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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
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FORM 10-K/A
(Amendment No. 1)
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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
KERAVISION, INC. (Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of 77-0328942
Incorporation or Organization) (IRS Employer Identification Number)
48630 Milmomt Drive
Fremont, CA 94538 (Address of principal executive offices)
Registrant's telephone number, including area code (510) 353-3000
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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
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Indicate by check mark whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) 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/A or any amendment to this Form 10-K/A. [ ]
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 $101,526,929 as of March 21, 2000.
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 18,860,632 shares of Registrant's Common Stock issued and
outstanding as of March 21, 2000.
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KeraVision, Inc. hereby amends and restates its Annual Report on Form 10-K
for the fiscal year ended December 31, 1999, originally filed with the
Securities and Exchange Commission on March 28, 2000, as follows:
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Form 10-K is incorporated by reference from
the Registrant's proxy statement for the 2000 Annual Stockholders Meeting filed
with the Securities and Exchange Commission on April 14, 2000.
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KERAVISION, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
INDEX
PART I
Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 16
Item 3. Legal Proceedings................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............... 16
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters.......................................................... 17
Item 6. Selected Financial Data.......................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 18
Item 7A. Market Risk Disclosure........................................... 21
Item 8. Financial Statements and Supplementary Data...................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 21
PART III
Item 10. Directors and Executive Officers of the Registrant............... 22
Item 11. Executive Compensation........................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and Management... 22
Item 13. Certain Relationships and Related Transactions................... 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 23
Signatures................................................................ 25
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PART I
Item 1. Business
The Company notes that certain of the statements in this report are forward
looking. You can identify these statements by forward-looking words such as
"may," '"will," "expect," "anticipate," "believe," "estimate," and "continue" or
similar words. Forward-looking statements may also use different phrases.
Forward-looking statements address, among other things: (1) our future
expectations; (2) projections of our future results of operations or of our
financial condition; or (3) our "forward-looking" information. We believe it is
important to communicate our expectations to our investors. However, there may
be events in the future that we are not able to accurately predict or which we
do not fully control that could cause actual results to differ materially from
those expressed or implied by our forward-looking statements. Actual results may
differ materially due to a variety of factors including, but not limited to (i)
lack of market acceptance of KeraVision Intacs, (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) competitive products and technology, (vi) unavailability
of capital, and (vii) other risk factors described under the heading "Risk
Factors" as set forth below in this Item 1.
General
Since being founded in 1986, KeraVision has been developing a new category
of non-laser vision correction products for the treatment of common vision
disorders, including myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism, to offer an alternative to eyeglasses, contact lenses and other
vision correction surgical procedures. Our first product, Intacs(TM) corneal
ring segments, based on our proprietary patented technology, has been approved
by the FDA for correcting mild myopia. Intacs are the first surgical vision
correction technology to be approved by the FDA for distribution and sales that
is designed to permanently correct a patient's vision while providing the option
of removability. Intacs are composed of two thin half-circles of polymer
material that are inserted into the periphery of the cornea to reshape the
curvature of the cornea to correct vision. The polymer material has been used in
intraocular lenses to treat patients with cataracts since 1952. The Intacs
insertion process is a simple outpatient procedure that typically can be
performed in 15 minutes or less. KeraVision believes that the Intacs technology
is the first technology specifically designed to surgically treat patients with
low degrees of nearsightedness, a group estimated at approximately 20 million
people in the U.S. KeraVision is currently developing other potential products
to treat other vision correction disorders including higher and lower levels of
nearsightedness, as well as farsightedness and astigmatism.
We have positioned our Intacs technology to address the growing market for
refractive surgery by offering an alternative to laser-based vision correction.
While laser-based technologies require the permanent removal of corneal tissue,
Intacs can be removed if desired. Patients' refractions return generally to
pre-operative levels by three months following removal, in most instances. We
believe that Intacs technology offers several potential benefits to patients
including:
. long-term, convenient vision correction with predictable results
. rapid visual recovery
. a simple, minimally invasive out-patient procedure with minimal post-
operative pain in most cases
. easy to remove and replace in an outpatient procedure.
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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 that regulates the amount of light that passes through the
central zone of the cornea, and the retina, a light-sensitive surface that, like
film, records the image. The cornea, lens and iris operate to focus light rays
on the retina, which contains the light- sensitive receptors that transmit the
image through the optic nerve to the brain. Nearly all light that reaches the
retina passes through the central portion of the cornea, called the optical
zone. Approximately 75% of the refractive, or focusing, power of the eye is
provided by the curvature of the cornea.
Most common refractive problems result from an inability of the optical
system to focus images on the retina properly. This inability to focus is known
as a refractive error. For instance, in the myopic (nearsighted) eye, light rays
focus in front of the retina when the curvature of the cornea is too steep.
People with myopia see nearby objects clearly, but distant objects appear
blurry. Conversely, in the hyperopic (farsighted) eye, light rays focus behind
the retina when the curvature of the cornea is too flat. People with hyperopia
see distant objects clearly, but may need correction so that nearby objects do
not appear blurry. In the astigmatic eye, the curvature of the cornea is not
uniform. This lack of uniform curvature makes it difficult for a person to focus
clearly on an object. Refractive surgery changes the cornea's refractive power
by altering the curvature of the cornea, so that light passing through the eye
can be properly focused on the retina, thereby improving vision.
Vision Correction Market
KeraVision estimates that over one-half of the world's population suffers
from common vision problems such as myopia, hyperopia or astigmatism. In the
United States alone, approximately 160 million people currently use eyeglasses
or contact lenses to correct these common vision problems, with over $16 billion
spent on corrective eyewear products annually. It is estimated that over 70
million people of all ages are affected by myopia. Of these, an estimated 20
million people with mild myopia fall within the currently approved range of
indications for Intacs.
Surgical techniques to correct common vision problems, known as refractive
surgery, or vision correction surgery, include laser assisted in-situ
keratomileusis ("LASIK"), photorefractive keratectomy ("PRK") and radial
keratotomy ("RK"). LASIK is currently the most commonly performed refractive
surgery technique used in the United States. Generally these procedures have
been used to treat myopia; however, laser-based technologies to treat hyperopia
have recently been approved by the FDA, and other procedures are under
development. LASIK and PRK both require the use of a laser system to remove
corneal tissue to achieve a flattening of the cornea to treat nearsightedness,
and a steepening of the cornea to treat farsightedness. Each procedure
represents one eye and requires permanent cutting or tissue removal in the
central cornea.
KeraVision estimates that existing refractive procedure costs in the United
States averaged $2,100 per eye for a LASIK procedure and $1,800 per eye for a
PRK procedure in 1999, with a fairly wide range for each procedure. We believe,
however, overall average prices are declining. Ophthalmic surgeons generally set
the prices of refractive surgery procedures performed at their medical offices.
KeraVision anticipates that the procedure for placement of Intacs will be
competitively priced with existing laser-based procedures. Consumers generally
pay directly for currently available refractive surgery procedures, including
the procedure for placement of Intacs, and are generally not reimbursed by
third-party payors.
Refractive Surgery Techniques
RK, developed in the 1970's, was the first refractive surgical technique
for vision correction. In RK, a diamond knife is used to make from four to eight
radial incisions that penetrate beyond 90% of the depth of the cornea. The
procedure is generally conducted using topical anesthesia in an outpatient
setting. As the incisions heal, the curvature of the cornea is altered and
vision may be improved. RK results can vary with the skill and experience of the
surgeon and can be relatively unpredictable for patients requiring greater
degrees of correction. In addition, the procedure can result in the instability
of the eye over a period of months to years. Because RK entails making cuts in
or near the optical zone of the eye, unwanted side effects, such as halos,
reduced night vision and other visual distortions may occur.
In both PRK and LASIK, a laser is used to permanently remove tissue within
the central optical zone to reshape the cornea, with the amount of tissue to be
removed based upon the level of intended change sought. In PRK, the top layer of
the central cornea, known as the epithelium, is manually removed to expose the
stromal tissue. The patient is then asked to fixate on a light to minimize eye
movement while the laser removes or ablates tissue from the stromal tissue in
the central
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area of the cornea. While vision improvement is achieved, PRK depends in part on
a healing response to reach the desired level of flattening of the cornea, which
generally occurs over a three-month period, although the cornea may continue to
reshape itself over a 12 to 15-month period. The equipment required to conduct
this procedure is significantly more expensive than the equipment required for
use in RK. Because PRK, like RK, surgically alters tissue in the central optical
zone, haze, halos, reduced night vision and other vision problems have been
observed in patients who have undergone the PRK procedure.
LASIK involves using an automated cutting device called a microkeratome to
cut a thin corneal flap, which is then pulled back to expose the underlying
stromal tissue. A laser is then used to remove corneal tissue to either flatten
the cornea in the case of myopia or steepen the cornea in the case of hyperopia
to achieve vision correction. The corneal flap is then placed back on the
stromal tissue where it adheres back onto the eye. Primary complications with
this procedure arise from cutting of the corneal flap, including incorrect flap
thickness, as well as haze, halos, reduced night vision and other vision
problems. The LASIK procedure offers several advantages over PRK, including
reduced post-operative pain and a shorter visual recovery time. Both PRK and
LASIK are performed in an outpatient setting under topical anesthetic.
Quality of Vision
The most common measurement of vision utilizes an eye chart. One of the
recent developments in ophthalmology involves the concept of quality of vision.
It has been observed that patients can attain 20/20 vision, as measured with an
eye chart, and still be dissatisfied with their quality of vision. This issue
may play a role in the future in modifying current refractive surgery
techniques, which are known to affect the smooth shape of the cornea and to
create corneal scarring in ways that may induce unwanted visual aberrations.
Typical vision complaints include haze, halos, reduced night vision and other
visual distortions. At the current time, most assessments attribute undesirable
visual side-effects of refractive procedures either to a disturbance of corneal
tissue within the central optical zone or to the interruption or distortion of
the smooth shape of the cornea. New measurement techniques, including corneal
topography, contrast sensitivity and night-vision testing, are emerging to
better analyze the quality of vision beyond the assessment available using
standardized eye charts.
KeraVision Technology
In response to the perceived market need for an alternative to eyeglasses,
contact lenses and existing laser-based surgical procedures, KeraVision has
developed a proprietary technology to treat a broad range of vision disorders.
Intacs are a proprietary product designed to reduce or eliminate the need for
corrective eyewear by reshaping the curvature of the patient's cornea. Intacs
are inserted between the layers of the corneal stroma through a small incision
made in the periphery of the cornea. The presence of Intacs in the periphery of
the cornea creates a flattening of the central cornea, thereby improving the
focus of light rays onto the retina to correct myopia. The Intacs placement
procedure does not cut or remove tissue from the central optical zone of the
cornea and therefore may reduce the risk of unwanted visual side-effects such as
haze, halos and reduced night vision.
KeraVision believes that Intacs provide the following potential benefits
for the treatment of myopia:
. Long term, convenient vision correction with predictable results. Intacs
provide a predictable long-term correction of mild myopia in a form more
convenient than eyeglasses or contacts lenses and without the risks
associated with laser alternatives that permanently remove tissue from the
cornea.
. Rapid visual recovery. Patients achieve significant vision improvements
almost immediately. U.S. clinical trials showed that 81% of patients
achieved vision of 20/40 or better within 24 hours and 92% of patients
achieved vision of 20/40 or better within 30 days.
. A simple, minimally invasive outpatient procedure with minimal post-
operative pain in most cases. The Intacs corneal ring segment placement
procedure was designed to promote ease of surgery utilizing standard
instrumentation, with minimal trauma to the eye, and can typically be
performed in less than 15 minutes. Post-operative pain experienced in the
clinical trials was modest in most cases and was typically treated with
only non-prescription pain relievers.
. Easy to remove and replace. Intacs can be easily removed in a brief,
outpatient procedure. When removed during clinical trials, the patients'
refractions returned to approximately the same level as measured prior to
the Intacs placement by three months following removal, in most cases.
Intacs and Instruments
On April 9, 1999, KeraVision obtained FDA approval to distribute and sell
Intacs in the United States for the treatment
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of mild myopia in the range of-1.0 to -3.0 diopters in patients who are 21 years
of age or older, who have a stable refraction and who have up to +1.0 diopter of
astigmatism.
The initial design of Intacs consisted of an optically clear split ring
made of PMMA. In order to simplify the surgical procedure, KeraVision modified
the design of Intacs in 1995 into two, thin half- circles of PMMA, each with an
arc measurement of 150 degrees. The two half-circles are placed in the periphery
of the cornea at a diameter of approximately eight millimeters. KeraVision has
extensively studied the relationship between physical parameters of Intacs and
corneal curvature change. As a result of these studies, KeraVision believes that
a small number of Intacs sizes, with minor variations in their dimensions, can
produce a wide range of corneal curvature change and could provide treatment for
a substantial segment of those people with myopia. KeraVision has developed
Intacs in six different thicknesses ranging from 0.21 mm to 0.45 mm. At present,
the FDA has approved three of these thicknesses (0.25, 0.30 and 0.35 mm) for
commercial use in the U.S.
KeraVision has developed proprietary surgical instruments to be used for
the insertion of Intacs. These stainless steel and titanium instruments include
a marking instrument, a centering guide and stromal separators. KeraVision's
instruments have been designed to standardize the Intacs placement procedure and
reduce the variability associated with differing levels of surgical skill by
showing the surgeon where to make the corneal incision. The purchase of
KeraVision's instruments represents a relatively small capital investment
compared to the cost of equipment required for surgeons performing LASIK or PRK
procedures.
The Intacs Placement Procedure
The placement of Intacs is a simple, minimally invasive procedure that can
be performed on an outpatient basis typically in 15 minutes or less. The
procedure is usually performed using topical anesthetic eyedrops. The procedure
in part includes surgical techniques and ophthalmic surgical instruments that
are widely used by and familiar to ophthalmic surgeons. The procedure requires a
single incision of less than two millimeters outside of the central optical zone
of the cornea. The incision is located at the top of the eye under the eyelid.
The Intacs placement procedure consists of the following steps. The
ophthalmic surgeon uses a guide to mark the geometric center of the cornea.
Using the reference mark, a marking instrument is used to mark the line of
incision on the cornea outside the central optical zone and the location where
the ring segments are to be placed. A small entry incision is then made to
approximately two-thirds of the depth of the cornea and the layers of the stroma
at the bottom of the incision are separated. The stroma, which comprises 90% of
the cornea, consists of 500 to 700 overlapping layers of tissue that can be
easily separated. The surgeon places the centering guide over the eye,
introduces each stromal separator through the small entry incision and rotates
each stromal separator, spreading the layers of the stroma to create a circular
subsurface tunnel in the periphery of the cornea. The surgeon then removes the
stromal separator and the centering guide. Intacs are introduced into the tunnel
and rotated into place. Patients generally experience substantial and immediate
improvement in vision. The amount of postoperative pain experienced by patients
in Intacs clinical trials has been minimal for most patients and is typically
treated only with nonprescription pain relievers. Most patients resume their
normal activities within two to three days. In addition, since Intacs are
inserted below the nerve endings of the cornea, patients do not feel the
presence of Intacs in the eye.
Clinical Trials Results
Myopia. Since 1991, ophthalmic surgeons have utilized Intacs technology for
the treatment of myopia in 1,956 patient eyes in clinical trials conducted in
the United States and throughout the world. KeraVision's clinical trials have
been designed to demonstrate the safety and efficacy of Intacs and the safety of
the surgical procedure used to insert Intacs. The safety and efficacy of Intacs
was evaluated using standard ophthalmic techniques. KeraVision initiated
clinical trials using the initial design of Intacs in 1991 in both the United
States and Brazil. In September 1994, KeraVision completed enrollment of a 90-
patient FDA Phase II myopia trial using the initial design of Intacs. In
September 1996, KeraVision completed enrollment of the group of 150 U.S. Phase
II myopia patients with a modified design of Intacs. In November 1996,
KeraVision initiated an expanded Phase II myopia trial involving 59 patient eyes
to evaluate moderate myopia (-3.5 to -5.0 diopters). In October 1996, KeraVision
received FDA approval to commence a ten-center, 360-patient Phase III clinical
trial for myopia in the United States and began that trial in December 1996.
KeraVision completed the enrollment for the trial in May 1997. Our initial Pre-
Market Approval (PMA) application was based on data from the PMA cohort, a group
of 452 patients enrolled in the Intacs Phase II and Phase III clinical trials.
Three thicknesses (0.25, 0.30 and 0.35mm) of Intacs were evaluated. Intacs were
successfully placed in 449 eyes out of 454 surgical attempts. After 12 months of
follow-up, data were available for 97.6% of the PMA cohort patients. In January
1998, KeraVision received FDA approval to expand the Phase III trial to evaluate
three additional thicknesses (0.21, 0.40, and 0.45 mm). This approval permitted
KeraVision to implant Intacs into one eye of each of 120 patients (40 patient
eyes for each thickness), but required KeraVision to obtain additional approval
from the FDA before implanting the second eye in those patients or enrolling any
additional patients. In 82 of the enrolled 118 patients, KeraVision
inadvertently implanted Intacs into the patients' second eye prior to obtaining
the required approval. In July 1999, KeraVision reported these unauthorized
implantations in the patients' second eye to the FDA in a filing that requested
permission to enroll an additional 240 patients and approval to implant the
second eyes of the 118 patients already enrolled. In August 1999, the FDA
approved the proposed
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supplement. KeraVision has also conducted two myopia clinical trials in Europe.
The results from these trials are comparable with KeraVision's clinical trials
in the United States. In addition, KeraVision is conducting a trial for myopia
in Singapore.
Intacs have been removed from 39 patient eyes from the PMA cohort. Intacs
can be easily removed in a brief, outpatient procedure. The Intacs removal rate
for the Phase III trial was 4.3% as compared to 9.6% from the earlier Phase II
trial. Reasons for Intacs removals included: one for infection, 15 for patient
dissatisfaction with correction achieved (undercorrection, overcorrection or
induced astigmatism), 19 for patient dissatisfaction with visual symptoms
(glare, halos, difficulty with night vision, etc.) and four for other reasons.
There have been no clinically significant complications associated with Intacs
removal procedures. The removal results demonstrate that the refractions
returned to preoperative levels by three months following removal, in most
instances. Best spectacle- corrected visual acuity was 20/20 or better in all
cases following removal.
The first procedure for the treatment of myopia using Intacs was performed
in 1991, and to date more than 1,900 procedures have been conducted using Intacs
corneal ring segment technology in clinical trials. Although KeraVision has
developed eight-year clinical data on the safety and efficacy of Intacs in
correcting myopia, it has limited long- term safety and efficacy data. We cannot
assure you that long-term safety and efficacy data when collected will be
consistent with these clinical trial results and will demonstrate that Intacs
can be used safely and successfully to treat myopia in a broad segment of the
population or on a long-term basis.
All surgical procedures, including the Intacs placement procedure, involve
some inherent risk of complications. For the PMA cohort, five patients
experienced safety-related complications for an overall incident rate of 1.1%.
All five patients recovered with no clinically significant effects. Adverse
events include: one infection, one shallow Intacs corneal ring segment
placement, one temporary loss of 2 lines of best corrected visual acuity and two
corneal perforations. During the 12 months of follow up, there was a 4.3%
incidence of removal and a 0.9% incidence of exchange procedures. Other
complications included: overcorrection, reduction in central corneal sensation,
difficulty with night vision, undercorrection, induced astigmatism, blurry
vision, double vision, halos, glare, corneal blood vessels, and fluctuating
distance vision. No patient has had a lasting injury to the eye or sustained any
material loss of best corrected vision. In many patients, deposits have been
observed in the stromal tunnel next to the Intacs. In all cases, the deposits
were confined to the stromal tunnel with no effect on patients' vision. Although
KeraVision believes that these deposits are not complications, we cannot assure
you that this will be the case on a long- term basis.
All of these complications have also been observed in connection with other
refractive surgery techniques. Although KeraVision believes these complications
may be mitigated, KeraVision cannot assure you that these or other complications
will not be serious or lasting or will not impair or preclude KeraVision from
retaining existing regulatory approvals or obtaining regulatory approvals for
our products or the acceptance of these products by patients or
ophthalmologists.
Hyperopia. Treatment for correction of hyperopia consists of implanting six
rectangular segments made of PMMA placed in the periphery of the cornea. These
segments steepen the center of the cornea and flatten the periphery. Each
segment is 2.0 mm long and 0.8 mm wide, with a thickness ranging from 0.25 to
0.45 mm. Patients requiring +1.0 to +3.0 diopters of hyperopia correction have
experienced significant improvement in their vision. After 12 months following
the placement procedure, 40% of patients achieved vision of 20/20 or better, 90%
saw 20/25 or better, and 100% saw 20/40 or better. Because only a limited number
of patients to date have received the treatment for hyperopia, KeraVision will
need to treat additional patients to characterize the range and predictability
of correction prior to moving to a large scale trial. We have initiated a second
feasibility trial at several additional sites in Europe.
Astigmatism. KeraVision has studied a potential product that uses arc
segments to treat pure astigmatism. This device utilizes the core Intacs
technology for the treatment of myopia and the segments are manufactured from
the same material as Intacs. A similar surgical technique is used to implant the
segments in the eye. In August 1994 and March 1995, KeraVision implanted arc
segments in eight astigmatic patients. Clinical results showed that these
patients exhibited improvement in their vision. KeraVision is pursuing broader
experimentation and analysis, but has not enrolled further patients due to the
perceived smaller size of the potential market compared to the markets for
myopia and hyperopia. In October 1999, regulatory approval was obtained to
initiate a feasibility trial at two centers in Europe. No patients have been
enrolled to date.
Keratoconus. KeraVision has begun a clinical study in Europe using the
Company's patented Intacs technology as a possible treatment for keratoconus, a
progressive thinning-of-the-cornea disorder.
Marketing and Sales
United States
Our U.S. marketing roll-out objective is to gain acceptance of Intacs by
both ophthalmic surgeons and consumers. We have established two distribution
channels to begin the initial marketing efforts to the estimated 8,000
ophthalmic surgeons, of which an estimated 2,000 are currently performing
refractive surgery. The first channel is our direct sales force. We have added
refractive surgery business specialists and manufacturers' representatives to
market directly to
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ophthalmic surgeons. The second channel involves our accessing the use of
refractive surgery provider groups. These groups have emerged primarily to
market laser- based refractive surgery procedures. We have signed purchasing or
distribution agreements with Laser Vision Centers, Inc., NovaMed Eyecare, Inc.,
ARIS Vision and Vision America giving us access to approximately 600 ophthalmic
surgeons affiliated with these groups.
Surgeon Acceptance. Our marketing program for ophthalmic surgeons involves
several key elements, including a skills transfer program and a practice
integration program. We believe our success depends on well- trained surgeons to
ensure successful outcomes from their first patients onward. High levels of
patient satisfaction will develop the critical mass of patients required to
start and sustain the word-of-mouth process, an established driver of refractive
procedure volume growth. Prior to performing the Intacs corneal ring segment
placement procedure, ophthalmologists are required to go through KeraVision
surgeon training. Our training program is guided by six leading ophthalmologists
who are part of the KeraVision's senior training faculty and are highly
experienced with the Intacs technology. The classes include a comprehensive
lecture and a surgical wet lab that can accommodate up to 20 ophthalmologists. A
detailed training manual is provided to each of the program attendees. Following
the initial training, we provide experienced personnel to provide on-site
guidance for the ophthalmologists through their first series of procedures.
Through December 31, 1999, we have trained over 600 surgeons, including both
primary doctors and their associates.
KeraVision's marketing program includes significant post-training efforts
to ensure rapid integration of Intacs into each surgeon's practice. Our
integration process includes education of the office staff, development of
patient education materials, including brochures and videos and seminars with
optometrists in the region.
Prior to attending the training sessions, doctors are required to purchase
an initial kit consisting of two instrument sets, a vacuum system and 18 Intacs
for a total price of $45,000. If desired, the instrumentation may be leased. We
have derived our initial revenues from kit sales while we are working to build
underlying procedure volumes to maintain and grow future revenues.
Consumer Acceptance. In addition to personal referrals, we intend to
increase awareness of Intacs through several other approaches. First, we have
engaged in a public relations strategy that has resulted in coverage on over 400
TV news programs and 3,300 print articles since January 1999. Second, many
ophthalmic practices currently use extensive marketing efforts to market laser
procedures. We believe that practices which integrate Intacs will use their own
resources to advertise and perform other activities to build procedure volume.
Third, we may elect to conduct co-operative advertising in conjunction with
these practices. Fourth, once there is a sufficient number of doctors trained
and an adequate level of interest in Intacs established within a region, we
believe that a regional consumer marketing campaign may be used to increase
further market acceptance. Part of our strategy is to create the Intacs brand,
which is the first branded product within the refractive surgery market. The
development of a brand identity can facilitate consumer adoption by allowing
consumers to ask for the product by name, enabling focused advertising and
fostering general awareness.
Our initial marketing effort will focus on the estimated 20 million
Americans who are within the treatment range of our first product. Our efforts
have focused on enhancing consumer awareness, with a goal of increasing the
volume of Intacs placement procedures to drive sales of Intacs. We are also
seeking to expand the market for refractive surgery to reach those consumers who
have an interest in refractive surgery but are concerned with other vision
correction surgical procedures that do not allow for the option of removal and
placement.
International Markets
Canada
KeraVision received approval in Canada in May 1998 to sell Intacs for the
treatment of myopia in the range of -1.0 to -5.0 diopters of correction, along
with related instruments. KeraVision focused its initial marketing efforts on
developing seven sites to become proficient in the Intacs corneal ring segment
placement procedure, to be able to discuss the Canadian experience with Intacs
and to potentially serve as training centers. KeraVision then formally announced
the product launch in October 1998. KeraVision targeted the Vancouver area for
the purpose of training a high percentage of the refractive surgeons in the
region and testing the effect of consumer advertising on patient flow to those
Canadian centers.
Europe/Other
Upon obtaining the right in November 1996 to market 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 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
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channel whereby potential patients can easily reach the ophthalmic surgeon,
rather than the non-surgical ophthalmologists and opticians who may tend to
recommend that a patient not consider refractive surgery. Further, restrictions
on direct broad scale advertising hinders the expansion of consumer awareness of
refractive surgery. It is expected that because of these and other factors the
refractive surgery market and the market for Intacs will be slow to develop in
Europe. KeraVision, however, is seeking to expand its reach to other European
countries by adding additional distributors. KeraVision has concluded agreements
with distributors in Spain, Switzerland, the Benelux region, Greece, and the
United Kingdom. KeraVision has also updated its agreement with its Italian
distributor.
KeraVision has completed distribution agreements with companies in Israel,
South Africa and Mexico.
Asia
In July 1998, KeraVision commenced our first clinical trial in Asia, with
the initiation of a myopia trial in Singapore. We have signed a distribution
agreement with a South Korean distributor to begin the work on product
registration in South Korea. We are reviewing our plans for expanding into other
areas in the Pacific Rim.
Patents and Proprietary Rights
One of KeraVision's primary strategies has been to develop a strong
proprietary patent position with respect to Intacs technology. As of December
31, 1999, KeraVision had 168 pending patent applications worldwide and had been
awarded 29 United States patents and 59 foreign patents. These issued patents
and pending patent applications cover various aspects of Intacs technology,
including Intacs, methods of use, instruments and related materials, as well as
other vision correction technologies. The expiration dates of the United States
issued patents range from 2002 to 2016. KeraVision's policy is to protect its
technology by, among other things, filing patent applications relating to
important aspects of its Intacs technology and other vision correction
technology. KeraVision has entered into confidentiality agreements with its
contract manufacturers to protect the proprietary nature of its technology.
Manufacturing
KeraVision manufactures Intacs in its facility in Fremont, California using
a computer-controlled machining process. KeraVision has sufficient manufacturing
capacity for Intacs and is building experience in manufacturing medical devices
and other products. To be successful, we must manufacture our products and
potential products in commercial quantities in compliance with regulatory
requirements at acceptable costs. Production of commercial-scale quantities will
involve technical challenges for us. As we establish our own commercial-scale
manufacturing capability for Intacs, we could incur significant scale-up
expenses including the need to expand our facilities and personnel. KeraVision
may seek collaborative arrangements with other companies to manufacture products
and potential products, including Intacs. The manufacturer of KeraVision's
potential products will be subject to periodic inspection by regulatory
authorities. Any such operations must undergo compliance inspections conducted
by the FDA and equivalent inspections conducted by state and foreign officials.
We cannot assure you that any KeraVision manufacturer will be able to
successfully pass these inspections on a timely basis or at all. In addition, we
cannot assure you that KeraVision will be able to develop clinical or
commercial-scale manufacturing capabilities at acceptable costs or enter into
agreements with third parties with respect to these activities. In many cases,
instruments and other purchased materials critical for production are sole-
sourced.
KeraVision has several sole-sources for sterilization, tools and equipment,
the PMMA raw material and other elements necessary to manufacture Intacs and the
related instrumentation. If we are dependent upon third parties for the
manufacture of our products, our profit margins and ability to develop and
deliver such products on a timely basis may be adversely affected. Moreover, we
cannot assure you that such third parties will adequately perform, and any
failures by these parties may impair our ability to deliver products on a timely
basis or otherwise impair our competitive position.
Intacs are made from PMMA, a polymer widely used in implantable intraocular
lenses since 1952. PMMA cast sheet is purchased from a sole supplier and is
stored at KeraVision prior to release to production. KeraVision believes it
could develop the capability over a significant time period to manufacture PMMA
cast sheet internally if this sole-source were to become unavailable. Any change
in materials used for Intacs would require additional testing, regulatory review
and approval, which could result in significant manufacturing and shipping
delays. See "Risk Factors--KeraVision will need to find a new supplier for the
raw material we use in manufacturing our products."
Research and Development
KeraVision has been engaged in the research and development of Intacs
technology since its inception in 1986. The development effort has incorporated
both extensive clinical testing as well as laboratory testing to determine the
effect of various configurations and insertion techniques for Intacs technology.
Some of the analytical techniques employed include computer modeling using
finite element analysis, optical ray tracing and various corneal topography
measurement instruments. These approaches aid in determining the expected change
in the shape of the cornea, the pattern of light distribution through the cornea
and curvature of the cornea achieved with various designs. The analytical
approaches are used in conjunction with information determined from both
feasibility studies and expanded clinical trials to determine the
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best design to move forward in the testing cycle. For each of the years ended
December 31, 1999, 1998 and 1997 our expenditures for research and development
were approximately $8.8 million, $11.4 million, and $10.8 million, respectively.
KeraVision has also used these approaches to begin work on potential
products for astigmatism, hyperopia and keratoconus corneal thinning disease.
KeraVision has begun investigations into refinements for the existing product
for myopia, including myopia concurrent with high level of astigmatism and
potential treatments for higher and lower levels of myopic correction.
Competition
Intacs compete with other treatments for refractive problems, including
eyeglasses, contact lenses, and other refractive surgery procedures such as PRK
and LASIK. In addition, other refractive surgery technologies are currently
under development, including the intraocular contact lens ("ICL"), radio
frequency keratoplasty ("RFK"), and "refractive" intraocular lenses. The ICL
seeks to correct refractive errors by placing a lens inside the eye between the
natural lens and the iris. The ICL is currently available for sale in Europe.
RFK uses radio- frequency energy to change the shape of the cornea. Currently,
this treatment has been approved for use in Canada but has not been approved for
use in the United States. Refractive intraocular lenses ("IOL") involve the
placement of an intraocular lens behind the cornea for the correction of vision
problems. Significant competitive factors in the industry include efficacy of
vision correction, safety, reliability, convenience and price. The healthcare
field is characterized by extensive research and rapid technological change. At
any time, competitors may develop and bring to market new products or surgical
techniques with vision correction capabilities superior to those of Intacs or
which would otherwise render Intacs corneal ring segment technology obsolete.
Other companies, most of which are larger than KeraVision and have greater
financial resources, are engaged in the refractive surgery market. Several
companies, including Summit Technology, Inc., VISX, Nidek, Inc. and Bausch &
Lomb have received approval to market their products in the United States. In
addition to these companies, there are other large entities that currently
market and sell laser systems overseas for use in refractive surgery, some of
whom are seeking to obtain approval with the FDA to sell their products in the
United States.
KeraVision's competition will be determined in part by current or potential
future refractive surgery products that are approved for sale by regulatory
authorities. The relative speed at which KeraVision is able to develop its
potential products, complete the necessary governmental and regulatory approval
processes for those products and manufacture and market commercial quantities of
the products will be important competitive factors.
Government Regulation
FDA's Premarket Clearance and Approval Requirements. Unless an exemption
applies, each medical device that we wish to market in the U.S. must receive
either "510(k) clearance" or "PMA approval" in advance from the U.S. Food and
Drug Administration pursuant to the Federal Food, Drug, and Cosmetic Act. The
FDA's 510(k) clearance process usually takes from four to 12 months, but it can
last longer. The process of obtaining PMA approval is much more costly, lengthy
and uncertain and generally takes from one to three years or even longer.
The FDA decides whether a device must undergo either the 510(k) clearance
or PMA approval process based upon statutory criteria. These criteria include
the level of risk that the agency perceives is associated with the device and a
determination whether the product is a type of device that is similar to devices
that are already legally marketed. Devices deemed to pose relatively less risk
are placed in either class I or II, which requires the manufacturer to submit a
premarket notification requesting 510(k) clearance, unless an exemption applies.
The premarket notification must demonstrate that the proposed device is
"substantially equivalent" in intended use and in safety and effectiveness to a
legally marketed "predicate device" that is either in class I, class II, or is a
"preamendment" class III device (i.e., one that was in commercial distribution
before May 28, 1976) for which the FDA has not yet decided whether to require
PMA approval.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance. The FDA
requires each manufacturer to make this determination in the first instance, but
the FDA can review any such decision. If the FDA disagrees with a manufacturer's
decision not to seek a new 510(k) clearance, the agency may retroactively
require the manufacturer to submit a premarket notification requiring 510(k)
clearance. The FDA also can require the manufacturer to cease marketing and/or
recall the modified device until 510(k) clearance is obtained.
Devices deemed by the FDA to pose the greatest risk, such as life-
sustaining, life-supporting or implantable devices, or devices deemed not
substantially equivalent to a legally marketed predicate device, are placed in
class III. Intacs are regulated by the FDA as a class III device. Such devices
are required to undergo the PMA approval process in which the manufacturer must
prove the safety and effectiveness of the device to the FDA's satisfaction. A
PMA application must provide extensive preclinical and clinical trial data and
also information about the device and its components regarding, among other
things, manufacturing and labeling.
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Upon submission, the FDA determines if the PMA application is sufficiently
complete to permit a substantive review, and, if so, the application is accepted
for filing. The FDA then commences an in-depth review of the PMA application.
The review time is often significantly extended as a result of the FDA asking
for more information or clarification of information already provided. The FDA
also may respond with a "not approvable" determination based on deficiencies in
the application and require additional clinical trials that are often expensive
and time consuming and can delay approval for months or even years. During the
review period, an FDA advisory committee, typically a panel of clinicians,
likely will be convened to review the application and recommend to the FDA
whether, or upon what conditions, the device should be approved. Although the
FDA is not bound by the advisory panel decision, the panel's recommendation is
important to the FDA's overall decision making process.
If the FDA's evaluation of the PMA application is favorable, the FDA
typically issues an "approvable letter" requiring the applicant's agreement to
specific conditions (e.g., changes in labeling) or specific additional
information (e.g., submission of final labeling) in order to secure final
approval of the PMA application. Once the approvable letter is satisfied, the
FDA will issue a PMA for the approved indications, which can be more limited
than those originally sought by the manufacturer. The PMA can include post
approval conditions that the FDA believes necessary to ensure the safety and
effectiveness of the device including, among other things, restrictions on
labeling, promotion, sale and distribution. Failure to comply with the
conditions of approval can result in material adverse enforcement action,
including the loss or withdrawal of the approval.
After the approval of a PMA, a new PMA or PMA supplement is required in the
event of a modification to the device, its labeling or its manufacturing
process. Supplements to a PMA application often require the same type of
information as a premarket approval application, except that the supplement is
limited to the information needed to support any changes from the product
covered by the original PMA application, and may not require the submission of
clinical data or the convening of an advisory committee. A new PMA or PMA
supplement will be required to expand the Intacs approval beyond mild myopia to
new ranges of myopia, and to hyperopia and astigmatism.
A clinical trial may be required in support of a 510(k) submission or PMA
application. Such trials generally require an Investigational Device Exemption
application approved in advance by the FDA for a limited number of patients,
unless the product is deemed a nonsignificant risk device eligible for more
abbreviated IDE requirements. The IDE application must be supported by
appropriate data, such as animal and laboratory testing results. Clinical trials
may begin if the IDE application is approved by the FDA and the appropriate
institutional review boards at the clinical trial sites.
Pervasive and Continuing FDA Regulation. A number of regulatory
requirements apply to marketed devices, including Intacs. These requirements
include labeling regulations, the Quality System Regulation (which requires
manufacturers to follow elaborate design, testing, control, documentation and
other quality assurance procedures), the Medical Device Reporting regulation
(which requires that manufacturers report to the FDA certain types of adverse
events involving their products), and the FDA's general prohibition against
promoting products for unapproved or "off label" uses. Class II devices also can
have special controls such as performance standards, postmarket surveillance,
patient registries, and FDA guidelines that do not apply to class I devices.
Other Regulation
KeraVision is also subject to regulation by the Occupational Safety and
Health Administration and the Environmental Protection Agency and to regulation
under the Toxic Substances Control Act, the Resource Conservation and Recovery
Act, the National Environmental Policy Act and other regulatory statutes, and
may in the future be subject to other federal, state or local regulations. In
addition, new or modified regulations may be promulgated governing Intacs or
KeraVision's potential products that may be more restrictive or that may
otherwise alter or affect KeraVision's research and development programs. We
cannot assure you that KeraVision will not be required to incur significant
costs to comply with these laws and regulations in the future or that such laws
and regulations will not have a materially adverse effect upon KeraVision's
ability to do business. KeraVision is unable to predict whether any agency will
adopt any regulation that would have a material adverse effect on KeraVision's
operations.
All of the above described government regulation and product approval risks
apply to Intacs and will apply to any future potential product of KeraVision.
Government regulation may become more restrictive in the future. We cannot
assure you that KeraVision will not be required to incur significant costs to
comply with such laws and regulations in the future or that such laws and
regulations will not have a material adverse effect upon KeraVision's ability to
conduct business.
European Government Regulation and Product Testing
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements. Export sales of investigational devices that have
not received FDA marketing approval may be subject to FDA export permit
requirements. As KeraVision begins to sell products in additional foreign
markets it will be required to obtain an FDA export permit and comply with
foreign regulations for each of these markets. A delay in obtaining the
necessary approvals or failing to comply with regulatory
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requirements could have a material adverse effect on KeraVision's business,
financial condition and results of operations.
The regulatory environment in Europe for medical devices differs
significantly from that in the United States. A total of 19 European countries
are grouped in a union with the objective of establishing a single market
without internal borders among the member countries and eliminating divergent
national requirements. The members of the European Union include Austria,
Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
The Netherlands, Portugal, Spain, Sweden, the United Kingdom, Iceland, Norway,
Switzerland and Lichtenstein.
Products that comply with the requirements of a specified EC medical
directive are entitled to bear CE marking. Since July 14, 1998, all commercial
medical device products have been required to bear CE marking. It is illegal to
market these products in the European Union without a CE marking.
To obtain a CE marking, the product must be assessed and found to conform
to the applicable directive. This assessment is carried out by the manufacturer,
in most cases with the assistance of a third party certification organization
known as a "notified body." The notified body assessment may consist of an audit
of the manufacturer's quality system or specific testing of the product. A
manufacturer can sell a product throughout the European Union once it secures an
assessment by a notified body in one of the European Union countries.
The European Union has adopted two directives to regulate medical devices,
including the "Active Implantable Medical Devices Directive" ("AIMDD") and the
"Medical Devices Directive," ("MDD") and has proposed a third directive, the "In
Vitro Diagnostic Directive," ("IVDD") to harmonize the regulatory requirements
for medical devices.
Medical devices such as Intacs are regulated under the MDD. A manufacturer
may affix CE marking after a determination that the product complies with the
essential requirements of this directive and completion of the appropriate
conformity assessment procedure as specified by the directive. The conformity
assessment requirements are based upon a given product's classification within
the directive. Products within the scope of the directive are grouped within
four classes: Class I, IIA, IIB and III. A product with a higher classification
is considered to have higher risk, and will therefore be subject to more
controls in order to obtain CE marking. Intacs have been designated as a Class
IIB device. Essential requirements under the directive include substantiating
that the device meets the manufacturer's performance claims and that any
undesirable side effects of the device constitute an acceptable medical risk
when weighed against the intended benefits of the device.
There are two basic options for assessing conformity of devices designated
as Class IIB. The first option allows a manufacturer to seek a decision from the
notified body that the processes employed in the design and manufacture of a
device qualify as a full quality system. Alternatively, manufacturers can seek
product certification based on various control schemes. KeraVision obtained
qualification of its processes as a full quality system. Approval of
KeraVision's full quality system has been achieved through ISO 9001 and EN 46001
certification by an approved notified body. The full quality system encompasses
the organizational structure, responsibilities, procedures, processes and
resources necessary to assure quality assurance in design, development,
production, installation and servicing of its medical devices.
The Medical Devices Directive also covers the instrumentation supplied by
KeraVision for the purpose of implanting Intacs. These instruments are
classified as Class I and therefore are not subject to full quality assurance
system requirements.
Once a manufacturer has satisfactorily completed the regulatory compliance
tasks required by the directive and received a favorable decision from the
notified body, it may affix CE marking to its product. Based on the current
regulatory laws, no additional premarket approvals in the individual European
Union countries are required. Custom-made devices and devices intended for
clinical investigation do not bear CE marking and are subject to particular
requirements under the Directive. Manufacturers are required to report serious
adverse incidents concerning CE marked devices to the authorities of the
countries where the incidents take place. If such incidents occur, the
manufacturer may have to take remedial action, perhaps including withdrawal of
the product from the European market.
The directives must be transposed into national law in order to be applied.
All member states of the European Union have completed this transposition. This
transposition process has not created significant differences among the member
states of the European Union with respect to compliance with the essential
requirements and the conformity assessment process. However, meaningful
differences have emerged in at least the following areas: authorities'
evaluation of proposed clinical investigation, notification of products and
activities, handling of adverse event reporting and language requirements for
labels and instructions for use. As the directive does not cover distribution
practices, healthcare financing and purchasing, it is expected that there will
be significant regulatory variances from country to country in these areas.
KeraVision obtained conformity certification under Annex II of the MDD in
October 1996 from a notified body and thus achieved the right to affix the CE
marking to Intacs 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
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Data and Safety Monitoring Board
KeraVision has established an independent Data and Safety Monitoring Board
to serve in a medical monitoring capacity and to review the collective safety
and efficacy data generated from KeraVision's various clinical trials. In
addition, the members of the Monitoring Board examine representative patients
from the United States investigational sites, provide medical advice to the
clinical investigators, review any safety-related complications and provide
suggested guidelines for patient management to the investigators. The Monitoring
Board currently consists of three prominent ophthalmologists. Additional
individuals will be added to the Monitoring Board, as required. The members of
the Monitoring Board are not allowed to be clinical investigators for Intacs.
Employees
As of December 31, 1999, KeraVision had 172 full-time employees consisting
of 58 in manufacturing, 42 in research and development, 49 in sales and
marketing, and 23 in general and administration. KeraVision also has contracts
with outside consultants. KeraVision considers relations with its employees to
be good. None of KeraVision's employees are covered by a collective bargaining
agreement.
RISK FACTORS
KeraVision is incurring operating losses and may not achieve profitability in
the future.
KeraVision has generated only limited revenues to date and has experienced
significant operating losses every year since its inception in 1986. We expect
to continue to experience increasing expenses as we expand our sales and
marketing efforts, and we expect to continue to incur substantial operating
losses until sufficient revenues can be generated to offset these expenses. We
cannot predict the amount of our future operating losses or the length of time
required for us to achieve and sustain profitability.
KeraVision needs market acceptance of Intacs and other products to be
successful.
KeraVision's future performance depends upon the degree of market
acceptance of Intacs for correction of myopia, and on KeraVision's ability to
successfully manufacture, market, deliver and support Intacs. We cannot assure
you that Intacs or any future product that KeraVision develops will achieve or
maintain acceptance in their target markets. To be successful, Intacs will have
to be accepted by ophthalmic surgeons as well as by patients. Until recently,
KeraVision has sold its product primarily in Canada, France and Germany and
generated only limited revenues. KeraVision only began selling Intacs in the
United States in the second half of 1999. Many surgeons have already invested
significant time and resources in developing expertise in other corrective
ophthalmic surgical techniques and may be unwilling to devote the time and
resources necessary to incorporate the procedure for Intacs placement into their
practices.
We intend to market our products to people whose vision can be corrected
with eyeglasses or contact lenses. We cannot assure you that these persons will
elect to undergo surgical insertion of Intacs when nonsurgical vision-correction
alternatives are available. KeraVision believes that the inability of some
patients to afford the procedure and the psychological aversion of some patients
to refractive surgery may further limit the potential market for Intacs. The
extent of, and rate at which, Intacs and our future products achieve market
acceptance and penetration is a function of many variables including price,
safety, efficacy, reliability and sales and marketing efforts.
We have limited sales and marketing experience and may not be able to
successfully sell or market our products.
We have only sold products in the United States since April 1999, in Canada
since mid-1998 and in Europe since late 1996 and to date have generated only
limited revenues. We recently entered into several distribution agreements and
also plan to sell and market our products through a direct sales force. To
successfully market and sell our products, we will need to develop a sales force
which has established relationships with surgeons and which has consumer
marketing skills. We will need significant resources to recruit and retain
skilled sales management, direct sales persons and distributors. To the extent
that KeraVision has established or enters into distribution arrangements for the
sale of its products, KeraVision is and will be dependent on the efforts of
third parties. We cannot assure you that our sales and marketing efforts will be
successful.
KeraVision may not be able to execute its business plan if a significant amount
of capital is not available to it in the near future.
KeraVision will be required to commit substantial resources to establish
production, marketing and sales capabilities to successfully commercialize
Intacs. In addition, KeraVision will be required to commit additional resources
to conduct the research and development, clinical studies and regulatory
activities necessary to bring additional products to market. We currently
anticipate that cash from operations will be sufficient to fund KeraVision's
operations at least through December 31, 2000. We will be required to seek
additional sources for funding our business operations, and we cannot assure you
that other sources of funding will be available when needed or available on
terms favorable
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or acceptable to KeraVision. If we fail to obtain sufficient funds to continue
our operations, we may need to delay, scale back or eliminate some or all of our
sales and marketing efforts, research and product development programs, clinical
studies or regulatory activities or license third parties to commercialize
products or technologies that we would otherwise seek to develop. These actions
would adversely affect our ability to execute our business plan.
KeraVision has limited manufacturing experience and may be unable to develop
commercial-scale manufacturing capabilities.
To be successful, we must manufacture our products and potential products
in commercial quantities in compliance with regulatory requirements at
acceptable costs. At the present time, we have sufficient manufacturing capacity
and are building experience in manufacturing medical devices and other products.
We cannot assure you that KeraVision will be able to develop commercial-scale
manufacturing capabilities at acceptable costs or enter into agreements with
third parties with respect to these activities. Production of commercial-scale
quantities will involve technical challenges for us. As we establish our own
commercial-scale manufacturing capability for Intacs, we could incur significant
scale-up expenses including the need to expand our facilities and hire
additional personnel. We may seek collaborative arrangements with other
companies to manufacture products and potential products, including Intacs. If
we are dependent upon third parties for the manufacture of our products, our
profit margins and ability to develop and deliver such products on a timely
basis may be adversely affected. Moreover, we cannot assure you that such third
parties will adequately perform, and any failures by these parties may impair
our ability to deliver products on a timely basis or otherwise impair our
competitive position.
KeraVision may not be able to obtain additional regulatory approvals or maintain
current approvals, which could delay the sale and distribution of current and
future products and adversely affect our revenues.
The research, manufacture, sale and distribution of medical devices,
including KeraVision's current and planned products, is subject to regulations
imposed by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies. Securing regulatory approval for
KeraVision's additional products and new uses of existing products may entail a
lengthy, expensive and uncertain process involving, for example, submission to
the FDA of extensive clinical data and other supporting information. Unless an
exemption applies, each medical device that we wish to market in the U.S. must
receive either "510(k) clearance" or "PMA approval" in advance from the FDA
pursuant to the Federal Food, Drug, and Cosmetic Act. The current PMA approval
for Intacs is limited to mild myopia. A separate PMA approval or PMA supplement
approval supported by clinical data will be required to expand the indications
for use of Intacs to new ranges of myopia, and to hyperopia and astigmatism.
To generate revenue growth, KeraVision must continue to develop, obtain
regulatory approval for, and successfully commercialize new products. The time
frame to develop and successfully commercialize additional products and
modifications of existing products is long and uncertain. Although KeraVision
has received regulatory approval to market Intacs in the United States, the
European Union and Canada, we cannot assure you that we will successfully
complete our efforts to secure regulatory approval for this product to be
marketed elsewhere. Furthermore, we cannot assure you that KeraVision will
successfully obtain regulatory approval in the U.S. or elsewhere for marketing
our future new or modified products or indications.
Having received approval from the FDA for the correction of mild myopia,
Intacs are subject to additional post-market testing, extensive record keeping
and other device follow up required by the FDA and other regulatory agencies. In
addition, to the extent KeraVision continues to perform the manufacturing
function, we will be required to adhere to additional FDA requirements for the
manufacture and distribution of Intacs. KeraVision's ongoing compliance with the
Quality System Regulation, labeling and other applicable regulatory requirements
is monitored through periodic inspections by federal and state agencies,
including the FDA, and comparable agencies in other countries. Current FDA
enforcement policy strictly prohibits the marketing of medical devices for
unapproved ("off label") uses. Product approvals can be withdrawn due to
unforeseen safety or effectiveness problems following initial marketing. Failure
to comply with the applicable regulatory requirements can, among other things,
result in fines, injunctions, civil penalties, suspensions or withdrawal of
regulatory approvals, product recalls, product seizures, including cessation of
manufacturing and sales, operating restrictions and criminal prosecution. Any
such FDA enforcement actions could have a material adverse effect on
KeraVision's business, financial condition and results of operations.
KeraVision will need to find a new supplier for the raw material we use in
manufacturing our products.
Our sole supplier of polymethylmethacrylate (PMMA), the polymer raw
material used in manufacturing Intacs, no longer provides the particular
material we use for Intacs, and has notified us that the material may be
purchased by special order only. We currently have what we estimate is at least
a three-year supply of PMMA. We have not yet made arrangements to obtain
additional PMMA beyond this supply. We have stored our current supply of PMMA in
two separate locations. Should the PMMA at either or both of these locations be
damaged or destroyed, our ability to continue to manufacture and distribute
Intacs or additional products may be seriously impaired. We would be required to
find an alternate source of PMMA or a similar polymer material, or commence
manufacturing the raw material ourselves. We would need to obtain FDA regulatory
approval for the use of new raw materials in any of our products or to qualify a
new PMMA supplier. If we elected to manufacture PMMA ourselves, we would need to
establish manufacturing facilities for this purpose, hire additional personnel,
and obtain additional regulatory approvals, processes which could take up to
several
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years and require additional expenditures. We cannot assure you that:
. our supplier will be able to fulfill future special orders for PMMA;
. interruptions in supplies will not occur in the future;
. we will be able to obtain a new source for the supply of PMMA or establish
facilities to manufacture PMMA, both of which would require approval of
additional regulatory submissions; or
. our current supply will last as long as we anticipate.
We have identified an alternative material for use in manufacturing Intacs
products. We have begun the qualification efforts required to obtain regulatory
approval, but we can not assure that the alternate material will be approved or
useful for manufacturing our products. In the event we are unable to obtain
alternative supplies of materials upon the depletion of our current supply we
will experience delays in the production of Intacs and will need to obtain other
alternate materials. If we are required to manufacture Intacs using alternate
materials we will also be required to obtain FDA approval of this material, a
process that could take several years and cause us to incur substantial costs.
Furthermore, we cannot assure you that we will be able to obtain FDA approval of
a new material at all. Any interruption of supply would have a material adverse
effect on KeraVision's ability to manufacture Intacs or future products which
could have a material adverse effect on our business, financial condition or
results of operations.
KeraVision may not have the ability to obtain and maintain patents on Intacs and
our technology which could permit others to develop similar products or more
easily compete with our business.
KeraVision's commercial success depends in part on acquiring and
maintaining patent and trade secret protection of Intacs technology, Intacs and
any other potential products we seek 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 design products that circumvent any
patents used by KeraVision.
In addition, KeraVision could incur substantial costs in defending against
patent litigation or in bringing suits to protect its patents against
infringement. If the outcome of any such litigation is adverse to KeraVision,
our business could be adversely affected.
KeraVision also relies on trade secrets and proprietary knowledge which it
seeks to protect by confidentiality agreements with its employees, consultants,
investigators and advisors. We cannot assure you that these agreements will not
be breached, that KeraVision will have adequate remedies for any breach, or that
competitors will not otherwise discover KeraVision's trade secrets and
proprietary knowledge.
KeraVision may not be able to successfully compete in the highly competitive
field of vision correction.
KeraVision is engaged in a rapidly evolving field. Many public and private
companies, universities and research laboratories engage in activities relating
to research on vision correction alternatives. Our competitors could develop
technologies, procedures or products that are more effective or economical than
those KeraVision is developing or that would render our technology and products
obsolete or noncompetitive.
Most of the other companies in the vision correction market are larger and
better financed than KeraVision. Several companies have received approval to
market their laser systems for refractive surgery in the United States,
including VISX, Summit Technology, Inc. and Nidek, and others may receive
similar approvals in the future.
These companies and institutions represent significant long-term
competition for KeraVision. In comparison to KeraVision, they may have:
. substantially greater resources and better facilities;
. larger research and development staffs and more experience in research and
development;
. more experience in preclinical and human clinical studies;
. more experience obtaining regulatory approval;
. more experience manufacturing medical device products; and
. more experience in marketing, selling and developing a market for medical
device products.
Moreover, several companies are developing other non-laser approaches to
vision correction, including the use of radio frequency energy to reshape the
cornea, phakic intraocular lenses, and the use of enzymes to alter the shape of
the cornea. See "Business--Competition."
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Long-term follow-up data may not demonstrate that Intacs are safe and effective.
The Intacs technology is a relatively new technology, clinical data for
which dates back to 1991. KeraVision has developed only limited long- term
clinical data to date on the safety and efficacy of Intacs in correcting mild
myopia. The FDA is requiring KeraVision to provide data to assess the effects of
Intacs on the corneal endothelium after two years of implantation. If these and
other long-term data show that Intacs are not safe and effective, our ability to
commercialize Intacs may be adversely affected. We cannot assure you that Intacs
will prove to be safe or effective over the long term in correcting vision. If
Intacs fail to perform as anticipated our revenue growth will be limited.
Complications associated with Intacs may affect KeraVision's ability to gain
market acceptance for Intacs or to obtain additional regulatory approvals.
Some patients who have received Intacs have experienced various
complications. These complications include infection, shallow placement,
temporary loss of correctable vision, anterior chamber perforation,
overcorrection, reduction in central corneal sensation, difficulty with night
vision, undercorrection, induced astigmatism, blurry vision, double vision,
halos, glare, corneal blood vessels and fluctuating distance vision. We cannot
assure you that these complications or side effects will not be serious or
lasting, will not impair or preclude acceptance of the product by patients or
ophthalmologists, will not preclude KeraVision from obtaining regulatory
approval for additional products or will not cause withdrawal of approval for
Intacs.
In addition, negative publicity surrounding complications associated with
other surgical vision correction procedures could negatively impact market
acceptance for our product.
Our ability to operate our business may be adversely affected if we are unable
to retain our key personnel or to hire additional key personnel.
Our success depends in large part on our ability to attract and retain key
management, technical, manufacturing, sales and marketing and other operating
personnel. We cannot assure you that KeraVision will be able to attract and
retain the qualified personnel or develop the expertise in these areas as needed
for our business. The loss of the services of one or more members of these
groups or the inability to hire additional personnel and develop expertise as
needed could limit our ability to successfully commercialize Intacs and
additional products. Such persons are in high demand and often receive competing
employment offers.
KeraVision is subject to the risk of product liability litigation, and product
liability insurance may be unavailable.
KeraVision faces a risk of exposure to product liability claims and product
recalls if the use of Intacs or any future product is alleged to have resulted
in serious adverse effects. We cannot assure you that the precautions we take
with respect to these risks will prevent KeraVision from incurring significant
liability. We also cannot assure you that our current product liability
insurance policies will cover any or all material liabilities or that the
coverage we have obtained will continue to be available at an acceptable cost,
if at all, before or after commercialization of any of KeraVision's products. A
product liability claim, product recall or other claims with respect to
uninsured liabilities or in excess of insured liabilities could have a material
adverse effect on KeraVision's business and financial condition.
Item 2. Properties
KeraVision's primary manufacturing, R&D and administrative facilities
occupy a total of approximately 53,000 square feet of space in two locations in
Fremont, California. The facilities are subject to leases which expire in 2004.
The current monthly rent is approximately $61,500. 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 2005. The current
monthly rent is approximately $4,000. 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
Not applicable.
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, 1999.
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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.
Calendar Year High Low
---------------------- --------- ---------
1999:
First quarter $18.500 $10.500
Second quarter 17.500 8.250
Third quarter 29.625 10.000
Fourth quarter 16.000 5.563
1998:
First quarter $8.250 $5.250
Second quarter 10.625 7.250
Third quarter 8.063 4.250
Fourth quarter 13.500 8.625
The closing stock price on March 21, 2000 was $6.313. The Company reported
367 stockholders of record and 19,100 beneficial holders of the Company's common
stock on March 21, 2000.
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
Year Ended December 31,
(in thousands, except per ------------------------------------------------
share data) 1999 1998 1997 1996 1995
----------------------------- -------- -------- -------- -------- --------
Consolidated Statement of
Operations Data
Net sales..................... $ 10,494 $ 835 $ 355 $ 137 $ --
Costs and expenses:
Cost of sales and
manufacturing expense....... 9,945 4,386 3,701 319 --
Research and development..... 8,844 11,356 10,774 10,888 6,527
Selling, general and
administrative.............. 19,491 9,693 6,405 3,930 1,725
-------- -------- -------- -------- -------
Total costs and expenses...... 38,280 25,435 20,880 15,137 8,252
-------- -------- -------- -------- -------
Operating loss................ (27,786) (24,600) (20,525) (15,000) (8,252)
Interest income and
other, net.................. 1,377 683 1,303 2,146 1,203
Interest expense.............. (935) (120) (174) (25) (57)
-------- -------- -------- -------- -------
Net loss...................... ($27,344) ($24,037) ($19,396) ($12,879) ($7,106)
======== ======== ======== ======== =======
Net loss applicable to
common stockholders......... ($28,847) ($27,414) ($19,396) ($12,879) ($7,106)
======== ======== ======== ======== =======
Basic and diluted net loss
per share applicable to
common stockholders......... ($1.88) ($2.16) ($1.55) ($1.04) ($1.05)
Shares used in calculation
of net loss per share....... 15,343 12,686 12,528 12,342 6,757
--------- ---------------------------------------
(in thousands) 1999 1998 1997 1996 1995
----------------------------- --------- --------- --------- --------- ---------
Consolidated Balance Sheet Data
Cash, cash equivalents
and available-for-sale
investments................. $49,770 $7,728 $14,113 $32,065 $44,703
Working capital............... 42,769 4,915 11,820 30,435 43,205
Total assets.................. 57,139 11,981 17,345 35,485 45,919
Capital lease
obligations, noncurrent..... 1,030 821 850 793 114
Redeemable convertible
preferred stock............. 16,964 17,489 -- -- --
Accumulated deficit........... (118,939) (90,092) (62,678) (43,282) (30,403)
Total stockholders' equity
(net capital deficiency).... 28,013 (10,650) 12,937 31,765 44,035
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K.
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 we have been selling our product since 1996, we expect to
continue to incur substantial losses until sufficient revenues can be generated
to offset expenses. Given the uncertainties in developing a market for a new
product, we may not be able to achieve or sustain significant revenue growth in
the foreseeable future. Furthermore, we expect our overall expenses to increase
as our sales and marketing activities grow.
On April 9, 1999, KeraVision obtained FDA approval to distribute and sell
Intacs in the United States for the treatment of mild myopia in the range of
-1.0 to -3.0 diopters in patients who are 21 years of age or older, who have a
stable refraction and who have up to +1.0 diopter of astigmatism. We are
currently conducting a Phase III clinical trial to expand our approved range of
indication for myopia to include -0.75 to - 1.0 diopter and -3.1 to -4.5
diopters. In May 1998, we began limited commercial sales in Canada following
regulatory approval to sell Intacs to treat myopia in the range of -1.0 to -5.0
diopters. In late 1996, we were granted the right to affix the CE mark on Intacs
for myopia which allows KeraVision to sell products to treat myopia in the range
of -1.0 to -5.0 diopters in European Union countries.
The research, manufacture, sale and distribution of medical devices such as
Intacs are subject to numerous regulations imposed by governmental authorities,
principally the FDA and comparable 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
Union 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 our Intacs technology will prove to be safe
or effective over the long term in correcting vision, that our Intacs technology
will perform in the manner we anticipate or that Intacs or any other product
developed by us will be commercially successful.
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Years ended December 31, 1999 and 1998
Net sales for the year ended December 31, 1999, totaled $10.5 million, an
increase of $9.7 million from the $0.8 million for the year ended December 31,
1998. The increase in net sales primarily reflected the initial shipments of
instrument kits to surgeons subsequent to their completion of training in the
Intacs placement procedure. Each kit includes two sets of proprietary
instruments to perform the Intacs placement procedure and a supply of 18 Intacs.
The predominant portion of the revenues received from the sale of the kits was
attributable to the proprietary instruments. Significant growth and maintenance
of our net sales will be dependent upon our ability to sell Intacs in increasing
volumes. In 1999, approximately 91% of net sales were to U.S. customers and the
balance of the sales were in Canada and Europe. In 1998, approximately 51% of
the Company's sales were generated from the limited product launch into the
Canadian market, and the balance of the sales were in Europe.
Cost of sales and manufacturing expenses totaled $9.9 million in 1999 as
compared to $4.4 million in 1998. 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 year ended December 31, 1999 were $8.8 million compared to
$11.4 million incurred in the prior year. The decrease in research and
development expenses from 1998 to 1999 was primarily due to reduced clinical
trial costs as a result of the completion of various studies, in addition to
reduced expenses related to patents.
Selling, general and administrative expenses in 1999 were $19.5 million, an
increase of $9.8 million from 1998. The increase is due primarily to increased
staffing and marketing efforts related to market development in the U.S. and
Canada. The Company expects sales and marketing expenses to continue to increase
as further investments in marketing our product in the United States are
incurred.
The Company recorded $1.4 million in interest income for the year ended
December 31, 1999, as compared to $0.7 million for the previous year. Interest
income increased due to the short-term investment of proceeds from the secondary
offering completed on August 17, 1999. Interest expense increased from $0.1
million in 1998 to $0.9 million in 1999. The increase was primarily due to the
increase in average short- term debt balances. The net loss per share applicable
to common stockholders was $1.88 as compared to $2.16 for the same period from
the previous year. In 1999, this per share calculation includes the effect of
dividends of $1.5 million to the holders of series B redeemable convertible
preferred stock. In 1998 the per share calculation includes the effect of a
deemed dividend of $2.5 million, in addition to the effect of a dividend of
$846,000 to preferred stockholders as part of the series B redeemable
convertible preferred stock financing. The Company believes that its net loss
could significantly increase in future periods, dependent on product acceptance
in the market place.
Years ended December 31, 1998 and 1997
Net sales for 1998 increased to $0.8 million from $0.4 million in 1997,
primarily as a result of increased unit shipments associated with the Company's
limited product launch into the Canadian market.
Cost of sales and manufacturing expenses exceeded revenues reflecting
currently low production volumes and 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 both periods consisted primarily of clinical trial
expenses, product development expenses and patent expenses.
Selling, general and administrative expenses in 1998 were $9.7 million, an
increase of $3.3 million from 1997. The increase in spending reflects increased
staffing and associated expenses, in addition to increased marketing efforts
related to our limited launch in Canada and in anticipation of our U.S. launch
following FDA regulatory approval.
The Company recorded $0.7 million of interest income for the year ended
December 31, 1998, as compared to $1.3 million for the previous year. Interest
income decreased due to lower average cash and investment balances from period
to period. The net loss per share applicable to common stockholders was $2.16.
This per share calculation includes the effect of a deemed dividend of $2.5
million, in addition to the effect of a dividend of $846,000 to preferred
stockholders as part of the series B redeemable convertible preferred stock
financing.
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<PAGE>
Tax Matters
Due to the Company's loss position, there was no provision for income tax
for the years ended December 31, 1999, 1998 and 1997.
As of December 31, 1999, the Company had federal, state and French net
operating loss carryforwards of approximately $91.5 million, $28.4 million and
$4.6 million, respectively. The Company also had federal and state research and
experimentation credit carryforwards of approximately $1.5 million and $1.2
million, respectively. The net operating loss and credit carryforwards will
expire at various dates beginning in 2000 through 2019, 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, 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 public offerings, private sales of preferred stock, interest income,
equipment and debt financing arrangements and the Transcend acquisition
described below. The Company's operating activities used cash of $26.3 million
in 1999 and $23.0 million in 1998. The use of cash for operating activities was
primarily affected by an increase in net loss reflecting increased selling,
general and administrative and manufacturing expenses and increases in inventory
and accounts receivable, partially offset by increases in accounts payable and
other liabilities. The increases in inventory, accounts receivable, accounts
payable and other liabilities year-over-year reflect increased business
activities related to the U.S. launch and significant increases in sales volume
in 1999 as compared to 1998. Cash and investments were $49.8 million at December
31, 1999. Capital expenditures for 1999 and 1998 were $1.6 million and $0.7
million, respectively.
In August 1999, KeraVision completed a secondary public offering of its
common stock. The Company issued 4,600,000 shares at $13.00 per share, from
which it realized net proceeds (after under-writing discounts and expenses) of
approximately $55.6 million.
In May 1999, KeraVision completed the acquisition of Transcend
Therapeutics, Inc. (Nasdaq: TSND) and its net cash balance of $8.5 million.
Under the agreement, Transcend 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, principally cash.
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 year until maturity 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 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
portion of the proceeds representing 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.
The Company believes it has the financial resources to meet business
requirements through at least December 31, 2000. The Company's future cash
requirements, however, 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. We cannot
assure you that we will be able to obtain additional sources for funding our
business operations when necessary, and we cannot assure you that other sources
of funding, if any, will be available on terms favorable or acceptable to
KeraVision. If we fail to obtain sufficient funds to continue our operations, we
may need to delay, scale back or eliminate some or all of our sales and
marketing efforts, research and product development programs, clinical studies
or regulatory activities or license third parties to commercialize products or
technologies that we would otherwise seek to develop.
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Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission-critical
information technology and non- information technology systems and believes
those systems successfully responded to the Year 2000 date change. The Company
spent approximately $30,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its
mission-critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
Euro Conversion
On January 1, 1999, several member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and adopted the Euro as their new common legal currency. As of that date, the
Euro traded on currency exchanges and the legacy currencies remain legal tender
in the participating countries for a transition period between January 1, 1999
and January 1, 2002. During the transition period, noncash payments can be made
in the Euro, and parties can elect to pay for goods and services and transact
business using either the Euro or legacy currency. Between January 1, 1999 and
January 1, 2002 the participating countries will introduce Euro notes and coins
and withdraw all legacy currencies so that they will no longer be available. The
Company does not expect that the transition to the Euro will materially affect
the Company's foreign sales or will result in any material increase in costs to
the Company.
Item 7A. Market Risk Disclosure
Interest Rate Risk
KeraVision is exposed to financial market risks from changes in interest
rates related to our investment portfolio, short-term debt, and capital lease
obligations. To mitigate these risks, we invest in debt instruments that meet
high credit quality standards and we further limit the amount of credit exposure
to any one issue, issuer, or type of instrument. KeraVision also limits the
maturity of debt investments to one year or less. KeraVision does not utilize
derivative financial instruments. As of December 31, 1999 and 1998, we held
$49.4 million and $7.1 million of interest rate sensitive investments in debt
securities, respectively. The interest rate exposure of the investments is
partially offset by $6.2 million and $1.3 million of short-term debt and capital
lease obligations outstanding as of December 31, 1999 and 1998, respectively. A
hypothetical 1% increase in interest rates would result in a decrease in the net
fair value of the interest rate sensitive securities of less than $80,000 as of
December 31, 1999 and less than $30,000 as of December 31, 1998. This estimate
is based on sensitivity analyses performed on our financial positions at
December 31, 1999 and 1998. Actual results may differ materially.
Item 8. Financial Statements and Supplementary Data
See Item 14(c) for an index to financial statements and supplementary
information.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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<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 17,
2000, 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.
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.
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<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) The following financial statements and Report of Ernst & Young LLP,
Independent Auditors, are filed as part of this report:
Report of Ernst & Young, Independent Auditors
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations Years Ended December 31, 1999, 1998 and
1997
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Net Capital Deficiency) Years
Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows Years Ended December 31, 1999, 1998, and
1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Schedules II - Valuation and Qualifying Accounts
All other 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.
(b) The Company filed the following reports on Form 8-K during the quarter ended
December 31, 1999:
Report Date: December 23, 1999
Item 5. Other Events
KeraVision Announces Preliminary Fourth Quarter Revenues and 1999 Procedure
Volume.
Report Date: October 29, 1999
Item 5. Other Events
KeraVision Reports Two-Year Clinical Results for Intacs - Correction of Myopia
is Stable.
Report Date: October 21, 1999
Item 5. Other Events
KeraVision Reports Record Revenues for 3rd Quarter.
(c) (3) The following exhibits are filed as part of this reports:
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Exhibit
Number Description
------- -------------------------------------------------------------------
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.(13)
3.1 Amended and Restated Certificate of Incorporation of Registrant.(1)
3.2 Amended and Restated Bylaws of Registrant. (incorporated by reference
to exhibit 3.2 to the Registrant's Form 10-K for the year ended
December 31, 1998)
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.(13)
4.3 Certificate of Designation of Rights, Preferences and Privileges of
Series B Convertible Preferred Stock of KeraVision, Inc.(14)
10.1 Form of Indemnification Agreements for directors and officers. (1)
10.2 1997 Employee Stock Option Plan.(1)(2)
10.3 1987 Stock Option
Plan and forms of agreements thereunder.(1)(2)
10.4 Form of Change of Control Agreement entered into between Registrant
and Chief Executive Officer in May 1997.(2)(8)
10.5 Form of Change of Control Agreement entered into between Registrant
and Executive Officers in May 1997.(2)(8)
10.6 1995 Stock Plan, as amended.(2)(9)
10.7 1995 Directors' Option Plan and form of subscription agreement.(4)(2)
10.8 401(k) Plan.(1)(2)
10.9 Fremont Office Lease dated August 20, 1993 and all amendments
thereto.(1)
10.10 Kilmer License Agreement, dated December 31, 1992.(1)
10.11 Manufacturing Agreement dated October 1, 1992.(1)(3)
10.12 Form of Warrant for Series D Preferred Stock between Registrant and
certain holders of Common Stock of Registrant.(1)
10.13 Promissory Notes, dated January 29, 1988, March 8, 1988, March 8,
1989, October 30, 1991, April 12, 1993 and November 7, 1993,
executed by Thomas Loarie in favor of Registrant and all amendments
thereto. (9)
10.14 Promissory Notes, dated September 17, 1990, October 30, 1991, October
30, 1991, and November 7, 1993, executed by Thomas Silvestrini in
favor of Registrant and all amendments thereto. (9)
10.15 Promissory Note, dated November 7, 1993, executed by Mark
Fischer-Colbrie in favor of Registrant and all amendments thereto.(10)
10.16 Promissory Notes, dated March 8, 1988, March 8, 1988, March 8, 1989,
October 30, 1991, and November 7, 1993, executed by Darlene
Crockett-Billig in favor of Registrant and all amendments thereto.(9)
10.17 Consulting Agreement dated January 19, 1994 between Registrant and
John R. Gilbert, and all amendments thereto.(1)
10.18 Information and Registration Rights Agreement between Registrant and
holders of the Preferred Stock of the Registrant, dated as of November
19, 1992.(1)
10.19 Consulting Agreement dated January 1, 1996 between Registrant and
John R. Gilbert.(4)
10.20 Employment Agreement dated January 1997 between Registrant and
Thomas M. Loarie.(2)(6)
10.21 Distribution Agreement dated as of October 31, 1996 by and between
Registrant and AM Peschke, a German corporation.(5)(6)
10.22 Promissory notes, dated April 1, 1998, executed by Thomas Loarie in
favor of Registrant.(11)
10.23 Promissory note, dated April 1, 1998, executed by Mark
Fischer-Colbrie in favor of Registrant.(11)
10.24 Promissory note, dated April 1, 1998, executed by Thomas
Silvestrini in favor of Registrant.(11)
10.25 Promissory notes, dated September 1, 1998 executed by Thomas Loarie
in favor of Registrant.(12)
10.26 Promissory notes, dated September 1, 1998 executed by Darlene
Crockett-Billig in favor of Registrant.(12)
10.27 Promissory notes, dated September 1, 1998 executed by Thomas
Silvestrini in favor of Registrant.(12)
10.28 Promissory notes, dated September 1, 1998 executed by Mark
Fischer-Colbrie in favor of Registrant.(12)
10.29 Master loan and security agreement dated March 25, 1999 between
Registrant in favor of Transamerica Business Credit Corporation.(13)
10.30 Agreement with A.M. Pappas & Associates dated January 20, 1998.
21 Subsidiaries of KeraVision, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See Signature Page).
27 Financial Data Schedule.
----------------
(1) Incorporated by reference to identically numbered exhibits filed in
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
Registrant's 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
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 exhibits 10.23 and 10.24 filed in Registrant's
Form 10-K for the year ended December 31, 1997.
(9) Incorporated by reference to identically numbered exhibits filed in
Registrant's Registration Statement on Form S-1 (File No. 33-92880), which
became effective on July 27, 1995, and Form 10-K for the year ended December 31,
1996.
(10) Incorporated by reference to identically numbered exhibits filed in
Registrant's Registration Statement on Form S-1 (File No. 33-92880), which
became effective on July 27, 1995, and Form 10-K for the year ended December 31,
1997.
(11) Incorporated by reference to Exhibits 10.25 through 10.27 filed in
Registrant's Form 10-Q for the quarterly period ended March 31, 1998.
(12) Incorporated by reference to Exhibits 10.28 through 10.31 filed in
Registrant's Form 10-Q for the quarterly period ended September 30, 1998.
(13) Incorporated by reference to identically numbered Exhibits filed in
Registrant's Form 10-K for the year ended December 31, 1998.
(14) Incorporated by reference to Exhibit 3.3 filed in Registrant's Form 10-K
for the year ended December 31, 1998.
24 of 40
<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 Fremont,
California on this 28th day of March 2000.
----------------
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)
25 of 40
<PAGE>
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.
Signature Title Date
--------------------------- -------------------------------- ---------------
/s/ Thomas Loarie Chairman of the Board of March 28, 2000
--------------------------- Directors and Chief
(Thomas M. Loarie) Executive Officer (Principal
Executive Officer)
/s/ Mark Fischer-Colbrie Vice President, Finance and March 28, 2000
--------------------------- Administration, Chief Financial
(Mark Fischer-Colbrie) Officer, and Assistant
Secretary (Principal Financial
and Accounting Officer)
/s/ Charles Crocker Director March 28, 2000
---------------------------
(Charles Crocker)
/s/ Lawrence Lehmkuhl Director March 28, 2000
---------------------------
(Lawrence Lehmkuhl)
/s/ Kshitij Mohan Director March 28, 2000
---------------------------
(Kshitij Mohan)
/s/ Arthur M. Pappas Director March 28, 2000
---------------------------
(Arthur M. Pappas)
/s/Peter L. Wilson Director March 28, 2000
---------------------------
(Peter L. Wilson)
26 of 40
<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, 1999 and 1998, 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, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated February 4, 2000,
the Company, as discussed in Note 1, has experienced a decrease in revenues and
an increase in operating expenses that has adversely affected the Company's
liquidity. Note 1 describes management's plans to address these issues.
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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
-----------------
Ernst & Young LLP
February 4, 2000, except for the third paragraph of Note 1, as to which the date
is October 10, 2000.
San Jose, California
27 of 40
<PAGE>
KeraVision, INC.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
December 31,
-----------------------
1999 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents....................... $43,251 $1,449
Available- for- sale investments................ 6,519 6,279
Accounts receivable............................. 567 365
Inventory....................................... 2,403 427
Prepaid expenses and other current assets....... 1,161 716
---------- ----------
Total current assets.............................. 53,901 9,236
---------- ----------
Property and equipment, at cost:
Manufacturing and laboratory equipment.......... 4,826 3,709
Office furniture and fixtures................... 638 597
Leasehold improvements.......................... 819 636
---------- ----------
6,283 4,942
Accumulated depreciation and amortization......... (3,679) (3,102)
---------- ----------
Net property and equipment...................... 2,604 1,840
Other assets...................................... 634 905
---------- ----------
Total assets...................................... $57,139 $11,981
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $2,282 $1,742
Accrued payroll and related expenses............ 1,172 581
Accrued clinical trial costs.................... 1,674 1,282
Other accrued liabilities....................... 792 204
Current portion of capital lease obligations.... 685 512
Short-term debt................................. 4,527 --
---------- ----------
Total current liabilities......................... 11,132 4,321
Capital lease obligations......................... 1,030 821
Redeemable convertible Series B Preferred Stock,
no par value:
Authorized shares--662,500;
Issued and outstanding shares--552,808 and 562,500 at
December 31, 1999 and 1998, respectively, aggregate
liquidation preference of $20,166 in 1999....... 16,964 17,489
Commitments
Stockholders' equity (net capital deficiency):
Preferred stock, par value $.001, 2,000,000
shares authorized, none issued or outstanding.. -- --
Common stock, par value $.001, 30,000,000
shares authorized, 18,769,482 and 12,776,920
shares issued and outstanding in 1999 and
1998, respectively............................. 19 13
Additional paid-in capital...................... 147,548 80,162
Deferred compensation........................... -- (30)
Accumulated other comprehensive income.......... 206 109
Accumulated deficit............................. (118,939) (90,092)
Notes receivable from stockholders.............. (821) (812)
---------- ----------
Total stockholders' equity
(net capital deficiency)........................ 28,013 (10,650)
---------- ----------
Total liabilities and stockholders' equity
(net capital deficiency)........................ $57,139 $11,981
========== ==========
See accompanying notes.
28 of 40
<PAGE>
KeraVision, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Net sales........................ $10,494 $835 $355
Costs and expenses:
Cost of sales and
manufacturing expenses........ 9,945 4,386 3,701
Research and development....... 8,844 11,356 10,774
Selling, general and
administrative................ 19,491 9,693 6,405
--------- --------- ---------
Total costs and expenses......... 38,280 25,435 20,880
--------- --------- ---------
Operating loss................... (27,786) (24,600) (20,525)
Interest income and other, net... 1,377 683 1,303
Interest expense................. (935) (120) (174)
--------- --------- ---------
Net loss......................... ($27,344) ($24,037) ($19,396)
--------- --------- ---------
Preferred stock dividend
requirements:
Redeemable convertible
series B..................... (1,503) (846) --
Deemed dividend (Note 5)....... -- (2,531) --
--------- --------- ---------
Net loss applicable to common
stockholders................... ($28,847) ($27,414) ($19,396)
========= ========= =========
Basic and diluted net loss
per share applicable to
common stockholders.............. ($1.88) ($2.16) ($1.55)
Shares used in calculation
of net loss per share........... 15,343 12,686 12,528
See accompanying notes.
29 of 40
<PAGE>
Consolidated Statements of Redeemable Convertible
Preferred stock and stockholders' Equity 9Net Capital def
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Accumu-
Redeemable lated
Convertible Addi- Other
Preferred Stock Common Stock tional Deferred Compre-
------------------- ----------------------- Paid-in Compen- hensive
Shares Amount Shares Amount Capital sation Income
--------- --------- ----------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ............. -- $ -- 12,444,802 $ 12 $ 76,114 ($ 328) $ 17
Net loss.................................. -- -- -- -- -- -- --
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on
investments............................ -- -- -- -- -- -- 26
Foreign currency translation
adjustments............................ -- -- -- -- -- -- 1
Comprehensive income (loss) ............
Issuance of common stock upon exercise
of options............................. -- -- 148,844 1 426 -- --
Amortization of deferred compensation.... -- -- -- -- -- 149 --
Accrued interest on notes receivable
from stockholders ..................... -- -- -- -- -- -- --
---------- ---------- -------- --------- --------- ------ -----
Balance at December 31, 1997 ............. -- -- 12,593,646 13 76,540 (179) 44
Net loss ................................. -- -- -- -- -- -- --
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on
investments ........................... -- -- -- -- -- -- (42)
Foreign currency translation
adjustments ........................... -- -- -- -- -- -- 107
Comprehensive income (loss) ............
Issuance of common stock upon exercise
of options ............................ -- -- 183,274 -- 598 -- --
Issuance of redeemable convertible
series B preferred stock, net of
issuance costs ........................ 562,500 14,112 -- -- 2,531 -- --
Accretion of dividends on preferred
stock ................................. -- 150 -- -- -- -- --
Dividends on preferred stock to be
distributed ........................... -- 696 -- -- -- -- --
Dividends on series B preferred stock
issuance related to deemed deividend... -- 2,531 -- -- -- -- --
Amortization of deferred compensation.... -- -- -- -- -- 149 --
Forgiveness of notes receivable from
stockholders, net of accrued interes... -- -- -- -- -- -- --
Accrued interest on notes receivable
from stockholders ..................... -- -- -- -- -- -- --
Compensation expense related to
employee stock activity ............... -- -- -- -- 493 -- --
---------- ---------- ---------- --------- --------- ------ -----
Balance at December 31, 1998 ............. 562,500 17,489 12,776,920 13 80,162 (30) 109
Net loss ................................. -- -- -- -- -- -- --
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on
investments ........................... -- -- -- -- -- -- 99
Foreign currency translation
adjustments ........................... -- -- -- -- -- -- (2)
Comprehensive income (loss) ............
Issuance of common stock under
employee stock plans .................. -- -- 148,972 -- 951 -- --
Conversion of redeemable convertible
series B preferred stock .............. (66,273) (2,028) 265,092 -- 2,028 -- --
Accretion of dividends on preferred
stock ................................. -- 258 -- -- -- -- --
Dividends on preferred stock ............ 56,581 1,245 -- -- -- -- --
Issuance of common stock for
acquisition of Transcend .............. -- -- 978,498 1 7,831 -- --
Issuance of common stock in
secondary offering .................... -- -- 4,600,000 5 55,610 -- --
Issuance of warrants related
to short-term debt .................... -- -- -- -- 661 -- --
Compensation expense related to
employee stock activitiy .............. -- -- -- -- 305 -- --
Amortization of deferred compensation.... -- -- -- -- -- 30 --
Repayment of notes receivable from
stockholders .......................... -- -- -- -- -- -- --
Accrued interest on notes receivable
from stockholders ..................... -- -- -- -- -- -- --
---------- ---------- ---------- --------- -------- ------ -----
Balance at December 31, 1999 ............. 552,808 $ 16,964 18,769,482 $ 19 $147,548 $ 0 $ 206
========== ========== ========== ========= ======== ====== =====
<CAPTION>
Total
Notes Stock-
Receiv- holders'
able Equity
(Accumu- from (Net
lated Stock- Capital
Deficit) holders Deficiency)
----------- --------- -----------
<S>....................................... <C> <C> <C>
Balance at December 31, 1996 ............. ($ 43,282) ($ 768) $ 31,765
Net loss ................................. (19,396) -- (19,396)
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on
investments ........................... -- -- 26
Foreign currency translation
adjustments ........................... -- -- 1
Comprehensive income (loss) ............. ($ 19,369)
Issuance of common stock upon exercise
of options ............................ -- -- 427
Amortization of deferred compensation.... -- -- 149
Accrued interest on notes receivable
from stockholders ..................... -- (35) (35)
---------- ---------- ----------
Balance at December 31, 1997 ............. (62,678) (803) 12,937
Net loss ................................. (24,037) -- (24,037)
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on
investments ........................... -- -- (42)
Foreign currency translation
adjustments ........................... -- -- 107
Comprehensive income (loss) ............. ($ 23,972)
Issuance of common stock upon exercise
of options ............................ -- -- 598
Issuance of redeemable convertible
series B preferred stock, net of
issuance costs ........................ -- -- 2,531
Accretion of dividends on preferred
stock ................................. (150) -- (150)
Dividends on preferred stock to be
distributed ........................... (696) -- (696)
Dividends on series B preferred stock
issuance related to deemed deividend... (2,531) -- (2,531)
Amortization of deferred compensation.... -- -- 149
Forgiveness of notes receivable from
stockholders, net of accrued interes... -- 46 46
Accrued interest on notes receivable
from stockholders ..................... -- (55) (55)
Compensation expense related to
employee stock activity ............... -- -- 493
---------- ---------- ----------
Balance at December 31, 1998 ............. (90,092) (812) (10,650)
Net loss ................................. (27,344) -- (27,344)
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on
investments ........................... -- -- 99
Foreign currency translation
adjustments ........................... -- -- (2)
Comprehensive income (loss) ............. ($ 27,247)
Issuance of common stock under
employee stock plans .................. -- -- 951
Conversion of redeemable convertible
series B preferred stock .............. -- -- 2,028
Accretion of dividends on preferred
stock ................................. (258) -- (258)
Dividends on preferred stock ............ (1,245) -- (1,245)
Issuance of common stock for
acquisition of Transcend .............. -- -- 7,832
Issuance of common stock in
secondary offering .................... -- -- 55,615
Issuance of warrants related
to short-term debt .................... -- -- 661
Compensation expense related to
employee stock activitiy .............. -- -- 305
Amortization of deferred compensation.... -- -- 30
Repayment of notes receivable from
stockholders .......................... -- 35 35
Accrued interest on notes receivable
from stockholders ..................... -- (44) (44)
---------- ---------- ----------
Balance at December 31, 1999 ............. ($ 118,939) ($ 821) $ 28,013
========== ========== ==========
</TABLE>
30 of 40
<PAGE>
KeraVision, INC.
Consolidated Statements Of Cash Flows
Decrease in cash and cash equivalents
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... ($27,344) ($24,037) ($19,396)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation.................................. 797 704 652
Amortization of debt discount................. 188 -- --
Issuance of stockholders' notes............... -- (776) --
Payment on stockholders' notes................ 35 -- --
Interest receivable on stockholders' notes.... (44) (76) (35)
Expenses related to employee stock activity,
including amortization of deferred
compensation................................. 335 688 149
Changes in operating assets and liabilities:
Accounts receivable........................ (202) (239) 11
Inventory.................................. (1,976) (152) 225
Prepaid expenses and other current assets.. (445) 276 (204)
Other assets............................... 271 (10) 49
Accounts payable........................... 540 653 116
Other accrued liabilities.................. 1,571 (47) 504
-------- ------- -------
Net cash used in operating activities........ (26,274) (23,016) (17,929)
-------- ------- -------
Cash flows from investing activities:
Purchases of available-for-sale investments.... (11,457) (22,214) (20,620)
Sales of available-for-sale investments........ 5,815 25,210 11,408
Maturities of available-for-sale investments... 5,499 2,201 21,474
Capital expenditures........................... (1,561) (675) (545)
-------- ------- -------
Net cash provided by (used in)
investing activities...................... (1,704) 4,522 11,717
-------- ------- -------
Cash flows from financing activities:
Principal payments under capital
lease obligations............................. (564) (480) (427)
Proceeds from sales-leaseback of
capital equipment............................. 946 608 495
Proceeds from issuance of short-term debt
and warrants.................................. 5,000 -- --
Proceeds from common stock offering, net....... 55,615 -- --
Proceeds from acquisition of Transcend, net.... 7,832 -- --
Proceeds from issuance of equity securities
under employee stock plans..................... 951 598 427
Proceeds from issuance of redeemable
convertible series B preferred stock,
net of issuance costs......................... -- 16,643 --
-------- ------- -------
Net cash provided by financing activities.... 69,780 17,369 495
-------- ------- -------
Net increase (decrease) in cash and
cash equivalents............................... 41,802 (1,125) (5,717)
Cash and cash equivalents at the
beginning of the year.......................... 1,449 2,574 8,291
-------- ------- -------
Cash and cash equivalents at the end
of the year.................................... $43,251 $ 1,449 $ 2,574
======== ======= =======
Supplemental disclosure of non-cash
financing activities:
Accrued and deemed dividends related
to preferred stock........................... $ 1,245 $ 3,227 $ --
Accretion related to preferred stock.......... $ 258 $ 150 $ --
Conversion of preferred stock to common....... $ 2,028 $ -- $ --
Supplemental disclosures of cash flow information:
Cash paid for interest........................ $ 898 $ 123 $ 140
======== ======= =======
</TABLE>
See accompanying notes.
31 of 40
<PAGE>
KeraVision, INC.
Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
Organization and Basis of Presentation
KeraVision, Inc. ("KeraVision" or the "Company") was incorporated on
November 6, 1986 in the State of California and reincorporated in the State of
Delaware on July 25, 1995.
The Company was founded to develop and commercialize proprietary medical
products for the treatment of common vision problems. KeraVision provides
Intacs(TM) corneal ring segments, and the instrument sets needed to perform the
Intacs procedure for treatment of mild myopia (nearsightedness). The Company's
primary target market is the United States. The Company has the exclusive
license 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.
KeraVision will be required to commit substantial resources to
commercialize INTACS inserts. In addition, KeraVision will be required to commit
additional resources to conduct the research and development, clinical studies
and regularory activities necessary to bring additional products to markets.
During 2000, the Company has experienced a decrease in revenues and an increase
in operating expenses that has adversely affected the Company's liquidity. The
Company will be required to seek additional sources of funding to finance its
business operations. Management currently anticipates securing financing under
an equity line of credit during 2000, and will continue to seek additional debt
or equity financing. If the Company fails to obtain sufficient funds to continue
operations, management may need to delay, scale back or eliminate some or all of
the sales and marketing efforts, research and product development programs,
clinical studies or regulatory activities or license third parties to
commercialize products or technologies that management would otherwise seek to
develop. These actions would adversely affect KeraVision's business and its
financial condition and results of operations.
Certain prior year amounts in the consolidated financial statements and the
notes thereto have been reclassified to conform to the 1999 presentation.
Comprehensive Income
The following table summarizes the components of accumulated other
comprehensive income, (in thousands):
December 31,
1999 1998 1997
--------------------------------
Foreign currency translation adjustment $105 $107 $ --
Unrealized gain on available-for-sale
securities 101 2 44
--------------------------------
Accumulated other comprehensive income $206 $109 $ 44
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. Intercompany transactions and balances have
been eliminated in consolidation.
32 of 40
<PAGE>
Segment Information
The Company operates in one business segment, which is the development,
production and marketing of medical products for the treatment of common vision
problems. The Chief Executive Officer has been identified as the Chief Operating
Decision Maker (CODM) because he has final authority over resource allocation
decisions and performance assessment.
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 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 for
indications of impariment. If indicators of impairment are identified,
reconverability is assessed based upon an undiscounted cash flow analysis.
Impairments, if any, are recognized in operating results in the period in which
a permanent diminuation in value is determined, as measured by a discounted cash
flow analysis.
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 and 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, 1999 and 1998, 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.
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, 1999 and 1998, 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 accumulated other comprehensive income. 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 transfer of title,
which is generally 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. In 1999, approximately 91% of the
Company's sales were generated in the U.S. and the balance of the sales were to
customers in Canada and Europe. In 1998, approximately 51% of the Company's
sales were generated from product sales into the Canadian market, and the
balance of the sales were in Europe. Product sales in 1997 were composed
principally of sales to the European market through the Company's French sales
office and German Distributor.
Inventories
Inventories represent material on-hand, valued at the lower of cost or
market on a first-in-first-out basis. The
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Company's inventories were composed of the following:
(in thousands) 1999 1998
---------------------------------------------------------------
Raw materials.............. $ 1,168 $ 182
Finished goods............. 1,235 245
------------------------
Total.................... $ 2,403 $ 427
========================
Net Loss Per Share
Due to the Company's net loss in all periods presented, net loss per share
includes only weighted average shares outstanding and excludes all outstanding
stock options and warrants as the effect of including them would be
anti-dilutive in all periods presented.
Advertising Expenses
The cost of advertising is recorded as an expense when incurred.
Advertising costs for the years ended December 31, 1999 and 1998 were $4.0
million and $1.7 million. Advertising expenses for the year ended December 31,
1997 were immaterial.
Accounting for Employee Stock Options
The Company accounts for stock-based compensation issued to employees and
directors, including outside directors, using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB Opinion No. 25). 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 8, 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 8). The Company
periodically remeasures options granted to non-employees during the vesting
period in accordance with EITF 96-18.
Employee Savings and Retirement Plan
The Company adopted a 401(k) savings and retirement plan in 1995. The plan
covers all US employees who are 21 years of age or older complete 520 hours of
service during any consecutive twelve-month period. Under the plan, the Company
my elect to make a matching contribution or an additional contribution to the
Plan. To date there have been no employer contributions to the plan.
2. Investments
At December 31, 1999, the Company's investments were composed of the
following (in thousands):
Gross Estimated
Unrealized Fair
Cost Gains Value
-------- -------- --------
Money market instrument........................ $ 4,128 $ -- $ 4,128
Certificate of deposit......................... 170 -- 170
Commercial paper............................... 17,568 101 17,669
Short-term notes............................... 5,042 -- 5,042
Auction rate preferred......................... 2,325 -- 2,325
Corporate debt securities...................... 20,181 -- 20,181
-------- -------- --------
Available-for-sale investment.................. 49,414 101 49,515
Included in cash & cash equivalents............ 42,996 -- 42,996
Included in available for sale investments..... $ 6,418 $ 101 $ 6,519
======== ======== ========
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At December 31, 1998, the Company's investments were composed of the following:
Gross Estimated
Unrealized Fair
Cost Gains Value
------- --------- ---------
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
======= ========= =========
During 1999, 1998 and 1997 there were no gross realized gains or losses.
3. Acquisition of Transcend Therapeutics, Inc.
In May 1999, KeraVision completed the acquisition of Transcend
Therapeutics, Inc. (Nasdaq: TSND) and its net cash balance of $8.5 million. This
transaction was accounted for as an acquisition of assets, primarily cash net of
certain liabilities. Under the agreement, Transcend 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, which were recorded at the net proceeds
acquired of $7.8 million.
4. Capital Lease Obligations
The Company leases certain office and manufacturing equipment under
capitalized leases which expire in 2003. The total future minimum lease payments
under capital leases as of December 31, 1999 are as follows (in thousands):
Years ended December 31:
2000............................. $ 875
2001............................. 546
2002............................. 462
2003............................. 217
------
Total minimum lease payments............... 2,100
Amounts representing interest.............. (385)
------
Present value of minimum lease payments.... 1,715
Less current portion....................... (685)
------
$1,030
======
The cost of assets under capital leases at December 31, 1999 and 1998 were
$2,754,000 and $2,552,000 with related accumulated amortization amounting to
$1,324,000 and $1,293,000, respectively.
5. Commitments
Leases
The Company rents office facilities under operating lease agreements which
expire at various dates through 2004. The facility lease agreements 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, 1999 are as follows (in thousands):
2000............................. $ 776
2001............................. 771
2002............................. 800
2003............................. 831
2004............................. 498
--------
Total minimum lease payments............... $3,676
========
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Rent expense was approximately $592,000, $444,000 and $414,000 for the year
ended December 31, 1999, 1998 and 1997, respectively.
6. Short-Term Debt
In March 1999, the Company entered into a senior term loan agreement
providing for borrowing 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. The loan bears interest at 12.6% per
year and matures 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. The fair value of the senior term loan agreement is not readily
determinable based upon the lack of comparable current market rates. At December
31, 1999, the annual debt payments were as follows (in thousands):
2000............................. $ 632
2001............................. 5,421
-------
Total debt payments.............. 6,053
Amounts representing interest.... (1,526)
-------
$ 4,527
=======
The entire balance of the loan is classified as current on the balance
sheet as a result of certain acceleration rights held by the lender.
Additionally, certain covenants set forth in the loan agreement prohibit the
Company's ability to pay cash dividends. 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. KeraVision recorded the portion of the proceeds
representing the fair value of the warrants of $661,000 as additional interest
expense to be amortized over the term of the related debt. As of December 31,
1999, all of the warrants were still outstanding.
7. Redeemable Convertible Preferred Stock
On June 12, 1998, the Company issued 562,500 shares of 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. The Series B
Shares are convertible at the Company's option after two years if the market
value 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, 1999 were approximately
$1,245,000. For the year ended December 31, 1999, preferred dividends of
$1,245,000 and accretion of $258,000 are added to the net loss to arrive at a
net loss applicable to common stockholders. For the year ended December 31,
1998, preferred dividends of $696,000, accretion of $150,000 and the deemed
dividends, representing the difference at the date of issuance between the
market value of the Company's common stock of $9.125 at June 12, 1998 and the
conversion price of the Company's series B convertible preferred stock of $2.5
million are added to the net loss to arrive at net loss applicable to common
stockholders. The difference between the carrying value of the preferred stock
and the aggregate redemption value is being accreted as preferred stock
dividends over the five year redemption period.
Upon any liquidation, dissolution or winding up of the 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.
8. Stockholders' Equity
Stock Offerings
In August, 1999, the Company completed a secondary public offering of its
common stock, issuing 4,600,000 shares at
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$13.00 per share, from which it realized net proceeds (after under writing
discounts and expenses) of approximately $55.6 million.
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 1,540,000
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 600,000 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 were not exercisable 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:
Outstanding Options
-----------------------------------
Weighted
Available Number Average Aggregate
for of Exercise Exercise
Grant Shares Price Price
--------- ---------- -------- -----------
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
Authorized...................... 450,000 -- -- --
Granted......................... (550,250) 550,250 15.47 8,512,282
Canceled........................ 81,891 (86,861) 8.04 (698,683)
Exercised....................... -- (104,259) 6.19 (644,920)
-------- ---------- -----------
Balance at December 31, 1999..... 572,824 1,840,706 $9.37 $17,249,167
======== ========== ========= ===========
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, 1999 and 1998, approximately 639,286 and 284,926,
respectively, of the outstanding options were exercisable.
The following table summarizes information about options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
----------------------------------- ------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/99 Life Price at 12/31/99 Price
------------------ ------------ ----------- ---------- ------------ ----------
$3.750 - $5.938 750,190 7.61 5.36 338,575 5.45
6.125 - 10.060 477,317 6.78 7.85 179,231 7.99
11.000 - 18.125 505,199 8.99 14.04 114,651 13.02
22.125 - 22.125 108,000 9.58 22.13 6,829 22.13
- ------------ ------------
$3.750 - 24.125 1,840,706 7.89 $9.37 639,286 $7.70
============ ============
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<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 1999, 1998 and 1997 with exercise prices equal to
the fair value of the Company's common stock on the date of grant. Had
compensation cost for the Company's stock option plans and employee stock
purchase plan described below been determined based on the fair value at the
grant date for awards in 1999, 1998 and 1997 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:
1999 1998 1997
---------- ---------- ----------
Net loss applicable to common
stockholders - as reported
(in thousands)....................... ($28,847) ($27,414) ($19,396)
Net loss applicable to common
stockholders - pro forma
(in thousands)....................... ($32,220) ($28,947) ($21,414)
Basic and diluted net loss
per share - as reported............... ($1.88) ($2.16) ($1.55)
Basic and diluted net loss
per share - pro forma................. ($2.10) ($2.28) ($1.71)
FAS No. 123 was applicable only to options granted subsequent to December
31, 1994 and its pro forma effect was not fully reflected until 1998.
The weighted average fair value of options granted in 1999, 1998 and 1997
is $13.88, $2.87 and $6.31 respectively, estimated using the Black-Scholes
multiple option pricing model with the following weighted- average assumptions:
1999 1998 1997
---------- ---------- ----------
Expected volatility.................... 0.85 0.8669 0.8068
Risk-free interest rate................ 5.70% 5.02% 6.06%
Weighted-average expected life......... 4.98 4.60 4.53
Dividend yield......................... -- -- --
Deferred and Other Compensation
For certain options granted prior to December 31, 1995, the Company
recognized as deferred compensation the excess of the deemed value for financial
reporting purposes of the common stock issuable upon the exercise of such
options over the aggregate exercise price of such options. Deferred compensation
of $597,000 recorded in 1995 is being amortized ratably over the vesting period
of such options. In connection with the modification of certain employee stock
arrangements and the forgiveness of employee notes receivable, the Company
recorded compensation expense of $30,000 in 1999 and $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 44,713, 30,718 and 25,289 shares in 1999, 1998 and
1997, respectively. The weighted average fair value of the employee stock
purchase plan shares is $4.03, $2.78 and $2.90 for 1999, 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 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, 1999, 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, 1999:
Exercises under the 1987 Stock Option Plan................ 175,200
Purchases under the 1995 Employee Stock Purchase Plan..... 83,367
Exercises under the 1995 Stock Option Plan................ 1,507,017
Exercises under the 1995 Directors Option Plan............ 147,500
Exercises under the 1997 Stock Option Plan................ 583,813
Exercises of warrants..................................... 55,492
Conversion of Redeemable Convertible Series B
preferred stock......................................... 2,384,908
Conversion of undesignated preferred stock................ 2,000,000
---------
6,937,297
=========
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<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-thousandth 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.
9. Income Taxes
Due to the Company's loss position, there was no provision for income taxes
for the years ended December 31, 1999, 1998 and 1997. 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:
Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
Income tax benefit computed at
the federal statutory rate.......... $(9,297) ($6,595) ($4,379)
Operating losses not utilized......... 9,297 6,595 4,379
---------- ---------- ----------
Total income tax provision............ $ -- $ -- $ --
========== ========== ==========
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 (in thousands):
Year Ended December 31,
-----------------------
1999 1998
---------- ----------
(In Thousands)
Net operating loss carryforwards..... $35,617 $25,109
Capitalized research costs........... 3,562 7,556
Tax credit carryforwards............. 2,359 1,901
Other................................ 467 368
---------- ----------
Total deferred tax assets............ 42,005 34,934
Valuation allowance.................. (42,005) (34,934)
---------- ----------
Net deferred tax assets.............. $ -- $ --
========== ==========
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation allowance
in an amount equal to the net deferred tax as of December 31, 1999 and 1998 has
been established to reflect these uncertainties. The deferred tax asset
valuation allowance increased $7,071,000, $8,935,000 and $8,048,000 in 1999,
1998 and 1997, respectively.
As of December 31, 1999, the Company has federal, state and French net
operating loss carryforwards of approximately $91.5 million, $28.4 million and
$4.6 million, respectively, that will expire in fiscal years 2000 through 2019,
if not utilized. The Company also has federal and state research and
experimentation credit carryforwards of approximately $1.5 million and $1.2
million, respectively, that will expire in fiscal years 2002 through 2019, 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.
10. Related Party Transactions
At December 31, 1999 and 1998, the Company had outstanding notes receivable
from four of its officers, totaling $816,000 and $796,000, respectively. The
notes bear interest at rates from between 4.57 to 5.95% per year, compounded
semi-annually, and are repayable at various dates between July, 2000 and August,
2001. The notes are classified as other assets on the balance sheet.
SCHEDULE II
KeraVision, Inc.
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and Deductions At End
of Period Expense Write-offs of Period
<S> <C> <C> <C> <C>
Allowance for doubtfull accounts:
Year ended December 31, 1997....... $-- $-- $-- $--
=================================================
Year ended December 31, 1998....... $-- $-- $-- $--
=================================================
Year ended December 31, 1999....... $-- $522- $3 $519
=================================================
</TABLE>
--------------------------------------------------------------------------------
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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:
KERAVISION, INC.
a Delaware Corporation
By: /s/ THOMAS M. LOARIE
-------------------------------
Thomas M. Loarie,
Chief Executive Officer and
Chairman of the Board
October 13, 2000
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<PAGE>
KERAVISION. INC.
Index to Exhibits
Exhibit
Number Description
21 Subsidiaries of KeraVision, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (included on page 26)
27 Financial Data Schedule
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