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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 1998, or
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[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _____ to _________.
Commission file number: 0-26208
KERAVISION, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0328942
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
48630 Milmont Drive
Fremont, CA 94538
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 353-3000
__________________________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
__________________________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES __ NO __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
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The aggregate market value of the voting stock held by nonaffiliates of the
Registrant based upon the closing sale price of the Registrant's Common Stock on
the Nasdaq National Market was approximately $77,591,193 as of March 16, 1998.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
There were 12,667,950 shares of Registrant's Common Stock issued and
outstanding as of March 16, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document is incorporated by reference in Part III of
this Form 10-K Report: The Proxy Statement for the Registrant's 1999 Annual
Meeting of Stockholders scheduled to be held on May 26, 1999.
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PART I
Item 1. Business
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The Company notes that certain of the statements in this report, including
without limitation statements about the timing of FDA approval, are forward
looking. Actual results may differ materially due to a variety of factors
including, but not limited to (i) significant unforeseen delays in the
regulatory approval process, (ii) determinations by the FDA or foreign
regulatory bodies that the clinical data collected are insufficient to support
the safety and efficacy of KeraVision Intacs (iii) changes in regulatory review
guidelines, procedures, regulations or administrative interpretations, (iv)
complications relating to KeraVision Intacs or the surgical procedure, (v) lack
of market acceptance of KeraVision Intacs, (vi) competitive products and
technology, and (vii) other risk factors described under the heading "Risk
Factors Affecting the Company, its Business and its Stock Price" as set forth
below in this Item 1.
General
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, 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 in
most cases. 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
KeraVision's objective is to commercialize KeraVision Intacs technology for
the treatment of common vision problems on a worldwide basis.
Since 1991, clinical trials have used KeraVision Intacs technology for the
treatment of myopia in over 1,700 patient eyes. KeraVision has conducted several
clinical trials using various designs of KeraVision Intacs in Brazil, the United
States and Europe. KeraVision initiated a United States Phase II trial for the
current KeraVision Intacs design in May 1995 that involved 150 patients who
require a myopic correction in the range of -1.0 to -6.0 diopters.
An interim analysis was performed on the initial 75 patients who had three
months of available follow-up. Based upon the analysis of these data, KeraVision
proceeded to slightly modify the range of correction achieved with the current
KeraVision Intacs design and to separate the indications addressed into mild
myopia (-1.0 to -3.5 diopters) and moderate myopia (-3.5 to -5.0 diopters).
KeraVision initiated an expanded Phase II trial in November 1996 involving 59
patients to evaluate moderate myopia using two KeraVision Intacs sizes. In
December 1996, KeraVision initiated a Phase III trial at ten clinical sites
involving 360 patients requiring correction for mild myopia. KeraVision
completed enrollment of patients in the Phase III trial in May 1997. After a 12-
month follow-up period, KeraVision used the results of its Phase II and Phase
III clinical trials to prepare its application to the FDA for approval of
KeraVision Intacs. KeraVision has expanded its Phase III trial to include the
range of -0.5 to -1.0 diopters and the range of -3.5 to -5.0 diopters and has
enrolled limited numbers of patients for the expanded ranges.
In the United States, KeraVision is seeking to obtain FDA approval to sell
KeraVision Intacs for the treatment of myopia in the range of -1.0 to -3.5
diopters of correction. The FDA 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. The conditions relate to labeling changes and a
post-market
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surveillance study. In February the FDA deemed KeraVision's application
"approvable," moving KeraVision Intacs a step closer to receiving possible FDA
approval. While the role of the panel is advisory in nature, the FDA often
accepts the panel's recommendations in its considerations leading up to its
decision regarding approval. KeraVision is now awaiting the FDA's final
determination of approval. We cannot, however, assure you that:
. the FDA will approve KeraVision's application or will do so in a timely
fashion; and
. the FDA guidelines, procedures, regulations and administrative
interpretations will not become more restrictive before the FDA approves
KeraVision Intacs and its related instrumentation for sale.
KeraVision cannot market KeraVision Intacs in any jurisdiction in which the
controlling regulatory agency, including the FDA, fails to confer and maintain
the required approval.
Preliminary results from the Phase III clinical trial of KeraVision Intacs
indicate that 97% of the patients achieved 20/40 or better vision, the legal
requirement in most states to obtain a driver's license without corrective
lenses. KeraVision has also expanded its Phase III trial to cover moderate
myopia (-3.5 to -5.0 diopters) as well as for very low levels of myopia (-0.5 to
- - -1.0 diopters); it has as yet not completed enrollment for the expanded ranges
of correction.
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;
. 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;
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. 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. 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 reversible procedure
that does not interfere with the central cornea. KeraVision is currently
working to expand the potential applications of its core KeraVision Intacs
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.
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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.
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
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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.
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 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 certain dimensions,
can produce a wide range of corneal curvature change and, therefore, could
provide treatment for a substantial segment of those people with myopia.
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.
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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 instruments 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. 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
Since 1991, ophthalmic surgeons have utilized KeraVision Intacs technology for
the treatment of myopia in 1,700 patient eyes in clinical trials. 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
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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 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 undercorrection, three removals related
to visual symptoms, two removals related to induced astigimatism and one removal
related to cosmetic reasons. KeraVision submitted the data from this trial to
the FDA and received approval in November 1997 to expand the existing Phase III
trial to include these sizes of KeraVision Intacs.
In December 1996, KeraVision initiated a Phase III trial at ten clinical sites
involving 360 patients requiring correction for mild myopia (-1.0 to -3.5
diopters). Enrollment was completed for this trial in early May 1997. KeraVision
has implanted a total of 595 patient eyes to date. 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 a total of 595 patient eyes.
There was one patient who had a best spectacle corrected visual acuity loss of
ten or more letters at two consecutive exams. The investigation is currently
monitoring this subject. Twenty-three KeraVision Intacs were removed due to
patient dissatisfaction with the correction achieved and three removals were for
personal reasons.
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 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, it cannot assure 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 European clinical center, with twelve 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 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.
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
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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 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, KeraVision cannot assure
that its 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 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.
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Competition
If approved by the FDA and other regulatory authorities, KeraVision Intacs
will compete with other treatments for refractive problems, including
eyeglasses, contact lenses, other refractive surgery procedures such as PRK,
LASIK, RK, the ICL 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.
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 (the "FDC Act") and other federal
statutes and regulations, the FDA regulates the testing, manufacture, safety,
labeling, storage, record keeping, reporting, approval, sale, distribution,
advertising and promotion of such products. Noncompliance with applicable
requirements can result in fines, recall, injunction or seizure of products,
total or partial suspension of production, withdrawal of approval or refusal to
approve product approval applications or allow 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 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.
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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 will require a premarket approval application,
as will KeraVision products under development for 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 approval process may materially reduce the
period during which KeraVision may have the exclusive right to exploit patented
products or technologies.
Clinical Trials. Before KeraVision Intacs can be commercialized in the
United States, KeraVision must undergo a series of approval processes that are
sequential in nature. In general terms, KeraVision 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 has 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.
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In order to meet FDA requirements for KeraVision Intacs for the treatment of
myopia, KeraVision is conducting clinical trials in three phases and has
completed Phase III for one range of indication and begun enrollment in Phase II
for another range of indication. KeraVision may begin commercialization of
KeraVision Intacs in the United States only after the receipt of PMA approval
from the FDA.
The results of the preclinical and clinical studies on medical devices such as
KeraVision Intacs are submitted to the FDA in the form of a premarket approval
application for approval to commence commercial sales. We cannot assure that the
FDA will deem the safety or efficacy data in the premarket approval application
sufficiently complete and adequate. If not, a final determination by FDA
regarding approval of the device could be delayed while KeraVision performs
additional trials. Such trials could add significant new costs and delay to the
program, which would materially and adversely affect KeraVision's business,
financial condition and results of operation. KeraVision must maintain
compliance with all FDA requirements and conditions in an approved application,
including product specification, manufacturing process, labeling and promotional
material and record keeping and reporting requirements. 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, in certain
instances, 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 certain Quality System Regulation requirements. KeraVision
would be required to adhere to additional such Quality System Regulation
requirements for the development and distribution of the KeraVision Intacs.
KeraVision will be required to engage in extensive recordkeeping and reporting
and possibly to conduct extensive post-market surveillance or other device
follow-up. To supply products for use in the United States, foreign
manufacturing establishments must also comply with 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 also will be 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 potential
products that may be more restrictive or that may otherwise alter or affect
KeraVision's research and development programs. We cannot assure 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
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 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. Failure to comply with regulatory requirements could have a
material adverse effect on KeraVision's business, financial condition and
results of operations.
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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
such 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.
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 certain 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
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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."
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 December 31, 1998, KeraVision had 108 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.
The success of KeraVision and of its business strategy is dependent in large
part on the ability of KeraVision to attract and retain key management,
scientific and operating personnel. Such persons are in high demand and are
often subject to competing employment offers. 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. There can be no assurance that
KeraVision will be able to attract and retain the qualified personnel or develop
the expertise needed for its business. 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.
Executive Officers of the KeraVision
The executive officers of KeraVision and their ages as of December 31,
1998, 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-Billig 46 Vice President, Regulatory Affairs, Clinical Research and
Quality Assurance
Mark D. Fischer-Colbrie 42 Vice President, Finance and Administration, 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 the Company since September 1987. From 1985 until
joining KeraVision, Mr. Loarie served as President of ABA BioManagement, a
management service firm specializing in medical technology start-ups, and from
1984 to 1985 he served as President of Novacor Medical Corporation, a
manufacturer of cardiovascular implants. Prior to 1984, Mr. Loarie held
management positions in four divisions of American Hospital Supply Corporation,
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
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<PAGE>
and wound management as well as rebuilding the company's international business.
Mr. Loarie holds a B.S. degree in engineering from the University of Notre Dame
and has completed graduate work in business administration at the Universities
of Chicago and Minnesota. Mr. Loarie also serves as a member of the Executive
Committee of the Company, a director of the Health Industry Manufacturers
Association and serves on the Board of the California Healthcare Institute.
Darlene E. Crockett-Billig has served as Vice President, Regulatory Affairs
and Clinical Research of the Company since February 1988. From 1986 to 1988,
she served as Regulatory Affairs Manager for CooperVision Ophthalmic Products,
an ophthalmic device manufacturer, where she was responsible for all FDA
submissions, product approval strategies and regulatory compliance. Prior to
that time, Ms. Crockett-Billig spent ten years in management and laboratory
supervision positions with Miles Laboratories and Medtronic, Inc., two
healthcare products manufacturers. Ms. Crockett-Billig received her B.A. in
Biology from Augustana College and her M.B.A. from the College of St. Thomas,
Minnesota.
Mark D. Fischer-Colbrie has served as Vice President, Finance and
Administration and Chief Financial Officer of the Company since March 1992.
From 1983 to 1992, Mr. Fischer-Colbrie held several senior financial positions,
most recently as Vice President, Controller, at Maxtor Corporation, a
manufacturer of computer disk drives. Prior to 1983, he worked for four years
with a subsidiary of Xerox Corp. in accounting and finance. Mr. Fischer-Colbrie
holds a B.A. from Stanford University and an M.B.A. in Finance and Marketing
from the University of California at Berkeley.
David Heniges has served as Vice-President Europe since July, 1998. Mr.
Heniges was most recently VP Global Marketing for Baxter International's
Cardiovascular Surgery Division. Prior to that position, Mr. Heniges was VP
Worldwide Business Development for IOLAB, a division of Johnson&Johnson. Mr.
Heniges worked for Johnson&Johnson for 23 years. (update needed)
Richard Meader has served as Vice-President, Quality Assurance since
September, 1998. Mr. Meader was most recently VP Regulatory and Quality Affairs
for B. Braun/McGaw Inc., a $350 million-a-year maker of medical device systems
for drug delivery and a provider of pharmacy out-source services.
Edward R. Newill has served as Vice President, Marketing and Sales since May
1996. Mr. Newill has 21 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 the Company since July 1990. Prior to joining the Company, Mr. Silvestrini
spent 12 years in senior management and project positions including Manager of
Research and Development, Project Leader, and Senior Research Scientist with the
Corporate Research Center of the Hospital Products Group for the Pfizer
Corporation, a manufacturer of healthcare products. He has received 11 patents
for medical devices and has an additional 12 patents pending. Mr. Silvestrini
received his B.S. in Chemical Engineering and his M.S. in Organic Chemistry from
the University of Minnesota.
Robert P. Wood has served as Vice President, Manufacturing since April 1996.
From 1994 to 1996, Mr. Wood was operations manager of Allergan, Inc.'s medical
device and pharmaceutical facility. From 1987 to 1994 Mr. Wood held management
positions with Abbott Laboratories. Mr. Wood holds a B.S., in mechanical
engineering from Texas A&M University.
Each executive officer serves at the sole discretion of the Board of
Directors.
Risk Factors Affecting the Company, its Business and its Stock Price
KeraVision is incurring operating losses.
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.
17
<PAGE>
KeraVision will need significant additional capital in the near future.
KeraVision will be required to commit substantial resources to conducting the
research and development, clinical studies and regulatory activities necessary
to bring any potential medical device products to market. KeraVision will be
required to commit additional resources to establish production, marketing and
sales capabilities for any product that will be brought 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 or through the receipt of FDA approval to market and
sell KeraVision Intacs for the treatment of myopia in the United States.
KeraVision will need to raise substantial additional funds for these purposes.
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 relies on a single product.
KeraVision has concentrated its efforts primarily on the development of
KeraVision Intacs for the correction of myopia and will be dependent upon the
successful development of that product to generate revenues. KeraVision has
performed only limited research on other applications of KeraVision Intacs
technology. We cannot assure that KeraVision Intacs technology will prove safe
and effective in vision correction, or that if proven safe and effective,
KeraVision will commercialize the technology successfully.
The FDA has not yet approved KeraVision Intacs and related instrumentation.
KeraVision must submit extensive clinical data and supporting information to
the FDA to secure FDA approvals and clearances. The FDA has not yet approved
KeraVision Intacs for marketing or sale for the treatment of myopia in the
United States. 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. KeraVision may also be required to demonstrate that
KeraVision Intacs represents an improved form of treatment over existing
alternatives or that the expected benefits of KeraVision Intacs outweigh any of
the risks associated with its use. Moreover, product approvals and clearances
can be withdrawn by the FDA if KeraVision does not comply with regulatory
standards or if unforeseen problems occur following initial marketing.
Delays or failures in obtaining FDA regulatory approvals would likely cause
KeraVision's stock price to drop, adversely affect or prevent the marketing of
KeraVision Intacs, impair KeraVision's ability to generate funds from
operations, and may furnish a competitive advantage to other companies.
The development of KeraVision's products and KeraVision's future revenue are
uncertain.
KeraVision Intacs will require additional clinical studies and a significant
investment of capital before full commercialization in the United States. To
obtain revenues KeraVision must, alone or with others, successfully develop,
obtain regulatory approval for, manufacture and market products. The time frame
for any products and potential products, including KeraVision Intacs, to succeed
in the market is long and uncertain. KeraVision completed the development of
KeraVision Intacs in November 1996. KeraVision has received approval to market
KeraVision Intacs in the European Union and Canada; however, we cannot assure
that KeraVision will successfully complete its research and development efforts
for this or other products to be marketed elsewhere. Nor can we assure 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
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 may be jeopardized.
18
<PAGE>
KeraVision's operations must comply with government standards.
As the developer of KeraVision Intacs, KeraVision is required to satisfy
government regulations, including extensive testing, control, documentation and
other quality assurance procedures and standards. Failure to comply with the
applicable regulatory requirements can, among other things, result in fines,
injunctions, civil penalties, suspensions or withdrawal of regulatory approvals,
product recalls, product seizures, including cessation of manufacturing and
sales, operating restrictions and criminal prosecution, and could have a
material adverse effect on KeraVision's business, financial condition and
results of operations. If KeraVision Intacs is approved for the correction of
myopia, KeraVision Intacs will be subject to additional post-market testing and
surveillance programs required by regulatory agencies. KeraVision will be
required to engage in extensive record keeping and reporting, and possibly to
conduct extensive post-market surveillance or other device follow-up. In
addition, as KeraVision expects to manufacture KeraVision Intacs internally it
will also be required to adhere to additional FDA requirements for the
development 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.
KeraVision must comply with foreign regulatory requirements.
KeraVision's success depends, in substantial part, on its ability to
successfully market and sell KeraVision Intacs and other products it may develop
in markets outside the United States. We cannot guarantee that KeraVision will
obtain the requisite approvals of foreign countries for the intended use of
KeraVision Intacs or any of its products. 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 in foreign
countries may be longer or shorter than that required for FDA approval, and
requirements for licensing may differ from FDA requirements. Export sales of
investigational devices that have not received FDA marketing clearance may be
subject to FDA export permit requirements.
Governmental regulations applicable to KeraVision Intacs may become more
restrictive in the future.
Government regulations that apply to KeraVision Intacs or other products
developed by KeraVision may become more restrictive in the future. We cannot
assure 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 on KeraVision's ability to conduct
business. See "KeraVision, Inc.--Business--United States Government Regulation
and Product Testing" and "KeraVision, Inc.--Business--European Government
Regulation and Product Testing."
KeraVision needs market acceptance of KeraVision Intacs and other products.
KeraVision's future performance depends, to a substantial extent, upon the
degree of market acceptance of KeraVision Intacs, and on KeraVision's ability to
successfully manufacture, market, 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. Many surgeons in these countries and throughout
the world may have already invested significant time and resources in developing
expertise in other corrective ophthalmic surgical techniques. 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 cost of KeraVision Intacs and the availability of other established
corrective products may limit the potential market for KeraVision Intacs.
KeraVision's target market 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.
19
<PAGE>
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 Intacs is in clinical trials, and
KeraVision cannot yet determine if KeraVision Intacs will prove to be effective
for the predictable treatment of myopia. We cannot assure you that the initial
clinical trial results 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.
All surgical procedures, including the KeraVision Intacs procedure, involve
some inherent risk of complications. 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 certain 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 KeraVision
from obtaining regulatory approval for its potential products or the acceptance
of the product by patients or ophthalmologists.
KeraVision depends on key personnel and needs 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. 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. We cannot assure you that KeraVision
will be able to attract and retain the qualified personnel or develop the
expertise needed for its business.
KeraVision's manufacturing operations must pass government inspections.
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 affected. We cannot assure that KeraVision or these third parties will be
able to obtain necessary regulatory approvals in a timely basis or at all.
Delays in receipt of or failure to receive such approvals or loss of previously
received approvals would have a material adverse effect on KeraVision's
business, financial condition and results of operations.
KeraVision has limited manufacturing experience.
KeraVision has limited ability to manufacture a large volume of products and
limited experience in manufacturing medical devices or other products. 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. 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. 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 provide any assurance 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.
20
<PAGE>
KeraVision has limited sales and marketing experience.
KeraVision has only sold products in Canada in mid-1998 and Europe since
late-1998 and has yet to receive authorization to sell its products in the
United States. If KeraVision obtains the necessary regulatory authorization to
sell its products in the United States, KeraVision plans to market and sell its
products through a direct sales force or a combination of a direct sales force
and distributors. 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
enters into distribution arrangements for the sale of its products, KeraVision
will be dependent on the efforts of third parties. We cannot assure you that
such efforts will be successful.
KeraVision's international sales and operations may be limited or disrupted.
KeraVision is currently selling KeraVision Intacs and instrumentation to
customers in Canada, Germany and France. In addition, KeraVision is seeking to
expand its sales efforts in other countries in Europe and Asia. International
sales and operations may be limited or disrupted by:
. the imposition of the regulatory approval process;
. changes in regulatory standards;
. government controls;
. price controls; and
. trade restrictions.
Additionally, KeraVision's sales and financial condition could be affected by
fluctuations in currency exchange rates or increases in duty rates.
The field of research and development of vision correction alternatives is very
competitive.
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. 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. 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."
These companies and institutions represent significant long-term competition
for KeraVision. In comparison to KeraVision, they have:
. substantially greater resources;
. greater 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
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<PAGE>
. more experience manufacturing and marketing medical device products.
There is a risk of 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 precaution that KeraVision takes with respect to these risks will prevent it
from incurring significant liability. We cannot assure you that we have obtained
adequate product liability insurance coverage 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.
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 KeraVision expects 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; or
. KeraVision will not have to obtain substitute vendors, which would require
additional regulatory submissions.
Any interruption of supply would have a material adverse effect on KeraVision's
ability to manufacture its products which could have a material adverse effect
on its business, financial condition or results of operations.
Year 2000 computer problem may affect KeraVision's computer systems.
The Year 2000 computer problem is caused by the inability of some software and
hardware to handle dates after December 31, 1999. Some of KeraVision's or its
suppliers' computer systems could fail or miscalculation could occur, causing
disruptions or operations, including a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Based on recent assessments, KeraVision determined that it would be required
to replace a small portion of its software so that those systems will properly
utilize dates beyond December 31, 1999. KeraVision has determined that all of
its critical business systems already are Year 2000 compliant. Assessment,
testing and remediation are proceeding in tandem, and KeraVision currently plans
to have all modifications to systems completed and tested by mid-1999. These
activities are intended to encompass all major categories of systems KeraVision
uses, including manufacturing, sales, finance and human resources. KeraVision is
also actively working with its largest suppliers of products and services to
determine that these suppliers' operations and the products and services they
provide are Year 2000 compliant or to monitor their progress toward Year 2000
compliance. KeraVision has reviewed its product line and determined that all of
the products it has sold and will continue to sell do not require remediation to
be Year 2000 compliant.
To date, KeraVision has incurred less than $5,000 in costs related to these
programs. KeraVision currently expects 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. KeraVision based the total costs
estimate on the current assessment of the projects. The estimate is subject to
change as the projects progress. Due to KeraVision's reliance on widely used
software packages that have been certified as Year 2000 compliant, KeraVision
has not developed a formal contingency plan for software. Should unforeseen
problems surface during KeraVision's testing of those packages, KeraVision will
evaluate its alternatives, such as utilizing different software packages.
KeraVision is 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, management does not believe that the Year
2000 matters discussed above related to internal systems will have a material
adverse effect on KeraVision's financial condition or overall trends in results
of operations; however, we cannot predict to what extent KeraVision may be
affected by such matters. We cannot guarantee that any system of other
companies, on
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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's ability to obtain and maintain patents on KeraVision Intacs and its
technology will determine KeraVision's success.
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.
Item 2. Properties
- - ------- ----------
KeraVision's primary manufacturing, R&D and administrative facilities
occupy approximately a total of approximately 40,000 square feet of space in two
locations in Fremont, California. The facilities is subject to leases which
expire in 1999. The current monthly rent is approximately $29,000. The
Company's European sales facilities occupy approximately 3,300 square feet of
space in Chatenay-Malabry, France. The facility is subject to a lease which
expires in 1999. The current monthly rent is approximately $4,500. The Company
believes that this space is adequate for its immediate needs, and that it will
be able to renew its lease or obtain additional space as necessary.
Item 3. Legal Proceedings update from last 10-Q
- - ------ ----------------------------------------
In July 1997, an interference action was brought in the United States
Patent Trademark Office before the Board of Patent Appeals and Interferences in
the matter of Loomas et. al. vs. Simon et. al., Interference No. 103,973. The
interference involves the issue of the priority of inventions relating to
technology for forming corneal channels in which an implant or implants may be
placed. Settlement discussions are in progress. However, no assurance can be
made that a settlement can be reached and, if not reached, that the interference
will be resolved favorably to the Company.
Item 4. Submission of Matters to a Vote of Security Holders update
- - ------ ----------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter for the fiscal year ended December 31, 1998.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
- - ------ ----------------------------------------------------------------
Matters
-------
The following table sets forth, for the periods indicated, the high and
low trading prices for the Company's common stock as reported on the Nasdaq
National Market.
23
<PAGE>
<TABLE>
<CAPTION>
Calendar Year High Low
- - ---------------------------------------------- --------------------- ---------------------
1998
<S> <C> <C>
First quarter $ 8.25 $ 5.25
Second quarter 10.625 7.25
Third quarter 8.063 4.25
Fourth quarter 13.50 8.625
1997
First quarter $ 15.00 $10.00
Second quarter 10.50 6.75
Third quarter 10.188 7.00
Fourth quarter 8.50 5.125
</TABLE>
The closing stock price on February 24, 1999 was $12.063. The Company
reported 274 stockholders of record and 8,794 beneficial holders of the
Company's common stock on February 24, 1999.
The Company has not historically paid cash dividends. The Company does not
anticipate paying cash dividends in the foreseeable future.
Item 6. Selected Financial Data
- - ------ -----------------------
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands, except per share data) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
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 6,527 5,146
Selling, general and administrative.......... 9,693 6,405 3,930 1,725 1,262
Total costs and expenses....................... 25,435 20,880 15,137 8,252 6,408
--------- ---------- --------- -------- -------
Operating loss................................. (24,600) (20,525) (15,000) (8,252) (6,408)
Interest income, net........................... 563 1,129 2,121 1,203 425
Other expense.................................. -- -- -- (57) (114)
Net loss....................................... $(24,037) $(19,396) $(12,879) $(7,106) $(6,097)
======= ========== ========= ======== =========
Basic and diluted net loss per share applicable
to common stockholders..................... $(2.16) $(1.55) $(1.04) $(1.05) $(4.52)
Shares used in calculation of net loss per
share...................................... 12,686 12,528 12,342 6,757 1,348
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
(in thousands) 1998 1997 1996 1995 1994
- - ----------------------------------------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash, cash equivalents and
available-for-sale investments.......... $ 7,728 $ 14,113 $ 32,065 $ 44,703 $ 5,909
Working capital.......................... 4,915 11,820 30,435 43,205 4,935
Total assets............................. 11,184 17,345 35,485 45,919 6,934
Capital lease obligations, noncurrent.... 821 850 793 114 210
Redeemable convertible preferred stock... 17,489 -- -- -- 27,844
Accumulated deficit...................... (90,092) (62,678) (43,282) (30,403) (23,440)
Total stockholders' equity (net capital
deficiency)............................. (11,447) 12,937 31,765 44,035 (22,144)
</TABLE>
Item 7. KeraVision Management's Discussion and Analysis of Operations
- - ------ -------------------------------------------------------------
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K.
24
<PAGE>
Overview
Since its founding in November 1986, the Company has been engaged in the
research and development of the KeraVision Intacs and related technology.
Although the Company recorded its first revenue in the quarter ended December
31, 1996, the Company expects to continue to incur substantial losses at least
through the year ending December 31, 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
foreseeable future. Furthermore, the Company expects its overall expenses to
increase as its sales and marketing activities grow.
On February 16, 1999, the Company's Pre-Market Approval application to sell
Intacs was deemed "approvable" by the U.S. Food and Drug Administration (FDA).
On January 12, 1999, the Ophthalmic Devices Panel of the FDA unanimously
recommended approval with conditions for the Company to sell its initial
product, Intacs, in the range of -1.0 to -3.5 diopters. The Company 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, the Company received
regulatory approval in Canada to sell KeraVision Intacs in the range of -1.0
to -5.0 diopters; the Company has subsequently begun limited commercial sales in
Canada. In late 1996, the Company was granted the right to affix the CE mark on
KeraVision Intacs for myopia which allows the Company to sell product in the
range of -1.0 to -5.0 diopters in European Union countries.
The research, manufacture, sale and distribution of medical devices such as
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 KeraVision Intacs,
must be cleared or approved by the FDA. Securing FDA approvals and clearances
will require the submission to the FDA of extensive clinical data and supporting
information. Current FDA enforcement policy strictly prohibits the marketing of
medical devices for uses other than those for which the product has been
approved or cleared. After approvals have been given, product approvals and
clearances can be withdrawn for failure to comply with regulatory standards or
for the occurrence of unforeseen problems following initial marketing. Foreign
governments or agencies also have review processes for medical devices which
present many of the same risks. The right to affix the CE mark can be
withdrawn, resulting in an inability to sell products in European countries.
There can be no assurance that the Company's research and development
efforts will be successfully completed, and until the development and testing
processes for KeraVision Intacs are complete, there can be no assurance that
KeraVision Intacs will perform in the manner anticipated. Although the Company
does have approval to sell product in the European Union and Canada, there can
be no assurance that KeraVision Intacs will prove to be safe or effective over
the long term in correcting vision, that the product will be approved for
marketing by the FDA or other government agencies or that KeraVision Intacs or
any other product developed by the Company will be commercially successful, will
be successfully marketed or achieve market acceptance. There can be no assurance
that the Company will ever achieve either significant revenues from sales of
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 the Company'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 certain fixed costs associated with the Company's 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. The Company expects research and development expenses to remain
relatively stable as certain 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.
The Company 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 the effect of a
dividend of $846,000 to preferred stockholders as part of
25
<PAGE>
the Series B Redeemable Convertible Preferred Stock financing. The Company
believes that its 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 certain fixed costs associated with the Company's higher volume
manufacturing capabilities.
Research and development expenses for the year ended December 31, 1997 were
$10.8 million compared to $10.9 million incurred in the prior year. Research
and development expenses for the most recent year represented 53% of the $20.5
million loss from operations, and in 1996 represented 73% of the $15.0 million
loss from operations.
Selling, general and administrative expenses in 1997 were $6.4 million, an
increase of $2.5 million from 1996. The increase in spending reflects increased
staffing and associated expenses, in addition to increased marketing efforts
related to European commercialization.
The Company recorded $1.1 million of net interest income for the year ended
December 31, 1997, as compared to $2.1 million for the previous year. Interest
income decreased due to lower average cash and investment balances 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, the Company had federal, state and French net
operating loss carryforwards of approximately $66.3 million, $16.9 million and
$3.7 million, respectively. The Company 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.
Under Statement of Financial Accounting Standards No. 109 ("FAS 109"),
deferred tax assets and liabilities are based on differences between financial
reporting and tax bases of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company has provided a full valuation allowance
against its net deferred tax assets due to uncertainties surrounding their
realization, primarily due to the Company's lack of an earnings history.
Liquidity and Capital Resources
The Company 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, the Company
completed the sale of Series B Convertible Preferred Stock with net proceeds to
the Company 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 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 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 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
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 of 30 percent. Certain stockholders 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. 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.
Borrowings under the loan are secured by substantially all of the company's
assets except for intellectual property. In conjunction with the loan, the
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.
26
<PAGE>
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. The Company intends to raise
additional funds through the sale of its equity securities and/or debt
financings. The Company may also enter into collaborative arrangements with
corporate partners that could provide the Company with additional funding in the
form of equity, debt or license fees in exchange for the Company's rights with
respect to certain markets or technology. There can be no assurance that the
Company will be able to raise any additional funds or enter into any such
collaborative arrangements on terms favorable to the Company, or at all. If the
Company is unable to obtain the necessary additional capital, significant
reductions in spending and the delay or cancellation of planned activities or
more substantial restructuring options may be necessary. In such event, the
Company intends to implement expense reduction plans in a timely manner to
enable the Company to meet its operating cash requirements through December 31,
1999. These actions would have material adverse effects on the Company's
business, results of operations and prospects.
The Company's cash requirements may vary materially from those now planned
because of results of research, development and clinical testing, establishment
of relationships with strategic partners, changes in focus and direction of the
Company's research and development programs, changes in the scale, timing, or
cost of the Company's commercial manufacturing facility, competitive and
technological advances, the FDA or other regulatory processes, changes in the
Company's marketing and distribution strategy, and other factors.
Year 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it would be
required to replace a small portion of its software so that those systems will
properly utilize dates beyond December 31, 1999. The Company has determined that
all of its critical business systems are already year 2000 compliant.
Assessment, testing and remediation are proceeding in tandem, and the Company
currently plans 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 the Company, 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. The Company reviewed its product line and
determined that all of the products it has sold and will continue to sell do not
require remediation to be year 2000 compliant. There can be no guarantee that
any system of other companies, on which the Company'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 the Company's systems.
The costs incurred to date related to these programs are less than $5,000.
The Company currently expects 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 Company's reliance on widely used software packages that have
been certified as year 2000 compliant, the Company has not developed a formal
contingency plan for software. Should unforeseen problems surface during its
testing of those packages, the Company will evaluate its alternatives, such as
utilizing different software packages. The Company is 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, management does not believe that
the year 2000 matters discussed above related to internal systems, will have a
material adverse impact on the Company's financial condition or overall results
of operations; however, it is uncertain to what extent the Company may be
affected by such matters. In addition, there can be no assurance that the
failure to ensure year 2000 compliance by a supplier or another third party
would not have a material adverse effect on the Company.
27
<PAGE>
Euro
The Company does not presently expect that the introduction and use of the
Euro will materially affect the Company's foreign exchange or will result in any
material increase in costs to the Company. While KeraVision will continue to
evaluate the impact of the Euro introduction over time, based on currently
available information, management does not believe that the introduction of the
Euro currency will have a material adverse impact on the Company's financial
condition or overall trends in results of operations.
Market Risk Disclosure
- - ----------------------
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and long-term debt obligations.
The Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments with high credit quality issuers
and, by policy, limits the amount of credit exposure to any one issuer. As
stated in its policy, the Company 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.
The Company mitigates 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.
The Company has no cash flow exposure due to rate changes for long-term
debt obligations. The Company primarily enters into debt obligations to support
general corporate purposes including capital expenditures and working capital
needs.
The table below presents principal amounts and related weighted average
interest rates by year of maturity for the Company's investment portfolio and
debt obligations. All investments mature, by policy, in one year or less.
<TABLE>
<S>
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
The Company transacts business in French Francs, German Deutsch Marks and
Canadian dollars. Transactions in foreign currency are minimal and do not have a
material impact on the Company's financial statements.
Item 8. Financial Statements and Supplementary Data
- - ------ -------------------------------------------
See Item 14(a) for an index to financial statements and supplementary
information.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- - ------ ---------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
28
<PAGE>
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file a definitive proxy statement within 120 days
after the end of its fiscal year pursuant to Regulation 14A (the "Proxy
Statement") for its annual meeting of stockholders scheduled to be held May 26,
1999, and the information included therein is incorporated herein by reference
to the extent detailed below.
Item 10. Directors and Executive Officers of the Registrant
- - ------- --------------------------------------------------
Information with respect to the Registrant's directors required by
this Item is incorporated by reference from the information under the caption
"Election of Directors--Board of Directors" in the Registrant's Proxy Statement.
Information as to the Registrant's executive officers is set forth in
"Item 1 -- Business -- Executive Officers of the Company" of this Form 10-K.
Item 11. Executive Compensation
- - ------- ----------------------
Information required by this Item is incorporated by reference from
the information under the caption "Executive Compensation" in the Registrant's
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- - ------- --------------------------------------------------------------
Information required by this Item is incorporated by reference from
the information under the caption "Common Stock Ownership of Certain Beneficial
Owners and Management" in the Registrant's Proxy Statement.
Item 13. Certain Relationships and Related Transactions
- - ------- ----------------------------------------------
Information required by this Item is incorporated by reference from
the information under the caption "Certain Relationships and Related
Transactions" in the Registrant's Proxy Statement.
PART IV
Item 14. Exhibits,Financial Statement Schedules and Reports on Form 8-K
--------------------------------------------------------------
<TABLE>
<CAPTION>
(a) (1) The following financial statements and Report of Ernst & Young LLP, Independent Auditors, are filed as part of this report:
<S> <C>
Page
---
Report of Ernst & Young, Independent Auditors 35
Consolidated Balance Sheets at December 31, 1998 and 1997 36
Consolidated Statements of Operations Years Ended December 31,
1998, 1997 and 1996 37
Consolidated Statements of Redeemable Convertible
Preferred Stock and Stockholders' Equity (net capital
deficiency) Years Ended December 31, 1998, 1997 and 1996 38
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996 39
Notes to Consolidated Financial Statements 40
(2) Financial Statement Schedule
</TABLE>
29
<PAGE>
Schedules have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
30
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page Number
---------------------------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of reorganization by and among KeraVision, Inc. KVTT acquisition corporation
and Transcend Theraputics, Inc. dated as of December 22, 1998.
3.1 Amended and Restated Certificate of Incorporation of Registrant.(2)
3.2 Bylaws of Registrant.(1)
3.3 Certificate of Designation of Rights, Preferences and Privileges of Series B Convertible
Preferred Stock of KeraVision, Inc.
4.1 Preferred Shares Rights Agreement, dated as of August 18, 1997, between Registrant and Bank
Boston, N.A. (7)
4.2 KeraVision, Inc. Investors' rights Agreement.
10.1 Form of Indemnification Agreements for directors and officers.(1)
10.2 1987 Stock Option Plan and forms of agreements thereunder.(1)(2)
10.3 1995 Stock Plan, as amended.(2)
10.4 1995 Directors' Option Plan and form of subscription agreement.(4)(2)
10.5 401(k) Plan.(1)(2)
10.6 Fremont Office Lease dated August 20, 1993 and all amendments thereto.(1)
10.7 Kilmer License Agreement, dated December 31, 1992.(1)
10.8 Manufacturing Agreement dated October 1, 1992.(1)(3)
10.9 Form of Warrant for Series D Preferred Stock between Registrant and certain holders of Common
Stock of Registrant.(1)
10.10 Promissory Notes, dated January 29, 1988, March 8, 1988, March 8, 1989, October 30, 1991, April
12, 1993 and November 7, 1993, executed by Thomas Loarie in favor of the Registrant and all
amendments thereto. (8)
10.11 Promissory Notes, dated September 17, 1990, October 30, 1991, October 30, 1991, and November 7,
1993, executed by Thomas Silvestrini in favor of the Registrant and all amendments thereto. (8)
10.12 Promissory Note, dated November 7, 1993, executed by Mark Fischer-Colbrie in favor of the
Registrant and all amendments thereto.(9)
10.13 Promissory Notes, dated March 8, 1988, March 8, 1988, March 8, 1989, October 30, 1991, and
November 7, 1993, executed by Darlene Crockett-Billig in favor of the Registrant and all
amendments thereto.(8)
10.14 Consulting Agreement dated January 19, 1994 between the Registrant and John R. Gilbert, and all
amendments thereto.(1)
10.15 Information and Registration Rights Agreement between the Registrant and holders of the Preferred
Stock of the Registrant, dated as of November 19, 1992.(1)
10.16 Consulting Agreement dated January 1, 1996 between the Registrant and John R. Gilbert(4)
10.17 Employment Agreement dated January 1997 between the Registrant and Thomas M. Loarie.(2)(6)
10.18 Distribution Agreement dated as of October 31, 1996 by and between the Registrant and AM Peschke,
a German corporation.(5)(6)
10.19 1997 Employee Stock Option Plan.(2)
10.20 Form of Change of Control Agreement entered into between Registrant and Chief Executive Officer
in May 1997.(2)
10.21 Form of Change of Control Agreement entered into between Registrant and Executive Officers in May
1997.(2)
10.22 Promissory notes, dated April 1, 1998, executed by Thomas Loarie in favor of the Registrant(8)
10.23 Promissory note, dated April 1, 1998, executed by Mark Fischer-Colbrie in favor of the Registrant(8)
10.24 Promissory note, dated April 1, 1998, executed by Thomas Silvestrini in favor of the Registrant(8)
10.25 Promissory notes, dated September 1, 1998 executed by Thomas Loarie in favor of Registrant(8)
10.26 Promissory notes, dated September 1, 1998 executed by Darlene Crokett-Billigin in favor of Registrant(8)
10.27 Promissory notes, dated September 1, 1998 executed by Thomas Silvestrini in favor of Registrant(8)
10.28 Promissory notes, dated September 1, 1998 executed by Mark Fischer-Colbrie in favor of Registrant(8)
10.29 Master loan and security agreement dated as of March 25, 1999 between Registrant in favor of
Transamerica Business Credit Corporation.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. (See signature page)
27 Financial Data Schedule
</TABLE>
31
<PAGE>
- - -----------------------
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits," of the Registrant's Registration
Statement on Form S-1 and Amendment No. 1, Amendment No. 2 and Amendment
No. 3 thereto (File No. 33-92880), which became effective on July 27, 1995.
(2) Management contract or compensatory plan or arrangement.
(3) Confidential treatment has been granted with respect to certain portions of
this Exhibit by the Securities and Exchange Commission by order dated July
27, 1995.
(4) Incorporated by reference to identically numbered exhibits filed in
response to the 16(a), Exhibits of the Registrants Annual Report on Form
10-K for the year ended December 31, 1995.
(5) Confidential treatment has been sought with respect to certain portions of
this Exhibit.
(6) Incorporated by reference to identically numbered exhibits filed in the
Registrant's Form 10-K for the year ended December 31, 1996.
(7) Incorporated by reference to identically numbered exhibit filed in
Registrant's Registration on Form 8-A which became effective on August 25,
1997.
(8) Incorporated by reference to identically numbered exhibit filed in
Registrant's Form 10-K for the year ended December 31, 1996. Supplemental
amendments to promissory notes are attached with this filing.
(9) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits" of the Registrant's Registration
Statement on Form S-1 and Amendment No. 1, Amendment No. 2 and Amendment
No. 3 thereto (File No. 33-92880), which became effective July 27, 1995.
(10) (b) The Company filed the following reports on Form 8-K during the year
ended December 31, 1998:
Report Date: August 26, 1998
Item 5. Other Events
Pioneering Ring technology for nearsighted people to receive full PMA
review by FDA.
Report Date: August 3, 1998
Item 5. Other Events
KeraVision Appoints to Board Peter L. Wilson, Former President of
Richardson Vicks USA.
Report Date: July 23, 1998
Item 5. Other Events
KeraVision Appoints 23-Year J&J Veteran as VP-EuropeMenlo Park, California
on this 27th day of March 1999.
Report Date: July 23, 1998
Item 5. Other Events
KeraVision reports second quarter results.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Menlo
Park, California on this 30th day of March 1999.
KERAVISION, INC.
By: /s/Mark Fischer-Colbrie
-----------------------
Mark Fischer-Colbrie
Vice President, Finance and
Administration, Chief Financial Officer and Assistant Secretary
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Thomas M. Loarie and Mark Fischer-
Colbrie, jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - ------------------------------------- ----------------------------------------------------- --------------------
<S> <C> <C>
/s/Thomas M. Loarie Chairman of the Board of Directors, President and March 30, 1999
- - ----------------------------------- Chief Executive Officer (Principal Executive Officer)
(Thomas M. Loarie)
/s/Mark Fischer-Colbrie Vice President, Finance and Administration, Chief March 30, 1999
- - ----------------------------------- Financial Officer, and Assistant Secretary
(Mark Fischer-Colbrie) (Principal Financial and Accounting Officer)
/s/Charles Crocker Director March 30, 1999
- - -----------------------------------
(Charles Crocker)
/s/John R Gilbert Director March 30, 1999
- - -----------------------------------
(John R. Gilbert)
/s/Kathleen D. La Porte Director March 30, 1999
- - -----------------------------------
(Kathleen D. La Porte)
/s/Lawrence Lehmkuhl Director March 30, 1999
- - -----------------------------------
(Lawrence Lehmkuhl)
/s/Kshitij Mohan Director March 30, 1999
- - -----------------------------------
(Kshitij Mohan)
/s/Arthur M. Pappas Director March 30, 1999
- - -----------------------------------
(Arthur M. Pappas)
/s/Peter L. Wilson Director March 30, 1999
- - -----------------------------------
(Peter L. Wilson)
</TABLE>
33
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
KeraVision, Inc.
We have audited the accompanying consolidated balance sheets of
KeraVision, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, and 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.
Ernst & Young LLP
February 3, 1999,
except for Note 9, as to which the date is
March 25, 1999
San Jose, California
34
<PAGE>
<TABLE>
<CAPTION>
KERAVISION, INC.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
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.
35
<PAGE>
<TABLE>
<CAPTION>
KERAVISION, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
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.
36
<PAGE>
<TABLE>
<CAPTION>
KeraVision, Inc.
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Net Capital Deficiency)
(In thousands, except share and per share amounts)
Redeemable Convertible
Preferred Stock Common Stock
---------------------- ------------------------ Paid-In Deferred
(in thousands, except share and per share amounts) Shares Amount Shares Amount Capital Compensation
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 -- -- 12,262,845 $ 12 $ 75,710 $ (477)
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 -- -- -- -- -- --
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities,
net of reclassification adjustments -- -- -- -- -- --
Foreign currency translation adjustments -- -- -- -- -- --
Other comprehensive income -- -- -- -- -- --
Comprehensive income (loss) -- -- -- -- -- --
- - --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 -- -- 12,444,802 12 76,114 (328)
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 -- -- -- -- -- --
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities,
net of reclassification adjustments -- -- -- -- -- --
Foreign currency translation adjustments -- -- -- -- -- --
Other comprehensive income -- -- -- -- -- --
Comprehensive income (loss) -- -- -- -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- -- 12,593,646 13 76,540 (179)
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 $ 16,643 -- -- -- --
Accretion of dividends on preferred stock -- 150 -- -- -- --
Dividends on preferred stock to be distributed -- 696 -- -- -- --
Dividends on series D preferred stock issuance -- -- -- -- 2,531 --
related to deemed dividend (Note 5) -- -- -- -- -- --
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 -- -- -- -- -- --
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities,
net of reclassification adjustments -- -- -- -- -- --
Foreign currency translation adjustments -- -- -- -- -- --
Other comprehensive income -- -- -- -- -- --
Comprehensive income (loss) -- -- -- -- -- --
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 562,500 $ 17,489 $12,776,920 $ 13 $ 80,162 $ (30)
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Notes Stockholders
Other Receivable Equity (Net
Comprehensive Comprehensive Accumulated From Capital
(in thousands, except share and per share amounts) Income/loss Income Deficit Stockholders Deficiency
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- $-- $ (30,403) $ (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) -- (12,879) -- (12,879)
---------
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities,
net of reclassification adjustments 18 -- -- -- 18
Foreign currency translation adjustments (1) -- -- -- (1)
---------
Other comprehensive income 17 17 -- -- --
---------
Comprehensive income (loss) $(12,862) -- -- -- --
=========
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 -- 17 (43,282) (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) -- (19,396) -- (19,396)
---------
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities,
net of reclassification adjustments 26 -- -- -- 26
Foreign currency translation adjustments 1 -- -- -- 1
---------
Other comprehensive income 27 27 -- -- --
---------
Comprehensive income (loss) $(19,369) -- -- -- --
=========
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- 44 (62,678) (803) 12,937
Issuance of common stock upon exercise of options -- -- -- -- 598
Issuance of redeemable convertible series B -- -- -- -- --
preferred stock, net of issuance costs -- -- -- -- --
Accretion of dividends on preferred stock -- -- -- -- --
Dividends on preferred stock to be distributed -- -- -- -- --
Dividends on series D 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: -- -- -- -- 0
Net loss (27,414) -- (27,414) -- (27,414)
---------
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities,
net of reclassification adjustments (42) -- -- -- (42)
Foreign currency translation adjustments 107 -- -- -- 107
---------
Other comprehensive income 65 65 -- -- --
---------
Comprehensive income (loss) $(27,349) -- -- -- --
=========
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 109 $ (90,092) $(1,609) $(11,447)
==================================================================================================================================
See accompanying notes.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
KERAVISION, INC.
Consolidated Statements Of Cash Flows
Decrease in cash and cash equivalents
(in thousands)
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.
38
<PAGE>
KeraVision, Inc.
Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
Organization and Basis of Presentation
KeraVision, Inc. ("KeraVision" or the "Company") was incorporated on
November 6, 1986 in the State of California and reincorporated in the State of
Delaware on July 25, 1995. On August 2, 1995, the Company completed its initial
public offering ("IPO") by issuing 3,600,000 shares of common stock in exchange
for net proceeds of $44.4 million.
The Company was founded to develop and commercialize proprietary medical
products for the treatment of common vision problems. On December 23, 1986, the
Company acquired certain equipment and patent rights from Kera Associates, a
partnership, in exchange for 425,000 shares of the Company's common stock issued
to the former partners of Kera Associates. The assets were recorded at the
predecessor's cost basis. As part of the transaction with Kera Associates, the
Company acquired the exclusive license, existing between Kera Associates and an
outside third party, to develop and market the licensor's "proprietary
rights," as defined, relating to the development of certain instruments used in
the insertion of the KeraVision 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 was advanced on March
25, 1999 (see Note 9 Subsequent Events).
Management's planned expenditures for 1999 exceed current cash, cash
equivalents and available-for-sale investments and the funds to be received from
the Transcend acquisition and the Senior Term Loan. The Company will need to
obtain additional funds to continue its research and development activities,
fund operating expenses 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 financings. The Company may also enter into collaborative
arrangements with corporate partners that could provide the Company with
additional funding in the form of equity, debt or license fees in exchange for
the Company's rights with respect to certain markets or technology. There can
be no assurance that the Company will be able to raise any additional funds or
enter into any such collaborative arrangements on terms favorable to the
Company, or at all. If the Company is unable to obtain the necessary additional
capital, significant reductions in spending and the delay or cancellation of
planned activities or more substantial restructuring options may be necessary.
In such event, the Company intends to implement expense reduction plans in a
timely manner to enable the Company to meet its operating cash requirements
through December 31, 1999. These actions would have material adverse effects on
the Company's business, results of operations and prospects.
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 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
39
<PAGE>
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 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
40
<PAGE>
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 using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25). The Company's
policy is to grant options with an exercise price equal to the 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>
Estimated
Gross Fair
Cost Unrealized 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.
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):
41
<PAGE>
Years ended December 31:
<TABLE>
<CAPTION>
<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>
<CAPTION>
<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 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 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 Corporation, 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.
42
<PAGE>
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.
Information relative to stock option activity under all plans is as follows:
<TABLE>
<CAPTION>
Outstanding Options
-----------------------------------------------------------------
Aggregate
Available Number Weighted-Average Exercise
for Grant of Shares Exercise Price Price
------------------- ----------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Balance at December 31, 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 Weighted
Weighted Average Average Number Average
Range of Exercise Number Outstanding Remaining Exercise Exercisable at Exercise
Prices at 12/31/98 Contractual 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>
43
<PAGE>
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 and purchase plans 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 related notes receivable, the Company recorded
compensation expense of $493,000 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. 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>
<CAPTION>
<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>
44
<PAGE>
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
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
(In Thousands)
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.
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
-------------------------------------------
<S> <C> <C>
(In Thousands)
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 Acquisition
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
45
<PAGE>
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. Certain stockholders, representing a majority of the voting interests,
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, the Company 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 the company's
assets except for intellectual property. In conjunction with the loan, the
Company granted to the lender warrants to purchase 55,492 shares of the common
stock at an exercise price of $10.8125, the closing price as of March 5, 1999,
the date of the loan commitment. The respective warrants are exercisable for 7
years from the date of issuance.
46
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page Number
---------------------------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of reorganization by and among KeraVision, Inc. KVTT acquisition corporation
and Transcend Theraputics, Inc. dated as of December 22, 1998.
3.1 Amended and Restated Certificate of Incorporation of Registrant.(2)
3.2 Bylaws of Registrant.(1)
3.3 Certificate of Designation of Rights, Preferences and Privileges of Series B Convertible
Preferred Stock of KeraVision, Inc.
4.1 Preferred Shares Rights Agreement, dated as of August 18, 1997, between Registrant and Bank
Boston, N.A. (7)
4.2 KeraVision, Inc. Investors' rights Agreement.
10.1 Form of Indemnification Agreements for directors and officers.(1)
10.2 1987 Stock Option Plan and forms of agreements thereunder.(1)(2)
10.3 1995 Stock Plan, as amended.(2)
10.4 1995 Directors' Option Plan and form of subscription agreement.(4)(2)
10.5 401(k) Plan.(1)(2)
10.6 Fremont Office Lease dated August 20, 1993 and all amendments thereto.(1)
10.7 Kilmer License Agreement, dated December 31, 1992.(1)
10.8 Manufacturing Agreement dated October 1, 1992.(1)(3)
10.9 Form of Warrant for Series D Preferred Stock between Registrant and certain holders of Common
Stock of Registrant.(1)
10.10 Promissory Notes, dated January 29, 1988, March 8, 1988, March 8, 1989, October 30, 1991, April
12, 1993 and November 7, 1993, executed by Thomas Loarie in favor of the Registrant and all
amendments thereto. (8)
10.11 Promissory Notes, dated September 17, 1990, October 30, 1991, October 30, 1991, and November 7,
1993, executed by Thomas Silvestrini in favor of the Registrant and all amendments thereto. (8)
10.12 Promissory Note, dated November 7, 1993, executed by Mark Fischer-Colbrie in favor of the
Registrant and all amendments thereto.(9)
10.13 Promissory Notes, dated March 8, 1988, March 8, 1988, March 8, 1989, October 30, 1991, and
November 7, 1993, executed by Darlene Crockett-Billig in favor of the Registrant and all
amendments thereto.(8)
10.14 Consulting Agreement dated January 19, 1994 between the Registrant and John R. Gilbert, and all
amendments thereto.(1)
10.15 Information and Registration Rights Agreement between the Registrant and holders of the Preferred
Stock of the Registrant, dated as of November 19, 1992.(1)
10.16 Consulting Agreement dated January 1, 1996 between the Registrant and John R. Gilbert(4)
10.17 Employment Agreement dated January 1997 between the Registrant and Thomas M. Loarie.(2)(6)
10.18 Distribution Agreement dated as of October 31, 1996 by and between the Registrant and AM Peschke,
a German corporation.(5)(6)
10.19 1997 Employee Stock Option Plan.(2)
10.20 Form of Change of Control Agreement entered into between Registrant and Chief Executive Officer
in May 1997.(2)
10.21 Form of Change of Control Agreement entered into between Registrant and Executive Officers in May
1997.(2)
10.22 Promissory notes, dated April 1, 1998, executed by Thomas Loarie in favor of the Registrant(8)
10.23 Promissory note, dated April 1, 1998, executed by Mark Fischer-Colbrie in favor of the Registrant(8)
10.24 Promissory note, dated April 1, 1998, executed by Thomas Silvestrini in favor of the Registrant(8)
10.25 Promissory notes, dated September 1, 1998 executed by Thomas Loarie in favor of Registrant(8)
10.26 Promissory notes, dated September 1, 1998 executed by Darlene Crokett-Billigin in favor of Registrant(8)
10.27 Promissory notes, dated September 1, 1998 executed by Thomas Silvestrini in favor of Registrant(8)
10.28 Promissory notes, dated September 1, 1998 executed by Mark Fischer-Colbrie in favor of Registrant(8)
10.29 Master loan and security agreement dated as of March 25, 1999 between Registrant in favor of
Transamerica Business Credit Corporation.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. (See signature page)
27 Financial Data Schedule
</TABLE>
<PAGE>
- - -----------------------
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits," of the Registrant's Registration
Statement on Form S-1 and Amendment No. 1, Amendment No. 2 and Amendment
No. 3 thereto (File No. 33-92880), which became effective on July 27, 1995.
(2) Management contract or compensatory plan or arrangement.
(3) Confidential treatment has been granted with respect to certain portions of
this Exhibit by the Securities and Exchange Commission by order dated July
27, 1995.
(4) Incorporated by reference to identically numbered exhibits filed in
response to the 16(a), Exhibits of the Registrants Annual Report on Form
10-K for the year ended December 31, 1995.
(5) Confidential treatment has been sought with respect to certain portions of
this Exhibit.
(6) Incorporated by reference to identically numbered exhibits filed in the
Registrant's Form 10-K for the year ended December 31, 1996.
(7) Incorporated by reference to identically numbered exhibit filed in
Registrant's Registration on Form 8-A which became effective on August 25,
1997.
(8) Incorporated by reference to identically numbered exhibit filed in
Registrant's Form 10-K for the year ended December 31, 1996. Supplemental
amendments to promissory notes are attached with this filing.
(9) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits" of the Registrant's Registration
Statement on Form S-1 and Amendment No. 1, Amendment No. 2 and Amendment
No. 3 thereto (File No. 33-92880), which became effective July 27, 1995.
(10) (b) The Company filed the following reports on Form 8-K during the year
ended December 31, 1998:
<PAGE>
EXHIBIT 2.1
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....................................... 2
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................................. 21
</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>
AGREEMENT 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
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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 3.3
CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES
AND PRIVILEGES OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
KERAVISION, INC.
Pursuant to Section 151 of the General Corporation Law of the State of Delaware
We, Mark Fischer-Colbrie and Michael W. Hall, the Vice President, Finance
and Administration and Chief Financial Officer and the Secretary, respectively,
of KeraVision, Inc., a Delaware corporation (the "Corporation"), in accordance
-----------
with the provisions of Section 103 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Certificate of Incorporation of the said Corporation, the Board of Directors on
June 9, 1998 adopted the following resolution creating a series of shares of
Preferred Stock designated as Series B Convertible Preferred Stock:
"RESOLVED, that pursuant to the authority vested in the Board of Directors
of the corporation by the Certificate of Incorporation, the Board of Directors
does hereby provide for the issue of a Series of Preferred Stock, $0.001 par
value, of the Corporation, to be designated "Series B Convertible Preferred
Stock", initially consisting of Six Hundred and Sixty Two Thousand Five Hundred
(662,500) shares and to the extent that the designations, powers, preferences
and relative and other special rights and the qualifications, limitations and
restrictions of the Series B Convertible Preferred Stock are not stated and
expressed in the Certificate of Incorporation, does hereby fix and herein state
and express such designations, powers, preferences and relative and other
special rights and the qualifications, limitations and restrictions thereof, as
follows (all terms used herein which are defined in the Certificate of
Incorporation shall be deemed to have the meanings provided therein):
Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as "Series B Participating Preferred Stock", par value $0.001 per
share, and the number of shares constituting such series shall be Six Hundred
Sixty Two Thousand and Five Hundred (662,500).
Section 2. Dividends and Distributions. Subject to the rights of series
---------------------------
of Preferred Stock which may from time to time come into existence, the holders
of shares of Series B Convertible Preferred Stock shall be entitled to receive
dividends, out of any assets legally available therefor, prior and in preference
to any declaration or payment of any dividend (payable other than in Common
Stock or other securities and rights convertible into or entitling the holder
thereof to receive, directly or indirectly, additional shares of Common Stock of
the Corporation) on the Common Stock of the Corporation, payable on the last day
of the Corporation's fiscal
<PAGE>
quarter in which any dividend is declared, when, as and if declared by the Board
of Directors, at the rate of $2.24 per share (as adjusted for stock splits and
combinations) per annum, payable, at the election of the Corporation, in either
cash or shares of Series B Convertible Preferred Stock, the number of shares of
which shall equal the amount of any such dividend divided by the product of (i)
the average closing price of the Company's Common Stock on the Nasdaq National
Market for each of the twenty (20) trading days prior to the declaration of such
dividend multiplied by (ii) four (4). Such dividends shall accrue on each share
from June 12, 1998 and shall accrue from day to day, whether or not earned or
declared. Such dividends shall be paid as soon as practicable at the end of each
quarter in either cash or shares of Series B Convertible Preferred Stock as
described above. Without limiting the foregoing, such dividends shall be
cumulative so that, if such dividends in respect of any current quarterly
dividend period, at the annual rate specified above, shall not have been paid
the deficiency shall first be fully paid before any dividend or other
distribution shall be paid on or declared and set apart for the Common Stock.
Any accumulation of dividends on the Series B Convertible Preferred Stock shall
not bear interest. Cumulative dividends with respect to a share of Series B
Convertible Preferred Stock which are accrued, payable and/or in arrears shall,
upon conversion of such share to Common Stock, subject to the rights of series
of Preferred Stock which may from time to time come into existence, be paid to
the extent assets are legally available therefor and any amounts for which
assets are not legally available shall be paid promptly as assets become legally
available therefor; any partial payment will be made pro rata among the holders
of such shares. In the event that the holders of the Corporation's Common Stock
are entitled to receive any dividend (payable other than in Common Stock or
other securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock of the
Corporation), the holders of Series B Convertible Preferred Stock shall be
entitled to receive such dividend as if the shares of Series B Convertible
Preferred Stock had converted to Common Stock immediately prior to the
declaration of such dividend.
Section 3. Liquidation and Merger Preference.
---------------------------------
(A) Liquidation, Dissolution or Winding Up. Upon any liquidation
--------------------------------------
(voluntary or otherwise), dissolution or winding up of the Corporation (a
"Liquidation"), no distribution shall be made to the holders of shares of stock
- - ------------
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series B Convertible Preferred Stock unless, prior thereto,
the holders of shares of Series B Convertible Preferred Stock shall have
received an amount equal to accrued and unpaid dividends and distributions
thereon (the "Accrued Dividends"), whether or not declared, to the date of such
-----------------
payment, plus an amount equal to $32 per share (as adjusted for stock splits and
combinations) 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 pursuant to Section 2 above (other than pursuant to
the last sentence of Section 2), provided that, in the event of a Change in
Control (as defined in Section 3(B)(i) below) in which the value of the
consideration received by the holders of the Common Stock of the Corporation
exceeds $16 per share (as adjusted for stock splits and combinations and as
determined pursuant to Section 3(B)(ii) below), then the holders of Preferred
Stock shall receive only the Accrued Dividends plus $32 per share (as adjusted
for stock splits and combinations), and provided further that in the event the
Corporation does not have sufficient assets, subject to the rights of series of
Preferred Stock which may from time to time come into
-2-
<PAGE>
existence, the amount required to be paid under this Section 3 shall equal the
value of the amount of available assets divided by the number of outstanding
shares of Series B Convertible Preferred Stock (the "Series B Liquidation
--------------------
Preference").
- - ----------
(B) Certain Acquisitions.
--------------------
(i) Deemed Liquidation. For purposes of this Section 3, a
------------------
Liquidation shall be deemed to occur if the Corporation shall sell, convey, or
otherwise dispose of or encumber all or substantially all of its property or
business or merge into or consolidate with any other corporation (other than a
wholly-owned subsidiary corporation) or effect any other transaction or series
of related transactions that results in the transfer of fifty percent (50%) or
more of the outstanding voting power of the Corporation or in which the
stockholders of the Corporation immediately prior to such transaction or series
of transactions own less than fifty percent (50%) of the Corporation's voting
power immediately after such transaction or series of transactions (a "Change in
---------
Control").
- - -------
(ii) Valuation of Consideration. In the event of a Change in
--------------------------
Control, if the consideration received by the Corporation is other than cash,
its value will be deemed its fair market value as determined in good faith by
the Corporation's Board of Directors. Notwithstanding the foregoing, any
securities shall be valued as follows:
(A) Securities not subject to investment letter or
other similar restrictions on free marketability:
(1) If traded on a securities exchange or
The Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty (30) day
period ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty (30) day period ending three (3) days
prior to the closing; and
(3) If there is no active public market, the
value shall be the fair market value thereof, as determined in good faith by the
Corporation's Board of Directors.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in Section 3(B)(ii)(A) to reflect the approximate fair
market value thereof, as determined in good faith by the Corporation's Board of
Directors.
(iii) Notice of Transaction. The Corporation shall give each
---------------------
holder of record of Series B Convertible Preferred Stock written notice of such
impending transaction not later than ten business (10) days prior to the
stockholders' meeting called to approve such transaction, or ten business (10)
days prior to the closing of such transaction, whichever is earlier, and
-3-
<PAGE>
shall also notify such holders in writing of the final approval of such
transaction. The first of such notices shall describe the material terms and
conditions of the impending transaction and the provisions of this Section 3,
and the Corporation shall thereafter give such holders prompt notice of any
material changes. The transaction shall in no event take place sooner than ten
business (10) days after the Corporation has given the first notice provided for
herein or sooner than ten business (10) days after the Corporation has given
notice of any material changes provided for herein; provided, however, that such
periods may be shortened upon the written consent of the holders of Preferred
Stock that are entitled to such notice rights or similar notice rights and that
represent at least a majority of the voting power of all then outstanding shares
of such Preferred Stock.
(iv) Effect of Noncompliance. In the event the requirements of
-----------------------
this Section 3(B) are not complied with, the Corporation shall forthwith either
cause the closing of the transaction to be postponed until such requirements
have been complied with, or cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Series B Convertible Preferred
Stock shall revert to and be the same as such rights, preferences and privileges
existing immediately prior to the closing of the transaction.
Section 4. Conversion. The holders of the Series B Convertible Preferred
----------
Stock shall have conversion rights as follows (the "Conversion Rights"):
-----------------
(A) Right to Convert. Subject to Section 4(C), each share of Series
----------------
B Convertible Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such share, at the office of
the Corporation or any transfer agent for such stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing
$32.00 by the Conversion Price applicable to such share, determined as hereafter
provided, in effect on the date the certificate is surrendered for conversion.
The initial Conversion Price per share of Series B Convertible Preferred Stock
shall be set as of the earlier of (i) June 12, 2000 (the "Anniversary Date"),
upon written request by the holders of a majority of the outstanding Series B
Convertible Preferred Stock on or before July 10, 2000, (ii) the date
immediately preceding a Liquidation or Change of Control prior to the
Anniversary Date as defined herein (the "Liquidation Date"), (iii) the date the
holder thereof elects to convert such Series B Convertible Preferred Stock or
(iv) the date the Corporation elects to convert such Series B Convertible
Preferred Stock pursuant to Section 4(B) below. The initial Conversion Price
shall be the lower of (i) $8.00, or (ii) if the price is set as of the
Anniversary Date or the Liquidation Date, the average closing price of shares of
the Corporation's Common Stock on the Nasdaq National Market (or equivalent
exchange) for each of the first five (5) and last five (5) trading days of the
three (3) months immediately prior to such date, subject to adjustment as set
forth in Section 4(D) without regard to whether the event giving rise to such
adjustment occurs prior to or after the time at which the initial Conversion
Price is set.
(B) Automatic Conversion. Each share of Series B Convertible
--------------------
Preferred Stock shall be converted, at the election of the Corporation, into
shares of Common Stock at the Conversion Price at the time in effect for such
share at any time after June 12, 2000, if at the time of such election the
average closing price per share of the Corporation's Common Stock on the
-4-
<PAGE>
Nasdaq National Market (or equivalent exchange) for the immediately preceding
twenty (20) consecutive trading days exceeds $16 per share (as adjusted for
stock splits and combinations).
(C) Mechanics of Conversion. Before any holder of Series B
-----------------------
Convertible Preferred Stock shall be entitled to convert the same into shares of
Common Stock, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Series B Convertible Preferred Stock, and shall give written
notice to the Corporation at its principal corporate office, of the election to
convert the same and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series B Convertible Preferred Stock, or to the nominee
or nominees of such holder, a certificate or certificates for the number of
shares of Common Stock to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the close
of business (i) on the date of such surrender of the shares of such series of
Preferred Stock to be converted or (ii) in case of a conversion pursuant to
Section 4(B), on the date the Corporation delivers notice of its intent to
effect an automatic conversion pursuant to Section 4(B). The person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock as of such date.
(D) Conversion Price Adjustments of Preferred Stock for Certain
-----------------------------------------------------------
Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series
- - -------------------------------------------
B Convertible Preferred Stock shall be subject to adjustment from time to time
as follows:
(i) Issuance of Additional Stock below Purchase Price. If
-------------------------------------------------
the Corporation shall issue, after the date upon which any shares of Series B
Convertible Preferred Stock were first issued (the "Purchase Date"), any
-------------
Additional Stock (as defined below) without consideration or for a consideration
per share less than the Conversion Price for such Series B Convertible Preferred
Stock in effect immediately prior to the issuance of such Additional Stock, the
Conversion Price for such Series B Convertible Preferred Stock in effect
immediately prior to each such issuance shall automatically be adjusted as set
forth in this Section 4(D)(i), unless otherwise provided in this Section
4(D)(i).
(A) Adjustment Formula. Whenever the Conversion
------------------
Price is adjusted pursuant to this Section 4(D)(i), the new Conversion Price
shall be determined by multiplying the Conversion Price then in effect by a
fraction, (x) the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issuance (the "Outstanding Common")
------------------
plus the number of shares of Common Stock that the aggregate consideration
received by the Corporation for such issuance would purchase at such Conversion
Price then in effect for such series; and (y) the denominator of which shall be
the number of shares of Outstanding Common plus the number of shares of such
Additional Stock. For purposes of the foregoing calculation, the term
"Outstanding Common" shall include shares of Common Stock deemed issued pursuant
to Section 4(D)(i)(E) below.
(B) Definition of "Additional Stock". For purposes
--------------------------------
of this Section 4(D)(i), "Additional Stock" shall mean any shares of Common
----------------
Stock issued (or deemed
-5-
<PAGE>
to have been issued pursuant to Section 4(D)(i)(E)) by the Corporation after the
Purchase Date) other than
(1) Common Stock issued pursuant to a
transaction described in Section 4(D)(iii) hereof,
(2) Shares of Common Stock issuable or
issued to employees, consultants or directors of the Corporation directly or
pursuant to stock option plans or restricted stock plans approved by the Board
of Directors of the Corporation,
(3) Capital stock, or options or warrants to
purchase capital stock, issued to financial institutions or lessors in
connection with commercial credit arrangements, equipment financings or similar
transactions,
(4) Shares of Common Stock or Preferred
Stock issuable upon exercise of warrants outstanding as of Purchase Date,
(5) Capital stock or warrants or options to
purchase capital stock issued in connection with bona fide acquisitions, mergers
or similar transactions, the terms of which are approved by the Board of
Directors of the Corporation, and
(6) Shares of Common Stock issued or
issuable upon conversion of the Series B Convertible Preferred Stock.
(C) No Fractional Adjustments. No adjustment of the
-------------------------
Conversion Price for the Series B Convertible Preferred Stock shall be made in
an amount less than one cent per share, provided that any adjustments which are
not required to be made by reason of this sentence shall be carried forward and
shall be either taken into account in any subsequent adjustment made prior to
three years from the date of the event giving rise to the adjustment being
carried forward, or shall be made at the end of three years from the date of the
event giving rise to the adjustment being carried forward.
(D) Determination of Consideration. In the case of
------------------------------
the issuance of Common Stock for cash, the consideration shall be deemed to be
the amount of cash paid therefor before deducting any reasonable discounts,
commissions or other expenses allowed, paid or incurred by the Corporation for
any underwriting or otherwise in connection with the issuance and sale thereof.
In the case of the issuance of the Common Stock for a consideration in whole or
in part other than cash, the consideration other than cash shall be deemed to be
the fair value thereof as determined in good faith by the Board of Directors
irrespective of any accounting treatment.
(E) Deemed Issuances of Common Stock. In the case
--------------------------------
of the issuance (whether before, on or after the applicable Purchase Date) of
options to purchase or rights to subscribe for Common Stock, securities by their
terms convertible into or exchangeable for Common Stock or options to purchase
or rights to subscribe for such convertible or exchangeable securities, the
following provisions shall apply for all purposes of this Section 4(D)(i):
-6-
<PAGE>
(1) The aggregate maximum number of shares
of Common Stock deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the passage of time,
but without taking into account potential antidilution adjustments) of such
options to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
Section 4(D)(i)(D)), if any, received by the Corporation upon the issuance of
such options or rights plus the minimum exercise price provided in such options
or rights (without taking into account potential antidilution adjustments) for
the Common Stock covered thereby.
(2) The aggregate maximum number of shares
of Common Stock deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability, including,
without limitation, the passage of time, but without taking into account
potential antidilution adjustments) for any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to subscribe
for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such securities
were issued or such options or rights were issued and for a consideration equal
to the consideration, if any, received by the Corporation for any such
securities and related options or rights (excluding any cash received on account
of accrued interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by the Corporation (without taking into
account potential antidilution adjustments) upon the conversion or exchange of
such securities or the exercise of any related options or rights (the
consideration in each case to be determined in the manner provided in Section
4(D)(i)(D)).
(3) In the event of any change in the number
of shares of Common Stock deliverable or in the consideration payable to the
Corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof, the
Conversion Price of the Series B Convertible Preferred Stock, to the extent in
any way affected by or computed using such options, rights or securities, shall
be recomputed to reflect such change, but no further adjustment shall be made
for the actual issuance of Common Stock or any payment of such consideration
upon the exercise of any such options or rights or the conversion or exchange of
such securities.
(4) Upon the expiration of any such options
or rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price of the Series B Convertible Preferred Stock, to
the extent in any way affected by or computed using such options, rights or
securities or options or rights related to such securities, shall be recomputed
to reflect the issuance of only the number of shares of Common Stock (and
convertible or exchangeable securities which remain in effect) actually issued
upon the exercise of such options or rights, upon the conversion or exchange of
such securities or upon the exercise of the options or rights related to such
securities.
(5) The number of shares of Common Stock
deemed issued and the consideration deemed paid therefor pursuant to Sections
4(D)(i)(E)(1) and
-7-
<PAGE>
4(D)(i)(E)(2) shall be appropriately adjusted to reflect any change, termination
or expiration of the type described in either Section 4(D)(i)(E)(3) or
4(D)(i)(E)(4).
(F) No Increased Conversion Price. Notwithstanding
any other provisions of this Section 4(D)(i), except to the limited extent
provided for in Sections 4(D)(i)(E)(3) and 4(D)(i)(E)(4), no adjustment of the
Conversion Price pursuant to this Section 4(D)(i) shall have the effect of
increasing the Conversion Price above the Conversion Price in effect immediately
prior to such adjustment.
(ii) Stock Splits and Dividends. In the event the Corporation
--------------------------
should at any time or from time to time after the Purchase Date fix a record
date for the effectuation of a split or subdivision of the outstanding shares of
Common Stock or the determination of holders of Common Stock entitled to receive
a dividend or other distribution payable in additional shares of Common Stock
or other securities or rights convertible into, or entitling the holder thereof
to receive directly or indirectly, additional shares of Common Stock
(hereinafter referred to as "Common Stock Equivalents") without payment of any
--------------------------
consideration by such holder for the additional shares of Common Stock or the
Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, unless the holders of
Series B Convertible Preferred Stock receive a pro rata portion of such
dividends on a basis as if they had converted immediately prior to such
dividend, as of such record date (or the date of such dividend distribution,
split or subdivision if no record date is fixed), the Conversion Price of the
Series B Convertible Preferred Stock shall be appropriately decreased so that
the number of shares of Common Stock issuable on conversion of each share of
such series shall be increased in proportion to such increase of the aggregate
of shares of Common Stock outstanding and those issuable with respect to such
Common Stock Equivalents with the number of shares issuable with respect to
Common Stock Equivalents determined from time to time in the manner provided for
deemed issuances in Section 4(D)(i)(E).
(iii) Reverse Stock Splits. If the number of shares of Common
--------------------
Stock outstanding at any time after the Purchase Date is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date of such combination, the Conversion Price for the Series B
Convertible Preferred Stock shall be appropriately increased so that the number
of shares of Common Stock issuable on conversion of each share of such series
shall be decreased in proportion to such decrease in outstanding shares.
(E) Other Distributions. In the event the Corporation shall declare
-------------------
a distribution payable in securities of other persons, evidences of indebtedness
issued by the Corporation or other persons, assets (excluding cash dividends) or
options or rights not referred to in Section 4(D)(iii), then, in each such case
for the purpose of this Section 4(E), the holders of Series B Convertible
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Corporation into which their shares of Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution on.
-8-
<PAGE>
(F) Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
Section 3 or this Section 4) provision shall be made so that the holders of the
Series B Convertible Preferred Stock shall thereafter be entitled to receive
upon conversion of such Preferred Stock the number of shares of stock or other
securities or property of the Corporation or otherwise, to which a holder of
Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 4 with respect to the rights of
the holders of such Preferred Stock after the recapitalization to the end that
the provisions of this Section 4 (including adjustment of the Conversion Price
then in effect and the number of shares purchasable upon conversion of such
Preferred Stock) shall be applicable after that event and be as nearly
equivalent as practicable to what such holder would be entitled had the
recapitalization not been effected.
(G) No Impairment. The Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of Preferred Stock against impairment.
(H) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon the conversion
of any share or shares of the Series B Convertible Preferred Stock, and the
number of shares of Common Stock to be issued shall be rounded to the nearest
whole share. The number of shares issuable upon such conversion shall be
determined on the basis of the total number of shares of Series B Convertible
Preferred Stock the holder is at the time converting into Common Stock and the
number of shares of Common Stock issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment
of the Conversion Price of Series B Convertible Preferred Stock pursuant to this
Section 4, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of such Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series B Convertible Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting forth
(A) such adjustment and readjustment, (B) the Conversion Price for the Series B
Convertible Preferred Stock at the time in effect, and (C) the number of shares
of Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of a share of the Series B Convertible
Preferred Stock.
-9-
<PAGE>
(I) Notices of Record Date. In the event of any taking by the
----------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of Series B Convertible Preferred Stock, at least ten
(10) days prior to the date specified therein, a notice specifying the date on
which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
(J) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series B Convertible Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of such series of Preferred Stock; and if
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding shares of
such series of Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes, including, without limitation, engaging
in best efforts to obtain the requisite stockholder approval of any necessary
amendment to this Certificate of Incorporation.
(K) Notices. Any notice required by the provisions of this Section
4 to be given to the holders of shares of Series B Convertible Preferred Stock
shall be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his address appearing on the books of
the Corporation.
Section 5. Redemption.
----------
(A) Redemption Date and Price. Subject to the rights of series of
-------------------------
Preferred Stock which may from time to time come into existence, at any time
after June 12, 2003, but on a date (the "Redemption Date") within thirty (30)
---------------
days after receipt by the Corporation of a written request (a "Redemption
----------
Election") from the holders of not less than a majority of the then outstanding
- - --------
Series B Convertible Preferred Stock that all or some of the shares of such
series held by such holders be redeemed, the Corporation shall, to the extent it
may lawfully do so, redeem the number of shares specified in the Redemption
Election and any additional shares tendered pursuant to Section 5(B) below in
accordance with the procedures set forth in this Section 5 by paying in cash
therefor a sum per share equal to $32 per share of Series B Convertible
Preferred Stock (as adjusted for stock splits and combinations) plus all accrued
but unpaid dividends on such shares (the "Redemption Price").
----------------
(B) Procedure. Subject to the rights of series of Preferred Stock
---------
which may from time to time come into existence, within fifteen (15) days
following its receipt of the Redemption Election, the Corporation shall mail a
written notice, first class postage prepaid, to
-10-
<PAGE>
each holder of record (at the close of business on the business day next
preceding the day on which notice is given) of Series B Convertible Preferred
Stock at the address last shown on the records of the Corporation for such
holder, notifying such holder of the redemption to be effected, the Redemption
Date, the applicable Redemption Price, the place at which payment may be
obtained and calling upon such holder to surrender to the Corporation, in the
manner and at the place designated, such holder's certificate or certificates
representing the shares that such holder desires to be redeemed (the "Redemption
----------
Notice"). The Redemption Date shall be at least seven (7) days after the date of
- - ------
mailing of the Redemption Notice. Any holder of Series B Convertible Preferred
Stock who has not made a Redemption Election and who wishes to have some or all
of its shares redeemed shall provide written notice to the Corporation on or
before three (3) days prior to the Redemption Date, specifying the number of
shares of Series B Convertible Preferred such holder wishes to be redeemed.
Except as provided in Section 5(C), on or after the Redemption Date, each holder
of Series B Convertible Preferred Stock to be redeemed shall surrender to the
Corporation the certificate or certificates representing such shares, in the
manner and at the place designated in the Redemption Notice, and thereupon the
Redemption Price of such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the owner thereof and
each surrendered certificate shall be canceled. In the event less than all the
shares represented by any such certificate are redeemed, a new certificate shall
be issued representing the unredeemed shares.
(C) Effect of Redemption; Insufficient Funds. From and after the
----------------------------------------
Redemption Date, unless there shall have been a default in payment of the
Redemption Price, all rights of the holders of shares of Series B Convertible
Preferred Stock designated for redemption in the Redemption Notice (except the
right to receive the Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Corporation or be
deemed to be outstanding for any purpose whatsoever. Subject to the rights of
series of Preferred Stock which may from time to time come into existence, if
the funds of the Corporation legally available for redemption of shares of
Series B Convertible Preferred Stock on any Redemption Date are insufficient to
redeem the total number of shares of Series B Convertible Preferred Stock to be
redeemed on such date, those funds which are legally available will be used to
redeem the maximum possible number of such shares ratably among the holders of
such shares to be redeemed based upon the total Redemption Price applicable to
each such holder's shares of Series B Convertible Preferred Stock which are
subject to redemption on such Redemption Date. The shares of Series B
Convertible Preferred Stock not redeemed shall remain outstanding and entitled
to all the rights and preferences provided herein. Subject to the rights of
series of Preferred Stock which may from time to time come into existence, at
any time thereafter when additional funds of the Corporation are legally
available for the redemption of shares of Series B Convertible Preferred Stock,
such funds will immediately be used to redeem the balance of the shares which
the Corporation has become obliged to redeem on any Redemption Date but which it
has not redeemed.
Section 6. Voting Rights. Except as otherwise expressly provided herein
-------------
or by law, the holder of each share of Series B Convertible Preferred Stock
shall have the right to one vote for each share of Common Stock into which such
Preferred Stock could then be converted, and
-11-
<PAGE>
with respect to such vote, such holder shall have full voting rights and powers
equal to the voting rights and powers of the holders of Common Stock, and shall
be entitled, notwithstanding any provision hereof, to notice of any
stockholders' meeting in accordance with the bylaws of the Corporation, and
shall be entitled to vote, together with holders of Common Stock, with respect
to any question upon which holders of Common Stock have the right to vote.
Fractional votes shall not, however, be permitted and any fractional voting
rights available on an as-converted basis (after aggregating all shares into
which shares of Series B Convertible Preferred Stock held by each holder could
be converted) shall be rounded to the nearest whole number (with one-half being
rounded upward). Notwithstanding anything to the contrary contained herein, so
long as 300,000 shares of Series B Convertible Preferred Stock remain
outstanding (as adjusted for stock splits and combinations), the holders of a
majority of the Series B Convertible Preferred Stock shall be entitled to elect
one (1) member of the Board of Directors of the Corporation.
Section 7. Protective Provisions. Subject to the rights of series of
---------------------
Preferred Stock which may from time to time come into existence, so long as at
least 30,000 shares of Series B Convertible Preferred Stock are outstanding (as
adjusted for stock splits, stock dividends and combinations), the Corporation
shall not without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of at least a majority of the then outstanding
shares of Series B Convertible Preferred Stock, voting together as a class:
(A) alter or change the rights, preferences or privileges of the
shares of Series B Convertible Preferred Stock so as to affect adversely the
shares of such series;
(B) increase or decrease (other than by redemption or conversion)
the total number of authorized shares of Series B Convertible Preferred Stock;
(C) authorize or issue, or obligate itself to issue, any other
equity security, including any other security convertible into or exercisable
for any equity security, having a preference over the Series B Convertible
Preferred Stock with respect to voting, dividends or conversion; or
(D) reclassify the shares of Common Stock or any other shares of
any class of capital stock hereafter created junior to the Series B Convertible
Preferred Stock into shares of any class or series of capital stock (i) ranking
either as to payment of dividends, distributions of assets or redemptions, prior
to the Series B Convertible Preferred Stock, or (ii) which in any manner
adversely affects the holders of Series B Convertible Preferred Stock.
Section 8. Reacquired Shares. Any shares of Series B Convertible
-----------------
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 9. Ranking. The Series B Convertible Preferred Stock shall rank
-------
senior to the Corporation's Series A Preferred Stock, Common Stock and, unless
the terms of any such
-12-
<PAGE>
class or series shall provide otherwise, all other classes of capital stock or
series of the Corporation's Preferred Stock as to dividend rights, rights of
liquidation, winding up or dissolution.
Section 10. Amendment. This Certificate of Designation shall not be
---------
amended without the affirmative vote of the holders of a majority of the
outstanding shares of Series B Convertible Preferred Stock.
-13-
<PAGE>
IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do
affirm the foregoing as true under the penalties of perjury this 12th day of
June, 1998.
/s/Mark Fischer-Colbrie
-----------------------
Mark Fischer-Colbrie, Vice President,
Finance and Administration and
Chief Financial Officer
ATTEST:
/s/Michael W. Hall
------------------
Michael W. Hall, Secretary
-14-
<PAGE>
Exhibit 4.2
KERAVISION, INC.
INVESTORS' RIGHTS AGREEMENT
---------------------------
This Investors' Rights Agreement (the "Agreement") is made as of the 12th
---------
day of June, 1998, by and among KeraVision, Inc., a Delaware corporation (the
"Company"), the investors listed on Exhibit A hereto, each of which is herein
- - -------- ---------
referred to as an "Investor."
--------
RECITALS
--------
The Company and the Investors have entered into a Series B Convertible
Preferred Stock Purchase Agreement (the "Purchase Agreement") of even date
------------------
herewith pursuant to which the Company desires to sell to the Investors and the
Investors desire to purchase from the Company shares of the Company's Series B
Convertible Preferred Stock. A condition to the Investors' obligations under
the Purchase Agreement is that the Company and the Investors enter into this
Agreement in order to provide the Investors with (i) certain rights to register
shares of the Company's Common Stock issuable upon conversion of the Series B
Convertible Preferred Stock held by the Investors and (ii) a right of first
offer with respect to certain issuances by the Company of its securities. The
Company and the Investors each desire to induce the Investors to purchase shares
of Series B Convertible Preferred Stock pursuant to the Purchase Agreement by
agreeing to the terms and conditions set forth herein.
AGREEMENT
---------
The parties hereby agree as follows:
1. Registration Rights. The Company and the Investors covenant and agree
-------------------
as follows:
1.1 Definitions. For purposes of this Section 1:
-----------
(a) The terms "register," "registered," and "registration" refer
-------- ---------- ------------
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), and the declaration or ordering of effectiveness of such
registration statement or document;
(b) The term "Registrable Securities" means (i) the shares of
----------------------
Common Stock issuable or issued upon conversion of the Series B Convertible
Preferred Stock and (ii) any other shares of Common Stock of the Company issued
as (or issuable upon the conversion or exercise of any warrant, right or other
security which is issued as) or by way of a dividend, a stock split or other
distribution with respect to, or in exchange for or in replacement of, the
shares listed in (i) or the Series B Convertible Preferred Stock or any shares
of Common Stock of the Company issued in connection with a combination of
shares, reclassification, recapitalization, merger, consolidation or
reorganization with respect to the shares listed in (i) or the Series B
<PAGE>
Convertible Preferred Stock; provided, however, that the foregoing definition
-------- -------
shall exclude in all cases any Registrable Securities sold by a person in a
transaction in which his or her rights under this Agreement are not assigned.
Notwithstanding the foregoing, Common Stock or other securities shall only be
treated as Registrable Securities if and so long as they have not been (A) sold
to or through a broker or dealer or underwriter in a public distribution or a
public securities transaction, or (B) sold in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act under
Section 4(1) thereof so that all transfer restrictions, and restrictive legends
with respect thereto, if any, are removed upon the consummation of such sale;
(c) The number of shares of "Registrable Securities then
----------------------------
outstanding" shall be determined by the number of shares of Common Stock
- - -----------
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities;
(d) The term "Holder" means any person owning or having the
------
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 1.11 of this Agreement;
(e) The term "Form S-1" means such form under the Securities Act
--------
as in effect on the date hereof or any successor form under the Securities Act;
(f) The term "Form S-3" means such form under the Securities Act
--------
as in effect on the date hereof or any successor form under the Securities Act;
and
(g) The term "SEC" means the Securities and Exchange Commission.
---
1.2 Form S-3 and Form S-1 Registration.
----------------------------------
(a) Within thirty (30) days after the date hereof, the Company
shall file with the SEC a registration statement on Form S-3 covering all of the
Registrable Securities and use its best efforts thereafter to effect such
registration and all such qualifications and compliances as may be necessary and
as would permit or facilitate the sale and distribution of all of the
Registrable Securities; provided, however, that the Company shall not be
-------- -------
obligated to effect any such registration, qualification or compliance pursuant
to this Section 1.2(a): (i) if Form S-3 is not available for such offering by
the Holders; or (ii) in any particular jurisdiction in which the Company would
be required to qualify to do business or to execute a general consent to service
of process in effecting such registration, qualification or compliance.
(b) In the event that a registration on Form S-3 is not
available to the Company or if the effectiveness of the Form S-3 is suspended or
terminated at any time within the two (2) year period following the date hereof,
then the Company shall give written notice to all Holders and shall use its best
efforts to effect as soon as practicable the registration on Form S-1 of all
Registrable Securities which the Holders request to be registered pursuant to
such request and all such qualifications and compliances as may be necessary and
as would permit or facilitate the sale and distribution of all of the
Registrable Securities requested to be registered;
-2-
<PAGE>
provided, however, that the Company shall not be obligated to effect any such
- - -------- -------
registration, qualification or compliance pursuant to this Section 1.2(b): (i)
if Form S-1 is not available for such offering by the Holders; (ii) after the
Company has effected two (2) registrations pursuant to this Section 1.2(b) and
such registrations have been declared or ordered effective; (iii) if one
registration pursuant to this Section 1.2(b) has been filed within the previous
six (6) months of the date upon which a demand pursuant to this Section 1.2(b)
has been made and has been declared or ordered effective; (iv) after the second
anniversary of the date hereof; or (v) in any particular jurisdiction in which
the Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
1.3 Company Registration. If (but without any obligation to do so)
--------------------
the Company proposes to register (including for this purpose a registration
effected by the Company for stockholders other than the Holders) any of its
stock under the Securities Act in connection with the public offering of such
securities solely for cash (other than a registration relating solely to the
sale of securities to participants in a Company stock plan or a transaction
covered by Rule 145 under the Securities Act, a registration in which the only
stock being registered is Common Stock issuable upon conversion of debt
securities which are also being registered, or any registration on any form
which does not include substantially the same information as would be required
to be included in a registration statement covering the sale of the Registrable
Securities), the Company shall, at such time, promptly give each Holder written
notice of such registration. Upon the written request of each Holder given
within twenty (20) days after mailing of such notice by the Company in
accordance with Section 3.3, the Company shall, subject to the provisions of
Section 1.7, cause to be registered under the Securities Act all of the
Registrable Securities that each such Holder has requested to be registered.
1.4 Obligations of the Company. Whenever required under this
--------------------------
Section 1 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective and keep such registration statement
effective until two (2) years after the date hereof.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement until two (2) years after the
date hereof.
(c) Furnish to the Holders (and to each underwriter, if any)
such numbers of copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other documents
as they may reasonably request in order to facilitate the disposition of
Registrable Securities owned by them.
-3-
<PAGE>
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
- - --------
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) Before filing the registration statement or prospectus, or
amendments or supplements thereto, furnish to counsel selected by the
participating Holders copies of such documents proposed to be filed which shall
be subject to the reasonable approval of such counsel.
(f) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(g) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing and promptly file such amendments and supplements as may be necessary
so that, as thereafter delivered to such Holders of such Registrable Securities,
such prospectus shall not include an untrue statement of a material fact or omit
to state a material fact necessary to make the statements made therein, in the
light of the circumstances under which they were made, not misleading and use
its best efforts to cause each such amendment and supplement to become
effective.
(h) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed.
(i) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
(j) Use its best efforts to furnish, at the request of any
Holder requesting registration of Registrable Securities pursuant to this
Section 1, on the date that such Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this Section
1, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (i) an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities and
(ii) a letter dated such date, from the independent certified public accountants
of the Company, in form
-4-
<PAGE>
and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to the Holders requesting registration of Registrable
Securities.
1.5 Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.
1.6 Expenses of Registration. All expenses other than underwriting
------------------------
discounts and commissions incurred in connection with registrations, filings or
qualifications of Registrable Securities pursuant to Sections 1.2 or 1.3 for
each Holder (which right may be assigned as provided in Section 1.11), including
(without limitation) all registration, filing, and qualification fees, printers'
and accounting fees and fees and disbursements of counsel for the Company shall
be borne by the Company.
1.7 Underwriting Requirements. In connection with any offering
-------------------------
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in good faith will not jeopardize the
success of the offering by the Company. If the total amount of securities,
including Registrable Securities, requested by stockholders to be included in
such offering exceeds the amount of securities sold other than by the Company
that the underwriters determine in good faith is compatible with the success of
the offering, then the Company shall be required to include in the offering only
that number of such securities, including Registrable Securities, which the
underwriters determine in good faith will not jeopardize the success of the
offering (the securities so included to be apportioned pro rata among the
selling stockholders according to the total amount of securities entitled to be
included therein owned by each selling stockholder or in such other proportions
as shall mutually be agreed to by such selling stockholders) but in no event
shall the amount of securities of the selling Holders included in the offering
be reduced below twenty-five percent (25%) of the total amount of securities
included in such offering. For purposes of the preceding parenthetical
concerning apportionment, for any selling stockholder which is a holder of
Registrable Securities and which is a partnership or corporation, the partners,
retired partners and stockholders of such holder, or the estates and family
members of any such partners and retired partners and any trusts for the benefit
of any of the foregoing persons shall be deemed to be a single "selling
-------
stockholder," and any pro-rata reduction with respect to such "selling
- - -----------
stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder," as defined in this sentence.
-5-
<PAGE>
1.8 Delay of Registration. No Holder shall have any right to
---------------------
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.
1.9 Indemnification. In the event any Registrable Securities are
---------------
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the Securities
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and each officer, director,
------------
employee or agent thereof, against any losses, claims, damages, or liabilities
(joint or several) to which they may become subject under the Securities Act,
the Exchange Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations
(collectively a "Violation"): (i) any untrue statement or alleged untrue
---------
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law; and the Company will pay to each
such Holder, underwriter or controlling person and each officer, director,
employee or agent thereof, as incurred, any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
-------- -------
agreement contained in this subsection 1.9(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable to any Holder,
underwriter or controlling person for any such loss, claim, damage, liability,
or action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will
severally (and not jointly) indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed the registration statement, each
person, if any, who controls the Company within the meaning of the Securities
Act, any underwriter, any other Holder selling securities in such registration
statement and any controlling person of any such underwriter or other Holder,
against any losses, claims, damages, or liabilities (joint or several) to which
any of the foregoing persons may become subject, under the Securities Act, the
Exchange Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereto) arise out of or are
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information
-6-
<PAGE>
furnished by such Holder expressly for use in connection with such registration;
and each such Holder will pay, as incurred, any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to this
subsection 1.9(b), in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the
-------- -------
indemnity agreement contained in this subsection 1.9(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; provided, that in no event shall any
--------
indemnity under this subsection 1.9(b) exceed the net proceeds from the offering
received by such Holder, except in the case of willful fraud by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
-------- -------
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the reasonable fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.9, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.9.
(d) If the indemnification provided for in this Section 1.9 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations; provided, that in no event shall any contribution by a Holder
--------
under this subsection 1.9(d) exceed the net proceeds from the offering received
by such Holder, except in the case of willful fraud by such Holder. The relative
fault of the indemnifying party and of the indemnified party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified party and
the parties' relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement or omission.
-7-
<PAGE>
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this
Section 1.9 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise (and,
to the extent permitted by law, any investigation made by or on behalf of the
indemnified party or any officer, director or controlling person of such
indemnified party).
1.10 Reports Under Securities Exchange Act of 1934 . With a view to
---------------------------------------------
making available to the Holders the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144 at all times;
(b) take such action, including the voluntary registration of
its Common Stock under Section 12 of the Exchange Act, as is necessary to enable
the Holders to utilize Form S-3 for the sale of their Registrable Securities;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144,
the Securities Act and the Exchange Act or that it qualifies as a registrant
whose securities may be resold pursuant to Form S-3, (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested in availing any Holder of any rule or regulation of the SEC
which permits the selling of any such securities without registration or
pursuant to such form.
1.11 Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of at least 100,000 shares or all of such securities, provided the
--------
Company is, within a reasonable time after such transfer, furnished with written
notice of the name and address of such transferee or assignee and the securities
with respect to which such registration rights are being assigned; and provided,
--------
further, that such assignment shall be effective only if immediately following
- - -------
such transfer the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act. For the purposes of
determining the number of shares of Registrable Securities held by a transferee
or assignee, the holdings of transferees and assignees of a partnership who are
partners or retired
-8-
<PAGE>
partners of such partnership (including spouses and ancestors, lineal
descendants and siblings of such partners or spouses who acquire Registrable
Securities by gift, will or intestate succession) shall be aggregated together
and with the partnership; provided that all assignees and transferees who would
not qualify individually for assignment of registration rights shall have a
single attorney-in-fact for the purpose of exercising any rights, receiving
notices or taking any action under Section 1.
1.12 Termination of Registration Rights. No Holder shall be
----------------------------------
entitled to exercise any right provided for in this Section 1 after the earlier
of (i) two (2) years after the date hereof or (ii) such time as Rule 144 or
another similar exemption under the Securities Act is available for the sale of
all of such Holder's shares during a three (3) month period without
registration.
1.13 Restrictions on and Procedure for Sales. Each Investor shall
---------------------------------------
comply with following procedures:
(a) If any Investor shall propose to sell any Registrable
Securities pursuant to a registration statement filed by the Company pursuant to
Section 1.2 or 1.3, the Investor shall notify the Company of its intent to do so
at least three (3) full business days prior to such sale (the "Notice of Sale"),
--------------
and the provision of the Notice of Sale to the Company shall conclusively be
deemed to establish an agreement by such Investor to comply with the
registration provisions herein described. The Notice of Sale shall be deemed to
constitute a representation that any information previously supplied by such
Investor is accurate as of the date of such Notice of Sale.
(b) The Notice of Sale in substantially the form attached as
Exhibit B shall be delivered to the Company at the address shown on Exhibit A in
---------
writing in accordance with Section 3.3. However, the Investor may give the
Notice of Sale orally by telephoning Mark Fischer-Colbrie or the then current
Chief Financial Officer of the Company at (510) 353-3000. An oral Notice of Sale
shall be deemed to have been received only at such time as the selling Investor
speaks directly with Mr. Fischer-Colbrie (or such then current Chief Financial
Officer). In addition, an oral Notice of Sale shall only be deemed effective if
it is followed by a written Notice of Sale received by the Company by personal
delivery or facsimile within twenty-four (24) hours after giving the oral Notice
of Sale.
(c) Unless the Company has notified the selling Investor in
writing that the Company will not refuse the sale of Registrable Securities
identified in a Notice of Sale pursuant to this Section 1.13(c), at any time
within such three (3) business-day period, the Company may refuse to permit the
Investor to sell any Restricted Securities; provided, however, that in order to
exercise this right, the Company must deliver a certificate in writing from an
officer of the Company to the Investor to the effect that a delay in such sale
is necessary because a sale pursuant to the Registration Statement in its then
current form could constitute a violation of the federal securities laws. In no
event shall such delay exceed ten (10) trading days; provided, however, that if,
prior to the expiration of such ten (10) trading day period, the Company
delivers a certificate in writing from an officer of the Company to the Investor
to the
-9-
<PAGE>
effect that the Board of Directors of the Company has determined in reasonable
good faith that a further delay in such sale beyond such ten (10) trading day
period is necessary because a sale pursuant to such Registration Statement in
its then current form could constitute a violation of the federal securities
laws, the Company may refuse to permit such Investor to resell any Shares for an
additional period not to exceed ten (10) trading days. The Company shall not
exercise this right of delay for more than twenty (20) consecutive trading days
or for more than thirty (30) trading days in any six (6) month period, provided,
--------
however, that in the event the ability of the Investors to sell Registrable
- - -------
Securities under the Form S-3 or Form S-1 is delayed or suspended for any reason
during the two-year period following the date hereof, the aggregate thirty (30)
trading day limitation shall be reduced by the number of trading days the
Investors are restricted from selling the Registrable Securities.
(d) Unless the Company delivers a certificate in writing to the
selling Investor pursuant to Section 1.13(c), the selling Investor shall have
thirty (30) trading days after the Notice of Sale in which to complete the
transaction identified in the Notice of Sale (the "Trading Window"). Any period
of delay pursuant to Section 1.13(c) shall extend the Trading Window on a day by
day basis.
2. Right of First Offer. Subject to the terms and conditions specified
--------------------
in this Section 2, the Company hereby grants to each Investor (as hereinafter
defined) a right of first offer with respect to future sales by the Company of
its Shares (as hereinafter defined). An Investor who chooses to exercise the
right of first offer may designate as purchasers under such right itself or its
partners or affiliates in such proportions as it deems appropriate. Each time
the Company proposes to offer any shares of, or securities convertible into or
exercisable for any shares of, any class of its capital stock ("Shares"), the
------
Company shall first make an offering of such Shares to each Investor in
accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail
("Notice") to the Investors stating (i) its bona fide intention to offer such
------
Shares, (ii) the number of such Shares to be offered, and (iii) the price and
terms, if any, upon which it proposes to offer such Shares.
(b) Within 15 calendar days after delivery of the Notice, the Investor
may elect to purchase or obtain, at the price and on the terms specified in the
Notice, up to that portion of such Shares which equals the proportion that the
number of shares of Common Stock issued and held, or issuable upon conversion
and exercise of all convertible or exercisable securities then held, by such
Investor bears to the total number of shares of Common Stock then outstanding
(assuming full conversion and exercise of all convertible or exercisable
securities). The Company shall promptly, in writing, inform each Investor that
purchases all the shares available to it (each, a "Fully-Exercising Investor")
-------------------------
of any other Investor's failure to do likewise. During the ten (10)-day period
commencing after receipt of such information, each Fully-Exercising Investor
shall be entitled to obtain that portion of the Shares for which Investors were
entitled to subscribe but which were not subscribed for by the Investors that is
equal to the proportion that the number of shares of Common Stock issued and
held, or issuable upon conversion and exercise of all convertible or exercisable
securities then held, by such Fully-
-10-
<PAGE>
Exercising Investor bears to the total number of shares of Common Stock then
outstanding (assuming full conversion and exercise of all convertible or
exercisable securities).
(c) The Company may, during the 45-day period following the
expiration of the period provided in subsection 2(b) hereof, offer and sell the
remaining unsubscribed portion of the Shares to any person or persons at a price
not less than, and upon terms no more favorable to the offeree than those
specified in the Notice. If the Company does not enter into an agreement for the
sale of the Shares within such period and if such agreement is not consummated
within such period, the right provided hereunder shall be deemed to be revived
and such Shares shall not be offered unless first reoffered to the Investors in
accordance herewith.
(d) The right of first offer in this paragraph 2 shall not be
applicable (i) to the issuance or sale of shares of Common Stock (or options
therefor) to employees, consultants and directors, pursuant to plans or
agreements approved by the Board of Directors, (ii) to the issuance of
securities pursuant to the conversion or exercise of convertible or exercisable
securities, (iii) to the issuance of securities in connection with a bona fide
business acquisition of or by the Company, whether by merger, consolidation,
sale of assets, sale or exchange of stock or otherwise, (iv) to the issuance of
securities to financial institutions or lessors in connection with commercial
credit arrangements, equipment financings, or similar transactions or (v) to the
issuance of the Series A Participating Preferred Stock.
(e) Notwithstanding the foregoing, the right of first offer in this
Section 2 shall terminate (i) with respect to any Investor whose shares of
Series B Convertible Preferred Stock are converted into shares of Common Stock
of the Company, or (ii) when the Company shall sell, convey, or otherwise
dispose of or encumber all or substantially all of its property or business or
merge into or consolidate with any other corporation (other than a wholly-owned
subsidiary corporation) or effect any other transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
Company is disposed of.
3. Miscellaneous.
-------------
3.1 Successors and Assigns. Except as otherwise provided in
----------------------
this Agreement, the terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective permitted successors and assigns
of the parties (including transferees of any of the Series B Convertible
Preferred Stock or any Common Stock issued upon conversion thereof). 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.
3.2 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended or waived only with the written consent of (i) the Company, (ii) the
holders of a majority of the Registrable Securities then outstanding, and (iii)
Johnson & Johnson Development Corporation if its obligations hereunder are
materially increased by such
-11-
<PAGE>
amendment. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon each future holder of all such Registrable Securities and
the Company.
3.3 Notices. Unless otherwise provided, any notice required or
-------
permitted by this Agreement shall be in writing and shall be deemed sufficient
upon delivery, when delivered personally or by overnight courier or sent by
telegram or fax, or forty-eight (48) hours after being deposited in the U.S.
mail, as certified or registered mail, with postage prepaid, and addressed to
the party to be notified at such party's address or fax number as set forth on
the signature page on Exhibit A hereto or as subsequently modified by written
---------
notice.
3.4 Severability. If one or more provisions of this Agreement
------------
are held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the parties cannot
reach a mutually agreeable and enforceable replacement for such provision, then
(a) such provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
3.5 Governing Law. This Agreement and all acts and
-------------
transactions pursuant hereto shall be governed, construed and interpreted in
accordance with the laws of the State of California, without giving effect to
principles of conflicts of laws.
3.6 Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.7 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.
3.8 Aggregation of Stock. All shares of the Preferred Stock
--------------------
held or acquired by affiliated entities or persons shall be aggregated together
for the purpose of determining the availability of any rights under this
Agreement.
[Signature Page Follows]
-12-
<PAGE>
The parties have executed this Investors' Rights Agreement as of the date
first above written.
COMPANY:
KeraVision, Inc.
By: /s/Mark Fischer-Colbrie
-------------------------------
Name: Mark Fischer-Colbrie
-------------------------------
(print)
Title: VP Finance & CFO
-------------------------------
-13-
<PAGE>
INVESTORS:
DLJ Capital Corp.
By: /s/Kathleen D. LaPorte
-------------------------------
Name: Kathleen D. LaPorte
-------------------------------
Title: General Partner and Attorney in
-------------------------------
Fact
----
DLJ ESC II, L.P.
By: DLJ LBO Plans Management Corporation
Its: Manager
By: /s/Kathleen D. LaPorte
-------------------------------
Name: Kathleen D. LaPorte
-------------------------------
Title: Attorney In Fact
-------------------------------
Sprout Capital VIII, L.P.
By: DLJ Capital Corp.
Its: Managing General Partner
By: Kathleen D. LaPorte
-------------------------------
Name: Kathleen D. LaPorte
-------------------------------
Title: General Partner and Attorney in Fact
------------------------------------
Sprout Venture Capital, L.P.
By: DLJ Capital Corp.
Its: Managing General Partner
By: /s/Kathleen D. LaPorte
-------------------------------
Name: Kathleen D. LaPorte
-------------------------------
Title: General Partner and Attorney in Fact
------------------------------------
-14-
<PAGE>
The Sprout CEO Fund, L.P.
By: DLJ Capital Corp.
Its: General Partner
By: /s/Kathleen D. LaPorte
-------------------------------
Name: Kathleen D. LaPorte
-------------------------------
Title: General Partner and Attorney in Fact
------------------------------------
-15-
<PAGE>
Johnson & Johnson Development Corporation
By: /s/Blair M Flecher
-------------------------------
Name: Blair M. Flecher
-------------------------------
Title: Vice President
-------------------------------
GMI/DRI INVESTMENT TRUST
By: /s/David B. Van Benschoten
-------------------------------
Name: David B. Van Benschoten
-------------------------------
Title: Executive Secretary - Benefit
Finance Committee of General Mills,
Inc. as Named Financial Fiduciary
-----------------------------------
-16-
<PAGE>
Special Situations Private Equity Fund, LP
By: /s/Austin Marxe
-------------------------------
Name: Austin Marxe
-------------------------------
Title: Mgr. Dir.
-------------------------------
Special Situations Fund III, LP
By: /s/Austin Marxe
-------------------------------
Name: Austin Marxe
-------------------------------
Title: Mgr. Dir.
-------------------------------
Special Situations Cayman Fund, LP
By: /s/Austin Marxe
-------------------------------
Name: Austin Marxe
-------------------------------
Title: Mgr. Dir.
-------------------------------
-17-
<PAGE>
EXHIBIT 10.29
MASTER LOAN AND SECURITY AGREEMENT
THIS MASTER LOAN AND SECURITY AGREEMENT dated as of March 25, 1999, is made by
KeraVision, Inc. (the "Borrower"), a Delaware corporation having its principal
place of business and chief executive office at 48630 Milmont Drive, Fremont,
California, 94538, in favor of Transamerica Business Credit Corporation, a
Delaware corporation (the "Lender"), having its principal office at 9399 West
Higgins Road, Suite 600, Rosemont, Illinois 60018 and having an office at 76
Batterson Park Road, Farmington, Connecticut 06032.
WHEREAS, the Borrower has requested that the Lender make Loans to the
Borrower; and
WHEREAS, the Lender has agreed to make such Loans on the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and to induce the
Lender to extend credit, the Borrower hereby agrees with the Lender as follows:
SECTION 1. DEFINITIONS.
-----------
As used herein, the following terms shall have the following meanings,
and shall be equally applicable to both the singular and plural forms of the
terms defined:
Agreement shall mean this Master Loan and Security Agreement together
---------
with all schedules and exhibits hereto, as amended, supplemented, or otherwise
modified from time to time.
Applicable Law shall mean the laws of the State of Illinois (or any
--------------
other jurisdiction whose laws are mandatorily applicable notwithstanding the
parties' choice of Illinois law) or the laws of the United States of America,
whichever laws allow the greater interest, as such laws now exist or may be
changed or amended or come into effect in the future.
Business Day shall mean any day other than a Saturday, Sunday, or
------------
public holiday or other day that banks in New York City are authorized by law
to be closed.
Cash Equivalents means (i) securities issued or directly and fully guaranteed or
- - ----------------
insured by the United States of America or any agency or instrumentality
thereof having a maturity of not more than one year from the date acquired;
(ii) time deposits and certificates of deposit with maturities of not more than
one year from the date acquired, issued by any U.S. federal or state chartered
commercial bank of recognized standing which has capital and unimpaired surplus
in excess of $100,000,000; (iii) investments in money market funds registered
under the Investment Company Act of 1940; (iv) mutual funds, at least 90% of the
assets of which constitute Cash Equivalents of the kinds described in clauses
(i) (iii) of this definition; (v) commercial paper issued by the parent
corporation of any domestic commercial bank of recognized standing having
capital and surplus in excess of $100,000,000, the parent corporation of any
Bank, and commercial paper of any domestic corporation rated at least A-1 or the
equivalent thereof by S&P or the equivalent thereof by Moody's and, in each
case, having a maturity not exceeding ninety (90) days from the date of
acquisition,(vi) fully secured repurchase obligations with a term of not more
than seven (7) days from underlying securities of the types described in clause
(i) above entered into with any bank meeting the qualifications established in
clause (ii) above, (vii) high-grade corporate bonds rated at least AA or the
equivalent thereof by S&P or the equivalent thereof by Moody's, (viii)
marketable securities, and (ix) other instruments, commercial paper or
investments acceptable to the Lender in its sole discretion.
Closing Date means the date first set forth above.
------------
Code shall have the meaning specified in Section 8(d).
----
Collateral shall have the meaning specified in Section 2.
----------
<PAGE>
Collateral Access Agreement shall mean any landlord waiver, mortgagee
---------------------------
waiver, bailee letter, or similar acknowledgement of any warehouseman or
processor in possession of any Collateral.
Contingent Obligation means any direct, indirect, contingent or non-
---------------------
contingent guaranty or obligation for the indebtedness of another Person, except
endorsements in the ordinary course of business.
Effective Date shall mean the date on which all of the conditions
--------------
specified in Section 3.3 shall have been satisfied.
Event of Default shall mean any event specified in Section 7.
----------------
Financial Statements shall have the meaning specified in Section 6.1.
--------------------
GAAP shall mean generally accepted accounting principles in the United
----
States of America, as in effect from time to time.
Intellectual Property shall mean all patents, patent applications,
---------------------
patent rights, trademarks, trademark applications, trademark rights, trade
names, trade name rights, service marks and copyrights (whether registered or
not) now or in the future owned or possessed by the Borrower.
Loans shall mean the loans and financial accommodations made by the
-----
Lender to the Borrower in accordance with the terms of this Agreement and any
Note delivered hereunder.
Loan Documents shall mean, collectively, this Agreement, any Note
--------------
delivered hereunder, and all other documents, agreements, certificates and
instruments executed and delivered in connection herewith and therewith, as the
same may be modified, extended, restated, or supplemented from time to time.
Material Adverse Change shall mean, with respect to any Person, a
-----------------------
material adverse change in the business, operations, results of operations,
assets, liabilities, or financial condition of such Person taken as a whole.
Material Adverse Effect shall mean, with respect to any Person, a
-----------------------
material adverse effect on the business, operations, results of operations,
assets, liabilities, or financial condition of such Person taken as a whole.
Note shall mean each Promissory Note, in substantially the form
----
attached hereto, made by the Borrower in favor of the Lender, as amended,
supplemented, or otherwise modified from time to time.
Obligations shall mean the Loans made hereunder, advances, debts,
-----------
liabilities and obligations, owing by Borrower to Lender of any kind or nature,
present or future, whether or not evidenced by any note, guaranty or other
instrument, which may arise under, out of, or in connection with, this
Agreement, or any other agreement executed in connection herewith.
Other Obligations shall mean advances, debts, liabilities and
-----------------
obligations, owing by Borrower to Lender of any kind or nature, present or
future, whether or not evidenced by any note, guaranty or other instrument,
which may arise under, out of, or in connection with, any loan document other
than this Agreement or any other agreement other than this Agreement executed in
connection therewith or otherwise (including a Master Lease Agreement dated as
of November 17, 1998 ("Master Lease")), whether arising by reason of an
extension of credit, opening, guaranteeing or confirming of a letter of credit,
loan, guaranty, indemnification or in any other manner, whether direct or
indirect (including those acquired by assignment, purchase, discount or
otherwise), whether absolute or contingent, due or to become due, now due or
hereafter arising and however acquired, but specifically excluding Obligations.
Notwithstanding the foregoing the Other Obligations shall expressly exclude the
Obligations.
Permitted Indebtedness shall mean: (a) indebtedness incurred under the
----------------------
Master Lease Agreement dated as of November 17, 1998 between the Borrower and
the Lender, (b) indebtedness under this Agreement and the other Loan Documents,
(c) trade or other similar indebtedness incurred in the ordinary course of
business (but
2
<PAGE>
not for borrowed money), (i) not more than 90 days past due, or (ii) being
contested in good faith and by appropriate proceedings, (d) contingent
liabilities permitted pursuant to Section 5.17, (e) indebtedness in an amount up
to $3,000,000.00 for new equipment purchases, to the extent that such
indebtedness is secured by specific items of equipment financed, and (f) other
indebtedness not secured by any assets of the Borrower provided such
indebtedness shall not be paid until any and all indebtedness of Lender has been
paid.
Permitted Liens shall mean such of the following as to which no
---------------
enforcement, collection, execution, levy, or foreclosure proceeding shall have
been commenced: (a) liens for taxes, assessments, and other governmental
charges or levies or the claims or demands of landlords, carriers, warehousemen,
mechanics, laborers, materialmen, and other like Persons arising by operation of
law in the ordinary course of business for sums which are not yet due and
payable, or liens which are being contested in good faith by appropriate
proceedings diligently conducted and with respect to which adequate reserves are
maintained to the extent required by GAAP; (b) deposits or pledges to secure the
payment of worker's compensation, unemployment insurance, or other social
security benefits or obligations, public or statutory obligations, surety or
appeal bonds, bid or performance bonds, or other obligations of a like nature
incurred in the ordinary course of business; (c) licenses, restrictions, or
covenants for or on the use of the Collateral arising in the ordinary course of
business or which do not materially impair either the use of the Collateral in
the operation of the business of the Borrower or the value of the Collateral;
(d) attachment or judgment liens so long as an appeal or proceeding for review
is being diligently prosecuted in good faith and reserves, bonds or other
security established or provided and all such security and efforts of Borrower
are acceptable to Lender and sufficient evidence of such security has been
provided to Lender or are fully covered by insurance; and (e) a lien on any item
of equipment created substantially simultaneously with the acquisition of such
equipment for the purpose of financing such acquisition, provided that such lien
shall attach only to the equipment acquired.
Person shall mean any individual, sole proprietorship, partnership,
------
limited liability partnership, joint venture, trust, unincorporated
organization, association, corporation, limited liability company, institution,
entity, party, or government (including any division, agency, or department
thereof), and the successors, heirs, and assigns of each.
Receivable shall have the meaning set forth in Section 8(e).
----------
Schedule shall mean schedule A hereto containing certain information
--------
pertaining to the Borrower.
Solvent means, with respect to any Person, that as of the date as to
-------
which such Person's solvency is measured:
(a) the fair saleable value of its assets is in excess of the total
amount of its liabilities (including contingent liabilities as valued in
accordance with GAAP) as they become absolute and matured;
(b) it has sufficient capital to conduct its business; and
(c) it is able generally to meet its debts as they mature.
Taxes shall have the meaning specified in Section 5.5.
-----
SECTION 2. CREATION OF SECURITY INTEREST; COLLATERAL. The Borrower
-----------------------------------------
hereby assigns and grants to the Lender a continuing general first priority,
first lien on, and security interest in, all the Borrower's right, title, and
interest in and to the collateral described in the next sentence (the
"Collateral") to secure the payment and performance of all the Obligations and
other Obligations. The collateral consists of:
(i) all present and future machinery, equipment, furniture,
fixtures, leasehold improvements, conveyors, tools, materials, storage
and handling equipment, hydraulic presses, cutting equipment, computer
equipment and hardware, including central processing units, terminals,
drives, memory units, printers, keyboards, screens, peripherals and
input or output devices, molds, dies, stamps, and other equipment of
every kind and nature and wherever situated now or hereafter owned and
held for use by the Borrower or in which the Borrower may have any
3
<PAGE>
interest as lessee (to the extent of such interest as of the date
hereof), together with all additions and accessions thereto, all
replacements and all accessories and parts therefore, all manuals,
blueprints, know-how, warranties and records in connection therewith
(including, without limitation, any computer software, whether on
tape, disc, card, strip or cartridge or in any other form) and all
rights against suppliers, warrantors, manufacturers, and sellers or
others in connection therewith, together with all substitutes for any
of the foregoing;
(ii) all present and future goods intended for sale, lease or
other disposition by the Borrower including, without limitation, all
raw materials, work in process, systems, accessories, spare parts,
finished goods and other retail inventory, goods in the possession of
outside processors or other third parties, consigned goods (to the
extent of the consignee's interest therein), materials, parts and
supplies of any kind, nature or description which are or might be used
in connection with the manufacture, packing, shipping, advertising,
selling or finishing of any such goods, all documents of title or
documents representing the same and all records, files and writings
(including, without limitation, any computer software, whether on
tape, disc, card, strip or cartridge or in any other form) with
respect thereto;
(iii) all investment property of Borrower, including all
securities, whether certificated or uncertificated, security
entitlements, securities accounts, commodity contracts and commodity
accounts, and all financial assets held in any securities account or
otherwise, wherever located, and whether now existing or hereafter
acquired or arising;
(iv) all of the Borrower's present and future accounts (including
rights to receive payments for goods sold or services rendered arising
out of the sale or delivery of personal property or work done or labor
performed), instruments, documents, documents of title, contract
rights, agreements, understandings, open purchase and sale orders,
promissory notes, chattel paper, documents, tax refunds, rights to
receive tax refunds, bonds, certificates, insurance policies,
insurance proceeds, royalties, rights to receive fees, royalties and
other payments under license agreements, permits, franchise rights,
authorizations, customer and supplier lists, rights of
indemnification, contribution and subrogation, leases, computer tapes,
programs, discs and software, trade secrets, computer service
contracts, logos, goodwill, deposits, causes of action, choses in
action, judgments, designs, blueprints, quotations and bids, plans,
specifications, sales literature, know-how, all other general
intangibles (other than Intellectual Property) claims against third
parties of every kind or nature, notes, securities, bonds, drafts,
acceptances, letters of credit and rights to receive payments under
letters of credit, deposit accounts, accounts receivable, book
accounts, prepaid expenses, credits and reserves and all forms of
obligations whatsoever owing, now or hereafter owing to Borrower,
instruments, documents of title, leasehold rights, all property of
Borrower at any time in the possession or under the control of Lender,
books, ledgers, files (including credit and project files) and records
(including tax records) with respect to any collateral or security,
together with all right, title, security and guaranties with respect
to thereto, including any right of stoppage in transit;
(v) all additions and accessions thereto and substitutions and
replacements thereof, and improvements thereon, and all proceeds
(whether cash or other property) and products hereof, including,
without limitation, all proceeds of insurance covering the same and
all tort claims in connection therewith, and all records, files,
computer programs and files, data and writings relating to the
foregoing, and all equipment containing the foregoing; and
(vi) any and all proceeds arising out of the sale or other disposition
of Intellectual Property.
Notwithstanding the foregoing provisions of this Section 2, such grant of a
security interest shall not extend to, and the term "Collateral" shall not
include:
(a) any general intangibles of the Borrower consisting of licenses or
similar contracts, to the extent that (i) such general intangibles are not
assignable or capable of being encumbered as a matter of law or under the terms
of the license or other agreement applicable thereto (but solely to the extent
that any such restriction shall be
4
<PAGE>
enforceable under applicable law), without the consent of the licensor thereof
or other applicable party thereto and (ii) such consent has not been obtained;
provided, however, that the foregoing grant of security interest shall extend
to, and the term "Collateral" shall include, (A) any general intangible which is
a Receivable or a proceed of, or otherwise related to the enforcement or
collection of, any Receivable, or goods which are the subject of any Receivable,
(B) any and all proceeds of any general intangibles which are otherwise excluded
to the extent that the assignment or encumbrance of such proceeds is not so
restricted, and (C) upon obtaining the consent of any such licensor or other
applicable party's consent with respect to any such otherwise excluded general
intangibles, such general intangibles as well as any and all proceeds thereof
that might have been previously excluded from such grant of a security interest
and the term "Collateral"; and
(b) any Intellectual Property.
SECTION 3. THE CREDIT FACILITY.
-------------------
SECTION 3.1. Borrowings. The Lender, subject to the terms and
conditions of this Agreement, agrees to make a Loan to Borrower on the Effective
Date, at Borrower's request, in an aggregate principal amount equal to
$5,000,000. . Notwithstanding anything herein to the contrary, the Lender
shall be obligated to make such Loan only after the Lender, in its good faith
business judgement, determines that the applicable conditions for borrowing
contained in Sections 3.3 and 3.4 are satisfied. The Borrower acknowledges and
agrees to pay Lender all amounts pursuant to the terms and conditions of this
Agreement and the Note attached hereto and made a part hereof.
SECTION 3.2. Application of Proceeds. The Borrower shall use the
proceeds of the Loans for its general working capital purposes.
SECTION 3.3. Conditions to Loans.
(a) The obligation of the Lender to make the Loans is subject to the
Lender's receipt of the following, on or before the Closing Date, each dated the
date of the first Loan or as of an earlier date acceptable to the Lender, in
form and substance satisfactory to the Lender and its counsel:
(i) completed requests for information (Form UCC-11) listing all
effective Uniform Commercial Code financing statements naming the
Borrower as debtor and all tax lien, judgment, and litigation searches
for the Borrower as the Lender shall reasonably deem necessary or
desirable;
(ii) acknowledgment copies of Uniform Commercial Code financing
statements (naming the Lender as secured party and the Borrower as
debtor), duly filed in all jurisdictions that the Lender deems
necessary or desirable to perfect and protect the security interests
created hereunder, and evidence that all other filings, registrations
and recordings have been made in the appropriate governmental offices,
and all other action has been taken, which shall be necessary to
create, in favor of the Lender, a perfected Lien on the Collateral;
(iii) a Note duly executed by the Borrower evidencing the amount
of such Loan;
(iv) if requested by the Lender, a Collateral Access Agreement
duly executed by the lessor or mortgagee, as the case may be, of each
premises where the equipment Collateral is located;
(v) a Notice of Security Interest, in form and substance
satisfactory to the Lender and its counsel, to each financial
institution at which any deposit accounts of Borrower are maintained;
(vi) certificates of insurance required under Section 5.4 of this
Agreement together with loss payee endorsements for all such policies
naming the Lender as lender loss payee and as an additional insured;
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(vii) a certificate of the Secretary or an Assistant Secretary of
the Borrower ("Secretary's Certificate") certifying (A) that attached
to the Secretary's Certificate is a true, complete, and accurate copy
of the resolutions of the Board of Directors of the Borrower (or a
unanimous consent of directors in lieu thereof) authorizing the
execution, delivery, and performance of this Agreement, the other Loan
Documents, and the transactions contemplated hereby and thereby, and
that such resolutions have not been amended or modified since the date
of such certification and are in full force and effect; (B) the
incumbency, names, and true signatures of the officers of the Borrower
authorized to sign the Loan Documents to which it is a party; (C) that
attached to the Secretary's Certificate is a true and correct copy of
the Articles or Certificate of Incorporation of the Company, as
amended, which Articles or Certificate of Incorporation have not been
further modified, repealed or rescinded and are in full force and
effect; (D) that attached to the Secretary's Certificate of the
Borrower is a true and correct copy of the Bylaws, as amended, which
Bylaws of the Company have not been further modified, repealed or
rescinded and are in full force and effect; and (E) that attached to
the Secretary's Certificate is a valid Certificate of Good Standing
issued by the Secretary of the State of the Borrower's state of
incorporation;
(viii) the opinion of Latham & Watkins, special counsel for the
Borrower covering such matters incident to the transactions
contemplated by this Agreement as the Lender may reasonably require;
(ix) evidence of the consent or authorization of, filing with or
other act by or in respect of any governmental agency or authority or
any other Person required in connection with the execution, delivery,
performance, validity or enforceability of this Agreement, or the
other Loan Documents or the consummation of the transactions
contemplated hereby or thereby; and
(x) such other documents, agreements and instruments as the
Lender deems necessary in its sole and absolute discretion in
connection with the transactions contemplated hereby.
(b) The security interests in the Collateral granted in favor of the
Lender under this Agreement shall have been duly perfected and shall constitute
first priority liens, except for Permitted Liens.
SECTION 3.4. Additional Conditions Precedent. The obligation of
the Lender to make each Loan is subject to the satisfaction of the following
additional conditions precedent:
(a) There shall be no pending or, to the knowledge of the Borrower
after due inquiry, threatened litigation, proceeding, inquiry, or other action
(i) seeking an injunction or other restraining order, damages, or other relief
with respect to the transactions contemplated by this Agreement or the other
Loan Documents or (ii) which affects or could affect the business, operations,
results of operations , , assets, liabilities, or financial condition of the
Borrower, except, in the case of clause (ii), where such litigation, proceeding,
inquiry, or other action could not reasonably be expected to have a Material
Adverse Effect in the judgment of the Lender;
(b) all representations and warranties contained in this Agreement and
the other Loan Documents shall be true and correct in all material respects on
and as of the date of such Loan as if then made, other than representations and
warranties that expressly relate solely to an earlier date, in which case they
shall have been true and correct as of such earlier date;
(c) no Event of Default or event which with the giving of notice or
the passage of time, or both, would constitute an Event of Default, shall have
occurred and be continuing or would result from the making of the requested Loan
as of the date of such request; and
(d) the Borrower shall be deemed to have hereby reaffirmed and
ratified all security interests, liens, and other encumbrances heretofore
granted by the Borrower to the Lender.
SECTION 3.5. Interest Rate; Repayment. The interest rate
applicable to each Loan
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made by the Lender hereunder, and the repayment date for such Loan, are as set
forth in the Note evidencing such Loan.
SECTION 4. REPRESENTATIONS AND WARRANTIES. The Borrower
------------------------------
represents and warrants as follows:
SECTION 4.1. Good Standing; Qualified to do Business. The
Borrower (a) is duly organized, validly existing, and in good standing under the
laws of the State of its organization, (b) has the power and authority to own
its properties and assets and to transact the businesses in which it is
presently, or proposes to be, engaged, and (c) is duly qualified and authorized
to do business and is in good standing in every jurisdiction in which the
failure to be so qualified could reasonably be expected to have a Material
Adverse Effect on (i) the Borrower, (ii) the Borrower's ability to perform its
obligations under the Loan Documents, or (iii) the rights of the Lender
hereunder.
SECTION 4.2. Due Execution, etc. The execution, delivery, and
performance by the Borrower of each of the Loan Documents to which it is a party
are within the powers of the Borrower, do not contravene the organizational
documents, if any, of the Borrower, and do not (a) violate any law or
regulation, or any order or decree of any court or governmental authority, (b)
conflict with or result in a breach of, or constitute a default under, any
material indenture, mortgage, or deed of trust or any material lease, agreement,
or other instrument binding on the Borrower or any of its properties, or (c)
require the consent, authorization by, or approval of or notice to or filing or
registration with any governmental authority or other Person, except as may be
set forth in the Schedule. This Agreement is, and each of the other Loan
Documents to which the Borrower is or will be a party, when delivered hereunder
or thereunder, will be, the legal, valid, and binding obligation of the Borrower
enforceable against the Borrower in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, or similar laws
affecting creditors' rights generally and by general principles of equity.
SECTION 4.3. Solvency; No Liens. The Borrower is Solvent
and will be Solvent upon the completion of all transactions contemplated to
occur hereunder (including, without limitation, the Loan to be made on the
Effective Date); the security interests granted herein constitute and shall at
all times constitute the first and only liens on the Collateral other than
Permitted Liens; and the Borrower is, or will be at the time additional
Collateral is acquired by it, the absolute owner of the Collateral with full
right to pledge, sell, consign, transfer, and create a security interest
therein, free and clear of any and all claims or liens in favor of any other
Person other than Permitted Liens.
SECTION 4.4. No Judgments, Litigation. No judgments are
outstanding against the Borrower nor is there now pending or, to the best of the
Borrower's knowledge, threatened any litigation, contested claim, or
governmental proceeding by or against the Borrower except judgments and pending
or threatened litigation, contested claims, and governmental proceedings which
would not, in the aggregate, reasonably be expected to have a Material Adverse
Effect on the Borrower.
SECTION 4.5. No Defaults. The Borrower is not in default or has
not received a notice of default under any material contract, lease, or
commitment to which it is a party or by which it is bound. The Borrower knows of
no dispute regarding any contract, lease, or commitment which could be expected
to have a Material Adverse Effect on the Borrower.
SECTION 4.6. Collateral Locations. The address of the principal
place of business and chief executive office of Borrower is, and the books and
records of Borrower and all of its chattel paper and records relating to
Collateral are maintained exclusively in the possession of Borrower at, the
address of Borrower specified in the heading of this Agreement. Borrower has
places of business, and tangible Collateral (except Collateral in the possession
of outside processors) is located, only at such address and at the addresses set
forth in the Schedule and at any additional locations reported to the Lender as
provided in Section 5.7.
SECTION 4.7. Corporate and Trade Names; Federal Tax ID. During
the past five years, Borrower has not been known by or used any other corporate,
trade or fictitious name except for its name as set forth on the signature page
of this Agreement and the other names specified in the Schedule. The Borrower's
Federal Tax ID number is as set forth in the Schedule.
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SECTION 4.8. No Events of Default. As of the date of any Loan, no
Event of Default has occurred and is continuing nor has any event occurred
which, with the giving of notice or the passage of time, or both, would
constitute an Event of Default.
SECTION 4.9. No Limitation on Lender's Rights. Except as
permitted herein, none of the Collateral is subject to contractual obligations
that may restrict or inhibit the Lender's rights or abilities to sell or dispose
of the Collateral or any part thereof after the occurrence of an Event of
Default, except in connection with contractual obligations constituting
Permitted Liens.
SECTION 4.10. Perfection and Priority of Security Interest. This
Agreement and the Loan Documents create a valid and, upon completion of all
required notice with respect to deposit accounts and filings of financing
statements, perfected, and first priority and exclusive, security interest in
the Collateral to the extent a security interest can be perfected by such notice
or filing, except for Permitted Liens, securing the payment of all the
Obligations.
SECTION 4.11. Intellectual Property. Set forth in the Schedule is
a complete and accurate list of all patents, trademarks, trade names, service
marks and copyrights (registered and unregistered), and all applications
therefor and licenses thereof, of Borrower. Borrower owns or licenses all
material patents, trademarks, service-marks, logos, tradenames, trade secrets,
know-how, copyrights, or licenses and other rights with respect to any of the
foregoing, which are necessary or advisable for the operation of its business as
presently conducted or proposed to be conducted. To the best of its knowledge
after due inquiry, Borrower has not infringed any patent, trademark, service-
mark, tradename, copyright, license or other right owned by any other Person by
the sale or use of any product, process, method, substance, part or other
material presently contemplated to be sold or used, where such sale or use would
reasonably be expected to have a Material Adverse Effect on Borrower and except
as set forth in the Schedule no claim or litigation is pending, or to the best
of Borrower's knowledge, threatened against or affecting Borrower that contests
its right to sell or use any such product, process, method, substance, part or
other material.
SECTION 4.12. Consents and Filings. No consent, authorization or
approval of, or filing with or other act by, any shareholders of Borrower or any
governmental authority or other Person is required in connection with the
execution, delivery, performance, validity or enforceability of this Agreement
or any other Loan Document, the consummation of the transactions contemplated
hereby or thereby or the continuing operations of Borrower following such
consummation, except (i) those that have been obtained or made, (ii) the filing
of financing statements under the Code (iii) any necessary filings with U.S.
Copyright Office and the U.S. Patent and Trademark Office and (iv) in the case
of those required in connection with the continuing operations of Borrower
following consummation of the transactions contemplated hereby, those Borrower
expects to obtain as and when so required without cost, expense or delay which
could reasonably be expected to have a Material Adverse Effect on Borrower.
SECTION 4.13. Year 2000 Compliance. The Borrower reasonably
believes that all computer applications (including those of its suppliers and
vendors) that are material to its business and operations will on a timely basis
be able to perform properly date-sensitive functions for all dates before and
after January 1, 2000 (that is, be "Year 2000 compliant"), except to the extent
that a failure to do so could not reasonably be expected to have Material
Adverse Effect.
SECTION 4.14. Taxes. Borrower has properly completed and timely
filed all income tax returns it is required to file, and all Taxes, assessments,
fees and other governmental charges for periods beginning prior to the date of
this Agreement have been timely paid (or, if not yet due or being disputed in
good faith, adequate reserves therefor have been established in accordance with
GAAP) and Borrower has no liability for Taxes in excess of the amounts so paid
or reserves so established. No deficiencies for Taxes have been claimed,
proposed or assessed by any taxing or other governmental agency or authority
against Borrower and no notice of any tax lien (other than Permitted Liens) has
been filed. There are no pending or (to the best knowledge of Borrower)
threatened audits, investigations or claims for or relating to any liability for
Taxes and there are no matters under discussion with any governmental agency or
authority which could result in an additional material liability for Taxes.
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SECTION 4.15. Financial Statements. Borrower has provided to the
Lender complete and accurate Financial Statements, which have been prepared in
accordance with GAAP (except for the absence of footnotes and subject to normal
year-end adjustments with respect to unaudited financial statements)
consistently applied throughout the periods involved and fairly present the
financial position and results of operations of Borrower for each of the periods
covered, subject, in the case of any quarterly financial statements, to normal
year-end adjustments and the absence of footnotes. Borrower has no Contingent
Obligation or liability for Taxes, unrealized losses, unusual forward or long-
term commitments or long-term leases, which is not reflected in such Financial
Statements or the footnotes thereto and which would be required to be so
reflected by GAAP. Since the last date covered by such Financial Statements,
except as set forth in the Schedule there has been no sale, transfer or other
disposition by Borrower of any material part of its business or property and no
purchase or other acquisition of any business or property (including any capital
stock of any other Person) material in relation to the financial condition of
Borrower at said date. Since said date, (i) there has been no change,
occurrence, development or event which has had or could reasonably be expected
to have a Material Adverse Effect on Borrower and (ii) none of the capital stock
of Borrower has been redeemed, retired, purchased or otherwise acquired for
value by Borrower, other than repurchases of stock from terminated service
providers or employees.
SECTION 4.16. Accuracy and Completeness of Information. All data,
reports, and information heretofore, contemporaneously, or hereafter furnished
by or on behalf of the Borrower in writing to the Lender or for purposes of or
in connection with this Agreement or any other Loan Document, or any transaction
contemplated hereby or thereby, (a) are or will be true and accurate in all
material respects on the date as of which such data, reports, and information
are dated or certified and (b) do not and will not omit to state any material
fact necessary to make such data, reports, and information not misleading as of
the date so dated or certified. There are no facts now known to the Borrower
which individually or in the aggregate would reasonably be expected to have a
Material Adverse Effect on Borrower and which have not been specified herein, in
the Financial Statements, or in any certificate, opinion, or other written
statement previously furnished by the Borrower to the Lender.
SECTION 5. COVENANTS OF THE BORROWER.
-------------------------
SECTION 5.1. Existence, etc. The Borrower shall: (a) retain its
existence and its current yearly accounting cycle, (b) maintain in full force
and effect all licenses, bonds, franchises, leases, trademarks, patents,
contracts, and other rights necessary or desirable to the conduct of its
business unless the failure to do so could not reasonably be expected to have a
Material Adverse Effect on the Borrower, (c) continue in, and limit its
operations to, the same general lines of business as those presently conducted
by it, and (d) comply with all applicable laws and regulations of any federal,
state, or local governmental authority, except for such laws and regulations the
violations of which would not, in the aggregate, have a Material Adverse Effect
on the Borrower.
SECTION 5.2. Notice to the Lender. As soon as possible, and in
any event within five days after the Borrower learns of the following, the
Borrower will give written notice to the Lender of the following:
(a) any proceeding instituted or threatened to be instituted by
or against the Borrower in any federal, state, local, or foreign court or before
any commission or other regulatory body (federal, state, local, or foreign)
involving a sum, together with the sum involved in all other similar
proceedings, in excess of $50,000 in the aggregate,
(b) any contract that is terminated or amended and which
termination or amendment has had or could reasonably be expected to have a
Material Adverse Effect on the Borrower,
(c) the occurrence of any Material Adverse Change with respect to
the Borrower;
(d) the occurrence of any Event of Default or event or condition
which, with notice or lapse of time or both, would constitute an Event of
Default, together with a statement of the action which the Borrower has taken or
proposes to take with respect thereto;
(e) of any discovery or determination by Borrower that any
computer application
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(including those of its suppliers and vendors) that is material to its business
and operations will not be Year 2000 compliant on a timely basis, except to the
extent that such failure could not reasonably be expected to have a Material
Adverse Effect on the Borrower;
(f) of any material damage to, the destruction of or any other
material loss to any Collateral owned or used by Borrower other than any such
Collateral with a net book value (individually or in the aggregate) less than
$50,000 or any condemnation, confiscation or other taking, in whole or in part,
or any event that otherwise diminishes so as to render impracticable or
unreasonable the use of such Collateral owned or used by Borrower together with
a good faith estimate of the amount of the damage, destruction, loss or
diminution in value;
(g) of any copyright registration made by it, any rights Borrower
may obtain to any copyrightable works, new trademarks or any patentable
inventions, and of any renewal or extension of any trademark registration, or if
it shall otherwise become entitled to the benefit of any patent or patent
application or trademark or trademark application; and
(h) of the opening by the Borrower of any new bank account or
other deposit account, and any new securities account.
SECTION 5.3. Maintenance of Books and Records. Borrower shall (i)
maintain books and records (including computer records) pertaining to the
Collateral in such detail, form and scope as is customary for companies in
similar businesses and (ii) provide the Lender and its agents access to the
premises of Borrower at any time and from time to time, during normal business
hours and upon reasonable notice under the circumstances, and at any time on and
after the occurrence and during the continuation of an Event of Default, or
event or condition which, with notice or lapse of time or both, would constitute
an Event of Default, for the purposes of (A) inspecting and verifying the
Collateral, (B) inspecting and copying (at Borrower's reasonable expense) any
and all records pertaining thereto, and (C) discussing the affairs, finances and
business of Borrower with any officer, employee or director of Borrower or with
Borrower's accountants. Borrower shall reimburse the Lender for the reasonable
travel and related expenses of the Lender's employees or, at the Lender's
option, of such outside accountants or examiners as may be retained by the
Lender to verify or inspect Collateral, records or documents of Borrower once
per annum or for special inspections if an Event of Default has occurred and is
continuing If the Lender's own employees are used, Borrower shall also pay
therefor $600 per person per day (or such other amount as shall represent the
Lender's then current standard charge for the same), or, if outside examiners or
accountants are used, Borrower shall also pay the Lender such reasonable sum as
the Lender may be obligated to pay as fees therefor.
SECTION 5.4. Insurance. Borrower shall maintain public liability
insurance, business interruption insurance, third party property damage
insurance and replacement value insurance on its assets (including the
Collateral) under such policies of insurance, with such insurance companies, in
such amounts and covering such risks as are at all times reasonably satisfactory
to the Lender in its good faith business judgement all of which policies
covering the Collateral shall name the Lender as an additional insured and
lender loss payee in case of loss, and contain other provisions as the Lender
may reasonably require to protect fully the Lender's interest in the Collateral
and any payments to be made under such policies.
SECTION 5.5. Taxes. The Borrower will pay, when due, all taxes,
assessments, claims, and other charges ("Taxes") lawfully levied or assessed
against the Borrower or the Collateral other than taxes that are being
diligently contested in good faith by the Borrower by appropriate proceedings
promptly instituted and for which an adequate reserve is being maintained by the
Borrower in accordance with GAAP. If any Taxes remain unpaid after the date
fixed for the payment thereof, or if any lien shall be claimed therefor (other
than Permitted Liens), then, without notice to the Borrower, but on the
Borrower's behalf, the Lender may pay such Taxes, and the amount thereof shall
be included in the Obligations.
SECTION 5.6. Borrower to Defend Collateral Against Claims; Fees
on Collateral. The Borrower will defend the Collateral against all claims and
demands of all Persons at any time claiming the same or any interest therein
adverse to the Borrower or the Lender. The Borrower will not permit any notice
creating or otherwise relating to liens on the Collateral or any portion thereof
to exist or be on file in any
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public office other than Permitted Liens. The Borrower shall promptly pay, when
payable, all transportation, storage, and warehousing charges and license fees,
registration fees, assessments, charges, permit fees, and taxes (municipal,
state, and federal) which may now or hereafter be imposed upon the ownership,
leasing, renting, possession, sale, or use of the Collateral, other than taxes
on or measured by the Lender's income and fees, assessments, charges, and taxes
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP.
SECTION 5.7. Change of Location, Structure, or Identity. The
Borrower will give Lender at least 30 days prior written notice of any change of
Borrower's chief executive office or of the opening of any additional place of
business. The Borrower will not move or permit the movement of any item of
Collateral from the locations specified in the Schedule, except that the
Borrower may keep Collateral at other locations within the United States
provided that the Borrower has delivered to the Lender (i) prior written notice
thereof and (ii) duly executed financing statements and other agreements and
instruments (all in form and substance satisfactory to the Lender) necessary or,
in the reasonable judgment of the Lender, desirable to perfect and maintain in
favor of the Lender a first priority security interest in the Collateral.
Notwithstanding anything to the contrary in the immediately preceding sentence,
the Borrower may keep any Collateral consisting of motor vehicles or rolling
stock at any location in the United States provided that the Lender's security
interest in any such Collateral is conspicuously marked on the certificate of
title thereof and the Borrower has complied with the provisions of Section 5.9.
SECTION 5.8. Use of Collateral; Licenses; Repair. The Collateral
constituting equipment and machines shall be operated by competent, qualified
personnel in connection with the Borrower's business purposes, for the purpose
for which the Collateral was designed and in accordance with applicable
operating instructions, laws, and government regulations, and the Borrower shall
use every reasonable precaution to prevent loss or damage to the Collateral from
fire and other hazards. The Borrower shall procure and maintain in effect all
material orders, licenses, certificates, permits, approvals, and consents
required by federal, state, or local laws or by any governmental body, agency,
or authority in connection with the delivery, installation, use, and operation
of such Collateral.
SECTION 5.9. Further Assurances. The Borrower will, promptly upon
request by the Lender, execute and deliver or use its best efforts to obtain any
document reasonably required by the Lender (including, without limitation,
warehouseman or processor disclaimers, mortgagee waivers, landlord disclaimers,
or subordination agreements with respect to the Obligations and the Collateral),
give any notices, execute and file any financing statements, mortgages, or other
documents (all in form and substance satisfactory to the Lender), mark any
chattel paper, deliver any chattel paper or instruments to the Lender, and take
any other actions that are necessary or, in the reasonable judgment of the
Lender, desirable to perfect or continue the perfection and the priority of the
Lender's security interest in the Collateral, to protect the Collateral against
the rights, claims, or interests of any Persons, or to effect the purposes of
this Agreement. The Borrower hereby authorizes the Lender to file one or more
financing or continuation statements, and amendments thereto, relating to all or
any part of the Collateral without the signature of the Borrower where permitted
by law. A carbon, photographic, or other reproduction of this Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law. To the extent
required under this Agreement, the Borrower will pay all costs incurred in
connection with any of the foregoing.
SECTION 5.10. No Disposition of Collateral. The Borrower will not
in any way hypothecate or create or permit to exist any lien, security interest,
charge, or encumbrance on or other interest in any of the Collateral, except for
the lien and security interest granted hereby and Permitted Liens. In the event
the Collateral, or any part thereof, is sold, transferred, assigned, exchanged,
or otherwise disposed of in violation of this Agreement, the security interest
of the Lender shall continue in such Collateral or part thereof notwithstanding
such sale, transfer, assignment, exchange, or other disposition, and the
Borrower will hold the proceeds thereof in a separate account for the benefit of
the Lender. Following such a sale, the Borrower will transfer such proceeds to
the Lender in kind.
SECTION 5.11. No Limitation on Lender's Rights. The Borrower will
not enter into any contractual obligations which may restrict or inhibit the
Lender's rights or ability to sell or otherwise dispose of the Collateral or any
material part thereof.
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SECTION 5.12. Protection of Collateral. Upon prior written notice
to the Borrower (provided that if an Event of Default has occurred and is
continuing the Lender need not give any prior written notice), the Lender shall
have the right at any time to make any payments and do any other acts the Lender
may deem necessary to protect its security interests in the Collateral,
including, without limitation, the rights to satisfy, purchase, contest, or
compromise any encumbrance, charge, or lien which, in the reasonable judgment of
the Lender, appears to be prior to or superior to the security interests granted
hereunder (other than Permitted Liens), and appear in, and defend any action or
proceeding purporting to affect its security interests in, or the value of, any
of the Collateral. The Borrower hereby agrees to reimburse the Lender for all
payments made and expenses incurred under this Agreement including reasonable
fees, expenses, and disbursements of attorneys and paralegals (including the
reasonable allocated costs of in-house counsel) acting for the Lender, including
any of the foregoing payments under, or acts taken to protect its security
interests in, any of the Collateral, which amounts shall be secured under this
Agreement, and agrees it shall be bound by any payment made or act taken by the
Lender hereunder absent the Lender's gross negligence or willful misconduct. The
Lender shall have no obligation to make any of the foregoing payments or perform
any of the foregoing acts.
SECTION 5.13. Delivery of Items. The Borrower will (a) promptly
(but in no event later than two Business Days) after its receipt thereof,
deliver to the Lender any documents or certificates of title issued with respect
to any property included in the Collateral, and any promissory notes, letters of
credit or instruments related to or otherwise in connection with any property
included in the Collateral, which in any such case come into the possession of
the Borrower, or shall cause the issuer thereof to deliver any of the same
directly to the Lender, in each case with any necessary endorsements in favor of
the Lender and (b) deliver to the Lender as soon as available copies of any and
all press releases and other similar communications issued by the Borrower.
SECTION 5.14. Solvency. The Borrower shall be and remain
Solvent at all times.
SECTION 5.15. Intellectual Property. The Borrower shall do and
cause to be done all things necessary to preserve, maintain and keep in full
force and effect all of its registrations of trademarks, service marks and other
marks, trade names and other trade rights, patents, copyrights and other
intellectual property in accordance with prudent business practices, except to
the extent that the failure to preserve or maintain any of the foregoing would
not reasonably be expected to have a Material Adverse Effect.
SECTION 5.16. Fundamental Changes. The Borrower shall not (a)
amend or modify its name, unless the Borrower delivers to the Lender thirty days
prior to any such proposed amendment or modification written notice of such
amendment or modification and within ten days before such amendment or
modification delivers executed Uniform Commercial Code financing statements or
amendments (in form and substance satisfactory to the Lender) or (b) merge or
consolidate with any other entity or make any material change in its capital
structure, in each case without the Lender's prior written consent which shall
not be unreasonably withheld.
SECTION 5.17. Contingent Obligations. The Borrower will not,
directly or indirectly, incur, assume, or suffer to exist any Contingent
Obligation, excluding indemnities given in connection with this Agreement or the
other Loan Documents in favor of the Lender or in connection with the sale of
inventory or other asset dispositions permitted hereunder, except Contingent
Obligations relating to obligations of vendors and suppliers of Borrower in
respect of transactions entered into in the normal course of business and trade
credit, provided that the aggregate amount of any guarantees and other similar
third party credit support shall not exceed $200,000 at any time outstanding,
and provided further that no Default or Event of Default shall exist either
immediately prior to or after giving effect to the making of the foregoing
guarantees or the entering into any third party credit support transactions.
SECTION 5.18. Change in Nature of Business. The Borrower will not
at any time make any material change in the lines of its business as carried on
at the date of this Agreement or enter into any new line of business; provided
that Borrower may enter businesses reasonably related or incidental to its
current lines of business.
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SECTION 5.19. Sales of Assets. The Borrower will not, directly or
indirectly, in any fiscal year, sell, transfer or otherwise dispose of any
assets, or grant any option or other right to purchase or otherwise acquire any
assets other than (i) equipment with an aggregate value of less than $200,000
the proceeds of which, shall be paid to the Lender and applied to the
Obligations, (ii) sales of inventory in the ordinary course of business and
(iii) licenses or sublicenses on a non-exclusive basis of intellectual property
in the ordinary course of Borrower's business. Nothing contained herein shall
prohibit the Borrower from disposing of Collateral which in the aggregate is
less than $100,000.00 and which is either obsolete or worn out or otherwise not
necessary for the conduct of the Borrower's business.
SECTION 5.20. Loans to Other Persons. The Borrower will not at
any time make loans or advance any credit in excess of $25,000 in the aggregate
at any time for all such loans to any Person except to trade debtors or
employees, except that Borrower may make cashless advances of credit to senior
members of Borrower's management team to purchase restricted stock of Borrower.
SECTION 5.21. Dividends, Stock Redemptions. Borrower will not,
directly or indirectly, pay any dividends or distributions on, purchase, redeem
or retire any shares of any class of its capital stock or any warrants, options
or rights to purchase any such capital stock, whether now or hereafter
outstanding ("Stock"), or make any payment on account of or set apart assets for
a sinking or other analogous fund for, the purchase, redemption, defeasance,
retirement or other acquisition of its Stock, or make any other distribution in
respect thereof, either directly or indirectly, whether in cash or property or
in obligations of Borrower, except for dividends paid solely in stock of the
Borrower and repurchases of stock owned by employees, directors and consultants
of Borrower pursuant to terms of employment, consulting or other stock
restrictions agreements at such time as any such employee, director or
consultant terminates his or her affiliations with the Borrower, provided that
no Default or Event of Default shall exist either immediately prior to or after
giving effect to such repurchase and provided further thus the total amount paid
in connection therewith by Borrower shall not exceed $50,000 in any consecutive
12 month period. Nothing in this Section 5.21 or any Section of this Agreement
shall prohibit the Borrower from selling new equity securities to investors
(public or private) at such prices and on such terms as the Borrower elects in
its sole discretion, including without limitation the issuance of equity
securities to employees pursuant to employee stock purchase plans, employee sock
option plans, or other incentives plans for officers, directors or employees of
the Borrower.
SECTION 5.22. Investments in Other Persons. Borrower will not,
directly or indirectly, at any time make or hold any investment in any Person
(whether in cash, securities or other property of any kind) other than
investments in Cash Equivalents, except that if Borrower is not in default under
any Obligations or Other Obligations to Lender and such investment shall not
cause a default or an Event of Default, Borrower may make capital investments in
wholly owned subsidiaries of Borrower.
SECTION 5.23. Acquisition of Stock or Assets. Borrower will not
acquire or commit or agree to acquire all or any stock, securities or assets of
any other Person other than raw materials, supplies, inventory and equipment
acquired in the ordinary course of business, without the prior written consent
of Lender, which consent will not be unreasonably withheld, provided the
Borrower shall be permitted to acquire directly or indirectly all of the capital
stock of Transcend Therapeutics.
SECTION 5.24. Partnerships; Subsidiaries; Joint Ventures;
Management Contracts. Borrower will not at any time create any direct or
indirect Subsidiary, enter into any joint venture or similar arrangement (other
than joint ventures or strategic partnerships consisting of non-exclusive
licensing of technology or the providing of technical support) or become a
partner in any general or limited partnership or enter into any management
contract (other than an employment contract for the employment of an officer or
employee entered into in the regular course of Borrower's business) permitting
third party management rights with respect to Borrower's business.
SECTION 5.25. Limitation on Additional Indebtedness. Borrower
shall not incur additional indebtedness other than Permitted Indebtedness
without the prior consent of the Lender, which will not be unreasonably
withheld. Notwithstanding anything contained in this Agreement to the contrary,
Borrower shall not request and Lender shall have no obligation to advance to
Borrower any additional funds or enter into any lease
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pursuant to the Master Lease or otherwise until such time as Borrower completes
and raises net proceeds in excess of $10,000,000.00 pursuant to a private
placement acceptable to Lender.
SECTION 5.26 Negative Covenants. The Borrower will not in any way
hypothecate or create or permit to exist any lien, security interest, charge, or
encumbrance on or other interest in any of its Intellectual Property in
connection with any indebtedness of the Borrower, except Permitted Liens.
Notwithstanding the foregoing, Borrower shall not be prohibited from (i)
pledging or otherwise committing its Intellectual Property in order to engage in
a joint venture or in connection with a merger or acquisition which has been
consented to by the Lender or (ii) granting licenses to use its Intellectual
Property to third parties in the ordinary course of business. Notwithstanding
the exclusion of Intellectual Property from Lender's Collateral, Lender's
security interest shall include proceeds from any sale of the Borrower's
Intellectual Property.
SECTION 5.27. Additional Requirements. The Borrower shall take
all such further actions and execute all such further documents and instruments
as the Lender may reasonably request to effect the transactions contemplated by
this Agreement.
SECTION 6. FINANCIAL STATEMENTS. Until the payment and satisfaction
--------------------
in full of all Obligations, the Borrower shall deliver to the Lender the
following financial information:
SECTION 6.1. Annual Financial Statements. As soon as available,
but not later than 90 days after the end of each fiscal year of the Borrower and
its consolidated subsidiaries, (i) the consolidated balance sheet, income
statement, and statements of cash flows and shareholders equity for the Borrower
and its consolidated subsidiaries (the "Financial Statements") for such year,
audited by independent certified public accountants without an adverse
qualification or (ii) a copy of the Borrower's Form 10-K as filed with the
Securities and Exchange Commission; and
SECTION 6.2. Quarterly Financial Statements. As soon as
available, but not later than 30 days after the end of each of the first three
fiscal quarters in any fiscal year of the Borrower and its consolidated
subsidiaries, (i) the Financial Statements for such fiscal quarter, together
with a certification duly executed by a responsible officer of the Borrower that
such Financial Statements have been prepared in accordance with GAAP and are
fairly stated in all material respects (subject to normal year-end audit
adjustments) or (ii) a copy of the Borrower's Form 10-Q as filed with the
Securities and Exchange Commission.
SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the
-----------------
following events shall constitute an Event of Default hereunder:
(a) the Borrower shall fail to pay within three (3) business days
of notice of failure to pay when due any principal or interest, or any other fee
or other amount required to be paid by the Borrower under or in connection with
any Note and this Agreement;
(b) any representation or warranty made or deemed made by the
Borrower under or in connection with any Loan Document or any Financial
Statement shall prove to have been false or incorrect in any material respect
when made or deemed made, provided that , so long as there is no material
Adverse Effect on the Borrower or the rights of Lender hereunder as a result
thereof, Borrower shall have ten (10) Business Days to cure the false or
incorrect statement.;
(c) the Borrower shall fail to perform or observe (i) any of the
terms, covenants or agreements contained in Sections 5.4, 5.7, 5.10, 5.14 or
5.16 through 5.25 hereof or (ii) any other term, covenant, or agreement
contained in any Loan Document (other than the other Events of Default specified
in this Section 7) and such failure remains unremedied for the earlier of ten
business days from (A) the date on which the Lender has given the Borrower
written notice of such failure and (B) the date on which the Borrower knew or
should have known of such failure;
(d) any defined "Event of Default" shall occur under any other
Loan Document; or Borrower or any Person shall deny or disaffirm its obligations
under any of the Loan Documents or any Liens
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granted in connection therewith or shall otherwise challenge any of its
obligations under any of the Loan Documents; or any Liens granted in any of the
Collateral shall be determined to be void, voidable or invalid, are subordinated
or are not given the priority contemplated by this Agreement; or any Loan
Document shall for any reason cease to create a valid and perfected Lien on the
Collateral purported to be covered thereby, of first priority (except for
Permitted Liens);
(e) dissolution, liquidation, winding up, or cessation of the
Borrower's business, failure of the Borrower generally to pay its debts as they
mature, admission in writing by the Borrower of its inability generally to pay
its debts as they mature, or calling of a meeting of the Borrower's creditors
for purposes of compromising any of the Borrower's debts;
(f) the commencement by or against the Borrower of any
bankruptcy, insolvency, arrangement, reorganization, receivership, or similar
proceedings under any federal or state law and, in the case of any such
involuntary proceeding, such proceeding remains undismissed or unstayed for
thirty days following the commencement thereof, or any action by the Borrower is
taken authorizing any such proceedings;
(g) an assignment for the benefit of creditors is made by the
Borrower, whether voluntary or involuntary, the appointment of a trustee,
custodian, receiver, or similar official for the Borrower or for any substantial
property of the Borrower, or any action by the Borrower authorizing any such
proceeding;
(h) the Borrower shall default in (i) the payment of principal or
interest on any indebtedness in excess of $100,000 (other than the Obligations
but including the Other Obligations) beyond the period of grace, if any,
provided in the instrument or agreement under which such indebtedness was
created, and such payment default has not been cured within any applicable grace
period unless such default has been waived by such Person; or (ii) the
observance or performance of any other agreement or condition relating to any
such indebtedness or contained in any instrument or agreement relating thereto,
or any other event shall occur or condition exist, the effect of which default
or other event or condition is to cause, or to permit the holder or holders of
such indebtedness to cause, with the giving of notice if required, such
indebtedness to become due prior to its stated maturity, and such default has
not been cured within any applicable grace period unless such default has been
waived by such Person; or (iii) any loan or other agreement under which the
Borrower has received financing from Transamerica Corporation or any of its
affiliates, including, without limitation, the Master Lease Agreement dated
November 17, 1998 and such default has not been cured within any applicable
grace period unless such default has been waived by Lender or its affiliates;
(i) the Borrower suffers or sustains a Material Adverse Change;
(j) any tax lien, other than a Permitted Lien, is filed of record
against the Borrower and is not bonded or discharged within five Business Days;
(k) any judgment or order for the payment of money in excess of
$200,000 and not otherwise covered by applicable insurance shall be rendered
against the Borrower and such judgment or order shall not be stayed, vacated,
bonded, or discharged within thirty days;
(l) any material covenant, agreement, or obligation, as
determined in the good faith business judgment of the Lender, made by the
Borrower and contained in or evidenced by any of the Loan Documents shall cease
to be enforceable, or shall be determined to be unenforceable by a court of
competent jurisdiction, in accordance with its terms; the Borrower shall deny or
disaffirm the Obligations under any of the Loan Documents or any liens granted
in connection therewith; or any liens granted on any of the Collateral in favor
of the Lender shall be determined to be void, voidable, or invalid, or shall not
be given the priority contemplated by this Agreement; or
(m) there is a change, which change results from a single
transaction or series of related transactions, but not from the sale of newly
issued securities to investors, in more than 35% of the ownership of any equity
interests of the Borrower on the date hereof or more than 35% of such interests
become subject to any contractual, judicial, or statutory lien, charge, security
interest, or encumbrance, but not including liens on accounts
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of holders of stock in connection with margin and other broker liens.
SECTION 8. REMEDIES. If any Event of Default shall have occurred
--------
and be continuing:
(a) The Lender may, without prejudice to any of its other rights
under any Loan Document or Applicable Law, declare all Obligations to be
immediately due and payable (except with respect to any Event of Default set
forth in Section 7(f) hereof, in which case all Obligations shall automatically
become immediately due and payable without necessity of any declaration) without
presentment, representation, demand of payment, or protest, which are hereby
expressly waived.
(b) The Lender may take possession of the Collateral and, for
that purpose may enter, with the aid and assistance of any person or persons,
any premises where the Collateral or any part hereof is, or may be placed, and
remove the same.
(c) The obligation of the Lender, if any, to make additional
Loans or financial accommodations of any kind to the Borrower shall immediately
terminate.
(d) The Lender may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein (or in any Loan
Document) or otherwise available to it, all the rights and remedies of a secured
party under the applicable Uniform Commercial Code (the "Code") whether or not
the Code applies to the affected Collateral and also may (i) require the
Borrower to, and the Borrower hereby agrees that it will at its expense and upon
request of the Lender forthwith, assemble all or part of the Collateral as
directed by the Lender and make it available to the Lender at a place to be
designated by the Lender that is reasonably convenient to both parties and (ii)
without notice except as specified below, sell the Collateral or any part
thereof in one or more parcels at public or private sale, at any of the Lender's
offices or elsewhere, for cash, on credit, or for future delivery, and upon such
other terms as the Lender may deem commercially reasonable.
(e) The Lender may accelerate or extend the time of payment,
compromise, issue credits, or bring suit on all accounts receivable
("Receivables") and other Collateral (in the name of Borrower or the Lender) and
otherwise administer and collect the Receivables and other Collateral.
(f) The Lender may collect, receive, dispose of and realize upon
any investment property Collateral, including withdrawal of any and all funds
from any securities accounts.
(g) The Lender may (i) settle or adjust disputes or claims
directly with account debtors for amounts and upon terms which it considers
advisable, and (ii) notify account debtors on the Receivables and other
Collateral that the Receivables and Collateral have been assigned to the Lender,
and that payments in respect thereof shall be made directly to the Lender. If an
Event of Default has occurred and is continuing, Borrower hereby irrevocably
authorizes and appoints the Lender, or any Person the Lender may designate, as
its attorney-in-fact, at Borrower's sole cost and expense, to exercise, all of
the following powers, which are coupled with an interest and are irrevocable,
until all of the Obligations have been indefeasibly paid and satisfied in full
in cash: (A) to receive, take, endorse, sign, assign and deliver, all in the
name of the Lender or Borrower, any and all checks, notes, drafts, and other
documents or instruments relating to the Collateral and (B) to take or bring, in
the name of the Lender or Borrower, all steps, actions, suits or proceedings
deemed by the Lender necessary or desirable to enforce or effect collection of
Receivables and other Collateral or file and sign Borrower's name on a proof of
claim in bankruptcy or similar document against any obligor of Borrower.
(h) The Borrower agrees that, to the extent notice of sale shall
be required by law, at least ten days' notice to the Borrower of the time and
place of any public sale or the time after which any private sale is to be made
shall constitute reasonable notification. The Lender shall not be obligated to
make any sale of Collateral regardless of notice of sale having been given. The
Lender may adjourn any public or private sale from time to time by announcement
at the time and place fixed therefor, and such sale may, without further notice,
be made at the time and place to which it was so adjourned. Borrower recognizes
that the Lender may be unable to make a public sale of any or all of any
investment property Collateral, by reason of prohibitions contained in
applicable securities laws or otherwise, and expressly agrees that a private
sale to a restricted group of purchasers for
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investment and not with a view to any distribution thereof shall be considered a
commercially reasonable sale.
(i) Unless expressly prohibited by any licensor thereof, the
Lender is in connection with realizing on the Collateral hereby granted a
license to use all computer software programs, data bases, processes,
trademarks, tradenames and materials used by Borrower in connection with its
businesses or in connection with the Collateral.
(j) All cash proceeds received by the Lender in respect of any
sale of, collection from, or other realization upon all or any part of the
Collateral may, in the discretion of the Lender, be held by the Lender as
collateral for, or then or at any time thereafter applied in whole or in part by
the Lender against, all or any part of the Obligations in such order as the
Lender shall elect. Any surplus of such cash or cash proceeds held by the Lender
and remaining after the full and final payment of all the Obligations shall be
paid over to the Borrower or to such other Person to which the Lender may be
required under applicable law, or directed by a court of competent jurisdiction,
to make payment of such surplus.
SECTION 9. MISCELLANEOUS PROVISIONS.
------------------------
SECTION 9.1. Notices. Except as otherwise provided herein, all
notices, approvals, consents, correspondence, or other communications required
or desired to be given hereunder shall be given in writing and shall be
delivered by overnight courier, hand delivery, or certified or registered mail,
postage prepaid, if to the Lender, then to at 76 Batterson Park Road,
Farmington, Connecticut 06032, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, and if to the
Borrower, then to 48630 Milmont Drive, Fremont, California, 94538,
attention:_________,___________ or such other address as shall be designated by
the Borrower or the Lender to the other party in accordance herewith. All such
notices and correspondence shall be effective when received.
SECTION 9.2. Headings. The headings in this Agreement are for
purposes of reference only and shall not affect the meaning or construction of
any provision of this Agreement.
SECTION 9.3. Assignments and Participations. The Borrower shall
not have the right to assign any Note or this Agreement or any interest therein
unless the Lender shall have given the Borrower prior written consent and the
Borrower and its assignee shall have delivered assignment documentation in form
and substance satisfactory to the Lender in its sole discretion. The Lender may
assign (without the consent of Borrower) to one or more Persons, all or a
portion of its rights and obligations under this Agreement and the other Loan
Documents (provided that such Person shall not be a direct or indirect
competitor of the Borrower). The Lender may sell participations in or to all or
a portion of its rights and obligations under this Agreement, (including,
without limitation, all or a portion of any Loans); provided, however, that the
Lender's obligations under this Agreement shall remain unchanged. The Lender
may, in connection with any permitted assignment or participation or proposed
assignment or participation pursuant to this Agreement, disclose to the assignee
or participant or proposed assignee or participant any information relating to
Borrower furnished to the Lender by or on behalf of Borrower, subject to
reasonable confidentiality restrictions.
SECTION 9.4. Amendments, Waivers, and Consents. Any amendment or
waiver of any provision of this Agreement and any consent to any departure by
the Borrower from any provision of this Agreement shall be effective only by a
writing signed by the Lender and shall bind and benefit the Borrower and the
Lender and their respective successors and assigns, subject, in the case of the
Borrower, to the first sentence of Section 9.3.
SECTION 9.5. Interpretation of Agreement. Time is of the essence
in each provision of this Agreement of which time is an element. All terms not
defined herein or in a Note shall have the meaning set forth in the applicable
Code, except where the context otherwise requires. To the extent a term or
provision of this Agreement conflicts with any Note, or any term or provision
thereof, and is not dealt with herein with more specificity, this Agreement
shall control with respect to the subject matter of such term or provision.
Acceptance of or acquiescence in a course of performance rendered under this
Agreement shall not be relevant in determining the meaning of this Agreement
even though the accepting or acquiescing party had knowledge of the
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nature of the performance and opportunity for objection.
SECTION 9.6. Continuing Security Interest. This Agreement shall
create a continuing security interest in the Collateral and shall (i) remain in
full force and effect until the indefeasible payment in full of the Obligations,
(ii) be binding upon the Borrower and its successors and assigns and (iii)
inure, together with the rights and remedies of the Lender hereunder, to the
benefit of the Lender and its successors, transferees, and assigns.
SECTION 9.7. Reinstatement. To the extent permitted by law, this
Agreement and the rights and powers granted to the Lender hereunder and under
the Loan Documents shall continue to be effective or be reinstated if at any
time any amount received by the Lender in respect of the Obligations is
rescinded or must otherwise be restored or returned by the Lender upon the
insolvency, bankruptcy, dissolution, liquidation, or reorganization of the
Borrower or upon the appointment of any receiver, intervenor, conservator,
trustee, or similar official for the Borrower or any substantial part of its
assets, or otherwise, all as though such payments had not been made.
SECTION 9.8. Survival of Provisions. All representations,
warranties, and covenants of the Borrower contained herein shall survive the
execution and delivery of this Agreement, and shall terminate only upon the full
and final payment and performance by the Borrower of the Obligations secured
hereby.
SECTION 9.9. Indemnification. The Borrower agrees to indemnify
and hold harmless the Lender and its directors, officers, agents, employees, and
counsel from and against any and all costs, expenses, claims, or liability
incurred by the Lender or such Person hereunder and under any other Loan
Document or in connection herewith or therewith, unless such claim or liability
shall be due to willful misconduct or gross negligence on the part of the Lender
or such Person. In addition and without limiting the generality of the
foregoing, Borrower shall, upon demand: (i) pay to the Lender all reasonable
costs and expenses incurred by the Lender (including the reasonable fees and
disbursements of counsel and other professionals) in connection with the
preparation, execution, delivery, administration, modification and amendment of
the Loan Documents, and pay to the Lender all reasonable costs and expenses
(including the reasonable fees and disbursements of counsel and other
professionals) paid or incurred by the Lender in order to enforce or defend any
of its rights under or in respect of this Agreement, any other Loan Document or
any other document or instrument now or hereafter executed and delivered in
connection herewith, (ii) collect the Obligations or otherwise administer this
Agreement, (iii) foreclose or otherwise realize upon the Collateral or any part
thereof, (iv) prosecute actions against, or defend actions by, account debtors;
(v) commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; (vi) file or
prosecute any probate claim, bankruptcy claim, third-party claim, or other
claim; examine, audit, copy, and inspect any of the Collateral or any of
Borrower's books and records; (vii) protect, obtain possession of, lease,
dispose of, or otherwise enforce the Lender's security interest in, the
Collateral; and (viii) otherwise represent the Lender in any litigation relating
to Borrower.
SECTION 9.10. Counterparts; Signatures by Facsimile. This
Agreement may be executed in counterparts, each of which when so executed and
delivered shall be an original, but both of which shall together constitute one
and the same instrument. This Agreement and each of the other Loan Documents
and any notices given in connection herewith or therewith may be executed and
delivered by facsimile transmission all with the same force and effect as if the
same was a fully executed and delivered original manual counterpart.
SECTION 9.11. Severability. In case any provision in or
obligation under this Agreement or any Note or any other Loan Document shall be
invalid, illegal, or unenforceable in any jurisdiction, the validity, legality,
and enforceability of the remaining provisions or obligations, or of such
provision or obligation in any other jurisdiction, shall not in any way be
affected or impaired thereby.
SECTION 9.12. Delays; Partial Exercise of Remedies. No delay or
omission of the Lender to exercise any right or remedy hereunder, whether before
or after the happening of any Event of Default, shall impair any such right or
shall operate as a waiver thereof or as a waiver of any such Event of Default.
No single or partial exercise by the Lender of any right or remedy shall
preclude any other or further exercise thereof, or preclude any other right or
remedy.
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SECTION 9.13. Entire Agreement. The Borrower and the Lender agree
that this Agreement, and the Schedule hereto, are the complete and exclusive
statement and agreement between the parties with respect to the subject matter
hereof, superseding all proposals and prior agreements, oral or written, and all
other communications between the parties with respect to the subject matter
hereof.
SECTION 9.14. Setoff. In addition to and not in limitation of all
rights of offset that the Lender may have under Applicable Law, and whether or
not the Lender has made any demand or the Obligations of the Borrower have
matured, the Lender shall have the right to appropriate and apply to the payment
of the Obligations of the Borrower all deposits and other obligations then or
thereafter owing by the Lender to or for the credit or the account of the
Borrower.
SECTION 9.15 Joint and Several Liability. Intentionally deleted.
SECTION 9.16 Maximum Rate. Notwithstanding anything to the
contrary contained elsewhere in this Agreement or in any other Loan Document,
the parties hereto hereby agree that all agreements between them under this
Agreement and the other Loan Documents, whether now existing or hereafter
arising and whether written or oral, are expressly limited so that in no
contingency or event whatsoever shall the amount paid, or agreed to be paid, to
the Lender for the use, forbearance, or detention of the money loaned to
Borrower and evidenced hereby or thereby or for the performance or payment of
any covenant or obligation contained herein or therein, exceed the maximum non-
usurious interest rate, if any, that at any time or from time to time may be
contracted for, taken, reserved, charged or received on the Obligations, under
the laws of the State of Illinois (or the laws of any other jurisdiction whose
laws may be mandatorily applicable notwithstanding other provisions of this
Agreement and the other Loan Documents), or under applicable federal laws which
may presently or hereafter be in effect and which allow a higher maximum non-
usurious interest rate than under the laws of the State of Illinois (or such
other jurisdiction), in any case after taking into account, to the extent
permitted by applicable law, any and all relevant payments or charges under this
Agreement and the other Loan Documents executed in connection herewith, and any
available exemptions, exceptions and exclusions (the "Highest Lawful Rate"). If
due to any circumstance whatsoever, fulfillment of any provisions of this
Agreement or any of the other Loan Documents at the time performance of such
provision shall be due shall exceed the Highest Lawful Rate, then,
automatically, the obligation to be fulfilled shall be modified or reduced to
the extent necessary to limit such interest to the Highest Lawful Rate, and if
from any such circumstance the Lender should ever receive anything of value
deemed interest by applicable law which would exceed the Highest Lawful Rate,
such excessive interest shall be applied to the reduction of the principal
amount then outstanding hereunder or on account of any other then outstanding
Obligations and not to the payment of interest, or if such excessive interest
exceeds the principal unpaid balance then outstanding hereunder and such other
then outstanding Obligations, such excess shall be refunded to Borrower. All
sums paid or agreed to be paid to the Lender for the use, forbearance, or
detention of the Obligations and other indebtedness of Borrower to the Lender
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full term of such indebtedness, until
payment in full thereof, so that the actual rate of interest on account of all
such indebtedness does not exceed the Highest Lawful Rate throughout the entire
term of such indebtedness. The terms and provisions of this Section shall
control every other provision of this Agreement, the other Loan Documents and
all other agreements between the parties hereto.
SECTION 9.17. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN
DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
SECTION 9.18. GOVERNING LAW. THE VALIDITY, INTERPRETATION, AND
ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAW PRINCIPLES THEREOF.
SECTION 9.19. Venue; Service of Process. ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK COUNTY, OR OF
THE
19
<PAGE>
UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION
OF THE AFORESAID COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES, IN CONNECTION
WITH ANY SUCH ACTION OR PROCEEDING, (A) ANY OBJECTION, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF
FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY
SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS, AND (B) THE RIGHT TO
INTERPOSE ANY NONCOMPULSORY SETFALL, COUNTERCLAIM OR CROSSCLAIM. THE BORROWER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS
FOR IT SPECIFIED IN SECTION 9.1 HEREOF. NOTHING HEREIN SHALL AFFECT THE RIGHT OF
THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE
LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY OTHER
JURISDICTION, SUBJECT IN EACH INSTANCE TO THE PROVISIONS HEREOF WITH RESPECT TO
RIGHTS AND REMEDIES.
SECTION 9.20. RELEASE OF LIEN. Upon the payment in full of the
Obligations (other than such unliquidated contingent liabilities as remain in
effect following payment in full of all other Obligations) and provided Borrower
is not in default under the Other Obligations due to Lender the security
interest and the liens granted hereby shall terminate and all rights in the
Collateral shall revert to the Borrower. Upon any such termination, the Lender
will, at the Borrower's expense, execute and deliver to the Borrower such
documents to evidence such termination.
SECTION 9.21. EXPENSES. All costs and reasonable expenses
incurred by Lender in connection with (i) the underwriting, (ii) closing of the
Loans and (iii) this execution and performance of the Borrower in connection
with this Agreement and/or the Note whether or not any Loans are consummated and
funds advance by Lender.
IN WITNESS WHEREOF, the undersigned Parties have caused this
Agreement to be duly executed and delivered by its proper and duly authorized
officer as of the date first set forth above.
KERAVISION, INC.
BY: /S/MARK FISCHER-COLBRIE
----------------------------------------------
NAME: MARK FISCHER-COLBRIE
TITLE: VP FINANCE & ADMINISTRATION
FEDERAL TAX ID: 77-0328942
TRANSAMERICA BUSINESS CREDIT CORPORATION
BY:/S/ GARY P. MORO
------------------------------------------------
NAME: GARY P. MORO
TITLE: SENIOR VICE PRESIDENT - MARKETING
20
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Schedule A
to
Loan and Security Agreement
Consents and Approvals (Section 4.2):
Other Places of Business and Locations of Collateral (Section 4.16):
Prior Names of Obligor (Section 4.7):
Prior Trade Names of Obligor (Section 4.7):
Existing Trade Names of Obligor (Section 4.7):
Federal Tax ID (Section 4.7):
Registered and Unregistered Patents (Section 4.11):
Registered and Unregistered Trademarks (Section 4.11):
Registered Copyrights (Section 4.11):
21
<PAGE>
SENIOR TERM LOAN
PROMISSORY NOTE
---------------
1073-003
Date: March 25, 1999
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
Transamerica Business Credit Corporation or its assigns (the "Payee") at its
office located at Riverway II, West Office Tower, 9399 West Higgins Road,
Rosemont, Illinois 60018, or at such other place as the Payee or the holder
hereof may designate in writing, the principal amount of Five Million Dollars
($5,000,000.00) received by the undersigned, plus interest, in lawful money of
the United States and in immediately available funds. This Note shall be
payable commencing with a first installment (interest only) of Twelve Thousand,
Two Hundred Seventy Nine and 19/100 Dollars ($12,279.19) payable on March 25,
1999 and thereafter in 30 consecutive equal monthly installments (interest only)
of Fifty Two Thousand, Six Hundred Twenty Five and 00/100 Dollars ($52,625.00),
commencing April 30, 1999, payable on the thirtieth day of each month, and a
final installment (principal and interest) payable on September 30, 2001 of Five
Million, Fifty Two Thousand, Six Hundred Twenty Five and 00/100 Dollars
($5,052,625.00) together with any unpaid balance of the Note. No amount of
principal paid or prepaid hereunder may be reborrowed.
This Note is one of the Notes referred to in the Master Loan and
Security Agreement dated as of March 25, 1999 (as amended, supplemented or
otherwise modified from time to time, the "Agreement"), between the undersigned
and the Payee and is subject and entitled to all provisions and benefits
thereof. Capitalized terms used but not defined herein shall have the meanings
set forth in the Agreement.
If any installment of this Note is not paid within five days after its
due date, the undersigned agrees to pay on demand, in addition to the amount of
such installment, an amount equal to 4% of such installment, but only to the
extent permitted by Applicable Law.
The undersigned shall have the right to prepay this Note at any time
on thirty days' prior written notice to the Payee. On the date of any such
prepayment, the undersigned will pay an amount equal to 6% of the principal
amount being prepaid, together with all interest, fees and other amounts payable
on the amount so prepaid or in connection therewith to the date of such
prepayment. Any prepayments will be applied to the installments hereof in the
inverse order of maturity.
Upon the maturity of this Note or the acceleration of the maturity of
this Note in accordance with the terms of the Agreement, the entire unpaid
principal amount on this Note, together with all interest, fees and other
amounts payable hereon or in connection herewith, shall be immediately due and
payable without further notice or demand, with interest on all such amounts at a
rate not to exceed the lesser of 18% per annum or the maximum rate allowed by
law, from the date of such maturity or acceleration, as the case may be, until
all such amounts have been paid.
If any payment on this Note becomes payable on a day other than a
Business Day, the maturity thereof shall be extended to the next succeeding
Business Day.
The undersigned hereby waives diligence, demand, presentment, protest
and notice of any kind, and assents to extensions of the time of payment,
release, surrender or substitution of security, or forbearance or other
indulgence, without notice. The undersigned agrees to pay all amounts under
this Note without offset, deduction, claim, counterclaim, defense or recoupment,
all of which are hereby waived.
The Payee, the undersigned and any other parties to the Loan Documents
intend to contract in strict compliance with applicable usury law from time to
time in effect. In furtherance thereof such Persons stipulate and agree that
none of the terms and provisions contained in the Loan Documents shall ever be
construed to create a contract to pay, for the use, forbearance or detention of
money, interest in excess of the maximum amount of interest permitted to be
charged by Applicable Law from time to time in effect. Neither the undersigned
nor any present or future guarantors, endorsers, or other Persons hereafter
becoming liable for payment of any Obligation shall ever be
22
<PAGE>
liable for unearned interest thereon or shall ever be required to pay interest
thereon in excess of the maximum amount that may be lawfully charged under
Applicable Law from time to time in effect, and the provisions of this paragraph
shall control over all other provisions of the Loan Documents which may be in
conflict or apparent conflict herewith. The Payee expressly disavows any
intention to charge or collect excessive unearned interest or finance charges in
the event the maturity of any Obligation is accelerated. If (a) the maturity of
any Obligation is accelerated for any reason, (b) any Obligation is prepaid and
as a result any amounts held to constitute interest are determined to be in
excess of the legal maximum, or (c) the Payee or any other holder of any or all
of the Obligations shall otherwise collect amounts which are determined to
constitute interest which would otherwise increase the interest on any or all of
the Obligations to an amount in excess of that permitted to be charged by
Applicable Law then in effect, then all sums determined to constitute interest
in excess of such legal limit shall, without penalty, be promptly applied to
reduce the then outstanding principal of the related Obligations or, at the
Payee's or such holder's option, promptly returned to the undersigned upon such
determination. In determining whether or not the interest paid or payable, under
any specific circumstance, exceeds the maximum amount permitted under Applicable
Law, the Payee and the undersigned (and any other payors thereof) shall to the
greatest extent permitted under Applicable Law, (i) characterize any non-
principal payment as an expense, fee or premium rather than as interest, (ii)
exclude voluntary prepayments and the effects thereof, and (iii) amortize,
prorate, allocate, and spread the total amount of interest through the entire
contemplated term of this Note in accordance with the amount outstanding from
time to time thereunder and the maximum legal rate of interest from time to time
in effect under Applicable Law in order to lawfully charge the maximum amount of
interest permitted under Applicable Law.
This Note may not be changed, modified or terminated orally, but only
by an agreement in writing signed by the undersigned and the Payee or any holder
hereof.
The undersigned shall, upon demand, pay to the Payee all costs and
expenses incurred by the Payee (including the reasonable fees and disbursements
of counsel and other professionals) in connection with the preparation,
execution and delivery of this Note and all other Loan Documents (not to exceed
$5,000), and out-of-pocket expenses in connection with the administration,
modification and amendment of the Loan Documents, and pay to the Payee all costs
and expenses (including the fees and disbursements of counsel and other
professionals) paid or incurred by the Payee in (A) enforcing or defending its
rights under or in respect of this Note or any of the other Loan Documents, (B)
collecting any of the liabilities by the undersigned to the Payee or otherwise
administering the Loan Documents, (C) foreclosing or otherwise collecting upon
any collateral and (D) obtaining any legal, accounting or other advice in
connection with any of the foregoing.
This Note shall be binding upon the successors and assigns of the
undersigned and inure to the benefit of the Payee and its successors, endorsees
and assigns. If any term or provision of this Note shall be held invalid,
illegal or unenforceable, the validity of all other terms and provisions hereof
shall in no way be affected thereby.
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<PAGE>
EACH OF THE UNDERSIGNED AND, BY ITS ACCEPTANCE HEREOF, THE PAYEE
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES (TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW) ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY OF ANY
DISPUTE ARISING UNDER OR RELATING TO THIS NOTE AND AGREES THAT ANY SUCH DISPUTE
SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS
OF LAW.
KERAVISION, INC.
By: /s/ Mark Fischer-Colbrie
--------------------------------------
Name: Mark Fischer-Colbrie
Title: VP Finance & Administration, CFO
24
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
No. 1
STOCK SUBSCRIPTION WARRANT
To Purchase Common Stock of
KERAVISION, INC. (THE "COMPANY")
DATE OF INITIAL ISSUANCE: MARCH 25, 1999
THIS CERTIFIES THAT for value received, TBCC FUNDING TRUST II or its
registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant, Fifty-Five
Thousand Four Hundred Ninety-Two (55,492) shares of common stock, $0.001 par
value, of the Company (the "Common Stock"), at the Warrant Price, payable as
provided herein. The exercise of this Warrant shall be subject to the
provisions, limitations and restrictions herein contained, and may be exercised
in whole or in part.
SECTION 1. Definitions.
-----------
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
Common Stock - shall mean and include the Company's authorized Common
------------
Stock, $0.001 par value, as constituted at the date hereof.
Exchange Act - shall mean the Securities Exchange Act of 1934, as
------------
amended from time to time.
Securities Act - shall mean the Securities Act of 1933, as amended.
--------------
Term of this Warrant - shall mean the period beginning on the date of
--------------------
initial issuance hereof and ending on March __, 2006.
Warrant Price - shall mean $10.8125 per share, subject to adjustment
-------------
in accordance with Section 5 hereof.
Warrants - shall mean this Warrant and any other Warrant or Warrants
--------
issued in connection with a Commitment Letter dated August 22, 1997 executed by
the Company and Transamerica Business Credit Corporation (the "Commitment
Letter") to the original holder of this Warrant, or any transferees from such
original holder or this Holder.
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<PAGE>
Warrant Shares - shall mean shares of Common Stock purchased or purchasable
--------------
by the Holder of this Warrant upon the exercise hereof.
SECTION 2. Exercise of Warrant.
-------------------
2.1. Procedure for Exercise of Warrant. To exercise this Warrant in whole
---------------------------------
or in part (but not as to any fractional share of Common Stock), the Holder
shall deliver to the Company at its office referred to in Section 12 hereof at
any time and from time to time during the Term of this Warrant: (i) the Notice
of Exercise in the form attached hereto, (ii) cash, certified or official bank
check payable to the order of the Company, wire transfer of funds to the
Company's account, or evidence of any indebtedness of the Company to the Holder
(or any combination of any of the foregoing) in the amount of the Warrant Price
for each share being purchased, and (iii) this Warrant. Notwithstanding any
provisions herein to the contrary, if the Current Market Price (as defined in
Section 5) is greater than the Warrant Price (at the date of calculation, as set
forth below), in lieu of exercising this Warrant as provided above permitted,
the Holder may elect to receive shares of Common Stock equal to the value (as
determined below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the office of the Company referred to in Section 12
hereof, together with the Notice of Exercise, in which event the Company shall
issue to the Holder that number of shares of Common Stock computed using the
following formula:
CS = WCS x (CMP-WP)
--------------
CMP
Where
CS equals the number of shares of Common Stock to be issued to the
Holder
WCS equals the number of shares of Common Stock purchasable under the
Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being exercised (at
the date of such calculation)
CMP equals the Current Market Price (at the date of such calculation)
WP equals the Warrant Price (as adjusted to the date of such
calculation)
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding fifteen (15) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number of shares (except a remaining
fractional share), if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such time.
The person in whose name any certificate for shares of Common Stock is issued
upon exercise of this Warrant shall for all purposes be deemed to have become
the holder of record of such shares on the date on which the Warrant was
surrendered and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate, except that, if the
date of such surrender and payment is a date when the stock transfer books of
the Company are closed, such person shall be deemed to have become the holder of
such shares at the close of business on the next succeeding date on which the
stock transfer books are open.
26
<PAGE>
2.2. Transfer Restriction Legend. Each certificate for Warrant Shares
---------------------------
shall bear the following legend (and any additional legend required by (i) any
applicable state securities laws and (ii) any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on the face
thereof unless at the time of exercise such Warrant Shares shall be registered
under the Securities Act:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or the laws of any
State and may not be sold or transferred in the absence of such
registration or an exemption therefrom under the Securities Act of
1933 and any applicable state securites laws.
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution under a registration statement of the securities
represented thereby) shall also bear such legend unless, in the opinion of
counsel for the holder thereof (which counsel shall be reasonably satisfactory
to counsel for the Company) the securities represented thereby are not, at such
time, required by law to bear such legend
SECTION 3. Covenants as to Common Stock. The Company covenants and agrees that
----------------------------
all shares of Common Stock that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable, and free from all taxes, liens (except those imposed by the
holder) and charges with respect to the issue thereof. The Company further
covenants and agrees that it will pay when due and payable any and all federal
and state taxes which may be payable in respect of the issue of this Warrant or
any Common Stock or certificates therefor issuable upon the exercise of this
Warrant. The Company further covenants and agrees that the Company will at all
times have authorized and reserved, free from preemptive rights, a sufficient
number of shares of Common Stock to provide for the exercise of the rights
represented by this Warrant. The Company further covenants and agrees that if
any shares of capital stock to be reserved for the purpose of the issuance of
shares upon the exercise of this Warrant require registration with or approval
of any governmental authority under any federal or state law before such shares
may be validly issued or delivered upon exercise, then the Company will in good
faith and as expeditiously as possible endeavor to secure such registration or
approval, as the case may be. If and so long as the Common Stock issuable upon
the exercise of this Warrant is listed on any national securities exchange, the
Company will, if permitted by the rules of such exchange, list and keep listed
on such exchange, upon official notice of issuance, all shares of such Common
Stock issuable upon exercise of this Warrant.
SECTION 4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
------------------------------
Price as provided in Section 5, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest tenth of a share) obtained by multiplying the
Warrant Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
SECTION 5. Adjustment of Warrant Price. The Warrant Price shall be subject to
---------------------------
adjustment from time to time as follows:
(i) If, at any time during the Term of this Warrant, the number of shares
of Common Stock outstanding is increased by a stock dividend payable in shares
of Common Stock or by a subdivision or split-up of shares of Common Stock, then,
following the record date fixed for the determination of holders of Common Stock
entitled to receive such stock dividend, subdivision or split-up, the Warrant
27
<PAGE>
Price shall be appropriately decreased so that the number of shares of Common
Stock issuable upon the exercise hereof shall be increased in proportion to such
increase in outstanding shares.
(ii) If, at any time during the Term of this Warrant, the number of shares
of Common Stock outstanding is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date for such combination,
the Warrant Price shall appropriately increase so that the number of shares of
Common Stock issuable upon the exercise hereof shall be decreased in proportion
to such decrease in outstanding shares.
(iii) In case, at any time during the Term of this Warrant, the Company
shall declare a cash dividend upon its Common Stock payable otherwise than out
of earnings or earned surplus or shall distribute to holders of its Common Stock
shares of its capital stock (other than Common Stock), stock or other securities
of other persons, evidences of indebtedness issued by the Company or other
persons, assets (excluding cash dividends and distributions) or options or
rights (excluding options to purchase and rights to subscribe for Common Stock
or other securities of the Company convertible into or exchangeable for Common
Stock), then, in each such case, immediately following the record date fixed for
the determination of the holders of Common Stock entitled to receive such
dividend or distribution, the Warrant Price in effect thereafter shall be
determined by multiplying the Warrant Price in effect immediately prior to such
record date by a fraction of which the numerator shall be an amount equal to the
difference of (x) the Current Market Price of one share of Common Stock minus
(y) the fair market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the stock, securities,
evidences of indebtedness, assets, options or rights so distributed in respect
of one share of Common Stock, and of which the denominator shall be such Current
Market Price.
(iv) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-tenth (1/10) of a share, as the case may be.
(v) For the purpose of any computation pursuant to this Section 5, the
Current Market Price at any date of one share of Common Stock shall be deemed to
be the average of the daily closing prices for the 10 consecutive business days
ending on the last business day before the day in question (as adjusted for any
stock dividend, split, combination or reclassification that took effect during
such 15 business day period). The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or as reported by Nasdaq (or if the
Common Stock is not at the time listed or admitted for trading on any such
exchange or if prices of the Common Stock are not reported by Nasdaq then such
price shall be equal to the average of the last reported bid and asked prices on
such day as reported by The National Quotation Bureau Incorporated or any
similar reputable quotation and reporting service, if such quotation is not
reported by The National Quotation Bureau Incorporated); provided, however, that
if the Common Stock is not traded in such manner that the quotations referred to
in this clause (v) are available for the period required hereunder, the Current
Market Price shall be determined in good faith by the Board of Directors of the
Company or, if such determination cannot be made, by a nationally recognized
independent investment banking firm selected by the Board of Directors of the
Company (or if such selection cannot be made, by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in accordance with its rules).
(vi) Whenever the Warrant Price shall be adjusted as provided in Section
5, the Company shall prepare a statement showing the facts requiring such
adjustment and the Warrant Price that shall be in effect after such adjustment.
The Company shall cause a copy of such statement to be sent by mail, first
28
<PAGE>
class postage prepaid, to each Holder of this Warrant at its, his or her address
appearing on the Company's records. Where appropriate, such copy may be given in
advance and may be included as part of the notice required to be mailed under
the provisions of subsection (viii) of this Section 5.
(vii) Adjustments made pursuant to clauses (i), (ii) and (iii) above shall
be made on the date such dividend, subdivision, split-up, combination or
distribution, as the case may be, is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend, subdivision, split-up,
combination or distribution.
(viii) In the event the Company shall propose to take any action of the
types described in clauses (i), (ii), or (iii) of this Section 5, the Company
shall forward, at the same time and in the same manner, to the Holder of this
Warrant such notice, if any, which the Company shall give to the holders of
capital stock of the Company.
(ix) In any case in which the provisions of this Section 5 shall require
that an adjustment shall become effective immediately after a record date for an
event, the Company may defer until the occurrence of such event issuing to the
Holder of all or any part of this Warrant which is exercised after such record
date and before the occurrence of such event the additional shares of capital
stock issuable upon such exercise by reason of the adjustment required by such
event over and above the shares of capital stock issuable upon such exercise
before giving effect to such adjustment exercise; provided, however, that the
Company shall deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
SECTION 6. Ownership.
---------
6.1. Ownership of This Warrant. The Company may deem and treat the person
-------------------------
in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Section 6.
6.2. Transfer and Replacement. This Warrant and all rights hereunder are
------------------------
transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 12
hereof. Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft or destruction, and, in such case, of indemnity or security
reasonably satisfactory to it, and upon surrender of this Warrant if mutilated,
the Company will make and deliver a new Warrant of like tenor, in lieu of this
Warrant; provided that if the Holder hereof is an instrumentality of a state or
local government or an institutional holder or a nominee for such an
instrumentality or institutional holder an irrevocable agreement of indemnity by
such Holder shall be sufficient for all purposes of this Section 6, and no
evidence of loss or theft or destruction shall be necessary. This Warrant shall
be promptly cancelled by the Company upon the surrender hereof in connection
with any transfer or replacement. Except as otherwise provided above, in the
case of the loss, theft or destruction of a Warrant, the Company shall pay all
expenses, taxes and other charges payable in connection with any transfer or
replacement of this Warrant, other than stock transfer taxes (if any) payable in
connection
29
<PAGE>
with a transfer of this Warrant, which shall be payable by the Holder. Holder
will not transfer this Warrant and the rights hereunder except in compliance
with federal and state securities laws.
SECTION 7. Mergers, Consolidation, Sales. In the case of any proposed
-----------------------------
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made whereby the Holder
of this Warrant shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein, in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable hereunder, such
shares of stock, securities or assets as may (by virtue of such consolidation,
merger, sale, reorganization or reclassification) be issued or payable with
respect to or in exchange for the number of shares of such Common Stock
purchasable hereunder immediately before such consolidation, merger, sale,
reorganization or reclassification. In any such case appropriate provision
shall be made with respect to the rights and interests of the Holder of this
Warrant to the end that the provisions hereof shall thereafter be applicable as
nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise of this Warrant.
SECTION 8. Notice of Dissolution or Liquidation. In case of any distribution
------------------------------------
of the assets of the Company in dissolution or liquidation (except under
circumstances when the foregoing Section 7 shall be applicable), the Company
shall give notice thereof to the Holder hereof and shall make no distribution to
shareholders until the expiration of thirty (30) days from the date of mailing
of the aforesaid notice and, in any case, the Holder hereof may exercise this
Warrant within thirty (30) days from the date of the giving of such notice, and
all rights herein granted not so exercised within such thirty-day period shall
thereafter become null and void.
SECTION 9. Notice of Extraordinary Dividends. If the Board of Directors of the
---------------------------------
Company shall declare any dividend or other distribution on its Common Stock
except out of earned surplus or by way of a stock dividend payable in shares of
its Common Stock, the Company shall mail notice thereof to the Holder hereof not
less than thirty (30) days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other distribution, and
the Holder hereof shall not participate in such dividend or other distribution
unless this Warrant is exercised prior to such record date. The provisions of
this Section 9 shall not apply to distributions made in connection with
transactions covered by Section 7.
SECTION 10. Fractional Shares. Fractional shares shall not be issued upon the
-----------------
exercise of this Warrant but in any case where the Holder would, except for the
provisions of this Section 10, be entitled under the terms hereof to receive a
fractional share upon the complete exercise of this Warrant, the Company shall,
upon the exercise of this Warrant for the largest number of whole shares then
called for, pay a sum in cash equal to the excess of the value of such
fractional share (determined in such reasonable manner as may be prescribed in
good faith by the Board of Directors of the Company) over the Warrant Price for
such fractional share.
SECTION 11. Special Arrangements of the Company. The Company covenants and
-----------------------------------
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant:
11.1. Will Reserve Shares. The Company will reserve and set apart and
-------------------
have available for issuance at all times, free from preemptive or other
preferential rights, the number of shares of authorized but unissued Common
Stock deliverable upon the exercise of this Warrant.
30
<PAGE>
11.2. Will Not Amend Certificate. The Company will not amend its
--------------------------
Certificate of Incorporation to eliminate as an authorized class of capital
stock that class denominated as "Common Stock" on the date hereof.
11.3. Will Bind Successors. This Warrant shall be binding upon any
--------------------
corporation or other person or entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
SECTION 12. Notices. Any notice or other document required or permitted to be
-------
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at Transamerica Technology Finance Division, 76
Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President, Lease Administration, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention:
Legal Department or to such other address as shall have been furnished to the
Company in writing by the Holder. Any notice or other document required or
permitted to be given or delivered to the Company shall be delivered at, or sent
by certified or registered mail to, the Company at 48630 Milmont Drive, Fremont,
California, 94538, Attention: Chief Financial Officer or to such other address
as shall have been furnished in writing to the Holder by the Company. Any notice
so addressed and mailed by registered or certified mail shall be deemed to be
given when so mailed. Any notice so addressed and otherwise delivered shall be
deemed to be given when actually received by the addressee.
SECTION 13. No Rights as Stockholder; Limitation of Liability. This Warrant
-------------------------------------------------
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon exercise in accordance with the terms hereof. No provision
hereof, in the absence of affirmative action by the Holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
Holder, shall give rise to any liability of the Holder for the Warrant Price
hereunder or as a shareholder of the Company, whether such liability is asserted
by the Company or by creditors of the Company.
SECTION 14. Law Governing. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF
-------------
THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
SECTION 15. Miscellaneous. This Warrant and any provision hereof may be
-------------
changed, waived, discharged or terminated only by an instrument in writing
signed by both parties (or any respective predecessor in interest thereof). The
headings in this Warrant are for purposes of reference only and shall not affect
the meaning or construction of any of the provisions hereof.
31
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer this 24/th/ day of March, 1999.
KERAVISION, INC.
[CORPORATE SEAL]
By: /s/ Mark Fischer-Colbrie
------------------------
Title: VP Finance & Administration, CFO
--------------------------------
32
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
The undersigned hereby exercises the right to purchase _________ shares of
Common Stock which the undersigned is entitled to purchase by the terms of the
within Warrant according to the conditions thereof, and herewith
[check one]
[ ] makes payment of $__________ therefor; or
[ ] directs the Company to issue ______ shares, and to
withhold ____ shares in lieu of payment of the
Warrant Price, as described in Section 2.1 of the
Warrant.
All shares to be issued pursuant hereto shall be issued in the name of and the
initial address of such person to be entered on the books of the Company shall
be:
The shares are to be issued in certificates of the following denominations:
-----------------------------------------------
[Type Name of Holder]
By:
--------------------------------------------
Title:
-----------------------------------------
Dated:
-----------------------------------
33
<PAGE>
FORM OF ASSIGNMENT
(ENTIRE)
[To be signed only upon transfer of entire Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED ___________________________ hereby sells, assigns and
transfers unto _______________________________ all rights of the undersigned
under and pursuant to the within Warrant, and the undersigned does hereby
irrevocably constitute and appoint _______________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
-----------------------------------------------
[Type Name of Holder]
By:
--------------------------------------------
Title:
-----------------------------------------
Dated:
-------------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
34
<PAGE>
FORM OF ASSIGNMENT
(PARTIAL)
[To be signed only upon partial transfer of Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _______________________________ (i) the rights of the undersigned
to purchase ___ shares of Common Stock under and pursuant to the within Warrant,
and (ii) on a non-exclusive basis, all other rights of the undersigned under and
pursuant to the within Warrant, it being understood that the undersigned shall
retain, severally (and not jointly) with the transferee(s) named herein, all
rights assigned on such non-exclusive basis. The undersigned does hereby
irrevocably constitute and appoint __________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
-----------------------------------------------
[Type Name of Holder]
By:
-------------------------------------------
Title:
-----------------------------------------
Dated:
--------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
35
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-59861 and Form S-8 Nos. 333-00436 and 333-50983) pertaining to
certain shares of KeraVision, Inc. common stock issuable to the holders of
Series B convertible preferred stock, the 1997 Employee Stock Option Plan, the
1995 Director's Stock Option Plan, the 1995 Employee Stock Purchase Plan, the
1995 Stock Option Plan and the 1987 Stock Option Plan of KeraVision, Inc. of
our report dated February 3, 1999, except for Note 9, for which the date is
March 25, 1999, with respect to the consolidated financial statements of
KeraVision, Inc. included in its Annual Report (Form 10-K) for the year ended
December 31, 1998.
San Jose, California
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,449 2,574
<SECURITIES> 6,279 11,539
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,236 15,378
<PP&E> 4,942 4,267
<DEPRECIATION> (3,102) (2,398)
<TOTAL-ASSETS> 11,184 17,345
<CURRENT-LIABILITIES> 4,321 3,558
<BONDS> 0 0
0 0
17,489 0
<COMMON> 13 13
<OTHER-SE> (11,460) 12,924
<TOTAL-LIABILITY-AND-EQUITY> 11,184 17,345
<SALES> 835 355
<TOTAL-REVENUES> 835 355
<CGS> 0 0
<TOTAL-COSTS> 25,435 20,880
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (24,037) (19,396)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (27,414) (19,396)
<EPS-PRIMARY> (2.16) (1.55)
<EPS-DILUTED> (2.16) (1.55)
</TABLE>
