SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- -------
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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 0-10521
ADVANCED NEUROMODULATION SYSTEMS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Texas 75-1646002
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6501 Windcrest Drive, Plano, Texas 75024
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(972) 309-8000
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant:(1)has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Number of Shares Outstanding at
Title of Each Class November 5, 1999
------------------------ ---------------------------------
<S> <C>
Common stock, $.05 Par Value 7,381,879
</TABLE>
<PAGE>
ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
PART I. Financial Information 2
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 3-4
Condensed Consolidated Statements of Operations
For the Three Months and Nine Months Ended
September 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30, 1999 and 1998 6
Condensed Consolidated Statements of Stockholders'
Equity For the Year Ended December 31, 1998
and the Nine Months Ended September 30, 1999 7
Notes to Condensed Consolidated
Financial Statements 8-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-21
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 21
PART II. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
-1-
<PAGE>
PART I
FINANCIAL INFORMATION
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
September 30,
1999 December 31,
Assets (Unaudited) 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,192,217 $ 11,697,209
Marketable securities 489,252 566,072
Receivables:
Trade accounts, less allowance for
doubtful accounts of $143,315 in 1999
and $249,607 in 1998 3,703,617 3,135,615
Interest and other 58,450 124,511
------------- -------------
Total receivables 3,762,067 3,260,126
------------- -------------
Inventories:
Raw materials 2,618,543 1,010,865
Work-in-process 578,263 415,442
Finished goods 1,596,939 1,216,955
------------- -------------
Total inventories 4,793,745 2,643,262
------------- -------------
Net assets of building and land sold in 1999 --- 6,310,985
Deferred income taxes 408,107 887,609
Prepaid expenses and other current assets 1,171,608 852,025
------------- -------------
Total current assets 22,816,996 26,217,288
------------- -------------
Property, plant and equipment:
Leasehold improvements 593,311 ---
Furniture and fixtures 3,093,051 882,968
Machinery and equipment 3,121,528 2,066,514
------------- -------------
6,807,890 2,949,482
Less accumulated depreciation and amortization 1,592,013 1,060,890
------------- -------------
Net property, plant and equipment 5,215,877 1,888,592
------------- -------------
Cost in excess of net assets acquired, net of
accumulated amortization of $2,152,069 in 1999
and $1,734,617 in 1998 8,659,595 9,077,047
Patents, net of accumulated amortization of
$427,492 in 1999 and $302,281 in 1998 2,966,572 3,054,283
Purchased technology from acquisitions, net of
accumulated amortization of $1,200,000 in 1999
and $1,000,000 in 1998 2,800,000 3,000,000
Tradenames, net of accumulated amortization of
$562,500 in 1999 and $468,750 in 1998 1,937,500 2,031,250
Other assets, net of accumulated amortization of
$132,379 in 1999 and $68,993 in 1998 966,592 216,908
------------- -------------
$ 45,363,132 $ 45,485,368
============= =============
</TABLE>
-3-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
September 30,
1999 December 31,
Liabilities and Stockholders' Equity (Unaudited) 1998
- ------------------------------------ ------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,935,738 $ 904,899
Short-term notes payable and current maturities
of long-term notes payable --- 3,633,475
Deferred revenue --- 900,000
Accrued salary and employee benefit costs 561,071 562,618
Income taxes payable 1,379,701 2,276,655
Accrued tax abatement liability 969,204 969,204
Other accrued expenses 191,175 544,295
------------- -------------
Total current liabilities 5,036,889 9,791,146
------------- -------------
Deferred income taxes 2,290,599 2,390,475
Commitments and contingencies
Stockholders' equity:
Common stock of $.05 par value. Authorized
25,000,000 shares; issued 8,708,367 shares
in 1999 and 8,708,367 in 1998 435,418 435,418
Additional capital 40,331,753 41,156,582
Retained earnings (deficit) 5,576,128 (308,859)
Cost of common shares in treasury; 1,166,988
shares in 1999 and 1,073,751 in 1998 (8,126,194) (7,848,634)
Accumulated other comprehensive income (loss),
net of tax benefit of $93,482 in 1999 and
$67,363 in 1998 (181,461) (130,760)
------------- -------------
Total stockholders' equity 38,035,644 33,303,747
------------- -------------
$ 45,363,132 $ 45,485,368
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months and Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue-product sales $5,488,479 $3,706,402 $15,253,331 $12,860,529
Net revenue-contract research
and development --- 1,300,000 8,900,000 1,900,000
----------- ----------- ----------- -----------
Total net revenue 5,488,479 5,006,402 24,153,331 14,760,529
Costs and expenses:
Cost of product sales 2,074,531 1,049,089 5,020,346 3,544,290
Research and development 913,001 869,647 2,703,141 1,940,129
Marketing 1,588,804 1,223,392 4,630,536 3,461,254
Amortization of intangibles 305,751 292,544 899,801 875,550
General and administrative 677,243 706,726 2,033,322 1,946,339
----------- ----------- ----------- ------------
5,559,330 4,141,398 15,287,146 11,767,562
----------- ----------- ----------- ------------
Earnings (loss) from
operations (70,851) 865,004 8,866,185 2,992,967
----------- ----------- ----------- ------------
Other income (expenses):
Interest expense --- (78,395) (44,861) (254,133)
Interest and other income 168,609 250,466 609,642 665,882
Gain (loss) on sale of assets
and marketable securities --- (4,300) --- (4,381)
----------- ----------- ----------- ------------
168,609 167,771 564,781 407,368
----------- ----------- ----------- ------------
Earnings from continuing
operations before income
taxes 97,758 1,032,775 9,430,966 3,400,335
Income taxes (benefit) (118,377) 419,138 3,545,979 1,363,866
----------- ----------- ----------- ------------
Net earnings from
continuing operations 216,135 613,637 5,884,987 2,036,469
----------- ----------- ----------- ------------
Discontinued Operations:
Loss from discontinued
operations, net of income
tax benefit of $129,711 --- --- --- (211,634)
Gain on sale of assets of
discontinued operations, net
of income tax expense of
$3,037,968 --- --- --- 5,200,575
----------- ----------- ----------- ------------
Net earnings from
discontinued operations --- --- --- 4,988,941
----------- ----------- ----------- ------------
Net earnings $ 216,135 $ 613,637 $5,884,987 $ 7,025,410
=========== =========== =========== ============
Basic earnings per share:
Continuing operations $ .03 $ .07 $ .77 $ .24
=========== =========== =========== ============
Discontinued operations $ --- $ --- $ --- $ .58
=========== =========== =========== ============
Net earnings $ .03 $ .07 $ .77 $ .82
=========== =========== =========== ============
Diluted earnings per share:
Continuing operations $ .03 $ .07 $ .73 $ .23
=========== =========== =========== ============
Discontinued operations $ --- $ --- $ --- $ .57
=========== =========== =========== ============
Net earnings $ .03 $ .07 $ .73 $ .80
=========== =========== =========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings from continuing operations $ 5,884,987 $ 2,036,469
------------- -------------
Adjustments to reconcile net earnings from
continuing operations to net cash provided by
operating activities
Depreciation and amortization 1,409,006 1,328,747
Loss on sale of assets and marketable
securities --- 4,381
Deferred income taxes 405,745 (866,377)
Changes in assets and liabilities:
Receivables (501,941) (341,173)
Inventories (2,150,483) (17,039)
Prepaid expenses and other assets (1,133,585) (1,404)
Deferred revenue (900,000) 2,100,000
Income taxes payable (859,015) 2,197,942
Accounts payable 1,030,839 270,044
Accrued expenses (413,300) 576,825
------------- -------------
Total adjustments (3,112,734) 5,251,946
------------- -------------
Net cash provided by continuing
operations 2,772,253 7,288,415
Net cash provided by discontinued
operations --- 59,049
------------- -------------
Net cash provided by operating
activities 2,772,253 7,347,464
------------- -------------
Cash flows from investing activities:
Net proceeds from sales of marketable securities --- 851,623
Purchases of marketable securities --- (106,001)
Additions to property, plant and equipment-
continuing operations (3,858,408) (807,222)
Acquisition of patent rights --- (250,000)
Additions to property, plant and equipment-
discontinued operations --- (12,060)
Net proceeds from sale of discontinued operations 6,354,965 21,754,179
------------- -------------
Net cash provided by investing
activities 2,496,557 21,430,519
------------- -------------
Cash flows from financing activities:
Exercise of stock options 533,435 819,742
Purchase of treasury stock (1,673,762) (6,430,790)
Payment of short-term obligations (3,633,475) (8,081,763)
Payment of long-term debt --- (131,499)
------------- -------------
Net cash used in financing activities (4,773,802) (13,824,310)
------------- -------------
Net increase in cash and cash equivalents 495,008 14,953,673
Cash and cash equivalents at beginning of year 11,697,209 747,828
------------- -------------
Cash and cash equivalents at September 30 $ 12,192,217 $ 15,701,501
============= =============
Supplemental cash flow information is presented
below:
Income taxes paid $ 3,999,250 $ 32,300
============= =============
Interest paid $ 44,861 $ 292,977
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-6-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Retained Other Total
Common Stock Additional Earnings Comprehensive Treasury Stockholders'
Share Amount Capital (Deficit) Income (Loss) Stock Equity
------------- ------------ -------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 8,635,509 $ 431,775 $ 40,780,717 $ (7,268,061) $ (38,494) --- $ 33,905,937
Net earnings --- --- --- 6,959,202 --- --- 6,959,202
Adjustment to
unrealized
losses on
marketable
securities --- --- --- --- (92,266) --- (92,266)
-------------
Comprehensive
Income 6,866,936
-------------
Shares issued upon
exercise of
stock options 72,858 3,643 160,554 --- --- --- 164,197
Tax benefit from
employee stock
option exercise --- --- 119,509 --- --- --- 119,509
Compensation
expense
resulting from
changes to stock
options --- --- 1,004,654 --- --- --- 1,004,654
Issuance of
184,874 shares
from treasury
for stock option
exercises --- --- (908,852) --- --- 1,562,421 653,569
Purchase of
1,258,625
treasury shares,
at cost --- --- --- --- --- (9,411,055) (9,411,055)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at December
31, 1998 8,708,367 435,418 41,156,582 (308,859) (130,760) (7,848,634) 33,303,747
Net earnings --- --- --- 5,884,987 --- --- 5,884,987
Adjustment to
unrealized
losses on
marketable
securities --- --- --- --- (50,701) --- (50,701)
-------------
Comprehensive
Income 5,834,286
-------------
Tax benefit from
employee stock
option exercise --- --- 37,938 --- --- --- 37,938
Issuance of
148,138 shares
from treasury
for stock option
exercises --- --- (862,767) --- --- 1,396,202 533,435
Purchase of
241,375 treasury
shares, at cost --- --- --- --- --- (1,673,762) (1,673,762)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at
September 30, 1999 8,708,367 $ 435,418 $ 40,331,753 $ 5,576,128 $ (181,461) $ (8,126,194) $ 38,035,644
============= ============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-7-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(1) BUSINESS
Continuing Operations
Advanced Neuromodulation Systems, Inc. (the "Company" or "ANS")
designs, develops, manufactures and markets implantable medical device
systems used to manage chronic intractable pain and other disorders of
the central nervous system. ANS revenues are derived primarily from
sales throughout the United States, Europe and Australia.
The business described above was acquired in March 1995. All other
businesses of the Company were sold in January 1998 as described below
under Discontinued Operations.
The research and development, manufacture, sale and distribution of
medical devices is subject to extensive regulation by various public
agencies, principally the Food and Drug Administration and
corresponding state, local and foreign agencies. Product approvals and
clearances can be delayed or withdrawn for failure to comply with
regulatory requirements or the occurrence of unforeseen problems
following initial marketing.
In addition, ANS products are purchased primarily by hospitals and
other users who then bill various third party payers including
Medicare, Medicaid, private insurance companies and managed care
organizations. These third party payers reimburse fixed amounts for
services based on a specific diagnosis. The impact of changes in third
party payer reimbursement policies and any amendments to existing
reimbursement rules and regulations that restrict or terminate the
eligibility of ANS products could have an adverse impact on the
Company's financial condition and results of operations.
Discontinued Operations
On January 30, 1998, the Company sold its cardiovascular and
intravenous fluid product lines ("CVS Operations"), including its
MPS(R) myocardial protection system product line, to Atrion Corporation
(see Note 8 - "Sale of CVS Operations/Discontinued Operations"). The
CVS Operations have been accounted for as discontinued operations in
the Condensed Consolidated Financial Statements for the nine months
ended September 30, 1998. During October 1998, Atrion also exercised an
option to acquire the Company's land, office and manufacturing facility
for $6.5 million. The transaction was closed on February 1, 1999. Net
assets of the land and facility have been presented on the Condensed
Consolidated Balance Sheet at December 31, 1998, as net assets of
building and land sold in 1999.
(2) CONDENSED FINANCIAL STATEMENTS
The unaudited consolidated financial information contained in this
report reflects all adjustments (consisting of normal recurring
accruals) considered necessary, in the opinion of management, for a
fair presentation of results for the interim periods presented. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
-8-
<PAGE>
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the financial statements
and notes thereto included in the Company's December 31, 1998 Annual
Report on Form 10-K. The results of operations for periods ended
September 30, 1999 are not necessarily indicative of operations for the
full year.
The consolidated financial statements include the accounts of Advanced
Neuromodulation Systems, Inc. and subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(3) MARKETABLE SECURITIES
The following is a summary of available-for-sale securities at
September 30, 1999:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Investment grade preferred
securities $ 554,596 $ --- $ 190,114 $ 364,482
Publicly traded limited
partnerships 51,875 --- 31,250 20,625
Real estate investment trusts 141,590 --- 37,863 103,727
Other 16,134 --- 15,716 418
----------- ----------- ----------- ------------
$ 764,195 $ --- $ 274,943 $ 489,252
=========== =========== =========== ============
</TABLE>
Estimated fair value is determined by the closing prices of the
respective available-for-sale securities from the New York Stock
Exchange and NASDAQ markets at each financial reporting period.
At September 30, 1999, no individual security represented more than 33
percent of the total portfolio or 1 percent of total assets. The
Company did not have any investments in derivative financial
instruments at September 30, 1999.
(4) NOTES PAYABLE
Notes payable at September 30, 1999 and December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Mortgage notes $ --- $ 3,633,475
Less current maturities --- 3,633,475
------------- -------------
Long-term notes payable $ --- $ ---
============= =============
</TABLE>
In 1993, the Company entered into two mortgage notes relating to its
principal office and manufacturing facility. The first note, in the
amount of $2,825,332 at December 31, 1998, bore interest at 8.59
percent and had a twenty-five year amortization. The Allen facility and
land secured the note. The second note, in the amount of $808,143 at
December 31, 1998, was related to equipment and furnishings and bore
interest at 7.94 percent. The note had a ten-year amortization and was
collateralized by the equipment and furnishings. On February 1, 1999,
-9-
<PAGE>
the Company repaid the two mortgage notes in connection with the sale
of the land and facility to Atrion Corporation (see Note 8 - "Sale of
CVS Operations/Discontinued Operations").
(5) COMMITMENTS AND CONTINGENCIES
In February 1999, the Company entered into a sixty-three month lease
agreement on 40,000 square feet of space located in the North Dallas
area. The Company relocated its operations to the leased facility in
May 1999. Under the terms of the lease agreement, the Company received
three months free rent and the monthly rental rate for the remaining
term of the lease is $48,308. The monthly rental rate includes certain
operating expenses such as property taxes on the facility, insurance,
landscape and maintenance and janitorial services. The Company also has
a first right of refusal to acquire the facility. The Company spent
approximately $2.3 million for furniture and equipment, leasehold
improvements, computer systems, telephone systems and manufacturing
clean room space for the leased facility. Other than the facility
lease, the Company has no material commitments under noncancelable
operating leases at September 30, 1999.
The Company is a party to product liability claims related to ANS
implantable stimulation devices. Product liability insurers have
assumed responsibility for defending the Company against these claims.
While historically product liability claims for ANS stimulation devices
have not resulted in significant monetary liability for the Company
beyond its insurance coverage, there can be no assurances that the
Company will not incur significant monetary liability to the claimants
if such insurance is inadequate or that the Company's stimulation
business and future ANS product lines will not be adversely affected by
these product liability claims.
Except for such product liability claims and other ordinary routine
litigation incidental or immaterial to its business, the Company is not
currently a party to any other pending legal proceeding. The Company
maintains general liability insurance against risks arising out of the
normal course of business.
(6) INCOME TAXES
The Company recorded income tax expense from continuing operations
during the nine months ended September 30, 1999 and 1998, of $3,545,979
and $1,363,866, an overall effective tax rate of 37.6 percent and 40.1
percent, respectively. The Company's expense for amortization of costs
in excess of net assets acquired (goodwill) is not deductible for tax
purposes, and, when combined with a provision for state taxes, results
in the higher effective tax rate compared to the U.S. statutory rate
for corporations of 34 percent. During the nine months ended September
30, 1998, the Company also recorded income tax expense from
discontinued operations of $2,908,257 from the gain on the sale of the
CVS Operations (see Note 8 - "Sale of CVS Operations/Discontinued
Operations").
(7) EARNINGS PER SHARE
Basic earnings per share is computed based only on the weighted average
number of common shares outstanding during the period. Diluted earnings
per share is computed using the additional dilutive effect, if any, of
stock options and warrants using the treasury stock method based on the
average market price of the stock during the period. The following
table presents the reconciliation of basic and diluted shares:
-10-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Weighted-average
shares outstanding
(basic shares) 7,541,379 8,327,546 7,630,354 8,528,789
Effect of dilutive
instruments
Stock options 508,444 181,713 399,865 218,507
Warrants 29,202 17,368 18,320 19,835
----------- ----------- ----------- ------------
Dilutive potential
common shares 537,646 199,081 418,185 238,342
----------- ----------- ----------- ------------
Diluted shares 8,079,025 8,526,627 8,048,539 8,767,131
=========== =========== =========== ============
</TABLE>
For the three months and nine months ended September 30, 1999 and 1998,
the incremental shares used for dilutive earnings per share relate to
stock options and warrants whose exercise price was less than the
average market price in the underlying quarterly computations. Options
to purchase 524,300 shares at an average price of $8.88 were
outstanding at September 30, 1998 but were not included in the
computation of diluted earnings per share for the three months ended
September 30, 1998 because the options' exercise prices were greater
than the average market price of the common shares and, therefore, the
effect would be antidilutive. For the three months ended September 30,
1999, all options and warrants were included in the computation of
diluted earnings per share since all exercise prices were less than the
average market price of the common shares for the three month period in
1999.
(8) SALE OF CVS OPERATIONS/DISCONTINUED OPERATIONS
On January 30, 1998, the Company sold its cardiovascular and
intravenous fluid product lines, including its MPS(R) myocardial
protection system product line, to Atrion Corporation. The Company
received approximately $23 million from the sale and utilized $8.0
million of the proceeds to retire debt and $1.2 million to pay expenses
related to the transaction. The Company reported an after tax gain from
the sale of $5.2 million during the nine months ended September 30,
1998. This gain is net of $1 million of compensation expense recorded
as a result of changes made to the stock options held by employees of
the CVS Operations. These changes included accelerated vesting of the
unvested portion of these terminated employee options as a result of
the sale and extension of the normal 90-day exercise period subsequent
to termination to one year for these options. The Company also reported
an after tax loss of $212,000 during the nine months ended September
30, 1998, from operating losses of the CVS Operations prior to the sale
to Atrion.
As part of the sale of the CVS Operations to Atrion, the Company
granted Atrion a nine-month option to acquire the Company's principal
office and manufacturing facility for $6.5 million. During October
1998, Atrion exercised its option to acquire the facility. When the
facility was built in 1993, the Company entered a ten-year agreement
with the City of Allen granting tax abatements to the Company if a
minimum job base and personal property base was maintained in the City
of Allen. The agreement provided for the repayment of abated taxes if
the Company defaulted under the agreement. During the fourth quarter of
1998 the Company recorded a pretax expense of $969,204 in connection
with the abated taxes. In April 1999, the Company was successful in
petitioning the City of Allen to assign the abatement agreement to
Atrion. In July 1999, the Company, Atrion and the City of Allen
-11-
<PAGE>
executed an assignment agreement under which Atrion (as successor in
interest to the Company) must continue to meet the conditions of the
original tax abatement agreement until August 2003. The City preserved
its rights to collect previously abated taxes if Atrion fails to comply
with its obligations any time prior to August 2003. The Company retains
monetary liability for the amount of abated taxes, even after
assignment, because pursuant to the purchase and sale agreement with
Atrion, the Company indemnified Atrion from any tax abatement
liabilities that accrued to the City of Allen prior to the sale of the
CVS Operations in January 1998. If Atrion meets the minimum
requirements under the agreement until August 2003, then no payment
will be required. If no payment is required, the Company intends on
reversing the obligation of $969,204 in September 2003.
Operating results of the CVS Operations have been reclassified and
reported as discontinued operations. Summary operating results for the
nine months ended September 30, 1998 for the CVS Operations were as
follows (the 1998 period included results until the sale on January 30,
1998):
<TABLE>
<CAPTION>
One Month Ended
January 30, 1998
----------------
<S> <C>
Revenue $ 1,111,992
Gross profit 206,481
Earnings (loss) from operations (307,120)
Interest expense (34,225)
----------------
Loss before income tax benefit (341,345)
Income tax benefit 129,711
----------------
Net loss $ (211,634)
================
</TABLE>
On February 1, 1999, the sale of the facility to Atrion was
consummated. The Company repaid the mortgage debt on the facility at
the closing of the transaction (see Note 4 - "Notes Payable"). After
repayment of the mortgage debt and expenses related to the transaction,
the Company received $2.7 million of net proceeds. No material gain or
loss was recorded on the sale of the facility except related to the tax
abatement liability described above. The Company moved its operations
to a 40,000 square foot leased facility in the North Dallas area during
May 1999. Until that time, the Company leased space and equipment from
Atrion at a monthly expense of $48,175 and paid Atrion fifty percent of
certain facility operating expenses.
The expense of moving and transitioning into the new facility was
immaterial.
(9) COMPREHENSIVE INCOME
Total comprehensive income for 1998 and for the nine months ended
September 30, 1999 is reported in the Condensed Consolidated Statements
of Stockholders' Equity. Comprehensive income for the three months and
nine months ended September 30, 1999 and 1998 is as follows:
-12-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net earnings $ 216,135 $ 613,637 $5,884,987 $ 7,025,410
Other comprehensive
income (loss) (70,617) (18,557) (50,701) (104,311)
----------- ----------- ----------- ------------
Comprehensive income $ 145,518 $ 595,080 $5,834,286 $ 6,921,099
----------- ----------- ----------- ------------
</TABLE>
(10) PRODUCT DEVELOPMENT AGREEMENT
In June 1998, the Company entered an agreement with Sofamor Danek
Group, Inc. ("Sofamor Danek") under which the Company agreed to develop
and manufacture for Sofamor Danek, products and systems for use in Deep
Brain Stimulation ("DBS"). DBS products provide electrical stimulation
to certain areas of the brain and are intended to relieve the effects
of various neurological disorders, such as Parkinson's Disease and
Essential Tremor. Under terms of the agreement, the Company granted
Sofamor Danek exclusive worldwide rights to use, market and sell the
DBS products developed and manufactured by ANS. The Company received a
cash payment of $4 million upon execution of the agreement that was
being recognized into income as revenue based upon the estimated
percentage of completion of the development project. During the year
ended December 31, 1998, the Company recognized $3.1 million into
income as revenue. Due to the termination of the agreement discussed
below, the remaining $900,000 was recognized into income as revenue
during the first quarter of 1999 and is included in the Statement of
Operations for the nine month period ended September 30, 1999. The
agreement also called for ANS to receive four additional payments of $2
million each, to be recognized into income upon the satisfactory
completion of certain domestic and international regulatory milestones
over the next several years.
In December 1998, the Company and Sofamor Danek agreed to terminate the
June 1998 DBS agreement due to the impending merger of Sofamor Danek
and Medtronic, the Company's sole competitor in the DBS market. Under
the termination agreement, Sofamor Danek agreed to accelerate the $8
million in payments due the Company and the Company agreed to release
Sofamor Danek from further contractual obligations. The $8 million
payment was made in January 1999 and recognized into income as revenue
during the first quarter of 1999 and is included in the Statement of
Operations for the nine month period ended September 30, 1999.
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Consolidated Financial
Statements of the Company and the related Notes.
OVERVIEW
On January 30, 1998, we sold the assets of our CVS Operations, including our
MPS(R) myocardial protection system product line, to Atrion Corporation
("Atrion"). See Note 8 - "Sale of CVS Operations/ Discontinued Operations" of
the Notes to Condensed Consolidated Financial Statements. We received
approximately $23 million in cash from the sale. We also granted Atrion a
nine-month option to acquire our principal office and manufacturing facility in
Allen, Texas for $6.5 million. Atrion exercised the option to acquire the
facility during October 1998 and the transaction closed on February 1, 1999. We
repaid the outstanding mortgage debt on the facility at closing and received net
proceeds of $2.7 million after paying expenses related to the transaction. No
material gain or loss was realized on the sale of the facility. Until May 1999,
we leased space, furniture and equipment from Atrion at the monthly rate of
$48,125 and paid Atrion fifty percent of certain operating expenses. During May
1999 we moved our operations to a 40,000 square foot leased facility in Plano,
Texas, a northeast suburb of Dallas. The expense of moving and transitioning
into the new facility was immaterial.
We have accounted for the CVS Operations as discontinued operations in the
Consolidated Financial Statements for the nine months ended September 30, 1998.
In June 1998, we completed an agreement with Sofamor Danek Group, Inc. ("Sofamor
Danek") under which we would develop and manufacture for Sofamor Danek, products
and systems for use in Deep Brain Stimulation ("DBS"). See Note 10 - "Product
Development Agreement" of the Notes to Condensed Consolidated Financial
Statements. We received a payment of $4 million upon execution of the agreement
that was recognized into income as revenue based upon the estimated completion
of the development project. During the year ended December 31, 1998, we
recognized $3.1 million into income as revenue. The remaining $900,000 was
recognized into income as revenue during the first quarter of 1999 and is
included in the Statements of Operations for the nine month period ended
September 30, 1999. In January 1999, the agreement with Sofamor Danek was
terminated in conjunction with the merger of Sofamor Danek and Medtronic, Inc.
In connection with the termination, we received an additional payment of $8
million from Sofamor Danek, which was recognized into income as revenue during
the first quarter of 1999 and is included in the Statements of Operations for
the nine month period ended September 30, 1999.
Our strategy is to strengthen and broaden our neuromodulation technology
platforms and to ally ourselves with strategic partners who can help us leverage
ANS' core technology into other significant market segments beyond our focus on
the pain management market.
-14-
<PAGE>
RESULTS OF OPERATIONS
Comparison of the Three Months and Nine Months Ended September 30, 1999 and 1998
- --------------------------------------------------------------------------------
We reported net earnings of $216,000 or $.03 per diluted share for the three
months ended September 30, 1999, compared to $614,000 or $.07 per diluted share
in the same 1998 period. Net earnings for the three-month period in 1998
benefited from $1,300,000 of revenue recorded in connection with our former
agreement with Sofamor Danek. For the nine months ended September 30, 1999, we
reported net earnings of $5.88 million or $.73 per diluted share compared to
$7.03 million or $.80 per diluted share in the same 1998 period. The 1998 nine
month results included net earnings of $4.99 million from the net gain on the
sale of the discontinued CVS Operations, or $.57 per diluted share. Net earnings
for the nine-month period in 1999 benefited from $8.9 million of revenue
recorded in connection with our former agreement with Sofamor Danek.
Total net revenue from continuing ANS operations was $5.49 million for the three
months ended September 30, 1999 compared to $5.01 million in the comparable 1998
period. The 1998 period includes $1,300,000 of net revenue associated with our
former development agreement for DBS products with Sofamor Danek. Net revenue
from ANS product sales increased 48.1 percent to $5.49 million during the
three-month period ended September 30, 1999 compared to $3.71 million in the
same 1998 period. This increase in net revenue from product sales was the result
of higher unit sales volume of ANS' radio-frequency stimulation systems to treat
complex pain patterns, primarily in the United States. In early June 1999, we
launched in the United States our enhanced radio-frequency stimulation systems,
the Renew(TM) System. We expect to receive CE Mark approval in Europe for the
Renew System during the fourth quarter of 1999 and plan to begin selling the
Renew System in Europe in the first quarter of 2000. For the nine months ended
September 30, 1999, total net revenue from continuing ANS operations was $24.15
million compared to $14.76 million in the comparable 1998 period. The 1999
period includes $8.9 million and the 1998 period includes $1.9 million of net
revenue associated with our former development agreement with Sofamor Danek. Net
revenue from ANS product sales increased 18.6 percent to $15.25 million during
the 1999 period compared to $12.86 million in the comparable 1998 period. This
increase in net revenue from product sales was the result of higher unit sales
volume of ANS' radio-frequency stimulation systems used to treat complex pain
patterns, primarily in the United States. Our strategy is to expand our product
offerings to all segments of the neuromodulation market and therefore we have
increased our investment in research and development. These development projects
include an implantable pulse generator (IPG) for spinal cord stimulation, an
implantable pulse generator for deep brain stimulation and a low-cost constant
rate intrathecal drug pump. Through a strategic alliance with Tricumed, a German
corporation, we are also developing a programmable rate intrathecal drug pump
that we intend to market in the United States and internationally after
receiving the appropriate regulatory approvals.
During September 1999, an FDA panel recommended to the FDA reclassification of
our totally implantable pulse generator (IPG) for spinal cord stimulation to
treat pain of the trunk and/or limbs from a Class III device to a Class II
device. Regulatory requirements for approval of Class II devices are
significantly less than those required for Class III devices, thereby shortening
the approval process. We submitted a petition to the FDA to reclassify the
device in June 1999. We expect notification from the FDA on its decision before
the end of January 2000.
-15-
<PAGE>
A decision by the FDA to implement the panel recommendation would significantly
accelerate the launch of our IPG system for spinal cord stimulation in the
United States. If the FDA reclassification order is received, we anticipate
obtaining 510(k) pre-market notification clearance during the second half of
2000 and would launch the IPG system domestically upon receipt of the clearance.
In addition, we expect to receive CE mark approval for the IPG system in the
second half of 2000, at which time we would launch the IPG system in European
markets.
Today, the spinal cord stimulation (SCS) market for treating pain of the trunk
and limbs is estimated by industry analysts to approximate $140 million, and
is growing between 20 and 30 percent annually. The SCS market consists of two
product categories radio frequency (RF) stimulation systems and IPG stimulation
systems. The RF market segment, the only segment in which we currently sell
products, is approximately $40 million, and we are the technology leader with a
50 percent market share. Our advanced 16 channel, multiple-electrode, computer
programmable systems have been the product of choice to treat complex,
bilateral, multi-focal pain patterns that consume high levels of battery power.
Management believes the recent launch of the Renew system will further solidify
our market position. The IPG stimulation market segment is approximately $100
million and is dominated by one competitor. IPGs are used predominantly
for simple, unilateral pain patterns that do not require high energy levels to
treat. These systems are totally implantable, eliminating the need for the
patient to wear external hardware. Again as was discussed above, if the FDA
order to reclassify the IPG is received, we expect to launch our IPG stimulation
system in this larger market segment during the second half of 2000.
Gross profit from product sales increased to $3.41 million during the three
months ended September 30, 1999 compared to $2.66 million in 1998, due to the
increase in net revenue from product sales discussed above. Gross profit margin
from product sales decreased to 62.2 percent in 1999 compared to 71.7
percent in 1998, however, due principally to additional costs we incurred from
product transition and unexpected lower manufacturing yields related to the
Renew system. These additional costs of approximately $350,000 reduced gross
margin during the three months ended September 30, 1999, by 6.5%. By the end of
the third quarter of 1999, we believe we made significant progress in increasing
yields on the Renew manufacturing processes to acceptable levels, and continued
improvement is expected during the fourth quarter. In addition, gross profit
margins in the 1999 third quarter compared to the same period in 1998 were
impacted by an increase in manufacturing overhead expense in quality assurance
and manufacturing engineering for additional salary expense from staffing
additions and increased costs for validation of the Renew system. For the nine
months ended September 30, 1999, gross profit from product sales increased to
$10.23 million compared to $9.32 million in the comparable 1998 nine-month
period due to the increase in net revenue from product sales discussed above.
Gross profit margin from product sales decreased to 67.1 percent during the
nine-month period in 1999 compared to 72.4 percent in the same period in 1998.
This decrease in gross profit margin during the 1999 nine-month period compared
to the same period in 1998 was due to the same factors related to product
transition costs and unexpected lower manufacturing yields discussed above, an
increase in manufacturing overhead expense in quality assurance and
manufacturing engineering, production downtime associated with our move to our
new leased facility in May 1999 and inefficiencies in the start-up manufacturing
of the Renew System.
-16-
<PAGE>
Total operating expenses (the aggregate of research and development, marketing,
amortization of intangibles and administrative expenses) increased to $3.48
million for the three months ended September 30, 1999 compared to $3.09 million
in the same 1998 period. For the nine months ended September 30, 1999, total
operating expenses increased to $10.27 million compared to $8.22 million in the
same 1998 period. This increase during both periods in 1999 compared to 1998
reflects our accelerated investments in research and development and marketing.
Research and development expense increased to $913,000 during the three months
ended September 30, 1999 from $870,000 during the same period in 1998,
reflecting our commitment to develop new advanced products that can expand our
presence into all market segments of the neuromodulation market. For the nine
months ended September 30, 1999, research and development expense increased to
$2.70 million from $1.94 million during the same period in 1998. This increase
during both 1999 periods compared to the same periods in 1998 was the result of
higher salary and benefit expense from staffing additions and higher
expenditures for consulting and test materials. During 1999 we have continued to
direct these expenditures toward development of our enhanced radio-frequency
stimulation systems (which we introduced to the U.S. market in the second
quarter of 1999), a low-cost constant rate intrathecal drug pump, an implantable
pulse generator stimulation system for spinal cord stimulation and an
implantable pulse generator system for deep brain stimulation.
Marketing expense increased from $1.22 million during the three months ended
September 30, 1998 to $1.59 million during the same period in 1999. For the nine
months ended September 30, 1999, marketing expense increased to $4.63 million
from $3.46 million during the same period in 1998. This increase in expense
during both periods of 1999 compared to 1998 was attributable to higher
commissions from increased product sales and a change from distributors to
commissioned sales agents in certain United States territories, higher salary
and benefit expense from staffing additions, higher expenses for education and
training of new implanters and expenses related to the launch of our Renew
System.
General and administrative expense decreased from $707,000 during the three
months ended September 30, 1998 to $677,000 during the same period in 1999. This
decrease in expense during 1999 compared to 1998 was principally the result of
lower recruiting and relocation expense. For the nine months ended September 30,
1999, general and administrative expense increased to $2.03 million from $1.95
million during the same 1998 period. This increase in expense during the
nine-month period in 1999 compared to 1998 was principally the result of higher
salary and benefit expense from staffing additions, including a new Chief
Executive Officer hired in April 1998 and higher investor relations expense.
Amortization of ANS intangibles increased from $293,000 during the three months
ended September 30, 1998 to $306,000 during the same period in 1999 and for the
nine month period ended September 30, 1999, increased to $900,000 from $876,000
in the same period in 1998. This increase during both periods during 1999
compared to 1998 was to due to amortization expense on additional patents we
have licensed.
Other income of $169,000 for the three months ended September 30, 1999 remained
approximately the same as the $168,000 during the same period in 1998. For the
nine months ended September 30, 1999, other income increased to $565,000 from
$407,000 during the same period a year ago. This increase was due to a $209,000
-17-
<PAGE>
reduction in interest expense during 1999 compared to 1998 due to the repayment
of our mortgage debt on February 1, 1999, when we sold our facility to Atrion
Corporation.
We recorded an income tax benefit of $118,000 from continuing operations during
the three months ended September 30, 1999 due to lower actual state income taxes
that had been provided for in the first quarter of 1999 for the January 1999
payment from Sofamor Danek. For the three months ended September 30, 1998,
income tax expense was $419,000. For the nine months ended September 30, 1999,
income tax expense from continuing operations increased to $3.55 million from
$1.36 million during the same period in 1998 due to higher earnings from ANS
operations. This represents effective tax rates of 37.6 percent in 1999 and 40.1
percent in 1998. Our expense for amortization of costs in excess of net assets
acquired (goodwill) is not deductible for tax purposes, and, when combined with
a provision for state taxes, results in the higher effective tax rate during
1999 and 1998 compared to the U.S. statutory rate for corporations of 34
percent.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999 our working capital increased from $16.43 million at
year-end 1998 to $17.78 million. The ratio of current assets to current
liabilities was 4.53:1 at September 30, 1999, compared to 2.68:1 at December 31,
1998. Cash, cash equivalents and marketable securities totaled $12.7 million at
September 30, 1999 compared to $12.3 million at December 31, 1998.
In January 1999, we received the $8 million payment in connection with the
termination of the DBS agreement with Sofamor Danek.
During February 1999, we completed the sale of our corporate facility to Atrion
for $6.5 million. After we repaid the mortgage debt on the facility and paid
expenses related to the transaction, we realized net proceeds of $2.7 million.
During the first nine months of 1999, we repurchased an additional 241,375
shares of our common stock under our share repurchase program at a cost of
$1,673,672, or $6.93 per share. These repurchases completed our authorized stock
repurchase program of 1,500,000 shares. In total, the cost of repurchasing the
1,500,000 shares was $11,085,000, or $7.39 per share. In September 1999, the
Board of Directors authorized increasing our stock repurchase program by an
additional 250,000 shares. While no shares were purchased under this new
authorization during the third quarter, we did repurchase 163,500 shares in
October and early November at a cost of $1,278,549, or $7.82 per share.
During the first nine months of 1999, we have increased our investment in
inventories by $2.15 million to $4.79 million from $2.64 million at year-end
1998. While this is a higher level of inventory than we plan to carry on an
ongoing basis, several factors contributed to the increase. First, we are
continuing to transition from our former radio-frequency systems (which we are
continuing to sell internationally until the appropriate regulatory approvals
are received) to the Renew system. Second, we have built inventory of Renew
system components as part of a phased product and geographical launch. Third, we
decided to increase our safety stock levels on critical single-sourced
components due to electronic component shortages experienced during the quarter,
which are not expected to continue.
We spent $3.86 million on capital expenditures during the first nine months of
1999. Of the $3.86 million in expenditures, approximately $2.3 million was for
-18-
<PAGE>
new furniture and equipment, computer systems, telephone system, manufacturing
clean room and leasehold improvements for our new leased facility. The remaining
expenditures primarily related to manufacturing tooling and equipment for the
Renew System and other products we are developing. We anticipate capital
expenditures for the remainder of 1999 to approximate $200,000, primarily for
additional tooling and equipment for the new products we are currently
developing.
We believe our current cash, cash equivalents and marketable securities and cash
generated from our operations will be sufficient to fund all of our operating
and capital expenditure needs for the foreseeable future.
CASH FLOWS
Net cash provided by continuing operations was $2.77 million for the nine months
ended September 30, 1999 compared to $7.29 million during the comparable period
in 1998, a decrease of $4.52 million primarily due to changes in components of
working capital. During 1999 we used cash to increase our investment in assets
such as inventories, receivables and prepaid expenses and other assets by $3.79
million. In addition, we used cash during 1999 to reduce our level of payables
by $241,000 relating to income taxes payable, accounts payable and accrued
expenses. During the 1998 period, however, we increased our level of payables
for income taxes, accounts payable and accrued expenses by $3.04 million (which
provided cash) and recorded $2.1 million for deferred revenue from a payment
associated with our former agreement with Sofamor Danek. Net cash provided by
discontinued operations was $59,000 for the nine months ended September 30,
1998, which included only one month of results until the sale in January 1998.
Net cash provided by investing activities was $2.50 million for the nine months
ended September 30, 1999 compared to $21.43 million during the comparable period
in 1998. The 1998 period reflects net proceeds from the sale of our discontinued
operations of $21.75 million and the 1999 period reflects $6.35 million of net
proceeds from the sale of our facility in February 1999. During 1999, we spent
$3.86 million for additions to property, plant and equipment compared to
$819,000 during the same period in 1998, an increase of $3.04 million. Of this
increase in capital expenditures, approximately $2.3 million was for a new
computer system, office furniture and equipment, telephone system, manufacturing
clean room and leasehold improvements for our relocation to our new leased
facility in May 1999. The remainder of the increase was related to additional
manufacturing tooling and equipment for the Renew System products launched
during June 1999 and tooling for new products we are currently developing.
Net cash used in financing activities was $4.77 million for the nine months
ended September 30, 1999 compared to $13.82 million during the comparable period
in 1998. During 1999, we received cash of $533,000 from the exercise of stock
options while we used $3.63 million to repay our mortgage debt when we sold our
facility to Atrion in February 1999 and $1.67 million to repurchase 241,375
shares of our common stock. During the nine months ended September 30, 1998, we
received cash of $820,000 from the exercise of stock options while we used $8.21
million to repay borrowings under short-term and long-term notes and $6.43
million to repurchase 806,000 shares of our common stock.
-19-
<PAGE>
YEAR 2000
The Year 2000 issue results from computer programs being written using two
digits rather than four to define the applicable year. Computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the Year 1900 rather than the Year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, manufacture products or engage in similar normal business
activities.
We began our assessment of our computer software, hardware, manufacturing
equipment and other non-critical systems in early 1998 and are complete. The
assessment determined that most of our computer hardware and software and
manufacturing equipment were Year 2000 compliant. Certain personal computers,
non-critical internal software programs and manufacturing equipment were
modified or replaced and we spent approximately $138,000 associated with the
replacements and modifications. We estimate the costs incurred in the assessment
of our systems since early 1998 to be under $100,000, which have been expensed
in our current operations.
When we sold our facility to Atrion on February 1, 1999, Atrion also acquired
our mainframe computer and software applications. In moving to our new leased
facility in May 1999, we purchased new computer hardware and software that is
similar to our former systems. We also purchased a new telephone system. We
received assurances from the providers of the new systems that they are Year
2000 compliant. We spent approximately $500,000 for these new systems (in
addition to the $138,000 for modifications and replacements discussed above),
which is included in the $2.3 million we spent for the relocation. We funded
these costs from our current cash reserves and most of the costs were
capitalized.
Upon relocating to our new facility and installation of our new computer
hardware and software systems, we began testing the systems to ensure compliance
with Year 2000. We completed the testing in the third quarter of 1999 and are
satisfied that these systems are Year 2000 compliant.
We have contacted the third-party vendors and suppliers of products and services
that we consider critical to our operations to ascertain their level of Year
2000 readiness. We have no means of ensuring that all vendors and suppliers will
be Year 2000 compliant. The inability of these parties to complete their Year
2000 resolution process could materially impact us. As a result, we will
consider new business relationships with alternate providers of products and
services as necessary and to the extent alternatives are available.
Our goal is to ensure all critical systems and processes under our control
remain operational. However, because certain systems and processes may be linked
with systems outside our control, we cannot guarantee you that all
implementations will be successful. As a result, we are developing a contingency
plan to respond to any failures that may occur. We do not expect Year 2000 to
have a material adverse effect on our financial position or results of
operations. However, any unanticipated failures by critical third party
suppliers and vendors could have a material adverse impact on the Company.
-20-
<PAGE>
FORWARD-LOOKING STATEMENTS
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: The matters discussed in this Quarterly Report on
Form 10-Q contain statements that constitute forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
The words "expect", "estimate", "anticipate", "predict", "believe", "plan",
"will", "should", "intend", "potential", "new market applications" and similar
expressions and variations thereof are intended to identify forward-looking
statements. Such statements appear in a number of places in this Quarterly
Report on Form 10-Q and include statements regarding our intent, belief or
current expectations with respect to, among other things: (i) trends affecting
our financial condition or results of operations; (ii) our financing plans; and
(iii) our business growth strategies. We caution our readers that any
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. These risks and uncertainties include the following:
completion of research and development projects in an efficient and timely
manner; obtaining regulatory approvals on a timely and cost efficient basis to
permit the introduction of new products; reclassification of our IPG stimulation
system by the FDA; entering into suitable strategic alliances that enable us to
leverage our technology into other markets; the satisfactory completion of
clinical trials and/or market tests prior to the introduction of new products;
continued improvements in manufacturing processes for the Renew system; the
adequacy, acceptability and timeliness of component supply; the approval of new
products by reimbursement agencies like insurance companies, HMOs, Medicare and
Medicaid; the efficacy of our products for new applications; the uncertainty
that our third party suppliers have satisfactorily completed their Year 2000
efforts; and other risks detailed from time to time in our SEC public filings.
Consequently, if our assumptions prove to be incorrect or such risks or
uncertainties materialize, anticipated results could differ materially from
those forecasted in forward-looking statements. You should not place undue
reliance on these forward-looking statements, and the Company undertakes no
obligation to publicly update or revise any forward-looking statements.
CURRENCY FLUCTUATIONS
Substantially all of our international sales are denominated in U.S. dollars.
Fluctuations in currency exchange rates in other countries could reduce the
demand for our products by increasing the price of our products in the currency
of the countries in which the products are sold, although we do not believe
currency fluctuations have had a material effect on the Company's results of
operations to date.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------ ----------------------------------------------------------
For the quarter ended September 30, 1999, the Company did not experience any
material changes in market risk exposure that affect the quantitative and
qualitative disclosures presented in the Company's 1998 Annual Report to
Shareholders on Form 10-K.
-21-
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibit 27.1- Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter
ended September 30, 1999.
-22-
<PAGE>
Signatures
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED NEUROMODULATION SYSTEMS, INC.
Date: November 12, 1999 By: /s/ F. Robert Merrill III
--------------------------------
F. Robert Merrill III
Executive Vice President, Finance
Chief Financial Officer and Treasurer
-23-
<PAGE>
EXHIBIT 27.1
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.1, Financial Data Sheet
</LEGEND>
<CIK> 0000351721
<NAME> Advanced Neuromodulation Systems, Inc.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,192,217
<SECURITIES> 489,252
<RECEIVABLES> 3,846,932
<ALLOWANCES> 143,315
<INVENTORY> 4,793,745
<CURRENT-ASSETS> 22,816,996
<PP&E> 6,807,890
<DEPRECIATION> 1,592,013
<TOTAL-ASSETS> 45,363,132
<CURRENT-LIABILITIES> 5,036,889
<BONDS> 0
0
0
<COMMON> 435,418
<OTHER-SE> 37,600,226
<TOTAL-LIABILITY-AND-EQUITY> 45,363,132
<SALES> 15,253,331
<TOTAL-REVENUES> 24,153,331
<CGS> 5,020,346
<TOTAL-COSTS> 10,266,800
<OTHER-EXPENSES> (609,642)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,861
<INCOME-PRETAX> 9,430,966
<INCOME-TAX> 3,545,979
<INCOME-CONTINUING> 5,884,987
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,884,987
<EPS-BASIC> .77
<EPS-DILUTED> .73
</TABLE>
