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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

10700 Bren Road West
Minnetonka, MN 55343
(Address of Principal Executive Offices, Including Zip Code)

Registrant’s Telephone Number, Including Area Code:

952-930-6000

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share

     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 x No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes x No o

     As of June 28, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common stock of the registrant (based upon the closing price of the voting Common Stock as of that date as reported by The Nasdaq Stock Market and excluding shares beneficially owned by directors, executive officers, and affiliates of AMS) was approximately $413,541,253.

     As of March 20, 2003, 32,560,839 shares of Common Stock of the registrant were outstanding, of which 32,219,139 shares were voting Common Stock and 341,700 shares were non-voting Common Stock.

     Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to in this Annual Report) from the registrant’s Proxy Statement for its 2003 Annual Meeting of Stockholders to be held May 7, 2003 (the “2003 Proxy Statement”).

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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

FORM 10-K

For the Fiscal Year Ended December 28, 2002

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FORWARD-LOOKING INFORMATION

     This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements not of historical fact may be considered forward-looking statements. Written words such as “may,” “expect,” “believe,” “anticipate,” or “estimate,” or other variations of these or similar words, 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. Important factors known to us that could cause such material differences are identified in this Annual Report on Form 10-K beginning on page 10, and in the “Management Discussion and Analysis of Results of Operations and Financial Condition” beginning on page 14 of this Annual Report on Form 10-K. 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.

PART I

ITEM 1. BUSINESS.

Overview

Since its inception in 1972, American Medical Systems has operated as a single business developing, manufacturing, and marketing medical devices to physicians who treat urological and gynecological disorders. These diseases affect approximately 160 million people worldwide, profoundly diminishing their quality of life and significantly impacting their relationships. We manufacture and market a broad and well-established line of proprietary products for erectile restoration; other men’s health needs, including products for incontinence, stricture, and prostate disease; and women’s health needs, including products for incontinence and other pelvic floor disorders. Our product development and acquisition strategy has focused on expanding our product offering and on adding less-invasive medical devices for surgeons and their patients. We estimate that nearly 18 million men and women are potential candidates for treatment with our products, although only a very small share of them ever seek treatment.

Our company was founded in 1972, and acquired by Pfizer Inc. in 1985. In September 1998, a group of investors led by Warburg, Pincus Equity Partners L.P. (WPEP) purchased the assets of the Company from Pfizer. We formed American Medical Systems Holdings Inc., our current holding company, in April 2000. In August 2000, we completed our initial public offering, selling 6.3 million shares or 22.6 percent of the post offering shares outstanding. In July 2001, we completed a secondary offering, selling an additional 3.5 million shares or 11.1 percent of the post offering shares outstanding. Since the IPO, WPEP has sold many of its shares, in the secondary offering and in the open market, and now owns approximately 30 percent of the shares outstanding.

We maintain a website at www.AmericanMedicalSystems.com. We are not including the information contained on our website as a part of, nor incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission.

Markets and Products

Approximately 160 million men and women, 80 million of them in the United States, suffer from erectile dysfunction, incontinence, or other pelvic disorders. While we estimate that approximately 18 million of these people have a disorder severe enough to be potential candidates for treatment with our products, the

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lack of information about potential therapies and the general discomfort with discussing these disorders with others, including healthcare professionals, means that very few of those who could benefit from our products and procedures ever seek treatment. In recent years, the number of people seeking treatment for these disorders has grown with the publicity for new treatment alternatives, especially new drug therapies, but the portion seeking treatment remains relatively small. When patients do seek treatment, they generally begin with medical treatment rather than surgical treatment, regardless of the severity of the disease. Only if medical therapy is unsuccessful and the patient persists with seeking a cure, is surgery considered.

Erectile Restoration. These products represented $69.5 million, or 49 percent, of our 2002 net sales. Erectile dysfunction is the inability to achieve or maintain an erection sufficient for sexual intercourse, most often caused by vascular disease, or complications from diabetes, or prostate surgery which can damage both nerves and arteries necessary for erectile function. This disease can also be caused by spinal cord injury, and may have a psychogenic component. Erectile dysfunction may affect 100 million of men and their partners around the world. The primary treatment for erectile dysfunction is Viagra or a similar-acting drug. If these drugs do not work, the patient may try a vacuum device or a topical or injected drug before considering penile implants such as those we offer. If the patient elects to have implant surgery, the surgeon would replace the erectile tissues of the penis with a prosthesis which would provide sufficient rigidity for sexual intercourse.

We lead the penile implant market, with a series of semi-rigid malleable prostheses and a complete range of more naturally functioning inflatable prostheses, including the AMS 700 CX and Ultrex. In 2001, we began offering two significant improvements to our AMS 700 inflatable prostheses: (1) a parylene coating on certain internal surfaces of the prosthesis, to reduce friction and increase durability, and (2) our InhibiZone antibacterial surface treatment, to help reduce the risk of surgical infections. Physician preference for this new product, which carries a higher price than any of our untreated products, was a major contributor to our growth in 2002.

Since 2001, we have been developing a new inflatable prostheses control pump for patients with limited manual dexterity. While we had expected to have this product on the market in 2002, our initial clinical evaluations in 2002 suggested that the new control system was not a significant enough improvement over the existing system, which has a very high satisfaction rate, to justify a change at that time. These evaluations did, however, give us better information about how we could improve the existing control system, and we are working to make these changes as soon as we can complete testing and obtain necessary regulatory approvals. Given the regulatory pathway, we do not expect to have this product available for commercial distribution before the end of 2004.

Other Men’s Health. These products represented $42.0 million, or 29 percent, of our 2002 net sales. Approximately 7 million men suffer from urinary incontinence, the uncontrolled release of urine from the body. In men, this most often results from nerve and sphincter damage during prostate surgery. Male incontinence may be managed with a catheter and leg bag to collect the urine, or with pads and diapers to absorb the leaks. These measures are not ideal, as they come with recurring replacement product costs and the potential for infection and embarrassing leaks and odor.

Since 1972, when we introduced the Artificial Urinary Sphincter, we have been the world leader with surgical solutions for male incontinence. This fully enclosed system includes an inflatable urethral cuff to restrict flow through the urethra, and a control pump which allows the patient to discretely open the cuff when he wishes to urinate. Since 2000, we have also been selling the InVance sling system, which is a less invasive procedure for men with mild to moderate incontinence. This system uses technology which came with our 1999 acquisition of Influence Inc. to support the bulbous urethra and improve urinary control. Sales of these products, included in the men’s health total, were $35.9 million in 2002.

We also have products to relieve the restrictions on the normal flow of urine from the bladder caused by an enlarged prostate, generally the result of benign prostatic hyperplasia (BPH) or urethral strictures. Symptoms of these restrictions include increased urination frequency, sudden urges to urinate, and weak

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urine flow. Nearly 3 million men in the United States (70 percent of men over age 65) have severe BPH, most of whom find existing drug treatments acceptable. The conventional treatment for men requiring surgery is a transurethral resection of the prostate (TURP). We offer the Coaguloop resection electrode for this procedure, and the UroLume endoprostheis stent as a less invasive procedure for men who may not be good surgical candidates. Newer, less-invasive tissue ablation techniques such as lasers, RF energy needles, and microwave therapy are becoming increasingly available as alternatives to Urolume for BPH symptoms. These alternative BPH procedures are not used for relieving symptoms of urethral stricture, and we expect continuing growth in Urolume sales for this indication. In 1999, we acquired exclusive worldwide distribution rights for the ProstaJect system to inject ethanol or other medicaments to treat prostate disease. This therapy, currently in U.S. clinical trials, may prove to be more effective and less costly than any of the currently marketed minimally invasive procedures. Sales of these products, included in the Men’s Health total were $6.1 million in 2002.

Womens’ Health. These products represented $30.1 million, or 21 percent of 2002 sales. Over 16 million women in the United States suffer from urinary or fecal incontinence. These diseases can lead to debilitating medical and social problems, from embarrassment to anxiety and depression. There are three types of urinary incontinence: stress, urge, and mixed. Pads and diapers are often used to contain and absorb leaks, and may be acceptable for controlling mild incontinence; new drugs may be shown to be effective, especially for urge incontinence. Our products treat stress incontinence, which generally results from a weakening of the tissue surrounding the bladder, urethra, and bladder neck from pregnancy and childbirth. Pregnancy and childbirth trauma may also cause fecal incontinence, pelvic organ prolapse, and other pelvic floor disorders. Incontinence may be relieved through exercise to strengthen pelvic floor muscles, or the injection of collagen or some other bulking agent into the wall of the urethra, bladder neck, or sphincter and narrow the passage. Surgical solutions are generally recommended only if these therapies are not effective. Prolapse and other pelvic floor defects may be repaired with a variety of open, laparoscopic, and transvaginal surgeries.

We offer a broad range of systems to restore continence including the Artificial Urinary Sphincter, and the In-Fast, Sparc, and Monarc sling systems. This broad range allows the surgeon to select the procedure most appropriate to the individual patient’s symptoms and anatomy. With an In-Fast procedure, which we have been selling since acquiring Influence in 1999, the surgeon uses a transvaginal approach to support the urethra and bladder neck with a sling attached to the back of the pubis. During 2002, we introduced the In-Fast Ultra, with a new profile designed to allow better placement of the bone anchors which hold the support material in place. We introduced the Sparc procedure in 2001 as the first complete system to place a self-fixating, mid-urethral sling with a suprapubic approach. During 2002, we launched Sparc II, with several improvements in form and function. Since its introduction, Sparc has been the major sales driver in our products for women’s health. The Monarc procedure was introduced at the end of 2002, and uses unique helical needles to place a self-fixating, sub-fascial hammock through the transobturator foramina. This procedure may be done without disrupting the endopelvic fascia and is especially valuable for women who have scarring from previous abdominal surgery and are not good candidates for a Sparc procedure. We believe all of these products offer significant advantages over comparable competitive products. The Acticon neosphincter, an extension of our urine control technology, is used to cure severe fecal incontinence. We also offer InteGraft pelvic reconstructive materials and a growing number of surgical tools to repair bladder and other pelvic organ prolapse.

About 13 million American women suffer from excessive uterine bleeding, or menorrhagia. Menorrhagia is socially debilitating and causes anemia. Drug therapies are effective for some women, but most end up with a hysterectomy, approximately 150,000 (25 percent all hysterectomies) in the United States each year. Other procedures which have some efficacy include dilation and curettage to remove the endometrial tissue from the uterus, and several new techniques to destroy the endometrium with heat or cold. On December 30, 2002, two days after the close of our 2002 fiscal year, we acquired CryoGen Inc.

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and its Her Option cryoablation therapy. This system uses a micro-processor-controlled probe to eliminate excessive menstrual bleeding by freezing the lining of the uterus and reducing its ability to regenerate. The procedure can be performed in the gynecologist’s office, allowing the woman to keep her uterus and normal hormonal levels, and avoids the hospital stay and recovery time associated with a hysterectomy. We believe that Her Option offers significant advantages over other therapies to the woman, her physician, and the healthcare system. These other therapies are, however, supported by more marketing resources and have a greater installed base of experienced users than CryoGen has. Further, this is our most significant venture into products used primarily by gynecologists rather than urologists. Our success with this product will depend on, among other things, our ability to quickly understand the needs of gynecologists, and build a marketing and sales organization to address those needs.

Sales and Marketing

We sell our products in the United States, Canada, Australia and most European countries through direct field representatives. We have nearly 100 employees in our U.S. sales force, and approximately 40 employees in our international sales force. Fifteen of our U.S. sales team call on gynecologists in relatively small geographical territories. All other U.S. sales personnel call on urologists and gynecologists. We have approximately 47 independent distributors who represent our products in other countries and account for less than 5 percent of our world-wide sales. Local market conditions, including the regulatory and competitive situation determine the type of products we sell in each market.

Our marketing people are responsible for understanding patient and physician needs, guiding new product development, and increasing the awareness, understanding, and preference for our products among physicians and patients.

Manufacturing and Supply

We use approximately 20,000 square feet of the recently acquired CryoGen facility in San Diego to manufacture the Her Option products. We use approximately 75,000 square feet of our facility in Minnetonka for manufacturing, warehousing, and distribution of nearly all other products and related components. In countries outside the U.S. where we have direct sales representation, we maintain warehouses to support local distribution.

Although many of the materials we purchase for our products are available from multiple sources, some materials are only supplied by a limited number of vendors. We purchase the silicone used in most of our implantable products from one supplier, the loss of which would have a material adverse effect on our sales and earnings. We procure a limited supply of human cadaveric dermis through two processors, and we have one supplier of porcine dermis.

We maintain a comprehensive quality assurance and quality control program, which includes documentation of all material specifications, operating procedures, equipment maintenance, and quality control test methods. Our documentation systems comply with appropriate FDA and ISO requirements.

We are currently operating with one manufacturing shift and have adequate physical capacity to serve our business operations for the foreseeable future. We do not have a back up facility, and the loss of either the Minnetonka or San Diego facility due to natural disaster or terrorist attack would have a material adverse effect on our sales, earnings, and financial condition.

Research and Development

We are committed to developing new products and improving our current products to provide physicians with better clinical outcomes through less invasive and more efficient products and procedures. Most of our research and development activities are carried out in our Minnetonka facility, although we work with physicians, research hospitals, and universities around the world. Product development for Her Option and other cryoablation opportunities is conducted in San Diego. None of this work is funded by customers or other outside institutions. Many of the ideas for new and improved products come from a

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global network of leading physicians, who also work with us in evaluating new concepts in conducting clinical trials to gain regulatory approvals. The development process for any new product can range from several months to several years, primarily depending on the regulatory pathway required for approval. We spent $12.2 million in 2000, and $11.9 million in 2001 and 2002, on research and development activities.

Competition

Competition in the medical device industry is intense and is characterized by extensive research efforts and rapid technological progress. The primary competitive factors include clinical outcomes, distribution capabilities, and price relative to competitive technologies and payments to physicians and hospitals for their services. Many of our competitors have greater resources to develop and market products, broader distribution resources, and potentially higher economies of scale than we do. Our competitive capability depends on our ability to develop new products and innovative procedures, obtain regulatory clearance and ensure regulatory compliance for our products, assist our customers to obtain reimbursement, protect the proprietary technology of our products and manufacturing process, and maintain and develop preference for our products among physicians and patients. All of these abilities require recruiting, retaining, and developing skilled and dedicated employees, and maintaining and developing excellent relationships with physicians and suppliers.

Our principal competitors in the erectile restoration market include pharmaceutical companies such as Pfizer, which makes Viagra, and Mentor Corporation, which also makes penile prostheses. Principal competitors in other men’s health, primarily for treating BPH, include drug manufacturers and other minimally-invasive treatment suppliers such as Medtronic, Urologix, and Johnson & Johnson. Our principal competitors for women’s health products include, for treating menorrhagia, Boston Scientific, Johnson & Johnson, and Novacept, and, for other products, Boston Scientific, C.R. Bard, and Johnson & Johnson.

Our competitors also include medical schools and other public and private research hospitals that continue to conduct research, seek patent protection, and establish arrangements for commercializing products in this market which will compete with our products.

Patents and Intellectual Property

We rely on patents, trade secrets, know-how, continuing technical innovations, and various licensing agreements to protect and build our competitive position. We have numerous issued U.S. patents and numerous corresponding international patents covering various aspects of our technology. We also have U.S. and international patent applications pending. We review third party products and patents to protect our rights, and to avoid infringing the legitimate rights of others.

We file patent applications to protect technology, inventions, and improvements that we consider important, but we cannot be sure our applications will be granted, or that, if granted, the patents will provide competitive advantages for our products, or that our competitors will not challenge or circumvent these patent rights. We could incur substantial costs in defending out patents or in protecting our activities from the patent claims of others, even though we do not believe that any of our products infringe any valid claims of patents or other proprietary rights held by third parties, and even if we were ultimately successful in defending the claim. If our products were found to infringe any third-party right, we could be required to pay significant damages or license fees to the third party or cease production and sale of the infringing product.

Government Regulation

Numerous governmental authorities, principally the FDA and comparable foreign regulatory agencies, regulate the development, testing, manufacturing, labeling, marketing, and distribution of our products.

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Generally, before we can market a new medical device, we must obtain marketing clearance through a 510(k) premarket notification, approval of a premarket approval application, or PMA, or approval of product development protocol, or PDP. A PMA or PDP application must be submitted if a proposed device does not qualify for a 510(k) premarket clearance procedure. It generally takes several months from the date of a 510(k) submission to obtain clearance, and it may take longer, particularly if a clinical trial is required. The PMA and PDP process can be expensive, uncertain, require detailed and comprehensive data, and generally takes significantly longer than the 510(k) process.

If human clinical trials of a device are required, either for a 510(k) submission or a PMA application, the sponsor of the trial, usually the manufacturer or the distributor of the device, must file an investigational device exemption (IDE) application prior to commencing human clinical trials. The FDA may not approve the IDE and, even if it is approved, the FDA may not accept that the data derived from the studies support the safety and efficacy of the device or warrant the continuation of clinical trials.

Our core implantable products have been approved through the PMA or PDP application process. Most of our other products are approved through the 510(k) pre-marketing notification process. We have conducted clinical trials to support many of our regulatory approvals.

The FDA and international regulatory authorities also periodically inspect our company to assure compliance with applicable quality system regulations. We must comply with the host of regulatory requirements that apply to medical devices marketed in the United States and internationally. If we fail to comply with these regulatory requirements, which are subject to change, our business, financial condition, and results of operations could be significantly harmed.

We are also subject to the National Organ Transplant Act, or NOTA, because we provide human tissue in connection with our sling systems for urinary incontinence. NOTA prohibits the purchase and sale of human organs, including related tissue, for valuable consideration. NOTA permits the payment of reasonable expenses associated with the removal, transportation, processing, preservation, quality control, implantation and storage of human tissue. NOTA enables the federal government to impose civil and criminal penalties on those found to have violated this federal statute.

The FDA has proposed a more comprehensive regulatory framework that builds upon and supersedes the existing regulations for human tissue-based products. Implementation of this proposed regulatory approach may lead to medical device submissions for some of the tissue products we provide with our sling kits. We do not expect at this time that our human tissue products will be subject to the device regulations.

Third-Party Reimbursement

Most of our products are purchased by hospitals which are reimbursed for their services by third-party payers including Medicare, Medicaid, comparable foreign agencies, private health care insurance, and managed care plans. The reimbursement environment facing our customers varies widely, as do our customers’ systems for dealing with such variation. We support the efforts of our customers to obtain appropriate reimbursement by providing them with the information necessary to align the utilization of our products with procedures for which reimbursement is established. We believe our support of customer reimbursement efforts is critical to the ongoing acceptance and success of our products.

Many third-party payers (including Medicare, Medicaid, and other large, influential payers) are seeking to reduce their costs by denying coverage for certain procedures, including new procedures for which efficacy has not yet been well established, or reimbursing at rates which do not cover the full cost of procedures. These activities may be particularly detrimental to AMS because our products treat quality-of-life conditions rather than life-threatening conditions and we are developing new products, which may not find market acceptance because of delays in third-party payer acceptance of the medical value of the new procedures. The reimbursement rates for several procedures that use our products have been reduced over the last few years and it is likely that this trend will continue.

We are not able to determine what effect, if any, the Medicare reimbursement changes discussed above have had on our revenues. We believe the average age of patients receiving our products is less than 60 and, therefore, a significant portion of our revenues are not directly affected by Medicare reimbursement trends. Further, we believe the amount that hospitals pay medical device suppliers is not always tied directly to Medicare reimbursement rates. Hospitals may consider the total volume generated by a particular surgical specialty or practice and compensate suppliers at rates higher than Medicare reimbursement rates for particular procedures to maintain volumes on other procedures performed by that specialty. Finally, Medicare reimbursement rates are affected by regional variations and, for inpatient procedures, by disease severity factors, making the correlation between national reimbursement rate adjustments and our sales and pricing less than clear. For example, while Medicare reimbursement for hospital-based outpatient surgical procedures using our inflatable penile prostheses for erectile restoration, including the "pass-through" payment for our device, decreased approximately 32 percent from 2001 to 2002, U.S. sales of products used in these surgeries increased 18 percent. (For 2003, reimbursement for these procedures, including the payment for our device, has decreased 9 percent.) Ultimately, we cannot predict the frequency or severity of future reimbursement reductions and such future reductions, if they occur, could have a material adverse effect on our revenue growth rates and profitability.

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Employees

As of February 28, 2003, we employed 576 people in the following areas: 105 in manufacturing, 238 in sales and marketing, 77 in administration, 53 in regulatory, clinical and quality assurance, and 48 in research and development. We do not have any active organized labor unions. We believe we have an excellent relationship with our employees.

Financial Information about Geographic Areas

See Note 10 of our financial statements on page F-17 of this Annual Report on Form 10-K for the information about geographic areas.

ITEM 1A. CERTAIN IMPORTANT FACTORS.

There are several important factors that could cause our actual results to differ materially from our anticipated results or which are reflected in any forward-looking statements in this Annual Report on Form 10-K. These factors, and their impact on the success of our operations and our ability to achieve our goals, include the following:

Continued Physician Use and Endorsement of our Products

In order 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 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. In particular, at the end of 2002, we introduced the Monarc sub-fascial hammock for urinary incontinence, and with the acquisition of CryoGen Inc., the Her Option therapy for excessive uterine bleeding. We believe both of these products address major market opportunities, and we have committed significant marketing and selling resources to making this therapy available to physicians and their patients. If we are unsuccessful in marketing either of them, our sales and earnings may be below expectations.

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 growth will suffer.

Continued Use of Non-Invasive Treatment Alternatives

We predominantly sell devices and kits for invasive or minimally invasive surgical procedures. If patients do not accept our products, our sales may 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.

Actions Related to Reimbursement for our Products

Our revenues depend largely on U.S. and O.U.S. 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 for the cost of procedures using our products.

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Effective January 1, 2003, the Centers for Medicare and Medicaid Services again reduced the hospital payment rates for certain procedures in which our products are used. We do not believe these reductions will have a material adverse effect on our sales or earnings in 2003, but we cannot assure you that hospitals which treat Medicare and Medicaid patients will not prohibit physicians from performing procedures which use our products. If any hospital were to prohibit these procedures, sales of our products would decline unless physicians who had been performing these procedures in that hospital were able to obtain surgical privileges in other hospitals which did allow these procedures. Further, changes in the relative reimbursement rates for different products may cause hospitals to encourage physicians to use lower cost products from our product lines, thereby having a material adverse effect on our sales and earnings. For a fuller discussion of these changes, please see “Business-Third Party Reimbursement”.

Costs of Physician Malpractice Insurance

Most of our products are used by physicians who are required to maintain certain levels of medical malpractice insurance to maintain their hospital privileges. As the cost of this insurance increases, certain physicians who have used our products to treat their patients may stop performing surgeries. Unless these patients who would have been treated by these physicians are referred to other physicians, sales of our products will decline.

Potential Product Recalls

In the event that any of our products prove to be defective, we could voluntarily recall, or the FDA could require us to redesign or implement a recall of, any defective product. 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.

Increased Supply of Sling Material

In the past we have provided human cadaveric dermis as a service in conjunction with the sale of our sling procedure kits for urinary incontinence. Currently, the supply of human tissue is not sufficient to meet demand, and during 2002 sales of our sling procedure kits which require human tissue declined. We are supplying porcine dermis that can be used with our sling procedure kits and are developing new sources of supply for human dermis, but we cannot assure you that these supplies will be sufficient to meet our customers’ demands and sales of certain sling procedure kits may continue to decline.

Product Liability Lawsuits

The manufacture and sale of medical devices exposes us to significant risk of product liability claims. In the past, we have had a number of product liability claims relating to our products. In the future, we may be subject to additional product liability claims, some of which may have a negative impact on our business. Additionally, we could experience a material design or manufacturing failure in our products, a quality system failure, other safety issues, or heightened regulatory scrutiny that would warrant a recall of some of our products. Our existing product liability insurance coverage may be inadequate to protect us from any liabilities we might incur. If a product liability claim or series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, our business could suffer. In addition, a recall of some of our products, whether or not the result of a product liability claim, could result in significant costs to us.

Acquisition Integration

On December 30, 2002, we acquired CryoGen Inc., which we are maintaining as a San Diego-based subsidiary with full responsibility for product development and manufacturing of all components and final assembly and testing of all of the components for the Her Option system for endometrial ablation, including product enhancements and new products based on CryoGen technologies. Failure to retain and develop the CryoGen workforce, or establish and maintain appropriate communications, performance expectations, regulatory compliance procedures, accounting controls, and reporting procedures could adversely affect our future sales and earnings.

Seasonality

Our business is seasonal, with the third quarter of each year typically having the lowest sales and earnings, and fourth quarter of each year typically having the highest sales and earnings. There can be no assurance that future seasonal fluctuations will not vary from this pattern or that these or other variations will not adversely affect our business and results of operations.

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ITEM 2. PROPERTIES.

Our corporate headquarters, main warehouse and manufacturing operations are located in a 180,000 square foot building we own in Minnetonka, Minnesota. The manufacturing operations at this location include sufficient capacity to expand production of our current products.

We lease a 26,000 square foot office and manufacturing facility in San Diego, California for Her Option therapy products. The manufacturing operations at this location include sufficient capacity to expand production.

We lease office space for our international operations in France, Spain, Germany, Belgium, England, Australia and Canada.

ITEM 3. LEGAL PROCEEDINGS.

We have been and are also currently subject to various legal proceedings and other matters which arise in the ordinary course of business, including product liability claims. In connection with the purchase of our assets from Pfizer in 1998, Pfizer retained liability for claims relating to products that were sold before the completion of the acquisition. We are liable for claims relating to products sold after the completion of the acquisition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 28, 2002.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.

Our executive officers, with their ages and biographical information as of March 7, 2003, are as follows:

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Douglas W. Kohrs has served as our President, Chief Executive Officer and one of our directors since April 1999. Mr. Kohrs has 20 years of experience in the medical device industry, most recently as general manager of Sulzer Spine-Tech, Inc. from May 1998 to April 1999. Mr. Kohrs was part of the founding team at Spine-Tech when it was formed in 1991 to develop and commercialize the BAK spinal fusion cage, a novel implantable device to improve the surgical treatment of degenerative disc disease. Mr. Kohrs also served as Vice President of Research and Development and Vice President of Marketing during his tenure at Spine-Tech. Mr. Kohrs currently serves as a director of Disc Dynamics, Inc. and Pioneer Surgical Technologies, both of which are privately-held companies, and Kyphon, Inc., which is publicly-held company engaged in orthopedic medical devices.

M.  James Call has served as our Executive Vice President, Chief Financial Officer and Secretary since July 2001. From 1995 through May 2001, Mr. Call was Chief Financial Officer of Interventional Technologies Inc., a private company acquired by Boston Scientific Corporation in April 2001. From 1990 through 1994, Mr. Call was with Medalist Industries, as Vice President Business Planning & Development, Corporate Secretary, and, from 1992, Chief Financial Officer.

Janet L. Dick has served as our Vice President, Human Resources since 1996. Overall, Ms. Dick has spent almost 18 years in positions of increasing responsibility within our human resources department and Schneider’s human resources department, both of which were divisions of Pfizer at the time.

Martin J. Emerson has served as our Executive Vice President, Global Sales and Marketing since January 2003. From June 2000 through December 2002, he served as our Vice President and General Manager of International. Mr. Emerson has 17 years experience in the medical device field in finance and general management capacities. From September 1998 to February 2000, he served as General Manager and Finance Director for Boston Scientific Corporation in Singapore. Also in Singapore, he was Vice President and Regional Financial Officer with MasterCard International from April 1997 to September 1998. Mr. Emerson’s earlier experience was with Baxter International from June 1985 to March 1998 most recently holding the position of Vice President Finance — Hospital Business, Brussels, from September 1995 to April 1997.

Richard J. Faleschini has served as our Vice President and General Manager, Cryogen since January 2003. From November 1999 through December 2002, he served as our Vice President, Sales and Marketing. Mr. Faleschini has over 23 years experience in medical device sales, marketing and general management. From July 1995 to August 1999, he served in various executive positions at Medtronic, Inc. with responsibilities for several sectors of its cardiovascular businesses, including coronary stents, most recently as Vice President, U.S. Cardiovascular Health Care Systems Marketing.

Lawrence W. Getlin, J.D. has served as our Vice President, Regulatory, Medical Affairs and Quality Systems and Compliance since 1990. He is a member of the American Bar Association and the California State Bar, as well as the U.S. Court of Appeals 9th District, and District Court, Central District of California, and is Regulatory Affairs Certified. Mr. Getlin currently serves as AMS’ representative on the board of directors of InjecTx, Inc., a privately held company that supplies us with our ProstaJect ethanol injection systems.

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Ross A. Longhini has served as our Executive Vice President, Chief Technology Officer since January 2003. Mr. Longhini has 20 years of experience in the field of medical device product development. From 1998 to 2002, he served in various management positions in Sulzer Spine-Tech of Minnesota including Vice President, Research and Development, Clinical & Regulatory. From 1991 to 1998, he worked at I.V. Infusion Therapy of Minnesota which was sold to Gaseby in 1996 then purchased by Smiths Medical Systems in 1997, and from 1983 to 1991, he worked at 3M Dental Products and contributed to the rapid growth of the division.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information

Our common stock began trading on the Nasdaq National Market System on August 11, 2000 under the symbol “AMMD.” Before that date, no public market for our common stock existed. The following table sets forth, for the periods indicated, the high and low closing sales prices per share of our common stock as reported on the Nasdaq National Market. These prices do not include adjustments for retail mark-ups, mark-downs or commissions.

Holders

As of March 7, 2003, there were approximately 87 shareholders of record and an estimated 2,400 beneficial stockholders.

Dividends

We have never declared or paid cash dividends. We intend to retain all future earnings for the operation and expansion of our business. We do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future. In addition, our current senior credit facility prohibits us from paying you any cash dividends without out lenders’ consent.

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ITEM 6. SELECTED FINANCIAL DATA.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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”. 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

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Management’s discussion and analysis of financial condition and results of operations is based upon the 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 (1) the reported amounts of assets, liabilities, revenues, and expenses and (2) the 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 and sales return obligations, inventories, long-lived assets, warranty, legal contingencies, and income taxes. The critical accounting policies that are most important in fully understanding and evaluating the financial condition and results of operations are discussed below.

Revenue Recognition Policy. A significant portion of our revenue is generated from inventory temporarily loaned to customers or from consigned inventory maintained at hospitals or with field representatives. In these situations, revenue is recognized at the time that the product has been implanted or used. In all other instances, revenue is recognized at the time product is shipped, net of allowances for estimated returns.

Allowance for Doubtful Accounts and Other Accounts Receivable Related Valuation Accounts. We maintain an allowance for doubtful accounts and sales returns, that are calculated using subjective judgments and estimates to establish these valuation accounts. Different judgements could have material variances in the amount and timing of our reported results for any period. In addition, actual results could be different from current estimates, possibly resulting in increased future charges to earnings.

An allowance for doubtful accounts is maintained for all individual accounts receivable that we believe are unlikely to be collected. For all other accounts receivable, an allowance for doubtful accounts based on the age of receivable balances is recorded. At December 28, 2002, the allowance for doubtful accounts was $1.0 million compared to $.8 million at December 29, 2001. As a percentage of total accounts receivable, the allowance was 3.4% at December 2002 compared to 3.1% at December 2001.

We maintain an allowance for returns based on historical and current trends in product returns. At December 28, 2002, this allowance was $.4 million compared to $.5 million at December 29, 2001.

Inventory Valuation. Inventories are recorded at the lower of manufacturing cost or net realizable value. Each quarter, we 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. Inventories that are considered obsolete are written off. In

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addition, an allowance for inventory quantities in excess of forecasted demand is recorded. Inventory allowances were $2.7 million at December 28, 2002 and December 29, 2001. 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. As a percentage of total inventories, the allowance was 16.9% at December 28, 2002 compared to 16.2% at December 29, 2001.

Warranty Accrual / Allowance. We warrant all of our products to be free from manufacturing defects. In addition, if a product fails, we provide replacement prostheses at substantial discounts from its list price. We maintain a warranty allowance to cover the cost of these replacements. To recognize this liability, we record the expected costs of warranty-related claims when products are sold. The amount of the accrued warranty allowance is the estimate of the expected future cost of honoring our warranty obligation. Factors influencing this estimate include historical claim rates, changes in product performance, the frequency of use by the patient, and the patient’s performance expectations. Product reliability is a function of raw material properties, manufacturing processes, and surgical technique. During 2002, we noted a significant decrease in warranty claims. With further investigation, we concluded that this decrease is primarily the result of recent product improvements and customers preferring enhanced, newer generation products rather than a replacement of their original prosthesis. Because we expect these trends to affect warranty claims for the foreseeable future, a determination that the warranty allowance should be reduced by approximately $2.9 million was made. This adjustment has been recorded as a reduction to cost of goods sold and as an increase reported operating income and net income. At December 28, 2002, our allowance for estimated future warranty costs was $4.5 million compared to $7.6 million at December 29, 2001. If we experience further changes in any of the factors that influence this estimate, we may make additional adjustments to this accrual.

Legal Liability Accrual. Each quarter, we estimate 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 surgeon and medical facility responsibility, make litigation costs hard to predict. Accruals for future litigation costs were $1.1 million on December 28, 2002 compared to $1.5 million at December 29, 2001. If, in the future, we determine that this accrual is inadequate, the adjustment would reduce reported income in the period the adjustment is recorded.

Income Taxes. In the preparation of the consolidated financial statements, income taxes in each of the jurisdictions in which we operate are estimated. 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 are reviewed for recoverability and then valued accordingly. An evaluation on the realizability of the deferred tax assets is made on a quarterly and yearly basis as well as an assessment for 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 believe all or part of our deferred tax assets will not be realized.

A valuation allowance of $0.7 million is maintained to offset tax loss carry forwards created in a foreign jurisdiction, which, if subsequently recognized, would be allocated to goodwill. No other allowances against net deferred tax assets are maintained at December 28, 2002. If a determination that we would not realize all or part of the deferred tax assets, an adjustment to the deferred tax asset valuation allowance and a charge to income in the period of the determination would be made.

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Overview

We manufacture and market a broad and well-established line of proprietary surgical products directly to urologists and gynecologists focusing on four major urological and gynecological disorders: incontinence and other pelvic floor disorders, erectile dysfunction, and prostate disease. We focus on expanding our product offering and adding less-invasive medical devices for urological and gynecological disorders through product development and acquisitions.

Effective January 1, 2001, we changed our fiscal year end from a calendar year ending on December 31 to a 52 or 53-week fiscal year ending on the Saturday nearest December 31. Accordingly, fiscal years 2000, 2001, and 2002 ended on December 31, 2000, December 29, 2001, and December 28, 2002. Our next fiscal year will be a 53-week year and will end on January 3, 2004. Fiscal years are identified in this report according to the calendar year in which they end. For example, the fiscal year ended December 28, 2002 is alternatively referred to as “fiscal 2002” or “2002”.

On December 30, 2002, two days after the end of the 2002 fiscal year, we acquired CryoGen Inc. Accordingly, the following discussion does not include CyroGen operations.

Results of Operations

The following is a discussion of the results of our operations and financial condition for fiscal 2000 compared to fiscal 2001 and fiscal 2001 compared to fiscal 2002.

Net Sales. The erectile restoration product line includes four types of inflatable and non-inflatable prostheses and smaller amounts of diagnostic equipment. Male urinary control products include all sales of the inflatable urinary sphincter even though a very small share of this product is used in women. Women’s health product line sales include sales of Acticon Neosphincter to control fecal incontinence even though a small percentage of the product is used in males. Prostate treatments include all sales of our Urolume product even though this product is also used to treat urethral strictures.

The following table compares net sales of our product lines between 2000 and 2001 and between 2001 and 2002.

During 2001, the 15.5% increase in erectile restoration sales was primarily due to a shift to our new InhibiZone antibiotic coated penile implant which was released in the U.S. during the second quarter of 2001. The 19.1% increase in male urinary control sales was due to a combination of unit increases, especially in the InVance male sling system, and price and unit increases on the AMS 800 Artificial Urinary Sphincter. The 25.7% increase in sales of women’s health products was primarily due to sales of

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SPARC, a suprapubic mid-urethral sling system which we released internationally in the second quarter of 2001 and in the U.S. in the third quarter of 2001. The 7.8% increase in other men's health sales was due to sales of Prostaject, an ethanol injection system for the treatment of BPH.

During 2002, approximately half of the 17.4% increase in erectile restoration sales was due to a continued shift to the InhibiZone antibiotic coated penile implant introduced in 2001 and price increases. We plan to release InhibiZone to international markets during the second quarter of 2003. The 14.7% increase in male urinary control sales was due to a combination of unit increases, especially in the InVance male sling system, and price increases on the AMS 800 Artificial Urinary Sphincter. The 48.5% increase in women’s health sales is attributable to greater unit sales of SPARC. The 14.6% decrease in other men's health sales was due to lower unit sales partially offset by a price increase.

The following table compares the dollar and percentage change in the Statement of Operations between 2000 and 2001 and between 2001 and 2002.

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The following table shows the Statement of Operations as a percentage of net sales for 2000, 2001, and 2002.

Cost of sales. Recent cost of sales trends have benefited from greater spreading of fixed overhead costs over higher manufacturing volumes. During 2002, we noted a significant decrease in warranty claims. With further investigation, we concluded that this decrease is primarily the result of recent product improvements and customers preferring enhanced, newer generation products rather than a replacement of their original prosthesis. This change resulted in a $2.9 million reduction in the allowance for future warranty claims. This change in estimate was recorded as a reduction in cost of sales during 2002. Without this change in estimate, cost of sales during 2002 would have been $27.5 million, or 19.4% of sales. Operating income would have been $35.2 million, and net income would have been $23.1 million, or $.68 per diluted earnings per share. See Critical Accounting Policies and Estimates for further details.

Marketing and sales. Although decreasing as a percentage of sales, cost increases for 2001 and 2002 resulted from higher employee and commission expenses to support higher sales and new product rollout costs. A significant portion of this increase built international infrastructure leading to increased international sales in 2002. In the future, we expect marketing and selling costs to increase as sales increase, but decrease as a percentage of sales.

General and administrative. Cost increases in 2002 compared to 2001 were primarily due to professional fees and services, recruiting and relocation costs, and corporate insurance, partially offset by a $0.6 million savings due to the closing of our Israeli manufacturing facility during 2001. We expect spending in general and administrative to increase in 2003 compared to 2002 at a percentage less than our sales growth.

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 these products. Cost increases during 2001 and 2002 in clinical studies and product development costs were more than offset by the savings of $0.4 million and $0.7 million due to the closing of our Israeli R&D facility during 2001. We expect total spending in research and development to increase in

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2003 compared to 2002 and, longer term, to be in the range of 8 to 10 percent of net sales. In addition, costs in this area could vary as a result of spending on purchased technologies as new opportunities are discovered.

Transition and reorganization. During 2000 and 2001, assessments were completed of management personnel needs and transition and reorganization costs of $1.0 million were recorded for employee termination costs.

Amortization of intangibles. The increase in amortization of intangibles in 2001 compared to 2000 is attributable to milestone payments and contingent purchase price payments following the Influence acquisition. Cost decreases in 2002 compared to 2001 are 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 no longer amortized. For a fuller description of this change and its impact on financial results, see Notes to Consolidated Financial Statements.

Royalty income. We license our stent delivery technology for medical use outside of the urology field. All royalty income is from this license.

Other income(expense). Other expense in 2001 includes the receipt of a non-recurring payment of $0.4 million representing reimbursement to resolve a quality issue with a supplier netted against a $3.4 million write-off relating to an investment in Collagenesis Corporation and certain equipment related to the investment.

On January 1, 2002, we terminated the AMS Retirement Annuity. In conjunction with this termination, we made a settlement contribution to the pension trust of approximately $5.8 million and recorded as other income in 2002 a gain on pension plan termination of $0.7 million.

Substantially all of the remainder of other income and expense relates to exchange gains and losses resulting from the weakening and strengthening of foreign currencies, mainly the Euro, against the U.S. dollar and relate to translating foreign denominated inter-company receivables to current rates.

Interest income and interest expense. Interest income was higher in 2001 than in 2000 due to the investments of the proceeds of a follow-on public offering completed in July 2001. During 2002, interest income was higher as these proceeds were invested for the full year versus a partial year in 2001.

Interest expense was lower in 2001 than in 2000 as average borrowings under notes payable were approximately $37 million lower. Interest expense decreased further in 2002 as average borrowings again declined by approximately $5 million.

Income tax expense. As part of our adoption of Statements of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets", we no longer record goodwill amortization that previously had been a permanent non-deductible expense. In 2000 and 2001, the total of this non-deductible amortization was approximately $1.1 million and $1.9 million. If the new rules that were adopted in 2002 were in place in 2001, the effective tax rate in 2001 would have been approximately 41%. Effective tax rate comparisons for 2000 are not meaningful as permanent non-deductible expenses were abnormally high in comparison to pretax income.

Net income. Increases in net income in 2001 and 2002 resulted from the increase in sales while maintaining control over operating costs, the change in accounting for amortization of goodwill, and the reduction in the allowance for future warranty claims, all of which are described above.

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Liquidity and Capital Resources

Cash and cash equivalents plus investments in short-term and long-term marketable securities were $79.4 million as of December 28, 2002, compared to $56.6 million as of December 29, 2001. This increase is due to cash provided from operations plus cash flows from investing and financing activities.

Cash flows from operating activities. During 2000, net income plus the non-cash expenses of depreciation and amortization of intangibles totaled $12.1 million compared to $19.8 million in 2001 and $32.6 million in 2002. During 2000, accounts payable and accrued expenses decreased $4.8 million as accrued acquisition expenses, mostly relating to the Influence acquisition, and transition and reorganization expenses incurred in 1999, were paid. During 2001, we incurred a non-cash expense of $0.7 million due to the acceleration of stock option vesting for a terminated employee and a non-cash expense of $3.4 million related to the write-off of an investment in Collagenesis. In addition, we built inventories by approximately $4.3 million to support new products. During 2002, we made a $5.8 million pension plan termination payment and realized a $2.9 million non-cash gain on the reduction in the allowance for warranty claims. Both of these items are reflected in a reduction of accrued expense.

Cash flows from investing activities. During 2000 and 2001, we made milestone and contingent purchase price payments relating to the Influence acquisition totaling $3.7 million and $11.5 million. During 2000, we paid the second $1.0 million installment related to a patent purchase and $1.6 million in up-front financing fees on our senior credit facility. During 2001 and 2002 we made investments of $1.5 million and $1.0 million in InjecTx. In 2001 we acquired worldwide distribution rights to distribute DermMatrix, a porcine dermis graft material used in sling and pelvic prolapse procedures, for an initial payment of $1.5 million and another $1.0 million in 2002. During 2001, we made a $3.0 million investment in Collagenesis Corporation.

Cash flows from financing activities. We have a senior credit facility, which consists of term debt and a $15 million revolving line of credit. The 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. During 2000, 2001, and 2002, we made regular principal payments and prepayments of $61.5 million, $15.6 million, and $4.9 million. As of December 28, 2002, the outstanding principal balance under the senior credit facility was $24.0 million. As of December 28, 2002, we did not have an outstanding balance under the revolving line of credit and had $15 million of availability under the revolving line of credit. The following table sets forth the future payment obligations under the senior credit facility and operating leases:

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In 2000, we received $63.3 million in net proceeds from our initial public offering of common stock and the exercise of stock options. In 2001, we received $55.0 million in net proceeds from a follow-on public offering of common stock and the exercise of stock options.

Cash Commitments.

On December 30, 2002, two days after our fiscal year end, we completed the acquisition of Cryogen, Inc. Pursuant to the acquisition agreement, we paid former Cryogen shareholders cash proceeds of $40 million, net of certain transaction expenses and subject to certain adjustments. The initial payment made by us to former Cryogen shareholders, after payment of transaction expenses and all adjustments, was approximately $36.2 million. We deposited $3.0 million of this initial consideration in escrow to be held for eighteen months after closing of the merger to cover certain contingencies.

In addition to the initial consideration described above, Cryogen’s former shareholders will receive an earnout payment equal to three times our net revenues from sales of Cryogen’s products over a period of four consecutive Company fiscal quarters ending three years after closing, less $40 million. If our net product revenues attributable to sales of Cryogen’s products during any such four-quarter period do not exceed $13.3 million, no earnout payment will be made. The maximum amount of the earnout payment is $110 million. The earnout payment, if any, will be distributed to former Cryogen shareholders subject to certain rights of set-off.

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

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Hedging and Currency Fluctuations

We have not purchased options or entered into forward or futures contracts, except as required by our senior credit facility. As of December 28, 2002, all of our derivatives, designated as cash flow hedges, are interest rate swaps. We hedged a portion of our original $65.0 million variable rate term note, as required by our senior credit facility, by entering into an interest rate swap agreement in which we agree to exchange, at specified intervals, the calculated difference between the fixed interest rate of the swap and the variable interest rate on a portion of our debt. This interest rate swap agreement expires June 30, 2003. We expect that pre-tax losses totaling approximately $0.9 million, which are recorded in other comprehensive income (loss) at December 28, 2002 and represent the difference between the fixed rate of the swap agreement and variable interest of the term note, will be recognized within the next twelve months as part of interest expense. At December 28, 2002, the fair value of the interest rate swap, based upon quoted market prices for contracts with similar maturities, was approximately $0.9 million. The pay rate of the interest rate swap is 10.065% and the predicted future receive rate on our senior credit facility is approximately 3.41%.

Our operations outside of the United States are maintained in their local currency, except for our Israeli subsidiary, where the U.S. dollar serves as the functional currency. All assets and liabilities of our international subsidiaries are translated to U.S. dollars at year-end exchange rates in effect during the year. Translation adjustments arising from the use of differing exchange rates are included in accumulated other comprehensive income in stockholders’ equity. Gains and losses on foreign currency transactions are included in other income (expense) and were not material in any period.

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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ITEM 8. FINANCIAL STATEMENTS.

Our Consolidated Financial Statements and the report of our independent certified public accountants are included in this Annual Report on Form 10-K beginning on page F-1. The index to this report and the financial statements is included in Item 14 (a) (1) below.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

	A.		Directors of the Registrant.
			The information in the “Election of Directors-Information About Nominees and Other Directors” and “Election of Directors-Additional Information About the Board of Directors” sections of our 2003 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.
	B.		Executive Officers of the Registrant.
			Information about our executive officers is included in this Annual Report on Form 10-K under Item 4A, “Executive Officers of the Registrant.”
	C.		Compliance with Section 16(a) of the Exchange Act.
			The information in the “Section 16(a) Beneficial Ownership Reporting Compliance” section of our 2003 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.
	D.		Audit Committee Financial Expert
			The information in the “Election of Directors-Additional Information About the Board of Directors” section of our 22003 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information in the “Election of Directors-Director Compensation,” “Election of Directors-Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report on Executive Compensation,” and “Compensation and Other Benefits” sections of our 2003 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information in the “Compensation and Other Benefits—Securities Authorized for Issuance Under Equity Compensation Plans” and “Principal Stockholders and Beneficial Ownership of Management” sections of our 2003 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information in the “Certain Transactions” section of our 2003 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

PART IV

ITEM 14. CONTROLS AND PROCEDURES

(a)		Evaluation of Disclosure Controls and Procedures.
		Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this annual report on Form 10-K, have concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.
(b)		Changes in Internal Controls.
		There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date.

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

	(a)		1. Financial Statements:
	Our following Consolidated Financial Statements and the Independent Auditors’ Report thereon are included herein (page numbers refer to pages in this Annual Report on Form 10-K):

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2. Financial Statement Schedules:

American Medical Systems Holdings, Inc.
Schedule II — Valuation and Qualifying Accounts
(In thousands)