##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549




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FORM 10-Q

(X)
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934


For the quarterly period ended March 31, 2004

or

(   )
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934


For the transition
period
fromto

Commission File Number 1-10694



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VISX, INCORPORATED

(Exact name of registrant as specified in its charter)


Delaware
    
    06-1161793(State or other Jurisdiction of
Incorporation or Organization)
    
    (IRS Employer
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).  Total number of shares of common stock outstanding as of April 22, 2004:
48,714,091. Page 1 of 29




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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 March
31, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Interim Statements of Operations for
the Three Months Ended March 31, 2004 and 2003
    
    
    4Condensed Consolidated Interim Statements of Cash Flows for
the Three Months Ended March 31, 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
    
    
    16Critical Accounting Policies, Estimates and Judgments
    
    
    18Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4.Controls and Procedures
    
    
    25PART II. OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    26Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities
    
    
    26Item 5.Other Information
    
    
    26Item 6.Exhibits and Reports on Form 8-K
    
    
    27SIGNATURES
    
    
    28EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  Page 2 of 29




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PART I. FINANCIAL INFORMATION 
 Item 1. Condensed Consolidated Interim Financial Statements VISX, INCORPORATED AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
(In thousands, except share and per share amounts) March 31,
    
    December 31,2004
    
    2003(unaudited)
    
    (unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    24,111
    
    
    $
    24,895Short-term investments
    
    
    76,628
    
    
    
    61,181Accounts receivable, net of allowance for
doubtful accounts of $4,102 and $4,195
respectively
    
    
    27,641
    
    
    
    27,432Inventories
    
    
    11,336
    
    
    
    11,219Deferred tax assets and prepaid expenses
    
    
    15,881
    
    
    
    20,450Total current assets
    
    
    155,597
    
    
    
    145,177Property and Equipment, net
    
    
    3,883
    
    
    
    3,850Long-Term Deferred Tax and Other Assets
    
    
    13,772
    
    
    
    14,936Total assets
    
    $
    173,252
    
    
    $
    163,963LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    3,604
    
    
    $
    3,442Accrued liabilities and other current liabilities
    
    
    37,666
    
    
    
    34,722Total current liabilities
    
    
    41,270
    
    
    
    38,164Stockholders Equity:Common stock: $.01 par value, 180,000,000
shares authorized; 64,990,089 shares issued at

March 31, 2004 and December 31, 2003,
respectively
    
    
    650
    
    
    
    650Additional paid-in capital
    
    
    199,339
    
    
    
    201,108Treasury stock, at cost 16,447,903 and
16,295,297 shares, at March 31, 2004 and
December 31, 2003 respectively
    
    
    (262,091
    )
    
    
    (258,218
    )Accumulated other comprehensive income
    
    
    410
    
    
    
    341Retained earnings
    
    
    193,674
    
    
    
    181,918Total stockholders equity
    
    
    131,982
    
    
    
    125,799Total liabilities and stockholders equity
    
    $
    173,252
    
    
    $
    163,963
 The accompanying notes are an integral part of these condensed consolidated
interim financial statements. Page 3 of 29




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VISX, INCORPORATED AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) Three months endedMarch 31,2004
    
    2003(unaudited)Revenues:License and other revenues
    
    $
    32,487
    
    
    $
    19,677System revenues
    
    
    6,076
    
    
    
    9,926Service and parts revenues
    
    
    5,242
    
    
    
    4,830Total revenues
    
    
    43,805
    
    
    
    34,433Costs and Expenses:Cost of license and other revenues
    
    
    980
    
    
    
    832Cost of system revenues
    
    
    5,291
    
    
    
    8,379Cost of service and parts revenues
    
    
    3,598
    
    
    
    3,613Selling, general and administrative
    
    
    9,757
    
    
    
    9,454Research, development and regulatory
    
    
    5,044
    
    
    
    4,046Total costs and expenses
    
    
    24,670
    
    
    
    26,324Income From Operations
    
    
    19,135
    
    
    
    8,109Interest and other income
    
    
    328
    
    
    
    943Income Before Provision For Income Taxes
    
    
    19,463
    
    
    
    9,052Provision for income taxes
    
    
    7,707
    
    
    
    3,576Net Income
    
    $
    11,756
    
    
    $
    5,476Earnings Per Share:Basic
    
    $
    0.24
    
    
    $
    0.11Diluted
    
    $
    0.23
    
    
    $
    0.11Shares Used For Earnings Per Share:Basic
    
    
    48,672
    
    
    
    51,342Diluted
    
    
    50,433
    
    
    
    51,805
 The accompanying notes are an integral part of these condensed consolidated
interim financial statements. Page 4 of 29




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VISX, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(In thousands) Three months ended March 31,2004
    
    2003(unaudited)Cash flows from operating activities:Net income
    
    $
    11,756
    
    
    $
    5,476Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    2,185
    
    
    
    1,274Provision for doubtful accounts receivable
    
    
    85
    
    
    
    209Increase (decrease) in cash flows from changes in
operating assets and liabilities:Accounts receivable
    
    
    (297
    )
    
    
    (1,577
    )Inventories
    
    
    (1,326
    )
    
    
    (3,219
    )Deferred tax assets and prepaid expenses
    
    
    4,260
    
    
    
    3,360Long-term deferred tax and other assets
    
    
    996
    
    
    
    872Accounts payable
    
    
    162
    
    
    
    1,276Accrued liabilities and other current liabilities
    
    
    2,939
    
    
    
    (440
    )Net cash provided by operating activities
    
    
    20,760
    
    
    
    7,231Cash flows from investing activities:Capital expenditures
    
    
    (540
    )
    
    
    (251
    )Purchases of available for sale securities
    
    
    (18,054
    )
    
    
    (14,882
    )Proceeds from maturities of available for sale securities
    
    
    2,684
    
    
    
    6,971Net cash (used in) investing activities
    
    
    (15,910
    )
    
    
    (8,162
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    2,476
    
    
    
    72Repurchases of common stock
    
    
    (8,118
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (5,642
    )
    
    
    72Effect of exchange rate changes on cash and cash equivalents
    
    
    8
    
    
    
    Net (decrease) in cash and cash equivalents
    
    
    (784
    )
    
    
    (859
    )Cash and cash equivalents, beginning of period
    
    
    24,895
    
    
    
    37,687Cash and cash equivalents, end of period
    
    $
    24,111
    
    
    $
    36,828Supplemental Cash Flow Information:Cash paid (refunded) for income taxes
    
    $
    959
    
    
    $
    (10
    )Non-cash investing activities:Inventory transferred to deferred costs under operating leases
    
    $
    1,203
    
    
    $
    1,726
 The accompanying notes are an integral part of these condensed consolidated
interim financial statements. Page 5 of 29




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VISX, INCORPORATED AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
March 31, 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 accounting principles generally accepted 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. 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 period. 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 EndedMarch 31,2004
    
    2003Net income
    
    $
    11,756
    
    
    $
    5,476Basic earnings per shareIncome available to common shareholders
    
    $
    11,756
    
    
    $
    5,476Weighted average common shares outstanding
    
    
    48,672
    
    
    
    51,342Basic Earnings Per Share
    
    $
    0.24
    
    
    $
    0.11Diluted earnings per shareIncome available to common shareholders
    
    $
    11,756
    
    
    $
    5,476Weighted average common shares outstanding
    
    
    48,672
    
    
    
    51,342Dilutive potential common shares from stock options
    
    
    1,761
    
    
    
    463Weighted average common shares and dilutive
potential common shares
    
    
    50,433
    
    
    
    51,805Diluted Earnings Per Share
    
    $
    0.23
    
    
    $
    0.11
 Options to purchase 2,172,000 and 6,597,000 shares with a weighted average
exercise price of $33.80 and $21.51, during the three-month periods ended March
31, 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. Page 6 of 29




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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 EndedMarch 31,2004
    
    2003Net Income
    
    As Reported
    
    $
    11,756
    
    
    $
    5,476Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects
    
    
    
    
    
    
    (1,947
    )
    
    
    (1,817
    )Net Income
    
    Pro Forma
    
    $
    9,809
    
    
    $
    3,659Basic Earnings Per Share
    
    As Reported
    
    $
    0.24
    
    
    $
    0.11Pro Forma
    
    
    0.20
    
    
    
    0.07Diluted Earnings Per Share.
    
    As Reported
    
    $
    0.23
    
    
    $
    0.11Pro Forma
    
    
    0.20
    
    
    
    0.07
 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 endedMarch 31,2004
    
    2003Expected life of options (in years)
    
    
    5.36
    
    
    
    4.36Expected life of ESPP rights (in years)
    
    
    1.25
    
    
    
    1.25Volatility for options
    
    
    72
    %
    
    
    76
    %Volatility for ESPP rights
    
    
    59
    %
    
    
    60
    %Risk free interest rate for options
    
    
    2.86
    %
    
    
    2.55
    %Risk free interest rate for ESPP rights
    
    
    1.71
    %
    
    
    1.63
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
 The weighted average fair value of options granted under our stock option plans
during the three month periods ended March 31, 2004 and 2003 was $12.34 and
$4.82, respectively. The weighted average fair value per share of options
granted under the ESPP during the three month periods ended March 31, 2004 and
2003 was $4.30 and $3.64, respectively. Page 7 of 29




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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 14% and 21% of total revenues
for the three month periods ended March 31, 2004 and 2003 respectively. We did
not generate export revenues to any country that equaled or exceeded 10% of our
total revenues for either of the three month periods ended March 31, 2004 and
2003. In the following table we have presented our export revenues by
geographic region (in thousands): Three months endedMarch 31,2004
    
    2003(Unaudited)Europe
    
    $
    1,980
    
    
    $
    1,956Americas (excluding the United States)
    
    
    895
    
    
    
    945Asia and Other
    
    
    3,140
    
    
    
    4,479$
    6,015
    
    
    $
    7,380
 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 29% and 13% of
total revenues in the first quarter of 2004 and 2003, respectively.
Additionally, TLC accounted for 24% and 22% of our total receivables at March
31, 2004 and December 31, 2003, respectively. 3. Inventories Components of inventories are as follows (in thousands): March 31,
    
    December 31,2004
    
    2003(Unaudited)Raw materials and subassemblies
    
    $
    6,678
    
    
    $
    7,786Work-in-process
    
    
    1,722
    
    
    
    1,321Finished goods
    
    
    2,936
    
    
    
    2,112$
    11,336
    
    
    $
    11,219
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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 EndedMarch 31,2004
    
    2003Net income
    
    $
    11,756
    
    
    $
    5,476Other
comprehensive income (net of tax effects)Increase (decrease) in accumulated unrealized
holding gains on available-for-sale
securities
    
    
    77
    
    
    
    (122
    )Change in accumulated foreign currency
translation adjustment
    
    
    (8
    )
    
    
    Comprehensive income
    
    $
    11,825
    
    
    $
    5,354
 5. Warranty Obligations Changes in product warranty obligations for the periods ended March 31, 2004
and 2003 are as follows (unaudited, in thousands): Three Months EndedMarch 31,2004
    
    2003Balance as of the beginning of the period
    
    $
    1,779
    
    
    $
    1,963Expense accrued (recoveries recognized)
    
    
    (14
    )
    
    
    768Cost of services provided
    
    
    (419
    )
    
    
    (751
    )Balance as of the end of the period
    
    $
    1,346
    
    
    $
    1,980
 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 applicable securities
laws, we have repurchased 7.5 million shares cumulatively on the open market
through March 31, 2004 at a total cost of $98.6 million. Accordingly, 2.5
million shares remain available as of March 31, 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 Page 9 of 29




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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. Page 10 of 29




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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 reduce concerns perceived by some consumers; 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; our
intention to continue to repurchase shares of our common stock in 2004; our
near-term level of expenditures; our belief that ongoing technical advances
will enhance patients vision, which may increase customer acceptance of laser
vision correction surgery; our belief that our revenue and profit in 2004 will
improve compared to 2003; our belief that operating expenses will increase 5%
to 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 license and other revenues will increase in 2004 compared to 2003;
our belief that there will be no significant growth in revenues from laser
system revenues in 2004 and that the sale of WaveScan Systems will be less than
in 2003; our expectation that service revenues will be lower in the remaining
quarters of 2004; our anticipation that gross profit margin will decrease
through the remainder of 2004 as revenues from per-procedure based service
plans generate lower revenues; our current operations plan for the remainder 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 Page 11 of 29




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involved. In the United States, we have always charged a license fee for our
standard procedure and charge 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 standard procedures we charge a small price per procedure
for the treatment card. For CustomVue procedures we charge a significantly
larger price per procedure. 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 maintained at least 60% market share for procedures performed in the United
States in 2003. According to MarketScope, we have held at least 60% market
share since 1997. Licensing revenues comprise the majority of our revenues and generated in
excess of 90% of our gross profit dollars. They are predominantly derived from
license fees from our United States customers. Licensing revenues grew 65% in
the three month period ended March 31, 2004 compared with the corresponding
period in 2003 and generated approximately 97% gross profit margin on the sale
of procedures. We evaluate this aspect of our business by tracking the
following:  
    
    The number of procedures sold;
    
    Trends in procedures 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 0.4
million shares of stock in the first quarter of 2004 and intend to continue to
repurchase additional shares through the remainder of 2004. We will also
continue to investigate areas where we can expand our presence in the
refractive surgery market. This could result in using cash for the acquisition
of technology or a business. Our capital expenditures have been in the range
of $2.3 million to $4 million per year in the past five years. We do not
expect a near-term change in this level of expenditures. We have no long term
debt. Looking to the remainder of 2004, our business is highly leveraged on procedure
volume, and increasingly, 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 Page 12 of 29




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continued growth. Laser vision correction has penetrated less than 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. We expect that ongoing technical
advances, such as the CustomVue procedure, will enhance the quality of
patients vision which 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, raising the potential for growth in
procedures, CustomVue adoption and licensing revenue.
    
    Our competition. Competition in the laser vision correction market
is intense. Many of our competitors have greater resources and a
stronger international market presence. As a result, we compete
aggressively to obtain procedure market share.
    
    The United States economy. Because we have always charged a
license fee for procedures sold in the United States, the United States
remains, by far, our most significant market for licensing revenue.
Economic conditions in the United States therefore 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 that the rebound in the
United States economy and increases in consumer confidence have
provided renewed 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 improve compared to 2003 as
a result of various factors including continued conversion to the CustomVue
procedure, maintenance, at least, of our United States market share, and
improvements in the United States economy. For 2004, we anticipate that
operating expenses will increase 5% to 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 March 31,2004
    
    2003
    
    ChangeLicense and other revenues
    
    $
    32,487
    
    
    $
    19,677
    
    
    
    65
    %Percent of total revenues
    
    
    74.2
    %
    
    
    57.2
    %System revenues
    
    
    6,076
    
    
    
    9,926
    
    
    
    (39
    )%Percent of total revenues
    
    
    13.9
    %
    
    
    28.8
    %Service and parts revenues
    
    
    5,242
    
    
    
    4,830
    
    
    
    9
    %Percent of total revenues
    
    
    11.9
    %
    
    
    14.0
    %Total revenues
    
    $
    43,805
    
    
    $
    34,433
    
    
    
    27
    %
 License and Other Revenues Page 13 of 29




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License and other revenues grew 65%, or $12.8 million, in the first quarter of
2004 compared with 2003, reflecting primarily increased adoption of our new
CustomVue procedure and 20% 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. In the
United States, CustomVue procedures represented 34.3% of the procedure orders
in the first quarter of 2004. Based on economists projections for further 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 were negatively impacted by:  
    
    Fewer VISX STAR System sales due primarily to softness of laser
markets and competitive pricing pressures.
    
    Fewer WaveScan System sales 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 first quarter of 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. In the remainder of 2004, we believe there will be no significant growth in
revenues from laser system revenues and that the sale of WaveScan Systems will
be less than in 2003, since most of our customers have already purchased a
WaveScan System. Service and parts revenues Service and parts revenues in the first quarter of 2004 were $0.4 million
higher than the comparable period of 2003 due primarily to higher revenues
derived from customers that purchased service on a per procedure basis.
Historically, procedure volume has been highest in the first quarter, therefore
we expect service revenues to be lower in the remaining quarters of 2004.  Page 14 of 29




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Three Months Ended March 31,2004
    
    2003
    
    ChangeCost of license and other revenues
    
    
    980
    
    
    
    832
    
    
    
    18
    %Percent of related revenues
    
    
    3.0
    %
    
    
    4.2
    %Cost of system revenues
    
    
    5,291
    
    
    $
    8,379
    
    
    
    (37
    )%Percent of related revenues
    
    
    87.1
    %
    
    
    84.4
    %Cost of service and parts revenues
    
    
    3,598
    
    
    
    3,613
    
    
    
    
    %Percent of related revenues
    
    
    68.6
    %
    
    
    74.8
    %Selling, general and administrative
    
    
    9,757
    
    
    
    9,454
    
    
    
    3
    %Percent of total revenues
    
    
    22.3
    %
    
    
    27.5
    %Research, develop. and regulatory
    
    
    5,044
    
    
    
    4,046
    
    
    
    25
    %Percent of total revenues
    
    
    11.5
    %
    
    
    11.8
    %
 Cost of license and other revenues Cost of license and other revenues increased in the first quarter of 2004 from
the comparable period of the prior year due to the increased number of
procedures. 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 37%, or $3.1 million, in the first quarter of
2004 from the comparable period of the prior year. Sales of lasers, upgrades
and WaveScan Systems decreased and the overall gross profit margin decreased as
the competitive pricing pressure for excimer lasers reduced the average system
selling price with no corresponding reduction in average system cost. Warranty expense decreased in the first quarter of 2004 from the
comparable period of the prior year due to the reduced incidence of service
calls for systems under warranty. Cost of service and parts revenues Cost of service and parts revenues was largely unchanged in the first quarter
of 2004 compared to the comparable quarter of 2003. The overall gross profit
margin increased to 31.4% in the first quarter of 2004 compared to 25.2% in the
corresponding quarter of 2003 as labor service costs are relatively fixed and
parts usage does not increase with procedure volume. We anticipate that our
gross profit margin percentage for the balance of 2004 will be lower than the
first quarter of 2004 as revenues from per-procedure based service plans
generate lower revenues. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by approximately $0.3
million to $9.8 million in the first quarter of 2004 compared with the
corresponding period of 2003. The change reflects primarily the following
items:  
    
    Selling expenses increased $0.8 million primarily reflecting
increased headcount and additional commission costs due to the increase
in procedure revenues; and
    
    Marketing costs decreased $0.4 million primarily due to a reduction
in professional media costs due to the launch of CustomVue in 2003. For the remainder of 2004, our current plan for operations includes:  
    
    Continued modest increases in marketing and sales expenses as we
continue to promote our CustomVue procedure;
    
    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; and Page 15 of 29




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
    
    An net increase in legal expenses in 2004, due to the significant
insurance reimbursements received in 2003. Research and Development and Regulatory Expenses Our research and development and regulatory expenses increased by approximately
$1.0 million in the first quarter of 2004 compared to the corresponding period
of 2003. The increase relates primarily to our ongoing focus on next generation
technologies and developments for laser vision correction, including:  
    
    Laser 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 believe these factors will result in an increase of 5% to 9% in the combined
total of our selling, general and administrative, and research and development
and regulatory expenses. Interest and Other Income Interest income declined in the first quarter of 2004 from the comparable period of 2003 as a result of:  
    
    Lower average cash balances due to use of cash for the repurchase of our stock; and  
    
    Lower average yields on our portfolio of cash and investments
compared to the first quarter of 2003 due to market declines in
interest rates. Income Tax Provision Our effective tax rate of 39.6% remained approximately constant in the first
quarter of 2004 compared to the comparable period of 2003. 
 Liquidity and Capital Resources Cash, cash equivalents and short-term investments (cash) and working capital
were as follows (in thousands): March 31,
    
    December 31,2004
    
    2003(Unaudited)Cash, cash equivalents and short-term investments
    
    $
    100,739
    
    
    $
    86,076Working capital
    
    
    114,327
    
    
    
    107,013Stockholders equity
    
    
    131,982
    
    
    
    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 on the
consolidated statements of operations. Page 16 of 29




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Cash, cash equivalents and short-term investments were $100.7 million at March
31, 2004, an increase of $14.7 million compared with December 31, 2003. It was
impacted principally by:  
    
    Stock repurchases of $8.1 million;  
    
    Positive cash flow from operating activities of $20.8 million; and  
    
    Proceeds from issuance of common stock related to employee
participation in employee stock programs generating $2.5 million. Operating activities generated $20.8 million in cash in the first quarter of
2004 compared with $7.2 million provided in the corresponding period of 2003.
In the first quarter of 2004 we:  
    
    Generated $14.0 million of cash from net income plus non-cash
related expenses ($2.3 million);  
    
    Increased accrued liabilities balances due primarily to a $3.1
million increase in income taxes payable;  
    
    Decreased deferred tax assets and prepaid expenses due primarily to
the utilization of prepaid tax assets of $4.3 million. Net cash used by investing activities was $15.9 million in the first quarter of
2004, up from $8.2 million used in the corresponding period of 2003. The
principal movements in cash used in investing activities were due to the
investment in, and maturity of, short-term investments. Cash used in financing activities was $5.6 million in the first quarter of
2004, compared to $0.1 million provided in the corresponding period of 2003.
The principal factor that contributed to the cash used in financing activities
was the cash used of $8.1 million to repurchase 0.4 million shares of VISX
stock on the open market in the first quarter of 2004. This was partially
offset by cash received upon the issuance of stock under employee stock
programs of $2.5 million and $0.1 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 7.5 million shares on the open market cumulatively through March
31, 2004, at a total cost of $98.6 million. Accordingly, 2.5 million shares
remain available as of March 31, 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 March 31, 2004, we did not have
any borrowings outstanding, nor any credit agreements. Our normal credit terms granted to customers are net 30 to 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 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 $100.7 million in cash, cash equivalents and short-term Page 17 of 29




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investments as of March 31, 2004 to provide for unforeseen contingencies and to
support strategic objectives including the development or acquisition of new
technologies and our Stock Repurchase Program. 
 Critical Accounting Policies, Estimates and Judgments 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 March 31,
2004 and December 31, 2003 as a percentage of gross accounts receivable was
12.1% and 13.2% respectively. At March 31, 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 quarters ending March 31, 2004 and 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 Page 18 of 29




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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. 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 less than 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. Page 19 of 29




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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 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 Page 20 of 29




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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
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 (TLC). TLC and its operating subsidiaries accounted for
29% and 13% of our total revenues for the three months ended March 31, 2004 and
2003 respectively. Additionally, TLC, accounted for 24% and 22% of our total
receivables at March 31, 2004 and December 31, 2003, respectively. 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 success. The research and
development process is expensive, prolonged, and entails considerable Page 21 of 29




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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. During the three months ended March 31, 2004 and 2003,
we derived approximately 14% and 21%, respectively, of our revenues from sales
to customers outside the United States. 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;
    
    foreign currency fluctuations;
    
    reduced or limited protection of our intellectual property rights in some countries; and
    
    dependence on local distributors. Page 22 of 29




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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 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
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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 March 31, 2004, there were an aggregate of
6,301,000 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. 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 Page 24 of 29




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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 three months ended March 31, 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 three months ended
March 31, 2004 or subsequent to the Evaluation Date. Page 25 of 29




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Overview 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 March 31, 2004,
there were no material developments with respect to such previously existing
proceedings and no new material proceedings not previously disclosed, except as
follows. 
 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)
    
    ProgramsJanuary 1 through
January 31, 2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    2,950,600February 1 through
February 29, 2004
    
    
    365,300
    
    
    
    19.52
    
    
    
    365,300
    
    
    
    2,585,300March 1 through
March 31, 2004
    
    
    55,000
    
    
    
    17.93
    
    
    
    55,000
    
    
    
    2,530,300Total
    
    
    420,300
    
    
    $
    19.31
    
    
    
    420,300
 (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 7.5 million shares
cumulatively through March 31, 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. 
 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 Page 26 of 29




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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 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 January 27, 2004 under Item 12 (Disclosure
of Results of Operations and Financial Condition) regarding VISXs
fourth quarter and year end financial results. Page 27 of 29




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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)May 6, 2004
    
    /s/Elizabeth H. DávilaElizabeth H. DávilaChairman of the Board andChief Executive OfficerMay 6, 2004
    
    /s/Derek A. BertocciDerek A. BertocciSenior Vice President andChief Financial Officer (principalfinancial officer)May 6, 2004
    
    /s/Martyn J. WebsterMartyn J. WebsterController (principalaccounting officer)
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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 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 Page 29 of 29