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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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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, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 1-10694
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VISX, INCORPORATED
(Exact name of registrant as specified in its charter)
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DELAWARE 06-1161793
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(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
3400 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (408) 733-2020
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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
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Total number of shares of common stock outstanding as of October 31,
1997: 15,445,607.
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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, 1997 and December 31, 1996 3
Condensed Consolidated Interim Statements of Operations for the
Three Months Ended September 30, 1997 and 1996 and for the Nine
Months Ended September 30, 1997 and 1996 4
Condensed Consolidated Interim Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Interim Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview 7
Results of Operations 8
Liquidity and Capital Resources 9
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 9
ITEM 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
VISX, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
September 30, December 31,
1997 1996
--------- ---------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 34,206 $ 24,909
Short-term investments 60,675 64,081
Accounts receivable, net of allowance for doubtful
accounts of $588 and $600, respectively 18,317 17,904
Inventories 5,120 5,848
Prepaid expenses 961 553
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Total current assets 119,279 113,295
PROPERTY AND EQUIPMENT, NET 4,122 3,621
OTHER ASSETS 2,567 2,773
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$ 125,968 $ 119,689
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,232 $ 2,385
Accrued liabilities 17,431 18,032
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Total current liabilities 21,663 20,417
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STOCKHOLDERS' EQUITY:
Common stock - $.01 par value, 90,000,000 shares authorized;
15,481,713 and 15,424,734 shares issued 155 154
Additional paid-in capital 132,922 133,836
Treasury stock, at cost - 85,135 and 20,000 shares, respectively (1,622) (462)
Accumulated deficit (27,181) (34,260)
Unrealized holding gain (loss) on available-for-sale securities 31 4
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Total stockholders' equity 104,305 99,272
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$ 125,968 $ 119,689
========= =========
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
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VISX, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
(unaudited) (unaudited)
REVENUES:
System sales $ 9,213 $ 14,484 $ 27,486 $ 39,385
Royalties, service and other revenues 8,754 5,183 21,819 11,391
-------- -------- -------- --------
Total revenues 17,967 19,667 49,305 50,776
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of revenues 5,111 7,662 16,133 21,904
Marketing, general and administrative 5,621 4,227 16,808 12,869
Research, development and regulatory 2,716 2,845 7,422 6,804
-------- -------- -------- --------
Total costs and expenses 13,448 14,734 40,363 41,577
-------- -------- -------- --------
Income from operations 4,519 4,933 8,942 9,199
Interest and other income 1,226 1,146 3,603 3,106
Litigation settlement -- -- (4,500) --
-------- -------- -------- --------
Income before provision for taxes on income 5,745 6,079 8,045 12,305
Provision for taxes on income 690 466 966 862
-------- -------- -------- --------
Net income $ 5,055 $ 5,613 $ 7,079 $ 11,443
======== ======== ======== ========
Net income per share $ 0.32 $ 0.35 $ 0.45 $ 0.72
======== ======== ======== ========
Weighted average number of shares and
equivalents outstanding
15,753 15,840 15,814 15,988
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
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VISX, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine months ended
September 30,
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1997 1996
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(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,079 $ 11,443
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,389 618
Increase (decrease) in cash flows from changes in operating assets
and liabilities:
Accounts receivable (413) (8,721)
Inventories 728 124
Prepaid expenses (408) (392)
Other assets (228) (2,170)
Accounts payable 1,847 808
Accrued liabilities (601) 7,558
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Net cash provided by operating activities 9,393 9,268
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,456) (2,118)
Purchase of short-term investments (52,063) (37,698)
Proceeds from maturities of short-term investments 55,496 21,191
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Net cash provided by (used in) investing activities 1,977 (18,625)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 903 2,931
Repurchases of common stock, net of shares used for option exercises (2,976) (1,229)
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Net cash provided by (used in) financing activities (2,073) 1,702
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Net increase (decrease) in cash and cash equivalents 9,297 (7,655)
Cash and cash equivalents, beginning of period 24,909 32,332
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Cash and cash equivalents, end of period $ 34,206 $ 24,677
======== ========
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
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VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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 1996 Annual Report and 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, 1996.
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. NET INCOME PER SHARE:
Net income per share is computed based on the weighted average number of common
shares and dilutive common share equivalents outstanding using the treasury
stock method. Fully diluted net income per share is substantially the same as
primary net income per share. Net loss per share is computed based on the
weighted average number of common shares outstanding, excluding dilutive common
share equivalents since their impact would reduce the net loss per share.
Basic net income per share calculated in accordance with FASB Statement No. 128
"Earnings Per Share" is $0.33 and $0.37 per share for the three month periods
ended September 30, 1997 and 1996, respectively and $0.46 and $0.75 per share
for the nine month periods ended September 30, 1997 and 1996, respectively.
Diluted net income per share calculated in accordance with FASB Statement No.
128 is not materially different from net income per share as reported in the
accompanying financial statements.
3. INVENTORIES (in thousands):
September 30, December 31,
1997 1996
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(unaudited)
Raw materials and subassemblies $2,811 $3,747
Work in process ............... 1,756 1,637
Finished goods ................ 553 464
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Total ....................... $5,120 $5,848
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4. LITIGATION
See Part II - Other Information, Item 1 - Legal Proceedings for a discussion of
new proceedings and new developments on previously disclosed proceedings.
5. REPORTING COMPREHENSIVE INCOME
In July 1997, the Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" ("SFAS 130") was issued and is effective for fiscal years
ending after December 15, 1997. Adoption is not expected to have a material
effect on the Company's 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 1996 Annual Report and Form 10-K under "Business -
Market Acceptance of Laser Vision Correction," "- Reliance on Patents and
Proprietary Technology," "- Risks Relating to Pillar Point Partners; Patent
Litigation," "- Government Regulation; Proliferation of Unapproved Lasers," "-
Manufacturing, Components and Raw Materials," "- Competition," and "- Product
Liability and Insurance" and under "Legal Proceedings" may cause the Company's
actual results to vary from those contemplated by certain forward-looking
statements set forth in this report and should be considered carefully in
addition to other information presented in this report. This MD&A should be read
in conjunction with the MD&A included in the Company's 1996 Annual Report and
Form 10-K.
OVERVIEW
VISX is 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 System for phototherapeutic keratectomy
("PTK") on September 29, 1995, for photorefractive keratectomy treatment of low
to moderate myopia ("PRK") on March 27, 1996, and for photorefractive
keratectomy treatment of astigmatism ("PRKa") on April 24, 1997.
The Company's future growth and profitability cannot be predicted with certainty
and will be influenced by a variety of factors. These factors include the extent
to which laser vision correction is accepted in the United States and key
international markets targeted by the Company, the degree to which Pillar Point
Partners is successful in generating royalty income from patent rights and
defending against legal challenges relating to its structure and operation,
developments in patent litigation both in support of the Company's patents and
in defense of claims of infringement, developments with respect to other
litigation to which the Company is a party or in which it may become involved,
competition from lasers that have not received FDA PMA for United States
commercial sales and competition from other vision correction products and
procedures which are currently in use or may be developed and introduced in the
future. Any of these factors, either alone or in combination, could materially
adversely affect the Company's business, financial condition and results of
operations and could cause the Company's results of operations to differ
materially from those contemplated in the Company's forward-looking statements.
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In particular, adverse determinations in the Company's pending legal proceedings
described in Part II Item 1 of this report and in the Company's report on Form
10-K for the year ended December 31, 1996 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 Sept 30, Nine Months Ended Sept 30,
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REVENUE 1997 1996 Change 1997 1996 Change
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System sales ...................... 9,213 14,484 (36)% 27,486 39,385 (30)%
Percent of revenue .......... 51.3% 73.6% 55.7% 77.6%
Royalties, service & other revenues 8,754 5,183 69% 21,819 11,391 92%
Percent of revenue .......... 48.7% 26.4% 44.3% 22.4%
Total ............................. 17,967 19,667 (9)% 49,305 50,776 (3)%
For the third quarter and first nine months of 1997, increased system sales in
international markets were more than offset by declines in the U.S. market
versus the comparable periods of 1996. Unit shipments of systems in the U.S. in
the second and third quarters of 1997 were significantly below the levels
reached in the comparable periods of the prior year. In addition, average prices
in the U.S. during 1997 have been lower than in 1996 primarily as the result of
trade-in discounts the Company has offered to owners of Summit and unapproved
lasers.
Royalties, service and other revenues increased due to growth in royalty
revenue.
Three Months Ended Sept 30, Nine Months Ended Sept 30,
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COSTS & EXPENSES 1997 1996 Change 1997 1996 Change
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Cost of revenues ......... 5,111 7,662 (33)% 16,133 21,904 (26)%
Percent of revenue . 28.4% 39.0% 32.7% 43.1%
Marketing, gen'l and admin 5,621 4,227 33% 16,808 12,869 31%
Percent of revenue . 31.3% 21.5% 34.1% 25.3%
R&D and regulatory ....... 2,716 2,845 (5)% 7,422 6,804 9%
Percent of revenue . 15.1% 14.5% 15.1% 13.4%
Gross profit margins were higher as the result of increased royalty revenue,
which has no associated cost of revenue. Reductions in units produced and lower
costs of sales resulted in the gross margin on system sales remaining comparable
with the corresponding periods of the prior year. Marketing, general and
administrative expenses increased mainly as the result of higher patent related
legal expenses plus a rise in marketing expenses in the third quarter. Research,
development and regulatory costs increased for the nine month period of 1997
over the comparable period of 1996 due to increased research and development
expenses associated with the development of new products and technologies, which
were partially offset by decreased regulatory expenses during the 1997 period.
For the three month period ended September 30, 1997 research, development and
regulatory costs decreased from the comparable period of the prior year due to a
decline in charges related to incentive compensation.
Interest and other income increased due to higher interest income generated on
additional cash provided by operations. In June, 1997 the Company settled all
outstanding U.S. and international patent disputes between itself and Summit
Technology, Inc. ("Summit"). The settlement required an exchange of payments
resulting in a net payment of $4,500,000 to Summit which was recorded as
litigation settlement expense.
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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,
1997 1996
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Cash, cash equivalents and short-term investments........ $94,881 $88,990
Working capital ......................................... 97,616 92,878
Payments came due in the third quarter on a significant number of systems sold
in prior periods with extended payment terms, resulting in a $6,300,000 decline
in accounts receivable during the quarter. Combined with net income and a
reduction in inventory, $12,900,000 of cash was generated by operations in the
third quarter. Approximately $2,600,000 was used to repurchase the Company's
stock, yielding a net increase of $10,300,000 in cash in the third quarter of
1997. The balance in accounts receivable is not expected to decline in this
manner in future quarters.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
VISX is a party to a number of patent-related 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 royalties in certain markets and have a material, adverse effect on VISX's
business, financial position and results of operations. 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, 1996 and reports on Form 10-Q for the quarters ended March 31 and June 30,
1997. During the quarter ended September 30, 1997, there were no material
developments with respect to such previously existing proceedings, except as
follows:
PATENT PROCEEDINGS AND LITIGATION: PILLAR POINT PARTNERS
Pillar Point Partners, et al. v. Barnet Dulaney Eye Center, et al. In September
1996, Pillar Point, VISX Partner, Inc. and Summit Partner, Inc. brought suit in
the United States District Court for the District of Arizona against David
Dulaney, M.D., Ronald Barnet, M.D., and others. The suit alleges infringement of
certain Pillar Point patents, and seeks monetary damages and injunctive relief.
For a more detailed description of this lawsuit, see the Company's Annual Report
on Form 10-K for the year ended Dec. 31, 1996. In August 1997, Pillar Point
amended the complaint to add Sun Valley Acquisition Corporation, a
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wholly-owned subsidiary of Physicians Resource Group, charging inducement to
infringe certain patents exclusively licensed to Pillar Point. During the same
time frame, in September 1997, the defendants amended their answer to add a
series of counterclaims against Pillar Point, VISX, Summit, and several current
and former VISX and Summit officers and directors. All of the enumerated
counterclaims stem from the same activity alleged to be in violation of
antitrust laws, namely the formation of Pillar Point, the charging of a per use
royalty, and enforcement of the patents licensed to Pillar Point. VISX and the
other plaintiffs believe that the counterclaims are without merit and intend to
vigorously defend their respective positions.
Federal Trade Commission. In October 1995, the Company received notice that the
Federal Trade Commission ("FTC") initiated an investigation to determine whether
Pillar Point, VISX and Summit or any of their predecessors (alone or in
conjunction with others) is engaging or has engaged in any unfair methods of
competition, in violation of the Federal Trade Commission Act, relating to
certain arrangements concerning patents on devices and procedures, and/or
practices relating to the sale or distribution of certain ophthalmic surgical
devices. VISX is unable to predict with certainty whether, or when, the FTC
might bring any proceeding, or the scope of relief, if any, that may ultimately
be ordered in the event that any such proceeding were determined adversely to
the Company and/or Pillar Point.
OTHER PROCEEDINGS AND LITIGATION
On November 3, 1997, the trial began in a lawsuit pending in Pennsylvania which
alleges that VISX was negligent in conducting its clinical trials for
phototherapeutic keratectomy ("PTK"). For a more detailed description of this
lawsuit, see the Company's Annual Report on Form 10-K for the year ended Dec.
31, 1996. VISX believes that it has meritorious defenses to this action, and
that its resolution will not have a material adverse effect on the Company's
business, financial position or results of operations. Nevertheless, there can
be no assurance as to the outcome of the suit, and VISX is potentially liable
for any amounts awarded above the insurance coverage for compensatory damages,
and for any amounts awarded as punitive damages against VISX. Should punitive
damages be assessed against VISX, the amount could potentially have a material
adverse effect on the Company's business, financial position or results of
operations.
In October 1997, VISX settled a lawsuit brought by a former employee in 1995
against VISX and a former officer of VISX. The plaintiff agreed to dismiss the
lawsuit with prejudice in return for a payment of an undisclosed amount. The
former officer of VISX contributed a portion of the settlement amount. The
settlement is included in the Company's financial statements and did not have a
material adverse effect on the Company's results of operations and financial
condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
Ex. 27 Financial Data Schedule
b) Reports on Form 8-K.
None.
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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
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(Registrant)
November 7 , 1997 /s/ MARK B. LOGAN
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(Date) Mark B. Logan
Chairman of the Board and
Chief Executive Officer
November 7 , 1997 /s/ TIMOTHY R. MAIER
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(Date) Timothy R. Maier
Vice President and
Chief Financial Officer (principal
financial and accounting officer)
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INDEX TO EXHIBITS
Exhibit
Number Description
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27 Financial Data Schedule