##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 or
 o
    
    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 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 10700 Bren Road West, Minnetonka, Minnesota
    
    55343(Address of principal executive offices)
    
    (Zip Code)
 952-930-6000
 
 þ o
  þ o o
 o þ




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##### 



INDEX
 PagePART I
    
    FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTS (UNAUDITED)Consolidated Balance Sheets as of
September 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations for
the three and nine month periods ended
September 30, 2006 and October 1, 2005
    
    
    4Consolidated Statements of Cash Flow for
the nine month periods ended September 30,
2006 and October 1, 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    29ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    41ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    41PART II
    
    OTHER INFORMATIONITEM 1A.
    
    RISK FACTORS
    
    
    43ITEM 6.
    
    EXHIBITS
    
    
    45SIGNATURES
    
    
    47EXHIBIT INDEX
    
    
    48Stock Purchase AgreementCertificate of Chief Executive OfficerCertification of Interim Chief Financial OfficerSection 906 Certification
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 American Medical Systems Holdings, Inc.
Consolidated Balance Sheets
 September 30, 2006
    
    
    December 31, 2005(Unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    34,077
    
    
    $
    30,885Short term investments
    
    
    468
    
    
    
    15,505Accounts receivable, net
    
    
    77,575
    
    
    
    51,058Inventories, net
    
    
    39,615
    
    
    
    18,191Deferred income taxes
    
    
    8,860
    
    
    
    3,197Other current assets
    
    
    25,063
    
    
    
    4,072Assets of discontinued operations held for sale
    
    
    34,400
    
    
    
    Total current assets
    
    
    220,058
    
    
    
    122,908Property, plant and equipment, net
    
    
    39,982
    
    
    
    21,371Goodwill, net
    
    
    680,113
    
    
    
    169,700Intangibles, net
    
    
    162,295
    
    
    
    40,578Deferred income taxes
    
    
    
    
    
    
    4,110Investment in technology and other assets
    
    
    926
    
    
    
    659Other long-term assets
    
    
    3,001
    
    
    
    Total assets
    
    $
    1,106,375
    
    
    $
    359,326Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    17,016
    
    
    $
    3,688Accrued compensation expenses
    
    
    19,833
    
    
    
    11,480Accrued warranty expense
    
    
    2,908
    
    
    
    1,618Income taxes payable
    
    
    
    
    
    
    2,387Other accrued expenses
    
    
    47,268
    
    
    
    8,214Contingent liability on acquisition
    
    
    
    
    
    
    25,988Liabilities of discontinued operations held for sale
    
    
    6,100
    
    
    
    Total current liabilities
    
    
    93,125
    
    
    
    53,375Long-term debt
    
    
    713,814
    
    
    
    Deferred income taxes
    
    
    26,146
    
    
    
    Accumulated post retirement benefit obligation
    
    
    3,072
    
    
    
    3,072Total liabilities
    
    
    836,157
    
    
    
    56,447Stockholders equityCommon stock, par value $.01 per share; authorized
220,000,000 shares; issued and outstanding:70,900,405 shares at September 30, 2006
and 69,525,169 shares at December 31, 2005
    
    
    709
    
    
    
    695Additional paid-in capital
    
    
    248,372
    
    
    
    227,284Accumulated other comprehensive income
    
    
    3,878
    
    
    
    2,414Retained earnings
    
    
    17,259
    
    
    
    72,486Total stockholders equity
    
    
    270,218
    
    
    
    302,879Total liabilities and stockholders equity
    
    $
    1,106,375
    
    
    $
    359,326
 The accompanying notes are an integral part of the consolidated financial statements.
 3




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##### Table of Contents



American Medical Systems Holdings, Inc.
Consolidated Statements of Operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    October 1, 2005
    
    
    September 30, 2006
    
    
    October 1, 2005Net sales
    
    $
    90,500
    
    
    $
    61,738
    
    
    $
    242,906
    
    
    $
    189,520Cost of sales (a)
    
    
    18,865
    
    
    
    11,156
    
    
    
    42,302
    
    
    
    34,130Gross profit
    
    
    71,635
    
    
    
    50,582
    
    
    
    200,604
    
    
    
    155,390Operating expensesMarketing and selling (a)
    
    
    31,465
    
    
    
    22,341
    
    
    
    88,649
    
    
    
    67,491Research and development (a)
    
    
    9,295
    
    
    
    4,995
    
    
    
    22,849
    
    
    
    14,499In-process research and development
    
    
    61,500
    
    
    
    9,220
    
    
    
    89,575
    
    
    
    9,220General and administrative (a)
    
    
    8,552
    
    
    
    5,217
    
    
    
    22,681
    
    
    
    16,213Integration costs
    
    
    273
    
    
    
    
    
    
    
    273
    
    
    
    Amortization of intangibles
    
    
    5,172
    
    
    
    2,200
    
    
    
    8,798
    
    
    
    5,938Total operating expenses
    
    
    116,257
    
    
    
    43,973
    
    
    
    232,825
    
    
    
    113,361Operating (expense) income
    
    
    (44,622
    )
    
    
    6,609
    
    
    
    (32,221
    )
    
    
    42,029Other (expense) incomeRoyalty income
    
    
    479
    
    
    
    505
    
    
    
    1,340
    
    
    
    1,491Interest income
    
    
    1,364
    
    
    
    298
    
    
    
    2,120
    
    
    
    933Interest expense
    
    
    (8,907
    )
    
    
    (44
    )
    
    
    (9,260
    )
    
    
    (140
    )Financing charges
    
    
    (491
    )
    
    
    
    
    
    
    (7,446
    )
    
    
    Other income (expense)
    
    
    107
    
    
    
    (28
    )
    
    
    397
    
    
    
    (1,104
    )Total other (expense) income
    
    
    (7,448
    )
    
    
    731
    
    
    
    (12,849
    )
    
    
    1,180(Loss) income from continuing operations before income taxes
    
    
    (52,070
    )
    
    
    7,340
    
    
    
    (45,070
    )
    
    
    43,209Provision for income taxes
    
    
    5,862
    
    
    
    5,925
    
    
    
    9,485
    
    
    
    18,544Net (loss) income from continuing operations
    
    
    (57,932
    )
    
    
    1,415
    
    
    
    (54,555
    )
    
    
    24,665Loss from discontinued operations, net of tax
    
    
    (672
    )
    
    
    
    
    
    
    (672
    )
    
    
    Net (loss) income
    
    $
    (58,604
    )
    
    $
    1,415
    
    
    $
    (55,227
    )
    
    $
    24,665Net (loss) income per shareBasic net (loss) earnings from continuing operations
    
    $
    (0.83
    )
    
    $
    0.02
    
    
    $
    (0.78
    )
    
    $
    0.36Discontinued operations, net of tax
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    Basic net (loss) earnings
    
    $
    (0.84
    )
    
    $
    0.02
    
    
    $
    (0.79
    )
    
    $
    0.36Diluted net (loss) earnings from continuing operations
    
    $
    (0.83
    )
    
    $
    0.02
    
    
    $
    (0.78
    )
    
    $
    0.34Discontinued operations, net of tax
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    Diluted net (loss) earnings
    
    $
    (0.84
    )
    
    $
    0.02
    
    
    $
    (0.79
    )
    
    $
    0.34Weighted average common shares used in calculationBasic
    
    
    70,122
    
    
    
    69,344
    
    
    
    69,877
    
    
    
    68,741Diluted
    
    
    70,122
    
    
    
    72,096
    
    
    
    69,877
    
    
    
    71,658(a) These line items include stock-based compensation of:Cost of sales
    
    $
    96
    
    
    $
    
    
    
    $
    251
    
    
    $
    Marketing and selling
    
    
    703
    
    
    
    
    
    
    
    2,454
    
    
    
    Research and development
    
    
    471
    
    
    
    
    
    
    
    1,505
    
    
    
    General and administrative
    
    
    633
    
    
    
    
    
    
    
    2,770
    
    
    
    Stock-based compensation expense
    
    $
    1,903
    
    
    $
    
    
    
    $
    6,980
    
    
    $
    
 The accompanying notes are an integral part of the consolidated financial statements.
 4




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##### Table of Contents



American Medical Systems Holdings, Inc.
Consolidated Statements of Cash Flow
 Nine Months EndedSeptember 30, 2006
    
    
    October 1, 2005Cash flows from operating activitiesNet (loss) income
    
    $
    (55,227
    )
    
    $
    24,665Loss from discontinued operations
    
    
    (672
    )
    
    
    (Loss) earnings from continuing operations
    
    
    (54,555
    )
    
    
    24,665Adjustments to reconcile net (loss) earnings from continuing operations
to net cash provided by operating activitiesDepreciation
    
    
    4,031
    
    
    
    4,030Loss on asset disposals
    
    
    331
    
    
    
    232Amortization of intangibles, including deferred financing costs
    
    
    9,289
    
    
    
    5,938Non-cash deferred compensation
    
    
    
    
    
    
    61In-process research and development charges
    
    
    89,575
    
    
    
    9,220Financing charges on credit facility
    
    
    6,955
    
    
    
    Excess tax benefit from excercise of stock options
    
    
    (1,515
    )
    
    
    Tax benefit on exercised stock option arrangements
    
    
    5,614
    
    
    
    4,079Change in net deferred income taxes
    
    
    4,701
    
    
    
    912Stock based compensation
    
    
    6,980
    
    
    
    Changes in operating assets and liabilities, net of acquired amounts:Accounts receivable
    
    
    (8,489
    )
    
    
    654Inventories
    
    
    (3,456
    )
    
    
    1,991Accounts payable and accrued expenses
    
    
    23,223
    
    
    
    (1,654
    )Other assets
    
    
    (18,010
    )
    
    
    (4,211
    )Net cash provided by operating activities
    
    
    64,674
    
    
    
    45,917Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    (13,484
    )
    
    
    (3,703
    )Purchase of business, net of cash acquired
    
    
    (750,853
    )
    
    
    (56,309
    )Purchase of investments in technology
    
    
    (28,075
    )
    
    
    (1,620
    )Purchase of license agreement
    
    
    (1,020
    )
    
    
    Purchase of short term investments
    
    
    (139
    )
    
    
    (30,340
    )Sale of short term investments
    
    
    15,189
    
    
    
    30,204Net cash used in investing activities
    
    
    (778,382
    )
    
    
    (61,768
    )Cash flows from financing activitiesProceeds from issuance of convertible notes, net of issuance costs
    
    
    361,218
    
    
    
    Proceeds from senior secured credit facility, net of issuance costs
    
    
    352,754
    
    
    
    Issuance of common stock
    
    
    8,321
    
    
    
    11,926Excess tax benefit from exercise of stock options
    
    
    1,515
    
    
    
    Proceeds from short term borrowings
    
    
    4,000
    
    
    
    Repayments of short term borrowings
    
    
    (4,000
    )
    
    
    Financing charges paid on credit facility
    
    
    (6,955
    )
    
    
    Net cash provided by financing activities
    
    
    716,853
    
    
    
    11,926Cash used in discontinued operationsOperating activities
    
    
    (672
    )
    
    
    Cash used in discontinued operations
    
    
    (672
    )
    
    
    Effect of currency exchange rates on cash
    
    
    719
    
    
    
    855Net increase (decrease) in cash and cash equivalents
    
    
    3,192
    
    
    
    (3,070
    )Cash and cash equivalents at beginning of period
    
    
    30,885
    
    
    
    35,689Cash and cash equivalents at end of period
    
    $
    34,077
    
    
    $
    32,619Supplemental disclosureCash paid for interest
    
    $
    935
    
    
    $
    Cash paid for taxes
    
    $
    16,798
    
    
    $
    14,843
 The accompanying notes are an integral part of the consolidated financial statements.
 5




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##### Table of Contents



AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. Basis of Presentation
     NOTE 2. Acquisition and Financing of Laserscope
     Note 3  Discontinued Operations
 6




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Financing
 Note 13- Debt.
 Purchase Accounting
  (in thousands)Developed and core technology
    
    $
    88,700Trademarks
    
    
    40,800In-process research and development
    
    
    61,500Assets held for sale, net of tax
    
    
    28,300Tangible assets acquired, net of liabiltiies assumed
    
    
    14,330Deferred tax liability on assets acquired, net of
deferred tax assets
    
    
    (19,891
    )Goodwill
    
    
    510,379Estimated fair value of identifiable tangible and
intangible assets and goodwill, net of cash acquired
and liabilites assumed
    
    $
    724,118
  Restructuring Costs
  Integration Costs
  7




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##### Table of Contents



Three Months Ended
    
    Nine Months Ended(in thousands except per share data)
    
    September 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005Revenues
    
    $
    101.2
    
    
    $
    92.2
    
    
    $
    315.6
    
    
    $
    281.6Net income (loss)
    
    $
    3.3
    
    
    $
    (0.1
    )
    
    $
    4.3
    
    
    $
    13.5Net income (loss) per share:Basic
    
    $
    0.05
    
    
    $
    (0.00
    )
    
    $
    0.06
    
    
    $
    0.20Diluted
    
    $
    0.05
    
    
    $
    (0.00
    )
    
    $
    0.06
    
    
    $
    0.19
  NOTE 3. Discontinued Operations
 Note 2  Acquisition and
Financing of Laserscope
 Accounting for
the Impairment or Disposal of Long-Lived Assets
  Three and NineMonths Ended(in thousands)
    
    September 30, 2006Net Sales
    
    $
    5,672Loss from discontinued operations before income
taxes
    
    
    (1,082
    )Income tax benefit
    
    
    (410
    )Loss from discontinued operations, net of taxes
    
    $
    (672
    )
 8




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##### Table of Contents



(in thousands)
    
    September 30, 2006Assets:Accounts receivable, net
    
    $
    6,910Inventories, net
    
    
    13,445Property, plant and equipment, net
    
    
    2,018Other assets
    
    
    1,102Total carrying value of assets of discontinued operations held for sale
    
    $
    23,475Liabilities:Accrued compensation expenses
    
    $
    911Accrued warranty expense
    
    
    1,611Other accrued expenses
    
    
    3,368Total carrying value of liabilities of discontinued operations held for sale
    
    $
    5,890
  NOTE 4. Stock-Based Compensation
 Accounting for Stock
Issued to Employees, Accounting for Stock-Based Compensation.
 Share-Based Payment
   Three MonthsEnded
    
    
    Nine Months Ended(in thousands)
    
    September 30, 2006
    
    
    September 30, 2006Stock-option awards
    
    $
    1,791
    
    
    $
    6,468Restricted stock awards
    
    
    50
    
    
    
    80Employee stock purchase plan
    
    
    63
    
    
    
    433Total share-based compensation expense
    
    $
    1,904
    
    
    $
    6,981
  9




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##### Table of Contents



Three MonthsEnded
    
    
    Nine Months Ended(in thousands, except per share data)
    
    October 1, 2005
    
    
    October 1, 2005Net income, as reported
    
    $
    1,415
    
    
    $
    24,665Total stock-based employee compensation
expense determined under fair-value based
method for all awards, net of tax
    
    
    (1,945
    )
    
    
    (5,200
    )Pro forma net income (loss)
    
    $
    (530
    )
    
    $
    19,465Net income (loss) per shareAs reportedBasic
    
    $
    0.02
    
    
    $
    0.36Diluted
    
    $
    0.02
    
    
    $
    0.34Pro formaBasic
    
    $
    (0.01
    )
    
    $
    0.28Diluted
    
    $
    (0.01
    )
    
    $
    0.27
     Weighted averageOptions
    
    
    exercise priceoutstanding
    
    
    per shareBalance at December 31, 2005
    
    
    7,950,650
    
    
    $
    11.97Granted
    
    
    991,050
    
    
    
    19.89Exercised
    
    
    (1,286,891
    )
    
    
    5.44Cancelled or expired
    
    
    (648,609
    )
    
    
    15.80Balance at September 30, 2006
    
    
    7,006,200
    
    
    $
    13.94
 10




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##### Table of Contents



Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    Weightedaverage
    
    average
    
    
    
    
    
    averageNumber
    
    remaining
    
    exercise
    
    Number
    
    exerciseRange of exercise prices
    
    of shares
    
    contractual life
    
    price
    
    of shares
    
    price$0.83 
$8.10
    
    
    1,762,083
    
    
    4.5 years
    
    $
    5.32
    
    
    
    1,700,702
    
    
    $
    5.22$8.28 
$14.94
    
    
    1,920,299
    
    
    6.8 years
    
    
    12.68
    
    
    
    1,607,151
    
    
    
    12.51$15.62  $19.69
    
    
    1,955,450
    
    
    6.9 years
    
    
    18.27
    
    
    
    668,002
    
    
    
    18.50$19.72  $21.68
    
    
    1,368,368
    
    
    6.9 years
    
    
    20.63
    
    
    
    316,922
    
    
    
    20.13Total
    
    
    7,006,200
    
    
    6.9 years
    
    $
    13.94
    
    
    
    4,292,777
    
    
    $
    11.12
   Three Months Ended
    
    Nine Months EndedSeptember 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005Fair value of options granted
    
    $
    7.14
    
    
    $
    6.47
    
    
    $
    7.50
    
    
    $
    7.56Risk free interest rate
    
    
    4.92
    %
    
    
    3.97
    %
    
    
    4.73
    %
    
    
    3.28
    %Expected dividend rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock price volatility
    
    
    35.16
    %
    
    
    37.82
    %
    
    
    35.25
    %
    
    
    38.25
    %Expected life of option
    
    
    5.1
    
    
    
    4.0
    
    
    
    4.7
    
    
    
    5.2
 Expected life
 Expected volatility
 Risk-free rate of return
 Dividend yield
 11




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Restricted Stock
   Unvested Shares
    
    
    Weighted averageoutstanding
    
    
    grant priceBalance at December
31, 2005
    
    
    
    
    
    $
    Granted
    
    
    93,676
    
    
    
    18.43Vested
    
    
    
    
    
    
    Cancelled
    
    
    (1,400
    )
    
    
    19.06Balance at September 30, 2006
    
    
    92,276
    
    
    $
    18.42
 Employee Stock Purchase Plan
  NOTE 5. Earnings per Share
  Three Months Ended
    
    
    Nine Months Ended(in thousands, except per share data)
    
    September 30, 2006
    
    
    October 1, 2005
    
    
    September 30, 2006
    
    
    October 1, 2005Net (loss) income from continuing operations
    
    $
    (57,932
    )
    
    $
    1,415
    
    
    $
    (54,555
    )
    
    $
    24,665Weighted-average shares
outstanding for basic net income per share
    
    
    70,122
    
    
    
    69,344
    
    
    
    69,877
    
    
    
    68,741Dilutive effect of stock options
and restricted shares
    
    
    
    
    
    
    2,752
    
    
    
    
    
    
    
    2,917Adjusted weighted-average
shares outstanding and assumed
conversions for diluted net income per share
    
    
    70,122
    
    
    
    72,096
    
    
    
    69,877
    
    
    
    71,658Net (loss) income per shareBasic net (loss) earnings from continuing operations
    
    $
    (0.83
    )
    
    $
    0.02
    
    
    $
    (0.78
    )
    
    $
    0.36Diluted net (loss) earnings from continuing
operations
    
    $
    (0.83
    )
    
    $
    0.02
    
    
    $
    (0.78
    )
    
    $
    0.34
 12




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##### Table of Contents



NOTE 6. Inventories
  (in thousands)
    
    September 30, 2006
    
    December 31, 2005Raw materials
    
    $
    13,669
    
    
    $
    4,252Work in process
    
    
    10,109
    
    
    
    2,394Finished goods
    
    
    18,570
    
    
    
    12,862Obsolescence reserve
    
    
    (2,733
    )
    
    
    (1,317
    )Net inventories
    
    $
    39,615
    
    
    $
    18,191
 NOTE 7. Warranties
   Three Months Ended
    
    Nine Months Ended(in thousands)
    
    September 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005Balance, beginning of period
    
    $
    1,774
    
    
    $
    1,480
    
    
    $
    1,618
    
    
    $
    1,451Provisions for warranty
    
    
    631
    
    
    
    159
    
    
    
    938
    
    
    
    310Warranty allowance from acquisition
    
    
    840
    
    
    
    
    
    
    
    840
    
    
    
    Claims processed
    
    
    (337
    )
    
    
    (169
    )
    
    
    (488
    )
    
    
    (291
    )Balance, end of period
    
    $
    2,908
    
    
    $
    1,470
    
    
    $
    2,908
    
    
    $
    1,470
 NOTE 8. Acquisitions
 TherMatrx, Inc.
 TherMatrx
 TherMatrx
 13




---



##### Table of Contents



(in thousands)
    
    AmountDeveloped technology and other intangible assets
    
    $
    26,000Customer relationships
    
    
    5,000In-process research and development
    
    
    35,000Tangible assets acquired, net of liabilities assumed
    
    
    5,721Deferred tax liability on assets acquired
    
    
    (7,190
    )Goodwill
    
    
    68,941Purchase price, including earned contingent payments, net of cash acquired, accrued through September 30, 2006
    
    $
    133,472
   Ovion Inc.
  Ovion
  (in thousands)
    
    AmountIn-process research and development (including $0.7 million in acquisition costs)
    
    $
    9,220Intangible royalty agreement (including $0.2 million in acquisition costs)
    
    
    2,050Liabilities assumed, net of tangible assets acquired
    
    
    (732
    )Deferred tax liability on assets acquired
    
    
    (131
    )Initial purchase price, net of cash acquired through September 30, 2006
    
    $
    10,407
 Goodwill and Other Intangible Assets
 14




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##### Table of Contents



BioControl Medical, Ltd.
  Goodwill and Other Intangible Assets
    Solarant Medical, Inc.
    (in thousands)
    
    AmountIn-process research and development (including $.8 million in acquisition costs)
    
    $
    2,462Liabilities assumed, net of tangible assets acquired
    
    
    (88
    )Deferred tax asset acquired
    
    
    360Initial purchase price, net of cash acquired through September 30, 2006
    
    $
    2,734
 15




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##### Table of Contents



Goodwill and Other Intangible Assets
   Laserscope
 Note 2  Acquisition and Financing of Laserscope .
 NOTE 9. Comprehensive (Loss) Income
 
 Three Months Ended
    
    Nine Months Ended(in thousands)
    
    September 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005Net (loss) income
    
    $
    (58,604
    )
    
    $
    1,415
    
    
    $
    (55,227
    )
    
    $
    24,665Foreign currency translation loss, net of taxes
    
    
    (392
    )
    
    
    (17
    )
    
    
    (1,465
    )
    
    
    (2,278
    )Comprehensive (loss) income
    
    $
    (58,996
    )
    
    $
    1,398
    
    
    $
    (56,692
    )
    
    $
    22,387
 NOTE 10. Industry Segment Information and Foreign Operations
    Three Months Ended
    
    Nine Months Ended(in thousands)
    
    September 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005United StatesNet sales
    
    $
    70,466
    
    
    $
    49,640
    
    
    $
    187,489
    
    
    $
    148,710Long-lived assets
    
    $
    871,313
    
    
    $
    197,232
    
    
    $
    871,313
    
    
    $
    197,232InternationalNet sales
    
    $
    20,034
    
    
    $
    12,098
    
    
    $
    55,417
    
    
    $
    40,810Long-lived assets
    
    $
    15,005
    
    
    $
    14,586
    
    
    $
    15,005
    
    
    $
    14,586
 16




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##### Table of Contents



NOTE 11. Goodwill and Intangible Assets
  Nine Months Ended
    
    
    Twelve Months Ended(in thousands)
    
    September 30, 2006
    
    
    December 31, 2005Goodwill, beginning of the year
    
    $
    169,700
    
    
    $
    102,365Additions and adjustments
    
    
    509,506
    
    
    
    69,142Effect of currency translation
    
    
    907
    
    
    
    (1,807
    )Goodwill, end of the period
    
    $
    680,113
    
    
    $
    169,700
  September 30, 2006
    
    December 31, 2005Gross carrying
    
    Accumulated
    
    Net book
    
    Gross carrying
    
    Accumulated
    
    Net book(in thousands)
    
    amount
    
    amortization
    
    value
    
    amount
    
    amortization
    
    valueAmortizedPatents
    
    $
    10,127
    
    
    $
    (8,480
    )
    
    $
    1,647
    
    
    $
    10,127
    
    
    $
    (7,708
    )
    
    $
    2,419Licenses
    
    
    7,931
    
    
    
    (5,189
    )
    
    
    2,742
    
    
    
    6,911
    
    
    
    (3,847
    )
    
    
    3,064Developed and core technology
    
    
    137,552
    
    
    
    (23,932
    )
    
    
    113,620
    
    
    
    48,853
    
    
    
    (17,454
    )
    
    
    31,399Non-compete agreements
    
    
    2,050
    
    
    
    (335
    )
    
    
    1,715
    
    
    
    2,050
    
    
    
    (125
    )
    
    
    1,925Total amortized intangible assets
    
    
    157,660
    
    
    
    (37,936
    )
    
    
    119,724
    
    
    
    67,941
    
    
    
    (29,134
    )
    
    
    38,807UnamortizedTrademarks
    
    
    43,033
    
    
    
    (462
    )
    
    
    42,571
    
    
    
    2,233
    
    
    
    (462
    )
    
    
    1,771Total intangible assets
    
    $
    200,693
    
    
    $
    (38,398
    )
    
    $
    162,295
    
    
    $
    70,174
    
    
    $
    (29,596
    )
    
    $
    40,578
 Three Months Ended
    
    Nine Months Ended(in thousands)
    
    September 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005Amortization expense
    
    $
    5,172
    
    
    $
    2,200
    
    
    $
    8,798
    
    
    $
    5,938
  NOTE 12. Credit Agreements
 Note 13  Debt
 Note 13  Debt
 Bridge Loan Commitment Fee
  17




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##### Table of Contents



NOTE 13. Debt
 Senior Secured Credit Facility
    18
    Table of Contents    Convertible Senior Subordinated Notes; Supplemental Guarantor Information
        19




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##### Table of Contents



American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements  (Continued)
Condensed Consolidating Balance Sheet
 As of September 30, 2006AmericanMedical
    
    
    
    
    
    
    Non-Systems
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    ConsolidatedHoldings Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalAssetsCurrent assetsCash and cash equivalents
    
    $
    4,676
    
    
    $
    23,704
    
    
    $
    5,697
    
    
    
    
    
    
    $
    34,077Short term investments
    
    
    
    
    
    
    259
    
    
    
    209
    
    
    
    
    
    
    
    468Accounts receivable, net
    
    
    598,701
    
    
    
    61,242
    
    
    
    16,209
    
    
    
    (598,577
    )
    
    
    77,575Inventories, net
    
    
    
    
    
    
    38,073
    
    
    
    5,847
    
    
    
    (4,305
    )
    
    
    39,615Deferred income taxes
    
    
    
    
    
    
    8,369
    
    
    
    491
    
    
    
    
    
    
    
    8,860Other current assets
    
    
    3,722
    
    
    
    14,405
    
    
    
    6,723
    
    
    
    213
    
    
    
    25,063Assets of discontinued operations held for sale
    
    
    
    
    
    
    34,400
    
    
    
    
    
    
    
    
    
    
    
    34,400Total current assets
    
    
    607,099
    
    
    
    180,452
    
    
    
    35,176
    
    
    
    (602,669
    )
    
    
    220,058Property, plant and equipment, net
    
    
    
    
    
    
    39,395
    
    
    
    587
    
    
    
    
    
    
    
    39,982Goodwill, net
    
    
    
    
    
    
    579,351
    
    
    
    101,283
    
    
    
    (521
    )
    
    
    680,113Intangibles, net
    
    
    
    
    
    
    156,730
    
    
    
    29,065
    
    
    
    (23,500
    )
    
    
    162,295Deferred income taxes
    
    
    
    
    
    
    16,103
    
    
    
    
    
    
    
    (16,103
    )
    
    
    Investment in subsidiaries
    
    
    54,771
    
    
    
    9,922
    
    
    
    (9
    )
    
    
    (64,684
    )
    
    
    Investment in technology and other assets
    
    
    
    
    
    
    770
    
    
    
    156
    
    
    
    
    
    
    
    926Other long-term assets
    
    
    1,308
    
    
    
    1,693
    
    
    
    
    
    
    
    
    
    
    
    3,001Total assets
    
    $
    663,178
    
    
    $
    984,416
    
    
    $
    166,258
    
    
    $
    (707,477
    )
    
    $
    1,106,375Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    27,085
    
    
    $
    483,145
    
    
    $
    127,951
    
    
    $
    (621,165
    )
    
    $
    17,016Accrued compensation expenses
    
    
    
    
    
    
    18,609
    
    
    
    1,224
    
    
    
    
    
    
    
    19,833Accrued warranty expense
    
    
    
    
    
    
    2,908
    
    
    
    
    
    
    
    
    
    
    
    2,908Other accrued expenses
    
    
    3,239
    
    
    
    42,485
    
    
    
    1,544
    
    
    
    
    
    
    
    47,268Liabilities of discontinued operations held for sale
    
    
    
    
    
    
    6,100
    
    
    
    
    
    
    
    
    
    
    
    6,100Total current liabilities
    
    
    30,324
    
    
    
    553,247
    
    
    
    130,719
    
    
    
    (626,336
    )
    
    
    93,125Non-current liabilitiesAccumulated post retirement benefit obligation
    
    
    
    
    
    
    3,072
    
    
    
    
    
    
    
    
    
    
    
    3,072Long term debt
    
    
    362,636
    
    
    
    351,178
    
    
    
    
    
    
    
    
    
    
    
    713,814Deferred income taxes
    
    
    
    
    
    
    22,148
    
    
    
    3,998
    
    
    
    
    
    
    
    26,146Intercompany loans payable
    
    
    
    
    
    
    
    
    
    
    21,619
    
    
    
    (21,619
    )
    
    
    Total non-current liabilities
    
    
    362,636
    
    
    
    376,398
    
    
    
    25,617
    
    
    
    (21,619
    )
    
    
    743,032Total liabilities
    
    
    392,960
    
    
    
    929,645
    
    
    
    156,336
    
    
    
    (647,955
    )
    
    
    836,157Stockholders equityCommon stock
    
    
    709
    
    
    
    
    
    
    
    9
    
    
    
    (9
    )
    
    
    709Additional paid-in capital
    
    
    248,372
    
    
    
    3,431
    
    
    
    130,030
    
    
    
    (133,461
    )
    
    
    248,372Accumulated other comprehensive income
    
    
    3,878
    
    
    
    458
    
    
    
    3,601
    
    
    
    (4,059
    )
    
    
    3,878Retained earnings (deficit)
    
    
    17,259
    
    
    
    50,882
    
    
    
    (123,718
    )
    
    
    72,836
    
    
    
    17,259Total stockholders equity
    
    
    270,218
    
    
    
    54,771
    
    
    
    9,922
    
    
    
    (64,693
    )
    
    
    270,218Total liabilities and stockholders equity
    
    $
    663,178
    
    
    $
    984,416
    
    
    $
    166,258
    
    
    $
    (707,477
    )
    
    $
    1,106,375
 20




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##### Table of Contents



American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements  (Continued)
Condensed Consolidating Balance Sheet
 As of December 31, 2005AmericanMedical
    
    
    
    
    
    
    Non-Systems
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    ConsolidatedHoldings Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalAssetsCurrent assetsCash and cash equivalents
    
    $
    1,567
    
    
    $
    21,751
    
    
    $
    7,567
    
    
    $
    
    
    
    $
    30,885Short term investments
    
    
    
    
    
    
    15,304
    
    
    
    201
    
    
    
    
    
    
    
    15,505Accounts receivable, net
    
    
    226,421
    
    
    
    37,152
    
    
    
    11,921
    
    
    
    (224,436
    )
    
    
    51,058Inventories, net
    
    
    
    
    
    
    16,645
    
    
    
    5,012
    
    
    
    (3,466
    )
    
    
    18,191Other current assets
    
    
    
    
    
    
    6,770
    
    
    
    499
    
    
    
    
    
    
    
    7,269Total current assets
    
    
    227,988
    
    
    
    97,622
    
    
    
    25,200
    
    
    
    (227,902
    )
    
    
    122,908Property, plant and equipment, net
    
    
    
    
    
    
    20,797
    
    
    
    574
    
    
    
    
    
    
    
    21,371Goodwill, net
    
    
    
    
    
    
    69,644
    
    
    
    100,577
    
    
    
    (521
    )
    
    
    169,700Intangibles, net
    
    
    
    
    
    
    32,201
    
    
    
    31,877
    
    
    
    (23,500
    )
    
    
    40,578Deferred income taxes
    
    
    
    
    
    
    1,451
    
    
    
    2,659
    
    
    
    
    
    
    
    4,110Investment in subsidiaries
    
    
    100,911
    
    
    
    14,293
    
    
    
    
    
    
    
    (115,204
    )
    
    
    Investment in technology and other assets
    
    
    
    
    
    
    24,222
    
    
    
    130
    
    
    
    (23,693
    )
    
    
    659Total assets
    
    $
    328,899
    
    
    $
    260,230
    
    
    $
    161,017
    
    
    $
    (390,820
    )
    
    $
    359,326Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    23,683
    
    
    $
    136,201
    
    
    $
    94,494
    
    
    $
    (250,690
    )
    
    $
    3,688Accrued compensation expenses
    
    
    
    
    
    
    10,105
    
    
    
    1,375
    
    
    
    
    
    
    
    11,480Accrued warranty expense
    
    
    
    
    
    
    1,618
    
    
    
    
    
    
    
    
    
    
    
    1,618Income taxes payable
    
    
    
    
    
    
    1,970
    
    
    
    657
    
    
    
    (240
    )
    
    
    2,387Other accrued expenses
    
    
    
    
    
    
    6,353
    
    
    
    1,861
    
    
    
    
    
    
    
    8,214Contingent liability on acquisition
    
    
    
    
    
    
    
    
    
    
    25,988
    
    
    
    
    
    
    
    25,988Total current liabilities
    
    
    23,683
    
    
    
    156,247
    
    
    
    124,375
    
    
    
    (250,930
    )
    
    
    53,375Non-current liabilitiesAccumulated post retirement benefit obligation
    
    
    
    
    
    
    3,072
    
    
    
    
    
    
    
    
    
    
    
    3,072Intercompany loans payable
    
    
    
    
    
    
    
    
    
    
    22,349
    
    
    
    (22,349
    )
    
    
    Total non-current liabilities
    
    
    
    
    
    
    3,072
    
    
    
    22,349
    
    
    
    (22,349
    )
    
    
    3,072Total liabilities
    
    
    23,683
    
    
    
    159,319
    
    
    
    146,724
    
    
    
    (273,279
    )
    
    
    56,447Stockholders equityCommon stock
    
    
    695
    
    
    
    
    
    
    
    9
    
    
    
    (9
    )
    
    
    695Additional paid-in capital
    
    
    227,284
    
    
    
    1,689
    
    
    
    130,031
    
    
    
    (131,720
    )
    
    
    227,284Accumulated other comprehensive income
    
    
    2,414
    
    
    
    37
    
    
    
    2,305
    
    
    
    (2,342
    )
    
    
    2,414Retained earnings (deficit)
    
    
    74,823
    
    
    
    99,185
    
    
    
    (118,052
    )
    
    
    16,530
    
    
    
    72,486Total stockholders equity
    
    
    305,216
    
    
    
    100,911
    
    
    
    14,293
    
    
    
    (117,541
    )
    
    
    302,879Total liabilities and stockholders equity
    
    $
    328,899
    
    
    $
    260,230
    
    
    $
    161,017
    
    
    $
    (390,820
    )
    
    $
    359,326
 21




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##### Table of Contents



American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements  (Continued)
Condensed Consolidating Statement of Operations
 Three Months Ended September 30, 2006AmericanMedical
    
    
    
    
    
    
    Non-Systems
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    ConsolidatedHoldings Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet sales
    
    $
    
    
    
    $
    85,005
    
    
    $
    12,404
    
    
    $
    (6,909
    )
    
    $
    90,500Cost of sales
    
    
    
    
    
    
    18,950
    
    
    
    7,086
    
    
    
    (7,171
    )
    
    
    18,865Gross profit
    
    
    
    
    
    
    66,055
    
    
    
    5,318
    
    
    
    262
    
    
    
    71,635Operating expensesMarketing and selling
    
    
    
    
    
    
    25,887
    
    
    
    5,578
    
    
    
    
    
    
    
    31,465Research and development
    
    
    
    
    
    
    9,295
    
    
    
    
    
    
    
    
    
    
    
    9,295In-process research and
development
    
    
    
    
    
    
    61,500
    
    
    
    
    
    
    
    
    
    
    
    61,500General and administrative
    
    
    
    
    
    
    8,507
    
    
    
    45
    
    
    
    
    
    
    
    8,552Integration costs
    
    
    
    
    
    
    273
    
    
    
    
    
    
    
    
    
    
    
    273Amortization of intangibles
    
    
    
    
    
    
    4,290
    
    
    
    882
    
    
    
    
    
    
    
    5,172Total operating expenses
    
    
    
    
    
    
    109,752
    
    
    
    6,505
    
    
    
    
    
    
    
    116,257Operating (loss) income
    
    
    
    
    
    
    (43,697
    )
    
    
    (1,187
    )
    
    
    262
    
    
    
    (44,622
    )Other (expense) incomeRoyalty income
    
    
    
    
    
    
    479
    
    
    
    
    
    
    
    
    
    
    
    479Interest income
    
    
    
    
    
    
    1,034
    
    
    
    330
    
    
    
    
    
    
    
    1,364Interest expense
    
    
    (3,321
    )
    
    
    (5,122
    )
    
    
    (465
    )
    
    
    1
    
    
    
    (8,907
    )Financing charge
    
    
    (110
    )
    
    
    (381
    )
    
    
    
    
    
    
    
    
    
    
    (491
    )Other income (expense)
    
    
    
    
    
    
    156
    
    
    
    (49
    )
    
    
    
    
    
    
    107Total other (expense) income
    
    
    (3,431
    )
    
    
    (3,834
    )
    
    
    (184
    )
    
    
    1
    
    
    
    (7,448
    )(Loss) income from continuing operations
before income taxes
    
    
    (3,431
    )
    
    
    (47,531
    )
    
    
    (1,371)
    
        
    263

    
    
    
    (52,070
    )Provision for income taxes
    
    
    (1,174
    )
    
    
    4,575
    
    
    
    2,353
    
    
    
    108
    
    
    
    5,862Net (loss) income from continuing operations
    
    
    (2,257
    )
    
    
    (52,106
    )
    
    
    (3,724
    )
    
    
    155
    
    
    
    (57,932
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (672
    )
    
    
    
    
    
    
    
    
    
    
    (672
    )Equity in (loss) earnings of subsidiary
    
    
    (56,502
    )
    
    
    (3,724
    )
    
    
    
    
    
    
    60,226
    
    
    
    Net (loss) income
    
    $
    (58,759
    )
    
    $
    (56,502
    )
    
    $
    (3,724
    )
    
    $
    60,381
    
    
    $
    (58,604
    )
 22




---



##### Table of Contents



American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements  (Continued)
Condensed Consolidating Statement of Operations
 Nine Months Ended September 30, 2006AmericanMedical
    
    
    
    
    
    
    Non-Systems
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    ConsolidatedHoldings Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet sales
    
    $
    
    
    
    $
    227,589
    
    
    $
    42,880
    
    
    $
    (27,563
    )
    
    $
    242,906Cost of sales
    
    
    
    
    
    
    42,644
    
    
    
    26,634
    
    
    
    (26,976
    )
    
    
    42,302Gross profit
    
    
    
    
    
    
    184,945
    
    
    
    16,246
    
    
    
    (587
    )
    
    
    200,604Operating expensesMarketing and selling
    
    
    
    
    
    
    72,218
    
    
    
    16,431
    
    
    
    
    
    
    
    88,649Research and development
    
    
    
    
    
    
    22,849
    
    
    
    
    
    
    
    
    
    
    
    22,849In-process research and development
    
    
    
    
    
    
    87,113
    
    
    
    2,462
    
    
    
    
    
    
    
    89,575General and administrative
    
    
    
    
    
    
    22,597
    
    
    
    84
    
    
    
    
    
    
    
    22,681Integration costs
    
    
    
    
    
    
    273
    
    
    
    
    
    
    
    
    
    
    
    273Amortization of intangibles
    
    
    
    
    
    
    5,986
    
    
    
    2,812
    
    
    
    
    
    
    
    8,798Total operating expenses
    
    
    
    
    
    
    211,036
    
    
    
    21,789
    
    
    
    
    
    
    
    232,825Operating loss
    
    
    
    
    
    
    (26,091
    )
    
    
    (5,543
    )
    
    
    (587
    )
    
    
    (32,221
    )Other (expense) incomeRoyalty income
    
    
    
    
    
    
    1,340
    
    
    
    
    
    
    
    
    
    
    
    1,340Interest income
    
    
    
    
    
    
    2,077
    
    
    
    43
    
    
    
    
    
    
    
    2,120Interest expense
    
    
    (3,324
    )
    
    
    (5,500
    )
    
    
    (437
    )
    
    
    1
    
    
    
    (9,260
    )Financing charge
    
    
    (7,065
    )
    
    
    (381
    )
    
    
    
    
    
    
    
    
    
    
    (7,446
    )Other income (expense)
    
    
    
    
    
    
    551
    
    
    
    (163
    )
    
    
    9
    
    
    
    397Total other (expense) income
    
    
    (10,389
    )
    
    
    (1,913
    )
    
    
    (557
    )
    
    
    10
    
    
    
    (12,849
    )Loss from continuing operations before income taxes
    
    
    (10,389
    )
    
    
    (28,004
    )
    
    
    (6,100
    )
    
    
    (577
    )
    
    
    (45,070
    )Provision for income taxes
    
    
    (3,832
    )
    
    
    13,964
    
    
    
    (434
    )
    
    
    (213
    )
    
    
    9,485Net loss from continuing operations
    
    
    (6,557
    )
    
    
    (41,968
    )
    
    
    (5,666
    )
    
    
    (364
    )
    
    
    (54,555
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (672
    )
    
    
    
    
    
    
    
    
    
    
    (672
    )Equity in loss of subsidiary
    
    
    (48,306
    )
    
    
    (5,666
    )
    
    
    
    
    
    
    53,972
    
    
    
    Net (loss) income
    
    $
    (54,863
    )
    
    $
    (48,306
    )
    
    $
    (5,666
    )
    
    $
    53,608
    
    
    $
    (55,227
    )
 23




---



##### Table of Contents



American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements  (Continued)
Condensed Consolidating Statement of Operations
 Three Months Ended October 1, 2005AmericanMedical
    
    
    
    
    
    
    Non-Systems
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    ConsolidatedHoldings Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet sales
    
    $
    
    
    
    $
    58,541
    
    
    $
    10,371
    
    
    $
    (7,174
    )
    
    $
    61,738Cost of sales
    
    
    
    
    
    
    11,090
    
    
    
    7,438
    
    
    
    (7,372
    )
    
    
    11,156Gross profit
    
    
    
    
    
    
    47,451
    
    
    
    2,933
    
    
    
    198
    
    
    
    50,582Operating expensesMarketing and selling
    
    
    
    
    
    
    17,591
    
    
    
    4,750
    
    
    
    
    
    
    
    22,341Research and development
    
    
    
    
    
    
    4,995
    
    
    
    
    
    
    
    
    
    
    
    4,995In-process research and
development
    
    
    
    
    
    
    
    
    
    
    9,220
    
    
    
    
    
    
    
    9,220General and administrative
    
    
    
    
    
    
    5,229
    
    
    
    (12
    )
    
    
    
    
    
    
    5,217Amortization of intangibles
    
    
    
    
    
    
    1,233
    
    
    
    967
    
    
    
    
    
    
    
    2,200Total operating expenses
    
    
    
    
    
    
    29,048
    
    
    
    14,925
    
    
    
    
    
    
    
    43,973Operating income (loss)
    
    
    
    
    
    
    18,403
    
    
    
    (11,992
    )
    
    
    198
    
    
    
    6,609Other income (expense)Royalty income
    
    
    
    
    
    
    505
    
    
    
    
    
    
    
    
    
    
    
    505Interest income
    
    
    
    
    
    
    278
    
    
    
    20
    
    
    
    
    
    
    
    298Interest income (expense)
    
    
    
    
    
    
    68
    
    
    
    (112
    )
    
    
    
    
    
    
    (44
    )Other (expense) income
    
    
    
    
    
    
    (38
    )
    
    
    15
    
    
    
    (5
    )
    
    
    (28
    )Total other income (expense)
    
    
    
    
    
    
    813
    
    
    
    (77
    )
    
    
    (5
    )
    
    
    731Income (loss) from continuing opertions
before income taxes
    
    
    
    
    
    
    19,216
    
    
    
    (12,069
    )
    
    
    193
    
    
    
    7,340Provision for income taxes
    
    
    
    
    
    
    3,530
    
    
    
    2,338
    
    
    
    57
    
    
    
    5,925Equity in earnings (loss) of subsidiary
    
    
    1,279
    
    
    
    (14,407
    )
    
    
    
    
    
    
    13,128
    
    
    
    Net income (loss)
    
    $
    1,279
    
    
    $
    1,279
    
    
    $
    (14,407
    )
    
    $
    13,264
    
    
    $
    1,415
 24




---



##### Table of Contents



American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements  (Continued)
Condensed Consolidating Statement of Operations
 Nine Months Ended October 1, 2005AmericanMedical
    
    
    
    
    
    
    Non-Systems
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    ConsolidatedHoldings Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet sales
    
    $
    
    
    
    $
    176,718
    
    
    $
    35,535
    
    
    $
    (22,733
    )
    
    $
    189,520Cost of sales
    
    
    
    
    
    
    34,637
    
    
    
    21,699
    
    
    
    (22,206
    )
    
    
    34,130Gross profit
    
    
    
    
    
    
    142,081
    
    
    
    13,836
    
    
    
    (527
    )
    
    
    155,390Operating expensesMarketing and selling
    
    
    
    
    
    
    53,068
    
    
    
    14,423
    
    
    
    
    
    
    
    67,491Research and development
    
    
    
    
    
    
    14,499
    
    
    
    
    
    
    
    
    
    
    
    14,499In-process research and
development
    
    
    
    
    
    
    
    
    
    
    9,220
    
    
    
    
    
    
    
    9,220General and administrative
    
    
    
    
    
    
    16,231
    
    
    
    (18
    )
    
    
    
    
    
    
    16,213Amortization of intangibles
    
    
    
    
    
    
    3,166
    
    
    
    2,772
    
    
    
    
    
    
    
    5,938Total operating expenses
    
    
    
    
    
    
    86,964
    
    
    
    26,397
    
    
    
    
    
    
    
    113,361Operating income (loss)
    
    
    
    
    
    
    55,117
    
    
    
    (12,561
    )
    
    
    (527
    )
    
    
    42,029Other income (expense)Royalty income
    
    
    
    
    
    
    1,491
    
    
    
    
    
    
    
    
    
    
    
    1,491Interest income
    
    
    
    
    
    
    890
    
    
    
    43
    
    
    
    
    
    
    
    933Interest income (expense)
    
    
    
    
    
    
    159
    
    
    
    (299
    )
    
    
    
    
    
    
    (140
    )Other (expense) income
    
    
    
    
    
    
    (1,007
    )
    
    
    52
    
    
    
    (149
    )
    
    
    (1,104
    )Total other income (expense)
    
    
    
    
    
    
    1,533
    
    
    
    (204
    )
    
    
    (149
    )
    
    
    1,180Income (loss) from continuing operations
before income taxes
    
    
    
    
    
    
    56,650
    
    
    
    (12,765
    )
    
    
    (676
    )
    
    
    43,209Provision for income taxes
    
    
    
    
    
    
    16,700
    
    
    
    2,093
    
    
    
    (249
    )
    
    
    18,544Equity in earnings (loss) of subsidiary
    
    
    25,092
    
    
    
    (14,858
    )
    
    
    
    
    
    
    (10,234
    )
    
    
    Net income (loss)
    
    $
    25,092
    
    
    $
    25,092
    
    
    $
    (14,858
    )
    
    $
    (10,661
    )
    
    $
    24,665
 25




---



##### Table of Contents



American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements  (Continued)
Condensed Consolidating Statement of Cash Flows
 Nine Months Ended September 30, 2006AmericanMedical
    
    
    
    
    
    Non-Systems
    
    Guarantor
    
    Guarantor
    
    
    
    
    
    ConsolidatedHoldings Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalNet cash (used in) provided by operating activities
    
    $
    228
    
    
    $
    63,074
    
    
    $
    1,372
    
    
    $
    
    
    
    $
    64,674Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    
    
    
    
    (13,364
    )
    
    
    (120
    )
    
    
    
    
    
    
    (13,484
    )Purchase of business, net of cash acquired
    
    
    
    
    
    
    (750,853
    )
    
    
    
    
    
    
    
    
    
    
    (750,853
    )Purchase of investments in technology
    
    
    
    
    
    
    (25,613
    )
    
    
    (2,462
    )
    
    
    
    
    
    
    (28,075
    )Purchase of license agreement
    
    
    
    
    
    
    (139
    )
    
    
    
    
    
    
    
    
    
    
    (139
    )Purchase of short term investments
    
    
    
    
    
    
    15,175
    
    
    
    14
    
    
    
    
    
    
    
    15,189Sale of short term investments
    
    
    
    
    
    
    (1,020
    )
    
    
    
    
    
    
    
    
    
    
    (1,020
    )Net cash used in investing activities
    
    
    
    
    
    
    (775,814
    )
    
    
    (2,568
    )
    
    
    
    
    
    
    (778,382
    )Cash flows from financing activitiesProceeds from issuance of convertible notes,
net of issuance costs
    
    
    
    
    
    
    361,218
    
    
    
    
    
    
    
    
    
    
    
    361,218Proceeds from senior secured credit facility,
net of issuance costs
    
    
    352,754
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352,754Intercompany notes
    
    
    (352,754
    )
    
    
    354,147
    
    
    
    (1,393
    )
    
    
    
    
    
    
    Issuance of common stock
    
    
    8,321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,321Excess tax benefit from exercise of stock options
    
    
    1,515
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,515Proceeds from short term borrowings
    
    
    
    
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    4,000Repayments of short term borrowings
    
    
    
    
    
    
    (4,000
    )
    
    
    
    
    
    
    
    
    
    
    (4,000
    )Financing charges paid on credit facility
    
    
    (6,955
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,955
    )Net provided by (used in) financing activities
    
    
    2,881
    
    
    
    715,365
    
    
    
    (1,393
    )
    
    
    
    
    
    
    716,853Cash used in discontinued operationsOperating activities
    
    
    
    
    
    
    (672
    )
    
    
    
    
    
    
    
    
    
    
    (672
    )Net cash used in discontinued operations
    
    
    
    
    
    
    (672
    )
    
    
    
    
    
    
    
    
    
    
    (672
    )Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    719
    
    
    
    
    
    
    
    719Net increase (decrease) in cash and cash equivalents
    
    
    3,109
    
    
    
    1,953
    
    
    
    (1,870
    )
    
    
    
    
    
    
    3,192Cash and cash equivalents at beginning of period
    
    
    1,567
    
    
    
    21,751
    
    
    
    7,567
    
    
    
    
    
    
    
    30,885Cash and cash equivalents at end of period
    
    $
    4,676
    
    
    $
    23,704
    
    
    $
    5,697
    
    
    $
    
    
    
    $
    34,077
 26




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##### Table of Contents



American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements  (Continued)
Condensed Consolidating Statement of Cash Flows
 Nine Months Ended October 1, 2005AmericanMedical
    
    
    
    
    
    
    Non-Systems
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    ConsolidatedHoldings Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet cash (used in) provided by operating activities
    
    $
    (2,244
    )
    
    $
    51,323
    
    
    $
    (3,162
    )
    
    $
    
    
    
    $
    45,917Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    
    
    
    
    (3,531
    )
    
    
    (172
    )
    
    
    
    
    
    
    (3,703
    )Purchase of business, net of cash acquired
    
    
    
    
    
    
    (56,309
    )
    
    
    
    
    
    
    
    
    
    
    (56,309
    )Purchase of license agreement
    
    
    
    
    
    
    (1,620
    )
    
    
    
    
    
    
    
    
    
    
    (1,620
    )Purchase of short term investments
    
    
    
    
    
    
    (30,324
    )
    
    
    (16
    )
    
    
    
    
    
    
    (30,340
    )Sale of short term investments
    
    
    
    
    
    
    29,803
    
    
    
    401
    
    
    
    
    
    
    
    30,204Net cash (used in) provided by investing activities
    
    
    
    
    
    
    (61,981
    )
    
    
    213
    
    
    
    
    
    
    
    (61,768
    )Cash flows from financing activitiesIntercompany notes
    
    
    
    
    
    
    (1,100
    )
    
    
    1,100
    
    
    
    
    
    
    
    Issuance of common stock
    
    
    11,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,926Net cash provided by (used in) financing activities
    
    
    11,926
    
    
    
    (1,100
    )
    
    
    1,100
    
    
    
    
    
    
    
    11,926Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    855
    
    
    
    
    
    
    
    855Net increase (decrease) in cash and cash equivalents
    
    
    9,682
    
    
    
    (11,758
    )
    
    
    (994
    )
    
    
    
    
    
    
    (3,070
    )Cash and cash equivalents at beginning of period
    
    
    1,305
    
    
    
    25,525
    
    
    
    8,859
    
    
    
    
    
    
    
    35,689Cash and cash equivalents at end of period
    
    $
    10,987
    
    
    $
    13,767
    
    
    $
    7,865
    
    
    $
    
    
    
    $
    32,619
 27




---



##### Table of Contents



NOTE 14. Other Contingencies
 Her Option® Her Option
 NOTE 15. Recent Accounting Pronouncements
 Fair Value Measurements.
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the
Current Year Financial Statements.
 Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement 109.
 28




---



##### Table of Contents



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. Any statements not of historical fact may be considered forward-looking statements.
Written words such as may, expect, believe, anticipate, or estimate, or other variations
of these or similar words, 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 as a result of many factors, including, but not
limited to, those included on our Form 10-K, Part I, Item 1A for the year ended December 31, 2005.
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
  Adoption of SFAS 123(R), Share-Based Payment
 Share-Based Payment
   29




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##### Table of Contents



Overview
  www.AmericanMedicalSystems.com.
 Laserscope Acquisition
   Notes
to Consolidated Financial Statements  No. 2
 Stock-Based Compensation
 Share-Based Payment
 Notes to Consolidated
Financial Statements  No. 4
 Three Months Ended
    
    Nine Months Ended(in thousands, except per share data)
    
    September 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005Net (loss) income, as reported
    
    $
    (58,604
    )
    
    $
    1,415
    
    
    $
    (55,227
    )
    
    $
    24,665Stock-based employee compensation expense
included in reported (loss) income, net of tax
    
    
    1,414
    
    
    
    
    
    
    
    5,256
    
    
    
    Diluted earnings per share, as reported
    
    
    (0.84
    )
    
    
    0.02
    
    
    
    (0.79
    )
    
    
    0.34Stock-based employee compensation expense
included in reported (loss) income, net of
tax, per diluted share
    
    
    0.02
    
    
    
    
    
    
    
    0.08
    
    
    
    
 30




---



##### Table of Contents



Results of Operations
 Sales Trends
  Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months Ended(in thousands)
    
    September 30, 2006
    
    October 1, 2005
    
    $ Increase
    
    % Increase
    
    September 30, 2006
    
    October 1, 2005
    
    $ Increase
    
    % IncreaseSalesProduct LineMens pelvic health
    
    $
    60,446
    
    
    $
    37,724
    
    
    $
    22,722
    
    
    
    60.2
    %
    
    $
    151,016
    
    
    $
    119,130
    
    
    $
    31,886
    
    
    
    26.8
    %Womens pelvic health
    
    
    30,054
    
    
    
    24,014
    
    
    
    6,040
    
    
    
    25.2
    %
    
    
    91,890
    
    
    
    70,390
    
    
    
    21,500
    
    
    
    30.5
    %Total
    
    $
    90,500
    
    
    $
    61,738
    
    
    $
    28,762
    
    
    
    46.6
    %
    
    $
    242,906
    
    
    $
    189,520
    
    
    $
    53,386
    
    
    
    28.2
    %GeographyUnited States
    
    $
    70,466
    
    
    $
    49,640
    
    
    $
    20,826
    
    
    
    42.0
    %
    
    $
    187,489
    
    
    $
    148,710
    
    
    $
    38,779
    
    
    
    26.1
    %International
    
    
    20,034
    
    
    
    12,098
    
    
    
    7,936
    
    
    
    65.6
    %
    
    
    55,417
    
    
    
    40,810
    
    
    
    14,607
    
    
    
    35.8
    %Total
    
    $
    90,500
    
    
    $
    61,738
    
    
    $
    28,762
    
    
    
    46.6
    %
    
    $
    242,906
    
    
    $
    189,520
    
    
    $
    53,386
    
    
    
    28.2
    %
 Three Months Ended
    
    Nine Months EndedSeptember 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005Percent of total salesProduct LineMens pelvic health
    
    
    66.8
    %
    
    
    61.1
    %
    
    
    62.2
    %
    
    
    62.9
    %Womens pelvic health
    
    
    33.2
    %
    
    
    38.9
    %
    
    
    37.8
    %
    
    
    37.1
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %GeographyUnited States
    
    
    77.9
    %
    
    
    80.4
    %
    
    
    77.2
    %
    
    
    78.5
    %International
    
    
    22.1
    %
    
    
    19.6
    %
    
    
    22.8
    %
    
    
    21.5
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 31




---



##### Table of Contents



Three Months Ended
    
    $ Increase
    
    % Increase
    
    Nine Months Ended
    
    $ Increase
    
    % Increase(in thousands)
    
    September 30, 2006
    
    October 1, 2005
    
    (Decrease)
    
    (Decrease)
    
    September 30, 2006
    
    October 1, 2005
    
    (Decrease)
    
    (Decrease)Net sales
    
    $
    90,500
    
    
    $
    61,738
    
    
    $
    28,762
    
    
    
    46.6
    %
    
    $
    242,906
    
    
    $
    189,520
    
    
    $
    53,386
    
    
    
    28.2
    %Cost of sales (a)
    
    
    18,865
    
    
    
    11,156
    
    
    
    7,709
    
    
    
    69.1
    %
    
    
    42,302
    
    
    
    34,130
    
    
    
    8,172
    
    
    
    23.9
    %Gross profit
    
    
    71,635
    
    
    
    50,582
    
    
    
    21,053
    
    
    
    41.6
    %
    
    
    200,604
    
    
    
    155,390
    
    
    
    45,214
    
    
    
    29.1
    %Operating expensesMarketing and selling (a)
    
    
    31,465
    
    
    
    22,341
    
    
    
    9,124
    
    
    
    40.8
    %
    
    
    88,649
    
    
    
    67,491
    
    
    
    21,158
    
    
    
    31.3
    %Research and development (a)
    
    
    9,295
    
    
    
    4,995
    
    
    
    4,300
    
    
    
    86.1
    %
    
    
    22,849
    
    
    
    14,499
    
    
    
    8,350
    
    
    
    57.6
    %In-process research and development
    
    
    61,500
    
    
    
    9,220
    
    
    
    52,280
    
    
    
    
    
    
    
    89,575
    
    
    
    9,220
    
    
    
    80,355General and administrative (a)
    
    
    8,552
    
    
    
    5,217
    
    
    
    3,335
    
    
    
    63.9
    %
    
    
    22,681
    
    
    
    16,213
    
    
    
    6,468
    
    
    
    39.9
    %Integration costs
    
    
    273
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    273
    
    
    
    Amortization of intangibles
    
    
    5,172
    
    
    
    2,200
    
    
    
    2,972
    
    
    
    135.1
    %
    
    
    8,798
    
    
    
    5,938
    
    
    
    2,860
    
    
    
    48.2
    %Total operating expenses
    
    
    116,257
    
    
    
    43,973
    
    
    
    72,284
    
    
    
    164.4
    %
    
    
    232,825
    
    
    
    113,361
    
    
    
    119,464
    
    
    
    105.4
    %Operating income
    
    
    (44,622
    )
    
    
    6,609
    
    
    
    (51,231
    )
    
    
    -775.2
    %
    
    
    (32,221
    )
    
    
    42,029
    
    
    
    (74,250
    )
    
    
    -176.7
    %Royalty income
    
    
    479
    
    
    
    505
    
    
    
    (26
    )
    
    
    -5.1
    %
    
    
    1,340
    
    
    
    1,491
    
    
    
    (151
    )
    
    
    -10.1
    %Interest income
    
    
    1,364
    
    
    
    298
    
    
    
    1,066
    
    
    
    357.7
    %
    
    
    2,120
    
    
    
    933
    
    
    
    1,187
    
    
    
    127.2
    %Interest expense
    
    
    (8,907
    )
    
    
    (44
    )
    
    
    (8,863
    )
    
    
    20143.2
    %
    
    
    (9,260
    )
    
    
    (140
    )
    
    
    (9,120
    )
    
    
    6514.3
    %Finance charge
    
    
    (491
    )
    
    
    
    
    
    
    (491
    )
    
    
    0.0
    %
    
    
    (7,446
    )
    
    
    
    
    
    
    (7,446
    )
    
    
    0.0
    %Other income (expense)
    
    
    107
    
    
    
    (28
    )
    
    
    135
    
    
    
    -482.1
    %
    
    
    397
    
    
    
    (1,104
    )
    
    
    1,501
    
    
    
    -136.0
    %(Loss) income from continuing operations
before income taxes
    
    
    (52,070
    )
    
    
    7,340
    
    
    
    (59,410
    )
    
    
    -809.4
    %
    
    
    (45,070
    )
    
    
    43,209
    
    
    
    (88,279
    )
    
    
    -204.3
    %Provision for income taxes
    
    
    5,862
    
    
    
    5,925
    
    
    
    (63
    )
    
    
    -1.1
    %
    
    
    9,485
    
    
    
    18,544
    
    
    
    (9,059
    )
    
    
    -48.9
    %Loss (Income) from continuing operations
    
    
    (57,932
    )
    
    
    1,415
    
    
    
    (59,347
    )
    
    
    -4194.1
    %
    
    
    (54,555
    )
    
    
    24,665
    
    
    
    (79,220
    )
    
    
    -321.2
    %Loss from discontinued operations,
net of tax
    
    
    (672
    )
    
    
    
    
    
    
    (672
    )
    
    
    0.0
    %
    
    
    (672
    )
    
    
    
    
    
    
    (672
    )
    
    
    0.0
    %Net (loss) income
    
    $
    (58,604
    )
    
    $
    1,415
    
    
    $
    (60,019
    )
    
    
    -4241.6
    %
    
    $
    (55,227
    )
    
    $
    24,665
    
    
    $
    (79,892
    )
    
    
    -323.9
    %
 Percent of Sales
    
    Percent of SalesFor the Three Months Ended
    
    For the Nine Months EndedSeptember 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales (a)
    
    
    20.8
    %
    
    
    18.1
    %
    
    
    17.4
    %
    
    
    18.0
    %Gross profit
    
    
    79.2
    %
    
    
    81.9
    %
    
    
    82.6
    %
    
    
    82.0
    %Operating expensesMarketing and selling (a)
    
    
    34.8
    %
    
    
    36.2
    %
    
    
    36.5
    %
    
    
    35.6
    %Research and development (a)
    
    
    10.3
    %
    
    
    8.1
    %
    
    
    9.4
    %
    
    
    7.7
    %In-process research and development
    
    
    68.0
    %
    
    
    14.9
    %
    
    
    36.9
    %
    
    
    4.9
    %General and administrative (a)
    
    
    9.4
    %
    
    
    8.5
    %
    
    
    9.3
    %
    
    
    8.6
    %Integration costs
    
    
    0.3
    %
    
    
    0.0
    %
    
    
    0.1
    %
    
    
    0.0
    %Amortization of intangibles
    
    
    5.7
    %
    
    
    3.6
    %
    
    
    3.6
    %
    
    
    3.1
    %Total operating expenses
    
    
    128.5
    %
    
    
    71.2
    %
    
    
    95.8
    %
    
    
    59.8
    %Operating income
    
    
    -49.3
    %
    
    
    10.7
    %
    
    
    -13.3
    %
    
    
    22.2
    %Royalty income
    
    
    0.5
    %
    
    
    0.8
    %
    
    
    0.6
    %
    
    
    0.8
    %Interest income
    
    
    1.5
    %
    
    
    0.5
    %
    
    
    0.9
    %
    
    
    0.5
    %Interest expense
    
    
    -9.8
    %
    
    
    -0.1
    %
    
    
    -3.8
    %
    
    
    -0.1
    %Finance charge
    
    
    -0.5
    %
    
    
    0.0
    %
    
    
    -3.1
    %
    
    
    0.0
    %Other income (expense)
    
    
    0.1
    %
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    -0.6
    %(Loss) income from continuing operations
before income taxes
    
    
    -57.5
    %
    
    
    11.9
    %
    
    
    -18.6
    %
    
    
    22.8
    %Provision for income taxes
    
    
    6.5
    %
    
    
    9.6
    %
    
    
    3.9
    %
    
    
    9.8
    %Loss (income) from continuing operations
    
    
    -64.0
    %
    
    
    2.3
    %
    
    
    -22.5
    %
    
    
    13.0
    %Loss from discontinued operations,
net of tax
    
    
    -0.7
    %
    
    
    0.0
    %
    
    
    -0.3
    %
    
    
    0.0
    %Net income
    
    
    -64.8
    %
    
    
    2.3
    %
    
    
    -22.7
    %
    
    
    13.0
    %
 
 (a)
    
    These line items include stock-based compensation of : Percent of Sales
    
    
    
    
    
    
    
    
    
    Percent of SalesThree Months Ended
    
    For the Three Months Ended
    
    Nine Months Ended
    
    For the Nine Months Ended(in thousands)
    
    September 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005Cost of sales
    
    $
    96
    
    
    $
    
    
    
    
    0.1
    %
    
    
    0.0
    %
    
    $
    251
    
    
    $
    
    
    
    
    0.1
    %
    
    
    0.0
    %Marketing and selling
    
    
    703
    
    
    
    
    
    
    
    0.8
    %
    
    
    0.0
    %
    
    
    2,454
    
    
    
    
    
    
    
    1.0
    %
    
    
    0.0
    %Research and development
    
    
    471
    
    
    
    
    
    
    
    0.5
    %
    
    
    0.0
    %
    
    
    1,505
    
    
    
    
    
    
    
    0.6
    %
    
    
    0.0
    %General and administrative
    
    
    633
    
    
    
    
    
    
    
    0.7
    %
    
    
    0.0
    %
    
    
    2,770
    
    
    
    
    
    
    
    1.1
    %
    
    
    0.0
    %Stock-based compensation expense
    
    $
    1,903
    
    
    $
    
    
    
    
    2.1
    %
    
    
    0.0
    %
    
    $
    6,980
    
    
    $
    
    
    
    
    2.9
    %
    
    
    0.0
    %
 32




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##### Table of Contents



Comparison of the Three Months Ended September 30, 2006 to the Three Months Ended October 1,
2005
 Net sales.
 Net sales mens pelvic health products. AMS 700 ® AMS
800 Artificial Urinary Sphincter Invance ® AdVanceMale Sling TherMatrx
 Net sales womens pelvic health products. Monarc ®, BioArc ®  SP, BioArc ®  TO InFast SPARC ® Apogee Perigee, Her Option
 Net sales by geography and foreign exchange effects.
 Cost of sales
 Marketing and selling.
 Research and development. GreenLight HPS
 33




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##### Table of Contents



In-process research and development. Notes to Consolidated Financial Statements  No. 2
 General and administrative.
 Amortization of intangibles.
 Royalty income.
 Interest income.
 Interest expense.
 Finance charges.
 Other income (expense)
 Income taxes
 Three Months Ended
    
    Percentage PointSeptember 30, 2006
    
    October 1, 2005
    
    (Decrease) IncreaseEffective tax rate  as reported
    
    
    (11.3
    %)
    
    
    80.7
    %
    
    
    -92.0
    %In-process research and development charge
    
    
    56.2
    %
    
    
    44.9
    %
    
    
    11.3
    %
  34




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##### Table of Contents



Comparison of the Nine Months Ended September 30, 2006 to the Nine Months Ended October 1, 2005
 Net sales
 Net sales mens pelvic health products AMS 700 AMS 800 Artificial Urinary Sphincter Invance ® TherMatrx
 Net sales womens pelvic health products Monarc ®, ,BioArc ® SP BioArc ® TO InFast SPARC ® Apogee Perigee, Her Option
 Net sales by geography and foreign exchange effects
 Cost of sales
 Marketing and selling.
 Research and development. GreenLight HPS
 In-process research and development. Notes to Consolidated
Financial Statements  No. 2 and 8
 35




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##### Table of Contents



General and administrative.
 Amortization of intangibles.
 Interest income.
 Interest expense.
 Finance charges.
 Other income (expense).
 Income taxes.
 Nine Months EndedPercentage PointSeptember 30, 2006
    
    October 1, 2005
    
    (Decrease) IncreaseEffective tax rate  as reported
    
    
    (21.0
    %)
    
    
    42.9
    %
    
    
    -63.9
    %In-process research and development charge
    
    
    62.8
    %
    
    
    7.5
    %
    
    
    55.4
    %
  Liquidity and Capital Resources
  Cash flows from operating activities.
 36




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##### Table of Contents



Cash flows from investing activities.
 Cash flows from financing activities.
     37




---



##### Table of Contents



Periods Ending
    
    RequiredFinancial Covenants
    
    Closest to
    
    RatioTotal Leverage Ratio
    
    September 30, 2006
    
    7.25 to 1(maximum)December 31, 2006
    
    6.95 to 1March 31, 2007
    
    6.50 to 1June 30, 2007
    
    6.00 to 1Reductions continuing until June 30, 2010
    
    3.00 to 1Senior Leverage Ratio
    
    September 30, 2006
    
    3.75 to 1(maximum)December 31, 2006
    
    3.50 to 1March 31, 2207
    
    3.25 to 1June 30, 2007
    
    3.00 to 1Reductions continuing until March 31, 2009
    
    2.00 to 1Interest Coverage Ratio
    
    September 30, 2006 through December 31, 2006
    
    2.50 to 1 (minimum)March 31, 2007
    
    2.75 to 1June 30, 2007
    
    3.00 to 1Increases continuing until September 30, 2009
    
    4.00 to 1Fixed Charge Coverage Ratio
    
    September 30, 2006 through March 31, 2007
    
    1.05 to 1 (minimum)June 30, 2007
    
    1.15 to 1Increases continuing until September 30, 2008
    
    1.50 to 1Capital Expenditures
    
    December 31, 2006
    
    $35.0 million (maximum)December 31, 2007
    
    $15.0 million
  Financial Covenant
    
    Required Ratio
    
    Actual RatioTotal Leverage Ratio (1)
    
    7.25 to 1(maximum)
    
    6.33 to 1Senior Leverage Ratio (2)
    
    3.75 to 1 (maximum)
    
    3.13 to 1Interest Coverage Ratio (3)
    
    2.50 to 1 (minimum)
    
    2.81 to 1Fixed Charge Ratio (4)
    
    1.05 to 1 (minimum)
    
    1.41 to 1Capital Expenditures
    
    $35.0 million (maximum)
    
    $24.1 million year to date
 
 (1)
    
    Total outstanding debt to Consolidated Adjusted EBITDA for the trailing four quarters.(2)
    
    Total outstanding senior secured debt to Consolidated Adjusted EBITDA for the trailing four quarters.(3)
    
    Ratio of Consolidated EBITDA for the trailing four quarters to interest expense for such period.(4)
    
    Ratio of Consolidated EBITDA for the trailing four quarters to fixed charges (cash interest expense, scheduled
principal payments on debt, capital expenditures, income taxes paid, earn-out and milestone payments) for such
period. 38




---



##### Table of Contents



Note13- Debt.
 Cash commitments.
 TherMatrx
   Ovion
   39




---



##### Table of Contents



Additional Information on AMS
 http://www.sec.gov.
 www.AmericanMedicalSystems.com
 40




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rates
   Currency
    Inflation
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
 Notes to Consolidated Financial Statements  Note
2
 41




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##### Table of Contents



42




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
   The failure to successfully integrate Laserscopes business and operations in the expected time
frame, or at all, may adversely affect the combined companys future results.
  
    
    failure to manage successfully relationships with customers, and suppliers;
    
    failure to transition successfully substantial revenue from indirect sales relationships to direct sales;
    
    failure of customers to accept new products or to continue as customers of the combined company;
    
    failure to coordinate effectively sales and marketing efforts to communicate the
capabilities of the combined company;
    
    failure to qualify the combined companys products as a primary source of supply with
OEM customers on a timely basis or at all;
    
    failure to rollout successfully the Laserscope Greenlight HPS product to treat obstructive BPH;
    
    potential incompatibility of technologies and systems;
    
    diversion of management resources from the business of the combined company to
integration-related issues;
    
    failure to leverage the increased scale of the combined company quickly and effectively;
    
    potential difficulties integrating and harmonizing financial reporting systems;
    
    failure to implement successfully our ERP system at Laserscope; and
    
    the loss of key employees.
  In connection with our acquisition of Laserscope, we have substantially increased our debt
leverage, which may result in dilution to our shareholders and requires sufficient cash flow.
 Note 13 Debt Note 13 Debt
 43




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##### Table of Contents




    
    requiring us to use a substantial portion of our cash to pay principal and interest
on our debt or AMS debt, instead of utilizing those funds for other purposes such as
working capital, capital expenditures, and aquisitions;
    
    limiting our ability to obtain any necessary additional financing in the future for
working capital, capital expenditures, debt service requirements, or other purposes;
    
    placing us at a competitive disadvantage relative to our competitors who have lower levels of debt;
    
    decreasing our debt ratings and increasing our cost of borrowed funds;
    
    making us more vulnerable to a downturn in our business or the economy generally; and
    
    subjecting us to the risk of being forced to refinance at higher interest rates
these amounts when due.
 Our Credit Facility contains financial covenants and other restrictions which may limit our ability
to operate our business.
  We may not be able to supply products that incorporate materials or components which are single or
sole-sourced.
 TherMatrx InhibiZone
  Loss
of our principal manufacturing facilities would adversely affect our financial position .
  44




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##### Table of Contents



ITEM 6. EXHIBITS
 Item No.
    
    Item
    
    Method of Filing2.1
    
    Amendment, dated as of July 10,
2006, to Agreement and Plan of
Merger, dated as of June 3, 2006,
by and among American Medical
Systems Holdings, Inc., Laserscope
and Kermit Merger Corp.
    
    Incorporated by
reference to Exhibit
2.1 of the Companys
Current Report on Form
8-K filed on July 11,
2006 (File No.
000-30733).4.1
    
    First Supplemental Indenture, dated
as of September 6, 2006, by and
between Laserscope and U.S. Bank
National Association, as trustee.
    
    Incorporated by
reference to Exhibit
4.1 of the Companys
Current Report on Form
8-K filed on September
8, 2006 (File No.
000-30733).4.2
    
    Guarantee, dated as of September 6,
2006, made by Laserscope in favor
of U.S. Bank National Association,
as trustee.
    
    Incorporated by
reference to Exhibit
4.2 of the Companys
Current Report on Form
8-K filed on September
8, 2006 (File No.
000-30733).10.1
    
    Credit and Guaranty Agreement,
dated as of July 20, 2006, by and
among American Medical Systems,
Inc., as borrower, American Medical
Systems Holdings, Inc. and certain
of its subsidiaries, as guarantors,
CIT Capital Securities LLC, as
co-lead arranger and sole
bookrunner, KeyBank National
Association, as co-lead arranger
and syndication agent, CIT
Healthcare LLC, as administrative
agent and collateral agent, General
Electric Capital Corporation, as
documentation agent, and various
lenders.
    
    Incorporated by
reference to Exhibit
10.1 of the Companys
Current Report on Form
8-K filed on July 26,
2006 (File No.
000-30733).10.2
    
    Pledge and Security Agreement,
dated as of July 20, 2006, between
each of the grantors party thereto
and CIT Healthcare LLC, as
administrative agent and collateral
agent.
    
    Incorporated by
reference to Exhibit
10.2 of the Companys
Current Report on Form
8-K filed on July 26,
2006 (File No.
000-30733).10.3
    
    Mortgage, Security Agreement,
Assignment of Rents and Leases and
Fixture Financing Statement, dated
as of July 20, 2006, executed by
American Medical Systems, Inc. to
and for the benefit of CIT
Healthcare LLC, as administrative
agent and collateral agent.
    
    Incorporated by
reference to Exhibit
10.3 of the Companys
Current Report on Form
8-K filed on July 26,
2006 (File No.
000-30733).10.4
    
    Services Agreement and Statement of
Work, effective August 8, 2006, by
and between American Medical
Systems Holdings, Inc. and Salo,
LLC.
    
    Incorporated by
reference to Exhibit
10.1 of the Companys
Current Report on Form
8-K filed on August 8,
2006 (File No.
000-30733).10.5
    
    Summary of Director Compensation.
    
    Incorporated by
reference to Exhibit
10.2 of the Companys
Current Report on Form
8-K filed on August 8,
2006 (File No.
000-30733).10.6
    
    Net Lease Agreement, dated as of
June 20, 2000, by and between
Laserscope and Realtec Properties.
    
    Incorporated by
reference to Exhibit
10.6 of Laserscopes
Annual Report on Form
10-K filed on March
28, 2001 (File No.
000-18053).10.7
    
    Net Lease Agreement, dated as of
October 18, 2000, by and between
Laserscope and Realtec Properties.
    
    Incorporated by
reference to Exhibit
10.6A of Laserscopes
Annual Report on Form
10-K filed on March
28, 2001 (File No.
000-18053).
 45




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##### Table of Contents



Item No.
    
    Item
    
    Method of Filing10.8
    
    Stock Purchase Agreement, dated as
of April 30, 2006, by and among
Laserscope, InnovaQuartz, Inc., The
Griffin Family Revocable Trust,
Steve Griffin and Brian Barr.
    
    Filed with this
Quarterly Report on
Form 10-Q.31.1
    
    Certificate of Chief Executive
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
    
    Filed with this
Quarterly Report on
Form 10-Q.31.2
    
    Certificate of Interim Chief
Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002.
    
    Filed with this
Quarterly Report on
Form 10-Q.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
Quarterly Report on
Form 10-Q.
 46




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##### Table of Contents



SIGNATURES
  AMERICAN MEDICAL SYSTEMSHOLDINGS, INCNovember 9, 2006
    
    By
    
    /s/ Martin J. EmersonDate
    
    
    
    Martin J. Emerson
President and Chief Executive OfficerNovember 9, 2006
    
    By
    
    /s/ Jill D. BurchillDate
    
    
    
    Jill D. Burchill
Chief Financial Officer
 47




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##### Table of Contents



AMERICAN
MEDICAL SYSTEMS HOLDINGS, INC.
EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Fiscal Quarter Ended September 30, 2006
 Item No.
    
    Item
    
    Method of Filing2.1
    
    Amendment, dated as of July 10,
2006, to Agreement and Plan of
Merger, dated as of June 3,
2006, by and among American Medical
Systems Holdings, Inc., Laserscope
and Kermit Merger Corp.
    
    Incorporated by
reference to Exhibit
2.1 of the Companys
Current Report on Form
8-K filed on July 11,
2006 (File No.
000-30733).4.1
    
    First Supplemental Indenture, dated
as of September 6, 2006, by and
between Laserscope and U.S. Bank
National Association, as trustee.
    
    Incorporated by
reference to Exhibit
4.1 of the Companys
Current Report on Form
8-K filed on September
8, 2006 (File No.
000-30733).4.2
    
    Guarantee, dated as of September 6,
2006, made by Laserscope in favor
of U.S. Bank National Association,
as trustee.
    
    Incorporated by
reference to Exhibit
4.2 of the Companys
Current Report on Form
8-K filed on September
8, 2006 (File No.
000-30733).10.1
    
    Credit and Guaranty Agreement,
dated as of July 20, 2006, by and
among American Medical Systems,
Inc., as borrower, American Medical
Systems Holdings, Inc. and certain
of its subsidiaries, as guarantors,
CIT Capital Securities LLC, as
co-lead arranger and sole
bookrunner, KeyBank National
Association, as co-lead arranger
and syndication agent, CIT
Healthcare LLC, as administrative
agent and collateral agent, General
Electric Capital Corporation, as
documentation agent, and various
lenders.
    
    Incorporated by
reference to Exhibit
10.1 of the Companys
Current Report on Form
8-K filed on July 26,
2006 (File No.
000-30733).10.2
    
    Pledge and Security Agreement,
dated as of July 20, 2006, between
each of the grantors party thereto
and CIT Healthcare LLC, as
administrative agent and collateral
agent.
    
    Incorporated by
reference to Exhibit
10.2 of the Companys
Current Report on Form
8-K filed on July 26,
2006 (File No.
000-30733).10.3
    
    Mortgage, Security Agreement,
Assignment of Rents and Leases and
Fixture Financing Statement, dated
as of July 20, 2006, executed by
American Medical Systems, Inc. to
and for the benefit of CIT
Healthcare LLC, as administrative
agent and collateral agent.
    
    Incorporated by
reference to Exhibit
10.3 of the Companys
Current Report on Form
8-K filed on July 26,
2006 (File No.
000-30733).10.4
    
    Services Agreement and Statement of
Work, effective August 8, 2006, by
and between American Medical
Systems Holdings, Inc. and Salo,
LLC.
    
    Incorporated by
reference to Exhibit
10.1 of the Companys
Current Report on Form
8-K filed on August 8,
2006 (File No.
000-30733).10.5
    
    Summary of Director Compensation.
    
    Incorporated by
reference to Exhibit
10.2 of the Companys
Current Report on Form
8-K filed on August 8,
2006 (File No.
000-30733).10.6
    
    Net Lease Agreement, dated as of
June 20, 2000, by and between
Laserscope and Realtec Properties.
    
    Incorporated by
reference to Exhibit
10.6 of Laserscopes
Annual Report on Form
10-K filed on March
28, 2001 (File No.
000-18053).10.7
    
    Net Lease Agreement, dated as of
October 18, 2000, by and between
Laserscope and Realtec Properties.
    
    Incorporated by
reference to Exhibit
10.6A of Laserscopes
Annual Report on Form
10-K filed on March
28, 2001 (File No.
000-18053).
 48




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##### Table of Contents



Item No.
    
    Item
    
    Method of Filing10.8
    
    Stock Purchase Agreement, dated as
of April 30, 2006, by and among
Laserscope, InnovaQuartz, Inc., The
Griffin Family Revocable Trust,
Steve Griffin and Brian Barr.
    
    Filed with this
Quarterly Report on
Form 10-Q.31.1
    
    Certificate of Chief Executive
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
    
    Filed with this
Quarterly Report on
Form 10-Q.31.2
    
    Certificate of Interim Chief
Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002.
    
    Filed with this
Quarterly Report on
Form 10-Q.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
Quarterly Report on
Form 10-Q.
 49