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 JUNE 30, 2000
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
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(Address of Principal Executive Offices) (Zip Code)
(972) 309-8000
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(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 July 28, 2000
---------------------------- ---------------------------------
<S> <C>
Common stock, $.05 Par Value 7,490,509
</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
June 30, 2000 and December 31, 1999 3-4
Condensed Consolidated Statements of Operations
For the Three Months and Six Months Ended
June 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999 6
Condensed Consolidated Statements of Stockholders'
Equity For the Year Ended December 31, 1999
and the Six Months Ended June 30, 2000 7
Notes to Condensed Consolidated
Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
PART II. Other Information 19-20
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6: Exhibits and Reports on Form 8-K 19-20
SIGNATURES 21
</TABLE>
-1-
<PAGE>
PART I
FINANCIAL INFORMATION
-2-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
June 30,
2000 December 31,
Assets (Unaudited) 1999
------ ------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,697,619 $ 8,353,658
Marketable securities 570,307 398,208
Certificates of deposit with maturities
over 90 days at purchase 1,139,000 ---
Receivables:
Trade accounts, less allowance for doubtful
accounts of $142,383 in 2000
and $140,824 in 1999 3,323,303 3,785,719
Interest and other 32,648 70,965
------------- -------------
Total receivables 3,355,951 3,856,684
------------- -------------
Inventories:
Raw materials 2,515,689 3,014,908
Work-in-process 755,341 626,402
Finished goods 3,014,007 2,357,907
------------- -------------
Total inventories 6,285,037 5,999,217
------------- -------------
Deferred income taxes 595,572 654,086
Prepaid expenses and other current assets 912,019 1,107,380
------------- -------------
Total current assets 20,555,505 20,369,233
------------- -------------
Equipment and fixtures:
Furniture and fixtures 3,037,187 3,240,322
Machinery and equipment 3,844,981 3,599,338
Leasehold improvements 714,762 711,271
------------- -------------
7,596,930 7,550,931
Less accumulated depreciation and amortization 2,210,832 1,862,361
------------- -------------
Net property, plant and equipment 5,386,098 5,688,570
------------- -------------
Cost in excess of net assets acquired, net of
accumulated amortization of $2,569,522 in 2000
and $2,291,220 in 1999 8,242,142 8,520,444
Patents, net of accumulated amortization of
$572,512 in 2000 and $472,708 in 1999 4,162,792 4,071,196
Purchased technology from acquisitions, net of
accumulated amortization of $1,400,000 in 2000
and $1,266,667 in 1999 2,600,000 2,733,333
Tradenames, net of accumulated amortization of
$656,250 in 2000 and $593,750 in 1999 1,843,750 1,906,250
Other assets, net of accumulated amortization of
$178,326 in 2000 and $137,985 in 1999 273,040 265,748
------------- -------------
$ 43,063,327 $ 43,554,774
============= =============
</TABLE>
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<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
June 30,
2000 December 31,
Liabilities and Stockholders' Equity (Unaudited) 1999
------------------------------------ ------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 691,160 $ 1,765,377
Accrued salary and employee benefit costs 633,450 793,275
Accrued tax abatement liability 969,204 969,204
Income taxes payable 126,834 511,848
Other accrued expenses 193,172 151,372
------------- -------------
Total current liabilities 2,613,820 4,191,076
------------- -------------
Deferred income taxes 2,258,819 2,325,403
Commitments and contingencies
Stockholders' equity:
Common stock of $.05 par value. Authorized
25,000,000 shares; issued 8,708,367 shares
in 2000 and 1999 435,418 435,418
Additional capital 40,199,601 40,423,457
Retained earnings 6,132,335 5,694,422
Cost of common shares in treasury; 1,230,108
shares in 2000 and 1,316,558 in 1999 (8,448,702) (9,273,452)
Accumulated other comprehensive income (loss),
net of tax benefit of $65,924 in 2000
and $124,437 in 1999 (127,964) (241,550)
------------- -------------
Total stockholders' equity 38,190,688 37,038,295
------------- -------------
$ 43,063,327 $ 43,554,774
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months and Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue-product sales $5,707,692 $5,169,614 $11,306,556 $ 9,764,852
Net revenue-contract research
and development --- --- --- 8,900,000
----------- ----------- ----------- ------------
Total net revenue 5,707,692 5,169,614 11,306,556 18,664,852
Costs and expenses:
Cost of product sales 1,860,045 1,585,635 3,708,641 2,945,815
Research and development 834,682 903,872 1,769,557 1,790,140
Marketing 1,695,805 1,538,550 3,325,636 3,041,732
Amortization of intangibles 307,409 298,206 614,280 594,050
General and administrative 696,756 681,470 1,385,567 1,356,079
----------- ----------- ----------- ------------
5,394,697 5,007,733 10,803,681 9,727,816
----------- ----------- ----------- ------------
Earnings from operations 312,995 161,881 502,875 8,937,036
----------- ----------- ----------- ------------
Other income (expenses):
Interest expense --- --- --- (44,861)
Interest and other income 136,980 213,501 265,037 441,033
----------- ----------- ----------- ------------
136,980 213,501 265,037 396,172
----------- ----------- ----------- ------------
Earnings before income
taxes 449,975 375,382 767,912 9,333,208
Income taxes 193,194 152,888 329,999 3,664,356
----------- ----------- ----------- ------------
Net earnings $ 256,781 $ 222,494 $ 437,913 $ 5,668,852
=========== =========== =========== ============
Net earnings per share: =========== =========== =========== ============
Basic $ .03 $ .03 $ .06 $ .74
=========== =========== =========== ============
Diluted $ .03 $ .03 $ .05 $ .71
=========== =========== =========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 437,913 $ 5,668,852
------------- -------------
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization 1,207,030 902,596
Increase to inventory reserve 5,133 ---
Deferred income taxes (66,584) 261,916
Changes in assets and liabilities:
Receivables 500,733 (91,577)
Inventories (290,953) (1,042,789)
Prepaid expenses and other assets 195,361 (420,846)
Deferred revenue --- (900,000)
Income taxes payable (186,721) (246,810)
Accounts payable (1,074,217) (10,210)
Accrued expenses (118,025) (568,028)
------------- -------------
Total adjustments 171,757 (2,115,748)
------------- -------------
Net cash provided by operating
activities 609,670 3,553,104
------------- -------------
Cash flows from investing activities:
Purchase of certificates of deposit with
maturities over 90 days (1,139,000) ---
Additions to equipment, fixtures, and
patent licenses (529,310) (3,568,195)
Net proceeds from sale of discontinued operations --- 6,354,965
------------- -------------
Net cash provided by (used in)
investing activities (1,668,310) 2,786,770
------------- -------------
Cash flows from financing activities:
Exercise of stock options 402,601 556,054
Purchase of treasury stock --- (1,673,762)
Payment of short-term obligations --- (3,633,475)
------------- -------------
Net cash provided by (used in)
financing activities 402,601 (4,751,183)
------------- -------------
Net increase (decrease) in cash and
cash equivalents (656,039) 1,588,691
Cash and cash equivalents at beginning of year 8,353,658 11,697,209
------------- -------------
Cash and cash equivalents at June 30 $ 7,697,619 $ 13,285,900
============= =============
Supplemental cash flow information is presented
below:
Income taxes paid $ 583,304 $ 3,649,250
============= =============
Interest paid $ --- $ 44,861
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<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'
Shares Amount Capital (Deficit) Income (Loss) Stock Equity
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 --- --- --- 6,003,281 --- --- 6,003,281
Adjustment to
unrealized losses
on marketable
securities --- --- --- --- (110,790) --- (110,790)
-------------
Comprehensive Income 5,892,491
-------------
Issuance of 162,068
shares from treasury
for stock option
exercises --- --- (954,221) --- --- 1,527,493 573,272
Tax benefit from
employee stock
option exercise --- --- 221,096 --- --- --- 221,096
Purchase of 404,875
treasury shares,
at cost --- --- --- --- --- (2,952,311) (2,952,311)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at
December 31, 1999 8,708,367 435,418 40,423,457 5,694,422 (241,550) (9,273,452) 37,038,295
Net earnings --- --- --- 437,913 --- --- 437,913
Adjustment to
unrealized
losses on
marketable
securities --- --- --- --- 113,586 --- 113,586
-------------
Comprehensive Income 551,499
-------------
Tax benefit from
employee stock
option purchase --- --- 198,293 --- --- --- 198,293
Issuance of
86,450 shares
from treasury
for stock option
exercises --- --- (422,149) --- --- 824,750 402,601
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at
June 30, 2000 8,708,367 $ 435,418 $ 40,199,601 $ 6,132,335 $ (127,964) $ (8,448,702) $ 38,190,688
============= ============= ============= ============= ============= ============= =============
</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
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 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.
(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.
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, 1999 Annual
Report on Form 10-K. The results of operations for the period ended
June 30, 2000 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.
-8-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(3) Marketable Securities
The following is a summary of available-for-sale securities at June 30,
2000:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Investment grade preferred
securities $ 554,596 $ 4,440 $ 110,799 $ 448,237
Publicly traded limited
partnerships 51,875 --- 31,250 20,625
Real estate investment trusts 141,590 --- 40,747 100,843
Other 16,134 --- 15,532 602
----------- ----------- ---------- ------------
$ 764,195 $ 4,440 $ 198,328 $ 570,307
=========== =========== =========== ============
</TABLE>
Estimated fair value is determined by the closing prices of the
respective available-for-sale securities as reported on the New York
and NASDAQ stock exchange markets at each financial reporting period.
At June 30, 2000, no individual security represented more than 40
percent of the total portfolio or 1 percent of total assets. The
Company did not have any investments in derivative financial
instruments at June 30, 2000.
(4) Commitments and Contingencies
On February 1, 1999, the Company sold its principal office and
manufacturing facility in Allen, Texas and leased space in the facility
until May 1999 at the rate of $48,125 per month. 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 and the
rental period under the lease commenced on June 1, 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
$2.4 million in 1999 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 June 30, 2000.
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.
-9-
<PAGE>
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.
(5) Income Taxes
The Company recorded income tax expense during the three months ended
June 30, 2000 and 1999, of $193,194 and $152,888, an overall effective
tax rate of 42.9 percent and 40.7 percent, respectively. For the six
months ended June 30, 2000 and 1999, respectively, the Company recorded
income tax expense of $329,999 and $3,664,356, an overall effective tax
rate of 43.0 percent in the 2000 period and 39.3 percent in the 1999
period. 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 for both the three month and six month periods ended
June 30, 2000 and 1999 compared to the U.S. statutory rate for
corporations of 34 percent.
(6) 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Weighted-average shares
outstanding (basic
shares) 7,469,182 7,603,281 7,451,720 7,674,842
Effect of dilutive
instruments
Stock options 737,464 341,376 748,683 345,570
Warrants 56,434 12,210 57,427 12,885
----------- ----------- ----------- ------------
Dilutive potential
common shares 793,898 353,586 806,110 358,455
----------- ----------- ----------- ------------
Diluted shares 8,263,080 7,956,867 8,257,830 8,033,297
=========== =========== =========== ============
</TABLE>
For the three months and six months ended June 30, 2000 and 1999, 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 51,900 shares at an average price of $15.38 were outstanding
at June 30, 2000 but were not included in the computation of diluted
earnings per share for the three months ended June 30, 2000 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 June 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.
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<PAGE>
(7) Comprehensive Income
Total comprehensive income for 1999 and for the six months ended June
30, 2000 is reported in the Condensed Consolidated Statements of
Stockholders' Equity. Comprehensive income for the three months and six
months ended June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net earnings $ 256,781 $ 222,494 $ 437,913 $ 5,668,852
Other comprehensive
income 95,598 39,631 113,586 19,916
----------- ----------- ----------- ------------
Comprehensive income $ 352,379 $ 262,125 $ 551,499 $ 5,688,768
----------- ----------- ----------- ------------
</TABLE>
(8) 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 January 1999 and is included in the Statements of Operations for
the six month period ended June 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 payments due the Company in the amount of $8
million and the Company agreed to release Sofamor Danek from further
contractual obligations. The Company received the $8 million payment
from Sofamor Danek on January 28, 1999, the day after the completion of
the merger. The $8 million payment was recognized into revenue during
January 1999 and is included in the Statements of Operations for the
six month period ended June 30, 1999.
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<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
--------
In June 1998, we entered into an agreement with Sofamor Danek under which we
would develop and manufacture for Sofamor Danek, products and systems for use in
Deep Brain Stimulation ("DBS"). See Note 8 - "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 being 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. In December 1998, Sofamor Danek and we agreed to
terminate the agreement due to the impending merger of Sofamor Danek and
Medtronic, Inc., the Company's only competitor in the DBS market. The
termination was effective upon the merger of Sofamor Danek and Medtronic in
January 1999. Accordingly, the remaining $900,000 was recognized into income as
revenue during January 1999 and is included in this report in our Statement of
Operations for the six month period ended June 30, 1999. In connection with the
termination, we also received an additional payment of $8 million from Sofamor
Danek, which was recognized into income as revenue during January 1999 and is
included in this report in our Statement of Operations for the six month period
ended June 30, 1999.
The former agreement with Sofamor Danek fits with our strategy 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 chronic pain segment of the
neuromodulation market. We cannot assure you, however, that we will be
successful in negotiating and consummating research and development agreements
with other strategic partners.
In September 1999, the Neurological Devices Panel of the Medical Devices
Advisory Committee recommended that the FDA reclassify Totally Implanted Spinal
Cord Stimulators (IPGs) for treatment of pain of the trunk and/or limbs from a
Class III device to a Class II device. Class III devices typically require a
Pre-Market Approval (PMA), supplemented with clinical trials to prove safety and
effectiveness of the device, while Class II devices typically require a
Pre-Market Notification (510(k)) to demonstrate substantial equivalence to an
existing legally marketed device prior to receiving market clearance by the FDA.
We expected to receive a final reclassification decision from the FDA in January
2000 but have experienced a delay that we believe is related to the FDA's
workload. We received a written progress report dated February 25, 2000 in which
the FDA stated that it had received adequate information to move forward toward
a final decision. The agency's letter further indicated that there may be
"special controls" available to ensure the safety and effectiveness of the IPG
device for treating pain of the trunk and/or limbs. We remain optimistic that
the FDA will follow the recommendation of its panel to reclassify the IPG and
-12-
<PAGE>
are prepared to move quickly to file the 510(k) Pre-Market Notification for
clearance to market the IPG in the United States if the FDA approves the
reclassification.
Results of Operations
---------------------
Comparison of the Three Months and Six Months Ended June 30, 2000 and 1999
We reported net earnings of $257,000 or $.03 per diluted share for the three
months ended June 30, 2000, compared to $222,000 or $.03 per diluted share in
the same 1999 period. For the six months ended June 30, 2000, we reported net
earnings of $438,000 or $.05 per diluted share compared to $5.67 million or $.71
per diluted share in the same 1999 period. Net earnings in the 1999 six-month
period benefited from $8.9 million of revenue recorded in connection with our
former agreement with Sofamor Danek.
Total net revenue was $5.71 million for the three months ended June 30, 2000
compared to $5.17 million in the comparable 1999 period, an increase of 10.4
percent. This increase in net revenue for the three month period in 2000
compared to 1999 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. For the six months ended June 30, 2000, total
net revenue decreased to $11.31 million from $18.66 million for the same period
in 1999. The 1999 six- month period included $8.9 million of net revenue
associated with our former agreement with Sofamor Danek. Excluding the $8.9
million of net revenue associated with this development agreement, net revenue
from ANS product sales increased 15.8 percent to $11.31 million during the six
months ended June 30, 2000, from $9.76 million in the same 1999 period. This
increase in net revenue from product sales was again the result of higher unit
sales volume of ANS' radio-frequency stimulation systems used to treat complex
pain patterns, primarily in the United States.
Because neuromodulation devices have gained acceptance as a viable, efficacious
and cost-effective treatment alternative for relieving chronic intractable pain
and improving neurological function, we are continuing our efforts to expand our
product offerings in the high growth market of neuromodulation. Today, ANS is a
market share and technology leader in the $42 million radio-frequency
stimulation segment of the neuromodulation market. In 1999 and the first half of
2000, to position us to participate in the other larger and more rapidly growing
segments of the neuromodulation market, we continued to aggressively invest in
development projects including an implantable pulse generator for spinal cord
stimulation, an implantable pulse generator for deep brain stimulation and a
constant-rate intrathecal drug pump.
Gross profit from product sales increased to $3.85 million during the three
months ended June 30, 2000 from $3.58 million in the comparable 1999 period, due
to the increase in net revenue from product sales discussed above. However,
gross profit margin from product sales for the three months ended June 30, 2000
compared to the same period in 1999, decreased to 67.4 percent in 2000 compared
to 69.3 percent in 1999 due to higher component costs for the Renew System and
higher depreciation expense. For the six months ended June 30, 2000, gross
profit from product sales increased to $7.60 million compared to $6.82 million
in the comparable period in 1999. However, gross profit margin from product
sales decreased to 67.2 percent during the six-month period in 2000 from 69.8
percent in the same 1999 period. Again, this decrease in gross profit margin
during the 2000 six-month period compared to the same period in 1999 was due,
for the most part, to higher component costs for the Renew System and higher
depreciation expense.
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<PAGE>
Total operating expenses (the aggregate of research and development, marketing,
amortization of intangibles and administrative expenses) increased to $3.53
million for the three months ended June 30, 2000 from $3.42 million in the same
period during 1999. As a percentage of net revenue from product sales, however,
these expenses decreased to 61.9 percent in 2000 from 66.2 percent in 1999. For
the six months ended June 30, 2000, total operating expenses increased to $7.10
million from $6.78 million in the same 1999 period. As a percentage of net
revenue from product sales, however, these expenses during the six-month period
in 2000 decreased to 62.8 percent from 69.5 percent in the same 1999 period.
Research and development expense decreased to $835,000 during the three months
ended June 30, 2000, or 14.6 percent of net revenue from product sales during
the period, from $904,000 during the same period in 1999, or 17.5 percent of net
revenue from product sales during the prior year period. This decrease in the
absolute dollar amount in 2000 compared to 1999 was the result of lower
consulting and test material expense. For the six months ended June 30, 2000,
research and development expense decreased to $1.77 million, or 15.7 percent of
net revenue from product sales during the period, from $1.79 million, or 18.3
percent of net revenue from product sales during the prior year six-month
period. The expenditures for research and development during the first half of
2000 were directed toward development of our next generation radio-frequency
stimulation systems, a silastic spring constant rate intrathecal drug pump, an
IPG stimulation system for spinal cord stimulation and an IPG stimulation system
for Deep Brain Stimulation. We have substantially completed the development of
our IPG stimulation system for spinal cord stimulation and are prepared to
submit for 510(k) pre-market approval if the FDA approves reclassification of
the device. 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 it in European
markets. We also expect to complete the development of our silastic spring
constant rate intrathecal drug pump and begin clinical trials in the United
States by the end of 2000. Similarly, we expect to receive CE mark approval on
the constant-rate intrathecal drug pump by year-end 2000, at which time we would
launch it in European markets.
Marketing expense increased to $1.70 million during the three months ended June
30, 2000 from $1.54 million during the same period in 1999 but as a percentage
of net revenue from product sales remained the same at about 29.7 percent. The
increase in the absolute dollar amount for the three months ended June 30, 2000
compared to the same period in 1999 was primarily the result of higher
commission expense. For the six months ended June 30, 2000, marketing expense
increased to $3.33 million from $3.04 million in the same 1999 six-month period
although, as a percentage of net revenue from product sales decreased to 29.4
percent for the 2000 six-month period from 31.2 percent in the same 1999 period.
The increase in the absolute dollar amount during the six-month period in 2000
compared to the same period in 1999 was attributable to higher commission
expense and higher expense for education and training of new implanters.
General and administrative expense increased slightly from $681,000 during the
three months ended June 30, 1999 to $697,000 during the same period in 2000,
while as a percentage of net revenue from product sales, this expense decreased
to 12.2 percent in 2000 from 13.2 percent during 1999. For the six months ended
June 30, 2000, general and administrative expense increased slightly to $1.39
million from $1.36 million during the same period in 1999, while as a percentage
of net revenue from product sales, this expense decreased to 12.3 percent in
2000 from 13.9 percent during 1999. The increase in the absolute dollar amounts
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during both periods in 2000 compared to the same periods in 1999 was principally
the result of higher salary expense from salary increases and higher training
expense.
Amortization of intangibles increased to $307,000 during the three months ended
June 30, 2000 from $298,000 in the same period in 1999 and for the six months
ended June 30, 2000 increased to $614,000 from $594,000 in the 1999 six-month
period. This increase in both periods during 2000 compared to 1999 was due to
expense from additional patents we have licensed.
Other income decreased to $137,000 for the three months ended June 30, 2000 from
$214,000 during the same period in 1999 and for the six months ended June 30,
2000 decreased to $265,000 from $396,000 during the same six-month period a year
ago. This decrease during both periods in 2000 compared to 1999 was primarily
due to a reduction in interest income due to lower funds available for
investment.
Income tax expense increased to $193,000 during the three months ended June 30,
2000 from $153,000 during the same period a year ago primarily due to higher
earnings and to a lesser extent a higher effective tax rate. This represents
effective tax rates of 42.9 percent in 2000 and 40.7 percent in 1999. For the
six months ended June 30, 2000, income tax expense decreased to $330,000 from
$3.66 million during the same period in 1999 due to higher earnings in the 1999
period from the $8.9 million of revenue recorded in connection with our former
agreement with Sofamor Danek. This represents effective tax rates of 43.0
percent in 2000 and 39.3 percent in 1999. 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 both periods in 2000 and 1999 compared to the U.S.
statutory rate for corporations of 34 percent.
Liquidity and Capital Resources
-------------------------------
At June 30, 2000 our working capital increased to $17.94 million from $16.18
million at year-end 1999. The ratio of current assets to current liabilities was
7.86:1 at June 30, 2000, compared to 4.86:1 at December 31, 1999. Cash, cash
equivalents, marketable securities and certificates of deposit totaled $9.41
million at June 30, 2000 compared to $8.75 million at December 31, 1999.
During September 1999, the Board of Directors authorized increasing our stock
repurchase program by an additional 250,000 shares to a total of 1,750,000
shares. During the year ended December 31, 1999, we repurchased 404,875 shares
of our common stock at an aggregate cost of $2,952,311, or an average of $7.29
per share. During the six months ended June 30, 2000, we made no additional
repurchases. In aggregate, we have purchased 1,663,500 shares under the
authorized repurchase programs and 86,500 shares are available for repurchase as
of July 31, 2000. During the six months ended June 30, 2000 we issued 86,450
shares from our treasury upon the exercise of stock options. At June 30, 2000,
1,230,108 shares remained in the treasury.
We increased our investment in inventories by $286,000 to $6.29 million at June
30, 2000, from $6.0 million at December 31, 1999. The increase from year-end
1999 relates to inventory we manufactured in anticipation of our launch of the
IPG in the second half of 2000. We estimate that our investment in inventory
will decrease by year-end 2000 to a total inventory level of $5.5 million.
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<PAGE>
We spent $529,000 during the six months ended June 30, 2000 for capital
expenditures and license fees for additional patents and intellectual property
we are licensing. Of such expenditures, approximately $290,000 was for tooling
and equipment primarily for the new products we are developing. We also spent
$239,000 during the first six months of 2000 to license additional patents and
intellectual property. We expect capital expenditures and patent license fees
for the remainder of fiscal 2000 to approximate $1.1 million.
We believe our current cash, cash equivalents, marketable securities,
certificates of deposit and cash generated from operations will be sufficient to
fund all of our operating needs and capital expenditures for the foreseeable
future.
Cash Flows
----------
Net cash provided by operations was $610,000 for the six months ended June 30,
2000 compared to $3.55 million for the same period in 1999. This decrease
related to the decrease in net earnings during the first six months of 2000 as
compared to the same period a year earlier as a result of the $8.9 million of
revenue recorded in the 1999 period in connection with our former agreement with
Sofamor Danek.
Net cash used in investing activities was $1.67 million for the six months ended
June 30, 2000, while investing activities for the same period in 1999 provided
cash of $2.79 million. During the first six months of 2000, we used $1.14
million to purchase certificates of deposit with maturities greater than ninety
days from the date of purchase and $529,000 for capital expenditures and license
fees related to additional patents and intellectual property we are licensing.
During the same six-month period in 1999, we received $6.35 million of net
proceeds from the sale of our facility. We used $3.57 million in the 1999 period
for additions to equipment and fixtures ($2.3 million of these expenditures were
for equipment and furnishings for our new leased facility, which we relocated to
in May 1999).
Net cash provided by financing activities was $403,000 for the six months ended
June 30, 2000 and compares to a net use of cash for the same period in 1999 of
$4.75 million. The net cash provided by financing activities of $403,000 in the
first six months of 2000 solely related to cash received upon the exercise of
stock options. During the first six months of 1999, we received $556,100 upon
the exercise of stock options while we used $3.63 million to repay our mortgage
debt due to the sale of our facility and $1.67 million to repurchase 241,375
shares of our common stock.
Year 2000
---------
We believe our computer software programs, operating systems and manufacturing
equipment are Year 2000 compliant and ready for use beyond the Year 2000.
We are not currently aware of any material Year 2000 problems relating to any of
our material internal software programs, operating systems and manufacturing
equipment. Our internal operations and business are also dependent upon the
computer-controlled systems of third parties such as our suppliers, customers
and other service providers. We believe that absent a systemic failure outside
our control, such as a prolonged loss of electrical or telecommunications
service, Year 2000 problems at third parties will not have a material impact on
our operations. However, the failure of our internal systems or the systems of
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<PAGE>
third parties to be Year 2000 compliant could result in disruptions to our
operations, including, among other things, a temporary inability to process
transactions, send invoices, manufacture products or engage in similar normal
business activities. Therefore, depending on the scope and nature of the
problems, we could be required to devote significant resources to correcting
such problems. The costs associated with remediating any Year 2000 problems have
not been material to date and although we do not anticipate that these costs
will be material in the future, we cannot assure you that these costs will not
be material.
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.
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 may appear 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. Actual
results may differ materially from those projected in the forward-looking
statements as a result of various factors. These risks and uncertainties include
the following:
o completion of research and development projects in an efficient and timely
manner
o obtaining regulatory approvals on a timely and cost efficient basis to
permit the introduction of new products
o the market for stimulation systems and implantable intrathecal drug pumps
is dominated by a significant supplier, Medtronic, Inc.
o reclassification of IPG stimulation systems for spinal cord stimulation by
the FDA
o entering into suitable strategic alliances (for example, with respect to
DBS) that enable us to leverage our technology into other markets
o the satisfactory completion of clinical trials and/or market tests prior to
the introduction of new products
o the adequacy, acceptability and timeliness of component supply
o the approval of new products by reimbursement agencies like insurance
companies, HMOs, Medicare and Medicaid
o the efficacy of our products for new applications
o Year 2000 issues arising at a later date
o general economic risks
o other risks detailed from time to time in our SEC public filings.
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<PAGE>
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.
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<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 2000 Annual Meeting of Shareholders ("Annual Meeting") on
May 24, 2000 at the Company's corporate office in Plano, Texas. At the Annual
Meeting, the following matters were voted on and approved:
<TABLE>
<CAPTION>
Votes Abstained
Votes For Votes Against And
Proposal Nominee/Proposal Nominee/Proposal Broker Non-Votes
-------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
1) Election of seven
directors for a
one-year term
Christopher G. Chavez 7,138,793 3,974 ---
Robert C. Eberhart, Ph.D. 7,139,926 2,841 ---
Joseph E. Laptewicz 7,138,368 4,399 ---
A. Ronald Lerner 7,138,593 4,174 ---
Hugh M. Morrison 7,139,926 2,841 ---
Richard D. Nikolaev 7,139,926 2,841 ---
Michael J. Torma, M.D. 7,139,701 3,066 ---
2) Approval of the Advanced
Neuromodulation Systems,
Inc. 2000 Stock Option Plan 4,545,251 690,842 1,906,674
</TABLE>
There were present at the Annual Meeting in person or by proxy, shareholders
holding 7,142,767 shares, or approximately 95.6% of the eligible voting shares.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3.1- Articles of Incorporation, as amended and restated (1)
Exhibit 3.2- ByLaws (2)
Exhibit 4.1- Rights Agreement dated as of August 30, 1996, between
Quest Medical, Inc. and KeyCorp Shareholder Services, Inc. as
Rights Agent (3)
Exhibit 27.1- Financial Data Schedule (filed herewith)
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(b) No reports on Form 8-K have been filed during the quarter ended
June 30, 2000.
-------------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form SB-2,
Registration No. 33-62991, and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form S-18,
Registration No. 2-71198-FW, and incorporated herein by reference.
(3) Filed as an Exhibit to the report of the Company on Form 8-K dated
September 3, 1996, and incorporated herein by reference.
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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: August 2, 2000 By: /s/ F. Robert Merrill III
------------------------------
F. Robert Merrill III
Executive Vice President, Finance
Chief Financial Officer and Treasurer
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EXHIBIT 27.1
<PAGE>
