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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 30733
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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 41-1978822
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10700 BREN ROAD WEST, MINNETONKA, MN 55343
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(Address of principal executive offices) (Zip Code)
(952) 933-4666
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
As of November 1, 2000, there were 27,741,328 shares of the registrant's
$.01 par value Common Stock outstanding.
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INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page(s)
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<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 (Unaudited)
and December 31, 1999 3 - 4
Consolidated Statements of Operations for the three and nine months
ended September 30, 2000 and 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for nine months ended
September 30, 2000 and 1999 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10 - 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 19
SIGNATURES 20
EXHIBIT INDEX 21
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------- -------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,108 $6,940
Accounts receivable, net 22,299 19,809
Inventories 11,010 11,045
Deferred taxes 6,237 6,336
Other current assets 1,551 1,475
------------------- -------------------
Total current assets 53,205 45,605
Property, plant and equipment, net 25,267 26,774
Intangibles, net 102,838 101,951
Deferred income taxes 11,399 12,533
Other assets 112 427
------------------- -------------------
Total assets $192,821 $187,290
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $4,199 $2,753
Accrued compensation expenses 12,310 11,684
Accrued warranty expense 7,135 7,385
Deferred income tax liability 7,375 8,282
Other accrued expenses 7,322 9,736
Current portion of notes payable 6,033 6,000
------------------- -------------------
Total current liabilities 44,374 45,840
Long-term notes payable 39,967 95,300
Minority interest 521 521
Redeemable preferred stock:
Series A convertible preferred stock, par value $.01 per
share; authorized 32,116 shares; none issued for
September 30, 2000; issued and outstanding 27,749
shares for December 31, 1999 - 30,523
Series B convertible preferred stock, par value $.01 per
share; authorized 4,050,000 shares; none issued for
September 30, 2000; issued and outstanding 680,000
shares for December 31, 1999 - 3,637
</TABLE>
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<TABLE>
<S> <C> <C>
Series C convertible preferred stock, par value $.01 per
share; authorized 6,000,000 shares; none issued for
September 30, 2000; issued and outstanding 3,370,000
shares for December 31, 1999 - 18,235
Series D convertible preferred stock, par value $.01 per
share; authorized 4,800,000 shares; none issued for
September 30, 2000; issued and outstanding 336,144
shares for December 31, 1999 - 3,395
Series E convertible preferred stock, par value $.01 per
share; authorized 3,400,000 shares; none issued for
September 30, 2000; issued and outstanding 1,163,856 - 11,675
shares for December 31, 1999
Stockholder's deficit:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued - -
Common stock, par value $.01 per share; authorized
95,000,000 shares; issued and outstanding
27,729,799 shares for September 30, 2000; none
issued for December 31, 1999 277 -
Additional paid-in capital 135,271 -
Deferred compensation (1,113) -
Accumulated other comprehensive loss (1,382) (993)
Accumulated deficit (25,094) (20,843)
------------------- -------------------
Total shareholders' equity (deficit) 107,959 (21,836)
------------------- -------------------
Total liabilities and shareholders' equity $192,821 $187,290
=================== ===================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- -------------------------------------
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $23,539 $19,536 $73,618 $59,770
Cost of sales 4,911 4,497 16,426 25,606
----------------- ----------------- ----------------- -----------------
Gross profit 18,628 15,039 57,192 34,164
Operating expenses:
Marketing and sales 9,059 7,621 28,942 22,013
General and administrative 3,105 2,019 8,734 5,743
Research and development 3,021 2,378 9,014 6,914
Transition and reorganization expenses - - 1,000 3,000
Amortization of intangibles 2,234 996 6,235 2,966
----------------- ----------------- ----------------- -----------------
Total operating expenses 17,419 13,014 53,925 40,636
----------------- ----------------- ----------------- -----------------
Operating income (loss) 1,209 2,025 3,267 (6,472)
Royalty and other income (expense) 801 835 2,228 3,043
Interest income (expense), net (1,823) (1,690) (5,904) (5,048)
----------------- ----------------- ----------------- -----------------
Income (loss) before income taxes 187 1,170 (409) (8,477)
Income tax benefit (expense) (535) (471) (495) 3,397
----------------- ----------------- ----------------- -----------------
Net income (loss) ($348) $699 ($904) ($5,080)
================= ================= ================= =================
Net income (loss) per share ($0.02) ($0.06)
================= ================= ================= =================
Weighted average common shares outstanding 14,056,493 - 14,056,493 -
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($904) ($5,080)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 2,817 1,880
Amortization of intangibles, including deferred financing costs 6,358 2,966
Noncash pension charge 1,295 1,569
Noncash deferred compensation 318 -
Change in net deferred taxes 726 (1,665)
Changes in operating assets and liabilities:
Accounts receivable (1,836) (3,789)
Receivable from former affiliate - 6,757
Inventories (98) 10,337
Accounts payable 1,480 (2,031)
Accrued expenses (3,733) (1,086)
Other assets 239 181
---------------- ----------------
Net cash provided by operating activities 6,662 10,039
---------------- ----------------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,310) (4,597)
Purchase of businesses, net of cash acquired (4,111) (5,460)
Purchase of other intangibles (3,135) -
---------------- ----------------
Net cash used in investing activities (8,556) (10,057)
---------------- ----------------
Cash flows from financing activities:
Sale of preferred stock - 2,000
Issuance of common stock 63,306 -
Borrowings on long-term debt 4,700 2,500
Payments on long-term debt (60,000) -
---------------- ----------------
Net cash provided by financing activities 8,006 4,500
---------------- ----------------
Effect of exchange rates (944) (246)
---------------- ----------------
Net increase in cash and cash equivalents 5,168 4,236
Cash and cash equivalents at beginning of period 6,940 2,808
---------------- ----------------
Cash and cash equivalents at end of period $12,108 $7,044
================ ================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
6
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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------------------
1. BASIS OF PRESENTATION
The consolidated financial statements included in this Form 10-Q have been
prepared by American Medical Systems Holdings, Inc. (the Company), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed, or omitted, pursuant to these rules
and regulations. The year-end balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. These unaudited consolidated interim financial statements
should be read in conjunction with the Company's consolidated financial
statements and related notes included in the Company's Final Prospectus dated
August 10, 2000 as filed with the SEC.
The consolidated interim financial statements presented herein as of September
30, 2000 and for the three and nine month periods ended September 30, 2000 and
1999 reflect, in the opinion of management, all adjustments (which include only
normal, recurring adjustments) necessary for a fair presentation of financial
position and the results of operations and cash flows for the periods presented.
The results of operations for any interim period are not necessarily indicative
of results for the full year.
2. ORGANIZATION
We founded our business in 1972. Pfizer Inc. acquired our business in 1985. In
September 1998, a group of investors led by Warburg, Pincus Equity Partners,
L.P., financed the purchase of our assets from Pfizer. We formed American
Medical Systems Holdings, Inc., our current holding company, in April 2000. The
Company designs, develops, manufactures and markets specialty medical devices
for patients suffering from incontinence, erectile dysfunction, and prostate
disease.
The consolidated financial statements include the accounts of American Medical
Systems Holdings, Inc. and its wholly-owned subsidiary, American Medical
Systems, Inc. after elimination of all significant intercompany transactions and
accounts.
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3. INVENTORIES
Inventories consist of the following (in thousands):
September 30, December 31,
2000 1999
---------------- ----------------
(Unaudited)
Raw materials $3,616 $2,940
Work-in-process 2,767 1,843
Finished goods 4,627 6,262
---------------- ----------------
$11,010 $11,045
================ ================
4. INDUSTRY SEGMENT INFORMATION
Since its inception, the Company has operated in the single industry segment of
developing, manufacturing and marketing medical devices.
The Company distributes its products through its direct sales force and
independent sales representatives in the United States, Canada, and most of
Europe. Additionally, the Company distributes its products through foreign
independent distributors, primarily in Europe and Asia, who then market the
products directly to medical institutions. No one customer or distributor
accounted for 10% or more of the Company's net sales for the three or nine
months ended September 30, 2000 or 1999.
Total export sales from the U.S. to unaffiliated entities (primarily to Europe
and payable in U.S. dollars) were $1,043,000 and $3,750,000 for the three and
nine month periods ended September 30, 2000, respectively, compared to
$1,119,000 and $3,883,000 for the three and nine month periods ended September
30, 1999, respectively. Foreign subsidiary sales are predominantly from
customers in Western Europe. Substantially all of the Company's foreign
subsidiary assets are located in Western Europe.
At September 30, 2000 and December 31, 1999, consolidated accounts receivable
included $7,021,000 and $6,253,000, respectively, due from customers located
outside of the United States.
5. COMPREHENSIVE INCOME
Comprehensive income for the Company includes net income, foreign currency
translation which is charged or credited to the cumulative translation account
within shareholders' equity, and compensatory stock options which is charged or
amortized to the deferred compensation account within shareholders' equity.
Comprehensive income for the three and nine months ended September 30, 2000 and
1999 and the year ended December 31, 1999, was as follows:
8
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended, Year Ended
September 30, September 30, December 31,
2000 1999 2000 1999 1999
--------------- ------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Net income (loss) ($348) $699 ($904) ($5,080) ($9,849)
Deferred compensation 78 0 (1,113) 0 0
Changes in cumulative
Translation (352) (120) (389) (260) (548)
--------------- ------------- ------------- -------------- -----------------
Comprehensive income
(loss) ($622) $579 ($2,406) ($5,340) ($10,397)
=============== ============= ============= ============== =================
</TABLE>
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the results of operations and financial
condition for the three and nine month periods ended September 30, 2000 compared
with the three and nine month periods ended September 30, 1999 and should be
read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto.
OVERVIEW
We founded our business in 1972. Pfizer Inc. acquired our business in 1985. In
September 1998, a group of investors led by Warburg, Pincus Equity Partners,
L.P., financed the purchase of our assets from Pfizer. We formed American
Medical Systems Holdings, Inc., our current holding company, in April 2000
We manufacture and market a broad and well-established line of medical devices
for patients suffering from incontinence, erectile dysfunction and prostate
disease. We are focused on expanding our product offering and adding
less-invasive medical devices for urological disorders through product
development and acquisitions.
In 1999, we expanded our commitment to the incontinence and prostate disease
markets with the acquisition of several technologies, most notably technologies
related to incontinence from Influence, Inc. These acquisitions have enabled us
to diversify our product portfolio and offer a sling product for incontinence,
one of the fastest growing surgical procedures for the treatment of
incontinence.
We have incurred substantial losses since the September 1998 acquisition from
Pfizer. These losses resulted primarily from non-recurring costs related to the
acquisition from Pfizer, including non-recurring charges to cost of sales
related to acquired inventories. We incurred additional losses in 1999 related
to the acquisition of Influence, Inc. and other technologies for incontinence.
These losses resulted primarily from non-recurring charges to operating costs
for in-process research and development. Without these non-recurring charges, we
would have been profitable during 1998 and 1999.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999
NET SALES
Net sales increased $4.0 million, or 20.5% from $19.5 million in the three-month
period ended September 30, 1999, to $23.5 million in the three-month period
ended September 30, 2000. The sales increase is primarily attributable to an
increase in incontinence sales.
Incontinence sales increased $4.0 million, or 67.7%, from $6.0 million in the
three-month period ended September 30, 1999, to $10.0 million in the three-month
period ended September 30, 2000. Of this increase, $3.7 million, or 91.9%, was
due to sling product sales from the
10
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acquisition of Influence in December 1999. Sales of erectile dysfunction
products were up slightly in the three-month period ended September 30, 2000,
compared to the same period in 1999. Erectile dysfunction unit sales increased
4.4% in the three-month period ended September 30, 2000, versus the same period
in 1999.
Net U.S. sales increased $4.1 million, or 26.4 %, from $15.6 million in the
three-month period ended September 30, 1999, to $19.7 million in the three-month
period ended September 30, 2000. Of this increase, $3.6 million, or 86.9%, is
attributable to sling product sales acquired from Influence and the balance of
the increase was primarily due to the growth in erectile dysfunction and other
incontinence products. Foreign net sales decreased $0.1 million, or 3.0%, from
$3.9 million in the three-month period ended September 30, 1999, to $3.8 million
in the three-month period ended September 30, 2000. This revenue decrease was
across all product lines and was heavily influenced by negative currency
translation costs of approximately $0.3 million, compared to the same period in
1999.
COST OF SALES
Cost of sales as a percentage of net sales decreased from 23.0% in the
three-month period ended September 30, 1999, to 20.9% in the three-month period
ended September 30, 2000. This decrease in cost of sales is attributable to a
combination of manufacturing efficiencies led by reduced scrap and lower
warranty costs.
MARKETING AND SALES
Marketing and sales costs increased $1.5 million, or 18.9%, from $7.6 million in
the three-month period ended September 30, 1999, to $9.1 million for the
three-month period ended September 30, 2000. Approximately $1.1 million of this
increase was attributable to marketing and the sales force that focuses on the
sling product sales acquired from Influence in December 1999. As a percentage of
sales, marketing and sales costs decreased from 39.0% in the three-month period
ended September 30, 1999, to 38.5% in the three-month period ended September 30,
2000.
GENERAL AND ADMINISTRATIVE
General and administrative costs increased $1.1 million, or 53.8%, from $2.0
million in the three-month period ended September 30, 1999, to $3.1 million for
the three-month period ended September 30, 2000. This increase in costs is
attributable to infrastructure expansion to support the Influence acquisition.
RESEARCH AND DEVELOPMENT
Research and development costs increased $0.6 million, or 27.0%, from $2.4
million in the three-month period ended September 30, 1999, to $3.0 million for
the three-month period ended September 30, 2000. This increased spending
supports our strategic emphasis on internal new product development. We also
added a number of research and development personnel through our acquisition of
Influence.
11
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AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased $1.2 million, or 124.3%, from $1.0 million
in the three-month period ended September 30, 1999, to $2.2 million for the
three-month period ended September 30, 2000. Amortization related to the
Influence acquisition added $1.0 million to costs in 2000 versus the same
period in 1999.
INTEREST EXPENSE
Interest expense increased $0.1 million, or 7.9%, from $1.7 million in the
three-month period ended September 30, 1999, to $1.8 million in the three-month
period ended September 30, 2000. The increase was due to higher interest rates
in 1999 that were partially offset by reduced borrowing levels in the last half
of the three-month period ended September 30, 2000.
INCOME TAX EXPENSE
Income tax expense increased $0.1 million for the three-month period ended
September 30, 2000, compared to the same period in 1999. Effective tax rate
comparisons between the three-month period ended September 30, 1999 and 2000 are
not meaningful as permanent non-tax deductible expenses exceed pretax income in
2000.
NET INCOME
Net loss for the three-month period ended September 30, 2000, was $0.3 million
or $.02 per share, versus net income of $0.7 million during the same period in
1999. Earnings before interest, taxes, and amortization (EBITA) was $4.2 million
in 2000 versus $3.9 million in the 1999 period.
Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September
30, 1999
NET SALES
Net sales increased $13.8 million, or 23.2%, from $59.8 million in the
nine-month period ended September 30, 1999, to $73.6 million in the nine-month
period ended September 30, 2000. Of this increase, 80.5% was attributable to
incontinence product sales. Incontinence sales related to sling products
acquired as part of the Influence acquisition in December 1999, amounted to
$10.4 million, or 75.4%, of our nine-month sales increase in 2000 over 1999.
Erectile dysfunction sales increased 10.9% mostly due to an increase in units
sold.
Increased sales of our incontinence and erectile dysfunction products were
offset by a decline in sales in our prostate products. Sales of our UroLume
stents decreased $0.8 million in the first nine months of 2000 compared to the
first nine months of 1999 due to a recall. This problem was corrected in the
first quarter of 2000 and sales of this product have been returning to
pre-recall levels since March 2000.
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Net sales in the United States increased $14.2 million, or 31.2 %, from $45.7
million in the nine-month period ended September 30, 1999, to $59.9 million in
the nine-month period ended September 30, 2000. Of this increase, $10.0 million,
or 70.0%, is attributable to sling product sales acquired from Influence and the
balance of the increase was due to the growth in sales from erectile dysfunction
and other incontinence products.
Foreign net sales decreased $0.4 million, or 2.7%, from $14.1 million in the
nine-month period ended September 30, 1999, to $13.7 million in the nine-month
period ended September 30, 2000. Greater sales of erectile dysfunction products
were more than offset by decreased sales of incontinence and prostate products.
The net decrease in sales revenue was heavily influenced by negative currency
translation costs of approximately $1.1 million, compared to the same period in
1999.
COST OF SALES
Cost of sales as a percentage of net sales decreased from 42.8% in the
nine-month period ended September 30, 1999, to 22.3% in the nine-month period
ended September 30, 2000. Our cost of sales in the first nine months of 1999
were negatively impacted because our inventories were recorded at fair market
value at the date of our acquisition from Pfizer. Some of this inventory was
sold during the first three months of 1999 resulting in an $11.6 million charge
to cost of sales. Excluding this charge, cost of sales as a percentage of net
sales was 23.4%.
MARKETING AND SALES
Marketing and sales costs increased $6.9 million, or 31.5%, from $22.0 million
in the nine-month period ended September 30, 1999, to $28.9 million for the
nine-month period ended September 30, 2000. Approximately $3.8 million of this
increase was attributable to marketing and the sales force that focuses on the
sling product sales acquired from Influence in December 1999. As a percentage of
sales, marketing and sales costs increased from 36.8% in the nine-month period
ended September 30, 1999, to 39.3% in the nine-month period ended September 30,
2000. This increase is due to sling product sales and marketing costs being
higher as a percentage of sales than our ratios prior to the Influence
acquisition.
GENERAL AND ADMINISTRATIVE
General and administrative costs increased $3.0 million, or 52.1%, from $5.7
million in the nine-month period ended September 30, 1999, to $8.7 million for
the nine-month period ended September 30, 2000. This increase in costs is partly
attributable to accounting, information technology, and general management
functions necessary to support the operations acquired from Influence.
RESEARCH AND DEVELOPMENT
Research and development costs increased $2.1 million, or 30.4%, from $6.9
million in the nine-month period ended September 30, 1999, to $9.0 million for
the nine-month period ended September 30, 2000. This increased spending supports
our strategic emphasis on internal new product development as described in the
following paragraphs and later in a section titled "Acquired In-Process Research
and Development Projects." We also added a number of research and development
personnel through our acquisition of Influence.
13
<PAGE> 14
In mid-2000, we launched the InVance male sling system, a novel approach to
treating stress urinary incontinence. Sling procedures are rapidly gaining
acceptance as a more effective treatment for this type of incontinence. The
InVance sling is implanted in a minimally invasive procedure in a hospital
outpatient setting, and offers immediate relief and minimal recovery time. The
product has been well received but a limited supply of sling material has
constrained sales of the device. We are negotiating with suppliers to improve
the availability of materials.
We plan to introduce a next-generation sling procedure for female patients
suffering from stress urinary incontinence. This less-invasive surgery can be
completed in less than an hour on a hospital outpatient basis. The Staple-Tac, a
product used in the sling procedure, is in development and scheduled for an
early 2001 market launch.
In the erectile dysfunction area, we have developed an antimicrobial-treated
penile prosthesis, an enhancement of its market-leading product. In August, we
submitted a PMA supplement to the FDA requesting approval in the U.S. The
Canadian regulatory agency, Health Canada Therapeutic Products Programme,
recently approved the Company's antimicrobial treated penile prosthesis, and the
first implants in that country are scheduled for the fourth quarter of this
year.
We have received CE Mark approval for ProstaJect, a new technology for the
treatment of benign prostatic hyperplasia (BPH) (enlarged prostate disease). The
ProstaJect device ablates tissue in the prostate using dehydrated alcohol. We
have initiated European marketing trials and are targeting a mid-year 2001
launch in many markets outside of the U.S. In the U.S., we plan to submit an
Investigational New Drug (IND) application to the FDA in the fourth quarter of
2000.
TRANSITION AND REORGANIZATION
In the first six months of 1999, we completed an assessment of senior management
personnel needs and also completed a strategic review of our research and
development function. We accrued $3.0 million of transition and reorganization
expenses as a result of this review. These costs primarily related to employee
termination benefits and executive search fees. In the first six months of 2000,
we completed another assessment of management personnel needs. We accrued $1.0
million of transition and reorganization expenses as a result of this review.
These costs are primarily related to employee termination benefits.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased $3.2 million, or 110.2%, from $3.0 million
in the nine-month period ended September 30, 1999, to $6.2 million for the
nine-month period ended September 30, 2000. Amortization related to the
Influence acquisition added $3.0 million to costs in 2000 versus the same period
in 1999.
ROYALTY AND OTHER INCOME (EXPENSE)
Royalty and other income decreased $0.8 million, or 26.8%, for the nine-month
period ended September 30, 2000, compared to the same period in 1999. During
1999, we benefited from a one-time $0.5 million contractual research and
development project reimbursement.
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INTEREST EXPENSE
Interest expense increased $0.9 million, or 17.0%, from $5.0 million in the
nine-month period ended September 30, 1999, to $5.9 million in the nine-month
period ended September 30, 2000. This increase is attributable to a combination
of higher borrowing levels and interest rates in 2000 versus 1999.
INCOME TAX EXPENSE
Income tax expense increased $3.9 million for the nine-month period ended
September 30, 2000, compared to the same period in 1999. Effective tax rate
comparisons between the nine-month period ended September 30, 1999 and 2000 are
not meaningful as permanent non-tax deductible expenses exceed pretax income in
2000.
NET INCOME
Net loss for the nine-month period ended September 30, 2000, was $0.9 million or
$.06 per share, versus a net loss of $5.1 million during the same period last
year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $12.1 million as of September 30, 2000, as
compared to $6.9 million as of December 31, 1999.
CASH PROVIDED FROM AND USED IN OPERATIONS
In the first nine months of 2000, our operations provided $6.7 million of cash
as compared to $10.0 million of cash provided from operations in the first nine
months of 1999. Non-cash operating expenses increased $4.4 million in the
nine-month period ended September 30, 2000, compared to the same period in 1999.
Most of this increase is attributable to additional intangible amortization
related to the Influence acquisition in December 1999. During 1999, our
operating activities were significantly impacted by the $11.6 million non-cash
charge related to the acquisition write-up of inventories and the collection of
$6.8 million of receivables from former affiliates.
CASH USED IN INVESTING ACTIVITIES
In the first nine months of 2000, we completed implementation of new software
systems. We invested $1.3 million in property and equipment during the period
primarily related to this project. We paid $4.1 million in contingent purchase
price payments related to Influence. We paid $1.0 million on a second
installment related to a patent purchase. We also paid $1.6 million in up-front
financing fees on our senior credit facility.
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CASH PROVIDED FROM FINANCING ACTIVITIES
In April 2000, we established a new credit facility. The new facility consists
of a $65.0 million term note, a $35.0 million guaranteed note, and a $15.0
million guaranteed revolving line of credit. In August 2000, we received $63.3
million in net proceeds from our Initial Public Offering of common stock and
exercise of stock options. We used these proceeds to pay $35.0 million
outstanding under the guaranteed note and approximately $6.0 million under the
guaranteed revolving line of credit. At June 30, 2000 and September 30, 2000, we
also made quarterly principal payments aggregating $4.0 million under a term
note. On September 30, 2000, we also prepaid $15.0 million under the term note
reducing required quarterly principal payments. The term note now requires
quarterly principal payments of $1.5 million through March 2002, $1.9 million
from June 2002 through March 2003, $2.3 million from June 2003 through March
2004, and $2.5 million from June 2004 through March 2006. We continue to
maintain the $15.0 million revolving line of credit which is guaranteed by our
principal shareholder. We are working with our lending group to remove this
guarantee, but have no certainty if or when this will happen.
CASH COMMITMENTS
Our acquisition of Influence obligates us to make contingent purchase price
payments of up to $10.0 million if various milestones related to transitional
and integration activities are completed by various dates ending on December 17,
2002. To date, we have made approximately $4.1 million of these contingent
payments. In addition, we are required to make contingent purchase price
payments of up to approximately $10 million depending on the outcome of our
litigation with Boston Scientific Corporation. We believe that our current cash
balances together with our funds available under our senior credit facility
will be sufficient to finance our current operations and planned capital
expenditure requirements for at least the next twelve months.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT PROJECTS
In connection with our acquisitions during 1999, we conducted a valuation of the
intangible assets acquired. Based on this valuation, we assigned $7.4 million to
purchased in-process research and development, or IPR&D. A brief description of
our acquired in-process research and development projects is set forth below:
INFLUENCE: INVANCE
The InVance, formerly Straight-In, is a male sling fixation system. For the
IPR&D valuation, we estimated that the product was 80% complete, and we
currently estimate that the product is 95% complete. An initial launch occurred
in mid-2000. The second design iteration has been verified and high volume
production tooling is scheduled to be completed in the fourth quarter of 2000.
The product has FDA approval and we plan to fully introduce it to the market by
the end of 2000.
INFLUENCE: NEXT GENERATION SLING SYSTEMS
We have two next generation sling systems under development: No-Tac and
Staple-Tac. The No-Tac does not require a metal implant in the pubic bone. For
the IPR&D valuation, we
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estimated that this product was 60% complete, and we currently estimate that
this product is 80% complete. As of the valuation date, we estimated costs to
complete to be $0.3 million. We currently estimate the cost to complete to be
$0.2 million. As of the valuation date, we estimated this product would be
released late in 2000. We currently expect this product to be released in early
2001.
The Staple-Tac is a pull-in inserter that is sutureless. For the IPR&D
valuation, we estimated that this product was 75% complete, and we currently
estimate that this product is 95% complete. The product is currently being
evaluated in a limited market release to ensure broad acceptance by urologists.
We expect to complete this limited launch in the first quarter of 2001. The cost
associated with the limited market release is approximately $0.1 million. The
product has FDA approval and full launch is expected in the first or second
quarter of 2001.
INFLUENCE: FLAST
The Flast is a device used to harvest human tissue for a sling procedure, and it
is in the late prototype stage. For the IPR&D valuation, we estimated that this
product was 75% complete. Our percent completion estimate has not changed since
that time. Our assessment of the economic viability has caused us to postpone
the release of this product. An increase in usage of synthetic material for
slings and better supply of dermis has reduced the demand for this product.
INFLUENCE: NEXTUS
NexTus is a soft tissue-anchoring device. For the IPR&D valuation, we estimated
that this product was 80% complete. Our percent completion estimate has not
changed since that time, although we believe that clinical costs will increase.
We initially estimated that the cost to complete would be $0.1 million, and we
currently estimate that this cost will be $0.3 million. We initially estimated
that we would release this product in 2001, pending regulatory approval. We are
assessing the market potential for this product along with the clinical outcome.
We plan to submit an IDE by the end of fourth quarter 2000, and pursue a variety
of applications in close cooperation with a key opinion-leading surgeon.
INFLUENCE: CLIP-IN
The Clip-In is a clip around the suture in place of a knot. For the IPR&D
valuation, we estimated that this product was 75% complete. Our percent
completion estimate has not changed since that time. We do not currently plan to
release this product based on our assessment of economic viability.
UROSURGE: NEXT GENERATION UROVIVE SYSTEM
The next generation UroVive system is a durable reversible microballoon system
to treat stress urinary incontinence. It includes a microballoon, a delivery
system, and a syringe filled with biocompatible hydrogel. At the IPR&D valuation
date, we estimated that the microballoon was 60% complete and the delivery
system was 40% complete. At the time of valuation, clinical trials were
underway, and we estimated the cost of completion to be $0.5 million. The
project has since been revised and development is expected to be completed
during the first quarter of 2001. The FDA requirements for this product have
significantly increased due to the acquired
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clinical data not being suitable for submission. We plan to launch this product
in the first quarter of 2001 internationally. We have suspended U.S. clinicals
and currently are not pursuing a U.S. launch. The company has assessed the
recoverability of goodwill from this technology's future operations using cash
flows of the acquired business as a measure. Under this approach, the carrying
value of goodwill would be reduced if it becomes probable that the estimated
expected undiscounted future cash flows of the related business are less than
the carrying amount of goodwill over its remaining amortization period. Based
upon this analysis, no impairment exists.
CERTAIN IMPORTANT FACTORS
Except for the historical information contained herein, the disclosures in this
Form 10-Q are forward-looking statements made under the Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated. These risks and
uncertainties include: continued use of non-invasive treatment alternatives;
continued physician use and endorsement of the company's products; increased
supply of sling material; increasing penetration of the penile implant market;
successful introduction of new products and product improvements; actions
related to reimbursement for the company's products and potential product
recalls. These risks and other relevant risks are described in more detail in
the Company's Final Prospectus, dated August 10, 2000, for its initial public
offering of common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
The exhibits to this Quarterly Report on Form 10-Q
are listed in the Exhibit Index beginning on page 21
of this Report.
(b) Reports on Form 8-K:
No report of Form 8-K was filed by the Company
during the quarter ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN MEDICAL SYSTEMS
HOLDINGS, INC.
November 13, 2000 By /s/ Douglas W. Kohrs
----------------------------------- -----------------------------------
Date Douglas W. Kohrs
Chief Executive Officer
November 13, 2000 By /s/ Gregory J. Melsen
----------------------------------- -----------------------------------
Date Gregory J. Melsen
Vice President-Finance, and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
EXHIBIT INDEX TO QUARTERLY REPORT
ON FORM 10-Q
For the Quarter Ended September 30, 2000
<TABLE>
<CAPTION>
Item No. Description Method of Filing
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation Filed herewith electronically
3.2 Bylaws, as amended through August 10, 2000 Filed herewith electronically
27.1 Financial Data Schedule Filed herewith electronically
99.1 Audit Committee Charter Filed herewith electronically
</TABLE>
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