<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 2000.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________________to_____________________
Commission file number 0-26208
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KeraVision, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 77-0328942
(State of Incorporation) (I.R.S. Employer
Identification No.)
48630 Milmont Drive
Fremont, CA 94538
(Address of principal executive offices)
(510) 353-3000
(Registrant's telephone number)
------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of November 3, 2000 there were 18,898,024 shares of Common Stock
outstanding.
<PAGE>
INDEX
Page
----
PART I. FINANCIAL INFORMATION (unaudited)
Item 1. Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999.............................................. 3
Condensed Consolidated Statements of Operations for the
three-month and nine-month periods ended September 30, 2000
and 1999........................................................... 4
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 2000 and 1999............... 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations.......................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities.............................................. 17
Item 6. Exhibits and Reports on Form 8-K................................... 17
SIGNATURES................................................................. 18
2
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KERAVISION, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(Unaudited)
September 30, December 31,
2000 1999*
----------- -----------
Assets
Current assets:
Cash and cash equivalents........................ $ 15,304 $ 43,251
Available-for-sale investments................... 4,175 6,519
Accounts receivable, net......................... 275 567
Inventory........................................ 2,537 2,403
Prepaid expenses and other current assets........ 617 1,161
--------- ---------
Total current assets............................... 22,908 53,901
Property and equipment, net........................ 2,613 2,604
Other assets....................................... 924 634
--------- ---------
Total assets....................................... $ 26,445 $ 57,139
========= =========
Liabilities and stockholders' equity (net capital deficiency)
Current liabilities:
Accounts payable................................. $ 1,061 $ 2,282
Accrued payroll and related expenses............. 828 1,172
Accrued clinical trial costs..................... 1,570 1,674
Other accrued liabilities........................ 542 792
Current portion of capital lease obligations..... 685 685
Short-term debt.................................. 4,721 4,527
--------- ---------
Total current liabilities.......................... 9,407 11,132
Capital lease obligations.......................... 467 1,030
Redeemable convertible series B preferred stock.... 18,108 16,964
Stockholders' equity (net capital deficiency):
Common stock..................................... 19 19
Additional paid-in capital....................... 148,249 147,548
Accumulated other comprehensive income........... 57 206
Accumulated deficit.............................. (149,024) (118,939)
Notes receivable from stockholders............... (838) (821)
--------- ---------
Total stockholders' equity
(net capital deficiency)........................... (1,537) 28,013
--------- ---------
Total liabilities and stockholders' equity
(net capital deficiency)........................... $ 26,445 $ 57,139
========= =========
See accompanying notes.
* Derived from audited financial statements.
3
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KERAVISION, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales.............................. $ 426 $ 4,188 $ 2,133 $ 8,569
Costs and expenses:
Cost of sales and manufacturing
expenses........................ 1,332 2,915 4,668 7,530
Research and development........ 1,698 2,293 6,308 6,494
Selling, general and
administrative.................. 6,317 4,258 20,848 12,429
------- ------- -------- --------
Total costs and expenses............ 9,347 9,466 31,824 26,453
------- ------- -------- --------
Operating loss...................... (8,921) (5,278) (29,691) (17,884)
Interest income and other, net...... 424 555 1,594 619
Interest expense.................... (295) (227) (844) (607)
------- ------- -------- --------
Net loss............................ (8,792) (4,950) (28,941) (17,872)
------- ------- -------- --------
Preferred stock dividend
requirements:
Redeemable convertible series B,
including accretion............... (389) (369) (1,144) (1,144)
------- ------- -------- --------
Net loss applicable to common
stockholders........................ $(9,181) $(5,319) $(30,085) $(19,016)
======= ======= ======== ========
Basic and diluted net loss per
share applicable to common
stockholders........................ $(0.49) $(0.32) $(1.60) $(1.34)
======= ======= ======== ========
Shares used in calculation of net
loss per share...................... 18,898 16,428 18,861 14,201
</TABLE>
See accompanying notes.
4
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KERAVISION, INC.
Condensed Consolidated Statements of Cash Flows
Increase(Decrease) in cash and cash equivalents
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(28,941) $(17,872)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................. 742 523
Loss from disposal of fixed assets....................... 72 --
Amortization of debt discount............................ 194 121
Interest receivable on stockholders' notes............... (25) --
Payments on stockholders' notes.......................... 8 36
Amortization of deferred compensation.................... -- 30
Changes in operating assets and liabilities:
Accounts receivable.................................... 292 (298)
Inventory.............................................. (134) (1,278)
Prepaid expenses and other current assets.............. 544 (28)
Other assets........................................... (290) 8
Accounts payable....................................... (1,221) (296)
Other accrued liabilities.............................. (698) 1,421
-------- --------
Net cash used in operating activities...................... (29,457) (17,633)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale investments................ (5,249) (6,523)
Sales of available-for-sale investments.................... 3,425 6,242
Maturities of available-for-sale investments............... 4,019 --
Capital expenditures....................................... (823) (1,060)
-------- --------
Net cash provided by/used in investing activities........ 1,372 (1,341)
-------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations......... (563) (357)
Proceeds from sales-leaseback of capital equipment......... -- 132
Proceeds from issuance of short-term debt and warrants..... -- 5,000
Proceeds from issuance of equity securities................ 701 64,421
-------- --------
Net cash provided by financing activities................ 138 69,196
-------- --------
Net increase(decrease) in cash and cash equivalents.......... (27,947) 50,222
Cash and cash equivalents at the beginning of the period..... 43,251 1,449
-------- --------
Cash and cash equivalents at the end of the period........... 15,304 $ 51,671
======= ========
Supplemental disclosure of non-cash investing and financing
activities:
Accrued dividends related to preferred stock................. $ 950 $ 1,009
======= ========
Accretion related to preferred stock......................... $ 194 $ 136
======= ========
</TABLE>
See accompanying notes.
5
<PAGE>
KERAVISION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed financial statements of KeraVision,
Inc. (the "Company" or "KeraVision"), have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X. The
balance sheet as of September 30, 2000, the statements of operations for the
three and nine-month periods ended September 30, 2000 and 1999 and cash flows
for the nine-month periods ended September 30, 2000 and 1999 are unaudited but
include all adjustments (consisting only of normal recurring adjustments) which
the Company considers necessary for a fair presentation of the financial
position at such date and the operating results and cash flows for those
periods. Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information normally included in financial statements and related
footnotes prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying financial statements should
be read in conjunction with the Company's annual financial statements and notes
thereto included in the Company's Annual Report on Form 10-K. The accompanying
condensed consolidated balance sheet at December 31, 1999 is derived from
audited financial statements at that date.
Results for three and nine-months ended September 30, 2000 and 1999 are not
necessarily indicative of results for any other interim period or for any year.
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 regulatory activities necessary to bring additional products to market.
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.
2. Net Loss Per Common Share
Net loss per common share is computed based on the weighted average number
of common shares outstanding and excludes potentially diluted. For the periods
ended September 30, 2000 and 1999 dividends and accretion related to the
redeemable preferred stock are added to the net loss to arrive at net loss
applicable to common stockholders. 602,654 shares of redeemable convertible
preferred stock, options and warrants to purchase 2,274,874 and 55,492 shares of
common stock were outstanding at September 30, 2000 but were not included in the
computation of diluted net loss per share as the Company incurred a net loss in
the periods presented and the effect of the securities would have been anti-
dilutive.
3. Inventory
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method. The Company's inventory was composed of the
following (in thousands):
September 30, December 31,
2000 1999
-------------- -------------
Raw materials......................... $ 260 $1,168
Finished goods........................ 2,277 1,235
------ ------
Total................................ 2,537 $2,403
====== ======
4. Available-for-sale investments
6
<PAGE>
The Company's available-for-sale investments at September 30, 2000 were
composed of the following (in thousands):
Gross Unrealized Estimated
Cost Gains/Loss Fair Value
------- ------------------ ------------
Money market Instruments................ $ 2,563 $-- $ 2,563
Certificates of deposit................. 175 -- 175
Auction rate preferred stock............ 4,000 -- 4,000
Corporate debt securities............... 10,799 -- 10,799
------- ------------------ ------------
Available-for-sale investments.......... 17,537 -- 17,537
Included in cash & cash equivalents..... 13,362 -- 13,362
------- ------------------ ------------
Included in available for sale
investments............................ $ 4,175 $-- $ 4,175
======= ================== ============
All available-for-sale investments mature within one year. Gross realized
gains and losses were not significant during the nine-month periods ended
September 30, 2000 and 1999.
At December 31, 1999, the Company's investments were composed of the
following (in thousands):
Gross Unrealized Estimated
Cost Gains Fair Value
------- ------------------ ------------
Money market Instruments................ $ 4,128 $-- $ 4,128
Certificates of deposit................. 170 -- 170
Commercial paper........................ 17,568 101 17,669
Short-term notes........................ 5,042 -- 5,042
Auction rate preferred stock............ 2,325 -- 2,325
Corporate debt securities............... 20,181 -- 20,181
------- ------------------ ------------
Available-for-sale investments.......... 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
======= ================== ============
5. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows (in
thousands):
Nine Months Ended
September 30,
-------------------
2000 1999
--------- ---------
Net loss............................................... $(28,941) $(17,872)
Change in unrealized gain/loss on available-for-sale
investment............................................ (101) 167
Foreign currency translation adjustment................ (48) 7
--------- ---------
Total comprehensive loss............................ $(29,090) $(17,698)
========= =========
Accumulated other comprehensive income presented in the accompanying
consolidated condensed balance sheets consists of the accumulated net unrealized
gain on available-for-sale investments and the cumulative foreign currency
translation adjustment.
6. Recent Accounting Interpretations
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues. We are required to
apply the guidance in SAB 101 to our financial statements no later than the
fourth quarter of 2000. The Company does not expect the adoption of SAB 101 to
have a material effect on its financial position or results of operations.
7
<PAGE>
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequences of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 does not have a material impact on the Company's financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
''Accounting for Derivative Instruments and Hedging Activities'' (FAS 133). The
Company is required to adopt FAS 133 for the year ending December 31, 2001. FAS
133 establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Because the Company currently holds no derivative financial
instruments and does not currently engage in hedging activities, adoption of FAS
133 is expected to have no material impact on our financial position or results
of operations.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Overview
Since our 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 or revenue
growth in the foreseeable future. Furthermore, we expect our overall expenses
could 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. KeraVision has also signed
distributor agreements in a number of other countries including Korea,
Singapore, Hong Kong, South Africa, and the Middle East to begin limited
training and market development in other 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.
Results of Operations
Three Months Ended September 30, 2000 and 1999
Net sales decreased 90 percent or $3.8 million to $426,000 for the third
quarter ended September 30, 2000 as compared to the $4.2 million in revenues for
the same quarter a year ago. As a result of the reduction in new surgeon
training, training-related surgeon kit sales were down from the third quarter of
1999. The change in revenue reflects a transition towards building on-going
sales of Intacs from procedures volume, the focus in the first half of 2000, and
away from initial sales of surgeon startup kits, which was the focus in 1999
following FDA approval in April 1999. Each kit includes two sets of proprietary
instruments to perform the Intacs placement procedure and a supply of 18 Intacs
corneal ring segments. The predominant portion of the revenues received from the
sale of the kits was attributable to the proprietary instruments. Significant
growth of our net sales will be dependent upon our ability to sell Intacs in
increasing volumes.
Cost of sales and manufacturing expenses totaled $1.3 million in the
three-month period ended September 30, 2000 as compared to $2.9 million in the
comparable prior year period. The decrease in cost of sales and manufacturing
expenses primarily reflected lower variable costs as a result of lower net
sales.
9
<PAGE>
Research and development expenses, which include clinical and regulatory
expenses, for the three-month period ended September 30, 2000 were $1.7 million,
a decrease of $600,000 from the three-month period ended September 30, 1999. The
decrease is primarily due to the reduction in research and development, clinical
trials, and a favorable change in estimate, in the third quarter of 2000, in
clinical trial costs.
Selling, general and administrative expenses of $6.3 million were incurred
in the three-month period ended September 30, 2000, an increase of $2.1 million
from the $4.3 million incurred in the comparable prior year period. The increase
is primarily due to increased staffing and marketing efforts related to market
development in the U.S. which included the development of a new website and
advertising. The Company expects sales and marketing expenses could continue to
increase as further investments in marketing our product in the United States
are incurred.
Interest income and other, net was $424,000 for the three-month period
ended September 30, 2000, as compared to $555,000 in the comparable prior year
period. Interest income decreased due to lower average cash balances
period-over-period. Interest expense remained relatively consistent with the
comparable prior year period, increasing $68,000 to $295,000 for the three-month
period ended September 30, 2000.
Nine months ended September 30, 2000 and 1999
Net sales for the nine-month period ended September 30, 2000 totaled $2.1
million, a decrease of $6.4 million from $8.6 million for the nine-month period
ended September 30, 1999. As part of the reduction in new surgeon training,
training-related surgeon kit sales were down from the from the nine-month period
ended September 30, 1999, which resulted in a reduction in revenues
period-over-period of $6.4 million.
Cost of sales and manufacturing expenses totaled $4.7 million in the 2000
period as compared to $7.5 million in the 1999 period. The decrease in cost of
sales and manufacturing expenses reflected primarily lower variable costs as a
result of lower net sales and change in sales mix.
Research and development expenses, which include clinical and regulatory
expenses, for the 2000 period were $6.3 million, which was relatively consistent
with the previous years nine-month period expense.
Selling, general and administrative expenses were $20.8 million in the 2000
period, which represented an increase of $8.4 million from the 1999 period,
primarily due to increased marketing efforts related to market development in
the U.S.
Interest income and other, net was $1,594,000 for the nine-month period
ended September 30, 2000, as compared to $619,000 in the comparable prior year
period. Interest income increased due to the short-term investment of proceeds
from the secondary public offering completed on August 17, 1999. Interest
expense increased $237,000 to $844,000 for the nine-month period ended
September 30, 2000. The increase was primarily due to the increase in average
short-term debt balances.
Liquidity and Capital Resources
In October 2000, KeraVision filed a registration statement with the U.S.
Securities and Exchange Commission for the sale of up to 3,760,706 shares of
common stock, paving the way for the company to complete a new financing
agreement. Among the options being considered is an equity line of credit that
would allow the company to draw funds on a periodic basis by selling shares over
time.
KeraVision has financed its operations since incorporation primarily
through its public offerings, private sales of preferred stock, interest income,
equipment financing arrangements and the May 1999 acquisition of Transcend
Therapeutics and its net cash balance of $8.5 million. Cash used in operating
activities for the first nine months of 2000 increased to $29.5 million from
$17.6 million in the comparable period of the prior year. The use of cash for
operating activities was primarily affected by an increase in net loss
reflecting increased selling, general and administrative, and research and
development expenses. Cash and investments were approximately $19.5 million at
10
<PAGE>
September 30, 2000. Capital expenditures for the first nine months of 2000 and
1999 were $823,000 and $1,060,000, respectively.
The Company believes it has the financial resources to meet business
requirements through at least March 31, 2001. 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. In addition,
we anticipate that we will need to obtain additional funds in the near future to
continue our business operations. 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 and that such efforts would impact our future results.
Additoinal Factors That Might Affect Future Results
Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks before you
decide to buy our common stock. If any of the following risks actually occur,
our business, results of operations or financial condition would likely suffer.
In any such case, the market price of our common stock could decline, and you
may lose all or part of the money you paid to buy our common stock.
KeraVision is incurring operating losses and may not achieve profitability in
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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 or if we will be able to
achieve profitability.
KeraVision needs market acceptance of INTACS inserts and other products to be
-----------------------------------------------------------------------------
successful.
-----------
KeraVision's future performance depends upon the degree of market
acceptance of INTACTS(TM) micro-thin prescription inserts for correction of
myopia, and on KeraVision's ability to successfully manufacture, market, deliver
and support INTACS inserts. We cannot assure you that INTACS inserts or any
future product that KeraVision develops will achieve or maintain acceptance in
their target markets. To be successful, INTACS inserts will have to be accepted
by ophthalmic surgeons as well as by patients. Until April 1999, KeraVision has
sold its product primarily in Canada, France and Germany and generated only
limited revenues. KeraVision began selling INTACS inserts in the United States
in the second quarter 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 inserts 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 inserts 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 inserts. The extent of, and rate at which, INTACS inserts 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.
11
<PAGE>
We have limited sales and marketing experience and may not be able to
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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. Most of the revenue recognized to date is from the sales of
instruments used to perform the procedure for the placement of INTACS. Our
revenues have declined since the second quarter of 1999 as we have shifted our
sales focus from instruments to seeking to build up our sales of INTACS inserts.
To successfully market and sell our products, we will need to develop and
maintain a sales force which has established relationships with surgeons and
which has consumer marketing skills. We recently changed over a large portion of
the sales force. 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
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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 inserts. 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 through March 31, 2001. 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 or acceptable to KeraVision. We cannot be sure that any of the
3,760,706 shares registered in our S-2 filed with the SEC on October 13, 2000
will be issued. 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 may not, in the future, continue to meet the requirements for
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continued listing on the Nasdaq National Market.
-------------------------------------------------
KeraVision's stock price has been, and is likely to continue to be,
volatile. The market price of our common stock has fluctuated substantially,
from a high of $29.13 on July 8, 1999 to a low of $1.75 on October 31, 2000. As
a result of this volatility, we may not, in the future, continue to meet the
requirements for continued listing on the Nasdaq National Market. Our inability
to satisfy the continued listing requirements of the Nasdaq National Market
could have a material adverse effect on the trading price and liquidity of our
stock. The market price of the shares of our common stock may be significantly
affected by factors such as actual or anticipated fluctuations in our operating
results, announcements of technological innovations, new products or new
contracts by KeraVision or its competitors, developments with respect to patents
or proprietary rights, conditions and trends in the medical device and other
technology industries, adoption of new accounting standards affecting the
medical device industry, changes in financial estimates by securities analysts,
general market conditions, and other factors. In addition, the stock market has
experienced extreme price and volume fluctuations that have particularly
affected the market price for many high technology companies and that have often
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of our common stock,
and there can be no assurance that the market price of our common stock will not
decline. In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. Such litigation, if brought against
KeraVision, could result in substantial costs and a diversion of management's
attention and resources.
KeraVision has limited manufacturing experience and may be unable to develop
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commercial-scale manufacturing capabilities.
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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, although we have sufficient manufacturing
capacity, we have limited 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 inserts,
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 inserts. 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
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current approvals, which could delay the sale and distribution of current and
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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 inserts 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 inserts 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 inserts 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 inserts 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 inserts.
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
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manufacturing our products.
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Our sole supplier of polymethylmethacrylate (PMMA), the polymer raw
material used in manufacturing INTACS inserts, no longer provides the particular
material we use for INTACS inserts, and this supplier 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
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locations be damaged or destroyed, our ability to continue to manufacture and
distribute INTACS inserts or additional products may be seriously impaired. We
would be required to find an alternate source of PMMA or a similar polymer
material, or commence manufacturing the raw material ourselves. We would need to
obtain FDA regulatory approval for the use of new raw materials in any of our
products or to qualify a new PMMA supplier. If we elected to manufacture PMMA
ourselves, we would need to establish manufacturing facilities for this purpose,
hire additional personnel, and obtain additional regulatory approvals, processes
which could take up to several years and require additional expenditures. We
cannot assure you that:
. our supplier will be able to fulfill future special orders for PMMA;
. interruptions in supplies will not occur in the future;
. we will be able to obtain a new source for the supply of PMMA or establish
facilities to manufacture PMMA, both of which would require approval of
additional regulatory submissions; or
. our current supply will last as long as we anticipate.
We have identified an alternative material for use in manufacturing INTACS
inserts. We have begun the qualification efforts required to obtain regulatory
approval, but we cannot 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 inserts and will need to
obtain other alternate materials. If we are required to manufacture INTACS
inserts 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 inserts 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
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inserts and our technology which could permit others to develop similar products
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or more easily compete with our business.
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KeraVision's commercial success depends in part on acquiring and
maintaining patent and trade secret protection of INTACS inserts technology,
INTACS inserts 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 owned or licensed 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
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field of vision correction.
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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,
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including VISX, Summit Technology, Inc. (recently purchased by Alcon, a division
of Nestle Corporation), Bausch & Lomb, 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.
Long-term follow-up data may not demonstrate that INTACS inserts are safe and
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effective.
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INTACS inserts represent 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 inserts in correcting
mild myopia. The FDA is requiring KeraVision to provide data to assess the
effects of INTACS inserts on the corneal endothelium after two years of
implantation. If these and other long-term data show that INTACS inserts are not
safe and effective, our ability to commercialize INTACS inserts may be adversely
affected. We cannot assure you that INTACS inserts will prove to be safe or
effective over the long term in correcting vision. If INTACS inserts fail to
perform as anticipated our revenue growth will be limited. Complications
associated with INTACS inserts may affect KeraVision's ability to gain market
acceptance for INTACS inserts or to obtain additional regulatory approvals.
Some patients who have received INTACS inserts have experienced various
complications. These complications include infection, shallow placement,
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 inserts.
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
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to retain our key personnel or to hire additional key personnel.
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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 inserts 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
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liability insurance may be unavailable.
----------------------------------------
KeraVision faces a risk of exposure to product liability claims and product
recalls if the use of INTACS inserts 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
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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 3. Quantitative and Qualitative Disclosures About Market Risk
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 September 30, 2000, we held $19.5
million of interest rate sensitive investments in debt securities. The interest
rate exposure of the investments is partially offset by $5.9 million of short-
term debt and capital lease obligations outstanding as of September 30, 2000. 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 $10,000 as of
September 30, 2000. This estimate is based on sensitivity analyses performed on
our financial positions at September 30, 2000. Actual results may differ
materially.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities
The Company sold no unregistered securities during the period but did issue
15,125 additional shares of its Series B Convertible Preferred Stock to holders
of Series B Convertible Preferred Stock as a stock dividend for the previous
quarter. These dividend shares were not registered under the Securities Act of
1933, because their issuance did not constitute a sale under the Securities Act
of 1933. The shares issued have the same conversion and other rights as the
originally issued shares of Series B Convertible Preferred Stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Amended and Restated Certificate of Incorporation of the Company (filed
as Exhibit 3.1 to the Company's registration statement on Form S-1 (File No.
33-92880) and incorporated herein by reference)
3.2 Amended and Restated Bylaws of the Company, as amended (filed as Exhibit
3.2 to the Company's Annual Report on Form 10-K/A for the year ended December
31, 1998 filed with the Commission on May 3, 1999 ("Form 10-K/A") and
incorporated herein by reference)
4.1 Preferred Shares Rights Agreement, dated as of August 18, 1997, between
the Company and Bank Boston, N.A., including the Certificate of Designation of
Rights, Preferences and 13 Privileges of Series A Participating Preferred Stock
attached thereto as Exhibit A (filed as Exhibit 4.1 to the Company's Form 8-A
filed with the Commission on August 25, 1997 and incorporated herein by
reference)
4.2 Investors' Rights Agreement dated as of June 12, 1998, by and among the
Company and the investors listed on Exhibit A thereto (filed as Exhibit 4.2 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1998
filed with the Commission on April 1, 1999 ("Form 10-K") and incorporated herein
by reference)
4.3 Certificate of Designation of Rights, Preferences and Privileges of
Series B Convertible Preferred Stock of the Company (filed as Exhibit 3.3 to the
Company's Form 10-K and incorporated herein by reference)
10.1 Form of Change of Control Agreement entered into between Registrant and
John S. Galantic
10.2 Employment Agreement dated as of July 19, 1999 by and between Registrant
and John S. Galantic
10.3 Form of Amendment to Change of Control Agreement entered into between
Registrant and Chief Executive Officer on August 15, 2000
10.4 Form of Amendment to Change of Control Agreement entered into between
Registrant and Executive Officers on August 15, 2000
27.1 Financial Data Schedule (filed via the EDGAR system)
(b) The Company did not file any Current Reports on Form 8-K during the
quarterly period ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KeraVision, Inc.
By: /s/ MARK FISCHER-COLBRIE
-------------------------------------
Mark Fischer-Colbrie
Vice President, Finance and Administration
and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Date: November 13, 2000
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