-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RVANvy+m/FSPiruqbIfJvhF/AwDnMYpdo+5v7PWdbSiWlDAn2HUUDL20WOm6i2Ek paYuhA8adVNz9LSrFfsfBg== 0000891618-98-004902.txt : 19981116 0000891618-98-004902.hdr.sgml : 19981116 ACCESSION NUMBER: 0000891618-98-004902 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VISX INC CENTRAL INDEX KEY: 0000837991 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 061161793 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17247 FILM NUMBER: 98747018 BUSINESS ADDRESS: STREET 1: 3400 CENTRAL EXPRESSWAY CITY: SANTA CLARA STATE: CA ZIP: 95051 BUSINESS PHONE: 4087332020 MAIL ADDRESS: STREET 1: VISX INC STREET 2: 3400 CENTRAL EXPRESSWAY CITY: SANTA CLARA STATE: CA ZIP: 95051-0703 FORMER COMPANY: FORMER CONFORMED NAME: TAUNTON TECHNOLOGIES INC DATE OF NAME CHANGE: 19901212 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------------------------- FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM --------------- TO --------------- Commission File Number 1-10694 --------------------------------------------- VISX, INCORPORATED (Exact name of registrant as specified in its charter) --------------------------------------------- DELAWARE 06-1161793 ------------------------ ------------------------ (State or other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.)
3400 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051 ---------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code): (408) 733-2020 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ Total number of shares of common stock outstanding as of October 31, 1998: 15,204,706. 2 VISX, INCORPORATED TABLE OF CONTENTS
PAGE PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS Condensed Consolidated Interim Balance Sheets as of September 30, 1998 and December 31, 1997 3 Condensed Consolidated Interim Statements of Operations for the Three Months Ended September 30, 1998 and 1997 and for the Nine Months Ended September 30, 1998 and 1997 4 Condensed Consolidated Interim Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 5 Notes to Condensed Consolidated Interim Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview 8 Results of Operations 9 Liquidity and Capital Resources 10 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 13 ITEM 6. Exhibits and Reports on Form 8 15 SIGNATURES 16
Page 2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS VISX, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
September 30, December 31, 1998 1997 -------------- ------------- (unaudited) CURRENT ASSETS: Cash and cash equivalents................................. $ 28,807 $ 29,952 Short-term investments.................................... 73,416 70,881 Accounts receivable, net of allowance for doubtful accounts of $1,399 and $814, respectively.............. 22,821 16,478 Inventories............................................... 7,150 4,747 Prepaid expenses and deferred tax assets.................. 7,926 1,875 --------- --------- Total current assets.............................. 140,120 123,933 PROPERTY AND EQUIPMENT, NET................................. 4,219 4,032 OTHER ASSETS................................................ 4,379 2,387 --------- --------- $ 148,718 $ 130,352 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 6,088 $ 5,453 Accrued liabilities....................................... 28,574 14,600 --------- --------- Total current liabilities......................... 34,662 20,053 --------- --------- STOCKHOLDERS' EQUITY: Common stock: $.01 par value, 90,000,000 shares authorized; 15,517,508 shares issued................... 155 155 Additional paid-in capital................................ 131,906 133,696 Treasury stock, at cost: 199,436 and 156,000 shares, respectively........................................... (6,558) (3,442) Unrealized holding gain on available-for-sale securities............................................. 351 53 Accumulated deficit....................................... (11,798) (20,163) --------- --------- Total stockholders' equity........................ 114,056 110,299 --------- --------- $ 148,718 $ 130,352 ========= =========
The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 3 4 VISX, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended Nine months ended September 30, September 30, --------------------- ---------------------- 1998 1997 1998 1997 -------- ------- -------- -------- (unaudited) (unaudited) REVENUES: System sales................................. $ 12,183 $ 9,213 $ 29,178 $ 27,486 License, service and other revenues.......... 23,661 8,754 62,639 21,819 -------- ------- -------- -------- Total revenues....................... 35,844 17,967 91,817 49,305 -------- ------- -------- -------- COSTS AND EXPENSES: Cost of revenues............................. 8,175 5,111 21,482 16,133 Marketing, general and administrative........ 9,171 5,621 21,825 16,808 Research, development and regulatory......... 2,655 2,716 7,872 7,422 -------- ------- -------- -------- Total costs and expenses............. 20,001 13,448 51,179 40,363 -------- ------- -------- -------- INCOME FROM OPERATIONS......................... 15,843 4,519 40,638 8,942 Interest and other income.................... 1,290 1,226 4,091 3,603 Litigation settlement........................ -- -- (35,000) (4,500) -------- ------- -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES....... 17,133 5,745 9,729 8,045 Provision for income taxes................... 2,401 690 1,364 966 ======== ======= ======== ======== NET INCOME..................................... $ 14,732 $ 5,055 $ 8,365 $ 7,079 ======== ======= ======== ======== EARNINGS PER SHARE Basic........................................ $ 0.96 $ 0.33 $ 0.55 $ 0.46 ======== ======= ======== ======== Diluted...................................... $ 0.89 $ 0.32 $ 0.51 $ 0.45 ======== ======= ======== ======== SHARES USED FOR EARNINGS PER SHARE Basic........................................ 15,300 15,432 15,236 15,416 ======== ======= ======== ======== Diluted...................................... 16,547 15,753 16,246 15,814 ======== ======= ======== ========
The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 4 5 VISX, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Nine months ended September 30, ------------------------ 1998 1997 --------- --------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 8,365 $ 7,079 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 1,515 1,389 Increase (decrease) in cash flows from changes in operating assets and liabilities: Accounts receivable.................................. (6,343) (413) Inventories.......................................... (2,403) 728 Prepaid expenses and deferred tax assets............. (6,051) (408) Other assets......................................... (2,425) (228) Accounts payable..................................... 635 1,847 Accrued liabilities.................................. 13,974 (601) --------- --------- Net cash provided by operating activities.............. 7,267 9,393 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (1,269) (1,456) Purchase of short-term investments........................ (87,899) (52,063) Proceeds from maturities of short-term investments........ 85,662 55,496 --------- --------- Net cash provided by (used in) investing activities.... (3,506) 1,977 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from new issuance of common stock............ -- 903 Repurchases of common stock, net of shares used for option exercises.............................................. (4,906) (2,976) --------- --------- Net cash (used in) financing activities................ (4,906) (2,073) --------- --------- Net increase (decrease) in cash and cash equivalents........ (1,145) 9,297 Cash and cash equivalents, beginning of period.............. 29,952 24,909 --------- --------- Cash and cash equivalents, end of period.................... $ 28,807 $ 34,206 ========= =========
The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 5 6 VISX, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) The accompanying interim financial statements and related notes should be read in conjunction with the financial statements and related notes included in the Company's 1997 annual report on Form 10-K. 1. BASIS OF PRESENTATION: The Condensed Consolidated Interim Financial Statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These Condensed Consolidated Interim Financial Statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. The Condensed Consolidated Interim Financial Statements included herein reflect, in the opinion of management, all adjustments (consisting primarily only of normal recurring adjustments) necessary to present fairly the results for the interim period. 2. EARNINGS PER SHARE: Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding plus dilutive potential common shares calculated in accordance with the treasury stock method.
Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- NET INCOME................................................ $ 14,732 $ 5,055 $ 8,365 $ 7,079 ======== ======== ======== ======== BASIC EARNINGS PER SHARE Income available to common shareholders................. $ 14,732 $ 5,055 $ 8,365 $ 7,079 Weighted average common shares outstanding.............. 15,300 15,432 15,236 15,416 -------- -------- -------- -------- Basic earnings per share................................ $ 0.96 $ 0.33 $ 0.55 $ 0.46 ======== ======== ======== ======== DILUTED EARNINGS PER SHARE Income available to common shareholders................. $ 14,732 $ 5,055 $ 8,365 $ 7,079 -------- -------- -------- -------- Weighted average common shares outstanding.............. 15,300 15,432 15,236 15,416 Dilutive potential common shares from stock options..... 1,247 321 1,010 398 -------- -------- -------- -------- Weighted average common shares and dilutive potential common shares......................................... 16,547 15,753 16,246 15,814 -------- -------- -------- -------- Diluted earnings per share.............................. $ 0.89 $ 0.32 $ 0.51 $ 0.45 ======== ======== ======== ========
Weighted average options outstanding to purchase 19,000 shares and 1,117,000 shares during the three month periods ended September 30, 1998 and 1997, respectively, and 32,000 shares and 682,000 shares during the nine month periods ended September 30, 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 these periods. Page 6 7 3. INVENTORIES (in thousands):
September 30, December 31, 1998 1997 ------------- ------------ (unaudited) Raw materials and subassemblies......................... $ 3,378 $ 2,487 Work in process......................................... 2,249 1,538 Finished goods.......................................... 1,523 722 -------- -------- Total......................................... $ 7,150 $ 4,747 ======== ========
4. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income" ("SFAS 130") effective for fiscal years beginning after December 15, 1997 and has restated information for all prior periods reported below to conform to this standard.
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 -------- -------- -------- -------- NET INCOME........................................ $ 14,732 $ 5,055 $ 8,365 $ 7,079 OTHER COMPREHENSIVE INCOME Unrealized holding gains on available-for-sale securities.................................... 323 6 298 27 -------- -------- -------- -------- COMPREHENSIVE INCOME.............................. $ 15,055 $ 5,061 $ 8,663 $ 7,106 ======== ======== ======== ========
5. LITIGATION 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 accordance with the agreement, VISX paid Summit a total of $35 million. See the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1998 for a more detailed description of this proceeding. See Part II -- Other Information, Item 1 -- Legal Proceedings for a discussion of new proceedings and new developments on previously disclosed proceedings. 6. NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments and hedging activities. The Company does not expect the adoption of SFAS No. 133, required beginning January 2000, to have a material effect on its consolidated financial statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains forward-looking statements that involve risks and uncertainties. The Company's actual results of operations could differ materially from those anticipated in such forward-looking statements as a result of various factors, including those identified below. In particular, the factors set forth in the Company's 1997 annual report on Form 10-K under Item 1. Business -- "Market Acceptance of Laser Vision Correction," "Reliance on Patents and Proprietary Technology," "Risks Relating to Pillar Point Partners; Patent Litigation," "Government Regulation; Unapproved Lasers," "Manufacturing, Components and Raw Materials," "Competition," "Product Liability and Insurance" and under Item 3 -- Legal Proceedings may cause the Company's actual results to vary from those contemplated by certain forward-looking statements set forth in this report and should be considered carefully in addition to other information presented in this report. This MD&A should be read in conjunction with the MD&A included in the Company's 1997 annual report on Form 10-K. Page 7 8 OVERVIEW Since its inception, VISX has been engaged in the design and development of proprietary technologies and systems for laser vision correction and has been manufacturing such systems since 1987. The U.S. Food and Drug Administration ("FDA") granted pre-market approval ("PMA") for use of the VISX STAR Excimer Laser System(TM) ("VISX System") for the following indications: phototherapeutic keratectomy ("PTK") on September 29, 1995, photorefractive keratectomy ("PRK") treatment of low to moderate myopia on March 27, 1996, PRK treatment of low to moderate myopia with astigmatism on April 25, 1997, PRK treatment of higher degrees of myopia with astigmatism on January 29, 1998, and PRK treatment of hyperopia on November 2, 1998. The Company's future growth and ability to sustain profitability cannot be predicted with certainty and will be influenced by a variety of factors. These include the extent to which laser vision correction is broadly accepted in the United States and key international markets targeted by the Company, the degree to which the Company is successful in generating license revenue from its patent rights, developments in patent litigation both in defense and enforcement of the Company's patents, developments with respect to other litigation to which the Company is a party or in which it may become involved, and competition from other vision correction products and procedures which are currently in use or may be developed and introduced in the future. In addition, several other companies are seeking PMA approval from the FDA for laser systems for PRK and Autonomous Technologies Corporation ("Autonomous") received such PMA approval for its laser system in November 1998. Autonomous and any other companies that receive PMA approval could increase price competition in the United States market with respect to both laser system sales and procedure fees. Any such increased competition could have a material adverse effect on the Company's business, financial condition and results of operations. The Company intends to offer to license certain of its patents to one or more of its competitors in the United States. However, there can be no assurance that mutually agreeable terms will be reached between the parties. The inability to license the Company's patents to any competitor in the United States could lead to litigation and a loss of license revenue. As a result of these factors, as well as those set forth in the above referenced portions of the Business and Legal Proceedings sections of the Company's 1997 annual report on Form 10-K, there can be no assurance that the Company will be able to sustain profitability. In particular, adverse determinations in the Company's pending legal proceedings described in Part II, Item 1 of this report, in the Company's annual report on Form 10-K for the year ended December 31, 1997, or in the Company's quarterly reports on Form 10-Q for the periods ended March 31, 1998 and June 30, 1998 could have a material adverse effect on the Company's business, financial condition and results of operations. Results of operations in the current or any prior fiscal period should not be considered as indicative of results to be expected for any future fiscal period. RESULTS OF OPERATIONS
Three Months Ended September 30, Nine Months Ended September 30, ---------------------------------- ---------------------------------- REVENUES 1998 1997 Change 1998 1997 Change -------- -------- -------- ------ -------- -------- ------ System sales............... $ 12,183 $ 9,213 32% $ 29,178 $ 27,486 6% Percent of total revenues............... 33.9% 51.3% 31.8% 55.7% License, service & other revenues................. 23,661 8,754 170% 62,639 21,819 187% Percent of total revenues............... 66.1% 48.7% 68.2% 44.3% Total...................... $ 35,844 $ 17,967 99% $ 91,817 $ 49,305 86%
System sales revenue was higher in the third quarter and first nine months of 1998 than in the comparable periods of 1997 due to an increase in units shipped, offset partially by a decline in average net selling prices. In the U.S., a decline in unit shipments to corporate laser centers was more than offset by an increase in shipments to individual customers. Internationally, unit shipments increased due to expansion into new markets. Average net selling prices declined due to sales promotions in various markets and pricing pressure in international markets resulting from the rise in the value of the dollar relative to other currencies. Page 8 9 License, service and other revenue increased in the third quarter and first nine months of 1998 over the comparable periods of 1997 due mainly to growth in procedure license revenue. Procedure volume rose significantly and VISX recorded virtually all procedure license fees directly as revenue in 1998, whereas in 1997 most procedure license fees were shared through Pillar Point Partners ("Pillar Point"). As a result of the June 1998 dissolution of Pillar Point by VISX and Summit Technologies, Inc. ("Summit"), VISX now records all procedure license fees on VISX Systems directly as revenue.
Three Months Ended September 30, Nine Months Ended September 30, ---------------------------------- ---------------------------------- COSTS & EXPENSES 1998 1997 Change 1998 1997 Change ---------------- -------- -------- ------ -------- -------- ------ Cost of revenues........... $ 8,175 $ 5,111 60% $ 21,482 $ 16,133 33% Percent of total revenues............... 22.8% 28.4% 23.4% 32.7% Marketing, gen'l and admin.................... 9,171 5,621 63% 21,825 16,808 30% Percent of total revenues............... 25.6% 31.3% 23.8% 34.1% R&D and regulatory......... 2,655 2,716 (2%) 7,872 7,422 6% Percent of total revenues............... 7.4% 15.1% 8.6% 15.1%
Cost of revenues increased in the third quarter and first nine months of 1998 over the comparable periods of 1997 due to several factors: an increase in the number of systems sold, increased costs arising from continued growth in the installed base of customers, and increased service costs as more customers purchased service contracts. Cost of revenues on system sales, as a percentage of system sales, was higher in the third quarter and first nine months of 1998 than in the comparable periods of 1997 due mainly to a decline in the average price for systems. Marketing, general and administrative expenses increased in the third quarter and first nine months of 1998 over the comparable periods of 1997 as the result of higher legal expenses related to patent matters, increases in sales and marketing programs, and increased incentive compensation which is tied to sales and operating income. Research, development and regulatory costs in the third quarter and first nine months of 1998 were largely unchanged from the comparable periods of 1997. The Company continued development of new products and technologies, and ran clinical trials and prepared submissions for regulatory approvals in the U.S. and Japan. Interest and other income increased due to higher average balances of cash, cash equivalents and short-term investments. In June 1998, VISX and Summit signed an agreement by which they dissolved Pillar Point and settled all pending disputes and litigation between the two companies. In accordance with the agreement, VISX paid Summit a total of $35 million. In June 1997, the Company settled certain U.S. and international patent disputes between itself and Summit. The settlement required an exchange of payments resulting in a net payment of $4.5 million to Summit. These payments were recorded as litigation settlement expense in the Statements of Operations in the second quarters of 1998 and 1997, respectively. The provision for income taxes covers alternative minimum taxes due under Federal statutes and state taxes at regular rates, net of credits anticipated. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments ("cash") and working capital were as follows.
September 30, December 31, 1998 1997 ------------- ------------ Cash, cash equivalents and short-term investments........... $ 102,223 $ 100,833 Working capital............................................. 105,458 103,880
Cash generated by income from operations was partially offset by cash used for capital expenditures and repurchases of company stock, net of option exercises. Increases in accounts receivable and inventory, Page 9 10 resulting from higher sales, were offset by increases in accrued liabilities. Changes in current deferred tax assets and liabilities contributed to increases in prepaid expenses and accrued liabilities. Purchases of short-term investments represent reinvestment of the proceeds from maturities of short-term investments and investment of cash and cash equivalents into short-term investments. The Company anticipates that its current cash, cash equivalents and short-term investments, as well as anticipated cash flows from operations, will be sufficient to meet its working capital and capital equipment needs at least through the next twelve months. YEAR 2000 DISCLOSURE The Company is aware that some information technology systems may not function properly at the onset of the year 2000. These systems record only the last two digits of a date's year instead of the full four digits. For example, they would record "00" as the year for dates in both 1900 and 2000. This could cause such systems to process and record information incorrectly or possibly fail to function in the year 2000. STATE OF READINESS Information technology systems, both hardware and software, are important to the proper functioning of the Company's products, operations, customers, suppliers and service providers. They include readily apparent systems such as those controlling our STAR Excimer Lasers as well as less obvious ones such as those imbedded in the security apparatus that protects our main facility. Products: The Company has evaluated the performance of the STAR S2(TM) Excimer Laser, STAR(TM) Excimer Laser, and the 2020B(TM) Excimer Laser Systems and has determined that none has any problems related to system performance, safety, or printer equipment interface as a result of handling dates in the year 2000 or beyond. We have determined, however, that these laser systems do not properly print or store patient report dates for procedures performed in the year 2000 or beyond. The Company is in the process of developing and testing a solution to this problem and expects to have it available to customers by the middle of 1999. Suppliers: In the third quarter of 1998, the Company began surveying current suppliers of critical components and all new suppliers about the ability of their systems and products to properly handle dates for the year 2000 and beyond. In the first quarter of 1999, the Company plans to survey remaining suppliers and service providers. If they do not reply or cannot comply, the Company may need to locate alternative sources for critical parts and services. If necessary, the Company anticipates that it will be able to locate and contract with alternative suppliers. However, the inability to locate alternative suppliers, if necessary, could have a material adverse impact on the Company's business and results of operation. Operations: In the second quarter of 1998, the Company began gathering information about year 2000 compliance by each of the major elements of the Company's internal information technology systems. Based on vendor statements, the Company's ERP system is year 2000 compliant. The Company also installed a test set of equipment to test and verify year 2000 compliance. The Company expects to complete testing of the major elements of its internal information technology systems listed below by the end of the first quarter of 1999. - Enterprise resource planning ("ERP") software and server hardware used to manage manufacturing, sales, customer service, accounting activities and prepare financial reports - LAN and WAN infrastructure linking users and internal and external systems and networks - Desktop and laptop computers and related software - PBX, voicemail, and fax systems The Company anticipates installing any necessary upgrades and new equipment to its information technology systems by the end of the second quarter of 1999. Any delay or inability of key vendors to supply Page 10 11 upgrades or new equipment that is year 2000 compliant could have a material adverse impact on the Company's business and results of operation. With regard to the Company's facilities and infrastructure, we have requested or will request that suppliers of key systems and services represent whether their products and services will function properly when handling dates for the year 2000 and beyond. These requests cover systems for building security and heating & lighting controls. COSTS TO ADDRESS YEAR 2000 ISSUES The Company has spent no more than $500,000 to date identifying, developing and testing solutions to year 2000 issues. The Company estimates that it may spend up to $1,500,000 to complete testing and implementation of upgrades and new equipment to make all major internal systems and the Company's laser systems capable of properly handling dates in the year 2000 and beyond. There can be no assurance that the cost estimates associated with the Company's year 2000 compliance will prove to be accurate or that the actual costs will not have a material adverse effect on the Company's results of operations and financial condition. RISKS OF YEAR 2000 ISSUES The Company has taken, and will take, various steps to ensure that its products, operations and suppliers are prepared to recognize dates and function properly in the year 2000 and beyond. However, unanticipated problems could arise relating to the operation of VISX's products, deliveries from suppliers, or VISX's ability to provide service or VisionKey(R) cards at the onset of the year 2000. Any resulting interruption to license fee revenue or legal claims could have a material adverse impact on the Company's business, financial position and results of operation. CONTINGENCY PLANS When its internal reviews and external surveys are complete, the Company will prepare contingency plans to prepare for problems that may reasonably be expected to arise. However, there can be no assurance that any such plans will prevent Year 2000 problems which may have a material adverse impact on the Company's business, financial position and results of operation. Page 11 12 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. VISX is a party to a number of patent and antitrust legal proceedings in the United States and in several international jurisdictions. Adverse determinations in one or more of such proceedings could limit VISX's ability to collect equipment and use fees in certain markets and could have a material, adverse effect on VISX's business, financial position and results of operations. The Company notes that the results of complex legal proceedings can be very difficult to predict with certainty. VISX is also a party to various other legal proceedings. For a complete description of legal proceedings, see VISX's annual report on Form 10-K for the year ended December 31, 1997 and reports on Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998. During the quarter ended September 30, 1998, there were no material developments with respect to such previously existing proceedings and no new material proceedings not previously disclosed, except as follows: ANTITRUST AND PATENT PROCEEDINGS FEDERAL TRADE COMMISSION On July 8, 1998, VISX reached a settlement with the Federal Trade Commission (FTC) and entered into a consent decree regarding the formation and operation of Pillar Point. The agreement was signed by VISX and by the FTC staff lawyers. The Director of the FTC's Bureau of Competition also approved the consent decree. In accordance with FTC regulations, the consent decree was presented to the Commissioners of the FTC for acceptance, placement on the public record, and a determination regarding issuance of a final order. The consent decree prohibits VISX and Summit from agreeing with one another on a variety of issues, including future pricing. No fines or penalties have been imposed against the Company, and nothing in the settlement prohibits VISX from collecting per-procedure fees under present and future licensing agreements. The consent decree does not address the patent portion of the FTC's Complaint. The parties are currently engaged in discovery regarding the remaining issues in anticipation of an administrative hearing scheduled to begin December 14, 1998. Although the Company believes the FTC's claims regarding the patents at issue are unfounded and intends to vigorously defend the enforceability of the patents, it is not possible to accurately predict the outcome of this proceeding. A determination by the Commission that certain of the Company's patents are unenforceable, if upheld on appeal, could reduce the breadth of the Company's patent coverage which, in turn, could have a material adverse effect on VISX's business, financial position and results of operation. For a more detailed description of this proceeding, see the Company's annual report on Form 10-K for the year ended December 31, 1997 and the Company's quarterly reports on Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998. PURPORTED CLASS ACTIONS Since the commencement of the FTC administrative proceedings on March 24, 1998, a large number of purported class actions have been filed against the Company alleging, among other things, violations of various state and federal antitrust laws. Marks v. Summit Technology Inc., et al. filed on April 27, 1998 in Florida State court has been remanded to Florida State court where the plaintiff's request for class certification is currently pending. Worcester v. Summit Technology, Inc. et al. filed on June 11, 1998 in Wisconsin State court has been removed to federal court and VISX is currently seeking to have the case transferred to the Multi-District Litigation described below. Two new purported class actions have been filed against the Company in federal court alleging violations of federal antitrust laws. David R. Shapiro, MD vs. VISX, Inc. and Summit Technology, Inc. (USDC AZ Aug. 6, 1998) and Laser Eye Center of Texas L.L.P. vs. Summit Technology, Inc., et al. (USDC TX Sept. 17, 1998). The plaintiffs in these cases seek unspecified damages and injunctive relief on behalf of a purported class of direct purchasers. Chisholm v. VISX, Inc. et al. (USDC AZ June 19, 1998) was dismissed on August 24, 1998. Page 12 13 These antitrust class actions are still in the very early pleading stages and it is too early to estimate the outcome of the suits. Nevertheless, to the extent that the complaints in these purported class actions mirror the initial FTC action, the Company believes it has meritorious defenses to the claims and intends to defend them vigorously. For a more detailed description of certain of these proceeding, see the Company's quarterly reports on Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998. MULTI-DISTRICT 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 the District of Arizona for pretrial proceedings. In October 1998, the court entered an order for consolidation of the pending class actions in the MDL. VISX believes that it and Pillar Point have meritorious defenses to the claims and counterclaims asserted in the Multi-District Litigation. These proceedings, however, are in various stages of discovery and there can be no assurance as to the outcome of any of the suits. For a more detailed description of certain of these proceedings, see the Company's quarterly reports on Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998 and the Company's annual report on Form 10-K for the year ended December 31, 1997. PATENT LITIGATION: AUTONOMOUS In September 1998, VISX filed a counterclaim against Autonomous Technologies Corporation in the case captioned Autonomous Technologies Corporation v. Pillar Point Partners, et al. (USDC Del Oct. 1996) asserting certain VISX United States patents and seeking declaratory and injunctive relief. On October 1, 1998 Autonomous announced that it had agreed to be acquired by Summit Technology, Inc. subject to the approval of the shareholders of the companies. The action is still in the early stages of discovery and there can be no assurance as to its outcome. For a more detailed description of this proceeding, see the Company's annual report on Form 10-K for the year ended December 31, 1997. PATENT LITIGATION: NIDEK In October 1998, the Company's European patent covering scanning laser technology was found to be valid and enforceable in a patent lawsuit brought by VISX against Nidek Co. Ltd. and certain other defendants in the United Kingdom. The trial judge also found that Nidek's broad-beam scanning slit laser did not infringe the scanning patent. Nidek was found to have infringed VISX's European Patent No. 0207648 covering broad beam laser technology. However, in light of public disclosure of elements of the invention shortly before the filing date of the patent, the infringed portion of the patent was found to be invalid. Since U.K. law differs significantly from United States law on this point, VISX believes the disclosure will not affect the validity or enforceability of United States counterparts of this patent. VISX will continue to vigorously enforce certain of its patents against Nidek in the infringement actions pending in Canada and France and to defend the validity of those patents against the invalidity claims asserted by Nidek, however, it is impossible to predict the outcome of either suit. Adverse determinations in either suit could limit VISX's ability to collect license fees in those markets. For a more detailed description of these proceedings, see the Company's annual report on Form 10-K for the year ended December 31, 1997. OTHER LITIGATION The Company is involved in various other legal proceedings that arise in the normal course of business. This litigation includes suits relating to employment, product liability and other matters. Based on the current status of these matters and the Company's review of these matters, the Company believes that their resolution, individually and in the aggregate, will not have a material adverse effect on the Company's business, financial condition or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a)Exhibits. Ex. 27 Financial Data Schedule b)Reports on Form 8-K. None. Page 13 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VISX, Incorporated (Registrant) November 6, 1998 /s/ MARK B. LOGAN (Date) ---------------------------------------------- Mark B. Logan Chairman of the Board and Chief Executive Officer November 6, 1998 /s/ TIMOTHY R. MAIER Date ---------------------------------------------- Timothy R. Maier Vice President and Chief Financial Officer (principal financial and accounting officer)
Page 14 15 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 28,807 73,416 24,220 (1,399) 7,150 140,120 9,423 (5,204) 148,718 34,662 0 0 0 155 113,901 148,718 29,178 91,817 21,482 21,482 0 585 0 9,729 1,364 8,365 0 0 0 8,365 .55 .51 For Purposes of This Exhibit, Diluted means Basic.
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