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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
   FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 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 EmployerIncorporation or Organization)
    
    Identification No.)
 3400 Central Expressway, Santa Clara, California 95051-0703(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code):(408) 733-2020 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
[X]    No [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
[X]    No [   ] Total number of shares of common stock outstanding as of July 31, 2004:
49,486,504




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VISX, INCORPORATED
TABLE OF CONTENTS PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Unaudited Condensed Consolidated Interim Financial StatementsCondensed Consolidated Interim Balance Sheets as  of June 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Interim Statements of Operations for the Three Months Ended June 30, 2004 and 2003 and for the Six Months Ended June 30, 2004 and 2003
    
    
    4Condensed Consolidated Interim Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Interim Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsOverview
    
    
    11Results of Operations
    
    
    13Liquidity and Capital Resources
    
    
    17Critical Accounting Policies, Estimates and Judgments
    
    
    19Risk Factors
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    26Item 4.
    
    Controls and Procedures
    
    
    26PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    27Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    27Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28Item 5.
    
    Other Information
    
    
    29Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    29SIGNATURES
    
    
    
    
    31EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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Item 1. Unaudited Condensed Consolidated Interim Financial Statements VISX, INCORPORATED AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
(In thousands, except share and per share amounts) June 30,
    
    December 31,2004
    
    2003(unaudited)
    
    (unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    23,406
    
    
    $
    24,895Short-term investments
    
    
    90,846
    
    
    
    61,181Accounts receivable, net of allowance for
doubtful accounts of $3,622 and $4,195
respectively
    
    
    25,321
    
    
    
    27,432Inventories
    
    
    12,707
    
    
    
    11,219Deferred tax assets and prepaid expenses
    
    
    18,240
    
    
    
    20,477Total current assets
    
    
    170,520
    
    
    
    145,204Property and Equipment, net
    
    
    3,924
    
    
    
    3,851Long-Term Deferred Tax and Other Assets
    
    
    12,704
    
    
    
    14,908Total assets
    
    $
    187,148
    
    
    $
    163,963LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    5,306
    
    
    $
    3,442Accrued liabilities and other current liabilities
    
    
    35,226
    
    
    
    34,722Total current liabilities
    
    
    40,532
    
    
    
    38,164Stockholders Equity:Common stock: $.01 par value, 180,000,000 shares
authorized; 64,990,089 shares issued at June 30,
2004 and December 31, 2003, respectively
    
    
    650
    
    
    
    650Additional paid-in capital
    
    
    193,642
    
    
    
    201,108Treasury stock, at cost 15,604,824 and
16,295,297 shares, at June 30, 2004 and December
31, 2003 respectively
    
    
    (250,939
    )
    
    
    (258,218
    )Accumulated other comprehensive income
    
    
    45
    
    
    
    341Retained earnings
    
    
    203,218
    
    
    
    181,918Total stockholders equity
    
    
    146,616
    
    
    
    125,799Total liabilities and stockholders equity
    
    $
    187,148
    
    
    $
    163,963
 The accompanying notes are an integral part of these condensed consolidated interim financial statements. 3




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VISX, INCORPORATED AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(unaudited)Revenues:License and other revenues
    
    $
    30,231
    
    
    $
    20,064
    
    
    $
    62,718
    
    
    $
    39,741System revenues
    
    
    7,303
    
    
    
    7,681
    
    
    
    13,379
    
    
    
    17,607Service and parts revenues
    
    
    5,442
    
    
    
    4,241
    
    
    
    10,684
    
    
    
    9,071Total revenues
    
    
    42,976
    
    
    
    31,986
    
    
    
    86,781
    
    
    
    66,419Costs and Expenses:Cost of license and other revenues
    
    
    864
    
    
    
    707
    
    
    
    1,844
    
    
    
    1,539Cost of system revenues
    
    
    6,814
    
    
    
    7,185
    
    
    
    12,105
    
    
    
    15,564Cost of service and parts revenues
    
    
    4,028
    
    
    
    3,498
    
    
    
    7,626
    
    
    
    7,111Selling, general and administrative
    
    
    10,475
    
    
    
    10,854
    
    
    
    20,232
    
    
    
    20,308Research, development and regulatory
    
    
    5,451
    
    
    
    4,789
    
    
    
    10,495
    
    
    

    8,835Total costs and expenses
    
    
    27,632
    
    
    
    27,033
    
    
    
    52,302
    
    
    
    53,357Income From Operations
    
    
    15,344
    
    
    
    4,953
    
    
    
    34,479
    
    
    
    13,062Interest and other income
    
    
    458
    
    
    
    1,818
    
    
    
    786
    
    
    
    2,761Income Before Provision For Income Taxes
    
    
    15,802
    
    
    
    6,771
    
    
    
    35,265
    
    
    
    15,823Provision for income taxes
    
    
    (6,258
    )
    
    
    (2,673
    )
    
    
    (13,965
    )
    
    
    (6,249
    )Net Income
    
    $
    9,544
    
    
    $
    4,098
    
    
    $
    21,300
    
    
    $
    9,574Earnings Per ShareBasic
    
    $
    0.19
    
    
    $
    0.08
    
    
    $
    0.44
    
    
    $
    0.19Diluted
    
    $
    0.19
    
    
    $
    0.08
    
    
    $
    0.42
    
    
    $
    0.19Shares Used For Earnings Per ShareBasic
    
    
    48,996
    
    
    
    50,076
    
    
    
    48,834
    
    
    
    50,705Diluted
    
    
    50,832
    
    
    
    51,406
    
    
    
    50,622
    
    
    
    51,601
 The accompanying notes are an integral part of these condensed consolidated interim financial statements. 4




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VISX, INCORPORATED AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(In thousands) Six months endedJune 30,2004
    
    2003(unaudited)Cash flows from operating activities:Net income
    
    $
    21,300
    
    
    $
    9,574Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    4,422
    
    
    
    3,477Provision for doubtful accounts receivable
    
    
    (137
    )
    
    
    (53
    )Increase (decrease) in cash flows from changes in
operating assets and liabilities:Accounts receivable
    
    
    2,242
    
    
    
    (2,534
    )Inventories
    
    
    (5,881
    )
    
    
    (6,271
    )Deferred tax assets and prepaid expenses
    
    
    3,066
    
    
    
    5,123Long-term deferred tax and other assets
    
    
    2,254
    
    
    
    2,120Accounts payable
    
    
    1,864
    
    
    
    665Accrued liabilities and other current liabilities
    
    
    493
    
    
    
    (10,742
    )Net cash provided by operating activities
    
    
    29,623
    
    
    
    1,359Cash flows from investing activities:Capital expenditures
    
    
    (990
    )
    
    
    (649
    )Cash paid for acquisition of intangibles
    
    
    
    
    
    
    (5,900
    )Purchase of available for sales securities
    
    
    (43,979
    )
    
    
    (35,944
    )Proceeds from maturities of available for sale securities
    
    
    14,038
    
    
    
    82,071Net cash provided by (used in) investing activities
    
    
    (30,931
    )
    
    
    39,578Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    15,026
    
    
    
    939Repurchases of common stock
    
    
    (15,213
    )
    
    
    (63,000
    )Net cash used in financing activities
    
    
    (187
    )
    
    
    (62,061
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    6
    
    
    
    (9
    )Net decrease in cash and cash equivalents
    
    
    (1,489
    )
    
    
    (21,133
    )Cash and cash equivalents, beginning of period
    
    
    24,895
    
    
    
    37,687Cash and cash equivalents, end of period
    
    $
    23,406
    
    
    $
    16,554Supplemental Cash Flow InformationCash paid for income taxes
    
    $
    12,356
    
    
    $
    2,169Non-cash investing activities:Inventory transferred to deferred costs under operating leases
    
    $
    4,385
    
    
    $
    3,396
 The accompanying notes are an integral part of these condensed consolidated interim financial statements. 5




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VISX, INCORPORATED AND
SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
 1. Significant Accounting Policies: Basis of Presentation.We prepared our Condensed Consolidated Interim
Financial Statements in conformity with Securities and Exchange Commission
rules and regulations. Accordingly, we condensed or omitted certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles in the
United States. Please read our 2003 Annual Report on Form 10-K to gain a more
complete understanding of these interim financial statements. The results of
operations for the three and six months ended June 30, 2004 are not necessarily
indicative of the results for the entire year or any other period. We included in these interim financial statements all adjustments (consisting
primarily only of normal recurring adjustments) that in our opinion are
necessary to present fairly our results for the interim periods. Our interim
financial statements have not been audited. Earnings Per Share.Basic earnings per share (EPS) equals net income divided
by the weighted average number of common shares outstanding. Diluted EPS
equals net income divided by the weighted average number of common shares
outstanding plus dilutive potential common shares calculated in accordance with
the treasury stock method. All amounts in the following table are in
thousands, except per share data, and are unaudited. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003NET INCOME
    
    $
    9,544
    
    
    $
    4,098
    
    
    $
    21,300
    
    
    $
    9,574BASIC EARNINGS PER SHAREIncome available to common shareholders
    
    $
    9,544
    
    
    $
    4,098
    
    
    $
    21,300
    
    

    $
    9,574Weighted average common shares outstanding
    
    
    48,996
    
    
    
    50,076
    
    
    
    48,834
    
    
    
    50,705Basic Earnings Per Share
    
    $
    0.19
    
    
    $
    0.08
    
    
    $
    0.44
    
    
    $
    0.19DILUTED EARNINGS PER SHAREIncome available to common shareholders
    
    $
    9,544
    
    
    $
    4,098
    
    
    $
    21,300
    
    
    $
    9,574Weighted average common shares outstanding
    
    
    48,996
    
    
    
    50,076
    
    
    
    48,834
    
    
    
    50,705Dilutive potential common shares from stock options
    
    
    1,836
    
    
    
    1,330
    
    
    
    1,788
    
    
    
    896Weighted average common shares and dilutive potential common shares
    
    
    50,832
    
    
    
    51,406
    
    
    
    50,622
    
    
    
    51,601Diluted Earnings Per Share
    
    $
    0.19
    
    
    $
    0.08
    
    
    $
    0.42
    
    
    $
    0.19
 Options to purchase 1,804,000 and 4,716,000 shares with a weighted average
exercise price of $36.25 and $24.52 during the three month periods ended June
30, 2004 and 2003, respectively, were excluded from the computation of diluted
EPS because the options exercise prices were greater than the average market
price of our common stock during these periods and would have been
anti-dilutive. Options to purchase 2,068,000 and 6,095,000 shares with a weighted average
exercise price of $34.45 and $22.35 during the six month periods ended June 30,
2004 and 2003, respectively, were excluded 6




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from the computation of diluted EPS
because the options exercise prices were greater than the average market price
of our common stock during these periods and would have been anti-dilutive. Stock-Based Employee Compensation.We account for stock-based employee
compensation arrangements using the intrinsic value method in accordance with
the provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25) and Financial Accounting Standards Board
(FASB) Interpretation No. 44 (FIN 44), Accounting for Certain Transactions
Involving Stock Compensation  an Interpretation of APB No. 25 and comply with
the disclosure provisions of Statement of Financial Accounting Standards No.
148, Accounting For Stock-Based Compensation  Transition and Disclosure
(SFAS 148). In accordance with APB 25 and FIN 44, we record no stock-based
employee compensation cost in our net income because (1) all options granted
under our stock option plans have an exercise price equal to the market value
of the underlying common stock on the date of grant and (2) stock purchased
through our Employee Stock Purchase Plan is priced at 85% of the fair market
value of the stock on the first day of a two-year offering period or as of the
end of each six month purchase segment of a two year offering period, whichever
is lower. The following table illustrates the effect on net income and earnings
per share if we had applied the fair value recognition provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), to stock-based employee compensation (unaudited, in
thousands, except per share data). Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net Income
    
    As Reported
    
    $
    9,544
    
    
    $
    4,098
    
    
    $
    21,300
    
    
    $
    9,574Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects
    
    
    
    
    (2,284
    )
    
    
    (2,349
    )
    
    
    (4,231
    )
    
    
    (4,164
    )Net Income
    
    Pro Forma
    
    $
    7,260
    
    
    $
    1,749
    
    
    $
    17,069
    
    
    $
    5,410Basic Earnings Per Share
    
    As Reported
    
    $
    0.19
    
    
    $
    0.08
    
    
    $
    0.44
    
    
    $
    0.19Pro Forma
    
    
    0.15
    
    
    
    0.03
    
    
    
    0.35
    
    
    
    0.11Diluted Earnings Per Share
    
    As Reported
    
    $
    0.19
    
    
    $
    0.08
    
    
    $
    0.42
    
    
    $
    0.19Pro Forma
    
    
    0.14
    
    
    
    0.03
    
    
    
    0.34
    
    
    
    0.11
 For purposes of computing pro forma net income, we estimate the fair value of
each option grant and employee stock purchase plan purchase right on the date
of grant using the Black-Scholes option pricing model. The assumptions used to
value the option grants and purchase rights are stated as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Expected life of options (in years)
    
    
    4.31
    
    
    
    2.93
    
    
    
    5.24
    
    
    
    4.27Expected life of ESPP rights (in years)
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25Volatility for options
    
    
    62
    %
    
    
    61
    %
    
    
    71
    %
    
    
    75
    %Volatility for ESPP rights
    
    
    59
    %
    
    
    60
    %
    
    
    59
    %
    
    
    60
    %Risk free interest rate for options
    
    
    3.61
    %
    
    
    1.68
    %
    
    
    2.95
    %
    
    
    2.49
    %Risk free interest rate for ESPP rights
    
    
    1.72
    %
    
    
    1.61
    %
    
    
    1.72
    %
    
    
    1.61
    %Dividend
yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 7




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The weighted average fair value of options granted under our stock option plans
during the three and six month periods ended June 30, 2004 was $11.17 and
$12.22, respectively. The weighted average fair value per share of options
granted under the ESPP during both the three and six month periods ended June
30, 2004 was $4.69. The weighted average fair value of options granted under our stock option plans
during the three and six month periods ended June 30, 2003 was $6.93 and $4.96,
respectively. The weighted average fair value per share of options granted
under the ESPP during both the three and six month periods ended June 30, 2003
was $3.63. These pro forma amounts may not be representative of the effects for future
years as options vest over several years and additional awards are generally
made each year. 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 operating
decision making group, in deciding how to allocate resources and in assessing
performance. Our CEO is our chief operating decision maker. Our business is
focused on one operating segment, products and procedures to improve peoples
vision with laser vision correction. 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 18% and 15% of total revenues
for the three month periods ended June 30, 2004 and June 30, 2003 respectively,
and 16% and 19% of total revenues for the six month periods ended June 30, 2004
and June 30, 2003 respectively. We did not generate export revenues to any
country that equaled or exceeded 10% of our total revenues for the three and
six month periods ended June 30, 2004 and June 30, 2003. In the following
table we have presented our export revenues by geographic region (in
thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Europe
    
    
    1,558
    
    
    
    1,523
    
    
    
    3,538
    
    
    
    3,480Americas (excluding the United States)
    
    
    883
    
    
    
    871
    
    
    
    1,779
    
    
    
    1,816Asia and Other
    
    
    5,318
    
    
    
    2,557
    
    
    
    8,457
    
    
    
    7,036$
    7,759
    
    
    $
    4,951
    
    
    $
    13,774
    
    
    $
    12,332
 Substantially all of our long-term assets are located in the United States. Major Customers.A significant portion of our revenues is derived from sales to
TLC Vision Corporation (TLC). Sales to TLC, accounted for 17% and 18% of
total revenues for the three month periods ended
June 30, 2004 and 2003 and 20% and 13% of total revenues for the three month
periods ended March 31, 2004 and 2003 respectively. For the six month periods
ended June 30, 2004 and 2003 TLC accounted for 19% and 16% of total revenues.
TLC accounted for 17% and 22% of our total receivables at June 30, 2004 and
December 31, 2003, respectively. Additionally, Taiwan Hwa-In Corporation
accounted for 13% of our total receivables at June 30, 2004. 8




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3. Inventories Components of inventories are as follows (in thousands): June 30,
    
    December 31,2004
    
    2003(Unaudited)Raw materials and subassemblies
    
    $
    8,169
    
    
    $
    7,786Work-in-process
    
    
    1,719
    
    
    
    1,321Finished goods
    
    
    2,819
    
    
    
    2,112$
    12,707
    
    
    $
    11,219
 4. Comprehensive Income We report components of comprehensive income in our annual consolidated
statements of stockholders equity. Components of comprehensive income
(unaudited, in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    9,544
    
    
    $
    4,098
    
    
    $
    21,300
    
    
    $
    9,574Other comprehensive income (net of related tax effects)Decrease in accumulated unrealized holding gains on
available-for-sale securities
    
    
    (334
    )
    
    
    (1,210
    )
    
    
    (276
    )
    
    
    (1,332
    )Change in accumulated foreign currency translation
adjustment
    
    
    (31
    )
    
    
    (9
    )
    
    
    (20
    )
    
    
    (9
    )Comprehensive income
    
    $
    9,179
    
    
    $
    2,879
    
    
    $
    21,004
    
    
    $
    8,233
 5. Warranty Obligations Changes in product warranty obligations for the periods ended June 30, 2004 and
2003 are as follows (unaudited, in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Balance as of the beginning of the period
    
    $
    1,346
    
    
    $
    1,980
    
    
    $
    1,779
    
    
    $
    1,963Expense accrued
    
    
    342
    
    
    
    630
    
    
    
    328
    
    
    
    1,398Cost of services provided
    
    
    (112
    )
    
    
    (947
    )
    
    
    (531
    )
    
    
    (1,698
    )Balance as of the end of the period
    
    $
    1,576
    
    
    $
    1,663
    
    
    $
    1,576
    
    
    $
    1,663
 6. Stockholders Equity On April 4, 2001, our Board of Directors authorized a new Stock Repurchase
Program under which up to 10 million shares of VISX common stock may be
repurchased. In accordance with this authorization and 9




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applicable securities
laws, we have repurchased 7.8 million shares cumulatively on the open market
through June 30, 2004 at a total cost of $105.6 million. Accordingly, 2.2
million shares remain available as of June 30, 2004 for repurchase under the
Board of Directors April 2001 authorization. On May 28, 2003 the Board of
Directors authorized the repurchase of an additional 3.5 million shares of VISX
stock at a total cost of $63.0 million, all of which were purchased during the
quarter ended June 30, 2003. 7. New Accounting Pronouncements In December 2003, the FASB revised Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
which it had originally issued in January 2003. As revised, FIN 46 requires
certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. As revised, application of
FIN 46 is required for interests in special-purpose entities for periods ending
after December 15, 2003. Application for all other types of entities covered by
FIN 46 is required in financial statements for periods ending after March 15,
2004. The adoption of FIN 46 as revised, did not have a material impact on our
financial position or results of operations. In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150 ( SFAS 150 ), Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS 150 requires that
certain financial instruments, which under previous guidance were accounted for
as equity, must now be accounted for as liabilities. The financial instruments
affected include mandatory redeemable stock, certain financial instruments that
require or may require the issuer to buy back some of its shares in exchange
for cash or other assets and certain obligations that can be settled with
shares of stock. SFAS 150 is effective for all financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003, although
certain aspects have been delayed pending further clarifications. The Company
currently does not have any financial instruments that are within the scope of
this statement. 8. Reclassifications Certain reclassifications were made to prior year financial data to conform
with current year presentation. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations This Report contains forward-looking statements, including but not limited to:
our belief that our CustomVue procedure represents a new standard in laser
vision correction; our belief that ongoing technical advances (including our
CustomVue procedure) have the potential to improve a persons vision beyond
that which can be obtained with contact lenses or glasses and may increase customer acceptance of laser vision correction
surgery; our belief that acceleration of the
markets acceptance of, and conversion to, our CustomVue procedure, or our
ability to maintain or gain market share, or an increase in our penetration of
the laser vision correction market in general, could cause an increase in our
licensing revenue;
our plan to continue to generate cash from our ongoing business in 2004; the possibility that we may
repurchase shares of our common stock in 2004; our
belief that these will not be a near-term change in our level of capital expenditures; our belief that our revenue and profit in 2004 will
continue to improve compared to 2003; our belief that operating expenses will
increase approximately 9% compared to 2003; our target of increasing operating
margins to in excess of 35% of revenues; our expectation that we will continue
to generate cash from operations; our belief that customers will increase
adoption of CustomVue; our belief that further improvement in the United States
economy and increased adoption by our customers of our CustomVue product will cause
license and other revenues to increase in 2004 compared to 10




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2003; our belief that system revenue for the remainder of 2004
will be less than in 2003; our current operations plan for the remainder of 2004 regarding
legal expenses and administrative spending; our
projection that research and development expense will be higher in the second
half of 2004 compared to the first half of 2004; our belief that operations
will generate cash in 2004 at a level equal to or greater than in 2003; and our
belief that cash from operations will exceed cash required to fund our working
capital and capital equipment needs during the coming twelve months. These
forward-looking statements are estimates reflecting the best judgment of our
senior management, and they involve a number of risks and uncertainties that
could cause actual results to differ materially from those suggested by the
forward-looking statements. The risks and uncertainties include the potential
reduction in demand for our equipment and upgrades, and the potential decline
in demand for procedures caused by the weakness in the economy, consumer
confidence and stock markets in the United States in recent years. In addition,
please see the disclosure under the caption Risk Factors at the end of Item
2. Moreover, we caution you not to place undue reliance on these
forward-looking statements, which speak only as of the date they were made. We
do not undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this report or to reflect the occurrence of unanticipated events. 
 Overview VISX, Incorporated (VISX), a Delaware corporation organized in 1988, is a
worldwide leader in the design and development of proprietary technologies and
systems for laser vision correction. Our primary operations are in Santa
Clara, CA. Our products require FDA approval in the United States and comparable
regulatory agency approvals in other countries. Our approvals in the United
States and key markets worldwide for laser vision correction cover most types
of refractive vision disorders including:  
    
    Nearsightedness;  
    
    Farsightedness; and  
    
    Astigmatism. Our CustomVue procedure is also available for all of these refractive vision
disorders in certain key international markets. In May 2003, we obtained FDA
approval for our new CustomVue procedure for nearsightedness and astigmatism. We sell products worldwide and generate the majority of our revenues and cash
through licensing fees charged for the performance of laser vision correction
procedures using the VISX STAR  Excimer Laser System (VISX STAR System). The
license fee charged for a particular procedure depends on whether the procedure
is performed in the United States or internationally, and the type of procedure
involved. In the United States, we charge a license fee for our standard
procedure and a license fee for our CustomVue procedure that is more than twice
the amount charged for our standard procedure. Additionally, we charge a
standard price of $10 per procedure for treatment cards. Internationally, for
our standard procedure we charge a small price per procedure for the treatment
card. For our CustomVue procedure we charge a significantly higher price per
procedure. 11




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We believe our CustomVue procedure, which requires use of a WaveScan System,
represents a new standard in laser vision correction. It enables doctors to
identify, measure, and correct imperfections in a patients eye much more
precisely than ever before, thus creating the potential for patients to
experience better vision than is possible with glasses or contact lenses. We believe we have the largest installed base of laser vision correction
systems, with over 1300 VISX STAR Systems in place worldwide. We also believe
we have approximately 60% market share for procedures performed in the United
States. According to MarketScope, we have held at least 60% market share since
1997. Licensing revenues comprise the majority of our revenues and carry a gross profit
margin of approximately 97%. Licensing revenues also generated in excess of 90%
of our gross profit dollars in the three and six month periods ended June 30,
2004. Such revenues are predominantly derived from license fees from our United
States customers. Licensing revenues grew 51% and 58% in the three and six
month periods ended June 30, 2004 compared with the corresponding periods in
2003. We evaluate this aspect of our business by tracking the following:  
    
    The number of procedures sold;  
    
    Trends in procedure sales, including conversion rates from standard
to CustomVue procedures; and  
    
    Market share for VISX and its competitors. Any increase in license fee revenue that results from either an increase in the
amount charged for a particular procedure or from an increase in overall
procedure volume directly impacts our net income. As a result, our management
team is focused on activities that will (i) accelerate the markets acceptance
of, and conversion to, our CustomVue procedure; (ii) enable VISX to maintain or
gain market share; and (iii) increase the laser vision correction market in
general. Progress on any one of these fronts offers the potential for growth
in our licensing revenue. We manage our expenses closely and plan to continue to generate cash from our
ongoing business operations in 2004. Historically, our primary non-operating
use of cash has been to repurchase shares of our common stock. We bought 0.7
million shares of stock in the first six months of 2004 and may repurchase
additional shares through the remainder of 2004. We will also continue to
investigate areas where we can expand our business. This could result in using
cash for the acquisition of technology or a business. Our capital expenditures
have been in the range of $2.4 million to $4 million per year in the past five
years. We do not expect to exceed this level of expenditures in 2004. We have
no long term debt. Looking to the remainder of 2004, our business is highly leveraged on procedure
volume and the conversion to CustomVue procedures. A number of factors, the
most material of which are set forth below, could impact our success in 2004
and beyond:  
    
    Market acceptance of laser vision correction. Increased acceptance
of laser vision correction by both doctors and patients in the United
States and key international markets is essential for our continued
growth. Laser vision correction has penetrated approximately 6% of the
eligible United States population, and our profitability and continued
growth will be largely dependent on increasing levels of market
acceptance and procedure growth, especially with regard to our 12




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higher-priced CustomVue procedure. We expect that ongoing technical
advances, such as the CustomVue procedure, will enhance the quality of
patients vision and may also increase consumer acceptance of laser
vision correction surgery.  
    
    Our ability to obtain additional FDA approvals. We continue to
expand the list of FDA approved indications that can be treated by our
systems. As we receive approvals for additional types and ranges of
refractive disorders from the FDA, the pool of eligible laser vision
correction candidates increases, expanding the potential for growth in
procedures, CustomVue adoption and licensing revenue.  
    
    Our competition. Competition in the laser vision correction market
is intense which creates pricing pressure on our products. Additionally,
most of our competitors have greater resources and a stronger
international market presence. As a result the competition to obtain
procedure market share is intense.  
    
    The United States economy. We have always charged a license fee
for procedures sold in the United States. Therefore it remains by far
our most significant market for licensing revenue. As such, economic
conditions in the United States impact our licensing revenue more than
global economic conditions. Industry analysts have tracked procedure
volume in the United States against economic indicators such as
consumer confidence. They have noted a correlation between consumer
confidence and the number of laser vision correction procedures
performed per quarter. We believe the continued improvements in the
United States economy and consumer confidence have provided support for
the laser vision correction market in the United States. A decline in
economic conditions in the United States could result in a decline in
the number of laser vision correction procedures performed. We believe that our revenue and profit in 2004 will continue to improve as
compared to 2003 as a result of various factors including continued conversion
to the CustomVue procedure, maintenance of our United States market share, and
improvements in the United States economy. For 2004, we anticipate that
operating expenses will increase approximately 9% compared to 2003 with a
target of increasing our operating margins to in excess of 35% of revenues. We
expect to continue to generate cash from operations. 
 Results of Operations Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    Change
    
    2004
    
    2003
    
    ChangeLicense and other revenues
    
    $
    30,231
    
    
    $
    20,064
    
    
    
    51
    %
    
    $
    62,718
    
    
    $
    39,741
    
    
    
    58
    %Percent of total revenues
    
    
    70.3
    %
    
    
    62.7
    %
    
    
    
    
    
    
    72.3
    %
    
    
    59.8
    %System revenues
    
    
    7,303
    
    
    
    7,681
    
    
    
    (5
    )%
    
    
    13,379
    
    
    
    17,607
    
    
    
    (24
    )%Percent of total revenues
    
    
    17.0
    %
    
    
    24.0
    %
    
    
    
    
    
    
    15.4
    %
    
    
    26.5
    %Service and parts
revenues
    
    
    5,442
    
    
    
    4,241
    
    
    
    28
    %
    
    
    10,684
    
    
    
    9,071
    
    
    
    18
    %Percent
of total revenues
    
    
    12.7
    %
    
    
    13.3
    %
    
    
    
    
    
    
    12.3
    %
    
    
    13.7
    %Total revenues
    
    $
    42,976
    
    
    $
    31,986
    
    
    
    34
    %
    
    $
    86,781
    
    
    $
    66,419
    
    
    
    31
    %
 License and other revenues 13




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License and other revenues increased by $10.1 million to $30.2 million for the
three months ended June 30, 2004 from $20.1 million for the three months ended
June 30, 2003. The increase was primarily attributable to increased adoption of
our new CustomVue procedure and 18% procedure growth in the United States. We
introduced the CustomVue procedure in June 2003 in the United States and sell
the product for more than double the price of our standard procedure. License
and other revenues increased by $23.0 million to $62.7 million for the six
months ended June 30, 2004 from $39.7 million for the six months ended June 30,
2003. The increase was also primarily attributable to increased adoption of
our CustomVue procedure and procedure growth in the United States. In the
United States, CustomeVue procedures represented approximately 35% of the
procedure orders in the six month period ended June 30, 2004. Based on economists views of improvements in the United States economy in 2004
and our belief that customers will increase adoption of our CustomVue product,
we continue to believe that license and other revenues will increase in 2004
compared to 2003. The decision to have laser vision correction surgery is
influenced by many factors. The procedure is elective and generally not covered
by medical insurance; therefore it competes with many types of purchases for
consumers discretionary spending. Perceptions about safety and effectiveness
of the procedure are additional considerations. The lack of long-term follow-up
studies of the procedure combined with media coverage of selected unfavorable
outcomes may contribute to uncertainty and delay by some potential consumers.
Economic uncertainties may also impact the interest in laser vision correction.
As such, we cannot accurately predict when, or to what extent, these
anticipated changes in the economy and technology will impact our license and
other revenues. System revenues System revenues comprise sales and leases of the following equipment:  
    
    VISX STAR Systems;  
    
    Upgrades to the VISX STAR System; and  
    
    WaveScan Systems. System revenues decreased by $0.4 million to $7.3 million for the three months
ended June 30, 2004 from $7.7 million for the three months ended June 30, 2003.
More VISX STAR Systems were shipped during the three months ended June 30, 2004
as compared to the comparable period of 2003. However a greater amount were
shipped under operating leases during the three months ended June 30, 2004.
Under rental or operating lease agreements for systems, rental revenue is
recognized over the term of the agreement.
System revenues decreased by $4.2 million to $13.4 million for the six months
ended June 30, 2004 from $17.6 million for the six months ended June 30, 2003
due to fewer VISX STAR System sales due primarily to softness of laser markets
and competitive pricing pressures. For both comparative periods, there were fewer WaveScan System sales in 2004 as
compared to 2003 as at least 80% of our United States customers now have one or
more WaveScan Systems. The market for laser systems remains competitive. We experienced lower per unit
pricing on laser sales in the six months ended June 30, 2004 compared with the
comparable period of 2003. MarketScope estimates that VISX is the leader in the
worldwide market with approximately 30% of worldwide laser placements. We believe that system revenue for the remainder of 2004 will be less than in
2003. 14




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##### Table of Contents



Service and parts revenues Service and parts revenues increased by $1.2 million to $5.4 million for the
three months ended June 30, 2004 from $4.2 million for the three months ended
June 30, 2003. Service and parts revenues increased by $1.6 million to $10.7
million for the six months ended June 30, 2004 from $9.1 million for the six
months ended June 30, 2003. The increases were higher than the comparable
periods of 2003 due primarily to higher procedure volumes and the resultant
higher revenues derived from customers that purchased service on a per
procedure basis. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    Change
    
    2004
    
    2003
    
    ChangeCost of license and other
revenue
    
    $
    864
    
    
    $
    707
    
    
    
    22
    %
    
    $
    1,844
    
    
    $
    1,539
    
    
    
    20
    %Percent of related revenues
    
    
    2.9
    %
    
    
    3.5
    %
    
    
    
    
    
    
    2.9
    %
    
    
    3.9
    %Cost of system revenues
    
    
    6,814
    
    
    
    7,185

    
    
    
    (5
    )%
    
    
    12,105
    
    
    
    15,564
    
    
    
    (22
    )%Percent of related revenues
    
    
    93.3
    %
    
    
    93.5
    %
    
    
    
    
    
    
    90.5
    %
    
    
    88.4
    %Cost of service and parts
revenues
    
    
    4,028
    
    
    
    3,498
    
    
    
    15
    %
    
    
    7,626
    
    
    
    7,111
    
    
    
    7
    %Percent of related
revenues
    
    
    74.0
    %
    
    
    82.5
    %
    
    
    
    
    
    
    71.4
    %
    
    
    78.4
    %Selling, general and administrative
    
    
    10,475
    
    
    
    10,854
    
    
    
    (3
    )%
    
    
    20,232
    
    
    
    20,308
    
    
    
    Percent of total revenues
    
    
    24.4
    %
    
    
    33.9

    %
    
    
    
    
    
    
    23.3
    %
    
    
    30.6
    %Research, develop. and regulatory
    
    
    5,451
    
    
    
    4,789
    
    
    
    14
    %
    
    
    10,495
    
    
    
    8,835
    
    
    
    19
    %Percent of total revenues
    
    
    12.7
    %
    
    
    15.0
    %
    
    
    
    
    
    
    12.1
    %
    
    
    13.3
    %
 Cost of license and other revenues Cost of license and other revenues increased by $0.2 million to $0.9
million for the three months ended June 30, 2004 from $0.7 million for the
three months ended June 30, 2003. Cost of license and other revenues increased
by $0.3 million to $1.8 million for the six months ended June 30, 2004 from
$1.5 million for the six months ended June 30, 2003. These increases were due
to the increased number of procedures
when compared to the related periods in 2003. The gross profit margin
increased slightly as the fixed cost components were spread over a larger
revenue base. Cost of system revenues Cost of system revenues decreased by $0.4 million to $6.8 million for the three
months ended June 30, 2004 from $7.2 million for the three months ended June
30, 2003. Cost of system revenues decreased by $3.5 million to $12.1 million
for the six months ended June 30, 2004 from $15.6 million for the six months
ended June 30, 2003. These decreases in cost of system revenues were due
primarily to the decrease of revenues from the sales of lasers, upgrades and
WaveScan Systems. The gross profit margin decreased as the competitive pricing
pressure reduced the average selling price with no corresponding reduction in
average cost. Cost of service and parts revenues Cost of service and parts revenues increased by $0.5 million to $4.0 million
for the three months ended June 30, 2004 from $3.5 million for the three months
ended June 30, 2003. Cost of service and parts revenues increased primarily due
to higher costs to service a larger installed base of products in the 15




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United
States. The overall gross profit margin increased to 26% in the three months
ended June 30, 2004 compared to 18% in the corresponding quarter of 2003 as
labor service costs are relatively fixed and parts usage does not typically
increase linearly with procedure volume. We also incurred significant service
costs in the second quarter of 2003 associated with the launch of our CustomVue
procedure. Cost of service and parts revenues increased by $0.5 million to $7.6
million for the six months ended June 30, 2004 from $7.1 million for the six
months ended June 30, 2003. The increase is primarily due to higher costs to
service a larger installed based of Wavescan Systems. Selling, general and administrative expenses Selling, general and administrative expenses decreased by $0.4 million to $10.5
million for the three months ended June 30, 2004 from $10.9 million for the
three months ended June 30, 2003. The change reflects primarily the following
items:  
    
    General expenses decreased by $1.2 million primarily due to higher
costs incurred in 2003 associated with the filing of the 2003 proxy
statement and stockholder vote;  
    
    Marketing costs decreased by $0.5 million primarily due to a
reduction in professional media costs in 2004 compared to those
incurred in 2003 associated with the launch of CustomVue in June 2003;  
    
    Legal expenses increased in 2004 as expenses in 2003 included the
benefit of a $0.7 million insurance reimbursement; and  
    
    Administrative expenses increased $0.7 million primarily due to the
costs of compliance with the provisions of the Sarbanes Oxley Act. Selling, general, and administrative expenses were largely unchanged for the
six months ended June 30, 2004 from the corresponding period of the prior year.
Increased legal expenses were offset by lower marketing costs for the reasons
noted above. For the remainder of 2004, our current plan for operations includes:  
    
    A net increase in legal expenses in 2004 as the second half of 2003
benefited from the non-recurring receipt of insurance reimbursements of
legal expenses totaling approximately $3.2 million; and  
    
    A modest increase in administrative spending to reflect the growth
in our operations and the cost of compliance with the provisions of the
Sarbanes Oxley Act. Research and development and regulatory expenses Research and development and regulatory expenses increased by $0.7 million to
$5.5 million for the three months ended June 30, 2004 from $4.8 million for the
three months ended June 30, 2003. Research and development and regulatory
expenses increased by $1.7 million to $10.5 million for the six months ended
June 30, 2004 from $8.8 million for the six months ended June 30, 2003. These
increases relate primarily to our ongoing focus on next generation technologies
and developments for laser vision correction, including:  
    
    System advancements;  
    
    New methods for correcting vision disorders including further
indications (such as hyperopia and high myopia) for our CustomVue
treatment; and  
    
    Continued research and clinical trials for treatment of presbyopia. We project that research and development expense will be higher in the second
half of 2004 compared to the first half of 2004 as we continue to invest in new
technology. 16




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##### Table of Contents



Interest and other income Interest and other income decreased by $1.3 million to $0.5 million for the
three months ended June 30, 2004 from $1.8 million for the three months ended
June 30, 2003. In 2003 we sold available for sale securities to repurchase
shares of VISX stock. This led to a $1.2 million realized gain on available-for-sale securities in the three months ended June 30, 2003. The holding gains were
previously recorded in accumulated other comprehensive income, and were
recognized in interest and other income upon realization in 2003. Interest
income decreased by $2.0 million to $0.8 million for the six months ended June
30, 2004 from $2.8 million for the six months ended June 30, 2003. Lower
average yields on our portfolio and lower cash investment balances also
contributed to the decrease in interest income compared to the first six months
of 2003. Income tax provision Our effective tax rate of 39.6% remained approximately constant in the three
and six months ended June 30, 2004 compared to the corresponding periods of
2003. 
 Liquidity and Capital Resources Cash, cash equivalents and short-term investments (cash) and working capital
were as follows (in thousands): June 30,
    
    December 31,2004
    
    2003Cash, cash equivalents and short-term investments
    
    $
    114,252
    
    
    $
    86,076Working capital
    
    
    129,988
    
    
    
    107,040Stockholders equity
    
    
    146,616
    
    
    
    125,799
 Our cash, cash equivalents and short-term investments consist principally of
money market funds and bonds issued by the United States government, government
sponsored enterprises and corporations. All of our short-term investments are
classified as available-for-sale under the provisions of Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities. The securities are carried at fair market value
with the unrealized gains and losses, net of tax, included in accumulated other
comprehensive income, which is reflected as a separate component of
stockholders equity. Gains and losses are recognized when realized in the
consolidated statements of operations. Cash, cash equivalents and short-term investments were $114.3 million at June
30, 2004, an increase of $28.2 million compared with December 31, 2003. It was
impacted principally by:  
    
    Positive cash flow from operating activities of $29.6 million;  
    
    Proceeds from issuance of common stock related to employee
participation in employee stock programs generating $15.0 million;  
    
    Stock repurchases of $15.2 million; and  
    
    Capital expenditures of $1.0 million. 17




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Operating activities generated $29.6 million in cash in the six months ended
June 30, 2004 up from $1.4 million provided in the six months ended June 30,
2003. In the first half of 2004 we:  
    
    Generated $25.6 million of cash from net income plus non-cash
related expenses;  
    
    Decreased accounts receivable by $2.2 million due primarily to the
collection of outstanding balances. Days sales outstanding in accounts
receivable was 54 days at the end of the second quarter of 2004 as
compared to 77 days at the comparable point in 2003; and  
    
    Decreased deferred tax assets and prepaid expenses due primarily to
the utilization of prepaid tax assets. Net cash used in investing activities was $31.0 million in the six months ended
June 30, 2004 down from $39.6 million net cash provided in the six months ended
June 30, 2003. The principal movements in cash used in investing activities in
the first half of 2004 were due to the investments in, and maturities of,
short-term investments. Net cash provided by investing activities in the first
half of 2003 consisted primarily of the investments in, and maturities of,
short-term investments offset by a payment of $5.9 million for acquired patents
and technology from 20/10 Perfect Vision Optische Gerate GmbH. Cash used in financing activities was $0.2 million in the six months ended June
30, 2004 down from $62.1 million cash used in the six months ended June 30,
2003. The principal factor that contributed to the cash used in financing
activities was the use of $15.2 million to repurchase 0.7 million shares of
VISX stock on the open market in the first half of 2004 compared to the $63.0
million used to repurchase 3.5 million shares during the first half of 2003.
This was offset by cash received upon the issuance of stock under employee
stock programs of $15.0 million and $0.9 million in 2004 and 2003,
respectively. On April 4, 2001, our Board of Directors authorized a Stock Repurchase Program
under which up to 10 million shares of VISX common stock may be repurchased. In
accordance with this authorization and
applicable securities laws, we have repurchased 7.8 million shares on the open
market cumulatively through June 30, 2004, at a total cost of $105.6 million.
Accordingly, 2.2 million shares remain available as of June 30, 2004 for
repurchase under the Board of Directors April 2001 authorization. On May 28,
2003, the Board of Directors authorized the repurchase of an additional 3.5
million shares of VISX stock at a total cost of $63.0 million, all of which
were purchased during the quarter ended June 30, 2003. 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 June 30, 2004, we did not have
any borrowings outstanding, nor any credit agreements. Our normal credit terms granted to customers are net 30 to net 60 days. In an
effort to promote the growth of the laser vision correction industry and the
use of VISX STAR Systems and WaveScan Systems, we provide long-term financing
to customers for their purchase of our equipment in certain markets. We
consider a number of factors including industry practice, competition, and our
evaluation of customers credit worthiness in determining when to offer such
financing. We believe our operations will continue to generate cash in 2004 at a level
equal to or greater than in 2003. We believe this will exceed cash required to
fund our working capital and capital equipment needs during the coming twelve
months. In addition, we have $114.3 million in cash, cash equivalents and
short-term investments as of June 30, 2004 to provide for unforeseen
contingencies and to support strategic objectives including the development or
acquisition of new technologies and our Stock Repurchase Program. 18




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Critical Accounting Policies We follow accounting principles generally accepted in the United States
(GAAP) in preparing our financial statements. As part of this process, we
must make many estimates and judgments about future events. These affect the
value of the assets and liabilities, contingent assets and liabilities, and
revenues and expenses reported in our financial statements. We believe these
estimates and judgments are reasonable and we make them in accordance with our
accounting policies based on information available at the time. However, actual
results could differ from our estimates and could require us to record
adjustments to expenses or revenues material to our financial position and
results of operations in future periods. We believe our most critical
accounting policies, estimates and judgments include the following: Revenue Recognition We are required to ensure that collectibility is reasonably assured before we
recognize revenue. Accordingly, we evaluate our customers for credit worthiness
and only recognize revenue if we believe that we have reasonable assurance that
amounts will be collected. Where we are unable to assess with reasonable
assurance that amounts will be collected, we defer revenue recognition until
the payments are received. This is occasionally the case with customers who
have recently set themselves up in business and typically where the customer is
thinly capitalized. Accounts Receivable At the end of each accounting period, we estimate the reserve necessary for
accounts receivable that will ultimately not be collected from customers. To
develop this estimate, we review all receivables and identify those accounts
with problems. For these problem accounts, we estimate individual, specific
reserves based on our analysis of the payment history, operations and finances
of each account. For all other accounts, we review historical bad debt trends,
general and industry specific economic trends, customer concentrations, and
current payment patterns to estimate the reserve necessary to provide for
payment defaults that cannot be specifically identified but can be expected
with reasonable probability to occur in the future. We face two particular
challenges in estimating these reserves: concentration of credit with certain
large customers and the potential for significant change in the overall health
of the national economies in the markets we serve. Unexpected deterioration in
the health of either a large customer or a national economy could lead to a
material adverse impact on the collectibility of our accounts receivable and
our future operating results. Our allowance for doubtful accounts at June 30,
2004 and December 31, 2003 as a percentage of gross accounts receivable was
12.5% and 13.3% respectively. At June 30, 2004, a one-percentage point
deviation in our allowance for doubtful accounts as a percentage of accounts
receivable would have resulted in an increase or decrease in expense of
approximately $0.3 million. Inventories Adjustments to the carrying value of inventory for excess and obsolete items
are based, in part, on our estimate of demand over the following 6 months. This
estimate, though based on our historical experience and consideration of other
relevant factors, (such as the current economic climate), is subject to some
uncertainty. Amounts charged to income for excess and obsolete inventory for
the three and six month periods ending June 30, 2004 and June 30, 2003
respectively as a percentage of total revenues in those periods, were all less
than 1.0%. To date, our estimates have been materially accurate. We do not
expect either our methodology or the accuracy of our estimates to change
significantly in the future unless there are any major changes in our business
model, our operating environment or the economy, or the ongoing development of
our technology. 19




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Legal Contingencies At the end of each accounting period, we review all outstanding legal matters.
If we believe it is probable that we will incur a loss as a result of the
resolution of a legal matter and we can reasonably estimate the amount of the
loss, we accrue our best estimate of the potential loss. It is very difficult
to predict the future results of complex legal matters, although historically,
the amounts we have paid out have been materially similar to the amounts that
we have accrued. New developments in legal matters can cause changes in
previous estimates and result in significant changes in loss accruals.
Currently we are not aware of any pending or threatened legal actions against
us that we believe could materially adversely affect our business, financial
condition or results of operations. However, we could in the future be subject
to litigation claims that could cause us to incur significant expenses and put
our business, financial position, and results of operations at material risk. 
 Risk Factors This report contains forward-looking statements that involve risk and
uncertainty. The factors set forth below, which are not the only risks we face,
may cause our actual results to vary from those contemplated by forward-looking
statements set forth in this report and should be considered carefully in
addition to the other information presented in this report. If any of the
following risks actually occur, our business, results of operations or cash
flows could be adversely affected. Our results of operations have varied widely
in
the past and could continue to vary significantly. In addition, our actual
results may differ significantly from the results contemplated by the
forward-looking statements. Accordingly, we believe that our results of
operations in any given period may not be a good indicator of our future
performance. Market Acceptance.Our business depends upon broad market acceptance of laser
vision correction by both doctors and patients in the United States and key
international markets. Laser vision correction has penetrated approximately 6%
of the eligible United States population, and our profitability and continued
growth will be largely dependent on increasing levels of market acceptance and
procedure growth, especially with regard to our higher-priced CustomVue
procedure. Although laser vision correction offers a more predictable outcome
and more precise 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). Some consumers may choose not to undergo laser vision correction
because of these complications or more general concerns relating to its safety
and efficacy or a resistance to surgery in general. Alternatively, some
consumers may elect to delay undergoing laser vision correction surgery because
they believe improved technology or methods of treatment will be available in
the near future. Should either the ophthalmic community or the general
population turn away from laser vision correction as an alternative to existing
methods of treating refractive vision disorders, or if future technologies
replaced laser vision correction, these developments could have a material
adverse effect on our business, financial position and results of operations. Unfavorable Side Effects.The possibility of long-term side effects and
adverse publicity regarding laser correction surgery could seriously harm our
business. Laser vision correction is a relatively new 20




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procedure. Consequently,
there is no long-term follow-up data beyond ten years that might reveal
additional complications or unknown side effects. Any future reported side
effects, other adverse events or unfavorable publicity involving patient
outcomes resulting from the use of laser vision correction systems manufactured
by VISX or any participant in the laser vision correction market, may have a
material adverse effect on our business, financial position, and results of
operations. Government Regulation.We are subject to extensive government regulation,
which increases our costs and could prevent us from selling our products.
Government regulation includes inspection of and controls over research and
development, testing, manufacturing, safety and environmental controls,
efficacy, labeling, advertising, promotion, pricing, record keeping, the sale
and distribution of pharmaceutical products and samples and electronic records
and electronic signatures. In the United States, we must obtain FDA approval or
clearance for each medical device that we market. The FDA approval process is
typically lengthy and expensive, and approval is never certain. Products
distributed outside of the United States are also subject to government
regulation, which may be equally or more demanding. Our new products could take
a significantly longer time than we expect to gain regulatory approval and may
never gain approval. If a regulatory authority delays approval of a potentially
significant product, our market value and operating results may decline. Even
if the FDA or another regulatory agency approves a product, the approval may
limit the indicated uses for a product, may otherwise limit our ability to
promote, sell and distribute a product or may require post-marketing studies.
If we are unable to obtain regulatory approval of our products, we will not be
able to market these products, which would result in a decrease in our sales.
Currently, we are actively pursuing approval for a number of our products from
regulatory
authorities in a number of countries, including, among others, the United
States, countries in the European Union and Japan. Continued growth in our
sales and profits will depend, in part, on the timely and successful
introduction and marketing of some or all of these products. The clinical trials required to obtain regulatory approvals are complex and
expensive and their outcomes are uncertain. We incur substantial expense for,
and devote significant time to, clinical trials but cannot be certain that the
trials will ever result in the commercial sale of a product. We may suffer
significant setbacks in clinical trials, even after earlier clinical trials
showed promising results. Any of our products may produce undesirable side
effects that could cause us or regulatory authorities to interrupt, delay or
halt clinical trials of a product candidate. We, the FDA, or another regulatory
authority may suspend or terminate clinical trials at any time if they or we
believe the trial participants face unacceptable health risks. Noncompliance with applicable United States regulatory requirements can result
in fines, injunctions, penalties, mandatory recalls or seizures, suspensions of
production, denial or withdrawal of pre-marketing approvals, recommendations by
the FDA against governmental contracts and criminal prosecution. The FDA also
has authority to request repair, replacement, or the refund of the cost of any
device we manufacture or distribute. Regulatory authorities outside of the
United States may impose similar sanctions for noncompliance with applicable
regulatory requirements. Competition.Intense competition in the laser vision correction industry could
result in the loss of customers, an inability to attract new customers, or a
decrease in prices for our products. The medical device and ophthalmic laser
industries are subject to intense competition and technological change. Not
only does laser vision correction compete with more traditional vision
correction options such as eyeglasses and contact lenses, it also competes with
other technologies and surgical techniques such as intraocular lenses and
surgery using different types of lasers. In addition, the market for laser
vision correction systems has become increasingly competitive in recent years
as a result of FDA approval of several laser systems. The VISX STAR System
competes with products marketed or under development by other laser and medical
equipment manufacturers, many of which have greater financial and other 21




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resources. Competitors may offer laser systems at a lower price, may price
their laser systems as part of a bundle of products or services, may lower the
prices they charge for procedures, may develop procedures that involve a lower
per procedure cost, or may offer products perceived as preferable to the VISX
STAR 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 laser
vision correction, and could potentially render laser vision correction
obsolete. Any such developments could have a material adverse effect on our
business, financial position and results of operations. Procedure Market Share. MarketScope estimated that as at December 31, 2003 we
were the leader in the United States procedures market with a market share of
over 60%. Because of this position, all of our competitors target us and our
market share in order to grow their own revenues. We can give no assurance that
we will be able to maintain or grow our existing market share and we may, in
fact, be required to incur considerable expenditures in order to maintain that
share. Should our procedure market share decline, it could have a material
adverse effect on our business, financial position, and results of operations
as well as the market price of our common stock. Economic Conditions.Because laser vision correction is not subject to
reimbursement from third-party payors such as insurance companies or government
programs, the cost of laser vision correction is typically borne by individuals
directly. Accordingly, weak or uncertain economic conditions may cause
individuals to be less willing to incur the procedure cost associated with
laser vision correction as was evidenced by our decline in revenues from 2002
compared to 2001 and from 2001 compared to 2000. A decline in economic
conditions especially in the United States, could result in a decline in the
number of laser vision correction procedures performed and could have a
material adverse effect on our business, financial position, and results of
operations. Significant Customers.A significant portion of our revenues is derived from
sales to TLC Vision Corporation (TLC). Sales to TLC, accounted for 20% and
13% of total revenues for the three month periods ended March 31, 2004 and 2003
and 17% and 18% of total revenues for the three month periods ended June 30,
2004 and 2003, respectively. For the six month periods ended June 30, 2004 and
2003 TLC accounted for 19% and 16% of total revenues. TLC accounted for 17% and
22% of our total receivables at June 30, 2004 and December 31, 2003,
respectively. Additionally, Taiwan Hwa In Corporation (Taiwan-Hwa) accounted
for 13% of our total receivables at June 30, 2004. Should we lose a significant
customer or if anticipated sales to a significant customer do not materialize,
our business, financial position and results of operations may suffer. In
addition, should a significant customer become unable to pay balances owed, we
would have to increase our charges for bad debt expense which could have a
material adverse effect on our business, financial position and results of
operations. New Technologies.If we fail to keep pace with advances in our industry or
fail to develop new methods of vision correction, customers may not buy our
products and our revenue may decline. We must be able to manufacture and
effectively market those products and persuade a sufficient number of eye care
professionals to use the new products, as well as new methods of vision
correction such as our CustomVue procedure, that we introduce. Sales of our
existing products may decline rapidly if a new product is introduced by one of
our competitors or if we announce a new product that, in either case,
represents a substantial improvement over our existing products. A decrease in
procedure volume may also occur if consumers elect to delay undergoing laser
vision correction surgery because they believe improved technology or methods
of treatment will be available in the near future. New Products May Not Be Commercially Viable.While we devote significant
resources to research and development, our research and development may not
lead to new products that achieve commercial 22




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success. The research and
development process is expensive, prolonged, and entails considerable
uncertainty. Development of a new medical device, from discovery through
testing and registration to initial product launch, typically takes between
three and seven years. Each of these periods varies considerably from product
to product and country to country. Because of the complexities and
uncertainties associated with ophthalmic research and development, products we
are currently developing may not complete the development process or obtain the
regulatory approvals required to market such products successfully. The
products currently in our development pipeline may not be approved by
regulatory entities and may not be commercially successful, and our current and
planned products could be surpassed by more effective or advanced products. Patents and Intellectual Property Disputes.Our business is dependent on the
enforceability and the validity of our United States and foreign patents. We
own over 200 United States and foreign patents and have more than 200 patent
applications pending. In the past, our patents have been challenged on several
fronts and we have asserted our patents against competitors. Generally, these
proceedings centered on whether infringement of the patents had occurred, and
on the validity or enforceability of the patents. While all of these
proceedings have now been resolved, we may assert our patents against
competitors in the future. If our patents were found to be invalid or
unenforceable (or in the event that parties against whom VISX asserted patent
infringement were found not to be infringing our patents) in any future
proceedings, 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 suffer and our
revenues could decline. In addition, other companies own United States and
foreign patents covering methods and apparatus for performing corneal surgery
with ultraviolet lasers. If we were accused of infringing such competitors
patents and found to have infringed such patents, we could be subject to
significant monetary liability and enjoined from distributing our products.
Any one of these results could harm our business. Product Liability Claims.We have and may become subject to product liability
claims. We could be liable for injuries or damage resulting from use of the
VISX STAR System or WaveScan System. In addition, a claim that an injury
resulted from a defect in any VISX product, even if successfully defended,
could damage our reputation. Although we possess insurance customarily obtained
by businesses of our type (including insurance against product liability risks
associated with the testing, manufacturing, and marketing of our products),
product liability claims in excess of our insurance coverage could have a
material adverse effect on our business, financial position, and results of
operations. Litigation.In the past, we have been involved in a number of legal
proceedings, some of which have resulted in significant legal expenses and
settlement costs. In the future, we may become involved in additional legal
proceedings and these could lead to additional expenses being incurred. International Operations.We face risks due to our reliance on sales in
international markets. Sales to customers outside the United States represented
18% and 16% of our total revenues for the three and six months ended June 30,
2004 and 15% and 19% of our total revenues for the three and six months ended
June 30, 2003. To date, all of our sales have been denominated in United States
dollars. Our international presence exposes us to risks including:  
    
    the need for export licenses;  
    
    unexpected regulatory requirements;  
    
    tariffs and other potential trade barriers and restrictions;  
    
    political, legal and economic instability in foreign markets;  
    
    longer accounts receivable cycles;  
    
    difficulties in managing operations across disparate geographic areas; 23




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
    
    foreign currency fluctuations;  
    
    reduced or limited protection of our intellectual property rights in some countries; and  
    
    dependence on local distributors. If one or more of these risks materialize, our sales to international customers
may decrease and our costs may increase, which could negatively impact our
revenues and operating results. Distributors.Internationally, we sell our products through distributors. If
we fail to maintain our existing distribution channels or develop additional
channels in the future, our ability to sell products internationally could be
impaired and our business harmed. Third Party Financing Entities. We have relationships with third party
financing entities that purchase our products directly and subsequently lease
and/or sell these products to our end-user customers, or provide financing
directly to customers who purchase our products directly from us. Should any
third party financing entity or entities fail or refuse to pay us in a timely
manner or at all, it could negatively affect our cash flows and could have a
material adverse effect on our business, financial position and results of
operations. In fact, DVI, which provided equipment purchase financing to our
customers, entered into Chapter 11 bankruptcy proceedings in August 2003, and
as a result, we recorded bad debt expense to
increase our reserve for doubtful accounts to cover any remaining exposure on
the $2.3 million of accounts receivables then outstanding from DVI. Fixed Short-Term Expenses.Because our expenses are relatively fixed in the
short term, our earnings will decline if we do not meet our projected sales.
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 expectations, we will not be able to reduce
our spending rapidly in response to such a shortfall. Acquisitions of Businesses or Technology. We have acquired technology assets
and may need to continue to do so to retain our competitive position within the
marketplace. If we acquire businesses, new products or technologies in the
future, we may be required to amortize significant amounts of identifiable
intangible assets and we may record significant amounts of goodwill that will
be subject to annual testing for impairment. If we consummate one or more
significant future acquisitions in which the consideration consists of stock or
other securities, our existing stockholders ownership could be significantly
diluted. If we were to proceed with one or more significant future acquisitions
in which the consideration included cash, we could be required to use a
substantial portion of our available cash. Additionally, such an acquisition
could have a substantial impact on our business, our financial position and our
results of operations. Taxes. We operate throughout the United States and, consequently, are subject
to various federal, state and local taxes, including sales, income, payroll,
unemployment, property, franchise, capital and use tax on our operations,
payroll, assets and services. Although we believe we have adequate provisions
and accruals in our financial statements for tax liabilities, we cannot predict
the outcome of all past and future tax assessments. If any taxing authority
determines we owe amounts for taxes greater than we expect, our earnings may be
negatively affected. Key Personnel.The success of our business depends on the efforts and
abilities of our senior management and other key personnel. We do not have long
term employment agreements with any of our key personnel. The loss of any of
our executive officers or other key employees could result in 24




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significant
disruption to our ongoing operations and hurt our business. Additionally, our
inability to attract new senior executives and key personnel could
significantly impact our business results. Single Sources For Key Components.The manufacture of the VISX STAR System and
WaveScan System is a complex operation involving numerous procedures. We depend
on single and limited sources for several key components. 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
the production of our products, parts and services were interrupted or could
not continue in a cost-effective or timely manner, our business, financial
position, and results of operations, could be materially adversely affected. Volatility of our Stock Price.The market price of our common stock has
experienced fluctuations and is likely to fluctuate significantly in the
future. Our stock price can fluctuate for a number of reasons, including:  
    
    announcements about us or our competitors;  
    
    results or settlements of litigation;
    
    quarterly variations in operating results;  
    
    the introduction or abandonment of new technologies or products;  
    
    changes in product pricing policies by us or our competitors;  
    
    changes in earnings estimates by analysts or changes in accounting policies; and  
    
    economic changes and political uncertainties. In addition, stock markets have experienced significant price and volume
volatility in recent years. This volatility has had a substantial effect on the
market prices of securities of many public companies for reasons frequently
unrelated or disproportionate to the operating performance of the specific
companies. In addition, the securities of many medical device companies,
including VISX, have historically been subject to extensive price and volume
fluctuations that may affect the market price of their common stock. If these
broad market fluctuations continue, they may adversely affect the market price
of our common stock. Proprietary Information and Inventions Agreements.We protect our proprietary
technology, in part, through proprietary information and inventions agreements
with employees, consultants and other parties. These agreements with employees
and consultants generally contain standard provisions requiring those
individuals to assign to us, without additional consideration, inventions
conceived or reduced to practice by them while employed or retained by us,
subject to customary exceptions. If any of our employees, consultants or others
breach these agreements our competitors may learn of our trade secrets. Changes to the Accounting for Stock Options.The Financial Accounting Standards
Board has issued a draft Financial Accounting Standard which includes proposed
rule changes requiring expensing of stock options. Currently, we include such
expenses on a pro forma basis in the notes to our annual financial statements
in accordance with accounting principles generally accepted in the United
States but do not include stock option expense for employee options in our
reported financial statements. If accounting standards are changed to require
us to expense stock options, our reported earnings will decrease significantly
and our stock price could decline. Exercising of stock options.As of June 30, 2004, there were an aggregate of
5,543,427 shares of our common stock issuable upon exercise of outstanding
vested stock options. If these stock options are exercised, the total number of
our traded shares will increase and this could adversely impact our earnings
per share. 25




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Antitakeover Provisions in Our Charter Documents.In 2000, we adopted a
stockholder rights plan. The presence of this plan could make it more difficult
for a third party to engage in a takeover attempt, even a takeover attempt in
which the potential purchaser offers to pay a per share price greater than the
current market price for our common stock. In addition, the presence of the
plan could delay or impede the removal of incumbent directors. These provisions
may also impact the amount of interest investors have in our business. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk There were no material changes during the six months ended June 30, 2004 in our
exposure to market risk for changes in interest rates and foreign currency
exchange rates. Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio. We do not use derivative financial instruments and
our investment portfolio to manage our interest rate risk,
foreign currency risk or for any other purpose. We invest in high-credit
quality issuers and, by policy, limit the amount of credit exposure to any one
issuer. As stated in our policy, we ensure the safety and preservation of our
invested principal funds by limiting default risk, market risk and reinvestment
risk. We mitigate default risk by investing in safe and high-credit quality
securities and by constantly positioning our portfolio to respond appropriately
to a significant reduction in a credit rating of any investment issuer,
guarantor or depository. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity. 
 Item 4. Controls and Procedures VISX management, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the
end of the period covered by this quarterly report (the Evaluation Date).
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, either during the period covered by this report or
subsequent to the Evaluation Date. 26




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings From time to time, we have been involved in a variety of legal proceedings. For
a complete description of legal proceedings, see our annual report on Form 10-K
for the year ended December 31, 2003. During the quarter ended June 30, 2004,
there were no material developments with respect to such previously existing
proceedings and no new material proceedings not previously disclosed 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities The following table contains information regarding repurchases of our common
stock during the quarter: TotalNumber of
    
    MaximumShares
    
    Number ofPurchased as
    
    Shares thatTotal
    
    
    
    
    
    Part of
    
    May Yet BeNumber of
    
    
    
    
    
    Publicly
    
    PurchasedShares
    
    Average
    
    Announced
    
    Under thePurchased
    
    Price Per
    
    Plans or
    
    Plans orPeriod
    
    (1)
    
    Share
    
    Programs (2)
    
    ProgramsApril 1 through April 30, 2004
    
    
    20,000
    
    
    $
    22.26
    
    
    
    20,000
    
    
    
    2,510,300May 1 through May 31, 2004
    
    
    63,200
    
    
    
    22.25
    
    
    
    63,200
    
    
    
    2,447,100June 1 through June 30, 2004
    
    
    217,900
    
    
    
    24.07
    
    
    
    217,900
    
    
    
    2,229,200Total
    
    
    301,100
    
    
    $
    23.57
    
    
    
    301,100
 (1) Shares have only been repurchased through publicly announced programs. All
repurchases were open-market purchases. (2) On April 4, 2001 our Board of Directors authorized the repurchase of up to
10 million shares of our common stock. We have repurchased 7.8 million shares
cumulatively through June 30, 2004 under the Board of Directors April 2001
authorization. Number of shares does not include an additional 3.5 million
shares of our common stock approved for repurchase by our Board of Directors on
May 28, 2003, all of which were repurchased during the quarter ended June 30,
2003. Unless terminated earlier by resolution of our Board of Directors, each share
repurchase program expires when we have repurchased all shares authorized for
repurchase thereunder. 27




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Item 4. Submission of Matters to a Vote of Security Holders At VISX, Incorporateds Annual Stockholders Meeting on May 13, 2004,
stockholders (1) elected each of the director nominees, (2) approved an
amendment increasing the number of shares reserved for issuance under the
Companys 2000 Stock Plan, (3) approved the Companys Performance Incentive
Plan, and (4) ratified the appointment of the Companys independent auditors.
The results of the voting were as follows: Number of SharesVoted For
    
    WithheldProposal 1. To elect a board of directors to
hold office until the next annual stockholders
meeting or until their respective successors
have been elected or appointed.E. Davila
    
    
    42,624,103
    
    
    
    1,476,938L. De Buono
    
    
    41,969,597
    
    
    
    2,131,444G. French
    
    
    40,857,117
    
    
    
    3,243,924J. Galiardo
    
    
    40,845,652
    
    
    
    3,255,389J. Holmes
    
    
    40,969,345
    
    
    
    3,131,696G. Petersmeyer
    
    
    41,109,804
    
    
    
    2,991,237R. Sayford
    
    
    40,851,626
    
    
    
    3,249,415
 28




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Number of SharesVoted
    
    
    
    
    
    Broker Non-Voted For
    
    Against
    
    Abstain
    
    VotesProposal 2. To
approve an
amendment
increasing the
number of shares
reserved for
issuance under the
Companys 2000
Stock Plan.
    
    
    21,980,785
    
    
    
    9,053,543
    
    
    
    85,786
    
    
    
    12,980,9271Proposal 3. To
approve the
Companys
Performance
Incentive Plan.
    
    
    29,002,470
    
    
    
    2,015,601
    
    
    
    102,043
    
    
    
    12,980,9271Proposal 4. To
ratify the
appointment of the
Companys
independent
auditors.
    
    
    40,766,409
    
    
    
    3,283,766
    
    
    
    50,866
    
    
    
    0
 1 Pursuant to Section 216 of the Delaware General Corporation Law, the
affirmative vote of the majority of the votes cast was required to pass
Proposals 2 and 3. Significantly fewer shares voted on each of Proposals 2 and 3
than voted on Proposal 1, the election of directors, and Proposal 4, the
ratification of the appointment of the Companys auditors. Broker non-votes
accounted for this difference in voted shares. For certain types of
non-routine proposals, such as Proposals 2 and 3, brokers do not have the
discretionary authority to vote their clients shares, and therefore they must
refrain from voting on such proposals in the absence of instructions from their
clients. Broker non-votes are counted for purposes of determining whether a
quorum exists but not for purposes of determining whether a proposal has passed. 
 Item 5. Other Information In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002, VISX is responsible for
disclosing the non-audit services approved by VISX s Audit Committee to be
performed by KPMG LLP, VISX s independent auditor. Non-audit services are
defined in the law as services other than those provided in connection with an
audit or a review of the financial statements of VISX. The non-audit services
approved by the Audit Committee in the first quarter are considered by VISX to
be audit-related services that closely relate to the financial audit process.
Each of the services has been approved in accordance with a pre-approval from
the Audit Committees Chairman pursuant to delegated authority by the Audit
Committee. During the quarterly period covered by this filing, the Committee approved
additional engagements of KPMG LLP for the following non-audit service: tax
return preparation, non-audit accounting services, and tax matter consultations
concerning federal and state taxes. 
 Item 6. Exhibits and Reports on Form 8-K a)Exhibits. 31.1 Certification of the Chief Executive Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 29




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31.2 Certification of the Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 b) Reports on Form 8-K.  (1)
    
    Report on 8-K filed on April 21, 2004 under Item 12 (Disclosure of
Results of Operations and Financial Condition) regarding VISXs first
quarter financial results 30




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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(Registrant)August 6, 2004
    
    /s/ Elizabeth H. DávilaElizabeth H. DávilaChairman of the Board andChief Executive OfficerAugust 6, 2004
    
    /s/ Derek A. BertocciDerek A. BertocciSenior Vice President andChief Financial Officer (principalfinancial officer)August 6, 2004
    
    /s/ Martyn J. WebsterMartyn J. WebsterController (principalaccounting officer)
 31




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Exhibit Index 31.1 Certification of the Chief Executive Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002




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##### Table of Contents



31.2 Certification of the Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002