##### 



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 30, 2002
|------------------------------ |  | --------------
|                               |  |               

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: |  | 30733
|----------------------- |  | -----
|                        |  |      



|AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.               
|------------------------------------------------------
|                                                      
|(Exact name of registrant as specified in its charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 41-1978822                          
|                                                               |  |                                     
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                              
|10700 Bren Road West, Minnetonka, MN                           |  | 55343                               
|                                                              
|(Address of principal executive offices)                       |  | (Zip Code)                          



|952-933-4666                                        
|----------------------------------------------------
|                                                    
|(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 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

As of May 1, 2002, there were 32,090,563 shares of the registrants $.01
par value Common Stock outstanding.





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##### 



INDEX

|           |  |         |  |                                                                                                    |  |         |        | 
|---------- |  | ------- |  | -------------------------------------------------------------------------------------------------- |  | ------- | ------ | 
|           |  |         |  |                                                                                                    |  | Page(s)
|Part I     |  |         |  | FINANCIAL INFORMATION                                                                              |  |         |        | 
|          
|           |  | Item 1. |  | Financial Statements                                                                               |  |         | 3      | 
|          
|           |  |         |  | Consolidated Balance Sheets as of December 29, 2001
and March 30, 2002 (Unaudited)                 |  |         | 3      | 
|          
|           |  |         |  | Statements of Operations for the three months ended
March 31, 2001, and March 30, 2002 (Unaudited) |  |         | 4      | 
|          
|           |  |         |  | Statements of Cash Flows for the three months ended
March 31, 2001, and March 30, 2002 (Unaudited) |  |         | 5      | 
|          
|           |  |         |  | Notes to Consolidated Financial Statements (Unaudited)                                             |  |         | 6 - 8  | 
|          
|           |  | Item 2. |  | Management's Discussion and Analysis of Financial
Condition and Results of Operations              |  |         | 9 - 15 | 
|          
|           |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  |         | 16     | 
|          
|Part II    |  |         |  | OTHER INFORMATION                                                                                  |  |         |        | 
|          
|           |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                   |  |         | 16     | 
|          
|SIGNATURES |  |         |  | 17                                                                                                 | 

2



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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)

|                                                                                                                                                                                                                                                |                                  |                                            |         |                   |         |                |         |             |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | ------------------------------------------ | ------- | ----------------- | ------- | -------------- | ------- | ----------- | ------- | 
|                                                                                                                                                                                                                                                |                                  |                                            |         | December 29, 2001 |         | March 30, 2002
|                                                                                                                                                                                                                                                |                                  |                                            |         |                   |         |               
|                                                                                                                                                                                                                                                |                                  |                                            |         |                   |         |                |         | (unaudited)
|Assets                                                                                                                                                                                                                                          |                                  |                                            |         |                   |         |                |         |            
|Current assets:                                                                                                                                                                                                                                 |                                  |                                            |         |                   |         |                |         |            
|                                                                                                                                                                                                                                                | Cash and cash equivalents        |                                            | $       | 28,755            |         |                | $       | 24,062      |        
|                                                                                                                                                                                                                                                | Short term investments           |                                            |         | 9,013             |         |                |         | 19,220      |        
|                                                                                                                                                                                                                                                | Accounts receivable, net         |                                            |         | 25,306            |         |                |         | 26,577      |        
|                                                                                                                                                                                                                                                | Inventories                      |                                            |         | 13,991            |         |                |         | 13,005      |        
|                                                                                                                                                                                                                                                | Deferred taxes                   |                                            |         | 7,471             |         |                |         | 5,657       |        
|                                                                                                                                                                                                                                                | Other current assets             |                                            |         | 1,552             |         |                |         | 1,135       |        
|                                                                                                                                                                                                                                                |                                  |                                            |         |                   |         |                |         |            
|                                                                                                                                                                                                                                                | Total current assets             |                                            |         | 86,088            |         |                |         | 89,656      |        
|Property, plant and equipment, net                                                                                                                                                                                                              |                                  |                                            | 23,604  |                   |         |                | 23,094  |            
|Goodwill, net                                                                                                                                                                                                                                   |                                  |                                            | 82,365  |                   |         |                | 82,365  |            
|Intangibles, net                                                                                                                                                                                                                                |                                  |                                            | 17,118  |                   |         |                | 16,108  |            
|Deferred income taxes                                                                                                                                                                                                                           |                                  |                                            | 3,180   |                   |         |                | 4,755   |            
|Investments in marketable securities                                                                                                                                                                                                            |                                  |                                            | 18,783  |                   |         |                | 14,588  |            
|Investments in technology and other assets                                                                                                                                                                                                      |                                  |                                            | 4,013   |                   |         |                | 3,666   |            
|                                                                                                                                                                                                                                                |                                  |                                            |         |                   |         |                |         |            
|Total assets                                                                                                                                                                                                                                    |                                  | $                                          | 235,151 |                   |         | $              | 234,232 |            
|                                                                                                                                                                                                                                                |                                  |                                            |         |                   |         |                |         |            
|Liabilities and Stockholders Equity                                                                                                                                                                                                            |                                  |                                            |         |                   |         |                |         |            
|Current liabilities:                                                                                                                                                                                                                            |                                  |                                            |         |                   |         |                |         |            
|                                                                                                                                                                                                                                                | Accounts payable                 |                                            | $       | 2,678             |         |                | $       | 1,914       |        
|                                                                                                                                                                                                                                                | Accrued compensation expenses    |                                            |         | 15,656            |         |                |         | 8,927       |        
|                                                                                                                                                                                                                                                | Accrued warranty expense         |                                            |         | 7,587             |         |                |         | 7,569       |        
|                                                                                                                                                                                                                                                | Other accrued expenses           |                                            |         | 4,350             |         |                |         | 7,237       |        
|                                                                                                                                                                                                                                                | Current portion of notes payable |                                            |         | 4,909             |         |                |         | 5,454       |        
|                                                                                                                                                                                                                                                |                                  |                                            |         |                   |         |                |         |            
|                                                                                                                                                                                                                                                | Total current liabilities        |                                            |         | 35,180            |         |                |         | 31,101      |        
|Long-term notes payable                                                                                                                                                                                                                         |                                  |                                            | 24,000  |                   |         |                | 21,273  |            
|Other long-term liabilities                                                                                                                                                                                                                     |                                  |                                            | 1,884   |                   |         |                | 1,428   |            
|Stockholders equity:                                                                                                                                                                                                                           |                                  |                                            |         |                   |         |                |         |            
|Common stock, par value $.01 per share;
authorized 95,000,000 shares; issued and
outstanding 29,587,378 voting shares and
2,372,941 non-voting shares for December 29,
2001; 31,707,737 voting and 341,700 non-voting
shares for March 29, 2002 |                                  |                                            | 320     |                   |         |                | 320     |            
|Additional paid-in capital                                                                                                                                                                                                                      |                                  |                                            | 194,630 |                   |         |                | 195,332 |            
|Deferred compensation                                                                                                                                                                                                                           |                                  |                                            | (448    | )                 |         |                | (382    | )          
|Accumulated other comprehensive loss                                                                                                                                                                                                            |                                  |                                            | (2,810  | )                 |         |                | (2,652  | )          
|Accumulated deficit                                                                                                                                                                                                                             |                                  |                                            | (17,605 | )                 |         |                | (12,188 | )          
|                                                                                                                                                                                                                                                |                                  |                                            |         |                   |         |                |         |            
|                                                                                                                                                                                                                                                |                                  | Total stockholders equity                 |         |                   | 174,087 |                |         |             | 180,430 | 
|                                                                                                                                                                                                                                                |                                  |                                            |         |                   |         |                |         |            
|                                                                                                                                                                                                                                                |                                  | Total liabilities and stockholders equity |         | $                 | 235,151 |                |         | $           | 234,232 | 
|                                                                                                                                                                                                                                                |                                  |                                            |         |                   |         |                |         |            

The accompanying notes are an integral part of the consolidated financial statements.

3



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##### 



AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

|                                |                              |   |                            |        |      |   |        |        |  
|------------------------------- | ---------------------------- | - | -------------------------- | ------ | ---- | - | ------ | ------ | -
|                                |                              |   | Three months through March
|                                |                              |   |                           
|                                |                              |   | 2001                       |        | 2002
|                                |                              |   |                            |        |     
|Net sales                       |                              | $ | 27,548                     |        |      | $ | 34,715 |       
|Operating expenses:             |                              |   |                            |        |      |   |        |       
|                                | Cost of sales                |   |                            | 5,397  |      |   |        | 7,132  |  
|                                | Marketing and sales          |   |                            | 11,409 |      |   |        | 12,810 |  
|                                | General and administrative   |   |                            | 2,726  |      |   |        | 3,274  |  
|                                | Research and development     |   |                            | 3,190  |      |   |        | 2,834  |  
|                                | Amortization of intangibles  |   |                            | 2,200  |      |   |        | 939    |  
|                                |                              |   |                            |        |      |   |        |       
|                                | Total operating expenses     |   |                            | 24,922 |      |   |        | 26,985 |  
|                                |                              |   |                            |        |      |   |        |       
|Operating income                |                              |   | 2,626                      |        |      |   | 7,726  |       
|Other income (expense)          |                              |   |                            |        |      |   |        |       
|                                | Royalty and other income     |   |                            | 1,075  |      |   |        | 1,499  |  
|                                | Interest income              |   |                            | 82     |      |   |        | 433    |  
|                                | Interest expense             |   |                            | (1,109 | )    |   |        | (763   | )
|                                |                              |   |                            |        |      |   |        |       
|                                | Total other income (expense) |   |                            | 48     |      |   |        | 1,169  |  
|                                |                              |   |                            |        |      |   |        |       
|Income before income taxes      |                              |   | 2,674                      |        |      |   | 8,895  |       
|Income tax expense              |                              |   | (1,270                     | )      |      |   | (3,478 | )     
|                                |                              |   |                            |        |      |   |        |       
|Net income                      |                              | $ | 1,404                      |        |      | $ | 5,417  |       
|                                |                              |   |                            |        |      |   |        |       
|Earnings per share:             |                              |   |                            |        |      |   |        |       
|                                | Basic                        |   | $                          | 0.05   |      |   | $      | 0.17   |  
|                                | Diluted                      |   | $                          | 0.05   |      |   | $      | 0.16   |  
|Weighted average common shares: |                              |   |                            |        |      |   |        |       
|                                | Basic                        |   |                            | 27,813 |      |   |        | 32,005 |  
|                                | Diluted                      |   |                            | 29,892 |      |   |        | 34,221 |  

The accompanying notes are an integral part of the consolidated financial statements.

4



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##### 



AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(In thousands, except share data)
(Unaudited)

|                                                 |                                                                                   |                                                 |                                       |        |                            |        |        |        |       |        |  
|------------------------------------------------ | --------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------- | ------ | -------------------------- | ------ | ------ | ------ | ----- | ------ | -
|                                                 |                                                                                   |                                                 |                                       |        | Three months through March
|                                                 |                                                                                   |                                                 |                                       |        |                           
|                                                 |                                                                                   |                                                 |                                       |        | 2001                       |        | 2002  
|                                                 |                                                                                   |                                                 |                                       |        |                            |        |       
|Cash flows from operating activities:            |                                                                                   |                                                 |                                       |        |                            |        |        |       
|                                                 | Net income                                                                        |                                                 | $                                     | 1,404  |                            |        | $      | 5,417  |      
|                                                 | Adjustments to reconcile net income to net cash provided by
operating activities: |                                                 |                                       |        |                            |        |        |        |      
|                                                 |                                                                                   | Depreciation                                    |                                       |        | 947                        |        |        |        | 950   |       
|                                                 |                                                                                   | Amortization of intangibles                     |                                       |        | 2,200                      |        |        |        | 939   |       
|                                                 |                                                                                   | Deferred financing costs                        |                                       |        | 68                         |        |        |        | 71    |       
|                                                 |                                                                                   | Stock-based compensation costs                  |                                       |        |                           |        |        |        | 10    |       
|                                                 |                                                                                   | Noncash deferred compensation                   |                                       |        | 118                        |        |        |        | 49    |       
|                                                 |                                                                                   | Income tax benefit related to stock option plan |                                       |        | 179                        |        |        |        | 279   |       
|                                                 |                                                                                   | Change in net deferred taxes                    |                                       |        | 1,577                      |        |        |        | 108   |       
|                                                 |                                                                                   | Changes in operating assets and liabilities:    |                                       |        |                            |        |        |        |       |       
|                                                 |                                                                                   |                                                 | Accounts receivable                   |        |                            | (1,084 | )      |        |       | (1,271 | )
|                                                 |                                                                                   |                                                 | Inventories                           |        |                            | (472   | )      |        |       | 986    |  
|                                                 |                                                                                   |                                                 | Accounts payable and accrued expenses |        |                            | 24     |        |        |       | (4,624 | )
|                                                 |                                                                                   |                                                 | Other assets                          |        |                            | (150   | )      |        |       | 764    |  
|                                                 |                                                                                   |                                                 |                                       |        |                            |        |        |       
|                                                 |                                                                                   | Net cash provided by operating activities       |                                       |        | 4,811                      |        |        |        | 3,678 |       
|                                                 |                                                                                   |                                                 |                                       |        |                            |        |        |       
|Cash flows from investing activities:            |                                                                                   |                                                 |                                       |        |                            |        |        |       
|                                                 | Purchase of property, plant and equipment                                         |                                                 |                                       | (316   | )                          |        |        | (440   | )    
|                                                 | Purchase of businesses, net of cash acquired                                      |                                                 |                                       | (3,041 | )                          |        |        |       |      
|                                                 | Purchase of investments in technology                                             |                                                 |                                       | (4,500 | )                          |        |        |       |      
|                                                 | Purchase of marketable securities                                                 |                                                 |                                       |       |                            |        |        | (8,889 | )    
|                                                 | Sales of marketable securities                                                    |                                                 |                                       |       |                            |        |        | 2,766  |      
|                                                 |                                                                                   |                                                 |                                       |        |                            |        |        |       
|                                                 | Net cash used in investing activities                                             |                                                 |                                       | (7,857 | )                          |        |        | (6,563 | )    
|                                                 |                                                                                   |                                                 |                                       |        |                            |        |        |       
|Cash flows from financing activities:            |                                                                                   |                                                 |                                       |        |                            |        |        |       
|                                                 | Issuance of common stock                                                          |                                                 |                                       | 343    |                            |        |        | 430    |      
|                                                 | Payments on long-term debt                                                        |                                                 |                                       | (1,508 | )                          |        |        | (2,182 | )    
|                                                 |                                                                                   |                                                 |                                       |        |                            |        |        |       
|                                                 | Net cash provided by (used in) financing activities                               |                                                 |                                       | (1,165 | )                          |        |        | (1,752 | )    
|                                                 |                                                                                   |                                                 |                                       |        |                            |        |        |       
|Effect of exchange rates                         |                                                                                   |                                                 | 642                                   |        |                            |        | (56    | )     
|                                                 |                                                                                   |                                                 |                                       |        |                            |        |        |       
|Net decrease in cash and cash equivalents        |                                                                                   |                                                 | (3,569                                | )      |                            |        | (4,693 | )     
|Cash and cash equivalents at beginning of period |                                                                                   |                                                 | 12,165                                |        |                            |        | 28,755 |       
|                                                 |                                                                                   |                                                 |                                       |        |                            |        |        |       
|Cash and cash equivalents at end of period       |                                                                                   | $                                               | 8,596                                 |        |                            | $      | 24,062 |       
|                                                 |                                                                                   |                                                 |                                       |        |                            |        |        |       
|Supplemental disclosure:                         |                                                                                   |                                                 |                                       |        |                            |        |        |       
|                                                 | Cash paid for interest                                                            |                                                 | $                                     | 920    |                            |        | $      | 696    |      
|                                                 | Cash paid for taxes                                                               |                                                 |                                       | 18     |                            |        |        | 20     |      

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
(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 its Annual Report on Form
10-K for 2001.

These statements reflect, in the opinion of management, 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.

2.    Inventories

Inventories consist of the following (in thousands):

|                     |  |                   |        |                |  |             |        |  
|-------------------- |  | ----------------- | ------ | -------------- |  | ----------- | ------ | -
|                     |  | December 29, 2001 |        | March 30, 2002
|                     |  |                   |        |               
|                     |  |                   |        |                |  | (Unaudited)
|Raw materials        |  | $                 | 3,366  |                |  | $           | 3,052  |  
|Work-in-process      |  |                   | 2,210  |                |  |             | 1,831  |  
|Finished goods       |  |                   | 11,114 |                |  |             | 10,683 |  
|Obsolescence reserve |  |                   | (2,699 | )              |  |             | (2,561 | )
|                     |  |                   |        |                |  |             |        |  
|Total, net           |  | $                 | 13,991 |                |  | $           | 13,005 |  
|                     |  |                   |        |                |  |             |        |  

3.    Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations,and No. 142,
Goodwill and Other Intangible Assets.SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. The Company has not been involved in a business combination since
then. Under SFAS No. 142, goodwill and other intangible assets with indefinite
lives are not amortized, but tested for impairment annually, or whenever there
is an impairment indicator. In addition, upon adoption of SFAS No. 142, all
goodwill is assigned to reporting units for purposes of impairment testing and
is no longer subject to amortization. Intangible assets that are not deemed to
have an indefinite life will continue to be amortized over their estimated
useful lives.

The Company adopted SFAS No. 142 as of December 30, 2001. As required by SFAS
No. 142, the Company assessed whether goodwill has been impaired at the date of
adoption. In connection therewith, the Company determined that it is a single
reporting unit and that its fair value exceeded its carrying

6



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##### 



amount of its goodwill, and therefore there was no indication that goodwill was
impaired. Accordingly, the Company was not required to perform the second step
of the transitional impairment test. In the second step, the Company would
have been required to compare the implied fair value of goodwill, determined by
allocating its fair value to all of its assets and liabilities to its carrying
amount, both of which would be measured as of the date of adoption.

The following table presents a reconciliation of net income and earnings per
share adjusted for the exclusion of goodwill amortization, net of income taxes:

|                                              |  |                        |       | 
|--------------------------------------------- |  | ---------------------- | ----- | 
|                                              |  | Three months          
|                                              |  | through               
|                                              |  | March 31, 2001        
|                                              |  |                       
|                                              |  | (in thousands,        
|                                              |  | except per share data)
|Net income, as reported                       |  | $                      | 1,404 | 
|Add: Goodwill amortization, net of taxes      |  |                        | 907   | 
|Adjusted net income                           |  | $                      | 2,311 | 
|                                              |  |                        |       | 
|Reported basic and diluted earnings per share |  | $                      | 0.05  | 
|Add: Goodwill amortization, net of taxes      |  |                        | 0.03  | 
|Adjusted basic and diluted earnings per share |  | $                      | 0.08  | 
|                                              |  |                        |       | 

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective for
fiscal years beginning after December 15, 2001. Under the new rule, a single
accounting model is established for long-lived assets to be disposed of by
sale. In addition, implementation issues are resolved in regards to previously
issued statements. The adoption of this new Statement has not had a
significant effect on reported earnings or the financial position of the
Company.

7



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##### 



4.    Comprehensive Income (Loss)

Comprehensive income (loss) for the Company includes net income, changes in
value on derivative financial instruments, unrealized gains and losses on
marketable securities, and foreign currency translation. Comprehensive income
for the three months ended March 31, 2001, and March 30, 2002, was as follows:

|                                                                                                                   |  |                            |       |      |  |   |       |  
|------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ----- | ---- |  | - | ----- | -
|                                                                                                                   |  | Three Months through March
|                                                                                                                   |  |                           
|                                                                                                                   |  | 2001                       |       | 2002
|                                                                                                                   |  |                            |       |     
|                                                                                                                   |  | (in thousands)            
|Net income                                                                                                         |  | $                          | 1,404 |      |  | $ | 5,417 |  
|Cumulative effect of change in accounting
principle for derivative and hedging
activities (SFAS 133), net of taxes |  |                            | (712  | )    |  |   |      |  
|Net income (loss) on derivative financial
instruments, net of taxes                                                |  |                            | (207  | )    |  |   | 43    |  
|Amounts reclassified to interest expense
during the period from derivative and
hedging activities, net of taxes    |  |                            |      |      |  |   | 240   |  
|Unrealized losses on marketable
securities, net of tax                                                             |  |                            |      |      |  |   | (69   | )
|Foreign currency translation adjustments                                                                           |  |                            | (486  | )    |  |   | (56   | )
|                                                                                                                   |  |                            |       |      |  |   |       |  
|Comprehensive income (loss)                                                                                        |  |                            | ($1   | )    |  | $ | 5,575 |  
|                                                                                                                   |  |                            |       |      |  |   |       |  

8



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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. Important factors known to us that could
cause such material differences are identified in this Report in the section
titled Certain Important Factors beginning on page 15. 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

Managements discussion and analysis of financial condition and results of
operations are based upon our 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 judgements that affect the reported amounts of assets,
liabilities, revenues, and expenses and 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,
inventories, long-lived assets, warranty and sales return obligations, legal
contingencies, and income taxes. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. The critical accounting policies that are most
important in fully understanding and evaluating our financial condition and
results of operations are discussed below.

Allowance for Doubtful Accounts and Other Accounts Receivable-Related Valuation
Accounts. We maintain an allowance for doubtful accounts, returns and
allowances, and warranty claims. We rely on subjective judgments and estimates
to establish these valuation accounts. Material differences could result in
the amount and timing of our results of operations for any period if we made
different judgments or used different estimates. In addition, actual results
could be different from our current estimates, possibly resulting in increased
future charges to earnings.

We maintain an allowance for doubtful accounts for all individual receivables
that we believe are unlikely to be collected. For all other accounts
receivable, we record an allowance for doubtful accounts based on a combination
of factors including the age of receivable balances, historical bad debt
experience, customer concentrations, general customer creditworthiness, and
current economic trends. At March 30, 2002, our allowance for doubtful
accounts was $757,000.

We maintain an allowance for returns that is based on historical and current
trends in product returns. At March 30, 2002, our allowance for sales returns
was $532,000.

We record a liability for estimated warranty claims. The amount of the accrual
is based on historical claims by product group and other factors. Claims could
be materially different from actual results for a variety of reasons, including
a change in our warranty policy in response to industry trends, competition or
other external forces, manufacturing changes that could impact product quality,
or as yet unrecognized defects in products sold. As of March 30, 2002, our
accrual for estimated future warranty costs was $7.6 million. If future
product quality standards or policies are less favorable than current analyses,
additional warranty accruals may be required and would be reflected in cost of
sales in the period the revision is made.

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Inventory Valuation.We use estimates and judgments to value our inventory.
In general, we record our inventories at the lower of standard manufacturing
cost or market value. Each quarter, we evaluate our inventories for
obsolescence and excess quantities. This evaluation includes analyses of
inventory levels, historical loss trends, expected product lives, sales levels
by product and projections of future sales demand. We write off inventories
that we consider obsolete. In addition, we maintain an allowance for inventory
quantities in excess of forecasted demand. Our inventory allowances were $2.5
million at March 30, 2002. If future demand or market conditions are less
favorable than current estimates, additional inventory adjustments would be
required and would adversely affect income in the period the adjustment is
made.

Legal Liability Accrual.Each quarter, we make an estimate of the uninsured
portion of legal representation and settlement costs of possible future
litigation claims relating to product liability. This evaluation consists of
reviewing historical claims costs as well as assessing future trends in medical
device liability cases. Social and political factors make litigation costs
hard to predict as well as doctor and medical facility culpability. Accruals
for future litigation costs were $1.4 million on March 30, 2002. If, in the
future, we determine this accrual is inadequate, the adjustment would reduce
income in the period the adjustment is recorded.

Income Taxes.In the preparation of our consolidated financial statements, we
estimate income taxes in each of the jurisdictions in which we operate. This
process involves estimating actual current tax exposures and assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in our consolidated balance sheet.

We have significant amounts of deferred tax assets that we review for
recoverability and then value accordingly. We evaluate the realizability of
our deferred tax assets on a quarterly basis and assess the need for valuation
allowances. These deferred tax assets are evaluated by considering historical
levels of income, estimates of future taxable income, and the impact of tax
planning strategies. We record a valuation allowance to reduce deferred tax
assets when we determine that we could not realize all or part of our deferred
tax assets.

We maintain a valuation allowance of $682,000 to offset tax loss carryfowards
created in a foreign jurisdiction, which, if subsequently recognized, will be
allocated to goodwill. We did not maintain any other allowances against our
net deferred tax assets at March 30, 2002. In the event we determined that we
would not be able to realize all or part of the deferred tax assets in the
future, we would adjust the deferred tax asset valuation allowance and charge
the adjustment to income in the period that we made the determination.

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Results of Operations

Net Sales.The following chart compares net sales between our first quarter of
2001 and 2002.

|                     |  |                            |        |          |  |         |        |         |  |   |       |  |  |  |      |  
|-------------------- |  | -------------------------- | ------ | -------- |  | ------- | ------ | ------- |  | - | ----- |  |  |  | ---- | -
|                     |  | Three months through March |        | Increase
|                     |  |                            |        |         
|                     |  | 2001                       |        | 2002     |  | Dollars |        | Percent
|                     |  |                            |        |          |  |         |        |        
|                     |  | (in thousands)            
|Erectile Dysfunction |  | $                          | 13,542 |          |  | $       | 17,288 |         |  | $ | 3,746 |  |  |  | 27.7 | %
|Male Incontinence    |  |                            | 7,649  |          |  |         | 8,736  |         |  |   | 1,087 |  |  |  | 14.2 | %
|Female Incontinence  |  |                            | 4,778  |          |  |         | 7,045  |         |  |   | 2,267 |  |  |  | 47.4 | %
|Prostate Disease     |  |                            | 1,579  |          |  |         | 1,646  |         |  |   | 67    |  |  |  | 4.2  | %
|                     |  |                            |        |          |  |         |        |         |  |   |       |  |  |  |      |  
|Total                |  | $                          | 27,548 |          |  | $       | 34,715 |         |  | $ | 7,167 |  |  |  | 26.0 | %
|                     |  |                            |        |          |  |         |        |         |  |   |       |  |  |  |      |  
|Domestic Sales       |  | $                          | 22,429 |          |  | $       | 29,142 |         |  | $ | 6,713 |  |  |  | 29.9 | %
|International Sales  |  |                            | 5,119  |          |  |         | 5,573  |         |  |   | 454   |  |  |  | 8.9  | %
|                     |  |                            |        |          |  |         |        |         |  |   |       |  |  |  |      |  
|Total                |  | $                          | 27,548 |          |  | $       | 34,715 |         |  | $ | 7,167 |  |  |  | 26.0 | %
|                     |  |                            |        |          |  |         |        |         |  |   |       |  |  |  |      |  

During the second quarter of 2001, we released a new penile implant with an
antimicrobial coating. Sales of this new product led to an increase of $3.7
million, or 27.7%, in erectile dysfunction product line sales. In the
incontinence product lines, a new product, specifically the Sparc, a suprapubic
synthetic sling system which we introduced in the third quarter of 2001, led to
an increase in sales of $3.4 million, or 27.0%.

In the United States, our sales increase was across all product lines led by
the introduction of the new products mentioned above and greater sales of
existing products. Our international sales increase is attributable to the
introduction of the SPARC system.

Cost of Sales.Cost of sales as a percentage of net sales increased from 19.6%
in the first quarter of 2001 to 20.5% in the same period in 2002. This
increase in percentage is attributable to sales mix changes between products
and between domestic and international markets and inventory reductions in the
quarter. We expect gross margins as a percentage of net sales in future
quarters to be consistent with the first quarter of 2002.

Marketing and sales.As a percent of sales, marketing and sales costs
decreased from 41.4% of net sales in the first quarter of 2001 to 36.9% in the
first quarter of 2002, although spending increased $1.1 million, or 15.5%, from
$7.7 million in the first quarter of 2001 to $8.8 million in the first quarter
of 2002. The increase in costs was driven by higher employee and commission
expenses in support of the higher sales. In the future, we expect marketing
and sales costs to continue to increase in dollars as sales increase but
decrease as a percentage of sales. In addition, costs will vary quarter to
quarter as certain costs, such as sales meetings and industry conventions, are
incurred independent of sales.

General and administrative.General and administrative costs increased
$548,000, or 20.1%, from $2.7 million in the first quarter of 2001 to $3.3
million in the first quarter of 2002. This increase included increases in
legal fees of $300,000 and spending on tax planning services of $237,000. We
expect quarterly spending in general and administrative for the remainder of
2002 to be consistent with the first quarter of 2002.

Research and development.Research and development costs decreased $356,000,
from $3.2 million in the first quarter of 2001 to $2.8 million in the first
quarter of 2002. As a percent of net sales, research and developments costs
decreased from 11.6% of sales in 2001 to 8.2% of sales in 2002. Technology
purchases and distribution agreement have allowed us to release new products
while reducing research and development costs from previous levels. We expect
total spending in research and development to

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increase in 2002 from 2001 levels and, longer term, to remain within the range,
as a percentages of net sales, of the past two fiscal years.

Amortization of intangibles.Amortization of intangibles decreased $1.3
million, from $2.2 million in the first quarter of 2001 to $939,000 in the
first quarter of 2002 This decrease is attributable to the Companys adoption
on December 30, 2001, of SFAS No. 142, Goodwill and Other Intangible Assets.
Under the provisions of SFAS No. 142, goodwill and other intangible assets with
indefinite lives are not amortized, but tested for impairment annually, or
whenever there is an impairment indicator. In addition, upon adoption of SFAS
No. 142, all goodwill must be assigned to reporting units for purposes of
impairment testing and is no longer subject to amortization. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their estimated useful lives.

Below is a table detailing the quarterly pro forma impact on earnings with the
adoption of SFAS 142, as if the adoption of the new standard were effective in
fiscal year 2001.

|                                                                              |  |                                       |       |         |  |         |       |         |  |   |       |   |  |   |       |  
|----------------------------------------------------------------------------- |  | ------------------------------------- | ----- | ------- |  | ------- | ----- | ------- |  | - | ----- | - |  | - | ----- | -
|                                                                              |  | 2001                                 
|                                                                              |  |                                      
|                                                                              |  | First                                 |       | Second  |  | Third   |       | Fourth 
|                                                                              |  | Quarter                               |       | Quarter |  | Quarter |       | Quarter
|                                                                              |  |                                       |       |         |  |         |       |        
|                                                                              |  | (in thousands, except per share data)
|Net income, as reported                                                       |  | $                                     | 1,404 |         |  | $       | 1,534 |         |  | $ | 2,007 |   |  | $ | 1,585 |  
|Pro forma change in net income with adoption
of new accounting pronouncements |  |                                       | 1,242 |         |  |         | 1,407 |         |  |   | 1,406 |   |  |   | 1,503 |  
|Tax impact                                                                    |  |                                       | (335  | )       |  |         | (335  | )       |  |   | (335  | ) |  |   | (335  | )
|                                                                              |  |                                       |       |         |  |         |       |         |  |   |       |   |  |   |       |  
|Pro forma net income                                                          |  | $                                     | 2,311 |         |  | $       | 2,606 |         |  | $ | 3,078 |   |  | $ | 2,753 |  
|                                                                              |  |                                       |       |         |  |         |       |         |  |   |       |   |  |   |       |  
|Diluted earnings per share, as reported                                       |  | $                                     | 0.05  |         |  | $       | 0.05  |         |  | $ | 0.06  |   |  | $ | 0.05  |  
|Pro forma diluted earnings per share                                          |  | $                                     | 0.08  |         |  | $       | 0.09  |         |  | $ | 0.09  |   |  | $ | 0.08  |  

Royalty and other income.All of our royalty income is from the license of
certain stent-delivery technology to a former subsidiary of Pfizer for medical
use outside urology. Royalty income was $700,000 in the first quarter of 2001
and $783,000 in the first quarter of 2002.

Other income increased from $375,000 in the first quarter of 2001 to $716,000
in the first quarter of 2002. In early 2001, we received a non-recurring
payment of $375,000 representing reimbursement to resolve a quality issue with
a materials supplier dating back to the fourth quarter of 1999. On January 1,
2002, we terminated the AMS Retirement Annuity Plan. In conjunction with this
termination, the Company made an approximate $5.8 million settlement
contribution to the pension trust and recorded a gain on pension termination of
$716,000.

Interest income and interest expense.Interest expense in the first quarter of
2002 decreased from $1.1 million in the first quarter of 2001 to $763,000
because average borrowings under notes payable were approximately $16 million
lower in 2002 than in 2001. Interest income increased from $82,000 in the
first quarter of 2001 to $433,000 in the first quarter of 2002 due to
investment of receipts from our secondary common stock offering completed in
July 2001.

Income tax expense.Income tax expense increased $2.2 million in the first
quarter of 2002 compared to the same period in 2001, as income before income
taxes in 2002 was $8.9 million compared to income before income taxes of $2.7
million in 2001.

As part of our adoption of SFAS 142, we no longer record goodwill amortization
that previously had been a permanent non-deductible tax expense. In the first
quarter of 2001, the total of this type of amortization was approximately
$500,000. If we had these new rules in place in 2001, our effective tax rate
would have been approximately 41%.

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Net income.Net income was $4.0 million higher in the first quarter of 2002
than in the first quarter of 2001. This 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 plus investments in marketable securities were $57.9
million as of March 30, 2002, as compared to $56.6 million as of December 29,
2001. The net increase in these accounts is due primarily to cash provided
from operations plus cash flows from financing activities offset by cash flows
from investing activities.

Cash provided from and used in operations.Cash flow provided by operating
activities totaled $9.5 million in the first quarter of fiscal 2002, of which
$5.8 million was used to meet the companys liabilities with its pension plan
termination. First quarter reported operating income was approximately $1.8
million lower than net cash from operations primarily because of non-cash
charges for depreciation and amortization.

Cash flows from investing activities.In the quarter ended March 30, 2002, we
purchased equipment for $440,000. We had purchases of marketable securities,
net of sales, that totaled $6.1 million.

Financing activities.We have a senior credit facility which consists of term
debt and a $15 million revolving line of credit. Our senior credit facility
expires in March 2006. This facility is secured by substantially all of our
assets, and contains restrictions concerning the payment of dividends,
incurrence of additional debt and capital expenditures. In addition, we are
subject to, and in compliance with, certain financial covenants including
ratios related to fixed charges coverage and leverage. As of March 30, 2002,
the outstanding principal balance under our senior credit facility was $26.7
million. As of March 30, 2002, we did not have an outstanding balance under
our revolving line of credit and had $15 million of availability under the
revolving line of credit. The following table sets forth our future payment
obligations under our senior credit facility:

|                           |  |                        |        |      |  |          |       |        |  |         |        |  |  |   |   | 
|-------------------------- |  | ---------------------- | ------ | ---- |  | -------- | ----- | ------ |  | ------- | ------ |  |  | - | - | 
|                           |  | Payments Due By Period
|                           |  |                       
|                           |  |                        |        |      |  | Less     |       | One to |  | Four to
|                           |  |                        |        |      |  | Than One |       | Three  |  | Five   
|                           |  | Total                  |        | Year |  | Years    |       | Years 
|                           |  |                        |        |      |  |          |       |       
|                           |  | (in thousands)        
|Future Payment Obligations |  | $                      | 26,727 |      |  | $        | 5,452 |        |  | $       | 21,275 |  |  | $ |  | 

In the quarter ended March 30, 2002, we received $430,000 from issuing common
stock related to our Employee Stock Purchase Plan and exercise of options under
our Equity Incentive Plan. On December 31, 2001, and March 29, 2002, we made
quarterly principal payments totaling $2.2 million on our senior credit
facility.

Cash Commitments

Our acquisition of the distribution rights to DermMatrix, a porcine dermis
graft material used in sling and pelvic prolapse procedures, allows us to make
an additional $1.0 million payment in December 2002 to extend the supply
agreement through December 2008.

We have implemented a new profit sharing plan whereby contributions to the plan
will vary based upon our performance and will be allocated to participants
equally. While the contribution will be variable, we expect that initially the
profit sharing contribution will approximate our historical AMS Retirement

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Annuity Plan expense at current income levels. We estimate that our profit
sharing contribution in 2002 will be approximately $1.2 million.

We believe that funds generated from operations, together with our balances in
cash and marketable securities and funds available under our senior credit
facility, will be sufficient to finance our current operations and planned
capital expenditure requirements for at least the next 12 months.

Certain Important Factors

There are several important factors that could cause our business to suffer.
These factors, and their impact on the success of our business and our ability
to achieve our goals, include the following:

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 timely introduce these new products and
product improvements, or they are not well-accepted by the market, our future
growth will suffer.

Continued Use of Non-Invasive Treatment Alternatives.We sell medical devices
for invasive or minimally invasive surgical procedures. If physicians and
patients do not accept our products, our sales will 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.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 have 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.In the past we have provided human
cadaveric dermis as a service in conjunction with the sale of some of our sling
procedure kits for urinary incontinence. Currently, the available supply of
human tissue is not sufficient to meet demand. In December 2001, our sole
supplier of human cadaveric dermis declared bankruptcy and is no longer
supplying us. We are actively working on obtaining additional sources of this
material, but if we are not successful sales of our sling procedure kits could
decline. We have, however, obtained a source of porcine dermis that can be
used with our sling procedure kits, but we cannot assure you that such supply
will be sufficient to meet our demands.

Actions Related to Reimbursement for our Products.We may be unable to sell
our products on a profitable basis (in the United States and Internationally)
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.

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Potential Product Recalls.In any of our products were found to be defective,
we could recall such 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.

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 of charge on our
website. The address of our website is 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, MN 55343

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Hedging.We have not purchased options or entered into forward
or futures contracts, except as required by our senior credit facility. As of
March 30, 2002, all of our derivatives, designated as cash flow hedges, are
interest rate swaps. 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 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 expires June 30, 2003. We expect that pre-tax
costs totaling approximately $934,000, which are recorded in other
comprehensive income (loss) at March 30, 2002, 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 months as part of interest
expense. At March 30, 2002, the fair value of the interest rate swap, based
upon quoted market prices for contracts with similar maturities, was
approximately $1.2 million. The pay rate of the interest rate swap is 10.065%
and the predicted future receive rate on our senior credit facility is
approximately 5.1%.

Currency Fluctuation.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 are
included in operations and were not material in any period.

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.

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 30, 2002.

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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 14, 2002 |  | By                                      |  | /s/  Douglas W. Kohrs                                                                              
|             |  |                                         |  |                                                                                                    
|Date         |  |                                         |  | Douglas W. Kohrs
Chief Executive Officer                                                           
|            
|May 14, 2002 |  | By                                      |  | /s/  M. James Call                                                                                 
|             |  |                                         |  |                                                                                                    
|Date         |  |                                         |  | M. James Call
Executive Vice President and Chief Financial Officer
and Principal Accounting Officer

17