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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997
COMMISSION FILE NUMBER: 1-10694
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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.
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting Common Stock held by
non-affiliates of the registrant as of March 20, 1998 is approximately
$455,200,000. The number of shares of Common Stock outstanding as of March 20,
1998 was 15,209,218.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's Proxy Statement for its Annual Meeting
of Stockholders to be held on May 15, 1998 are incorporated by reference into
Part III of this report.
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PART I
ITEM 1. BUSINESS
THE COMPANY
VISX, Incorporated ("VISX" or the "Company") is a worldwide leader in the
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. The vision correction market represents over
157 million people in the United States who experience 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.
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; 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 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. The VISX System is used to
change the shape of the cornea so that images are properly focused on the
retina, which in turn reduces or eliminates the need for corrective eyewear.
In the early 1980s, it was believed impossible to operate directly on the
front of the cornea. In 1987, doctors using VISX equipment performed the first
procedure for the treatment of nearsightedness in the United States. The U.S.
Food and Drug Administration ("FDA") has since approved laser vision correction
using the VISX System as safe and effective for the treatment of low to high
nearsightedness, with and without astigmatism. In 1997, VISX estimates that
approximately 200,000 LVC procedures were performed
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using the two FDA-approved excimer laser systems. VISX believes that additional
procedures were performed in 1997 using unapproved or modified excimer laser
systems.
In March 1996, the FDA approved the use of the VISX System to correct mild
to moderate nearsightedness. The approval was supplemented in April 1997 with
approval to correct astigmatism, and in January 1998 VISX became the first
company ever to receive FDA approval to use a laser to treat higher myopia with
or without astigmatism. LVC is medically known as PhotoRefractive Keratectomy or
PRK. To perform LVC, the ophthalmologist first measures the correction required
by performing 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 the width of a strand of human hair. The
average procedure lasts approximately 15 to 40 seconds, and consists of
approximately 150 laser pulses, each of which lasts several billionths of a
second. The cumulative exposure of the eye to laser light is 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 (vision without the aid
of eyeglasses or contact lenses) 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 type of knife
called a microkeratome to open a flap on the cornea. The doctor uses the laser
to ablate the exposed surface of the cornea, and then replaces the flap. LASIK
has gained in popularity primarily because there is less postoperative
discomfort and a more immediate improvement in uncorrected vision. Nevertheless,
LASIK has a higher incidence of adverse consequences, often attributable to the
microkeratome, and requires a high degree of surgical skill. The Company intends
to begin a U.S. clinical trial involving use of the VISX System for LASIK during
1998, and certain groups of physicians using the VISX System have begun their
own studies. LASIK is covered by patents owned by VISX, and therefore VISX
charges a license fee for LASIK procedures performed in the U.S. See
"-- Reliance on Patents and Proprietary Technology" below.
CORNEAL PATHOLOGIES AND PTK
The VISX System is also 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, and may result in the transmission of viruses and
rejection of the transplanted tissue. 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 15,000 PTK procedures. 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.
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PRODUCTS
VISX System. The VISX System is a fully integrated medical device
incorporating an excimer laser and a computer-driven workstation. It is capable
of both wide synchronous beam ablation and slit and spot scanning. The ablations
produced by the VISX System are the product of a seven-beam scanning system, in
which a series of small spot beams are homogenized as they converge to produce a
smooth ablation area.
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. The presence of seven beams, instead of one small diameter beam moving
at a higher frequency, means that refractive corrections can be completed in a
relatively short time. This hybrid of scanning and wide area ablation is unique
and proprietary to the VISX System.
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. One VisionKey card must be
used with each procedure performed, and therefore sales of the VisionKey card
correlate to the number of procedures performed.
MARKETING, SALES AND DISTRIBUTION
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, and (b) giving VISX customers various services
and programs designed to increase their operating efficiency and effectiveness.
The programs are promoted under the trademark banner Gateway Support(SM) and are
grouped into three categories: internal marketing, external marketing, and
customer support.
Internal Marketing
VISX University(SM) Management Seminars. VISX University(SM) is an
educational program designed to teach laser center decision makers how to
effectively promote and market their excimer laser practices. Four sessions were
held in 1997, and five are planned for 1998. 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 a two-day program of small-group, interactive
workshops in which "students" can learn about the experiences of successful
laser vision correction marketers and can share their own experiences. VISX has
arranged for professionals enrolled in VISX University to receive Continuing
Medical Education credits, as well as professional organization credit for
nurses and allied health professionals in ophthalmology.
Business Development Managers. VISX employs a team of industry experts as
Business Development Managers who evaluate VISX customers at their sites and
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. The VISX Ambassadors(TM) Program is intended
to help U.S. customers increase the number of procedures in their practices,
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. In
addition, VISX provides a complementary card to any U.S. ophthalmologist or
optometrist who elects to have his or her vision corrected with the VISX System.
This program is intended to generate referrals within the laser facility itself
and within
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each facility's network. Market research indicates that consumers who are
thinking of having LVC are strongly influenced by doctors and staff members who
have already had the procedure.
Marketing Communication Materials. Customers who buy a VISX System receive
educational materials including brochures, videos, slides, and other tools to
help them promote laser vision correction. Non-VISX customers can obtain many of
these items through the VISX Customer Response Center or by ordering on the VISX
website.
Procedure Financing Support. Typically, only one in four people in the
United States has sufficient disposable income to pay cash for purchases such as
laser vision correction. Consumers are accustomed to making monthly payments to
purchase goods and services, and laser vision correction is well adapted to that
approach. VISX has referred its customers to several financial vendors who
specialize in offering and processing loans to consumers through eye care
professionals. VISX is not directly involved with these financing programs and
does 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 respond
rapidly 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 to
use and maintain the system. Physicians are trained and certified by an
independent ophthalmologist that the Company selects and qualifies 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 VISX authorizes certified
Physician Trainers to train other physicians in the proper use of the VISX
System. Over 5,000 U.S. ophthalmologists have been trained to use the VISX
System.
VISX Newsletters. VISXPRESS(TM) is a broadcast fax bulletin that
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 semi-annual publication that 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.
VISX on the Internet. Internet-based marketing 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. The Company's website at
HTTP://WWW.VISX.COM includes the following resources:
- Information for consumers regarding the benefits of laser vision
correction, including multimedia testimonials from patients, and an
interactive map providing consumers with the locations of VISX
installations;
- Clinical information resources for the physician community, including
downloadable presentations of the most recent VISX clinical results from
leading ophthalmologists worldwide; and
- 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.
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International Sales and Marketing Strategy
VISX's international strategy is to establish and maintain a presence and
quality image in selected markets. Japan is expected to be the largest single
market opportunity outside the United States. The Company pursues other selected
markets primarily through distribution networks. VISX supports international
markets by sponsoring speaking engagements and attending selected exhibitions
and trade shows. VISX Systems are installed in nearly 45 countries and VISX has
contracts with nearly 20 distributors worldwide who are responsible for
servicing those systems. Future international sales may be limited or disrupted
by the imposition of government controls, export license requirements, political
or economic instability, trade restrictions, changes in tariffs, difficulties in
managing, staffing and coordinating communications among international
operations. In particular, recent weakness in the Asian economy resulted in
lower-than-anticipated system sales in certain Asian countries.
MARKET ACCEPTANCE OF LASER VISION CORRECTION
The Company's profitability and continued growth depend upon broad
acceptance of LVC in the United States and key international markets targeted by
the Company. Although the Company's results of operations for 1996 and 1997
reflect an initial level of acceptance of the procedure, the Company's future
results of operations will be largely dependent on increasing levels of market
acceptance, and 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 or that such acceptance will broaden.
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. 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. Another factor that may affect market acceptance is
the existence of lasers that have not received FDA approval. Consumers are not
likely to be able to distinguish an unapproved system from an FDA-approved
system. As a result, poor results from an unapproved laser could adversely
affect the entire industry. See " -- Government Regulation; Unapproved Lasers"
below.
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 (which may result in blurred or
double vision and/or shadow images). It is possible that longer term follow-up
data might reveal additional complications. The failure of laser vision
correction to achieve broad market acceptance could have a material adverse
effect on the Company's business, financial position and results of operations.
See "-- Marketing, Sales and Distribution" above.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY
VISX is committed to protecting its proprietary technology. VISX owns over
120 United States and foreign patents, including patents it has licensed to
Pillar Point Partners ("Pillar Point"), and has over 60 pending patent
applications in the United States and in foreign countries. VISX believes that
its patents provide a substantial proprietary position in system and application
technology relating to the use of lasers for vision correction. Other companies,
including Summit Technology, Inc. ("Summit"), own United States and foreign
patents covering methods and apparatus for performing corneal surgery with
ultraviolet lasers.
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Pillar Point Partners. In June 1992, VISX and Summit entered into
agreements establishing Pillar Point (collectively, the "Pillar Point
Agreement"). This relationship was intended to resolve differences regarding
patent issues while leaving VISX and Summit free to compete in the marketplace.
Pillar Point's functions are narrowly circumscribed: to hold, enforce and
acquire additional patents which it licenses to VISX, Summit and other
competitors in return for royalty payments which it distributes to its partners.
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 for certain
after-acquired patents to be contributed or offered to Pillar Point. Currently,
the last-to-expire of the patents licensed by Pillar Point expires in the year
2015. VISX and Summit pay Pillar Point certain procedure and equipment
royalties. This revenue, net of applicable expenses, and any other revenue of
Pillar Point is shared between VISX and Summit in accordance with the provisions
of the Pillar Point Agreement.
In order to ensure compliance with the antitrust laws which regulate
agreements between competitors, Pillar Point had to provide a means by which
future competitors could obtain access to the Pillar Point patents (e.g.,
through licenses), but it also had to allow for continued vigorous competition
between the partners. There are a number of provisions in the Pillar Point
Agreement which emphasize that VISX and Summit may act solely to further their
own best interests without regard to the interests of the Partnership or the
other partner, and that neither partner shall have a fiduciary duty, a duty of
loyalty, a duty of fair dealing, a duty of good faith, or a duty of disclosure
to the other partner or to Pillar Point.
Since the FDA first approved the commercialization of the technology, the
partnership has been characterized by differences of position and opinion,
resulting in several lawsuits. In August 1996, VISX Partner, Inc. ("VISX
Partner"), a subsidiary of VISX, sued Summit on behalf of Pillar Point to
recover certain equipment royalties which VISX maintains Summit has not paid
into the partnership in accordance with the Pillar Point Agreement. In October
1997, in reliance on language in the Pillar Point Agreement, VISX stopped making
certain procedure royalty payments to Pillar Point. Specifically, VISX no longer
pays royalties to Pillar Point for certain patented procedures performed using
the VISX System which have not received Pre-Market Approval from the FDA. VISX
sued Pillar Point and Summit Partner, Inc. ("Summit Partner"), a subsidiary of
Summit, for a declaratory judgment that the Pillar Point Agreement does not
require VISX to pay those royalties to the partnership. Most recently, in
February 1998, VISX Partner sued Summit Partner, seeking a dissolution and
winding up of Pillar Point. VISX contends that, because it is impractical (if
not impossible) for the business to be continued in partnership, dissolution is
mandatory under governing partnership law. Indeed, one provision of the Pillar
Point Agreement expressly contemplates that the partnership may be dissolved by
"any final and non-appealable court order" and, in that event, contains
provisions intended to restore the partners to their positions prior to the
formation of Pillar Point.
The litigation between VISX and Summit has exacerbated the relationship
between VISX and Summit as partners in Pillar Point and has made the operational
functioning of the partnership significantly more difficult. The litigation
regarding royalties owed by Summit is scheduled for trial in May 1998, but the
resolution of that single matter will not necessarily affect the outcome of the
other disputes between the companies. The other two lawsuits are still in the
pleading stage, and it is impossible to predict their outcome. With respect to
the declaratory relief action about procedure royalties, however, if VISX's
interpretation of the Pillar Point Agreement were found to be incorrect, VISX
could be obligated to remit to Pillar Point all the royalties it did not pay
with respect to such procedures from October 1997 until the time of the
judgment. In that instance, the contribution to VISX's earnings until that
judgment from non-approved procedures performed on VISX Systems would be reduced
to a percentage consistent with that reported in periods prior to October 1997.
Moreover, Summit contends that 100% of any such royalties would be payable to
Summit, not to Pillar Point. Either result would have a material adverse effect
on the Company's financial position and results of operations. See " -- Risks
Relating to Pillar Point Partners; Patent Litigation" below.
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"), Herbert Schwind GmbH & Co. KG
("Schwind"), Autonomous Technologies Corporation ("Autonomous"), and LaserSight,
Incorporated ("LaserSight"). Under these agreements, VISX is paid royalties for
all
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international sales of Chiron, Meditec, Schwind, Autonomous, and LaserSight
equipment. In addition, Summit has taken a fully-paid license to VISX's non-U.S.
patents.
In 1991, International Business Machines Corporation ("IBM") granted VISX
nonexclusive rights under United States and foreign IBM patents that include
claims that cover ultraviolet laser technology for removal of human tissue. In
1997, IBM advised VISX that it assigned the contract to LaserSight, and VISX is
informed that LaserSight has assigned some portion of that contract to Nidek
Co., Ltd. ("Nidek"). Under the terms of the agreement, VISX has agreed to pay a
royalty on VISX Systems made, used, sold or otherwise transferred by or for VISX
in the United States, Canada, Japan, Australia, Brazil and Spain. The Company
also has entered into a nonexclusive, worldwide license agreement with Patlex
Corporation which holds certain patents on lasers. Under this agreement, VISX
pays a royalty on certain laser components of the VISX System.
Confidentiality Arrangements. VISX 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
the 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. Since Pillar Point was created for the single purpose
of resolving patent claims, its functions are narrowly circumscribed: to hold,
enforce and acquire additional patents which it licenses to VISX, Summit and
other competitors in return for royalty payments which it distributes to its
partners. VISX is engaged in legal disputes 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,
(2) the definition of Net Selling Price as it is used in the Pillar Point
Agreement, (3) whether procedure royalties are payable to the partnership for
procedures which do not have Pre-Market Approval, and (4) whether these disputes
and others have so incapacitated the partnership that it should be dissolved.
VISX also has information that certain users of licensed Summit systems have
discovered a way to "disconnect" their card reading mechanisms, thus effectively
allowing them to treat patients without purchasing cards from Summit. In
addition, the Company believes that many unapproved systems currently in use in
the United States infringe the Pillar Point patents. Pillar Point is currently
receiving no payments for procedures done on those modified or unlicensed
systems, and 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 is in compliance 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
Pillar Point, VISX and Summit do not know or cannot control. In particular, on
March 24, 1998, the Federal Trade Commission ("FTC") filed an administrative
complaint charging that VISX and Summit have violated Section 5 of the Federal
Trade Commission Act ("FTC Act"). 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. On March 26, 1998,
the Company was served with a proposed class action lawsuit charging violations
of, inter alia, the California antitrust laws. Those cases are discussed in more
detail below. See "Legal Proceedings -- Litigation and Administrative
Proceedings: Pillar Point Partners" below.
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 owns
could have a
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material adverse effect on the Company's business, financial position and
results of operations. The defendants in one lawsuit brought by Pillar Point
have petitioned the U.S. Patent and Trademark Office ("PTO") to re-examine two
patents owned by VISX and licensed to Pillar Point. The PTO is expected to rule
on that request in April 1998. If the PTO were to agree to commence
re-examination proceedings against one or both of the patents at issue, VISX
believes that its patents would survive the re-examination. Nevertheless there
can be no assurance that the patents held by Pillar Point will ultimately be
found to be valid or enforceable.
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. There can be no
assurance that additional patent infringement claims in the United States or in
other countries will not be asserted against VISX, or that VISX would be
successful in defending against such claims if they were brought. Furthermore,
Pillar Point or VISX may undertake additional infringement actions against
others.
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 field have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial.
GOVERNMENT REGULATION; 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 and by similar agencies outside of the
United States. Products manufactured or distributed by VISX are subject to
pervasive and continuing regulation by the FDA, including, among other things,
postmarket surveillance and adverse event reporting requirements. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
instances, by the FTC. 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.
VISX manufactures 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, procedures and
practices have undergone and continue to be subject to GMP compliance
inspections conducted by the FDA.
The FDA's new Quality System Regulation ("QSR") went into effect on 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."
During 1997, VISX implemented a quality system to comply with the QSR, and to
meet ISO certification requirements. As of February 3, 1998, VISX is fully
certified to ISO 9001/EN46001. VISX is also licensed to apply the CE Mark to the
VISX System in accordance with the European Medical Device Directives.
In the two years since the FDA first approved the VISX System for the
treatment of nearsightedness, there has also been a proliferation of unapproved
devices available to treat all levels of refractive vision disorders. VISX is
aware of over 20 reimported Summit excimer laser systems (which were not
configured for the United States market when manufactured), and over 20 generic
systems, all in active use in the United States. The Company attributes this
phenomenon to the restricted scope of the U.S. 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 approved indications,
there are no such limitations on reimported and generic systems. Such systems
are, under applicable FDA regulations, Class III medical devices just as the
VISX System is, and as such 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. Nevertheless, the FDA's
enforcement efforts against unapproved lasers have been limited. Therefore,
while
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VISX was 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.
The FDA has declared such laser systems to be illegal, has issued several
warning letters, and in 1997 brought an injunction against one manufacturer of
an unapproved laser system and seized all of that manufacturer's inventory. Also
in 1997, VISX took steps to convince doctors using unapproved lasers to convert
to the VISX System. VISX was able to trade out eight unapproved systems using
this strategy. Approvals for use of the VISX System to treat astigmatism and
higher levels of myopia were also instrumental in convincing doctors to switch
to FDA-approved technology. Nevertheless, the unchecked use of unapproved
excimer laser systems in the United States could adversely affect VISX's royalty
income through Pillar Point to the extent that users of such lasers do not pay
procedure royalties to Pillar Point. Furthermore, the fact that users of
unapproved lasers are not limited to performing FDA-approved laser vision
correction procedures could adversely affect the Company's competitive position,
as well as the competitive position of ophthalmologists using VISX Systems.
Accordingly, the unregulated 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, and manufacturers to certify in product labeling and in
reports to the FDA that their products comply with all such standards. 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, however,
and 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
standards for quality assurance and manufacturing processes is one of the CE
Mark requirements. On February 3, 1998, VISX was certified to ISO 9001/EN46001,
and is licensed to apply the CE Mark to the VISX System.
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. The Japanese Ministry of Health and Welfare has reviewed
VISX's application for PTK approval and recommended it for approval. VISX
anticipates that it could receive approval for PTK in Japan in April 1998,
although there can be no assurance that such an approval is forthcoming. VISX's
application for approval of PRK (low to high myopia) was submitted to the
Ministry in October 1997 and is under review. VISX expects to submit an
application for approval of PRK with astigmatism (called "PAK" in Japan) in the
second quarter of 1998. VISX does not anticipate receiving PRK or PAK approval,
in Japan during 1998.
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
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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 a 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.
YEAR 2000 COMPLIANCE
Certain currently installed computer systems and software programs were
written to accept only two digit entries in the date fields rather than four
digit entries. In particular, the computers incorporated into the VISX System
accept only two digit entries. Beginning in the year 2000, these date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, in the next two years, computer systems
and/or software used by many companies, including software systems that are
installed in and control the operation of the Company's products, may need to be
upgraded to comply with such "Year 2000" requirements. The Company is in the
process of developing plans to address the potential exposures related to the
impact on its computer systems for the Year 2000 and beyond. In 1998, the
Company plans to assess key financial, informational and operational systems to
determine if they are Year 2000 compliant. If necessary, the Company will
develop detailed plans and timelines for implementation and testing of
modifications and corrections to the computer systems as required by December
31, 1999. At this stage in the assessment process, VISX does not believe that
the Year 2000 issue will pose significant operational problems for its business
or products. There can be no assurance, however, that operating problems or
expenses related to Year 2000 will not arise with the Company's computer systems
and software or in their interface with the computer systems and software of the
Company's vendors. The financial impact of making the required systems changes
cannot be known precisely at this time, but is not expected to be material to
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. Laser vision correction 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 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-approved protocol. Industry sources estimate that in the past few years
between 200,000 and 300,000 RK procedures were performed annually in the United
States. VISX believes, based on currently available follow-up data and market
trends in countries where laser vision correction is commercially available,
that people will prefer LVC to 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. There can be no assurance, however, that these
market trends will be repeated in the United States market.
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. Other competitors may enter the excimer laser equipment
manufacturing business or acquire existing companies, and such competitors may
be able to offer their products at a lower cost or may develop procedures that
involve a lower per procedure cost. 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
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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.
In the United States, VISX believes that it and Summit are the leading
manufacturers of excimer laser systems. The Company's principal international
competitors are Chiron, Meditec, Schwind, and Nidek. VISX has licensed certain
of its patents to Chiron, Meditec, Schwind, Autonomous, and LaserSight, each of
which is obligated to pay VISX royalties when it sells a system. In addition,
Summit has taken a fully-paid license to VISX's non-U.S. patents. Nidek has not
taken a license, and VISX has sued Nidek and its users for patent infringement
in Canada, the United Kingdom, and France. See "Legal Proceedings -- Patent
Litigation: Nidek," below.
The existence of unapproved laser systems also poses a 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
unapproved 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 unapproved 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
materially affected by all of these factors: loss of sales to unapproved lasers,
loss of royalty income through Pillar Point, and potential damage to the
industry at this early stage, posed by the proliferation of unapproved Class III
devices. These factors, either individually or in the aggregate, could have a
material adverse effect on VISX's business, financial position and results of
operations.
RESEARCH AND DEVELOPMENT AND REGULATORY
The Company's research efforts have been the primary source of the
Company's products. The Company intends to maintain its strong commitment to
research as an essential component of its product development effort. Toward
this end, the Company incurred research and development expenses, including
clinical trial expenses, of $10.3 million, $8.7 million, and $8.9 million during
the years ended December 31, 1997, 1996, and 1995, respectively. Licensed
technology developed by outside parties is an additional source of potential
products. The Company expects to continue spending significant amounts in
research and development for the foreseeable future.
PRODUCT LIABILITY AND INSURANCE
Inherent in the testing and use of human health care devices is the
potentially significant risk of physical injury to patients. Physical injury
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. Claims for such injury, even if the
Company successfully defends them, could injure the Company's reputation. The
VISX System includes high-voltage power supplies, cryogenic subsystems,
high-pressure gases, toxic gases, and other potentially hazardous factors. An
accident could result in liability for VISX for any damages that result, and any
such liability could exceed the resources of the Company. While VISX has taken,
and intends to continue to take, what it believes are appropriate precautions to
minimize exposure to product liability claims, there can be no assurance that
the Company will avoid liability. VISX believes that it possesses product
liability, general liability and certain other types of insurance customarily
obtained by business organizations of its type, including insurance against
product liability risks associated with the testing, manufacturing, and
marketing of its products. However, 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, certain medical institutions participating in the
Company's clinical studies, and certain consultants who train Physician Trainers
on behalf of VISX. The Company is currently a defendant in two lawsuits relating
to its products. See "Legal Proceedings -- Other Litigation."
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EMPLOYEES
As of December 31, 1997, VISX had 164 full-time employees, 22 temporary
employees and seven consultants. Of the full-time employees, 77 are employed in
manufacturing and service, 41 in research and development and regulatory, and 46
in general administrative and marketing and sales positions. None of the
Company's employees is covered by a collective bargaining agreement. VISX
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 facility expires in May
2003 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 8 of
Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION AND ADMINISTRATIVE PROCEEDINGS: PILLAR POINT PARTNERS
Overview
The patents owned by VISX and licensed to Pillar Point are widely
contested. Generally, the patent litigation in which Pillar Point is involved
concerns patent infringement issues relating to whether 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 certain 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 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.
Antitrust Proceedings and Litigation
In October 1995, Pillar Point received notice that the 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 FTC Act. On March 24, 1998
the FTC filed an administrative complaint challenging the existence of Pillar
Point and challenging the enforceability of certain patents owned by VISX to
which Pillar Point holds the exclusive licensing rights. The complaint seeks to
dissolve Pillar Point, and charges that VISX and Summit have fixed prices. The
issuance of a complaint is not a finding or ruling that any law has been
violated. VISX believes that the FTC's claims are unfounded. In the VISX
Partner, Inc. v. Summit Partner, Inc. litigation, VISX is seeking relief which
would be consistent with certain of the relief requested by the FTC, but the
basis for such requested relief is different. To the extent that the FTC
contends that VISX engaged in a price-fixing scheme or that VISX's patents were
obtained through fraudulent means, VISX intends to vigorously defend the
allegations. Nevertheless, VISX is unable to predict the scope of relief, if
any, that may ultimately be ordered if the administrative proceeding were to be
determined adversely to VISX and/or Pillar Point. Any finding that VISX engaged
in conduct violative of the antitrust laws or a finding that one or more of
VISX's patents is unenforceable could have a material adverse effect on the
Company's business, financial position and results of operations.
On March 26, 1998, VISX was served with a purported class action lawsuit
alleging violations of, inter alia, the California antitrust laws. The complaint
appears to draw heavily from the FTC complaint. The Company has not had time to
assess the claims, but to the extent that the complaint mirrors the FTC action,
the Company believes it has meritorious defenses to the claims and intends to
defend them vigorously. The Company is unable to predict the outcome of the
lawsuit at this very early stage.
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Patent Litigation
Pillar Point has brought patent-related lawsuits against physicians in
Colorado (Dishler) and Arizona (Barnet and Dulaney), a manufacturer in Florida
(J. T. Lin and Photon Data, Inc.), and a consultant based in Washington, D.C.
(Appler). The latter two cases are expected to settle in the near future. Pillar
Point has itself been sued in two jurisdictions (Delaware and Texas) on matters
related to its patents (Autonomous and Taboada). Pillar Point is also subject to
antitrust counterclaims in several of the suits listed above, and in three
lawsuits primarily relating to antitrust matters (Burlingame, Shepherd, and
Garabet).
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, M.D., Ronald Barnet, M.D., and others. Plaintiffs later amended the
complaint to add Sun Valley Acquisition Corporation, a wholly-owned subsidiary
of Physicians Resource Group. The suit alleges infringement of and inducement to
infringe certain Pillar Point patents, and seeks monetary damages and injunctive
relief. The defendants 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 award
defendants their costs in defending the lawsuit. In addition, in September 1997,
the defendants added a series of counterclaims against Pillar Point, VISX,
Summit, and several current and former VISX and Summit officers and directors,
including claims for alleged violations of antitrust laws and the Lanham Act.
The counterclaims all stem from the same activity, namely the formation of
Pillar Point, the charging of a per use royalty, and enforcement of the Pillar
Point patents.
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, M.D. and
several entities owned or controlled by him. 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 counterclaims denying
infringement, seeking a declaratory judgment that the patents in suit are
invalid and unenforceable, and asserting alleged violations of the antitrust
laws.
Burlingame v. Pillar Point Partners, et al.; John R. Shepherd, M.D., Ltd.
v. Pillar Point Partners, et al.; Antoine Garabet, M.D., Inc. and Abraham
Shammas, M.D., d/b/a The Laser Eye Center, v. Pillar Point Partners, et al. In
June 1996, Dr. Burlingame filed suit against Pillar Point, Summit, Summit
Partner, VISX, and VISX Partner. In September 1996, a corporation controlled by
Dr. Shepherd filed suit against the same parties. In November 1997, corporations
controlled by Drs. Garabet and Shammas filed suit against the same parties as
well as Stephen Trokel, M.D. All three actions were filed in the United States
District Court for the Northern District of California. Generally, all
plaintiffs allege that the per procedure royalty charged by Pillar Point to its
licensees is a violation of the Sherman Act or of corresponding state antitrust
laws. In addition, Drs. Garabet and Shammas are seeking a declaratory judgment
that the patents held by Pillar Point are invalid and unenforceable on account
of alleged antitrust violations. Each of the plaintiffs seeks monetary damages.
Drs. Garabet and Shammas also seek punitive damages of an unspecified amount,
injunctions against enforcement of the Pillar Point patents and against alleged
continuing violations of the antitrust laws, attorneys' fees and costs.
VISX believes that it and Pillar Point have meritorious defenses to the
counterclaims asserted in the Dulaney and Dishler proceedings and to the claims
asserted in the Burlingame, Shepherd and Garabet proceedings, and that the
resolution of these proceedings will not have a material adverse effect on
VISX's business, financial position or results of operations. However, these
proceedings are in various stages of discovery and there can be no assurance as
to the outcome of any of the suits.
John Taboada v. Stephen L. Trokel, VISX, et al. In July 1997, John Taboada
filed a complaint in the U.S. District Court for the Western District of Texas
against Stephen L. Trokel, VISX, VISX Partner, Summit Partner, and Pillar Point
Partners. In February 1998, he amended the complaint to add Summit. Taboada
seeks a declaration that he is either the sole inventor or a joint inventor of
U.S. patent No. 5,108,388
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(the " '388 patent") which names Dr. Trokel as the inventor. The '388 patent has
been assigned to VISX and is licensed to Pillar Point. Taboada also seeks to
recover royalties paid to one or more of the defendants for licenses granted
under the '388 patent, charges defendants with infringement of the '388 patent,
charges violations of the Lanham Act, and seeks monetary damages and injunctive
relief. VISX and the other defendants believe that Taboada's complaint is
without merit and intend to vigorously defend it.
To consolidate often conflicting discovery requests, and save resources and
management time with respect to these matters, in November 1997 Pillar Point
requested that several of the pending cases be consolidated by the Judicial
Panel on Multidistrict Litigation ("JPML"). On December 19, 1997, the JPML
ordered the counterclaims in the Dulaney and the Dishler suits consolidated with
antitrust claims against Pillar Point Partners made in the Burlingame and
Shepherd suits, and transferred all the cases to the District of Arizona for
consolidated pretrial proceedings. The JPML conditionally transferred the
Garabet and Taboada cases as well, although the attorneys in Taboada have filed
a motion opposing the transfer.
Other PPP Litigation
Pillar Point Partners, et al. v. Jui-Teng Lin, et al.; Pillar Point
Partners, et al. v. Appler. These suits were brought in January 1997, and
September 1996, respectively. These suits allege direct and contributory
infringement of certain Pillar Point patents, inducement to infringe those
patents, and conspiracy to interfere with the plaintiffs' existing and
prospective business relationships. The parties to each of these suits have
agreed to a settlement in principle, but neither settlement is final.
Autonomous Technologies Corporation v. Pillar Point Partners, et al. In
October 1996, Autonomous brought an action in the U.S. 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 barred from claiming that the Autonomous system infringes the same
patent. Autonomous subsequently filed an amended complaint, adding two claims
against VISX for alleged defamation and violation of Delaware's Uniform
Deceptive Practices Act. In 1997, in connection with a settlement that resulted
in a license to Autonomous of all VISX's non-U.S. patents, Autonomous agreed to
drop those two claims against VISX. The defendants have brought a motion to
dismiss the remaining claims made by Autonomous. No decision has been made on
that motion, and discovery is on hold pending that decision. VISX believes that
it and the other defendants have meritorious defenses to the remaining claims in
this action, and that the resolution of those claims 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.
LITIGATION: SUMMIT
In addition to litigation by or against Pillar Point, there are several
inter-partnership disputes currently in litigation:
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 U.S. 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
scheduled for trial in May 1998, but 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.
VISX, Incorporated v. Pillar Point Partners, et al. In November 1997, VISX
sued in the Superior Court for Santa Clara County, California, for declaratory
judgment that its interpretation of the License-back to VISX Agreement with
Pillar Point is correct. The suit is brought against Summit and Summit Partner,
as well as against Pillar Point, which is a party to the contract. VISX sought
this relief because Summit disagreed with the Company's decision to stop paying
certain procedure royalties to Pillar Point in reliance on language in that
contract. By the lawsuit, VISX seeks to ensure that the partners report
royalties to Pillar Point on a
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consistent basis. Summit cross-claimed, alleging that royalties are due on the
disputed procedures and that Summit alone, to the exclusion of Pillar Point, is
entitled to the royalty payments allegedly owed by VISX. Summit seeks damages
for alleged breach of the License-Back Agreement and a penalty for failing to
mediate before filing the action. VISX cross-claimed against Summit Technology,
asserting unfair competition and breach of contract claims. In addition, Pillar
Point attempted to answer "in pro per." Since a partnership cannot appear in pro
per VISX filed a motion to strike the answer. To the extent that VISX collects
royalties from its customers but is not required to remit that money to Pillar
Point, those royalties contribute directly to VISX's earnings. If VISX's
interpretation of the agreement were found to be incorrect, VISX could be
obligated to remit to Pillar Point all of the royalties not paid with respect to
such procedures from October 1997 until the time of the judgment. In that
instance, VISX believes that the contribution to VISX's earnings from
non-approved procedures performed on VISX Systems would be reduced to a
percentage consistent with that reported in periods prior to October 1997.
Summit contends that 100% of any such royalties would be payable to Summit, not
to Pillar Point. Either result would have a material adverse effect on the
Company's financial position and results of operations.
VISX Partner, Inc. v. Summit Partner, Inc. On February 17, 1998, VISX
Partner brought suit in the Superior Court for Santa Clara County, California,
seeking the dissolution and winding up of Pillar Point. VISX asserts that
several deadlocks between the partners which have persisted for months and which
concern matters which now have imminent adverse consequences to the partnership,
render the continued operations of the partnership virtually impossible. Where a
deadlock between the partners renders continuation of the partnership
impractical or inequitable, the Uniform Partnership Act requires that the
partnership be dissolved. Summit Partner has answered and cross-complained for
breach of contract and "wrongful attempted dissolution," and is seeking
indemnification, declaratory relief, and a penalty for failing to mediate before
filing the action. On March 9, 1998, VISX filed a motion for order of
dissolution and requested the appointment of a receiver during the pendency of
the winding-up to administer partnership affairs. The matter is scheduled to be
heard on April 28, 1998.
PATENT LITIGATION: NIDEK
VISX is a party to patent-related litigation against Nidek, a competing
manufacturer of LVC systems, in three countries: Canada, the United Kingdom and
France. These proceedings, which allege patent infringement by Nidek and, in
certain cases, customers of Nidek, were filed by VISX at various times between
February 1994 and May 1997. The defendants have contested VISX's infringement
claims as well as the validity of VISX's patents. The United Kingdom and Canada
proceedings are scheduled for trial in July 1998 and late 1998, respectively,
and the proceeding in France is currently in the early pleading stage. In all
three instances, it is impossible to predict the outcome of the litigation.
However, VISX believes that the invalidity claims asserted by Nidek are without
merit, and intends to vigorously defend its position. Adverse determinations in
one or more of these lawsuits could limit VISX's ability to collect equipment
and use royalties in certain markets. Any such adverse determination could
therefore adversely affect VISX's future results of operations.
OTHER LITIGATION
Product Liability. VISX requires all clinical investigators to advise
persons treated in United States clinical trials that the procedure is
investigational in nature and has not been determined to be safe or effective by
the FDA. Nevertheless, certain individuals who were treated in United States
clinical trials of the VISX System have sued their ophthalmologists and VISX
following their surgery. VISX is currently named in one such suit pending in
Louisiana. In addition, in April 1997 VISX was served with a lawsuit filed in
Canada by a patient treated by a surgeon in Canada, not in connection with
clinical trials. 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 Louisiana case is in the early pleading stages and discovery in the Canada
case has not yet commenced. There can be no assurance as to the outcome of
either suit.
15
<PAGE> 17
In addition, in November 1997, the trial began in a lawsuit in Pennsylvania
which alleged, in part, that VISX was negligent in conducting its clinical
trials for PTK. On November 11, 1997, following presentation of the plaintiffs'
case, VISX was granted a directed verdict and was dismissed from the case. The
plaintiff has filed post-trial motions and has indicated her intention to appeal
if those motions are not granted.
Employment Related. VISX is a party to a lawsuit by a former employee
claiming wrongful discharge. The case was brought in January 1997, and is still
in the discovery 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.
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.
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 1997.
16
<PAGE> 18
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>
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
1997
First Quarter............................................ $24.00 $20.38
Second Quarter........................................... 29.50 20.50
Third Quarter............................................ 25.50 18.38
Fourth Quarter........................................... 26.50 21.63
</TABLE>
On March 20, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $29.938 per share. As of such date, there were
approximately 523 holders of record of the Common Stock.
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.
17
<PAGE> 19
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,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues...................... $ 68,631 $ 69,664 $ 16,703 $ 17,896 $ 22,074
Cost of revenues.................... 20,598 28,876 9,749 11,774 12,030
Total costs and expenses............ 53,111 55,318 27,408 25,230 22,266
Income (loss) from operations....... 15,520 14,346 (10,705) (7,334) (192)
Net income (loss)................... $ 14,097(a) $ 17,308 $(14,765)(b) $ (6,264) $ 179
Earnings (loss) per share:
Basic............................ $ 0.91(a) $ 1.13 $ (1.20)(b) $ (.60) $ .02
Diluted.......................... $ 0.89(a) $ 1.08 $ (1.20)(b) $ (.60) $ .02
Shares used for earnings (loss) per
share:
Basic............................ 15,429 15,311 12,311 10,372 10,540
Diluted.......................... 15,818 15,974 12,311 10,372 10,540
BALANCE SHEET DATA:
Cash and short-term investments..... $100,833 $ 88,990 $ 75,219 $ 11,161 $ 11,847
Working capital..................... 103,880 92,878 77,665 11,842 15,733
Total assets........................ 130,352 119,689 91,078 20,627 22,917
Deferred revenue and other long-term
obligations...................... -- -- -- 409 659
Accumulated deficit................. (20,163) (34,260) (51,568) (36,803) (30,539)
Stockholders' equity................ $110,299 $ 99,272 $ 79,881 $ 13,993 $ 18,024
</TABLE>
- ---------------
(a) The results for 1997 include a charge for a litigation settlement of $4.0
million, net of taxes, or $0.26 and $0.25 basic and diluted earnings per
share, respectively.
(b) The results for 1995 include charges for litigation settlements of $5.4
million or $0.44 basic and diluted earnings per share.
18
<PAGE> 20
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 anticipated in such forward-looking statements as a result
of various factors, including those identified below. In particular, the factors
set forth under Item 1 -- Business: "Market Acceptance of Laser Vision
Correction," "Reliance on Patents and Proprietary Technology," "Risks Relating
to Pillar Point Partners; Patent Litigation," "Government Regulation; Unapproved
Lasers," "Manufacturing, Components and Raw Materials," "Competition," "Product
Liability and Insurance" and under Item 3 -- 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. The Food and Drug Administration ("FDA")
granted pre-market approval ("PMA") for use of the VISX Excimer Laser System(TM)
("VISX System") for the following indications: phototherapeutic keratectomy
("PTK") on September 29, 1995, photorefractive keratectomy ("PRK") treatment of
low to moderate myopia on March 27, 1996, PRK treatment of low to moderate
myopia with astigmatism on April 25, 1997 and PRK treatment of higher degrees of
myopia with astigmatism on January 29, 1998.
The Company's future growth and ability to sustain 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 the Company is successful in generating royalty income from its
patent rights, developments in patent litigation both in support of the
Company's patents and in defense of claims of infringement, developments with
respect to other litigation to which the Company is a party or in which it may
become involved, and competition from other vision correction products and
procedures which are currently in use or may be developed and introduced in the
future. As a result of these factors, as well as the factors set forth in the
above-referenced portions of the Business and Legal Proceedings sections of this
Form 10-K, there can be no assurance that the Company will be able to sustain
profitability. 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
1997 Compared to 1996
<TABLE>
<CAPTION>
(000'S)
YEAR ENDED DECEMBER 31,
--------------------------
REVENUE 1997 1996 CHANGE
------- ------- ------- ------
<S> <C> <C> <C>
System sales........................................ $34,393 $53,140 (35%)
Percent of revenue................................ 50.1% 76.3%
Royalties, service and other revenue................ $34,238 $16,524 107%
Percent of revenue................................ 49.9% 23.7%
Total............................................... $68,631 $69,664 (1%)
</TABLE>
System sales in the U.S. market decreased in 1997 from 1996. Unit shipments
of systems in the U.S. in 1997 were significantly below the level reached in the
prior year. In addition, average prices in the U.S. during 1997 were lower than
in 1996 primarily as the result of trade-in discounts the Company offered to
owners of lasers manufactured by Summit Technology, Inc. ("Summit") and owners
of unapproved lasers. Partially offsetting the decline in the U.S. market,
system sales in international markets increased in 1997 from 1996 due to higher
sales in certain established markets and expansion into new regions.
19
<PAGE> 21
Royalties, service and other revenues rose in 1997 over 1996 due to growth
in royalty revenue, principally the result of higher procedure volume. In
addition, commencing in October 1997 the Company recognized that it did not owe
royalties to Pillar Point Partners ("Pillar Point") for certain patented
procedures performed using the VISX System which have not been approved by the
FDA. Accordingly, since October 1997 the Company has recorded the full fee for
such procedures as royalty revenue, whereas it had previously recorded only the
portion received back from Pillar Point as royalty revenue. If VISX's
interpretation of the Pillar Point Agreement were found to be incorrect, VISX
could be obligated to remit to Pillar Point all the royalties it did not pay
with respect to such procedures from October 1997 until the time of the
judgment. In that instance, the contribution to VISX's earnings up until that
judgment from non-approved procedures performed on VISX Systems would be reduced
to a percentage consistent with that reported in periods prior to October 1997.
Summit contends that 100% of any such royalties would be payable to Summit, not
Pillar Point. Either result would have a material adverse effect on the
Company's financial condition and results of operations.
<TABLE>
<CAPTION>
(000'S)
YEAR ENDED DECEMBER 31,
--------------------------
COSTS & EXPENSES 1997 1996 CHANGE
---------------- ------- ------- ------
<S> <C> <C> <C>
Cost of revenues.................................... $20,598 $28,876 (29%)
Percent of revenue................................ 30.0% 41.5%
Marketing, general and administrative............... $22,255 $17,708 26%
Percent of revenue................................ 32.4% 25.4%
Research, development and regulatory................ $10,258 $ 8,734 17%
Percent of revenue................................ 14.9% 12.5%
</TABLE>
Cost of revenues was lower in 1997 due to a reduction in systems sold. Cost
of revenues on system sales, as a percentage of revenue, remained comparable
with the prior year. Marketing, general and administrative expenses increased in
1997 mainly as the result of higher patent-related legal expenses and an
increase in marketing expenses. Research, development and regulatory costs
increased in 1997 due to increased research and development expenses associated
with the development of new products and technologies. The Company expects to
continue spending significant amounts in research and development for the
foreseeable future. Regulatory expenses were essentially unchanged over the two
years.
Interest and other income increased due to higher average balances of cash,
cash equivalents and short-term investments. In June, 1997 the Company settled
all outstanding U.S. and international patent disputes between itself and
Summit. Under the settlement, VISX and Summit released each other and their
customers from claims of past infringement and cross-licensed each other's
foreign patents in the field of laser ablation of corneal tissue. In addition,
as part of the agreement, an exclusive license to Summit's U.S. Azema patent was
contributed to Pillar Point. The settlement required an exchange of payments
resulting in a net payment of $4.5 million to Summit which was recorded as
litigation settlement expense. The settlement excluded the lawsuit brought by
VISX Partner, Inc. against Summit in Massachusetts in connection with
partnership matters.
The provision for income taxes covers alternative minimum taxes due under
Federal statutes and state taxes at regular rates, net of credits anticipated.
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 and other revenue................ $16,524 $ 5,718 189%
Percent of revenue................................ 23.7% 34.2%
Total............................................... $69,664 $16,703 317%
</TABLE>
20
<PAGE> 22
System sales increased from 1995 to 1996 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 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.
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 when 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. In 1995 the Company
reached 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.
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.
21
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments ("cash") and working
capital were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- -------
<S> <C> <C>
Cash, cash equivalents and short-term investments......... $100,833 $88,990
Working capital........................................... 103,880 92,878
</TABLE>
Net income generated the majority of the increase in cash. In addition,
accounts receivable and inventory declined modestly, contributing further to
cash flow. Partially offsetting this was cash used for the net repurchase of
common stock.
In 1997, the Company's Board of Directors authorized the repurchase of up
to 2,000,000 shares of the Company's common stock. The Company has conducted and
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 and cash to be used for
repurchases cannot be forecast precisely.
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. The Company does not anticipate that
compliance with Year 2000 requirements will have a material impact on the
Company.
The Company has no outstanding debt and no credit agreements as of December
31, 1997. 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.
22
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 29,952 $ 24,909
Short-term investments.................................... 70,881 64,081
Accounts receivable, net of allowances for doubtful
accounts of
$814 and $600, respectively............................ 16,478 17,904
Inventories............................................... 4,747 5,848
Prepaid expenses and deferred tax assets.................. 1,875 553
-------- --------
Total current assets.............................. 123,933 113,295
PROPERTY AND EQUIPMENT, NET................................. 4,032 3,621
OTHER ASSETS................................................ 2,387 2,773
-------- --------
$130,352 $119,689
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 5,453 $ 2,385
Accrued liabilities....................................... 14,600 18,032
-------- --------
Total current liabilities......................... 20,053 20,417
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 8 AND 9)
STOCKHOLDERS' EQUITY:
Common stock -- $.01 par value, 90,000,000 shares
authorized; 15,517,508 and 15,424,734 shares issued at
December 31, 1997 and 1996, respectively............... 155 154
Additional paid-in capital................................ 133,696 133,836
Less: 156,000 and 20,000 common stock treasury shares at
December 31, 1997 and 1996, respectively, at cost...... (3,442) (462)
Unrealized holding gains on available-for-sale
securities............................................. 53 4
Accumulated deficit....................................... (20,163) (34,260)
-------- --------
Total stockholders' equity........................ 110,299 99,272
-------- --------
$130,352 $119,689
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 25
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
REVENUES:
System sales.............................................. $34,393 $53,140 $ 10,985
Royalties, service and other revenue...................... 34,238 16,524 5,718
------- ------- --------
Total revenues......................................... 68,631 69,664 16,703
------- ------- --------
COSTS AND EXPENSES:
Cost of revenues.......................................... 20,598 28,876 9,749
Marketing, general and administrative..................... 22,255 17,708 8,800
Research, development and regulatory...................... 10,258 8,734 8,859
------- ------- --------
Total costs and expenses............................... 53,111 55,318 27,408
------- ------- --------
INCOME (LOSS) FROM OPERATIONS............................... 15,520 14,346 (10,705)
------- ------- --------
OTHER INCOME (EXPENSE):
Interest income........................................... 4,999 4,265 1,340
Litigation settlement..................................... (4,500) -- (5,400)
------- ------- --------
Other income (expense), net............................ 499 4,265 (4,060)
------- ------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES............. 16,019 18,611 (14,765)
Provision for income taxes................................ 1,922 1,303 --
------- ------- --------
NET INCOME (LOSS)........................................... $14,097 $17,308 $(14,765)
======= ======= ========
EARNINGS (LOSS) PER SHARE
Basic..................................................... $ 0.91 $ 1.13 $ (1.20)
======= ======= ========
Diluted................................................... $ 0.89 $ 1.08 $ (1.20)
======= ======= ========
SHARES USED FOR EARNINGS (LOSS) PER SHARE
Basic..................................................... 15,429 15,311 12,311
======= ======= ========
Diluted................................................... 15,818 15,974 12,311
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<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, 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
Repurchases of common stock............ -- -- -- -- -- (8,307) (8,307)
Exercise of stock options.............. 72 1 (1,817) -- -- 5,327 3,511
Common stock issued under the Employee
Stock Purchase Plan.................. 21 -- 438 -- -- -- 438
Income tax benefit arising from
employee stock option plans.......... -- -- 1,239 -- -- -- 1,239
Adjustment for unrealized holding gains
on available-for-sale securities..... -- -- -- -- 49 -- 49
Net income............................. -- -- -- 14,097 -- -- 14,097
------- ---- -------- -------- ------ ------- --------
BALANCE, DECEMBER 31, 1997............. 15,518 $155 $133,696 $(20,163) $ 53 $(3,442) $110,299
======= ==== ======== ======== ====== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 27
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 14,097 $ 17,308 $(14,765)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 1,854 1,195 610
Increase (decrease) in cash flows from changes in
operating assets and liabilities:
Accounts receivable............................. 1,426 (11,237) (3,740)
Inventories..................................... 1,101 894 (2,950)
Prepaid expenses and deferred tax assets........ (1,322) (319) (47)
Other assets.................................... (191) (2,462) 438
Accounts payable................................ 3,068 (121) 448
Accrued liabilities............................. (3,432) 9,341 4,524
Long term obligations........................... -- -- (409)
--------- -------- --------
Net cash provided by (used in) operating
activities......................................... 16,601 14,599 (15,891)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................... (1,688) (2,911) (704)
Short-term investments
Available-for-sale securities: Purchases............ (102,024) (53,222) (38,526)
Proceeds from
maturities......................................... 95,273 27,671 --
Held-to-maturity securities: Purchases............. -- -- (9,066)
Proceeds from
maturities......................................... -- 4,249 4,817
--------- -------- --------
Net cash used in investing activities................... (8,439) (24,213) (43,479)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.............. 5,188 3,920 80,541
Repurchases of common stock............................. (8,307) (1,729) --
--------- -------- --------
Net cash provided by (used in) financing activities....... (3,119) 2,191 80,541
--------- -------- --------
Net increase (decrease) in cash and cash equivalents...... 5,043 (7,423) 21,171
Cash and cash equivalents, beginning of period............ 24,909 32,332 11,161
--------- -------- --------
Cash and cash equivalents, end of period.................. $ 29,952 $ 24,909 $ 32,332
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<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"), a Delaware
corporation, 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 the patient's dependence
on corrective lenses. The device is also intended to treat other eye disorders,
such as opacities and superficial scars. The Company 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.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries after the
elimination of significant intercompany accounts and transactions.
Cash, Cash Equivalents and Short-term Investments. The Company considers
all highly liquid debt instruments purchased with an original maturity of 90
days or less to be cash equivalents. Available-for-sale securities are carried
at fair market value, with unrealized gains and losses 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,
----------------
1997 1996
------ ------
<S> <C> <C>
Raw Materials and Subassemblies............................ $2,487 $3,747
Work-in-Process............................................ 1,538 1,637
Finished Goods............................................. 722 464
------ ------
$4,747 $5,848
====== ======
</TABLE>
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,
-----------------
1997 1996
------- -------
<S> <C> <C>
Furniture and fixtures..................................... $ 2,211 $ 1,731
Machinery and equipment.................................... 4,996 4,274
Leasehold improvements..................................... 948 742
------- -------
8,155 6,747
Less: accumulated depreciation and amortization............ (4,123) (3,126)
------- -------
Property and equipment, net................................ $ 4,032 $ 3,621
======= =======
</TABLE>
27
<PAGE> 29
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Service
revenue is recognized as services are performed. The Company records a royalty
payable to Pillar Point for VISX Systems and a portion of VisionKey(R) cards
sold in the United States. The Company records royalty revenue when Pillar Point
reports the amount of royalty distribution, net of expenses, due the Company.
The Company received its first report of royalty distribution from Pillar Point
in the first quarter of 1996. Commencing October 1997 the Company no longer pays
royalties to Pillar Point for certain patented procedures performed using the
VISX Excimer Laser System(TM) which have not been approved by the FDA. This is
consistent with a provision in the Company's License-Back To VISX Agreement with
Pillar Point which provides that royalties are due only for FDA-approved
procedures.
Earnings (Loss) Per Share. Effective December 15, 1997, the Company adopted
Statement of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings Per
Share." SFAS 128 requires companies to compute earnings (loss) per share
following two different methods, basic and diluted. Basic earnings (loss) per
share is computed based on the weighted average number of common shares
outstanding. Diluted earnings (loss) per share is computed based on the weighted
average number of common shares outstanding plus dilutive potential common
shares calculated in accordance with the treasury stock method. All amounts in
the following table are in thousands, except per share data.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
NET INCOME (LOSS)........................................... $14,097 $17,308 $(14,765)
======= ======= ========
BASIC EARNINGS PER SHARE
Income (loss) available to common stockholders............ $14,097 $17,308 $(14,765)
Weighted average common shares outstanding................ 15,429 15,311 12,311
------- ------- --------
Basic earnings (loss) per share........................... $ 0.91 $ 1.13 $ (1.20)
======= ======= ========
DILUTED EARNINGS PER SHARE
Income (loss) available to common stockholders............ $14,097 $17,308 $(14,765)
------- ------- --------
Weighted average common shares outstanding................ 15,429 15,311 12,311
Dilutive potential common shares from stock options....... 389 663 --
------- ------- --------
Weighted average common shares and dilutive potential
common shares.......................................... 15,818 15,974 12,311
------- ------- --------
Diluted earnings (loss) per share......................... $ 0.89 $ 1.08 $ (1.20)
======= ======= ========
</TABLE>
Options to purchase 675,000 and 391,000 weighted shares outstanding during
1997 and 1996, respectively, were excluded from the computation of diluted
earnings per share because the options' exercise prices were greater than the
average market price of the Company's common stock during those years. All
options outstanding during 1995, approximately 1,400,000 weighted shares, were
excluded from the computation of diluted earnings per share since their
inclusion would have been anti-dilutive due to the loss available to common
stockholders.
28
<PAGE> 30
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. EXPORT REVENUES AND MAJOR CUSTOMERS
Export Revenues. Export revenues accounted for 23%, 15% and 74% of revenues
for the years ended December 31, 1997, 1996 and 1995, respectively. The
following table represents export revenues by geographic region (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Europe............................................ $ 4,140 $ 3,945 $ 9,297
Western Hemisphere................................ 4,150 3,801 2,651
Pacific Rim and Other............................. 7,573 2,973 344
------- ------- -------
$15,863 $10,719 $12,292
======= ======= =======
</TABLE>
Major Customers. One customer accounted for 13%, 7% and 0% of total
revenues in 1997, 1996 and 1995, respectively. One other customer accounted for
7%, 13% and 0% of total revenues in 1997, 1996 and 1995, respectively. During
1995, 63% of the Company's products were distributed through Alcon. No other
customer accounted for 10% or more of sales during any of the three years ended
December 31, 1997.
NOTE 3. INVESTMENTS
Investments in securities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------ ------------------------------------
GROSS AGGREGATE GROSS AGGREGATE
AMORTIZED UNREALIZED FAIR AMORTIZED UNREALIZED FAIR
COST GAINS VALUE COST GAINS VALUE
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS
Available-for-Sale
Securities
Debt securities of the
U.S. Treasury and U.S
government agencies
and corporations...... $34,769 $30 $34,799 $48,138 $2 $48,140
Debt securities of U.S.
corporations.......... 36,059 23 36,082 15,939 2 15,941
------- --- ------- ------- -- -------
70,828 53 70,881 64,077 4 64,081
CASH EQUIVALENTS
Available-for-Sale
Securities
Debt securities of U.S.
corporations.......... 24,420 -- 24,420 20,526 -- 20,526
------- --- ------- ------- -- -------
Total
investments.... $95,248 $53 $95,301 $84,603 $4 $84,607
======= === ======= ======= == =======
</TABLE>
There were no gross realized gains or losses on available-for-sale
securities. All available-for-sale securities held at December 31, 1997 mature
in two years or less.
29
<PAGE> 31
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Payroll and related accruals................................ $ 1,909 $ 2,597
Accrued warranty, installation, and training expenses....... 3,246 5,200
Accrued royalties........................................... 1,879 2,667
Deposits and deferred revenue............................... 3,012 2,335
Accrued sales promotions and distributor commissions........ 1,620 --
Accrued income and sales taxes.............................. 1,138 1,914
Accrued legal expenses...................................... 566 1,535
Other....................................................... 1,230 1,784
------- -------
$14,600 $18,032
======= =======
</TABLE>
NOTE 5. 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 four
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,
------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C> <C>
Net Income (Loss)..................... As Reported........ $14,097 $17,308 $(14,765)
Pro Forma.......... 9,281 13,821 (15,714)
Diluted Earnings (Loss) Per Share..... As Reported........ $ 0.89 $ 1.08 $ (1.20)
Pro Forma.......... 0.60 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 1997, 1996 and 1995, respectively:
risk-free interest rates of 6.0, 5.6 and 6.1 percent, expected volatility of 54,
43 and 43 percent, 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 21,162 shares, 18,703 shares and 30,449 shares in 1997,
1996 and 1995, respectively, and 108,206 shares cumulatively through December
31, 1997. The weighted average fair market value of shares sold in 1997 was
$27.07.
30
<PAGE> 32
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1997 the Company is authorized to grant options for up
to 2,246,703 shares under the 1995 Plan and 250,000 shares under the Director
Plan. The Company has granted options on 1,163,300 shares and 51,000 shares,
respectively, under these two plans through December 31, 1997. 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 four 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,
1997, 1996 and 1995 and changes during the years then ended is presented in the
following tables and narrative. Share amounts are shown in thousands.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
WTD. AVG. WTD. AVG. WTD. AVG.
ACTIVITY SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
-------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, start of year............. 1,717 $20.73 1,390 $13.23 1,474 $10.09
Granted................................ 692 22.22 685 32.27 622 15.12
Exercised.............................. (361) 11.45 (292) 11.98 (587) 7.02
Forfeited.............................. (82) 25.24 (66) 21.06 (119) 14.84
------ ------ ------
Outstanding, end of year............... 1,966 22.78 1,717 20.73 1,390 13.23
====== ====== ======
Exercisable, end of year............... 679 $20.75 576 $12.29 514 $11.13
====== ====== ======
Weighted average fair value per option
granted.............................. $ 8.73 $11.71 $ 5.32
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------
(000'S) WTD. AVG. WTD. AVG. YEARS (000'S) WTD. AVG.
EXERCISE PRICES NUMBER EXERCISE PRICE LEFT TO EXERCISE NUMBER EXERCISE PRICE
--------------- ------- -------------- ---------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ 5.25 - $ 5.25.......... 15 $ 5.25 2.9 15 $ 5.25
11.25 - 16.15.......... 508 12.45 6.8 337 12.53
16.38 - 24.75.......... 845 21.80 9.1 90 20.22
25.13 - 37.25.......... 598 33.38 8.4 237 33.65
----- ---
$ 5.25 - $37.25.......... 1,966 $22.78 8.2 679 $20.75
===== ===
</TABLE>
NOTE 6. 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 of up to 2,000,000 shares of the Company's common stock. The Company
has and will conduct the purchases through open market transactions in
accordance with applicable securities laws. The amount of shares purchased and
31
<PAGE> 33
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
NOTE 7. INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------ ----
<S> <C> <C> <C>
Current:
Federal......................................... $ 1,561 $ 652 $--
State........................................... 1,361 651 --
------- ------ ---
2,922 1,303 --
------- ------ ---
Deferred, net
Federal......................................... (1,000) -- --
State........................................... -- -- --
------- ------ ---
(1,000) -- --
------- ------ ---
Net tax provision................................. $ 1,922 $1,303 $--
======= ====== ===
</TABLE>
The provision for income taxes is comprised of the following elements, all
expressed as a percentage of income before provision for income taxes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Statutory Federal income tax rate.................... 35.0% 35.0% --
State income taxes, net of Federal benefit........... 5.8 5.8 --
R&D credit........................................... (0.6) (0.3) --
Benefit from net operating loss carryforward......... (29.0) (33.5) --
Other................................................ 0.8 -- --
----- ----- --
Net tax provision.................................... 12.0% 7.0% --
===== ===== ==
</TABLE>
Income taxes paid amounted to $1,347,000, $698,000 and $0 in 1997, 1996 and
1995, respectively.
At December 31, 1997, the Company had a net operating loss carryforward of
approximately $26,100,000 available to offset future Federal taxable income.
This loss carryforward expires through the year 2010. 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.
32
<PAGE> 34
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the net deferred income tax asset were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Net operating loss carryforwards
Federal.............................................. $ 9,100 $ 13,800
State................................................ -- 100
Cumulative temporary differences
Inventory reserves................................... 900 1,100
Warranty reserves.................................... 1,400 2,100
Accrued sales promotions and commissions............. 1,100 --
State income taxes................................... 500 100
Other temporary differences.......................... 2,000 1,200
Tax credit carryforwards............................... 2,000 1,800
-------- --------
17,000 20,200
Valuation allowance, provision for income taxes........ (13,300) (17,200)
Valuation allowance, equity............................ (2,700) (3,000)
-------- --------
Net deferred income tax asset.......................... $ 1,000 $ --
======== ========
</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 uncertainty
exists regarding the realizability of these items, and accordingly, has
established a valuation allowance.
NOTE 8. COMMITMENTS
The Company leases facilities and equipment under operating leases which
expire through 2003. Rent expense was $990,000, $908,000, and $666,000 for the
years ended December 31, 1997, 1996, and 1995, respectively. Future minimum
lease commitments and subleases are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, GROSS SUBLEASE NET
----------------------- ------ -------- ------
<S> <C> <C> <C>
1998................................................. $1,379 $(399) $ 980
1999................................................. 1,379 (33) 1,346
2000................................................. 1,378 -- 1,378
2001................................................. 1,318 -- 1,318
2002................................................. 1,293 -- 1,293
Thereafter........................................... 539 -- 539
------ ----- ------
Total minimum lease payments............... $7,286 $(432) $6,854
====== ===== ======
</TABLE>
NOTE 9. LITIGATION
LITIGATION AND ADMINISTRATIVE PROCEEDINGS: PILLAR POINT PARTNERS
Overview
The patents owned by VISX and licensed to Pillar Point are widely
contested. Generally, the patent litigation in which Pillar Point is involved
concerns patent infringement issues relating to whether 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
33
<PAGE> 35
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
violation of federal and certain 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 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.
Antitrust Proceedings and Litigation
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 FTC Act. On March 24, 1998, the FTC filed an administrative
complaint challenging the existence of Pillar Point and challenging the
enforceability of certain patents owned by VISX, but not Summit patents, to
which Pillar Point holds the exclusive licensing rights. The complaint seeks to
dissolve Pillar Point, and charges that VISX and Summit have fixed prices. The
issuance of a complaint is not a finding or ruling that any law has been
violated. VISX believes that the FTC's claims are unfounded. In the VISX
Partner, Inc. v. Summit Partner, Inc. litigation, VISX is seeking relief which
would be consistent with certain of the relief requested by the FTC, but the
basis for such requested relief is different. To the extent that the FTC
contends that VISX engaged in a price-fixing scheme or that VISX's patents were
obtained through fraudulent means, VISX intends to vigorously defend the
allegations. Nevertheless, VISX is unable to predict the scope of relief, if
any, that may ultimately be ordered if the administrative proceeding were to be
determined adversely to VISX and/or Pillar Point. Any finding that VISX engaged
in conduct violative of the antitrust laws or a finding that one or more of
VISX's patents is unenforceable could have a material adverse effect on the
Company's business, financial position and results of operations.
On March 26, 1998, VISX was served with a purported class action lawsuit
alleging violations of, inter alia, the California antitrust laws. The complaint
appears to draw heavily from the FTC complaint. The Company has not had time to
assess the claims, but to the extent that the complaint mirrors the FTC action,
the Company believes it has meritorious defenses to the claims and intends to
defend them vigorously. The Company is unable to predict the outcome of the
lawsuit at this very early stage.
Patent Litigation
Pillar Point has brought patent-related lawsuits against physicians in
Colorado (Dishler) and Arizona (Barnet and Dulaney), a manufacturer in Florida
(J. T. Lin and Photon Data), and a consultant based in Washington, D.C.
(Appler). The latter two cases are expected to settle in the near future. Pillar
Point has itself been sued in two jurisdictions (Delaware and Texas) on matters
related to its patents (Autonomous and Taboada). Pillar Point is also subject to
antitrust counterclaims in several of the suits listed above, and in three
lawsuits primarily relating to antitrust matters (Burlingame, Shepherd, and
Garabet).
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, M.D., Ronald Barnet, M.D., and others. Plaintiffs later amended the
complaint to add Sun Valley Acquisition Corporation, a wholly-owned subsidiary
of Physicians Resource Group. The suit alleges infringement of and inducement to
infringe certain Pillar Point patents, and seeks monetary damages and injunctive
relief. The defendants 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 award
defendants their costs in defending the lawsuit. In addition, in September 1997,
the defendants added a series of counterclaims against Pillar Point, VISX,
Summit, and several current and former VISX and Summit officers and directors,
34
<PAGE> 36
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
including claims for alleged violations of antitrust laws and the Lanham Act.
The counterclaims all stem from the same activity, namely the formation of
Pillar Point, the charging of a per use royalty, and enforcement of the Pillar
Point patents.
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, M.D. and
several entities owned or controlled by him. 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 counterclaims denying
infringement, seeking a declaratory judgment that the patents in suit are
invalid and unenforceable, and asserting alleged violations of the antitrust
laws.
Burlingame v. Pillar Point Partners, et al.; John R. Shepherd, M.D., Ltd.
v. Pillar Point Partners, et al.; Antoine Garabet, M.D., Inc. and Abraham
Shammas, M.D., d/b/a The Laser Eye Center, v. Pillar Point Partners, et al. In
June 1996, Dr. Burlingame filed suit against Pillar Point, Summit, Summit
Partner, VISX, and VISX Partner. In September 1996, a corporation controlled by
Dr. Shepherd filed suit against the same parties. In November 1997, corporations
controlled by Drs. Garabet and Shammas filed suit against the same parties as
well as Stephen Trokel, M.D. All three actions were filed in the United States
District Court for the Northern District of California. Generally, all
plaintiffs allege that the per procedure royalty charged by Pillar Point to its
licensees is a violation of the Sherman Act or of corresponding state antitrust
laws. In addition, Drs. Garabet and Shammas are seeking a declaratory judgment
that the patents held by Pillar Point are invalid and unenforceable on account
of alleged antitrust violations. Each of the plaintiffs seeks monetary damages.
Drs. Garabet and Shammas also seek punitive damages of an unspecified amount,
injunctions against enforcement of the Pillar Point patents and against alleged
continuing violations of the antitrust laws, attorneys' fees and costs.
VISX believes that it and Pillar Point have meritorious defenses to the
counterclaims asserted in the Dulaney and Dishler proceedings and to the claims
asserted in the Burlingame, Shepherd and Garabet proceedings, and that the
resolution of these proceedings will not have a material adverse effect on
VISX's business, financial position or results of operations. However, these
proceedings are in various stages of discovery and there can be no assurance as
to the outcome of any of the suits.
John Taboada v. Stephen L. Trokel, VISX, et al. In July 1997, John Taboada
filed a complaint in the U.S. District Court for the Western District of Texas
against Stephen L. Trokel, VISX, VISX Partner, Summit Partner, and Pillar Point
Partners. In February 1998, he amended the complaint to add Summit. Taboada
seeks a declaration that he is either the sole inventor or a joint inventor of
U.S. patent No. 5,108,388 (the "'388 patent") which names Dr. Trokel as the
inventor. The '388 patent has been assigned to VISX and is licensed to Pillar
Point. Taboada also seeks to recover royalties paid to one or more of the
defendants for licenses granted under the '388 patent, charges defendants with
infringement of the '388 patent, charges violations of the Lanham Act, and seeks
monetary damages and injunctive relief. VISX and the other defendants believe
that Taboada's complaint is without merit and intend to vigorously defend it.
To consolidate often conflicting discovery requests, and save resources and
management time with respect to these matters, in November 1997 Pillar Point
requested that several of the pending cases be consolidated by the Judicial
Panel on Multidistrict Litigation ("JPML"). On December 19, 1997, the JPML
ordered the counterclaims in the Dulaney and the Dishler suits consolidated with
antitrust claims against Pillar Point Partners made in the Burlingame and
Shepherd suits, and transferred all the cases to the District of Arizona for
consolidated pretrial proceedings. The JPML conditionally transferred the
Garabet and Taboada cases as well, although the attorneys in Taboada have filed
a motion opposing the transfer.
35
<PAGE> 37
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other PPP Litigation
Pillar Point Partners, et al. v. Jui-Teng Lin, et al.; Pillar Point
Partners, et al. v. Appler. These suits were brought in January 1997, and
September 1996, respectively. These suits allege direct and contributory
infringement of certain Pillar Point patents, inducement to infringe those
patents, and conspiracy to interfere with the plaintiffs' existing and
prospective business relationships. The parties to each of these suits have
agreed to a settlement in principle, but neither settlement is final.
Autonomous Technologies Corporation v. Pillar Point Partners, et al. In
October 1996, Autonomous brought an action in the U.S. 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 barred from claiming that the Autonomous system infringes the same
patent. Autonomous subsequently filed an amended complaint, adding two claims
against VISX for alleged defamation and violation of Delaware's Uniform
Deceptive Practices Act. In 1997, in connection with a settlement that resulted
in a license to Autonomous of all VISX's non-U.S. patents, Autonomous agreed to
drop those two claims against VISX. The defendants have brought a motion to
dismiss the remaining claims made by Autonomous. No decision has been made on
that motion, and discovery is on hold pending that decision. VISX believes that
it and the other defendants have meritorious defenses to the remaining claims in
this action, and that the resolution of those claims 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.
LITIGATION: SUMMIT
In addition to litigation by or against Pillar Point, there are several
inter-partnership disputes currently in litigation:
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 U.S. 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
scheduled for trial in May 1998, but 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.
VISX, Incorporated v. Pillar Point Partners, et al. In November 1997, VISX
sued in the Superior Court for Santa Clara County, California, for declaratory
judgment that its interpretation of the License-back to VISX Agreement with
Pillar Point is correct. The suit is brought against Summit and Summit Partner,
as well as against Pillar Point, which is a party to the contract. VISX sought
this relief because Summit disagreed with the Company's decision to stop paying
certain procedure royalties to Pillar Point in reliance on language in that
contract. By the lawsuit, VISX seeks to ensure that the partners report
royalties to Pillar Point on a consistent basis. Summit cross-claimed, alleging
that royalties are due on the disputed procedures and that Summit alone, to the
exclusion of Pillar Point, is entitled to the royalty payments allegedly owed by
VISX. Summit seeks damages for alleged breach of the License-Back Agreement and
a penalty for failing to mediate before filing the action. VISX cross-claimed
against Summit Technology, asserting unfair competition and breach of contract
claims. In addition, Pillar Point attempted to answer "in pro per." Since a
partnership cannot appear in pro per VISX filed a motion to strike the answer.
To the extent that VISX collects royalties from its customers but is not
required to remit that money to Pillar Point, those royalties contribute
directly to VISX's earnings. If VISX's interpretation of the agreement were
found to be incorrect, VISX could be obligated to remit to Pillar Point all of
the royalties not paid with respect to such procedures from October 1997 until
the time of the judgment. In that instance, VISX believes that the contribution
to VISX's
36
<PAGE> 38
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
earnings from non-approved procedures performed on VISX Systems would be reduced
to a percentage consistent with that reported in periods prior to October 1997.
Summit contends that 100% of any such royalties would be payable to Summit, not
to Pillar Point. Either result would have a material adverse effect on the
Company's financial condition and results of operations.
VISX Partner, Inc. v. Summit Partner, Inc. On February 17, 1998, VISX
Partner brought suit in the Superior Court for Santa Clara County, California,
seeking the dissolution and winding up of Pillar Point. VISX asserts that
several deadlocks between the partners which have persisted for months and which
concern matters which now have imminent adverse consequences to the partnership,
render the continued operations of the partnership virtually impossible. Where a
deadlock between the partners renders continuation of the partnership
impractical or inequitable, the Uniform Partnership Act requires that the
partnership be dissolved. Summit Partner has answered and cross-complained for
breach of contract and "wrongful attempted dissolution," and is seeking
indemnification, declaratory relief, and a penalty for failing to mediate before
filing the action. On March 9, 1998, VISX filed a motion for order of
dissolution and requested the appointment of a receiver during the pendency of
the winding-up to administer partnership affairs. The matter is scheduled to be
heard on April 28, 1998.
PATENT LITIGATION: NIDEK
VISX is a party to patent-related litigation against Nidek, a competing
manufacturer of LVC systems, in three countries: Canada, the United Kingdom and
France. These proceedings, which allege patent infringement by Nidek and, in
certain cases, customers of Nidek, were filed by VISX at various times between
February 1994 and May 1997. The defendants have contested VISX's infringement
claims as well as the validity of VISX's patents. The United Kingdom and Canada
proceedings are scheduled for trial in July 1998 and late 1998, respectively,
and the proceeding in France is currently in the early pleading stage. In all
three instances, it is impossible to predict the outcome of the litigation.
However, VISX believes that the invalidity claims asserted by Nidek are without
merit, and intends to vigorously defend its position. Adverse determinations in
one or more of these lawsuits could limit VISX's ability to collect equipment
and use royalties in certain markets. Any such adverse determination could
therefore adversely affect VISX's future results of operations.
OTHER LITIGATION
Product Liability. VISX requires all clinical investigators to advise
persons treated in United States clinical trials that the procedure is
investigational in nature and has not been determined to be safe or effective by
the FDA. Nevertheless, certain individuals who were treated in United States
clinical trials of the VISX System have sued their ophthalmologists and VISX
following their surgery. VISX is currently named in one such suit pending in
Louisiana. In addition, in April 1997 VISX was served with a lawsuit filed in
Canada by a patient treated by a surgeon in Canada, not in connection with
clinical trials. 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 Louisiana case is in the early pleading stages and discovery in the Canada
case has not yet commenced. There can be no assurance as to the outcome of
either suit.
In addition, in November 1997, the trial began in a lawsuit in Pennsylvania
which alleged, in part, that VISX was negligent in conducting its clinical
trials for PTK. On November 11, 1997, following presentation of the plaintiffs'
case, VISX was granted a directed verdict and was dismissed from the case. The
plaintiff has filed post-trial motions and has indicated her intention to appeal
if those motions are not granted.
Employment Related. VISX is a party to a lawsuit by a former employee
claiming wrongful discharge. The case was brought in January 1997, and is still
in the discovery stage. The Company believes that the case
37
<PAGE> 39
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
LITIGATION SETTLEMENTS
In June 1997, the Company settled all outstanding U.S. and international
patent disputes between itself and Summit. Under the settlement, VISX and Summit
released each other and their customers from claims of past infringement and
cross-licensed each other's foreign patents in the field of laser ablation of
corneal tissue. In addition, as part of the agreement, an exclusive license to
Summit's U.S. Azema patent was contributed to Pillar Point. The settlement
required an exchange of payments resulting in a net payment of $4.5 million to
Summit which was recorded as litigation settlement expense. The settlement
excluded the lawsuit brought by VISX Partner, Inc. against Summit in
Massachusetts in connection with partnership matters.
In 1995 the Company reached 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.
38
<PAGE> 40
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, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 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 auditing 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 26, 1998
39
<PAGE> 41
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 Securities and Exchange Commission and relating
to its Annual Meeting of Stockholders to be held on May 15, 1998.
The officers of VISX are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark B. Logan.............. 59 Chairman of the Board, Chief Executive Officer and
President
Elizabeth H. Davila........ 53 Executive Vice President, Chief Operating Officer
Katrina J. Church.......... 36 Vice President, General Counsel and Secretary
Carol F.H. Harner, Ph.D.... 54 Vice President, Research and Development
James W. McCollum.......... 44 Vice President, Marketing and Sales
Timothy R. Maier........... 49 Vice President, Chief Financial Officer
David M. Patino............ 53 Vice President, Regulatory and Clinical Affairs
Douglas H. Post............ 46 Vice President, Operations and Customer Support
</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
October 1994, Mr. Logan was Chairman of the Board, President and Chief Executive
Officer of Insmed Pharmaceuticals, Inc., a development-stage biopharmaceutical
company based in Charlottesville, Virginia. From 1967 to 1992, Mr. Logan held
various senior management positions with Bausch & Lomb, Inc., Becton Dickinson &
Company, and American Home Products Corporation. His responsibilities have
included both medical devices and pharmaceuticals, and domestic and
international assignments.
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.
Carol F. H. Harner, Ph.D. Dr. Harner has been Vice President, Research and
Development, since December 1997. Prior to joining VISX, she was Vice President,
Scientific Affairs of Collagen Corporation, and President of CollOptics, Inc., a
subsidiary of Collagen Corporation. Before joining Collagen Corporation, Dr.
Harner held senior management and scientific positions at Chiron Ophthalmics
Inc. from 1986 to 1993, and Coopervision Surgical, from 1984 to 1986. Prior to
that time, she was in academia for 13 years. Dr. Harner received both her Ph.D.
in Molecular Biology and B.S. in Molecular Biology from the University of Utah.
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.
40
<PAGE> 42
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.
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 1998
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 1998 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 1998 Proxy Statement sections "Further Information
Concerning the Board of Directors" and "Executive Compensation."
41
<PAGE> 43
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, 1997:
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets................................. 23
Consolidated Statements of Operations....................... 24
Consolidated Statements of Stockholders' Equity............. 25
Consolidated Statements of Cash Flows....................... 26
Notes to Consolidated Financial Statements.................. 27
Report of Independent Public Accountants.................... 39
</TABLE>
2. The following financial statement schedule is filed as part of this
report:
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying Accounts....... 43
</TABLE>
3. The Exhibits filed as a part of this Report are listed in the Index to
Exhibits.
(B) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the fourth
quarter of 1997.
(C) EXHIBITS. See Index to Exhibits.
(D) FINANCIAL STATEMENT SCHEDULES. See Item 14(a)(2), above.
42
<PAGE> 44
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>
ADDITIONS
CHARGED TO
BALANCE AT --------------------
START OF COSTS & OTHER BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
----------- ---------- -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Allowance for bad debts............. $ -- $ -- $-- $-- $ --
YEAR ENDED DECEMBER 31, 1996
Allowance for bad debts............. -- 600 -- -- 600
YEAR ENDED DECEMBER 31, 1997
Allowance for bad debts............. 600 253 -- 39 814
</TABLE>
43
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VISX, Incorporated
a Delaware corporation
By: /s/ MARK B. LOGAN
------------------------------------
Mark B. Logan
Chairman of the Board, President
and Chief Executive Officer
Date: March 27, 1998
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 27, 1998
- --------------------------------------------- Chief Executive Officer and
Mark B. Logan Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ TIMOTHY R. MAIER Vice President, Chief Financial March 27, 1998
- --------------------------------------------- Officer
Timothy R. Maier
ADDITIONAL DIRECTORS:
/s/ ELIZABETH H. DAVILA Executive Vice President, Chief March 27, 1998
- --------------------------------------------- Operating Officer, and Director
Elizabeth H. Davila
/s/ GLENDON E. FRENCH Director March 27, 1998
- ---------------------------------------------
Glendon E. French
/s/ JOHN W. GALIARDO Director March 27, 1998
- ---------------------------------------------
John W. Galiardo
/s/ RICHARD B. SAYFORD Director March 27, 1998
- ---------------------------------------------
Richard B. Sayford
</TABLE>
44
<PAGE> 46
VISX, INCORPORATED
INDEX TO EXHIBITS
[ITEM 14(C)]
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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* Stock Option Plan (previously filed as Exhibit 10(E) to Form
S-1 Registration Statement No. 33-23844)
10.2* 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)
10.3* 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)
10.4* 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)
10.5* General Partnership Agreement of Pillar Point Partners dated
June 3, 1992, between VISX Partner, Inc. and Summit Partner,
Inc. (previously filed as Exhibit 10.2 to Form 8-K dated
June 3, 1992)
10.6* 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)
10.7* 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)
10.8* 1993 Flexible Stock Incentive Plan (previously filed as
Exhibit 10.28 to Annual Report on Form 10-K dated March 30,
1993)
10.9* 1993 Employee Stock Purchase Plan (previously filed as
Exhibit 10.29 to Annual Report on Form 10-K dated March 30,
1993)
10.10* Form of Subscription Agreement (previously filed as Exhibit
10.24 to Form 10-K for the year ended December 31, 1994)
10.11* 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)
10.12*+ 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)
10.13* 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)
10.14* 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)
10.15* 1995 Stock Plan (previously filed as Exhibit 10.2 to
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996)
10.16* 1995 Director Option Plan (previously filed as Exhibit 10.1
to Quarterly Report on Form 10-Q for the quarter ended June
30, 1996)
10.17* 1996 Supplemental Stock Plan (previously filed as Exhibit
10.3 to Form S-8 Registration Statement No. 333-23999)
</TABLE>
45
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.18*+ Settlement Agreement dated June 17, 1997 (previously filed
as Exhibit 99.1 to Current Report on Form 8-K dated June 17,
1997)
21.1 Subsidiaries
23.1 Consent of Independent Public Accountants
27.1 Financial Data Schedule (EDGAR-filed version only)
</TABLE>
- ---------------
* Previously filed.
+ Confidential Treatment has been requested and granted for certain portions of
this exhibit.
46
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
------------------ -----------------------------
<S> <C>
VISX Partner, Inc........................................... Delaware
VISX JAPAN K.K.............................................. Japan
</TABLE>
<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 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 29,952
<SECURITIES> 70,881
<RECEIVABLES> 17,292
<ALLOWANCES> (814)
<INVENTORY> 4,747
<CURRENT-ASSETS> 123,933
<PP&E> 8,154
<DEPRECIATION> (4,122)
<TOTAL-ASSETS> 130,352
<CURRENT-LIABILITIES> 20,053
<BONDS> 0
0
0
<COMMON> 155
<OTHER-SE> 110,144
<TOTAL-LIABILITY-AND-EQUITY> 130,352
<SALES> 34,393
<TOTAL-REVENUES> 68,631
<CGS> 20,598
<TOTAL-COSTS> 20,598
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 253
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,019
<INCOME-TAX> 1,922
<INCOME-CONTINUING> 14,097
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,097
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.89
</TABLE>
