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

FORM 10-Q

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

or

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

     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.

x Yes o No

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

x Yes o No

     As of November 10, 2003, there were 33,070,117 shares of the registrant’s Common Stock, $.01 par value 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)

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

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American Medical Systems Holdings Inc.
Consolidated Statements of Operations — Unaudited
(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.
Consolidated Statements of Cash Flow — Unaudited
(In thousands)

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. without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The consolidated financial statements include the accounts of the Company and its subsidiaries, and all significant inter-company accounts and transactions are eliminated in consolidation. Certain information and footnote disclosure 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 2002. All amounts are in thousands, except per share data.

These statements reflect all adjustments (which include only normal, recurring adjustments) management believes are necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented. Our business has seasonal fluctuations in both revenue and expenses, and the results of operations for any interim period are not indicative of results for the full year.

2.

Stock-Based Compensation

The Company has one stock-based employee compensation plan. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The exercise price of the Company’s employee stock options generally equals the market price of the underlying stock on the date of grant for all options granted, and thus, under APB 25, no compensation expense is recognized. However, during 2000, the Company recognized deferred compensation of $1.4 million, reflecting the excess of the fair value of the underlying stock on the date of grant over the exercise price. The deferred compensation is being amortized over vesting periods of two to four years. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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3.

Earnings per Share

The following table presents information necessary to calculate basic and diluted earnings per common share and common share equivalents for the three and nine months through September, 2002 and 2003.

4.

Inventories

Inventories consist of the following:

5.

Warranties

The Company adopted Financial Accounting Standards Board Interpretation No. 45, Guarantor’s accounting and disclosure requirements for guarantees, including indirect indebtedness to others (FIN 45), during the first quarter of 2003. FIN 45 requires disclosures concerning the Company’s obligations under certain guarantees.

Many of the Company’s products are sold with warranty coverage for periods ranging from one year up to the patient’s lifetime. The accrued warranty allowance is our estimate of the expected future cost of honoring current warranty obligations. Factors influencing this estimate include historical claim rates, surgical infection rates, changes in product performance, the frequency of use by the patient, and the patient’s performance expectations. Beginning and ending balances; and changes in warranty allowances during the nine months through September 2003 were as follows:

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6.

Acquisitions

CryoGen

On December 30, 2002, the Company completed a merger with CryoGen Inc. under which CryoGen became a wholly-owned subsidiary of the Company. In conjunction with the merger, the Company paid the former shareholders of CryoGen $36.2 million and paid $4.7 million of acquisition-related costs. In addition to the initial consideration for the CryoGen acquisition, CryoGen’s former shareholders may receive an earnout payment equal to three times the sales of CryoGen’s products during any four consecutive quarters ending three years after closing, less $40 million. If 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. This payment, if any, will be accounted for as goodwill. The primary purpose of the CryoGen acquisition was to gain access to CryoGen’s products and technology and further the Company’s strategy of developing more and better treatments to improve women’s health. The Company believes that many women with the incontinence and other pelvic disorders it treats (through urologists and gynecologists) also suffer from menorrhagia and uterine fibroids, and the Company’s investments in these markets would allow it to extend the benefits of the CryoGen products and technology to these women more efficiently and effectively than CryoGen could. The Company also believes that by broadening its offerings beyond incontinence treatments, it could offer more value to its physician-customers. The Company believes as many as 150,000 American women every year suffer from hysterectomies that might be avoided by using less invasive treatments such as Her Option. The primary advantage of Her Option over other less-invasive treatments is cost: the Company believes a gynecologist could use the Her Option to cure menorrhagia without monitored anesthesia, with significant savings to the healthcare system. The consolidated financial statements of the Company for the three and nine-month periods through September 2003, include the financial results of CryoGen from December 30, 2002, the date the purchase transaction was effective.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as a result of this acquisition:

Following are pro forma amounts assuming the acquisition was made at the beginning of 2002:

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Dura II

On April 7, 2003, the Company acquired the Dura II line of erectile restoration products from Endocare Inc. The Company paid Endocare $2.2 million for all intellectual property, production equipment, and current Dura II inventory. The primary purpose of this acquisition was to fill the void in the Company’s product line between its inflatable prostheses and its non-inflatable products with a non-inflatable, adjustable product.

The Company intends to conduct an internal valuation study of this product acquisition. The Company has recorded goodwill of approximately $1.8 million, including acquisition costs consisting of legal services. The allocation of the purchase price for the acquisition is as follows:

7. 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 three and nine months through September, 2002 and 2003, were:

8.

Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company is required to apply FIN 46 to all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, management is required to apply FIN 46 for periods ending after December 15, 2003. The Company is evaluating the impact of this interpretation.

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9. Goodwill and Intangible Assets

Intangible Assets
The following table presents the Company’s intangible assets and amortizations as of September 27, 2003:

Aggregate amortization expense

Estimated amortization expense

The estimated amortization expense for each of the years 2004 through 2007 is $4.8 million.

Goodwill
The changes in the carrying amount of goodwill for the nine-months ended September 27, 2003, are as follows:

10. Income Taxes
During the third quarter of 2003, the Company recognized a one-time tax benefit of $1.1 million resulting from the implementation of certain tax planning strategies, increasing net income by $1.1 million, or $0.03 per share. The Company also changed its estimated effective annual income tax rate from 37.2 percent to 36.3 percent. This reduced the provision for income taxes by $250,000 in the three and nine months through September 2003 from what they would have been without this change in estimate.

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ITEM 2. 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 “esti-mate,” 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 “Risk 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 we believe to be reasonable under the circumstances. Management’s discussion and analysis of financial condition and results of operations are 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 judgments 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 risks, 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 in our most recent Annual Report on Form 10-K on file with the SEC. During the third quarter of 2003 we determined that our use of certain tax credits would result in a lower effective annual income tax rate, and we adjusted our estimated effective annual income tax rate from 37.2 percent to 36.3 percent. This reduced our provision for income taxes by $250,000 in the three and nine months through September 2003 from what they would have been without this change in estimate.

RESULTS OF OPERATIONS

Overview

We manufacture and market a broad range of proprietary products for erectile restoration; other men’s health, including products for incontinence, stricture, and prostate disease; and women’s health, including products for menorrhagia, 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.

Results of Operations

The following discusses the results of operations and financial condition for the third fiscal quarter and first nine months of 2003 compared to the third fiscal quarter and first nine months of 2002.

Net Sales. Our erectile restoration products include several types of inflatable and non-inflatable prostheses to replace non-functioning penile erectile tissue. In April 2003, we expanded our range of erectile restoration products by purchasing the Dura II line of prostheses from Endocare. For male urinary control we sell our Artificial Urinary Sphincter and the InVance sling system. For urethral stricture and BPH symptoms we sell urethral stents, surgical resection loops, and a chemical ablation system (in clinical trials in the U.S.). Our women’s health products include several products for urinary control (Artificial Urinary Sphincter, InFast, Sparc, and Monarc), the Her Option products to cure excessive uterine bleeding, and a variety of other products for pelvic vault repairs.

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     The following tables show changes in the net sales by product lines and geography in 2002 and 2003: