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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, 1998
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. Yes [X]
The aggregate market value of the voting Common Stock held by
non-affiliates of the registrant as of March 15, 1999 is approximately
$3,358,800,000. The number of shares of Common Stock outstanding as of March 15,
1999 was 31,368,535.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's Proxy Statement for its Annual Meeting
of Stockholders to be held on May 12, 1999 are incorporated by reference into
Part III of this report.
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PART I
ITEM 1. BUSINESS
THE COMPANY
VISX 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 vision. 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.
We have developed and continue to refine a substantial proprietary position
in system and application technology relating to the use of lasers for vision
correction. Our 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. VISX'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," "-- Uncertain Outcome of Antitrust and
Patent Proceedings," "-- Unapproved Lasers," "-- Manufacturing, Components and
Raw Materials," "-- Competition," "-- Year 2000 Compliance," and "-- Product
Liability and Insurance" and under "Legal Proceedings" may cause 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 that
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, experts thought it was 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
United States 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, and
farsightedness. In 1998, we estimate that approxi-
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mately 425,000 LVC procedures were performed using FDA-approved excimer laser
systems. We believe that additional procedures were performed in 1998 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. That approval was supplemented in April 1997 with
approval to correct astigmatism. In January 1998 we became the first company
ever to receive FDA approval to use a laser to treat higher myopia with or
without astigmatism. In November 1998 we received the first -- and still only --
FDA approval for the correction of hyperopia or farsightedness with a laser.
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.
Patients 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. Certain
organizations are conducting their own clinical studies involving the use of the
VISX System for LASIK.
CORNEAL PATHOLOGIES AND PTK
The VISX System also treats 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 for 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.
We estimate that VISX Systems have been used worldwide to perform
approximately 20,000 PTK procedures. Although PTK is an important medical
procedure for people who suffer from corneal pathologies, the market opportunity
represented by PTK is much 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 can perform
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 number of small 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 and that can cause
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, 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. Use of the VISX System is controlled by a proprietary
optical memory card which is sold separately. The VisionKey card is encoded with
proprietary software which is required to operate the VISX System. It also
provides the user with access to software upgrades and can facilitate the
collection of patient data. Because one VisionKey card must be used with each
procedure performed, VisionKey card sales correlate with the number of
procedures performed.
MARKETING, SALES AND DISTRIBUTION
Our marketing objective is to maximize consumer acceptance of laser vision
correction by (a) offering proven laser technology to the eyecare medical
community, and (b) providing our customers various services and programs
designed to increase their operating efficiency and effectiveness.
Marketing Programs
VISX University(SM) Management Seminars. VISX University is an educational
program designed to teach laser center decision makers how to effectively
promote and market their excimer laser practices. Five sessions were held in
1998, and five are planned for 1999. 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
participants can learn about the experiences of successful laser vision
correction marketers and can share their own experiences. We have 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 our customers at their sites and
create a customized plan with follow-up. 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.
VISX Ambassadors()TM Program. The VISX Ambassadors Program is intended to
help United States 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, we offer the laser facility up to eight free
VisionKey cards to be used to treat staff members who may become "ambassadors"
for LVC. In addition, we provide a complementary card to any United States
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 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.
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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. Approximately 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. We have referred our customers to several financial vendors who
specialize in offering and processing loans to consumers through eye care
professionals. We are not directly involved with these financing programs and do
not benefit from the financing except to the extent it contributes to growth in
procedure royalties.
Customer Support and Service
Customer Response Center. The VISX Customer Response Center is open 24
hours a day, seven days a week, and is staffed by more than 55 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. More than 35 members of the Customer
Response Center are field-based service engineers, strategically located to
respond rapidly to customer needs.
Laser Installation/Training Process. We require 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 selected by VISX to serve as a VISX Physician
Trainer. The initial training of operators or physicians is included with the
purchase of the VISX System, and we receive no profit from training courses
given throughout the United States. Instead, it is our philosophy that
ophthalmologists are uniquely qualified to train ophthalmologists, and we
authorize certified Physician Trainers to train other physicians in the proper
use of the VISX System. Over 5,600 United States ophthalmologists have been
trained to use the VISX System.
VISXPRESS(TM). At least once a month, we broadcast a fax bulletin, called
VISXPRESS, communicating 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 our
customers.
VISX on the Internet. Internet-based marketing is particularly well suited
to the demographics of our targeted audience. Its interactive capabilities
enhance the effectiveness of communications with customers and the professional
eyecare community at large. Our 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 and VISX-certified physicians;
- Clinical information resources for the physician community, including
downloadable presentations of the most recent VISX clinical results from
leading ophthalmologists worldwide;
- 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; and
- VISX University(SM) Online which gives our customers access to some of
the same valuable educational information about practice building and
marketing offered in the live VISX University seminars, but from the
convenience of their own desktop computers.
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International Sales and Marketing Strategy
Our international strategy is to establish and maintain a presence and
quality image in selected markets either directly or indirectly through
distributors. We support international markets by sponsoring speaking
engagements and attending selected exhibitions and trade shows. VISX Systems are
installed in more than 50 countries and we have contracts with more than 20
distributors worldwide who are responsible for servicing those systems. 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 may limit or disrupt future international sales. 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
VISX's profitability and continued growth depend upon broad acceptance of
LVC in the United States and key international markets. Although our results of
operations since receiving the first FDA approval in 1996 reflect an initial
level of acceptance of the procedure, future results of operations will be
largely dependent on increasing levels of market acceptance. If either the
ophthalmic community or the general population turned away from LVC as an
alternative to existing methods of treating refractive vision disorders, or if
future technologies replaced LVC, our business, financial position and results
of operations could be materially adversely affected.
Consumers may be slow to adopt laser vision correction for many reasons,
including 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 presence of lasers that have not received FDA approval.
Consumers are not likely 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 "-- 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 (an increase in the light
scattering properties of the cornea) during healing, 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 VISX's business, financial position and results of operations. See
"-- Marketing, Sales and Distribution" above.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY
VISX owns over 140 United States and foreign patents and has 70 patent
applications pending. We believe that our patents provide a substantial
proprietary position in system and application technology relating to the use of
lasers for vision correction. We are committed to protecting our proprietary
technology, however, it is possible that one or more of our patents will be
found to be invalid or unenforceable, or that a party against whom we are
asserting claims of patent infringement will be found not to be infringing our
patents. Such an outcome could have a material adverse effect on our business,
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financial position and results of operation. See "-- Uncertain Outcome of
Antitrust and Patent Proceedings" below.
Cross License between VISX and Summit. In June 1998, VISX and Summit
Technology, Inc. ("Summit") signed an agreement by which they dissolved Pillar
Point Partners ("Pillar Point) and settled all pending disputes and litigation
between the two companies. In the agreement, VISX and Summit each granted the
other a fully-paid license to its patents. The licenses granted cover, with
certain exceptions, technology acquired by the recipient of the license. If the
planned merger between Summit and Autonomous Technologies Corporation
("Autonomous") is completed, the license granted by VISX to Summit may cover the
laser system developed by Autonomous. In that event, VISX will not receive any
license revenue from the disposition or use in the United States of the
Autonomous laser system.
Other Licensing Agreements. We have licensed certain patents issued outside
of the United States to the following companies: Chiron Vision Corporation
("Chiron"), now owned by Bausch & Lomb Incorporated, Aesculap-Meditec GmbH
("Meditec"), Herbert Schwind GmbH & Co. KG ("Schwind"), Autonomous, and
LaserSight, Incorporated ("LaserSight"). Under these agreements, we receive
royalties for all international sales of Chiron, Meditec, Schwind, Autonomous,
and LaserSight equipment. In addition, Summit has taken a fully-paid license to
our 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. 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. We also have entered into a nonexclusive,
worldwide license agreement with Patlex Corporation which holds certain patents
on lasers. Under this agreement, we pay a royalty on certain laser components of
the VISX System.
Confidentiality Arrangements. We protect our proprietary technology, in
part, through confidentiality and nondisclosure agreements with employees,
consultants and other parties. Our confidentiality agreements with employees and
consultants generally contain standard provisions requiring those individuals to
assign to VISX without additional consideration inventions conceived or reduced
to practice by them while employed or retained by VISX, subject to customary
exceptions. We cannot give any assurance that employees, consultants and others
will not breach the confidentiality agreements, that we would have adequate
remedies for any breach, or that our competitors will not learn of or
independently develop our trade secrets.
UNCERTAIN OUTCOME OF ANTITRUST AND PATENT PROCEEDINGS
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 our patents could have a material adverse effect on the our
business, financial position and results of operations.
Currently, several legal proceedings are pending in which the validity and
enforceability of our patents is being challenged. These proceedings include the
FTC administrative proceeding, a number antitrust actions, and patent
infringement litigation with manufacturers of excimer laser systems and their
users. During the course of one or more of these proceedings, patents held by
VISX could be found to be invalid or unenforceable. In addition, in response to
a patent lawsuit filed by VISX and other parties, the defendants petitioned the
United States Patent and Trademark Office ("PTO") to reexamine two patents owned
by VISX. In April 1998 the PTO granted the request and the reexamination
proceeding is in process. Although we believe these two patents will survive the
reexamination, we have not yet received the first office action from the PTO. It
is possible that these two VISX patents may ultimately be found to be invalid in
whole or in part.
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In the event that patents held by VISX are found to be invalid or
unenforceable, or in the event that parties against whom VISX is asserting
patent infringement are found not to be infringing VISX's patents, our ability
to collect license fees from the parties to the litigation or from other sellers
or users of laser vision correction equipment in the United States could be
adversely affected. In either event, VISX's future results of operations could
be materially and adversely affected. For additional information and detail
regarding the patent-related legal proceedings to which VISX is a party, see
"Item 3 -- Legal Proceedings."
In addition, other companies own United States and foreign patents covering
methods and apparatus for performing corneal surgery with ultraviolet lasers.
Claims of patent infringement may in the future be asserted against VISX. The
defense and prosecution of patent proceedings is costly and involves substantial
commitments of management time. Adverse determinations in litigation or other
patent proceedings could subject VISX to significant liability to third parties.
Although patent and intellectual property disputes in the medical device field
have often been settled through licensing or similar arrangements, the costs
associated with such arrangements may be substantial and there is no guarantee
that licenses would be available to VISX.
UNAPPROVED LASERS
Following the FDA's initial approval of the VISX System for the treatment
of nearsightedness, there was a proliferation of unapproved devices available to
treat all levels of refractive vision disorders. In 1997 and 1998 the FDA took
action against the manufacture and use of these illegal laser systems. During
the same period VISX took steps to convince doctors using unapproved lasers to
convert to the VISX System. VISX has been able to trade out 15 unapproved
systems. We attribute much of this success in convincing doctors to switch to
VISX's technology to our FDA approvals for treatment of astigmatism, higher
levels of myopia, and hyperopia. Despite this success, the unchecked use of
unapproved excimer laser systems in the United States could materially and
adversely affect our future results of operations by reducing our license
revenues. We are also concerned about the use by some competitors and their
customers of certain provisions of federal law applicable to medical devices
which enable physicians to obtain a special form of investigational device
exemption ("IDE") from the FDA. Generally, IDEs are issued to enable
manufacturers of medical devices to conduct clinical trials of new products to
collect clinical data necessary to support filing of pre-market approval
applications with the FDA in order to obtain approval to market products in the
United States. A physician IDE is similar to a conventional IDE except that it
is obtained by a physician for clinical studies of a particular product by the
physician. Increased use of physician IDEs for laser vision correction
procedures, which could in turn increase the number of procedures performed with
systems used by persons who are not licensed under VISX's patents, could
materially and adversely affect our future results of operations by reducing our
license revenues.
GOVERNMENT REGULATION
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.
We manufacture our products in accordance with Good Manufacturing Practices
("GMP") regulations, which impose certain procedural and documentation
requirements with respect to manufacturing and quality assurance activities. Our
manufacturing facilities, procedures and practices have undergone and continue
to be subject to GMP compliance inspections conducted by the FDA.
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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 1998, our quality system was maintained in compliance with the QSR. On
February 3, 1998, we were certified to ISO 9001/EN46001 and on November 19, 1998
we successfully passed a regularly scheduled recertification audit. We are also
licensed to apply the CE Mark to the VISX System in accordance with the European
Medical Device Directives.
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 VISX 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, we were certified to ISO 9001/EN46001
and on November 19, 1998 VISX successfully passed a regularly scheduled
recertification audit. VISX is licensed to apply the CE Mark to the VISX System.
In Japan, we received regulatory approval for PTK from the Japanese
Ministry of Health and Welfare in May 1998. Sales of VISX Systems in Japan are,
however, expected to be limited until we receive regulatory approval for PRK.
Our application for approval of PRK (low to high myopia) was submitted to the
Ministry in October 1997 and is under review. We submitted an application for
approval of PRK with astigmatism (called "PAK" in Japan) in September 1998. We
anticipate that we could receive approval for treatment of PRK and PAK by the
end of 1999, although there can be no assurance that such an approval will be
given in that time frame or at all.
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. We buy from various independent suppliers
many components that are either standard or built to our proprietary
specifications, and then assemble these components at our California facility.
We also contract with third parties for the manufacture or assembly of certain
components. Several of these components are currently provided by a single
vendor. If any of these suppliers were to cease providing components, we would
be required to locate and contract with a substitute supplier. We could have
difficulty identifying a substitute supplier in a timely manner or on
commercially reasonable terms. If we were unable to produce the VISX System in a
cost-effective or timely manner, or if the manufacturing of VISX Systems were
interrupted, our business, financial position and results of operations could be
adversely affected.
9
<PAGE> 10
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 or
awaiting FDA approval, such as corneal implants, interocular lenses, and surgery
using different types of lasers.
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. 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 VISX, which therapies could be more medically effective
and less expensive than LVC, and could potentially render LVC obsolete. Any such
developments could have a material adverse effect on VISX's business, financial
position and results of operations.
In the United States, VISX believes that it and Summit are the leading
providers of excimer laser systems. Autonomous and Nidek received FDA approval
to commercialize their laser systems at the end of 1998. Autonomous has not
begun shipping its laser system commercially in the United States, but is
believed to be soliciting orders for shipment following the planned merger with
Summit. Nidek is actively engaged in commercializing its laser system in the
United States and does not have a license to VISX's patents. Nidek is currently
offering laser systems for sale in the United States without requiring
purchasers to pay license fees upon use of the system. VISX is pursuing several
actions against Nidek and its users for patent infringement in the United
States, and in Canada and France. See "Legal Proceedings -- Patent Litigation:
Nidek," below. VISX's principal international competitors are Chiron,
LaserSight, Meditec, Schwind, and Nidek. VISX has licensed certain of its
patents to Autonomous, Chiron, LaserSight, Meditec, and Schwind, each of which
is obligated to pay VISX royalties when it sells a system outside of the United
States. In addition, Summit has taken a fully-paid license to VISX's non-U.S.
patents.
The existence and use of unapproved laser systems also poses a competitive
threat to VISX. 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 in the amount of refractive correction they can perform, or to
the scope of advertising they can use to encourage consumers to have the
procedure. Moreover, the manufacturers and users of unapproved systems have not
taken a license to VISX's patents. As a consequence, doctors in the United
States who purchase an approved system may be put at a significant commercial
disadvantage. VISX's business, financial position, and results of operations
could be materially affected by any of these factors: loss of sales due to sales
of unapproved lasers, loss of royalty income, 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. See "-- Unapproved Lasers" above.
YEAR 2000 COMPLIANCE
See description set out in "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Year 2000 Disclosure" below.
RESEARCH AND DEVELOPMENT AND REGULATORY
VISX's research efforts have been the primary source of our products. We
intend to maintain our strong commitment to research as an essential component
of our product development effort. Toward this end, we incurred research and
development expenses, including clinical trial expenses, of $11.3 million in
1998, $10.3 million in 1997, and $8.7 million in 1996. Licensed technology
developed by outside parties is an additional source of potential products.
Assuming we are successful in adding resources planned, we
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<PAGE> 11
anticipate that research, development and regulatory expenses could grow to
approximately $16 million in 1999.
PRODUCT LIABILITY AND INSURANCE
The testing and use of human health care devices carry the potentially
significant risk of physical injury to patients. The VISX System includes
high-voltage power supplies, cryogenic subsystems, high-pressure gases, toxic
gases, and other potentially hazardous factors. We could be liable for injuries
or damage resulting from use of the VISX System, and any such liability could
exceed our resources. In addition, a claim that an injury resulted from a defect
in the VISX System, even if successfully defended, could damage our reputation.
While we have taken, and intend to continue to take, what we believe are
appropriate precautions to minimize exposure to product liability claims, there
can be no assurance that we will avoid liability. We believe that we possess
product liability, general liability and certain other types of insurance
customarily obtained by business organizations of our type, including insurance
against product liability risks associated with the testing, manufacturing, and
marketing of our products. However, a product liability or other claim in excess
of our insurance coverage could have a material adverse effect on our business,
financial position and results of operations. Additionally, we have agreed to
indemnify certain medical institutions where research was sponsored by VISX,
certain medical institutions participating in VISX's clinical studies, and
certain consultants who train Physician Trainers on behalf of VISX.
EMPLOYEES
As of December 31, 1998, VISX had 200 full-time employees, 38 temporary
employees and 21 consultants. Of the full-time employees, 100 are employed in
manufacturing and service, 47 in research and development and regulatory, and 53
in general administrative and marketing and sales positions. None of VISX's
employees is covered by a collective bargaining agreement. We believe that our
relations with 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. We believe our
facilities are sufficient to meet our current and reasonably anticipated future
requirements. We sublease 33,579 square feet of the facility to another company.
The sublease has been extended and will expire on July 31, 2000. See Note 8 of
Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
PATENT AND ANTITRUST PROCEEDINGS
OVERVIEW
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. Because
a number of the proceedings have issues 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 VISX's business, financial position and
results of operations.
FEDERAL TRADE COMMISSION PROCEEDINGS
On March 24, 1998 the Federal Trade Commission ("FTC") filed an
administrative compliant challenging the existence of Pillar Point and
challenging the enforceability of certain patents owned by VISX. On July 8, 1998
we reached a settlement with the FTC and entered into a consent decree regarding
the dissolution of Pillar Point. On March 4, 1999 the FTC entered an order
finalizing that consent decree.
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<PAGE> 12
The consent decree does not address the portion of the FTC's complaint
directed towards the enforceability of certain VISX patents. An administrative
hearing was held in December 1998 and January 1999. The administrative law judge
is expected to issue his initial decision in the matter before the end of May
1999. An appeal to the FTC from the initial decision is expected to be made by
VISX or the staff of the FTC, or both. The FTC's decision is likely to be
appealed, in turn, to a federal court of appeals. Although we believe the FTC's
claims are unfounded and we will continue to vigorously defend the
enforceability of our patents, it is not possible to predict the outcome of this
proceeding or any appeal from the decision. A determination by the FTC that
certain of our patents are unenforceable, if upheld by the federal court of
appeals, 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 operation.
ANTITRUST CLASS ACTIONS
Since the commencement of the FTC administrative proceeding on March 24,
1998, a large number of purported class actions have been filed against VISX
alleging, among other things, violations of various state and federal antitrust
laws. These cases can be divided into two categories bases on the type of class
alleged: one on behalf of purported classes of patients, and the other on behalf
of purported classes of direct purchasers.
Patient Class Actions Filed in State Court
Several actions filed in California state court on behalf of purported
classes of patients have been consolidated into one case captioned In re
PRK filed on June 12, 1998 naming VISX, VISX Partner, Inc., Summit, and
Summit Partner, Inc. as defendants. The plaintiffs in the consolidated
action allege violations of the California Business and Professions Code
(under the Cartwright Act and the Unfair Business Practices Act) on
behalf of a putative nationwide class of patients. We have been named in
one additional state court action in Florida and two additional state
court actions in Wisconsin, each filed on behalf of a purported class of
patients: Marks v. Summit Technology Inc., et al., filed on April 27,
1998 in Florida state court ; Worcester v. Summit Technology, Inc. et
al., filed on June 11, 1998 in Wisconsin state court, which was
transferred in December 1998 to the Multi-District Litigation described
below; and Karen Frankson et al. v. Pillar Point Partners et al., filed
on January 4, 1999 in Wisconsin state court, which is expected also to
be transferred to the Multi-District Litigation.
Direct Purchaser Class Actions Filed in Federal Court
In addition to the state court actions, a number of purported class
actions alleging violations of federal antitrust laws on behalf of a
purported class of direct purchasers have been filed against VISX in
federal court. All of these actions have been transferred to the
Multi-District Litigation described below. In October 1998, the Federal
District Court in the District of Arizona, the location of the
Multi-District Litigation, entered an order for consolidation of these
class actions into a case captioned The Antitrust Class Actions (USDC AZ
Oct. 21 1998).
In each of these antitrust class actions the plaintiffs are seeking unspecified
damages and injunctive relief. These cases are still in the pleading stages. The
purported classes have not yet been certified and discovery has not begun.
Although we believe we and Pillar Point have meritorious defenses to the claims
presented in these actions and intend to defend them vigorously, it is too early
to estimate their outcome. There can be no assurances that VISX will prevail in
any of these antitrust class actions. 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 future results of operations.
MULTI-DISTRICT LITIGATION INVOLVING PILLAR POINT PARTNERS
On June 4, 1998 VISX and Summit agreed to dissolve Pillar Point and settle
all pending disputes and litigation between them. However, Pillar Point
continues to be a party in a number of cases. VISX and Summit share Pillar
Point's ongoing litigation expenses and each pursues its own interests in the
pending litigation.
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<PAGE> 13
To consolidate conflicting discovery requests and save resources and
management time with respect to certain litigation involving Pillar Point
partners, a number of cases have been transferred to Multi-District Litigation
("MDL") in the Federal District Court in the District of Arizona for pretrial
proceedings. In addition to the antitrust class actions described above, the
following cases are pending in the MDL:
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 patents owned by VISX, 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, the
plaintiffs allege that the per procedure royalty charged by Pillar Point was a
violation of the Sherman Act or of corresponding state antitrust laws and seek
injunctions against alleged violations of such laws, as well as monetary
damages. In addition, certain plaintiffs are seeking a judgment that the patents
once held by Pillar Point are invalid and unenforceable.
Although we believe we and Pillar Point have meritorious defenses to the
claims presented in these actions and we intend to defend them vigorously, it is
too early to estimate their outcome. There can be no assurances that VISX or
Pillar Point will prevail in any of these actions. 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 future results of operations.
Pillar Point Partners, et al. v. Barnet Dulaney Eye Center, et al., a
patent suit initiated by Pillar Point that was pending in the MDL was settled in
January 1999 and Pillar Point Partners, et al. v. Appler, which was also pending
in the MDL, was settled in March 1998. No payments were made in connection with
either of these settlements.
PATENT LITIGATION: NIDEK
United States. On December 17, 1998 Nidek received FDA approval to market
its laser vision correction system in the United States. On December 18, 1998,
VISX filed a lawsuit in United States District Court in Northern California
alleging that Nidek's laser vision correction systems infringe VISX United
States Patent Nos. 4,718,418, 4,732,148, and 5,711,762. In the case, VISX seeks
injunctive relief and monetary damages. On January 22, 1999, VISX filed a
complaint with the United States International Trade Commission (ITC) regarding
Nidek's laser vision correction systems. On February 23, 1999, the ITC
instituted an investigation into the activities of Nidek and its United States
subsidiaries. If the ITC determines that Nidek or its subsidiaries imported and
sold laser vision correction systems that infringe VISX-owned patents, the ITC
may issue an order prohibiting the importation, sale, and service of the Nidek
laser system and its component parts in the United States. Nidek has filed
counterclaims in the District Court action attacking the validity and
enforceability of the patents asserted, and we anticipate that Nidek will make
similar arguments in the ITC proceeding. While we believe that the patents
asserted in these cases are valid and enforceable and will vigorously defend any
contrary claims, there can be no assurance as to the outcome of these cases.
Adverse determinations in one or both of these suits could limit VISX's ability
to collect equipment and use royalties in the United States from Nidek as well
as
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<PAGE> 14
from other sellers of and users of laser vision correction systems. Any such
adverse determination would adversely affect VISX's license revenues and
therefore its future results of operations.
International. VISX is a party to patent-related litigation against Nidek
in Canada and France. These proceedings, which allege patent infringement by
Nidek and certain of its distributors and customers, were filed by VISX in
February 1994 (Canada) and May 1997 (France). The defendants have contested
VISX's infringement claims as well as the validity of VISX's patents. Trial in
the Canadian proceeding is expected to take place in 1999. The proceeding in
France is currently in the pleading stage. It is not possible to predict the
outcome of either case. However, VISX believes that the invalidity claims
asserted by Nidek are without merit, and intends to vigorously enforce its
patents and defend their validity. Adverse determinations in one or both of
these lawsuits could limit VISX's ability to collect royalties in certain
markets. Any such adverse determination could therefore adversely affect VISX's
future results of operations.
In November 1996, VISX initiated a patent infringement case against Nidek
and related parties in the United Kingdom. Nidek filed a counterclaim in the
case alleging that the patents asserted were invalid. In October 1998, the
United Kingdom court found that VISX's European Patent No. 0151869 was valid
but, under the court's constructions of the patent claims, not infringed by
Nidek's technology. The court also found that VISX's European Patent No. 0207648
was not valid for reasons specific to United Kindgom patent law, but that the
patent did cover the Nidek laser system.
PATENT LITIGATION: USERS OF NIDEK LASER SYSTEMS
On March 4, 1999 VISX filed a law suit against Farmington Laser Eye Center
PLLC and Donald C. Fiander, MD in the United States District Court in the
Eastern District of Michigan alleging that the defendants' use of, and their
offers to use, the Nidek EC-5000 laser system infringe VISX's United States
Patent No. 4,665,913. On March 5, 1999 VISX filed a complaint against OR
Providers, Inc. and Refractive Support, Inc. in the United States District Court
in the Northern District of Ohio alleging, among other things, that the
defendants' use of, and their active inducement of others to use, the Nidek
EC-5000 laser system to perform laser vision correction constitute infringement
of VISX's United States Patent No. 4,665,913. VISX may file additional actions
against users in the future. In both actions, VISX seeks an injunction against
the defendants prohibiting the use of the Nidek EC-5000 excimer laser and
monetary damages. It is possible that the defendants in these actions will file
one or more defenses or counterclaims attacking the validity and enforceability
of the patent asserted.
PATENT LITIGATION: AUTONOMOUS
Autonomous Technologies Corporation v. Pillar Point Partners, et al. In
October 1996, Autonomous brought an action in the United States District Court
for the District of Delaware against Pillar Point, Summit and VISX. The action
seeks declaratory relief that one of VISX's patents that was once licensed to
Pillar Point is not infringed, is invalid and unenforceable, and that the
defendants are otherwise barred from claiming that the Autonomous system
infringes the same patent. In September 1998, VISX filed a counterclaim in the
action against Autonomous asserting certain VISX patents and seeking declaratory
and injunctive relief. In October 1998 Autonomous announced that it had agreed
to be acquired by Summit, subject to the approval of the shareholders of each of
the companies. In November 1998 VISX and Autonomous stipulated to a stay in the
action pending the earlier of the resolution of the merger of Autonomous and
Summit or May 1, 1999. VISX believes that it and the other defendants have
meritorious defenses to the 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.
PATENT LITIGATION: OTHER
John Taboada v. Stephen L. Trokel, VISX, et al. In July 1997, John Taboada
filed a complaint in the United States District Court for the Western District
of Texas against Stephen L. Trokel, VISX,
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<PAGE> 15
VISX Partner, Summit Partner, and Pillar Point Partners. In February 1998, he
amended the complaint to add Summit. In February 1999, however, Summit, Summit
Partner and Pillar Point Partners were dismissed from the case on a motion for
summary judgment. Taboada seeks a declaration that he is either the sole
inventor or a joint inventor of United States Patent No. 5,108,388 (the " '388
patent") which names Dr. Trokel as the inventor. The '388 patent has been
assigned to VISX. Taboada also seeks to recover royalties received by VISX for
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 believes that Taboada's complaint is without merit and intends to
vigorously defend it, however, there can be no assurance as to the outcome of
the case. An adverse determination in this case could give rise to monetary
damages and could limit VISX's ability to collect license fees which, in turn,
could adversely affect VISX's future results of operations.
OTHER LITIGATION
VISX is involved in various other legal proceedings which arise in the
normal course of business. These matters include employment, product liability
and other matters. VISX 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 our 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 1998.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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 the
high and low sale prices of our common stock, after giving effect for the 2 for
1 stock split in the form of a 100% stock dividend distributed in January 1999.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997
First Quarter.............................................. $12.00 $10.19
Second Quarter............................................. 14.75 10.25
Third Quarter.............................................. 12.75 9.19
Fourth Quarter............................................. 13.25 10.81
1998
First Quarter.............................................. $16.06 $ 9.75
Second Quarter............................................. 29.97 12.50
Third Quarter.............................................. 34.63 24.00
Fourth Quarter............................................. 43.72 21.00
</TABLE>
On March 15, 1999, the last reported sale price of the Common Stock on the
Nasdaq National Market was $106.88 per share. We had approximately 465 holders
of record of our common stock on that date.
We have never declared or paid any cash dividends on our common stock. We
presently intend to retain all future earnings for use in our business and do
not anticipate paying any cash dividends on our common stock in the foreseeable
future.
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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,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues........................ $133,750 $ 68,631 $ 69,664 $ 16,703 $ 17,896
Cost of revenues...................... 31,109 20,598 28,876 9,749 11,774
Total costs and expenses.............. 74,530 53,111 55,318 27,408 25,230
Income (loss) from operations......... 59,220 15,520 14,346 (10,705) (7,334)
Litigation settlement................. 35,000 4,500 -- 5,400 --
Net income (loss)..................... $ 25,590 $ 14,097 $ 17,308 $(14,765) $ (6,264)
Earnings (loss) per share:(A)
Basic.............................. $ 0.84 $ 0.46 $ 0.57 $ (0.60) $ (0.30)
Diluted............................ $ 0.78 $ 0.45 $ 0.54 $ (0.60) $ (0.30)
Shares used for earnings (loss) per
share:(A)
Basic.............................. 30,507 30,858 30,622 24,622 20,744
Diluted............................ 32,699 31,636 31,948 24,622 20,744
BALANCE SHEET DATA:
Cash and short-term investments....... $116,539 $100,833 $ 88,990 $ 75,219 $ 11,161
Working capital....................... 129,008 103,880 92,878 77,665 11,842
Total assets.......................... 176,619 130,352 119,689 91,078 20,627
Retained earnings (accumulated
deficit)........................... 5,427 (20,163) (34,260) (51,568) (36,803)
Stockholders' equity.................. $138,989 $110,299 $ 99,272 $ 79,881 $ 13,993
</TABLE>
- ---------------
(A) All share and per share amounts have been adjusted to give effect for the 2
for 1 stock split in the form of a 100% stock dividend distributed in
January 1999.
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<PAGE> 18
ITEM 7. 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 this
Form 10-K. Please read these items carefully.
OVERVIEW
We develop products and procedures to improve people's eyesight with
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 vision problems 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 patents.
The laser vision correction industry is new and 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
1998 Compared to 1997
<TABLE>
<CAPTION>
(000'S)
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 CHANGE
-------- ------- ------
<S> <C> <C> <C>
Revenue
System sales....................................... $ 40,799 $34,393 19%
Percent of revenue............................... 30.5% 50.1%
License, service & other revenue................... $ 92,951 $34,238 171%
Percent of revenue............................... 69.5% 49.9%
Total.............................................. $133,750 $68,631 95%
</TABLE>
We sold significantly more VISX systems in 1998 than in 1997. However, the
increase in system sales revenue was more moderate because the average selling
price of a system declined. In the United States, individual doctors and clinics
purchased almost twice as many systems as in the prior year, while corporate
laser center customers purchased slightly fewer systems. The average price of a
system declined because we offered selected new sales programs during the year
plus continued granting allowances to customers who trade in a competitor's
laser system. Outside the United States, system sales increased in several
markets, including Japan and China, where we only recently commenced sales and
marketing activities. This more than offset the reduction in sales in Korea
caused by economic and currency problems in that country in 1998.
The total number of procedures performed with VISX laser systems in the
United States increased significantly in 1998 from the prior year. The license
fees for these procedures generated most of the
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<PAGE> 19
increase in license, service and other revenue in 1998. United States procedures
increased as the result of two factors: (1) we sold more laser systems,
increasing the number of VISX lasers in use in the United States in 1998, and
(2) our customers performed more procedures per laser system in 1998 than in
1997.
<TABLE>
<CAPTION>
(000'S)
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 CHANGE
------- ------- ------
<S> <C> <C> <C>
Costs & Expenses
Cost of revenues.................................... $31,109 $20,598 51%
Percent of revenue................................ 23.3% 30.0%
Marketing, general and administrative............... $32,138 $22,255 44%
Percent of revenue................................ 24.0% 32.4%
Research, development and regulatory................ $11,283 $10,258 10%
Percent of revenue................................ 8.4% 14.9%
</TABLE>
Cost of revenues increased in 1998 over the prior year because we sold more
systems and provided service to a larger installed base of systems. Marketing,
general and administrative expenses increased in several areas in 1998 over the
prior year. We expended more money on patent lawsuits and in defending the
company in the FTC administrative action. We increased spending on marketing
programs directed towards eye care professionals. Incentive compensation is tied
to sales and profit and increased due to the growth in those factors in 1998
over the prior year. In research and development, our efforts were directed at
improving current products and developing new capabilities for future products.
We continued to conduct clinical studies and prepare submissions designed to
obtain additional approvals from the FDA and regulatory authorities in other
countries. Assuming we are successful in adding resources planned, we anticipate
that research, development and regulatory expenses could grow to approximately
$16 million in 1999.
Our interest income increased in 1998 over the prior year because we
generated additional cash from operations in 1998 and invested this in interest
bearing securities. In June 1998, we agreed with Summit Technology, Inc.
("Summit") to dissolve Pillar Point and paid Summit $35,000,000 to settle all
pending disputes and litigation between us.
Our effective income tax rate for 1998 was 14% because we used losses from
prior years to reduce taxes otherwise due on income earned in 1998. As of
December 31, 1998 we had recorded deferred tax assets reflecting all the tax
savings to be generated from our prior losses. As a result, we expect our
effective income tax rate will be approximately 40% in 1999.
1997 Compared to 1996
<TABLE>
<CAPTION>
(000'S)
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 CHANGE
------- ------- ------
<S> <C> <C> <C>
Revenue
System sales........................................ $34,393 $53,140 (35%)
Percent of revenue................................ 50.1% 76.3%
License, service & other revenue.................... $34,238 $16,524 107%
Percent of revenue................................ 49.9% 23.7%
Total............................................... $68,631 $69,664 (1%)
</TABLE>
Our system sales in the U.S. market in 1997 decreased from 1996. Unit
shipments of systems in the U.S. 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 we offered to owners
of lasers manufactured by Summit and owners of lasers not approved by the FDA.
Partially offsetting the decline in the U.S. market, our 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> 20
Our license, service and other revenues rose in 1997 over 1996 due to
growth in license revenue, principally the result of higher procedure volume. In
addition, in October 1997 we recognized that we did not owe royalties to Pillar
Point for certain patented procedures performed using the VISX System that had
not been approved by the FDA. Accordingly, beginning in October 1997 we recorded
the full fee for such procedures as license revenue, whereas we had previously
recorded only the portion we received back from Pillar Point as license revenue.
<TABLE>
<CAPTION>
(000'S)
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 CHANGE
------- ------- ------
<S> <C> <C> <C>
Costs & Expenses
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>
Our 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. We expect to
continue spending significant amounts in research and development for the
foreseeable future. Our regulatory expenses were essentially unchanged over the
two years.
Our interest and other income increased due to higher average balances of
cash, cash equivalents and short-term investments. In June 1997, we settled
certain U.S. and international patent disputes with Summit. We paid a net amount
of $4.5 million to Summit in connection with this settlement.
Our effective income tax rate for 1997 was 12% because we used losses from
prior years to reduce taxes otherwise due on income earned in 1997. Our
provision for income taxes covered alternative minimum taxes due under Federal
statutes and state taxes at regular rates, net of credits anticipated.
20
<PAGE> 21
QUARTERLY RESULTS OF OPERATIONS
In the following tables we present selected items from our quarterly
financial results.
<TABLE>
<CAPTION>
1998
------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues................................... $24,310 $ 31,663 $35,844 $41,933
------- -------- ------- -------
Operating profit................................. 10,371 14,424 15,843 18,582
------- -------- ------- -------
Litigation settlement............................ -- (35,000)(A) -- --
------- -------- ------- -------
Income (loss) before provision (benefit) for
income taxes................................... 11,792 (19,196) 17,133 20,027
Provision (benefit) for income taxes............. 2,830 (3,867) 2,401 2,802
------- -------- ------- -------
Net income (loss)................................ $ 8,962 $(15,329) $14,732 $17,225
======= ======== ======= =======
Earnings (loss) per share, diluted(B)............ $ 0.29 $ (0.50) $ 0.45 $ 0.52
======= ======== ======= =======
Shares used for earnings (loss) per share,
diluted(B)..................................... 31,116 30,380 33,094 33,063
======= ======== ======= =======
</TABLE>
- ---------------
(A) In June 1998, we agreed with Summit Technology, Inc. ("Summit") to dissolve
Pillar Point and paid Summit $35,000,000 to settle all pending disputes and
litigation between us.
(B) All share and per share amounts have been adjusted to give effect for the 2
for 1 stock split in the form of a 100% stock dividend distributed in
January 1999.
<TABLE>
<CAPTION>
1997
------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues................................... $15,743 $15,595 $17,967 $19,326
------- ------- ------- -------
Operating profit................................. 1,852 2,571 4,519 6,578
------- ------- ------- -------
Litigation settlement............................ -- (4,500)(A) -- --
------- ------- ------- -------
Income (loss) before provision (benefit) for
income taxes................................... 3,067 (767) 5,745 7,974
Provision (benefit) for income taxes............. 368 (92) 690 956
------- ------- ------- -------
Net income (loss)................................ $ 2,699 $ (675) $ 5,055 $ 7,018
======= ======= ======= =======
Earnings (loss) per share, diluted(B)............ $ 0.09 $ (0.02) $ 0.16 0.22
======= ======= ======= =======
Shares used for earnings (loss) per share,
diluted(B)..................................... 31,620 30,908 31,506 31,647
======= ======= ======= =======
</TABLE>
- ---------------
(A) In June 1997, we settled certain patent disputes with Summit at a net cost
of $4.5 million.
(B) All share and per share amounts have been adjusted to give effect for the 2
for 1 stock split in the form of a 100% stock dividend distributed in
January 1999.
21
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments ("cash") and working
capital were as follows:
<TABLE>
<CAPTION>
(000'S)
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Cash, cash equivalents and short-term investments...... $116,539 $100,833
Working capital........................................ 129,008 103,880
</TABLE>
Cash increased $15,706,000 during 1998 due to the net income earned during
the year. Working capital increased due to the higher levels of accounts
receivable and inventories which grew to support our increased sales.
In 1997, the board of directors authorized management to repurchase up to
4,000,000 shares of VISX common stock. Through December 31, 1998, we have
repurchased 1,945,000 shares on the open market at a total cost of $26,952,000
in accordance with applicable securities laws. Before repurchasing shares, we
consider a number of factors including market conditions, the market price of
the stock, and the number of shares needed for employee benefit plans. As a
result, we cannot predict the number of shares that we may repurchase in the
future.
Purchases of short-term investments represent reinvestment of the proceeds
from short-term investments that matured and investment of cash and cash
equivalents into short-term investments. As of December 31, 1998 we did not have
any borrowings outstanding nor any credit agreements. We believe that our
current cash, cash equivalents and short-term investments plus anticipated cash
flows from operations will be sufficient to cover our working capital and
capital equipment needs at least through the next twelve months.
YEAR 2000 DISCLOSURE
We are aware that some information technology 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 information technology 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 ones such as those imbedded in the security
apparatus that protects our main facility.
Products: We 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, or printer equipment interface as a result of
handling dates in the year 2000 or beyond. We have determined, however, that
these laser systems do not properly print or store patient report dates for
procedures performed in the year 2000 or beyond. We are in the process of
developing and testing a solution to this problem and expect to have it
available to customers by the middle of 1999.
Suppliers: Since the third quarter of 1998, we have been surveying existing
suppliers of critical components and all new suppliers about the ability of
their systems and products to properly handle dates for the year 2000 and
beyond. In the first quarter of 1999, we plan to survey our remaining suppliers
and service providers. If they 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: We have been gathering information from vendors about year 2000
compliance for each of the major elements of our internal information technology
systems. Based on statements from vendors,
22
<PAGE> 23
our ERP system is year 2000 compliant. We have installed a back-up set of
equipment to test and verify year 2000 compliance. We expect to complete testing
of the major elements of our internal systems listed below by the end of the
first quarter of 1999:
- Enterprise resource planning ("ERP") software and server hardware which
is used to manage manufacturing, sales, customer service, accounting
activities and prepare financial reports
- 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
We will install any necessary upgrades and new equipment and software by
the end of the second quarter of 1999. With regard to our facility, we have
asked key suppliers to represent whether their products and services will
function properly when handling dates for the year 2000 and beyond. These
requests cover systems for building security, heating, and lighting controls.
Costs to Address Year 2000 Issues
We have spent no more than $500,000 to date identifying, developing and
testing solutions to year 2000 issues. We estimate that we will spend
approximately an additional $750,000 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.
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;
- 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,
23
<PAGE> 24
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;
- 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 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.
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
Interest Rate Risk. We invest our cash, beyond that needed for daily
operations, in high quality debt securities. We seek primarily to preserve the
value and liquidity of our capital, and secondarily to safely earn income from
these investments. To accomplish these goals, we invest only in debt securities
issued by (1) the U.S. Treasury and U.S. government agencies and corporations
and (2) U.S. corporations that meet the following criteria:
- Rated investment grade "A" or higher by the major rating services
- Can readily be resold for cash
- Mature no more than 2 years from our date of purchase
The following table shows the expected cash flows at maturity from our
investments in debt securities.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 BEYOND
------- ------- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Cash equivalents and short-term investments
(amortized cost as of December 31, 1998)... $92,448 $17,927 $-- $-- $-- $--
Weighted average effective interest rate..... 5.4% 5.4% -- -- -- --
</TABLE>
Foreign Currency Exchange Rate Risk. We sell products in various
international markets. Virtually all of these sales are contracted and paid for
in U.S. Dollars. As of December 31, 1998 we have no outstanding foreign currency
hedge contracts. Accordingly, we have no material foreign currency exchange risk
as of December 31, 1998.
24
<PAGE> 25
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,
--------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 29,870 $ 29,952
Short-term investments.................................... 86,669 70,881
Accounts receivable, net of allowances for doubtful
accounts of $1,620 and $814, respectively.............. 27,822 16,478
Inventories............................................... 6,820 4,747
Deferred tax assets and prepaid expenses.................. 15,457 1,875
-------- --------
Total current assets................................... 166,638 123,933
PROPERTY AND EQUIPMENT, NET................................. 4,318 4,032
OTHER ASSETS................................................ 5,663 2,387
-------- --------
$176,619 $130,352
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 3,682 $ 5,453
Accrued liabilities....................................... 33,948 14,600
-------- --------
Total current liabilities.............................. 37,630 20,053
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 8 AND 9)
STOCKHOLDERS' EQUITY:
Common stock -- $.01 par value, 90,000,000 shares
authorized; 31,035,016 shares issued at December 31,
1998 and 1997.......................................... 310 310
Additional paid-in capital................................ 137,645 133,541
Less: 235,964 and 312,000 common stock treasury shares at
December 31, 1998 and 1997, respectively, at cost...... (4,581) (3,442)
Unrealized holding gains on available-for-sale
securities............................................. 188 53
Retained earnings (accumulated deficit)................... 5,427 (20,163)
-------- --------
Total stockholders' equity............................. 138,989 110,299
-------- --------
$176,619 $130,352
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 26
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
REVENUES:
System sales.............................................. $ 40,799 $34,393 $53,140
License, service and other revenue........................ 92,951 34,238 16,524
-------- ------- -------
Total revenues.................................... 133,750 68,631 69,664
-------- ------- -------
COSTS AND EXPENSES:
Cost of revenues.......................................... 31,109 20,598 28,876
Marketing, general and administrative..................... 32,138 22,255 17,708
Research, development and regulatory...................... 11,283 10,258 8,734
-------- ------- -------
Total costs and expenses.......................... 74,530 53,111 55,318
-------- ------- -------
INCOME FROM OPERATIONS...................................... 59,220 15,520 14,346
-------- ------- -------
OTHER INCOME (EXPENSE):
Interest income........................................... 5,536 4,999 4,265
Litigation settlement..................................... (35,000) (4,500) --
-------- ------- -------
Other income (expense), net....................... (29,464) 499 4,265
-------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 29,756 16,019 18,611
Provision for income taxes................................ 4,166 1,922 1,303
-------- ------- -------
NET INCOME.................................................. $ 25,590 $14,097 $17,308
======== ======= =======
EARNINGS PER SHARE
Basic..................................................... $ 0.84 $ 0.46 $ 0.57
======== ======= =======
Diluted................................................... $ 0.78 $ 0.45 $ 0.54
======== ======= =======
SHARES USED FOR EARNINGS PER SHARE
Basic..................................................... 30,507 30,858 30,622
======== ======= =======
Diluted................................................... 32,699 31,636 31,948
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 27
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
STOCK RETAINED TOTAL
COMMON ------ ADD'L UNREALIZED COMPRE- EARNINGS STOCK-
SHARES PAR PAID-IN TREASURY HOLDING HENSIVE (ACCUM. HOLDERS'
ISSUED VALUE CAPITAL STOCK GAINS INCOME DEFICIT) EQUITY
------ ------ -------- -------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995.............. 30,348 $303 $131,034 $ -- $ 112 $(51,568) $ 79,881
Repurchases of common stock............. -- -- -- (1,729) -- -- (1,729)
Exercise of stock options............... 470 5 2,286 1,204 -- -- 3,495
Common stock issued under the Employee
Stock Purchase Plan................... 32 -- 362 63 -- -- 425
Comprehensive income:
Net income............................ -- -- -- -- -- $17,308 17,308 17,308
Other comprehensive loss
Adjustment for unrealized holding
loss on
available-for-sale securities....... -- -- -- -- (108) (108) -- (108)
-------
Comprehensive income.................. $17,200
=======
------ ---- -------- -------- ----- -------- --------
BALANCE, DECEMBER 31, 1996.............. 30,850 308 133,682 (462) 4 (34,260) 99,272
Repurchases of common stock............. -- -- -- (8,307) -- -- (8,307)
Exercise of stock options............... 143 2 (1,818) 5,327 -- -- 3,511
Common stock issued under the Employee
Stock Purchase Plan................... 42 -- 438 -- -- -- 438
Income tax benefit arising from employee
stock option plans.................... -- -- 1,239 -- -- -- 1,239
Comprehensive income:
Net income............................ -- -- -- -- -- $14,097 14,097 14,097
Other comprehensive income:
Adjustment for unrealized holding
gains on available-for-sale
securities........................ -- -- -- -- 49 49 -- 49
-------
Comprehensive income.................. $14,146
=======
------ ---- -------- -------- ----- -------- --------
BALANCE, DECEMBER 31, 1997.............. 31,035 310 133,541 (3,442) 53 (20,163) 110,299
Repurchases of common stock............. -- -- -- (18,645) -- -- (18,645)
Exercise of stock options............... -- -- (5,187) 16,995 -- -- 11,808
Common stock issued under the Employee
Stock Purchase Plan................... -- -- 15 511 -- -- 526
Income tax benefit arising from employee
stock option plans.................... -- -- 9,276 -- -- -- 9,276
Comprehensive income:
Net income............................ -- -- -- -- -- $25,590 25,590 25,590
Other comprehensive income:
Adjustment for unrealized holding
gains on available-for-sale
securities........................ -- -- -- -- 135 135 -- 135
-------
Comprehensive income.................. $25,725
=======
------ ---- -------- -------- ----- -------- --------
BALANCE, DECEMBER 31, 1998.............. 31,035 $310 $137,645 $ (4,581) $ 188 $ 5,427 $138,989
====== ==== ======== ======== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 28
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 25,590 $ 14,097 $ 17,308
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 2,083 1,854 1,195
Increase (decrease) in cash flows from changes in
operating
assets and liabilities:
Accounts receivable............................ (11,344) 1,426 (11,237)
Inventories.................................... (2,073) 1,101 894
Deferred tax assets and prepaid expenses....... (13,582) (1,322) (319)
Other assets................................... (4,096) (191) (2,462)
Accounts payable............................... (1,771) 3,068 (121)
Accrued liabilities............................ 19,348 (3,432) 9,341
--------- --------- --------
Net cash provided by operating activities........... 14,155 16,601 14,599
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................... (1,549) (1,688) (2,911)
Short-term investments
Available-for-sale securities: Purchases.......... (114,900) (102,024) (53,222)
Proceeds from
maturities......... 99,247 95,273 27,671
Held-to-maturity securities: Proceeds from
maturities..................................... -- -- 4,249
--------- --------- --------
Net cash used in investing activities............... (17,202) (8,439) (24,213)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.......... 21,610 5,188 3,920
Repurchases of common stock......................... (18,645) (8,307) (1,729)
--------- --------- --------
Net cash provided by (used in) financing activities...... 2,965 (3,119) 2,191
--------- --------- --------
Net increase (decrease) in cash and cash equivalents..... (82) 5,043 (7,423)
Cash and cash equivalents, beginning of period........... 29,952 24,909 32,332
--------- --------- --------
Cash and cash equivalents, end of period................. $ 29,870 $ 29,952 $ 24,909
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 29
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VISX, Incorporated. We develop products and procedures to improve people's
eyesight with lasers. Our current principal product, the 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 FDA has approved the VISX System for
use in the treatment of most types of vision problems 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 patents.
Use of Estimates. In order to prepare financial statements in conformity
with generally accepted accounting principles ("GAAP"), we are required to make
estimates and assumptions. Examples include estimates of our income tax
liability, the amount of our accounts receivable that we will be able to
collect, or the expenses we will incur to provide service under warranty
obligations. These affect the value of the assets and liabilities, contingent
assets and liabilities, and revenues and expenses that we report in our
financial statements. Our actual results could differ from our estimates.
Principles of Consolidation. Our consolidated financial statements include
the accounts of VISX, Incorporated and its wholly owned subsidiaries (the
"Company" or "VISX") after the elimination of significant intercompany accounts
and transactions.
Cash, Cash Equivalents and Short-term Investments. Cash equivalents are
debt securities that mature within 90 days after we purchase them and can be
resold for cash before they mature. Short-term investments are debt securities
that mature more than 90 days after we purchase them. Our short-term investments
are all classified as available-for-sale securities because we may sell them
before they reach maturity. They 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
finished 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,
----------------
1998 1997
------ ------
<S> <C> <C>
Raw Materials and Subassemblies............................. $3,183 $2,487
Work-in-Process............................................. 2,869 1,538
Finished Goods.............................................. 768 722
------ ------
$6,820 $4,747
====== ======
</TABLE>
Property and Equipment. Property and equipment is depreciated using the
straight-line method over the estimated useful lives of the assets, generally
two to seven years or, the term of the related lease in the case of leasehold
improvements. Property and equipment is stated at cost and consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Furniture and fixtures...................................... $2,313 $2,211
Machinery and equipment..................................... 6,880 4,996
Leasehold improvements...................................... 1,107 948
------ ------
10,300 8,155
Less: accumulated depreciation and amortization............. (5,982) (4,123)
------ ------
Property and equipment, net................................. $4,318 $4,032
====== ======
</TABLE>
30
<PAGE> 30
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition. We record revenue and the cost of installation,
training, and warranty services when we ship products. We recognize service
revenue when we provide service. We recognize license revenue when we ship
VisionKey(R) cards in the United States and when we receive payments from
international licensees.
Through June 1998, we paid royalties to Pillar Point for laser systems and
certain VisionKey(R) procedure cards sold in the United States. Pillar Point
allocated profits and losses back to the partners (VISX and Summit) in
accordance with the general partnership agreement. However, since Pillar Point
was dissolved in June 1998 no further royalties have been due the partnership,
though we have paid our share of the legal and administrative expenses
associated with resolving litigation involving the partnership.
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>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
NET INCOME................................................ $25,590 $14,097 $17,308
======= ======= =======
BASIC EARNINGS PER SHARE
Income available to common shareholders................. $25,590 $14,097 $17,308
Weighted average common shares outstanding.............. 30,507 30,858 30,622
------- ------- -------
Basic earnings per share................................ $ 0.84 $ 0.46 $ 0.57
======= ======= =======
DILUTED EARNINGS PER SHARE
Income available to common shareholders................. $25,590 $14,097 $17,308
------- ------- -------
Weighted average common shares outstanding.............. 30,507 30,858 30,622
Dilutive potential common shares from stock options..... 2,192 778 1,326
------- ------- -------
Weighted average common shares and dilutive potential
common shares........................................ 32,699 31,636 31,948
------- ------- -------
Diluted earnings per share.............................. $ 0.78 $ 0.45 $ 0.54
======= ======= =======
</TABLE>
Options to purchase 107,000, 1,350,000 and 782,000 weighted shares
outstanding during 1998, 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.
New Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards 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 2000. We do not expect the impact of adopting SFAS No. 133 to be
material to us.
In 1998 we adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130"), which requires us to report
all changes in equity, except those resulting from investment by and
distributions to owners, in the financial statement for the period in which they
are recognized. We have disclosed Comprehensive Income, which encompasses net
income and unrealized
31
<PAGE> 31
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
holding gains on available-for-sale securities, in the Consolidated Statement of
Shareholders' Equity. We have restated prior years to conform to the
requirements of SFAS No. 130.
NOTE 2. SEGMENT REPORTING
Segments. Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information," ("SFAS No. 131")
established standards for reporting information about operating segments in
financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or chief decision
making group, in deciding how to allocate resources and in assessing
performance. Mark B. Logan, Chairman and CEO, is our chief decision maker. As
our business is completely focused on one industry segment, products and
procedures to improve people's eyesight with lasers, we believe we have one
reportable segment. All of our revenues and profits are generated through the
sale, licensing, and service of products for this one segment.
Export Revenues. Export revenues accounted for 12%, 23% and 15% of total
revenues for the years ended December 31, 1998, 1997 and 1996, respectively. We
did not generate export revenues to any country that equaled or exceeded 10% of
our total revenues for any of the three years ended December 31, 1998. In the
following table we have presented our export revenues by geographic region (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Europe............................................ $ 3,355 $ 4,140 $ 3,945
Americas (excluding the United States)............ 4,810 4,150 3,801
Asia and Other.................................... 8,406 7,573 2,973
------- ------- -------
$16,571 $15,863 $10,719
======= ======= =======
</TABLE>
Major Customers. TLC The Laser Center, Inc. accounted for 11%, 13% and 7%
of total revenues in 1998, 1997 and 1996, respectively. Laser Vision Centers,
Inc. accounted for 10%, 7% and 13% of total revenues in 1998, 1997 and 1996,
respectively. No other customer accounted for 10% or more of sales during any of
the three years ended December 31, 1998.
32
<PAGE> 32
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. INVESTMENTS
Investments in securities consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------------- ----------------------------------
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....... $ 42,184 $114 $ 42,298 $34,769 $30 $34,799
Debt securities of U.S.
corporations.................... 44,297 74 44,371 36,059 23 36,082
-------- ---- -------- ------- --- -------
86,481 188 86,669 70,828 53 70,881
CASH EQUIVALENTS
Available-for-Sale Securities
Debt securities of U.S.
corporations.................... 23,894 -- 23,894 24,420 -- 24,420
-------- ---- -------- ------- --- -------
Total investments............ $110,375 $188 $110,563 $95,248 $53 $95,301
======== ==== ======== ======= === =======
</TABLE>
There were no gross realized gains or losses on available-for-sale
securities. All available-for-sale securities held at December 31, 1998 mature
within two years of that date.
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Payroll and related accruals................................ $ 5,708 $ 1,909
Accrued warranty, installation, and training expenses....... 2,941 3,246
Accrued royalties........................................... 601 1,879
Deposits and deferred revenue............................... 11,603 3,012
Accrued sales promotions and distributor commissions........ 2,668 1,620
Accrued income and sales taxes.............................. 7,888 1,138
Accrued legal expenses...................................... 1,668 566
Other....................................................... 871 1,230
------- -------
$33,948 $14,600
======= =======
</TABLE>
NOTE 5. STOCK BASED COMPENSATION PLANS
We have 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, we have four terminated stock
option plans with options still outstanding.
We recorded no compensation expense associated with these plans and we
account for them in accordance with APB Opinion No. 25. We would have recorded
compensation expense for options granted under these plans if we had accounted
for them in accordance with Statement of Financial Accounting Standards No. 123
("SFAS No. 123"). Under SFAS No. 123 our net income and earnings per share would
have been adjusted to the following pro forma amounts (in thousands, except per
share data).
33
<PAGE> 33
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C> <C>
Net Income.................... As Reported......... $25,590 $14,097 $17,308
Pro Forma........... 18,733 9,281 13,821
Diluted Earnings Per Share.... As Reported......... $ 0.78 $ 0.45 $ 0.54
Pro Forma........... 0.58 0.30 0.44
</TABLE>
Under SFAS No. 123 the fair value of each option is estimated on the date
of grant using the Black-Scholes option pricing model. The following weighted
average assumptions were used for grants issued in 1998, 1997 and 1996,
respectively: risk-free interest rates of 5.4, 6.0 and 5.6 percent, expected
volatility of 51, 54 and 43 percent, no expected dividends, and an expected life
of 1.70, 1.05 and 1.05 years beyond the vest date for each year's vesting
increment of an option. Since the SFAS 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, we may sell up to 1,000,000 shares of common stock
to our eligible, full-time employees who do not own 5% or more of our
outstanding common stock. Employees can allocate up to 10% of their wages to
purchase our 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. We sold 34,840
shares, 42,324 shares and 37,406 shares in 1998, 1997 and 1996, respectively,
and 251,252 shares cumulatively through December 31, 1998. The weighted average
fair market value of shares sold in 1998 was $29.18 per share.
As of December 31, 1998 we are authorized to grant options for up to
5,415,096 shares under the 1995 Plan and 500,000 shares under the Director Plan.
We have granted options on 3,974,100 shares and 114,000 shares, respectively,
under these two plans through December 31, 1998. 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,
1998, 1997 and 1996 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,
------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
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...... 3,933 $11.39 3,434 $10.37 2,780 $6.62
Granted......................... 1,657 18.72 1,386 11.11 1,370 16.14
Exercised....................... (1,179) 9.87 (723) 5.72 (584) 5.99
Forfeited....................... (257) 12.52 (164) 12.62 (132) 10.53
------- ------ ------
Outstanding, end of year........ 4,154 14.67 3,933 11.39 3,434 10.37
======= ====== ======
Exercisable, end of year........ 1,368 $11.54 1,358 $10.38 1,152 $6.15
======= ====== ======
Weighted average fair value per
option granted................ $ 8.54 $ 4.37 $ 5.86
======= ====== ======
</TABLE>
34
<PAGE> 34
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------------------------
OPTIONS OUTSTANDING
-------------------------------------- OPTIONS EXERCISABLE
WTD. AVG. ------------------------
(000'S) WTD. AVG. YEARS LEFT (000'S) WTD. AVG.
EXERCISE PRICES NUMBER EXERCISE PRICE TO EXERCISE NUMBER EXERCISE PRICE
- --------------- ------- -------------- ----------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.63 - $ 2.63 30 $ 2.63 1.9 30 $ 2.63
5.63 - 7.38 399 6.13 5.9 351 6.13
7.93 - 11.75 1,955 11.01 8.5 446 10.57
11.81 - 17.38 1,113 15.45 7.9 505 16.20
17.50 - 25.13 201 21.69 8.9 36 18.43
27.75 - 40.91 456 33.63 9.8 -- --
----- -----
$ 2.63 - $40.91 4,154 $14.67 8.2 1,368 $11.54
===== =====
</TABLE>
NOTE 6. STOCKHOLDERS' EQUITY
In 1997, the board of directors authorized management to repurchase up to
4,000,000 shares of VISX common stock. We have repurchased 1,945,000 shares on
the open market at a total cost of $26,952,000 in accordance with applicable
securities laws. Before repurchasing shares, we consider a number of factors
including market conditions, the market price of the stock, and the number of
shares needed for employee benefit plans. As a result, we cannot predict the
number of shares that we may repurchase in the future. In January 1999 we
distributed a 2 for 1 stock split in the form of a 100% stock dividend. All
share and per share information has been adjusted to reflect this split.
NOTE 7. INCOME TAXES
Our provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Current:
Federal......................................... $ 13,929 $ 1,561 $ 652
State........................................... 4,350 1,361 651
-------- ------- ------
18,279 2,922 1,303
-------- ------- ------
Deferred, net
Federal......................................... (12,309) (1,000) --
State........................................... (1,804) -- --
-------- ------- ------
(14,113) (1,000) --
-------- ------- ------
Net tax provision................................. $ 4,166 $ 1,922 $1,303
======== ======= ======
</TABLE>
Our 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,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Statutory Federal income tax rate....................... 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit.............. 5.6 5.8 5.8
R&D credit.............................................. (0.7) (0.6) (0.3)
Change in valuation allowance........................... (25.9) (28.2) (33.5)
----- ----- -----
Effective income tax rate............................... 14.0% 12.0% 7.0%
===== ===== =====
</TABLE>
35
<PAGE> 35
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We paid $1,556,000, $1,347,000 and $698,000 of income taxes in 1998, 1997
and 1996, respectively.
At December 31, 1998, we had a net operating loss carry forward of
approximately $13,200,000 available to offset future Federal taxable income. Our
loss carry forward expires through the year 2010. The amount of our prior losses
that can be used to offset taxable income in future years may be limited due to
various provisions, including any change in ownership interest of the Company
resulting from significant stock transactions.
Our net deferred income tax assets were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
------- --------
<S> <C> <C>
Net operating loss carryforwards
Federal................................................... $ 4,600 $ 9,100
Cumulative temporary differences
Allowance for doubtful accounts........................... 700 400
Inventory reserves........................................ 900 900
Warranty reserves......................................... 1,200 1,400
Accrued sales promotions and commissions.................. 900 1,100
State income taxes........................................ 900 500
Other temporary differences............................... 3,400 1,600
Tax credit carryforwards.................................... 1,800 2,000
------- --------
14,400 17,000
Valuation allowance, provision for income taxes............. -- (13,300)
Valuation allowance, equity................................. -- (2,700)
------- --------
Net deferred income tax asset............................... $14,400 $ 1,000
======= ========
</TABLE>
We have been profitable for the last three years since receiving FDA
approval. As a result, we believe it is more likely than not that we will
generate sufficient taxable income in the future to take full benefit for the
remaining Federal net operating loss carryforward, the temporary differences,
and the tax credit carryforwards. Therefore, in accordance with GAAP we did not
need a valuation allowance at December 31, 1998. However, given that the laser
vision correction industry is still new and evolving rapidly, we can provide no
assurance that our expectation for future taxable income will be realized.
NOTE 8. COMMITMENTS
We lease facilities and equipment under operating leases that expire
through 2003. Our expense under these leases was $1,027,000, $990,000 and
$908,000 for the years ended December 31, 1998, 1997, and 1996, respectively. We
must pay the following minimum payments under these leases. Our future minimum
lease commitments, net of subleases, are as follows (all amounts are shown in
thousands).
<TABLE>
<CAPTION>
GROSS SUBLEASE NET
------ -------- ------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1999................................................. $1,485 $(431) $1,054
2000................................................. 1,485 (252) 1,233
2001................................................. 1,424 -- 1,424
2002................................................. 1,398 -- 1,398
2003................................................. 582 -- 582
Thereafter........................................... -- -- --
------ ----- ------
Total minimum lease payments............... $6,374 $(683) $5,691
====== ===== ======
</TABLE>
36
<PAGE> 36
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. LITIGATION
PATENT AND ANTITRUST PROCEEDINGS
OVERVIEW
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. Because
a number of the proceedings have issues 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 VISX's business, financial position and
results of operations.
FEDERAL TRADE COMMISSION PROCEEDINGS
On March 24, 1998 the Federal Trade Commission ("FTC") filed an
administrative compliant challenging the existence of Pillar Point and
challenging the enforceability of certain of patents owned by VISX. On July 8,
1998 we reached a settlement with the FTC and entered into a consent decree
regarding the dissolution of Pillar Point. On March 4, 1999 the FTC entered an
order finalizing that consent decree.
The consent decree does not address the portion of the FTC's complaint
directed towards the enforceability of certain VISX patents. An administrative
hearing was held in December 1998 and January 1999. The administrative law judge
is expected to issue his initial decision in the matter before the end of May
1999. An appeal to the FTC from the initial decision is expected to be made by
VISX or the staff of the FTC, or both. The FTC's decision is likely to be
appealed, in turn, to a federal court of appeals. Although we believe the FTC's
claims are unfounded and we will continue to vigorously defend the
enforceability of our patents, it is not possible to predict the outcome of this
proceeding or any appeal from the decision. A determination by the FTC that
certain of our patents are unenforceable, if upheld by the federal court of
appeals, 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 operation.
ANTITRUST CLASS ACTIONS
Since the commencement of the FTC administrative proceeding on March 24,
1998, a large number of purported class actions have been filed against VISX
alleging, among other things, violations of various state and federal antitrust
laws. These cases can be divided into two categories bases on the type of class
alleged: one on behalf of purported classes of patients, and the other on behalf
of purported classes of direct purchasers.
Patient Class Actions Filed in State Court
Several actions filed in California state court on behalf of purported
classes of patients have been consolidated into one case captioned In re
PRK filed on June 12, 1998 naming VISX, VISX Partner, Inc., Summit, and
Summit Partner, Inc. as defendants. The plaintiffs in the consolidated
action allege violations of the California Business and Professions Code
(under the Cartwright Act and the Unfair Business Practices Act) on
behalf of a putative nationwide class of patients. We have been named in
one additional state court action in Florida and two additional state
court actions in Wisconsin, each filed on behalf of a purported class of
patients: Marks v. Summit Technology Inc., et al., filed on April 27,
1998 in Florida state court ; Worcester v. Summit Technology, Inc. et
al.,filed on June 11, 1998 in Wisconsin state court, which was
transferred in December 1998 to the Multi-District Litigation described
below; and Karen
37
<PAGE> 37
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frankson et al. v. Pillar Point Partners et al., filed on January 4,
1999 in Wisconsin state court, which is expected also to be transferred
to the Multi-District Litigation.
Direct Purchaser Class Actions Filed in Federal Court
In addition to the state court actions, a number of purported class
actions alleging violations of federal antitrust laws on behalf of a
purported class of direct purchasers have been filed against VISX in
federal court. All of these actions have been transferred to the
Multi-District Litigation described below. In October 1998, the Federal
District Court in the District of Arizona, the location of the
Multi-District Litigation, entered an order for consolidation of these
class actions into a case captioned The Antitrust Class Actions (USDC AZ
Oct. 21 1998).
In each of these antitrust class actions the plaintiffs are seeking unspecified
damages and injunctive relief. These cases are still in the pleading stages. The
purported classes have not yet been certified and discovery has not begun.
Although we believe we and Pillar Point have meritorious defenses to the claims
presented in these actions and intend to defend them vigorously, it is too early
to estimate their outcome. There can be no assurances that VISX will prevail in
any of these antitrust class actions. 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 future results of operations.
MULTI-DISTRICT LITIGATION INVOLVING PILLAR POINT PARTNERS
On June 4, 1998 VISX and Summit agreed to dissolve Pillar Point and settle
all pending disputes and litigation between them. However, Pillar Point
continues to be a party in a number of cases. VISX and Summit share Pillar
Point's ongoing litigation expenses and each pursues its own interests in the
pending litigation.
To consolidate conflicting discovery requests and save resources and
management time with respect to certain litigation involving Pillar Point
partners, a number of cases have been transferred to Multi-District Litigation
("MDL") in the Federal District Court in the District of Arizona for pretrial
proceedings. In addition to the antitrust class actions described above, the
following cases are pending in the MDL:
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 patents owned by VISX, 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, the
plaintiffs allege that the per procedure royalty charged by Pillar Point was a
violation of the Sherman Act or of corresponding state antitrust laws and seek
injunctions against alleged violations of such laws, as well as monetary
damages. In addition, certain plaintiffs are seeking a judgment that the patents
once held by Pillar Point are invalid and unenforceable.
38
<PAGE> 38
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Although we believe we and Pillar Point have meritorious defenses to the
claims presented in these actions and we intend to defend them vigorously, it is
too early to estimate their outcome. There can be no assurances that VISX or
Pillar Point will prevail in any of these actions. 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 future results of operations.
Pillar Point Partners, et al. v. Barnet Dulaney Eye Center, et al., a
patent suit initiated by Pillar Point that was pending in the MDL was settled in
January 1999 and Pillar Point Partners, et al. v. Appler, which was also pending
in the MDL, was settled in March 1998. No payments were made in connection with
either of these settlements.
PATENT LITIGATION: NIDEK
United States. On December 17, 1998 Nidek received FDA approval to market
its laser vision correction system in the United States. On December 18, 1998,
VISX filed a lawsuit in United States District Court in Northern California
alleging that Nidek's laser vision correction systems infringe VISX United
States Patent Nos. 4,718,418, 4,732,148, and 5,711,762. In the case, VISX seeks
injunctive relief and monetary damages. On January 22, 1999, VISX filed a
complaint with the United States International Trade Commission (ITC) regarding
Nidek's laser vision correction systems. On February 23, 1999, the ITC
instituted an investigation into the activities of Nidek and its United States
subsidiaries. If the ITC determines that Nidek or its subsidiaries imported and
sold laser vision correction systems that infringe VISX-owned patents, the ITC
may issue an order prohibiting the importation, sale, and service of the Nidek
laser system and its component parts in the United States. Nidek has filed
counterclaims in the District Court action attacking the validity and
enforceability of the patents asserted, and we anticipate that Nidek will make
similar arguments in the ITC proceeding. While we believe that the patents
asserted in these cases are valid and enforceable and will vigorously defend any
contrary claims, there can be no assurance as to the outcome of these cases.
Adverse determinations in one or both of these suits could limit VISX's ability
to collect equipment and use royalties in the United States from Nidek as well
as from other sellers of and users of laser vision correction systems. Any such
adverse determination would adversely affect VISX's license revenues and
therefore its future results of operations.
International. VISX is a party to patent-related litigation against Nidek
in Canada and France. These proceedings, which allege patent infringement by
Nidek and certain of its distributors and customers, were filed by VISX in
February 1994 (Canada) and May 1997 (France). The defendants have contested
VISX's infringement claims as well as the validity of VISX's patents. Trial in
the Canadian proceeding is expected to take place in 1999. The proceeding in
France is currently in the pleading stage. It is not possible to predict the
outcome of either case. However, VISX believes that the invalidity claims
asserted by Nidek are without merit, and intends to vigorously enforce its
patents and defend their validity. Adverse determinations in one or both of
these lawsuits could limit VISX's ability to collect royalties in certain
markets. Any such adverse determination could therefore adversely affect VISX's
future results of operations.
In November 1996, VISX initiated a patent infringement case against Nidek
and related parties in the United Kingdom. Nidek filed a counterclaim in the
case alleging that the patents asserted were invalid. In October 1998, the
United Kingdom court found that VISX's European Patent No. 0151869 was valid
but, under the court's constructions of the patent claims, not infringed by
Nidek's technology. The court also found that VISX's European Patent No. 0207648
was not valid for reasons specific to United Kindgom patent law, but that the
patent did cover the Nidek laser system.
39
<PAGE> 39
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PATENT LITIGATION: USERS OF NIDEK LASER SYSTEMS
On March 4, 1999 VISX filed a law suit against Farmington Laser Eye Center
PLLC and Donald C. Fiander, MD in the United States District Court in the
Eastern District of Michigan alleging that the defendants' use of, and their
offers to use, the Nidek EC-5000 laser system infringe VISX's United States
Patent No. 4,665,913. On March 5, 1999 VISX filed a complaint against OR
Providers, Inc. and Refractive Support, Inc. in the United States District Court
in the Northern District of Ohio alleging, among other things, that the
defendants' use of, and their active inducement of others to use, the Nidek
EC-5000 laser system to perform laser vision correction constitute infringement
of VISX's United States Patent No. 4,665,913. VISX may file additional actions
against users in the future. In both actions, VISX seeks an injunction against
the defendants prohibiting the use of the Nidek EC-5000 excimer laser and
monetary damages. It is possible that the defendants in these actions will file
one or more defenses or counterclaims attacking the validity and enforceability
of the patent asserted.
PATENT LITIGATION: AUTONOMOUS
Autonomous Technologies Corporation v. Pillar Point Partners, et al. In
October 1996, Autonomous brought an action in the United States District Court
for the District of Delaware against Pillar Point, Summit and VISX. The action
seeks declaratory relief that one of VISX's patents that was once licensed to
Pillar Point is not infringed, is invalid and unenforceable, and that the
defendants are otherwise barred from claiming that the Autonomous system
infringes the same patent. In September 1998, VISX filed a counterclaim in the
action against Autonomous asserting certain VISX patents and seeking declaratory
and injunctive relief. In October 1998 Autonomous announced that it had agreed
to be acquired by Summit, subject to the approval of the shareholders of each of
the companies. In November 1998 VISX and Autonomous stipulated to a stay in the
action pending the earlier of the resolution of the merger of Autonomous and
Summit or May 1, 1999. VISX believes that it and the other defendants have
meritorious defenses to the 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.
PATENT LITIGATION: OTHER
John Taboada v. Stephen L. Trokel, VISX, et al. In July 1997, John Taboada
filed a complaint in the United States 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.
In February 1999, however, Summit, Summit Partner and Pillar Point Partners were
dismissed from the case on a motion for summary judgment. Taboada seeks a
declaration that he is either the sole inventor or a joint inventor of United
States Patent No. 5,108,388 (the " '388 patent") which names Dr. Trokel as the
inventor. The '388 patent has been assigned to VISX. Taboada also seeks to
recover royalties received by VISX for 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 believes that Taboada's complaint
is without merit and intends to vigorously defend it, however, there can be no
assurance as to the outcome of the case. An adverse determination in this case
could give rise to monetary damages and could limit VISX's ability to collect
license fees which, in turn, could adversely affect VISX's future results of
operations.
OTHER LITIGATION
VISX is involved in various other legal proceedings which arise in the
normal course of business. These matters include employment, product liability
and other matters. VISX 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 our business, financial position or
results of operations.
40
<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, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 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 18, 1999
41
<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 VISX's definitive Proxy Statement (the "1999 Proxy Statement")
to be filed with the Securities and Exchange Commission and relating to its
Annual Meeting of Stockholders to be held on May 12, 1999.
The principal executive officers of VISX are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark B. Logan............................. 60 Chairman of the Board and Chief
Executive Officer
Elizabeth H. Davila....................... 54 President and Chief Operating
Officer
Derek A. Bertocci......................... 45 Vice President, Controller
Carol F.H. Harner, Ph.D. ................. 55 Vice President, Research and
Development
Frances L. Henville-Shannon............... 49 Vice President, Human Resources
Kina Lamblin.............................. 31 Vice President, General Counsel and
Secretary
James W. McCollum......................... 45 Vice President, Marketing and Sales
Timothy R. Maier.......................... 50 Executive Vice President, Chief
Financial Officer and Treasurer
David M. Patino........................... 54 Vice President, Regulatory and
Clinical Affairs
Douglas H. Post........................... 47 Vice President, Operations and
Customer Support
</TABLE>
Mark B. Logan. Mr. Logan has served as Chairman of the Board and Chief
Executive Officer of VISX since November 1994 and was also President from
November 1994 to February 1999. 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 Incorporated, Becton Dickinson &
Company, and American Home Products Corporation. His responsibilities included
both medical devices and pharmaceuticals, and domestic and international
assignments.
Elizabeth H. Davila. Ms. Davila has served as President and Chief Operating
Officer since February 1999, prior to which she had 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.
Derek A. Bertocci. Mr. Bertocci has been Vice President, Controller since
December 1998. He served as Controller from November 1995 until December 1998.
Prior to joining VISX, Mr. Bertocci was Controller for Time Warner Interactive
Group from 1993 to 1995 and Controller and Assistant Treasurer for Datron
Systems, Inc. from 1987 to 1993.
42
<PAGE> 42
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.
Frances L. Henville-Shannon. Ms. Henville-Shannon has been Vice President,
Human Resources since June 1998. From March 1997 until June of 1998, Ms.
Henville-Shannon held the position of Senior Human Resources Business
Partner/Director at Fairchild Semiconductor. Fairchild is a spin off from
National Semiconductor Corporation where Ms. Henville-Shannon was employed since
April 1992, with her last position as Human Resources Director. Prior to
National Semiconductor Corporation, Ms. Henville-Shannon held various human
resources positions (including the areas of compensation, operations, staffing,
and benefits) during her eleven years with Xerox Corporation.
Kina Lamblin. Ms. Lamblin has been Vice President, General Counsel since
November 1998. She served as Assistant General Counsel from March 1996 through
November 1998. Ms. Lamblin has been Secretary of the Company since September
1998, prior to which time she was Assistant Secretary. Before joining VISX in
1996, Ms. Lamblin held the position of Assistant General Counsel at Sanctuary
Woods, Inc., a software company. Prior to that, Ms. Lamblin practiced law in the
Business and Technology department of the law firm Brobeck, Phleger & Harrison
in Palo Alto, California. Ms. Lamblin received her J.D. from the University of
Chicago and her B.A. from the University of California, Berkeley.
James W. McCollum. Mr. McCollum has been Vice President, Marketing and
Sales since February 1996. Prior to joining VISX as an employee, he spent two
and a half years at Alcon Laboratories, Inc. where he was responsible for all
excimer refractive activities in Canada and the U.S. Mr. McCollum has held
various senior management positions at CooperVision, Inc., Innovision Medical
Inc., and American Hospital Supply Corporation, and has over 20 years of
professional experience, including 16 years in the medical device industry and
14 years in ophthalmic products.
Timothy R. Maier. Mr. Maier has been Executive Vice President, Chief
Financial Officer since December 1999, prior to which he had 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 1999
Proxy Statement sections "Further Information Concerning the Board of
Directors -- Director Compensation" and "Executive Compensation."
43
<PAGE> 43
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 VISX is
incorporated into this item by reference to the 1999 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 VISX is incorporated into this item
by reference to the 1999 Proxy Statement sections "Further Information
Concerning the Board of Directors" and "Executive Compensation."
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, 1998:
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets................................. 25
Consolidated Statements of Operations....................... 26
Consolidated Statements of Stockholders' Equity............. 27
Consolidated Statements of Cash Flows....................... 28
Notes to Consolidated Financial Statements.................. 29
Report of Independent Public Accountants.................... 40
2. The following financial statement schedule is filed
as part of this report:
Schedule II -- Valuation and Qualifying Accounts 44
</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 1998.
(C) EXHIBITS. See Index to Exhibits.
(D) FINANCIAL STATEMENT SCHEDULES. See Item 14(a)(2), above.
44
<PAGE> 44
VISX, INCORPORATED AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULES
The following additional consolidated financial statement schedule should
be considered in conjunction with VISX'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
BALANCE CHARGED TO BALANCE
AT --------------------- AT
START OF COSTS & OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- -------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Allowance for bad debts.......... $ -- $600 $-- $-- $ 600
YEAR ENDED DECEMBER 31, 1997
Allowance for bad debts.......... 600 253 -- 39 814
YEAR ENDED DECEMBER 31, 1998
Allowance for bad debts.......... 814 810 -- 4 1,620
</TABLE>
45
<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 and
Chief Executive Officer
Date: March 23, 1999
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
--------- ----- ----
<C> <S> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ MARK B. LOGAN Chairman of the Board, Chief March 23, 1999
- ------------------------------------- Executive Officer and Director
Mark B. Logan
PRINCIPAL FINANCIAL OFFICER:
/s/ TIMOTHY R. MAIER Executive Vice President, Chief March 23, 1999
- ------------------------------------- Financial Officer and Treasurer
Timothy R. Maier
PRINCIPAL ACCOUNTING OFFICER:
/s/ DEREK A. BERTOCCI Vice President, Controller March 23, 1999
- -------------------------------------
Derek A. Bertocci
/s/ ELIZABETH H. DAVILA President, Chief Operating Officer March 23, 1999
- ------------------------------------- and Director
Elizabeth H. Davila
/s/ GLENDON E. FRENCH Director March 23, 1999
- -------------------------------------
Glendon E. French
/s/ JOHN W. GALIARDO Director March 23, 1999
- -------------------------------------
John W. Galiardo
/s/ JAY T. HOLMES Director March 23, 1999
- -------------------------------------
Jay T. Holmes
/s/ RICHARD B. SAYFORD Director March 23, 1999
- -------------------------------------
Richard B. Sayford
</TABLE>
46
<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)
</TABLE>
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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)
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)
10.19* Settlement and Dissolution Agreement dated June 4, 1998
filed as an exhibit to VISX's Form 8-K filed June 23, 1998.
Confidential treatment has been requested for certain
portions of this exhibit.
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.
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
VISX Partner, Inc., a Delaware Corporation
VISX Japan KK, a Japan Corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this Annual Report on Form 10-K, into the
Company's previously filed Registration Statement Nos. 33-34374, 33-40519,
33-53806, 33-69044, 333-23999, and 333-53041 on Form S-8.
ARTHUR ANDERSEN LLP
San Jose, California
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 29,870
<SECURITIES> 86,669
<RECEIVABLES> 29,442
<ALLOWANCES> (1,620)
<INVENTORY> 6,820
<CURRENT-ASSETS> 166,638
<PP&E> 10,300
<DEPRECIATION> 5,982
<TOTAL-ASSETS> 176,619
<CURRENT-LIABILITIES> 37,630
<BONDS> 0
0
0
<COMMON> 310
<OTHER-SE> 138,679
<TOTAL-LIABILITY-AND-EQUITY> 176,619
<SALES> 40,799
<TOTAL-REVENUES> 133,750
<CGS> 31,109
<TOTAL-COSTS> 31,109
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 810
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 29,756
<INCOME-TAX> 4,166
<INCOME-CONTINUING> 25,590
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,590
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.78
</TABLE>
