<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: DECEMBER 31, 1996
Commission file number: 1-10694
------------------------
VISX, INCORPORATED
(Exact name of Registrant as specified in its charter)
------------------------
3400 Central Expressway
Santa Clara, California 95051
(408) 733-2020
(Address, including zip code and telephone number, including area code,
of Registrant's principal executive offices)
<TABLE>
<S> <C>
DELAWARE 06-1161793
(State or other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
</TABLE>
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.
------------------------
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 voting Common Stock held by
non-affiliates of the registrant as of March 21, 1997 is approximately
$341,183,633. The number of shares of Common Stock outstanding as of March 21,
1997 was 15,367,465.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's Proxy Statement for its Annual Meeting
of Stockholders to be held on May 16, 1997 are incorporated by reference into
Part III of this report.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SEC ITEM NUMBER DESCRIPTION PAGE NUMBER
- ---------------------- ----------------------------------------------------- ------------------
<S> <C> <C> <C>
Part I Item 1 Business............................................. 1
Item 2 Properties........................................... 13
Item 3 Legal Proceedings.................................... 13
Item 4 Submission of Matters to a Vote of Security
Holders.............................................. 17
Part II Item 5 Market for the Company's Common Equity and Related
Stockholder Information.............................. 17
Item 6 Selected Financial Data.............................. 18
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 18
Item 8 Financial Statements and Supplementary Data
Consolidated Financial Statements.................... 22
Notes to Consolidated Financial Statements........... 26
Report of Independent Public Accountants............. 36
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 37
Part Item 10 Directors and Executive Officers of VISX............. 37
III....
Item 11 Executive Compensation............................... 38
Item 12 Security Ownership of Certain Beneficial Owners and
Management........................................... 38
Item 13 Certain Relationships and Related Transactions....... 38
Part IV.. Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................... 39
Financial Statement Schedules........................ 40
Company Directory.................................... Inside Back Cover
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
THE COMPANY
VISX, Incorporated ("VISX" or the "Company") is a leader in the design and
development of proprietary technologies and systems for laser vision correction
(sometimes abbreviated as "LVC"). Laser vision correction relies on a
computerized laser to treat nearsightedness, astigmatism and farsightedness with
the goal of eliminating or reducing reliance on eyeglasses and contact lenses.
The VISX Excimer Laser System(TM) (the "VISX System") 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 157 million people in the United States experiencing
some form of nearsightedness, astigmatism or farsightedness. Typically, the
individual receiving vision correction pays for the treatment, and so the
industry is not reliant on reimbursement from governmental or private health
care payors. A secondary market for the VISX System is the treatment of corneal
pathologies using the laser.
VISX has developed and continues to refine 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 by broadening the installed base of VISX Systems around the
world, and collecting procedure and equipment royalties from licensed users and
manufacturers.
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results contemplated by the forward-looking statements. The factors set forth
under "Business -- Market Acceptance of Laser Vision Correction," "-- Reliance
on Patents and Proprietary Technology," "-- Risks Relating to Pillar Point
Partners; Patent Litigation," "-- Government Regulation; Proliferation of
Unapproved Lasers," "-- Manufacturing, Components and Raw Materials,"
"-- Competition," and "-- Product Liability and Insurance" and under "Legal
Proceedings" may cause the Company's actual results to vary from those
contemplated by certain forward-looking statements set forth herein and should
be considered carefully in addition to the other information presented in this
report.
REFRACTIVE VISION DISORDERS AND LASER VISION CORRECTION
The human eye functions much like a camera. It incorporates 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 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. The retina translates the
image into an electrical signal, which it relays to the optic nerve and from
there to the brain. When the cornea is improperly curved, it cannot properly
focus (or refract) the light passing through it, resulting in a refractive
vision disorder. As a result, the viewer perceives a blurred image. The three
most common refractive vision disorders are:
NEARSIGHTEDNESS (also known as myopia): images are focused in front of
the retina
ASTIGMATISM: images are not focused at any one point on the retina
FARSIGHTEDNESS (also known as hyperopia): 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.
In the early 1980s, it was believed impossible to operate directly on the
front of the cornea. The first procedure for the treatment of nearsightedness
was performed in the United States in 1987. The U.S. Food and Drug
Administration ("FDA") announced in late 1995 that laser vision correction was
safe and effective for the treatment of low to moderate nearsightedness. In
1996, the first full year in which laser vision correction was approved, VISX
estimates that approximately 70,000 LVC procedures were performed using the two
excimer laser systems which have FDA approval. VISX believes that a significant
number of procedures were performed in 1996 using unapproved black market
excimer laser systems. By comparison,
<PAGE> 4
industry sources estimate that between 200,000 and 300,000 Radial Keratotomy
("RK") procedures are performed annually in the United States. See
" -- Competition" below.
On March 27, 1996, the FDA approved the use of the VISX System to correct
mild to moderate nearsightedness. LVC is medically known as PhotoRefractive
Keratectomy or PRK. To perform LVC, the ophthalmologist first measures the
correction required using the same examination used to prescribe eyeglasses or
contact lenses. The doctor programs the "prescription" into the VISX System, and
the computer calculates the data needed to make a precise corneal correction.
The excimer laser system emits laser pulses to ablate submicron layers of tissue
from the front surface of the cornea in a pattern to reshape the cornea. A
micron equals 0.001 of a millimeter, and the depth of tissue ablated during the
procedure typically is less than a strand of 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 eye
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.
Individuals who undergo laser vision correction may experience discomfort
for approximately 24 hours, and blurred vision for approximately 48 to 72 hours,
after the procedure. The ophthalmologist may prescribe topical pharmaceuticals
to promote corneal healing and alleviate discomfort. Although most patients
experience significant improvement in uncorrected vision within a few days of
the procedure, it generally takes several months for the final correction to
stabilize and for the full benefit of the procedure to be realized.
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 surgical technique (keratomileusis). The doctor uses a knife, or
microkeratome, to open a flap on the cornea. The laser then ablates the exposed
surface of the cornea, and the doctor folds the flap back into place. LASIK
appears to be gaining in popularity primarily because there may be less
postoperative discomfort and a more immediate improvement in uncorrected vision.
Nevertheless, LASIK is also associated with some severe adverse consequences,
often attributable to the microkeratome (the cutting device), and requires a
high degree of surgical skill. Because the laser is used in both LVC and LASIK
procedures, VISX is unable to calculate the number of LASIK procedures performed
with the VISX System. The Company has not commenced clinical trials involving
use of the VISX System for LASIK in the United States, although certain groups
of physicians using the VISX System have begun their own studies. See
" -- Government Regulation; Proliferation of Unapproved Lasers" and
" -- Competition" below. LASIK is covered by patents licensed to Pillar Point
Partners ("Pillar Point"), and therefore Pillar Point charges a royalty for
LASIK procedures performed in the U.S. See " -- Reliance on Patents and
Proprietary Technology" below.
CORNEAL PATHOLOGIES AND PTK
The VISX System is designed to treat certain types of corneal pathologies
in an outpatient procedure known as PhotoTherapeutic Keratectomy or 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. Corneal
transplant, the typical treatment of these conditions, involves major surgery,
is expensive and depends 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. The possible transmission of viruses and rejection of the transplanted
tissue are also of concern with corneal transplants. The principal goal of PTK
is to alleviate the symptoms associated with the corneal pathology. The VISX
System accomplishes this by ablating submicron layers of diseased, scarred or
sight-inhibiting tissue from the surface of the cornea.
The Company estimates that VISX Systems have been used worldwide to perform
approximately 10,000 PTK procedures. VISX received FDA approval of its
Pre-Market Approval ("PMA") application for use of the VISX System to perform
PTK in September 1995. 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 laser vision correction.
Page 2
<PAGE> 5
PRODUCTS
VISX System. The VISX System is a fully integrated medical device
incorporating an excimer laser and a computerdriven workstation. 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.
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; the light does
not penetrate the eye, and so there is no measurable effect in the interior of
the eye.
VisionKey(R) Card. The use of the VISX System is controlled by a
proprietary optical memory card, called VisionKey(R), which is sold separately.
The VisionKey card is encoded with proprietary software which is required to
operate the VISX System, and provides the user with access to software upgrades
and can facilitate the collection of patient data. When and if the Company
receives approval from the FDA for the treatment of astigmatism, the astigmatism
software in the VisionKey card will be enabled and no additional system changes
will be necessary to permit the VISX System to treat astigmatism. One VisionKey
card must be used with each procedure performed, and therefore sales of the
VisionKey card correlate to the number of procedures performed. (The correlation
is not exact, however, because approximately 30 VISX Systems outside the United
States have not been retrofitted to include the VisionKey card system.)
MARKETING, SALES AND DISTRIBUTION
Until March 1996, Alcon Laboratories, Inc. ("Alcon") served as VISX's
exclusive international distributor. On March 12, 1996, Alcon ceased all
marketing and sales efforts on behalf of VISX, following a five-month transition
period. Alcon continues to service VISX Systems which Alcon sold before March
1996. During the first quarter of 1996, VISX focused its marketing efforts on
building a marketing and sales department to take over from Alcon.
United States. VISX's marketing objective is to maximize consumer
acceptance of laser vision correction by: (a) providing proven laser technology
to the eyecare medical community; (b) giving VISX customers various services and
programs designed to increase their operating efficiency and effectiveness; and
(c) directly educating the public about the benefits of laser vision correction.
The programs are promoted under the trademark banner Gateway Support(TM) and are
grouped into three areas: internal marketing, external marketing, and customer
support. To launch the VISX System following receipt of PMA approval for laser
vision correction, VISX introduced an updated logo, featuring the image of an
eye to replace the image of the laser, and added the phrase "We Make Things
Clear."
[LOGO]
Picture of VISX logo showing the word "visx"
in lower case letters with an arc over the word,
and the phrase "we make things clear" underneath the word.
Page 3
<PAGE> 6
<TABLE>
<S> <C>
Internal Marketing LOGO
VISX University(TM) Management
Seminar. During 1996, VISX convened the first
VISX University(TM) Management Seminar. Four are
planned for 1997. VISX University is an educational
program designed to teach laser center decision
makers how to effectively promote and market their
excimer laser practices. Attendees learn about
procedure- building techniques in advertising,
marketing, public relations, lead tracking, staff
training, and consumer education and recruitment.
The VISX University curriculum features an
extensive two-day program of small-group,
interactive workshops in which "students" can learn
about the real world experiences of successful
laser vision correction marketers and can share
their own experiences.
</TABLE>
Business Development Managers. For more "hands-on" training, VISX also
introduced the concept of Business Development Managers, industry experts who
evaluate VISX customers at their sites, and then create a customized plan with
follow-up. VISX accounts that participate in this program receive intensive
"hands-on" consulting and training to help them grow their procedure volume. The
plan developed during the consultation phase identifies specific areas that the
customer can modify in order to respond more successfully to consumers
interested in having laser vision correction.
External Marketing
VISX Ambassadors(TM) Program. In the summer of 1996, VISX launched the
VISX Ambassadors(TM) Program. The program is intended to help U.S. customers
increase the number of procedures in their practice, based on the theory that
good results will generate good referrals. When a VISX System is purchased, VISX
offers the laser facility up to eight free VisionKey cards to be used to treat
staff members who may become "ambassadors" for LVC. Beginning in 1997, VISX
expanded the program to cover treatment of any ophthalmologist or optometrist.
This generates referrals both within the laser facility and in the offices of
eye doctors who are part of each facility's community network. Market research
indicates that doctors and staff members who have had LVC are viewed as highly
credible and influential to consumers considering the procedure.
Marketing Communication Materials. Customers who buy a VISX System receive
educational materials including brochures, videos, slides, and other information
to help them promote laser vision correction. Non-VISX customers can also obtain
many of these items through the VISX Customer Response Center.
Sight Line(TM) Program. For customers with advanced consumer advertising
needs, VISX funded the development of a comprehensive marketing and advertising
program which customers can purchase and implement within their local market
area. This program, called Sight Line(TM), offers a local marketing plan derived
from a national consumer database on laser vision correction. This database
identifies consumers by their lifestyle and buying behavior, and targets those
most likely to be interested in laser vision correction. Sight Line provides an
array of advertising and educational media, including television, radio,
newspaper, video, and brochures, all of which is professionally produced and
personalized for each customer.
National Consumer Public Relations. VISX intends to begin a national
consumer public relations effort when and if VISX receives FDA approval for the
treatment of astigmatism. VISX anticipates that this marketing program will
increase awareness of laser vision correction and educate and motivate consumers
to learn more about the procedure. Using astigmatism as the launching point,
consumer public relations will also help establish the VISX name, reputation and
"brand" of laser vision correction as a way to direct consumers to VISX
locations and VISX doctors.
Test Market Advertising and Public Relations. In 1997, VISX plans to
conduct focused test marketing in a small number of targeted cities. This test
market evaluation will measure the effectiveness of various
Page 4
<PAGE> 7
marketing messages using a combination of television, radio and print media and
local targeted public relations. Inquiries will be directed to a dedicated
toll-free telephone number. VISX hopes to use the information it generates
during the test marketing to determine costs associated with generating leads
for VISX laser vision correction and to project the return for possible larger
scale campaigns in future years.
Procedure Financing Support. Typically, only one in four people in the
United States can afford to pay cash for higher disposable income purchases such
as laser vision correction. Consumers are accustomed to making monthly payments
to purchase goods and services, and laser vision correction is no exception.
VISX has identified several financial vendors who specialize in offering and
processing loans to consumers through eye care professionals. The Company has
helped negotiate financing programs and encourages its customers to work
directly with these vendors to add consumer financing to their practice. VISX
will not be directly involved with these financing programs and will not benefit
from the financing (except to the extent it contributes to growth in procedure
royalties).
Customer Support
Customer Response Center. The VISX Customer Response Center is open 24
hours a day, seven days a week, and is staffed by over 40 VISX employees to
respond to calls to the telephone number 800.246.VISX. Telephone requests range
from orders for parts and VisionKey cards, to requests for technical support,
customer information, and field service. Twenty members of the Customer Response
Center are field-based service engineers, strategically located to ensure rapid
response to customer needs.
Laser Installation/Training Process. VISX requires new customers to
participate in a thorough and rigorous training process to ensure that they know
how to safely operate the VISX System and perform laser surgery. After a VISX
field service engineer installs the system, the operators are trained on site
how to use and maintain the system. Physicians are trained and certified by an
independent ophthalmologist who has been selected and qualified to serve as a
VISX Physician Trainer. VISX does not charge for the initial training of
operators or physicians, and receives no revenue from training courses given
throughout the U.S. Instead, it is VISX's philosophy that ophthalmologists are
uniquely qualified to train ophthalmologists, and certified VISX Physician
Trainers are qualified to train other physicians in the proper use of the VISX
System.
VISX Newsletters. VISXPRESS(TM) is a broadcast fax bulletin which
communicates the latest news regarding VISX and laser vision correction. The
frequency of the publication is determined by the timing of news; the bulletin
is used to communicate breaking news immediately to VISX customers.
VISXchange(TM) is a quarterly publication which provides a forum for eyecare
professionals and industry leaders to exchange information, share their success
stories and communicate the latest in laser vision correction and excimer laser
technology. A "typical" edition of VISXchange might include new product
information, clinical updates and tips, patient testimonials, VISX customer
marketing and sales success stories, and information on new Gateway Support
programs and VISX-sponsored events.
LOGO LOGO
Picture of the VISXPRESS logo. Picture of the VISXchange logo.
VISX on the Internet. In 1996, VISX added Internet-based marketing to its
overall marketing strategy. This medium is particularly well suited to the
demographics of the Company's targeted consumer audience; its interactive
capabilities enhance the effectiveness of communications with customers and the
professional eyecare community at large. VISX's World Wide Web presence supports
the Company's practice development, physician clinical education, and consumer
awareness-building activities.
Page 5
<PAGE> 8
The Company's website at HTTP://WWW.VISX.COM includes the following resources:
S Information for consumers regarding the benefits of laser vision
correction, including multimedia testimonials from satisfied patients,
and an interactive map providing consumers with the locations of VISX
installations;
S Clinical information resources for the physician community, including
downloadable presentations of the most recent VISX clinical results from
leading ophthalmologists worldwide; and
S On-line access to the Customer Response Center, including new products
and services news, physician certification course schedules, and
registration for practice development programs such as VISX University
and the Ambassadors Program.
VISX promotes the website's resources to both the consumer and medical
communities through Internet-based promotions, as well as through public
relations efforts directed at more traditional print and broadcast media.
International Sales and Marketing Strategy
Following the termination of Alcon's exclusive marketing rights, VISX
established and implemented new marketing and sales strategies for international
markets, as well. VISX's international strategy is to re-establish and maintain
a presence and quality image in selected markets. Japan represents the largest
single market opportunity outside the United States. The Company intends to
pursue other selected markets primarily through distribution networks. VISX will
continue to support international markets by sponsoring speaking engagements and
attending selected exhibitions and trade shows. VISX Systems are installed in
nearly 40 countries outside the U.S. Alcon or a local distributor is responsible
for servicing those systems. Future 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.
The Health Protection Branch of the Canadian government has approved the
use of the VISX System in Canada for treatment of low-level myopia. This
approval permits VISX to 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 only LVC system manufacturer with such
approval in Canada.
MARKET ACCEPTANCE OF LASER VISION CORRECTION
The Company's profitability and growth will depend upon broad acceptance of
LVC in the United States and key international markets targeted by the Company.
Although initial results are promising, there can be no assurance that either
the ophthalmic community or the general population will accept LVC as an
alternative to existing methods of treating refractive vision disorders.
Consumers may be slow to adopt laser vision correction because of the cost
of the procedure, 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 beyond ten
years, the possibility of unknown side effects, the lack of third-party
reimbursement for the procedure, and the decision to spend their disposable
income in other ways. Many consumers may choose not to have laser vision
correction due to the availability of non-incisional methods for vision
correction, and promotional efforts by suppliers of products or procedures which
are alternatives to laser vision correction, including eyeglasses and contact
lenses, may also adversely affect the market acceptance of laser vision
correction. Any future reported adverse events or other unfavorable publicity
involving patient outcomes from use of laser vision correction systems
manufactured by any participant in the LVC market could also adversely affect
acceptance of the procedure. In particular, it is unlikely that consumers will
be able to distinguish a black market system from an approved system, with the
likely consequence that poor results from an unapproved laser could adversely
affect the entire industry. Consequently, the FDA's lack of enforcement action
against the manufacturers and users of those unapproved devices permits the
continued existence of black market excimer lasers, which increases the risk to
the entire industry. See " -- Government Regulation; Proliferation of Unapproved
Lasers" below.
Page 6
<PAGE> 9
If laser vision correction does not achieve broad market acceptance, that
could have a material adverse effect on the Company's business, financial
position and results of operations. See " -- Marketing, Sales and Distribution"
above.
Although laser vision correction has a more predictable outcome and
precision of results than other surgical methods used to correct refractive
disorders, it is not without risk. 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. It is possible that longer term
follow-up data might 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 position and results of operations.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY
VISX is committed to protecting its proprietary technology. VISX holds over
120 United States and foreign patents, including patents it has licensed to
Pillar Point. 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 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"). In
addition, there are multiple foreign patents covering apparatus for performing
excimer laser corneal surgery, including patents or patent rights held by VISX,
Summit, and others. In particular, the Company has several pending patent
applications in the United States and in foreign countries, and recently
acquired a portfolio of patents formerly owned by Phoenix Laser Systems, Inc.
Pillar Point Partners. In June 1992, VISX and Summit entered into
agreements establishing Pillar Point (collectively, the "Pillar Point
Agreement"). By virtue of the Pillar Point Agreement, all then-pending issues
between VISX and Summit regarding the ownership and use of their respective
United States patents for performing ultraviolet laser corneal surgery were
settled. Pursuant to the Pillar Point Agreement, VISX and Summit each licensed
exclusively to Pillar Point their rights under United States patents previously
issued to them covering methods and apparatus for performing ultraviolet laser
corneal surgery (collectively, the "Pillar Point patents"). 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. Currently, the last-to-expire
of the patents licensed by Pillar Point expires in the year 2013.
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, VISX and Summit pay Pillar
Point certain procedure and equipment royalties. 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. In
August 1996, VISX Partner, Inc., a subsidiary of VISX ("VISX Partner"), sued
Summit on behalf of Pillar Point to recover certain royalties which VISX
maintains Summit has not paid into the partnership in accordance with the Pillar
Point Agreement. See " -- Risks Relating to Pillar Point Partners; Patent
Litigation" below.
Pillar Point currently charges its licensees a procedure royalty of $250
per procedure performed using its technology. At that royalty rate, partnership
profits realized from procedure royalties from LVC procedures using an excimer
laser with an adjustable iris (the only type of system approved by the FDA) are
allocated 56% to VISX and 44% to Summit. Pillar Point has decided not to charge
procedure royalties for PTK at this time.
Pillar Point also charges the licensees an equipment royalty of 6% for
sales of excimer laser systems using an adjustable iris. Profits from royalties
on such sales paid to Pillar Point are allocated entirely to VISX. If and
Page 7
<PAGE> 10
when manufacturers other than VISX and Summit take a license to manufacture,
sell and use such systems in the U.S., it is anticipated that 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. VISX has licensed the following companies
under VISX's patents outside of the United States: Chiron Vision Corporation
("Chiron"), Aesculap-Meditec GmbH ("Meditec"), and Herbert Schwind GmbH & Co. KG
("Schwind"). Under these agreements, VISX is paid royalties for all
international sales of Chiron, Meditec, and Schwind equipment.
VISX is party to a license agreement with International Business Machines
Corporation ("IBM") that grants VISX 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. VISX is
aware that another company claims to have entered into an agreement with IBM to
acquire certain rights with respect to IBM's patents, including IBM's rights
under its contract with VISX. VISX does not anticipate that that transaction
will have any effect on its license to the patents. The Company also has entered
into a nonexclusive, worldwide license agreement with Patlex Corporation which
holds certain patents on lasers. Under this agreement, VISX pays a royalty on
certain laser components of the VISX System.
Confidentiality Arrangements. VISX also seeks to protect its proprietary
technology, in part, through 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. VISX
cannot give any assurance that employees, consultants and others will not breach
its proprietary information agreements, that VISX would have adequate remedies
for any breach, or that VISX's competitors will not learn of or independently
develop the Company's trade secrets.
RISKS RELATING TO PILLAR POINT PARTNERS; PATENT LITIGATION
Payment of Royalties. The Pillar Point Agreement contemplates that
royalties will be paid to Pillar Point each time a laser system is used to
perform laser vision correction in the United States under licenses granted to
VISX, Summit or other manufacturers. VISX maintains contractual arrangements
permitting it to collect per procedure royalties from the use of VISX Systems.
VISX is engaged in a legal dispute with Summit over the issues of (1) whether
royalties are due Pillar Point from Summit on the sale of systems which are now
being used to perform LVC but were sold prior to FDA approval for LVC, and (2)
the definition of Net Selling Price as it is used in the Pillar Point Agreement.
In addition, the Company believes that nearly 50 unlicensed systems in use in
the U.S. infringe the Pillar Point patents. Therefore, Pillar Point is currently
receiving no payments for procedures done on those black market systems. Pillar
Point has sued several doctors and manufacturers for patent infringement on that
basis. See "Legal Proceedings" below.
Antitrust Considerations. VISX and Summit endeavored to structure the
operations of Pillar Point in a manner consistent with antitrust laws. Whether
Pillar Point has complied 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 relative strength of
competitors in the relevant market 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 particular, in October 1995, the Federal Trade
Commission ("FTC") requested 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. In addition, Pillar
Point and its partners are engaged in various lawsuits in which the validity of
the partnership itself, and the concept of the procedure royalty, have been
challenged. Those cases are discussed in more detail below. See "Legal
Proceedings -- Patent Proceedings and Litigation" below.
Page 8
<PAGE> 11
Challenges to Patent Position. 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. Any successful challenge to the Pillar Point patents which VISX still
owns could have a material adverse effect on the Company's business, financial
position and results of operations. Further, there can be no assurance that the
patents held by Pillar Point 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.
Similarly, there can be no assurance that the Pillar Point patents or
international patents owned by VISX will afford any significant degree of
protection or provide VISX 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. One such
dispute, over the so-called "Azema Patent," has already arisen. See "Legal
Proceedings--Patent Proceedings and Litigation" below.
The Company is engaged in several other patent proceedings internationally.
VISX has filed actions alleging infringement of its patents by certain parties
in Canada, has itself been sued for a declaratory judgment of noninfringement by
another party in Canada, and is involved in administrative proceedings in the
European Patent Office ("EPO") challenging the issuance of certain patents held
by VISX. 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. For Additional Detail Regarding These
Patent Proceedings, See "Legal Proceedings," below.
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 countries, which could have a material
adverse effect on the Company's business, financial position and results of
operations.
GOVERNMENT REGULATION; PROLIFERATION OF UNAPPROVED LASERS
U.S. Food and Drug Administration. 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 of 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
pre-market approval for the device.
Although VISX has pre-market approval for the VISX System for certain
indications, VISX will need to seek additional regulatory approvals for
additional indications for the VISX System, through either additional PMA
applications or supplements to existing PMA applications. 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 position and results of operations.
Products manufactured or distributed by VISX 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
Page 9
<PAGE> 12
instances, by the FTC, 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 pre-market approval of
devices, and criminal prosecution.
The FDC Act also requires VISX 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. On October 7, 1996, the FDA issued the
final rule revising the GMP regulations to harmonize them with worldwide quality
system requirements. The new Quality System Regulation ("QSR") is effective June
1, 1997. The goal of QSR is to make the existing GMP regulations consistent, to
the extent possible, with the requirements for quality systems contained in
applicable international standards, primarily, the International Organization
for Standardization (ISO) 9001:1994 "Quality Systems -- Model for Quality
Assurance in Design, Development, Production, Installation, and Servicing." VISX
is taking steps to be in full compliance with QSR by the effective date, and to
receive ISO 9001 certification. 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 position and results of
operations.
In the year (approximately) since the FDA issued the first PMA for the
treatment of nearsightedness, the industry has undergone radical change. Where
once there were a handful of manufacturers of excimer laser systems, there is
now a proliferation of unapproved Class III devices available to treat all
levels of refractive vision disorders. In particular, VISX is aware of over 20
reimported Summit excimer laser systems (which were not configured for the
United States market when manufactured), and over 30 generic systems, all in
active use in the United States. The Company attributes this phenomenon -- which
is not seen outside of the U.S. -- to the narrow scope of the PMA approvals for
Summit and VISX. That is, while the FDA has mandated that both approved
manufacturers limit the software in their systems so that doctors may only treat
simple myopia, reimported and generic systems have no such limitations. Although
such systems are, under applicable FDA regulations, Class III medical devices
just as the VISX System is, the FDA's enforcement efforts in this field have
been limited to date to inviting all manufacturers and users of unapproved laser
systems to submit clinical study protocols to the FDA while they continue to use
their devices without restrictions on the indications for which such devices can
be used. Therefore, while VISX and Summit were required to undertake extensive
clinical trials in the United States prior to receipt of FDA approval to
commence commercial sales, resulting in significant clinical, regulatory and
related expenses, the manufacturers and users of unapproved lasers are able to
capture revenue from performing laser vision correction without the expenses
associated with extensive clinical trials.
To date, although the FDA has declared such laser systems to be illegal and
has issued several warning letters, to the best of the Company's knowledge no
manufacturer or user of an unapproved laser system has been stopped. The
continued, unchecked use of unapproved excimer laser systems in the United
States could adversely affect VISX's system sales revenue and, to the extent
that users of such lasers do not pay procedure royalties to Pillar Point, the
Company's royalty income through Pillar Point could also be adversely affected.
Furthermore, the ability of users of unapproved lasers to perform laser vision
correction in addition to other procedures for which VISX and Summit lasers have
received PMA approval from the FDA could adversely affect the Company's
competitive position, as well as the competitive position of ophthalmologists
using VISX or Summit lasers. Accordingly, the continued, unchecked use of
unapproved excimer lasers in the United States could have a material adverse
effect on the Company's business, financial position and results of operations.
Other Government Regulation. VISX is 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
Page 10
<PAGE> 13
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 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, manufacturing 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, and it is not
possible to estimate the associated cost or delay to receive such additional
approvals. Failure to receive approval in, or meet the requirements of, any
country would prevent the Company from selling its products in that country.
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. VISX is actively pursuing approval to market the
VISX System in Japan. Although clinical trials for PTK and PRK have been
completed in Japan, no date has been set for the Japanese health ministry to
review VISX's applications for approval. VISX does not anticipate receiving PTK
approval in Japan before the fourth quarter of 1997, and there can be no
assurance as to when or whether such approval will be received.
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 before 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. VISX
also 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 position and results of operations.
COMPETITION
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
RK, as well as with other technologies and surgical techniques currently under
development, such as corneal implants and surgery using different types of
lasers. 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. RK is a manual procedure, highly
dependent on the surgical skill of the ophthalmologist performing the procedure,
and the incisions into the corneal tissue weaken the cornea which can have
adverse consequences as patients age. Furthermore, RK has never undergone a
controlled clinical study under an FDA protocol because no medical devices,
other than a scalpel, are used in the procedure. VISX believes, based on
currently available follow-up data and market trends in countries
Page 11
<PAGE> 14
where laser vision correction 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.
In the United States, VISX believes that it and Summit are the leading
manufacturers of excimer laser systems. Summit received FDA approval of its PMA
application for LVC for treatment of nearsightedness approximately five months
before VISX received such approval, which enabled Summit to commence commercial
sale of its laser system for LVC in the United States before VISX could sell
commercially. As a result, Summit had a competitive advantage for several
months, and VISX believes that Summit has a larger installed base of systems in
the United States than VISX does.
The Company's principal international competitors are Chiron, Meditec,
Schwind, and Nidek Co., Ltd. ("Nidek"). VISX has licensed certain of its patents
to Chiron, Meditec, and Schwind, each of which is obligated to pay VISX
royalties on system sales. Neither Nidek nor Summit has taken a license, and
VISX has sued both companies and their users for patent infringement in Canada.
VISX has also sued Nidek for infringement in the United Kingdom. A sixth
company, Autonomous Technologies Corporation ("Autonomous"), has sued VISX in
Canada, seeking a declaratory judgment that the Autonomous system does not
infringe two of VISX's 120 patents. VISX sued Autonomous for patent infringement
in the U.K. in July 1996. See "Legal Proceedings" below.
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 position and results of operations of the Company.
The continued proliferation of black market laser systems poses a serious
threat to VISX's future. Such laser systems have not been determined to be safe
or effective by the FDA, and they are entirely unregulated. The users are not
limited either to the amount of refractive correction they can perform, or to
the scope of advertising they can use to encourage consumers to have the
procedure. As a consequence, doctors in the United States who purchase an
approved system are put at a significant commercial disadvantage. Moreover, the
users of the black market systems are not licensed under the Pillar Point
patents, and Pillar Point continues to spend significant amounts of money in
litigation with the makers and users of the black market equipment. VISX, as the
owner of the patents-in-suit in all of the pending litigation, is spending
significant additional amounts in legal fees to safeguard its patent rights.
VISX's business, financial position, and results of operations are potentially
affected materially by all of these factors: loss of sales to illegal lasers,
loss of royalty income through Pillar Point, and potential damage to the
industry at this very early stage, posed by the proliferation of unapproved
Class III devices posing as the "next generation" of laser vision correction.
RESEARCH & DEVELOPMENT AND REGULATORY
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 $8.7 million, $8.9 million, and $7.1
million during the years ended December 31, 1996, 1995, and 1994, respectively.
The Company expects to continue spending significant amounts in research and
development for the foreseeable future.
Page 12
<PAGE> 15
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 $10 million, which represents the maximum
payout for all claims that could be made during an annual policy period. If VISX
were unable to maintain adequate insurance coverage at any time, a product
liability or other claim in excess of the Company's insurance coverage could
have a material adverse effect on the Company's business, financial position 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, 1996, VISX had 166 full-time employees, 19 temporary
employees and six consultants. Of the full-time employees, 81 are employed in
manufacturing and service, 42 in research and development and regulatory, and 43
in general administrative and marketing and sales 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 108,844 square foot leased
facility in Santa Clara, California. The lease for the entire facility was
extended to seven years following substantial completion of the tenant
improvements to the second floor (which were completed in or about June 1996),
with an option to extend the term an additional five years. The Company believes
its facilities are sufficient to meet its current and reasonably anticipated
future requirements. VISX subleases 33,579 square feet of the facility to
another company; the sublease continues through February 28, 1999 and contains
an option to extend the lease until July 31, 1999. See Note 9 of Notes to
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
PATENT PROCEEDINGS AND LITIGATION: VISX
VISX 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 VISX from
manufacturing, marketing or selling its products in certain countries, limit
VISX's ability to collect use and equipment royalties in certain markets and
have a material, adverse effect on VISX's business, financial position and
results of operations. These proceedings are discussed separately below.
VISX is involved in the following patent-related litigation:
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 September 1995, the Company filed lawsuits in Canada
against LaserSight, Inc. ("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 monetary damages against all defendants in Canada. The Canadian
actions other than the Nidek proceedings are in the pleading stage. In 1996,
Autonomous sued VISX in Canada, seeking declaratory judgment that two of VISX's
Canadian patents are invalid or, in the alternative, that the Autonomous excimer
laser system does not infringe those patents. VISX believes that the claims are
without merit, and intends to vigorously defend the action.
Page 13
<PAGE> 16
United Kingdom. VISX has brought patent infringement actions against
several companies in the United Kingdom. In July 1996, VISX commenced an action
against Autonomous, LaserVision Centers, Inc., and LVC (Europe) Limited. By
agreement, the action has been stayed against the latter two defendants. The
suit alleges infringement of a European patent by an Autonomous system which was
placed in London at the time the action was commenced. Autonomous has filed a
defense, but has not challenged the validity of the VISX patent. This case is in
the process of discovery. In November 1996, VISX commenced an action against
Nidek, Birmingham Optical Group Limited and Optimax Laser Eye Clinics Limited,
alleging infringement of two VISX European patents. The defendants have
contested the validity of the patents. This case is in the very early pleadings
stages, and it is impossible to predict the outcome. VISX believes, however,
that the invalidity claims are without merit, and intends to vigorously defend
its position.
Europe. The issuance of four of VISX's European patents granted by the
European Patent Office ("EPO") has been opposed by Summit and, in the case of
two of the four patents, Carl Zeiss GmbH. VISX has filed written submissions in
response to these oppositions. VISX amended two of these patents during the EPO
oral hearings and the grants of the patents, as amended, were maintained. There
are appeals pending in both cases. The EPO revoked a third patent and VISX is
appealing that decision; until the appeal is decided, the decision of the EPO is
not in effect. 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. An oral hearing regarding the
opposition filed against a fourth patent is scheduled for April 1997. 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 pending
opposition proceedings.
Azema Patent. In August 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.
VISX believes that the lawsuit is without merit and intends to vigorously defend
its position. Therefore, the Company believes that the resolution of this matter
will not have a material adverse effect on the Company's business, financial
position or results of operations. Nevertheless, the cost of defending this
action has been and is expected to continue to be significant, and there can be
no assurance that the VISX System will be held not to infringe the patent. If
VISX were found to have infringed the patent, 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. A redesign of the VISX System, depending on its
scope, could entail delays in FDA approval of the redesign. The lawsuit is
scheduled for trial in July 1997.
PATENT PROCEEDINGS AND LITIGATION: PILLAR POINT PARTNERS
Due primarily to the potential of the LVC industry, the patents owned by
VISX and licensed to Pillar Point are widely contested. Generally, the patent
litigation described below involves patent infringement issues relating to
whether or not patents licensed to Pillar Point are valid and/or are infringed
by the activities of the other parties to such actions. In addition, the
structure and operation of Pillar Point has been alleged by certain of such
other parties to be in violation of federal and, in certain cases, state
antitrust laws. In all cases, litigation involving Pillar Point also involves
VISX or its subsidiary, VISX Partner. Adverse determinations in any of such
proceedings with respect to the patents licensed to Pillar Point or with respect
to whether or not the structure and operation of Pillar Point is in violation of
antitrust laws could have a material adverse effect on VISX's business,
financial position and results of operations, and could lead to adverse
determinations in one or more of the other pending proceedings.
Pillar Point has brought the following patent-related lawsuits:
Pillar Point Partners, et al. v. LaserSight, Inc. In March 1995 Pillar
Point brought suit in the United States District Court for the District of
Delaware against LaserSight. An amended complaint was subse-
Page 14
<PAGE> 17
quently filed adding VISX, VISX Partner, Summit, and Summit Partner, Inc.
("Summit Partner") as plaintiffs. The suit alleges infringement of a Pillar
Point patent, and seeks monetary damages and injunctive relief. LaserSight has
asserted several affirmative defenses and has filed a declaratory judgment
counterclaim asserting, among other things, that the Pillar Point Agreement
constitutes patent misuse. VISX and the other plaintiffs believe that this
counterclaim is without merit and intend to vigorously defend against it. As of
March 26, 1997, the parties had reached a tentative agreement by which Pillar
Point and the other plaintiffs agreed to dismiss the lawsuit without prejudice
granting LaserSight a release from liability for the alleged patent infringement
before the effective date of the agreement. In exchange, LaserSight will make a
nominal payment and agrees to notify Pillar Point before LaserSight begins
manufacturing or selling in the United States in the future, at which time the
parties agree to negotiate in good faith to reach a mutually agreeable license
to one or more of the Pillar Point patents.
Pillar Point Partners, et al. v. Appler. In September 1996, Pillar Point,
VISX, VISX Partner, Summit, and Summit Partner brought suit in the United States
District Court for the District of Columbia against William D. Appler, an
individual. The suit alleges that Mr. Appler has induced others to infringe the
Pillar Point patents and interfered with prospective business relationships, and
seeks monetary damages and injunctive relief.
Pillar Point Partners, et al. v. Barnet Dulaney Eye Center, et al. In
September 1996, Pillar Point, VISX Partner, and Summit Partner brought suit in
the United States District Court for the District of Arizona against David
Dulaney and Anna Marie Dulaney (husband and wife), Ronald Barnet and Teri Lynn
Barnet (husband and wife) and Barnet Dulaney Eye Center P.L.L.C. On March 3,
1997, plaintiffs filed an amended complaint deleting certain infringement
allegations. The suit alleges infringement of certain Pillar Point patents, and
seeks monetary damages and injunctive relief. The defendants have filed an
answer and counterclaim which denies infringement and requests a declaratory
judgment that the patents in suit are invalid and unenforceable, alleging, among
other things, patent misuse. The defendants have also moved the Court to strike
the complaint and direct plaintiffs and their principal counsel to reimburse
defendants for their costs in defending the lawsuit. VISX and the other
plaintiffs believe that these counterclaims are without merit and intend to
vigorously defend against them.
Pillar Point Partners, et al. v. Jon Dishler, et al. In October 1996,
Pillar Point, VISX Partner, and Summit Partner brought suit in the United States
District Court for the District of Colorado against Jon G. Dishler, DTC Eye
Surgery Center, Inc., D.T.C. Eye Associates, P.C., and Laser Institute of the
Rockies, LLC. On March 14, 1997, the plaintiffs filed an amended complaint
naming Telco -- The Excimer Laser Company PTY, Ltd., Lions Eye Institute, and
Paul van Saarloos, as additional defendants. The suit alleges infringement of
certain Pillar Point patents, and seeks monetary damages and injunctive relief.
The defendants have filed an answer and counterclaim denying infringement and
seeking a declaratory judgment that the patents in suit are invalid and
unenforceable, alleging, among other things, patent misuse. Defendant Dishler
has moved for a summary judgment of no personal liability as to himself. VISX
and the other plaintiffs believe that these counterclaims are without merit and
intend to vigorously defend against them.
Pillar Point Partners, et al. v. Jui-Teng Lin, et al. In January 1997,
Pillar Point, VISX Partner, and Summit Partner brought suit in the United States
District Court for the Middle District of Florida against Jui-Teng Lin, Chung
Lee, Chun Ju Lee, Vera Lee, Yuchin Lin, Photon Data, Inc., PDI International,
Inc., and Nexus Technology, Inc. The suit alleges direct and contributory
infringement of certain Pillar Point patents, inducement to infringe those
patents, and conspiracy to interfere with the plaintiffs' business relationships
with medical practitioners. The plaintiffs request judgment of infringement, an
injunction, and monetary relief.
Pillar Point and the Company (as well as VISX Partner, Summit, and Summit
Partner) have been named as defendants in the following lawsuits:
Burlingame v. Pillar Point Partners, et al.; John R. Shepherd, M.D., Ltd.
v. Pillar Point Partners, et al. In June 1996, Dr. Burlingame filed suit
against Pillar Point, Summit, Summit Partner, VISX, and VISX Partner. The action
was served on Pillar Point in August 1996. In September 1996, a corporation
controlled by Dr. Shepherd filed suit against the same parties. Both actions
were filed in the United States District Court for the Northern District of
California. Generally, both plaintiffs allege that the per procedure royalty
charged by Pillar Point to its licensees is a violation of the Sherman Act, or
alternatively a violation of corresponding state
Page 15
<PAGE> 18
antitrust laws. Dr. Burlingame seeks monetary damages of $6,250 (plus $2,500 per
month until a judgment is reached). Dr. Shepherd's corporation seeks monetary
damages of $56,250 (plus $12,500 per month through the judgment date). VISX
believes that it and Pillar Point have meritorious defenses to these actions,
and that the resolution of the actions will not have a material adverse effect
on VISX's business, financial position or results of operations. However, both
suits are in the early stages of discovery and there can be no assurance as to
the outcome of either suit.
Autonomous Technologies Corporation v. Pillar Point Partners, et al. In
October 1996, Autonomous brought an action in the United States District Court
for the District of Delaware, against Pillar Point, Summit, Summit Partner,
VISX, and VISX Partner. The action seeks declaratory relief that one of the
Pillar Point patents is not infringed, is invalid and unenforceable, and that
the defendants are otherwise promissorily estopped from claiming that the
Autonomous system infringes the same patent. The action also seeks an injunction
requiring VISX to drop its suit in the U.K. against Autonomous. See discussion
above. Autonomous subsequently filed an amended complaint, adding two claims
against VISX for alleged defamation and violation of Delaware's Uniform
Deceptive Practices Act. Autonomous has requested its costs and attorneys' fees
in the litigation. VISX believes that it and the other defendants have
meritorious defenses to this action, and that its resolution will not have a
material adverse effect on VISX's business, financial position or results of
operations. However, the suit is in the early stages of discovery and there can
be no assurance as to its outcome.
Other
VISX Partner, Inc. on behalf of Pillar Point Partners v. Summit. In August
1996, VISX Partner brought suit against Summit on behalf of Pillar Point. The
suit, filed in the United States District Court for the District of
Massachusetts, alleges breach of contract by Summit under its license agreement
with Pillar Point. VISX Partner brought the suit on behalf of the partnership in
accordance with provisions of the Pillar Point Agreement governing resolution of
disputes. VISX Partner seeks damages in an amount not less than $4,500,000. The
action is in the early phase of discovery, and it is not possible to predict the
outcome of the action or the effect, if any, that the resolution of the case
will have on VISX's business, financial position or results of operations.
Federal Trade Commission. In October 1995, Pillar Point received notice
that the Federal Trade Commission ("FTC") initiated an investigation to
determine whether Pillar Point, VISX and Summit or any of their predecessors,
alone or in conjunction with others, is engaging or has engaged in any unfair
methods of competition in violation of the Federal Trade Commission Act,
relating to certain arrangements concerning patents on devices and procedures,
and/or practices relating to the sale or distribution of certain ophthalmic
surgical devices. There can be no assurances that, following its investigation,
the FTC will not commence a proceeding alleging that Pillar Point does not
comply with the United States antitrust laws. VISX is unable to predict whether
or not, or when, the FTC may bring any proceeding following such investigation,
or the scope of relief, if any, that may ultimately be ordered in the event that
any such proceeding were determined adversely to VISX or to Pillar Point.
OTHER LITIGATION
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, two 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 Pennsylvania
and Illinois. 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 business, financial position or results of operations. However, the
Illinois case is in the early stages of discovery and the Pennsylvania case is
in the final stage of discovery, and there can be no assurance as to the outcome
of either suit.
Page 16
<PAGE> 19
Employment Related. VISX is a party to two lawsuits by former employees
claiming wrongful discharge. One case, brought in 1995 against the Company and a
former officer of the Company, is in the final stage of discovery and could go
to trial in 1997. VISX believes that it has meritorious defenses to the action
and that its resolution will not have a material adverse effect on the Company's
business, financial position, or results of operation. VISX may, however, be
required to indemnify the former officer if a judgment is rendered against the
defendants in the case, and no assurance can be given as to its outcome. The
second case was brought in January 1997, and is still in the pleading stage. The
Company believes that the case is without merit and that its resolution will not
have a material adverse effect on the Company's business, financial position or
results of operations.
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 1996.
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 Market(sm) 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>
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
1996
First Quarter............................................... $39.50 $28.25
Second Quarter.............................................. 37.50 28.25
Third Quarter............................................... 34.75 17.75
Fourth Quarter.............................................. 29.00 21.75
</TABLE>
On March 21, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $22.50 per share. As of such date, there were
approximately 610 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.
Page 17
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from VISX'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,
-------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues......................... $ 69,664 $ 16,703 $ 17,896 $ 22,074 $ 20,285
Cost of revenues....................... 28,876 9,749 11,774 12,030 12,551
Total costs and expenses............... 55,318 27,408 25,230 22,266 30,859*
Income (loss) from operations.......... 14,346 (10,705) (7,334) (192) (10,574)*
Net income (loss)...................... 17,308 (14,765)** (6,264) 179 (9,551)*
Net income (loss) per share............ $ 1.08 $ (1.20)** $ (.60) $ .02 $ (.98)*
Weighted average number of shares and
equivalents outstanding............. 15,974 12,311 10,372 10,540 9,706
BALANCE SHEET DATA:
Cash and short-term investments........ $ 88,990 $ 75,219 $ 11,161 $ 11,847 $ 9,135
Working capital........................ 92,878 77,665 11,842 15,733 14,003
Total assets........................... 119,689 91,078 20,627 22,917 23,033
Deferred revenue and other long-term
obligations......................... -- -- 409 659 664
Accumulated deficit.................... (34,260) (51,568) (36,803) (30,539) (30,718)
Stockholders' equity................... 99,272 79,881 13,993 18,024 16,207
</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
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results of operations could differ
materially from those contemplated by such forward-looking statements as a
result of various factors, including those identified below. In particular, the
factors set forth under "Business -- Market Acceptance of Laser Vision
Correction," "-- Reliance on Patents and Proprietary Technology," "-- Risks
Relating to Pillar Point Partners; Patent Litigation," "-- Government
Regulation; Proliferation of Unapproved Lasers," "-- Manufacturing, Components
and Raw Materials," "-- Competition," and "-- Product Liability and Insurance"
and under "Legal Proceedings" may cause the Company's actual results to vary
from those contemplated by certain forward-looking statements set forth in this
report and should be considered carefully in addition to the other information
presented in this 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 laser vision correction and has been
manufacturing such systems since 1987. In March 1995, the Company introduced a
new model of the VISX System. The FDA approved PMA applications for use of the
VISX System for PTK on September 29, 1995 and for PRK treatment of low to
moderate myopia on March 27, 1996.
Page 18
<PAGE> 21
The Company's future growth and profitability cannot be predicted with
certainty and will be influenced by a variety of factors. These factors include
the extent to which laser vision correction is broadly accepted in the United
States and key international markets targeted by the Company, the degree to
which Pillar Point is successful in generating royalty income from patent rights
and defending against legal challenges relating to its structure and operation,
developments in patent litigation both in support of the Company's patents and
in defense of claims of infringement such as pending patent litigation against
the Company brought by Summit, developments with respect to other litigation to
which the Company is a party or in which it may become involved, competition
from lasers that have not received FDA PMA approval for United States commercial
sales and competition from other vision correction products and procedures which
are currently in use or may be developed and introduced in the future. Results
of operations in the current or any prior fiscal period should not be considered
as indicative of results to be expected for any future fiscal period.
RESULTS OF OPERATIONS
1996 Compared to 1995
<TABLE>
<CAPTION>
(000'S)
YEAR ENDED DECEMBER 31,
------------------------------
REVENUE 1996 1995 CHANGE
- -------------------------------------------------------------- ------- ------- ------
<S> <C> <C> <C>
System sales.................................................. $53,140 $10,985 384%
Percent of revenue....................................... 76.3% 65.8%
Royalties, service & other revenue............................ $16,524 $ 5,718 189%
Percent of revenue....................................... 23.7% 34.2%
Total......................................................... $69,664 $16,703 317%
</TABLE>
System sales increased due to the FDA's approval of the Company's PMA
application for use of the VISX System. This allowed the Company to sell VISX
Systems in the United States, which generated an increase in unit sales over
1995. In addition, average selling prices were higher in 1996 because the
Company was selling through its own direct sales force in the United States, as
contrasted to 1995 when, through the end of the third quarter, the Company's
revenue was primarily generated outside the United States at lower prices
through its distributor, Alcon Pharmaceuticals, Ltd. ("Alcon"). The Company's
marketing agreement with Alcon was terminated in the first quarter of 1996.
Royalties, service and other revenues increased principally because the
Company began to receive royalty revenue from Pillar Point Partners in 1996.
Royalty license revenue from other third parties and service and parts revenue
also contributed to the increase.
<TABLE>
<CAPTION>
(000'S)
YEAR ENDED DECEMBER 31,
------------------------------
COSTS & EXPENSES 1996 1995 CHANGE
- -------------------------------------------------------------- ------- ------- ------
<S> <C> <C> <C>
Cost of revenues.............................................. $28,876 $ 9,749 196%
Percent of revenue....................................... 41.5% 58.4%
Marketing, general and administrative......................... $17,708 $ 8,800 101%
Percent of revenue....................................... 25.4% 52.7%
Research, development and regulatory.......................... $8,734.. $ 8,859 (1)%
Percent of revenue....................................... 12.5% 53.0%
</TABLE>
Gross profit margins improved mainly as the result of higher average
selling prices for systems and lower overhead cost per unit due to increased
production. Higher royalty revenue, which has no associated cost of revenue,
also contributed significantly to higher gross profit margins in 1996.
Marketing, general and administrative expenses increased as the Company
created its own direct sales force to replace Alcon, developed marketing
programs and began direct advertising about the VISX System for laser vision
correction. In addition, legal expenses were higher than in the prior year due
to litigation and other matters primarily related to the Company's patents and
relating legal proceedings.
Page 19
<PAGE> 22
Research, development and regulatory expenses in total were level from year
to year as the result of offsetting changes. Research and development costs
increased 49% in 1996 over 1995 principally as the result of higher spending to
develop new products and technologies. Research and development costs declined
as a percentage of net sales in 1996 over 1995 due primarily to increased net
sales during 1996. Regulatory costs were 38% lower in 1996 than in 1995. In
1995, the Company incurred incremental costs for staff, consultants and other
regulatory expenses necessary to pursue PMA applications filed with the FDA. The
Company expects to continue spending significant amounts in research and
development for the foreseeable future.
Interest and other income increased in 1996 over 1995 due to higher
interest income generated by funds raised in the November 1995 common stock
offering and cash generated from operations during 1996.
The provision for income taxes covers alternative minimum taxes due under
Federal and California statutes and taxes due in other states where the Company
has no net operating loss carryforwards.
1995 Compared to 1994
<TABLE>
<CAPTION>
(000'S)
YEAR ENDED DECEMBER 31,
------------------------------
REVENUE 1995 1994 CHANGE
- -------------------------------------------------------------- ------- ------- ------
<S> <C> <C> <C>
System sales.................................................. $10,985 $15,233 (28)%
Percent of revenue....................................... 65.8% 85.1%
Royalties, service & other revenue............................ $ 5,718 $ 2,663 115%
Percent of revenue....................................... 34.2% 14.9%
Total......................................................... $16,703 $17,896 (7)%
</TABLE>
The decline in system 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 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 FDA approved the Company's PMA application for use of the VISX System
for PTK in September, 1995.
Royalties, service and other revenue increased due to a larger installed
base of VISX Systems and due to royalty payments received under license
agreements with third parties.
<TABLE>
<CAPTION>
(000'S)
YEAR ENDED DECEMBER 31,
------------------------------
COSTS & EXPENSES 1995 1994 CHANGE
- -------------------------------------------------------------- ------- ------- ------
<S> <C> <C> <C>
Cost of revenues.............................................. $9,749.. $11,774 (17)%
Percent of revenue....................................... 58.4% 65.8%
Marketing, general and administrative......................... $ 8,800 $ 6,371 38%
Percent of revenue....................................... 52.7% 35.6%
Research, development and regulatory.......................... $ 8,859 $ 7,085 25%
Percent of revenue....................................... 53.0% 39.6%
</TABLE>
Cost of revenues, as a percentage of total revenue, decreased in 1995 from
1994 due primarily to the following factors: (1) $1,500,000 of expense was
recorded in 1994 for the disposition of the 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 with third parties. These items
were offset partially by lower average selling prices in 1995 over 1994 on
systems distributed internationally through Alcon.
Page 20
<PAGE> 23
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.
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. Partially offsetting the cost of litigation settlements was higher
interest income which increased mainly due to investment earnings on funds
raised in the November 1995 common stock offering.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments totaled $88,990,000 at
December 31, 1996 compared to $75,219,000 at December 31, 1995. Working capital
totaled $92,878,000 at December 31, 1996 compared to $77,665,000 at December 31,
1995. Positive cash flow from operations was the principal reason for the
increase in these measures of Company liquidity.
Higher sales in the fourth quarter of 1996 over the fourth quarter of 1995
contributed to the increase in accounts receivable. To promote placement of more
systems and increase procedure royalty revenue, the Company offered six month
extended payment terms on the majority of systems shipped in the fourth quarter
of 1996. Accordingly, the balance in accounts receivable is expected to rise and
cash is expected to be used in operating activities during the first half of
1997.
Increases in accrued liabilities largely offset the impact of the increase
in accounts receivable on cash flow. Purchases of short-term investments
represent reinvestment of the proceeds from maturities of short-term investments
and investment of cash and cash equivalents into short-term investments.
On February 10, 1997 the Company's board of directors authorized the
repurchase, over the following twelve months, of up to 2,000,000 shares of the
Company's common stock. The Company will conduct the purchases in open market
transactions in accordance with applicable securities laws. The amount of shares
purchased and the timing of purchases will be based on a number of factors,
including the number of shares needed for replenishment of employee benefit
plans, the market price of the stock, market conditions, and as the Company's
management deems appropriate. As a result of these factors, the actual number of
shares repurchased cannot be forecast precisely.
The Company anticipates that its current cash, cash equivalents and
short-term investments, as well as anticipated cash flows from operations, will
be sufficient to meet its working capital and capital equipment needs at least
through the next twelve months.
Page 21
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................ $ 24,909 $ 32,332
Short-term investments............................................... 64,081 42,887
Accounts receivable, net of allowances for doubtful accounts of $600
and $0, respectively.............................................. 17,904 6,667
Inventories.......................................................... 5,848 6,742
Prepaid expenses..................................................... 553 234
-------- --------
Total current assets......................................... 113,295 88,862
PROPERTY AND EQUIPMENT, NET............................................ 3,621 1,565
OTHER ASSETS........................................................... 2,773 651
-------- --------
$119,689 $ 91,078
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................................................... $ 2,385 $ 2,506
Accrued liabilities.................................................. 18,032 8,691
-------- --------
Total current liabilities.................................... 20,417 11,197
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 9 AND 10)
STOCKHOLDERS' EQUITY:
Common stock -- $.01 par value, 30,000,000 shares authorized;
15,424,734 and 15,173,855 shares issued at December 31, 1996 and
1995, respectively................................................ 154 152
Additional paid-in capital........................................... 133,836 131,185
Accumulated deficit.................................................. (34,260) (51,568)
Unrealized holding gains on available-for-sale securities............ 4 112
Less: 20,000 and -0- common stock treasury shares at December 31,
1996 and 1995, respectively, at cost.............................. (462) --
-------- --------
Total stockholders' equity................................... 99,272 79,881
-------- --------
$119,689 $ 91,078
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 22
<PAGE> 25
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
REVENUES:
System sales.............................................. $53,140 $ 9,305 $ 1,240
System sales to Alcon, a related party.................... -- 1,680 13,993
Royalties, service and other revenue...................... 16,524 5,718 2,663
------- -------- -------
Total revenues.................................... 69,664 16,703 17,896
------- -------- -------
COSTS AND EXPENSES:
Cost of revenues.......................................... 28,876 9,749 11,774
Marketing, general and administrative..................... 17,708 8,800 6,371
Research, development and regulatory...................... 8,734 8,859 7,085
------- -------- -------
Total costs and expenses.......................... 55,318 27,408 25,230
------- -------- -------
INCOME (LOSS) FROM OPERATIONS............................... 14,346 (10,705) (7,334)
------- -------- -------
OTHER INCOME (EXPENSE):
Interest income........................................... 4,265 1,340 472
Other income.............................................. -- -- 598
Litigation settlement..................................... -- (5,400) --
------- -------- -------
Other income (expense), net....................... 4,265 (4,060) 1,070
------- -------- -------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES............. 18,611 (14,765) (6,264)
Provision for income taxes................................ 1,303 -- --
------- -------- -------
NET INCOME (LOSS)........................................... $17,308 $(14,765) $ (6,264)
======= ======== =======
NET INCOME (LOSS) PER SHARE................................. $ 1.08 $ (1.20) $ (0.60)
======= ======== =======
Weighted average number of shares and equivalents
outstanding............................................... 15,974 12,311 10,372
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 23
<PAGE> 26
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------- ADDITIONAL UNREALIZED TOTAL
SHARES PAR PAID-IN ACCUMULATED HOLDING TREASURY STOCKHOLDERS'
ISSUED VALUE CAPITAL DEFICIT GAINS STOCK EQUITY
------ ----- ---------- ----------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Common stock issued 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
Common stock issued 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
Repurchases of common
stock...................... -- -- -- -- -- (1,729) (1,729)
Exercise of stock options.... 235 2 2,289 -- -- 1,204 3,495
Common stock issued under the
Employee Stock Purchase
Plan....................... 16 -- 362 -- -- 63 425
Adjustment for unrealized
holding gains on
available-for-sale
securities................. -- -- -- -- (108) -- (108)
Net income................... -- -- -- 17,308 -- -- 17,308
------ ---- -------- -------- ---- ------- --------
BALANCE, DECEMBER 31, 1996... 15,425 $ 154 $ 133,836 $ (34,260) $ 4 $ (462) $ 99,272
====== ==== ======== ======== ==== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 24
<PAGE> 27
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 17,308 $(14,765) $(6,264)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization............................. 1,195 610 609
Increase (decrease) in cash flows from changes in
operating assets and liabilities:
Accounts receivable.................................... (11,237) (6,399) 791
Accounts receivable from Alcon......................... -- 2,659 1,031
Inventories............................................ 894 (2,950) (586)
Prepaid expenses....................................... (319) (47) (22)
Other assets........................................... (2,462) 438 228
Accounts payable....................................... (121) 448 1,044
Accrued liabilities.................................... 9,341 4,524 947
Long term obligations.................................. -- (409) (250)
-------- ------- -------
Net cash provided by (used in) operating activities....... 14,599 (15,891) (2,472)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (2,911) (704) (447)
Short-term investments
Available-for-sale securities:
Purchases............................................ (53,222) (38,526) --
Proceeds from maturities............................. 27,671 -- --
Held-to-maturity securities:
Purchases............................................ -- (9,066) --
Proceeds from maturities............................. 4,249 4,817 --
-------- ------- -------
Net cash used for investing activities.................... (24,213) (43,479) (447)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................ 3,920 80,541 2,233
Repurchases of common stock............................... (1,729) -- --
-------- ------- -------
Net cash provided by financing activities................... 2,191 80,541 2,233
-------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (7,423) 21,171 (686)
Cash and cash equivalents, beginning of period.............. 32,332 11,161 11,847
-------- ------- -------
Cash and cash equivalents, end of period.................... $ 24,909 $ 32,332 $11,161
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 25
<PAGE> 28
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. 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 a person'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, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. 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 FASB Statement 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 business, 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 market 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, subassemblies 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,
-----------------
1996 1995
------ ------
<S> <C> <C>
Raw Materials and Subassemblies............................................ $3,747 $2,878
Work-in-Process............................................................ 1,637 1,348
Finished Goods............................................................. 464 2,516
------ ------
$5,848 $6,742
====== ======
</TABLE>
Page 26
<PAGE> 29
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and Equipment. Property and equipment is depreciated using the
straight-line method over the 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,
-------------------
1996 1995
------- -------
<S> <C> <C>
Furniture and fixtures................................................... $ 1,731 $ 986
Machinery and equipment.................................................. 4,274 3,120
Leasehold improvements................................................... 742 119
------ ------
6,747 4,225
Less: accumulated depreciation and amortization.......................... (3,126) (2,660)
------ ------
Property and equipment, net.............................................. $ 3,621 $ 1,565
====== ======
</TABLE>
Revenue Recognition. The Company generally recognizes revenue on sales of
systems and parts when the products are shipped. An allowance for installation,
training and warranty costs is made at the time sales are recognized. The
Company records a royalty payable to Pillar Point Partners when VISX Systems and
VisionKey(R) cards are sold in the United States. The Company records royalty
revenue when Pillar Point Partners reports the amount of royalty distribution,
net of expenses, due the Company. The Company received its first report of
royalty distribution from Pillar Point Partners in the first quarter of 1996.
Service revenue is recognized as services are performed.
Reclassifications. Certain items from prior year financial statements have
been reclassified to conform with the current year presentation.
Income Taxes. An asset and liability approach is used in accounting for
income taxes in accordance with FASB Statement No. 109. Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities measured using
the enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Net Income (Loss) Per Share. Net income per share is computed based on the
weighted average number of common shares and dilutive common share equivalents
outstanding using the treasury stock method. Fully diluted net income per share
is substantially the same as primary net income per share. Net loss per share
data is computed based on the weighted average number of common shares
outstanding, excluding dilutive common share equivalents since their impact
would reduce the net loss per share.
NOTE 2. RELATIONSHIP WITH ALCON
Marketing Agreement. From 1987 through 1995 the Company had various
marketing agreements 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. In connection with the
agreements, Alcon advanced $2,500,000 to the Company in 1988 to defray
development costs. The Company repaid $1,000,000 of that amount in 1992 and was
contingently liable for the $1,500,000 balance. Under the agreements, the
Company reimbursed Alcon for $94,000, $1,281,000 and $120,000 for the years
ended December 31, 1996, 1995 and 1994, respectively, related to marketing costs
incurred by Alcon on behalf of the Company. These costs were charged to
marketing, general and administrative expenses in the accompanying consolidated
statements of operations.
The marketing agreement with Alcon was terminated as the result of a
January 9, 1996 decision by the California Superior Court approving 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
ceased all
Page 27
<PAGE> 30
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
marketing and sales efforts on behalf of VISX by March 9, 1996, but agreed to
continue to service VISX Systems sold internationally by Alcon. In addition,
Alcon obtained a fully-paid license under VISX's Canadian patents for the use of
the VISX Systems sold by Alcon in Canada. Under the settlement terms, Alcon will
be able to market competitors' laser vision correction systems. Also, under
settlement terms, the Company was released from its obligation to reimburse
Alcon for $1.5 million of developmental expenses previously advanced by Alcon.
Additionally, Alcon's right to receive 25% of VISX's future excess cash flow was
also terminated.
NOTE 3. EXPORT REVENUES AND MAJOR CUSTOMERS
Export Revenues. Export revenues accounted for 15%, 74% and 85% of revenues
for the years ended December 31, 1996, 1995 and 1994, respectively. The
following table represents export revenues by geographic region (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Europe........................................................ $ 3,945 $ 9,297 $12,653
Canada........................................................ 2,020 1,833 1,790
Pacific Rim and Other......................................... 4,754 1,162 790
------- ------- -------
$10,719 $12,292 $15,233
======= ======= =======
</TABLE>
Major Customers. In 1996, sales to one customer accounted for 13% of total
revenues. During 1995 and 1994, the majority of the Company's products were sold
through Alcon, which was a related party to VISX up until May 26, 1995 when all
Alcon representatives resigned their positions as VISX directors. Sales to Alcon
accounted for 63% and 86% of total revenues for 1995 and 1994, respectively. No
other customer accounted for 10% or more of sales during 1996, 1995 or 1994.
NOTE 4. INVESTMENTS
Investments in securities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------
GROSS AGGREGATE
AMORTIZED 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................................ $48,138 $ 2 $48,140
Debt securities of U.S. corporations....................... 15,939 2 15,941
------- ---- -------
64,077 4 64,081
CASH EQUIVALENTS
Available-for-Sale Securities:
Debt securities of U.S. corporations....................... 20,526 -- 20,526
------- ---- -------
Total investments..................................... $84,603 $ 4 $84,607
======= ==== =======
</TABLE>
Page 28
<PAGE> 31
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------
GROSS AGGREGATE
AMORTIZED 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. All available-for-sale securities held at December 31, 1996 mature
in two years or less.
NOTE 5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- ------
<S> <C> <C>
Payroll and related accruals.............................................. $ 2,597 $1,626
Accrued warranty, installation, and training expenses..................... 5,200 861
Product line disposition.................................................. -- 561
Accrued royalties......................................................... 2,667 585
Deposits and deferred revenue............................................. 2,335 615
Accrued litigation settlement expenses.................................... -- 3,150
Accrued income and sales taxes............................................ 1,914 --
Accrued legal expenses.................................................... 1,535 --
Other..................................................................... 1,784 1,293
------- ------
$18,032 $8,691
======= ======
</TABLE>
Page 29
<PAGE> 32
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. STOCK BASED COMPENSATION PLANS
The Company has two open stock option plans, the 1995 Stock Plan (the "1995
Plan") and the 1995 Director Option Plan (the "Director Plan"), and an Employee
Stock Purchase Plan (the "Purchase Plan"). In addition, the Company has five
terminated stock option plans with options still outstanding.
The Company accounts for these plans in accordance with APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost for
these plans been determined consistent with FASB Statement No. 123, the
Company's net income (loss) and earnings (loss) per share would have been
adjusted to the following pro forma amounts (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1995
------- --------
<S> <C> <C> <C>
Net Income (Loss)................................ As Reported......... $17,308 $(14,765)
Pro Forma........... 13,821 (15,714)
Earnings (Loss) Per Share........................ As Reported......... $ 1.08 $ (1.20)
Pro Forma........... 0.87 (1.28)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants issued in 1996 and 1995, respectively: risk-free
interest rates of 5.6 and 6.1 percent, expected volatility of 43 percent for
each year, no expected dividends, and an expected life of 1.05 years beyond the
vest date for each year's vesting increment of an option.
Since the FASB Statement No. 123 method of accounting has not been applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
Under the Purchase Plan, the Company may sell up to 500,000 shares of
common stock to its eligible, full-time employees who do not own 5% or more of
the Company's outstanding common stock. Employees can allocate up to 10% of
their wages to purchase the Company's stock at 85% of the fair market value of
the stock on the first or last day of a six month offering period, whichever is
lower. The Company sold 18,703 shares, 30,449 shares and 37,892 shares in 1996,
1995 and 1994, respectively, and 87,044 shares cumulatively through December 31,
1996. The weighted average fair market value of shares sold in 1996 was $26.73.
As of December 31, 1996 the Company is authorized to grant options for up
to 1,784,561 shares under the 1995 Plan and 250,000 shares under the Director
Plan. The Company has granted options on 472,050 shares and 45,000 shares,
respectively, under these two plans through December 31, 1996. Under both Plans
the option exercise price equals the stock's market price on the date of grant,
options vest 25% one year after the date of grant and ratably thereafter over
three years, and options expire ten years from the date of grant. Options
outstanding under the five terminated stock option plans have generally the same
eligibility and vesting terms as those described for the 1995 Plan, though no
further options may be granted under these terminated plans.
A summary of the status of the Company's stock option plans at December 31,
1996, 1995 and 1994 and changes during the years then ended is presented in the
following tables and narrative. Share amounts are shown in thousands.
Page 30
<PAGE> 33
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
WTD. WTD. WTD.
AVG. AVG. AVG.
ACTIVITY SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
- -------------------------------------------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, start of year.................. 1,390 $ 13.23 1,474 $ 10.09 1,250 $ 8.38
Granted..................................... 685 32.27 622 15.12 546 13.77
Exercised................................... (292) 11.98 (587) 7.02 (263) 8.58
Forfeited................................... (66) 21.06 (119) 14.84 (59) 14.59
------ ------ ------
Outstanding, end of year.................... 1,717 20.73 1,390 13.23 1,474 10.09
====== ====== ======
Exercisable, end of year.................... 576 $ 12.29 514 $ 11.13 789 $ 7.45
====== ====== ======
Weighted average fair value per option
granted................................... $11.71 $ 5.32
====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ --------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE YEARS LEFT EXERCISE
EXERCISE PRICES NUMBER PRICE TO EXERCISE NUMBER PRICE
- --------------- ------ --------- ----------- ------ ---------
<S> <C> <C> <C> <C> <C>
$ 5.25 - $ 5.25 84 $ 5.25 3.9 84 $ 5.25
6.50 - 14.75 729 12.15 7.5 385 12.04
15.86 - 24.00 258 18.93 8.3 99 17.75
24.12 - 37.25 646 33.16 9.3 8 29.33
======
-
---
$ 5.25 - $37.25 1,717 $ 20.73 8.1 576 $ 12.29
============= ===
</TABLE>
Additional Options and Warrants. 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 in 1994. 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.
NOTE 7. 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.
On February 10, 1997 the Company's board of directors authorized the
repurchase, over the following approximately twelve months, of up to 2,000,000
shares of the Company's common stock. The Company will conduct the purchases
through open market transactions in accordance with applicable securities laws.
The amount of shares purchased and the timing of purchases will be based on a
number of factors, including the number of shares needed for replenishment of
employee benefit plans, the market price of the stock, market conditions, and as
the Company's management deems appropriate. As a result of these factors, the
actual number of shares repurchased cannot be precisely forecast.
Page 31
<PAGE> 34
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current:
Federal........................................................ $ 652 $ -- $ --
State.......................................................... 651 -- --
------ ------ ------
1,303 -- --
------ ------ ------
Deferred, net
Federal........................................................ -- -- --
State.......................................................... -- -- --
------ ------ ------
-- -- --
------ ------ ------
Net tax provision................................................ $1,303 $ -- $ --
====== ====== ======
</TABLE>
The difference between the federal statutory income tax rate of 35% and the
effective income tax rate of 7% in 1996 is due principally to state income
taxes, net of federal income tax benefit, and a reduction of the valuation
allowance. Income taxes paid amounted to $698,000 in 1996. No income taxes were
paid in prior years.
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $39,400,000 and $900,000 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 in 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 were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Net operating loss carryforwards
Federal................................................................ $13,800 $18,700
State.................................................................. 100 1,000
Cumulative temporary differences
Inventory reserves..................................................... 1,100 700
Warranty reserves...................................................... 2,100 200
Other temporary differences............................................ 1,300 2,500
Tax credit carryforwards................................................. 1,800 1,900
------- -------
20,200 25,000
Valuation allowance, provision for income taxes.......................... (17,200) (21,700)
Valuation allowance, equity.............................................. (3,000) (3,300)
------- -------
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.
Page 32
<PAGE> 35
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. COMMITMENTS
The Company leases facilities and equipment under operating leases which
expire through 2003. Rent expense was $908,000, $666,000 and $529,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. Future minimum lease
commitments, net of subleases, are as follows (in thousands):
<TABLE>
<S> <C>
YEAR ENDED DECEMBER 31,
1997................................................................................ $ 923
1998................................................................................ 974
1999................................................................................ 1,381
2000................................................................................ 1,481
2001................................................................................ 1,491
Thereafter.......................................................................... 2,180
------
Total minimum lease payments.............................................. $8,430
======
</TABLE>
NOTE 10. LITIGATION
Patent Proceedings and Litigation: VISX
VISX 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 VISX from
manufacturing, marketing or selling its products in certain countries, limit
VISX's ability to collect equipment and use royalties in certain markets and
have a material, adverse effect on VISX's business, financial position and
results of operations. These proceedings are discussed separately below.
Canada. In 1996, Autonomous sued VISX in Canada, seeking declaratory
judgment that two of VISX's Canadian patents are invalid or, in the alternative,
that Autonomous's excimer laser system does not infringe those patents. VISX
believes that the invalidity claim is without merit, and intends to vigorously
defend the action.
United Kingdom. VISX has brought patent infringement actions against
several companies in the U.K. In July 1996, VISX commenced an action against
Autonomous, LaserVision Centers, Inc., and LVC (Europe) Limited. By agreement,
the action has been stayed against the latter two defendants. The suit alleges
infringement of a European patent by an Autonomous system which was placed in
London at the time the action was commenced. Autonomous has filed a defense, but
has not challenged the validity of the VISX patent. This case is in the process
of discovery. In November 1996, VISX commenced an action against Nidek,
Birmingham Optical Group Limited and Optimax Laser Eye Clinics Limited, alleging
infringement of two VISX European patents. The defendants have contested the
validity of the patents. This case is in the very early pleadings stages, and it
is impossible to predict the outcome. VISX believes, however, that the
invalidity claims are without merit, and intends to vigorously defend its
position.
Azema Patent. In August 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.
VISX believes that the lawsuit is without merit and intends to vigorously defend
its position. Therefore, the Company believes that the resolution of this matter
will not have a material adverse effect on the Company's business, financial
position or results of operations. Nevertheless, the cost of defending this
action has been and is expected to continue to be significant, and there can be
no assurance that the VISX System will be held not to infringe the patent. If
VISX were found to have infringed the patent, 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
Page 33
<PAGE> 36
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. A redesign of the VISX System, depending
on its scope, could entail delays in FDA approval of the redesign. The lawsuit
is scheduled for trial in July 1997.
Patent Proceedings and Litigation: Pillar Point Partners
Due primarily to the potential of the laser vision correction industry, the
patents owned by VISX and exclusively licensed to Pillar Point Partners ("Pillar
Point") are widely contested. Generally, the patent litigation described below
involves patent infringement issues relating to whether or not patents licensed
to Pillar Point are valid and/or are infringed by the activities of the other
parties to such actions. In addition, the structure and operation of Pillar
Point has been alleged by certain of such other parties to be in violation of
federal and, in certain cases, state antitrust laws. In all cases, litigation
involving Pillar Point also involves VISX or its subsidiary, VISX Partner, Inc.
("VISX Partner"). VISX believes that it and the other defendants have
meritorious defenses to these actions, and that their resolution will not have a
material adverse effect on VISX's business, financial position or results of
operations. However, adverse determinations in any of such proceedings with
respect to the patents licensed to Pillar Point or with respect to whether or
not the structure and operation of Pillar Point is in violation of antitrust
laws could have a material adverse effect on VISX's business, financial position
and results of operations, and could lead to adverse determinations in one or
more of the other pending proceedings.
Pillar Point has brought the following patent-related lawsuits:
Pillar Point Partners, et al. v. LaserSight, Inc. In March 1995 Pillar
Point brought suit in the United States District Court for the District of
Delaware against LaserSight. An amended complaint was subsequently filed adding
VISX, VISX Partner, Summit, and Summit Partner, Inc. ("Summit Partner") as
plaintiffs. The suit alleges infringement of a Pillar Point patent, and seeks
monetary damages and injunctive relief. LaserSight has asserted several
affirmative defenses and has filed a declaratory judgment counterclaim
asserting, among other things, that the Pillar Point Agreement constitutes
patent misuse. VISX and the other plaintiffs believe that this counterclaim is
without merit and intend to vigorously defend against it. As of March 26, 1997,
the parties had reached a tentative agreement by which Pillar Point and the
other plaintiffs agreed to dismiss the lawsuit without prejudice granting
LaserSight a release from liability for the alleged patent infringement before
the effective date of the agreement. In exchange, LaserSight will make a nominal
payment and agrees to notify Pillar Point before LaserSight begins manufacturing
or selling in the United States in the future, at which time the parties agree
to negotiate in good faith to reach a mutually agreeable license to one or more
of the Pillar Point patents.
Pillar Point Partners, et al. v. Barnet Dulaney Eye Center, et al. In
September 1996, Pillar Point, VISX Partner, and Summit Partner brought suit in
the United States District Court for the District of Arizona against David
Dulaney and Anna Marie Dulaney (husband and wife), Ronald Barnet and Teri Lynn
Barnet (husband and wife) and Barnet Dulaney Eye Center P.L.L.C. On March 3,
1997, plaintiffs filed an amended complaint deleting certain infringement
allegations. The suit alleges infringement of certain Pillar Point patents, and
seeks monetary damages and injunctive relief. The defendants have filed an
answer and counterclaim which denies infringement and requests a declaratory
judgment that the patents in suit are invalid and unenforceable, alleging, among
other things, patent misuse. The defendants have also moved the Court to strike
the complaint and direct plaintiffs and their principal counsel to reimburse
defendants for their costs in defending the lawsuit. VISX and the other
plaintiffs believe that these counterclaims are without merit and intend to
vigorously defend against them.
Pillar Point Partners, et al. v. Jon Dishler, et al. In October 1996,
Pillar Point, VISX Partner, and Summit Partner brought suit in the United States
District Court for the District of Colorado against Jon G. Dishler, DTC Eye
Surgery Center, Inc., D.T.C. Eye Associates, P.C., and Laser Institute of the
Rockies, LLC. On March 14, 1997, the plaintiffs filed an amended complaint
naming Telco -- The Excimer Laser
Page 34
<PAGE> 37
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company PTY, Ltd., Lions Eye Institute, and Paul van Saarloos, as additional
defendants. The suit alleges infringement of certain Pillar Point patents, and
seeks monetary damages and injunctive relief. The defendants have filed an
answer and counterclaim denying infringement and seeking a declaratory judgment
that the patents in suit are invalid and unenforceable, alleging, among other
things, patent misuse. Defendant Dishler has moved for a summary judgment of no
personal liability as to himself. VISX and the other plaintiffs believe that
these counterclaims are without merit and intend to vigorously defend against
them.
Pillar Point and the Company (as well as VISX Partner, Summit and Summit
Partner) have been named as defendants in the following lawsuits:
Burlingame v. Pillar Point Partners, et al.; John R. Shepherd, M.D., Ltd.
v. Pillar Point Partners, et al. In June 1996, Dr. Burlingame filed suit against
Pillar Point, Summit, Summit Partner, VISX, and VISX Partner. The action was
served on Pillar Point in August 1996. In September 1996, a corporation
controlled by Dr. Shepherd filed suit against the same parties. Both actions
were filed in the United States District Court for the Northern District of
California. Generally, both plaintiffs allege that the per procedure royalty
charged by Pillar Point to its licensees is a violation of the Sherman Act, or
alternatively a violation of corresponding state antitrust laws. Dr. Burlingame
seeks monetary damages of $6,250 (plus $2,500 per month until a judgment is
reached). Dr. Shepherd's corporation seeks monetary damages of $56,250 (plus
$12,500 per month through the judgment date). VISX believes that it and Pillar
Point have meritorious defenses to these actions, and that the resolution of the
actions will not have a material adverse effect on VISX's business, financial
position or results of operations. However, both suits are in the early stages
of discovery and there can be no assurance as to the outcome of either suit.
Autonomous Technologies Corporation v. Pillar Point Partners, et al. In
October 1996, Autonomous brought an action in the United States District Court
for the District of Delaware, against Pillar Point, Summit, Summit Partner,
VISX, and VISX Partner. The action seeks declaratory relief that one of the
Pillar Point patents is not infringed, is invalid and unenforceable, and that
the defendants are otherwise promissorily estopped from claiming that the
Autonomous system infringes the same patent. The action also seeks an injunction
requiring VISX to drop its suit in the U.K. against Autonomous. See discussion
above. Autonomous subsequently filed an amended complaint, adding two claims
against VISX for alleged defamation and violation of Delaware's Uniform
Deceptive Practices Act. Autonomous has requested its costs and attorneys' fees
in the litigation. VISX believes that it and the other defendants have
meritorious defenses to this action, and that its resolution will not have a
material adverse effect on VISX's business, financial position or results of
operations. However, the suit is in the early stages of discovery and there can
be no assurance as to its outcome.
Other Proceedings and Litigation
Federal Trade Commission. In October 1995, Pillar Point received notice
that the Federal Trade Commission ("FTC") initiated an investigation to
determine whether Pillar Point, VISX and Summit or any of their predecessors,
alone or in conjunction with others, is engaging or has engaged in any unfair
methods of competition in violation of the Federal Trade Commission Act,
relating to certain arrangements concerning patents on devices and procedures,
and/or practices relating to the sale or distribution of certain ophthalmic
surgical devices. There can be no assurances that, following its investigation,
the FTC will not commence a proceeding alleging that Pillar Point does not
comply with the United States antitrust laws. VISX is unable to predict whether
or not, or when, the FTC may bring any proceeding following such investigation,
or the scope of relief, if any, that may ultimately be ordered in the event that
any such proceeding were determined adversely to VISX or to Pillar Point.
The Company is involved in various other legal proceedings which arise in
the normal course of business. The Company could incur significant legal fees in
connection with these matters, but in the opinion of management, their ultimate
disposition will not have a material adverse effect on the Company's business,
financial position or results of operations.
Page 35
<PAGE> 38
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, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements and the schedule referred to below 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the audting procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
January 28, 1997
Page 36
<PAGE> 39
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 10 regarding directors of VISX is
incorporated into this item by reference to the information set forth under
"Election of Directors" and "Further Information Concerning the Board of
Directors" in the Company's definitive Proxy Statement (the "1997 Proxy
Statement") to be filed with the Commission and relating to its Annual Meeting
of Stockholders to be held on May 16, 1997.
The officers of VISX are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Mark B. Logan.......................... 58 Chairman of the Board, Chief Executive Officer and
President
Elizabeth H. Davila.................... 52 Executive Vice President, Chief Operating Officer
Katrina J. Church...................... 35 Vice President, General Counsel and Secretary
Terrance N. Clapham.................... 49 Vice President, Research and Development
James W. McCollum...................... 42 Vice President, Marketing and Sales
Timothy R. Maier....................... 48 Vice President, Chief Financial Officer
David M. Patino........................ 52 Vice President, Regulatory and Clinical Affairs
Douglas H. Post........................ 45 Vice President, Operations and Customer Support
Judith A. Somerville................... 54 Vice President, Human Resources
</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. Mr. Logan serves as a member of the Boards of Directors of
Imagyn Medical, Inc., and Whetstone Partners, LLC.
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; she served as Corporate Counsel from June 1991 through
December 1994. 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,
Page 37
<PAGE> 40
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.
James W. McCollum. Mr. McCollum has been Vice President, Marketing and
Sales since February 1996. Prior to joining VISX as an employee, he spent two
and a half years at Alcon Laboratories, Inc. where he 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 16 years in the medical device industry and
14 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 Vice President
of Finance, Operations Manager, and International Finance and Administration
Manager.
David M. Patino. Mr. Patino has been Vice President, Regulatory and
Clinical Affairs since July 1996. Prior to joining VISX, Mr. Patino was Vice
President of Regulatory/Clinical Affairs and Quality Assurance at Storz
Ophthalmics in St. Louis, Missouri from 1993 to 1996. From 1979 to 1993 Mr.
Patino was the Director of Regulatory/Clinical Affairs and Quality Assurance for
the ophthalmic divisions of Schering-Plough, Ciba Geigy, Syntex and National
Patent Development Corporation.
Douglas H. Post. Mr. Post has been Vice President, Operations and Customer
Support since September 1996. Prior to that, he served as Senior Director,
Customer Support from December 1992 to September 1996. He was Senior Vice
President, Sales & Customer Support, with VISX Massachusetts Inc. (formerly
Questek, Inc.) from February 1985 to December 1992.
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.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 regarding compensation of VISX's
directors and executive officers is incorporated into this item by reference
(except to the extent allowed by Item 402(a)(8) of Regulation S-K) to the 1997
Proxy Statement sections "Further Information Concerning the Board of
Directors -- Director Compensation" and "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 regarding beneficial ownership of
the Common Stock by certain beneficial owners and by management of the Company
is incorporated into this item by reference to the 1997 Proxy Statement section
"Principal Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 regarding certain relationships
and related transactions with management of the Company is incorporated into
this item by reference to the 1997 Proxy Statement sections "Further Information
Concerning the Board of Directors" and "Executive Compensation."
Page 38
<PAGE> 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(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, 1996:
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets................................... 22
Consolidated Statements of Operations......................... 23
Consolidated Statements of Stockholders' Equity............... 24
Consolidated Statements of Cash Flows......................... 25
Notes to Consolidated Financial Statements.................... 26
Report of Independent Public Accountants...................... 36
</TABLE>
2. The following financial statement schedule is filed as part of this
report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Schedule II Valuation and Qualifying
Accounts 40
</TABLE>
3. The Exhibits filed as a part of this Report are listed in the Index to
Exhibits on pages 42 through 43 of this Form 10-K.
(b) REPORTS ON FORM 8-K. None.
(c) EXHIBITS. See Index to Exhibits on pages 42 through 43 of this Form 10-K.
(d) FINANCIAL STATEMENT SCHEDULES. See Item 14(a)(2), above.
Page 39
<PAGE> 42
VISX, INCORPORATED AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULES
The following additional consolidated financial statement schedule should
be considered in conjunction with the Company's consolidated financial
statements. All other schedules have been omitted because the required
information is either not applicable, not sufficiently material to require
submission of the schedule, or is included in the consolidated financial
statements or the notes thereto. All amounts are shown in thousands.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGED TO BALANCE
START ------------------- AT
OF COSTS & OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- --------------------------------------------------- ------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Allowance for bad debts.......................... $ -- $ -- $ -- $ -- $ --
YEAR ENDED DECEMBER 31, 1995
Allowance for bad debts.......................... -- -- -- -- --
YEAR ENDED DECEMBER 31, 1996
Allowance for bad debts.......................... $ -- $600 $ -- $ -- $ 600
</TABLE>
Page 40
<PAGE> 43
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 26, 1997
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 or her
attorneys-in-fact, each with the power of substitution, for him or her 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 or she 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ---------------------------------- ---------------
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ MARK B. LOGAN Chairman of the Board, President, March 26, 1997
- ------------------------------------- Chief Executive Officer and
Mark B. Logan Director
PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER:
/s/ TIMOTHY R. MAIER Vice President Chief Financial March 26, 1997
- ------------------------------------- Officer
Timothy R. Maier
ADDITIONAL DIRECTORS:
/s/ ELIZABETH H. DAVILA Executive Vice President, Chief March 26, 1997
- ------------------------------------- Operating Officer, and Director
Elizabeth H. Davila
- ------------------------------------- Director March , 1997
Glendon E. French
/s/ JOHN W. GALIARDO Director March 26, 1997
- -------------------------------------
John W. Galiardo
/s/ RICHARD B. SAYFORD Director March 26, 1997
- -------------------------------------
Richard B. Sayford
</TABLE>
Page 41
<PAGE> 44
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 to Quarterly Report on Form 10-Q for the quarter ended September
30, 1996)
3.2 * Amended and Restated Bylaws as revised through December 13, 1995 (previously
filed as Exhibit 3 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996)
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)
</TABLE>
10.7 TO 10.11 SEE BELOW
<TABLE>
<C> <S> <C>
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)
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)
</TABLE>
Page 42
<PAGE> 45
<TABLE>
<C> <S> <C>
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* 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)
10.26*+ Agreement effective as of November 20, 1995, among the Company, Alcon
Laboratories, Inc., and Alcon Pharmaceuticals, Ltd. (previously filed as
Exhibit 10.28 to Form 10-K for the year ended December 31, 1995)
10.27* Agreement and Stipulation of Settlement filed on November 20, 1995, in the
Superior Court for the County of Santa Clara (previously filed as Exhibit
10.29 to Form 10-K for the year ended December 31, 1995)
10.28* Second Amendment to Lease dated March 8, 1996, between the Company and
Sobrato Interests, a California limited partnership (previously filed as
Exhibit 10.29 to Form 10-K for the year ended December 31, 1995)
10.29* 1995 Stock Plan (previously filed as Exhibit 10.2 to Quarterly Report on Form
10-Q for the quarter ended June 30, 1996)
10.30* 1995 Director Option Plan (previously filed as Exhibit 10.1 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996)
10.31* 1996 Supplemental Stock Plan (previously filed as Exhibit 10.3 to Form S-8
Registration Statement No. 333-23999)
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
27.1 Financial Data Schedule
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.
+ Confidential Treatment has been requested for certain portions of this
exhibit.
Page 43
<PAGE> 46
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,
33-69044 and 333-23999 on Form S-8.
ARTHUR ANDERSEN LLP
San Jose, California
March 21, 1997
Page 44
<PAGE> 1
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,
33-69044 and 333-23999 on Form S-8.
ARTHUR ANDERSEN LLP
San Jose, California
March 21, 1997
Page 44
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 24,909
<SECURITIES> 64,081
<RECEIVABLES> 18,504
<ALLOWANCES> (600)
<INVENTORY> 5,848
<CURRENT-ASSETS> 113,295
<PP&E> 6,747
<DEPRECIATION> (3,126)
<TOTAL-ASSETS> 119,689
<CURRENT-LIABILITIES> 20,417
<BONDS> 0
0
0
<COMMON> 154
<OTHER-SE> 99,118
<TOTAL-LIABILITY-AND-EQUITY> 119,689
<SALES> 53,140
<TOTAL-REVENUES> 69,664
<CGS> 28,876
<TOTAL-COSTS> 28,876
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 600
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 18,611
<INCOME-TAX> 1,303
<INCOME-CONTINUING> 17,308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,308
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
</TABLE>
