##### 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 April 1, 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
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 10700 Bren Road West, Minnetonka, Minnesota
    55343(Address of principal executive offices)
    
    (Zip Code)
 952-930-6000
 
   þ Yes
    
    o No
  Large accelerate filer
þ   Accelerated filer o   Non-accelerated filer o
  o Yes
    
    þ No




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##### 



INDEX
 PagePART I
    
    FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTS (UNAUDITED)Consolidated Balance Sheets as of April 1, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations for the three month periods ended April 1, 2006 and April 2, 2005
    
    
    4Consolidated Statements of Cash Flow for the three month periods ended April 1, 2006 and April 2, 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    15ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    22ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    22PART II
    
    OTHER INFORMATIONITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    23ITEM 1A.
    
    RISK FACTORS
    
    
    23ITEM 6.
    
    EXHIBITS
    
    
    23SIGNATURES
    
    
    
    
    25EXHIBIT
INDEX
    
    
    
    
    26Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to Section 906
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 American Medical Systems Holdings, Inc.
 
 Consolidated Balance Sheets
  April 1, 2006
    
    
    December 31, 2005(Unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    26,801
    
    
    $
    30,885Short term investments
    
    
    15,593
    
    
    
    15,505Accounts receivable, net
    
    
    52,108
    
    
    
    51,058Inventories, net
    
    
    17,065
    
    
    
    18,191Deferred income taxes
    
    
    3,202
    
    
    
    3,197Other current assets
    
    
    3,700
    
    
    
    4,072Total current assets
    
    
    118,469
    
    
    
    122,908Property, plant and equipment, net
    
    
    23,655
    
    
    
    21,371Goodwill, net
    
    
    169,861
    
    
    
    169,700Intangibles, net
    
    
    38,737
    
    
    
    40,578Deferred income taxes
    
    
    4,072
    
    
    
    4,110Investment in technology and other assets
    
    
    695
    
    
    
    659Total assets
    
    $
    355,489
    
    
    $
    359,326Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    6,921
    
    
    $
    3,688Accrued compensation expenses
    
    
    10,006
    
    
    
    11,480Accrued warranty expense
    
    
    1,697
    
    
    
    1,618Income taxes payable
    
    
    4,950
    
    
    
    2,387Other accrued expenses
    
    
    8,547
    
    
    
    8,214Contingent liability on acquisition
    
    
    
    
    
    
    25,988Total current liabilities
    
    
    32,121
    
    
    
    53,375Accumulated post retirement benefit obligation
    
    
    3,072
    
    
    
    3,072Total liabilities
    
    
    35,193
    
    
    
    56,447Stockholders equityCommon stock, par value $.01 per share; authorized
220,000,000 shares; issued and outstanding: 69,773,928 shares at April 1, 2006
and 69,525,169 shares at December 31, 2005
    
    
    698
    
    
    
    695Additional paid-in capital
    
    
    232,947
    
    
    
    227,284Accumulated other comprehensive income
    
    
    2,693
    
    
    
    2,414Retained earnings
    
    
    83,958
    
    
    
    72,486Total stockholders equity
    
    
    320,296
    
    
    
    302,879Total liabilities and stockholders equity
    
    $
    355,489
    
    
    $
    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 EndedApril 1, 2006
    
    
    April 2, 2005Net sales
    
    $
    73,624
    
    
    $
    62,145Cost of sales (a)
    
    
    11,730
    
    
    
    11,020Gross profit
    
    
    61,894
    
    
    
    51,125Operating expensesMarketing and selling (a)
    
    
    27,814
    
    
    
    21,656Research and development (a)
    
    
    7,782
    
    
    
    4,638General and administrative (a)
    
    
    6,494
    
    
    
    5,789Amortization of intangibles
    
    
    1,841
    
    
    
    1,790Total operating expenses
    
    
    43,931
    
    
    
    33,873Operating income
    
    
    17,963
    
    
    
    17,252Other income (expense)Royalty income
    
    
    453
    
    
    
    478Interest income
    
    
    322
    
    
    
    274Interest expense
    
    
    (96
    )
    
    
    (55
    )Other expense
    
    
    (146
    )
    
    
    (463
    )Total other income
    
    
    533
    
    
    
    234Income before income taxes
    
    
    18,496
    
    
    
    17,486Provision for income taxes
    
    
    7,024
    
    
    
    6,243Net income
    
    $
    11,472
    
    
    $
    11,243Net income per shareBasic
    
    $
    0.16
    
    
    $
    0.17Diluted
    
    $
    0.16
    
    
    $
    0.16Weighted average common shares used in calculationBasic
    
    
    69,679
    
    
    
    67,898Diluted
    
    
    72,040
    
    
    
    71,250(a) These line items include stock-based compensation of:Cost of sales
    
    $
    45
    
    
    $
    Marketing and selling
    
    
    874
    
    
    
    Research and development
    
    
    500
    
    
    
    General and administrative
    
    
    1,178
    
    
    
    Stock-based compensation expense
    
    $
    2,597
    
    
    $
    
 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.
 
 Condensed Statements of Cash Flow
   Three Months EndedApril 1, 2006
    
    
    April 2, 2005Cash flows from operating activitiesNet income
    
    $
    11,472
    
    
    $
    11,243Adjustments to reconcile net income to
net cash provided by operating activitiesDepreciation
    
    
    823
    
    
    
    1,515Loss on asset disposals
    
    
    322
    
    
    
    25Amortization of intangibles, including deferred financing costs
    
    
    1,841
    
    
    
    1,790Excess tax benefit from share based payment arrangements
    
    
    (279
    )
    
    
    Tax benefit on exercised stock option arrangements
    
    
    681
    
    
    
    2,355Change in net deferred income taxes
    
    
    32
    
    
    
    1,089Stock based compensation
    
    
    2,699
    
    
    
    Changes in operating assets and liabilitiesAccounts receivable
    
    
    (874
    )
    
    
    (805
    )Inventories
    
    
    1,125
    
    
    
    510Accounts payable and accrued expenses
    
    
    2,712
    
    
    
    1,373Other assets
    
    
    336
    
    
    
    (538
    )Net cash provided by operating activities
    
    
    20,890
    
    
    
    18,557Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    (3,419
    )
    
    
    (1,421
    )Purchase of business
    
    
    (23,986
    )
    
    
    (1,450
    )Purchase of license agreement
    
    
    
    
    
    
    (750
    )Purchase of short term investments
    
    
    (100
    )
    
    
    (2,600
    )Sale of short term investments
    
    
    14
    
    
    
    5,728Net cash used in investing activities
    
    
    (27,491
    )
    
    
    (493
    )Cash flows from financing activitiesIssuance of common stock
    
    
    2,285
    
    
    
    3,822Excess tax benefit from share based payment arrangements
    
    
    279
    
    
    
    Net cash provided by financing activities
    
    
    2,564
    
    
    
    3,822Effect of currency exchange rates on cash
    
    
    (47
    )
    
    
    558Net increase (decrease) in cash and cash equivalents
    
    
    (4,084
    )
    
    
    22,444Cash and cash equivalents at beginning of period
    
    
    30,885
    
    
    
    35,689Cash and cash equivalents at end of period
    
    $
    26,801
    
    
    $
    58,133Supplemental disclosureCash paid for interest
    
    $
    96
    
    
    $
    Cash paid for taxes
    
    $
    3,778
    
    
    $
    2,415
 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. Stock-Based Compensation
 Adoption of SFAS 123(R)
 Accounting for Stock Issued to Employees, Accounting for Stock-Based Compensation.
 Share-Based Payment
   6




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##### Table of Contents



Three Months Ended(in thousands, except per share data)
    
    April 2, 2005Net income, as reported
    
    $
    11,243Total stock-based employee compensation
expense determined under fair-value based
method for all awards, net of tax
    
    
    (1,479
    )Pro forma net income
    
    $
    9,764Net income per shareAs reportedBasic
    
    $
    0.17Diluted
    
    $
    0.16Pro formaBasic
    
    $
    0.14Diluted
    
    $
    0.14
    Restricted Stock
  Employee Stock Purchase Plan
 
 7




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##### Table of Contents



WeightedaverageOptions
    
    
    exercise priceoutstanding
    
    
    per shareBalance at December 31, 2005
    
    
    7,950,650
    
    
    $
    11.97Granted
    
    
    594,550
    
    
    $
    20.65Exercised
    
    
    (240,065
    )
    
    $
    8.51Cancelled or expired
    
    
    (88,591
    )
    
    $
    15.62Balance at April 1, 2006
    
    
    8,216,544
    
    
    $
    12.69
  Options Outstanding
    
    
    Options ExercisableWeighted avg
    
    
    Weighted avg
    
    
    
    
    
    
    Weighted avgNumber
    
    
    remaining
    
    
    exercise
    
    
    Number
    
    
    exerciseRange of exercise prices
    
    of shares
    
    
    contractual life
    
    
    price
    
    
    of shares
    
    
    price$.83 - $8.00
    
    
    2,091,952
    
    
    4.5 years
    
    $
    3.84
    
    
    
    1,952,874
    
    
    $
    3.55$8.03 - $14.43
    
    
    2,225,982
    
    
    6.8 years
    
    $
    10.71
    
    
    
    1,698,652
    
    
    $
    10.32$14.81 - $19.69
    
    
    2,478,140
    
    
    7.6 years
    
    $
    17.38
    
    
    
    825,844
    
    
    $
    16.81$19.72 - $21.67
    
    
    1,420,470
    
    
    7.4 years
    
    $
    20.63
    
    
    
    160,339
    
    
    $
    20.25Total
    
    
    8,216,544
    
    
    6.5 years
    
    $
    12.69
    
    
    
    4,637,709
    
    
    $
    8.97
   Quarter Ended
    
    Quarter EndedApril 1, 2006
    
    April 2, 2005Fair value of options granted
    
    $
    8.03
    
    
    $
    8.40Risk free interest rate
    
    
    4.54
    %
    
    
    4.08
    %Expected dividend rate
    
    
    0.00
    %
    
    
    0.00
    %Stock price volatility
    
    
    35.52
    %
    
    
    38.53
    %Expected life of option
    
    4.7 years
    
    6.5 years
 Expected life
 8




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##### Table of Contents



Expected volatility
 Risk-free rate of return
 Dividend yield
   NOTE 3. Earnings per Share
  Three Months Ended(in thousands, except per share data)
    
    April 1, 2006
    
    
    April 2, 2005Net income
    
    $
    11,472
    
    
    $
    11,243Weighted-average shares
outstanding for basic net income per share
    
    
    69,679
    
    
    
    67,898Dilutive effect of stock options
    
    
    2,361
    
    
    
    3,352Adjusted weighted-average
shares outstanding and assumed
conversions for diluted net income per
share
    
    
    72,040
    
    
    
    71,250Net income per shareBasic
    
    $
    0.16
    
    
    $
    0.17Diluted
    
    $
    0.16
    
    
    $
    0.16
  NOTE 4. Inventories
  (in thousands)
    
    April 1, 2006
    
    
    December 31, 2005Raw materials
    
    $
    4,031
    
    
    $
    4,252Work in process
    
    
    3,020
    
    
    
    2,394Finished goods
    
    
    12,032
    
    
    
    12,862Obsolescence reserve
    
    
    (2,018
    )
    
    
    (1,317
    )Net inventories
    
    $
    17,065
    
    
    $
    18,191
 NOTE 5. Warranties
  9




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##### Table of Contents



Three Months Ended(in thousands)
    
    April 1, 2006
    
    
    April 2, 2005Balance, beginning of period
    
    $
    1,618
    
    
    $
    1,451Provisions for warranty
    
    
    161
    
    
    
    77Claims processed
    
    
    (82
    )
    
    
    (61
    )Balance, end of period
    
    $
    1,697
    
    
    $
    1,467
 NOTE 6. Acquisitions
 TherMatrx, Inc.
  TherMatrx
 TherMatrx
  (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
    
    
    (7,763
    )Goodwill
    
    
    69,142Purchase price, including earned contingent
payments, net of cash acquired, accrued through
April 1, 2006
    
    $
    133,100
   10




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##### Table of Contents



Ovion
  Ovion
  (in thousands)
    
    Amount|In-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
    
    $
    10,407
 Goodwill and Other Intangible Assets
  NOTE 7. Comprehensive Income
   Three Months Ended(in thousands)
    
    April 1, 2006
    
    
    April 2, 2005Net income
    
    $
    11,472
    
    
    $
    11,243Foreign currency translation (loss), net of taxes
    
    
    (279
    )
    
    
    (946
    )Comprehensive income
    
    $
    11,193
    
    
    $
    10,297
 11




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##### Table of Contents



NOTE 8. Industry Segment Information and Foreign Operations
    Three Months Ended(in thousands)
    
    April 1, 2006
    
    April 2, 2005United StatesNet sales
    
    $
    56,999
    
    
    $
    48,333Long-lived assets
    
    $
    218,485
    
    
    $
    154,187InternationalNet sales
    
    $
    16,625
    
    
    $
    13,812Long-lived assets
    
    $
    14,463
    
    
    $
    15,439
 NOTE 9. Goodwill and Intangible Assets
  Three Months Ended(in thousands)
    
    April 1, 2006Goodwill, beginning of the year, net
    
    $
    169,700Additions
    
    
    Effect of currency translation
    
    
    161Goodwill, end of first quarter, net
    
    $
    169,861
  April 1, 2006
    
    
    December 31, 2005Gross carrying
    
    
    Accumulated
    
    
    Net book
    
    
    Gross carrying
    
    
    Accumulated
    
    
    Net book(in thousands)
    
    amount
    
    
    amortization
    
    
    value
    
    
    amount
    
    
    amortization
    
    
    valueAmortizedPatents
    
    $
    10,127
    
    
    $
    (7,990
    )
    
    $
    2,137
    
    
    $
    10,127
    
    
    $
    (7,708
    )
    
    $
    2,419Licenses
    
    
    6,911
    
    
    
    (4,359
    )
    
    
    2,552
    
    
    
    6,911
    
    
    
    (3,847
    )
    
    
    3,064Developed technology
    
    
    48,853
    
    
    
    (18,438
    )
    
    
    30,415
    
    
    
    48,853
    
    
    
    (17,454
    )
    
    
    31,399Non-compete agreements
    
    
    2,050
    
    
    
    (188
    )
    
    
    1,862
    
    
    
    2,050
    
    
    
    (125
    )
    
    
    1,925Total amortized intangible assets
    
    
    67,941
    
    
    
    (30,975
    )
    
    
    36,966
    
    
    
    67,941
    
    
    
    (29,134
    )
    
    
    38,807UnamortizedTrademarks
    
    
    2,233
    
    
    
    (462
    )
    
    
    1,771
    
    
    
    2,233
    
    
    
    (462
    )
    
    
    1,771Total intangible assets
    
    $
    70,174
    
    
    $
    (31,437
    )
    
    $
    38,737
    
    
    $
    70,174
    
    
    $
    (29,596
    )
    
    $
    40,578
 Three Months Ended(in thousands)
    
    April 1, 2006
    
    April 2, 2005Amortization expense
    
    $
    1,841
    
    
    $
    1,790
  12




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##### Table of Contents



NOTE 10. Credit Agreement
 Notes to Consolidated Financial Statements  No. 12
  NOTE 11. Contingencies
 Her Option® Her Option
 NOTE 12. Subsequent Events
 BioControl Medical, Ltd.
   13




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##### Table of Contents



Solarant Medical, Inc.
    14




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##### 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
   15




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##### Table of Contents



Overview
  www.AmericanMedicalSystems.com.
 Stock-Based Compensation
 Share-Based Payment
 Notes to
Consolidated Financial Statements  No. 2
 Three Months Ended(in thousands, except per share data)
    
    April 1, 2006
    
    April 2, 2005Net income, as reported
    
    $
    11,472
    
    
    $
    11,243Stock-based employee compensation expense
included in reported income, net of tax
    
    $
    1,935
    
    
    $
    Diluted earnings per share, as reported
    
    $
    0.16
    
    
    $
    0.16Stock-based employee compensation expense
included in reported income, net of tax, per diluted share
    
    $
    0.03
    
    
    $
    
 16




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##### Table of Contents



Results of Operations
 Sales Trends
  Three Months Ended(in thousands)
    
    April 1, 2006
    
    
    April 2, 2005
    
    
    $ Increase
    
    
    % IncreaseSalesProduct LineMens pelvic health
    
    $
    44,658
    
    
    $
    40,589
    
    
    $
    4,069
    
    
    
    10.0
    %Womens pelvic health
    
    
    28,966
    
    
    
    21,556
    
    
    
    7,410
    
    
    
    34.4
    %Total
    
    $
    73,624
    
    
    $
    62,145
    
    
    $
    11,479
    
    
    
    18.5
    %GeographyUnited States
    
    $
    56,999
    
    
    $
    48,333
    
    
    $
    8,666
    
    
    
    17.9
    %International
    
    
    16,625
    
    
    
    13,812
    
    
    
    2,813
    
    
    
    20.4
    %Total
    
    $
    73,624
    
    
    $
    62,145
    
    
    $
    11,479
    
    
    
    18.5
    %Percent of total salesProduct LineMens pelvic health
    
    
    60.7
    %
    
    
    65.3
    %Womens pelvic health
    
    
    39.3
    %
    
    
    34.7
    %Total
    
    
    100.0
    %
    
    
    100.0
    %GeographyUnited States
    
    
    77.4
    %
    
    
    77.8
    %International
    
    
    22.6
    %
    
    
    22.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 Net Sales
 Mens pelvic health products. AMS 700 Tactile Pump InhibiZone® AMS 800 Artificial Urinary Sphincter Invance® TherMatrx
 Womens pelvic health products. Apogee Perigee Monarc Monarc InFast SPARC Her Option
 International sales and foreign exchange effects.
 17
    Table of Contents  Three Months Ended
    
    $ Increase
    
    % Increase(in thousands)
    
    April 1, 2006
    
    April 2, 2005
    
    (Decrease)
    
    (Decrease)Net sales
    
    $
    73,624
    
    
    $
    62,145
    
    
    $
    11,479
    
    
    
    18.5
    %Cost of sales (a)
    
    
    11,730
    
    
    
    11,020
    
    
    
    710
    
    
    
    6.4
    %Gross profit
    
    
    61,894
    
    
    
    51,125
    
    
    
    10,769
    
    
    
    21.1
    %Operating expensesMarketing and selling (a)
    
    
    27,814
    
    
    
    21,656
    
    
    
    6,158
    
    
    
    28.4
    %Research and development (a)
    
    
    7,782
    
    
    
    4,638
    
    
    
    3,144
    
    
    
    67.8
    %General and administrative (a)
    
    
    6,494
    
    
    
    5,789
    
    
    
    705
    
    
    
    12.2
    %Amortization of intangibles
    
    
    1,841
    
    
    
    1,790
    
    
    
    51
    
    
    
    2.8
    %Total operating expenses
    
    
    43,931
    
    
    
    33,873
    
    
    
    10,058
    
    
    
    29.7
    %Operating income
    
    
    17,963
    
    
    
    17,252
    
    
    
    711
    
    
    
    4.1
    %Royalty income
    
    
    453
    
    
    
    478
    
    
    
    (25
    )
    
    
    -5.2
    %Interest income
    
    
    322
    
    
    
    274
    
    
    
    48
    
    
    
    17.5
    %Interest expense
    
    
    (96
    )
    
    
    (55
    )
    
    
    (41
    )
    
    
    -74.5
    %Other income (expense)
    
    
    (146
    )
    
    
    (463
    )
    
    
    317
    
    
    
    -68.5
    %Income before income taxes
    
    
    18,496
    
    
    
    17,486
    
    
    
    1,010
    
    
    
    5.8
    %Provision for income taxes
    
    
    7,024
    
    
    
    6,243
    
    
    
    781
    
    
    
    12.5
    %Net income
    
    $
    11,472
    
    
    $
    11,243
    
    
    $
    229
    
    
    
    2.0
    %
 Percent of SalesFor the Three Months EndedApril 1, 2006
    
    April 2, 2005Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales (a)
    
    
    15.9
    %
    
    
    17.7
    %Gross profit
    
    
    84.1
    %
    
    
    82.3
    %Operating expensesMarketing and selling (a)
    
    
    37.8
    %
    
    
    34.8
    %Research and development (a)
    
    
    10.6
    %
    
    
    7.5
    %General and administrative (a)
    
    
    8.8
    %
    
    
    9.3
    %Amortization of intangibles
    
    
    2.5
    %
    
    
    2.9
    %Total operating expenses
    
    
    59.7
    %
    
    
    54.5
    %Operating income
    
    
    24.4
    %
    
    
    27.8
    %Royalty income
    
    
    0.6
    %
    
    
    0.8
    %Interest income
    
    
    0.4
    %
    
    
    0.4
    %Interest expense
    
    
    -0.1
    %
    
    
    -0.1
    %Other income (expense)
    
    
    -0.2
    %
    
    
    -0.7
    %Income before income taxes
    
    
    25.1
    %
    
    
    28.1
    %Provision for income taxes
    
    
    9.5
    %
    
    
    10.0
    %Net income
    
    
    15.6
    %
    
    
    18.1
    %
 
 (a)
    
    These line items include stock-based compensation of: Percent of SalesThree Months Ended
    
    For the Three Months Ended(in thousands)
    
    April 1, 2006
    
    April 2, 2005
    
    April 1, 2006
    
    April 2, 2005Cost of sales
    
    $
    45
    
    
    $
    
    
    
    
    0.1
    %
    
    
    0.0
    %Marketing and selling
    
    
    874
    
    
    
    
    
    
    
    1.2
    %
    
    
    0.0
    %Research and development
    
    
    500
    
    
    
    
    
    
    
    0.7
    %
    
    
    0.0
    %General and administrative
    
    
    1,178
    
    
    
    
    
    
    
    1.6
    %
    
    
    0.0
    %Stock-based compensation expense
    
    $
    2,597
    
    
    $
    
    
    
    
    3.5
    %
    
    
    0.0
    %
 18
    Table of Contents  Cost of sales
 Marketing and selling.
 Research and development.
 General and administrative.
 Amortization of intangibles.
 Royalty income.
 Interest income.
 Interest expense.
 Other income/(expense).
 Income taxes.
 Three Months EndedApril 1, 2006
    
    April 1, 2005Effective tax rate  as reported
    
    
    38.0
    %
    
    
    35.7
    %Stock option expense increase to tax rate
    
    
    1.6
    %
    
    
    Expiration of Federal research and development credit
    
    
    1.0
    %
    
    
    
 19
    Table of Contents  Liquidity and Capital Resources
  Cash flows from operating activities.
 Cash flows from investing activities.
 Cash flows from financing activities.
   Credit facilityCovenant
    
    requirements
    
    ActualLeverage ratio
    
    < 2.75 to 1.00
    
    0.00 to 1.00Interest coverage ratio
    
    > 3.00 to 1.00
    
    297.3 to 1.00
  Cash commitments.
   20
    Table of Contents  Notes to
Consolidated Financial Statements  No. 6
    Additional Information on AMS
 http://www.sec.gov.
 www.AmericanMedicalSystems.com
 21
    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
  22
    Table of Contents  PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Her Option Her Option
 
 ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
 Item No.
    
    Item
    
    Method of Filing10.1
    
    Asset Purchase Agreement,
dated April 26, 2006,
between American Medical
Systems, Inc. and
BioControl Medical, LTD.
Incorporated by reference
to Exhibit 10.1 of the
Companys Current Report on
Form 8-K.
    
    Incorporated by reference to
Exhibit 10.1 of the Companys
Current Report on Form 8-K
filed on April 27, 2006 (File
No. 000-30733).10.2
    
    License Agreement, dated
April 26, 2006, between
American Medical Systems,
inc. and BioControl
Medical, LTD. Incorporated
by reference to Exhibit
10.2 of the Companys
Current Report on Form 8-K.
    
    Incorporated by reference to
Exhibit 10.2 of the Companys
Current Report on Form 8-K
filed on April 27, 2006 (File
No. 000-30733).10.3
    
    Agreement and Plan of
Merger, dated as of May 8,
2006, entered into by and
among American Medical
Systems, Inc., Xenon Merger
Corp., Solarant Medical,
Inc., and Warburg Pincus
Equity Partners, L.P., as
stockholders
representative.
    
    Incorporated by reference to
Exhibit 10.1 to the Companys
Current Report on Form 8-K
filed on May 9, 2006 (File No.
000-30733).31.1
    
    Certification of Chief
Executive Officer pursuant
to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    Filed with this Report.
 23
    Table of Contents  Item No.
    
    Item
    
    Method of Filing31.2
    
    Certification of Chief
Financial Officer pursuant
to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    Filed with this Report.32.1
    
    Certification pursuant to
18 U.S.C. Section 1350, as
adopted pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
    
    Filed with this Report.
 24
    Table of Contents  SIGNATURES
  AMERICAN MEDICAL SYSTEMS
HOLDINGS, INCMay 11, 2006
    
    By
    
    /s/ Martin J. EmersonDate
    
    
    
    Martin J. EmersonPresident and Chief Executive OfficerMay 11, 2006
    
    By
    
    /s/ Carmen L. DiersenDate
    
    
    
    Carmen L. DiersenExecutive Vice President, Chief FinancialOfficer and Corporate Secretary (PrincipalFinancial and Accounting Officer)
 25
    Table of Contents  AMERICAN
MEDICAL SYSTEMS HOLDINGS, INC.
 
 EXHIBIT
INDEX TO QUARTERLY REPORT ON FORM 10-Q
 For the Fiscal Quarter Ended April 1, 2006
 Item No.
    
    Item
    
    Filing Method10.1
    
    Asset Purchase
Agreement, dated
April 26, 2006,
between American
Medical Systems,
Inc. and BioControl
Medical, LTD.
Incorporated by
reference to Exhibit
10.1 of the
Companys Current
Report on Form 8-K.
    
    Incorporated by reference to Exhibit
10.1 of the Companys Current Report
on Form 8-K filed on April 27, 2006
(File No. 000-30733).10.2
    
    License Agreement,
dated April 26,
2006, between
American Medical
Systems, inc. and
BioControl Medical,
LTD. Incorporated by
reference to Exhibit
10.2 of the
Companys Current
Report on Form 8-K.
    
    Incorporated by reference to Exhibit
10.2 of the Companys Current Report
on Form 8-K filed on April 27, 2006
(File No. 000-30733).10.3
    
    Agreement and Plan
of Merger, dated as
of May 8, 2006,
entered into by and
among American
Medical Systems,
Inc., Xenon Merger
Corp., Solarant
Medical, Inc., and
Warburg Pincus
Equity Partners,
L.P., as
stockholders
representative.
    
    Incorporated by reference to Exhibit
10.1 to the Companys Current Report
on Form 8-K filed on May 9, 2006
(File No. 000-30733).31.1
    
    Certification of
Chief Executive
Officer pursuant to
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    Filed with this Report on Form 10-Q.31.2
    
    Certification of
Chief Financial
Officer pursuant to
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    Filed with this 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 Report on Form 10-Q.
 26