<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 1999.
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
Commission file number 0-26208
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KeraVision, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 77-0328942
(State of Incorporation) (I.R.S. Employer
Identification No.)
48630 Milmont Drive
Fremont, CA 94538
(Address of principal executive offices)
(510) 353-3000
(Registrant's telephone number)
------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of July 16, 1999 there were 14,100,877 shares of Common Stock outstanding.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION (unaudited)
Item 1. Condensed Consolidated Balance Sheets as of June 30, 1999 and 3
December 31, 1998...................................................
Condensed Consolidated Statements of Operations for the three-month 4
and
six-month periods ended June 30, 1999 and 1998......................
Condensed Consolidated Statements of Cash Flows for the six-month 5
periods ended June 30, 1999 and 1998................................
Notes to Condensed Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations...............................................
PART II. OTHER INFORMATION
Item 2. Changes in Securities............................................... 11
Item 4. Submission of Matters to a Vote of Security Holders................. 11
Item 6. Exhibits and Reports on Form 8-K.................................... 11
SIGNATURES......................................................................... 13
</TABLE>
2
<PAGE>
KERAVISION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
(Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 8,164 $ 1,449
Available-for-sale investments....................... 166 6,279
Accounts receivable, net............................. 1,144 365
Inventory............................................ 1,140 427
Prepaid expenses and other current assets............ 487 716
-------- -------
Total current assets................................... 11,101 9,236
Property and equipment, at cost:
Manufacturing and laboratory equipment............... 4,448 3,709
Office furniture and fixtures........................ 607 597
Leasehold improvements............................... 696 636
-------- -------
5,751 4,942
Accumulated depreciation and amortization.............. (3,408) (3,102)
-------- -------
Net property and equipment........................... 2,343 1,840
Other assets........................................... 100 108
-------- -------
Total assets........................................... $ 13,544 $11,184
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable..................................... $ 2,785 $ 1,742
Accrued payroll and related expenses................. 773 581
Accrued clinical trial costs......................... 1,176 1,282
Other accrued liabilities............................ 899 204
Current portion of capital lease obligations......... 540 512
Short-term debt...................................... 4,424 --
-------- -------
Total current liabilities.............................. 10,597 4,321
Capital lease obligations.............................. 666 821
Redeemable convertible series B preferred stock........ 18,265 17,489
Commitments and contingencies
Stockholders' equity:
Common stock......................................... 14 13
Additional paid-in capital........................... 89,257 80,162
Deferred compensation................................ -- (30)
Accumulated other comprehensive income............... 107 109
Accumulated deficit.................................. (103,789) (90,092)
Notes receivable from stockholders................... (1,573) (1,609)
-------- -------
Total stockholders' equity (net capital deficiency).... (15,984) (11,447)
-------- -------
Total liabilities and total stockholders' equity (net
capital deficiency)................................... $ 13,544 $11,184
======== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
3
<PAGE>
KERAVISION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ------------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales.............................. $ 3,909 $ 112 $ 4,381 $ 264
Costs and expenses:
Cost of sales and manufacturing
expenses.......................... 3,027 989 4,615 1,949
Research and development............ 2,111 3,113 4,201 6,016
Selling, general and
administrative.................... 4,192 1,740 8,171 3,652
-------- ------- -------- --------
Total costs and expenses............... 9,330 5,842 16,987 11,617
-------- ------- -------- --------
Operating loss......................... (5,421) (5,730) (12,606) (11,353)
Interest income and other, net......... 14 117 (5) 241
Interest expense....................... (258) (31) (310) (62)
-------- ------- -------- --------
Net loss............................... (5,665) (5,644) (12,921) (11,174)
Dividend on redeemable convertible
Series B preferred stock.............. (365) (2,611) (776) (2,611)
-------- ------- -------- --------
Net loss applicable to common
stockholders.......................... $( 6,030) $(8,255) $(13,697) $(13,785)
======== ======= ======== ========
Basic and diluted net loss per share
applicable to common stockholders..... $ (0.45) $ (0.65) $ (1.05) $ (1.09)
======== ======= ======== ========
Shares used in calculation of net loss
per share............................. 13,382 12,673 13,088 12,655
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
4
<PAGE>
KERAVISION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------
June 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(12,921) $(11,174)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................. 306 345
Amortization of debt discount............................ 85 --
Issuance of stockholders' notes.......................... -- (251)
Payment on stockholders' notes........................... 36 --
Forgiveness of stockholders' notes....................... -- 45
Amortization of deferred compensation.................... 30 74
Changes in operating assets and liabilities:
Accounts receivable.................................... (779) (10)
Inventory.............................................. (713) (2)
Prepaid expenses and other current assets.............. 229 364
Accounts payable....................................... 1,043 1,544
Other accrued liabilities.............................. 779 (104)
-------- --------
Net cash used in operating activities................... (11,905) (9,169)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale investments............... (297) (17,226)
Sales of available-for-sale investments................... 6,410 12,572
Maturities of available-for-sale investments.............. -- 2,201
Capital expenditures...................................... (809) (597)
Other assets.............................................. 8 --
-------- --------
Net cash provided by (used in) investing activities..... 5,312 (3,050)
-------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations........ (259) (221)
Proceeds from sales-leaseback of capital equipment........ 132 180
Proceeds from issuance of short-term debt and warrants.... 5,000 --
Proceeds from issuance of equity securities, net of
repurchases.............................................. 8,435 268
Proceeds from issuance of redeemable convertible Series B
shares................................................... -- 18,000
Fees incurred to obtain additional financing.............. -- (1,320)
-------- --------
Net cash provided by financing activities............... 13,308 16,907
-------- --------
Net increase in cash and cash equivalents.................. 6,715 4,688
Cash and cash equivalents at the beginning of the period... 1,449 2,574
-------- --------
Cash and cash equivalents at the end of the period......... $ 8,164 $ 7,262
======== ========
Supplemental disclosure of non-cash financing activities:
Accrued dividends to preferred stock, including deemed
dividends in 1998......................................... $ 708 $ 2,597
======== ========
Accretion related to preferred stock....................... $ 68 $ 14
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
5
<PAGE>
KERAVISION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. Basis of Presentation
The accompanying unaudited condensed financial statements of KeraVision, Inc.
(the "Company" or "KeraVision"), have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X. The
balance sheet as of June 30, 1999, the statements of operations for the three
and six-month periods ended June 30, 1999 and 1998 and cash flows for the six-
month periods ended June 30, 1999 and 1998 are unaudited but include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position at such
date and the operating results and cash flows for those periods. Although the
Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading, certain information
normally included in financial statements and related footnotes prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The accompanying financial statements should be read in conjunction
with the Company's annual financial statements and notes thereto included
separately herein. The accompanying condensed consolidated balance sheet at
December 31, 1998 is derived from audited financial statements at that date.
Results for the three and six-months ended June 30, 1999 and 1998 are not
necessarily indicative of results for any other interim period or for any year.
2. Management's Plans and Financing
The Company's financial statements are prepared and presented on a basis
assuming it continues as a going concern. At June 30, 1999, the Company had an
accumulated deficit of $103.8 million and incurred a net loss of $12.9 million
for the six months then ended.
In March 1999, the Company entered into a senior term loan agreement
providing for borrowings of $5,000,000, which was advanced on March 25, 1999.
In May 1999, the Company completed an acquisition of Transcend Therapeutics,
Inc. and its net cash balance of $8.5 million. Transcend has terminated its
activities as a drug development company and now is a wholly owned subsidiary
of the Company. No Transcend employees were retained. Transcend stockholders
received 978,498 shares of the Company's common stock. This transaction was
accounted for as an acquisition of assets.
Management's planned expenditures for 1999 exceed current cash, cash
equivalents and available-for-sale investments and the funds received from the
Transcend acquisition and the senior term loan. The Company will need to obtain
additional funds to continue its research and development activities, fund
operating expenses, initiate sales and marketing activities in the U.S. for its
approved products and pursue regulatory approvals for its products under
development. Management believes that sufficient funds will be available from
sales of the Company's products and from financing from additional investors to
support planned operations through December 1999. The Company intends to raise
additional funds through the sale of its equity securities and/or debt
financings. The Company may also enter into collaborative arrangements with
corporate partners that could provide the Company with additional funding in
the form of equity, debt or license fees in exchange for the Company's rights
with respect to certain markets or technology. There can be no assurance that
the Company will be able to raise any additional funds or enter into any such
collaborative arrangements on terms favorable to the Company, or at all. If the
Company is unable to obtain the necessary additional capital, significant
reductions in spending and the delay or cancellation of planned activities or
more substantial restructuring options may be necessary. In such event, the
Company intends to implement expense reduction plans in a timely manner to
enable the Company to meet its operating cash requirements through December 31,
1999. These actions would have material adverse effects on the Company's
business, results of operations and prospects.
6
<PAGE>
KERAVISION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Net Loss Per Common Share
Net loss per common share is computed based on the weighted average number of
common shares outstanding and excludes common stock equivalents as their effect
would be antidilutive. For the periods ended June 30, 1999 and 1998 dividends
and accretion related to the redeemable preferred stock are added to the net
loss to arrive at net loss applicable to common stockholders. Options and
warrants to purchase 1,579,778 and 55,492 shares of common stock were
outstanding at June 30, 1999 but were not included in the computation of
diluted net income per share as the Company incurred a net loss in the periods
presented and the effect of the securities would have been anti-dilutive.
4. Inventory
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out method. The Company's inventory was composed of the
following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Raw materials........................................ $ 614 $182
Finished goods....................................... 526 245
------ ----
Total.............................................. $1,140 $427
====== ====
</TABLE>
5. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management believes that all of the assumptions used in the
preparation of these unaudited condensed consolidated financial statements are
reasonable and have a reasonable basis. Actual results could differ from these
estimates.
6. Issuance of Debt
In March 1999, the Company entered into a senior term loan agreement
providing for borrowings of $5,000,000, which were advanced on March 25, 1999.
The loan bears interest at 12.6% per year until the Company repays the loan on
September 30, 2001. Borrowings under the loan are secured by substantially all
of the company's assets except for intellectual property. In conjunction with
the loan, the Company granted to the lender warrants to purchase 55,492 shares
of the common stock at an exercise price of $10.8125, the closing price as of
March 5, 1999, the date of the loan commitment. The respective warrants are
exercisable for 7 years from the date of issuance. The Company recorded the
fair value of the warrants as additional interest expense to be amortized over
the term of the related debt. The value of the immediately exercisable warrants
was determined using a Black-Scholes valuation model, based on the contractual
term of the warrants.
7
<PAGE>
KERAVISION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss............................................. $(12,921) $(11,174)
Change in unrealized gain on available-for-sale
investments......................................... -- (35)
Foreign currency translation adjustment.............. -- (10)
-------- --------
Total comprehensive income (loss).................. $(12,921) $(11,219)
======== ========
</TABLE>
Accumulated other comprehensive income presented in the accompanying
consolidated condensed balance sheets consists of the accumulated net
unrealized gain on available-for-sale investments.
8. Recent Acquisitions
On May 28, 1999, pursuant to an Agreement and Plan of Reorganization dated as
of December 22, 1998 (the "Merger Agreement"), by and among and Transcend
Therapeutics, Inc. ("Transcend"), the Company acquired all of the capital stock
of Transcend (the "Merger"). This transaction was accounted for as an
acquisition of assets. Transcend's only material asset is a net cash balance of
$8.5 million.
Pursuant to the terms of the Merger Agreement, at the effective time of the
Merger, each outstanding share of Transcend common stock was converted into the
right to receive 0.16486 shares of KeraVision common stock (the "Merger
Shares"). Transcend stockholders received approximately 978,498 shares of
KeraVision common stock. Transcend has terminated its activities as a drug
development company and now is a wholly owned subsidiary of the Company. No
Transcend employees were retained. The Merger Shares are registered under the
Securities Act of 1933 on a registration statement on Form S-4.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Overview
Since its founding in November 1986, KeraVision has been engaged in the
research and development of technologies for surgical correction of vision
disorders. Although KeraVision recorded its first revenues in the quarter ended
December 31, 1996, we expect to continue to incur substantial losses until
sufficient revenues can be generated to offset expenses. Given the
uncertainties in developing a market for a new product, we may not be able to
achieve or sustain significant revenue growth in the foreseeable future.
Furthermore, we expect our overall expenses to increase as our sales and
marketing activities grow.
On April 9, 1999, KeraVision obtained FDA approval to distribute and sell
Intacs in the United States for the treatment of myopia in the range of -1.0 to
- -3.0 diopters in patients who are 21 years of age or older, who have a stable
refraction and who have up to +1.0 diopter of astigmatism. We are currently
conducting a Phase III clinical trial to expand our approved range of
indication for myopia to include -0.75 to -1.0 diopters and -3.1 to -4.5
diopters. In May 1998, we began limited commercial sales in Canada following
regulatory approval to sell Intacs to treat myopia in the range of -1.0 to -5.0
diopters. In late 1996, we were granted the right to affix the CE mark on
Intacs for myopia which allows KeraVision to sell products to treat myopia in
the range of -1.0 to -5.0 diopters in European Union countries.
The research, manufacture, sale and distribution of medical devices such as
Intacs are subject to numerous regulations, imposed by governmental
authorities, principally the FDA and corresponding state and foreign agencies.
The regulatory process is lengthy, expensive and uncertain. Prior to commercial
sale in the United States, most medical devices, including Intacs, must be
cleared or approved by the FDA. Securing FDA approvals and clearances requires
the submission to the FDA of extensive clinical data and supporting
information. Current FDA enforcement policy strictly prohibits the marketing of
medical devices for uses other than those for which the product has been
approved or cleared. Product approvals and clearances can be withdrawn for
failure to comply with regulatory standards or for the occurrence of unforeseen
problems following initial marketing. Foreign governments or agencies also have
review processes for medical devices which present many of the same risks. The
right to affix the CE mark can be withdrawn, resulting in an inability to sell
products in European countries.
We cannot be sure that we will achieve significant revenues from sales of
Intacs or any other potential products or become profitable. Although
KeraVision has received approval to sell Intacs in the United States, the
European Union and Canada, we cannot be sure that Intacs will prove to be safe
or effective over the long term in correcting vision, that Intacs will perform
in the manner we anticipate or that Intacs or any other product developed by us
will be commercially successful.
Results of Operations
Three Months Ended June 31, 1999 and 1998
Net revenue increased by $3.8 million to $3.9 million for the three-month
period ended June 30, 1999 compared to $112,000 for the three-month period
ended June 30, 1998. The increase in net sales primarily reflected the initial
shipment of instrument kits to surgeons subsequent to their completion of
training in the Intacs procedure. Each kit includes two sets of proprietary
instruments to perform the Intacs procedure and a supply of 18 Intacs corneal
ring segments. The predominant portion of the revenues received from the sale
of the kits was attributable to the proprietary instruments. Significant growth
of our net sales will be dependent upon our ability to sell Intacs in
increasing volumes.
Cost of sales and manufacturing expenses totaled $3.0 million in the three-
month period ended June 30, 1999 as compared to $1.0 million in the comparable
prior year period. The increase in cost of sales and
9
<PAGE>
manufacturing expenses reflected higher fixed costs associated with the
establishment of our manufacturing operations and higher variable costs as a
result of higher net sales.
Research and development expenses, which include clinical and regulatory
expenses, for the three-month period ended June 30, 1999 were $2.1 million, a
decrease of $1.0 million from the three-month period ended June 30, 1999. The
decrease is primarily due to reduced clinical trial costs due to the completion
of various studies, in addition to the reduced legal expenses related to
patents.
Selling, general and administrative expenses of $4.2 million were incurred in
the three-month period ended June 30, 1999, an increase of $2.5 million from
the $1.7 million incurred in the comparable prior year period. The increase was
primarily due to increased marketing efforts related to market development in
the U.S. and Canada.
Interest income and other, net was $14,000 for the three-month period ended
June 30, 1999, as compared to $117,000 in the comparable prior year period. The
1999 amount reflected a lower level of interest income due to lower cash
balances and a higher level of interest expense reflecting a higher level of
borrowings.
The net loss applicable to common stockholders for the three-month period
ended June 30, 1999 was $6.0 million versus $8.3 million for the comparable
prior year period. Net loss applicable to common stockholders included the
effect of dividends and deemed dividends, of $365,000 and $2.6 million to
preferred stockholders for the three-month periods ended June 30, 1999 and
1998, respectively.
Six months ended June 30, 1999 and 1998
Net sales for the six-month period ended June 30, 1999 totaled $4.4 million,
an increase of $4.1 million from $264,000 for the six-month period ended June
30, 1998. The increase in net sales primarily reflected the initial shipment of
instrument kits to surgeons subsequent to their completion of training in the
Intacs placement procedure during the second quarter of 1999. Each kit includes
two sets of proprietary instruments to perform the Intacs placement procedure
and a supply of 18 Intacs correal ring segments. The predominant portion of the
revenues received from the sale of the kits was attributable to the proprietary
instruments. Significant growth of our net sales will be dependent upon our
ability to sell Intacs in increasing volumes.
Cost of sales and manufacturing expenses totaled $4.6 million in the 1999
period as compared to $1.9 million in the 1998 period. The increase in cost of
sales and manufacturing expenses reflected higher fixed costs associated with
the establishment of our manufacturing operations and higher variable costs as
a result of higher net sales.
Research and development expenses, which include clinical and regulatory
expenses, for the 1999 period were $4.2 million, which represented a decrease
of $1.8 million from the 1998 period. The decrease was primarily due to reduced
clinical trial costs as a result of the completion of various studies, in
addition to reduced legal expenses related to patents.
Selling, general and administrative expenses were $8.2 million in the 1999
period, which represented an increase of $4.5 million from the 1998 period,
primarily due to increased marketing efforts related to market development in
the U.S. and Canada.
Interest income (expense) and other, net was $(315,000) in the 1999 period,
as compared to $179,000 in the 1998 period. The 1999 amount reflected a lower
level of interest income due to lower cash balances and a higher level of
interest expense reflecting a higher level of borrowings.
The net loss applicable to common stockholders for the 1999 period was $13.7
million versus $13.8 million for the 1998 period. Net loss applicable to common
stockholders included the effect of dividends, including deemed dividends, of
$776,000 and $2.6 million to preferred stockholders for the 1999 and 1998
periods, respectively.
10
<PAGE>
Liquidity and Capital Resources
KeraVision has financed its operations since incorporation primarily through
its initial public offering, private sales of preferred stock, interest income,
equipment financing arrangements and the Transcend acquisition described below.
Cash used in operating activities for the first six months of 1999 increased to
$11.9 million from $9.2 million in the comparable period of the prior year,
reflecting increased selling, general and administrative and manufacturing
expenses. Cash and investments were $8.3 million at June 30, 1999. Capital
expenditures for the first six months of 1999 and 1998 were $809,000 and
$597,000, respectively.
In March 1999, KeraVision entered into a loan agreement providing for
borrowings of $5.0 million. The full amount was advanced on March 25, 1999. The
loan bears interest at 12.6% per annum until KeraVision repays the loan due on
September 30, 2001. KeraVision has the right to prepay the loan subject to a
prepayment penalty of 6.0% of the amount being prepaid on the prepayment date.
Repayment of the loan is secured by KeraVision's assets except for intellectual
property. In connection with the loan, KeraVision granted to the lender
warrants to purchase 55,492 shares of the common stock at an exercise price of
$10.81, the closing price as of March 5, 1999, the date of the loan commitment.
These warrants are exercisable for 7 years from the date of issuance.
KeraVision recorded the fair value of the warrants as additional interest
expense to be amortized over the term of the related debt. The value of
immediately exercisable warrants was determined using a Black-Scholes valuation
model, based on the contractual term of the warrants.
In May 1999, KeraVision completed the acquisition of Transcend Therapeutics,
Inc. and its net cash balance of $8.5 million. Transcend has terminated its
activities as a drug development company and now is a wholly owned subsidiary
of KeraVision. No Transcend employees were retained. Transcend stockholders
received 978,498 shares of KeraVision's common stock. This transaction was
accounted for as an acquisition of assets.
KeraVision expects to continue to incur substantial expenses in support of
additional research and development and sales and marketing activities,
including cost of clinical studies, manufacturing costs, the expansion of its
sales and marketing organization and the support for ongoing administrative
activities. Management's planned expenditures for 1999 exceed current cash,
cash equivalents and available-for-sale investments, and the funds received
from the Transcend acquisition and the March 1999 loan agreement. Excluding the
proceeds of this offering, management believes that sufficient funds will be
available from sales of its products and from external financing sources to
support planned operations at least through December 1999. KeraVision may also
enter into collaborative arrangements with corporate partners that could
provide KeraVision with additional funding in the form of equity, debt or
license fees in exchange for rights with respect to KeraVision's technology.
There can be no assurance that KeraVision will be able to raise any additional
funds or enter into any such collaborative arrangements on terms favorable to
KeraVision, or at all. If KeraVision is unable to obtain the necessary
additional capital, significant reductions in spending and the delay or
cancellation of planned activities or more substantial restructuring options
may be necessary. In such event, KeraVision intends to implement expense
reduction plans in a timely manner to enable KeraVision to meet its operating
cash requirements at least through December 31, 1999. These actions would have
material adverse effects on KeraVision's business, results of operations and
prospects.
KeraVision's cash requirements may vary materially from those now planned
because of results of research, development and clinical testing, establishment
of relationships with strategic partners, changes in focus and direction of
KeraVision's research and development programs, changes in the scale, timing,
or cost of KeraVision's commercial manufacturing facility, competitive and
technological advances, the FDA or other regulatory processes, changes in
KeraVision's marketing and distribution strategy, and other factors.
Year 2000
The Year 2000 Issue is the result of computer programs being unable to
correctly recognize dates beyond December 31, 1999. This could result in a
system failure or miscalculations causing disruptions of operations,
11
<PAGE>
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on recent assessments, we have determined that we would be required to
replace a small portion of our software so that those systems will properly
utilize dates beyond December 31, 1999. We have determined that all of our
critical business systems are already Year 2000 compliant. Assessment, testing
and remediation are proceeding in tandem, and we currently plan to have all
modifications to systems completed and tested by September 1999. These
activities are intended to encompass all major categories of systems in use by
KeraVision, including manufacturing, sales, finance and human resources.
KeraVision is also actively working with critical suppliers of products and
services to determine that the suppliers' operations and the products and
services they provide are Year 2000 compliant or to monitor their progress
toward Year 2000 compliance. We reviewed our product line and determined that
all of the products we have sold and will continue to sell do not require
remediation to be Year 2000 compliant. KeraVision cannot guarantee that any
system of other companies, on which our systems rely and which are not Year
2000 compliant, will be Year 2000 compliant in a timely fashion and would not
have an adverse effect on our systems.
The costs incurred to date related to these programs are less than $17,000.
We currently expect that the total cost of these programs, including both
incremental spending and redeployed resources, will not exceed $60,000. The
total cost estimate does not include potential costs related to any customer or
other claims or the cost of internal software and hardware replaced in the
normal course of business. The total cost estimate is based on the current
assessment of the projects and is subject to change as the projects progress.
Due to the KeraVision's reliance on widely used software packages that have
been certified as Year 2000 compliant, we have not developed a formal
contingency plan for software. Should unforeseen problems surface during our
testing of those packages, we will evaluate our alternatives, such as utilizing
different software packages. We are currently working on developing contingency
plans to increase inventories and raw materials in preparation for the Year
2000. This plan is currently in the development stages and should be finalized
by September 1999.
Based on currently available information, we do not believe that the Year
2000 issue will have a material adverse effect on our financial condition or
overall results of operations; however, we cannot be certain to what extent we
may be affected by such matters. In addition, we cannot guarantee that the
failure to ensure Year 2000 compliance by a supplier or another third party
would not have a material adverse effect on us.
12
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
As part of the consideration for entering into a senior term loan agreement, on
March 25, 1999, the Company issued to an affiliate of the lender a warrant to
purchase 55,492 shares of the Company's common stock. The warrant expires on
March 25, 2006. There were no underwriters in connection with the issuance of
the warrant. The warrant was issued in a private placement in reliance on the
exemption provided by Section 4(2) of the Securities Act of 1933, as amended.
The warrant is exercisable at any time during the term of the warrant, in whole
or in part, at the option of the warrant holder at an exercise price of
$10.8125, which exercise price is subject to adjustment as set forth in the
terms of the warrant.
Item 4. Submission of Matters to a Vote of Security Holders
1. The 1999 Annual Meeting of Stockholders of the Company was held pursuant
to notice at 9:00 a.m., Pacific Time on May 26, 1999 at the Embassy
Suites, 901 East Calaveras Blvd., Milpitas, California. There were
present at the meeting, in person or represented by the proxy, the
holders of 12,386,980 shares of combined Common/Preferred Stock or
81.58% of the total outstanding and 524, 820 shares of Preferred voting
as a class on their Director or 88.9% of the total Preferred and voted
in the following manner:
(a) As listed below, all of Management's nominees for Directors were
elected at the meeting:
<TABLE>
<CAPTION>
No. of Common No. of Common
Votes in Votes
Name of Nominee Favor Withheld
--------------- ------------- -------------
<S> <C> <C>
Kshitij Mohan.................................... 12,157,675 229,305
Arthur M. Pappas................................. 12,165,975 221,005
Peter L. Wilson.................................. 12,157,975 229,005
Preferred Director
Kathleen D. LaPorte.............................. 524,820 0
</TABLE>
(b) Approval of the Amendment to the 1995 Stock Option Plan was ratified
and approved with 11,746,234 Common shares voting in favor, 564,602
Common shares voting against and 76,144 Common shares abstaining.
(c) The appointment of Ernst & Young, LLP as independent public accountants
of the Company for the fiscal year ending December 31, 1999 was
ratified and approved with 12,366,629 Common shares voting in favor,
11,045 Common shares voting against and 9,306 Common shares abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Amended and Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1 to the Company's registration statement on
Form S-1 (File No. 33-92880) and incorporated herein by reference)
3.2 Amended and Restated Bylaws of the Company, as amended (filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K/A for the
year ended December 31, 1998 filed with the Commission on May 3,
1999 ("Form 10-K/A") and incorporated herein by reference)
4.1 Preferred Shares Rights Agreement, dated as of August 18, 1997,
between the Company and Bank Boston, N.A., including the
Certificate of Designation of Rights, Preferences and
13
<PAGE>
Privileges of Series A Participating Preferred Stock attached
thereto as Exhibit A (filed as Exhibit 4.1 to the Company's Form 8-A
filed with the Commission on August 25, 1997 and incorporated herein
by reference)
4.2 Investors' Rights Agreement dated as of June 12, 1998, by and among
the Company and the investors listed on Exhibit A thereto (filed as
Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 filed with the Commission on April 1, 1999
("Form 10-K") and incorporated herein by reference)
4.3 Certificate of Designation of Rights, Preferences and Privileges of
Series B Convertible Preferred Stock of the Company (filed as
Exhibit 3.3 to the Company's Form 10-K and incorporated herein by
reference)
27.1 Financial Data Schedule (filed via the EDGAR system)
(b) The Company filed the following Current Reports on Form 8-K during the
quarterly period ended June 30, 1999:
<TABLE>
<CAPTION>
Date of Report Items Reported Financial Statements Filed
-------------- -------------- --------------------------
<S> <C> <C>
April 19, 1999 5,7 None
April 30, 1999 5,7 None
May 28, 1999 2,7 None
</TABLE>
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KeraVision, Inc.
/s/ Mark Fischer-Colbrie
By: _________________________________
Mark Fischer-Colbrie
Vice President, Finance and
Administration and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
Date: July 23, 1999
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,164
<SECURITIES> 166
<RECEIVABLES> 1,601
<ALLOWANCES> 457
<INVENTORY> 1,140
<CURRENT-ASSETS> 11,101
<PP&E> 5,751
<DEPRECIATION> 3,408
<TOTAL-ASSETS> 13,544
<CURRENT-LIABILITIES> 10,597
<BONDS> 0
0
18,265
<COMMON> 14
<OTHER-SE> (15,998)
<TOTAL-LIABILITY-AND-EQUITY> 13,544
<SALES> 3,909
<TOTAL-REVENUES> 3,909
<CGS> 3,027
<TOTAL-COSTS> 3,027
<OTHER-EXPENSES> 9,330
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (258)
<INCOME-PRETAX> (5,665)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,030)
<EPS-BASIC> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
