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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 MARCH 31, 2001
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 30733
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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 41-1978822
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10700 BREN ROAD WEST, MINNETONKA, MN 55343
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(Address of principal executive offices) (Zip Code)
(952) 933-4666
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(Registrant's telephone number, including area code)
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 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.
[X] Yes [ ] No
As of May 1, 2001, there were 27,883,978 shares of the registrant's $.01
par value Common Stock outstanding.
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INDEX
Part I. FINANCIAL INFORMATION Page(s)
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Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2001 (Unaudited)
and December 31, 2000 3 - 4
Statements of Operations for the three months ended March 31,
2001 and 2000 (Unaudited) 5
Statements of Cash Flows for three months ended March 31,
2001 and 2000 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7 - 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 17
SIGNATURES 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
MARCH 31, DECEMBER 31,
2001 2000
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(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 8,596 $ 12,165
Accounts receivable, net 23,596 23,616
Inventories 10,108 9,674
Deferred taxes 2,386 4,366
Other current assets 1,099 1,684
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Total current assets 45,785 51,505
Property, plant and equipment, net 24,142 24,773
Intangibles, net 98,504 97,731
Deferred income taxes 6,094 5,129
Investments and other assets 7,359 2,124
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Total assets $181,884 $181,262
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,519 $ 2,431
Accrued compensation expenses 13,332 13,306
Accrued warranty expense 7,751 7,548
Other accrued expenses 3,133 3,441
Current portion of notes payable 6,033 6,033
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Total current liabilities 32,768 32,759
Long-term notes payable 36,951 38,459
Other long-term liabilities 1,482 -
Minority interest 521 521
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MARCH 31, DECEMBER 31,
2001 2000
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(Unaudited)
Stockholder's equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued -- --
Common stock, par value $.01 per share; authorized
95,000,000 shares; issued and outstanding
27,859,028 shares for March 31, 2001 279 278
Additional paid-in capital 135,919 135,449
Deferred compensation (827) (996)
Accumulated other comprehensive loss (2,478) (1,073)
Accumulated deficit (22,731) (24,135)
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Total stockholders' equity 110,162 109,523
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Total liabilities and stockholders' equity 181,884 $181,262
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The accompanying notes are an integral part of the consolidated financial
statements.
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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
Three months ended
March 31,
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2001 2000
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Net sales $27,548 $24,986
Cost of sales 5,397 5,730
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Gross profit 22,151 19,256
Operating expenses:
Marketing and sales 11,409 9,864
General and administrative 2,726 2,694
Research and development 3,190 3,028
Amortization of intangibles 2,200 1,991
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Total operating expenses 19,525 17,577
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Operating income 2,626 1,679
Royalty and other income 1,075 726
Interest expense, net (1,027) (1,844)
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Income before income taxes 2,674 561
Income tax expense (1,270) (352)
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Net income $ 1,404 $ 209
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Earnings per share:
Basic and diluted $ 0.05
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Weighted average common shares:
Basic 27,813
Diluted 29,892
The accompanying notes are an integral part of the consolidated financial
statements.
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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(In thousands, except share data)
(UNAUDITED)
For the three months ended
March 31,
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2001 2000
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Cash flows from operating activities:
Net income $1,404 $ 209
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 947 919
Amortization of intangibles 2,200 1,991
Deferred financing costs 68 --
Noncash pension charge 278 355
Noncash deferred compensation 118 94
Income tax benefit related to stock option plan 179 --
Change in net deferred taxes 1,577 (234)
Changes in operating assets and liabilities:
Accounts receivable (1,084) (2,676)
Inventories (472) (1,612)
Accounts payable and accrued expenses (254) (45)
Other assets (150) 666
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Net cash provided by (used in) operating activities 4,811 (333)
Cash flows from investing activities:
Purchase of property, plant and equipment (316) (988)
Purchase of businesses, net of cash acquired (3,041) (2,472)
Purchase of investments in technology (4,500) --
Purchase of other intangibles -- (1,000)
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Net cash used in investing activities (7,857) (4,460)
Cash flows from financing activities:
Issuance of common stock 343 --
Borrowings on long-term debt -- 2,800
Payments on long-term debt (1,508) --
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Net cash provided by (used in) financing activities (1,165) 2,800
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Effect of exchange rates 642 159
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Net decrease in cash and cash equivalents (3,569) (1,834)
Cash and cash equivalents at beginning of period 12,165 6,940
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Cash and cash equivalents at end of period $8,596 $5,106
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Supplemental disclosure:
Cash paid for interest $ 920 $2,244
Cash paid for taxes $ 18 ($8)
The accompanying notes are an integral part of the consolidated financial
statements.
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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements included in this Form 10-Q have been
prepared by American Medical Systems Holdings, Inc. (the Company), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed, or omitted, pursuant to these rules
and regulations. The year-end balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. These unaudited consolidated interim financial statements
should be read in conjunction with the Company's consolidated financial
statements and related notes included in Annual Report on Form 10-K as filed
with the SEC.
The consolidated interim financial statements presented herein as of March 31,
2001 and for the three months then ended, reflect, in the opinion of management,
all adjustments (which include only normal, recurring adjustments) necessary for
a fair presentation of financial position and the results of operations and cash
flows for the periods presented. The results of operations for any interim
period are not necessarily indicative of results for the full year.
2. ORGANIZATION
We founded our business in 1972. Pfizer Inc. acquired our business in 1985. In
September 1998, a group of investors led by Warburg, Pincus Equity Partners,
L.P., financed the purchase of our assets from Pfizer. We formed American
Medical Systems Holdings, Inc., our current holding company, in April 2000. The
Company designs, develops, manufactures and markets specialty medical devices
for patients suffering from incontinence, erectile dysfunction, and prostate
disease.
The consolidated financial statements include the accounts of American Medical
Systems Holdings, Inc. and its wholly-owned subsidiary, American Medical
Systems, Inc. after elimination of all significant intercompany transactions and
accounts.
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3. INVENTORIES
Inventories consist of the following (in thousands):
March 31, December 31,
2001 2000
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(Unaudited)
Raw materials $ 2,861 $ 3,079
Work-in-process 2,577 2,699
Finished goods 7,622 7,036
Obsolescence reserve (2,952) (3,140)
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$10,108 $ 9,674
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4. INDUSTRY SEGMENT INFORMATION
Since its inception, the Company has operated in the single industry segment of
developing, manufacturing and marketing medical devices.
The Company distributes its products through its direct sales force and
independent sales representatives in the United States, Canada, and most of
Europe. Additionally, the Company distributes its products through foreign
independent distributors, primarily in Europe and Asia, who then market the
products directly to medical institutions. No one customer or distributor
accounted for 10% or more of the Company's net sales for the three months ended
March 31, 2001 or 2000.
Total export sales from the U.S. to unaffiliated entities (primarily to Europe
and payable in U.S. dollars) were $1,606,000 for the three month period ended
March 31, 2001, compared to $1,221,000 for the three month period ended March
31, 2000. Foreign subsidiary sales are predominantly from customers in Western
Europe. Substantially all of the Company's foreign subsidiary assets are located
in Western Europe.
At March 31, 2001 and December 31, 2000, consolidated accounts receivable
included $7,745,000 and $7,200,000 respectively, due from customers located
outside of the United States.
5. INVESTMENT IN TECHNOLOGY
On January 5, 2001, the Company made a $3.0 million equity investment in
Collagenesis Corp. At the time of the investment, Collagenesis was working with
its existing debt holders to exchange its outstanding debt into equity and raise
additional capital. Because Collagenesis has been unsuccessful in doing so, the
original agreement permitted the Company to convert its equity position into a
$3.0 million 10% Senior Subordinated Convertible Voting Promissory Note. The
Company converted its equity position into debt in April 2001. Each quarter the
Company reviews the long-term viability of its investments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 requires that investments
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such as the Company's investment in Collagenesis be reviewed for impairment
whenever events or circumstances indicate the carrying amount of an asset may
not be recoverable. The Company considers Collagenesis's inability to raise
additional equity investment and exchange its debt into equity such an event. At
this time, the Company is uncertain of the probability or amount of possible
impairment in its Collagenesis investment. Accordingly, the Company is currently
carrying its Collagenesis investment at cost.
6. ADOPTION OF STATEMENT OF FINANCIAL STANDARDS NO. 133
The Company adopted Statement of Financial Accounting Standards No. 133, as
amended by SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities", on January 1, 2001. SFAS 133 requires that all derivatives be
recorded on the consolidated balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in earnings or Other
Comprehensive Income (Loss) (OCI) depending on the type of hedging instrument
and the effectiveness of those hedges. In accordance with the transition
provisions of SFAS 133, the Company recorded a cumulative loss adjustment to OCI
of $712,000, after taxes, to recognize the fair value of its derivatives as of
the date of adoption.
All of the derivatives used by the Company as hedges are highly effective as
defined by SFAS 133 because all of the critical terms of the derivatives match
those of the hedged items. All of the derivatives used by the Company have been
designated as cash flow hedges at the time of adoption of SFAS 133. The
effective portion of the cumulative gain or loss on the derivative instrument is
reported as a component of OCI in stockholder's equity and recognized into
earnings in the same period or periods during which the hedged transaction
affects earnings. All derivatives are adjusted to their fair market values at
the end of each quarter. Unrealized net gains and losses for cash flow hedges
are recorded in OCI. The Company's credit risk related to derivatives is
considered low because they are entered into with only strong creditworthy
counterparties.
As of March 31, 2001, all of the Company's derivatives, designated as hedges,
are interest rate swaps which qualify for evaluation using the short cut method
for assessing effectiveness. As such, there is an assumption of no
ineffectiveness. The Company hedged a portion of its original $65.0 million
variable rate term note, as required by its senior credit facility, by entering
into an interest rate swap in which the Company agrees to exchange, at specified
intervals, the calculated difference between the fixed interest rate of the swap
and the variable interest rate on $30 million of debt. This interest rate swap
agreement expires June 30, 2003. The Company expects that pre-tax losses
totaling approximately $659,000, which are recorded in OCI at March 31, 2001 and
represent the difference between the fixed rate of the swap agreement and
variable interest of the term note, will be recognized within the next twelve
month period as part of interest expense. At March 31, 2001, the fair value of
the interest rate swap, based upon quoted market prices for contracts with
similar maturities, was approximately $1,482,000. During the quarter ended March
31, 2001, unrealized net losses totaling $919,000, after taxes, were recorded in
OCI.
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7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income for the Company includes net income, changes in value on
derivative financial instruments, and foreign currency translation.
Comprehensive income for the three months ended March 31, 2001 and 2000 and the
year ended December 31, 2000, was as follows:
Three Months Ended
March 31,
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2001 2000
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Net income $1,404 $209
Cumulative effect of
change in accounting
principle for
derivative and hedging
activities (SFAS 133),
net of taxes (712) --
Net loss on derivative
financial instruments, --
net of taxes (207)
Foreign currency
translation adjustments (486) (72)
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Comprehensive income
(loss) ($1) $137
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the results of operations and financial
condition for the three month period ended March 31, 2001 compared with the
three month period ended March 31, 2000 and should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto.
OVERVIEW
We founded our business in 1972. Pfizer Inc. acquired our business in 1985. In
September 1998, a group of investors led by Warburg, Pincus Equity Partners,
L.P., financed the purchase of our assets from Pfizer. We formed American
Medical Systems Holdings, Inc., our current holding company, in April 2000.
We manufacture and market a broad and well-established line of medical devices
for patients suffering from incontinence, erectile dysfunction and prostate
disease. We are focused on expanding our product offering and adding
less-invasive medical devices for urological disorders through product
development and acquisitions.
In 1999, we expanded our commitment to the incontinence and prostate disease
markets with the acquisition of several technologies, most notably technologies
related to incontinence from Influence, Inc. These acquisitions have enabled us
to diversify our product portfolio and offer a sling product for incontinence,
one of the fastest growing surgical procedures for the treatment of
incontinence.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001 Compared to the Three Months Ended March 31,
2000
NET SALES
Net sales increased $2.5 million, or 10.3%, from $25.0 million in the first
quarter of 2000 to $27.5 million in the first quarter of 2001. Of this increase,
76.1% was attributable to incontinence product sales, which increased 18.6% in
the first quarter of 2001 versus the same period in 2000. Erectile dysfunction
sales increased 2.1% in the first quarter of 2001 versus the same period in
2000. Prostate disease products sales increased 30.5% in the first quarter of
2001 versus the same period in 2000. Manufacturing problems at an outside
supplier negatively affected sales of prostate disease products in 2000.
Net sales in the United States increased $2.3 million, or 11.5%, from $20.1
million in the first quarter of 2000 to $22.4 million in the same period in
2001. The majority of this increase is attributable to higher sales in the
incontinence product line.
Foreign net sales increased $246,000, or 5.0%, from $4.9 million in the first
quarter of 2000 to $5.1 million in the same period in 2001. The entire increase
in sales is attributable to prostate disease products. An increase in
incontinence products sales was offset by a similar decrease in erectile
dysfunction products sales. The net increase in sales was negatively impacted by
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currency translation of approximately $300,000 in the first quarter of 2001
versus the same period in 2000.
COST OF SALES
Cost of sales as a percentage of net sales decreased from 22.9% in the first
quarter of 2000 to 19.6% in the same period in 2001. Cost of sales in 2001
benefited from improved manufacturing efficiencies and higher volumes of
production in a relatively fixed-cost manufacturing plant.
MARKETING AND SALES
Marketing and sales costs increased $1.5 million, or 15.7%, from $9.9 million in
the first quarter of 2000 to $11.4 million in the same period in 2001. These
cost increases are attributable to higher sales commissions supporting the
increase in sales and marketing and sales expenses associated with training
programs and materials, promotional literature and advertising necessary to
launch new products.
GENERAL AND ADMINISTRATIVE
General and administrative costs increased $32,000, or 1.2% in the first quarter
of 2001 versus the same period in 2000.
RESEARCH AND DEVELOPMENT
Research and development costs increased $162,000, or 5.4%, from $3.0 million in
the first quarter of 2000 to $3.2 million in the same period in 2001. This
increased spending supports our strategic emphasis on internal new product
development.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased $209,000, or 10.5%, from $2.0 million in
the first quarter of 2000 to $2.2 million in the same period in 2001. The
increase is attributable to additional amortization of intangibles related to
milestone payments following the Influence acquisition.
ROYALTY AND OTHER INCOME
We license our stent delivery technology to a former subsidiary of Pfizer for
medical use outside of the urology field. We entered into this agreement in
September 1998 in connection with our acquisition from Pfizer. All of our
royalty income is from this license.
Royalty and other income increased $349,000, or 48.1%, from $726,000 in the
first quarter of 2000 to $1.1 million in the same period in 2001. The increase
is due to a non-recurring payment of $375,000 we received in the first quarter
of 2001 representing a reimbursement to resolve a quality issue with a materials
supplier dating back to the fourth quarter of 1999.
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INTEREST EXPENSE
Net interest expense decreased $817,000, or 44.3%, from $1.8 million in the
first quarter of 2000 to $1.0 million in the same period in 2001. Average
borrowings under notes payable were $59.0 million lower in the first quarter of
2001 versus the same period in 2000. A portion of the benefit from lower
borrowing levels was offset by higher interest rates as our debt is no longer
guaranteed by a major shareholder.
INCOME TAX EXPENSE
Income tax expense increased $918,000, or 261%, from $352,000 in the first
quarter of 2000 to $1.3 million in the same period in 2001. Income before income
taxes increased 377% from $561,000 in the first quarter of 2000 to $2.7 million
in the same period in 2001. Effective tax rate comparisons between 2000 and 2001
are not meaningful as permanent non-deductible expenses are abnormally high in
comparison to pretax income in both 2000 and 2001.
NET INCOME
Net income for 2001 was $1.4 million in the first quarter of 2001, versus
$209,000 in the same period in 2000. Our increase in net income resulted from
the increase in revenues described above while maintaining control over our
operating costs.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $8.6 million as of March 31, 2001 as compared to
$12.2 million as of December 31, 2000. The net decrease in cash and cash
equivalents as due to cash flows from investing activities, offset by cash
provided from operations, as described below.
CASH PROVIDED FROM AND USED IN OPERATIONS
In the first quarter of 2000, our operations used $333,000 of cash as compared
to $4.8 million of cash provided from operations in the first quarter of 2001.
Our net income plus depreciation and amortization of intangibles provided $4.6
million of cash in 2001 versus $3.1 million in 2000. Our income tax expense of
$1.3 million in 2001 was mostly offset by tax loss carryforwards included in
deferred tax assets. In the first quarter of 2000, our inventories and accounts
receivable increased $4.3 million following our acquisition of Influence in
December 1999. In the first quarter of 2000, we paid accrued acquisition
expenses related to Influence and transition and reorganization expenses accrued
in 1999 resulting in decrease in accrued liabilities of $1.7 million.
CASH FLOWS FROM INVESTING ACTIVITIES
In an effort to secure a more dependable supply of dermis, on January 5, 2001,
we made a $3.0 million equity investment in Collagenesis Corp. At the time of
the investment, Collagenesis was working with its existing debt holders to
exchange its outstanding debt into equity and raise additional capital. Because
Collagenesis has been unsuccessful in doing so, our investment agreement
permitted us to convert our equity position into a $3.0 million 10% Senior
Subordinated Convertible Voting Promissory Note. We converted our equity
position into debt
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in April 2001. Each quarter we review the long-term viability of investments in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 121 requires that investments, such as our investment
in Collagenesis, be reviewed for impairment whenever events or circumstances
indicate the carrying amount of an asset may not be recoverable. We consider
Collagenesis's inability to raise additional equity investment and exchange its
debt into equity such an event. At this time, we are uncertain of the
probability or possible amount of impairment, if any, in our Collagenesis
investment. Accordingly, we are currently carrying our Collagenesis investment
at cost.
In the first quarter of 2001, we paid additional contingent purchase price
payments of $2.5 relating to the acquisition of Influence. We also made $1.5
million of milestone payments to InjecTx.
In the first quarter of 2000, we completed implementation of new software
systems. We invested $1.0 million in property and equipment during the period,
primarily related to this project. In the first quarter of 2000, we paid
contingent purchase price payments of $2.5 million related to the acquisition of
Influence in December, 1999 and paid the second $1.0 million installment related
to a patent purchase.
CASH FLOWS FROM FINANCING ACTIVITIES
In the first quarter of 2001, we received $300,000 from issuance of common stock
related to our Employee Stock Purchase Plan and exercise of options issued under
our Equity Incentive Plan. On March 30, 2001, we made a quarterly principal
payment of $1.5 million on our senior credit facility.
We used $2.8 million of borrowings under our credit facility to finance the
Influence contingent purchase price payments and patent acquisition in the first
quarter of 2000.
CASH COMMITMENTS
During the first quarter of 2001, we reached settlement with Boston Scientific
Corporation on all outstanding patent disputes. As a result of this settlement,
our acquisition agreement with the former shareholders of Influence obligates us
to make additional cash purchase price payments of approximately $7.9 million on
April 30, 2001. The term note under our senior credit facility requires
quarterly principal payments of $1.5 million through March 2002, $1.9 million
from June 2002 through March 2003, $2.3 million from June 2003 through March
2004, and $2.5 million from June 2004 through March 2006. We believe that our
current cash balances together with borrowings available under our senior credit
facility and cash from operations will be sufficient to finance our current
operations and planned capital expenditure requirements for at least the next 12
months.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT PROJECTS
In connection with our acquisitions of technologies during 1999, we conducted a
valuation of the intangible assets acquired. Based on this valuation, we
assigned $7.4 million to purchased in-process research and development, or
IPR&D. A brief description of our acquired in-process research and development
projects is set forth below:
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PROJECTS ACQUIRED THROUGH INFLUENCE ACQUISITION
The InVance(TM), formerly Straight-In, is a male sling fixation system. An
initial launch occurred in mid-2000. The second design iteration has been
verified and high volume production tooling is completed. The product has FDA
approval. We plan to fully introduce this product to the market in the second
quarter of 2001.
The TransFix(TM) Female Sling Fixation System, formerly known as Staple-Tac, is
a pull-in inserter that is sutureless. Development on this product is complete.
The product is currently being evaluated in a limited market release to ensure
broad acceptance by urologists. The product has FDA approval and full launch is
expected in the second quarter of 2001.
A next generation female sling system, the No-Tac, does not require a bone screw
in the pubic bone. We estimated that this is 90% complete. As of the valuation
date, we estimated this product would be released late in 2000. We have
submitted a 510(k) for this product and expect to perform initial U.S. cases on
a controlled basis before the end of 2001. Based on the outcome of these cases,
we will decide on appropriate launch plans.
The Flast is a device used to harvest human tissue for a sling procedure. An
increase in usage of synthetic material for slings and greater supply of dermis
has reduced the demand for this product. Our assessment of the economic
viability has caused us to postpone further product development and the release
of this product.
NexTus is a soft tissue-anchoring device. We received 510(k) clearance for this
device in the second quarter of 2001. We are now clinically evaluating the
product with a select physician group. Our launch plans will depend on both the
clinical success with the product and our ability to manufacture the product.
The Clip-In is a clip around the suture in place of a knot. We do not currently
plan to release this product based on our assessment of economic viability.
PROJECT ACQUIRED THROUGH ACQUISITION FROM UROSURGE
The UroVive(TM) Microballoon System is a durable reversible microballoon system
to treat stress urinary incontinence. It includes a microballoon, a delivery
system, and a syringe filled with saline. The clinical data we acquired with
this product was subsequently deemed not suitable for FDA submission, therefore,
because of the expense necessary to fulfill the FDA requirements, we are not
currently pursuing a U.S. launch. This product is being sold internationally and
a next generation product will be available in the third quarter of 2001.
CERTAIN IMPORTANT FACTORS
Except for the historical information contained herein, the disclosures in this
Form 10-Q are forward-looking statements made under the Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated. These risks, and
their impact on the success of our operations and our ability to achieve our
goals, include the following:
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SUCCESSFUL INTRODUCTION OF NEW PRODUCTS AND PRODUCT IMPROVEMENTS
As part of our growth strategy, we intend to introduce a number of new products
and product improvements, which are described above. If we do not introduce
these new products and product improvements timely, or they are not
well-accepted by the market, our future growth will suffer.
CONTINUED USE OF NON-INVASIVE TREATMENT ALTERNATIVES
We predominantly sell medical devices for invasive or minimally invasive
surgical procedures. If patients do not accept our products, our sales may
decline. Patient acceptance of our products depends on a number of factors,
including the failure of non-invasive therapies, the degree of invasiveness
involved in the procedures using our products, the rate and severity of
complications from the procedures using our products and other adverse side
effects from the procedures using our products. Patients are more likely first
to consider non-invasive alternatives to treat their urological disorders. The
introduction of new oral medications or other less-invasive therapies may cause
our sales to decline in the future.
CONTINUED PHYSICIAN USE AND ENDORSEMENT OF OUR PRODUCTS
In order for us to sell our products, physicians must recommend and endorse
them. We may not obtain the necessary recommendations or endorsements from
physicians. Many of the products we recently acquired or are developing are
based on new treatment methods. Acceptance of our products is dependent on
educating the medical community as to the distinctive characteristics, perceived
benefits, clinical efficacy and cost-effectiveness of our products compared to
competitive products, and on training physicians in the proper application of
our products.
INCREASED SUPPLY OF SLING MATERIAL
We provide human cadaveric tissue as a service in conjunction with the sale of
our sling procedure kits for urinary incontinence. Currently, the available
supply of human tissue is not sufficient to meet demand. In December 2000, we
entered into an agreement with our supplier of cadaveric dermal tissue to act as
a processor of the material we provide. If this agreement proves inadequate, or
we are unable to purchase enough unprocessed dermal tissue, sales of our sling
procedure kits could decline.
INCREASING GROWTH OF THE PENILE IMPLANT MARKET
In order to grow our business, we need to increase our sales in the penile
implant market. If we are unable to do so, our future growth will suffer.
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ACTIONS RELATED TO REIMBURSEMENT FOR OUR PRODUCTS
We may be unable to sell our products on a profitable basis if third-party
payors deny coverage or reduce their current levels of reimbursement. Our
revenues depend largely on government health care programs and private health
insurers reimbursing patients' medical expenses. Physicians, hospitals and other
health care providers may not purchase our products if they do not receive
satisfactory reimbursement from these third-party payors for the cost of the
procedures using our products. If we are unable to obtain adequate levels of
reimbursement from third-party payors outside of the United States,
international sales of our products may decline. Many foreign markets have
governmentally managed health care systems that govern reimbursement for new
devices and procedures.
POTENTIAL PRODUCT RECALLS
In the event that any of our products prove to be defective, we could
voluntarily recall, or the FDA could require us to redesign or implement a
recall of, any defective product. We believe there is a possibility that we may
recall products in the future and that future recalls could result in
significant costs to us and in significant negative publicity which could harm
our ability to market our products in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE HEDGING AND CURRENCY FLUCTUATIONS
We do not engage in trading market risk sensitive instruments or purchasing
hedging instruments that are likely to expose us to market risk, whether
interest rate, foreign currency exchange, and commodity price or equity price
risk. We have not purchased options or entered into forward or futures
contracts, except as required by our senior credit facility. See Note 6 in Notes
to Consolidated Financial Statements included in this report.
Our operations outside of the United States are maintained in their local
currency, except for our Israeli subsidiary, where the U.S. dollar serves as the
functional currency. All assets and liabilities of our international
subsidiaries are translated to U.S. dollars at quarter-end exchange rates.
Translation adjustments arising from the use of differing exchange rates are
included in accumulated other comprehensive income in stockholder's equity.
Gains and losses on foreign currency transactions are included in operations and
were not material in any period.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
There are no exhibits to this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K:
No report on Form 8-K was filed by the Company during the quarter
ended March 31, 2001.
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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.
AMERICAN MEDICAL SYSTEMS
HOLDINGS, INC.
May 4, 2001 By /s/ Douglas W. Kohrs
- -------------------------- -----------------------------------------
Date Douglas W. Kohrs
Chief Executive Officer
May 4, 2001 By /s/ Gregory J. Melsen
- -------------------------- -----------------------------------------
Date Gregory J. Melsen
Vice President-Finance, and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
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