraVision
common stock immediately following the merger as to:
. each person who is known by KeraVision to beneficially own more than five
percent of our common stock;
. each of our current directors;
. each of the executive officers named in the Summary Compensation Table
beginning on page 67; and
. 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 13,084,161 shares
actually outstanding on April 22, 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 Commission.
<TABLE>
<CAPTION>
Shares
Beneficially
5% Stockholders, Owned
Directors, Named -----------------
Executive Officers, and Shares Number Percent
Directors and Acquirable Number held held
Executive Officers as Shares Within currently after after
a Group Owned 60 Days held Percent merger merger(5)
------------------------ --------- ---------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Goldman Sachs & Co. .... 2,095,012 0 2,095,012 16.01% 2,095,012 14.00%
85 Broad Street
New York, NY 10004
Entities affiliated with
Donaldson, Lufkin &
Jenrette, Inc. (1)..... 0 1,574,464 1,574,464 10.74% 1,627,757(6) 10.47%
3000 Sand Hill Road
Menlo Park, CA 94025
Sprout Capital VIII,
L.P.................... 0 1,333,948 1,333,948 9.25% 1,333,948 9.25%
3000 Sand Hill Road
Menlo Park, CA 94025
Capital Research & Mngt.
Co. (7)................ 795,000 0 795,000 6.08% 795,000 5.31%
333 South Hope Street
Los Angeles, CA 90071
Charles Crocker(2)...... 166,943 10,000 176,943 1.35% 176,943 1.18%
Darlene E. Crockett-
Billig................. 109,083 31,267 140,352 1.07% 140,352 *
Mark Fischer-Colbrie.... 76,617 27,501 104,118 * 104,118 *
John R. Gilbert......... 37,500 6,500 44,000 * 44,000 *
Kathleen D. La
Porte(3)............... 0 1,333,948 1,333,948 9.25% 1,333,948 9.25%
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Shares
Beneficially
5% Stockholders, Owned
Directors, Named -----------------
Executive Officers, and Shares Number Percent
Directors and Acquirable Number held held
Executive Officers as Shares Within currently after after
a Group Owned 60 Days held Percent merger merger(5)
------------------------ --------- ---------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lawrence A. Lehmkuhl.... 17,000 10,000 27,000 * 27,000 *
Thomas M. Loarie........ 498,733 0 498,733 3.81% 498,733 3.33%
Kshitij Mohan........... 0 5,000 5,000 * 5,000 *
Edward R. Newill........ 1,834 0 1,834 * 1,834 *
Arthur Pappas........... 22,000 5,000 27,000 * 27,000 *
Thomas A. Silvestrini... 197,892 2,975 200,867 1.53% 200,867 1.34%
Peter L. Wilson......... 7,000 0 7,000 * 7,000 *
All directors and
officers as a group 1,432,191 2,566,795
(15 persons)(4)........ 1,134,604 17.68% 2,566,795 17.68%
</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.
(2) Shares attributable to Mr. Crocker include 55,215 shares held by Fund FBO
Charles Crocker.
(3) The shares attributable to Ms. La Porte consist of 1,333,948 shares of
common stock issuable upon conversion of the series B shares issued to
Sprout Capital VIII, L.P., which Ms. La Porte may be deemed to beneficially
own indirectly as disclosed in a Schedule 13D filed on January 8, 1999.
(4) Shares attributable to directors and officers as a group include 55,215
shares beneficially held by Mr. Crocker, an aggregate of 98,243 shares
subject to options held by officers and directors which options are
exercisable within 60 days after the date of this proxy
statement/prospectus, and 1,333,948 shares of common stock issuable upon
conversion of the series B shares issued to Sprout Capital VIII, L.P.
Ms. La Porte is a general partner of Sprout Capital VIII, L.P.
(5) Includes approximately 883,000 shares of KeraVision common stock estimated
to be issued in connection with the merger.
(6) Includes approximately 53,293 shares of KeraVision common stock estimated
to be issued to DLJ Capital Corporation in connection with the merger. The
estimation of shares to be issued to DLJ Capital Corporation in connection
with the merger is based upon an exchange ratio of 0.1492.
(7) Capital Research & Management Co. has sole investment power over such
shares. SMALLCAP World Fund, Inc. has sole voting power over such shares,
and, as such, may be deemed to beneficially own such shares.
The following table sets forth the beneficial ownership of KeraVision's
series B preferred stock as of and as of April 22, 1999 as to:
. each person who is known by the Company to beneficially own more than
five percent of KeraVision's series B preferred stock;
. each of KeraVision's current directors;
. each of the executive officers named in the Summary Compensation Table;
and
. all directors and executive officers as a group.
78
<PAGE>
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 Commission. The number and percentage of
shares beneficially owned will not be affected by the merger.
<TABLE>
<CAPTION>
Shares
5% Stockholders, Directors, Named Executive Officers, currently
and Directors and Executive Officers as a Group owned(1) Percent
----------------------------------------------------- --------- -------
<S> <C> <C>
Entities affiliated with Donaldson, Lufkin & Jenrette,
Inc.(2)............................................... 393,616 75.00%
3000 Sand Hill Road
Menlo Park, CA 94025
Sprout Capital VIII, L.P............................... 333,487 63.54%
3000 Sand Hill Road
Menlo Park, CA 94025
Johnson & Johnson Development Corporation.............. 98,403 18.75%
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
DLJ ESC II, L.P........................................ 33,369 6.36%
3000 Sand Hill Road
Menlo Park, CA 94025
GMI/DRI Investment Trust............................... 32,801 6.25%
P.O. Box 1113
Minneapolis, MN 55440
Charles Crocker........................................ -- *
Darlene E. Crockett-Billig............................. -- *
Mark Fischer-Colbrie................................... -- *
John R. Gilbert........................................ -- *
Kathleen D. La Porte(3)................................ 333,487 63.54%
Lawrence A. Lehmkuhl................................... -- *
Thomas M. Loarie....................................... -- *
Kshitij Mohan.......................................... -- *
Edward R. Newill....................................... -- *
Arthur Pappas.......................................... -- *
Thomas A. Silvestrini.................................. -- *
Peter L. Wilson........................................ -- *
All directors and officers as a group (15 persons)..... 333,487 63.54%
</TABLE>
- --------
(1) As of April 22, 1999, there were accrued dividends of $330,636 on the
preferred stock, calculated at a rate of $2.24 per share of preferred
stock. The dividends will be paid in the form of 5,894 shares of series B
preferred stock.
(2) Includes 5,235 shares held by DLJ Capital Corporation, 333,487 shares held
by Sprout Capital VIII, L.P., 1,516 shares held by the Sprout CEO Fund,
L.P., 20,009 held by Sprout Venture Capital, L.P. and 33,369 shares held
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.
(3) As disclosed in a Schedule 13D filed on January 8, 1999, Ms. La Porte may
be deemed to beneficially own indirectly the shares owned by Sprout Capital
VIII, L.P. Ms. La Porte shares voting and investment authority over such
shares.
79
<PAGE>
Transcend
The table below contains information about the following owners of
Transcend's common stock on April 22, 1999:
. Stockholders that own more than five percent of Transcend's common stock
. Stockholders who are either directors or executive officers of Transcend
(individually)
. All Transcend's directors and officers as a group.
Each percent assumes that, in addition to the 5,922,036 shares actually
outstanding on April 22, 1999, any shares under options or warrants owned by
the stockholder, but no other stockholder, were also outstanding. No shares of
Transcend common stock will be outstanding after the merger.
<TABLE>
<CAPTION>
Shares
Acquirable Total Shares Percentage
Name and Address of Beneficial Shares Within Beneficially Beneficially
Owner Owned 60 Days Owned Owned
- ------------------------------ --------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Advent Group (1)............... 1,281,248 0 1,281,248 21.6%
75 State Street
Boston, MA 02109
Baxter Healthcare Corporation 965,181 0 965,181 16.3%
(2)...........................
One Baxter Parkway
Deerfield, IL 60015
Nestle S.A..................... 798,744 0 798,744 13.5%
900 North Brand Boulevard
Glendale, CA 91203
Boehringer Ingelheim
International GmbH............ 500,000 0 500,000 8.4%
D-55216 Ingelheim am Rhein
Germany
The Venture Capital Fund of New
England III, L.P.............. 363,736 0 363,736 6.1%
160 Federal Street, 23rd Floor
Boston, MA 02110
DLJ Capital Corporation (3).... 357,197 0 357,197 6.0%
277 Park Avenue
New York, NY 10172
Jerry T. Jackson............... 23,000 8,000 31,000 *
Philippe O. Chambon, M.D., Ph.D 357,197 0 357,197 6.0%
(3)...........................
Frank L. Douglas, M.D., Ph.D... 10,000 8,000 18,000 *
Richard W. Hunt (2)............ 965,181 0 965,181 16.3%
William C. Mills III (4)....... 363,736 0 363,736 6.1%
Gerard M. Moufflet (1)......... 1,281,248 0 1,281,248 21.6%
B. Nicholas Harvey............. 29,575 41,676 71,251 1.2%
All directors and executive
officers as a group (seven
persons)...................... 62,575 57,676 3,085,669 51.6%
</TABLE>
- --------
* Less than 1%
(1) Shares attributed to Advent Group consist of 815,114 shares held by Global
Private Equity II Limited Partnership, 328,314 shares held by Rovent II
Limited Partnership, 132,216 shares held by Advent Performance Materials
Limited Partnership, 3,660 shares held by Advent International Investors II
Limited Partnership and 1,944 shares held by two former affiliates of
Advent. Mr. Moufflet, a director of Transcend, is Managing Director of
Advent International Corporation, which is a general partner of Advent
International Investors II Limited Partnership and of Advent International
Limited Partnership, the general partner of each of the other members of
the Advent group. Mr. Moufflet, who shares voting and investment power over
all such shares of Transcend common stock, disclaims beneficial ownership
of such shares. Mr. Moufflet's address is the same as that of the Advent
group.
(2) Shares attributed to Baxter Healthcare include 698,744 shares held by
Clintec International, Inc., a wholly owned subsidiary of Baxter Healthcare
Corporation. Mr. Hunt, a director of Transcend and Vice President,
Corporate Audit of Baxter International, Inc., the sole stockholder of
Baxter, shares voting power over shares of Transcend common stock held by
Clintec and Baxter. Mr. Hunt's address is the same as that of Baxter
Healthcare Corporation.
80
<PAGE>
(3) Shares attributed to DLJ Capital Corporation consist of 308,365 shares held
by Sprout Capital VI, L.P. and 48,832 shares held by DLJ Capital
Corporation. DLJ Capital Corporation is the managing general partner of
Sprout Capital VI, L.P. Dr. Chambon, a director of Transcend and General
Partner of Sprout Group, shares voting and investment power over such
shares of Transcend common stock. Mr. Chambon's address is the same as that
of DLJ Capital Corporation.
(4) Mr. Mills, a director of Transcend, is a general partner of The Venture
Capital Fund of New England III, L.P., and shares voting and investment
power over VCFNE's shares of Transcend common stock. Mr. Mills' address is
the same as that of VCFNE.
Change in Control--Voting Agreements and Irrevocable Proxies
The following stockholders who are affiliated with Transcend have signed
voting agreements with KeraVision:
. Global Private Equity Limited Partnership,
. Rovent II Limited Partnership,
. Advent Performance Materials Limited Partnership,
. Advent International Investors II Limited Partnership,
. Paal Gisholt,
. Charles Hsu,
. DLJ Capital Corporation,
. Sprout Capital VI, L.P.,
. Baxter Healthcare Corporation,
. Clintec International, Inc.,
. The Venture Capital Fund of New England III, L.P. and
. Jerry T. Jackson.
Together, these stockholders own approximately 51 percent of Transcend's
outstanding common stock. These shares provide the majority vote needed to
approve the merger. The voting agreements require the stockholders to vote in
favor of the merger and against any other acquisition transaction, and they
apply to any votes by Transcend's stockholders on an acquisition transaction
involving Transcend. While the agreements are in effect, the stockholders may
not transfer their shares of Transcend common stock. The agreements expire when
the merger has been approved.
The same stockholders have also signed irrevocable proxies that give
KeraVision's board of directors the right to vote the stockholders' shares of
Transcend common stock whenever an acquisition transaction involving Transcend
is presented to Transcend's stockholders for vote. The proxies may not be
revoked until voting agreements terminate.
81
<PAGE>
DESCRIPTION OF KERAVISION 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 Keravision
series B convertible preferred stock and the Preferred Shares Rights Agreement,
dated as of August 18, 1997 (the "Rights Plan"). 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 "Comparison of Stockholder Rights--
Rights Plan." As of April 22, 1999, there were outstanding 13,084,161 shares of
KeraVision common stock, no shares of KeraVision series A preferred stock and
524,820 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 to be issued in the merger 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 and preferences of any series. The Keravision board
is also authorized to set the rights, qualifications, and restrictions on each
series of preferred stock.
Series A Participating Preferred
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.
82
<PAGE>
Series B Redeemable Convertible Preferred Stock
KeraVision's board of directors designated 662,500 shares of preferred stock
as series B redeemable 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. 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; and
. if KeraVision executes a reverse 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. As of April 22, 1999, there were accrued dividends, in
the amount of $330,636, calculated at a rate of $2.24 per share of series B
preferred stock, which will be paid in the form of 5,894 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.
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
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 of directors.
83
<PAGE>
COMPARISON OF CAPITAL STOCK AND RIGHTS OF HOLDERS OF
KERAVISION COMMON STOCK AND TRANSCEND COMMON STOCK
General
As a result of the merger, holders of shares of Transcend common stock will
own shares of KeraVision common stock. The following is a summary of the
material differences between the rights of holders of shares of Transcend
common stock and holders of shares of KeraVision common stock.
Election of Directors
Holders of KeraVision common stock are entitled, voting together with the
holders of KeraVision series B preferred stock, to elect members of
KeraVision's board. In these elections, each share of common stock will be
entitled to one vote and each share of series B preferred stock will be
entitled to four votes. In addition, the holders of KeraVision series B stock
are entitled to elect one member of the KeraVision board. Holders of Transcend
common stock are entitled to elect members of Transcend's board of directors
with each share being entitled to one vote.
Removal of Directors
KeraVision's directors may be removed, with or without cause, by the holders
of a majority of the shares then entitled to vote at an election of directors.
Transcend's directors may be removed only for cause by the affirmative vote of
the holders of two-thirds of the shares of Transcend's capital stock entitled
to vote.
Amendment of Charter Documents
KeraVision's charter may be amended in accordance with the Delaware law.
KeraVision's by-laws may be adopted, amended or repealed by its stockholders or
its board of directors. Transcend's charter may be amended in accordance with
Delaware law, except that articles of the Transcend charter related to the
number and election of directors, the inability of stockholders to take actions
by written consent in lieu of a meeting and special meetings of stockholders
cannot be amended or repealed without the consent of two-thirds of the shares
of Transcend's capital stock entitled to vote.
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 of
directors.
In August 1997, the KeraVision board declared a dividend of one preferred
share purchase right (a "KeraVision Right") for each outstanding share of
common stock. Each KeraVision Right entitles the holder to purchase one one-
thousandth 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 (1) August 17,
2007, unless extended, or (2) their redemption or exchange as described below.
Until a KeraVision Right is exercised, it confers no rights to a stockholder.
84
<PAGE>
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 (1) a public announcement that someone has obtained the right to
acquire beneficial ownership of twenty percent or more of the outstanding
shares of KeraVision common stock or (2) 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 tradable, 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 to Transcend
stockholders in the merger 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.
Transcend does not have a stockholder rights plan.
EXPERTS
Ernst & Young LLP, independent auditors, have audited KeraVision, Inc.'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 proxy
statement/prospectus in reliance on the report of Ernst & Young LLP,
independent auditors, given on their authority as experts in accounting and
auditing.
Ernst & Young LLP, independent auditors, have audited Transcend
Therapeutics, Inc.'s financial statements as of December 31, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998 and the
period January 1, 1993 (commencement of operations) to December 31, 1998. These
financial statements have been included in this proxy statement/prospectus in
reliance on the report of Ernst & Young LLP, independent auditors, given on
their authority as experts in accounting and auditing.
EVEREN Securities, Inc. has delivered an opinion to Transcend's board, dated
December 22, 1998, that the consideration to be paid to Transcend's
stockholders in the merger is fair from a financial point of view.
85
<PAGE>
LEGAL MATTERS
The validity of the KeraVision common stock issuable pursuant to the merger
and other legal matters relating to the issuance will be passed upon for
KeraVision by Latham & Watkins, Menlo Park, California. Hale and Dorr LLP is
acting as counsel for Transcend in connection with legal matters relating to
the merger and the transactions related to the merger. As of the date of this
proxy statement/prospectus, attorneys of Latham & Watkins beneficially own an
aggregate of 12,687 shares of KeraVision common stock.
WHERE YOU CAN FIND MORE INFORMATION
KeraVision and Transcend are subject to the informational requirements of
the Exchange Act and file periodic reports, registration statements and other
information with the Commission. You may inspect and copy any document filed
with the Commission by KeraVision or Transcend, including the registration
statement on Form S-4 and exhibits, at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's regional offices located
at 7 World Trade Center, New York, New York 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain copies
from the Public Reference Section of the Commission at 1-800-SEC-0330 for more
information on the public reference rooms. The Commission also maintains a
website at http://www.sec.gov which contains our reports, registration
statements and information statements and other information.
KeraVision has filed with the Commission a registration statement on Form S-
4 under the Securities Act with respect to its offering of common stock. This
prospectus, which constitutes part of the registration statement, does not
contain all of the information in the registration statement on Form S-4. You
will find additional information about KeraVision and the KeraVision common
stock in the registration statement on Form S-4. You should read the documents
which are filed as exhibits to the registration statement or otherwise filed by
us with the Commission.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
KeraVision and Transcend believe that some of the statements contained in
this prospectus are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 and are considered
prospective. These include statements contained under "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and "Business." The following statements are or may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995:
. statements before, after or including the words "may," "will," "could,"
"should," "believe," "expect," "future," "potential," "anticipate,"
"intend," "plan," "estimate," or "continue" or the negative or other
variations of these words; and
. other statements about matters that are not historical facts.
Neither KeraVision nor Transcend may be able to achieve future results
covered by the forward-looking statements. The statements are subject to risks,
uncertainties and other factors that could cause actual results to differ
materially from the future results that the statements express or imply. Please
do not put undue reliance on these forward-looking statements, which speak only
as of the date of this prospectus.
86
<PAGE>
INDEX TO FINANCIAL STATEMENTS
KeraVision Inc.
<TABLE>
<S> <C>
Consolidated Balance Sheets as of December 31, 1998 and 1997.............. F-2
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996...................................................... F-3
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity..................................................... F-4
Consolidated Statements of Cash Flows--years ended December 31, 1998, 1997
and 1996................................................................. F-5
Notes to Consolidated Financial Statements................................ F-6
Report of Independent Auditors............................................ F-16
Transcend Therapeutics, Inc. (A Company in the Development Stage)
Balance Sheets as of December 31, 1998 and 1997........................... F-17
Statements of Operations for the years ended December 31, 1998, 1997 and
1996 and the period from January 1, 1993 (Commencement of Operations) to
December 31, 1998........................................................ F-18
Statements of Redeemable Preferred Stock and Stockholder's Equity for the
period from January 1, 1993 (Commencement of Operations) to December 31,
1998..................................................................... F-19
Statements of Cash Flows for the years ended December 31, 1998, 1997 and
1996 and the period from January 1, 1993 (Commencement of Operations) to
December 31, 1998........................................................ F-23
Notes to Financial Statements............................................. F-24
Report of Independent Auditors............................................ F-32
</TABLE>
F-1
<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 $20,520,000... 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-2
<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 dividend requirements:
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 net loss per
share.......................................... 12,686 12,528 12,342
</TABLE>
See accompanying notes.
F-3
<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:
Net loss........ -- -- -- -- (12,879) -- (12,879)
-------
Other
comprehensive
income, net of
tax:
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:
Net loss........ -- -- -- -- (19,396) -- (19,396)
-------
Other
comprehensive
income, net of
tax:
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:
Net loss........ -- -- -- -- (24,037) -- (24,037)
-------
Other
comprehensive
income, net of
tax:
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>
Notes
Receivable Total
From Stockholders'
Stockholders Equity
------------ -------------
<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:
Net loss........ -- (12,879)
Other
comprehensive
income, net of
tax:
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:
Net loss........ -- (19,396)
Other
comprehensive
income, net of
tax:
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:
Net loss........ -- (24,037)
Other
comprehensive
income, net of
tax:
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-4
<PAGE>
KERAVISION, INC.
Consolidated Statements Of Cash Flows
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-5
<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 KeraVision Intacs, 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
KeraVision 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 as of and for the year ended December 31, 1998, respectively.
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-
Acquisitions). 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. See Note 9--Subsequent Events.
Management's planned expenditures for 1999 exceed current cash, cash
equivalents and available-for-sale investments and the funds to be received
from the Transcend acquisition 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-6
<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-7
<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 (deficit). 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-8
<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 instrument $ 215 $ -- $ 215
Certificate of deposit.......................... 165 -- 165
Auction rate preferred.......................... 1,875 -- 1,875
Corporate debt securities....................... 4,859 2 4,861
------ ----- ------
Available-for-sale investment................... 7,114 2 7,116
Included in cash & 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 instrument...................... $ 2,574 $ -- $ 2,574
Certificate 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 & 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-9
<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
F-10
<PAGE>
KERAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$8.00 per share, after two years if the price of the Company's common stock
exceeds $16.00 per share. The 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-11
<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
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise at 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-12
<PAGE>
KERAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). Accordingly, no compensation cost has been
recognized for stock options granted in 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-13
<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-14
<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,
------------------
1997 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. Pending Acquisitions
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. This
transaction would be accounted for as a purchase of assets. Under the
agreement, Transcend will wind down its operations as a drug development
company and no Transcend employees will be retained after the closing of the
transaction. According to the terms of the agreement, Transcend will become a
wholly owned subsidiary of the Company. Transcend stockholders will receive
shares of KeraVision common stock with a value equal to the amount of net cash
of Transcend as of the closing date plus a premium expected to be 30 percent.
KeraVision's board members approved the transaction with Transcend because the
merger, including the premium being paid over the net cash book value of the
Transcend shares, provides KeraVision a source of cash on terms that are
favorable to current financing options available to KeraVision. Stockholders
representing a majority of the voting interest of Transcend have agreed to vote
in favor of the merger. In addition, KeraVision will be entitled to a breakup
fee of $500,000 if the agreement is terminated for certain reasons.
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-15
<PAGE>
KERAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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-16
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
BALANCE SHEETS
(in thousands, except par value and shares)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 2,643 $ 10,989
Funds held in escrow..................................... 7,010 --
Restricted cash.......................................... -- 5,805
Prepaid expenses and other current assets................ 69 161
Other assets............................................. 26 25
-------- --------
Total current assets....................................... 9,748 16,980
Property and equipment, net................................ -- 111
Patents and licenses, net.................................. -- 335
-------- --------
Total Assets............................................... $ 9,748 $ 17,426
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 38 $ 293
Accrued expenses........................................... 941 1,367
-------- --------
Total current liabilities.................................. 979 1,660
Stockholders' equity:
Common Stock, par value $0.01, 25,000,000 shares
authorized, 5,917,026 and 5,758,649 shares issued and
outstanding at December 31, 1998 and 1997,
respectively............................................ 59 58
Additional paid-in capital............................... 38,083 38,395
Deferred compensation.................................... (264) (707)
Deficit accumulated during the development stage......... (29,109) (21,980)
-------- --------
Total stockholders' equity................................. 8,769 15,766
-------- --------
Total liabilities and stockholders' equity................. $ 9,748 $ 17,426
======== ========
</TABLE>
See accompanying notes.
F-17
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Period
January 1, 1993
Years ended December (commencement of
31, operations) to
------------------------- December 31,
1998 1997 1996 1998
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
Research and development contract
revenues and license fees........ $ -- $ 5,000 $ -- $ 11,095
Operating expenses:
Research and development........ 3,439 4,510 1,968 19,780
General administration.......... 4,038 3,339 1,834 13,596
Loss on impairment and
disposition of assets.......... 365 -- -- 365
------- ------- ------- --------
Total operating expenses.......... 7,842 7,849 3,802 33,741
Other income (expense):
Interest income................. 713 588 30 1,581
Interest expense................ -- -- (355) (532)
------- ------- ------- --------
713 588 (325) 1,049
------- ------- ------- --------
Net loss.......................... $(7,129) $(2,261) $(4,127) $(21,597)
------- ------- ------- --------
Accretion of redeemable noncon-
vertible preferred stock......... -- (178) (5,080)
------- -------
Net loss to common stockholders... $(7,129) $(2,439) $(9,207)
======= ======= =======
Net loss per share--basic and di-
luted............................ $ (1.23) $ (0.75) $(11.94)
------- ======= =======
Weighted average shares outstand-
ing.............................. 5,777 3,267 771
======= ======= =======
</TABLE>
See accompanying notes.
F-18
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series B Series C Redeemable
Convertible Preferred Convertible Preferred Convertible Preferred Nonconvertible
Preferred Stock Preferred Stock Preferred Stock Preferred Stock Common Stock
--------------------- ----------------------- ------------------------ --------------------- ----------------
Number of Number of Number of Number of Number of
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
--------- ----------- ----------------------- ------------ ---------- --------- ----------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
Common Stock,
December 1992
($.01/share).... 44,109 441
Net loss........
--------- ----------- --------- ------------ ---------- ---------- ----- ----------- ------- -----
Balance at
December 31,
1993............ 44,109 441
April 1994:
Issuance of
Series A
Redeemable
Convertible
Preferred Stock
($1.00/share)...
Issuance of
Redeemable
Nonconvertible
Preferred Stock
for technology
($1,000/share).. 6,500,000 $ 6,500,000 9,000 $ 489,124
Issuance of
Common Stock for
technology and
payment of
expenses
($.50/share).... 715,025 7,150
Issuance of
Series A
Preferred Stock
Warrants
($.01/share)....
Accretion of
Redeemable
Nonconvertible
Preferred
Stock........... 1,110,816
Net loss........
--------- ----------- --------- ------------ ---------- ---------- ----- ----------- ------- -----
Balance at
December 31,
1994............ 6,500,000 6,500,000 9,000 1,599,940 759,134 7,591
Cancellation of
Cornell's common
shares.......... (7,025) (70)
Extinguishment
of Series A
Preferred
Warrants........
Conversion of
options to
common shares... 11,197 112
Accretion of
Redeemable
Nonconvertible
Preferred
Stock........... 1,481,088
Net loss........
--------- ----------- --------- ------------ ---------- ---------- ----- ----------- ------- -----
Balance at
December 31,
1995............ 6,500,000 6,500,000 9,000 3,081,028 763,306 7,633
Issuance of
Series A
Redeemable
Convertible
Preferred Stock
in January
1996............ 130,000 130,000
Issuance of
Series A
Redeemable
Convertible
Preferred Stock
in lieu of
interest in
January, May and
September 1996
($1.00/share)... 496,437 496,437
Issuance of
Series B
Redeemable
Convertible
Preferred Stock
in lieu of
interest in
September 1996
($1.50/share)... 24,109 $ 36,164
Conversion of
Senior Secured
Convertible Note
to Series B
Redeemable
Convertible
Preferred Stock
in September
1996
($1.50/share)... 666,666 999,999
Conversion of
Redeemable
Convertible
Senior Secured
Convertible Note
to Series A
Redeemable
Convertible
Preferred Stock
in September
1996
($1.00/share)... 2,000,000 2,000,000
Accretion of
Redeemable
Nonconvertible
Preferred
Stock........... 999,734
</TABLE>
F-19
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY--(Continued)
<TABLE>
<CAPTION>
Series A Series B Series C Redeemable
Convertible Preferred Convertible Preferred Convertible Preferred Nonconvertible
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
---------------------- ----------------------- ----------------------- ---------------------
Number of Number of Number of Number of
Shares Amount Shares Amount Shares Amount Shares Amount
---------- ---------- ----------------------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
Series C
Redeemable
Convertible
Preferred Stock
in September
1996
($2.35/share)... 851,064 $ 2,000,000
Conversion of
Redeemable
Nonconvertible
Preferred Stock
to Series C
Redeemable
Convertible
Preferred Stock
in September
1996
($2.35/share)... 3,404,255 8,000,000 (9,000) (4,080,762)
Conversion of
Series A
Redeemable
Convertible
Warrants to
Series A
Preferred Stock
in September
1996
($.02/share).... 789,893 13,750
Exercise of
stock options...
Grant of stock
options.........
Amortization of
deferred
compensation
expense.........
Net loss........
---------- ---------- --------- ----------- ---------- ----------- -------- ----------
Balance at
December 31,
1996............ 9,916,330 9,140,187 690,775 1,036,163 4,255,319 10,000,000 -- --
---------- ---------- --------- ----------- ---------- ----------- -------- ----------
Exercise of
stock options...
Issuance of
Redeemable
Nonconvertible
Preferred Stock
and Common Stock
warrants........ 103,900 861,000
Accretion of
Redeemable
Nonconvertible
Preferred
Stock........... 178,000
Sale of
Registered
Common Stock in
IPO.............
Conversion of
Series
Redeemable
Convertible
Preferred Stock
and Redeemable
Nonconvertible
Preferred Stock
into Common
Stock at IPO.... (9,916,330) (9,140,187) (690,775) (1,036,163) (4,255,319) (10,000,000) (103,900) (1,039,000)
Amortization of
deferred
compensation....
Net loss........
---------- ---------- --------- ----------- ---------- ----------- -------- ----------
Balance at
December 31,
1997............ -- -- -- -- -- -- -- --
---------- ---------- --------- ----------- ---------- ----------- -------- ----------
Exercise of
stock options...
Stock option
grants..........
Amortization of
deferred
compensation....
Forfeiture of
compensatory
stock options...
Net loss........
---------- ---------- --------- ----------- ---------- ----------- -------- ----------
Balance at
December 31,
1998............ -- $ -- -- $ -- -- $ -- -- $ --
========== ========== ========= =========== ========== =========== ======== ==========
<CAPTION>
Common Stock
-----------------
Number of
Shares Amount
--------- -------
<S> <C> <C>
Issuance of
Series C
Redeemable
Convertible
Preferred Stock
in September
1996
($2.35/share)...
Conversion of
Redeemable
Nonconvertible
Preferred Stock
to Series C
Redeemable
Convertible
Preferred Stock
in September
1996
($2.35/share)...
Conversion of
Series A
Redeemable
Convertible
Warrants to
Series A
Preferred Stock
in September
1996
($.02/share)....
Exercise of
stock options... 16,075 160
Grant of stock
options.........
Amortization of
deferred
compensation
expense.........
Net loss........
--------- -------
Balance at
December 31,
1996............ 779,381 7,793
--------- -------
Exercise of
stock options... 57,099 571
Issuance of
Redeemable
Nonconvertible
Preferred Stock
and Common Stock
warrants........
Accretion of
Redeemable
Nonconvertible
Preferred
Stock...........
Sale of
Registered
Common Stock in
IPO............. 1,800,000 18,000
Conversion of
Series
Redeemable
Convertible
Preferred Stock
and Redeemable
Nonconvertible
Preferred Stock
into Common
Stock at IPO.... 3,122,167 31,222
Amortization of
deferred
compensation....
Net loss........
--------- -------
Balance at
December 31,
1997............ 5,758,647 57,586
--------- -------
Exercise of
stock options... 158,379 --
Stock option
grants..........
Amortization of
deferred
compensation....
Forfeiture of
compensatory
stock options...
Net loss........
--------- -------
Balance at
December 31,
1998............ 5,917,026 $59,917
========= =======
</TABLE>
F-20
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY--(Continued)
<TABLE>
<CAPTION>
Series A Preferred Cumulative Deficit
Stock Warrants Accretion on Accumulated Treasury Stock
------------------- Additional Redeemable During ----------------
Number of Paid-in Nonconvertible Deferred Development Number of
Warrants Amount Capital Preferred Stock Compensation Stage Shares Amount
--------- -------- ---------- --------------- ------------ ----------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common
Stock, December 1992
($.01/share)............ $ (436)
Purchase of Treasury
Stock................... $ (28,274) 4,959 $(2)
Net loss................
--------- -------- ---------- ----------- ---- ----------- ----- ---
(436) (28,274)
Balance at December 31,
1993.................... 4,959 (2)
April 1994:
Issuance of Common Stock
from treasury for
services................ 4,959 2
Issuance of Series A
Redeemable Convertible
Preferred Stock
($1.00/share)...........
Issuance of Redeemable
Nonconvertible Preferred
Stock for technology
($1,000/share)..........
Issuance of Common Stock
for technology and
payment of expenses
($.50/share)............ 350,363
Issuance of Series A
Preferred Stock Warrants
($.01/share)............ 1,625,000 $ 16,250
Accretion of Redeemable
Nonconvertible Preferred
Stock................... $(1,110,816)
Net loss................ (3,602,892)
--------- -------- ---------- ----------- ---- ----------- ----- ---
Balance at December 31,
1994.................... 1,625,000 16,250 349,927 (1,110,816) (3,631,166)
Cancellation of
Cornell's common
shares.................. (3,442)
Extinguishment of Series
A Preferred Warrants.... (250,000) (2,500) 2,500
Conversion of options to
common shares........... 5,486
Accretion of Redeemable
Nonconvertible Preferred
Stock................... (1,481,088)
Net loss................ (4,449,987)
--------- -------- ---------- ----------- ---- ----------- ----- ---
Balance at December 31,
1995.................... 1,375,000 13,750 354,471 (2,591,904) (8,081,153) -- --
Issuance of Series A
Redeemable Convertible
Preferred Stock in
January 1996............
Issuance of Series A
Redeemable Convertible
Preferred Stock in lieu
of interest in January,
May and September 1996
($1.00/share)...........
Issuance of Series B
Redeemable Convertible
Preferred Stock in lieu
of interest in September
1996 ($1.50/share)......
Conversion of Senior
Secured Convertible Note
to Series B Redeemable
Convertible Preferred
Stock in September 1996
($1.50/share)...........
Conversion of Redeemable
Convertible Senior
Secured Convertible Note
to Series A Redeemable
Convertible Preferred
Stock in September 1996
($1.00/share)...........
Accretion of Redeemable
Nonconvertible Preferred
Stock................... (999,734)
</TABLE>
F-21
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)--
(Continued)
<TABLE>
<CAPTION>
Series A Preferred Cumulative Deficit
Stock Warrants Accretion on Accumulated Treasury Stock
------------------- Additional Redeemable During ----------------
Number of Paid-in Nonconvertible Deferred Development Number of
Warrants Amount Capital Preferred Stock Compensation Stage Shares Amount
---------- ------- ------------ --------------- ------------ ------------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series C
Redeemable Convertible
Preferred Stock in
September 1996
($2.35/share)...........
Conversion of Redeemable
Nonconvertible Preferred
Stock to Series C
Redeemable Convertible
Preferred Stock in
September 1996
($2.35/share)........... (3,591,638) (7,510,876)
Conversion of Series A
Redeemable Convertible
Warrants to Series A
Preferred Stock in
September 1996
($.02/share)............ (1,375,000) (13,750) 7,877
Exercise of stock
options................. $(1,091,500)
Grant of stock options.. 1,091,500 113,689
Amortization of deferred
compensation expense....
Net loss................ (4,126,930)
---------- ------- ------------ ----------- ----------- ------------ ----- ----
Balance at December 31,
1996.................... -- -- 1,453,848 -- (977,802) (19,718,959) -- --
---------- ------- ------------ ----------- ----------- ------------ ----- ----
Exercise of stock
options................. 31,710
Issuance of Redeemable
Nonconvertible Preferred
Stock and Common Stock
warrants................ 3,346 (3,346)
Accretion of Redeemable
Nonconvertible Preferred
Stock................... (178,000)
Sale of Registered
Common Stock in IPO..... 15,722,000
Conversion of Series
Redeemable Convertible
Preferred Stock and
Redeemable
Nonconvertible Preferred
Stock into Common Stock
at IPO.................. 21,184,127 178,000
Amortization of deferred
compensation............ 273,897
Net loss................ (2,260,679)
---------- ------- ------------ ----------- ----------- ------------ ----- ----
Balance at December 31,
1997.................... -- -- 38,395,031 -- (707,251) (21,979,636) -- --
---------- ------- ------------ ----------- ----------- ------------ ----- ----
Exercise of stock
options................. 80,232
Grant of stock options.. 34,878
Amortization of deferred
compensation............ 238,369
Forfeiture of
compensatory stock
options................. (427,457) 204,823
Net loss................ (7,128,836)
---------- ------- ------------ ----------- ----------- ------------ ----- ----
Balance at December 31,
1998.................... -- $ -- $(38,082,684) -- (264,059) $(29,108,472) -- $--
========== ======= ============ =========== =========== ============ ===== ====
</TABLE>
See accompanying notes.
F-22
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period
January 1, 1993
(commencement of
December 31, operations) to
------------------------- December 31,
1998 1997 1996 1998
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss........................... $(7,129) $(2,261) $(4,127) $(21,598)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation....................... 42 25 13 101
Amortization....................... 50 54 54 253
Issuance of Preferred Stock in lieu
of interest payments.............. -- -- 533 533
Amortization of deferred
compensation expense.............. 238 274 114 626
Forfeiture of compensatory stock
options........................... (222) -- -- (222)
Non-cash severance expense......... 8 -- -- 8
Loss on disposition of property and
equipment......................... 79 -- -- 84
Impairment of intangible assets.... 286 -- -- 286
Expenses incurred with related
party that were settled with the
issuance of Common Stock.......... -- -- -- 304
Change in operating assets and
liabilities:
Restricted cash.................... 5,805 (5,805) -- --
Funds held in escrow............... (7,010) -- -- (7,010)
Prepaid expenses and other current
assets............................ 92 (121) (1) (69)
Other assets....................... (1) 16 13 (22)
Accounts payable, deferred offering
costs and accrued expenses........ (646) 1,036 146 940
Interest payable to related party.. -- -- (178) --
------- ------- ------- --------
Net cash used in operating
activities........................ (8,408) (6,782) (3,433) (25,786)
Investing activities:
Purchase of property and
equipment......................... (52) (90) (8) (229)
Proceeds from sale of equipment.... 34 -- 1 36
------- ------- ------- --------
Net cash used in investing
activities........................ (18) (90) (7) (193)
Financing activities:
Proceeds from issuance of debt..... -- -- 1,000 3,170
Payment on note payable to related
party............................. -- -- -- (170)
Offering costs..................... -- (590) (335) (924)
Issuance of Series A Preferred
Stock Warrants.................... -- -- -- 16
Issuance of Series A Redeemable
Convertible Preferred Stock....... -- -- 130 6,630
Issuance of Series C Redeemable
Convertible Preferred Stock....... -- -- 2,000 2,000
Issuance of Redeemable Non-
Convertible Preferred Stock....... -- 1,039 -- 1,039
Issuance of Common Stock........... -- 16,740 -- 16,740
Proceeds from exercise of stock
options........................... 80 32 8 123
Purchase of treasury stock......... -- -- -- (2)
------- ------- ------- --------
Net cash provided by financing
activities........................ 80 17,221 2,803 28,622
------- ------- ------- --------
Increase (decrease) in cash and
cash equivalents.................. (8,346) 10,349 (637) 2,643
Cash and cash-equivalents at
beginning of period............... 10,989 640 1,277 --
------- ------- ------- --------
Cash and cash-equivalents at end of
period............................ $ 2,643 $10,989 $ 640 $ 2,643
======= ======= ======= ========
Supplemental Disclosures for Non-
Cash Activities:
Non-Cash Financing Transactions....
Conversion of Senior Secured
Convertible Notes to Series B
Redeemable Convertible Preferred
Stock............................. $ 1,000
Conversion of Senior Secured
Convertible Notes to Series A
Redeemable Convertible Preferred
Stock............................. $ 2,000
Conversion of Series A Redeemable
Convertible Stock Warrants to
Series A Preferred Stock.......... $ 14
</TABLE>
See accompanying notes.
F-23
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation
Company
Transcend Therapeutics, Inc. (the "Company") was incorporated on December
23, 1992, and began operations in January 1993. The Company is a development-
stage enterprise, as defined in Statement of Financial Accounting Standards No.
7, and has been devoting its efforts to developing novel pharmaceuticals for
the treatment of diseases caused by oxidative stress and resultant tissue
damage, with a particular therapeutic focus on critical care. The Company had
begun a Phase III clinical trial of its lead product candidate, Procysteine, to
determine its safety and efficacy in the treatment of acute respiratory
distress syndrome ("ARDS"). In 1998, the Company suspended the trial following
a recommendation of an independent Safety Monitoring Board. The Safety
Monitoring Board had determined, following a review of preliminary mortality
data, that the incidence of all-cause mortality in patients receiving
Procysteine was higher than the incidence in patients receiving a placebo.
Subsequent to this recommendation, the Company ceased all of its developmental
activities, and focused its efforts on securing an acquisition candidate. In
December 1998, the Company agreed to be acquired by KeraVision, Inc.
("KeraVision").
2. Significant Accounting Policies
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the period. Actual
results could differ from those estimates.
Restricted Cash and Funds Held in Escrow
Pursuant to the Development and License Agreement (the "BI Agreement") with
Boehringer Ingelheim, GmbH ("BI") signed in February 1997, the Company was
restricted as to the manner in which it can use certain proceeds the Company
received from BI. According to the BI Agreement, the Company must use the
BI license fee of $5,000,000 and an equity investment from BI of $5,000,000
(received in the Company's initial public offering) exclusively for ARDS
development expenses. Through December 31, 1998, the Company has incurred $9.4
million of ARDS development expenses under the BI Agreement. On March 3, 1999,
the Company and BI decided to terminate the BI Agreement by mutual consent. The
parties released each other from any and all obligation under the BI Agreement
and BI acknowledged the Company's sole ownership of any remaining restricted
funds from the license fee and equity investment from BI. Consequently, none of
the Company's cash is restricted exclusively for ARDS development expenses at
December 31, 1998 (see Note 5).
Pursuant to the pending merger agreement with KeraVision, the Company placed
$7 million in an escrow account with a third-party escrow agent on December 22,
1998. Since Transcend alone may terminate the merger only in certain limited
conditions, the Company recorded the $7 million, plus accrued interest thereon,
as escrow cash at December 31, 1998.
Cash and Cash Equivalents
The Company considers all investments with an original maturity of three
months or less on their acquisition date to be cash equivalents.
F-24
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation has been provided
using the straight-line method over the estimated useful lives of five years
for all assets. During 1998, the Company recognized a loss on the disposal of
its property and equipment (see Note 3).
The cost and accumulated depreciation of property and equipment at December
31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- --------
<S> <C> <C>
Property and equipment..................................... $-- $165,600
Less accumulated depreciation.............................. -- 54,992
---- --------
Property and equipment, net................................ $-- $110,608
==== ========
</TABLE>
Intangible Assets
Acquired patents and licenses are recorded at cost and have been amortized
using the straight-line method over the estimated useful lives of the related
assets, subject to the maximum legal life of the patents and licenses. The
costs of internally generated patents or patent applications are expensed in
the period incurred as research and development expenses. During 1998, the
Company recognized an impairment charge on its intangible assets (see Note 3).
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts payable and accrued expenses. Fair value of issued equity instruments
is based upon negotiated prices and includes cash and the fair value of other
consideration received.
Revenue Recognition
Research and development contract revenues and license fees are recognized
as earned and represent, in 1993, reimbursement of the Company's expenditures
pursuant to the terms of an agreement with Clintec Nutrition Company
("Clintec") whereby the Company was reimbursed $6,095,000 for expenditures it
incurred. In 1997, the Company recognized as revenue a non-refundable
$5,000,000 license fee received from BI in exchange for which the Company
granted BI exclusive rights to various patents related to intravenous
Procysteine.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") in accounting for its
stock-based compensation plans. The Company has adopted the disclosure
provisions only of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("FAS 123").
Net Loss Per Share
Net loss per share is presented in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic
net loss per share is computed based on the weighted average number of shares
of common stock outstanding. Diluted net loss per share does not differ from
basic net loss per share since potential common shares to be issued upon
exercise of stock options are anti-dilutive for the periods presented.
F-25
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company provides for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under
SFAS 109, the liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined 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.
3. Restructuring
In the third quarter of fiscal 1998, the Company recorded a restructuring
charge of approximately $520,000, which is included in general and
administrative expenses. The charge related entirely to employee termination
costs resulting from an employee reduction plan (the "Reduction Plan") approved
in September 1998, in which ten employees and the Company's Chief Executive
Officer were notified of their fixed benefit termination arrangement. In total,
fifteen employees are subject to the Reduction Plan, which is expected to be
complete in early 1999. In the fourth quarter of 1998, the remaining four
employees were notified of their specific benefit arrangements. Approximately
$490,000 in termination charges were accrued in the fourth quarter to cover
those arrangements, including a probable commitment of up to approximately
$400,000 in termination and bonus related benefits that are variable based on
the Company's ability to find an acquisition partner. At December 31, 1998,
approximately $578,000 of restructuring charges remained in accrued expenses.
In the fourth quarter of 1998, following a clinical hold order by the
Federal Drug Administration on human clinical testing of oral Procysteine for
the treatment of amyotrophic lateral sclerosis, management ceased all
development activities related to Procysteine and determined that the Company's
patents and licenses related to Procysteine had declined in value. Management
assessed the fair value of the patents and licenses, and concluded that there
would be no future cash flows from these assets. Accordingly, the Company
recognized an impairment loss of approximately $286,000, which represented the
carrying value of the patents and licenses at the time of the assessment. In
the third and fourth quarters of 1998, the Company recognized an aggregate
impairment loss of $79,000 related to a write-down of property and equipment. A
decision was made by management to dispose of all of the Company's property and
equipment as a result of the Company's change in operational objectives
discussed in Note 1. As a result, the projected future cash flows from the
property and equipment were less than the carrying value of the assets, and an
impairment loss was recognized to record the property and equipment at its fair
value. As of December 31, 1998, the Company has disposed of all of its property
and equipment.
The recognition of these impairment losses was in accordance with the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of.
F-26
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Accrued Expenses
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- ----------
<S> <C> <C>
Accrued clinical costs............................... $ 90,000 $1,172,000
Accrued vacation..................................... 31,000 82,000
Accrued termination costs............................ 578,000 --
Accrued exit costs................................... 67,000 --
Accrued transaction costs............................ 75,000 --
Accrued other........................................ 100,000 113,000
-------- ----------
Total accrued expenses............................... $941,000 $1,367,000
======== ==========
</TABLE>
5. Senior Secured Convertible Notes
On September 13, 1995, the Company sold Series A Notes in the aggregate
principal amount of $2,000,000 to certain institutional investors. On May 29,
1996, the Company issued Series B Convertible Notes in the aggregate principal
amount of $1,000,000 to certain institutional investors. The Series A Notes
were convertible into shares of Series A Convertible Preferred Stock at one
share per $5.00 of principal outstanding. The Series B Notes were convertible
into shares of Series B Preferred stock at one share per $7.50 of principal
outstanding.
Prior to conversion, each note was to mature on January 15, 1997, bearing
interest of 30% per annum, payable every four months beginning January 13,
1996. Interest payments were made in the form of Series A and B Convertible
Preferred Stock. All principal and accrued interest were converted into shares
of Series A and B Convertible Preferred Stock upon the closing of the issuance
of the Series C Convertible Preferred Stock as described in Note 7.
6. Income Taxes
As of December 31, 1998, the Company has net operating loss carryforwards of
approximately $19,365,000. These loss carryforwards are available to reduce
future federal and state income taxes payable to the extent permitted under the
Internal Revenue Code, and expire in varying amounts through 2018.
Deferred income taxes reflect the net tax effect of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company believes
that, based on a number of factors, including the Company's net losses incurred
since its inception, the available objective evidence creates sufficient
uncertainty regarding the realization of the deferred tax assets such that a
full valuation allowance has been recorded. The Company has the following
deferred tax assets at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss............................... $7,700,000 $4,500,000
Deferred compensation............................ 300,000 155,000
Other accruals................................... 20,000 41,000
R&D tax credit................................... 540,000 2,550,000
---------- ----------
Total deferred tax assets......................... 8,560,000 7,246,000
Valuation allowance............................... (8,560,000) (7,246,000)
---------- ----------
Deferred income taxes, net........................ $ -0- $ -0-
========== ==========
</TABLE>
F-27
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Stockholders' Equity
Common Stock
On April 5, 1994, the Company acquired a direct license from Cornell
Research Foundation ("Cornell") to the Procysteine and related technologies for
the issue of 35,025 shares of Common Stock. In accordance with the same
agreement, the Company issued 680,000 shares of Common Stock to Clintec as part
consideration for the acquisition of the Procysteine and related technologies.
The technology has been recorded at the Common Stock's fair value of $.50 per
share at the time of the transaction.
In relation to the acquisition of Covered Technology from Clintec on April
5, 1994, Clintec agreed to forgive and forever discharge the Company from any
obligation to repay an outstanding amount due for expenses incurred of $304,446
due to Clintec. The Company recorded this amount as a contribution to capital
during 1994.
In August 1996, the Company's Board of Directors approved a one-for-five
reverse stock split of its Common Stock. There was a delay in filing the
necessary amendments to the Company's charter and the split was not effective
until February 1997. All common share and per share amounts have been adjusted
retroactively to reflect the stock split.
In July 1997, the Company completed its initial public offering of 1,800,000
shares of Common Stock. In connection with the completion of the offering, the
Company converted all of its outstanding shares of Series A, B and C
Convertible Preferred Stock and Redeemable Non-Convertible Preferred Stock to
an aggregate of 3,122,167 shares of Common Stock.
The Company has reserved 51,950 shares of Common Stock for issuance upon
exercise of Common Stock warrants, and 833,145 shares of Common Stock for
issuance upon exercise of stock options granted under the 1994 Equity Incentive
Plan.
Common Stock Warrants
On October 28, 1994, as additional consideration for the execution of the
lease on the Company's office space, the Company issued Common Stock warrants
to its lessor to purchase 5,000 shares of Common Stock, exercisable through
October 28, 1999, at $5.00 per share. These warrants were canceled in 1998 in
connection with the termination of the Company's office lease (see Note 9).
At December 31, 1998, the Company has Common Stock warrants outstanding to
purchase 51,950 shares of Common Stock, exercisable through March 3, 2002, at
$10.00 per share to certain affiliated parties.
Preferred Stock
The Company's Board of Directors is authorized to issue up to 5,000,000
additional shares of Preferred Stock in one or more series, without further
stockholder approval. Each such series of Preferred Stock would have such
number of shares, designations, preferences, voting powers, qualifications and
special and relative rights or privileges that the Board of Directors may from
time to time determine, which may include, among others, dividend rights,
voting rights, redemption and sinking fund provisions, liquidation preferences
and conversion rights. Mandatory redeemable preferred stock is recorded upon
issuance at fair value, net of issuance costs, and periodically accreted to
redemption value using the interest method.
F-28
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Series A Redeemable Convertible Preferred Stock
During 1994, the Company sold 6,500,000 shares of Series A Redeemable
Convertible Preferred Stock ("Series A Stock") for $6,500,000. The Series A
Stock was converted into 1,983,255 shares of Common Stock upon the closing of
the Company's Initial Public Offering in July 1997.
Series B and C Redeemable Convertible Preferred Stock
On September 3, 1996, the Company sold an aggregate of 851,064 shares of its
Series C Convertible Preferred Stock to a group of investors for $2.0 million.
As part of the same transaction, the sole holder (Clintec) of 9,000 shares of
the Company's Redeemable Non-convertible Preferred Stock exchanged such shares
for 3,404,255 shares of Series C Convertible Preferred Stock. In addition, $3.1
million in aggregate principal amount of, and interest on, the Series A Notes
and Series B Notes were converted into an aggregate of 2,098,631 shares of
Series A Convertible Preferred Stock and 690,775 shares of Series B Convertible
Preferred Stock. The notes were scheduled to mature on January 15, 1997,
bearing interest of 30% per annum.
The Series B and C Preferred Stock were converted into 138,155 and 896,861
shares of Common Stock, respectively, of the Company upon the closing of the
initial public offering in July 1997.
Series A Redeemable Convertible Preferred Warrant Shares
In conjunction with the issuance of the Series A Redeemable Convertible
Preferred Stock, the Company sold 1,625,000 warrants to purchase Series A
Redeemable Convertible Preferred Stock at a price per share equal to the lesser
of (i) the per share purchase price of the securities issued in the next
financing round or (ii) $5.00. During 1995, 250,000 warrant shares were
canceled by the Company in accordance with the terms and conditions stipulated
in the April 4, 1994 Series A Preferred Stock Purchase Warrants agreement, as a
result of not participating in the private placement offering in September
1995.
In connection with the issuance of the Series C Convertible Preferred Stock,
the holders of the Series A Preferred Stock warrants (Series A warrants)
elected to surrender the Series A warrants and receive Series A
Convertible Preferred Stock equivalent to the difference between the deemed
fair market value of the Series C Preferred Stock ($2.35 per share) and the
exercise price of the Series A warrants ($1.00 per share) multiplied by the
outstanding Series A warrants (1,375,000). The resulting aggregate fair market
value of the Series A Preferred Stock warrants received converted into 789,983
shares of Series A Convertible Preferred Stock and were issued upon the net
exercise of such warrants.
All of the outstanding shares of Series A, B and C Convertible Preferred
Stock were converted into Common Stock upon the closing of the Company's
initial public offering in July 1997.
Redeemable Nonconvertible Preferred Stock
The Company had issued 9,000 shares of Redeemable Nonconvertible Preferred
Stock to Clintec as part consideration for the acquisition of the Procysteine
and related technologies at its fair value of approximately $500,000 on April
5, 1994. The Redeemable Nonconvertible Preferred Stock was redeemable, upon
certain conditions at the option of the holder, at a price of $1,000 per share
plus any unpaid dividends which accrued at a rate of $70 per share per annum.
The Redeemable Nonconvertible Preferred Stock had a liquidation preference over
Common Stock of $1,000 per share, plus any accrued, but unpaid, dividends. As
part of the September 3, 1996 financing transaction, the holders exchanged the
Redeemable Nonconvertible Preferred Stock for 3,404,255 of Series C Preferred
Stock valued at $8 million by the Company. The Company recorded
F-29
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
the difference of approximately $4 million between the carrying value of the
Redeemable Nonconvertible Preferred Stock and the value of the Series C
Preferred Stock issued in exchange thereof as a charge to accumulated deficit
and an adjustment to net loss to common stockholders in 1996.
In February 1997, the Company issued 1,039,000 shares of Redeemable Non-
convertible Preferred Stock and warrants to purchase 51,950 shares of Common
Stock. The shares of Redeemable Non-convertible Preferred Stock were exchanged
for 103,896 shares of Common Stock upon the closing of the initial public
offering in July 1997.
8. Stock Option Plan
In 1994, the Company adopted its 1994 Equity Incentive Plan (the "Plan"), as
amended in 1998. The Plan authorizes the Board of Directors to grant stock
options to purchase up to an aggregate of 1,075,891 shares of Common Stock.
Stock options granted under the Plan may qualify as "incentive stock options"
under Section 422 of the Internal Revenue Code. The price at which shares may
be purchased with an option shall be specified by the Board at the date the
option is granted, but in the case of an incentive stock option, shall not be
less than the fair market value on the date of grant. The duration of any
option shall be specified by the Board, but no option designated as an
incentive stock option may be exercised beyond ten years from the date of
grant. Options granted under the Plan vest ratably over two to four years
beginning after one year of service.
During fiscal year 1996, the Company recorded an increase to additional-
paid-in capital and a corresponding charge to deferred compensation to
recognize the aggregate difference between the deemed fair market value for
accounting purposes of the stock options at the date of grant and the option
exercise price. The deferred compensation is being amortized over the option
vesting period. During the year ended December 31, 1998, the Company reversed
compensation expense related to the amortization of deferred compensation as a
result of forfeited stock options. In addition, during the year ended December
31, 1998, the Company settled a $30,000 liability with third party vendor
through the issuance of stock options. The fair value of the stock options, as
calculated using the Black-Scholes pricing model, resulted in additional
expense of $4,877 during 1998. If the proposed merger between the Company and
KeraVision is consummated, all of the stock options and warrants of the Company
outstanding at the time of the merger will be canceled.
The following table presents the activity of the Plan for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding options at beginning of
year.................................... 639,424 $5.25 370,324 $1.19
Granted.................................. 7,000 0.70 353,568 8.45
Exercised................................ (158,377) 0.52 (57,099) 0.54
Terminated............................... (329,004) 7.67 (27,369) 0.99
-------- ----- ------- -----
Options outstanding at end of year....... 159,043 $4.74 639,424 $5.25
======== ===== ======= =====
Exercisable at end of year............... 111,430 $3.38 221,519 $1.06
-------- -------
Available for grant at end of year....... 674,102 52,098
======== =======
Weighted average fair value per share of
options granted during the year......... $4.93 $2.93
===== =====
</TABLE>
F-30
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The weighted average remaining contractual life of options outstanding at
December 31, 1998 is 6.4 years.
Pro forma information is required by SFAS 123, and has been determined as
if the Company has accounted for employee stock options under the fair value
method. The pro forma net loss to common stockholders for the years ended
December 31, 1998, 1997 and 1996 was approximately $(7,451,000), $(2,600,000)
and $(9,300,000), respectively. The pro forma net loss per share-basic and
diluted to Common stockholders for the years ended December 31, 1998, 1997 and
1996 was $(1.25), $(0.80) and $(12.06), respectively. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the option vesting period, and is net of the amount recorded for
amortization of deferred compensation expense by the Company.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model with an estimated weighted-average life of
three to six years from the date of grant, assuming a risk free interest rate
of 5% to 7% and a volatility factor of .23 on the expected market price of the
Company's common stock. At this time management does not expect to pay any
dividends to stockholders during the vesting period of the options, and
therefore, has excluded such assumption from determining fair value of the
options.
The effects on 1998, 1997 and 1996 pro forma net loss of expensing the
estimated fair value of stock options are not necessarily representative of
the effects on reporting the results of operations for future years as the
periods presented include only one, two and three years of option grants under
the Plan.
9. Commitments and Contingencies
The Company leases office space and other equipment under various
noncancelable operating leases. Rent expense recognized under these leases
amounted to approximately $233,000, $203,000 and $199,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
The Company's office lease was scheduled to expire in fiscal 1999. However,
in November 1998, the Company and its lessor terminated the office lease
effective on December 31, 1998. At December 31, 1998, the Company is no longer
obligated to pay any amounts under its terminated office lease.
At December 31, 1998, the Company has recognized a liability of
approximately $67,000 to settle its commitment with respect to certain
equipment operating leases. The Company has no other future minimum lease
payments under noncancelable lease agreements.
The Company must pay KeraVision a $500,000 termination fee if the merger
agreement is terminated by KeraVision for cause.
10. Defined Contribution Plan
The Company had a defined contribution 401 (k) plan (the "Defined
Contribution Plan"), which covered substantially all employees. The Defined
Contribution Plan permitted participants to make contributions from 1% to 15%
of their compensation. In addition, the Company could have contributed to the
Defined Contribution Plan at its discretion. The Company made no contributions
to the Defined Contribution Plan during the years ended December 31, 1998,
1997 and 1996, respectively. The Company terminated the Defined Contribution
Plan effective November 30, 1998 and all funds were dispersed to the employees
in accordance with Internal Revenue Service guidelines governing defined
contribution plan terminations.
F-31
<PAGE>
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Transcend Therapeutics, Inc.
We have audited the accompanying balance sheets of Transcend Therapeutics,
Inc. (a company in the development stage) (the Company) as of December 31, 1998
and 1997, and the related statements of operations, redeemable preferred stock
and stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998 and the period January 1, 1993 (commencement of
operations) to 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 financial statements referred to above present fairly,
in all material respects, the financial position of Transcend Therapeutics,
Inc. (a company in the development stage) at December 31, 1998 and 1997, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998 and the period January 1, 1993 (commencement
of operations) to December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 4, 1999
F-32
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
KERAVISION, INC.
KVTT ACQUISITION CORPORATION
AND
TRANSCEND THERAPEUTICS, INC.
Dated as of December 22, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I THE MERGER................................................... 1
1.1 The Merger.................................................... 1
1.2 Effective Time; Closing....................................... 1
1.3 Effect of the Merger.......................................... 2
1.4 Certificate of Incorporation; Bylaws.......................... 2
1.5 Directors and Officers........................................ 2
1.6 Effect on Capital Stock....................................... 2
1.7 Surrender of Certificates..................................... 3
1.8 No Further Ownership Rights in Company Common Stock........... 4
1.9 Lost, Stolen or Destroyed Certificates........................ 4
1.10 Tax and Accounting Consequences............................... 5
1.11 Taking of Necessary Action; Further Action.................... 5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF COMPANY................... 5
2.1 Organization of Company....................................... 5
2.2 Company Capital Structure..................................... 5
2.3 Obligations With Respect to Capital Stock..................... 5
2.4 Authority..................................................... 6
2.5 SEC Filings; Company Financial Statements..................... 7
2.6 Absence of Certain Changes or Events.......................... 7
2.7 Taxes......................................................... 8
2.8 Title to Properties; Absence of Liens and Encumbrances........ 9
2.9 Intellectual Property......................................... 9
2.10 Compliance; Permits; Restrictions............................. 11
2.11 Litigation.................................................... 11
2.12 Brokers' and Finders' Fees.................................... 12
2.13 Employee Benefit Plans........................................ 12
2.14 Environmental Matters......................................... 15
2.15 Agreements, Contracts and Commitments......................... 15
2.16 Change of Control Payments.................................... 16
2.17 Statements; proxy statement/prospectus........................ 16
2.19 Board Approval................................................ 17
2.20 Fairness Opinion.............................................. 17
2.21 Section 203 of the Delaware General Corporation Law Not
Applicable.................................................... 17
2.22 Customs....................................................... 17
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.... 17
3.1 Organization of Parent and Merger Sub......................... 17
3.2 Parent and Merger Sub Capital Structure....................... 18
3.3 Authority..................................................... 18
3.4 SEC Filings; Parent Financial Statements...................... 19
3.5 Absence of Certain Changes or Events.......................... 19
3.6 Statements; proxy statement/prospectus........................ 19
3.7 Valid Issuance................................................ 20
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME......................... 20
4.1 Conduct of Business by Company................................ 20
4.2 Conduct of Business by Parent................................. 22
4.3 No Right to Continued Employment or Benefits.................. 22
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE V ADDITIONAL AGREEMENTS........................................ 22
5.1 Proxy statement/prospectus; Registration Statement; Other
Filings....................................................... 22
5.2 Meeting of Company Stockholders............................... 23
5.3 Confidentiality; Access to Information........................ 23
5.4 No Solicitation............................................... 24
5.5 Public Disclosure............................................. 24
5.6 Reasonable Efforts Notification............................... 24
5.7 Third-Party Consents.......................................... 25
5.8 Indemnification............................................... 25
5.9 Nasdaq Listing................................................ 26
5.10 Affiliate Agreements.......................................... 26
5.11 Regulatory Filings; Reasonable Efforts........................ 26
5.12 Updates to Net Cash........................................... 26
ARTICLE VI CONDITIONS TO THE MERGER.................................... 27
6.1 Conditions to Obligations of Each Party to Effect the Merger.. 27
6.2 Additional Conditions to Obligations of Company............... 27
6.3 Additional Conditions to the Obligations of Parent and Merger
Sub........................................................... 28
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER.......................... 28
7.1 Termination................................................... 28
7.2 Notice of Termination Effect of Termination................... 30
7.3 Fees and Expenses............................................. 30
7.4 Amendment..................................................... 30
7.5 Extension; Waiver............................................. 30
ARTICLE VIII GENERAL PROVISIONS........................................ 31
8.1 Non-Survival of Representations and Warranties................ 31
8.2 Notices....................................................... 31
8.3 Interpretation of Knowledge................................... 32
8.4 Counterparts.................................................. 32
8.5 Entire Agreement; Third-Party Beneficiaries................... 32
8.6 Severability.................................................. 32
8.7 Other Remedies; Specific Performance.......................... 33
8.8 Governing Law................................................. 33
8.9 Rules of Construction......................................... 33
8.10 Assignment.................................................... 33
</TABLE>
INDEX OF EXHIBITS
<TABLE>
<C> <S>
Exhibit A Form of Voting Agreement
Exhibit B Form of Affiliate Agreement
Exhibit C Form of Escrow Agreement
</TABLE>
ii
<PAGE>
GREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of
December 22, 1998, among KeraVision, Inc., a Delaware corporation ("Parent"),
KVTT Acquisition Corporation., a Delaware corporation and a wholly owned
subsidiary of Parent ("Merger Sub"), and Transcend Therapeutics, Inc., a
Delaware corporation ("Company").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.2 below) and in accordance with the Delaware General
Corporation Law ("Delaware Law"), Parent and Company intend to enter into a
business combination transaction.
B. The board of directors of Company (i) has determined that the Merger (as
defined in Section 1.1) is advisable, fair to, and in the best interests of,
Company and its stockholders, (ii) has approved this Agreement, the Merger and
the other transactions contemplated by this Agreement and (iii) has determined
to recommend that the stockholders of Company adopt and approve this Agreement
and approve the Merger.
C. Concurrently with the execution of this Agreement, and as a condition and
inducement to Parent's willingness to enter into this Agreement, certain
affiliates of Company constituting holders of a majority of the outstanding
shares of Company Common Stock (the "Affiliates") are entering into Voting
Agreements in substantially the form attached hereto as Exhibit A (the "Voting
Agreements").
D. As a condition to the Merger, each Company Affiliate (as defined in
Section 5.10) shall enter into an Affiliate Agreement in substantially the form
attached hereto as Exhibit B (the "Affiliate Agreements").
E. Concurrently with the execution of this Agreement, and as a condition and
inducement to Parent's willingness to enter into this Agreement, Company,
Parent and Chase Manhattan Bank and Trust Company are entering into an Escrow
Agreement in substantially the form attached hereto a Exhibit C (the "Escrow
Agreement").
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of Delaware Law, Merger Sub shall be merged with and into
Company (the "Merger"), the separate corporate existence of Merger Sub shall
cease and Company shall continue as the surviving corporation. Company as the
surviving corporation after the Merger is hereinafter sometimes referred to as
the "Surviving Corporation."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of Delaware Law (the "Certificate of
Merger") (the time of such filing (or such later time as may be agreed in
writing by Company and Parent and specified in the Certificate of Merger) being
the "Effective Time") as soon as practicable on or after the Closing Date (as
herein defined). Unless the context otherwise requires, the term "Agreement" as
used herein refers collectively to this Agreement and Plan of Reorganization
and the Certificate of Merger. The closing of the
A-1
<PAGE>
Merger (the "Closing") shall take place at the offices of Venture Law Group, A
Professional Corporation, at a time and date to be specified by the parties,
which shall be no later than the second business day after the satisfaction or
waiver of the conditions set forth in Article VI, or at such other time, date
and location as the parties hereto agree in writing (the "Closing Date").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of
Delaware Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers and
franchises of Company and Merger Sub shall vest in the Surviving Corporation,
and all debts, liabilities and duties of Company and Merger Sub shall become
the debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of Merger
Sub, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation of the
Surviving Corporation; provided, however, that at the Effective Time the
Certificate of Incorporation of the Surviving Corporation shall be amended
so that the name of the Surviving Corporation shall be "Transcend
Therapeutics, Inc."
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be, at the Effective Time, the Bylaws of the
Surviving Corporation until thereafter amended.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or appointed
and qualified. The initial officers of the Surviving Corporation shall be the
officers of Merger Sub immediately prior to the Effective Time, until their
respective successors are duly appointed.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of Merger Sub, Company or the holders of any
of the following securities:
(a) Conversion of Company Common Stock. Each share of Common Stock, $0.01
par value per share, of Company (the "Company Common Stock") issued and
outstanding immediately prior to the Effective Time, other than any shares
of Company Common Stock to be canceled pursuant to Section 1.6(b), will be
canceled and extinguished and automatically converted (subject to Sections
1.6(e) and (f)) into the right to receive a number (the "Exchange Ratio")
of shares of Common Stock of Parent (the "Parent Common Stock") calculated
as described in Section 1.6(e) upon surrender of the certificate
representing such share of Company Common Stock in the manner provided in
Section 1.7 (or in the case of a lost, stolen or destroyed certificate,
upon delivery of an affidavit (and bond, if required) in the manner
provided in Section 1.9).
(b) Cancellation of Parent-Owned Stock. Each share of Company Common
Stock held by Company or owned by Merger Sub, Parent or any direct or
indirect wholly owned subsidiary of Company or of Parent immediately prior
to the Effective Time shall be canceled and extinguished without any
conversion thereof.
(c) Stock Options and Warrants. At the Effective Time, all options to
purchase Company Common Stock then outstanding under Company's Amended and
Restated 1994 Equity Incentive Plan (the "Plan") and all warrants to
purchase Company Common Stock shall be canceled.
(d) Capital Stock of Merger Sub. Each share of Common Stock, $0.00l par
value per share, of Merger Sub (the "Merger Sub Common Stock") issued and
outstanding immediately prior to the Effective Time shall be converted into
one validly issued, fully paid and nonassessable share of Common Stock,
$0.01 par value per share, of the Surviving Corporation. Each certificate
evidencing ownership of shares of Merger Sub Common Stock shall evidence
ownership of such shares of capital stock of the Surviving Corporation.
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(e) Calculation of Exchange Ratio. The Exchange Ratio shall equal the
quotient obtained by dividing (i) the quotient obtained by dividing (A)
Company's Net Cash (as defined in Section 2.5(c)) plus the Premium (defined
below) by (B) the number of shares of Company Common Stock issued and
outstanding immediately prior to the Effective Time by (ii) the average
closing price of Parent's Common Stock as reported on the Nasdaq National
Market System ("Nasdaq") for the ten trading days prior to (but not
including) the third trading day before the Closing Date (the "Parent
Closing Price"). The Premium shall equal twenty percent (20%) of Net Cash;
provided, however, that if the Parent Closing Price is greater than $9
1/16, then the Premium shall equal the percentage of Net Cash equal to the
lesser of (i) twenty percent (20%) plus one-third of the percentage
increase of the KeraVision Closing Price above $9 1/16 or (ii) thirty
percent (30%). For example, if the KeraVision Closing Price is $10 1/2,
then the Premium shall equal 25.29%, calculated as follows:
<TABLE>
<C> <C> <S>
(1) $10.5 - $9.0625 = $1.4375 (difference between Parent Closing
Price and $9 1/16)
(2) ($1.4375 / $9.0625) * 100 = 15.862% (percentage increase of Parent
Closing Price above $9 1/16)
(3) 15.862% / 3 = 5.29% (one-third of percentage increase
calculated in (2))
(4) 20% + 5.29% = 25.29% (twenty percent plus (3))
</TABLE>
(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect appropriately the effect of any stock split, reverse stock
split, stock dividend (including any dividend or distribution of securities
convertible into Parent Common Stock or Company Common Stock),
reorganization, recapitalization, reclassification or other like change
with respect to Parent Common Stock or Company Common Stock occurring on or
after the date hereof and prior to the Effective Time.
(g) Fractional Shares. No fraction of a share of Parent Common Stock will
be issued by virtue of the Merger, but in lieu thereof each holder of
shares of Company Common Stock who would otherwise be entitled to a
fraction of a share of Parent Common Stock (after aggregating all
fractional shares of Parent Common Stock that otherwise would be received
by such holder) shall receive from Parent an amount of cash (rounded to the
nearest whole cent) equal to the product of (i) such fraction, multiplied
by (ii) the Parent Closing Price.
1.7 Surrender of Certificates.
(a) Exchange Agent. Parent shall select a bank or trust company
reasonably acceptable to Company to act as the exchange agent (the
"Exchange Agent") in the Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective Time,
Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I, the shares of Parent Common Stock issuable
pursuant to Section 1.6 in exchange for outstanding shares of Company
Common Stock, and cash in an amount sufficient for payment in lieu of
fractional shares pursuant to Section 1.6(g) and any dividends or
distributions to which holders of shares of Company Common Stock may be
entitled pursuant to Section 1.7(d).
(c) Exchange Procedures. Promptly after the Effective Time, Parent shall
cause the Exchange Agent to mail to each holder of record (as of the
Effective Time) of a certificate or certificates (the "Certificates"),
which immediately prior to the Effective Time represented outstanding
shares of Company Common Stock whose shares were converted into shares of
Parent Common Stock pursuant to Section 1.6, cash in lieu of any fractional
shares pursuant to Section 1.6(g) and any dividends or other distributions
pursuant to Section 1.7(d), (i) a letter of transmittal in customary form
(which shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall contain such other provisions
as Parent may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing shares of Parent Common Stock, cash in lieu of any fractional
shares pursuant to Section 1.6(g) and any dividends or other distributions
pursuant to Section 1.7(d). Upon surrender of Certificates for cancellation
to the Exchange Agent or to such other agent or agents as may be appointed
by Parent, together with such letter of transmittal, duly completed and
validly executed in accordance with
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the instructions thereto, the holders of such Certificates shall be
entitled to receive in exchange therefor certificates representing the
number of whole shares of Parent Common Stock into which their shares of
Company Common Stock were converted at the Effective Time, payment in lieu
of fractional shares which such holders have the right to receive pursuant
to Section 1.6(g) and any dividends or distributions payable pursuant to
Section 1.7(d), and the Certificates so surrendered shall forthwith be
canceled. Until so surrendered, outstanding Certificates will be deemed
from and after the Effective Time, for all corporate purposes, subject to
Section 1.7(d) as to the payment of dividends, to evidence only the
ownership of the number of full shares of Parent Common Stock into which
such shares of Company Common Stock shall have been so converted and the
right to receive an amount in cash in lieu of the issuance of any
fractional shares in accordance with Section 1.6(g) and any dividends or
distributions payable pursuant to Section 1.7(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the date of this Agreement with
respect to Parent Common Stock with a record date after the Effective Time
will be paid to the holders of any unsurrendered Certificates with respect
to the shares of Parent Common Stock represented thereby until the holders
of record of such Certificates shall surrender such Certificates. Subject
to applicable law, following surrender of any such Certificates, the
Exchange Agent shall deliver to the record holders thereof, without
interest, certificates representing whole shares of Parent Common Stock
issued in exchange therefor along with payment in lieu of fractional shares
pursuant to Section 1.6(g) hereof and the amount of any such dividends or
other distributions with a record date after the Effective Time payable
with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If certificates representing shares of Parent
Common Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it will be a
condition of the issuance thereof that the Certificates so surrendered will
be properly endorsed and otherwise in proper form for transfer and that the
persons requesting such exchange will have paid to Parent or any agent
designated by it any transfer or other taxes required by reason of the
issuance of certificates representing shares of Parent Common Stock in any
name other than that of the registered holder of the Certificates
surrendered, or established to the satisfaction of Parent or any agent
designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Section 1.7, neither the Exchange Agent, Parent, the Surviving Corporation
nor any party hereto shall be liable to a holder of shares of Parent Common
Stock or Company Common Stock for any amount properly paid to a public
official pursuant to any applicable abandoned property, escheat or similar
law.
1.8 No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued in accordance with the terms hereof (including any
cash paid in respect thereof pursuant to Section 1.6(f) and 1.7(d)) shall be
deemed to have been issued in full satisfaction of all rights pertaining to
such shares of Company Common Stock, and there shall be no further registration
of transfers on the records of the Surviving Corporation of shares of Company
Common Stock which were outstanding immediately prior to the Effective Time. If
after the Effective Time Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event that any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent
shall issue in exchange for such lost, stolen or destroyed Certificates, upon
the making of an affidavit of that fact by the holder thereof, certificates
representing the shares of Parent Common Stock into which the shares of Company
Common Stock represented by such Certificates were converted pursuant to
Section 1.6, cash for fractional shares, if any, as may be required pursuant to
Section 1.6(g) and any dividends or distributions payable pursuant to Section
1.7(d); provided, however, that Parent may, in its discretion and as a
condition precedent to the issuance of such certificates representing shares of
Parent Common Stock, cash and other distributions, require the owner of such
lost, stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may
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be made against Parent, the Surviving Corporation or the Exchange Agent with
respect to the Certificates alleged to have been lost, stolen or destroyed.
1.10 Tax and Accounting Consequences. It is intended by the parties hereto
that the Merger shall not constitute a reorganization within the meaning of
Section 368 of the Code, provided that no party makes any representation to any
other party or its Shareholders as to the tax consequences of the Merger or
commits to take any action to effect the foregoing intent except as may be
expressly provided herein.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Company and Merger Sub, the officers and directors of Company
and Merger Sub will take all such lawful and necessary action. Parent shall
cause Merger Sub to perform all of its obligations relating to this Agreement
and the transactions contemplated thereby.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents and warrants to Parent and Merger Sub, subject to the
exceptions specifically disclosed in writing in the disclosure letter and
referencing a specific representation supplied by Company to Parent dated as of
the date hereof (the "Company Disclosure Letter"), as follows:
2.1 Organization of Company.
(a) Company (i) is a corporation or other legal entity duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is organized; (ii) has the corporate or other power and authority
to own, lease and operate its assets and property and to carry on its
business as now being conducted; and (iii), except as would not be material
to Company, is duly qualified or licensed to do business in each
jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its activities makes such qualification or
licensing necessary.
(b) Company has no subsidiaries and has never had any subsidiaries.
(c) Company has delivered or made available to Parent a true and correct
copy of the Certificate of Incorporation and Bylaws of Company, each as
amended to date, and each such instrument is in full force and effect.
Company is not in violation of any of the provisions of its Certificate of
Incorporation or Bylaws or equivalent governing instruments.
2.2 Company Capital Structure. The authorized capital stock of Company
consists of 25,000,000 shares of Common Stock, $0.01 par value per share, of
which there were 5,763,091 shares issued and outstanding as of November 30,
1998, and 5,000,000 shares of Preferred Stock, $0.01 par value per share, of
which no shares are issued or outstanding. All outstanding shares of Company
Common Stock are duly authorized, validly issued, fully paid and nonassessable,
are not subject to preemptive rights created by statute, the Certificate of
Incorporation or Bylaws of Company or any agreement or document to which
Company is a party or by which it is bound and were issued in compliance with
applicable federal and state securities laws. As of November 30, 1998, Company
had reserved an aggregate of 665,745 shares of Company Common Stock, net of
exercises, for issuance pursuant to the Plan. As of November 30, 1998, there
were options outstanding to purchase an aggregate of 201,800 shares of Company
Common Stock pursuant to the Plan.
2.3 Obligations With Respect to Capital Stock. There are no equity
securities, partnership interests or similar ownership interests of any class
of Company equity security, or any securities exchangeable or convertible into
or exercisable for such equity securities, partnership interests or similar
ownership interests, issued, reserved for issuance or outstanding. Except as
set forth in Section 2.2 of the Company Disclosure
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Letter, there are no subscriptions, options, warrants, equity securities,
partnership interests or similar ownership interests, calls, rights (including
preemptive rights), commitments or agreements of any character to which Company
is a party or by which it is bound obligating Company to issue, deliver or
sell, or cause to be issued, delivered or sold, or repurchase, redeem or
otherwise acquire, or cause the repurchase, redemption or acquisition of, any
shares of capital stock, partnership interests or similar ownership interests
of Company or obligating Company to grant, extend, accelerate the vesting of or
enter into any such subscription, option, warrant, equity security, call,
right, commitment or agreement. As of the date of this Agreement, except as
contemplated by this Agreement, there are no registration rights and there is
no voting trust, proxy, rights plan, antitakeover plan or other agreement or
understanding to which Company is a party or by which it is bound with respect
to any equity security of any class of Company or with respect to any equity
security, partnership interest or similar ownership interest of any class of
any of its subsidiaries. Stockholders of Company will not be entitled to
dissenters' rights under applicable state law in connection with the Merger.
2.4 Authority.
(a) Company has all requisite corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Company, subject only to the approval and
adoption of this Agreement and the approval of the Merger by Company's
stockholders and the filing of the Certificate of Merger pursuant to
Delaware Law. A vote of the holders of a majority of the outstanding shares
of the Company Common Stock is sufficient for Company's stockholders to
approve and adopt this Agreement and approve the Merger. This Agreement has
been duly executed and delivered by Company and, upon execution and
delivery by Parent and Merger Sub, shall constitute a valid and binding
obligation of Company, enforceable against Company in accordance with its
terms, except as enforceability may be limited by bankruptcy and other
similar laws and general principles of equity. The execution and delivery
of this Agreement by Company does not, and the performance of this
Agreement by Company will not, (i) conflict with or violate the Certificate
of Incorporation or Bylaws of Company or the equivalent organizational
documents of any of its subsidiaries, (ii) subject to obtaining the
approval and adoption of this Agreement and the approval of the Merger by
Company's stockholders as contemplated in Section 5.2 and compliance with
the requirements set forth in Section 2.4(b) below, conflict with or
violate any law, rule, regulation, order, judgment or decree applicable to
Company or by which Company or any of its properties is bound or affected,
or (iii) result in any material breach of or constitute a material default
(or an event that with notice or lapse of time or both would become a
material default) under, or impair Company's rights or alter the rights or
obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a material lien or encumbrance on any of the material
properties or assets of Company pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit,
franchise, concession, or other instrument or obligation to which Company
is a party or by which Company or its or any of their respective assets are
bound or affected. The Company Disclosure Letter list all consents, waivers
and approvals under any of Company's agreements, contracts, licenses or
leases required to be obtained in connection with the consummation of the
transactions contemplated hereby, which, if individually or in the
aggregate not obtained, would result in a material loss of benefits to
Company, Parent or the Surviving Corporation as a result of the Merger.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any court, administrative agency or commission
or other governmental authority or instrumentality, foreign or domestic
("Governmental Entity"), is required to be obtained or made by Company in
connection with the execution and delivery of this Agreement or the
consummation of the Merger, except for (i) the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware, (ii) the
filing of the proxy statement/prospectus (as defined in Section 2.17) with
the Securities and Exchange Commission ("SEC") in accordance with the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (iii)
such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under
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applicable federal, foreign and state securities (or related) laws and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and the securities or antitrust laws of any foreign country, and
(iv) such other consents, authorizations, filings, approvals and
registrations which if not obtained or made would not be material to
Company or Parent or have a material adverse effect on the ability of the
parties hereto to consummate the Merger.
2.5 SEC Filings; Company Financial Statements.
(a) Company has filed all forms, reports and documents required to be
filed by Company with the SEC since July 2, 1997. All such required forms,
reports and documents (including those that Company may file subsequent to
the date hereof) are referred to herein as the "Company SEC Reports." As of
their respective dates, the Company SEC Reports (i) were prepared in
accordance with the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), or the Exchange Act, as the case may be, and the
rules and regulations of the SEC thereunder applicable to such Company SEC
Reports and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the
date of such filing) contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. None of Company's subsidiaries
is required to file any forms, reports or other documents with the SEC.
(b) Each of the financial statements (including, in each case, any
related notes thereto) contained in the Company SEC Reports (the "Company
Financials"), including each Company SEC Reports filed after the date
hereof until the Closing, (i) complied as to form in all material respects
with the published rules and regulations of the SEC with respect thereto,
(ii) was prepared in accordance with United States generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto or, in
the case of unaudited interim financial statements, as may be permitted by
the SEC on Form 10-Q under the Exchange Act) and (iii) fairly presented the
financial position of Company and its subsidiaries as at the respective
dates thereof and the results of Company's operations and cash flows for
the periods indicated, except that the unaudited interim financial
statements may not contain footnotes and were or are subject to normal and
recurring year-end adjustments. The unaudited balance sheet of Company
contained in the Company Disclosure Letter as of November 30, 1998 is
hereinafter referred to as the "Company Balance Sheet." Company has no
material obligations or liabilities of any nature (matured or unmatured,
fixed or contingent) other than (i) those set forth or adequately provided
for in the Company Balance Sheet, (ii) those not required under GAAP to be
set forth in the Company Balance Sheet, (iii) those incurred in the
ordinary course of business since the date of the Company Balance Sheet and
consistent with past practice and (iv) those incurred in connection with
the execution and delivery of this Agreement.
(c) Section 2.5(c) of the Company Disclosure Letter contains an itemized
calculation of Company's Net Cash position as of November 30, 1998 (as
updated through the Closing Date, "Net Cash"). Net Cash is calculated by
subtracting from Company's cash balances (as shown on the Company Balance
Sheet) all restricted cash, current liabilities and other such liabilities
as set forth in the Section 2.5(c) of the Company Disclosure Letter. Except
as set forth on Section 2.5(c) of the Company Disclosure Letter, to
Company's reasonable knowledge, there are no actual or potential
obligations by Company to pay any cash to any third party.
(d) Company has heretofore furnished to Parent a complete and correct
copy of any amendments or modifications, which have not yet been filed with
the SEC but which will be required to be filed, to agreements, documents or
other instruments which previously had been filed by Company with the SEC
pursuant to the Securities Act or the Exchange Act.
2.6 Absence of Certain Changes or Events. Since the date of the Company
Balance Sheet there has not been: (i) any Material Adverse Effect (as defined
in Section 8.3(c)) on Company, (ii) any declaration, setting aside or payment
of any dividend on, or other distribution (whether in cash, stock or property)
in respect of,
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any of Company's capital stock, or any purchase, redemption or other
acquisition by Company of any of Company's capital stock or any other
securities of Company or any options, warrants, calls or rights to acquire any
such shares or other securities, (iii) any split, combination or
reclassification of any of Company's capital stock, (iv) any granting by
Company of any increase in compensation or fringe benefits, or any payment by
Company of any bonus, or any granting by Company of any increase in severance
or termination pay or any entry by Company into any currently effective
employment, severance, termination or indemnification agreement or any
agreement the benefits of which are contingent or the terms of which are
materially altered upon the occurrence of a transaction involving Company of
the nature contemplated hereby, (v) entry by Company into any licensing or
other agreement with regard to the acquisition or disposition of any material
Company Intellectual Property (as defined in Section 2.9) or any amendment or
consent with respect to any licensing agreement filed or required to be filed
by Company with the SEC, (vi) any material change by Company in its accounting
methods, principles or practices, except as required by concurrent changes in
GAAP, or (vii) any revaluation by Company of any of its assets, including,
without limitation, writing down the value of capitalized inventory or writing
off notes or accounts receivable other than in the ordinary course of business.
2.7 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax" or
"Taxes" refers to any and all federal, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions and
liabilities relating to taxes, including taxes based upon or measured by
gross receipts, income, profits, sales, use and occupation, and value
added, ad valorem, transfer, franchise, withholding, payroll, recapture,
employment, excise and property taxes, together with all interest,
penalties and additions imposed with respect to such amounts and any
obligations under any agreements or arrangements with any other person with
respect to such amounts and including any liability for taxes of a
predecessor entity.
(b) Tax Returns and Audits.
(i) Company has timely filed all federal, state, local and foreign
returns, estimates, information statements and reports ("Returns")
relating to Taxes required to be filed by Company with any Tax
authority, except such Returns which are not material to Company, and
have paid all Taxes shown to be due on such Returns.
(ii) Company as of the Effective Time will have withheld with respect
to its employees all federal and state income taxes, Taxes pursuant to
the Federal Insurance Contribution Act ("FICA"), Taxes pursuant to the
Federal Unemployment Tax Act ("FUTA") and other Taxes required to be
withheld.
(iii) Company has not been delinquent in the payment of any Tax nor
is there any Tax deficiency outstanding, proposed or assessed against
Company or any of its subsidiaries, nor has Company executed any
unexpired waiver of any statute of limitations on or extending the
period for the assessment or collection of any Tax.
(iv) No audit or other examination of any Return of Company by any
Tax authority is presently in progress, nor has Company been notified
of any request for such an audit or other examination.
(v) No adjustment relating to any Returns filed by Company has been
proposed in writing formally or informally by any Tax authority to
Company or any representative thereof.
(vi) Company has no liability for unpaid Taxes which has not been
accrued for or reserved on the Company Balance Sheet, whether asserted
or unasserted, contingent or otherwise, which is material to Company,
other than any liability for unpaid Taxes that may have accrued since
the date of the Company Balance Sheet in connection with the operation
of the business of Company in the ordinary course.
(vii) There is no contract, agreement, plan or arrangement to which
Company is a party as of the date of this Agreement, including but not
limited to the provisions of this Agreement, covering
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any employee or former employee of Company, individually or
collectively, could give rise to the payment of any amount that would
not be deductible pursuant to Sections 280G, 404 or 162(m) of the Code.
(viii) Company has not filed any consent agreement under Section
341(f) of the Code or agreed to have Section 341(f)(2) of the Code
apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by Company.
(ix) Company is not a party to or has any obligation under any tax-
sharing, tax indemnity or tax allocation agreement or arrangement.
(x) Except as may be required as a result of the Merger, Company has
not been and will not be required to include any adjustment in Taxable
income for any Tax period (or portion thereof) pursuant to Section 481
or Section 263A of the Code or any comparable provision under state or
foreign Tax laws as a result of transactions, events or accounting
methods employed prior to the Closing T.
(xi) Company's assets are not tax exempt use property within the
meaning of Section 168(h) of the Code.
(xii) The Company Disclosure Letter lists (A) any foreign Tax
holidays, (B) any intercompany transfer pricing agreements, or other
arrangements that have been established by Company or any of its
subsidiaries with any Tax authority and (C) any expatriate programs or
policies affecting Company.
2.8 Title to Properties; Absence of Liens and Encumbrances.
(a) Company owns no real property and has never owned any real property.
The Company Disclosure Letter lists all real property leases to which
Company is a party as of the date of this Agreement and each amendment
thereto that is in effect as of the date of this Agreement. All such
current leases are in full force and effect, are valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any existing default or event of default (or event which with
notice or lapse of time, or both, would constitute a default) that would
give rise to a claim in an amount greater than $15,000.
(b) Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in
its business, free and clear of any liens, pledges, charges, claims,
security interests or other encumbrances of any sort ("Liens"), except as
reflected in the Company Financials and except for liens for taxes not yet
due and payable and such Liens or other imperfections of title and
encumbrances, if any, which are not material in character, amount or
extent, and which do not materially detract from the value, or materially
interfere with the present use, of the property subject thereto or affected
thereby.
2.9 Intellectual Property. For the purposes of this Agreement, the following
terms have the following definitions:
"Intellectual Property" shall mean any or all of the following and all
rights in, arising out of, or associated therewith: (i) all United States,
international and foreign patents and applications therefor and all
reissues, divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof; (ii) all inventions (whether patentable or
not), invention disclosures, improvements, trade secrets, proprietary
information, know how, technology, technical data and customer lists, and
all documentation relating to any of the foregoing; (iii) all copyrights,
copyright registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (iv) all industrial designs and
any registrations and applications therefor throughout the world; (v) all
trade names, logos, common law trademarks and service marks, trademark and
service mark registrations and applications therefor throughout the world;
(vi) all databases and data collections and all rights therein throughout
the world; (vii) all moral and
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economic rights of authors and inventors, however denominated, throughout
the world, and (viii) any similar or equivalent rights to any of the
foregoing anywhere in the world.
"Company Intellectual Property" shall mean any Intellectual Property that
is owned by, or exclusively licensed to, Company.
"Registered Intellectual Property" means all United States, international
and foreign: (i) patents and patent applications (including provisional
applications); (ii) registered trademarks, applications to register
trademarks, intent-to-use applications, or other registrations or
applications related to trademarks; (iii) registered copyrights and
applications for copyright registration; and (iv) any other Intellectual
Property that is the subject of an application, certificate, filing,
registration or other document issued, filed with, or recorded by any
state, government or other public legal authority.
"Company Registered Intellectual Property" means all of the Registered
Intellectual Property owned by, or filed in the name of, Company.
(a) No material Company Intellectual Property or product or service of
Company is subject to any proceeding or outstanding decree, order,
judgment, agreement, or stipulation restricting in any manner the use,
transfer, or licensing thereof by Company, or which may affect the
validity, use or enforceability of such Company Intellectual Property.
(b) To Company's knowledge, each material item of Company Registered
Intellectual Property is valid and subsisting, all necessary registration,
maintenance and renewal fees currently due in connection with such
Registered Intellectual Property have been made and all necessary
documents, recordations and certificates in connection with such Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign
jurisdictions, as the case may be, for the purposes of maintaining such
Registered Intellectual Property.
(c) Company owns and has good and exclusive title to, or has license
(sufficient for the conduct of its business as currently conducted and as
proposed to be conducted) to, each material item of Company Intellectual
Property free and clear of any lien or encumbrance (excluding licenses and
related restrictions); and Company is the exclusive owner of all trademarks
and trade names used in connection with the operation or conduct of the
business of Company, including the sale of any products or the provision of
any services by Company.
(d) Company owns exclusively, and has good title to, all copyrighted
works that are Company products or which Company otherwise expressly
purports to own.
(e) To the extent that any material Intellectual Property has been
developed or created by a third party for Company, Company has a written
agreement with such third party with respect thereto and Company thereby
either (i) has obtained ownership of, and is the exclusive owner of, or
(ii) has obtained a license (sufficient for the conduct of its business as
currently conducted and as proposed to be conducted) to all such third
party's Intellectual Property in such work, material or invention by
operation of law or by valid assignment, to the fullest extent it is
legally possible to do so.
(f) Company has not transferred ownership of, or granted any exclusive
license with respect to, any Intellectual Property that is or was material
Company Intellectual Property, to any third party.
(g) The Company Disclosure Letter lists all material contracts, licenses
and agreements to which Company is a party (i) with respect to Company
Intellectual Property licensed or transferred to any third party (other
than end-user licenses in the ordinary course), or (ii) pursuant to which a
third party has licensed or transferred any material Intellectual Property
to Company.
(h) All material contracts, licenses and agreements relating to the
Company Intellectual Property are in full force and effect. The
consummation of the transactions contemplated by this Agreement will
neither violate nor result in the breach, modification, cancellation,
termination, or suspension of such contracts, licenses and agreements.
Company is in material compliance with, and has not materially breached any
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term any of, such contracts, licenses and agreements and, to the knowledge
of Company, all other parties to such contracts, licenses and agreements
are in compliance with, and have not materially breached any term of, such
contracts, licenses and agreements. Following the Closing Date, the
Surviving Corporation will be permitted to exercise all of Company's rights
under such contracts, licenses and agreements to the same extent Company
would have been able to had the transactions contemplated by this Agreement
not occurred and without the payment of any additional amounts or
consideration other than ongoing fees, royalties or payments which Company
would otherwise be required to pay.
(i) The operation of the business of Company as such business has been
conducted, including Company's design, development, manufacture, marketing
and sale of the products or services of Company (including with respect to
products currently under development) has not, does not and will not
infringe or misappropriate the Intellectual Property of any third party or,
to its knowledge, constitute unfair competition or trade practices under
the laws of any jurisdiction.
(j) Company has not received notice from any third party that the
operation of the business of Company or any act, product or service of
Company, infringes or misappropriates the Intellectual Property of any
third party or constitutes unfair competition or trade practices under the
laws of any jurisdiction.
(k) To the knowledge of Company, no person has or is infringing or
misappropriating any Company Intellectual Property.
(l) Company has taken reasonable steps to protect Company's rights in
Company's confidential information and trade secrets that it wishes to
protect or any trade secrets or confidential information of third parties
provided to Company, and, without limiting the foregoing, Company has and
enforces a policy requiring each employee and contractor to execute a
proprietary information/confidentiality agreement substantially in the form
provided to Parent and all current and former employees and contractors of
Company have executed such an agreement, except where the failure to do so
is not reasonably expected to be material to Company.
2.10 Compliance; Permits; Restrictions.
(a) Company is not in conflict with, or in default or in violation of (i)
any law, rule, regulation, order, judgment or decree applicable to Company
or by which Company or any of its subsidiaries or any of their respective
properties is bound or affected, or (ii) any material note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Company is a party or by which Company or
any of its properties is bound or affected, except for conflicts,
violations and defaults that (individually or in the aggregate) would not
cause Company to lose any material benefit or incur any material liability.
No investigation or review by any Governmental Entity is pending or, to
Company's knowledge, has been threatened. Company is not aware of any facts
or circumstances concerning Company that could reasonably be expected to
give rise to any investigation of Company by any Government Entity. There
is no material agreement, judgment, injunction, order or decree binding
upon Company or any of its subsidiaries which has or could reasonably be
expected to have the effect of prohibiting or materially impairing any
business practice of Company or any of its subsidiaries, any acquisition of
material property by Company or any of its subsidiaries or the conduct of
business by Company as currently conducted.
(b) Company holds, to the extent legally required, all permits, licenses,
variances, exemptions, orders and approvals from governmental authorities
that are material to and required for the operation of the business of
Company as currently conducted (collectively, the "Company Permits").
Company is in compliance in all material respects with the terms of the
Company Permits, except where the failure to be in compliance with the
terms of the Company Permits would not be material to Company.
2.11 Litigation. There are no claims, suits, actions or proceedings pending
or, to the knowledge of the Company, threatened against, relating to or
affecting Company, before any court, governmental department, commission,
agency, instrumentality or authority, or any arbitrator that seeks to restrain
or enjoin the
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consummation of the transactions contemplated by this Agreement or which could
reasonably be expected, either singularly or in the aggregate with all such
claims, actions or proceedings, to have a material effect. Company is not aware
of any facts or circumstances concerning Company that could reasonably be
expected to give rise to any claim, suit, action or proceeding against Company
by any third party. Except for the United States Food and Drug Administration
and similar agencies of foreign governments, no Governmental Entity has at any
time challenged or questioned in a writing delivered to Company the legal right
of Company to design, manufacture, offer or sell any of its products in the
present manner or style thereof.
Company has never been subject to an audit, compliance review, investigation
or like contract review by the GSA Office of the Inspector General or other
Governmental Entity or agent thereof in connection with any government contract
(a "Government Audit"). To Company's knowledge, no Government Audit is
threatened, and in the event of such Government Audit, to the knowledge of
Company no basis exists for a finding of noncompliance with any material
provision of any government contract or a refund of any amounts paid or owed by
any Governmental Entity pursuant to such government contract. Company is not
aware of any facts or circumstances concerning Company that could reasonably be
expected to give rise to any Government Audit. For each item disclosed in the
Company Schedule pursuant to this Section 2.11 a true and complete copy of all
correspondence and documentation with respect thereto has been provided to
Parent.
2.12 Brokers' and Finders' Fees. Except for fees payable to EVEREN
Securities, Inc. pursuant to an engagement letter dated August 20, 1998, a copy
of which has been provided to Parent, Company has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
2.13 Employee Benefit Plans.
(a) Definitions. With the exception of the definition of "Affiliate" set
forth in Section 2.13(a)(i) below (which definition shall apply only to
this Section 2.13), for purposes of this Agreement, the following terms
shall have the meanings set forth below:
(i) "Affiliate" shall mean any other person or entity under common
control with Company within the meaning of Section 414(b), (c), (m) or
(o) of the Code and the regulations issued thereunder;
(ii) "Company Employee Plan" shall mean any plan, program, policy,
practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or
remuneration of any kind, whether written or unwritten or otherwise,
funded or unfunded, including without limitation, each "employee
benefit plan," within the meaning of Section 3(3) of ERISA which is or
has been maintained, contributed to, or required to be contributed to,
by Company or any Affiliate for the benefit of any Employee;
(iii) "COBRA" shall mean the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended;
(iv) "DOL" shall mean the Department of Labor;
(v) "Employee" shall mean any current, former, or retired employee,
officer, or director of Company or any Affiliate;
(vi) "Employee Agreement" shall mean each management, employment,
severance, consulting, relocation, repatriation, expatriation, visas,
work permit or similar agreement or contract between Company or any
Affiliate and any Employee or consultant;
(vii) "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended;
(viii) "FMLA" shall mean the Family Medical Leave Act of 1993, as
amended;
(ix) "IRS" shall mean the Internal Revenue Service;
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(x) "Multiemployer Plan" shall mean any "Pension Plan" (as defined
below) which is a "multiemployer plan," as defined in Section 3(37) of
ERISA;
(xi) "PBGC" shall mean the Pension Benefit Guaranty Corporation; and
(xii) "Pension Plan" shall mean each Company Employee Plan which is
an "employee pension benefit plan," within the meaning of Section 3(2)
of ERISA.
(b) Schedule. The Company Disclosure Letter contains an accurate and
complete list of each Company Employee Plan and each material Employee
Agreement. Company does not have any plan or commitment to establish any
new Company Employee Plan, to modify any Company Employee Plan or Employee
Agreement (except to the extent required by law or to conform any such
Company Employee Plan or Employee Agreement to the requirements of any
applicable law, in each case as previously disclosed to Parent in writing,
or as required by this Agreement), or to enter into any Company Employee
Plan or material Employee Agreement, nor does it have any intention or
commitment to do any of the foregoing.
(c) Documents. Company has provided or made available to Parent: (i)
correct and complete copies of all documents embodying to each Company
Employee Plan and each Employee Agreement including all amendments thereto
and written interpretations thereof; (ii) the most recent annual actuarial
valuations, if any, prepared for each Company Employee Plan; (iii) the
three (3) most recent annual reports (Form Series 5500 and all schedules
and financial statements attached thereto), if any, required under ERISA or
the Code in connection with each Company Employee Plan or related trust;
(iv) if the Company Employee Plan is funded, the most recent annual and
periodic accounting of Company Employee Plan assets; (v) the most recent
summary plan description together with the summary of material
modifications thereto, if any, required under ERISA with respect to each
Company Employee Plan; (vi) all IRS determination, opinion, notification
and advisory letters, and rulings relating to Company Employee Plans and
copies of all applications and correspondence to or from the IRS or the DOL
with respect to any Company Employee Plan; (vii) all material written
agreements and contracts relating to each Company Employee Plan, including,
but not limited to, administrative service agreements, group annuity
contracts and group insurance contracts; (viii) all communications material
to any Employee or Employees relating to any Company Employee Plan and any
proposed Company Employee Plans, in each case, relating to any amendments,
terminations, establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or other events which would
result in any material liability to Company; (ix) all COBRA forms and
related notices; and (x) all registration statements and prospectuses
prepared in connection with each Company Employee Plan.
(d) Employee Plan Compliance. (i) Company has performed in all material
respects all obligations required to be performed by it under, is not in
any material respect in default or violation of, and has no knowledge of
any default or violation by any other party to, each Company Employee Plan,
and each Company Employee Plan has been established and maintained in all
material respects in accordance with its terms and in compliance with all
applicable laws, statutes, orders, rules and regulations, including but not
limited to ERISA or the Code; (ii) each Company Employee Plan intended to
qualify under Section 401(a) of the Code and each trust intended to qualify
under Section 501(a) of the Code has either received a favorable
determination letter from the IRS with respect to each such Plan as to its
qualified status under the Code, including all amendments to the Code
effected by the Tax Reform Act of 1986 and subsequent legislation, or has
remaining a period of time under applicable Treasury regulations or IRS
pronouncements in which to apply for such a determination letter and make
any amendments necessary to obtain a favorable determination, or is
maintained pursuant to a standardized prototype plan; (iii) no "prohibited
transaction," within the meaning of Section 4975 of the Code or Sections
406 and 407 of ERISA, and not otherwise exempt under Section 408 of ERISA,
has occurred with respect to any Company Employee Plan; (iv) there are no
actions, suits or claims pending, or, to the knowledge of Company,
threatened or reasonably anticipated (other than routine claims for
benefits) against any Company Employee Plan or against the assets of any
Company Employee Plan; (v) each Company
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Employee Plan can be amended, terminated or otherwise discontinued
immediately prior to the Effective Time in accordance with its terms,
without liability to Parent, Company or any of its Affiliates (other than
ordinary administration expenses typically incurred in a termination event
or benefits accrued through the date of such amendment, termination or
discontinuance); (vi) there are no audits, inquiries or proceedings pending
or, to the knowledge of Company or any Affiliates, threatened by the IRS or
DOL with respect to any Company Employee Plan; and (vii) neither Company
nor any Affiliate is subject to any material penalty or tax with respect to
any Company Employee Plan under Section 402(i) of ERISA or Sections 4975
through 4980 of the Code.
(e) Pension Plans. Company does not now, nor has it ever, maintained,
established, sponsored, participated in, or contributed to, any Pension
Plan which is subject to Title IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has Company contributed to or been
required to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. No Company Employee Plan provides, or
has any liability to provide, retiree life insurance, retiree health or
other retiree employee welfare benefits to any person for any reason,
except as may be required by COBRA or other applicable statute, and Company
has never represented, promised or contracted (whether in oral or written
form) to any Employee (either individually or to Employees as a group) or
any other person that such Employee(s) or other person would be provided
with retiree life insurance, retiree health or other retiree employee
welfare benefit, except to the extent required by statute. Except for
obligations set forth on Schedule 2.5(c), Parent shall incur no liability
with respect to or on account of any Company Employee Plan, including
without limitation liabilities Company may have to employees or former
employees under all Company Employee Plans, or to any employee as a result
of termination of employment by Company.
(h) Neither Company nor any Affiliate has, prior to the Effective Time,
and in any material respect, violated any of the health care continuation
requirements of COBRA, the requirements of FMLA or any similar provisions
of state law applicable to its Employees.
(i) Effect of Transaction.
(i) The execution of this Agreement and the consummation of the
transactions contemplated hereby will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event
under any Company Employee Plan, Employee Agreement, trust or loan that
will or may result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with
respect to any Employee.
(ii) No payment or benefit which will or may be made by Company or
its Affiliates with respect to any Employee as a result of the
transactions contemplated by this Agreement will be characterized as an
"excess parachute payment," within the meaning of Section 280G(b)(1) of
the Code.
(j) Employment Matters. Company: (i) is in compliance in all material
respects with all applicable foreign, federal, state and local laws, rules
and regulations respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case, with respect to
Employees; (ii) has withheld all amounts required by law or by agreement to
be withheld from the wages, salaries and other payments to Employees; (iii)
is not liable for any arrears of wages or any taxes or any penalty for
failure to comply with any of the foregoing; and (iv) is not liable for any
material payment to any trust or other fund or to any governmental or
administrative authority, with respect to unemployment compensation
benefits, social security or other benefits or obligations for Employees
(other than routine payments to be made in the normal course of business
and consistent with past practice). There are no pending, threatened or
reasonably anticipated claims or actions against Company under any worker's
compensation policy or long-term disability policy. To Company's knowledge,
no employee of Company has violated any employment contract, nondisclosure
agreement or noncompetition agreement by which
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such employee is bound due to such employee being employed by Company and
disclosing to Company or using trade secrets or proprietary information of
any other person or entity.
(k) Labor. No work stoppage or labor strike against Company is pending,
threatened or reasonably anticipated. Company does not know of any
activities or proceedings of any labor union to organize any Employees.
There are no actions, suits, claims, labor disputes or grievances pending,
or, to the knowledge of Company, threatened or reasonably anticipated
relating to any labor, safety or discrimination matters involving any
Employee, including, without limitation, charges of unfair labor practices
or discrimination complaints. Neither Company nor any of its subsidiaries
has engaged in any unfair labor practices within the meaning of the
National Labor Relations Act. Company is not presently, nor has it been in
the past, a party to, or bound by, any collective bargaining agreement or
union contract with respect to Employees and no collective bargaining
agreement is being negotiated by Company.
2.14 Environmental Matters.
(a) Hazardous Material. Except as would not result in material liability
to Company, no underground storage tanks and no amount of any substance
that has been designated by any Governmental Entity or by applicable
federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without
limitation, PCBs, asbestos, petroleum, urea-formaldehyde and all substances
listed as hazardous substances pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, or defined
as a hazardous waste pursuant to the United States Resource Conservation
and Recovery Act of 1976, as amended, and the regulations promulgated
pursuant to said laws, but excluding office and janitorial supplies, (a
"Hazardous Material") are present, as a result of the actions of Company or
any affiliate of Company, or, to Company's knowledge, as a result of any
actions of any third party involving Company or its properties, in, on or
under any property, including the land and the improvements, ground water
and surface water thereof that Company has at any time owned, operated,
occupied or leased.
(b) Hazardous Materials Activities. Except as would not result in a
material liability to Company (in any individual case or in the aggregate)
(i) Company has not transported, stored, used, manufactured, disposed of
released or exposed its employees or others to Hazardous Materials in
violation of any law in effect on or before the Closing Date, and (ii)
Company has not disposed of, transported, sold, used, released, exposed its
employees or others to or manufactured any product containing a Hazardous
Material (collectively "Hazardous Materials Activities") in violation of
any rule, regulation, treaty or statute promulgated by any Governmental
Entity in effect prior to or as of the date hereof to prohibit, regulate or
control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. Company currently holds all environmental approvals,
permits, licenses, clearances and consents (the "Company Environmental
Permits") necessary for the conduct of Company's Hazardous Material
Activities (if any) and other businesses of Company as such activities and
businesses are currently being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ or injunction is pending, and to
Company's knowledge, no action, proceeding, revocation proceeding,
amendment procedure, writ or injunction has been threatened by any
Governmental Entity against Company in a writing delivered to Company
concerning any Company Environmental Permit, Hazardous Material or any
Hazardous Materials Activity of Company. To Company's knowledge, there is
no fact or circumstance which is reasonably likely to involve Company in
any environmental litigation or impose upon Company any material
environmental liability.
2.15 Agreements, Contracts and Commitments. Company is not a party to or is
bound by:
(a) any employment or consulting agreement, contract or commitment with
any officer or director or higher level employee or member of Company's
board of directors, other than those that are terminable by Company or any
of its subsidiaries on no more than thirty (30) days notice without
liability or financial
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obligation, except to the extent general principles of wrongful termination
law may limit Company's or any of its subsidiaries' ability to terminate
employees at will;
(b) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
(c) any agreement of indemnification or any guaranty other than any
agreement of indemnification entered into in connection with Phase III
clinical trials of Procysteine;
(d) any agreement, contract or commitment containing any covenant
limiting in any respect the right of Company to engage in any line of
business or to compete with any person or granting any exclusive
distribution rights;
(e) ny agreement, contract or commitment currently in force relating to
the disposition or acquisition by Company after the date of this Agreement
of a material amount of assets or pursuant to which Company has any
material ownership interest in any corporation, partnership, joint venture
or other business enterprise;
(f) ny joint marketing or development agreement currently in force under
which Company has continuing material obligations to jointly market any
product, technology or service and which may not be canceled without
penalty upon notice of thirty (30) days or less, or any material agreement
pursuant to which Company has continuing material obligations to jointly
develop any intellectual property that will not be owned, in whole or in
part, by Company and which may not be canceled without penalty upon notice
of thirty (30) days or less;
(g) any agreement, contract or commitment currently in force under which
Company is required to pay any fees, costs or expenses related to the
preparation, filing, prosecution or maintenance of any patent applications
in the United States or elsewhere;
(h) any agreement, contract or commitment currently in force to license
any third party to manufacture or reproduce any Company product, service or
technology;
(i) any agreement, contract or commitment currently in force under which
Company is required to pay any amount in connection with the completion,
continuation or termination of any clinical studies or trials; or
(j) any agreement, contract or commitment currently in force under which
Company is required to pay any third party any amount in connection with
any financing, merger, acquisition, joint development, or other strategic
partnering activity.
Neither Company, nor to Company's knowledge any other party to a Company
Contract (as defined below), is in breach, violation or default under, and
Company has not received written notice that it has breached, violated or
defaulted under, any of the material terms or conditions of any of the
agreements, contracts or commitments listed in Section 2.16 of the Company
Disclosure Letter (any such agreement, contract or commitment, a "Company
Contract") in such a manner as would permit any other party to seek material
damages or other remedies (for any or all of such breaches, violations or
defaults, in the aggregate).
2.16 Change of Control Payments. The Company Disclosure Letter sets forth
each plan or agreement pursuant to which any amounts may become payable
(whether currently or in the future) to current or former officers and
directors of Company as a result of or in connection with the Merger.
2.17 Statements; proxy statement/prospectus. The information supplied by
Company for inclusion in the Registration Statement (as defined in Section
3.3(b)) shall not, at the time the Registration Statement is filed with the SEC
or at the time it becomes effective under the Securities Act, contain any
untrue statement of a
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material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading. The
information supplied by Company for inclusion in the proxy statement/prospectus
to be sent to (a) the stockholders of Company in connection with the meeting of
Company's stockholders to consider the approval and adoption of this Agreement
and the approval of the Merger (the "Company Stockholders' Meeting") (such
proxy statement/prospectus as amended or supplemented is referred to herein as
the "proxy statement/prospectus") shall not, on the date the proxy
statement/prospectus is first mailed to Company's stockholders or at the time
of the Company Stockholders' Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The proxy
statement/prospectus will comply as to form in all material respects with the
provisions of the Securities Act, the Exchange Act and the rules and
regulations thereunder. If at any time prior to the Effective Time any event
relating to Company or any of its affiliates, officers or directors should be
discovered by Company which is required to be set forth in an amendment to the
Registration Statement or a supplement to the proxy statement/prospectus,
Company shall promptly inform Parent. Notwithstanding the foregoing, Company
makes no representation or warranty with respect to any information supplied by
Parent or Merger Sub which is contained in any of the foregoing documents.
2.19 Board Approval. The board of directors of Company has, as of the date
of this Agreement, unanimously (i) approved the Merger and the execution and
delivery of this Agreement, (ii) declared that the Merger is advisable and
(iii) recommended that the stockholders of Company approve and adopt this
Agreement and approve the Merger.
2.20 Fairness Opinion. Company's board of directors has received a written
opinion from EVEREN Securities, Inc. dated as of the date hereof, to the effect
that as of the date hereof, the Merger and the Exchange Ratio are fair to
Company's stockholders from a financial point of view and has delivered to
Parent a copy of such opinion.
2.21 Section 203 of the Delaware General Corporation Law Not Applicable. The
board of directors of Company has taken all actions so that the restrictions
contained in Section 203 of the Delaware General Corporation Law applicable to
a "business combination" (as defined in such Section 203) will not apply to the
execution, delivery or performance of this Agreement or to the consummation of
the Merger or the other transactions contemplated by this Agreement.
2.22 Customs. Company has acted with reasonable care to properly value and
classify, in accordance with applicable tariff laws, rules and regulations, all
goods that Company imports into the United States or into any other country
(the "Imported Goods"). To Company's knowledge, there are currently no material
claims pending against Company by the U.S. Customs Service (or other foreign
customs authorities) relating to the valuation, classification or marking of
the Imported Goods.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub, jointly and severally, represent and warrant to
Company, subject to the exceptions specifically disclosed in writing in the
disclosure letter and referencing a specific representation supplied by Parent
to Company dated as of the date hereof and certified by a duly authorized
officer of Parent (the "Parent Disclosure Letter"), as follows:
3.1 Organization of Parent and Merger Sub.
(a) Each of Parent and Merger Sub (i) is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is organized; (ii) has the corporate or other power and authority
to own, lease and operate its assets and property and to carry on its
business as now being
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conducted; and (iii), except as would not be material to Parent, is duly
qualified or licensed to do business in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature
of its activities makes such qualification or licensing necessary.
(b) Parent has delivered or made available to Company a true and correct
copy of the Certificate of Incorporation, Certificate of Designation of
Rights Preferences and Privileges of Series B Convertible Preferred Stock
(the "Certificate of Designation") and Bylaws of Parent, each as amended to
date, and each such instrument is in full force and effect. Neither Parent
nor any of its subsidiaries is in violation of any of the provisions of its
Certificate of Incorporation, Certificate of Designation or Bylaws or
equivalent governing instruments.
3.2 Parent and Merger Sub Capital Structure. The authorized capital stock of
Parent consists of 30,000,000 shares of Common Stock, of which there were
12,748,179 shares issued and outstanding as of November 6, 1998 and 2,000,000
shares of Preferred Stock, 30,000 of which have been designated Series A
Preferred Stock, none of which are issued and outstanding, and 662,500 of which
have been designated Series B Convertible Preferred Stock, 562,000 of which are
issued and outstanding. As of November 6, 1998, there were outstanding options
to purchase 1,425,565 shares of Parent Common Stock. Except as described herein
and as set forth in Section 3.2 of the Parent Disclosure Letter, there are no
subscriptions, options, warrants, equity securities, partnership interests or
similar ownership interests, calls, rights (including preemptive rights),
commitments or agreements of any character to which Parent is a party or by
which it is bound obligating Parent to issue, deliver or sell, or cause to be
issued delivered or sold, or repurchase, redeem or otherwise acquire, or cause
the repurchase, redemption or acquisition of, any shares of capital stock,
partnerships interests or similar ownership interest of Parent. All outstanding
shares of Parent Common Stock and Series B Convertible Preferred Stock are duly
authorized, validly issued, fully paid and nonassessable and are not subject to
preemptive rights created by statute, the Certificate of Incorporation,
Certificate of Designation or Bylaws of Parent or any agreement or document to
which Parent is a party or by which it is bound. The authorized capital stock
of Merger Sub consists of 1000 shares of Common Stock, $0.001 par value, all of
which, as of the date hereof, are issued and outstanding and are held by
Parent. Merger Sub was formed on or about December 17, 1998 for the purpose of
consummating the Merger and has no material assets or liabilities except as
necessary for such purpose.
3.3 Authority.
(a) Each of Parent and Merger Sub has all requisite corporate power and
authority to enter into, as applicable, this Agreement and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of
Parent and Merger Sub, subject only to the filing of the Certificate of
Merger pursuant to Delaware Law. This Agreement has been duly executed and
delivered by each of Parent and Merger Sub and, assuming the due
authorization, execution and delivery by Company, constitutes the valid and
binding obligation of Parent and Merger Sub, enforceable against Parent and
Merger Sub in accordance with its terms, except as enforceability may be
limited by bankruptcy and other similar laws and general principles of
equity. The execution and delivery of this Agreement by each of Parent and
Merger Sub does not, and the performance of this Agreement by each of
Parent and Merger Sub will not, (i) conflict with or violate the
Certificate of Incorporation, Certificate of Designation or Bylaws of
Parent or Merger Sub, (ii) conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to Parent or Merger Sub or
by which any of their respective properties is bound or affected or (iii)
result in any material breach of or constitute a material default (or an
event that with notice or lapse of time or both would become a material
default) under, or impair Parent's rights or alter the rights or
obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a material lien or encumbrance on any of the material
properties or assets of Parent or Merger Sub pursuant to, any material
note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument
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or obligation to which Parent or Merger Sub is a party or by which Parent
or Merger Sub or any of their respective properties are bound or affected.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required to be
obtained or made by Parent or Merger Sub in connection with the execution
and delivery of this Agreement or the consummation of the Merger, except
for (i) the filing of a Form S-4 (or any similar successor form thereto)
Registration Statement (the "Registration Statement") with the SEC in
accordance with the Securities Act, (ii) the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware, (iii) such
consents, approvals, orders, authorizations, registrations, declarations
and filings as may be required under applicable federal, foreign and state
securities (or related) laws and the HSR Act and the securities or
antitrust laws of any foreign country, (iv) such filings as are required by
the Nasdaq National Market or other exchange to permit the trading of
shares of Parent Company stock issued in connection with the Merger
(subject to the terms of the Affiliate Agreements) and (v) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not be material to Parent or Company or have a
material adverse effect on the ability of the parties hereto to consummate
the Merger.
3.4 SEC Filings; Parent Financial Statements.
(a) Parent has filed all forms, reports and documents required to be
filed by Parent with the SEC since January 1, 1997. All such required
forms, reports and documents (including those that Parent may file
subsequent to the date hereof) are referred to herein as the "Parent SEC
Reports." As of their respective dates, the Parent SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such Parent SEC Reports, and (ii) did not at the
time they were filed (or if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the Parent SEC Reports (the
"Parent Financials"), including any Parent SEC Reports filed after the date
hereof until the Closing, (i) complied as to form in all material respects
with the published rules and regulations of the SEC with respect thereto,
(ii) was prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes
thereto or, in the case of unaudited interim financial statements, as may
be permitted by the SEC on Form 1O-Q under the Exchange Act) and (iii)
fairly presented the consolidated financial position of Parent as at the
respective dates thereof and the consolidated results of Parent's
operations and cash flows for the periods indicated, except that the
unaudited interim financial statements may not contain footnotes and were
or are subject to normal and recurring year-end adjustments. The balance
sheet of Parent contained in Parent SEC Reports as of December 31, 1997, is
hereinafter referred to as the "Parent Balance Sheet."
3.5 Absence of Certain Changes or Events. Since the date of the Parent
Balance Sheet there has not been any Material Adverse Effect on Parent. Parent
has no material obligations or liabilities of any nature (matured or unmatured,
fixed or contingent) other than (i) those set forth or adequately provided for
in the Parent Balance Sheet, (ii) those not required under GAAP to be set forth
in the Parent Balance Sheet, (iii) those incurred in the ordinary course of
business since the date of the Parent Balance Sheet and consistent with past
practice, and (iv) those incurred in connection with the execution and delivery
of this Agreement.
3.6 Statements; proxy statement/prospectus. The information supplied by
Parent for inclusion in the Registration Statement shall not at, the time the
Registration Statement is filed with the SEC or at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The
information supplied by Parent for inclusion in the proxy statement/prospectus
shall not, on the date the
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proxy statement/prospectus is first mailed to Company's stockholders or at the
time of the Company Stockholders' Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The proxy
statement/prospectus will comply as to form in all material respects with the
provisions of the Securities Act, the Exchange Act and the rules and
regulations thereunder. If at any time prior to the Effective Time, any event
relating to Parent or any of its affiliates, officers or directors should be
discovered by Parent which is required to be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement Prospectus,
Parent shall promptly inform Company. Notwithstanding the foregoing, Parent
makes no representation or warranty with respect to any information supplied by
Company which is contained in any of the foregoing documents.
3.7 Valid Issuance. The Parent Common Stock to be issued in the Merger, when
issued in accordance with the provisions of this Agreement: (a) will be validly
issued, fully paid and nonassessable, and (b) will not be subject to any
restrictions on resale under the Securities Act, other than restrictions
imposed by Rule 145 promulgated under the Securities Act.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business by Company. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Effective Time, Company shall, except to the
extent that Parent shall otherwise consent in writing, carry on its business,
in all material respects, in a manner consistent with the winding down of
Company and in compliance with all applicable laws and regulations, pay its
debts and taxes when due subject to good faith disputes over such debts or
taxes and pay or perform other material obligations when due. In addition,
Company will promptly notify Parent of any material event involving its
business or operations.
In addition, except as permitted by the terms of this Agreement, and except
as provided in Article 4 of the Company Disclosure Letter, without the prior
written consent of Parent, during the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement pursuant
to its terms or the Effective Time, Company shall not do any of the following
and shall not permit its subsidiaries to do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant, director or other stock plans or
authorize cash payments in exchange for any options granted under any of
such plans;
(b) Grant any severance or termination pay to any officer or employee
except pursuant to written agreements outstanding, or policies existing, on
the date hereof and as previously disclosed in writing or made available to
Parent, or adopt any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend,
amend or modify in any material respect any rights to the Company
Intellectual Property, or enter into grants to future patent rights;
(d) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital
stock or issue or authorize the issuance of any other securities in respect
of; in lieu of or in substitution for any capital stock;
(e) Purchase, redeem or otherwise acquire, directly or indirectly, any
shares of capital stock of Company or its subsidiaries, except repurchases
of unvested shares at cost in connection with the termination of the
employment relationship with any employee pursuant to stock option or
purchase agreements in effect on the date hereof;
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(f) Issue, deliver, sell, authorize, pledge or otherwise encumber or
propose any of the foregoing of any shares of capital stock or any
securities convertible into shares of capital stock, or subscriptions,
rights, warrants or options to acquire any shares of capital stock or any
securities convertible into shares of capital stock, or enter into other
agreements or commitments of any character obligating it to issue any such
shares or convertible securities, other than the issuance delivery and/or
sale of shares of Company Common Stock pursuant to the exercise of stock
options therefor outstanding as of the date of this Agreement;
(g) Cause, permit or propose any amendments to its Certificate of
Incorporation, Bylaws or other charter documents (or similar governing
instruments of any of its subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof; or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to the business of Company or enter into any material joint
ventures, strategic partnerships or alliances;
(i) Sell, lease, license, encumber or otherwise dispose of any properties
or assets which are material, individually or in the aggregate, to the
business of Company, except for the destruction of Procysteine according to
terms or agreements disclosed to Parent prior to such destruction;
(j) Incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or
options, warrants, calls or other rights to acquire any debt securities of
Company, enter into any "keep well" or other agreement to maintain any
financial statement condition or enter into any arrangement having the
economic effect of any of the foregoing;
(k) Adopt or amend any employee benefit plan or employee stock purchase
or employee stock option plan, or enter into any employment contract or
collective bargaining agreement (other than offer letters and letter
agreements entered into in the ordinary course of business consistent with
past practice with employees who are terminable "at will,"), pay any
special bonus or special remuneration to any director or employee, or
increase the salaries or wage rates or fringe benefits (including rights to
severance or indemnification) of its directors, officers, employees or
consultants other than in the ordinary course of business, consistent with
past practice, or change in any material respect any management policies or
procedures;
(1) Except for payments listed on Schedule 2.5(c) of the Company
Disclosure Letter, make any payments individually in excess of $25,000 or
in the aggregate in excess of $50,000;
(m) except in the ordinary course of business, modify, amend or terminate
any Company Contract or waive, release or assign any material rights or
claims thereunder;
(n) enter into any contracts, agreements, or obligations that would be
required to be included in Section 2.15 of the Company Disclosure Letter as
a Company Contract;
(o) materially revalue any of its assets or, except as required by GAAP,
make any change in accounting methods, principles or practices;
(p) engage in any action with the intent to directly or indirectly
adversely impact any of the transactions contemplated by this Agreement; or
(q) make or change any Tax or accounting election, change any annual
accounting period, adopt or change any accounting method, file any amended
Return, enter into any closing agreement, settle any Tax claim or
assessment relating to Company, surrender any right to claim refund of
Taxes, consent to any extension or waiver of the limitation period
applicable to any Tax claim or assessment relating to Company, or take any
other action or omit to take any action if any such other action or
omission would have the effect of increasing the Tax liability of Company
or Parent; or
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(r) agree in writing or otherwise to take any of the actions described in
Article 4 (a) through (r) above.
4.2 Conduct of Business by Parent. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Effective Time, except as permitted by the terms
of this Agreement and except as provided in Article 4 of the Parent Disclosure
Letter, without the prior written consent of Company (which consent shall not
be unreasonably withheld), during the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement pursuant
to its terms or the Effective Time, Parent shall not, except for the payment of
dividends to the holders of Parent's Series B Convertible Preferred Stock
pursuant to the Certificate of Designation, declare, set aside or pay any
dividends on or make any other distributions (whether in cash, stock, equity
securities or property) in respect of any capital stock or split, combine or
reclassify any capital stock or issue or authorize the issuance of any other
securities in respect of in lieu of or in substitution for any capital stock.
4.3 No Right to Continued Employment or Benefits. Parent does not intend to
offer employment to any employees of Company. No provision in this Agreement
shall create any third party beneficiary or other right in any person
(including any beneficiary or dependent thereof) for any reason, including,
without limitation, in respect of continued employment with Company (or any
affiliate of Company) or in respect of any benefits that may be provided,
directly or indirectly, under any plan or arrangement maintained by Parent or
any affiliate of Company or Parent. Except for costs and liabilities that are
included in the calculation of Net Cash, there are no costs and liabilities
arising as a result of the termination and/or transfer of Company's employees,
including without limitation, with respect to any employee benefits, the
Company Employee Plans, vacation and sick pay accruals, salaries and bonuses,
and any severance or termination arrangements.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings.
(a) As promptly as practicable after the execution of this Agreement,
Company and Parent will prepare, and file with the SEC, the proxy
statement/prospectus and Parent will prepare and file with the SEC the
Registration Statement in which the proxy statement/prospectus will be
included as a prospectus; provided, however, that the proxy
statement/prospectus shall not be filed with the SEC until Company has
received a final report from its auditors for Company's financial
statements for the period ended November 30, 1998 and any contingencies
regarding such financial statements have been finally resolved. Each of
Company and Parent will respond to any comments of the SEC, will use its
respective commercially reasonable efforts to have the Registration
Statement declared effective under the Securities Act as promptly as
practicable after such filing, and Company will cause the proxy
statement/prospectus to be mailed to its stockholders at the earliest
practicable time after the Registration Statement is declared effective by
the SEC. As promptly as practicable after the date of this Agreement, each
of Company and Parent will prepare and file any other filings required to
be filed by it under the Exchange Act, the Securities Act or any other
Federal, foreign or Blue Sky or related laws relating to the Merger and the
transactions contemplated by this Agreement (the "Other Filings"). Each of
Company and Parent will notify the other promptly upon the receipt of any
comments from the SEC or its staff or any other government officials and of
any request by the SEC or its staff or any other government officials for
amendments or supplements to the Registration Statement, the proxy
statement/prospectus or any Other Filing or for additional information and
will supply the other with copies of all correspondence between such party
or any of its representatives, on the one hand, and the SEC, or its staff
or any other government officials, on the other hand, with respect to the
Registration Statement, the proxy statement/prospectus, the Merger or any
Other Filing. Each of Company and Parent will cause all documents that it
is responsible for filing with the SEC or other regulatory authorities
under this Section 5.1(a) to comply in all material
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respects with all applicable requirements of law and the rules and
regulations promulgated thereunder. Whenever any event occurs which is
required to be set forth in an amendment or supplement to the proxy
statement/prospectus, the Registration Statement or any Other Filing,
Company or Parent, as the case may be, will promptly inform the other of
such occurrence and cooperate in filing with the SEC or its staff or any
other government officials, and/or mailing to stockholders of Company, such
amendment or supplement.
(b) Notwithstanding Section 5.1(a) of this Agreement, in the event that
the Registration Statement has not been declared effective by the SEC and
the proxy statement/prospectus mailed to Company's stockholders by February
12, 1999, Parent, in its sole discretion, may delay the effectiveness of
the Registration Statement until the earlier of (i) the date Parent files
its Form 10-k for the year ended December 31, 1998, with the SEC or (ii)
April 15, 1999, provided, that Parent shall have filed a Form 12b-25 with
the SEC pursuant to the Exchange Act and such From 12b-25 shall be
effective in order for Parent to delay effectiveness of the Registration
Statement beyond March 31, 1999. Company shall mail the proxy
statement/prospectus to Company stockholders as soon as practicable after
the effective date of the Registration Statement.
5.2 Meeting of Company Stockholders.
(a) Promptly after the date hereof, Company will take all action
necessary in accordance with the Delaware Law and its Certificate of
Incorporation and Bylaws to convene the Company Stockholders' Meeting to be
held as promptly as practicable, and in any event (to the extent
permissible under applicable law) within 35 days after the declaration of
effectiveness of the Registration Statement, for the purpose of voting upon
this Agreement and the Merger. Company will use its commercially reasonable
efforts to solicit from its stockholders proxies. Notwithstanding anything
to the contrary contained in this Agreement, Company may adjourn or
postpone the Company Stockholders' Meeting to the extent necessary to
ensure that any necessary supplement or amendment to the proxy
statement/prospectus is provided to Company's stockholders in advance of a
vote on the Merger and this Agreement or if, as of the time for which
Company Stockholders' Meeting is originally scheduled (as set forth in the
proxy statement/prospectus), there are insufficient shares of Company
Common Stock represented (either in person or by proxy) to constitute a
quorum necessary to conduct the business of the Company Stockholders'
Meeting. Company shall ensure that the Company Stockholders' Meeting is
called, noticed, convened, held and conducted, and that all proxies
solicited by the Company in connection with the Company Stockholders'
Meeting are solicited, in compliance with the Delaware Law, its Certificate
of Incorporation and Bylaws, the rules of Nasdaq and all other applicable
legal requirements. Company's obligation to call, give notice of, convene
and hold the Company Stockholders' Meeting in accordance with this Section
5.2(a) shall not be limited to or otherwise affected by the commencement,
disclosure, announcement or submission to Company of any Acquisition
Proposal (as defined in Section 5.4(c)), or by any withdrawal, amendment or
modification of the recommendation of the board of directors of Company
with respect to the Merger.
(b) The board of directors of Company shall unanimously recommend that
Company's stockholders vote in favor of and adopt and approve this
Agreement and the Merger at the Company Stockholders' Meeting. The
Prospectus/Proxy Statement shall include a statement to the effect that the
board of directors of the Company has unanimously recommended that
Company's stockholders vote in favor of and adopt and approve this
Agreement and the Merger at the Company Stockholders' Meeting.
5.3 Confidentiality; Access to Information.
(a) The parties acknowledge that Company and Parent have previously
executed a Confidentiality Agreement, dated as of November 30, 1998 (the
"Confidentiality Agreement"), which Confidentiality Agreement will continue
in full force and effect in accordance with its terms.
(b) Access to Information. Company will afford Parent and its
accountants, counsel and other representatives reasonable access during
normal business hours to the properties, books, records and
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personnel of Company during the period prior to the Effective Time to
obtain all information concerning the business, properties, results of
operations and personnel of Company, as Parent may reasonably request. No
information or knowledge obtained by Parent in any investigation pursuant
to this Section 5.3 will affect or be deemed to modify any representation
or warranty contained herein or the conditions to the obligations of the
parties to consummate the Merger.
5.4 No Solicitation.
(a) Company and its officers, directors, employees or other agents of
Company (i) shall not, directly or indirectly, take any action to solicit,
initiate or encourage any inquiries or proposals that constitute, or which
could reasonably be expected to lead to, an Acquisition Proposal (as
defined in Section 5.4(c)), (ii) shall not, directly or indirectly, subject
to the terms of the immediately following sentence, engage in negotiations
or discussions with, or disclose any nonpublic information relating to
Company to, or afford access to the properties, books or records of Company
to, any person with regard to an Acquisition Proposal and (iii) shall
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any person, firm or entity conducted
heretofore with respect to any of the foregoing; provided, however, that
nothing herein shall prohibit the Company board of directors from taking
and disclosing to Company's stockholders a position with respect to a
tender offer as required under Rules 14d-9 and 14e-2 promulgated under the
Exchange Act.
(b) Company shall notify Parent promptly (and, in any event, no later
than 48 hours), orally and in writing, after receipt by Company (or its
advisors) of any Acquisition Proposal or obtaining actual knowledge that
any person is submitting an Acquisition Proposal or any request for non-
public information relating to Company or for access to the properties,
books or records of Company by any person that has advised Company that it
may be considering making, or that has made, an Acquisition Proposal and
will keep Parent informed of the status and details of any such Acquisition
Proposal, notice, request or any correspondence or communications related
thereto and shall provide Parent with a written summary in reasonable
detail of such Acquisition Proposal, notice or request or correspondence or
communications related thereto (including the identity of the offeror and a
summary of the terms and conditions of such Acquisition Proposal).
(c) For purposes of this Agreement, "Acquisition Proposal" means any
written offer or proposal for, or any written indication of interest in, a
merger or other business combination involving Company or the acquisition
of 35% or more of the outstanding shares of capital stock of Company, or
the sale or transfer of all or substantially all of the assets (excluding
the sale or disposition of assets in the ordinary course of business) of
Company, other than the transactions contemplated by this Agreement.
5.5 Public Disclosure. Parent and Company will consult with each other, and
to the extent practicable, agree, before issuing any press release or otherwise
making any public statement with respect to the Merger, this Agreement or an
Acquisition Proposal and will not issue any such press release or make any such
public statement prior to such consultation, except as may be required by law
or any listing agreement with a national securities exchange. The parties have
agreed to the text of the joint press release announcing the signing of this
Agreement.
5.6 Reasonable Efforts Notification.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use all reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done,
and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the
most expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement, including using reasonable efforts to
accomplish the following: (i) the taking of all reasonable action necessary
to cause the conditions precedent set forth in Article VI to be satisfied,
(ii) the obtaining of all necessary actions or nonactions, waivers,
consents, approvals, orders and authorizations from Governmental Entities
and the making of all necessary
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registrations, declarations and filings (including registrations,
declarations and filings with Governmental Entities, if any) and the taking
of all reasonable steps as may be necessary to avoid any suit, claim,
action, investigation or proceeding by any Governmental Entity, (iii) the
obtaining of all necessary consents, approvals or waivers from third
parties, (iv) the defending of any suits, claims, actions, investigations
or proceedings, whether judicial or administrative, challenging this
Agreement or the consummation of the transactions contemplated hereby,
including seeking to have any stay or temporary restraining order entered
by any court or other Governmental Entity vacated or reversed and (v) the
execution or delivery of any additional instruments necessary to consummate
the transactions contemplated by, and to fully carry out the purposes of,
this Agreement. In connection with and without limiting the foregoing,
Company and its board of directors shall, if any state takeover statute or
similar statute or regulation is or becomes applicable to the Merger, this
Agreement or any of the transactions contemplated by this Agreement, use
all reasonable efforts to ensure that the Merger and the other transactions
contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated by this Agreement and otherwise to
minimize the effect of such statute or regulation on the Merger, this
Agreement and the transactions contemplated hereby. Notwithstanding
anything herein to the contrary, nothing in this Agreement shall be deemed
to require Parent or Company or any subsidiary or affiliate thereof to
agree to any divestiture by itself or any of its affiliates of shares of
capital stock or of any business, assets or property, or the imposition of
any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such assets, properties and
stock.
(b) Company shall give prompt notice to Parent of any representation or
warranty made by it contained in this Agreement becoming untrue or
inaccurate in any material respect, or any failure of Company to comply
with or satisfy in any material respect any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement, in
each case, such that the conditions set forth in Section 6.3(a) or 6.3(b)
would not be satisfied; provided, however, that no such notification shall
affect the representations, warranties, covenants or agreements of the
parties or the conditions to the obligations of the parties under this
Agreement.
(c) Parent shall give prompt notice to Company of any representation or
warranty made by it or Merger Sub contained in this Agreement becoming
untrue or inaccurate in any material respect, or any failure of Parent or
Merger Sub to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement, in each case, such that the conditions set forth in Section
6.2(a) or 6.2(b) would not be satisfied; provided, however, that no such
notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the
parties under this Agreement.
5.7 Third-Party Consents. As soon as practicable following the date hereof,
Parent and Company will each use its commercially reasonable efforts to obtain
any consents, waivers and approvals under any of its or its subsidiaries'
respective agreements, contracts, licenses or leases required to be obtained in
connection with the consummation of the transactions contemplated hereby.
5.8 Indemnification.
(a) From and after the Effective Time, Parent will, and will cause the
Surviving Corporation to, fulfill and honor in all respects the obligations
of Company pursuant to any indemnification agreements between Company and
its directors and officers as of the Effective Time (the "Indemnified
Parties") and any indemnification provisions under Company's Certificate of
Incorporation or Bylaws as in effect on the date hereof. The Certificate of
Incorporation and Bylaws of the Surviving Corporation will contain
provisions with respect to exculpation and indemnification that are at
least as favorable to the Indemnified Parties as those contained in the
Certificate of Incorporation and Bylaws of Company as in effect on the date
hereof, which provisions will not be amended, repealed or otherwise
modified for a period of five years from the Effective Time in any manner
that would adversely affect the rights thereunder of individuals who,
immediately prior to the Effective Time, were directors, officers,
employees or agents of Company, unless such modification is required by
law.
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(b) For a period of five years after the Effective Time, Parent will, and
will cause the Surviving Corporation to use its commercially reasonable
efforts to, maintain in effect, directors' and officers' liability
insurance covering those persons who are currently covered by Company's
directors' and officers' liability insurance policy on terms comparable to
those applicable to the current directors and officers of Company;
provided, however, that in no event will Parent or the Surviving
Corporation be required to expend in excess of 125% of the annual premium
currently paid by Company for such coverage (or such coverage as is
available for such 125% of such annual premium).
5.9 Nasdaq Listing. Parent agrees to authorize, prior to the Effective Time,
for listing on Nasdaq the shares of Parent Common Stock issuable, and those
required to be reserved for issuance, in connection with the Merger, upon
official notice of issuance.
5.10 Affiliate Agreements. Set forth on the Company Disclosure Letter is a
list of the Affiliates (each a "Company Affiliate"). Company will provide
Parent with such information and documents as Parent reasonably requests for
purposes of reviewing such list. Company will use its commercially reasonable
efforts to deliver or cause to be delivered to Parent, as promptly as
practicable on or following the date hereof, from each Company Affiliate an
executed Affiliate Agreement, each of which will be in full force and effect as
of the Effective Time. Parent will be entitled to place appropriate legends on
the certificates evidencing any Parent Common Stock to be received by a Company
Affiliate pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for the Parent Common Stock,
consistent with the terms of the Company Affiliate Agreement.
5.11 Regulatory Filings; Reasonable Efforts. As soon as may be reasonably
practicable, Company and Parent each shall file with the United States Federal
Trade Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice ("DOJ") Notification and Report Forms relating to the
transactions contemplated herein as required by the HSR Act, as well as
comparable pre-merger notification forms required by the merger notification or
control laws and regulations of any applicable jurisdiction, as agreed to by
the parties. Company and Parent each shall promptly (a) supply the other with
any information which may be required in order to effectuate such filings and
(b) supply any additional information which reasonably may be required by the
FTC, the DOJ or the competition or merger control authorities of any other
jurisdiction and which the parties may reasonably deem appropriate. Company
shall file a final clinical report with the United States Food and Drug
Administration ("FDA") and shall provide Parent a copy of such report. Company
shall take all such actions as are required to terminate any obligations to
file any reports with the FDA or equivalent foreign agencies.
5.12 Updates to Net Cash. Within fifteen (15) days of the end of each month
following the date of this Agreement until the earlier of the Closing Date or
the termination of this Agreement, Company shall provide Parent a Statement of
Net Cash in the form of Section 2.5(c) of the Company Disclosure Letter,
stating Company's Net Cash as of the last day of the month just ended. Company
shall provide Parent a final statement of Net Cash in the same form as used in
Section 2.5(c) of the Company Disclosure Letter on the Closing Date, showing
Company's Net Cash as of such date. Each statement of Net Cash provided under
this Section 5.12 shall be accompanied by a certificate signed by the President
of Company certifying that such statement is true and correct and accurately
reflects Company's Net Cash as of such date. Parent has the right to have its
auditors review such updates, and Company shall reasonably cooperate with such
review.
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ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) Company Stockholder Approval. This Agreement shall have been approved
and adopted, and the Merger shall have been duly approved, by the requisite
vote under applicable law, by the stockholders of Company.
(b) Registration Statement Effective; Proxy Statement. The SEC shall have
declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding
in respect of the proxy statement/prospectus, shall have been initiated or
threatened in writing by the SEC.
(c) No Order; HSR Act. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger. All waiting
periods, if any, under the HSR Act relating to the transactions
contemplated hereby will have expired or terminated early and all material
foreign antitrust approvals required to be obtained prior to the Merger in
connection with the transactions contemplated hereby shall have been
obtained.
(d) Listing of Shares. The shares of Parent Common Stock issuable, and
reserved for issuance, in connection with the Merger shall have been
authorized for listing on Nasdaq upon official notice of insurance.
6.2 Additional Conditions to Obligations of Company. The obligation of
Company to consummate and effect the Merger shall be subject to the
satisfaction at or prior to the Closing Date of each of the following
conditions, any of which may be waived, in writing, exclusively by Company:
(a) Representations and Warranties. Each representation and warranty of
Parent and Merger Sub contained in this Agreement (i) shall have been true
and correct as of the date of this Agreement and (ii) shall be true and
correct on and as of the Closing Date with the same force and effect as if
made on the Closing Date except (A) in each case, or in the aggregate, as
does not constitute a Material Adverse Effect on Parent and Merger Sub, (B)
for changes contemplated by this Agreement and (C) for those
representations and warranties which address matters only as of a
particular date (it being understood that, for purposes of determining the
accuracy of such representations and warranties, (i) all "Material Adverse
Effect" qualifications and other qualifications based on the word
"material" or similar phrases contained in such representations and
warranties shall be disregarded and (ii) any update of or modification to
the Parent Disclosure Letter made or purported to have been made after the
date of this Agreement shall be disregarded). Company shall have received a
certificate with respect to the foregoing signed on behalf of Parent by an
authorized officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have performed
or complied with all agreements and covenants required by this Agreement to
be performed or complied with by them on or prior to the Closing Date,
except where the failure to do so would not (individually or in the
aggregate) have a Material Adverse Effect on Parent and Merger Sub, and
Company shall have received a certificate to such effect signed on behalf
of Parent by an authorized officer of Parent.
(c) Material Adverse Effect. No Material Adverse Effect with respect to
Parent shall have occurred since the date of this Agreement.
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6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Closing Date of each of the
following conditions, any of which may be waived, in writing, exclusively by
Parent:
(a) Representations and Warranties. Each representation and warranty of
Company contained in this Agreement (i) shall have been true and correct as
of the date of this Agreement and (ii) shall be true and correct on and as
of the Closing Date with the same force and effect as if made on and as of
the Closing Date except (A) in each case, or in the aggregate, as does not
constitute a Material Adverse Effect on Company, (B) for changes
contemplated by this Agreement and (C) for those representations and
warranties which address matters only as of a particular (it being
understood that, for purposes of determining the accuracy of such
representations and warranties, (i) all "Material Adverse Effect"
qualifications and other qualifications based on the word "material" or
similar phrases contained in such representations and warranties shall be
disregarded and (ii) any update of or modification to the Company
Disclosure Letter made or purported to have been made after the date of
this Agreement shall be disregarded). Parent shall have received a
certificate with respect to the foregoing signed on behalf of Company by
the President of Company.
(b) Agreements and Covenants. Company shall have performed or complied
with all agreements and covenants required by this Agreement to be
performed or complied with by it at or prior to the Closing Date, except
where the failure to do so would not (individually or in the aggregate)
have a Material Adverse Effect on Company, and Parent shall have received a
certificate to such effect signed on behalf of Company by the President of
Company.
(c) Material Adverse Effect. No Material Adverse Effect with respect to
Company and its subsidiaries shall have occurred since the date of this
Agreement.
(d) Affiliate Agreements. Each of the persons set forth on Section 5.10
of the Company Disclosure Letter shall have entered into an Affiliate
Agreement and each of such agreements will be in full force and effect as
of the Effective Time.
(e) Consents. Company shall have obtained all consents, waivers and
approvals required in connection with the consummation of the transactions
contemplated hereby in connection with the agreements, contracts, licenses
or leases set forth on Schedule 6.3(e).
(f) Termination. Company shall have obtained notices of termination in
form acceptable to Parent of the agreements, contracts, licenses or leases
set forth on Schedule 6.3(f).
(g) Company shall provide a certificate of destruction or a bill of sale
in form satisfactory to Parent for all Procysteine owned or controlled by
Company, in bulk form or otherwise.
(h) Company shall provide evidence of abandonment or a bill of sale of
all Company Registered Intellectual Property in form satisfactory to
Parent.
(i) Company shall have entered into severance agreements acceptable to
Parent with any and all employees.
(j) The costs associated or incurred in connection with any actions or
inactions required by this Agreement shall be included in the calculation
of Net Cash.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after the requisite approvals of the
stockholders of Company or Parent:
(a) by mutual written consent duly authorized by the Boards of Directors
of both Parent and Company;
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(b) by either Company or Parent if the Merger shall not have been
consummated by March 31, 1999 (the "Closing Deadline"); provided, however,
that if the Registration Statement shall not have been declared effective,
or the proxy statement/prospectus shall not have been mailed to Company
stockholders, by February 12, 1999, then the Closing Deadline shall be May
31, 1999, and provided further that the right to terminate this Agreement
under this Section 7.1(b) shall not be available to any party whose action
or failure to act has been a principal cause of or resulted in the failure
of the Merger to occur on or before such date and such action or failure to
act constitutes a breach of this Agreement;
(c) by either Company or Parent if a Governmental Entity shall have
issued an order, decree or ruling or taken any other action, in any case
having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger, which order, decree, ruling or other action is
final and nonappealable;
(d) by Parent if the required approval of the stockholders of Company
contemplated by this Agreement shall not have been obtained by reason of
the failure to obtain the required vote at a meeting of Company
stockholders duly convened therefor or at any adjournment thereof;
(e) by Parent (at any time prior to the adoption and approval of this
Agreement and the Merger by the required vote of the stockholders of
Company) if a Triggering Event (as defined below) shall have occurred;
(f) by Parent (at any time prior to the adoption and approval of this
Agreement and the Merger by the required vote of the stockholders of
Company) if a Termination Event (as defined below) shall have occurred;
(g) by Company if the conditions set forth in Section 6.2(a) or Section
6.2(b) are not satisfied as of the date of this Agreement or the earlier of
(i) the Closing Date, provided that if such failure is curable by Parent,
then Company may not terminate this Agreement under this Section 7.1(g)(i)
for thirty days after delivery of written notice from Company to Parent of
such failure setting forth a description of such failure in reasonable
detail, provided Parent continues to exercise commercially reasonable
efforts to cure such failure (it being understood that Company may not
terminate this Agreement pursuant to this paragraph (g) if Company shall
have violated the conditions of Section 6.3(a) or Section 6.3(b) of this
Agreement, materially breached this Agreement or if such failure by Parent
is cured during such thirty day period), or (ii) the Closing Deadline; or
(h) by Parent if the conditions set forth in Section 6.3(a) or Section
6.3(b) are not satisfied as of the date of this Agreement or the earlier of
(i) the Closing Date, provided that if such failure is curable by Company,
then Parent may not terminate this Agreement under this Section 7.1(h)(i)
for thirty days after delivery of written notice from Parent to Company of
such failure setting forth a description of such failure in reasonable
detail, provided Company continues to exercise commercially reasonable
efforts to cure such failure (it being understood that Parent may not
terminate this Agreement pursuant to this paragraph (h) if Parent shall
have violated the conditions of Section 6.2(a) or Section 6.2(b) of this
Agreement, materially breached this Agreement or if such failure by Company
is cured during such thirty day period), or (ii) the Closing Deadline.
For the purposes of this Agreement, a "Termination Event" shall be deemed to
occur if Company shall not have held the Company Stockholder's Meeting by the
Closing Deadline.
For the purposes of this Agreement, a "Triggering Event" shall be deemed to
have occurred if: (i) the board of directors of Company or any committee
thereof shall for any reason have withdrawn or shall have amended or modified
in a manner adverse to Parent its unanimous recommendation in favor of the
adoption and approval of the Agreement or the approval of the Merger; (ii)
Company shall have failed to include in the proxy statement/prospectus the
unanimous recommendation of the board of directors of Company in favor of the
adoption and approval of the Agreement and the approval of the Merger; (iii)
the board of directors of Company fails to reaffirm its unanimous
recommendation in favor of the adoption and approval of the Agreement and the
approval of the Merger within five (5) business days after Parent requests in
writing that
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such recommendation be reaffirmed at any time following the public announcement
of an Acquisition Proposal; (iv) the board of directors of Company or any
committee thereof shall have approved or publicly recommended any Acquisition
Proposal; (v) Company shall have entered into any letter of intent or similar
document or any agreement, contract or commitment accepting any Acquisition
Proposal; (vi) a tender or exchange offer relating to securities of Company
shall have been commenced by a Person unaffiliated with Parent and Company
shall not have sent to its securityholders pursuant to Rule 14e-2 promulgated
under the Securities Act, within ten (10) business days after such tender or
exchange offer is first published sent or given, a statement disclosing that
Company recommends rejection of such tender or exchange offer; or (vii) Company
shall have otherwise breached its obligations under Sections 5.2 and/or 5.4
hereof.
7.2 Notice of Termination Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other parties
hereto. In the event of the termination of this Agreement as provided in
Section 7.1, this Agreement shall be of no further force or effect, except (i)
as set forth in this Section 7.2, Section 7.3 and Article 8 (miscellaneous),
each of which shall survive the termination of this Agreement, and (ii) nothing
herein shall relieve any party from liability for any willful breach of this
Agreement. No termination of this Agreement shall affect the obligations of the
parties contained in the Confidentiality Agreement, all of which obligations
shall survive termination of this Agreement in accordance with their terms.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses
whether or not the Merger is consummated; provided, however, that Parent
and Company shall share equally all fees and expenses, other than
attorneys' and accountants fees and expenses, incurred in relation to the
printing and filing (with the SEC) of the proxy statement/prospectus
(including any preliminary materials related thereto) and the Registration
Statement (including financial statements and exhibits) and any amendments
or supplements thereto.
(b) Company Payments. In the event that this Agreement is terminated by
Parent or Company, as applicable, pursuant to Section 7.1(d), (e), (f),
provided that the Registration Statement shall have been declared effective
by April 15, 1999, or (h), Company shall promptly, but in no event later
than two days after the date of such termination, pay Parent a fee equal to
$500,000 in immediately available funds (the "Termination Fee"); provided,
however, that such payment shall not be due if in the case of termination
under Section 7.1(d), the failure to obtain the required stockholder
approval is primarily the result of a Material Adverse Effect on Parent.
Company acknowledges that the agreements contained in this Section 7.3(b)
are an integral part of the transactions contemplated by this Agreement,
and that, without these agreements, Parent would not enter into this
Agreement; accordingly, if Company fails promptly to pay the amounts due
pursuant to this Section 7.3(b), and, in order to obtain such payment,
Parent commences a suit which results in a judgment against Company for the
amounts set forth in this Section 7.3(b), Company shall pay to Parent its
reasonable costs and expenses (including attorneys' fees and expenses) in
connection with such suit, together with interest on the amounts set forth
in this Section 7.3(b) at the prime rate of The Chase Manhattan Bank in
effect on the date such payment was required to be made. Except as provided
by law, payments pursuant to this Section 7.3(b) are the sole remedy for
termination or breach of this Agreement.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of Parent and Company.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any of the agreements or
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conditions for the benefit of such party contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party. Delay in
exercising any right under this Agreement shall not constitute a waiver of such
right.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations and
warranties of Company, Parent and Merger Sub contained in this Agreement shall
terminate at the Effective Time, and only the covenants that by their terms
survive the Effective Time shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at
the following addresses or telecopy numbers (or at such other address or
telecopy numbers for a party as shall be specified by like notice):
(a) if to Parent or Merger Sub, to:
KeraVision, Inc.
48630 Milmont Drive
Fremont, California 94538
Attention: Mark Fischer-Colbrie
Telephone No.: (510) 353-3008
Telecopy No.: (510) 353-3030
with a copy to:
Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, California 94025
Attention: Michael W. Hall
Telephone No.: (650) 854-4488
Telecopy No.: (650) 233-8386
(b) if to Company, to:
Transcend Therapeutics, Inc.
640 Memorial Drive
Cambridge, Massachusetts 02139
Attention: B. Nicholas Harvey
Telephone No.: (617) 374-1211
Telecopy No.: (617) 374-1202
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention: Steven D. Singer
Telephone No.: (617) 526-6439
Telecopy No.: (617) 526-5000
Notices by personal delivery or via nationally recognized overnight delivery
service shall be effective on receipt. Telecopied notices shall be effective on
the date of receipt if received by 5:00 p.m. local time where received, and on
the next business day if received thereafter.
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8.3 Interpretation of Knowledge.
(a) When a reference is made in this Agreement to Exhibits, such
reference shall be to an Exhibit to this Agreement unless otherwise
indicated. When a reference is made in this Agreement to Sections, such
reference shall be to a Section of this Agreement. Unless otherwise
indicated the words "include," "includes" and "including" when used herein
shall be deemed in each case to be followed by the words "without
limitations." The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. When reference is made
herein to "the business of" an entity, such reference shall be deemed to
include the business of all direct and indirect subsidiaries of such
entity. Reference to the subsidiaries of an entity shall be deemed to
include all direct and indirect subsidiaries of such entity.
(b) For purposes of this Agreement the term "knowledge" means with
respect to a party hereto, with respect to any matter in question, that any
of the Chief Executive Officer, Chief Financial Officer or Controller of
such party, has actual knowledge of such matter.
(c) For purposes of this Agreement, the term "Material Adverse Effect"
when used in connection with an entity means any change, event, violation,
inaccuracy, circumstance or effect that is materially adverse to the
business, assets (including intangible assets), capitalization, financial
condition or results of operations of such entity and its subsidiaries
taken as a whole, except for those changes, events, violations,
inaccuracies, circumstances and effects that (i) are caused by conditions
affecting the United States economy as a whole, which conditions do not
affect such entity in a disproportionate manner, or (ii) are related to or
result from announcement or pendency of the Merger. With respect to
Company, a Material Adverse Effect shall have occurred if Net Cash as of
the Closing Date is less than $7 million, regardless of how caused.
Notwithstanding anything to the contrary herein, no change, event,
violation, inaccuracy, circumstance or effect arising from or relating to
Company's clinical trials shall constitute a Material Adverse Effect with
respect to Company, except to the extent such change, event violation,
inaccuracy, circumstance or effect is based on events taking place after,
or based on information materially different from that given to Parent by
Company on or before, the date of this Agreement.
(d) For purposes of this Agreement, the term "person" shall mean any
individual, corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability partnership, joint
venture, estate, trust, company (including any limited liability company or
joint stock company), firm or other enterprise, association, organization,
entity or Governmental Entity.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third-Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including the Company Disclosure Letter
and the Parent Disclosure Letter (a) constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, it being understood that the
Confidentiality Agreement shall continue in full force and effect until the
Closing and shall survive any termination of this Agreement; and (b) are not
intended to confer upon any other person any rights or remedies hereunder,
except as specifically provided in Section 5.8.
8.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in lull force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
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agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof;
provided that issues involving the corporate governance of any of the parties
hereto shall be governed by their respective jurisdictions of incorporation.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction
of any state or federal court within the State of Delaware, in connection with
any matter based upon or arising out of this Agreement or the matters
contemplated herein, other than issues involving the corporate governance of
any of the parties hereto, agrees that process may be served upon them in any
manner authorized by the laws of the State of Delaware for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction and such process.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule
of construction providing that ambiguities in an agreement or other document
will be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties. Subject to the preceding sentence, this Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
* * * * *
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
KERAVISION, INC.
/s/ Thomas M. Loarie
By: _________________________________
Thomas M. Loarie
Name: _______________________________
Chairman & CEO
Title: ______________________________
KVTT ACQUISITION CORPORATION
/s/ Thomas M. Loarie
By: _________________________________
Thomas M. Loarie
Name: _______________________________
Chairman & CEO
Title: ______________________________
TRANSCEND THERAPEUTICS, INC.
/s/ B. Nicholas Harvey
By: _________________________________
B. Nicholas Harvey
Name: _______________________________
President
Title: ______________________________
SIGNATURE PAGE TO REORGANIZATION AGREEMENT
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EXHIBIT A
VOTING AGREEMENT
This Voting Agreement (the "Agreement") is made and entered into as of
December 1998 between KeraVision, Inc., a Delaware corporation ("Acquiror"),
and the undersigned stockholder ("Holder") of Transcend Therapeutics, Inc., a
Delaware corporation ("Target").
RECITALS
Pursuant to an Agreement and Plan of Reorganization dated as of December ,
1998 (the "Merger Agreement") by and among Acquiror, KVTT Acquisition
Corporation, a Delaware corporation and wholly owned subsidiary of Acquiror
"Sub"), and Target, Sub is merging with and into Target (the "Acquisition") and
Target, as the surviving corporation of the Acquisition, will thereby become a
wholly owned subsidiary of Acquiror. In order to induce Acquiror to enter into
the Merger Agreement, Target has agreed to use its commercially reasonable
efforts to solicit the proxies of certain significant stockholders of Target on
behalf of Acquiror, and to cause certain significant stockholders of Target to
execute and deliver to Acquiror Voting Agreements in the form hereof. The
Holder is the beneficial owner (as defined in Rule l3d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) of such number of shares
of the outstanding Common Stock, $.01 par value per share, of Target as is
indicated on the final page of this Agreement (the "Shares").
In consideration of the execution of the Merger Agreement by Acquiror,
Holder agrees not to transfer or otherwise dispose of any of the Shares, or any
other shares of capital stock of Target acquired by Holder hereafter and prior
to the Expiration Date (as defined in Section 1(a) below), and agrees to vote
the Shares and any other such shares of capital stock of Target so as to
facilitate consummation of the Acquisition.
AGREEMENT
The parties agree as follows:
1. Agreement to Retain Shares.
(a) Transfer and Encumbrance. Holder agrees not to transfer (except as
may be specifically required by court order), sell, exchange, pledge
(except in connection with a bona fide loan transaction, provided that any
pledgee agrees not to transfer, sell, exchange, pledge or otherwise dispose
of or encumber the Shares or any New Shares (as defined in Section 1 (b))
or otherwise dispose of or encumber the Shares or any New Shares, or to
make any offer or agreement relating thereto, at any time prior to the
Expiration Date. As used herein, the term "Expiration Date" shall mean the
earlier to occur of (i) such date and time as the Acquisition shall become
effective in accordance with the terms and provisions of the Merger
Agreement, and (ii) three months after the date of termination of the
Merger Agreement; provided, however, that Holder may, upon prior written
notice to the Parent, effect such a transaction with any corporation or
other organization that owns fifty percent or more of the equity interests
of the Holder, or of which the Holder owns fifty percent or more of the
equity interests.
(b) New Shares. Holder agrees that any shares of capital stock of Target
that Holder purchases or with respect to which Holder otherwise acquires
beneficial ownership after the date of this Agreement and prior to the
Expiration Date ("New Shares") shall be subject to the terms and conditions
of this Agreement to the same extent as if they constituted Shares.
2. Agreement to Vote Shares. At every meeting of the stockholders of Target
called with respect to any of the following, and at every adjournment thereof,
and on every action or approval by written consent of the stockholders of
Target with respect to any of the following, Holder shall vote the Shares and
any New Shares
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(i) in favor of approval of the Merger Agreement and the Acquisition and (ii)
against any proposal for any recapitalization, merger, sale of assets or other
business combination (other than the Acquisition) between Target and any person
or entity other than Acquiror or any other action or agreement t that would
result in a breach of any covenant, representation or warranty or any other
obligation or agreement of Target under the Merger Agreement or which could
result in any of the conditions to Target's obligations under the Merger
Agreement not being fulfilled. This Agreement is intended to bind Holder as a
stockholder of Target only with respect to the specific matters set forth
herein.
3. Irrevocable Proxy. Concurrently with the execution of this Agreement,
Holder agrees to deliver to Acquiror a proxy in the form attached hereto as
Exhibit A (the "Proxy"), which shall be irrevocable to the extent provided in
Section 212 of the Delaware General Corporation Law, covering the total number
of Shares and New Shares beneficially owned or as to which beneficial ownership
is acquired (as such term is defined in Rule l3d-3 under the Exchange Act) by
Holder set forth therein.
4. Representations, Warranties and Covenants of Holder. Holder hereby
represents, warrants and covenants to Acquiror that Holder (i) is the
beneficial owner of the Shares, which at the date of this Agreement and at all
times up until the Expiration Date will be free and clear of any liens, claims,
options, charges or other encumbrances; (ii) does not beneficially own any
shares of capital stock of Target other than the Shares (excluding shares as to
which Holder currently disclaims beneficial ownership in accordance with
applicable law); and (iii) has full power and authority to make, enter into and
carry out the terms of this Agreement and the Proxy.
5. Consent and Waiver. Holder hereby gives any consents or waivers that are
reasonably required for the consummation of the Acquisition under the terms of
any agreement to which Holder is a party or pursuant to any rights Holder may
have.
6. Termination. This Agreement and the Proxy delivered in connection
herewith shall terminate and shall have no further force or effect as of the
Expiration Date.
7. Miscellaneous.
(a) Amendments and Waivers. Any term of this Agreement may be amended or
waived with the written consent of the parties or their respective
successors and assigns. Any amendment or waiver effected in accordance with
this Section 8(a) shall be binding upon the parties and their respective
successors and assigns.
(b) Governing Law. This Agreement and all acts and transactions pursuant
hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the
State of Delaware, without giving effect to principles of conflicts of law.
(c) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(d) Titles and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in -construing
or interpreting this Agreement.
(e) Notices. Any notice required or permitted by this Agreement shall be
in writing and shall be deemed sufficient upon receipt, when delivered
personally or by courier, overnight delivery service or confirmed
facsimile, or forty-eight (48) hours after being deposited in the regular
mail as certified or registered mail (airmail if sent internationally) with
postage prepaid, if such notice is addressed to the party to be notified at
such party's address or facsimile number as set forth below, or as
subsequently modified by written notice.
(f) Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith, in order to maintain the economic position
enjoyed by each party as close as possible to that under the provision
rendered
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unenforceable. In the event that the parties cannot reach a mutually
agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and
(iii) the balance of the Agreement shall be enforceable in accordance with
its terms.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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The parties have caused this Agreement to be duly executed on the date first
above written.
KERAVISION, INC.
By: _________________________________
Name: _______________________________
(print)
Title: ______________________________
Address: ____________________________
_______________________________
[STOCKHOLDER]
By: _________________________________
Name: _______________________________
(print)
Title: ______________________________
Holder's Address for Notice:
_____________________________________
_____________________________________
_____________________________________
Shares beneficially owned:
Class of Shares Number
--------------- ------
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<PAGE>
IRREVOCABLE PROXY
TO VOTE STOCK OF
TARGET
The undersigned stockholder of Transcend Therapeutics, Inc., a Delaware
corporation ("Target"), hereby irrevocably (to the full extent permitted by
Section 212 of the Delaware General Corporation Law) appoints the members of
the Board of Directors of KeraVision, Inc., a Delaware corporation
("Acquiror"), and each of them, as the sole and exclusive attorneys and proxies
of the undersigned, with full power of substitution and resubstitution, to vote
and exercise all voting and related rights (to the full extent that the
undersigned is entitled to do so) with respect to all of the shares of capital
stock of Target that now are or hereafter may be beneficially owned by the
undersigned, and any and all other shares or securities of Target issued or
issuable in respect thereof on or after the date hereof (collectively, the
"Shares") in accordance with the terms of this Proxy. The Shares beneficially
owned by the undersigned stockholder of Target as of the date of this Proxy are
listed on the final page of this Proxy. Upon the undersigned's execution of
this Proxy, any and all prior proxies given by the undersigned with respect to
any Shares are hereby revoked and the undersigned agrees not to grant any
subsequent proxies with respect to the Shares until after the expiration Date
(as defined below).
This Proxy is irrevocable (to the extent permitted by Section 212 of the
Delaware General Corporation Law), is granted pursuant to that certain Voting
Agreement of even date herewith, by and between Acquiror and the undersigned
stockholder (the "Voting Agreement"), and is granted in consideration of
Acquiror entering into that certain Agreement and Plan of Merger, of even date
herewith, by and among Target, Acquiror and KVTT Acquisition Corporation, a
Delaware corporation ("Sub") and wholly owned subsidiary of Acquiror (the
"Merger Agreement"). The Merger Agreement provides for the merger of Sub with
and into Target (the "Acquisition"). As used herein, the term "Expiration Date"
shall mean the earlier to occur of (i) such date and time as the Acquisition
shall become effective in accordance with the terms and provisions of the
Merger Agreement and (ii) the date of termination of the Voting Agreement.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the
Expiration Date, to act as the undersigned's attorney and proxy to vote the
Shares, and to exercise all voting and other rights of the undersigned with
respect to the Shares (including, without limitation, the power to execute and
deliver written consents pursuant to Section 228 of the Delaware General
Corporation Law), at every annual, special or adjourned meeting of the
stockholders of Target and in every written consent in lieu of such meeting (i)
in favor of approval of the Acquisition and (ii) against any proposal for any
recapitalization, merger, sale of assets or other business combination (other
than the Acquisition) between Target and any person or entity other than
Acquiror or any other action or agreement that would result in a breach of any
covenant, representation or warranty or any other obligation or agreement of
Target under the Merger Agreement or which could result in any of the
conditions to Target's obligations under the Merger Agreement not being
fulfilled. The attorneys and proxies named above may not exercise this Proxy on
any other matter except as provided above. The undersigned stockholder may vote
the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
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<PAGE>
This Proxy is irrevocable (to the extent provided in Section 212 of the
Delaware General Corporation Law) and shall expire on the Expiration Date.
Dated: December , 1998
[STOCKHOLDER]
By: _________________________________
Name: _______________________________
(print)
Title: ______________________________
Holder's Address for Notice:
_____________________________________
_____________________________________
_____________________________________
Shares beneficially owned:
Class of Shares Number
--------------- ------
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<PAGE>
EXHIBIT B
AFFILIATE LOCK-UP AGREEMENT
December , 1998
KeraVision, Inc.
48630 Milmont Drive
Fremont, California 94538
Ladies and Gentlemen:
Pursuant to the terms of an Agreement and Plan of Reorganization (the
"Merger Agreement") by and among KeraVision, Inc. a Delaware corporation
("Acquiror"), KVTT Acquisition Corporation, a Delaware corporation and a wholly
owned subsidiary of Acquiror ("Sub") and Transcend Therapeutics, Inc., a
Delaware corporation ("Target"), Acquiror will acquire Target.
For purposes of this Agreement "Affiliate" shall mean an affiliate of
Target, as the term "affiliate" is (i) defined for purposes of paragraphs (c)
and (d) of Rule 145 of the rules and regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), and/or (ii) used in
and for purposes of Accounting Series, Releases 130 and 135, as amended, of the
Commission.
In consideration of the Acquiror's agreement to effect the Merger Agreement,
and for other good and valuable consideration, receipt of which is hereby
acknowledged, the undersigned hereby agrees that, without the prior written
consent of Acquiror, it will not, during the period commencing on the Closing
Date (as defined in the Merger Agreement) of the Merger and ending on the date
180 days thereafter, (1) offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option to 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 of the Acquiror ("Common
Stock") or any securities convertible into or exercisable or exchangeable for
Common Stock (whether such shares or any such securities are now owned by the
undersigned or are hereafter acquired), or (2) enter into any swap or similar
agreement that transfers, in whole or in part, the economic consequences of
ownership of Common Stock, whether any such transaction described in clause (1)
or (2) above is to be settled by delivery of Common Stock or other securities,
in cash or otherwise. The foregoing sentence shall not apply to transfers,
without consideration, of Common Stock or any securities convertible into, or
exercisable or exchangeable for Common Stock, to family members or to one or
more trusts established for the benefit of one or more family members, or to
any corporation or other organization that owns fifty percent or more of the
equity interests of the undersigned, or of which the undersigned owns fifty
percent or more of the equity interests, in each case which shall be permitted
at any time, provided that each and every transferee executes and delivers to
Acquiror an agreement whereby such transferee agrees to be bound by all of the
terms and provisions of this Agreement.
Notwithstanding anything to the contrary herein, if the Closing Date shall
not have occurred prior to the Closing Deadline (as defined in the Merger
Agreement) this Agreement shall be of no further force and effect.
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The undersigned understands that the agreements of the undersigned are
irrevocable and shall be binding upon the undersigned's heirs, legal
representatives, successors and assigns. The undersigned agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent
against the transfer of Common Stock or other securities of the Company held by
the undersigned except in compliance with this Agreement.
Very truly yours,
By: _________________________________
Name: _______________________________
(print)
Title: ______________________________
(if applicable)
cc: ChaseMellon Shareholder Services
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EXHIBIT C
ESCROW AGREEMENT
This Escrow Agreement (the "Agreement") is entered into as of December 22,
1998, by and among KeraVision, Inc., a Delaware corporation (the "Acquiror"),
Transcend Therapeutics, Inc., a Delaware corporation (the "Target"), and Chase
Manhattan Bank and Trust (the "Escrow Agent").
RECITALS
Acquiror, KKTV Acquisition Corporation, a Delaware corporation and wholly
owned subsidiary of Acquiror (the "Merger Sub") and Target have entered into an
Agreement and Plan of Reorganization dated as of December 22, 1998 (the "Merger
Agreement"), pursuant to which Acquiror will acquire Target through the merger
of Merger Sub with and into Target (the "Merger"). As a condition to entering
into the Merger Agreement, the Acquiror and Target have agreed that the Escrow
Fund provided for hereby will be established and maintained for the Escrow
Period (as defined below) on the terms and conditions set forth herein. The
parties desire to establish the terms and conditions pursuant to which such
Escrow Fund will be established and maintained.
AGREEMENT
The parties agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not otherwise
defined shall have the meanings given them in the Merger Agreement.
2. Escrow and Indemnification.
(a) Escrow Fund. Upon execution of the Merger Agreement, Target shall
deposit with the Escrow Agent to hold on behalf of Target subject to the
terms and conditions of this Agreement: $7,000,000 in cash (the "Escrow
Fund"). The Escrow Fund shall be held as a trust fund and shall not be
subject to any lien, attachment, trustee process or any other judicial
process of any creditor of any party hereto. Escrow Agent agrees to accept
delivery of the Escrow Fund and to hold such Escrow Fund in escrow subject
to the terms and conditions of this Agreement.
(b) Investment of Escrow Fund. During the term of this Escrow Agreement,
the Escrow Fund shall be invested and reinvested by the Escrow Agent, in a
time deposit or demand deposit or cash escrow account with the Escrow
Agent. Such investment shall earn interest at a rate tied to the average
LIBOR, less 0.5% (i.e., 50 basis points). Such interest will be computed
daily and credited to the account monthly. At any time during the term of
this Agreement, the Acquiror and Target shall be permitted to change the
investment of the Escrow Fund with joint advance written notice to the
Escrow Agent.
The Escrow Agent shall have the right to liquidate any investments held in
order to provide funds necessary to make required payments under this Escrow
Agreement. The Escrow Agent in its capacity as escrow agent hereunder shall not
have any liability for any loss sustained as a result of any investment
liquidated prior to its maturity in accordance with this Escrow Agreement or
for the failure of the Company to give the Escrow Agent instructions to invest
or reinvest the Escrow Fund or any earnings thereon.
3. Administration of Escrow Fund. Escrow Agent shall hold and safeguard the
Escrow Fund during the Escrow Period (as defined in Section 4 below), shall
treat such fund as a trust fund in accordance with the terms of this Agreement
and the Merger Agreement and not as the property of Acquiror and shall hold and
dispose of the Escrow Fund only in accordance with the terms hereof.
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4. Release of Escrow Fund. Subject to the following requirements, the Escrow
Fund shall remain in existence from the date hereof until the Escrow.
Termination Date (the "Escrow Period"), which shall be earliest date to occur
of:
(a) the Closing Date of the Merger, at which time the Escrow Fund shall
be delivered to the Acquiror, as evidenced by a certified copy of the
Certificate of Merger as filed with the Delaware Secretary of State;
(b) receipt by the Escrow Agent of the written consent of the Acquiror to
terminate the Escrow Fund and deliver the Escrow Fund to the Target; or
(c) termination of the Merger Agreement, as evidenced by a certificate
signed by an executive officer of both parties, at which time the Escrow
Fund shall be delivered to Target; provide, however, that in the event that
the Escrow Agent shall receive a certificate signed by an executive officer
of Acquiror certifying that the Merger Agreement has been terminated
pursuant to Section 7.1(d), (e), (f) or (h) thereof, then the Escrow Agent
shall deliver to Acquiror $500,000 of the Escrow Fund and deliver the
remainder of the Escrow Fund to Target, and provide, further, that Acquiror
shall have given Target twenty-four hours advance written notice prior to
delivering such certificate to the Escrow Agent.
(d) In the event funds transfer instructions are given (other than in
writing at the time of execution of the Agreement), whether in writing, by
telecopier or otherwise, the Escrow Agent is authorized to seek
confirmation of such instructions by telephone call-back to the person or
persons designated on Schedule I hereto, and the Escrow Agent may rely upon
the confirmations of anyone purporting to be the person or persons so
designated. The persons and telephone numbers for call-backs may be changed
only in a writing actually received and acknowledged by the Escrow Agent.
The parties to this Agreement acknowledge that such security procedure is
commercially reasonable.
(e) It is understood that the Escrow Agent and the beneficiary's bank in
any funds transfer may rely solely upon any account numbers or similar
identifying number provided by either of the other parties hereto to
identify (i) the beneficiary, (ii) the beneficiary's bank, or (iii) an
order it executes using any such identifying number, even where its use may
result in a person other than the beneficiary being paid, or the transfer
of funds to a bank other than the beneficiary's bank, or an intermediary
bank designated.
5. Escrow Agent's Duties.
(a) Acquiror and Target acknowledge and agree that Escrow Agent (i) shall
not be responsible for any of the agreements referred to herein but shall
be obligated only for the performance of such duties as are specifically
set forth in this Agreement and as set forth in any additional written
escrow instructions which Escrow Agent may receive after the date of this
Agreement that are signed by an officer of Acquiror and Target; (ii) shall
not be obligated to take any legal or other action hereunder which might in
its reasonable judgment involve expense or liability unless it shall have
been furnished with indemnity reasonably acceptable to it; and (iii) may
rely on and shall be protected in acting or refraining from acting upon any
written notice, instruction, instrument, statement, request or document
furnished to it hereunder and reasonably believed by it to be genuine and
to have been signed or presented by the proper person.
(b) Escrow Agent is hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person, except
as provided in Section 4, and except for orders or process of courts of law
and is hereby expressly authorized to comply with and obey orders,
judgments or decrees of any court or written decision of arbitrator. In
case Escrow Agent obeys or complies with any such order, judgment or decree
of any court, Escrow Agent shall not be liable to any of the parties hereto
or to any other person by reason of such compliance, notwithstanding any
such order, judgment or decree being subsequently reversed, modified,
annulled, set aside, vacated or found to have been entered without
jurisdiction.
(c) Escrow Agent shall not be liable in any respect on account of the
identity, authority or rights of the parties executing or delivering or
purporting to execute or deliver this Agreement or any documents, or papers
deposited or called for hereunder.
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(d) Escrow Agent shall not be liable for the expiration of any rights
under any statute of limitations with respect to this Agreement or any
documents deposited with Escrow Agent.
(e) Neither Escrow Agent nor any of its directors, officers or employees
shall be liable to anyone for any action taken or omitted to be taken by it
or any of its directors, officers or employees hereunder except in the case
of gross negligence, bad faith or willful misconduct Subject to Section
5(g) below, Acquiror and Target (collectively, the "Indemnifying Parties" )
covenant and agree to jointly and severally indemnify Escrow Agent and hold
it harmless from and against any fee, loss, liability or expense (including
reasonable attorney's fees and expenses) (a "Loss") incurred by Escrow
Agent arising out of or in connection with the performance of its
obligations in accordance with the provisions of this Agreement or with the
administration of its duties hereunder, unless such Loss shall arise out of
or be caused by Escrow Agent's gross negligence, bad faith or willful
misconduct; provided, however, that indemnification for Escrow Agent's
standard fees and expenses set forth on the fee schedule attached hereto as
Exhibit A shall be borne exclusively by Acquiror, and provided further that
the indemnity agreement contained in this Section 5(e) shall not apply to
amounts paid in settlement of any Loss if such settlement is effected
without the consent of Acquiror and Target.
Anything in this Agreement to the contrary not withstanding, in no event
shall the Escrow Agent be liable for special, indirect or consequential
loss or damage of any kind whatever (including but not limited to lost
profits), even if the Escrow Agent has been advised of the likelihood of
such loss or damage and regardless of the form of action.
(f) To the extent that Escrow Agent becomes liable for the payment of any
taxes in respect of income derived from the investment of funds held or
payments made hereunder, Escrow Agent shall satisfy such liability to the
extent possible from the Escrow Fund. Subject to Section 5(g) below,
Indemnifying Parties agree to jointly and severally indemnify and hold
Escrow Agent harmless from and against any taxes, additions for late
payment, interest, penalties and other expenses, that may be assessed
against Escrow Agent on any payment or other activities under this
Agreement unless any such tax, addition for late payment, interest, penalty
or other expense shall arise out of or be caused by the actions of, or a
failure to act by, Escrow Agent.
(g) Subject to the foregoing, each of the Indemnifying Parties shall
contribute to the Indemnification Liability in such proportion as is
appropriate to reflect the relative fault of each individual Indemnifying
Party, including up to all such Indemnification Liability in the case of
any tax liability arising from failure to provide correct information with
respect to any taxes pursuant to Section 5(f) above. In all cases where
there is no such basis for allocating contribution for such Indemnification
Liability or except as otherwise provided in Section 5(e), one half of the
total Indemnification Liability shall be paid by the Target, and one half
of the total Indemnification Liability shall be paid by Acquiror out of the
Escrow Fund.
(h) Escrow Agent may resign at any time upon giving at least 30 days'
written notice to Acquiror and Target; provided, however, that no such
resignation shall become effective until the appointment of a successor
escrow agent, which shall be accomplished as follows: Acquiror and Target
shall use their best efforts to mutually agree upon a successor agent
within 30 days after receiving such notice. If the parties fail to agree
upon a successor escrow agent within such time, Target with the consent of
Acquiror, which shall not be unreasonably withheld, shall have the right to
appoint a successor escrow agent. The successor escrow agent selected in
the preceding manner shall execute and deliver an instrument accepting such
appointment and it shall thereupon be deemed Escrow Agent hereunder and it
shall without further acts be vested with all the estates, properties,
rights, powers, and duties of the predecessor Escrow Agent as if originally
named as Escrow Agent. If no successor escrow agent is named, Escrow Agent
may apply to a court of competent jurisdiction for the appointment of a
successor escrow agent. Thereafter, the predecessor Escrow Agent shall be
discharged from any further duties and liabilities under this Agreement.
The provisions of paragraphs 5(e) and 5(f) shall survive the resignation or
removal of Escrow Agent or the termination of this Agreement.
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6. Fees, Expenses and Taxes. The party hereto receiving the Escrow Fund
agrees to pay or reimburse Escrow Agent for its normal services hereunder in
accordance with the fee schedule attached hereto as Exhibit A. The Escrow Agent
shall be entitled to reimbursement upon 30 days' written notice for all
expenses incurred in connection with Sections 5(e) and 5(f) above, and payment
of any legal fees and expenses incurred by the Escrow Agent in connection with
the resolution of any claim by any party hereunder. Taxes incurred with respect
to the earnings of the Escrow Fund and payments made hereunder shall be borne
by the party to whom such earnings are distributed (or to be distributed) or to
whom such payment is made.
7. Miscellaneous.
(a) Amendments and Waivers. Any term of this Agreement may be amended or
waived with the written consent of the Acquiror, the Target and the Escrow
Agent, or their respective successors and assigns. Any amendment or waiver
effected in accordance with this Section 7(a) shall be binding upon the
parties and their respective successors and assigns.
(b) Successors and Assigns. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors
and assigns of the parties. Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly
provided in this Agreement.
If it further understood that any corporation into which the Escrow Agent in
its individual capacity may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Escrow Agent in its individual capacity shall be a
party, or any corporation to which substantially all the corporate trust
business of the Escrow Agent in its individual capacity may be transferred,
shall be the Escrow Agent under this Escrow Agreement without further act.
(c) Governing Law; Jurisdiction. This Agreement and all acts and
transactions pursuant hereto and the rights and obligations of the parties
hereto shall be governed, construed and interpreted in accordance with the
laws of the State of Delaware, without giving effect to principles of
conflicts of law.
(d) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(e) Titles and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
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(f) Notices. Any notice required or permitted by this Agreement shall be
in writing and shall be deemed sufficient upon receipt, when delivered
personally or by courier, overnight delivery service or confirmed
facsimile, or forty-eight (48) hours after being deposited in the regular
mail as certified or registered mail (airmail if sent internationally) with
postage prepaid, if such notice is addressed to the party to be notified at
such party's address or facsimile number as set forth below, or as
subsequently modified by written notice.
If to Acquiror:
KeraVision, Inc.
48630 Milmont Drive
Fremont, California 94538
Attn: Mark Fischer-Colbrie
(P) (510) 353-3008
(F) (510) 353-3030
with a copy to:
Venture Law Group, A Professional Corporation
2800 Sand Hill Road
Menlo Park, CA 94025
Attn: Michael W. Hall
(P) (650) 854-4488
(F) (650) 233-8386
If to Target:
Transcend Therapeutics, Inc.
640 Memorial Drive
Cambridge, Massachusetts 02139
Attn: B. Nicholas Harvey
(P) (617) 374-1211
(F) (617) 374-1202
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attn: Steven D. Singer
(P) (617) 526-6000
(F) (617) 526-5000
If to the Escrow Agent:
Chase Manhattan Bank and Trust Company,
National Association
101 California Street, Suite 2725
San Francisco, CA 94111
Attn: Mitch Gardner
(P) 415-954-9561
(F) 415-693-8850
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(g) Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith, in order to maintain the economic position
enjoyed by each party as close as possible to that under the provision
rendered unenforceable. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i)
such provision shall be excluded from this Agreement, (ii) the balance of
the Agreement shall be interpreted as if such provision were so excluded
and (iii) the balance of the Agreement shall be enforceable in accordance
with its terms.
(h) Entire Agreement. Except asset forth in the Merger Agreement, this
Agreement is the product of all of the parties hereto, and constitutes the
entire agreement between such parties pertaining to the subject matter
hereof, and merges all prior negotiations and drafts of the parties with
regard to the transactions contemplated herein. Any and all other written
or oral agreements existing between the parties hereto regarding such
transactions are expressly canceled.
(i) Advice of Legal Counsel. Each party acknowledges and represents that,
in executing this Agreement, it has had the opportunity to seek advice as
to its legal rights from legal counsel and that the person signing on its
behalf has read and understood all of the terms and provisions of this
Agreement. This Agreement shall not be construed against any party by
reason of the drafting or preparation thereof.
[Signature Page Follows]
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The parties have executed this Agreement as of the date first above written.
ACQUIROR:
KeraVision, Inc.
By: _________________________________
Name: _______________________________
(print)
Title: ______________________________
TARGET:
Transcend Therapeutics, Inc.
By: _________________________________
Name: _______________________________
(print)
Title: ______________________________
ESCROW AGENT:
Chase Manhattan Bank and Trust,
National Association
By: _________________________________
Name: _______________________________
(print)
Title: ______________________________
SIGNATURE PAGE TO ESCROW AGREEMENT
A-49
<PAGE>
ANNEX B
December 21, 1998
Board of Directors
Transcend Therapeutics, Inc.
640 Memorial Drive, 3rd Floor West
Cambridge, MA 02139
Gentlemen:
We understand that Transcend Therapeutics, Inc. ("Transcend," "TSND" or the
"Company") has agreed to sell 100% of its outstanding capital stock to
KeraVision, Inc. ("KeraVision") for $10.2 million, or $1.72 per share (the
"Merger Consideration") based on KeraVision's closing price of $10.38 on
December 15, 1998 (the "Transaction"). Under the terms of the Transaction, each
TSND share will be exchanged for 0.166 shares of KeraVision stock. Under the
proposed terms, the purchase price per share is subject to adjustment to the
extent KeraVision's average closing share price is above $9.0625 for the ten
day period ending the day before the closing of the Transaction. Regardless of
the movement of KeraVision's share price, Transcend shareholders will receive
no less than a 20% premium and no more than a 30% premium to the Net Cash/1/
per TSND share at closing, currently estimated to be $1.38 per share. Upon
closing of the Transaction, TSND shareholders will own approximately 6.1% of
the combined entity on a fully diluted basis.
The Company's warrant and option holders will be required to exercise their
positions into common stock prior to the Transaction. For the purpose of our
analysis, we have assumed that the fully diluted number of Transcend shares
outstanding after the exercise of all in-the-money options and warrants is
5,935,426.
The Company expects to execute an agreement and plan of merger (the "Merger
Agreement") and announce the Transaction at 4:00pm EST on December 21, 1998.
The transaction is expected to close in February 1999 following the completion
of Transcend's shareholder approval and regulatory clearance. No executive
officers or directors of Transcend will become executive officers or directors
of KeraVision following the Transaction.
Transcend has retained EVEREN Securities, Inc. ("EVEREN") to render an
opinion (the "Opinion") to the board of directors of Transcend as to whether
the consideration paid to Transcend shareholders in the Transaction is fair,
from a financial point of view, as of the date hereof. This Opinion does not
constitute a recommendation to Transcend or any Transcend shareholder.
In formulating the Opinion, EVEREN has:
(i) reviewed the draft Agreement and Plan of Merger in substantially
final form by and between Transcend and KeraVision;
(ii) reviewed Transcend's definitive proxy statement filed on June 23,
1998, annual report on Form 10-K for the year ended December 31, 1997, and
Forms 10-Q for the three month period ended March 31, 1998, the six month
period ended June 30, 1998, and the nine month period ended September 30,
1998;
(iii) reviewed certain non-public operating and financial information,
including projections relating to Transcend's business prepared by
management of Transcend;
(iv) met with certain members of Transcend's management to discuss its
operations, financial statements and projections, and future prospects;
- --------
/1/Net Cash is defined as cash available at closing after satisfaction of all
liabilities associated with terminating Transcend's operations and
transaction expenses
B-1
<PAGE>
Transcend Therapeutics, Inc.
December 21, 1998
Page 2
(v) reviewed KeraVision's definitive proxy statement dated May 5, 1998,
annual reports on Form 10-K for the year ended December 31, 1997, and Forms
10-Q for the three month period ended March 31, 1998, the six month period
ended June 30, 1998, and the nine month period ended September 30, 1998;
(vi) reviewed certain non-public operating and financial information,
including internal management reports, relating to KeraVision's business
prepared by management of KeraVision;
(vii) met with certain members of KeraVision's management to discuss its
operations, financial statements, and future prospects;
(viii) interviewed certain members of KeraVision's financial auditors to
discuss the financial controls, financial condition and results of
operations;
(ix) reviewed the historical stock prices and reported traded volumes of
Transcend's and KeraVision's common shares; and
(x) conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
In the course of our review, we have relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information provided to us by the management of Transcend and KeraVision.
We have further relied upon the assurances of each management team that they
are unaware of any factors that would make the information provided to us
incomplete or misleading. In arriving at our opinion, we have not performed any
independent valuation or appraisal of the assets of Transcend or KeraVision.
In arriving at our Opinion, we have considered such factors as we have
deemed relevant including, but not limited to, the following: (i) the
historical stock price performance of Transcend; (ii) the absence of ongoing
business of Transcend; (iii) the current book value of Transcend; (iv)
comparable merger transaction premiums; (v) the historical stock price
performance of KeraVision; (vi) the valuation of KeraVision using the
discounted earnings method; and (vii) a comparable company analysis of
KeraVision.
As our Opinion has taken into consideration forward looking valuation
techniques such as discounted earnings analysis, we have assumed that the
financial projections which we reviewed were reasonably prepared using
assumptions reflecting the best currently available estimates and judgments of
the future financial performance of each company. Our Opinion is necessarily
based on the economic, market, and other conditions as in effect on, and the
information made available to us as of, the date hereof. We disclaim any
undertaking or obligation to advise any person of any change in any fact or
matter affecting our Opinion which may come or be brought to our attention
after the date of this Opinion.
As our Opinion is based upon the share price of KeraVision as of the date
hereof, any material change in stock price may cause EVEREN to withdraw its
Opinion.
We have acted as financial advisor to the board of directors of Transcend in
connection with this Opinion and will receive a fee for our services. We are
also serving as financial advisor to Transcend in connection with the
Transaction and will receive a success fee upon its completion. Pursuant to the
terms of an engagement letter dated August 20, 1998 (the "Engagement Letter"),
Transcend has agreed to pay EVEREN an aggregate cash fee of $325,000 plus
reimbursement of out-of-pocket expenses. Of such fee, (i) $50,000 was paid to
EVEREN upon execution of the Engagement Letter; (ii) $50,000 becomes payable
upon the completion of due diligence and the execution of the Merger Agreement;
(iii) $150,000 becomes payable upon the delivery of the Opinion to Transcend's
board of directors, and (iv) the remaining $75,000 of such fee shall be payable
at the closing of the Transaction.
B-2
<PAGE>
Transcend Therapeutics, Inc.
December 21, 1998
Page 3
It is understood that this Opinion will be included in its entirety in any
proxy statement or other document distributed to shareholders of the Company in
connection with the Transaction and that this Opinion constitutes our express
written approval for that purpose. However, no summary of, or excerpt from,
this Opinion may be used, and no published public reference (other than as
provided in the preceding sentence) to this Opinion letter may be made without
our prior express written approval, which shall not be unreasonably withheld.
This Opinion does not constitute a recommendation to any shareholder of
Transcend as to how such shareholder should vote, or as to any other actions
which such shareholder should take in conjunction with the Transaction. This
Opinion relates solely to the question of fairness to the Transcend
shareholders, from a financial point of view, of the Merger Consideration as
currently proposed. Further, we express no Opinion herein as to the structure,
terms or effect of any other aspect of the Transaction, including, without
limitation, any effects resulting from the application of any bankruptcy,
fraudulent conveyance or other federal or state insolvency law or of any
pending or threatened litigation affecting Transcend or KeraVision.
Based on the foregoing, we are of the opinion that the consideration to be
paid to Transcend shareholders in the Transaction which will result in
Transcend shareholders receiving $1.72 per Transcend share in KeraVision common
stock is fair, from a financial point of view, to the shareholders of Transcend
as of the date hereof.
Very truly yours,
EVEREN Securities, Inc.
/s/ Kathryn Burrer Hyer
By: _________________________________
Kathryn Burrer Hyer
Managing Director
B-3
<PAGE>
ANNEX C
DELAWARE GENERAL CORPORATION LAW
SECTION 262
(S) 262. Appraisal Rights.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S)228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S)251 (other than a merger effected pursuant to (S)251(g)
of this title) , (S)252, (S)254, (S)257, (S)258, (S)263 or (S)264 of this
title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S)251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
C-1
<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or consented to the
merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to (S)228 or
(S)253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall
C-2
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be such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after such stockholder's written request for such a statement is received
by the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted such stockholder's certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not
entitled to appraisal rights under this section.
C-3
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(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall also be made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The cost of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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