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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999
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)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.01
PAR VALUE.
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X]
The aggregate market value of the voting Common Stock held by
non-affiliates of the registrant as of March 15, 2000 was approximately
$962,208,000. The number of shares of Common Stock outstanding as of March 15,
2000 was 62,077,940.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's Proxy Statement for its Annual Meeting
of Stockholders to be held on May 19, 2000 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," "-- Government Regulation,"
"-- Manufacturing, Components and Raw Materials," "-- Competition," 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 1999, we estimate that approxi-
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mately 900,000 LVC procedures were performed in the United States using
FDA-approved 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 FDA approval for the
correction of hyperopia or farsightedness with a laser. In November 1999 the FDA
approved the use of the VISX system for LAser in SItu Keratomileusis (LASIK).
LVC includes PhotoRefractive Keratectomy (PRK) and LASIK. 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.
With PRK, 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.
The vast majority of laser vision correction procedures performed in the
United States are LASIK procedures. In performing LASIK, 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 can be 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.
CORNEAL PATHOLOGIES AND PTK
The VISX System also treats certain types of corneal pathologies in an
outpatient procedure known as PhotoTherapeutic Keratectomy or PTK. We estimate
that VISX Systems have been used worldwide to perform approximately 26,000 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.
PRODUCTS
VISX System. The VISX System is a fully integrated medical device
incorporating an excimer laser and a computer-driven workstation. 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. Only the VISX System is capable of performing ablations
using both a variable-area beam and small-spot scanning, or a combination of the
two.
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,
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instead of one small diameter beam moving at a higher frequency, means that
refractive corrections can be completed in a relatively short time.
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 technology 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, (b) developing improvements to that technology, and (c) providing our
customers with various services and programs designed to increase their
operating efficiency and effectiveness.
Marketing Programs
VISX University(R) 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
1999, and six are planned for 2000. 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.
Marketing Communication Materials. Customers who buy or use a VISX System
receive educational and marketing materials including brochures, videos, slides,
and other tools to help them promote VISX laser vision correction.
Procedure Financing Support. 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 75 VISX employees to respond
to calls from our customers. Telephone requests range from orders for parts and
VisionKey cards, to requests for technical support, customer information, and
field service. More than 50 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
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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 7,400 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 news about new
products and services, physician certification course schedules, and
registration for practice development programs such as VISX University;
and
- VISX University 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.
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. To support this strategy, we have established a subsidiary in
Japan and have sales managers who cover key international sales regions. We also
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 30 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, and difficulties in managing, staffing and
coordinating communications among international operations may limit or disrupt
future international sales.
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
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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 between laser systems. As a result, poor results from
unapproved or other laser systems 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. A decrease in market acceptance of
laser vision correction could have a material adverse effect on VISX's business,
financial position and results of operations.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY
VISX owns over 150 United States and foreign patents and has 100 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,
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.
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 ("Bausch & Lomb"),
Aesculap-Meditec GmbH ("Meditec"), Herbert Schwind GmbH & Co. KG ("Schwind"),
Autonomous Technologies Corporation ("Autonomous"), now owned by Summit, and
LaserSight Incorporated ("LaserSight"). Under these agreements, we receive
royalties for international sales of Bausch & Lomb, Meditec, Schwind, and
LaserSight equipment that is covered by VISX's international patents. In
addition, Summit has taken a fully-paid license to our non-U.S. patents which
covers sales of the Summit and Autonomous laser systems.
In 1992, 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 and
certain other countries. 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.
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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 or ruling that VISX infringes patents held by another
could have a material adverse effect on 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
Federal Trade Commission ("FTC") administrative proceeding, a number of
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
requests and the reexamination proceedings are in process. We have received PTO
office actions rejecting certain claims of the patents. We are attempting to
overcome the office action rejections. Although we believe these two patents
will survive the reexamination with amendments, we do not yet know the final
outcome of these reexamination proceedings.
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.
LaserSight has filed a lawsuit alleging that VISX infringes a patent licensed to
LaserSight. Additional 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. If VISX were found to infringe a patent held by another, 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."
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 was able to trade out 15 unapproved systems. We
attribute much of this success in convincing
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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, IDE's 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 IDE's 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.
The FDA's 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
and December 10, 1999 we successfully passed a regularly scheduled
recertification audit.
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.
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In Europe, the member countries of the European Union have promulgated
rules which require that medical products receive 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. VISX
is licensed to apply the CE Mark to the VISX System in accordance with the
European Medical Device Directives.
In Japan, we received regulatory approval for PTK from the Japanese
Ministry of Health and Welfare in May 1998 and for myopia, or nearsightedness,
with astigmatism in January 2000. VISX is the first U.S. manufacturer to receive
approval for its laser vision correction system in Japan.
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
materially adversely affected.
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, 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. Competitors may be able to offer laser
systems at a lower price, may price their laser systems as part of a bundle of
products or services, may develop procedures that involve a lower per procedure
cost, or may offer products that are perceived as preferable to the VISX System.
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, there are six laser systems that have received FDA
approval, namely, those of VISX, Summit, Autonomous (now owned by Summit),
Nidek, LaserSight and Bausch & Lomb. Autonomous and Nidek received FDA approval
to commercialize their laser systems at the end of 1998, LaserSight at the end
of 1999 and Bausch & Lomb in February 2000. Nidek, LaserSight and Bausch & Lomb
are actively engaged in commercializing their laser systems in the United States
and do 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. LaserSight and Bausch & Lomb have said that
they will collect a per-procedure fee from their customers. VISX is pursuing
several actions against Nidek and its users for patent infringement in the
United States, and in Canada and France. VISX has also filed a lawsuit alleging
patent infringement against LaserSight. See "Legal Proceedings -- Patent and
Antitrust Proceedings" below.
VISX's principal international competitors are Bausch & Lomb, LaserSight,
Meditec, Nidek, Schwind, Summit, and Autonomous (now owned by Summit). VISX has
licensed certain of its patents to Bausch & Lomb, LaserSight, Meditec, and
Schwind, each of which is obligated to pay VISX royalties
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<PAGE> 10
when it sells a system covered by VISX's patents outside of the United States.
In addition, Summit has taken a fully-paid license to VISX's non-U.S. patents
which covers sales of its systems and those of Autonomous.
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 $15.5 million in
1999, $11.3 million in 1998, and $10.3 million in 1997. Licensed technology
developed by outside parties is an additional source of potential products. We
anticipate that research, development and regulatory expenses could be
approximately $16 million in 2000.
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, 1999, VISX had 279 regular employees, 41 temporary
employees and 33 consultants. Of the regular employees, 152 are employed in
manufacturing and service, 53 in research and development and regulatory, and 74
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 May 31, 2001. 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. The
results of these complex legal proceedings are very
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<PAGE> 11
difficult to predict with certainty. 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, could give rise to significant
monetary damages, could prevent VISX from manufacturing and selling the VISX
System, and therefore could have a material adverse effect on VISX's business,
financial position and results of operations.
PATENT LITIGATION: NIDEK AND USERS OF NIDEK LASERS
United States.
FEDERAL DISTRICT COURT IN NORTHERN CALIFORNIA. In December 1998, Nidek
received approval to market its laser vision correction systems in the United
States and VISX filed a lawsuit in the United States District Court in Northern
California alleging that Nidek's laser systems infringe VISX United States
Patent Nos. 4,718,418, 4,732,148, and 5,711,762 (USDC ND Cal C98-04842). VISX is
seeking injunctive relief and monetary damages in that case. Nidek filed a
lawsuit against VISX on March 30, 1999 in the United States District Court in
Northern California alleging, among other things, that VISX's use of patents
allegedly obtained through inequitable conduct violates certain antitrust laws.
This case was consolidated with VISX's action against Nidek for patent
infringement. The consolidated case was stayed by the court during 1999 pending
the outcome of the International Trade Commission decision described below and
is now in the early stages of discovery.
In February 2000, the four lawsuits filed during 1999 by VISX against
certain users of Nidek laser systems were transferred to Multi-District
Litigation in the United States District Court in Northern California (MDL
Docket No. 1319, the "California MDL") for the purpose of consolidating them
with the actions between VISX and Nidek for pre-trial proceedings. In these
cases (captioned VISX, Incorporated v. Farmington Eye Center PLLC and Donald C.
Fiander, MD (USDC ED Mich 99-60139); VISX, Incorporated v. OR Providers, Inc.,
Refractive Support, Inc., and Robert G. Wiley, M.D. (USDC ND Ohio 1:99CV00508);
VISX, Incorporated v. Southwest Eye Care Center, Inc. et al.(USDC SD Cal 99 CV
1029L); and VISX, Incorporated v. Antoine L. Garabet et al. (USDC CD Cal
99-05284)), VISX has alleged, among other things, that the defendants' use of
the Nidek laser system infringes one or more of VISX's patents and is seeking an
injunction against the defendants prohibiting the use of the Nidek laser system
and monetary damages. The defendants in these actions have filed counterclaims
seeking, among other things, a declaration of non-infringement, invalidity and
unenforceability of the patents asserted. Discovery and pretrial proceedings is
ongoing in these actions. We do not anticipate that any of these cases involving
Nidek or users of Nidek's laser system will go to trial before the year 2001.
Adverse determinations in any 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 could have a material adverse effect on VISX's license
revenues and therefore its business, financial position and results of
operations.
INTERNATIONAL TRADE COMMISSION. Trial in the International Trade Commission
(ITC) investigation of Nidek and its United States subsidiaries based on the
complaint filed with the ITC by VISX in January 1999 (Investigation No.
337-TA-419) took place in August 1999. In this case, VISX sought an order of the
ITC prohibiting the importation, sale and service of the Nidek laser system and
its component parts in the United States on the basis that Nidek and its United
States subsidiaries had violated Section 337 of the Tariff Act of 1930, as
amended, by infringing certain VISX patents. Nidek denied infringement and
challenged the validity and enforceability of the two VISX patents asserted in
the case. The ITC administrative law judge issued an initial determination on
December 6, 1999 finding that Nidek and its United States subsidiaries had not
violated Section 337 of the Tariff Act of 1930, as amended. VISX and the ITC's
Office of Unfair Import Investigations, a third party in the case representing
the government and the public interest, petitioned the full Commission
requesting review of the initial determination.
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<PAGE> 12
The Commission granted review with respect to certain findings of the
Initial Determination, however, on March 6, 2000 the Commission issued a Notice
that it had determined that Nidek had not violated Section 337 of the Tariff Act
of 1930, as amended. The Commission concluded the Nidek laser system does not
infringe the VISX patents at issue in the proceeding and that VISX does not
practice those patents. The Commission took no position with respect to the
Initial Determination findings regarding the validity and enforceability of
VISX's U.S. Patent No. 5,711,762. The Commission did not review the findings of
the ITC administrative law judge with respect to VISX's U.S. Patent No.
4,718,418 (the "'418 patent"). The administrative law judge's ruling upholding
the enforceability of the '418 patent but finding that it was not infringed by
the Nidek laser system therefore becomes the final determination of the
Commission. The decisions of the administrative law judge and the Commission are
not binding on any other court, however, parties may attempt to introduce them
in other litigation involving VISX's patents. The Commission's determination is
subject to review by the United States Court of Appeals for the Federal Circuit
and VISX may appeal all or a portion of the decision.
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 took
place in September 1999 and in December 1999 the Canadian federal court ruled
that Nidek and the other defendants had not infringed the VISX patents asserted
in the case. The court found that those patents were valid despite the
defendants' claims to the contrary. VISX, Nidek and the other defendants have
filed appeals of this decision. The proceeding in France is currently in the
pleading stage. It is not possible to predict the final outcome of either case.
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.
PATENT LITIGATION: LASERSIGHT
In November 1999, after LaserSight received approval from the FDA to market
its system for laser vision correction, VISX filed an action alleging that
LaserSight had infringed the '418 patent in United States District Court in
Delaware (USDC Del. 99-789). This suit was stayed pending licensing discussions
between the parties. In February 2000, LaserSight terminated the licensing
discussions and filed a lawsuit against VISX in the same District Court seeking
a declaration of non-infringement and invalidity of the '418 patent and alleging
that VISX infringes LaserSight's U.S. Patent No. 5,630,810 (USDC Del. 00-059).
Both parties are seeking damages and injunctive relief. Discovery has not
commenced and it is too early to predict the outcome of these cases. However,
adverse determinations in one or both of these lawsuits could give rise to
monetary damages, could limit VISX's ability to collect license fees, and could
prevent VISX from manufacturing and selling the VISX System, any of which, in
turn, could have a material adverse effect on VISX's business, financial
position and results of operations.
PATENT LITIGATION: OTHER
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 (USDC West. Dist. Tex.
SA-97-CA-794-FB). Trial in this case has been set for June 5, 2000. Taboada
seeks a declaration that he is either the sole inventor or a joint inventor of
VISX's United States Patent No. 5,108,388 (the " '388 patent") which names Dr.
Trokel as the inventor. 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, claims breach of contract, and seeks
monetary damages and injunctive relief. Taboada has also filed pleadings in the
United States District Court for the District of Columbia requesting that the
reexamination of the '388 patent currently pending in the U.S. Patent and
Trademark Office be stayed pending the outcome of the case in Texas (USDC CA
00-421). VISX
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believes that Taboada's complaint and request for stay of the reexamination are
without merit and intends to vigorously defend against them, 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, could limit VISX's ability to collect
license fees, and could prevent VISX from manufacturing and selling the VISX
System, any of which, in turn, could materially adversely affect 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 complaint (Docket No. 9286) challenging the existence of Pillar
Point and challenging the enforceability of certain patents owned by VISX. On
July 8, 1998 VISX 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 did not
address the portion of the FTC's complaint directed towards the enforceability
of certain VISX patents. On June 4, 1999 the FTC released the initial decision
of its administrative law judge dismissing the remaining portions of the FTC's
complaint against VISX. On June 21, 1999 the FTC attorneys filed notice that
they would appeal the judge's decision to the full Commission. On December 1,
1999, the FTC attorneys filed a conditional motion to dismiss the FTC's
complaint. The Commission has not yet ruled on the FTC's motion. Although we
believe the FTC's claims in this case are unfounded and we will continue to
vigorously defend the enforceability of our patents, it is not possible to
predict the outcome of this appeal proceeding. A determination by the FTC
Commissioners that certain of our patents are unenforceable could reduce the
breadth of our patent coverage. This, in turn, could have a material adverse
effect on our business, financial position and results of 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,
Summit and, in some cases, also against their affiliates, VISX Partner, Inc.,
Summit Partner, Inc., and Pillar Point, a now-dissolved partnership between VISX
Partner and Summit Partner. These actions allege, among other things, violations
of various state and federal antitrust and unfair competition laws. These cases
can be divided into two categories based 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
Several actions filed in California state court on behalf of purported
classes of patients have been consolidated into one case in Santa Clara County
Superior Court captioned In re PRK/LASIK Consumer Litigation, No. CV772894 ("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. On May 12, 1999, the court entered an order to
which the parties had stipulated conditionally certifying that the class shall
include patients in 17 states and the District of Columbia. Discovery is ongoing
in this action.
In addition to the In re PRK action pending in California, we have been
named in several duplicative actions in other states on behalf of purported
classes of patients:
Florida. In Marks v. Summit Technology Inc., et al., filed on April 27,
1998 in Florida state court, plaintiff brought suit on behalf of a purported
class of patients in several states alleging violations of the Florida antitrust
and unfair competition laws. On December 15, 1999, the Marks case was stayed
pending the final resolution of the In re PRK action in Santa Clara County,
California.
Wisconsin. Worcester v. Summit Technology, Inc. et al. was filed on June
11, 1998 in Wisconsin state court on behalf of a purported class of Wisconsin
patients alleging violations of the Wisconsin
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antitrust and unfair competition laws. The Worcester action was removed to
federal court and transferred in December 1998 to the Multi-District Litigation
pending in Arizona described below.
The action on behalf of a purported class of patients captioned Karen
Frankson et al. v. Pillar Point Partners et al., filed on January 4, 1999 in
Wisconsin state court, was removed to federal court and transferred to the
Multi-District Litigation pending in Arizona described below. On February 23,
2000, the MDL court entered an order dismissing the Frankson action without
prejudice.
Minnesota. In May 1999, Brisson v. Summit Technology, Inc., VISX, Inc.,
Summit Partner, Inc., VISX Partner, Inc. and Pillar Point Partners was filed by
plaintiff on behalf of a purported class of Minnesota patients alleging
violations of Minnesota antitrust laws, seeking unspecified damages and
injunctive relief.
In May 1999, another Minnesota action was filed, captioned Castino v. VISX,
Inc. and Summit Technology, Inc. (USDC Minn. 99-861). The Castino case, which
was filed on behalf of a purported class of patients in several states alleging
violations of the antitrust and unfair competition laws of those states, was
dismissed on July 12, 1999 pursuant to plaintiff's unopposed motion for
voluntary dismissal without prejudice.
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 in federal court against VISX, Summit, and, in
some cases, Pillar Point. All of these actions have been transferred to the
Multi-District Litigation in Arizona 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). Plaintiffs have moved for certification of a nationwide class of direct
purchasers who paid per procedure license fees to VISX or Summit. Plaintiffs'
motion to certify the class is currently pending, and discovery is ongoing.
In each of the antitrust class actions described above the plaintiffs are
seeking unspecified damages and injunctive relief for alleged violations of
state and/or federal antitrust laws. Although we believe we 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, could have a material adverse effect on VISX's business,
financial position and 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, a
number of cases have been transferred to Multi-District Litigation in the
Federal District Court in the District of Arizona for pretrial proceedings under
the caption In re Pillar Point Partners Antitrust and Patent Litigation (MDL No.
1202, the "Arizona MDL"). In addition to the antitrust class actions described
above, the following cases are pending in the Arizona 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
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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. 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.
Both 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.
Freedom Vision Laser Center, LP v. VISX, Incorporated et al. On May 28,
1999, Freedom Vision Laser Center filed an action on behalf of certain
physicians, which has been transferred to the Arizona MDL. In that case, the
plaintiffs allege, among other things, violations of federal and state antitrust
laws and are seeking unspecified damages and injunctive relief.
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, could have a
material adverse effect on VISX's business, financial position and results of
operations.
UNFAIR COMPETITION ACTION FILED IN CALIFORNIA STATE COURT
On January 24, 2000, a case captioned Antoine L. Garabet, M.D. and Abraham
v. Shammas, M.D. v. Summit Technology, Inc. and VISX (CV 787359) was filed in
Superior Court for Santa Clara County, California. Plaintiffs brought this
action purportedly on behalf of the public under Section 17200 of the Business
and Professions Code, California's unfair competition law. The complaint alleges
various purportedly anticompetitive activities, similar to the allegations made
in the antitrust class actions described above. Plaintiffs seek injunctive
relief, disgorgement of profits, a constructive trust, and attorneys' fees. This
action has only recently been filed and it is therefore too early to make an
assessment of the merits of the case and the financial consequences of an
adverse decision in the case.
SECURITIES CLASS ACTIONS
VISX and certain of its officers have been named as defendants in several
substantially similar securities class action lawsuits filed in February and
March 2000 in the United States District Court for the Northern District of
California. The plaintiffs in these actions purport to represent a class of all
persons who purchased VISX's common stock between March 1, 1999 and February 22,
2000. The complaints allege that the defendants made misleading statements in
violation of the federal securities laws, including Section 10(b) of the
Securities Exchange Act of 1934. VISX expects the Court to appoint a lead
plaintiff and consolidate the complaints in the near future.
VISX believes that the complaints are without merit and intends to defend
against them vigorously. Nevertheless, litigation is subject to inherent
uncertainties and thus there can be no assurance that these suits will be
resolved favorably to VISX or will not have a material adverse effect on VISX's
financial position.
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.
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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 1999.
PART II
ITEM 5. MARKET FOR VISX'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 closing prices of our common stock, after giving effect for the 2
for 1 stock splits distributed in January and May 1999.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1998
First Quarter........................................... $ 8.03 $ 4.88
Second Quarter.......................................... 14.98 6.25
Third Quarter........................................... 17.31 12.00
Fourth Quarter.......................................... 21.86 10.50
1999
First Quarter........................................... $ 53.78 $22.16
Second Quarter.......................................... 83.00 49.44
Third Quarter........................................... 103.75 79.09
Fourth Quarter.......................................... 88.13 50.88
</TABLE>
On March 15, 2000, the last reported sale price of the Common Stock on the
NASDAQ National Market was $15.50 per share. We had approximately 813 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
We derived the following selected financial data from our audited
consolidated financial statements. This historical financial data should be read
in conjunction with our consolidated financial statements and notes thereto.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................ $271,252 $133,750 $ 68,631 $ 69,664 $ 16,703
Cost of revenues.......................... 57,513 31,109 20,598 28,876 9,749
Total costs and expenses.................. 129,154 74,530 53,111 55,318 27,408
Income (loss) from operations............. 142,098 59,220 15,520 14,346 (10,705)
Litigation settlement..................... -- 35,000 4,500 -- 5,400
Net income (loss)......................... $ 91,768 $ 25,590 $ 14,097 $ 17,308 $(14,765)
Earnings (loss) per share:(A)
Basic.................................. $ 1.45 $ 0.42 $ 0.23 $ 0.28 $ (0.30)
Diluted................................ $ 1.35 $ 0.39 $ 0.22 $ 0.27 $ (0.30)
Shares used for earnings (loss) per share:
(A)
Basic.................................. 63,474 61,014 61,716 61,244 49,244
Diluted................................ 68,119 65,398 63,272 63,896 49,244
BALANCE SHEET DATA:
Cash and short-term investments........... $258,359 $116,539 $100,833 $ 88,990 $ 75,219
Working capital........................... 303,546 129,008 103,880 92,878 77,665
Total assets.............................. 362,721 176,619 130,352 119,689 91,078
Retained earnings (accumulated deficit)... 97,195 5,427 (20,163) (34,260) (51,568)
Stockholders' equity...................... $316,793 $138,989 $110,299 $ 99,272 $ 79,881
</TABLE>
- ---------------
(A) All share and per share amounts have been adjusted to give effect for the 2
for 1 stock splits distributed in January and May 1999.
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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 evolving rapidly. New developments
and changes in market conditions frequently affect VISX and could harm our
business in the future. We may face increased competition from manufacturers and
users of other laser vision correction systems or new competition from non-laser
methods for correcting a person's vision. Patients' and doctors' enthusiasm for
laser vision correction using VISX Systems may not grow or may decline in the
future. Prices for our products and services may change as the result of new
developments in our market. Due to adverse determinations in current and future
patent and antitrust litigation, damages may be assessed against us and we may
not be able to enforce our current patent rights or collect license fees. All of
these factors could cause orders and revenues for VISX Systems and VisionKey(R)
cards to fluctuate or even decline. Accordingly, our past results may not be
useful in predicting our future results.
RESULTS OF OPERATIONS
1999 Compared to 1998
<TABLE>
<CAPTION>
(000'S)
YEAR ENDED DECEMBER 31,
----------------------------------
REVENUE 1999 1998 CHANGE
------- -------- -------- ------
<S> <C> <C> <C>
System sales...................................... $ 74,415 $ 40,799 82%
Percent of revenue.............................. 27.4% 30.5%
License, service & other revenue.................. $196,837 $ 92,951 112%
Percent of revenue.............................. 72.6% 69.5%
Total............................................. $271,252 $133,750 103%
</TABLE>
We sold substantially more VISX Systems in 1999 than in 1998. The increase
occurred primarily in the United States, though sales in international markets
also rose from the prior year. We believe that U.S. doctors and laser centers
increased purchases of VISX Systems in response to rising consumer demand for
laser vision correction and popular acceptance of the VISX System. Partially
offsetting the increase in unit sales, our average U.S. selling price for a VISX
System was lower than in the prior year. This was due to a variety of factors
including allowances for the trade-in of a competitor's laser, discounts for a
second laser at an existing location, volume purchase incentives, and general
price reductions. The overall average selling price of a system in international
markets declined from the prior year due mainly to trade-in allowances.
Our customers in the United States purchased significantly more
VisionKey(R) cards for laser vision correction surgery in 1999 than in 1998. The
license fees associated with these cards generated most of the increase in
license, service and other revenues in 1999 over 1998. We believe that card
purchases increased because laser vision correction became increasingly well
known and popular among consumers and because the VISX System is well regarded.
Based on our analysis of the development of the U.S. laser vision
18
<PAGE> 19
correction market, we decided in February 2000 to reduce our U.S. license fee to
$100 per procedure from the $250 fee we had previously charged since we first
entered the U.S. market in 1996. While we expect this will result in a
significant decline in license revenue in 2000 as compared to 1999, we believe
the reduced fee should contribute to growth in the number of laser vision
correction procedures performed using VISX Systems in the U.S. At this time, we
cannot predict with any certainty whether and to what extent procedure volumes
will grow or when any such growth would offset the decline in our procedure fee.
<TABLE>
<CAPTION>
(000'S)
YEAR ENDED DECEMBER 31,
--------------------------------
COSTS & EXPENSES 1999 1998 CHANGE
---------------- ------- ------- ------
<S> <C> <C> <C>
Cost of revenues.................................... $57,513 $31,109 85%
Percent of revenue................................ 21.2% 23.3%
Marketing, general and administrative............... $56,166 $32,138 75%
Percent of revenue................................ 20.7% 24.0%
Research, development and regulatory................ $15,475 $11,283 37%
Percent of revenue................................ 5.7% 8.4%
</TABLE>
Cost of revenues increased in 1999 over 1998 because we sold more systems
and serviced a larger installed base of systems. We anticipate that cost of
revenues as a percent of total revenues will increase in 2000 as a result of our
new $100 license fee. Marketing, general and administrative expenses grew in
1999 due to a variety of factors. We increased spending on marketing programs
directed towards eye care professionals. We also spent approximately $10.5
million on a direct to consumer marketing campaign during the second half of
1999. Further, our legal expenses increased significantly in 1999 over the prior
year due to the International Trade Commission ("ITC") proceeding regarding the
investigation of Nidek Co., Ltd., the Federal Trade Commission ("FTC")
administrative action, and other patent litigation. In research and development,
our efforts were directed mainly at developing new products and new capabilities
for existing products. We continued to conduct clinical studies and prepare
submissions designed to obtain additional approvals from the FDA and regulatory
authorities in other countries.
Interest income increased because we generated cash from operations and
invested this in additional interest bearing securities. Our effective income
tax rate for 1999 was 40%, up from 14% in 1998 when losses and tax credits
carried forward from prior years reduced taxes otherwise due on income earned in
1998. We expect that our income tax rate will continue to be approximately 40%
in the future.
1998 Compared to 1997
<TABLE>
<CAPTION>
(000'S)
YEAR ENDED DECEMBER 31,
---------------------------------
REVENUE 1998 1997 CHANGE
------- -------- ------- ------
<S> <C> <C> <C>
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
and continued granting allowances to customers who traded in a competitor's
laser system. Outside the United States, system sales increased in several
markets, including Japan and China, where we had 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.
19
<PAGE> 20
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 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,
--------------------------------
COSTS & EXPENSES 1998 1997 CHANGE
---------------- ------- ------- ------
<S> <C> <C> <C>
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 based
on sales and profit increased due to the growth in those factors in 1998 over
the prior year. In research and development, our efforts were directed at
improving existing 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.
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 Partners ("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 and
tax credits 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 and tax credits.
QUARTERLY RESULTS OF OPERATIONS
In the following tables we present selected items from our quarterly
financial results ($000's).
<TABLE>
<CAPTION>
1999
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues..................................... $53,949 $62,503 $79,668 $75,132
------- ------- ------- -------
Operating profit................................... 30,624 33,723 38,354 39,397
Income before provision for income taxes........... 32,506 36,255 41,240 42,945
Provision for income taxes......................... 12,775 14,729 16,497 17,177
------- ------- ------- -------
Net income......................................... $19,731 $21,526 $24,743 $25,768
======= ======= ======= =======
Earnings per share, diluted (A).................... $ 0.29 $ 0.32 $ 0.36 $ 0.38
======= ======= ======= =======
Shares used for earnings per share, diluted (A).... 68,330 68,185 68,727 68,582
======= ======= ======= =======
</TABLE>
- ---------------
(A) All share and per share amounts have been adjusted to give effect for the 2
for 1 stock splits distributed in January and May 1999.
20
<PAGE> 21
<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)(B) -- --
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 (A)............. $ 0.14 $ (0.25) $ 0.22 $ 0.26
======= ======== ======= =======
Shares used for earnings (loss) per share, diluted
(A).............................................. 62,232 60,760 66,188 66,127
======= ======== ======= =======
</TABLE>
- ---------------
(A) All share and per share amounts have been adjusted to give effect for the 2
for 1 stock splits distributed in January and May 1999.
(B) In June 1998, we agreed with Summit to dissolve Pillar Point and paid Summit
$35,000,000 to settle all pending disputes and litigation between us.
FLUCTUATIONS IN RESULTS
Our results of operations have varied widely in the past, and they could
continue to vary significantly due to a number of factors, including:
- Patients' and doctors' acceptance of laser vision correction as a
preferred means of vision correction;
- Competition from manufacturers and users of other laser vision correction
systems;
- Introduction of new methods for vision correction which render our
products less competitive or obsolete;
- Changes in prices for our products and services as the result of new
developments in our markets;
- Developments in antitrust litigation to which we are currently a party,
including legal actions brought against us by private parties and the
legal action pending before the FTC;
- Developments in patent litigation that we have initiated, 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; and
- Developments in patent litigation in which we are a defendant,
particularly to the extent that adverse developments in these proceedings
result in damages being assessed against VISX or render certain of our
patents invalid or unenforceable, which would reduce the scope of
proprietary protection available to us and could limit our ability to
collect license fees from sellers and users of laser vision correction
equipment.
We anticipate that our revenue will be significantly lower in 2000 than in
1999 as a result of the new $100 license fee we began charging in February,
2000. In the future, our revenue may fluctuate significantly. Any shortfall in
revenues below expectations would likely 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 our
results of operations in any given period may not be a good indicator of our
future performance.
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,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash, cash equivalents and short-term investments........... $258,359 $116,539
Working capital............................................. 303,546 129,008
</TABLE>
Cash increased by $142 million in 1999 due primarily to net income and the
exercise of stock options. Approximately $12 million was generated directly from
the exercise of stock options, net of repurchases of common stock. In addition,
our income tax payments were reduced by approximately $70 million in 1999 as the
result of tax deductions arising from exercises of non-qualified stock options
and disqualifying dispositions of stock purchased upon the exercise of incentive
stock options. This amount was credited directly to additional paid-in capital.
In 1997 the board of directors authorized management to repurchase up to
8,000,000 shares of VISX common stock. In February 2000 the board of directors
replaced this plan with a new authorization for management to repurchase up to
10,000,000 shares of VISX common stock. Through purchases on the open market in
accordance with these authorizations and applicable securities laws, we
repurchased 4,081,000 shares at a total cost of $39,557,000 from 1997 through
1999. In 2000 we have repurchased 2,940,000 shares at a total cost of
$59,486,000 as of March 15, 2000. All share figures reflected in this
information on repurchases have been adjusted for the 2 for 1 stock splits we
distributed in January and May 1999. 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 into short-term
investments of the proceeds from short-term investments that matured and
investment of cash and cash equivalents. As of December 31, 1999 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 evaluated our products and determined that they were year 2000 compliant
with one exception: our laser systems did not properly print or store patient
report dates for procedures performed in the year 2000 or beyond. We developed
software revisions that corrected this problem. These software revisions were
made available to all customers and most have had the upgrade installed. We are
not aware of any year 2000 problems encountered by customers using our products.
In addition, we evaluated our internal information technology systems and
installed upgrades, new equipment and software necessary to make our systems
year 2000 compliant. We have not encountered any year 2000 related disruptions
in our internal information technology systems. Finally, we believe that our
significant vendors and service providers are year 2000 compliant and we are not
aware that any have experienced disruptions related to year 2000 problems.
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
22
<PAGE> 23
(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 ($000's).
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 BEYOND
-------- ------- ------- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Cash equivalents and short-term investments
(amortized cost as of December 31, 1999).... $134,334 $91,866 $27,641 $ -- $ -- $ --
Weighted average effective interest rate...... 5.6% 6.3% 6.7% -- -- --
</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, 1999 we have no outstanding foreign currency
hedge contracts. Accordingly, we have no material foreign currency exchange risk
as of December 31, 1999.
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 December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), Revenue Recognition in Financial
Statements. SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements. We
will adopt SAB No. 101 as required in the first quarter of 2000 and are
evaluating the effect that SAB No. 101 may have on our financial statements.
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 25,842 $ 29,870
Short-term investments.................................... 232,517 86,669
Accounts receivable, net of allowances for doubtful
accounts of $1,773 and $1,620, respectively............ 51,254 27,822
Inventories............................................... 10,669 6,820
Deferred tax assets and prepaid expenses.................. 29,192 15,457
-------- --------
Total current assets.............................. 349,474 166,638
PROPERTY AND EQUIPMENT, NET................................. 5,681 4,318
OTHER ASSETS................................................ 7,566 5,663
-------- --------
$362,721 $176,619
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 5,156 $ 3,682
Accrued liabilities....................................... 40,772 33,948
-------- --------
Total current liabilities......................... 45,928 37,630
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 8 AND 9)
STOCKHOLDERS' EQUITY:
Common stock -- $.01 par value, 180,000,000 shares
authorized; 64,890,946 and 62,070,032 shares issued at
December 31, 1999 and 1998, respectively............... 649 620
Additional paid-in capital................................ 220,049 137,335
Less: 2,939 and 471,928 common stock treasury shares at
December 31, 1999 and 1998, respectively, at cost...... (153) (4,581)
Accumulated other comprehensive income (loss)............. (947) 188
Retained earnings......................................... 97,195 5,427
-------- --------
Total stockholders' equity........................ 316,793 138,989
-------- --------
$362,721 $176,619
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 25
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
REVENUES:
System sales.............................................. $ 74,415 $ 40,799 $34,393
License, service and other revenue........................ 196,837 92,951 34,238
-------- -------- -------
Total revenues.................................... 271,252 133,750 68,631
-------- -------- -------
COSTS AND EXPENSES:
Cost of revenues.......................................... 57,513 31,109 20,598
Marketing, general and administrative..................... 56,166 32,138 22,255
Research, development and regulatory...................... 15,475 11,283 10,258
-------- -------- -------
Total costs and expenses.......................... 129,154 74,530 53,111
-------- -------- -------
INCOME FROM OPERATIONS...................................... 142,098 59,220 15,520
-------- -------- -------
OTHER INCOME (EXPENSE):
Interest income........................................... 10,848 5,536 4,999
Litigation settlement..................................... -- (35,000) (4,500)
-------- -------- -------
Other income (expense), net............................ 10,848 (29,464) 499
-------- -------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 152,946 29,756 16,019
Provision for income taxes................................ 61,178 4,166 1,922
-------- -------- -------
NET INCOME.................................................. $ 91,768 $ 25,590 $14,097
======== ======== =======
EARNINGS PER SHARE
Basic..................................................... $ 1.45 $ 0.42 $ 0.23
======== ======== =======
Diluted................................................... $ 1.35 $ 0.39 $ 0.22
======== ======== =======
SHARES USED FOR EARNINGS PER SHARE
Basic..................................................... 63,474 61,014 61,716
======== ======== =======
Diluted................................................... 68,119 65,398 63,272
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 26
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
COMMON CURRENCY/ COMPRE- RETAINED TOTAL
COMMON STOCK ADD'L UNREALIZED HENSIVE EARNINGS STOCK-
SHARES PAR PAID-IN TREASURY HOLDING INCOME (ACCUM. HOLDERS'
ISSUED VALUE CAPITAL STOCK GAINS (LOSS) DEFICIT) EQUITY
------ ------ -------- -------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996............... 61,700 $617 $133,373 $ (462) $ 4 $(34,260) $ 99,272
Repurchases of common stock.............. -- -- -- (8,307) -- -- (8,307)
Exercise of stock options................ 286 2 (1,818) 5,327 -- -- 3,511
Common stock issued under the Employee
Stock Purchase Plan.................... 84 1 437 -- -- -- 438
Income tax benefit arising from employee
stock option plans..................... -- -- 1,239 -- -- -- 1,239
Comprehensive income:
Net income............................. -- -- -- -- -- $14,097 14,097 14,097
Adjustment for unrealized holding gains
on available-for-sale securities..... -- -- -- -- 49 49 -- 49
-------
Comprehensive income................... $14,146
------ ---- -------- -------- ------- ======= -------- --------
BALANCE, DECEMBER 31, 1997............... 62,070 620 133,231 (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
Adjustment for unrealized holding gain
on available-for-sale securities..... -- -- -- -- 135 135 -- 135
-------
Comprehensive income................... $25,725
------ ---- -------- -------- ------- ======= -------- --------
BALANCE, DECEMBER 31, 1998............... 62,070 620 137,335 (4,581) 188 5,427 138,989
Repurchases of common stock.............. -- -- -- (12,785) -- -- (12,785)
Exercise of stock options................ 2,789 28 7,070 17,213 -- -- 24,311
Common stock issued under the Employee
Stock Purchase Plan.................... 32 1 761 -- -- -- 762
Income tax benefit arising from employee
stock option plans..................... -- -- 74,883 -- -- -- 74,883
Comprehensive income:
Net income............................. -- -- -- -- -- $91,768 91,768 91,768
Foreign currency translation
adjustment........................... -- -- -- -- 68 68 -- 68
Adjustment for unrealized holding loss
on available-for-sale securities..... -- -- -- -- (1,203) (1,203) -- (1,203)
-------
Comprehensive income................... $90,633
------ ---- -------- -------- ------- ======= -------- --------
BALANCE, DECEMBER 31, 1999............... 64,891 $649 $220,049 $ (153) $ (947) $ 97,195 $316,793
====== ==== ======== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 27
VISX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 91,768 $ 25,590 $ 14,097
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 3,132 2,083 1,854
Increase (decrease) in cash flows from changes in
operating assets and liabilities:
Accounts receivable.............................. (23,432) (11,344) 1,426
Inventories...................................... (3,849) (2,073) 1,101
Deferred tax and other current assets............ (13,735) (13,582) (1,322)
Other assets..................................... (2,441) (4,096) (191)
Accounts payable................................. 1,474 (1,771) 3,068
Accrued liabilities.............................. 6,824 19,348 (3,432)
--------- --------- ---------
Net cash provided by operating activities........ 59,741 14,155 16,601
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................. (3,957) (1,549) (1,688)
Short-term investments
Available-for-sale securities: Purchases........... (240,322) (114,900) (102,024)
Proceeds from
maturities.......... 93,271 99,247 95,273
--------- --------- ---------
Net cash used in investing activities................. (151,008) (17,202) (8,439)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options, including income tax
benefit............................................ 100,024 21,610 5,188
Repurchases of common stock........................... (12,785) (18,645) (8,307)
--------- --------- ---------
Net cash provided by (used in) financing activities... 87,239 2,965 (3,119)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... (4,028) (82) 5,043
Cash and cash equivalents, beginning of year............ 29,870 29,952 24,909
--------- --------- ---------
Cash and cash equivalents, end of year.................. $ 25,842 $ 29,870 $ 29,952
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 28
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 tax liabilities,
the amount of our accounts receivable that we will be able to collect, the
potential for inventory obsolescence, 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.
Translation of Foreign Currencies. The local currency is the functional
currency for our foreign operations in Japan. Gains and losses from translation
of our Japanese foreign operations are included as a component of stockholders'
equity. Foreign currency translation gains and losses are recognized in the
statement of operations and have not been material.
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 current available-for-sale securities because we may sell
them before they reach maturity. They are carried at fair market value, with
unrealized holding 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,
-----------------
1999 1998
------- ------
<S> <C> <C>
Raw Materials and Subassemblies........................... $ 5,310 $3,183
Work-in-Process........................................... 4,756 2,869
Finished Goods............................................ 603 768
------- ------
$10,669 $6,820
======= ======
</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
28
<PAGE> 29
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
case of leasehold improvements. Property and equipment is stated at cost and
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1999 1998
------ ------
<S> <C> <C>
Furniture and fixtures..................................... $2,745 $2,313
Machinery and equipment.................................... 9,913 6,880
Leasehold improvements..................................... 1,610 1,107
------ ------
14,268 10,300
Less: accumulated depreciation and amortization............ (8,587) (5,982)
------ ------
Property and equipment, net................................ $5,681 $4,318
====== ======
</TABLE>
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
available to common shareholders divided by the weighted average number of
common shares outstanding. Diluted EPS equals net income available to common
shareholders 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,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
NET INCOME.................................................. $91,768 $25,590 $14,097
======= ======= =======
BASIC EARNINGS PER SHARE
Income available to common shareholders................... $91,768 $25,590 $14,097
Weighted average common shares outstanding................ 63,474 61,014 61,716
------- ------- -------
Basic earnings per share.................................. $ 1.45 $ 0.42 $ 0.23
======= ======= =======
DILUTED EARNINGS PER SHARE
Income available to common shareholders................... $91,768 $25,590 $14,097
------- ------- -------
Weighted average common shares outstanding................ 63,474 61,014 61,716
Dilutive potential common shares from stock options....... 4,645 4,384 1,556
------- ------- -------
Weighted average common shares and dilutive potential
common shares.......................................... 68,119 65,398 63,272
------- ------- -------
Diluted earnings per share................................ $ 1.35 $ 0.39 $ 0.22
======= ======= =======
</TABLE>
Options to purchase 125,000, 214,000 and 2,700,000 weighted shares
outstanding during 1999, 1998 and 1997, 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.
29
<PAGE> 30
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), Revenue Recognition in Financial
Statements. SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements. We
will adopt SAB No. 101 as required in the first quarter of 2000 and are
evaluating the effect that SAB No. 101 may have on our financial statements.
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 8%, 12% and 23% of total
revenues for the years ended December 31, 1999, 1998 and 1997, 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, 1999. In the
following table we have presented our export revenues by geographic region (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Europe................................................ $ 4,554 $ 3,355 $ 4,140
Americas (excluding the United States)................ 3,287 4,810 4,150
Asia and Other........................................ 14,640 8,406 7,573
------- ------- -------
$22,481 $16,571 $15,863
======= ======= =======
</TABLE>
Major Customers. TLC The Laser Center, Inc. accounted for 12%, 11% and 13%
of total revenues in 1999, 1998 and 1997, respectively. Laser Vision Centers,
Inc. accounted for 13%, 10% and 7% of total revenues in 1999, 1998 and 1997,
respectively. No other customer accounted for 10% or more of sales during any of
the three years ended December 31, 1999.
30
<PAGE> 31
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, 1999 DECEMBER 31, 1998
------------------------------------ ----------------------------------
GROSS AGGREGATE GROSS AGGREGATE
AMORTIZED UNREALIZED FAIR AMORTIZED UNREALIZED FAIR
COST GAIN (LOSS) 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............ $ 97,714 $ (604) $ 97,110 $ 42,184 $114 $ 42,298
Debt securities of U.S.
corporations............ 135,818 (411) 135,407 44,297 74 44,371
-------- ------- -------- -------- ---- --------
233,532 (1,015) 232,517 86,481 188 86,669
CASH EQUIVALENTS
Available-for-Sale Securities
Debt securities of U.S.
corporations............ 20,309 -- 20,309 23,894 -- 23,894
-------- ------- -------- -------- ---- --------
Total investments.... $253,841 $(1,015) $252,826 $110,375 $188 $110,563
======== ======= ======== ======== ==== ========
</TABLE>
There were no gross realized gains or losses on available-for-sale
securities. All available-for-sale securities held at December 31, 1999 mature
within two years of that date.
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Payroll and related accruals............................. $ 5,869 $ 5,708
Accrued warranty, installation, and training expenses.... 6,391 2,941
Accrued royalties........................................ 1,850 601
Deposits and deferred revenue............................ 10,216 11,603
Accrued sales promotions and distributor commissions..... 5,019 2,668
Accrued income and sales taxes........................... 8,367 7,888
Accrued legal expenses................................... 2,330 1,668
Other.................................................... 730 871
------- -------
$40,772 $33,948
======= =======
</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 may account for these plans following either Accounting Principles Board
Opinion No. 25 ("APB No. 25") or Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"). We have elected to follow APB No. 25 and, accordingly,
have recorded no compensation expense associated with these plans. If we had
elected to follow SFAS No. 123, we would have recorded compensation expense for
31
<PAGE> 32
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
options granted under these plans and our net income and earnings per share
would have been adjusted to the following pro forma amounts (in thousands,
except per share data).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C> <C>
Net Income...................................... As Reported $91,768 $25,590 $14,097
Pro Forma.. 69,868 18,733 9,281
Diluted Earnings Per Share...................... As Reported $ 1.35 $ 0.39 $ 0.22
Pro Forma.. 1.03 0.29 0.15
</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 1999, 1998 and 1997,
respectively: risk-free interest rates of 5.4, 5.4 and 6.0 percent, expected
volatility of 68, 51 and 54 percent, no expected dividends, and an expected life
of 1.15, 1.70 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 2,000,000 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 31,675
shares, 69,680 shares and 84,648 shares in 1999, 1998 and 1997, respectively,
and 534,179 shares cumulatively through December 31, 1999. Accordingly 1,465,821
shares are available for grant under the Purchase Plan at December 31, 1999. The
weighted average fair market value of shares sold in 1999 was $58.83 per share.
As of December 31, 1999 we are authorized to grant options for up to
12,678,134 shares under the 1995 Plan and 1,000,000 shares under the Director
Plan. We have granted options on 9,933,350 shares and 291,000 shares,
respectively, under these two plans through December 31, 1999. Accordingly
3,350,362 and 709,000 shares, respectively, are available for grant under these
two plans at December 31, 1999. Under both Plans the option exercise price
equals the stock's market price on the date of grant, options generally 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.
32
<PAGE> 33
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's stock option plans at December 31,
1999, 1998 and 1997 and changes during the years then ended is presented in the
following tables. Share amounts are shown in thousands.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
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.............. 8,308 $ 7.34 7,866 $5.69 6,868 $5.18
Granted................................. 2,048 41.70 3,314 9.36 2,772 5.56
Exercised............................... (3,499) 7.10 (2,358) 4.93 (1,446) 2.86
Forfeited............................... (98) 25.30 (514) 6.26 (328) 6.31
------- ------- -------
Outstanding, end of year................ 6,759 17.61 8,308 7.34 7,866 5.69
======= ======= =======
Exercisable, end of year................ 2,229 $11.33 2,736 $5.77 2,716 $5.19
======= ======= =======
Weighted average fair value per option
granted............................... $ 17.16 $ 4.27 $ 2.19
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WTD. AVG.
WTD. AVG. YEARS LEFT WTD. AVG.
EXERCISE PRICES SHARES EXERCISE PRICE TO EXERCISE SHARES EXERCISE PRICE
- --------------- ------ -------------- ----------- ------ --------------
<S> <C> <C> <C> <C> <C>
$ 1.31 - $ 3.97 169 $ 2.89 4.5 169 $ 2.89
4.04 - 6.09 2,761 5.58 7.7 1,004 5.52
6.16 - 11.94 1,108 8.55 7.3 557 8.52
12.00 - 18.72 813 16.72 8.8 168 17.12
19.70 - 30.50 1,296 30.11 9.2 268 30.27
30.69 - 101.75 612 67.03 9.4 63 55.58
----- -----
$ 1.31 - $101.75 6,759 $17.61 8.1 2,229 $11.33
===== =====
</TABLE>
NOTE 6. STOCKHOLDERS' EQUITY
In 1997 the board of directors authorized management to repurchase up to
8,000,000 shares of VISX common stock. In February 2000 the board of directors
replaced this plan with a new authorization for management to repurchase up to
10,000,000 shares of VISX common stock. Through purchases on the open market in
accordance with these authorizations and applicable securities laws, we
repurchased 4,081,000 shares at a total cost of $39,557,000 from 1997 through
1999. In 2000 we have repurchased 2,940,000 shares at a total cost of
$59,486,000 as of March 15, 2000. All share figures reflected in this
information on repurchases have been adjusted for the 2 for 1 stock splits we
distributed in January and May 1999. 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.
33
<PAGE> 34
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. -- INCOME TAXES
Our provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal........................................... $ 60,764 $ 13,929 $ 1,561
State............................................. 14,340 4,350 1,361
-------- -------- -------
75,104 18,279 2,922
-------- -------- -------
Deferred, net
Federal........................................... (11,891) (12,309) (1,000)
State............................................. (2,035) (1,804) --
-------- -------- -------
(13,926) (14,113) (1,000)
-------- -------- -------
Net tax provision................................... $ 61,178 $ 4,166 $ 1,922
======== ======== =======
</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,
-------------------------
1999 1998 1997
----- ------ ------
<S> <C> <C> <C>
Statutory Federal income tax rate........................... 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit.................. 5.2 5.6 5.8
R&D credit and foreign sales corporation benefit............ (0.2) (0.7) (0.6)
Change in valuation allowance............................... -- (25.9) (28.2)
---- ----- -----
Effective income tax rate................................... 40.0% 14.0% 12.0%
==== ===== =====
</TABLE>
We received $171,000 in net income tax refunds during 1999. We paid
$1,556,000 and $1,347,000 in income taxes during 1998 and 1997, respectively.
At December 31, 1999, we had net operating loss carryforwards of
approximately $23,900,000 and $9,300,000 available to offset future federal and
state taxable income, respectively. Our loss carry forwards expire through the
year 2019. 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.
34
<PAGE> 35
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Our net deferred income tax assets were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Net operating loss carryforwards
Federal................................................... $ 8,400 $ 4,600
State..................................................... 800 --
Cumulative temporary differences
Allowance for doubtful accounts........................... 800 700
Inventory reserves........................................ 900 900
Warranty reserves......................................... 2,400 1,200
Accrued sales promotions and commissions.................. 1,800 900
Deferred revenue.......................................... 1,700 300
State income taxes........................................ 4,600 900
Other temporary differences............................... 3,500 3,100
Tax credit carryforwards.................................... 3,400 1,800
------- -------
Net deferred income tax asset............................... $28,300 $14,400
======= =======
</TABLE>
We believe it is more likely than not that we will generate sufficient
taxable income in the future to take full benefit for the federal and state net
operating loss carryforwards, the temporary differences, and the tax credit
carryforwards. Therefore, in accordance with GAAP we have no valuation
allowance. However, given that the laser vision correction industry is still
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 $1,040,000, $1,027,000 and
$990,000 for the years ended December 31, 1999, 1998, and 1997, 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,
2000........................................... $1,514 $(625) $ 889
2001........................................... 1,424 (215) 1,209
2002........................................... 1,398 -- 1,398
2003........................................... 583 -- 583
2004........................................... -- -- --
Thereafter..................................... -- -- --
------ ----- ------
Total minimum lease payments......... $4,919 $(840) $4,079
====== ===== ======
</TABLE>
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
35
<PAGE> 36
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
patents has occurred. In addition, VISX's use of patents and its business
practices are being contested in several proceedings as violations of antitrust
laws. The results of these complex legal proceedings are very difficult to
predict with certainty. Because a number of the proceedings have issues 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, could give rise to significant
monetary damages, could prevent VISX from manufacturing and selling the VISX
System, and therefore could have a material adverse effect on VISX's business,
financial position and results of operations.
PATENT LITIGATION: NIDEK AND USERS OF NIDEK LASERS
United States.
FEDERAL DISTRICT COURT IN NORTHERN CALIFORNIA. In December 1998, Nidek
received approval to market its laser vision correction systems in the United
States and VISX filed a lawsuit in the United States District Court in Northern
California alleging that Nidek's laser systems infringe VISX United States
Patent Nos. 4,718,418, 4,732,148, and 5,711,762 (USDC ND Cal C98-04842). VISX is
seeking injunctive relief and monetary damages in that case. Nidek filed a
lawsuit against VISX on March 30, 1999 in the United States District Court in
Northern California alleging, among other things, that VISX's use of patents
allegedly obtained through inequitable conduct violates certain antitrust laws.
This case was consolidated with VISX's action against Nidek for patent
infringement. The consolidated case was stayed by the court during 1999 pending
the outcome of the International Trade Commission decision described below and
is now in the early stages of discovery.
In February 2000, the four lawsuits filed during 1999 by VISX against
certain users of Nidek laser systems were transferred to Multi-District
Litigation in the United States District Court in Northern California (MDL
Docket No. 1319, the "California MDL") for the purpose of consolidating them
with the actions between VISX and Nidek for pre-trial proceedings. In these
cases (captioned VISX, Incorporated v. Farmington Eye Center PLLC and Donald C.
Fiander, MD (USDC ED Mich 99-60139); VISX, Incorporated v. OR Providers, Inc.,
Refractive Support, Inc., and Robert G. Wiley, M.D. (USDC ND Ohio 1:99CV00508);
VISX, Incorporated v. Southwest Eye Care Center, Inc. et al (USDC SD Cal 99 CV
1029L); and VISX, Incorporated v. Antoine L. Garabet et al. (USDC CD Cal
99-05284)), VISX has alleged, among other things, that the defendants' use of
the Nidek laser system infringes one or more of VISX's patents and is seeking an
injunction against the defendants prohibiting the use of the Nidek laser system
and monetary damages. The defendants in these actions have filed counterclaims
seeking, among other things, a declaration of non-infringement, invalidity and
unenforceability of the patents asserted. Discovery and pretrial proceedings is
ongoing in these actions. We do not anticipate that any of these cases involving
Nidek or users of Nidek's laser system will go to trial before the year 2001.
Adverse determinations in any 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 could have a material adverse effect on VISX's license
revenues and therefore its business, financial position and results of
operations.
INTERNATIONAL TRADE COMMISSION. Trial in the International Trade Commission
(ITC) investigation of Nidek and its United States subsidiaries based on the
complaint filed with the ITC by VISX in January 1999 (Investigation No.
337-TA-419) took place in August 1999. In this case, VISX sought an order of the
ITC prohibiting the importation, sale and service of the Nidek laser system and
its component parts in the United States on the basis that Nidek and its United
States subsidiaries had violated Section 337 of the Tariff Act of 1930, as
amended, by infringing certain VISX patents. Nidek denied infringement and
challenged the validity and enforceability of the two VISX patents asserted in
the case. The ITC
36
<PAGE> 37
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
administrative law judge issued an initial determination on December 6, 1999
finding that Nidek and its United States subsidiaries had not violated Section
337 of the Tariff Act of 1930, as amended. VISX and the ITC's Office of Unfair
Import Investigations, a third party in the case representing the government and
the public interest, petitioned the full Commission requesting review of the
initial determination.
The Commission granted review with respect to certain findings of the
Initial Determination, however, on March 6, 2000 the Commission issued a Notice
that it had determined that Nidek had not violated Section 337 of the Tariff Act
of 1930, as amended. The Commission concluded the Nidek laser system does not
infringe the VISX patents at issue in the proceeding and that VISX does not
practice those patents. The Commission took no position with respect to the
Initial Determination findings regarding the validity and enforceability of
VISX's U.S. Patent No. 5,711,762. The Commission did not review the findings of
the ITC administrative law judge with respect to VISX's U.S. Patent No.
4,718,418 (the "'418 patent"). The administrative law judge's ruling upholding
the enforceability of the '418 patent but finding that it was not infringed by
the Nidek laser system therefore becomes the final determination of the
Commission. The decisions of the administrative law judge and the Commission are
not binding on any other court, however, parties may attempt to introduce them
in other litigation involving VISX's patents. The Commission's determination is
subject to review by the United States Court of Appeals for the Federal Circuit
and VISX may appeal all or a portion of the decision.
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 took
place in September 1999 and in December 1999 the Canadian federal court ruled
that Nidek and the other defendants had not infringed the VISX patents asserted
in the case. The court found that those patents were valid despite the
defendants' claims to the contrary. VISX, Nidek and the other defendants have
filed appeals of this decision. The proceeding in France is currently in the
pleading stage. It is not possible to predict the final outcome of either case.
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.
PATENT LITIGATION: LASERSIGHT
In November 1999, after LaserSight received approval from the FDA to market
its system for laser vision correction, VISX filed an action alleging that
LaserSight had infringed the '418 patent in United States District Court in
Delaware (USDC Del. 99-789). This suit was stayed pending licensing discussions
between the parties. In February 2000, LaserSight terminated the licensing
discussions and filed a lawsuit against VISX in the same District Court seeking
a declaration of non-infringement and invalidity of the '418 patent and alleging
that VISX infringes LaserSight's U.S. Patent No. 5,630,810 (USDC Del. 00-059).
Both parties are seeking damages and injunctive relief. Discovery has not
commenced and it is too early to predict the outcome of these cases. However,
adverse determinations in one or both of these lawsuits could give rise to
monetary damages, could limit VISX's ability to collect license fees, and could
prevent VISX from manufacturing and selling the VISX System, any of which, in
turn, could have a material adverse effect on VISX's business, financial
position and results of operations.
PATENT LITIGATION: OTHER
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
37
<PAGE> 38
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Partners (USDC West. Dist. Tex. SA-97-CA-794-FB). Trial in this case has been
set for June 5, 2000. Taboada seeks a declaration that he is either the sole
inventor or a joint inventor of VISX's United States Patent No. 5,108,388 (the
" '388 patent") which names Dr. Trokel as the inventor. 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, claims
breach of contract, and seeks monetary damages and injunctive relief. Taboada
has also filed pleadings in the United States District Court for the District of
Columbia requesting that the reexamination of the '388 patent currently pending
in the U.S. Patent and Trademark Office be stayed pending the outcome of the
case in Texas (USDC CA 00-421). VISX believes that Taboada's complaint and the
request for stay of the reexamination are without merit and intends to
vigorously defend against them, 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, could limit VISX's ability to collect license fees, and could
prevent VISX from manufacturing and selling the VISX System, any of which, in
turn, could materially adversely affect 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 complaint (Docket No. 9286) challenging the existence of Pillar
Point and challenging the enforceability of certain patents owned by VISX. On
July 8, 1998 VISX 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 did not
address the portion of the FTC's complaint directed towards the enforceability
of certain VISX patents. On June 4, 1999 the FTC released the initial decision
of its administrative law judge dismissing the remaining portions of the FTC's
complaint against VISX. On June 21, 1999 the FTC attorneys filed notice that
they would appeal the judge's decision to the full Commission. On December 1,
1999, the FTC attorneys filed a conditional motion to dismiss the FTC's
complaint. The Commission has not yet ruled on the FTC's motion. Although we
believe the FTC's claims in this case are unfounded and we will continue to
vigorously defend the enforceability of our patents, it is not possible to
predict the outcome of this appeal proceeding. A determination by the FTC
Commissioners that certain of our patents are unenforceable could reduce the
breadth of our patent coverage. This, in turn, could have a material adverse
effect on our business, financial position and results of 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,
Summit and, in some cases, also against their affiliates, VISX Partner, Inc.,
Summit Partner, Inc., and Pillar Point, a now-dissolved partnership between VISX
Partner and Summit Partner. These actions allege, among other things, violations
of various state and federal antitrust and unfair competition laws. These cases
can be divided into two categories based 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
Several actions filed in California state court on behalf of purported
classes of patients have been consolidated into one case in Santa Clara County
Superior Court captioned In re PRK/LASIK Consumer Litigation, No. CV772894 ("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. On May 12, 1999, the court entered an order to
which the parties had stipulated conditionally certifying that the class shall
include patients in 17 states and the District of Columbia. Discovery is ongoing
in this action.
38
<PAGE> 39
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition to the In re PRK action pending in California, we have been
named in several duplicative actions in other states on behalf of purported
classes of patients:
Florida. In Marks v. Summit Technology Inc., et al., filed on April 27,
1998 in Florida state court, plaintiff brought suit on behalf of a purported
class of patients in several states alleging violations of the Florida antitrust
and unfair competition laws. On December 15, 1999, the Marks case was stayed
pending the final resolution of the In re PRK action in Santa Clara County,
California.
Wisconsin. Worcester v. Summit Technology, Inc. et al. was filed on June
11, 1998 in Wisconsin state court on behalf of a purported class of Wisconsin
patients alleging violations of the Wisconsin antitrust and unfair competition
laws. The Worcester action was removed to federal court and transferred in
December 1998 to the Multi-District Litigation pending in Arizona described
below.
The action on behalf of a purported class of patients captioned Karen
Frankson et al. v. Pillar Point Partners et al., filed on January 4, 1999 in
Wisconsin state court, was removed to federal court and transferred to the
Multi-District Litigation pending in Arizona described below. On February 23,
2000, the MDL court entered an order dismissing the Frankson action without
prejudice.
Minnesota. In May 1999, Brisson v. Summit Technology, Inc., VISX, Inc.,
Summit Partner, Inc., VISX Partner, Inc. and Pillar Point Partners was filed by
plaintiff on behalf of a purported class of Minnesota patients alleging
violations of Minnesota antitrust laws, seeking unspecified damages and
injunctive relief.
In May 1999, another Minnesota action was filed, captioned Castino v. VISX,
Inc. and Summit Technology, Inc. (USDC Minn. 99-861). The Castino case, which
was filed on behalf of a purported class of patients in several states alleging
violations of the antitrust and unfair competition laws of those states, was
dismissed on July 12, 1999 pursuant to plaintiff's unopposed motion for
voluntary dismissal without prejudice.
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 in federal court against VISX, Summit, and, in
some cases, Pillar Point. All of these actions have been transferred to the
Multi-District Litigation in Arizona 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). Plaintiffs have moved for certification of a nationwide class of direct
purchasers who paid per procedure license fees to VISX or Summit. Plaintiffs'
motion to certify the class is currently pending, and discovery is ongoing.
In each of the antitrust class actions described above the plaintiffs are
seeking unspecified damages and injunctive relief for alleged violations of
state and/or federal antitrust laws. Although we believe we 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, could have a material adverse effect on VISX's business,
financial position and 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
39
<PAGE> 40
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, a
number of cases have been transferred to Multi-District Litigation in the
Federal District Court in the District of Arizona for pretrial proceedings under
the caption In re Pillar Point Partners Antitrust and Patent Litigation (MDL No.
1202, the "Arizona MDL"). In addition to the antitrust class actions described
above, the following cases are pending in the Arizona 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. 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.
Both 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.
Freedom Vision Laser Center, LP v. VISX, Incorporated et al. On May 28,
1999, Freedom Vision Laser Center filed an action on behalf of certain
physicians, which has been transferred to the Arizona MDL. In that case, the
plaintiffs allege, among other things, violations of federal and state antitrust
laws and are seeking unspecified damages and injunctive relief.
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, could have a
material adverse effect on VISX's business, financial position and results of
operations.
UNFAIR COMPETITION ACTION FILED IN CALIFORNIA STATE COURT
On January 24, 2000, a case captioned Antoine L. Garabet, M.D. and Abraham
v. Shammas, M.D. v. Summit Technology, Inc. and VISX (CV 787359) was filed in
Superior Court for Santa Clara County, California. Plaintiffs brought this
action purportedly on behalf of the public under Section 17200 of the Business
and Professions Code, California's unfair competition law. The complaint alleges
various purportedly anticompetitive activities, similar to the allegations made
in the antitrust class actions described above. Plaintiffs seek injunctive
relief, disgorgement of profits, a constructive trust, and attorneys' fees. This
action has only recently been filed and it is therefore too early to make an
assessment of the merits of the case and the financial consequences of an
adverse decision in the case.
40
<PAGE> 41
VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SECURITIES CLASS ACTIONS
VISX and certain of its officers have been named as defendants in several
substantially similar securities class action lawsuits filed in February and
March 2000 in the United States District Court for the Northern District of
California. The plaintiffs in these actions purport to represent a class of all
persons who purchased VISX's common stock between March 1, 1999 and February 22,
2000. The complaints allege that the defendants made misleading statements in
violation of the federal securities laws, including Section 10(b) of the
Securities Exchange Act of 1934. VISX expects the Court to appoint a lead
plaintiff and consolidate the complaints in the near future.
VISX believes that the complaints are without merit and intends to defend
against them vigorously. Nevertheless, litigation is subject to inherent
uncertainties and thus there can be no assurance that these suits will be
resolved favorably to VISX or will not have a material adverse effect on VISX's
financial position.
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.
41
<PAGE> 42
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, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
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 17, 2000
42
<PAGE> 43
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 VISX's definitive Proxy Statement (the "2000 Proxy Statement") to
be filed with the SEC and relating to its Annual Meeting of Stockholders to be
held on May 19, 2000.
The principal executive officers of VISX are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark B. Logan.................. 61 Chairman of the Board and Chief Executive Officer
Elizabeth H. Davila............ 55 President and Chief Operating Officer
Derek A. Bertocci.............. 46 Vice President, Controller
Carol F.H. Harner, Ph.D. ...... 56 Vice President, Research and Development
Frances L. Henville-Shannon.... 50 Vice President, Human Resources
Kina Lamblin................... 32 Vice President, General Counsel and Secretary
James W. McCollum.............. 46 Vice President, Marketing and Sales
Timothy R. Maier............... Executive Vice President, Chief Financial Officer and
51 Treasurer
David M. Patino................ 55 Vice President, Regulatory and Clinical Affairs
Douglas H. Post................ 48 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
from 1993 to 1995 and Controller and Assistant Treasurer for Datron Systems,
Inc. from 1987 to 1993.
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.
43
<PAGE> 44
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 had been 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 2000
Proxy Statement sections "Further Information Concerning the Board of
Directors -- Director Compensation" and "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 regarding beneficial ownership of
the Common Stock by certain beneficial owners and by management of VISX is
incorporated into this item by reference to the 2000 Proxy Statement section
"Principal Stockholders."
44
<PAGE> 45
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 2000 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, 1999:
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets................................. 24
Consolidated Statements of Operations....................... 25
Consolidated Statements of Stockholders' Equity............. 26
Consolidated Statements of Cash Flows....................... 27
Notes to Consolidated Financial Statements.................. 28
Report of Independent Public Accountants.................... 42
</TABLE>
2. The following financial statement schedule is filed as part of this
report:
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
3. The Exhibits filed as a part of this Report are listed in the Index to
Exhibits.
(b) REPORTS ON FORM 8-K.
Two reports on Form 8-K were filed during the fourth quarter of 1999:
(1) Form 8-K filed on December 16, 1999 under Item 5 (Other Events) to
which we attached a copy of a VISX Press Release dated December 6, 1999
entitled Initial Determination Issued by International Trade Commission.
(2) Form 8-K filed on December 22, 1999 under Item 5 (Other Events)
regarding the December 17, 1999 ruling of the Canadian Federal Court in the
case captioned VISX v. Nidek Co., Ltd.
(c) EXHIBITS.
See Index to Exhibits.
(d) FINANCIAL STATEMENT SCHEDULES.
See Item 14(a)(2), above.
45
<PAGE> 46
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, 1997
Allowance for bad debts............................. $ 600 $253 $ -- $39 $ 814
Year Ended December 31, 1998
Allowance for bad debts............................. 814 810 -- 4 1,620
Year Ended December 31, 1999
Allowance for bad debts............................. 1620 166 -- 13 1,773
</TABLE>
46
<PAGE> 47
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 24, 2000
47
<PAGE> 48
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 24, 2000
- ----------------------------------------------------- Executive Officer and Director
Mark B. Logan
PRINCIPAL FINANCIAL OFFICER:
/s/ TIMOTHY R. MAIER Executive Vice President, Chief March 24, 2000
- ----------------------------------------------------- Financial Officer and Treasurer
Timothy R. Maier
PRINCIPAL ACCOUNTING OFFICER:
/s/ DEREK A. BERTOCCI Vice President, Controller March 24, 2000
- -----------------------------------------------------
Derek A. Bertocci
/s/ ELIZABETH H. DAVILA President, Chief Operating March 24, 2000
- ----------------------------------------------------- Officer and Director
Elizabeth H. Davila
/s/ GLENDON E. FRENCH Director March 24, 2000
- -----------------------------------------------------
Glendon E. French
/s/ JOHN W. GALIARDO Director March 24, 2000
- -----------------------------------------------------
John W. Galiardo
/s/ JAY T. HOLMES Director March 24, 2000
- -----------------------------------------------------
Jay T. Holmes
/s/ RICHARD B. SAYFORD Director March 24, 2000
- -----------------------------------------------------
Richard B. Sayford
</TABLE>
48
<PAGE> 49
VISX, INCORPORATED
INDEX TO EXHIBITS
[ITEM 14(c)]
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1* Amended and Restated Certificate of Incorporation
(previously filed as Exhibit 3 to Quarterly Report on Form
10-Q for the quarter ended September 30, 1996)
3.2* Amended and Restated Bylaws as revised through December 13,
1995 (previously filed as Exhibit 3 to Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996)
4.1* Reference is made to Exhibits 3.1 and 3.2
4.2* Specimen Common Stock Certificate (previously filed as
Exhibit 4.2 to Annual Report on Form 10-K, File No. 1-10694,
for the fiscal year ended December 31, 1990)
10.1* Stock Option Plan (previously filed as Exhibit 10(E) to Form
S-1 Registration Statement No. 33-23844)
10.2* 1990 Stock Option Plan (previously filed as Exhibit 10.39 to
Annual Report on Form 10-K, File No. 1-10694, for the fiscal
year ended December 31, 1990)
10.3* Agreement dated as of January 1, 1992, between International
Business Machines Corporation and the Company (previously
filed as Exhibit 10.34 to Amendment No. 1 to Form S-1
Registration Statement No. 33-46311)
10.4* Formation Agreement dated June 3, 1992, among Summit
Technology, Inc., VISX, Incorporated, Summit Partner, Inc.,
and VISX Partner, Inc. (previously filed as Exhibit 10.1 to
Form 8-K dated June 3, 1992)
10.5* General Partnership Agreement of Pillar Point Partners dated
June 3, 1992, between VISX Partner, Inc. and Summit Partner,
Inc. (previously filed as Exhibit 10.2 to Form 8-K dated
June 3, 1992)
10.6* License-back to VISX Agreement dated June 3, 1992, between
Pillar Point Partners and the Company (previously filed as
Exhibit 10.3 to Form 8-K dated June 3, 1992)
10.7* Lease dated July 16, 1992, as amended October 2, 1992,
between the Company and Sobrato Interests, a California
limited partnership (previously filed as Exhibit 10.1 to
Form 10-Q for the quarter ended September 30, 1992)
10.8* 1993 Flexible Stock Incentive Plan (previously filed as
Exhibit 10.28 to Annual Report on Form 10-K dated March 30,
1993)
10.9* 1993 Employee Stock Purchase Plan (previously filed as
Exhibit 10.29 to Annual Report on Form 10-K dated March 30,
1993)
10.10* Form of Subscription Agreement (previously filed as Exhibit
10.24 to Form 10-K for the year ended December 31, 1994)
10.11* Complaint filed on September 26, 1994 in the Superior Court
for the County of Santa Clara by CAP Advisers Limited, CAP
Trust, and Osterfak, Ltd. (previously filed as Exhibit 5.1
to Form 8-K dated September 26, 1994)
10.12*+ Agreement effective as of November 20, 1995, among the
Company, Alcon Laboratories, Inc., and Alcon
Pharmaceuticals, Ltd. (previously filed as Exhibit 10.28 to
Form 10-K for the year ended December 31, 1995)
10.13* Agreement and Stipulation of Settlement filed on November
20, 1995, in the Superior Court for the County of Santa
Clara (previously filed as Exhibit 10.29 to Form 10-K for
the year ended December 31, 1995)
10.14* Second Amendment to Lease dated March 8, 1996, between the
Company and Sobrato Interests, a California limited
partnership (previously filed as Exhibit 10.29 to Form 10-K
for the year ended December 31, 1995)
10.15* 1995 Stock Plan (previously filed as Exhibit 10.2 to
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996)
10.16* 1995 Director Option Plan (previously filed as Exhibit 10.1
to Quarterly Report on Form 10-Q for the quarter ended June
30, 1996)
10.17* 1996 Supplemental Stock Plan (previously filed as Exhibit
10.3 to Form S-8 Registration Statement No. 333-23999)
</TABLE>
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.18*+ Settlement Agreement dated June 17, 1997 (previously filed
as Exhibit 99.1 to Current Report on Form 8-K dated June 17,
1997)
10.19*+ Settlement and Dissolution Agreement dated June 4, 1998
filed as an exhibit to VISX's Form 8-K filed June 23, 1998
and From 8-K/A filed July 28, 1999.
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
46
<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 From 10-K, into the
Company's previously filed Registration Statement Nos. 33-34374, 33-40519,
33-53806, 33-69044, 333-23999, 333-53041, and 333-75207 on Form S-8.
ARTHUR ANDERSEN LLP
San Jose, California
March 23, 2000
47
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 25,842
<SECURITIES> 232,517
<RECEIVABLES> 53,027
<ALLOWANCES> (1,773)
<INVENTORY> 10,669
<CURRENT-ASSETS> 349,474
<PP&E> 14,268
<DEPRECIATION> (8,587)
<TOTAL-ASSETS> 362,721
<CURRENT-LIABILITIES> 45,928
<BONDS> 0
0
0
<COMMON> 649
<OTHER-SE> 316,144
<TOTAL-LIABILITY-AND-EQUITY> 362,721
<SALES> 74,415
<TOTAL-REVENUES> 271,252
<CGS> 57,513
<TOTAL-COSTS> 57,513
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 166
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 152,946
<INCOME-TAX> 61,178
<INCOME-CONTINUING> 91,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,768
<EPS-BASIC> 1.45
<EPS-DILUTED> 1.35
</TABLE>
