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
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SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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.
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(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 April 28, 2000
------------------------ ---------------------------------
<S> <C>
Common stock, $.05 Par Value 7,471,134
</TABLE>
<PAGE>
ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES
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TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
PART I. Financial Information 2
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 3-4
Condensed Consolidated Statements of Operations
For the Three Months Ended
March 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended
March 31, 2000 and 1999 6
Condensed Consolidated Statements of Stockholders'
Equity For the Year Ended December 31, 1999
and the Three Months Ended March 31, 2000 7
Notes to Condensed Consolidated
Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
PART II. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
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<PAGE>
PART I
FINANCIAL INFORMATION
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<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
March 31,
2000 December 31,
Assets (Unaudited) 1999
- ------ ------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,555,350 $ 8,353,658
Marketable securities 425,462 398,208
Receivables:
Trade accounts, less allowance for doubtful
accounts of $136,432 in 2000
and $140,824 in 1999 3,295,303 3,785,719
Interest and other 78,786 70,965
------------- -------------
Total receivables 3,374,089 3,856,684
------------- -------------
Inventories:
Raw materials 2,467,609 3,014,908
Work-in-process 877,967 626,402
Finished goods 2,808,794 2,357,907
------------- -------------
Total inventories 6,154,370 5,999,217
------------- -------------
Deferred income taxes 644,819 654,086
Prepaid expenses and other current assets 934,828 1,107,380
------------- -------------
Total current assets 20,088,918 20,369,233
------------- -------------
Equipment and fixtures:
Furniture and fixtures 3,034,022 3,240,322
Machinery and equipment 3,726,266 3,599,338
Leasehold improvements 714,762 711,271
------------- -------------
7,475,050 7,550,931
Less accumulated depreciation and amortization 1,913,497 1,862,361
------------- -------------
Net property, plant and equipment 5,561,553 5,688,570
------------- -------------
Cost in excess of net assets acquired, net of
accumulated amortization of $2,430,371 in 2000
and $2,291,220 in 1999 8,381,293 8,520,444
Patents, net of accumulated amortization of
$522,538 in 2000 and $472,708 in 1999 4,134,284 4,071,196
Purchased technology from acquisitions, net of
accumulated amortization of $1,333,334 in 2000
and $1,266,667 in 1999 2,666,666 2,733,333
Tradenames, net of accumulated amortization of
$625,000 in 2000 and $593,750 in 1999 1,875,000 1,906,250
Other assets, net of accumulated amortization of
$157,958 in 2000 and $137,985 in 1999 280,694 265,748
------------- -------------
$ 42,988,408 $ 43,554,774
============= =============
</TABLE>
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<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
March 31,
2000 December 31,
Liabilities and Stockholders' Equity (Unaudited) 1999
- ------------------------------------ ------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,075,623 $ 1,765,377
Accrued salary and employee benefit costs 424,509 793,275
Accrued tax abatement liability 969,204 969,204
Income taxes payable 264,330 511,848
Other accrued expenses 174,227 151,372
------------- -------------
Total current liabilities 2,907,893 4,191,076
------------- -------------
Deferred income taxes 2,292,111 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 40,218,275 40,423,457
Retained earnings 5,875,554 5,694,422
Cost of common shares in treasury; 1,237,233
shares in 2000 and 1,316,558 in 1999 (8,517,281) (9,273,452)
Accumulated other comprehensive income (loss),
net of tax benefit of $115,171 in 2000
and $124,437 in 1999 (223,562) (241,550)
------------- -------------
Total stockholders' equity 37,788,404 37,038,295
------------- -------------
$ 42,988,408 $ 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 Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net revenue-product sales $ 5,598,864 $ 4,595,238
Net revenue-contract research and development --- 8,900,000
------------- -------------
Total net revenue 5,598,864 13,495,238
------------- -------------
Operating expenses:
Cost of product sales 1,848,596 1,360,180
Research and development 934,875 886,268
Marketing 1,629,831 1,503,182
Amortization of intangibles 306,871 295,844
General and administrative 688,811 674,609
------------- -------------
5,408,984 4,720,083
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Earnings from operations 189,880 8,775,155
------------- -------------
Other income (expenses):
Interest expense --- (44,861)
Interest and other income 128,057 227,532
------------- -------------
128,057 182,671
------------- -------------
Earnings before income taxes 317,937 8,957,826
Income taxes 136,805 3,511,468
------------- -------------
Net earnings $ 181,132 $ 5,446,358
============= =============
Basic earnings per share:
============= =============
Net earnings $ .02 $ .70
============= =============
Diluted earnings per share:
============= =============
Net earnings $ .02 $ .67
============= =============
</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 Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 181,132 $ 5,446,358
------------- -------------
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 602,284 444,331
Deferred income taxes (33,292) 295,208
Changes in assets and liabilities:
Receivables 482,594 (282,052)
Inventories (155,153) (881,946)
Prepaid expenses and other assets 172,554 8,069
Deferred revenue --- (900,000)
Income taxes payable (56,688) 1,091,261
Accounts payable (689,754) (200,647)
Accrued expenses (345,912) (181,576)
------------- -------------
Total adjustments (23,367) (607,352)
------------- -------------
Net cash provided by operating
activities 157,765 4,839,006
------------- -------------
Cash flows from investing activities:
Additions to equipment, fixtures and
patent licenses (316,235) (703,194)
Net proceeds from sale of discontinued
operations --- 6,354,965
------------- -------------
Net cash provided by (used in)
investing activities (316,235) 5,651,771
------------- -------------
Cash flows from financing activities:
Exercise of stock options 360,162 527,475
Payment of short-term obligations --- (3,633,475)
------------- -------------
Net cash provided by (used in)
financing activities 360,162 (3,106,000)
------------- -------------
Net increase in cash and cash equivalents 201,692 7,384,777
Cash and cash equivalents at beginning of year 8,353,658 11,697,209
------------- -------------
Cash and cash equivalents at March 31 $ 8,555,350 $19,081,986
============= =============
Supplemental cash flow information is presented
below:
Income taxes paid $ 227,344 $ 2,125,000
============= =============
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 --- --- --- 181,132 --- --- 181,132
Adjustment to
unrealized
losses on
marketable
securities --- --- --- --- 17,988 --- 17,988
------------
Comprehensive
Income 199,120
-------------
Tax benefit from
employee stock
option exercise --- --- 190,827 --- --- --- 190,827
Issuance of 79,325
shares from
treasury for
stock option
exercises --- --- (396,009) --- --- 756,171 360,162
------------- ------------ -------------- ------------- ------------- ------------- ------------
Balance at
March 31, 2000 8,708,367 $ 435,418 $ 40,218,275 $ 5,875,554 $ (223,562) $ (8,517,281) $ 37,788,404
============= ============ ============== ============= ============= ============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<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
March 31, 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.
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<PAGE>
(3) Marketable Securities
The following is a summary of available-for-sale securities at March
31, 2000:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Investment grade preferred
securities $ 554,596 $ --- $ 247,770 $ 306,826
Publicly traded limited
partnerships 51,875 --- 29,690 22,185
Real estate investment trusts 141,590 --- 45,622 95,968
Other 16,134 --- 15,651 483
----------- ----------- ----------- ------------
$ 764,195 $ --- $ 338,733 $ 425,462
=========== =========== =========== ============
</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 March 31, 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 March 31, 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 March 31, 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
March 31, 2000 and 1999, of $136,805 and $3,511,468, an overall
effective tax rate of 43.0 percent and 39.2 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.
(6) Earnings Per Share
Basic earnings per share is computed based only on the weighted average
number of common shares outstanding during the period, and the dilutive
effect of stock options and warrants is excluded. 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. Basic earnings per
share for the three months ended March 31, 2000 and 1999 are based upon
7,434,258 and 7,746,402 shares, respectively. Diluted earnings per
share for the three months ended March 31, 2000 and 1999 are based upon
8,252,579 and 8,109,726 shares, respectively. The following table
presents the reconciliation of basic and diluted shares:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Weighted-average shares outstanding
(basic shares) 7,434,258 7,746,402
Effect of dilutive instruments
Stock options 759,902 349,775
Warrants 58,419 13,549
-------------- --------------
Dilutive potential common shares 818,321 363,324
-------------- --------------
Diluted shares 8,252,579 8,109,726
============== ==============
</TABLE>
For the three months ended March 31, 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. For the three months ended March
31, 2000 and 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
respective three month periods.
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<PAGE>
(7) Comprehensive Income
Total comprehensive income for 1999 and for the three months ended
March 31, 2000 is reported in the Condensed Consolidated Statements of
Stockholders' Equity. Comprehensive income for the three months ended
March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Net earnings $ 181,132 $ 5,446,358
Other comprehensive income 17,988 (19,715)
-------------- --------------
Comprehensive income $ 199,120 $ 5,426,643
============== ==============
</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 three months ended March 31, 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
three months ended March 31, 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 the three months ended March 31, 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 the three months ended
March 31, 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.
According to the FDA's 1999 ODE Annual Report, the average time required to
receive a PMA was 12.5 months (excluding the one year typically required for
clinical trials, or approximately 24 months total). The ODE Annual Report
reported the average elapsed time for a 510(k) approval of 3.4 months in 1999.
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
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<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 Ended March 31, 2000 and 1999
- ------------------------------------------------------------
We reported net earnings of $181,000 or $.02 per diluted share for the three
months ended March 31, 2000, compared to $5.45 million or $.67 per diluted share
in the same 1999 period. Net earnings in the 1999 period benefited from $8.9
million of revenue recorded in connection with our former agreement with Sofamor
Danek.
Total net revenue was $5.60 million for the three months ended March 31, 2000
compared to $13.50 million in the comparable 1999 period. Excluding the $8.9
million of net revenue associated with our former development agreement for DBS
products with Sofamor Danek, net revenue from ANS product sales increased 21.8
percent to $5.60 million during the three months ended March 31, 2000, compared
to $4.60 million in the same 1999 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. During June 1999, we launched our enhanced radio-frequency stimulation
system, the Renew(TM) System, in the United States and will launch the Renew
System in international markets beginning in the second quarter of 2000.
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 quarter
of 2000, to position us to participate in the other larger and more rapidly
growing segments of the neuromodulation market, we continued to accelerate our
investment 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 $3.75 million during the three
months ended March 31, 2000 from $3.24 million in 1999, due to the increase in
net revenue from product sales discussed above. Gross profit margin from product
sales decreased to 67.0 percent in 2000 compared to 70.4 percent in 1999, due to
higher component costs for the Renew System and higher depreciation expense.
Total operating expenses (the aggregate of research and development, marketing,
amortization of intangibles and administrative expenses) increased to $3.56
million for the three months ended March 31, 2000 from $3.36 million in the same
period during 1999. As a percentage of net revenue from product sales, however,
these expenses decreased to 63.6 percent in 2000 from 73.1 percent in 1999.
Research and development expense increased to $935,000 during the three months
ended March 31, 2000, or 16.7 percent of net revenue from product sales during
the period, from $886,000 during the same period in 1999, or 19.3 percent of net
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<PAGE>
revenue from product sales during the prior year period. This increase in the
absolute dollar amount in 2000 compared to 1999 was the result of higher
consulting expense. The expenditures for research and development during the
first quarter 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 are substantially complete
with the development of our IPG stimulation system for spinal cord stimulation
and if the FDA approves reclassification of the device, we anticipate obtaining
510(k) pre-market approval and launching the IPG system domestically during the
second half of 2000. 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, as a percentage of net revenue from product sales, decreased
to 29.1 percent during the three months ended March 31, 2000 from 32.7 percent
in the same 1999 period, and the absolute dollar amount increased from $1.50
million during 1999 to $1.63 million in 2000. This increase in the absolute
dollar amount during 2000 compared to 1999 was attributable to higher expense
for education and training of new implanters.
General and administrative expense increased slightly from $674,000 during the
three months ended March 31, 1999 to $689,000 during the same period in 2000,
while as a percentage of net revenue from product sales, this expense decreased
to 12.3 percent in 2000 from 14.7 percent during 1999. The dollar increase in
this expense of $15,000 during 2000 was principally the result of higher salary
expense from salary increases.
Amortization of intangibles increased to $307,000 during the three months ended
March 31, 2000 from $296,000 in the same period in 1999, due to expense from
additional patents we have licensed.
Other income decreased to $128,000 for the three months ended March 31, 2000
from $183,000 during the same period in 1999 primarily as a result of a
reduction in interest income due to lower funds available for investment.
Income tax expense decreased to $137,000 during the three months ended March 31,
2000 from $3.51 million during the same period a year ago, due to the 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 39.2 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 1999 and 2000
compared to the U.S. statutory rate for corporations of 34 percent.
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<PAGE>
Liquidity and Capital Resources
At March 31, 2000 our working capital increased to $17.18 million from $16.18
million at year-end 1999. The ratio of current assets to current liabilities was
6.91:1 at March 31, 2000, compared to 4.86:1 at December 31, 1999. Cash, cash
equivalents and marketable securities totaled $8.98 million at March 31, 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 three months ended March 31, 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 April 30, 2000. During the three months ended March 31, 2000 we issued 79,325
shares from our treasury upon the exercise of stock options. At March 31, 2000,
1,237,233 shares remained in the treasury.
We increased our investment in inventories by $155,000 to $6.15 million at March
31, 2000, from $6.0 million at December 31, 1999. The slight 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 approximately $1.1 million by year-end 2000 to a
total inventory level of $5.0 million.
We spent $316,000 during the three months ended March 31, 2000 for capital
expenditures and license fees for additional patents and intellectual property
we are licensing. Of such expenditures, approximately $168,000 was for tooling
and equipment primarily for the new products we are developing. We also spent
$148,000 during the first quarter 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 $1.4 million.
We believe our current cash, cash equivalents and marketable securities 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 $158,000 for the three months ended March
31, 2000 compared to $4.84 million for the same period in 1999. This decrease
solely related to the decrease in net earnings during the first quarter 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 $316,000 for the three months ended
March 31, 2000, while investing activities for the same period in 1999 provided
cash of $5.65 million. This reduction was due to $6.35 million of net proceeds
we received in the 1999 period from the sale of our facility. We used $703,000
in the first quarter of 1999 for capital expenditures and patent licenses, while
during the first quarter of 2000 we used $316,000 for capital expenditures and
patent licenses.
-15-
<PAGE>
Net cash provided by financing activities was $360,000 for the three months
ended March 31, 2000 while we used cash in our financing activities for the same
period in 1999 of $3.11 million. During the first quarter of 1999, we used $3.63
million to repay our mortgage debt due to the sale of our facility and received
$527,000 upon the exercise of stock options. The net cash provided by financing
activities of $360,000 in the first quarter of 2000 solely related to cash
received upon the exercise of stock options.
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
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 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. Actual results may differ materially from those
-16-
<PAGE>
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 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.
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.
-17-
<PAGE>
PART II
OTHER INFORMATION
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)
(b) No reports on Form 8-K have been filed during the quarter ended
March 31, 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.
-18-
<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: May 4, 2000 By: /s/ F. Robert Merrill III
-----------------------------
F. Robert Merrill III
Executive Vice President, Finance
Chief Financial Officer and Treasurer
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<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,555,350
<SECURITIES> 425,462
<RECEIVABLES> 3,431,735
<ALLOWANCES> 136,432
<INVENTORY> 6,154,370
<CURRENT-ASSETS> 20,088,918
<PP&E> 7,475,050
<DEPRECIATION> 1,913,497
<TOTAL-ASSETS> 42,988,408
<CURRENT-LIABILITIES> 2,907,893
<BONDS> 0
0
0
<COMMON> 435,418
<OTHER-SE> 37,352,986
<TOTAL-LIABILITY-AND-EQUITY> 42,988,408
<SALES> 5,598,864
<TOTAL-REVENUES> 5,598,864
<CGS> 1,848,596
<TOTAL-COSTS> 3,560,388
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<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 317,937
<INCOME-TAX> 136,805
<INCOME-CONTINUING> 181,132
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 181,132
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