<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission File Number 1-10694
---------------------------------
VISX, INCORPORATED
(Exact name of registrant as specified in its charter)
---------------------------------
DELAWARE 06-1161793
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
3400 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051-0703
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (408) 733-2020
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 [ ]
Total number of shares of common stock outstanding as of July 31, 1999:
63,755,660
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VISX, INCORPORATED
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Condensed Consolidated Interim Balance Sheets as 3
of June 30, 1999 and December 31, 1998
Condensed Consolidated Interim Statements of Operations for the 4
Three Months Ended June 30, 1999 and 1998 and for the Six Months
Ended June 30, 1999 and 1998
Condensed Consolidated Interim Statements of Cash Flows for the 5
Six Months Ended June 30, 1999 and 1998
Notes to Condensed Consolidated Interim Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview 8
Results of Operations 8
Liquidity and Capital Resources 9
Year 2000 Disclosure 10
Business Risks and Fluctuations in Quarterly Results 11
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 12
ITEM 4. Submission of Matters to a Vote of Security Holders 14
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
VISX, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
(unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ................................ $ 62,995 $ 29,870
Short-term investments ................................... 126,367 86,669
Accounts receivable, net of allowance for doubtful
accounts of $1,695 and $1,620, respectively ............ 36,426 27,822
Inventories .............................................. 9,076 6,820
Deferred tax assets and prepaid expenses ................. 20,895 15,457
----------- -----------
Total current assets .................................. 255,759 166,638
PROPERTY AND EQUIPMENT, NET ................................. 5,150 4,318
OTHER ASSETS ................................................ 6,380 5,663
----------- -----------
$ 267,289 $ 176,619
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ......................................... $ 6,909 $ 3,682
Accrued liabilities ...................................... 39,635 33,948
----------- -----------
Total current liabilities ............................. 46,544 37,630
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock:
$.01 par value, 180,000,000 shares authorized;
63,636,948 and 62,070,032 shares issued, respectively .. 636 621
Additional paid-in capital ............................... 173,855 137,334
Treasury stock, at cost: 0 and 471,928 shares,
respectively ........................................... -- (4,581)
Accumulated comprehensive income (loss) .................. (430) 188
Retained earnings ........................................ 46,684 5,427
----------- -----------
Total stockholders' equity ........................... 220,745 138,989
----------- -----------
$ 267,289 $ 176,619
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
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VISX, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
System sales ............................. $ 14,848 $ 9,435 $ 26,762 $ 16,995
License, service and other revenues ...... 47,655 22,228 89,690 38,978
----------- ----------- ----------- -----------
Total revenues ......................... 62,503 31,663 116,452 55,973
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of revenues ......................... 12,496 7,477 23,093 13,307
Marketing, general and administrative .... 12,968 6,956 22,061 12,654
Research, development and regulatory ..... 3,316 2,806 6,951 5,217
----------- ----------- ----------- -----------
Total costs and expenses ............... 28,780 17,239 52,105 31,178
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS ...................... 33,723 14,424 64,347 24,795
Interest and other income ................ 2,532 1,380 4,414 2,801
Litigation settlement .................... -- (35,000) -- (35,000)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES ......................... 36,255 (19,196) 68,761 (7,404)
Provision (benefit) for income taxes ..... 14,729 (3,867) 27,504 (1,037)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ........................... $ 21,526 $ (15,329) $ 41,257 $ (6,367)
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE
Basic .................................... $ 0.34 $ (0.25) $ 0.66 $ (0.10)
=========== =========== =========== ===========
Diluted .................................. $ 0.32 $ (0.25) $ 0.61 $ (0.10)
=========== =========== =========== ===========
SHARES USED FOR EARNINGS (LOSS) PER SHARE
Basic .................................... 63,283 60,760 62,711 60,813
=========== =========== =========== ===========
Diluted .................................. 68,185 60,760 67,522 60,813
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
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VISX, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................. $ 41,257 $ (6,367)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ............................... 1,435 973
Increase (decrease) in cash flows from changes in
operating assets and liabilities:
Accounts receivable ...................................... (8,604) (3,826)
Inventories .............................................. (2,256) (1,139)
Deferred tax assets and prepaid expenses ................. (5,438) (2,789)
Other assets ............................................. (1,031) (1,714)
Accounts payable ......................................... 3,227 310
Accrued liabilities ...................................... 5,687 4,077
----------- -----------
Net cash provided by (used in) operating activities ......... 34,277 (10,475)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................... (1,953) (616)
Purchase of short-term investments ............................. (87,322) (59,372)
Proceeds from maturities of short-term investments ............. 47,016 70,496
----------- -----------
Net cash provided by (used in) investing activities ......... (42,259) 10,508
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options, including income tax benefit ........ 45,317 5,857
Repurchase of common stock ..................................... (4,210) (9,770)
----------- -----------
Net cash provided by (used in) financing activities ......... 41,107 (3,913)
----------- -----------
Net increase (decrease) in cash and cash equivalents .............. 33,125 (3,880)
Cash and cash equivalents, beginning of period .................... 29,870 29,952
----------- -----------
Cash and cash equivalents, end of period .......................... $ 62,995 $ 26,072
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
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VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION:
We prepared our Condensed Consolidated Interim Financial Statements in
conformity with Securities and Exchange Commission rules and regulations.
Accordingly, we condensed or omitted certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles. Please read our 1998 Annual
Report and Form 10-K to gain a more complete understanding of these interim
financial statements.
We included in these interim financial statements all adjustments
(consisting primarily only of normal recurring adjustments) necessary to present
fairly our results for the interim period. Our interim financial statements have
not been audited.
2. EARNINGS PER SHARE:
Basic earnings per share ("EPS") equals net income divided by the
weighted average number of common shares outstanding. Diluted EPS equals net
income divided by 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>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) ....................................... $ 21,526 $ (15,329) $ 41,257 $ (6,367)
=========== =========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) available to common shareholders ......... $ 21,526 $ (15,329) $ 41,257 $ (6,367)
Weighted average common shares outstanding ............. 63,283 60,760 62,711 60,813
----------- ----------- ----------- -----------
Basic Earnings (Loss) Per Share ........................ $ 0.34 $ (0.25) $ 0.66 $ (0.10)
=========== =========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) available to common shareholders ......... $ 21,526 $ (15,329) $ 41,257 $ (6,367)
----------- ----------- ----------- -----------
Weighted average common shares outstanding ............. 63,283 60,760 62,711 60,813
Dilutive potential common shares from stock options .... 4,902 -- 4,811 --
----------- ----------- ----------- -----------
Weighted average common shares and dilutive potential
common shares ....................................... 68,185 60,760 67,522 60,813
----------- ----------- ----------- -----------
Diluted Earnings (Loss) Per Share ...................... $ 0.32 $ (0.25) $ 0.61 $ (0.10)
=========== =========== =========== ===========
</TABLE>
Options to purchase 18,000 shares and 59,000 shares outstanding during
the three and six month periods ended June 30, 1999, respectively, were excluded
from the computation of diluted EPS because the options' exercise prices were
greater than the average market price of the Company's common stock during these
periods. All options outstanding during the three and six months ended June 30,
1998 were excluded from the computation of diluted earnings per share because
the effect of including them would have been antidilutive.
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3. INVENTORIES (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
Raw materials and subassemblies ... $ 4,646 $ 3,183
Work in process ................... 3,718 2,869
Finished goods .................... 712 768
----------- -----------
Total ........................... $ 9,076 $ 6,820
=========== ===========
</TABLE>
4. COMPREHENSIVE INCOME (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) ............................. $ 21,526 $(15,329) $ 41,257 $ (6,367)
OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized holding gains (losses) on
available-for-sale securities ............. (361) 18 (608) (25)
Change in accumulated foreign currency
translation adjustment .................... (13) -- (10) --
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) ................... $ 21,152 $(15,311) $ 40,639 $ (6,392)
======== ======== ======== ========
</TABLE>
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133") which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It requires
that we recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. We
are required to adopt SFAS No. 133 in the first quarter of 2001. We do not
expect the impact of adopting SFAS No. 133 to have a material effect on our
financial position or results of operations.
6. STOCK SPLITS
On April 14, 1999 our Board of Directors approved a two-for-one stock
split (in the form of a 100% stock dividend) to shareholders of record on April
27, 1999 which was issued on May 13, 1999. On December 17, 1998 our Board of
Directors approved a two-for-one stock split (in the form of a 100% stock
dividend) to shareholders of record on December 28, 1998 which was issued on
January 14, 1999. We have adjusted all references to share and per share data
for all periods presented to give effect for both of these stock splits.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In our Management's Discussion and Analysis of Financial Condition and
Results of Operations we review our past performance and, where appropriate,
state our expectations about future activity in forward-looking statements. Our
future results may differ from our expectations. We have described our business
and the challenges and risks we may face in the future in Items 1 and 3 of our
1998 Annual Report and Form 10-K and under "Business Risks and Quarterly
Fluctuations" below. Please read these items carefully.
OVERVIEW
We develop products and procedures to improve people's eyesight using
lasers. Our principal product, the VISX STAR S2(TM) Laser System ("VISX
System"), is designed to correct the shape of a person's eyes to reduce or
eliminate their need for eyeglasses or contact lenses. The Food and Drug
Administration ("FDA") has approved the VISX System for use in the treatment of
most types of refractive vision disorders including nearsightedness,
farsightedness, and astigmatism. We sell VisionKey(R) cards to control the use
of the VISX System and to collect license fees for the use of our proprietary
technology.
The laser vision correction industry is evolving rapidly. New
developments could harm our business in the future. We may face increased
competition from manufacturers of other laser vision correction systems (several
have now received FDA approval) or new competition from non-laser methods for
correcting a person's vision. Further, patients' and doctors' enthusiasm for
laser vision correction may decline in the future. In addition, we may not be
able to enforce our current patent rights or collect license fees due to adverse
determinations in current and future patent and antitrust litigation. All of
these factors may cause orders for VISX Systems and VisionKey(R) cards to
fluctuate. Accordingly, our past results may not be useful in predicting our
future results.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ---------------------------------------
REVENUES (000's) 1999 1998 Change 1999 1998 Change
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
System sales ................ $ 14,848 $ 9,435 57% $ 26,762 $ 16,995 57%
Percent of total revenues 23.7% 29.7% 22.9% 30.4%
License, service & other
revenues ................ 47,655 22,228 114% 89,690 38,978 130%
Percent of total revenues 76.3% 70.3% 77.1% 69.6%
Total ....................... $ 62,503 $ 31,663 97% $116,452 $ 55,973 108%
</TABLE>
We sold substantially more VISX Systems in the second quarter and first
half of 1999 than in the comparable periods of 1998. The increase occurred
primarily in the United States, while sales in international markets rose more
modestly. We believe that U.S. doctors and laser centers increased purchases of
VISX Systems in response to rising consumer demand for laser vision correction
and popular acceptance of the VISX System. Partially offsetting the increase in
unit sales, our average U.S. selling price for a VISX System was lower than in
the prior year. This was due to a variety of factors including allowances for
the trade-in of a competitor's laser, discounts for a second laser at an
existing location, volume purchase incentives, and general price reductions. The
overall average selling price of a system in international markets remained
consistent in 1999 compared to the prior year.
License fees from procedures in the United States generated most of the
increase in license, service and other revenues in 1999 over 1998. We believe
these procedures increased because laser vision correction has become
increasingly well known and popular among consumers.
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<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------ ----------------------------------------
COSTS & EXPENSES (000's) 1999 1998 Change 1999 1998 Change
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cost of revenues ............ $ 12,496 $ 7,477 67% $ 23,093 $ 13,307 74%
Percent of total revenues 20.0% 23.6% 19.8% 23.8%
Marketing, gen'l and admin .. 12,968 6,956 86% 22,061 12,654 74%
Percent of total revenues 20.7% 22.0% 18.9% 22.6%
R&D and regulatory .......... 3,316 2,806 18% 6,951 5,217 33%
Percent of total revenues 5.3% 8.9% 6.0% 9.3%
</TABLE>
Cost of revenues increased in the second quarter and first half of 1999
over the comparable periods of the prior year because we sold more systems and
serviced a larger installed base of systems. Marketing, general and
administrative expenses grew in 1999 over the comparable periods of the prior
year due to a variety of factors. We increased spending on marketing programs
directed towards eye care professionals. We also completed planning and design
work for our consumer marketing campaign for launch in July. We anticipate
spending approximately $11 million on this marketing campaign in 1999. Further,
our legal expenses increased significantly over the comparable periods of the
prior year as the result of the Federal Trade Commission (FTC) administrative
action, the International Trade Commission (ITC) trial regarding its
investigation of Nidek Co., Ltd., and other patent litigation. In research and
development, our efforts were directed mainly at developing new capabilities for
current and planned new products. We continued to conduct clinical studies and
prepare submissions designed to obtain additional approvals from the FDA and
regulatory authorities in other countries. We anticipate that research,
development and regulatory expenses could increase to $16 million for 1999.
Interest income increased because we have continued to generate cash
from operations and have invested this in additional interest bearing
securities. We have accrued income taxes based on our expected effective income
tax rate for all of 1999, net of credits anticipated.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments ("cash") and working
capital were as follows.
<TABLE>
<CAPTION>
(000's)
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Cash, cash equivalents and short-term
investments ......................... $ 189,362 $ 116,539
Working capital ..................... 209,215 129,008
</TABLE>
Cash increased $72,823,000 due mainly to net income and the exercise of
stock options. Approximately $9 million was generated from the exercise of stock
options. In addition, our income tax payments have been reduced by approximately
$27 million in the first six months of 1999 as the result of tax deductions
arising from exercises of non-qualified stock options and disqualifying
dispositions of stock purchased under incentive stock options. This amount was
credited directly to additional paid in capital.
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.
We anticipate that our current cash, cash equivalents and short-term
investments, as well as anticipated cash flows from operations, will be
sufficient to meet our working capital and capital equipment needs at least
through the next twelve months.
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YEAR 2000 DISCLOSURE
We are aware that some information technology ("IT") systems may not
function properly at the onset of the year 2000. These systems record only the
last two digits of a date's year instead of the full four digits. For example,
they would record "00" as the year for dates in both 1900 and 2000. This could
cause such systems to process and record information incorrectly or possibly
fail to function in the year 2000.
State of Readiness
Our products, operations, customers, suppliers and service providers all
rely on IT systems, both hardware and software, to function properly. They
include readily apparent systems such as those controlling our VISX Systems as
well as less obvious systems such as those imbedded in the security apparatus
that protects our main facility.
Products: We have evaluated the performance of the STAR S2(TM),
STAR(TM), and 2020B(TM) Excimer Laser Systems and concluded that none has any
problems related to system performance, safety, efficacy, or printer equipment
interface as a result of handling dates in the year 2000 or beyond. However, we
determined that these laser systems do not properly print or store patient
report dates for procedures performed in the year 2000 or beyond. We have
developed software revisions which correct this problem for the STAR S2(TM),
STAR(TM), and 2020B(TM) Excimer Laser Systems. We will provide the software
revisions free to all customers and they can be self-installed by any STAR
S2(TM) or STAR(TM) customer and most 2020B(TM) customers. In the U.S. we expect
all customers will update their systems by September 30, 1999. In international
markets we will make these software revisions available to all customers and
distributors, though we will not know where it is installed since service is
provided by our distributors.
Suppliers: We have sent a survey to all of our suppliers inquiring about
the ability of their systems and products to properly handle dates for the year
2000 and beyond. We have received responses from approximately one half of our
suppliers and, in general, they have or expect to have implemented any upgrades
and fixes necessary to their systems and products. We will follow up on vendors
who have not returned their surveys or who do not anticipate having solutions in
place before 2000. If suppliers do not reply or cannot comply, we may need to
locate alternative sources for critical parts and services. We anticipate that
we will be able to locate and contract with alternative suppliers if necessary.
Operations: Our internal IT systems, listed below, include a variety of
equipment and software to process and store both voice and data information.
- LAN and WAN infrastructure which is used to link users and
internal and external systems and networks
- Desktop and laptop computers and related software
- PBX, voicemail, and fax systems
Based on information supplied by the vendors of each of the major
elements of these systems, we determined what changes, if any, were necessary to
make the products year 2000 compliant. With limited exceptions, we have
installed all upgrades and new equipment and software identified as necessary by
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vendors. During the third quarter of 1999 we plan to test the year 2000
compliance of our current configuration on a back-up set of equipment we have
installed.
We use our enterprise resource planning ("ERP") system to help manage
manufacturing, sales, customer service, accounting activities and prepare
financial reports. Based on representations from vendors, all elements of our
current ERP system are year 2000 compliant except for our database software. An
upgrade to our database software is available which is year 2000 compliant. We
intend to test and implement this along with other upgrades to our ERP system in
the third quarter of 1999.
With regard to our facility, providers of key services have represented
that their products and services will function properly when handling dates for
the year 2000 and beyond.
Costs to Address Year 2000 Issues
We have spent no more than $750,000 to date identifying, developing and
testing solutions to year 2000 issues. We estimate that we will spend
approximately an additional $500,000 to complete testing and implementation of
upgrades and new equipment to make all major internal systems and our products'
systems capable of properly handling dates in the year 2000 and beyond. However,
we may spend more money than we have estimated and this could have a material
adverse effect on our results of operations and financial condition.
Contingency Plans
When we complete our internal reviews and external surveys we will
prepare contingency plans to prepare for problems that we believe are reasonably
likely to arise. However, despite our best efforts, we may not anticipate all
problems that may ultimately arise.
Risks of Year 2000 Issues
We will continue preparations with the goal of ensuring that our
products, operations and suppliers will recognize dates and function properly in
the year 2000 and beyond. However, unanticipated problems could affect the
operation of our products, interrupt or prevent deliveries from suppliers, or
disrupt our delivery of service or VisionKey(R) cards to our customers at the
onset of the year 2000. As a result, we could suffer a material adverse impact
to our business, financial position and results of operation due to a loss of
revenue, legal claims or extra expenses caused by unanticipated year 2000
computer problems.
BUSINESS RISKS AND FLUCTUATIONS IN QUARTERLY RESULTS
Our results of operations have varied widely in the past, and they could
continue to vary significantly from quarter to quarter due to a number of
factors, including:
- Public and market acceptance of laser vision correction as a
preferred means of vision correction;
- Developments in antitrust litigation to which we are currently a
party, including legal actions brought against us by private
parties and legal actions pending before the FTC;
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- Developments in patent litigation that we have initiated against
certain of our competitors, particularly to the extent that
adverse developments in these proceedings could limit our
ability to collect license fees from sellers and users of laser
vision correction equipment;
- Developments in patent litigation in which we are a defendant,
particularly to the extent that adverse developments in these
proceedings render certain of our patents invalid or
unenforceable, which would reduce the scope of proprietary
protection available to us and could limit our ability to
collect license fees from sellers and users of laser vision
correction equipment, which could have a material adverse effect
on our business, financial condition and results of operations;
- The receipt by additional competitors of FDA approval to market
laser vision correction systems in the United States,
particularly to the extent that such competitors do not obtain
licenses under VISX's patents;
- The receipt by competitors of FDA approvals to market their
laser vision correction systems for the treatment of additional
types of refractive vision disorders.
- The proliferation of unapproved lasers which are used to perform
laser vision correction as well as any increase in the number of
physician investigational device exemptions issued by the FDA
for laser vision correction equipment; and
- The introduction of new methods for vision correction which
render our products less competitive or obsolete.
Please also read Items 1 and 3 in our 1998 Annual Report and Form 10-K
where we have described our business and the challenges and risks we may face in
the future.
Our revenue growth rates may not be sustainable. Any shortfall in
revenues, particularly in license fees, would have an immediate impact on our
earnings per share, which could adversely affect the market price of our common
stock. Our operating expenses, which include sales and marketing, research and
development and general and administrative expenses, are based on our
expectations of future revenues and are relatively fixed in the short term.
Accordingly, if revenues fall below our expectations, we will not be able to
reduce our spending rapidly in response to such a shortfall. This will adversely
affect our operating results. Due to the foregoing factors, we believe that
quarter-to-quarter comparisons of our results of operations are not a good
indication of our future performance.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes during the six months ended June 30, 1999
to our exposure to market risk for changes in interest rates and foreign
currency exchange rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The patents owned by VISX are being challenged on several fronts.
Generally, the litigation and other proceedings center on the validity or
enforceability of the patents, and on whether infringement of the patents has
occurred. In addition, VISX's use of patents and its business practices are
being contested in several proceedings as violations of antitrust laws. The
results of these complex legal proceedings are very difficult to predict with
certainty. Because a number of the proceedings have issues
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in common, an adverse determination in one proceeding could lead to adverse
determinations in one or more of the other pending proceedings. Adverse
determinations in any of these proceedings could limit our ability to collect
equipment and use fees in certain markets and could have a material, adverse
effect on our business, financial position and results of operations. For a
complete description of legal proceedings, see VISX's annual report on Form 10-K
for the year ended December 31, 1998 and report on Form 10-Q for the quarter
ended March 31, 1999. During the quarter ended June 30, 1999, there were no
material developments with respect to such previously existing proceedings and
no new material proceedings not previously disclosed, except as follows:
FEDERAL TRADE COMMISSION PROCEEDINGS
In the complaint filed on March 24, 1998, the Federal Trade Commission
(FTC) had challenged the enforceability of certain VISX patents. On June 4, 1999
the FTC released the initial decision of its administrative law judge dismissing
the remaining portions of the FTC's complaint against VISX. On June 21, 1999 the
FTC attorneys filed notice that they will appeal the judge's decision to the FTC
Commissioners. The Commissioners are expected to review the case and issue a
final decision within approximately 12-18 months of the filing of the notice of
appeal. VISX plans to appeal any adverse Commission decision to a federal court
of appeals. A determination by the FTC that certain VISX patents are
unenforceable could reduce the breadth of our patent coverage. This, in turn,
could have a material adverse effect on our business, financial position and
results of operations.
ANTITRUST CLASS ACTIONS
Since the commencement of the FTC administrative proceedings on March
24, 1998, a large number of purported class actions have been filed against VISX
and others alleging, among other things, violations of various state and federal
antitrust laws. An additional action filed on behalf of certain physicians,
captioned Freedom Vision Laser Center, LP v. VISX, Incorporated et al. (USDC AZ
MDL No. 1202 May 28, 1999), has been transferred to the Multi-District
Litigation pending in federal court in Arizona (the "MDL"). In that case, the
plaintiffs allege, among other things, violations of federal and state antitrust
laws and are seeking unspecified damages and injunctive relief. The case
captioned Camp v. Summit Technology, Inc. et al. (USDC AZ MDL No. 1202 Mar. 26,
1998) which had been pending in the MDL has been dismissed. The complaint in the
case captioned Antoine L. Garabet, M.D. Inc. et al. v. Pillar Point Partners, et
al. (USDC AZ MDL No. 1202) has been dismissed against defendants VISX, VISX,
Inc., Stephen L. Trokel, and Pillar Point Partners. The remainder of the
purported class actions alleging violations of antitrust laws are still in the
early stages. Although we believe VISX has meritorious defenses to the claims
presented in these actions and intend to defend them vigorously, it is too early
to estimate their outcome. Adverse determinations in one or more of these cases
could give rise to significant monetary damages and could limit VISX's ability
to collect license fees which, in turn, would adversely affect VISX's business,
financial position and results of operations.
PATENT LITIGATION: NIDEK AND USERS OF NIDEK LASERS
The International Trade Commission (ITC) has set a trial date of August
18, 1999 in its investigation of Nidek and its United States subsidiaries based
on the complaint filed with the ITC by VISX on January 22, 1999 (Investigation
No. 337-TA-419). The trial is expected to last approximately 10 days. Assuming
there are no changes to the trial schedule, the ITC administrative law judge is
expected to issue her initial determination by December 1, 1999. The final
determination of the ITC is expected to be made no later than March 1, 2000. The
ITC determination is subject to Presidential Review and may be appealed to the
Federal Circuit Court of Appeals. While we believe that the patents asserted
against Nidek in this action are infringed by the Nidek laser vision correction
system and are
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<PAGE> 14
valid and enforceable and we will vigorously defend Nidek's claims to the
contrary, there can be no assurance as to the outcome of this case.
The action filed by VISX against Nidek in the United States District
Court in Northern California on December 18, 1998 (USDC ND Cal C98-04842)
alleging, among other things, that Nidek's laser vision correction systems
infringe certain VISX patents has been stayed pending the outcome of the ITC
proceeding described above. In addition, the action filed by Nidek against VISX
in the United States District Court in Northern California on March 30, 1999
(USDC ND Cal VISX) alleging, among other things, that VISX's use of patents
allegedly obtained though inequitable conduct violates certain antitrust laws
has also been stayed pending the outcome of the ITC proceeding.
On May 19, 1999 VISX filed two additional actions against users of
Nidek's laser system. VISX, Incorporated v. Southwest Eye Care Center, Inc. et
al (USDC SD Cal 99 CV 1029H JFS) and VISX, Incorporated v. Antoine L. Garabet
et. al (USDC CD Cal 99-05284 SVW). In each case, VISX alleges, among other
things, that the defendants' use of the Nidek laser system infringes VISX's
United States Patent Number 4,665,913. VISX recently filed a reply in the
Garabet case adding Nidek Incorporated, one of Nidek's United States
subsidiaries, as a defendant and asserting claims that the defendants have also
infringed VISX's United States Patent Number 5,735,843. Trial in the Garabet
case is scheduled to begin on January 11, 2000. In each case, VISX is seeking
treble (three times) damages and injunctive relief. These cases are in the
pleading stages and discovery has not yet begun. While VISX believes that the
patents asserted in these cases are valid and infringed by the defendants,
patent litigation is inherently uncertain and there can be no assurances as to
their outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
a) We held our Annual Meeting of Stockholders on May 12, 1999.
b) The stockholders voted as follows on the election of all six members of
the Board of Directors. There were no abstentions or non-votes for any
nominee and all six were elected as directors.
<TABLE>
<CAPTION>
Name For Against
---- --- -------
<S> <C> <C>
Elizabeth H. Davila 55,614,506 205,718
Glendon E. French 55,614,168 206,056
John W. Galiardo 55,613,542 206,682
Jay T. Holmes 55,610,382 209,842
Mark B. Logan 55,615,450 204,774
Richard B. Sayford 55,608,642 211,582
</TABLE>
c) The stockholders voted as follows on a proposal to increase VISX's
authorized stock (par value $0.01) from 90,000,000 shares to 180,000,000
shares.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
51,933,740 3,807,600 78,884
</TABLE>
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<PAGE> 15
d) The stockholders voted as follows on a proposal to extend the term of
the 1995 Director Option Plan which covers the granting of stock options
to members of VISX's Board of Directors.
<TABLE>
<CAPTION>
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C>
27,117,114 15,919,820 139,672 12,643,618
</TABLE>
e) The stockholders voted as follows on a proposal to extend the term of
the 1995 Stock Plan which covers the granting of stock options to VISX
employees and consultants.
<TABLE>
<CAPTION>
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C>
16,198,888 26,467,626 143,682 13,010,028
</TABLE>
f) The stockholders voted as follows on a proposal to ratify the
appointment of Arthur Andersen LLP as independent public accountants of
the Company for 1999.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
55,742,312 22,524 55,388
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
<TABLE>
<S> <C>
Ex. 27 Financial Data Schedule
</TABLE>
b) Reports on Form 8-K.
VISX filed one report on Form 8-K/A during or after the period covered
by this report, as follows:
(i) Report on Form 8-K/A filed on July 28, 1999 for the purpose of
updating the Exhibit attached thereto following discussions with the
staff of the Securities and Exchange Commission regarding the Company's
request for confidential treatment of certain portions of the Exhibit.
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<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
VISX, Incorporated
------------------
(Registrant)
August 9 , 1999 /s/Mark B. Logan
(Date) -------------------------------
Mark B. Logan
Chairman of the Board and
Chief Executive Officer
August 9 , 1999 /s/Timothy R. Maier
(Date) -------------------------------
Timothy R. Maier
Executive Vice President and
Chief Financial Officer (principal
financial officer)
August 9 , 1999 /s/Derek A. Bertocci
(Date) -------------------------------
Derek A. Bertocci
Vice President, Controller (principal
accounting officer)
</TABLE>
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<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
Ex. 27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 62,995
<SECURITIES> 126,367
<RECEIVABLES> 38,121
<ALLOWANCES> (1,695)
<INVENTORY> 9,076
<CURRENT-ASSETS> 255,759
<PP&E> 12,264
<DEPRECIATION> (7,114)
<TOTAL-ASSETS> 267,289
<CURRENT-LIABILITIES> 46,544
<BONDS> 0
0
0
<COMMON> 636
<OTHER-SE> 220,109
<TOTAL-LIABILITY-AND-EQUITY> 267,289
<SALES> 26,762
<TOTAL-REVENUES> 116,452
<CGS> 23,093
<TOTAL-COSTS> 23,093
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 68,761
<INCOME-TAX> 27,504
<INCOME-CONTINUING> 41,257
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,257
<EPS-BASIC> 0.66
<EPS-DILUTED> 0.61
</TABLE>
