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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended                     June 29, 2002                   

or

		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:                      30733                    

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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        No      

      As of July 22, 2002, there were 32,272,301 shares of the registrant’s $.01 par value Common Stock outstanding.

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INDEX

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PART I. FINANCIAL INFORMATION

Item. 1. Financial Statements

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

The accompanying notes are an integral part of the consolidated financial statements.

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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(In thousands, except share data)
(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The consolidated financial statements included in this Form 10-Q have been prepared by American Medical Systems Holdings, Inc. (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations. The year-end balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These unaudited consolidated interim financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes included in its Annual Report on Form 10-K for 2001.

These statements reflect, in management’s opinion, all adjustments (which include only normal, recurring adjustments) necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented. The results of operations for any interim period may not be indicative of results for the full year.

2. Inventories

Inventories consist of the following (in thousands):

3. Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, which requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The Company has not been involved in a business combination since then.

In June 2001, the Financial Standards Board also issued issued Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and other intangible assets with indefinite lives are not amortized, but tested for impairment annually, or whenever there is an impairment indicator. In addition, upon adoption of SFAS No. 142, all goodwill is assigned to reporting units for purposes of impairment testing and is no longer subject to amortization. Intangible assets that are not deemed to have an indefinite life continue to be amortized over their estimated useful lives. The Company adopted SFAS No. 142 as of December 30, 2001, and assessed whether goodwill had been impaired at the date of adoption, determined that it is a single reporting unit, and, that the Company’s fair value exceeded the carrying amount of its goodwill. There was no indication that goodwill was impaired.

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The following table presents a reconciliation of net income and earnings per share adjusted for the exclusion of goodwill amortization, net of income taxes:

4. Comprehensive Income

Comprehensive income for the Company is net income adjusted for changes in value of derivative financial instruments, unrealized gains and losses on marketable securities, and foreign currency translation. Comprehensive income for the six months through June 30, 2001, and June 29, 2002, was:

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The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “expect,” “believe,” “anticipate,” or “estimate,” identify such forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially from those expressed in such forward-looking statements. Some of the factors that could cause such material differences are identified in “Certain Important Factors” beginning on page 14. We undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events, or otherwise. You are advised, however, to consult any future disclosures we make on related subjects in future filings with the SEC.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. At each balance sheet date, we evaluate our estimates, including but not limited to, those related to accounts receivable, inventories, long-lived assets, warranty and sales return obligations, legal contingencies, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The critical accounting policies that are most important in fully understanding and evaluating our financial condition and results of operations are discussed below.

Allowance for Doubtful Accounts and Other Accounts Receivable-Related Valuation Accounts. We maintain an allowance for doubtful accounts, returns, and warranty claims. We rely on subjective judgments and estimates to establish these valuation accounts. If we make different judgements, we could have material variances in the amount and timing of our reported results for any period. In addition, actual results could be different from our current estimates, possibly resulting in increased future charges to earnings.

We maintain an allowance for doubtful accounts for all individual accounts receivable that we believe are unlikely to be collected. For all other accounts receivable, we record an allowance for doubtful accounts based on a combination of factors including the age of receivable balances, historical bad debt experience, general customer creditworthiness, and current economic trends. At June 29, 2002, our allowance for doubtful accounts was $838,000.

We maintain an allowance for returns based on historical and current trends in product returns. At June 29, 2002, our allowance for sales returns was $463,000.

We accrue a liability for estimated warranty claims. The amount of the accrual is based on historical claims by product group and other factors. Claims could be materially different from actual results for a variety of reasons, including a change in our warranty policy, competition or other external forces, manufacturing changes that could impact product quality, or as yet unrecognized defects in products sold. As of June 29, 2002, our accrual for estimated future warranty costs was $7.4 million. If future product quality standards or policies are less favorable than current analyses, additional warranty accruals may be required and would be reflected in cost of sales in the period the revision is made.

Inventory Valuation. We use estimates and judgments to value our inventory. In general, we record our inventories at the lower of standard manufacturing cost or expected market value. Each quarter, we

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evaluate our inventories for obsolescence and excess quantities. This evaluation includes analyses of inventory levels, historical loss trends, expected product lives, sales levels by product and projections of future sales demand. We write off inventories that we consider obsolete. In addition, we maintain an allowance for inventory quantities in excess of forecasted demand. Our inventory allowances were $2.7 million at June 29, 2002. If future demand or market conditions are less favorable than current estimates, additional inventory adjustments would be required and would adversely affect income in the period the adjustment is made.

Legal Liability Accrual. Each quarter, we make an estimate of the uninsured portion of legal representation and settlement costs of possible future product liability. This evaluation consists of reviewing historical claims costs as well as assessing future trends in medical device liability cases. Social and political factors, as well as doctor and medical facility responsibility, make litigation costs hard to predict. Accruals for future litigation costs were $1.3 million on June 29, 2002. If, in the future, we determine this accrual is inadequate, the adjustment would reduce income in the period the adjustment is recorded.

Income Taxes. In the preparation of our consolidated financial statements, we estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposures and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet.

We have significant amounts of deferred tax assets that we review for recoverability and then value accordingly. We evaluate the realizability of our deferred tax assets on a quarterly basis and assess the need for valuation allowances. These deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income, and the impact of tax planning strategies. We record a valuation allowance to reduce deferred tax assets when we determine that we could not realize all or part of our deferred tax assets.

We maintain a valuation allowance of $682,000 to offset tax loss carryfowards created in a foreign jurisdiction, which, if subsequently recognized, would be allocated to goodwill. We did not maintain any other allowances against our net deferred tax assets at June 29, 2002. If we later determine that we would not realize all or part of the deferred tax assets, we would adjust the deferred tax asset valuation allowance and charge the adjustment to income in the period we made the determination.

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Results of Operations

Three Months Through June 30, 2001, Compared to the Three Months Through June 29, 2002

Net Sales. The following chart compares net sales between our second quarter of 2001 and 2002.

The erectile restoration product line includes four types of inflatable and non-inflatable prostheses and smaller amounts of diagnostic equipment. During the second quarter of 2002, sales of the erectile restoration products increased $3.7 million, or 26.6%, when compared to the second quarter of 2001. This increase was primarily due to increased sales of our new InhibiZone antimicrobial coated penile implant, which was released in the U.S. second quarter of 2001. We expect international availability of this product by the end of 2002. The incontinence product line includes all sales of Acticon Neosphincter to control fecal incontinence and tissue, even though we believe some small share of these products are used in men, and tissue may also be used in non-incontinence procedures. Sales of the continence product line increased $4.2 million, or 33.4%, during the second quarter primarily due to the increased sales of SPARC, a suprapubic mid-urethral sling system which was approved for sale in Europe in April 2001 and in the U.S. in August 2001. Prostate treatments include all sales of our Urolume product even though this product is also used to treat urethral strictures.

Cost of Goods Sold. Cost of goods sold as a percentage of net sales decreased from 20.3% in the second quarter of 2001 to 19.6% in 2002. This decrease resulted from spreading of relatively fixed manufacturing costs over higher production levels, and lower warranty costs in 2002 than in 2001. Recent quality improvements as well as changes made to our procedures for granting warranty credit are leading to longer-term reductions in our warranty expenses and exposure. Future costs of goods sold will depend on production levels, product mix, and sales volumes.

Marketing and selling. Marketing and selling costs decreased from 39.4% of net sales in 2001 to 36.1% in 2002, although costs increased $1.9 million. This increase resulted from higher employee and commission expenses to support the 28% higher sales, with a small offset of new product rollouts costs in 2002 than in 2001. In the future, we expect marketing and selling costs to increase as sales increase, but decrease as a percentage of sales. In addition, costs will vary quarter to quarter as certain costs, such as sales meetings and product rollout costs, are incurred independent of that quarter’s sales.

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General and administrative. General and administrative costs decreased $165,000, or 5.4%, from $3.1 million in the second quarter of 2001 to $2.9 million in 2002. These decreases were primarily due to gains on currency of approximately $400,000 and the closing of our Israeli manufacturing facility in early 2002, which reduced expenses approximately $300,000 in the second quarter of 2002 versus 2001. The exchange gains were the result of the strengthening of foreign currencies, mainly the Euro, against the US dollar and related to translating foreign denominated inter-company receivables to current rates. We expect quarterly spending in general and administrative for the remainder of 2002 to be consistent with the first quarter of 2002 rather than the just-completed-quarter as the currency gains may be non-recurring.

Research and development. Research and development includes costs to develop and improve current and possible future products and the costs for regulatory and clinical activities for our products. Research and development costs increased from $2.9 million in 2001 to $3.2 million in 2002. We expect total spending in research and development to increase in 2002 from 2001 levels and, longer term, to remain within the range of 8 to 10 percent of net sales. In addition, our costs in this area could vary as a result of spending on purchased technologies as opportunities are discovered.

Amortization of intangibles. Amortization of intangibles decreased $1.4 million, from $2.4 million in the second quarter of 2001 to $939,000 in 2002. This decrease is attributable to the Company’s adoption on December 30, 2001, of SFAS No. 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS No. 142, goodwill and other intangible assets with indefinite lives are not amortized, but tested for impairment annually, or whenever there is an impairment indicator. In addition, upon adoption of SFAS No. 142, all goodwill must be assigned to reporting units for purposes of impairment testing and is no longer subject to amortization. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their estimated useful lives.

Below is a table detailing the quarterly pro forma impact on earnings with the adoption of SFAS 142, as if the adoption of the new standard were effective in fiscal year 2001.

Royalty and other income. All of our royalty income is from the license of certain stent-delivery technology to Boston Scientific Corporation for use outside urology. Royalty income was $747,000 in the second quarter of 2001 and $775,000 in 2002.

Interest income and interest expense. Interest expense decreased from $1.0 million in 2001 to $718,000 because average borrowings under notes payable were approximately $16.0 million lower in 2002 than in 2001. Interest income increased from $20,000 in 2001 to $325,000 in 2002 due primarily to investment of receipts from our July 2001 secondary common stock offering.

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Income tax expense. Income tax expense increased $2.3 million in 2002 compared to 2001, as income before income taxes in 2002 was $9.4 million compared to income before income taxes of $2.9 million in 2001.

As part of our adoption of SFAS 142, we no longer record goodwill amortization that previously had been a permanent non-deductible tax expense. In the second quarter of 2001, the total of this type of amortization was approximately $500,000. If we had these new rules in place in 2001, our effective tax rate would have been approximately 41%.

Net income. Net income was $4.2 million higher in 2002 than in 2001. This increase in net income resulted from the increase in revenues while maintaining control over our operating costs and the change in accounting for amortization of goodwill, all of which are described above.

Six Months Through June 30, 2001, Compared to the Six Months Through June 29, 2002

Net Sales. The following chart compares net sales between our first six-month period of 2001 and 2002.

During the first six months of 2002, sales of erectile restoration products increased $7.5 million, or 27.2%, when compared to the same period in 2001. This increase was primarily due to increased sales of our new InhibiZone antimicrobial coated penile implant, which was released in the second quarter of 2001. Sales of continence products increased $7.6 million, or 30.2%, primarily due to the increased sales of SPARC, a suprapubic mid-urethral sling system which we introduced in the third quarter of 2001.

Costs of Goods Sold. Costs of goods sold as a percentage of net sales inceased from 20.0% in 2001 to 20.1% in 2002.

Marketing and selling. Marketing and selling costs decreased from 40.4% of net sales in 2001 to 36.5% in 2002, although costs increased $3.3 million. This increase resulted from higher employee and commission expenses to support of the higher sales, both within the United States and internationally.

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General and administrative. General and administrative costs increased $383,000, or 6.6%, from $5.8 million in 2001 to $6.2 million in 2002. This increase was primarily due to professional fees and services, recruiting and relocation costs, corporate insurance, and bad debt charges partially offset by the closing of our Israeli manufacturing facility in early 2002, and gains on currency which were approximately $450,000 in the first half of 2002. These exchange gains were the result of the strengthening of foreign currencies, mainly the Euro, against the US dollar, and related to translating foreign denominated inter-company receivables to current rates.

Amortization of intangibles. Amortization of intangibles decreased $2.7 million, from $4.6 million in 2001 to $1.9 million in 2002. This decrease is attributable to the Company’s adoption on December 30, 2001, of SFAS No. 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS No. 142, goodwill and other intangible assets with indefinite lives are not amortized, but tested for impairment annually, or whenever there is an impairment indicator. In addition, upon adoption of SFAS No. 142, all goodwill must be assigned to reporting units for purposes of impairment testing and is no longer subject to amortization. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their estimated useful lives.

Royalty and other income. All of our royalty income is from the license of certain stent-delivery technology to Boston Scientific Corporation for use outside urology. Royalty income was $1.5 million in 2001 and 2002.

Other income increased from $375,000 in 2001 to $716,000 in 2002. In early 2001, we received a non-recurring payment of $375,000 representing reimbursement to resolve a quality issue with a materials supplier dating back to the fourth quarter of 1999. On January 1, 2002, we terminated the AMS Retirement Annuity Plan. In conjunction with this termination, the Company made an approximate $5.8 million settlement contribution to the pension trust and recorded a gain on pension termination of $716,000.

Interest income and interest expense. Interest expense decreased $664,000 in 2002 compared to 2001 from $2.1 million to $1.5 million because average borrowings under notes payable were approximately $16.0 million lower in 2002 than in 2001. Interest income increased from $102,000 in 2001 to $758,000 in 2002 due to investment of receipts from our July 2001 secondary common stock offering.

Income tax expense. Income tax expense increased $4.6 million in 2002 compared to 2001, as income before income taxes in 2002 was $18.3 million compared to $5.5 million in 2001.

As part of our adoption of SFAS 142, we no longer record goodwill amortization that previously had been a permanent non-deductible tax expense. In the first six months of 2001, the total of this type of amortization was approximately $1.0 million. If we had these new rules in place in 2001, our effective tax rate would have been approximately 41%.

Net income. Net income was $8.2 million higher in 2002 than in 2001. This increase in net income resulted from the increase in revenues while maintaining control over our operating costs and the change in accounting for amortization of goodwill, all of which are described above.

Liquidity and Capital Resources

Cash and cash equivalents plus investments in short-term and long-term marketable securities were $62.2 million as of June 29, 2002, as compared to $56.6 million as of December 29, 2001. This increase is due to cash provided from operations less cash flows from financing activities and cash flows from investing activities.

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Cash provided from operations. Cash flow provided by operating activities totaled $8.9 million in the first six months of 2002. Net income plus non-cash operating expenses totaled $15.3 million the first six months of and was offset by the $5.8 million pension plan termination payment made in the first quarter of 2002 and other changes in operating assets and liabilities.

Cash flows used in investing activities. During 2002, we purchased equipment for $920,000 and had purchases of marketable securities, net of sales, totaling $3.1 million.

Financing activities. We have a senior credit facility that consists of term debt and a $15 million revolving line of credit. Our senior credit facility expires in March 2006. This facility is secured by substantially all of our assets, and contains restrictions concerning the payment of dividends, incurrence of additional debt and capital expenditures. In addition, we are subject to, and in compliance with, certain financial covenants including ratios related to fixed charges coverage and leverage. As of June 29, 2002, the outstanding principal balance under our senior credit facility was $25.4 million. As of June 29, 2002, we did not have an outstanding balance under our revolving line of credit and had $15 million of availability under the revolving line of credit. The following table sets forth our future payment obligations under our senior credit facility:

In the six-months through June 29, 2002, we received $1.0 million from issuing common stock related to our Employee Stock Purchase Plan and exercise of options under our Equity Incentive Plan. On December 31, 2001, March 29, 2002, and June 28, 2002, we made quarterly principal payments totaling $3.5 million on our senior credit facility.

Cash Commitments

Our acquisition of the distribution rights to DermMatrix, a porcine dermis graft material used in sling and pelvic prolapse procedures, allows us to make an additional $1.0 million payment in December 2002 to extend the supply agreement through December 2008.

We have implemented a new profit sharing plan whereby contributions to the plan will vary based upon our performance and will be allocated to participants equally. While the contribution will be variable, we expect that initially the profit sharing contribution will approximate our historical AMS Retirement Annuity Plan expense at current income levels. We estimate that our profit sharing contribution in 2002 will be approximately $1.5 million.

We believe that funds generated from operations, together with our balances in cash and marketable securities and funds available under our senior credit facility, will be sufficient to finance our current operations and planned capital expenditure requirements for at least the next 12 months.

Certain Important Factors

There are several important factors that could cause our business to suffer. These factors, and their impact on the success of our business and our ability to achieve our goals, include the following:

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Successful Introduction of New Products and Product Improvements. As part of our growth strategy, we intend to introduce a number of new products and product improvements. If we do not timely introduce these new products and product improvements, or they are not well-accepted by the market, our future growth will suffer.

Continued Use of Non-Invasive Treatment Alternatives. We sell medical devices for invasive or minimally invasive surgical procedures. If physicians and patients do not accept our products, our sales will decline. Patient acceptance of our products depends on a number of factors, including the failure of non-invasive therapies, the degree of invasiveness involved in the procedures using our products, the rate and severity of complications from the procedures using our products, and other adverse side effects from the procedures using our products. Patients are more likely first to consider non-invasive alternatives to treat their urological disorders. The introduction of new oral medications or other less-invasive therapies may cause our sales to decline in the future.

Continued Physician Use and Endorsement of our Products. For us to sell our products, physicians must recommend and endorse them. We may not obtain the necessary recommendations or endorsements from physicians. Many of the products we have acquired or are developing are based on new treatment methods. Acceptance of our products is dependent on educating the medical community as to the distinctive characteristics, perceived benefits, clinical efficacy and cost-effectiveness of our products compared to competitive products, and on training physicians in the proper application of our products.

Increased Supply of Sling Material. In the past we have provided human cadaveric dermis as a service in conjunction with the sale of some of our sling procedure kits for urinary incontinence. Currently, the available supply of human tissue is not sufficient to meet demand. In December 2001, our sole supplier of human cadaveric dermis declared bankruptcy and is no longer supplying us. We are actively working with another supplier of this material, but the available supply is still inadequate to meet our needs. We continue to have a source of porcine dermis that can be used with our sling procedure kits, but we cannot assure you that such supply will be sufficient to meet our demands. If our sources of sling materials cannot fill our needs, sales of our sling procedure kits could decline.

Actions Related to Reimbursement for our Products. We may be unable to sell our products on a profitable basis (in the United States and Internationally) if third-party payors deny coverage or reduce their current levels of reimbursement. Our revenues depend largely on government health care programs and private health insurers reimbursing patients’ medical expenses. Physicians, hospitals, and other health care providers may not purchase our products if they do not receive satisfactory reimbursement from these third-party payors.

Potential Product Recalls. If any of our products were found to be defective, we could recall such defective product. We believe there is a possibility that we may recall products in the future and that future recalls could result in significant costs to us and in significant negative publicity which could harm our ability to market our products in the future.

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Additional Information on AMS

We are currently subject to the informational requirements of the Securities Exchange Act of 1934, as amended. As a result, we are required to file periodic reports and other information with the SEC, such as annual, quarterly and current reports and proxy and information statements. You are advised to read this Form 10-Q in conjunction with the other reports, proxy statements and other documents we file from time to time with the SEC. If you would like more information regarding AMS, you may read and copy the reports, proxy and information statements and other documents we file with the SEC, at prescribed rates, at the SEC’s public reference room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information regarding the operation of the SEC’s public reference rooms by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public free of charge at the SEC’s website. The address of this website is http://www.sec.gov.

We also make all of our SEC filings, such as our annual, quarterly and current reports and proxy statements, available to the public free of charge on our website. The address of our website is www.AmericanMedicalSystems.com. Our website is not intended to be, and is not, a part of this Quarterly Report on Form 10-Q. We place our SEC filings on our website on the same day as we file such material with the SEC. In addition, we will provide electronic or paper copies of our SEC filings (excluding exhibits) to any AMS stockholder free of charge upon receipt of a written request for any such filing. All requests for our SEC filings should be sent to the attention of Investor Relations at American Medical Systems, Inc., 10700 Bren Road West, Minnetonka, MN 55343

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Hedging. We hedged a portion of our original $65.0 million variable rate term note, as required by our senior credit facility, by entering into two interest rate swap agreements in which we agree to exchange, at specified intervals, the calculated difference between the fixed interest rate of the swaps and the variable interest rate on a portion of our debt. These interest rate swap agreements expire June 30, 2003. We expect that pre-tax costs totaling approximately $1.2 million, which are recorded in other comprehensive income (loss) at June 29, 2002, and represent the difference between the fixed rate of the swap agreements and variable interest of the term note, will be recognized within the next twelve months as part of interest expense. At June 29, 2002, the fair value of the interest rate swaps, based upon quoted market prices for contracts with similar maturities, was approximately $1.2 million.

Currency Fluctuation. Our operations outside of the United States are maintained in their local currency. All assets and liabilities of our international subsidiaries are translated to U.S. dollars at quarter-end exchange rates. Translation adjustments arising from the use of differing exchange rates are included in accumulated other comprehensive income in stockholders’ equity. Realized and unrealized gains and losses on foreign currency transactions are included in operations. Gains of approximately $450,000 were recognized in the first six months of 2002 compared to losses of approximately $160,000 in 2001.

Inflation. We do not believe that inflation has had a material effect on our results of operations in recent years and periods. There can be no assurance, however, that our business will not be adversely affected by inflation in the future.

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PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders.

	(a)		Our annual meeting of stockholders was held on May 8, 2002.
	(b)		Not required. We solicited proxies pursuant to Regulation 14A under the Securities Exchange Act of 1934, there was no solicitation in opposition to management’s nominees for directors as listed in the proxy statement and our stockholders elected all of these nominees at the annual meeting.
	(c)		At the annual meeting, our stockholders were presented with and asked to vote upon a proposal to elect three directors, one to serve for a two-year term and two to serve for three-year terms, or until their successors are elected and duly qualified. One nominee for director, an incumbent director, was elected at the annual meeting to serve for a two-year term expiring in 2004. The name of this nominee for director and voting results are as follows:

Two nominees for director, both incumbent directors, were elected at the annual meeting to serve for a three-year term expiring in 2005. The name of these nominees for director and voting results are as follows:

Item 6. Exhibits and Reports on Form 8-K

(a)		Exhibits
		There are no exhibits to this Quarterly Report on Form 10-Q.
(b)		Reports on Form 8-K
		No report on Form 8-K was filed by the Company during the quarter ended June 29, 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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