##### Table of Contents



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 April 3, 2004 or [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from________________ to _____________________ Commission File Number: 00030733 AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.   Delaware
    
    41-1978822(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 10700 Bren Road West, Minnetonka, Minnesota
    
    55343(Address of principal executive offices)
    
    (Zip Code)
 952-930-6000   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. [X] Yes [  ] No Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [  ] No As of May 6, 2004, there were 33,328,833 shares of the registrants $.01
par value Common Stock outstanding.




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INDEX Page(s)Part I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets as of
April 3, 2004 and January 3, 2004
    
    
    3Consolidated Statements of Operations for the first
fiscal quarter ended April 3, 2004 and March 29, 2003
    
    
    4Consolidated Statements of Cash Flows for the first
fiscal quarter ended April 3, 2004 and March 29, 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6  9Item 2.
    
    Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    10  17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4.
    
    Controls and Procedures
    
    
    18Part II.
    
    OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    19SIGNATURES
    
    
    
    
    20EXHIBIT INDEX
    
    
    21
  2




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PART I. FINANCIAL INFORMATION 
 ITEM. 1. FINANCIAL STATEMENTS (Unaudited) American Medical Systems Holdings, Inc. 
 Consolidated Balance Sheets
 April 3, 2004
    
    January 3, 2004AssetsCurrent assetsCash and cash equivalents
    
    $
    72,370
    
    
    $
    58,953Accounts receivable, net
    
    
    35,226
    
    
    
    33,507Inventories, net
    
    
    17,888
    
    
    
    18,402Deferred income taxes
    
    
    5,802
    
    
    
    5,637Other current assets
    
    
    2,743
    
    
    
    2,896Total current assets
    
    
    134,029
    
    
    
    119,395Property, plant and equipment, net
    
    
    23,966
    
    
    
    25,489Goodwill, net
    
    
    98,989
    
    
    
    98,989Intangibles, net
    
    
    16,348
    
    
    
    17,466Deferred income taxes
    
    
    12,599
    
    
    
    12,991Investment in technology and other assets
    
    
    4,978
    
    
    
    4,997Total assets
    
    $
    290,909
    
    
    $
    279,327Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    3,636
    
    
    $
    4,621Accrued compensation expenses
    
    
    10,467
    
    
    
    9,886Accrued warranty expense
    
    
    1,338
    
    
    
    1,338Income taxes payable
    
    
    4,671
    
    
    
    1,667Other accrued expenses
    
    
    5,672
    
    
    
    5,105Current portion of notes payable
    
    
    7,364
    
    
    
    7,159Total current liabilities
    
    
    33,148
    
    
    
    29,776Long-term notes payable
    
    
    7,363
    
    
    
    9,205Stockholders equityCommon stock, par value $.01 per share; authorized
95,000,000 shares; issued and outstanding:33,308,523 shares at April 3, 2004
and 33,135,354 shares at January 3, 2004
    
    
    333
    
    
    
    331Additional paid-in capital
    
    
    204,761
    
    
    
    202,341Deferred compensation
    
    
    
    
    
    
    (24
    )Accumulated other comprehensive income
    
    
    946
    
    
    
    1,367Retained earnings
    
    
    44,358
    
    
    
    36,331Total stockholders equity
    
    
    250,398
    
    
    
    240,346Total liabilities and stockholders equity
    
    $
    290,909
    
    
    $
    279,327
 The accompanying notes are an integral part of the consolidated financial statements. 3




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American Medical Systems Holdings, Inc. 
 Consolidated Statements of Operations
 First Fiscal Quarter EndedApril 3, 2004
    
    March 29, 2003Net sales
    
    $
    47,313
    
    
    $
    39,347Cost of sales
    
    
    8,930
    
    
    
    6,943Gross profit
    
    
    38,383
    
    
    
    32,404Operating expensesMarketing and selling
    
    
    16,493
    
    
    
    14,797Research and development
    
    
    3,584
    
    
    
    3,791General and administrative
    
    
    4,876
    
    
    
    4,070Amortization of intangibles
    
    
    1,061
    
    
    
    1,065Total operating expenses
    
    
    26,014
    
    
    
    23,723Operating income
    
    
    12,369
    
    
    
    8,681Other income (expense)Royalty income
    
    
    491
    
    
    
    777Interest income
    
    
    138
    
    
    
    130Interest expense
    
    
    (201
    )
    
    
    (726
    )Other income (expense)
    
    
    (156
    )
    
    
    35Total other income
(expense)
    
    
    272
    
    
    
    216Income before income taxes
    
    
    12,641
    
    
    
    8,897Provision for income taxes
    
    
    4,614
    
    
    
    3,443Net income
    
    $
    8,027
    
    
    $
    5,454Net income per shareBasic
    
    $
    0.24
    
    
    $
    0.17Diluted
    
    $
    0.23
    
    
    $
    0.16Weighted average common shares used in calculationBasic
    
    
    33,242
    
    
    
    32,547Diluted
    
    
    34,999
    
    
    
    34,042
 The accompanying notes are
an integral part of the consolidated financial statements. 4




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American Medical Systems Holdings, Inc. 
 Consolidated Statements of Cash Flow
 First Fiscal Quarter EndedApril 3, 2004
    
    March 29, 2003Cash flows from operating activitiesNet income
    
    $
    8,027
    
    
    $
    5,454Adjustments to reconcile net income to
net cash provided by operating activitiesDepreciation
    
    
    1,678
    
    
    
    1,382Loss on asset disposals
    
    
    10
    
    
    
    1Amortization of intangibles
    
    
    1,061
    
    
    
    1,065Amortization of deferred financing costs
    
    
    44
    
    
    
    71Non-cash compensation
    
    
    8
    
    
    
    46Income tax benefit related to stock option plan
    
    
    763
    
    
    
    170Change in net deferred taxes
    
    
    (290
    )
    
    
    (83
    )Changes in operating assets and liabilitiesAccounts receivable
    
    
    (1,812
    )
    
    
    50Inventories
    
    
    540
    
    
    
    (1,039
    )Accounts payable and accrued expenses
    
    
    3,361
    
    
    
    (1,638
    )Other assets
    
    
    172
    
    
    
    433Net cash provided by operating activities
    
    
    13,562
    
    
    
    5,912Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    (165
    )
    
    
    (707
    )Purchase of business
    
    
    
    
    
    
    (40,698
    )Net cash used in investing activities
    
    
    (165
    )
    
    
    (41,405
    )Cash flows from financing activitiesIssuance of common stock
    
    
    1,674
    
    
    
    570Payments on long-term debt
    
    
    (1,637
    )
    
    
    (1,956
    )Net cash provided by (used in) financing activities
    
    
    37
    
    
    
    (1,386
    )Effect of exchange rates on cash
    
    
    (17
    )
    
    
    217Net increase (decrease) in cash and cash equivalents
    
    
    13,417
    
    
    
    (36,662
    )Cash and cash equivalents at beginning of period
    
    
    58,953
    
    
    
    79,429Cash and cash equivalents at end of period
    
    $
    72,370
    
    
    $
    42,767Supplemental disclosureCash paid for interest
    
    $
    132
    
    
    $
    630Cash paid for taxes
    
    $
    116
    
    
    $
    2,427
 The accompanying notes are an integral part of the consolidated financial statements. 5




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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  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 its Annual Report on Form
10-K for fiscal 2003. All amounts are in thousands, except per share data. These statements reflect, in managements opinion, all adjustments (which
include only normal, recurring adjustments) necessary for a fair presentation
of the financial position and the results of operations and cash flows for the
periods presented. The results of operations for any interim period may not be
indicative of results for the full year. Effective January 1, 2001, the Company changed its fiscal year to a 52 or 53
week fiscal year ended on the Saturday nearest December 31. Accordingly, the
first fiscal quarters of 2004 and 2003 ended on April 3, 2004 and March 29,
2003, respectively. These periods are identified herein as our first fiscal
quarters of 2004 and 2003. 2. Stock-Based Compensation The Company has one stock-based employee compensation plan. The Company
accounts for this plan under the recognition and measurement principles of APB
Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations. The exercise price of the Companys employee stock options
generally equals the market price of the underlying stock on the date of grant
for all options granted, and thus, under APB 25, no compensation expense is
recognized. However, during 2000, the Company recognized deferred compensation
of $1.4 million, reflecting the excess of the fair value of the underlying
stock on the date of grant over the exercise price. The deferred compensation
was being amortized over vesting periods of two to four years, and was fully
amortized as of April 3, 2004. The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation. First Fiscal Quarter(in thousands, except per share data)
    
    2004
    
    2003Net income, as reported
    
    $
    8,027
    
    
    $
    5,454Stock-based employee compensation
expense included in reported income, net of tax
    
    
    15
    
    
    
    36Total stock-based employee compensation
expense determined under fair-value based
method for all awards, net of tax
    
    
    (816
    )
    
    
    (976
    )Pro forma net income
    
    $
    7,226
    
    
    $
    4,514Net income per shareAs reportedBasic
    
    $
    0.24
    
    
    $
    0.17Diluted
    
    $
    0.23
    
    
    $
    0.16Pro formaBasic
    
    $
    0.22
    
    
    $
    0.14Diluted
    
    $
    0.21
    
    
    $
    0.13
 6




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3. Earnings per Share The following table presents information necessary to calculate basic and
diluted net income per common share and common share equivalents for the first
fiscal quarter of 2004 and 2003. First Fiscal Quarter(in thousands, except per share data)
    
    2004
    
    2003Net income
    
    $
    8,027
    
    
    $
    5,454Weighted-average shares
outstanding for basic net income per share
    
    
    33,242
    
    
    
    32,547Dilutive effect of stock options
    
    
    1,757
    
    
    
    1,495Adjusted weighted-average shares outstanding and
assumed conversions for diluted net income per share
    
    
    34,999
    
    
    
    34,042Net income per shareBasic
    
    $
    0.24
    
    
    $
    0.17Diluted
    
    $
    0.23
    
    
    $
    0.16
 4. Inventories Inventories consist of the following: (in thousands)
    
    April 3, 2004
    
    January 3, 2004Raw materials
    
    $
    4,690
    
    
    $
    5,001Work in process
    
    
    3,486
    
    
    
    2,817Finished goods
    
    
    9,712
    
    
    
    10,584Net inventories
    
    $
    17,888
    
    
    $
    18,402
 5. Warranties Many of the Companys products are sold with warranty coverage for periods
ranging from one year up to the patients lifetime. The accrued warranty
allowance is the Companys estimate of the expected future cost of honoring
warranty obligations. Factors influencing this estimate include historical
claim rates, surgical infection rates, changes in product performance, the
frequency of use by the patient, the patients performance expectations, and
changes in the terms of our policies. The warranty allowance was adjusted down
in the fourth quarters of 2003 and 2002 by $3.1 million and $2.9 million,
respectively. This was based on a reduction in managements estimate of the
future cost of honoring the Companys warranty obligations resulting from
improvements in the quality and durability of its products and changes in its
claims processing. Changes in warranty allowances during the first fiscal
quarter of 2004 were as follows: First Fiscal Quarter(in thousands)
    
    2004Balance, beginning of period
    
    $
    1,338Provisions for warranty
    
    
    83Claims processed
    
    
    (83
    )Balance, end of period
    
    $
    1,338
 6. Comprehensive Income Comprehensive income for the Company is net income adjusted for changes in the
value of derivative financial instruments, unrealized gains and losses on
marketable securities, and foreign currency translation. 7




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Comprehensive income for the first fiscal quarters ended 2004 and 2003 was: First Fiscal Quarter(in thousands)
    
    2004
    
    2003Net income
    
    $
    8,027
    
    
    $
    5,454Net loss on derivative
financial instruments, net of taxes
    
    
    
    
    
    
    (5
    )Amounts reclassified to interest
expense during the period from
derivative and hedging activities, net of taxes
    
    
    
    
    
    
    263Cumulative translation gain (loss), net of taxes
    
    
    (421
    )
    
    
    478Comprehensive income
    
    $
    7,606
    
    
    $
    6,190
 7. Recent Accounting Pronouncements On January 1, 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation 46, Consolidation of Variable Interest Entities(FIN 46). In
addition, on December 24, 2003, the FASB issued a revision of FIN 46 (the
Revised Interpretation). The Revised Interpretation addresses consolidation
of business enterprises of variable interest entities and is effective for
variable interest entities for the first fiscal year or interim period ending
after March 15, 2004. There was no impact to the Company upon adoption of FIN
46. In January 2004, the FASB issued FASB Staff Position (FSP) FAS 106-1,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003, which permits a sponsor of a
postretirement health care plan that provides a prescription drug benefit to
make a one-time election to defer accounting for the effects of this Act.
Regardless of whether a sponsor elects that deferral, FSP FAS 106-1 requires
certain disclosures pending further consideration of the underlying accounting
issues. The guidance in FSP FAS 106-1 is effective for interim or annual
financial statements of fiscal years ending after December 7, 2003. The
Company has elected to defer accounting for these effects, if any, until
authoritative guidance on the accounting is issued or until there is a
significant event that ordinarily would call for re-measurement of the plans
assets and obligations. 8. Industry Segment Information and Foreign Operations 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, Australia, and
most of Europe. Additionally, the Company distributes its products through
foreign independent distributors, primarily in Europe, Asia, and South America,
who then sell the products to medical institutions. No customer or distributor
accounted for five percent or more of the Companys net sales during the first
fiscal quarters of 2004 or 2003. Foreign subsidiary sales are predominantly to
customers in Western Europe, Australia, and Canada. Substantially all of the
Companys foreign subsidiary assets are located in Western Europe, Australia,
and Canada. The following table presents net sales and long-lived assets by geographical
territory. No individual foreign countrys net sales or long-lived assets are
material. First Fiscal Quarter(in thousands)
    
    2004
    
    2003United StatesNet sales
    
    $
    36,598
    
    
    $
    32,347Long-lived assets
    
    $
    132,034
    
    
    $
    150,650Outside United StatesNet sales
    
    $
    10,715
    
    
    $
    7,000Long-lived assets
    
    $
    12,247
    
    
    $
    12,716
 8




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9. Goodwill and Intangible Assets There were no changes in the carrying amount of goodwill during the first
fiscal quarter of 2004. It is the Companys practice to assess goodwill
impairment under the annual requirement of SFAS 142 or when impairment
indicators arise. The following table presents the Companys intangible assets and accumulated
amortization as of April 3, 2004: Gross carrying
    
    Accumulated
    
    Net book(in thousands)
    
    amount
    
    amortization
    
    valueAmortizedPatents
    
    $
    10,132
    
    
    
    ($5,740
    )
    
    $
    4,392Licenses
    
    
    2,790
    
    
    
    (1,143
    )
    
    
    1,647Deferred financing
    
    
    1,611
    
    
    
    (1,205
    )
    
    
    406Developed technology
    
    
    17,853
    
    
    
    (9,721
    )
    
    
    8,132Non-compete agreements
    
    
    1,111
    
    
    
    (1,111
    )
    
    
    Total amortized intangible assets
    
    
    33,497
    
    
    
    (18,920
    )
    
    
    14,577UnamortizedTrademarks
    
    
    2,233
    
    
    
    (462
    )
    
    
    1,771Total intangible assets
    
    $
    35,730
    
    
    
    ($19,382
    )
    
    $
    16,348
 First Fiscal Quarter2004
    
    2003Aggregate amortization expense
    
    $
    1,061
    
    
    $
    1,065
 The estimated amortization expense for the years 2004 through 2008 is $4.2
million, $2.7 million, $2.2 million, $1.3 million and $1.3 million,
respectively. 9




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS The following Managements Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Words such as may,
expect, believe, anticipate, or estimate, identify such forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, and actual results may differ materially from those expressed in
such forward-looking statements. Some of the factors that could cause such
material differences are identified in Risk Factors. We undertake no
obligation to correct or update any forward-looking statements, whether as a
result of new information, future events, or otherwise. You are advised,
however, to consult any future disclosures we make on related subjects in
future filings with the SEC. Critical Accounting Policies and Estimates We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Managements
discussion and analysis of financial condition and results of operations are
based upon the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect (1) the reported amounts of assets, liabilities,
revenues, and expenses; and (2) the related disclosure of contingent assets and
liabilities. At each balance sheet date, we evaluate our estimates, including
but not limited to, those related to accounts receivable and sales return
obligations, inventories, long-lived assets, warranty, legal contingencies, and
income taxes. The critical accounting policies that are most important in fully
understanding and evaluating the financial condition and results of operations
are discussed in our Form 10-K on file with the SEC. Overview American Medical Systems develops, manufactures, and markets medical devices
for physician customers, primarily urologists, gynecologists and
urogynecologists. Our products are utilized by physicians to treat male
disorders such as erectile dysfunction, incontinence, and prostate disease; and
also female disorders such as incontinence, excessive uterine bleeding, and
pelvic organ prolapse. Our strategy has been to develop innovative products
that provide our customers with therapy options to better, and/or less
invasively, manage under-treated urological and gynecological conditions. Our product offering includes a full line of erectile restoration products
including both inflatable and non-inflatable prostheses to replace
non-functioning penile erectile tissue. For male urinary control we sell our
AMS 800 Artificial Urinary Sphincterand the InVancesling system. For
urethral stricture and benign prostatic hyperplasia (BPH) symptoms we sell
urethral stents and surgical resection loops. The ProstaJectchemical prostate
ablation system is currently available outside of the U.S. and is in clinical
trials in the U.S. Our womens health products include several products for
stress urinary incontinence (InFast, SPARC, Monarcand BioArc). Through the
acquisition of CryoGen, Inc. in January 2003, we added the Her Optiontherapy
to our womens health portfolio for excessive menstrual bleeding. 10




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Results of Operations The following table compares net sales by product line and geography for the
first fiscal quarter of 2004 and 2003: First Fiscal Quarter
    
    $ Increase
    
    % Increase(in thousands)
    
    2004
    
    2003
    
    (Decrease)
    
    (Decrease)SalesProduct LineMens healthErectile restoration
    
    $
    17,465
    
    
    $
    17,852
    
    
    ($
    387
    )
    
    
    -2.2
    %Continence
    
    
    12,166
    
    
    
    10,032
    
    
    
    2,134
    
    
    
    21.3
    %Prostate treatment
    
    
    1,166
    
    
    
    1,199
    
    
    
    (33
    )
    
    
    -2.8
    %Total mens health
    
    
    30,797
    
    
    
    29,083
    
    
    
    1,714
    
    
    
    5.9
    %Womens health
    
    
    16,516
    
    
    
    10,264
    
    
    
    6,252
    
    
    
    60.9
    %Total
    
    $
    47,313
    
    
    $
    39,347
    
    
    $
    7,966
    
    
    
    20.2
    %GeographyUnited States
    
    $
    36,598
    
    
    $
    32,347
    
    
    $
    4,251
    
    
    
    13.1
    %Outside United States
    
    
    10,715
    
    
    
    7,000
    
    
    
    3,715
    
    
    
    53.1
    %Total
    
    $
    47,313
    
    
    $
    39,347
    
    
    $
    7,966
    
    
    
    20.2
    %Percent of total salesProduct LineMens healthErectile restoration
    
    
    37
    %
    
    
    45
    %Continence
    
    
    26
    %
    
    
    26
    %Prostate treatment
    
    
    2
    %
    
    
    3
    %Total mens health
    
    
    65
    %
    
    
    74
    %Womens health
    
    
    35
    %
    
    
    26
    %Total
    
    
    100
    %
    
    
    100
    %GeographyUnited States
    
    
    77
    %
    
    
    82
    %Outside United States
    
    
    23
    %
    
    
    18
    %Total
    
    
    100
    %
    
    
    100
    %
 Net Sales.Erectile restoration sales decreased 2.2 percent in the first fiscal
quarter of 2004. Sales in the first fiscal quarter of 2004 included modest
revenues from the Dura IIline of prostheses that was acquired in April of
2003. We believe the slight decline in the first fiscal quarter erectile
restoration sales represents normal variability in quarter to quarter sales and
we continue to expect single digit sales growth in this
product line over the longer term. Sales of products to treat male
incontinence grew by 21.3 percent in the first fiscal quarter of 2004, driven
by unit increases in both the AMS 800 Artificial Urinary Sphincterand the
InVancemale sling system. Sales of prostate treatment products declined by
2.8 percent in the first fiscal quarter of 2004 as we repositioned the UroLume
product toward obstructive urethral conditions such as urethral stricture.
Revenue growth from womens health products at 60.9 percent was driven by the
continued physician acceptance of our sling systems for treating female stress
urinary incontinence. We believe that the less invasive nature of our sling
procedures and the multiple surgical options we now have available for treating
incontinence are encouraging more and more physicians to recommend our
treatments. During the first fiscal quarter of 2004, revenues increased $1.3 million as a
result of favorable currency exchange rates, mainly the euro. If these
currency exchange rates in 2004 were the same as in 2003, revenues in the first
fiscal quarter of 2004 would have been $46.0 million, an increase of $6.6
million, or 16.9 percent, over the comparable period in 2003. 11




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The following table compares revenue, expense, and other income accounts for
the first fiscal quarters of 2004 and 2003: Percent of SalesFirst Fiscal Quarter
    
    $ Increase
    
    % Increase
    

    First Fiscal Quarter(in thousands)
    
    2004
    
    2003
    
    (Decrease)
    
    (Decrease)
    
    2004
    
    2003Net sales
    
    $
    47,313
    
    
    $
    39,347
    
    
    $
    7,966
    
    
    
    20.2
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    8,930
    
    
    
    6,943
    
    
    
    1,987
    
    
    
    28.6
    %
    
    
    18.9
    %
    
    
    17.6
    %Gross profit
    
    
    38,383
    
    
    
    32,404
    
    
    
    5,979
    
    
    
    18.5
    %
    
    
    81.1
    %
    
    
    82.4
    %Operating expensesMarketing and selling
    
    
    16,493
    
    
    
    14,797
    
    
    
    1,696
    
    
    
    11.5
    %
    
    
    34.9
    %
    
    
    37.6
    %Research and development
    
    
    3,584
    
    
    
    3,791
    
    
    
    (207
    )
    
    
    -5.5
    %
    
    
    7.6
    %
    
    
    9.6
    %General and administrative
    
    
    4,876
    
    
    
    4,070
    
    
    
    806
    
    
    
    19.8
    %
    
    
    10.3
    %
    
    
    10.3
    %Amortization of intangibles
    
    
    1,061
    
    
    
    1,065
    
    
    
    (4
    )
    
    
    -0.4
    %
    
    
    2.2
    %
    
    
    2.7
    %Total operating expenses
    
    
    26,014
    
    
    
    23,723
    
    
    
    2,291
    
    
    
    9.7
    %
    
    
    55.0
    %
    
    
    60.3
    %Operating income
    
    
    12,369
    
    
    
    8,681
    
    
    
    3,688
    
    
    
    42.5
    %
    
    
    26.1
    %
    
    
    22.1
    %Royalty income
    
    
    491
    
    
    
    777
    
    
    
    (286
    )
    
    
    -36.8
    %
    
    
    1.0
    %
    
    
    2.0
    %Interest income
    
    
    138
    
    
    
    130
    
    
    
    8
    
    
    
    6.2
    %
    
    
    0.3
    %
    
    
    0.3
    %Interest expense
    
    
    (201
    )
    
    
    (726
    )
    
    
    525
    
    
    
    72.3
    %
    
    
    -0.4
    %
    
    
    -1.8
    %Other income (expense)
    
    
    (156
    )
    
    
    35
    
    
    
    (191
    )
    
    
    -545.7
    %
    
    
    -0.3
    %
    
    
    0.1
    %Income before income taxes
    
    
    12,641
    
    
    
    8,897
    
    
    
    3,744
    
    
    
    42.1
    %
    
    
    26.7
    %
    
    
    22.6
    %Provision for income taxes
    
    
    4,614
    
    
    
    3,443
    
    
    
    1,171
    
    
    
    34.0
    %
    
    
    9.8
    %
    
    
    8.8
    %Net income
    
    $
    8,027
    
    
    $
    5,454
    
    
    $
    2,573
    
    
    
    47.2
    %
    
    
    17.0
    %
    
    
    13.9
    %
 Cost of sales.Cost of sales increased as a percentage of sales by 1.3 points.
Over half of this increase was due to a greater portion of our revenues
represented by sales of womens health products and sales in international
markets, both of which carry a slightly lower margin than our consolidated
average. Inventory reserves for lesser-used product sizes were also increased
during the first fiscal quarter of 2004 as we prepare to phase out older
products in favor of anticipated new product releases later in the year. These
unfavorable increases were partially offset by the favorable foreign exchange
impact on our
revenues. Future cost of goods sold will continue to depend on product
phase-ins, production levels and product mix. Marketing and selling.Marketing and selling expense increased by 11.5 percent
in the first fiscal quarter of 2004, but declined by 2.5 percentage points
relative to sales. This decline as a percent of sales resulted from our
ability to leverage the investment made during 2003 in our marketing and
training programs for womens health products. Although we expect to continue
to expand our sales and marketing investment in support of our products, our
objective remains to leverage sales and marketing expense as a percentage of
sales. Research and development.Research and development expense during the first
fiscal quarter of 2004 declined by 5.5 percent in absolute terms and by 2.0
percentage points relative to sales. This decline was due to a reduction in
regulatory and clinical expenditures as the result of the timing of certain
regulatory filings and clinical trials. Expenditures to develop and improve
current and future products were comparable to 2003. We expect total spending
in research and development to increase during the remainder of 2004 and longer
term, to be in the range of 7 to 9 percent of sales. In addition, costs in
this area could vary as a result of spending on purchased technologies. General and administrative.General and administrative expenses during the
first fiscal quarter of 2004 increased 19.8 percent and were unchanged as a
percentage of sales. The increase reflects approximately $0.3 million of
external Sarbanes-Oxley Act related expenditures. We have incurred higher
costs for additional personnel and consulting resources to comply with the
requirements of the act and related regulations, and expect these costs to
continue to increase in future periods as we complete our work. Other
increases for the quarter included corporate executive recruiting and
transition costs. Amortization of intangibles.Amortization of intangibles includes amortization
expense on our definite-lived intangible assets, consisting of patents,
licenses and developed technology. We expect amortization of intangibles to
remain at approximately $1.1 million per quarter for the remainder of 2004. 12




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Royalty income.Our royalty income is primarily from the license of our
stent-delivery technology for medical use outside of urology. This exclusive
worldwide license was entered into during 1998, with expiration immediately
following the term of the various licensed patents. We receive a royalty equal
to 2.625 percent of net sales of licensed products on a quarterly basis, which
accounted for $0.5 million and $0.8 million in income for the first fiscal
quarters of 2004 and 2003, respectively. We do not directly influence sales of
the products on which this royalty is based and cannot give any assurance as to
future income levels. Interest income.Interest income increased over the first fiscal quarter of
2003 due to higher levels of investments resulting from cash generated from
operations during 2003 and the first fiscal quarter of 2004. Interest expense.Interest expense declined from the first fiscal quarter of
2003 due to the expiration of our interest rate swap agreement and a decline in
our long term debt balance. We hedged a portion of our original $65.0 million
variable rate term note, as required by our senior credit facility, by entering
into an interest rate swap agreement in which we agreed to exchange, at
specified intervals, the calculated difference between the fixed interest rate
of the swap and the variable interest rate on a portion of our debt. This
interest rate swap agreement expired June 30, 2003. We did not renew the swap
agreement and do not expect those swap-related expenses going forward. Other income.Other income and expense primarily represents gains and losses
as a result of re-measuring foreign denominated inter-company receivables,
mainly the euro, to current rates. First fiscal quarter of 2004 reflects a
loss due to the weakening of the euro by 1.0 percent to the U.S. dollar from
year end 2003, while the first fiscal quarter of 2003 reflected a gain due to
the strengthening of the euro by 3.1 percent to the U.S. dollar from year end
2002. Income taxes.We believe our utilization of research and development tax
credits and the extraterritorial income exclusion will lower our effective tax
rate for 2004 to 36.5 percent, compared to 38.7 percent in the first fiscal
quarter of 2003. This change in rate reduced our income tax expense by
$278,000 in the first fiscal quarter of 2004. Liquidity and Capital Resources Cash and cash equivalents were $72.4 million on April 3, 2004, compared to
$59.0 million on January 3, 2004. This increase is due primarily to the
continued strong growth in revenues and net income, the timing of income tax
payments, and the issuance of common stock, offset somewhat by the repayment of
our long-term debt. Each of these is described below. Cash flows from operating activities.Net cash from operations was $13.6
million. This differs from net income of $8.0 million because of certain
non-cash expenses including depreciation and amortization of $2.7 million, and
a tax provision of $4.6 million which required minimal cash payments during the
first fiscal quarter. Receivables increased by $1.8 million during the period,
primarily driven by increases in the receivable balances of our foreign
subsidiaries as a result of their increase in revenues. Net cash from
operations in the first fiscal quarter of 2003 was $5.9 million. The increase
in 2004 was primarily driven by the increase in revenues and net income, a
decline in our inventory balance, and lower income tax payments during the
first fiscal quarter of 2004. Cash flows from investing activities.During the first fiscal quarters of 2004
and 2003, we purchased equipment totaling $0.2 million and $0.7 million,
respectively. During the first fiscal quarter of 2003, we also had a cash
outlay of $40.7 million related to the acquisition of CryoGen Inc. Despite the
very low level experienced in our first fiscal quarter of 2004, we expect
capital expenditures to be in the range of $5.0 to $7.0 million for the full
year. Cash flows from financing activities.We have a senior credit facility
consisting of term debt and a $15.0 million revolving line of credit, which
incurs a commitment fee of .25 percent for unused portions. The senior credit
facility expires in September 2005. This facility is secured by substantially
all of our assets, and contains certain restrictions requiring prior bank
approval. The restrictions prohibit the payment of dividends and the
incurrence of additional debt, limit capital expenditures to $10.0 million for
any fiscal year (plus the unused portion of this $10.0 million capital
expenditure limit for the preceding fiscal year), limit acquisitions to an
aggregate of $25.0 million in any fiscal year, prohibit sale and leaseback
agreements, and limit operating leases (except for vehicles for sales
personnel) to $1.0 million in any fiscal year. 13




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In addition, we are subject to, and in full compliance with, four financial
covenants: a leverage ratio, an interest coverage ratio, a fixed charge
coverage ratio, and a required minimum level of consolidated EBITDA. During the first fiscal quarter of 2004, we made regular principal payments of
$1.6 million, reducing the quarter-end balance to $14.7 million. As of April
3, 2004, the interest rate on outstanding balances was equal to LIBOR plus 2.0
percentage points, or 3.09 percent. We do not have an outstanding balance
under the revolving line of credit. The following table sets forth the future payment obligations under our senior
credit facility: Less than
    
    One toTotal
    
    one year
    
    three yearsFuture payment obligation
    
    $
    14,727
    
    
    $
    7,364
    
    
    $
    7,363
 During the first fiscal quarter of 2004, we received $1.7 million from issuing
common stock for our Employee Stock Purchase Plan and for the exercises of
options under our 2000 Equity Incentive Plan. Cash Commitments.Pursuant to our acquisition of CryoGen, Inc. on January 2,
2003, we have agreed to pay CryoGens former shareholders an earnout payment
contingent upon sales of CryoGen products. The earnout payment will be equal
to three times our net sales of CryoGen products during four consecutive
quarters, less our $40.0 million initial acquisition payment. The earnout
period expires December 31, 2005. If our net CryoGen product sales do not
exceed $13.3 million during any consecutive four-quarter period prior to
December 31, 2005, no earnout payment will be required. The maximum amount of
the earnout payment is $110.0 million. This transaction is more fully
described in our Form 8-K filed with the SEC on January 6, 2003. We believe that funds generated from operations, together with our balances in
cash and cash equivalents and funds available under our senior credit facility,
will be sufficient to finance current operations, planned capital expenditures,
and commitments to CryoGen shareholders for at least the next twelve months. Risk Factors There are several factors that could cause our actual results to differ
materially from our anticipated results. Some of these factors, and their
impact on the success of our operations and our ability to achieve our goals,
are discussed below. Supplier Risks Many of our products are dependent on raw materials from one or two suppliers
who may not be able to meet our demands or who may decide to stop supplying us
because of their concerns about product liability claims or other reasons.
Losing any of these raw material suppliers could have a material adverse effect
on our sales and income. As a result of supplier consolidations, we now rely
on only one source for the silicone elastomer used in some of our implantable
products; the loss of this supplier would have a material adverse effect on our
cost of sales and income, as we would be required to qualify an additional
supplier. We procure human cadaveric dermis through two processors, and we
have one supplier of porcine dermis. Potential Product Recalls In the event that any of our products were defective, we could voluntarily
recall, or the FDA or an international regulatory body could require us to
redesign or recall, any defective product. 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. 14




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Continued Physician Use and Endorsement of our Products 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 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.
We believe our products address major market opportunities, but if we are
unsuccessful in marketing them, our sales and earnings might be below
expectations. 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. If we do not introduce these new products and
product improvements on schedule, or they are not well-accepted by the market,
our growth may be reduced. Continued Use of Non-Invasive Treatment Alternatives We predominantly sell devices and kits 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, and other adverse side effects from the procedures using our
products. Patients are more likely to first consider non-invasive
alternatives to treat their urological disorders. The introduction of new oral
medications or other less-invasive therapies might cause our sales to decline. Actions Related to Reimbursement for Procedures Using our Products Our physician and hospital customers depend on third party government and
non-government entities for reimbursement for services provided to patients.
The level of such third party reimbursement may influence whether or not
customers purchase our products. Effective January 1, 2004, the Centers for Medicare and Medicaid Services (CMS)
increased reimbursement for certain procedures utilizing inflatable penile
prostheses and urinary sphincter devices. This increase partially reverses
reductions in such reimbursement rates in 2001 and 2002. Our sales history of
these devices does not evidence an obvious correlation with changes in CMS
reimbursement rates. In March of 2004 we were informed by the American Medical Association that the
organizations Current Procedural Terminology (CPT) Editorial Panel had
approved a CPT code for our Her Optioncryoablation system to treat excessive
uterine bleeding. The receipt of this CPT code is the first step toward the
availability of standard reimbursement for Her Option.A noticeable effect on
sales of Her Optionis not expected until such reimbursement is established
(currently anticipated to be January 2005). We can offer no assurances that a
new code for Her Optionprocedures will be in place by January 2005 or that the
reimbursement will adequately cover the costs of performing the procedure. Intellectual Property Lawsuits The medical device industry is litigious with respect to patents and other
intellectual property rights. Companies in the medical device industry have
used intellectual property litigation to gain a competitive advantage. We are
currently involved in an intellectual property lawsuit with Mentor Corporation
relating to our Monarcsub-fascial hammock for the treatment of female
incontinence. If Mentor were to obtain a favorable ruling in this lawsuit, the
court could require us to pay significant damages to Mentor, prevent us from
selling our Monarcsub-fascial hammock for the treatment of female
incontinence, or both. The occurrence of any of these would have a negative
impact on our business. In the future, we may become a party to other lawsuits involving patents or
other intellectual property. A legal proceeding, regardless of the outcome,
could drain our financial resources and divert the time and efforts of our
management. If we lose one of these proceedings, a court, or a similar foreign
governing body, could require us to pay significant damages to third parties,
require us to seek licenses from third parties and pay ongoing royalties,
require us to redesign our products, or prevent us from manufacturing, using or
selling our products. In addition to being costly, protracted litigation to
defend or prosecute our intellectual property rights could result in our
customers or potential customers deferring or limiting their purchase or use of
the affected products until resolution of the litigation. 15




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##### Table of Contents



Product Liability Lawsuits The manufacture and sale of medical devices exposes us to significant risk of
product liability claims. In the past, we have had a number of product
liability claims relating to our products. In the future, we may be subject to
additional product liability claims, some of which may have a negative impact
on our business. If a product liability claim or series of claims is brought
against us for uninsured liabilities or for amounts in excess of our insurance
coverage, our business could suffer. We are not currently involved in any
material product liability litigation. Costs of Physician Malpractice Insurance Most of our products are used by physicians who are required to maintain
certain levels of medical malpractice insurance to maintain their hospital
privileges. As the cost of this insurance increases, certain physicians who
have used our products to treat their patients may stop performing surgeries.
Unless these patients who would have been treated by these physicians are
referred to other physicians, sales of our products will decline. Acquisition Integration We have acquired businesses in the past, and we may acquire other businesses in
the future. Failure to successfully retain critical employees of an acquired
company, gain FDA approval for the products of an acquired company, or
establish and maintain appropriate communications, performance expectations,
regulatory compliance procedures, accounting controls, and reporting procedures
could have a material adverse affect on our business. Our most recent
acquisition, CryoGen, has now been fully integrated into our business as we
obtained FDA approval for manufacturing and product service on March 31, 2004. International Sales In the first fiscal quarter of 2004, approximately 23 percent of our sales were
to customers outside the United States. Some of these sales were to
governmental entities and other organizations with extended payment terms. A
number of factors, including political or economic instability in the countries
where we do business, could affect payment terms and our ability to collect
foreign receivables. We have little influence over these factors and changes
could have a materially adverse impact on our business. Manufacturing Facility We are currently operating with one manufacturing shift and have adequate
physical capacity to serve our business operations for the foreseeable future.
We do not have a back up facility, and the loss of our Minnetonka facility
would have a materially adverse effect on our sales, earnings, and financial
condition. 16




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##### Table of Contents



ADDITIONAL INFORMATION ON AMS We are currently subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. As a result, we are required to file
periodic reports and other information with the SEC, such as annual, quarterly,
and current reports, and proxy and information statements. You are advised to
read this Form 10-Q in conjunction with the other reports, proxy statements,
and other documents we file from time to time with the SEC. If you would like
more information regarding AMS, you may read and copy the reports, proxy and
information statements and other documents we file with the SEC, at prescribed
rates, at the SECs public reference room at 450 Fifth Street, NW, Washington,
DC 20549. You may obtain information regarding the operation of the SECs
public reference rooms by calling the SEC at 1-800-SEC-0330. Our SEC filings
are also available to the public free of charge at the SECs website. The
address of this website is http://www.sec.gov. We also make all of our SEC filings, such as our annual, quarterly and current
reports and proxy statements, available to the public free from charge on our
website www.AmericanMedicalSystems.com. Our website is not intended to be, and
is not, a part of this Quarterly Report on Form 10-Q. We place our SEC filings
on our website on the same day as we file such material with the SEC. In
addition, we will provide electronic or paper copies of our SEC filings
(excluding exhibits) to any AMS stockholder free of charge upon receipt of a
written request for any such filing. All requests for our SEC filings should
be sent to the attention of Investor Relations at American Medical Systems,
Inc., 10700 Bren Road West, Minnetonka, Minnesota 55343. 17




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rates To reduce our variable interest rate risk on our original $65.0 million
variable rate term note, we hedged a portion of the note, as required by our
senior credit facility, by entering into an interest rate swap agreement in
which we agree to exchange, at specified intervals, the calculated difference
between the fixed interest rate of the swap and the variable interest rate on a
portion of our debt. This interest rate swap agreement expired June 30, 2003.
We do not believe that our interest rate risk is material given the low
volatility of interest rates in recent years and the low level and relatively
short-term nature of our outstanding debt. Currency Our operations outside of the United States are maintained in their local
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 stockholders equity. Gains and
losses on foreign currency transactions and short-term inter-company
receivables from foreign subsidiaries are included in other income (expense).
In the first fiscal quarter of 2004, revenues from sales to customers outside
the United States were 23 percent of total consolidated revenues, and
international accounts receivable, inventory, cash, and accounts payable were
36 percent, 5 percent, 10 percent, and 37 percent of total consolidated
accounts for each of these items. Changes in the relative value of the U.S.
dollar and the euro would affect our sales, euro-denominated expenses, and the
U.S. dollar value of European assets and liabilities. If these changes were
large and rapid, they could have a material effect on our results of
operations. Inflation We do not believe that inflation has had a material effect on our results of
operations in recent years and periods. There can be no assurance, however,
that our business will not be adversely affected by inflation in the future. 
 ITEM 4. CONTROLS AND PROCEDURES Our chief executive officer and chief financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in the
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered
by this Quarterly Report on Form 10-Q, have concluded that, based on such
evaluation, our disclosure controls and procedures were adequate and designed
to ensure that material information relating to us and our consolidated
subsidiaries, which we are required to disclose in the reports we file or
submit under the Securities Exchange Act of 1934, was made known to them by
others within those entities and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms. There were no changes in our internal control over financial reporting
identified in connection with the evaluation of such internal control over
financial reporting that occurred during our last fiscal quarter which have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 18




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##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Item No.
    
    Item
    
    Method of Filing10.1
    
    Employment Agreement, dated April
26, 2004, between Martin J. Emerson
and American Medical Systems, Inc.
    
    Filed with this Report.31.1
    
    Certification of Chief Executive
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
    
    Filed with this Report.31.2
    
    Certification of Chief Financial
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
    
    Filed with this Report.32.1
    
    Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
    
    Filed with this Report.
 b) Reports on Form 8-K On January 12, 2004, we filed a Current Report on Form 8-K
furnishing our press release dated January 8, 2004, announcing
preliminary sales for the quarter and fiscal year ended January 3,
2004. On February 13, 2004, we filed a Current Report on Form 8-K
furnishing our press release dated February 12, 2004, announcing
results of operations for the quarter ended January 3, 2004. 19




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##### Table of Contents



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 SYSTEMSHOLDINGS, INCMay 13, 2004
    
    By
    
    /s/ Douglas W. KohrsDate
    
    
    
    Douglas W. KohrsChairman and Chief Executive OfficerMay 13, 2004
    
    By
    
    /s/ Carmen L. DiersenDate
    
    
    
    Carmen L. DiersenExecutive Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)
 20




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##### Table of Contents



AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED APRIL 3, 2004 Item No.
    
    Item
    
    Method of Filing10.1
    
    Employment Agreement, dated April
26, 2004, between Martin J. Emerson
and American Medical Systems, Inc.
    
    Filed with this Report.31.1
    
    Certification of Chief Executive
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
    
    Filed with this Report.31.2
    
    Certification of Chief Financial
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
    
    Filed with this Report.32.1
    
    Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
    
    Filed with this Report.