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[LOGO]
1995 ANNUAL REPORT
AND FORM 10-K
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TABLE OF CONTENTS
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ITEM PAGE NUMBER
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Letter to the Stockholders................ i
Annual Report on Form 10-K................ 1
Item 1. Business........................ 2
Item 2. Properties...................... 11
Item 3. Legal Proceedings............... 12
Item 4. Submission of Matters to a Vote
of Security Holders.................... 14
Item 5. Market for the Company's Common
Equity and Related Stockholder
Information............................ 14
Item 6. Selected Financial Data......... 15
Item 7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations.................. 15
Item 8. Financial Statements and
Supplementary Data..................... 19
Consolidated Financial Statements....... 19
Notes to Consolidated Financial
Statements............................. 23
Report of Independent Public
Accountants............................ 32
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K...... 35
Company Directory......................... Inside Back Cover
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LETTER TO OUR STOCKHOLDERS:
WHAT A DIFFERENCE A YEAR MAKES! As 1995 began, VISX
faced significant challenges in nearly every aspect of
its business. Because of discrepancies noted by the FDA
in the prior year, we were conducting a thorough
compliance review at our investigational sites. Two
significant lawsuits were consuming management at-
tention and Company resources. Agreements signed early
in the Company's history had granted most product
marketing rights to Alcon Laboratories, and further
obligated VISX to pay 25% of its excess cash flow to
Alcon. The Company needed a cash infusion and,
reflecting these problems, the stock price had reached
a low of $10 per share. Senior management and the Board
of Directors lacked cohesion and focus. PHOTO OF MARK LOGAN
Since then, a series of remarkable accomplishments
has provided VISX with a renewed sense of energy and
pride. Today we have a Company that is fully prepared
to assume a leadership role in the industry VISX
pioneered: Laser Vision Correction (LVC). A few of the
steps that got us here include:
-A strong new management team and a new Board of Directors;
-Cash infusions through a small private placement and a public offering
reinforcing VISX's presence in the equity market;
-An infusion of regulatory expertise;
-The receipt of royalty revenue from international licensing agreements and
receipt of royalties by Pillar Point Partners.
When I joined the Company in November 1994, one of my top priorities was to
strengthen our management team. Together with valued members of the VISX team
already in place, we began a recruitment effort which resulted in the hiring of
several superbly qualified executives for key positions such as Chief Operating
Officer, Chief Financial Officer, Vice President -- Regulatory & Clinical
Affairs, Vice President -- Human Resources, and Medical Monitor. VISX now has a
resourceful and highly motivated management team with impeccable professional
credentials and solidly grounded experience in the specialized fields of lasers
and vision correction. We can also report that 1995 saw a very positive change
in our Board of Directors. VISX was able to attract individuals to serve who
have broad business experience, a clear understanding of our potential, and the
will to enact the bold policy changes needed.
The next issue we addressed was our finances. In February VISX completed a
small private placement providing cash required to fund operations. We were
confident that in the following months we could increase the Company's market
value and then raise a larger amount at a higher valuation. In November we
renewed and reaffirmed our presence in the equity market by completing a public
offering of common stock, managed by Dillon, Read & Co. Inc. and PaineWebber
Incorporated, that provided net proceeds of $64 million. With this funding we
can move ahead vigorously with internal growth plans and pursue opportunities
outside the Company to strengthen and expand our product line.
In March 1995, VISX introduced the STAR Excimer Laser System to
international markets at our Hong Kong Users' Meeting. Physicians attending the
Hong Kong meeting were most enthusiastic and predicted that the system would set
a new technology standard for Laser Vision Correction. Outstanding clinical
results have been compiled by some of the world's finest ophthalmologists using
this accurate and physician-friendly Laser Vision Correction device.
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We also made steady progress on the regulatory front during 1995. In March,
after installing a new regulatory team, we completed an independent review of
our clinical sites and re-opened our clinical studies to new enrollment. At the
end of September, VISX received FDA Pre-Market Approval ("PMA") for the
therapeutic use of the VISX Excimer Laser System. In October, the FDA Ophthalmic
Devices Advisory Panel recommended approval of our PMA application for
Photorefractive Keratectomy (PRK), the primary commercial indication of Laser
Vision Correction. In November, the FDA followed that recommendation with an
approvable letter, and on March 26, 1996 we received FDA approval for the use of
the VISX System for PRK.
VISX pioneered modern Laser Vision Correction and its patents are recognized
as the most fundamental and important in the field. During 1995, VISX
commercialized its intellectual property by licensing its technology to other
manufacturers internationally. These licenses to Aesculap-Meditec, Chiron Vision
and Herbert Schwind GmbH not only provide a revenue stream, but add strength to
the validity of the patents themselves and to the basic technology. In December
1995, the Pillar Point Partnership that holds our fundamental United States
patents received its first royalty income.
Finally, we resolved two major lawsuits. First, the stockholder class action
lawsuit was settled, which probably saved hundreds of thousands of dollars in
legal fees and put an end to the diversion of management's attention from the
business of the Company. Later in the year, we reached agreement in a derivative
lawsuit filed on our behalf by one of our largest shareholders, CAP Advisers,
against our marketing partner, Alcon Laboratories, Inc., and certain former
directors and officers of VISX. The terms of this agreement are very favorable
to VISX. The agreement returns all marketing rights to us and eliminates the
requirement to pay Alcon 25% of the Company's excess cash flow. For the first
time, VISX exists as an independent, fully integrated company.
As VISX moves into 1996, we are invigorated by our successful recovery from
the substantial challenges of the past. Now, however, there will be new
challenges and opportunities as we build the U.S. Laser Vision Correction
market, focusing first on the correction of low myopia, or nearsightedness, and
then astigmatism and hyperopia, or farsightedness. Our immediate focus will be
on building our marketing and sales organization to meet the anticipated global
demand for the STAR Excimer Laser System. We have begun this process by
recruiting a talented, experienced sales and marketing staff which includes
several key people from Alcon. These individuals bring with them
well-established professional relationships in the eyecare arena and the ability
to provide continuity and a smooth transition for our customers.
Recognizing that VISX's fundamental strength has always been its technology,
we want to assure our stockholders that we will continue to pursue technological
advancements that can lead us to revolutionary new products in the Laser Vision
Correction field. In the U.S. market, VISX is unique in that we have chosen to
focus on our core strengths rather than diversify into the retail delivery side
of our industry. We believe this philosophy will help position VISX as the
premier service and technology company in the Laser Vision Correction market.
To all our stockholders, customers, and especially our employees, I want to
say thank you for your loyalty and support in 1995 and years past. We are
committed to maintaining our momentum and building on our fine achievements. We
look forward to an eventful and rewarding 1996 as VISX moves to the forefront of
this new industry known as Laser Vision Correction.
/s/ Mark B. Logan
Mark B. Logan
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended: Commission file number:
DECEMBER 31, 1995 0-10694
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VISX, INCORPORATED
(Exact name of Registrant as specified in its charter)
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DELAWARE 06-1161793
(State of incorporation) (I.R.S. Employer
Identification No.)
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3400 CENTRAL EXPRESSWAY
SANTA CLARA, CA 95051
(408) 733-2020
(Address, including zip code and telephone number, including area code,
of Registrant's principal executive offices)
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DELAWARE 06-1161793
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(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
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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, $0.01
PAR VALUE.
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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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the Common Stock held by non-affiliates of the
registrant as of March 22, 1996 is approximately $508,952,000. The number of
shares of Common Stock outstanding as of March 22, 1996 was 15,204,169.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's Proxy Statement for its Annual Meeting
of Stockholders to be held on May 17, 1996 are incorporated by reference into
Part III of this report.
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PART I
ITEM 1. BUSINESS
THE COMPANY
VISX, Incorporated ("VISX") is a leader in the design and development of
proprietary technologies and systems for laser vision correction ("LVC"), an
outpatient surgical procedure to treat refractive vision disorders such as
nearsightedness, astigmatism and farsightedness with the goal of eliminating or
reducing reliance on eyeglasses and contact lenses. In LVC, a
computer-controlled excimer laser ablates, or removes, submicron layers of
tissue from the surface of the cornea to reshape the eye, thereby improving
visual acuity. Vision correction represents one of the largest medical markets
with over 100 million people in the United States experiencing some form of
nearsightedness, astigmatism or farsightedness. Industry sources estimate that
approximately $13 billion was spent on eyeglasses, contact lenses and other
corrective eyewear in the United States in 1994. Vision correction is typically
paid for by the individual receiving treatment, and does not rely on
reimbursement from governmental or private health care payors.
Since its inception in 1985, VISX has been developing a substantial
proprietary position in system and application technology relating to the use of
lasers for vision correction. The Company's strategy is to commercialize this
intellectual property position through (1) per procedure and equipment royalties
from Pillar Point Partners ("Pillar Point"), (2) international use and equipment
royalties collected under direct licensing agreements, and (3) worldwide sales
of the VISX System.
REFRACTIVE VISION DISORDERS AND LVC
The human eye is approximately 25 millimeters in diameter and functions much
like a camera, incorporating a lens system that focuses light (the cornea and
the lens), a variable aperture system which regulates the amount of light
passing through the eye (the iris) and a film which records the image (the
retina). Images enter the human eye through the cornea. In a properly
functioning eye, the cornea bends, or refracts, the incoming images, causing the
images to focus on the retina of the eye. Refractive vision disorders are caused
by improper curvature of the cornea, which results in the cornea being unable to
properly focus the light passing through it. As a result, the viewer perceives a
blurred image. Nearsightedness (also known as myopia), astigmatism and
farsightedness (also known as hyperopia) are the three most common refractive
vision disorders. In a nearsighted eye, images are focused in front of the
retina. In an astigmatic eye, images are not focused at any one point. In a
farsighted eye, images are focused behind the retina. Currently, eyeglasses or
contact lenses are most often used to correct the vision of people with
refractive vision disorders.
The principal market for LVC is the correction of refractive vision
disorders such as nearsightedness, astigmatism and farsightedness. In 1993,
industry sources estimated that over 100 million people in the United States
used eyeglasses or contact lenses to correct refractive vision disorders. Of
these individuals, approximately 60 million are estimated to suffer from
nearsightedness, with approximately 90% of nearsighted persons having low-level
myopia. The Company estimates that approximately one-fourth of all sufferers of
nearsightedness also experience astigmatism and an additional 23 million people
in the United States suffer from astigmatism, but do not experience
nearsightedness. United States consumers spent approximately $13 billion on
eyeglasses, contact lenses and other corrective eyewear in 1994 according to
industry sources. The Company believes that LVC will make it possible for many
of these people to eliminate or reduce their reliance on corrective eye wear. In
particular, the Company believes that many of the approximately 26 million
contact lens users in the United States will be particularly receptive to LVC as
they have already chosen to use an alternative to eyeglasses for vision
correction.
Industry sources estimate that between 250,000 and 300,000 radial keratotomy
("RK") procedures are performed annually in the United States. RK is a surgical
procedure in which the ophthalmologist uses a scalpel to make a series of
incisions in the cornea with the goal of reshaping the cornea to correct the
patient's vision. Because RK is a manual procedure and is not performed with a
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computer-controlled device, it is highly dependent on the surgical skill of the
ophthalmologist performing the procedure. In addition, because RK involves
incisions into the corneal tissue, it weakens the structure of the cornea which
can have adverse consequences as patients age. Furthermore, RK has never
undergone a controlled clinical study under a U.S. Food and Drug Administration
("FDA") protocol because no medical devices, other than a scalpel, are used in
the procedure. The Company believes, based on currently available follow-up data
and market trends in countries where LVC is commercially available, that more
people will seek vision correction through LVC than through RK because LVC
involves reduced surgical risk, does not weaken the corneal tissue, is less
invasive and is less dependent on the ophthalmologist's skill.
CORNEAL PATHOLOGIES AND PTK
Corneal pathologies include traumatic and congenital defects and diseases of
the cornea which result in restricted vision. A number of conditions can cause a
clouding or opacification of the cornea, resulting in a loss of visual acuity. A
typical treatment of these conditions is a corneal transplant, which involves
major surgery, is expensive and is dependent on the availability of a suitable
donor cornea as well as on the individual surgeon's skill and experience.
Corneal transplants frequently produce irregular corneal surfaces which can
compromise the patient's vision. Additional major concerns relating to corneal
transplants are the possible transmission of viruses and rejection of the
transplanted tissue. Certain corneal pathologies can be addressed with an
excimer laser system in a procedure known as PTK, or phototherapeutic
keratectomy. In PTK, submicron layers of tissue are ablated from the surface of
the cornea in order to remove diseased, scarred or sight-inhibiting tissue with
the principal goal of alleviating the symptoms associated with the corneal
pathology. Although PTK is an important medical procedure for people who suffer
from corneal pathologies, the market opportunity represented by PTK is
significantly smaller than that represented by LVC.
PROCEDURES
LVC PROCEDURE. On March 26, 1996, the FDA approved the use of the VISX
System to correct mild to moderate nearsightedness. To perform LVC, also known
as photorefractive keratectomy or PRK, with excimer lasers, the ophthalmologist
determines the exact correction required (which is measured by the same
examination used to prescribe eyeglasses or contact lenses) and programs the
correction into the excimer laser system's computer. The computer calculates the
data needed to make a precise corneal correction which the physician verifies
before commencing the laser treatment. The excimer laser system emits laser
pulses to ablate submicron (a micron equals 0.001 of a millimeter) layers of
tissue from the surface of the cornea in a pattern to reshape the front surface
of the cornea. The depth of tissue ablated during the procedure typically is
less than one-half of the thickness of a human hair. The average procedure,
which lasts approximately 15 to 40 seconds, consists of approximately 150 laser
pulses each of which lasts several billionths of a second with cumulative
exposure to laser light of less than one second. The entire patient visit,
including preparation, application of a topical anesthetic and post-operative
dressing, generally lasts no more than 30 minutes.
Following the procedure, the ophthalmologist may prescribe topical
pharmaceuticals to promote corneal healing and alleviate discomfort. Individuals
undergoing LVC may experience discomfort for approximately 24 hours, and blurred
vision for approximately 48 to 72 hours, after the procedure. Although most
patients experience improvement in uncorrected vision within a few days of the
procedure, it generally takes from two to six months for the correction to
stabilize and for the full benefit of the procedure to be realized. An
individual typically has one eye treated in a session, with the second eye
treated three to six months later.
The LVC procedure described above can be performed using a number of
manufacturers' excimer laser systems, including the VISX System. However, the
VISX System incorporates several advanced technological features that permit
treatment of hyperopia as well as simultaneous treatment of myopia and
astigmatism, including a proprietary adjustable iris and proprietary software.
Another refractive procedure that can be performed with excimer laser
systems is laser in situ keratomileusis ("LASIK"). LASIK is a variation of a
non-laser technique in which a knife, or
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microkeratome, is used to open a flap on the surface of the cornea. Laser energy
is then used to ablate corneal cells on the exposed surface to improve the
person's visual acuity, and the flap is then folded back into place. VISX
Systems are being used for LASIK in several international markets. The Company
has not commenced clinical trials involving use of the VISX System for LASIK in
the United States. LASIK is covered by the patents held by Pillar Point, and as
such the procedure requires payment of a royalty to Pillar Point for each LASIK
procedure performed. SEE "RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY."
PTK PROCEDURE. PTK is an outpatient surgical procedure to treat corneal
pathologies. In this procedure, submicron layers of tissue are ablated from the
surface of the cornea to remove diseased, scarred or sight-inhibiting tissue.
The Company estimates that VISX Systems have been used worldwide to perform
approximately 10,000 PTK procedures. On September 29, 1995, the Company received
FDA approval of its Pre-Market Approval ("PMA") application for the VISX System
for PTK.
PRODUCTS
VISX SYSTEM. The VISX System is a fully integrated unit incorporating an
excimer laser and a computer-driven workstation for use by an ophthalmologist.
The system is designed to enable an ophthalmologist to perform LVC and PTK after
a brief training program. The VISX System automatically varies the diameter of
the laser beam using a sophisticated optical delivery system that provides
temporal and spatial integration of an excimer laser beam through an adjustable,
mechanical iris. In March 1995, the Company introduced a streamlined model of
the VISX System. This system is functionally equivalent to the prior model, but
is one-half its size, easier and more economical to operate, and is capable of
treating farsightedness in addition to nearsightedness and astigmatism.
Excimer lasers ablate tissue without generating the heat associated with
many other types of lasers that use different wavelengths which can result in
unintended thermal damage to surrounding tissue. The excimer laser operates in
the ultraviolet spectrum and acts on the surface of the cornea without any
measurable effect in the interior of the cornea, which is approximately 500
microns thick, or the other parts of the eye.
VISIONKEY CARD. The use of the VISX System is controlled by a proprietary
optical memory card, the VisionKey-Registered Trademark- card, which is sold
separately and is encoded with proprietary software required to operate the VISX
System. Approximately 30 VISX Systems still in the field have not been
retrofitted to include the VisionKey card system. Additionally, the VisionKey
card provides the user with access to software upgrades and can facilitate the
collection of patient data. One VisionKey card must be used with each procedure
performed, and therefore sales of the VisionKey card correlate to the number of
procedures performed, except for those procedures performed with units that have
not been retrofitted to include the VisionKey card system. The price charged per
card varies based on the package of services and materials programmed onto the
VisionKey card provided to the user. The percentage of VISX revenues received
from sales of the VisionKey card is expected to vary based upon demographics and
other site-specific considerations.
MARKET ACCEPTANCE OF LVC
The Company believes that its profitability and growth will depend upon
broad acceptance of LVC in the United States and key international markets
targeted by the Company. There can be no assurance that LVC will be accepted by
either the ophthalmic community or the general population as an alternative to
existing methods of treating refractive vision disorders. The acceptance of LVC
may be affected adversely by its cost, concerns relating to its safety and
efficacy, general resistance to surgery, the effectiveness of alternative
methods of correcting refractive vision disorders, the lack of long-term
follow-up data, the possibility of unknown side effects, and the lack of
third-party reimbursement for the procedure. Many consumers may choose not to
have LVC due to the availability of nonsurgical methods for vision correction.
Any future reported adverse events or other unfavorable publicity involving
patient outcomes from use of LVC systems manufactured by any participant in the
LVC market could also adversely affect acceptance of the procedure. Market
acceptance could also be affected by the ability of the Company and other
participants in the LVC market to train a broad
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population of ophthalmologists in the procedure. Ophthalmologist acceptance
could also be affected by the cost of the excimer laser systems used to perform
LVC. Promotional efforts by suppliers of products or procedures which are
alternatives to LVC, including eyeglasses and contact lenses, may also adversely
affect the market acceptance of LVC. The failure of LVC to achieve broad market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations. SEE "-- MARKETING, SALES AND
DISTRIBUTION."
Concerns with respect to the safety and efficacy of LVC include
predictability and stability of results. Potential complications and side
effects include: post-operative discomfort; corneal haze during healing (an
increase in the light scattering properties of the cornea); glare/halos
(undesirable visual sensations produced by bright lights); decreases in contrast
sensitivity; temporary increases in intraocular pressure in reaction to
procedure medication; modest fluctuations in refractive capabilities during
healing; modest decrease in best corrected vision (I.E., with corrective
eyewear); unintended over- or under-corrections; regression of effect; disorders
of corneal healing; corneal scars; corneal ulcers and induced astigmatism. There
can be no assurance that long-term follow-up data will not reveal additional
complications that may have a material adverse effect on acceptance of LVC which
in turn would have a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY
Protection of the Company's proprietary technology is important to its
business. VISX holds over 100 United States and foreign patents, including
patents licensed to Pillar Point by VISX. VISX believes that its patents provide
a substantial proprietary position in system and application technology relating
to the use of lasers for vision correction. In addition, the Company has several
pending patent applications in the United States and in foreign countries. In
the United States, there are a number of patents covering methods and apparatus
for performing corneal surgery with ultraviolet lasers, including patents owned
by VISX and Summit Technology, Inc. ("Summit"). Pursuant to the agreements
establishing Pillar Point (collectively, the "Pillar Point Agreement"), VISX and
Summit each contributed their rights under United States patents previously
issued to them covering apparatus and methods for performing ultraviolet laser
corneal surgery. The Pillar Point Agreement also provides that certain other
patent rights obtained by either VISX or Summit must be contributed or offered
to Pillar Point, depending upon the nature of the particular patent rights
involved. In addition, there are also multiple foreign patents covering
apparatus for performing excimer laser corneal surgery, including patents or
patent rights held by VISX, Summit, and others.
PILLAR POINT PARTNERS. On June 3, 1992, VISX and Summit entered into the
Pillar Point Agreement by virtue of which all then pending issues between Summit
and VISX regarding the ownership and use of their respective United States
patents for performing ultraviolet laser corneal surgery were settled. Under the
agreements, each of Summit and VISX exclusively licensed to Pillar Point, a
partnership consisting of entities controlled by VISX and Summit, their
respective rights under United States patents previously issued to them covering
apparatus and methods for performing ultraviolet laser corneal surgery. The
Pillar Point Agreement also provides that any patent covering apparatus and
methods for performing ultraviolet laser corneal surgery which is issued after
the date of the Pillar Point Agreement to either party with respect to patent
applications filed, or which claim a priority date, at any time prior to June 3,
1993, will automatically be contributed to Pillar Point at no additional cost.
The Pillar Point Agreement also contains provisions requiring VISX and Summit to
offer to the partnership certain after-acquired precluding patents more
particularly defined in the Pillar Point Agreement regardless of when issued.
Pillar Point has licensed to each of VISX and Summit, on a nonexclusive
basis, the rights to the inventions covered by the patents described above. It
is also contemplated that Pillar Point will grant licenses to other qualified
third parties. Under the Pillar Point Agreement, Pillar Point will be paid
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certain per procedure and equipment royalties by VISX and Summit. This revenue,
net of applicable expenses, and any other revenue of Pillar Point, will be
shared between VISX and Summit in accordance with the provisions of the Pillar
Point Agreement.
The per procedure royalty charged by Pillar Point has been fixed at $250 per
procedure. Profits realized from per procedure royalties from LVC procedures
using an excimer laser with an adjustable iris (the only type of system approved
by, or for which PMA applications have been filed with, the FDA) are allocated
56% to VISX and 44% to Summit assuming a $250 per procedure royalty. Pillar
Point profits realized from receipt of PTK per procedure royalties are allocated
51% to VISX and 49% to Summit. However, Pillar Point has decided not to charge
any per procedure royalties for PTK at this time.
In addition, VISX and Summit are required to pay Pillar Point royalties of
6% for sales of excimer laser systems using an adjustable iris (excimer laser
systems owned by VISX or Summit generally are not subject to royalties). Profits
from royalties on such sales paid to Pillar Point are allocated entirely to
VISX. If and when manufacturers other than VISX and Summit obtain FDA approval
for excimer laser systems, profits from royalties received as a result of the
sale of their equipment would be allocated 50% to VISX and 50% to Summit.
OTHER LICENSING AGREEMENTS. In October 1995, VISX entered into a license
agreement with Chiron Vision Corporation ("Chiron") and extended its agreement,
originally entered into in 1994, with Aesculap-Meditec GmbH ("Meditec"). In
December 1995, VISX entered into a license agreement with Herbert Schwind GmbH &
Co. KG ("Schwind"). Under these agreements, the Company will receive royalties
for sales and use of Chiron, Meditec, and Schwind equipment in Canada and will
receive equipment royalties on all other international sales. Chiron and Meditec
are two of the largest manufacturers of excimer lasers for eye care applications
in international markets.
In March 1992, the Company and IBM signed a license agreement that grants
the Company nonexclusive rights under United States and foreign IBM patents that
include claims that cover ultraviolet laser technology for removal of human
tissue. VISX has agreed to pay a royalty of 2% of the net sales price of VISX
Systems made, used, sold or otherwise transferred by or for VISX in the United
States, Canada, Japan, Australia, Brazil and Spain. The Company also has entered
into a nonexclusive, worldwide license agreement with Patlex Corporation which
holds certain patents on lasers. Under this agreement, the Company pays a
royalty on certain laser components of the VISX System.
OTHER ARRANGEMENTS. The Company also seeks to protect its proprietary
technology, in part, through proprietary confidentiality and nondisclosure
agreements with employees, consultants and other parties. The Company's
confidentiality agreements with its employees and consultants generally contain
industry standard provisions requiring such individuals to assign to the Company
without additional consideration any inventions conceived or reduced to practice
by them while employed or retained by the Company, subject to customary
exceptions. There can be no assurance that proprietary information agreements
with employees, consultants and others will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known to or independently developed by competitors.
RISKS RELATING TO PILLAR POINT PARTNERS; PATENT LITIGATION
The Pillar Point Agreement contemplates that royalties will be paid to
Pillar Point each time a laser system is used to perform LVC in the United
States under licenses granted to the Company, Summit or other manufacturers.
Should the Company receive PMA for LVC, the Company will seek to establish and
maintain contractual arrangements permitting it to collect per procedure
royalties from use of VISX Systems. There can, however, be no assurance that the
Company or Summit will be able to collect such royalties. In forming Pillar
Point, the Company and Summit endeavored to structure the operations of the
partnership in a manner consistent with antitrust laws. The compliance of Pillar
Point with these laws will depend upon the activities of the partners, a
determination of what constitutes a relevant market for purposes of such laws,
the nature of the patents, the number and
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relative strength of competitors in such markets and numerous other factors,
many of which are presently unknown or are beyond the control of Pillar Point,
VISX and Summit. No assurance can be given that the activities of Pillar Point
will not be challenged under such laws. In March 1995, Pillar Point sued
LaserSight, Inc. for patent infringement in the Federal District Court for
Delaware. In that action, LaserSight has asserted several affirmative defenses
and has entered a declaratory judgment counterclaim asserting, among other
things, that the Pillar Point Agreement constitutes patent misuse. Additionally,
in October 1995, VISX received notice that the Federal Trade Commission ("FTC")
is requesting the production of certain documents in connection with an inquiry
relating to whether or not Pillar Point and/or the companies that formed Pillar
Point, VISX and Summit, have engaged in any unfair methods of competition in
violation of federal trade regulation laws. Any successful challenge to the
operation of Pillar Point or to its patents could have a material adverse effect
on the Company's business, financial condition and results of operations.
There can be no assurance that the United States patent rights held by
Pillar Point or international patents held by VISX will afford any significant
degree of protection or provide the Company with a competitive advantage. In
particular, there can be no assurance that the Pillar Point Agreement will
preclude patent disputes with Summit relating to technology not included in
Pillar Point in the United States or relating to any technology outside the
United States. Failure to maintain the protection afforded by the patents held
by Pillar Point and the Company's international patents would have a material
adverse effect on the Company's future revenues and ability to become
profitable. Further, there can be no assurance that the patents held by Pillar
Point or the Company's international patents will ultimately be found to be
valid or enforceable or that the Company's patent rights will deter others from
developing substantially equivalent or competitive products.
In addition, the medical device industry, including the ophthalmic laser
sector, has been characterized by substantial litigation, both in the United
States and internationally, regarding patents and proprietary rights. The
Company is engaged in several pending patent proceedings, both in the United
States and internationally. In the United States, Summit has sued the Company
for infringement of a patent held by Summit and not licensed to Pillar Point.
Internationally, the Company has filed actions alleging infringement of its
patents against certain parties in Canada, and is involved in opposition
proceedings challenging the issuance of certain patents in the European Patent
Office ("EPO"). There can be no assurance that additional patent infringement
claims in the United States or in other countries will not be asserted against
VISX by Summit (limited in the United States to patent rights not included in
Pillar Point) or others, or, if asserted, that VISX will be successful in
defending against such claims. Furthermore, Pillar Point or VISX may undertake
additional infringement actions against others. Infringement actions with
respect to United States patents licensed to Pillar Point could be brought or
defended by Pillar Point, although the partners would have the right to
initiate, pursue, defend or participate in such actions if Pillar Point declined
to do so. FOR ADDITIONAL DETAIL REGARDING THESE PATENT PROCEEDINGS, SEE "--
LEGAL PROCEEDINGS."
The defense and prosecution of patent proceedings is costly and involves
substantial commitments of management time. Adverse determinations in litigation
or other patent proceedings to which the Company currently is or may become a
party could subject the Company to significant liabilities to third parties and
require the Company to seek licenses from third parties. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing and
selling its products in one or more markets, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
SEE "-- LEGAL PROCEEDINGS."
7
<PAGE>
MARKETING, SALES AND DISTRIBUTION
Through 1995 and until March 12, 1996, Alcon Laboratories, Inc. ("Alcon")
served as the Company's exclusive international distributor. On November 20,
1995, Alcon, VISX and the other participants in VISX's pending stockholder
derivative litigation agreed to settle the litigation, including the
counterclaims filed by Alcon, by filing a definitive settlement agreement with
the Superior Court. On January 9, 1996 the Superior Court approved the proposed
settlement which, according to its terms, automatically became effective on
March 12, 1996, and Alcon ceased all marketing and sales efforts on behalf of
VISX as of that date. Alcon will continue to service VISX Systems sold
internationally by Alcon. Under the settlement terms, Alcon will be able to
market competitors' LVC systems.
INTERNATIONAL SALES AND MARKETING STRATEGY. As a result of the termination
of Alcon's exclusive marketing rights, the Company has established and
implemented new marketing and sales strategies for the United States and
international markets. The Company's future success will depend in large part on
its ability to establish and implement new domestic and international marketing
and sales strategies, and there can be no assurance that the Company will be
able to do so in a timely manner or at all. International sales may be limited
or disrupted by the imposition of government controls, export license
requirements, political instability, trade restrictions, changes in tariffs,
difficulties in staffing and coordinating communications among and managing
international operations.
In September 1995, the Company received notice that the Health Protection
Branch of the Canadian government approved the use of the VISX System in Canada
for treatment of low-level myopia. With this approval, VISX can market the VISX
System for low-level myopia in Canada without labeling the VISX System "for
investigational use" for that indication. The Company believes that it is the
first and only LVC system manufacturer to receive such approval in Canada.
DOMESTIC SALES AND MARKETING STRATEGY. Following its receipt of PMA for
PTK, the Company has commenced United States commercialization for this
indication. The VISX System cannot be marketed in the United States for LVC
unless and until a PMA for LVC is received. Effective March 12, 1996, the
Company is entirely dependent on its own internal sales and marketing efforts.
SEE "-- LEGAL PROCEEDINGS."
GOVERNMENT REGULATION
UNITED STATES. Ophthalmic excimer lasers such as the VISX System are
medical devices, and as such are subject to regulation by the FDA under the Food
Drug and Cosmetic Act ("FDC Act") and by similar agencies outside the United
States. Medical devices are classified by the FDA into class I, II or III on the
basis of the controls necessary to reasonably ensure their safety and
effectiveness. Class III devices, such as the VISX System, are subject to the
most stringent form of regulation and oversight and cannot be marketed for
commercial sale in the United States until the FDA grants a PMA for the device.
To obtain a PMA for a medical device, the Company was required to file a PMA
application that included clinical data and the results of pre-clinical and
other testing sufficient to show that there is a reasonable assurance of safety
and effectiveness of the VISX System for its intended conditions of use. Human
clinical studies may be conducted only under an FDA-approved IDE and must be
conducted in accordance with FDA regulations. In addition to the results of
clinical trials, the PMA application includes other information relevant to the
safety and efficacy of the device, a description of the facilities and controls
used in the manufacturing of the device, and proposed labeling. After the FDA
accepts a PMA application for filing, and after the FDA's review of the
application, a public meeting is held before an FDA advisory panel in which the
PMA is reviewed and discussed. The panel then issues a favorable or unfavorable
recommendation to the FDA or recommends approval with conditions. Although the
FDA is not bound by the panel's recommendations, it tends to give them
significant weight.
8
<PAGE>
The first LVC procedure for the treatment of nearsightedness was performed
in the United States in 1987 and the first PTK procedure for the treatment of a
corneal pathology was performed in 1988. To date, over 200 VISX Systems have
been shipped, and the Company estimates that over 300,000 eyes have been treated
with the installed base of VISX Systems in over 35 countries.
The Company has sponsored clinical trials in the United States for low-level
myopia on 1,610 eyes. According to two-year follow-up data accumulated by the
Company during these trials, all persons undergoing LVC experienced an
improvement in visual acuity without corrective eyewear. Of the eyes treated in
these trials, approximately 86% were 20/200 or worse and approximately 94% were
20/100 or worse prior to treatment. Approximately 93% of the eyes treated in
these trials improved to 20/40 or better, the legal requirement to obtain a
driver's license in most states without corrective eyewear.
On September 29, 1995, the Company received FDA approval of its PMA
application for the VISX System for PTK. On October 20, 1995, the FDA's
Ophthalmic Devices Advisory Panel recommended approval of the Company's PMA
application for the VISX System for treatment of low-level myopia, and on
November 17, 1995 the FDA notified the Company that the Company's PMA
application for use of the VISX System for LVC is approvable. The Company
received PMA approval for LVC on March 26, 1996.
Although the Company has received PMA for the VISX System for LVC, it will
be necessary for the Company to seek additional regulatory approvals, through
either additional PMA applications or supplements to existing PMA applications,
for additional indications for the VISX System. There can be no assurance that
any such approvals would be obtained on a timely basis, or at all. The failure
to receive such PMAs could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company is in
various clinical trial stages for other LVC indications with the VISX System,
including higher myopia (greater than -6 and less than -10 diopters of
correction), severe myopia (more than -10 diopters of correction), astigmatism
and hyperopia.
OTHER GOVERNMENT REGULATION. Products manufactured or distributed by the
Company pursuant to a PMA will be subject to pervasive and continuing regulation
by the FDA, including, among other things, postmarket surveillance and adverse
event reporting requirements. Labeling and promotional activities are subject to
scrutiny by the FDA and, in certain instances, by the Federal Trade Commission,
and current FDA enforcement policy prohibits the marketing of approved medical
devices for unapproved uses. Noncompliance with applicable requirements can
result in, among other things, warning letters, fines, injunctions, penalties,
recall or seizure of products, total or partial suspension of production, denial
or withdrawal of premarket approval of devices, and criminal prosecution. The
FDC Act also requires the Company to manufacture its products in accordance with
Good Manufacturing Practices ("GMP") regulations, which impose certain
procedural and documentation requirements upon the Company with respect to
manufacturing and quality assurance activities. The Company's manufacturing
facilities have undergone GMP compliance inspections conducted by the FDA. The
Company's facilities, procedures and practices will be subject to ongoing,
periodic GMP inspections by the FDA. The FDA has proposed amendments to the GMP
regulations that will likely increase the cost of compliance with GMP
requirements. There can be no assurance that the Company will not be required to
incur significant costs to comply with laws and regulations in the future or
that laws and regulations will not have a material adverse effect upon the
Company's business, financial condition and results of operations.
VISX is also regulated under the Radiation Control for Health and Safety
Act, which requires laser products to comply with performance standards,
including design and operation requirements, and manufacturers to certify in
product labeling and in reports to the FDA that their products comply with all
such standards. The law also requires laser manufacturers to file new product
and annual reports, maintain manufacturing, testing and sales records, and
report product defects, affix various warning labels, and install certain
protective devices. In addition, VISX is subject to California
9
<PAGE>
regulations governing the manufacture of medical devices, including an annual
licensing requirement, and VISX's facilities have been inspected by, and are
subject to ongoing, periodic inspections by, California regulatory authorities.
Sales, manufacture and further development of the VISX System also may be
subject to additional federal regulations pertaining to export controls and
environmental and worker protection, as well as to state and local health,
safety and other regulations that vary by locality, which may require obtaining
additional permits. The impact of such regulations cannot be predicted.
INTERNATIONAL. Many countries outside the United States do not impose
safety and efficacy testing or regulatory approval requirements for medical
laser systems. International regulatory requirements vary by country and there
can be no assurance that VISX will receive additional international regulatory
approvals or meet requirements for ongoing commercial sales, or as to the
associated cost or delay. Failure to receive approval in, or meet the
requirements of, any country would prevent the Company from selling its products
in that country, which could adversely affect the Company's results of
operations.
In Europe, the member countries of the European Union have promulgated rules
which require that medical products receive by mid-1998 the certifications
necessary to affix the CE mark to the device. The CE mark is an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. Certification under the ISO 9000
series of standards for quality assurance and manufacturing processes is one of
the CE mark requirements. The Company is implementing policies and procedures to
enable it to achieve ISO 9000 qualification within the required time frame. In
Japan, sales of VISX Systems are limited until such time as the Company receives
regulatory approval.
MANUFACTURING, COMPONENTS AND RAW MATERIALS
The manufacture of VISX Systems is a complex operation involving numerous
procedures, and the completed system must pass a series of quality control and
reliability tests prior to shipment. VISX purchases from various independent
suppliers many components that are either standard or built to the Company's
proprietary specifications, and assembles them at its California facility. In
addition, the Company contracts with third parties for the manufacture or
assembly of certain components. Several of these components are currently
provided by a single vendor. If any of these suppliers were to cease providing
components to the Company, the Company would be required to locate and contract
with a substitute supplier, and there can be no assurances that such substitute
supplier could be located and qualified in a timely manner or could provide
required components on commercially reasonable terms. A failure to increase
production volumes in a cost-effective or timely manner, or an interruption in
the manufacturing of VISX Systems, could have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION AND TECHNOLOGICAL CHANGE
The medical device and ophthalmic laser industries are subject to intense
competition and technological change. LVC using excimer laser systems for
treatment of refractive disorders competes with eyeglasses, contact lenses and
radial keratotomy ("RK"), as well as with other technologies and surgical
techniques currently under development, such as corneal implants and surgery
using different types of lasers. In the United States, the Company believes that
it and Summit are the leading manufacturers of excimer laser systems. In October
1995, Summit received FDA approval of its PMA application for LVC for treatment
of nearsightedness. This approval enabled Summit to commence commercial sale of
its laser system for LVC in the United States prior to the Company, which
(although the Company will receive use and equipment royalties through Pillar
Point) may have afforded Summit a competitive advantage with respect to
equipment sales for LVC. The Company's principal international competitors are
Chiron, Meditec, and Nidek Co., Ltd. ("Nidek"). Chiron and Meditec, as well as
Schwind, have received licenses from VISX and are obligated to pay VISX
royalties on system sales. Nidek has not taken a license, and VISX has sued
Nidek and its users for patent infringement in Canada. SEE "-- LEGAL
PROCEEDINGS."
10
<PAGE>
Use of the VISX System for PTK to treat corneal pathologies competes with
corneal transplants, surgery and drug treatments. The VISX System also competes
with products marketed or under development by other laser and medical equipment
manufacturers, many of which may have greater financial and other resources than
the Company. Additionally, competitors, both in the United States and abroad,
may enter the excimer laser equipment manufacturing business or acquire existing
companies. Such competitors may be able to offer their products at a lower cost
or may develop procedures that involve a lower per procedure cost. Competition
from new entrants may be particularly prevalent in those countries where
significant regulatory approvals are not required. In addition, medical
companies, academic and research institutions and others could develop new
therapies, including new medical devices or surgical procedures, for the
conditions targeted by the Company, which therapies could be more medically
effective and less expensive than LVC, and could potentially render LVC
obsolete. Any such developments could have a material adverse effect on the
business, financial condition and results of operations of the Company.
RESEARCH AND DEVELOPMENT
The Company intends to remain a leader in the development of
state-of-the-art laser technologies for the treatment of ophthalmic disorders.
Toward this end, the Company incurred research and development expenses,
including clinical trial expenses, of $8.9 million, $7.1 million, and $5.0
million during the years ended December 31, 1995, 1994 and 1993, respectively.
The Company expects to continue spending significant amounts in research and
development for the foreseeable future.
PRODUCT LIABILITY AND INSURANCE
Inherent in the testing and use of human health care devices is the
potentially significant risk of physical injury to patients which could result
in product liability or other claims based upon injuries or alleged injuries
associated with a defect in the product's performance, which may not become
evident for a number of years. The VISX System includes high-voltage power
supplies, cryogenic subsystems, high-pressure gases, toxic gases, and other
potentially hazardous factors. In the event of an accident, the Company could be
liable for any damages that result, and any such liability could exceed the
resources of the Company. VISX maintains a "claims made" product liability
insurance policy in the amount of $4.0 million, which represents the maximum
payout for all claims that could be made during an annual policy period. At such
time as the VISX System is marketed commercially for LVC in the United States,
the Company may require broader coverage in greater amounts. The inability of
the Company to maintain adequate insurance coverage at any time could, in the
event of product liability or other claims in excess of the Company's insurance
coverage, have a material adverse effect on the Company's business, financial
condition and results of operations. Additionally, VISX has agreed to indemnify
certain medical institutions where research was sponsored by the Company and
certain of the medical institutions participating in the Company's clinical
studies.
EMPLOYEES
As of December 31, 1995, VISX had 132 full-time employees, 13 temporary
employees and nine consultants. Of the full-time employees, 62 are employed in
manufacturing and service, 46 in research and development and regulatory, and 24
in general administrative and marketing positions. None of VISX's employees is
covered by a collective bargaining agreement. The Company believes that its
relations with its employees are good.
ITEM 2. PROPERTIES
VISX's operations are currently located in a 52,000 square foot leased
facility in Santa Clara, California. Effective March 8, 1996, the lease was
extended to the space directly above the space currently leased by the Company,
for a total of 108,844 square feet. The lease for the entire facility is
extended to seven years following substantial completion of the tenant
improvements to the second floor, with an option to extend the term an
additional five years. Based on current plans for expansion to the second floor,
the Company anticipates that the tenant improvements will be complete in or
about June 1996. The Company believes its facilities are sufficient to meet its
current and reasonably anticipated future requirements. SEE NOTE 7 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
PATENT PROCEEDINGS AND LITIGATION
The Company is a party to a number of patent-related legal proceedings in
the United States and in several international jurisdictions. Adverse
determinations in one or more of such proceedings could limit or restrict the
Company from manufacturing, marketing or selling its products in certain
markets, limit the Company's ability to collect use and equipment royalties in
certain markets and have a material, adverse effect on the Company's business,
financial condition and results of operations. These proceedings are discussed
separately below.
CANADA. In February 1994, the Company filed suit in the Federal Court of
Canada against Nidek and its Canadian distributor for infringement of three of
VISX's Canadian patents. In August 1994, the Canadian trial court dismissed most
of Nidek's counterclaims against VISX, and Nidek has appealed this dismissal.
The Nidek appeal does not stay or delay the trial of VISX's claims against
Nidek. In July 1995, the Company notified Chiron, LaserSight, Meditec, Nidek and
Summit, and all of the doctors known to be using their equipment in Canada, that
such manufacturers' products infringe VISX's Canadian patents. The Company
offered all such manufacturers the opportunity to take a license in Canada. The
Company entered into license agreements with Chiron, Meditec and Schwind for
systems sold in Canada. The Company's offer to enter into license agreements
expired on September 1, 1995, and on September 5, 1995, the Company filed
lawsuits in Canada against LaserSight, Summit and their respective customers.
The Company has also added Nidek's Canadian customers to the lawsuit already
filed between the Company and Nidek. The Company is seeking injunctive relief
and unspecified money damages against all defendants in Canada. The Canadian
actions other than the Nidek proceedings are in the pleading stage.
EUROPE. During the last two years, Carl Zeiss GmbH, Summit, and Schwind
each filed oppositions to one or more of VISX's European patents before the EPO.
The Company has filed written submissions in response to these oppositions. On
October 17, 1995, the EPO held a hearing in the first of these oppositions and
rendered a decision to revoke the patent. The Company has appealed this
decision. The patent at issue is directed to comparative topography apparatus
and is neither currently in use in the VISX System nor part of the fundamental
VISX patents for vision correction. The Company expects to appeal the decision
once it receives a written opinion from the EPO. The EPO held hearings in two
additional opposition proceedings in December 1995, and both patents were
maintained with amended claim language. Due to the nature of the patent
opposition process (in which claims can be reworded to overcome the opposition),
it is impossible to predict the outcome of the two opposition proceedings still
pending. In August 1995, the Company sued Schwind in Germany, alleging
infringement of certain of the Company's European patents. In addition, Schwind
has filed a nullity action in Germany against one of VISX's European patents. In
connection with the settlement of disputes between the two companies, VISX
dropped its lawsuit against Schwind for patent infringement, and Schwind has
withdrawn both the nullity action and the opposition.
AZEMA PATENT. On August 30, 1995, Summit sued the Company in the United
States for infringement of a United States patent held by Summit. Summit
acquired the rights to the patent in 1993, and Pillar Point elected not to
acquire rights to the patent from Summit at that time. The lawsuit claims that
the manufacture and export of VISX Systems from the United States is an
infringement of the patent. The Company believes that the lawsuit is without
merit and intends to vigorously defend its position. The Company believes that
the resolution of this matter will not have a material adverse effect on the
Company's financial position or results of operations. Nevertheless, the cost of
defending this action could be significant, and there can be no assurance that
the VISX System will be held not to infringe the patent. In such event, the
Company could be subject to significant liabilities to Summit and it could be
necessary for the Company to seek a license from Summit in order for the Company
to manufacture, market and sell products in the United States. There can be no
assurance that a license would be available on acceptable terms or at all. It
might also be necessary for the Company to attempt to redesign the VISX System
so that it no longer infringes the patent,
12
<PAGE>
although there can be no assurance that any such redesign efforts would be
successful. Additionally, a redesign of the VISX System, depending on its scope,
could entail delays in FDA approval of the redesign.
PRODUCT LIABILITY
VISX requires all clinical investigators to advise persons treated in United
States clinical trials that the procedure is investigational and has not been
determined to be safe or effective by the FDA and requires that signed consents
be obtained prior to treatment. Notwithstanding these requirements, three
individuals who were treated in United States clinical trials of the VISX System
have sued their ophthalmologists and VISX following their surgery. These suits
are currently pending in Michigan, New Jersey and Pennsylvania. VISX believes
that it has meritorious defenses to these actions, and that their resolution
will not have a material adverse effect on the Company's financial position or
results of operations. However, all three suits are in the early stages of
discovery and there can be no assurance as to their outcome.
STOCKHOLDER DERIVATIVE LITIGATION
In September 1994, an action was filed in the Superior Court of California
as a derivative action on behalf of the Company by CAP Advisers Limited, CAP
Trust and Osterfak Limited (collectively, the "CAP Group"), who collectively
owned in excess of 10% of the Company's outstanding Common Stock at the time the
action was filed. The action named as defendants several former officers of the
Company, former directors of the Company including representatives of Alcon, and
Alcon and certain of its affiliates. The suit alleged, among other things,
breaches of fiduciary duties involving the failure to exercise appropriate
oversight over regulatory affairs and the Alcon marketing agreements by the
named individual defendants as well as breaches of certain of Alcon's marketing
obligations under the Company's agreements with Alcon, and sought monetary
damages in excess of $2.25 billion from Alcon and the named individual
defendants. Alcon made counterclaims against the CAP Group and two former
directors of the Company not named in the original suit for interference with
the Company's contractual relationship with Alcon.
On November 20, 1995, VISX, Alcon and the CAP Group agreed to settle the
litigation, including the counterclaims filed by Alcon, by filing a definitive
settlement agreement with the Superior Court. On January 9, 1996 the Superior
Court approved the proposed settlement which, according to its terms,
automatically became effective on March 12, 1996, at which time the Company's
marketing agreements with Alcon terminated. As part of the settlement, the
Company was obligated to reimburse the CAP Group for legal fees and expenses and
certain other related expenses incurred by them, as well as indemnify officers
and directors for their legal fees and expenses. These costs were estimated to
total $3,150,000 and were accrued as of December 31, 1995. The Company believes
that no further material adverse effect on the Company's financial position or
results of operations will result from this matter.
SECURITIES CLASS ACTION LITIGATION
In September 1994, various actions were filed in United States District
Court for the Northern District of California against the Company and several
former and current directors and officers of the Company alleging violations of
federal securities laws. These actions were consolidated into a single class
action. The plaintiffs in the class action alleged that from periods ranging
from November 1993 to October 1994, the Company issued misleading statements and
failed to make required disclosures about the Company's business prospects and
the status of FDA process relating to approval of the VISX System, in violation
of certain Federal securities laws. The amount of damages sought was
unspecified. In December 1995, the District Court approved a settlement of the
securities class action lawsuit against the Company. The net cost of settlement
after insurance reimbursement was $2,250,000.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1995.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market tier of
The Nasdaq Stock MarketSM under the symbol "VISX." The following table sets
forth for the periods indicated the high and low sale prices of the Common
Stock.
<TABLE>
<CAPTION>
HIGH LOW
----------- ---------
<S> <C> <C>
1994
First Quarter...................................................... $ 28.750 $ 15.500
Second Quarter..................................................... 21.250 13.750
Third Quarter...................................................... 22.000 11.750
Fourth Quarter..................................................... 14.500 10.000
1995
First Quarter...................................................... $ 15.875 $ 10.000
Second Quarter..................................................... 14.3125 10.875
Third Quarter...................................................... 24.125 13.000
Fourth Quarter..................................................... 40.125 18.750
</TABLE>
On March 1, 1996, the last reported sale price of the Common Stock on the
Nasdaq National Market was $31.25 per share. As of such date, there were
approximately 735 holders of record of the Common Stock. The Nasdaq quotations
represent prices between dealers without adjustment for retail markup, markdown
or commission and may not necessarily represent actual transactions.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company presently intends to retain any future earnings for use in
its business and does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the Company's
audited consolidated financial statements. The historical financial data should
be read in conjunction with the Company's consolidated financial statements and
notes thereto.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
---------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues........................ $16,703 $ 17,896 $ 22,074 $20,285 $ 13,171
Cost of revenues...................... 9,749 11,774 12,030 12,551 8,285
Total costs and expenses.............. 27,408 25,230 22,266 30,859* 15,573
Loss from operations.................. (10,705) (7,334) (192) (10,574)* (2,402)
Net income (loss)..................... (14,765)** (6,264) 179 (9,551)* (1,817)
Net income (loss) per share........... $ (1.20)** $ (.60) $ .02 $ (.98)* $ (.22)
Weighted average number of shares and
equivalents outstanding.............. 12,311 10,372 10,540 9,706 8,214
BALANCE SHEET DATA:
Cash and short-term investments....... $75,219 $ 11,161 $ 11,847 $ 9,135 $ 6,823
Working capital....................... 77,665 11,842 15,733 14,003 7,595
Total assets.......................... 91,078 20,627 22,917 23,033 25,157
Deferred revenue and other long-term
obligations.......................... -- 409 659 664 699
Accumulated deficit................... (51,568) (36,803) (30,539) (30,718) (21,167)
Stockholders' equity.................. 79,881 13,993 18,024 16,207 19,603
</TABLE>
- ------------------------
*Includes a $6.0 million charge or $0.62 per share for purchased research and
development incurred in connection with an acquisition.
**Includes a $5.4 million charge or $0.44 per share for litigation settlements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since its inception, VISX has been engaged in the design and development of
proprietary technologies and systems for LVC and has been manufacturing such
systems since 1987. In 1994, the Company determined that it was necessary to
strengthen its management as well as to devote increased attention to regulatory
affairs and monitoring of activities at clinical trial sites. This determination
arose, in part, as the Company became aware of procedural and administrative
irregularities at three of the Company's clinical sites following FDA
inspections in September 1994, which were conducted as part of the FDA's normal
oversight responsibility. The issues raised by the FDA inspections did not
involve concerns over patient safety or the efficacy of the VISX System.
On November 1, 1994, the Company hired Mark B. Logan as Chairman of the
Board, President and Chief Executive Officer to strengthen its executive
management. In 1995, the Company hired Jordan D. Haller, M.D. as Vice President,
Regulatory and Clinical Affairs, and retained Marc G. Odrich, M.D. as Medical
Monitor to provide additional oversight of clinical trials. During 1994 and
throughout 1995, the Company underwent a transition from a primary focus on
development and clinical evaluation of the Company's products to a broad-based,
market-driven strategy to expand and commercialize the Company's proprietary
technology. In May 1995, Elizabeth Davila joined the Company as Executive Vice
President and Chief Operating Officer to help implement this new strategy.
15
<PAGE>
Until May 26, 1995, Alcon was a related party to the Company by virtue of
its representation on the Company's board of directors. Alcon's representatives
did not stand for reelection at the Company's 1995 stockholders' meeting.
Accordingly, Alcon is no longer considered a related party to the Company.
Certain portions of the derivative litigation brought by stockholders of the
Company related to Alcon's marketing of the VISX System. On January 9, 1996 the
California Superior Court approved a settlement reached by Alcon, VISX and the
other participants in VISX's stockholder derivative litigation pursuant to
which, among other things, the domestic and international marketing agreements
between VISX and Alcon were terminated in early 1996. SEE NOTES 2 AND 8 OF NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, "RELATIONSHIP WITH ALCON" AND
"LITIGATION."
In March 1995, the Company introduced a new, streamlined model of the VISX
System. On September 29, 1995, the Company received FDA approval of its PMA
application for the VISX System for PTK. On October 20, 1995, the FDA's
Ophthalmic Devices Advisory Panel recommended approval of the Company's PMA
application for the VISX System for treatment of low-level myopia. On November
17, 1995 the Company received an approvable letter from the FDA for the VISX
System for treatment of low level myopia, and on March 26, 1996, the Company
received final approval from the FDA for use of the VISX System for LVC for mild
to moderate nearsightedness.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
The 28% decline in product sales was due to a significant drop in system
sales to Alcon, the Company's exclusive international distributor through the
end of 1995. Alcon, accounting for 66% of product sales in 1995 compared to 92%
in 1994, reduced their purchases in an effort to lower their inventory levels
and in anticipation of the termination of their exclusive marketing agreement
with the Company in early 1996. Additionally, in connection with the
introduction of the new model VISX System, the Company agreed to reduce the
distributor price charged to Alcon for the earlier model system during 1995.
These effects were only partially offset by the direct sale of a small number of
systems in the U.S. at higher average selling prices. The Company was allowed to
begin selling the VISX System in the U.S. after the Company received PMA from
the FDA in September 1995 for PTK applications.
Service and other revenues, covering primarily customer service, spare
parts, VisionKey cards and license royalties, increased 115% due to a larger
installed base of VISX Systems and due to royalty payments received under
license agreements signed from late 1994 through 1995.
Including product sales, service and other revenues, Alcon accounted for 63%
of the Company's total revenue in 1995, compared to 86% in 1994. Alcon was a
related party through May 26, 1995 and product sales to Alcon through that date
were reported as "Product sales to Alcon, a related party" and thereafter sales
to Alcon were reported as "Product sales." SEE NOTES 1 AND 2 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
Cost of revenues decreased to 58% of total revenue from 66% due primarily to
the following factors: (1) $1,500,000 of expense recorded in 1994 for the
disposition of the Company's model 2015 product line, (2) higher average selling
prices on systems sold in the U.S. in 1995 and (3) royalty license income
received under license agreements signed from late 1994 through 1995. These
items were offset partially by lower average selling prices in 1995 on systems
distributed internationally through Alcon.
Marketing, general and administrative expenses increased 38% due to
increased marketing costs paid to Alcon, additional personnel expense and higher
legal costs related to litigation and patent enforcement.
Research, development and regulatory expenses increased 25% due principally
to additional staff, consulting and regulatory expenses necessary to conduct
United States clinical trials, compile clinical results and pursue PMA
applications filed with the FDA.
16
<PAGE>
The change in Other Income (Expense) was due primarily to the settlement of
two lawsuits: (1) a securities class action lawsuit against the Company which
cost $2,250,000 net of insurance reimbursement, and (2) a lawsuit filed as a
derivative action on behalf of the Company by a stockholder which cost
$3,150,000 in reimbursement of legal fees and expenses to various parties to the
suit. SEE NOTE 8 "LITIGATION" FOR FURTHER EXPLANATION OF THESE MATTERS.
Partially offsetting the costs of litigation settlements was higher interest
income which increased mainly due to investment earnings on funds raised in the
November 1995 common stock offering.
1994 COMPARED TO 1993
The 22% decline in product sales was due to a reduced number of
international systems sold during the second half of the year to Alcon, the
Company's exclusive international distributor. Alcon's inventory of VISX Systems
increased in the first half of 1994 and as such Alcon required fewer units from
VISX in the second half of the year to satisfy international customer demand.
Alcon accounted for 92% of the Company's product sales in 1994, compared to 94%
in 1993.
Service and other revenues, covering primarily customer service, spare parts
and VisionKey cards, increased 5% due primarily to increased service revenues
and increased sale of parts and accessories due to a larger installed base of
VISX Systems internationally and an increase in the number of procedures
performed as the installed base of VISX Systems increased. Including revenues
from the sale of parts and VisionKey cards, Alcon accounted for 86% and 87% of
total revenues in 1994 and 1993, respectively.
Cost of revenues declined 2% as a result of lower material costs due to
fewer units shipped during 1994, partially offset by increased costs associated
with the product transition to the new model VISX System and $1,500,000 of
expense recorded for the disposition of a product line. Gross margins decreased
to 34% in 1994 compared to 46% in 1993 due to the lower volume of units shipped
during 1994, and costs associated with the product transition and disposition of
a product line. The Company recorded an expense of $1,500,000 in 1994 for
disposition of the model 2015 excimer system product line. The Company
determined not to pursue FDA approval of the model 2015 system, discontinued
clinical trials of such system as of August 31, 1994 and withdrew the IDEs
pursuant to which those trials were conducted. The Company has not manufactured
the model 2015 system since 1990.
Marketing, general and administrative expenses increased 21% due primarily
to increases in patent enforcement expenses, other legal expenses and expenses
associated with a reduction in workforce implemented in the third quarter of
1994.
Research, development and regulatory expenses increased 43% due to increased
regulatory expenses necessary to monitor and support United States clinical
trials and to manage processing of the Company's PMA applications to the FDA.
Other income, net increased $699,000 primarily as a result of the Company's
patent license agreement with Meditec entered into in September 1994. The
license agreement included a payment for past infringement and provides for
ongoing royalty payments based upon future sales.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's primary sources of liquidity have
consisted of financing from the sale of common stock and revenues from the sale
of VISX Systems. Cash and cash equivalents and short-term investments totaled
$75,219,000 at December 31, 1995 compared to $11,161,000 at December 31, 1994.
Working capital totaled $77,665,000 at December 31, 1995 compared to $11,842,000
at December 31, 1994. The increase was primarily the result of the Company's
sale of common stock. A private placement of 1,200,000 shares of common stock in
February 1995 generated $12,234,000 of net proceeds and a public offering of
2,875,000 shares of common stock in November 1995 generated $63,885,000 of net
proceeds.
Cash flow used for operating activities in 1995 was impacted by several
factors: (1) lower sales of systems, (2) increased spending on clinical testing
in the United States and pursuit of approval of
17
<PAGE>
PMA applications with the FDA, (3) a build up of inventory to support sales of
the new model VISX System, particularly in the U.S., (4) increased receivables
arising from U.S. system sales late in the fourth quarter of 1995 and (5)
payments to settle the securities class action litigation. Approximately
$3,150,000 of cash will be paid in 1996 to reimburse legal expenses related to
the settlement of the stockholder derivative litigation (see Notes 2 and 8 of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS).
The Company anticipates that its current cash and cash equivalents and
short-term investments will be sufficient to fund operating expenses for at
least the next two years, including anticipated capital expenditures. If the
Company were to receive FDA approval to market the VISX System for LVC in the
United States, the Company could require additional capital to fund larger-scale
manufacturing of the VISX System, additional trade receivables, as well as
future product development. There can be no assurance that capital will be
available when needed or, if available, that the terms for obtaining such funds
will be favorable to the Company or will not result in dilution to the Company's
stockholders.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company is not required to adopt the provisions of this
statement until its fiscal year 1996. The provisions of this statement must be
made on a prospective basis. The Company plans to adopt the disclosure
provisions of this statement in 1996, and believes the effect on its financial
position and results of operations, upon adoption, will not be significant.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
----------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.............................................................. $ 32,332 $ 11,161
Short-term investments................................................................. 42,887 --
Accounts receivable:
Trade................................................................................ 6,667 268
Alcon, a related party............................................................... -- 2,659
Inventories............................................................................ 6,742 3,792
Prepaid expenses....................................................................... 234 187
----------- ----------
Total current assets............................................................... 88,862 18,067
Property and equipment, net.............................................................. 1,565 1,450
Other assets............................................................................. 651 1,110
----------- ----------
$ 91,078 $ 20,627
----------- ----------
----------- ----------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....................................................................... $ 2,506 $ 2,058
Accrued liabilities.................................................................... 8,691 4,167
----------- ----------
Total current liabilities.......................................................... 11,197 6,225
----------- ----------
Deferred revenue & other long-term obligations........................................... -- 409
----------- ----------
Commitments and Contingencies (Notes 7 and 8)
Stockholders' equity:
Common stock -- $.01 par value, 30,000,000 shares authorized; 15,173,855 and 11,024,808
shares issued at December 31, 1995 and 1994, respectively............................. 152 110
Additional paid-in capital............................................................. 131,185 50,689
Accumulated deficit.................................................................... (51,568) (36,803)
Unrealized holding gains on available-for-sale securities.............................. 112 --
Less: 0 and 500,000 common stock treasury shares at December 31, 1995 and 1994,
respectively, at cost................................................................. -- (3)
----------- ----------
Total stockholders' equity......................................................... 79,881 13,993
----------- ----------
$ 91,078 $ 20,627
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
19
<PAGE>
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Product sales............................................................... $ 9,305 $ 1,240 $ 1,092
Product sales to Alcon, a related party..................................... 1,680 13,993 18,450
Service and other revenues.................................................. 5,718 2,663 2,532
---------- --------- ---------
Total revenues.......................................................... 16,703 17,896 22,074
---------- --------- ---------
COSTS AND EXPENSES:
Cost of revenues............................................................ 9,749 11,774 12,030
Marketing, general and administrative....................................... 8,800 6,371 5,272
Research, development and regulatory........................................ 8,859 7,085 4,964
---------- --------- ---------
Total costs and expenses................................................ 27,408 25,230 22,266
---------- --------- ---------
Loss from Operations.......................................................... (10,705) (7,334) (192)
---------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income............................................................. 1,340 472 295
Other income................................................................ -- 598 76
Litigation settlement....................................................... (5,400) -- --
---------- --------- ---------
Other income (expense), net............................................... (4,060) 1,070 371
---------- --------- ---------
Net income (loss)............................................................. $ (14,765) $ (6,264) $ 179
---------- --------- ---------
---------- --------- ---------
Net income (loss) per share................................................... $ (1.20) $ (0.60) $ 0.02
---------- --------- ---------
---------- --------- ---------
Weighted average number of shares and equivalents outstanding................. 12,311 10,372 10,540
---------- --------- ---------
---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED TOTAL
---------------------- PAID-IN ACCUMULATED HOLDING TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT GAINS STOCK EQUITY
--------- ----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992............ 10,396 $ 104 $ 46,824 $ (30,718) $ -- $ (3) $ 16,207
Exercise of stock options............. 177 2 682 -- -- -- 684
Exercise of warrants and options
issued to underwriters............... 114 1 953 -- -- -- 954
Net income............................ -- -- -- 179 -- -- 179
--------- ----- ----------- ------------ ----- ----- ------------
Balance, December 31, 1993............ 10,687 107 48,459 (30,539) -- (3) 18,024
Exercise of stock options............. 265 3 1,488 -- -- -- 1,491
Exercise of warrants issued to
Underwriters......................... 35 -- 350 -- -- -- 350
Issuance of common stock under the
Employee Stock Purchase Plan......... 38 -- 392 -- -- -- 392
Net loss.............................. -- -- -- (6,264) -- -- (6,264)
--------- ----- ----------- ------------ ----- ----- ------------
Balance, December 31, 1994............ 11,025 110 50,689 (36,803) -- (3) 13,993
Exercise of stock options............. 544 6 4,115 -- -- -- 4,121
Sale of common stock in a private
placement, net of issuance costs..... 1,200 12 12,222 -- -- -- 12,234
Retirement of treasury shares......... (500) (5) 2 -- -- 3 --
Proceeds of public stock offering net
of issuance costs.................... 2,875 29 63,856 -- -- -- 63,885
Issuance of common stock under the
Employee Stock Purchase Plan......... 30 -- 301 -- -- -- 301
Adjustment for unrealized holding
gains on available-for-sale
securities........................... -- -- -- -- 112 -- 112
Net loss.............................. -- -- -- (14,765) -- -- (14,765)
--------- ----- ----------- ------------ ----- ----- ------------
Balance, December 31, 1995............ 15,174 $ 152 $ 131,185 $ (51,568) $ 112 $ -- $ 79,881
--------- ----- ----------- ------------ ----- ----- ------------
--------- ----- ----------- ------------ ----- ----- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................. $ (14,765) $ (6,264) $ 179
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization................................................. 610 609 550
CHANGES IN ASSETS AND LIABILITIES:
Decrease (increase) in trade accounts receivable............................ (6,399) 791 478
Decrease in accounts receivable from Alcon.................................. 2,659 1,031 1,589
Decrease (increase) in inventories.......................................... (2,950) (586) 519
Decrease (increase) in prepaid expenses..................................... (47) (22) 324
Decrease (increase) in other assets......................................... 438 228 (12)
Increase (decrease) in accounts payable..................................... 448 1,044 (940)
Increase (decrease) in accrued liabilities.................................. 4,524 947 (988)
Decrease in deferred revenue and other long-term obligations................ (409) (250) --
---------- --------- ---------
Net cash provided by (used for) operating activities........................ (15,891) (2,472) 1,699
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (704) (447) (620)
Short-term investments
Available-for-sale securities
Purchases............................................................... (38,526) -- --
Held-to-maturity securities
Purchases............................................................... (9,066) -- --
Proceeds from maturities................................................ 4,817 -- --
---------- --------- ---------
Net cash used for investing activities.................................. (43,479) (447) (620)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.................................. 80,541 2,233 1,638
Repayments of long-term obligations and capital leases...................... -- -- (5)
---------- --------- ---------
Net cash provided by financing activities................................. 80,541 2,233 1,633
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents...................... 21,171 (686) 2,712
Cash and cash equivalents, beginning of period.............................. 11,161 11,847 9,135
---------- --------- ---------
Cash and cash equivalents, end of period.................................... $ 32,332 $ 11,161 $ 11,847
---------- --------- ---------
---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY. VISX, Incorporated (the "Company" or "VISX") is incorporated
in Delaware and is engaged in the design and development of proprietary
technologies and systems for laser vision correction ("LVC"). The Company has
developed and manufactures a device (the "VISX System") which utilizes an
excimer laser to reshape the surface of the cornea to treat nearsightedness,
astigmatism and farsightedness and is intended to reduce or eliminate the
patient's dependence on corrective lenses. The device is also intended to treat
other eye disorders, such as opacities and superficial scars.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its subsidiaries after the elimination of
significant intercompany accounts and transactions.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt
instruments purchased with an original maturity of 90 days or less to be cash
equivalents.
SHORT-TERM INVESTMENTS. In 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS No. 115") "Accounting for Certain
Investments in Debt and Equity Securities." The adoption of this statement did
not have any effect on the Company's financial position or results of operations
as the Company did not have any investments in debt or equity securities during
1994. Held-to-maturity securities are stated at amortized cost.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses, net of tax, recorded in stockholders' equity. The cost of securities
sold is based on the specific identification method.
INVENTORIES. Inventories consist of purchased parts and systems and are
stated at the lower of cost or market, using the first-in, first-out method.
Inventory costs include material, labor, and overhead. Inventories consisted of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Raw Materials and Subassemblies.......................................... $ 2,878 $ 1,394
Work-in-Process.......................................................... 1,348 2,398
Finished Goods........................................................... 2,516 --
--------- ---------
$ 6,742 $ 3,792
--------- ---------
--------- ---------
</TABLE>
23
<PAGE>
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT. Property and equipment is depreciated using the
straight-line method over estimated useful lives of the assets, generally three
to seven years or, in the case of leasehold improvements, the term of the
related lease. Property and equipment is stated at cost and consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Furniture and fixtures................................................... $ 986 $ 813
Machinery and equipment.................................................. 3,120 2,676
Leasehold improvements................................................... 119 103
--------- ---------
4,225 3,592
Less -- accumulated depreciation and amortization........................ (2,660) (2,142)
--------- ---------
Property and equipment, net.............................................. $ 1,565 $ 1,450
--------- ---------
--------- ---------
</TABLE>
REVENUE RECOGNITION. The Company recognizes revenue on product sales when
the products are shipped. Service revenue is recognized as the services are
performed. An allowance for installation, training and warranty costs is made at
the time sales are recognized.
RECLASSIFICATIONS. Certain items from prior year financial statements have
been reclassified to conform with current year presentation.
NET INCOME (LOSS) PER SHARE. Net income per share data for 1993 has been
computed using the weighted average number of common shares outstanding, after
giving effect to dilutive common stock equivalents. Common stock equivalents
consist of the dilutive shares issuable upon the exercise of stock options and
warrants (using the treasury stock method). Net loss per share data has been
computed using the weighted average number of shares outstanding during each
period; dilutive common stock equivalents have been excluded from the
computation as their effect would be to reduce the net loss per share amount.
CONCENTRATION OF CREDIT RISK; MAJOR CUSTOMERS AND EXPORT REVENUES. The
Company's credit risk in its accounts receivable has concentrated primarily in
sales to Alcon. Internationally, Alcon has bought product from the Company and
sold direct to end-users. The Company recognized $7,280,000, $13,993,000 and
$18,450,000 in revenues from the sale of VISX Systems to Alcon for the years
ended December 31, 1995, 1994 and 1993, respectively. Including sales of parts
and VisionKey cards, Alcon accounted for 63%, 86% and 87% of total revenues for
the years ended December 31, 1995, 1994 and 1993, respectively. The Company's
past marketing agreements with Alcon required the Company to nominate two
representatives of Alcon for election to the Company's Board of Directors. Alcon
was a related party to the Company due to its representation on the Company's
Board of Directors. Alcon representatives did not stand for reelection at the
Company's 1995 stockholders' meeting on May 26, 1995. Accordingly, after such
date, Alcon was no longer considered a related party to the Company. The
accompanying financial statements reflect transactions with Alcon up until May
26, 1995 as related party transactions (see Note 2).
24
<PAGE>
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Export revenues accounted for 74%, 85% and 86% of revenues for the years
ended December 31, 1995, 1994 and 1993, respectively. The following table
represents export revenues by geographic region (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Europe..................................................... $ 9,297 $ 12,653 $ 18,450
Canada..................................................... 1,833 1,790 --
Pacific Rim, Central & South America....................... 1,162 790 453
--------- --------- ---------
$ 12,292 $ 15,233 $ 18,903
--------- --------- ---------
--------- --------- ---------
</TABLE>
ACCOUNTING FOR STOCK-BASED COMPENSATION. In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation." The Company is not required
to adopt the provisions of this statement until its fiscal year 1996. The
provisions of this statement must be made on a prospective basis. The Company
plans to adopt the disclosure provisions of this statement in 1996, and believes
the effect on its financial position and results of operations, upon adoption,
will not be significant.
NOTE 2. RELATIONSHIP WITH ALCON
MARKETING AGREEMENT. In 1987, the Company amended its then-existing
agreement with Alcon Laboratories, Inc. and Alcon Pharmaceuticals Ltd.
(collectively "Alcon") whereby the Company granted a license and exclusive
marketing rights for the VISX System to Alcon, and in 1988, Alcon advanced
$2,500,000 to the Company to defray development costs. In January 1990, the
Company and Alcon entered into a Second Amended and Restated Marketing Agreement
("Marketing Agreement") which amended and restated the marketing agreement, as
it pertained to domestic marketing. The Marketing Agreement granted Alcon a
license and exclusive marketing rights for the Company's VISX System in the
U.S., and Alcon was required to collect a per-procedure fee and remit it to the
Company. The Marketing Agreement contained provisions to repay the $2,500,000
previously advanced to defray development costs. The Company repaid $1,000,000
of that amount in 1992. Under the Marketing Agreement the Company reimbursed
Alcon for costs it incurred on behalf of the Company throughout the year. The
Company recorded expenses of $1,281,000, $120,000 and $90,000 for the years
ended December 31, 1995, 1994 and 1993, respectively, related to the
reimbursement of these costs. These expenses were recorded in marketing, general
and administrative expenses in the accompanying consolidated statements of
operations.
In addition, per the agreement Alcon was entitled to the following payments:
(1) VISX was contingently liable to Alcon for $1,500,000, the balance of the
$2,500,000 previously advanced. This payment was to be made at the end of each
year, to the extent VISX had Annual Cash Flow, as defined in the Marketing
Agreement. (2) VISX was obligated to reimburse Alcon for certain additional
approved costs not previously reimbursed, to the extent the Company had Annual
Cash Flow. (3) Thereafter, Alcon would receive 25% of the Company's Excess Cash
Flow, as defined in the Marketing Agreement. During the term of the Marketing
Agreement no payments accrued or became due and payable under the segments of
the Marketing Agreement described in (1), (2) and (3), above.
On January 9, 1996, the California Superior Court approved a settlement of
all matters between Alcon, VISX and the other participants in VISX's stockholder
derivative litigation. Under the terms of the agreement, Alcon has ceased, after
the transition period of 60 days, all marketing and sales efforts on behalf of
VISX. However, Alcon will continue to service VISX Systems sold internationally
by Alcon. Alcon has agreed to cooperate with the Company in various respects to
facilitate the transition resulting from termination of the marketing agreements
with Alcon. Under the settlement terms,
25
<PAGE>
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. RELATIONSHIP WITH ALCON (CONTINUED)
Alcon will be able to market competitors' LVC systems. Also, under settlement
terms, the Company is released from its contingent obligation to reimburse Alcon
for $1.5 million of developmental expenses for the VISX System previously
advanced by Alcon. Additionally, Alcon's right to receive 25% of VISX's future
excess cash flow is also terminated. (See Note 8).
INSURANCE/INDEMNIFICATION. Under the Marketing Agreement, the Company was
required to indemnify Alcon, its affiliates and their respective officers,
directors, partners, employees and stockholders for damages, up to an aggregate
of $4,000,000, arising out of the design, manufacture or authorized use of the
VISX Systems or any claim that the manufacture, design, use, marketing or sale
of the VISX Systems infringes any patent owned or controlled by any third party.
The indemnity did not cover damages resulting from negligence, recklessness,
willful misconduct or unauthorized act of any party seeking indemnification.
VISX maintained a product liability policy sufficient to cover the $4,000,000.
CLINICAL AND REGULATORY. In September 1994, VISX and Alcon signed a letter
of intent pursuant to which Alcon agreed to provide interim regulatory and
clinical assistance to the Company. During 1994, the Company recognized expenses
of $400,000 related to these services provided by Alcon. Effective February
1995, the Company terminated the interim regulatory and clinical agreement with
Alcon.
NOTE 3. INVESTMENTS
Investments in securities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------
GROSS AGGREGATE
UNREALIZED FAIR
COST GAINS VALUE
--------- ----------- ---------
<S> <C> <C> <C>
Short-Term Investments
Available-for-Sale Securities
Debt securities of the U.S. Treasury and U.S. government corporations and
agencies................................................................. $ 30,400 $ 91 $ 30,491
Debt securities of U.S. corporations...................................... 8,126 21 8,147
Held-to-Maturity Securities
U.S. Treasury bills 4,249 -- 4,249
--------- ----- ---------
42,775 112 42,887
Cash Equivalents
Available-for-Sale Securities
Debt securities of U.S. corporations...................................... 26,022 -- 26,022
--------- ----- ---------
Total investments $ 68,797 $ 112 $ 68,909
--------- ----- ---------
--------- ----- ---------
</TABLE>
There were no gross realized gains or losses on available-for-sale
securities. The net adjustment to unrealized holding gains on available-for-sale
securities included in stockholders' equity totaled $112,000 and $0 in 1995 and
1994, respectively. All available-for-sale securities held at December 31, 1995
mature in two years or less. All held-to-maturity securities held at December
31, 1995 mature by May 31, 1996.
26
<PAGE>
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Payroll and related accruals............................................. $ 1,626 $ 729
Accrued warranty, installation, and training expenses.................... 861 657
Product line disposition................................................. 561 1,437
Accrued royalties........................................................ 585 318
Deposits and deferred revenue............................................ 615 101
Accrued litigation settlement expenses (see note 8)...................... 3,150 --
Other.................................................................... 1,293 925
--------- ---------
$ 8,691 $ 4,167
--------- ---------
--------- ---------
</TABLE>
NOTE 5. STOCKHOLDERS' EQUITY
COMMON STOCK. On February 14, 1995, the Company concluded a private
placement of 1,200,000 shares of its Common Stock at a price of $10.85 per share
and received net proceeds of approximately $12,234,000. Certain holders of the
shares purchased in the private placement demanded registration of those shares
for resale under the Securities Act of 1933, pursuant to the terms of the
private placement agreement. The Company filed for registration of those shares
in April 1995. On November 8, 1995, the Company completed a public offering of
2,875,000 shares of its common stock at a price of $23.75 and received net
proceeds of approximately $63,885,000.
STOCK OPTION PLANS. The Company has reserved shares of its common stock for
issuance upon the exercise of stock options granted to the Company's employees
under six separate option plans. In 1993, the Company adopted a Flexible Stock
Incentive Plan (the "1993 Plan") and reserved 1,000,000 shares. The 1993 Plan
permits the issuance of incentive or non-qualified stock options and stock
grants to employees, consultants and non-employee directors of the Company with
an exercise price not less than 85% of the fair market value on the date of
grant (100% for incentive stock options). Options granted under the 1993 Plan
generally vest 25% one year after the date of grant and ratably thereafter over
three years and expire ten years from the date of grant. In addition to the 1993
Plan, the Company has options outstanding under its 1983, 1987, 1988 and 1990
option plans, which have generally the same eligibility and vesting terms as
options granted under the 1993 Plan. The Company also grants 2,000 shares of the
Company's common stock annually to each non-employee director
27
<PAGE>
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
of the Company. Options granted to non-employee directors of the Company become
fully exercisable six months after the date of grant; however, unvested shares
are subject to repurchase as set forth in the agreement. A summary of stock
option activity for all plans follows:
<TABLE>
<CAPTION>
SHARES UNDER OPTION EXERCISE PRICE
------------------- ---------------------
<S> <C> <C>
December 31, 1992.......................................... 1,198,964 $ 1.70 - $16.15
Granted.................................................. 320,755 9.88 - 14.75
Exercised................................................ (176,531) 1.70 - 16.15
Canceled................................................. (93,301) 5.25 - 16.15
---------- ---------------------
December 31, 1993.......................................... 1,249,887 3.00 - 16.15
Granted.................................................. 545,910 11.25 - 19.25
Exercised................................................ (262,642) 5.25 - 16.15
Canceled................................................. (59,340) 5.25 - 17.125
---------- ---------------------
December 31, 1994.......................................... 1,473,815 3.00 - 19.25
Granted.................................................. 622,000 11.375 - 36.00
Exercised................................................ (587,196) 3.00 - 16.50
Canceled................................................. (118,241) 10.84 - 19.875
---------- ---------------------
December 31, 1995.......................................... 1,390,378 $ 5.25 - $36.00
---------- ---------------------
---------- ---------------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. The Company has an Employee Stock Purchase
Plan ("the Purchase Plan"). The Purchase Plan is available to all eligible
full-time employees, excluding those owning 5% or more of the Company's stock.
Pursuant to the Purchase Plan, employees can purchase the Company's common stock
at 85% of fair market value, in an amount up to 10% of the employee's wages
during the semiannual plan purchase period. Employees purchased 30,449 shares,
37,892 shares and 0 shares under the Purchase Plan during the years ended
December 31, 1995, 1994 and 1993, respectively.
OPTION AGREEMENT. The Company assumed a stock option that VISX California
granted to an officer to purchase 66,195 shares of common stock at $5.70 per
share. These options were exercised during 1994.
WARRANTS AND STOCK OPTIONS ISSUED TO UNDERWRITERS. In December 1993, Noel
Group, Inc. ("Noel"), which had two representatives on the Company's Board of
Directors, exercised a warrant to purchase 100,000 shares of the Company's
common stock at a purchase price of $8.40 per share, which resulted in net
proceeds to the Company of $840,000. Noel purchased the warrant in 1991 from the
underwriter that received the warrant in 1988 in connection with the Company's
initial public offering.
Also in 1993, options to purchase an additional 14,000 shares of common
stock were exercised at a purchase price of $8.16 per share, resulting in net
proceeds to the Company of $114,000. The options were initially issued to the
underwriters in connection with the initial public offering of VISX California.
The Company assumed the options in connection with the 1990 acquisition of VISX
California.
In January 1990, in connection with the private placement of 800,000 shares
of its common stock, the Company issued to its private placement agent a warrant
to purchase up to 35,000 shares of the Company's common stock at a purchase
price of $10.00 per share. The warrant became exercisable in January 1991, and
was exercised during 1994, resulting in proceeds to the Company of $350,000.
28
<PAGE>
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1995, there were no remaining warrants or stock options
outstanding outside of the Company's Stock Option and Purchase plans. The
following table summarizes the share information at December 31, 1995 related to
all Stock Option plans and the Purchase Plan.
<TABLE>
<CAPTION>
AVAILABLE
SHARES FOR
RESERVED OUTSTANDING FUTURE GRANT EXERCISABLE
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
All Option Plans................................. 2,278,532 1,390,378 -- 453,932
Purchase Plan.................................... 500,000 -- 431,659 --
----------- ----------- ------------ -----------
Total.......................................... 2,778,532 1,390,378 431,659 453,932
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
NOTE 6. INCOME TAXES
In January 1993, the Company adopted on a prospective basis Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income
Taxes." SFAS No. 109 is an asset and liability approach for computing deferred
income taxes. This method requires that the statement of operations reflect any
changes in tax laws and rates enacted during the period affecting events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, SFAS No. 109 generally considers all
expected future events other than enactments of changes in the tax law or rates.
The Company has not had any taxable income or related tax liabilities for any
period and accordingly, there is no provision for income taxes in the
accompanying statements of operations. As a result, the implementation of SFAS
No. 109 did not have any effect on the Company's financial position or results
of operations.
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $54,000,000 and $13,000,000 available to offset future Federal and
California taxable income, respectively. The Federal loss carryforwards expire
through the year 2010 and the California loss carryforwards expire at various
dates from 1996 through the year 2000. The availability and timing of the amount
of prior losses to be used to offset taxable income in future years will be
limited due to various provisions, including any change in ownership interest of
the Company resulting from significant stock transactions.
The components of the net deferred income tax asset as of December 31, 1995
and 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Net operating loss carryforwards............................................... $ 19,700 $ 12,700
Cumulative temporary differences (reserves).................................... 3,400 1,900
Tax credit carryforwards....................................................... 1,900 1,400
---------- ----------
25,000 16,000
Valuation allowance, provision for income taxes................................ (21,700) (14,700)
Valuation allowance, equity.................................................... (3,300) (1,300)
---------- ----------
Net deferred income tax asset.................................................. $ -- $ --
---------- ----------
---------- ----------
</TABLE>
The valuation allowances consist of net operating losses, deferred tax
assets and tax credit carryforwards which may expire before the Company can use
them. The portion of the valuation allowance which will affect equity and which
will not be available to offset future provisions of income tax is stated in the
above table as "Valuation allowance, equity". The Company believes sufficient
uncertainty exists regarding the realizability of these items, and accordingly,
a valuation allowance has been established.
29
<PAGE>
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. COMMITMENTS
The Company leases facilities and equipment under operating leases which
expire through 2000. Rent expense was $666,000, $529,000 and $657,000 for the
years ended December 31, 1995, 1994 and 1993, respectively. Future minimum lease
commitments are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C>
1996....................................................................... $ 626
1997....................................................................... 484
1998....................................................................... 55
1999....................................................................... 55
2000....................................................................... 23
---------
Total minimum lease payments ............................................ $ 1,243
---------
---------
</TABLE>
NOTE 8. LITIGATION
SECURITIES CLASS ACTION LITIGATION
In September 1994, various actions were filed in United States District
Court for the Northern District of California against the Company and several
former and current directors and officers of the Company alleging violations of
federal securities laws. These actions were consolidated into a single class
action. The plaintiffs in the class action alleged that from periods ranging
from November 1993 to October 1994, the Company issued misleading statements and
failed to make required disclosures about the Company's business prospects and
the status of FDA process relating to approval of the VISX System, in violation
of certain Federal securities laws. The amount of damages sought was
unspecified. In December 1995, the District Court approved a settlement of the
securities class action lawsuit against the Company. The net cost of settlement
after insurance reimbursement was $2,250,000.
STOCKHOLDER DERIVATIVE LITIGATION
In September 1994, an action was filed in the Superior Court of California
as a derivative action on behalf of the Company by CAP Advisers Limited, CAP
Trust and Osterfak Limited (collectively, the "CAP Group"), who collectively
owned in excess of 10% of the Company's outstanding Common Stock at the time the
action was filed. The action named as defendants several former officers of the
Company, former directors of the Company including representatives of Alcon, and
Alcon and certain of its affiliates. The suit alleged, among other things,
breaches of fiduciary duties involving the failure to exercise appropriate
oversight over regulatory affairs and the Alcon marketing agreements by the
named individual defendants as well as breaches of certain of Alcon's marketing
obligations under the Company's agreements with Alcon, and sought monetary
damages in excess of $2.25 billion from Alcon and the named individual
defendants. Alcon made counterclaims against the CAP Group and two former
directors of the Company not named in the original suit for interference with
the Company's contractual relationship with Alcon.
On November 20, 1995, VISX, Alcon and the CAP Group agreed to settle the
litigation, including the counterclaims filed by Alcon, by filing a definitive
settlement agreement with the Superior Court. On January 9, 1996 the Superior
Court approved the proposed settlement which, according to its terms,
automatically became effective on March 12, 1996, at which time the Company's
marketing agreements with Alcon terminated. As part of the settlement, the
Company was obligated to reimburse the CAP Group for legal fees and expenses and
certain other related expenses incurred by them, as well as indemnify officers
and directors for their legal fees and expenses. These costs were estimated to
total $3,150,000 and were accrued as of December 31, 1995. The Company believes
that no further material adverse effect on the Company's financial position or
results of operations will result from this matter.
30
<PAGE>
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. LITIGATION (CONTINUED)
AZEMA PATENT LITIGATION
On August 30, 1995, Summit Technology, Inc. ("Summit") sued the Company in
the United States for infringement of a U.S. patent held by Summit. Summit
acquired the rights to the patent in 1993, and Pillar Point Partners, a
partnership consisting of entities controlled by VISX and Summit, elected not to
acquire rights to the patent from Summit at that time. The lawsuit claims that
the manufacture and export of VISX Systems from the United States is an
infringement of the patent. The Company believes that the lawsuit is without
merit and intends to vigorously defend its position. The Company believes that
the resolution of this matter will not have a material adverse effect on the
Company's financial position or results of operations. Nevertheless, the cost of
defending this action could be significant, and there can be no assurance that
the VISX System will be held not to infringe the patent. In such event, the
Company could be subject to significant liabilities to Summit and it could be
necessary for the Company to seek a license from Summit in order for the Company
to manufacture, market and sell products in the United States. There can be no
assurance that a license would be available on acceptable terms or at all. It
might also be necessary for the Company to attempt to redesign the VISX System
so that it no longer infringes the patent, although there can be no assurance
that any such redesign efforts would be successful. Additionally, a redesign of
the VISX System, depending on its scope, could entail delays in FDA approval of
the redesign.
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To VISX, Incorporated:
We have audited the accompanying consolidated balance sheets of VISX,
Incorporated (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VISX, Incorporated and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Jose, California
January 31, 1996
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the independent public accountants on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF VISX
The information required by this item regarding directors of VISX, set forth
under "Election of Directors" and "Further Information Concerning the Board of
Directors" in the Company's definitive Proxy Statement (the "1996 Proxy
Statement") to be filed with the Commission and relating to its Annual Meeting
of Stockholders to be held on May 17, 1996, is incorporated herein by reference.
The officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- ----------------------------------------------------------
<S> <C> <C>
Mark B. Logan......................... 57 Chairman of the Board, Chief Executive Officer and
President
Elizabeth H. Davila................... 51 Executive Vice President, Chief Operating Officer
Katrina J. Church..................... 34 Vice President, General Counsel and Secretary
Terrance N. Clapham................... 48 Vice President, Research and Development
Jordan D. Haller, M.D................. 63 Vice President, Regulatory and Clinical Affairs
James W. McCollum..................... 41 Vice President, Marketing and Sales
Timothy R. Maier...................... 47 Vice President, Chief Financial Officer
Judith A. Somerville.................. 53 Vice President, Human Resources
W. Michael Wilson..................... 51 Vice President, Operations
</TABLE>
MARK B. LOGAN. Mr. Logan has served as Chairman of the Board, President and
Chief Executive Officer of the Company since November 1994. From January 1992 to
July 1994, Mr. Logan was Chairman of the Board, President and Chief Executive
Officer of Insmed Pharmaceuticals, Inc., a development-stage biopharmaceutical
company, and has served on its board of directors since its founding in 1988.
Prior to 1992, Mr. Logan was a Principal Associate with McManis Associates,
Inc., a Washington, D.C. based research and management firm specializing in the
health care field. From 1981 to 1985, Mr. Logan was employed by Bausch & Lomb,
Inc. as President, Health Care and Consumer Group, and was a member of Bausch &
Lomb's board of directors. From 1975 to 1981, he was employed by Becton
Dickinson & Company, where he held the position of Consumer Group President, and
was responsible for that Company's worldwide diabetes syringe business. From
1967 to 1974, Mr. Logan held various management positions with American Home
Products Corporation.
ELIZABETH H. DAVILA. Ms. Davila has been Executive Vice President and Chief
Operating Officer since May 1995. From 1977 to 1994, Ms. Davila held senior
management positions with Syntex Corporation which included Vice President of
Quality and Reengineering, Vice President and Director of the Company's Drug
Development Optimization Program, Vice President of Marketing and Sales for the
Syva Company Diagnostics Division and Vice President of Marketing and Sales of
the Syntex Ophthalmics Division.
KATRINA J. CHURCH. Ms. Church has been Vice President, General Counsel
since January 1995 and corporate counsel since June 1991. She has served as
Secretary of the Company since May 1994. Before joining the Company in 1991, Ms.
Church practiced law with the firm Hopkins & Carley in San Jose, California.
TERRANCE N. CLAPHAM. Mr. Clapham has been Vice President, Research and
Development since March 1993. He also served as Secretary of the Company from
November 1990 to May 1994 and Vice President, Engineering and Product
Development from November 1990 to March 1993. He was a founder, Vice President,
Secretary and director of one of the Company's predecessors from its inception
in August 1987 until November 1990, when it was merged with the Company.
33
<PAGE>
JORDAN D. HALLER, M.D. Dr. Haller has been Vice President, Regulatory and
Clinical Affairs since July 1995. Prior to joining VISX, Dr. Haller was Medical
Director of Quantum Bio-Medical Technologies from 1990. Dr. Haller also served
on the faculty at Columbia University and taught courses in technology
assessment, with emphasis on government and FDA regulation. From 1985 to 1990,
he was Medical Director for C.R. Bard Company. In 1984 he founded The Laser
Institute of Pittsburgh. Prior to 1984, Dr. Haller was Director of
Cardiovascular Surgery at Maimonides Medical Center and a practicing
cardiovascular surgeon.
JAMES W. MCCOLLUM. Mr. McCollum has been Vice President, Marketing and
Sales since February 1996. Prior to joining VISX, he served as Area Director -
North America for Alcon Laboratories and was responsible for all excimer
refractive activities in Canada and the U.S. Mr. McCollum has held various
senior management positions at CooperVision, Inc., Innovision Medical Inc., and
American Hospital Supply Corporation, and has over 20 years of professional
experience, including 15 years in the medical device industry and 13 years in
ophthalmic products.
TIMOTHY R. MAIER. Mr. Maier has been Vice President, Chief Financial
Officer since June 1995. From 1991 to June 1995, he served as Vice President,
Chief Financial Officer of GenPharm, International, Inc., a privately held
international biotechnology company. From 1976 to 1991, Mr. Maier held various
positions with Spectra-Physics, Inc., an international manufacturer of
scientific and commercial laser products. His positions included Operations
Manager, International Finance and Administration Manager, and Vice President of
Finance.
JUDITH A. SOMERVILLE. Ms. Somerville has been Vice President, Human
Resources since September 1995 and Director, Human Resources since March 1995.
From 1993 to March 1995, she served as Corporate Director, Compensation and
Benefits at VLSI Technology, Inc., a publicly held semiconductor company. From
1990 to 1993, she was Director, Corporate Compensation and Benefits at Conner
Peripherals, Inc., an international manufacturer of disk drives. From 1989 to
1990, she was Corporate Compensation Manager at Hexcel Corporation. From 1980 to
1989, Ms. Somerville was employed by United Technologies Corporation in a
variety of Human Resource positions.
W. MICHAEL WILSON. Mr. Wilson has been Vice President, Operations since
January 1992 and served as Director of Operations from December 1991 to January
1993. He was Manufacturing Manager with one of the Company's predecessors from
January to November 1990 and Manufacturing Manager of the Company from November
1990 to December 1991.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item regarding compensation of VISX's
directors and executive officers set forth in the 1996 Proxy Statement under
"Further Information Concerning the Board of Directors -- Director Compensation"
and "Executive Compensation" is incorporated herein by reference (except to the
extent allowed by Item 402(a)(8) of Regulation S-K).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item regarding beneficial ownership of the
Common Stock by certain beneficial owners and by management of the Company set
forth in the 1996 Proxy Statement under "Principal Stockholders" is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item regarding certain relationships and
related transactions with management of the Company set forth in the 1996 Proxy
Statement under "Further Information Concerning the Board of Directors" and
"Executive Compensation" is incorporated herein by reference.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) 1. The following consolidated financial statements of VISX, Incorporated and its
subsidiaries are found in this Annual Report on Form 10-K for the fiscal year ended
December 31, 1995:
FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Consolidated Balance Sheets......................................... 19
Consolidated Statements of Operations............................... 20
Consolidated Statements of Stockholders' Equity..................... 21
Consolidated Statements of Cash Flows............................... 22
Notes to Consolidated Financial Statements.......................... 23
Report of Independent Public Accountants............................ 32
</TABLE>
<TABLE>
<S> <C> <C>
2. All schedules have been omitted since the required information is not applicable or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the Consolidated Financial
Statements or notes thereto.
3. The Exhibits filed as a part of this Report are listed in the Index to Exhibits on
pages 37 through 39 of this Report.
(b) REPORTS ON FORM 8-K. None.
(c) EXHIBITS. See Index to Exhibits on pages 38 through 39 of this Report.
(d) FINANCIAL STATEMENT SCHEDULES. None.
</TABLE>
35
<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.
VISX, Incorporated
a Delaware corporation
By: /s/ MARK B. LOGAN
-----------------------------------
Mark B. Logan
CHAIRMAN OF THE BOARD, PRESIDENT,
AND CHIEF EXECUTIVE OFFICER
Date: March 27, 1996
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Mark B. Logan and Timothy R. Maier, and each of them, 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 all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting to said attorneys-in-fact, or his
substitute or substitutes, the power and authority to perform each and every act
and thing requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as he might or could do in person, 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 and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
PRINCIPAL EXECUTIVE OFFICER:
Chairman of the Board,
/s/ MARK B. LOGAN President, Chief
- ----------------------------------- Executive Officer and March 27, 1996
Mark B. Logan Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ TIMOTHY R. MAIER Chief Financial Officer,
- ----------------------------------- Vice President Finance March 27, 1996
Timothy R. Maier and Administration
ADDITIONAL DIRECTORS:
/s/ ELIZABETH H. DAVILA Executive Vice President,
- ----------------------------------- Chief Operating Officer, March 27, 1996
Elizabeth H. Davila and Director
/s/ GLENDON E. FRENCH
- ----------------------------------- Director March 27, 1996
Glendon E. French
/s/ RICHARD B. SAYFORD
- ----------------------------------- Director March 27, 1996
Richard B. Sayford
36
<PAGE>
VISX, INCORPORATED
INDEX TO EXHIBITS
[ITEM 14(C)]
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------------------------------------------------------------- ----
<C> <S> <C>
2.1* Asset Purchase Agreement among the Company, Questek,
Incorporated, and Lambda-Physik, dated February 1, 1993
(PREVIOUSLY FILED AS EXHIBIT 2.2 TO ANNUAL REPORT ON FORM 10-K
DATED MARCH 30, 1993).
3.1* Amended and Restated Certificate of Incorporation (PREVIOUSLY
FILED AS EXHIBIT 3.1 TO FORM S-1 REGISTRATION STATEMENT NO.
33-41621) as amended in Registration Statement on Form S-8
(EXHIBIT 4.2, FILE NO. 33-53806)
3.2* Amended and Restated Bylaws as revised through April 25, 1991
(PREVIOUSLY FILED AS EXHIBIT 3.2 TO FORM S-1 REGISTRATION
STATEMENT NO. 33-46311) as amended on September 12, 1994 (EXHIBIT
5.2 TO FORM 8-K DATED SEPTEMBER 8, 1994)
4.1* REFERENCE IS MADE TO EXHIBITS 3.1 AND 3.2
4.2* Specimen Common Stock Certificate (PREVIOUSLY FILED AS EXHIBIT
4.2 TO ANNUAL REPORT ON FORM 10-K, FILE NO. 1-10694, FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1990)
10.1* Amended and Restated Marketing Agreement dated April 21, 1987
among the Company, LRI L. P., Alcon Laboratories, Inc. and Alcon
Pharmaceuticals, Ltd. (PREVIOUSLY FILED AS EXHIBIT 10(A) TO FORM
S-1 REGISTRATION STATEMENT NO. 33-23844)
10.2* Second Amended and Restated Marketing Agreement dated December
22, 1989 among the Company, Alcon Surgical, Inc. and Alcon
Laboratories, Inc. (PREVIOUSLY FILED AS EXHIBIT 10(B) TO ANNUAL
REPORT ON FORM 10-K, FILE NO. 0-17247, FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1989)
10.3* Letter Agreement dated December 11, 1989 among the Company,
L'Esperance Research Incorporated and Alcon Surgical, Inc.
(PREVIOUSLY FILED AS EXHIBIT 10(C) TO ANNUAL REPORT ON FORM 10-K,
FILE NO. 0-17247, FOR THE FISCAL YEAR ENDED DECEMBER 31, 1989)
10.4* Letter Agreement dated December 22, 1989 among the Company, Alcon
Laboratories, Inc. and Alcon Surgical, Inc. (PREVIOUSLY FILED AS
EXHIBIT 10(D) TO ANNUAL REPORT ON FORM 10-K, FILE NO. 0-17247,
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1989)
10.5* Letter Agreement dated May 22, 1990 among the Company, Alcon
Surgical, Inc., Alcon Laboratories, Inc. and Alcon
Pharmaceuticals, Ltd. (PREVIOUSLY FILED AS EXHIBIT 10.5 TO ANNUAL
REPORT ON FORM 10-K, FILE NO. 1-10694, FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1990)
10.6* Second Amended and Restated Development Agreement dated as of
April 21, 1987 between LRI L. P. and the Company, with Amendment
dated July 28, 1988 (PREVIOUSLY FILED AS EXHIBIT 10(B) TO FORM
S-1 REGISTRATION STATEMENT NO. 33-23844)
10.7 TO 10.11 SEE BELOW
10.12* Stock Option Plan (PREVIOUSLY FILED AS EXHIBIT 10(E) TO FORM S-1
REGISTRATION STATEMENT NO. 33-23844)
10.13* 1988 Stock Option Plan (PREVIOUSLY FILED AS EXHIBIT 10.1 TO FORM
S-1 REGISTRATION STATEMENT NO. 33-26991)
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------------------------------------------------------------- ----
<C> <S> <C>
10.14* Amendment to 1988 Stock Option Plan (PREVIOUSLY FILED AS EXHIBIT
10.20 TO FORM S-1 REGISTRATION STATEMENT NO. 33-26991)
10.15* 1990 Stock Option Plan (PREVIOUSLY FILED AS EXHIBIT 10.39 TO
ANNUAL REPORT ON FORM 10-K, FILE NO. 1-10694, FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1990)
10.16* 1983 Incentive Stock Option Plan (PREVIOUSLY FILED AS EXHIBIT 4.4
TO FORM S-8 REGISTRATION STATEMENT NO. 33-53806)
10.17* Agreement dated as of January 1, 1992, between International
Business Machines Corporation and the Company (PREVIOUSLY FILED
AS EXHIBIT 10.34 TO AMENDMENT NO. 1 TO FORM S-1 REGISTRATION
STATEMENT NO. 33-46311)
10.18* Formation Agreement dated June 3, 1992, among Summit Technology,
Inc., VISX, Incorporated, Summit Partner, Inc., and VISX Partner,
Inc. (PREVIOUSLY FILED AS EXHIBIT 10.1 TO FORM 8-K DATED JUNE 3,
1992)
10.19* General Partnership Agreement of Pillar Point Partners dated June
3, 1992, between VISX Partner, Inc. and Summit Partner, Inc.
(PREVIOUSLY FILED AS EXHIBIT 10.2 TO FORM 8-K DATED JUNE 3, 1992)
10.20* License-back to VISX Agreement dated June 3, 1992, between Pillar
Point Partners and the Company (PREVIOUSLY FILED AS EXHIBIT 10.3
TO FORM 8-K DATED JUNE 3, 1992)
10.21* Lease dated July 16, 1992, as amended October 2, 1992, between
the Company and Sobrato Interests, a California limited
partnership (PREVIOUSLY FILED AS EXHIBIT 10.1 TO FORM 10-Q FOR
THE QUARTER ENDED SEPTEMBER 30, 1992)
10.22* 1993 Flexible Stock Incentive Plan (PREVIOUSLY FILED AS EXHIBIT
10.28 TO ANNUAL REPORT ON FORM 10-K DATED MARCH 30, 1993)
10.23* 1993 Employee Stock Purchase Plan (PREVIOUSLY FILED AS EXHIBIT
10.29 TO ANNUAL REPORT ON FORM 10-K DATED MARCH 30, 1993)
10.24* Form of Subscription Agreement (PREVIOUSLY FILED AS EXHIBIT 10.24
TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994)
10.25* Independent Consultant Services Agreement dated October 20, 1995,
among VISX, Donald R. Sanders, M.D. and Centers for Clinical
Research (PREVIOUSLY FILED AS EXHIBIT 10.25 TO FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1994)
10.26* Complaint filed on September 26, 1994 in the Superior Court for
the County of Santa Clara by CAP Advisers Limited, CAP Trust, and
Osterfak, Ltd. (PREVIOUSLY FILED AS EXHIBIT 5.1 TO FORM 8-K DATED
SEPTEMBER 26, 1994)
10.27* Consolidated Amended Class Action Complaint filed on February 10,
1995 in the United States District Court for the Northern
District of California (PREVIOUSLY FILED AS EXHIBIT 10.27 TO FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1994)
10.28 Agreement effective as of November 20, 1995, among the Company,
Alcon Laboratories, Inc., and Alcon Pharmaceuticals, Ltd.........
10.29 Agreement and Stipulation of Settlement filed on November 20,
1995, in the Superior Court for the County of Santa Clara........
10.30 Second Amendment to Lease dated March 8, 1996, between the
Company and Sobrato Interests, a California limited
partnership......................................................
21.1* Subsidiaries (PREVIOUSLY FILED AS EXHIBIT 21.1 TO ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994)
23.1 Consent of Independent Public Accountants........................
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------------------------------------------------------------- ----
<C> <S> <C>
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.7* Employment Agreement dated May 22, 1990 between the Company and
Charles R. Munnerlyn (PREVIOUSLY FILED AS EXHIBIT 10(K) TO FORM
S-4 REGISTRATION STATEMENT NO. 33-35491)
10.8* Amendment to Employment Agreement dated July 21, 1994 between the
Company and Charles R. Munnerlyn (PREVIOUSLY FILED AS EXHIBIT
10.8 TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994)
10.9* Employment Agreement dated May 22, 1990 between the Company and
Alan R. McMillen (PREVIOUSLY FILED AS EXHIBIT 10(L) TO FORM S-4
REGISTRATION STATEMENT NO. 33-35491)
10.10* Amendment to Employment Agreement dated October 25, 1994 between
the Company and Alan R. McMillen (PREVIOUSLY FILED AS EXHIBIT
10.10 TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994)
10.11* Employment Agreement dated May 22, 1990 between the Company and
Terrance N. Clapham (PREVIOUSLY FILED AS EXHIBIT 10(M) TO FORM
S-4 REGISTRATION STATEMENT NO. 33-35491)
</TABLE>
- ------------------------
* Previously filed.
39
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Annual Report on Form 10-K, into the Company's
previously filed Registration Statements Nos. 33-34374, 33-40519, 33-53806 and
33-69044 on Form S-8.
ARTHUR ANDERSEN LLP
San Jose, California
March , 1996
<PAGE>
COMPANY DIRECTORY
BOARD OF DIRECTORS
Mark B. Logan
Elizabeth H. Davila
Glendon E. French
Richard B. Sayford
OFFICERS
Mark B. Logan
Elizabeth H. Davila
Katrina J. Church
Terrance N. Clapham
Jordan D. Haller, M.D.
James W. McCollum
Timothy R. Maier
Judith A. Somerville
W. Michael Wilson
CORPORATE HEADQUARTERS
3400 Central Expressway
Santa Clara, CA 95051
Telephone 408/733-2020
Facsimile 408/773-7300
INQUIRIES
Stockholders or members of the
investment community seeking information
about VISX, Incorporated are encouraged
to contact the Company by telephone or
address their inquiries to Investor
Relations at the corporate address.
AUDITORS
Arthur Andersen LLP
LEGAL COUNSEL
Wilson Sonsini Goodrich & Rosati,
Professional Corporation
TRANSFER AGENT AND REGISTRAR
The First National Bank of Boston
150 Royall Street
Canton, MA 02021
617/575-2790
Please direct any inquiries regarding
stock transfers, lost certificates or
address changes to the Transfer Agent
and Registrar.
STOCK LISTING
The Company's Common Stock is listed
on the Nasdaq National Market Tier
of The Nasdaq Stock MarketSM
Symbol VISX
ANNUAL MEETING
May 17, 1996, 9:00 a.m.
Corporate Headquarters
TRADEMARKS
The VISX logo and VisionKey are Company
trademarks. Trademarks of other
companies also are referred to in this
Annual Report on Form 10-K.
<PAGE>
EXHIBIT 10.28
EXECUTION COPY
AGREEMENT dated as of November 20, 1995, among VISX, INCORPORATED,
a Delaware corporation ("VISX"), ALCON LABORATORIES, INC., a
Delaware corporation ("ALI"), and ALCON PHARMACEUTICALS, LTD., a
corporation organized and existing under the laws of Switzerland
("APL" and, together with ALI, "Alcon") (VISX, ALI and APL being
referred to herein as the "Parties").
WHEREAS the Parties are parties to the Amended and Restated Marketing
Agreement dated as of April 21, 1987 (the "First Agreement"), the Second Amended
and Restated Marketing Agreement dated as of December 22, 1989 (the "Second
Agreement") and certain letter agreements dated as of December 11, 1989 and May
22, 1990 (the "Letter Agreements" and, together with the First Agreement and the
Second Agreement, the "Marketing Agreements");
WHEREAS the Parties, CAP Advisers Limited, Charles R. Munnerlyn, Alan R.
McMillen, William L. Bennett, Daniel J. Kunst, Karen Brenner, Robert B. Samuels,
Robert R. Montgomery, Timothy R.G. Sear, Edgar H. Schollmaier, Anthony M.
Pilaro, Richard S. Braddock and Osterfak, Ltd. simultaneously with the execution
of this Agreement, are entering into a Settlement Agreement dated the date
hereof (the "Settlement Agreement"), which provides for the settlement of
certain litigation in Case No. 744052 in the Superior Court of California and
relating to claims between the parties to the Settlement Agreement and certain
other parties; and
WHEREAS the Parties desire to terminate the Marketing Agreements and restate
the terms of their relationship presently and subsequent to the "Effective
Date", as defined in the Settlement Agreement.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. SPECIFIC DEFINITIONS. For purposes of this Agreement, the
following terms shall have the following meanings:
"Affiliate" of any Party shall mean any other Person which owns or
controls, is owned or is controlled by, or is under common ownership or
control with, such Party. As used herein, "control" shall mean the
possession, direct or indirect, of the power to direct or cause the
direction of management or policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"Effective Date" shall mean the Effective Date as set forth in the
Settlement Agreement.
"FDA" shall mean the United States Food and Drug Administration or its
successor.
"Hyperopia Module" shall mean that hardware and software necessary to
enable a VISX System to perform hyperopia.
"Model B Units" shall mean the VISX Excimer Laser System, Model B.
"Model C Units" shall mean the VISX Excimer Laser System, Model C.
"Operating Committee" shall mean the Operating Committee established
under the terms of the Second Agreement.
"Person" shall mean any natural person, entity, corporation, business
trust, joint venture, association, company, partnership, trust or
government, or any agency or political subdivision thereof.
(***) Confidential Treatment Requested
1
<PAGE>
"PRK" shall mean photorefractive keratectomy.
"Procedure Royalty" shall mean an amount, whether in the form of
license, use fees or otherwise, charged to each purchaser and/or user of a
VISX System for the use of such VISX System.
"Representatives" of any Person shall mean such Person's directors,
officers, employees, agents and representatives, distributors, sales agents,
attorneys, accountants, financial advisers and other consultants.
"Transition Period" shall mean the period from and including October 27,
1995 to and including the Effective Date, unless this Agreement is earlier
terminated in accordance with its terms.
"Unit" shall mean an individual VISX System as manufactured by VISX.
"United States" shall mean the 50 states of the United States of
America, the District of Columbia, Puerto Rico and the other territories and
possessions of the United States of America.
"VisionKey Card" shall mean the cards which contain the proprietary
software necessary to perform procedures with a VISX System.
"VISX System" shall mean any laser system manufactured by VISX for
correcting the refractive optical property of an eye through photoablative
sculptured change in the cornea, or for the treatment of eye disorders
involving corneal opacities, including, without limitation, the treatment of
superficial corneal scars, epithelial irregularities and fungal and
bacterial ulcers.
ARTICLE II
SECTION 2.01. SUSPENSION OF MARKETING AGREEMENTS. During the Transition
Period, the Marketing Agreements shall be suspended and shall not be deemed to
define the rights or obligations of the Parties with respect to the subject
matter thereof, and the only rights and obligations of the Parties with respect
to the subject matter of the Marketing Agreements shall be as set forth in this
Agreement. If this Agreement shall terminate in accordance with Section 5.01,
then the Marketing Agreements shall continue in full force and effect from the
date of such termination. Any action taken pursuant to this Agreement, and any
failure to take any action not required by this Agreement, during the Transition
Period shall be deemed to be and have been consistent with and not in violation
or breach of the Marketing Agreements even if this Agreement should be so
terminated and the Marketing Agreements so continued; provided, however, that
any arrangement or transaction entered into by a Party during the Transition
Period pursuant to Section 2.07(a) shall be capable of being modified or
terminated by such Party without the consent of any third party to the extent
necessary to permit such Party to resume compliance with the Marketing
Agreements if this Agreement is terminated.
SECTION 2.02. EXISTING UNIT ORDERS. (a) Alcon will withdraw its request
that VISX repurchase (***) Units shipped to it on or before (***), and shall
pay to VISX (***) of any currently outstanding balance of the purchase price
for the last ten units shipped in (***), by each of (***), (***), (***), (***),
(***) and (***). VISX shall install, at VISX's sole cost, in each Model C Unit
shipped to Alcon on or before (***), (i) (***) and (ii) (***). These payment
and upgrade obligations shall survive the Effective Date and the termination
of this Agreement.
(***) Confidential Treatment Requested
2
<PAGE>
(b) During the Transition Period and after the Effective Date, Alcon shall
not have any obligation to purchase any Units in addition to those shipped by
VISX to Alcon on or before (***), notwithstanding any orders for Units that may
have been placed by Alcon or which any of the Parties may have forecasted for
purchase by Alcon after (***).
SECTION 2.03. BUDGETS. The supplemental budget for the quarter ending
December 31, 1995, previously submitted to the Operating Committee in September
1995 (a copy of which is attached as Exhibit I hereto) (the "Supplemental
Budget") is hereby approved, except that no amounts shall be deemed to have been
budgeted for Alcon to perform service of Units or physician training as provided
therein. In the event that the FDA grants approval for PRK use of the VISX
Systems on or prior to December 31, 1995, VISX and Alcon agree to negotiate a
modification of such supplemental budget to take account of such approval. VISX
shall, no later than 30 days following receipt of Alcon's invoice, make payment
to Alcon for all marketing costs and expenses relating to the quarter ended
September 30, 1995 included in budgets previously submitted to the Operating
Committee but not yet paid. Alcon shall perform all tasks that are specifically
provided by the Supplemental Budget, except that it shall not be obligated to
perform service of Units or physician training. VISX shall pay, no later than 30
days following receipt of Alcon's invoice, all documented costs and expenses
incurred by Alcon pursuant to the original and supplemental budgets submitted to
the Operating Committee for the quarter ending December 31, 1995 as such budgets
are modified as provided above.
SECTION 2.04. INTERNATIONAL USERS MEETING. Alcon and VISX hereby agree
that the international users meeting previously scheduled for February 8-10,
1996 shall be cancelled.
SECTION 2.05. CERTAIN CLAIMS. Each Party shall fully cooperate and provide
to the other Party, upon request, all relevant documents and other materials and
information relating to any claims against insurers, carriers or other third
parties for damage caused to any Units previously sold to Alcon during shipping,
transporting or handling of such Units. This Section 2.05 shall survive the
Effective Date and the termination of this Agreement.
SECTION 2.06. HIRING OF EMPLOYEES. During the Transition Period and for
the period until 5 years after the Effective Date, VISX and Alcon agree that
neither VISX nor Alcon shall solicit for employment any person then employed by
the other Party; and neither VISX nor Alcon shall employ any individual who is
or was employed by the other Party if such employment is known by such Party to
be in violation of any employment or non-competition agreement to which the
other Party is a signatory. VISX and Alcon agree to make reasonable inquiries as
to the existence of any such agreement.
SECTION 2.07. PREPARATION FOR TERMINATION OF MARKETING AGREEMENTS. (a) In
anticipation of the termination of the Marketing Agreements but subject to the
proviso to Section 2.01, during the Transition Period Alcon shall be free and
clear to make any and all arrangements, and to effect any transactions in order
to arrange, for the sale (or the facilitation or financing of the sale) of
systems competitive with VISX Systems by Alcon or any of its Affiliates or
Representatives or for the purchase (or the facilitation or financing of the
purchase) of such competitive systems by Alcon or its Affiliates,
Representatives or customers subsequent to the Effective Date. In anticipation
of the termination of the Marketing Agreements but subject to the proviso to
Section 2.01, during the Transition Period VISX shall be free and clear to make
any arrangements, and to effect any transactions in order to arrange, for the
sale of VISX Systems by VISX or through third parties subsequent to the
Effective Date.
(b) Alcon agrees to provide to VISX, on or prior to November 27, 1995, all
material information relating to the quotation of prices and leads for sales of
VISX Systems in Alcon's possession, with respect to VISX Systems to be sold in
the United States and, upon the sale or other disposition by Alcon of all Units
currently held by Alcon in its inventory (such date being the "Transfer Date"),
to provide to VISX all material information relating to the quotation of prices
and leads then in Alcon's possession with respect to sales of VISX Systems
outside the United States.
(***) Confidential Treatment Requested
3
<PAGE>
SECTION 2.08. VISIONKEY CARDS FOR PREVIOUSLY SHIPPED UNITS. During the
Transition Period, Alcon shall have the right to purchase from VISX VisionKey
Cards for use on the Units sold and shipped to Alcon on or prior to (***) and
set forth in Exhibit II hereto at the prices currently being charged to Alcon
by VISX. On and after the Effective Date, Alcon shall have the right to purchase
VisionKey Cards for use on such Units, as well as any Unit which Alcon provides
to its customers in exchange for a defective Unit (including without limitation
any Unit provided in exchange for a Unit which is not able to perform
hyperopia), at the following initial prices for each VisionKey Card: (a)
(***) for Units in use in (***) or (***) or sold from Alcon's existing inventory
for use in (***) or (***); (b) (***) for Units in use by Alcon end customers
(***); and (c) (***) for all other Units currently in use (***); PROVIDED
that the initial price for each VisionKey Card for use on (x) (***) and
(y) (***); PROVIDED FURTHER, HOWEVER, that clause (y) of the immediately
preceding proviso shall not apply to (1) (***) or (2) (***) VisionKey Cards
purchased by Alcon's end users for (***) shall include (***). On or after
each annual anniversary of the Effective Date, VISX shall have the right to
increase the prices for VisionKey Cards sold to Alcon; PROVIDED, HOWEVER, that
(***) such cost increases to be substantiated by VISX by providing Alcon with
written proof of such price increases by such manufacturer.
SECTION 2.09. SALES OF VISX STOCK BY ALCON. Alcon agrees that it will not
sell any of the 224,000 shares of Common Stock of VISX currently owned by Alcon
before January 24, 1996.
SECTION 2.10. USE OF INFORMATION FOR MARKETING BY ALCON. During the
Transition Period and after the Effective Date, Alcon shall have the right to
use any information obtained from purchasers and users of VISX Systems sold by
Alcon for the marketing and sale of any equipment or other products manufactured
by Alcon or any of its Affiliates or purchased by Alcon or any of its Affiliates
from third parties for resale; PROVIDED that Alcon shall not use any such
information which Alcon knows or has reason to believe to be confidential
proprietary information of VISX without the prior permission of VISX, such
permission by VISX not to be unreasonably withheld or delayed.
SECTION 2.11. NOTICE OF ADVERSE MEDICAL EVENTS. Alcon shall promptly
notify VISX of any material adverse medical events reported to Alcon which
relate to VISX Systems sold by Alcon. This Section 2.11 shall survive the
Effective Date. Alcon agrees to use commercially reasonable efforts to forward
to VISX on a monthly basis all copies of service reports regarding the VISX
Systems serviced by Alcon, coded with the problem and "work done" codes agreed
to with VISX.
ARTICLE III
SECTION 3.01. EFFECTIVENESS OF ARTICLE III. Except as provided in the last
sentence of Section 3.04, the provisions of this Article III shall only become
effective upon, and shall be conditioned upon the occurrence of, the Effective
Date.
SECTION 3.02. TERMINATION OF MARKETING AGREEMENTS. (a) Upon the Effective
Date, each of the Marketing Agreements shall terminate immediately and shall
have no remaining effect. Except as specifically provided in this Agreement,
termination of the Marketing Agreements pursuant hereto shall terminate all
rights and obligations of the Parties under the Marketing Agreements, including
(***) Confidential Treatment Requested
4
<PAGE>
rights and obligations (including without limitation the license granted to VISX
by Alcon pursuant to Section 2.06 of the Second Agreement) that, under the terms
of the Marketing Agreements, would otherwise have survived their termination.
(b) Alcon hereby agrees, following the Effective Date, to sell Alcon
pharmaceutical products to VISX as priced to wholesalers, for (***) and
thereafter on a commercially reasonable basis.
SECTION 3.03. FRENCH AND JAPANESE REGISTRATIONS. Alcon or its Affiliates
shall promptly provide to VISX all pertinent data relating to the registration
of the VISX Systems in France and Japan (the "French Registrations" and
"Japanese Registrations", respectively). Such data shall include data with
respect to the status and the transferability of such registrations and the
out-of-pocket costs and expenses incurred by Alcon or its Affiliates in
connection with seeking such registrations. VISX shall have the option, by
providing written notice to Alcon or Alcon's Appropriate Affiliate no later than
60 days subsequent to the Effective Date, and upon payment to Alcon or its
Affiliates equal to all of Alcon's or its Affiliate's documented costs and
expenses relating thereto, to acquire Alcon's or its Affiliate's rights with
respect to either or both of the French Registrations and the Japanese
Registrations. Alcon shall cooperate fully with VISX in effecting such
transfers.
SECTION 3.04. UNITS SOLD IN CANADA. In consideration of the other terms of
this Agreement, APL and Alcon Canada shall have from VISX (***) relating to the
(***); PROVIDED, HOWEVER, that the (***). Prior to any sale of any Unit not a
Licensed Unit, which to Alcon's or any of its Affiliates' knowledge will be for
use in Canada, and prior to the subsequent sale of any such Unit, including
those listed on Exhibit III, by Alcon or any of its Affiliates to a party not
listed as a user of a Unit on Exhibit III hereto, Alcon or such Affiliate, as
applicable, shall (***).
SECTION 3.05. SERVICE OF UNITS SOLD BY ALCON. Alcon shall be responsible
for the servicing of all Units designated in Exhibit II hereto. Through (***),
VISX shall make available to Alcon parts, manuals, training and other
materials for the servicing of such Units at the same prices and on the same
terms as are available from VISX on the date of this Agreement. Subject to
Section 3.07, after (***), VISX shall make available to Alcon such parts,
manuals, training and other materials on a commercially reasonable basis.
SECTION 3.06. (***)
SECTION 3.07. NONDISCRIMINATION IN SALES OF VISX SYSTEMS. Alcon and any
customer of Alcon shall have the right to purchase VISX Systems, including
VisionKey Cards and any related parts, manuals or services from VISX on terms
that do not discriminate against Alcon or its customers in comparison to other
distributors and end users of VISX Systems similarly situated.
(***) Confidential Treatment Requested
5
<PAGE>
SECTION 3.08. CANCELLATION OF ALI ADVANCE. In consideration of the other
terms of this Agreement, VISX shall not be obligated to repay the (***)
advanced to VISX by ALI under the Marketing Agreements and ALI shall not seek
any payment from VISX relating to such advance in consideration of the
settlement by VISX of any claims it may assert against ALI.
SECTION 3.09. PURCHASES OF VISX VOTING SECURITIES. During the period
commencing (***) and ending on (***), Alcon shall not purchase or otherwise
acquire any stock or other security issued by VISX that has the general power to
vote in the election of directors of VISX ("Voting Securities").
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. VISX. VISX represents and warrants to Alcon that (a) the
execution and delivery by VISX of this Agreement and the performance of the
activities contemplated hereby are duly authorized by all necessary corporate
action on its part and do not contravene its Certificate of Incorporation or
By-laws or any agreement binding upon VISX or VISX's assets; and (b) VISX and
its Affiliates have no prior commitments or agreements with any third party that
might interfere with or preclude the full and complete discharge by VISX of its
obligations and undertakings pursuant to this Agreement.
SECTION 4.02. ALCON. Alcon represents and warrants to VISX that (a) the
execution and delivery by Alcon of this Agreement and the performance of the
activities contemplated hereby are duly authorized by all necessary corporate
action on its part and do not contravene its Certificate of Incorporation or
By-laws or any agreement binding upon Alcon or Alcon's assets; and (b) Alcon and
its Affiliates have no prior commitments or agreements with any third party that
might interfere with or preclude the full and complete discharge by Alcon of its
obligations and undertakings pursuant to this Agreement.
ARTICLE V
MISCELLANEOUS
SECTION 5.01. TERMINATION. Either Party may elect to terminate this
Agreement if the Effective Date does not occur by February 28, 1996 by providing
written notice to the other Party.
SECTION 5.02. AMENDMENT. This Agreement may not be changed or modified
except as specifically and mutually agreed upon in writing and signed by all the
Parties.
SECTION 5.03. NOTICE. Any notice required hereunder may be served by any
Party on the others by personal delivery, or by sending same post-prepaid, by
registered or by certified mail, return receipt requested, to the following
addresses:
(a) If to Alcon:
Alcon Laboratories, Inc.
6201 South Freeway
Fort Worth, Texas 76134
Attn: E. H. Schollmaier
(b) If to VISX:
VISX, Incorporated
3400 Central Expressway
Santa Clara, California 95051-0703
Attn: Mark B. Logan
or to such other person or at such other place as any Party shall notify the
other Parties in writing.
(***) Confidential Treatment Requested
6
<PAGE>
SECTION 5.04. WAIVER. The Parties covenant and agree that a waiver by any
Party of a breach of any of the terms of this Agreement by any other Party shall
not be deemed a waiver of any subsequent breach of the same or other terms of
this Agreement. No failure or delay in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power or privilege hereunder.
SECTION 5.05. SPECIFIC PERFORMANCE. The Parties agree that in the event of
a breach of any provision of this Agreement the aggrieved Party would suffer
irreparable harm and therefore would be without an adequate remedy at law. The
Parties therefore agree that in the event of a breach or threatened breach of
any provision of this Agreement, the aggrieved Party shall be entitled to
institute and prosecute proceedings in any court of competent jurisdiction to
enforce specific performance or to enjoin the continuing breach of such
provision without the requirement of posting a bond or other security. By
seeking or obtaining any such relief, the aggrieved Party will not be precluded
from seeking or obtaining any other relief to which it may be entitled.
SECTION 5.06. LITIGATION. If any Party institutes legal proceedings with
respect to this Agreement or the transactions contemplated hereby, the losing or
defaulting Party shall pay to the prevailing Party reasonable attorneys' fees,
costs and expenses incurred in connection with the prosecution or defense of
such action.
SECTION 5.07. CAPTIONS. The captions and section headings used in this
Agreement are for convenience only and are not intended to have, nor shall they
be interpreted as having, any substantive effect whatsoever.
SECTION 5.08. EXPENSES. Each of the parties hereto shall be deemed
responsible for all expenses incurred by it in connection with the execution and
performance of this Agreement except as otherwise provided for herein.
SECTION 5.09. GOVERNING LAW. This Agreement is made and entered into and
is to be performed in accordance with the laws of the State of Delaware and
shall be construed and enforced in accordance with the laws of the State of
Delaware, without regard to its principles of conflicts of laws.
SECTION 5.10. SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect or limit the validity or
enforceability of any other provision hereof.
SECTION 5.11. ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES. This Agreement
including the Exhibits referred to herein (a) constitutes the entire agreement
and, subject to Section 2.01, supersedes all prior agreements and undertakings,
both written and oral, among the parties with respect to the subject matter
hereof, including the Marketing Agreements and the term sheet between the
Parties dated October 27, 1995, and (b) is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder.
SECTION 5.12. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original but all of which together
shall constitute a single instrument.
7
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by
their fully authorized officers as of the date first above written.
VISX, INCORPORATED,
by /s/ Elizabeth Davila
_________________________________
Elizabeth Davila
EXECUTIVE VICE PRESIDENT
AND CHIEF OPERATING OFFICER
ALCON LABORATORIES, INC.,
by /s/ C. Allen Baker
_________________________________
C. Allen Baker
EXECUTIVE VICE PRESIDENT,
SURGICAL
ALCON PHARMACEUTICALS, LTD.,
by /s/ Guido Koller
_________________________________
Guido Koller
GENERAL MANAGER/AREA CONTROLLER
(***) Confidential Treatment Requested
8
<PAGE>
JAMES E. LYONS (State Bar No. 112582)
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
4 Embarcadero Center, Suite 3800
San Francisco, California 94111
(415) 984-6400
ROBERT E. ZIMET
SUSAN L. SALTZSTEIN
MATTHEW J. SAVA
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
919 Third Avenue
New York, New York 10022
(212) 735-3000
Attorneys for Derivative Plaintiff
CAP ADVISERS LIMITED, As Trustee for
THE CAP TRUST
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF SANTA CLARA
CAP ADVISERS LIMITED, AS ) Case No. CV744052
TRUSTEE OF THE CAP TRUST, )
Derivatively on behalf of )
VISX, INC., ) AGREEMENT AND STIPULATION
) OF SETTLEMENT
Plaintiff, )
)
v. )
)
ALCON LABORATORIES, INC., ET )
AL., )
)
Defendants. )
- -----------------------------------)
)
ALCON LABORATORIES, INCORPO- )
RATED, ET AL., )
)
Cross-Complainants, )
)
v. )
)
ANTHONY M. PILARO, ET AL., )
)
Cross-Defendants. )
- -----------------------------------)
<PAGE>
This Agreement and Stipulation of Settlement ("Stipula-
tion") is entered into among (i) CAP Advisers Limited, trustee
for the CAP Trust, on behalf of itself and derivatively on
behalf of VISX, Inc. ("Derivative Plaintiff" or "CAP Advisers"
as hereinafter defined in Section 2.7); (ii) Charles R.
Munnerlyn, Alan R. McMillen, William L. Bennett, Daniel J.
Kunst, Karen Brenner, Robert B. Samuels, Robert R. Montgomery,
Timothy R.G. Sear, and Edgar H. Schollmaier (collectively the
"Individual Defendants"); (iii) VISX, Inc. ("VISX" or the "Com-
pany" as hereinafter defined in Section 2.8); (iv) Alcon Labo-
ratories, Incorporated and Alcon Pharmaceuticals, Ltd. (collec-
tively "Alcon" as hereinafter defined in Section 2.9); and (v)
Anthony M. Pilaro, Richard S. Braddock, CAP Advisers, and
Osterfak, Ltd. ("Osterfak" is hereinafter defined in Section
2.10). It is conditioned on its approval by the Superior Court
of California for the County of Santa Clara (hereinafter the
"Court").
1 RECITALS.
1.1 On September 26, 1994, Derivative Plaintiff and
Osterfak filed a lawsuit captioned CAP ADVISERS LIMITED, ET AL.
V. ALCON LABORATORIES, INC. ET AL., Santa Clara County Superior
Court No. CV744052, which names as defendants Alcon and the
Individual Defendants ("Derivative Action"). VISX is named as
a nominal defendant on whose behalf the Derivative Action pur-
ports to be brought.
1.2 The Derivative Action alleges, among other things,
that various directors and officers of VISX (the Individual
2
<PAGE>
Defendants) breached their fiduciary duties to the Company by
mismanaging and failing to disclose the true state of the
Company's operations and by failing to enforce certain mar-
keting agreements between the Company and Alcon (the "Marketing
Agreements"). The Derivative Action also asserts claims
against Alcon for breach of contract, breach of the implied
covenant of good faith and fair dealing, intentional interfer-
ence with prospective economic advantage, and breach of fidu-
ciary duties in connection with the Marketing Agreements.
1.3 On November 22, 1994, VISX demurred to the complaint
in the Derivative Action on the grounds that the Derivative
Plaintiff and Osterfak failed to make a demand on the VISX
Board of Directors and such demand was not excused. Alcon and
the Individual Defendants joined in this demurrer which, on
February 9, 1995, was overruled by the Superior Court for the
County of Santa Clara. Subsequently, VISX filed a petition for
writ of mandate with the Court of Appeals, which petition was
denied.
1.4 On March 13, 1995, Alcon and Individual Defendants
Montgomery, Sear, and Schollmaier filed a cross-complaint
against CAP Advisers and Cross-Defendants alleging, INTER ALIA,
claims for breach of fiduciary duty, intentional interference
with economic relationship and equitable indemnity.
1.5 On March 13, 1995, Individual Defendants Munnerlyn,
McMillen, Bennett, Kunst, Brenner, and Samuels filed a cross-
complaint against Richard S. Braddock and J. Michael
Mavrogordato, two former members of the VISX Board of Direc-
tors, asserting claims for equitable indemnity.
3
<PAGE>
1.6 On May 8, 1995, Osterfak's request for dismissal as a
plaintiff in the Derivative Action was granted by the Court.
1.7 Each of the Defendants separately has denied and
continues to deny each and every one of the claims and conten-
tions alleged in the law suit captioned CAP ADVISERS LIMITED,
ET AL. V. ALCON LABORATORIES, INC. ET AL., Santa Clara County
Superior Court No. CV744052, including the cross-claims filed
in the Cross-Complaints ("The Action"). Each of the parties to
this Stipulation expressly have denied and continues to deny
all charges of wrongdoing or liability against him, her or it
arising out of any of the conduct, statements, acts or omis-
sions alleged, or that could have been alleged, in The Action.
Nonetheless, the parties have concluded that the fur-
ther conduct of The Action would be protracted and expensive
and that it is desirable that The Action be fully and finally
settled in the manner and upon the terms and conditions set
forth in this Stipulation in order to limit further expense,
inconvenience and distraction and to secure the benefits
achieved by settlement on the terms provided herein. There-
fore, the parties have now reached an agreement that, subject
to the approval of this Court, will settle the claims alleged
in The Action.
2 DEFINITIONS.
2.1 "Cross-Complaints" means the cross-complaint filed on
March 13, 1995 by Individual Defendants Munnerlyn, McMillen,
Bennett, Kunst, Brenner and Samuels against Richard S. Braddock
and J. Michael Mavrogordato and the cross-complaint filed on
March 13, 1995 by Alcon and Individual Defendants Montgomery,
4
<PAGE>
Sear and Schollmaier against CAP Advisers and Cross-Defendants
Anthony M. Pilaro, Richard S. Braddock, J. Michael Mavrogordato
and Osterfak.
2.2 "Cross-Defendants" means (i) CAP Advisers (as herein-
after defined in paragraph 2.7), (ii) Osterfak (as hereinafter
defined in paragraph 2.10), and (iii) Anthony M. Pilaro, Rich-
ard S. Braddock, J. Michael Mavrogordato, and their respective
employees, partners, principals, agents, any entity in which a
controlling interest is held, attorneys, advisors, personal or
legal representatives, assigns, spouses, and heirs.
2.3 "Derivative Plaintiff" means CAP Advisers (as herein-
after defined in paragraph 2.7), on behalf of itself and derivatively
on behalf of VISX.
2.4 "Effective Date" means the first date on which both
the following shall have occurred: (a) The Superior Court
shall have entered its order and judgment substantially in the
form attached hereto as Exhibit B approving this Stipulation
and dismissing with prejudice The Action and (b) such order and
judgment shall have become final, which shall be deemed to be
the last to occur of the following: (i) if an appeal or review
is not sought from the order and judgment, the first day after
the first to occur of the acts described in Rule 2 of the
California Rules of Court, or (ii) if an appeal or review is
sought from the judgment, the day after the judgment is af-
firmed or the appeal is dismissed or denied, and the judgment
is no longer subject to further judicial review.
2.5 "Individual Defendants" means Munnerlyn, McMillen,
Bennett, Kunst, Brenner, Samuels, Montgomery, Sear, and
5
<PAGE>
Schollmaier, and their respective employees, partners, princi-
pals, agents, any entity in which a controlling interest is
held, attorneys, advisors, personal or legal representatives,
assigns, spouses, and heirs.
2.6 "Marketing Agreements" means collectively the market-
ing agreements with (i) Alcon and APL dated October 10, 1986,
(the "Original Marketing Agreement"); (ii) an Amended and Re-
stated Marketing Agreement dated April 21, 1987 (the "Amended
Marketing Agreement"); and (iii) the Second Amended and Restat-
ed Marketing Agreement with Alcon and Alcon Surgical, Inc.,
dated December 22, 1989 (the "Domestic Marketing Agreement"),
and any amendments or modifications thereto.
2.7 "CAP Advisers" means CAP Advisers Limited, a United
Kingdom company, as trustee for the CAP Trust, a Channel Is-
lands trust, and all past or present directors, officers,
employees, partners, principals, agents, controlling sharehold-
ers, any entity in which a controlling interest is held, attor-
neys, advisors, personal or legal representatives, parents,
subsidiaries, affiliates, predecessors, successors, divisions,
joint ventures, and assigns.
2.8 "VISX" means VISX, Inc., a Delaware corporation, and
all past or present directors, officers, employees, partners,
principals, agents, controlling shareholders, any entity in
which a controlling interest is held, attorneys, advisors,
personal or legal representatives, parents, subsidiaries,
affiliates, predecessors, successors, divisions, joint ven-
tures, and assigns.
6
<PAGE>
2.9 "Alcon" means Alcon Laboratories, Inc., a Delaware
corporation, Alcon Pharmaceuticals, Ltd., a Swiss corporation,
and all past or present directors, officers, employees, part-
ners, principals, agents, controlling shareholders, any entity
in which a controlling interest is held, attorneys, advisors,
personal or legal representatives, parents, subsidiaries,
affiliates, predecessors, successors, divisions, joint ven-
tures, and assigns.
2.10 "Osterfak" means Osterfak Ltd., a Cayman Islands
company, and all past or present directors, officers, employ-
ees, partners, principals, agents, controlling shareholders,
any entity in which a controlling interest is held, attorneys,
advisors, personal or legal representatives, parents, subsid-
iaries, affiliates, predecessors, successors, divisions, joint
ventures, and assigns.
2.11 "Other Released Individuals" means all present and
former officers and directors and employees, agents and attor-
neys (including law firms), of (i) VISX; (ii) Alcon; (iii)
Cross-Defendants; and (iv) the Individual Defendants.
2.12 "Pillar Point Partners" means Pillar Point Partners,
the partnership jointly owned and controlled by subsidiaries of
VISX and Summit Technology, Inc.
2.13 "Settled Claims" means all claims, actions, causes of
action, suits, debts, sums of money, accounts, reckonings,
bonds, bills, covenants, contracts, conversions, controversies,
agreements, promises, variances, trespasses, damages, judg-
ments, extents, executions, demands, rights and liabilities of
every nature and description whatsoever, known or unknown,
7
<PAGE>
whether or not concealed or hidden, including all pleadings
filed therein by any party, (i) asserted or that might have
been asserted in The Action, (ii) based on or arising from any
contractual relationship, written or oral, express or implied,
between Alcon and VISX, (iii) based on or arising from the ser-
vice of any of the Individual Defendants or Cross-Defendants as
officers, directors, agents or advisors of VISX, (iv) based on
or arising from allegations of wrongful conduct or inaction
against the Cross-Defendants, including but not limited to,
claims of negligent, reckless, intentional or wilful miscon-
duct, (v) based on or arising from allegations of wrongful con-
duct or inaction of Alcon or VISX in relation to each other,
(vi) relating in any way to the class action captioned IN RE
VISX SECURITIES LITIGATION, C-94-20649-RPA (EAI), or to the
settlement thereof, or to a claim for the contribution to that
settlement, (vii) based on or arising from any duties, fiducia-
ry or otherwise, owed by Cross-Defendants to VISX or Alcon,
(viii) based on or arising from Cross-Defendants' relationship
with VISX, (ix) based on or arising from Cross-Defendants'
relationship with Alcon, or (x) based on or arising from Cross-
Defendants' action or inaction with respect to the Marketing
Agreements or the relationship between Alcon and VISX. Such
claims shall include claims which the Settling Parties do not
know or suspect to exist in their favor at the time of the
release, including but not limited to such claims which, if
known by them, might have affected their decision to settle.
Such claims shall also include, without limitation, claims for
negligence, gross negligence, breach of duty of care, breach of
8
<PAGE>
duty of loyalty, breach of duty of candor, fraud, breach of
fiduciary duty, tortious interference, breach of contract,
aiding and abetting, indemnification, contribution, equitable
indemnity, violations of any state or federal statutes, rules,
or regulations, violations of any common law rights, and all
other acts or omissions alleged in The Action. Notwithstanding
the foregoing, "Settled Claims" shall not include prospective
breaches of the 1995 Agreement between and by VISX and Alcon
and shall not include claims against VISX for indemnification
for legal fees incurred by the Individual Defendants and Cross-
Defendants Richard S. Braddock and J. Michael Mavrogordato.
2.14 "Settling Parties" means VISX, Alcon, Derivative
Plaintiff, the Individual Defendants and Cross-Defendants.
3 AGREEMENT.
3.1 CONSIDERATION.
In consideration of the parties' agreement to settle The
Action and certain other current and future disputes as out-
lined herein as may arise between them, the parties hereby
agree as follows:
3.1.1 MARKETING AGREEMENTS. VISX and Alcon (a) have
entered into an agreement, a copy of which is attached hereto
as Exhibit D (the "1995 Agreement"), pursuant to which, subject
to the termination provision set forth in paragraph 5.01 there-
of, upon the Effective Date, as defined in paragraph 2.4 above,
all existing agreements between VISX and Alcon, including the
Marketing Agreements, and all obligations and liabilities
arising out of or relating to such Marketing Agreements, will
terminate, except for the contractual obligations defined in
9
<PAGE>
the 1995 Agreement; and (b) have agreed that on the Effective
Date they will exchange written releases attached hereto as
Exhibits E and F, unless the 1995 Agreement is terminated in
accordance with its terms. Due to the confidential nature of
the information contained in other exhibits to the 1995 Agree-
ment, such exhibits will not be filed with this Stipulation;
however, the parties are willing to submit these exhibits to
the Court for confidential IN CAMERA review.
3.1.2 RESIGNATION OF CERTAIN VISX DIRECTORS. As of
the Effective Date, Karen Brenner and Robert B. Samuels shall
have resigned from VISX' Board of Directors and any committee
thereof.
3.1.3 REGULATORY AFFAIRS OVERSIGHT COMMITTEE. VISX
agrees to establish a regulatory affairs oversight committee
(the "Committee"), consisting of three members, one such member
appointed by the Company at the request of Cap Advisers or any
of its successors. Cap Advisers' initial designee to the
Committee will be Nancy Buc. Visx shall be without power to
remove Cap Advisers' appointee to the Committee without the
prior consent of Cap Advisers. The Committee's charter shall
include, but is not limited to, reviewing the Company's regula-
tory affairs program, providing recommendations, if any, as to
improving the program, and submitting a report on the foregoing
to the Board of Directors. The Committee will meet at least
quarterly and the term of the Committee shall extend until one
year following the approval by the Food and Drug Administration
of the use of VISX' Excimer Laser for the treatment of astigma-
tism.
10
<PAGE>
3.1.4 STANDSTILL. Alcon Laboratories, Inc. and
Alcon Pharmaceuticals, Ltd. agree not to purchase VISX shares
for a period of fifteen years commencing on the Effective Date.
Alcon further agrees not to dispose of any or all of its
224,000 VISX shares before January 24, 1996.
3.1.5 NON-DISPARAGEMENT. Each Settling Party hereby
agrees that he, she or it will make no public statements con-
cerning the subject matter of the Action or the circumstances
leading to the Settlement disparaging of any other Settling
Party. This provision shall not apply to documents filed in
Court.
3.1.6 PILLAR POINT PARTNERS. VISX agrees to appoint
or cause to be appointed to the Board of Directors of Pillar
Point Partners one person designated by CAP Advisers (the "Cap
Advisers Designee"). CAP Advisers' right to designate such
member to Pillar Point Partners Board of Directors shall exist
for at least three years from the effective date of this stipu-
lation and Agreement. VISX and its appointed Managing Director
of Pillar Point Partners shall be without power to remove CAP
Advisers' designee without the prior consent of CAP Advisers,
except if such designee shall be found by VISX' Board of Direc-
tors acting as a whole and after providing such designee with
an opportunity to be heard to have engaged in fraud, embezzle-
ment, theft, or the commission of a felony, in the course of
performing such designee's duties on the Pillar Point Partners
Board of Directors. In case any such person is so removed, Cap
Advisers shall have the right to designate a successor.
11
<PAGE>
3.1.7 OTHER PAYMENTS. Other than what is expressed
herein and in the exhibits attached hereto, no other payments
will be exchanged between the parties to The Action.
3.1.8 ATTORNEYS' FEES AND OTHER EXPENSES. Pursuant
to VISX' indemnification obligations, VISX agrees to reimburse,
against receipt of invoices, the reasonable legal expenses of
the Individual Defendants and Cross-Defendant Richard S.
Braddock. In recognition by VISX of the substantial benefits
conferred on it by the initiation of The Action, and in light
of the benefits accruing to VISX by the Settlement, and in
recognition by VISX of Mr. Pilaro's efforts to date, VISX has
agreed to reimburse, against receipt of invoices, CAP Advisers
and Mr. Pilaro for their respective attorneys' fees, consultant
fees and other related fees and expenses.
3.2 DISMISSAL OF THE ACTION. The parties shall submit
this Stipulation to the Court and request approval thereof and
for a judgment and order in the form attached hereto as Exhibit
B approving the settlement and dismissing The Action with
prejudice. Notwithstanding the foregoing, the action shall be
dismissed without prejudice against Cross-Defendant J. Michael
Mavrogordato, such dismissal to become with prejudice when
Mavrogordato executes a general release in the form attached
hereto as Exhibit C.
3.2.1 TIME OF THE ESSENCE. This Stipulation
shall be finalized and filed with the Superior Court on or
before November 17, 1995 unless extended by agreement among CAP
Advisers, Alcon and VISX.
12
<PAGE>
3.3 MUTUAL RELEASES. Upon the Effective Date, each Set-
tling Party shall be deemed to have, and by operation of the
judgment shall have fully, finally and forever released, relin-
quished and discharged each and every one of the Settling
Parties from the Settled Claims. Each Settling Party shall,
upon the Effective Date, evidence such release by executing a
general release in a form of Exhibit C hereto. Any Settling
Party who refuses to execute and deliver such a release within
ten days after the occurrence of the Effective Date shall be
deemed to have done so. Notwithstanding the foregoing, J.
Michael Mavrogordato shall not be deemed to have been released
from any of the Settled Claims until such time as he executes a
release in the form of Exhibit C hereto, in which event he
shall then be deemed to have been released from any and all
Settled Claims.
4 CONDITIONS OF SETTLEMENT.
Except as noted in Section 5 hereof, this Stipulation
shall become effective only upon the satisfaction of the fol-
lowing conditions: (i) The Court shall enter an order and judg-
ment substantially in the form attached hereto as Exhibit B,
and (ii) the Effective Date shall have occurred.
5 SETTLEMENT HEARING.
To implement this settlement, the parties shall promptly
submit this Stipulation to the Court for a hearing as soon as
the Court deems practical, for final approval of this settle-
ment and an order and judgment substantially in the form of
Exhibit B hereto.
13
<PAGE>
6 MISCELLANEOUS.
6.1 All of the exhibits attached hereto are incorporated
by reference as though fully set forth herein.
6.2 This Stipulation may be amended or modified only by
a written instrument signed by all parties who enter into this
Stipulation or their successors-in-interest.
6.3 The waiver by one Settling Party of any breach of
this Stipulation by another Settling Party shall not be deemed
(i) a waiver of that breach by any other Settling Party or (ii)
a waiver of any other breach by the Settling Party or any other
Settling Party.
6.4 This Stipulation and its exhibits constitute the
entire agreement among these Settling Parties, and no represen-
tations, warranties or inducements have been made to any Set-
tling Party concerning this Stipulation or its exhibits other
than the representations, warranties and covenants expressly
set forth in such documents.
6.5 Counsel for the Settling Parties are expressly
authorized by the Settling Parties whom they represent to enter
into this Stipulation, to take all appropriate action required
or permitted to be taken by such Settling Parties pursuant to
this Stipulation to effectuate its terms, and are also express-
ly authorized to enter into any modifications or amendments to
this Stipulation and to execute any other documents required to
effectuate the terms of this Stipulation.
6.6 Each of Alcon, VISX, the Individual Defendants,
Derivative Plaintiff and the Cross-Defendants represent and
warrant that he, she or it is expressly authorized to enter
14
<PAGE>
into this Stipulation, to take all appropriate action required
or permitted to be taken pursuant to this Stipulation to effec-
tuate its terms, and is also expressly authorized to enter into
any modifications or amendments to this Stipulation and to
execute any other documents required to effectuate the terms of
this Stipulation.
6.7 This Stipulation shall be binding upon, and inure to
the benefit of, the successors and assigns of the Settling
Parties hereto.
6.8 All terms of this Stipulation and the exhibits
hereto shall be governed by and interpreted according to the
laws of the State of California. The Court shall retain juris-
diction with respect to implementation and enforcement of the
terms of the Stipulation, and all parties hereto submit to the
jurisdiction of the Court for purposes of implementing and
enforcing it. Any action brought to enforce the Stipulation
shall be filed in the Superior Court for the County of Santa
Clara.
6.9 This Stipulation may be executed in two or more
counterparts. All executed counterparts and each of them shall
be deemed to be one and the same instrument provided that
counsel for the Settling Parties to this Stipulation shall
exchange among themselves original signed counterparts.
6.10 The Settling Parties shall cooperate in presenting
such papers to the Superior Court and other documents as may be
necessary to effectuate the purposes and intent of this Stipu-
lation.
15
<PAGE>
6.11 If the Effective Date does not occur for whatever
reason by March 22, 1996 (or such other date as to which the
parties hereto may agree), then this Stipulation shall be of no
force or effect and the Settling Parties shall be restored to
their respective positions existing prior to the execution of
this Stipulation, unless otherwise agreed to by all parties who
enter into this Stipulation. Neither this Stipulation, nor the
fact of its execution, nor any of its provisions, shall be
offered or received in evidence in any action or proceeding of
any nature or otherwise referred to or used in any manner in
any court or other tribunal except as evidence of the fact of
the making of this Stipulation or to enforce the terms of the
Settlement described herein.
16
<PAGE>
Dated: November __, 1995 SKADDEN, ARPS, SLATE, MEAGHER
& FLOM
By ____________________________
Attorneys for Plaintiff and
Cross-Defendant CAP ADVISERS LIM-
ITED as trustee of the CAP TRUST
and for specially-appearing
Cross-Defendant OSTERFAK LTD.
17
<PAGE>
Dated: November __, 1995 VISX, INC.
By ____________________________
Katrina J. Church
18
<PAGE>
Dated: November __, 1995 WILSON, SONSINI, GOODRICH
& ROSATI
By ____________________________
Boris Feldman
Attorneys for Defendants and
Cross-Complainants CHARLES R.
MUNNERLYN, ALAN R. MCMILLEN, WIL-
LIAM L. BENNETT, DANIEL J. KUNST,
KAREN BRENNER and ROBERT SAMUELS
19
<PAGE>
Dated: November __, 1995 HELLER, EHRMAN, WHITE
& MCAULIFFE
By ____________________________
Attorneys for Defendants and
Cross-Complainants ALCON LABORA-
TORIES, INC., ALCON
PHARMACEUTICALS, LTD., TIMOTHY
R.G. SEAR, ROBERT R. MONTGOMERY
and EDGAR H. SCHOLLMAIER
20
<PAGE>
Dated: November __, 1995 ROBINSON BROG LEINWAND REICH
GENOVESE & GLUCK, P.C.
By ____________________________
Anthony S. Genovese
Attorney for Cross-Defendant
ANTHONY M. PILARO
21
<PAGE>
Dated: November __, 1995 SHEPPARD, MULLIN, RICHTER
& HAMPTON
By ____________________________
Darryl M. Woo
Attorneys for Cross-Defendant
RICHARD S. BRADDOCK
22
<PAGE>
[LOGO]
SOBRATO 10600 N. De Anza Boulevard, Suite 200
DEVELOPMENT Cupertino, CA 95014-2075
COMPANIES (408) 446-0700
FAX (408) 446-0583
SECOND AMENDMENT TO LEASE
This second amendment to lease ("Amendment") is made this 8th day of March,
1996 by and between Sobrato Interests, a California limited partnership having
an address at 10600 N. De Anza Blvd., Suite 200, Cupertino, California 95014
("Landlord") and VISX, Incorporated, a Delaware corporation having its
principal place of business at 3400 Central Expressway, Santa Clara, California
("Tenant").
WITNESSETH
WHEREAS Landlord and Tenant entered into a lease dated July 16, 1992 and a
First Amendment to Lease dated October 2, 1992 (collectively the "Lease") for
the premises ("Premises") located at 3400 Central Expressway, Santa Clara; and
WHEREAS effective January 19, 1996, Landlord and Tenant wish to modify the
Lease to reflect the Tenant's exercise of its right of First Offering to Lease;
NOW, THEREFORE, in order to effect the intent of the parties as set forth above
and for good and valuable consideration exchanged between the parties, the
Lease is amended as follows:
1. PREMISES: The first sentence of the second paragraph of Section 2 of
the Lease (Premises) shall be replaced with the following: The entirety of that
certain real property commonly known as 3400 Central Expressway, Santa Clara,
California consisting of a two-story building of 108,844 square foot building
and 385 parking stalls in a project consisting of a total of five (5) buildings
including the Premises, totaling 412,171 square feet ("Project") as outlined in
red on Exhibit "A".
2. TERM & RENTAL: Section 4 of the Lease (Term & Rental) shall be
replaced with the following: The Commencement Date of the Lease occurred on
October 1, 1992 and shall end eighty four (84) months following Substantial
Completion of the Tenant Improvements desired by Tenant to the second floor of
the Premises ("Second Floor Commencement Date"). In addition to all other sums
payable by Tenant under this Lease, prior to the Second Floor Commencement Date
Tenant shall pay as base monthly rent ("Base Monthly Rent") for the Premises
the sum of Forty Six Thousand Five Hundred and 90/100 Dollars ($46,500.90) per
month. From the Second Floor Commencement
Page 1
<PAGE>
Date through September 30, 1997, Tenant shall pay as Base Monthly Rent the sum
of One Hundred Two Thousand Four Hundred Thirty Five and 90/100 Dollars
($102,435.90) per month. Beginning on October 1, 1997 through the balance of
the Lease Term, subject to adjustment pursuant to Section 3 of this Amendment,
Tenant shall pay as Base Monthly Rent the sum of One Hundred Seven Thousand
Seven Hundred Fifty Five and 56/100 Dollars ($107,755.56) per month. Base
Monthly Rent shall be due on or before the first day of each calendar month
during Lease Term. All sums payable by Tenant under this Lease shall be paid in
lawful money of the United States of America, without offset or deduction, and
shall be paid to Landlord at such place or places as may be designated from
time to time by Landlord. Base Monthly Rent for any period less than a calendar
month shall be a pro rata portion of the monthly installment.
3. RENTAL ADJUSTMENT: Section 4A of the Lease (Rental Adjustment) shall
be replaced with the following: On the twenty fourth (24th) month following the
Second Floor Commencement Date and every twenty four (24) months thereafter,
(an "Adjustment Date"), the then payable Base Monthly Rent shall be subject to
adjustment based on the increase, if any, in the Consumer Price Index that has
occurred during the twenty four (24) months preceding the then applicable
Adjustment Date. The basis for computing the adjustment shall be the U.S.
Department of Labor, Bureau of Labor Statistic's Consumer Price Index for All
Urban Consumers, All Items, 1982-84=100, for the San Francisco-Oakland-San Jose
area ("Index"). The Index most recently published preceding the Second Floor
Commencement Date for the first Adjustment (or previous Adjustment Date, as
applicable), shall be considered the "Base Index". If the Index most recently
published preceding the Adjustment Date ("Comparison Index") is greater than
the Base Index, the then payable Base Monthly Rent shall be increased by
multiplying the then payable Base Monthly Rent by a fraction, the numerator of
which is the Comparison Index and the denominator of which is the Base Index.
Notwithstanding any subsequent decrease in the Index, the increase in the CPI
for any calendar year shall never be less than four percent (4%) per year
compounded annually nor more than eight percent (8%) per year compounded
annually. On adjustment of the Base Monthly Rent Landlord shall notify Tenant
by letter stating the new Base Monthly Rent. Landlord's calculation of the Base
Monthly Rent escalation shall be conclusive and binding unless Tenant objects
to said calculation within a thirty (30) day period following receipt from
Landlord of such calculation. Landlord's failure to adjust Base Monthly Rent on
an Adjustment Date shall not prevent Landlord from retroactively adjusting Base
Monthly Rent at any subsequent time during the Lease Term. If the Index base
year is changed so that it differs from 1982-84=100, the Index shall be
converted in accordance with the conversion factor published by the United
States Department of Labor, Bureau of Labor Statistics. If the Index is
discontinued or revised during the Lease Term, such other government index or
computation with which it is replaced shall be used in order to obtain
substantially the same result as would be obtained if the index had not been
discontinued or revised.
4. CONSTRUCTION AND POSSESSION: The entirety of Section 7 of the Lease
(Construction and Possession) shall be replaced with the following:
Page 2
<PAGE>
The Tenant Improvements shall be constructed by McLarney Construction, as
general contractor, ("General Contractor") in accordance with the working
drawings ("Working Drawings") attached as Exhibit "1" and budget for the cost
of the Tenant Improvements ("Budget") attached as Exhibit "2". The Tenant
Improvements constructed hereunder shall comply with all existing applicable
municipal, local, state and federal laws, statutes, rules, regulations and
ordinances. Landlord shall provide a warranty, excluding routine maintenance
or damage caused by the negligence or misuse by Tenant, on the Tenant
Improvements for one (1) year from the Second Floor Commencement Date.
Landlord and Tenant shall be responsible for and shall pay the cost of the
Tenant Improvements as allocated in the Budget attached as Exhibit "2".
Tenant shall contract directly with General Contractor for the portion of the
Tenant Improvements to be constructed at Tenant's expense and Tenant reserves
the right to eliminate or delay the construction of this work.
In the event Tenant makes any changes to the Working Drawings which increase
the cost of Tenant Improvements paid for by Landlord ("Cost Increase"), the
Cost Increase shall be paid for by Tenant in cash within seven (7) days after
payment by Landlord to the General Contractor. In the event Tenant makes any
changes to the Final Working Drawings after March 1, 1996 which cause the
General Contractor's construction schedule to be delayed, the Second Floor
Commencement Date shall occur one (1) day in advance of Substantial
Completion as defined below for each day of delay.
The Second Floor Commencement Date shall not be deemed to have occurred until
such date Landlord notifies Tenant that Substantial Completion of the Tenant
Improvements paid for by Landlord has occurred and the second floor of the
Premises is ready for occupancy. "Substantial Completion" shall mean that:
(i) all necessary governmental approvals, permits, consents, and certificates
have been obtained by or for Landlord for the lawful construction by
Landlord, and occupancy by Tenant of the Premises, excluding any Tenant
Improvement work paid for by Tenant, (ii) the Tenant Improvements paid for by
Landlord have been completed consistent with the Working Drawings and (iii)
said interior is in a "broom clean" finished condition.
5. MAINTENANCE OF PREMISES: In the second to last sentence of Section
11.C of the Lease (Tenant's Allocable Share) change Tenant's Allocable Share
of Building Costs to 100% and Tenant's Allocable Share of Project Costs to
26.41%. In addition add "Landlord agrees to replace to membrane of the roof
of the Premises within six (6) months following the date of this Amendment."
6. OPTION TO EXTEND THE TERM OF THE LEASE: In the third sentence of
Section 37.A of the Lease (Grant & Exercise of Option) add "ninety five
percent (95%) of" before the phrase "Fair Market Rental".
7. MISCELLANEOUS: All defined terms shall have the same meanings as in
the Lease, except as otherwise stated in this Amendment. Except as hereby
amended, the Lease and all of the terms,
Page 3
<PAGE>
covenants and conditions thereof shall remain unmodified and in full force
and effect. In the event of any conflict or inconsistency between the terms
and provisions of this Amendment and the terms and provisions of the Lease,
the terms and provisions of this Amendment shall prevail.
IN WITNESS WHEREOF, the parties hereto have set their hands to this Amendment
as of the day and date first above written.
LANDLORD TENANT
Sobrato Interests, VISX, Incorporated
a California limited partnership a Delaware corporation
By: /s/ John M. Sobrato By: /s/ Timothy R. Maier
----------------------- -----------------------
Its: General Partner Its: Chief Financial Officer
-----------------------
Page 4
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 32332
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<RECEIVABLES> 6667
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<CURRENT-ASSETS> 88862
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0
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