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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

10700 Bren Road West
Minnetonka, MN 55343
(Address of principal executive offices)

Registrant’s telephone number:

(952) 933-4666

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                        No  

     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.   

     As of March 18, 2002, 31,705,653 shares of Common Stock of the Registrant were deemed outstanding, and the aggregate market value of the Common Stock of the Registrant (based upon the closing price of the Common Stock at that date as reported by The Nasdaq Stock Market), excluding outstanding shares beneficially owned by directors, executive officers, and affiliates of AMS, was approximately $421,719,069.

     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 the Annual Meeting of the Stockholders to be held May 8, 2002 (the “2002 Proxy Statement”).

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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

FORM 10-K

For the Fiscal Year Ended December 29, 2001

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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 on page 10 through 12, and in the “Management Discussion and Analysis of Results of Operations and Financial Condition” beginning on page 17 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

We are the leading independent company focused solely on supplying medical devices to physicians specializing in the treatment of urological disorders. We currently manufacture and market a broad and well-established line of proprietary products directly to urologists, with our principal focus on the three major urological disorders: incontinence, erectile dysfunction and prostate disease.

	•		Incontinence. We offer a broad line of products designed to treat men and women suffering from urinary and fecal incontinence. Our products include artificial sphincters, male and female sling systems, a vaginal vault prolapse system, and graft materials. Our incontinence products represented $51.7 million, or 44%, of our 2001 net sales.
	•		Erectile Dysfunction. We are the leader in the surgical erectile dysfunction market, with about 70% market share in penile prostheses based on 2001 sales. Our erectile dysfunction products include a full line of inflatable and malleable penile prostheses and accessories used in the diagnosis and treatment of erectile dysfunction. Our erectile dysfunction products represented $59.2 million, or 50%, of our 2001 net sales.
	•		Prostate Disease. We participate in the prostate disease market with our prostatic stents and resection loops, and outside of the United States, we market our minimally invasive ethanol injection system for treatment of enlarged prostates, also referred to as Benign Prostatic Hyperplasia, or BPH. Our prostate disease products represented $7.1 million, or 6%, of our 2001 net sales.

Our product development and acquisition strategy has focused on expanding our product offering and on adding less-invasive medical devices for the treatment of incontinence, erectile dysfunction and prostate disease. Starting in 1999, we expanded our commitment to the treatment of incontinence and prostate disease through the acquisitions of several leading-edge technologies. In October 1999, we acquired exclusive worldwide distribution rights to the ProstaJect Ethanol Injection System, a minimally invasive treatment for BPH. In December 1999, we acquired Influence, Inc., a provider of less-invasive sling products for treating female incontinence.

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In fiscal year 2001, our research and development activities resulted in the commercialization of several new or improved products. In the first quarter of 2001, we introduced an internal paralyne coating for our penile prostheses to increase the durability of the prostheses. In the second quarter of 2001, we introduced InhibiZone, an external anitibiotic surface coating for our penile prostheses. In April 2001, we introduced in Europe our SPARC sling system for the treatment of female incontinence, which was introduced in the United States in August 2001. In January 2001, we acquired rights to distribute cadaveric human dermis from Collagenesis Corporation, which ceased operations at the end of 2001. As a result, we are currently working to establish another supplier for cadaveric human dermis tissue. In December 2001, we acquired worldwide rights to distribute DermMatrix, a porcine dermis graft material, from Carbon Medical Technologies, Inc. Human dermis and porcine dermis can be used as sling materials for incontinence, and for other pelvic vault repairs.

We are currently developing several new products or product enhancements for incontinence, erectile dysfunction and prostate disease. These products include a new and improved InFast product to replace the design acquired with Influence, Inc., and a new and improved pump for our urinary control system and inflatable penile prostheses.

Our company was founded in 1972. Pfizer Inc. acquired the company in 1985. In September 1998, a group of investors led by Warburg, Pincus Equity Partners L.P. purchased the assets of the company from Pfizer. We formed American Medical Systems Holdings, Inc., our current holding company, in April 2000. In this Annual Report on Form 10-K, references to “AMS,” “the company,” “we” and “our,” unless the context otherwise requires, refer to American Medical Systems Holdings, Inc. and its subsidiaries, including its wholly owned operating subsidiary, American Medical Systems, Inc. Our principal executive offices are located at 10700 Bren Road West, Minnetonka, Minnesota 55343, and our telephone number is 952-933-4666. Our website is www.AmericanMedicalSystems.com. Our website is not intended to be part of this Annual Report of Form 10-K.

Financial Information About Segments

Since our inception, we have operated in the single industry segment of developing, manufacturing, and marketing medical devices.

Seasonality

Our sales and operating results have varied and are expected to continue to vary significantly from quarter to quarter as a result of seasonal patterns. We believe our business is seasonal, with the third quarter of each year typically having the lowest sales and fourth quarter of each year typically having the highest sales. There can be no assurance that future seasonal fluctuations will not adversely affect our business and results of operations.

Our Products

We offer a full line of surgical products to treat incontinence, erectile dysfunction and prostate disease. Approximately 60 million people in the United States suffer from one or more of these disorders. We estimate that approximately 11 million of these people have a disorder severe enough to be potential candidates for treatment with our products, although only a small share of the patients suffering from these disorders seek treatment. In recent years, the number of people seeking treatment for urological disorders has grown with the publicity for new treatment alternatives, especially new drug therapies.

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When a patient seeks treatment, urologists generally assess the severity of the urological disorder as mild, moderate or severe. Regardless of the degree of severity, however, patients will often consider a non-invasive treatment first. If the non-invasive treatment is unsuccessful, urologists may recommend a surgical treatment.

Incontinence products accounted for 33%, 42%, and 44% of our revenues in 1999, 2000 and 2001. Erectile dysfunction products accounted for 58%, 51% and 50% of our revenues in 1999, 2000 and 2001. Prostate disease products accounted for 9%, 7% and 6% of our revenues in 1999, 2000 and 2001.

Incontinence Products

Incontinence is the involuntary release of urine or fecal matter from the body. There are three primary types of incontinence: stress, urge and mixed. AMS products treat stress incontinence, which is a symptom of the lack of bladder-neck or mid-urethral support caused primarily by weak tissue surrounding the bladder, urethra and bladder neck. The weakening of tissue surrounding the bladder, urethra and bladder neck arises most commonly in women as a result of pregnancy and childbirth and in men as a result of prostate cancer surgery.

We estimate urinary incontinence affects approximately 11 million women and 2 million men in the United States, the majority of whom suffer from mild incontinence. These patients will typically attempt to manage their incontinence condition through the use of disposable adult diapers and pads, a catheter and a urinary drainage bag, or, for women, pelvic floor muscle strengthening. These approaches only provide the patient a means to manage their incontinence. They do not permanently cure incontinence.

Patients with moderate to severe stress incontinence may find incontinence management unacceptable and may benefit from one of the following procedures to cure their incontinence:

	•		A bulking procedure, where a bulking product is implanted in the wall of the urethra at the bladder neck to bulk the sphincter and close the urethra;
	•		A sling procedure, where a sling material acts as a back stop to the urethra to prevent leakage when there is a stress event;
	•		A bladder-neck suspension procedure, which lifts up vaginal or periurethral tissue and repositions the bladder to prevent urine leakage during a stress event; or
	•		An artificial urinary sphincter procedure, where a saline-filled cuff is inserted around the urethra to gently squeeze the urethra closed to keep urine in the bladder.

We offer products that are used in all four of the above procedures. Our line of incontinence products are designed to meet a wide range of patient needs in the treatment of urinary and fecal incontinence for men and women. Our core incontinence products consist of the following:

	•		In-Fast Female Sling System, a bladder-neck suspension system used to treat female incontinence;
	•		SPARC Sling System, a mid-urethral support system used to treat female incontinence;
	•		InVance Male Sling System, a urethral support system used to treat male incontinence; and
	•		Acticon Neosphincter, an implant used to treat severe fecal incontinence.

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Our core incontinence products under development include changes to the In-Fast inserter, the SPARC needles and handles, and the control pump for the sphincter products. For information on the FDA regulatory approval process for our products, see the “Business—Government Regulation” section below.

Erectile Dysfunction Products

Erectile dysfunction is the inability to achieve or maintain an erection sufficient for sexual intercourse, most often caused by cardiovascular disease, vascular disorders, or complications from diabetes or prostate surgery. We believe erectile dysfunction affects approximately 100 million men, and their partners, around the world, of which approximately 18 percent have severe dysfunction. The primary treatment options for erectile dysfunction are oral and injectable medications, vacuum devices, and penile implants. The most popular oral medication is Viagra, and there are new oral and topical medications in development that could be introduced into the U.S. market in 2002.

Although the success of Viagra and other treatments has had a positive impact on the diagnosis and treatment of patients suffering from erectile dysfunction, many men with severe erectile dysfunction are not successfully treated with these therapies. For these men, an implanted penile prostheses may be required to allow an erection.

Our core erectile dysfunction products consist of the following:

	•		AMS Malleable Prostheses, a series of semi-rigid malleable penile implants, including the AMS Malleable 650;
	•		AMS Inflatable Prostheses, a complete range of inflatable penile implants, including the AMS 700 inflatable prosthesis with paralyne and InhibiZone antibiotic surface coating; and
	•		Neva System, a diagnostic system that measures nocturnal erectile events and records pertinent data for physician review.

We are developing a new pump for the inflatable prostheses, which we expect to have available during 2002. For information on the FDA regulatory approval process for our products, see the “Business—Government Regulation” section below.

Prostate Disease Products

An enlarged prostate, generally caused by BPH, and urethral strictures may restrict the normal passage of urine from the bladder. Symptoms of these restrictions include: increased frequency of urination, sudden urge to urinate and weak urine flow. We believe more than 13 million men in the United States have symptoms of BPH, and nearly 3 million of these men suffer from severe BPH. Approximately 2 million are treated with drugs and approximately 250,000 are treated surgically.

Conventional treatments for patients with mild to moderate BPH are watchful waiting and drug therapy. For patients with moderate to severe BPH, the most common surgical treatment is transurethral resection of the prostate, or TURP. New, less-invasive techniques such as lasers, RF energy needles, and microwave therapy, are also available. These therapies are designed to kill prostatic tissue without damaging the urethra. Stents are another alternative for patients who suffer from BPH. Treatments of urethral strictures include dilation procedures, urethrotomy procedures and stents.

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Our core prostate disease products consist of the following:

	•		UroLume Endoprostheses, an urethral stent used to relieve urinary obstruction caused by BPH, detrusor external sphincter dyssenergia, or DESD, and strictures;
	•		Coaguloop Resection Electrode, a resection loop used for electrosurgery of the prostate; and
	•		ProstaJect Ethanol Injection System, available outside of the United States and in early-stage clinical trials in the United States, is used to relieve the symptoms of BPH by injecting ethanol into the prostate.

We have also developed the BioFlow degradable stent to hold the urethra open for two to four weeks after prostate surgery, eliminating the need for a catheter. This product has been cleared for sale in many international markets, and for early-stage clinical trials in the United States. For information on the FDA regulatory approval process for our products, see the “Business—Government Regulation” section below.

Sales and Marketing

We sell our products in the United States, Canada, Australia and most European countries through direct field representatives. We have 60 employees in our U.S. sales force, and 40 employees in our international sales force. We also have a network of approximately 47 foreign independent distributors and agents who supplement our direct sales force. These distributors and agents sell our products primarily in Eastern Europe, Southeast Asia, South America, the Middle East and Africa. The local market condition, regulatory situation and competitive situation determine the type of products we sell in our distributor markets.

Our marketing department consists of approximately 41 professionals who develop and implement marketing programs designed to increase awareness, understanding and preference for our products with patients and urologists. We do this through medical marketing programs, surgical training programs, patient education materials, reimbursement assistance and medical advisory boards.

Manufacturing and Supply

Our products are manufactured in an ISO 9001 certified facility. We use approximately 75,000 square feet at our headquarters in Minnetonka, Minnesota for manufacturing, research and development, warehousing and distribution. We manufacture almost all of our products and related components in our Minnesota facility where we have numerous manufacturing capabilities, including highly skilled operations specialists using state-of-the-art expertise and technology in plastic injection molding, silicone molding, dip coating, and silicone extrusion. By the end of our first quarter of 2002, we expect to complete the transition of our Israeli manufacturing processes to our Minnesota facility.

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. The main materials for our implantable prostheses is raw silicone. We currently rely on one supplier to provide the silicone used in most of our implantable products. We are aware of only two suppliers of silicone to the medical device industry for permanent implant usage. We currently do not have a supplier of human cadaveric dermal tissue, a material used in our sling procedures, but there are several other companies who supply this tissue to hospitals and surgeons. We are actively working on obtaining additional sources of this material. We do, however, have a supplier of porcine dermis tissue, which can be used in our sling procedures and other procedures. We purchase other raw materials from multiple suppliers in the United States.

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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 9001 requirements.

We are currently operating one manufacturing shift and are at approximately 30% of our production capacity. We believe that our property in Minnesota is adequate to serve our business operations for the foreseeable future.

Research and Development

Our research and development staff focuses on improving our current products and developing new products to treat incontinence, erectile dysfunction, and enlarged prostate and urinary strictures. Our research and development staff also consults with our network of leading urologists to develop new products and new features to our existing products.

In addition to developing internal ideas, we consult with a global network of leading physicians, and evaluate new concepts against our current business strategy. Selected concepts are prototyped and evaluated before substantial funding is allocated to any development or clinical and regulatory approval activities. We spent $9.6 million in 1999, $12.2 million in 2000, and $11.9 million in 2001 on research and development activities. We invested $3.5 million in 1999 and 2001 in InjecTx and our ProstaJect product. We invested $3.0 million and $1.5 million during 2001 for rights to distribute tissue products from Collagenesis and Carbon Medical Technologies.

Competition in the medical device industry is intense and is characterized by extensive research efforts and rapid technological progress. We believe that the primary competitive factors include quality, technical capability, innovation, breadth of product line, distribution capabilities and price. Many of our competitors in the urology market have greater resources, more widely accepted products, less-invasive therapies, greater technical capabilities and stronger name recognition than we do. Our competitive capability is affected by our ability to develop new products and innovative technologies, obtain regulatory clearance and ensure regulatory compliance for our products, protect the proprietary technology of our products and manufacturing process, effectively market our products, and maintain and establish distribution relationships. All of these abilities require continuously attracting and retaining skilled and dedicated employees and excellent relationships with physicians and suppliers.

Our principal competitors in the erectile dysfunction market include pharmaceutical companies such as Pfizer, Inc., which makes Viagra, and manufactures of penile implants such as Mentor Corporation. Our principal competitors in the incontinence market include Boston Scientific Corporation, Johnson & Johnson, C.R. Bard, Inc., and Mentor Corporation. Our principal competitors in the enlarged prostate and urethral strictures market include Urologix, Inc., VidaMed, Inc. (which is being acquired by Medtronic, Inc.), Johnson & Johnson, and Boston Scientific Corporation.

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

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Patents and Intellectual Property

We rely on a combination of patents, trade secrets, know-how, trademarks, copyrights and agreements to protect our business interests. We currently have 80 issued U.S. patents and numerous corresponding international patents that cover various aspects of our technology. We also have U.S. and international patent applications pending. A substantial portion of our annual research and development budget is allocated towards generating new concepts and product ideas. This, combined with our patent program, has significantly increased the number of patentable proposals.

We seek to aggressively protect technology, inventions and improvements that we consider important through the use of patents and trade secrets in the United States and significant foreign markets, but we cannot be sure our patents will provide competitive advantages for our products, or that our competitors will not challenge or circumvent these rights. In addition, we cannot be sure the U.S. Patent and Trademark Office, or PTO, will issue any of our pending patent applications. The PTO may also deny or significantly narrow claims made under our patent applications. Any issued patents may not provide us with significant commercial protection. We could incur substantial costs in proceedings before the PTO, including interference proceedings. These proceedings could result in adverse decisions as to the priority of our inventions. The laws of some of the countries in which our products are or may be sold may not protect our products and intellectual property to the same extent as the laws in the United States, or at all.

While we do not believe that any of our products infringe any valid claims of patents or other proprietary rights held by third parties, we cannot assure you that we do not infringe any patents or other proprietary rights held by third parties. If a third party makes an infringement claim, our costs to defend the claim could be substantial and adversely affect us, even if we were ultimately successful in defending the claim. If our products were found to infringe any proprietary right of a third party, we could be required to pay significant damages or license fees to the third party or cease production. Litigation may also be necessary to enforce patent rights we hold or to protect trade secrets or techniques we own. Any claims or litigation could result in substantial costs and diversion of effort by our management.

We also rely on trade secrets and other unpatented proprietary technology, but we cannot be sure we can meaningfully protect our rights in these unpatented proprietary technologies or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to our proprietary technology. We seek to protect our trade secrets and proprietary know-how, in part, with confidentiality agreements with our employees and consultants, but we cannot be sure these agreements will not be breached, that we will have adequate remedies for any breach or that our competitors will not discover or independently develop our trade secrets.

Government Regulation

United States

Numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies, strictly regulate our products and research and development activities. The Federal Food, Drug, and Cosmetic Act, or FDA Act, the regulations promulgated under this act, and other federal and state statutes and regulations, govern, among other things, the pre-clinical and clinical testing, design, manufacture, safety, efficacy, labeling, storage, record keeping, advertising and promotion of medical devices.

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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, but 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 take 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, or an IDE, application prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and/or laboratory testing. If the IDE application is approved by the FDA and one or more appropriate institutional review boards, or IRBs, human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a nonsignificant risk to the patient, a sponsor may begin the clinical trial after obtaining approval for the study by the IRBs without separate approval from the FDA. Submission of an IDE does not give assurance that the FDA will approve the IDE and, if it is approved, there can be no assurance the FDA will determine that the data derived from the studies support the safety and efficacy of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects.

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) premarketing notification process. We have conducted clinical trials to support many of our regulatory approvals.

We currently plan to seek approval from the FDA to market the ProstaJect device and dehydrated alcohol, as a drug/device combination product, in the United States. An investigational new drug application, commonly known as an IND application, was cleared by the FDA in January 2001 and allows us to conduct a clinical study to assess safety and dosage parameters of use. In order to obtain FDA marketing approval, we will need to conduct adequate and well-controlled randomized clinical trials to establish the safety and effectiveness of the combination drug/device product; submit to the FDA a new drug application, commonly known as an NDA; and obtain FDA approval of the NDA prior to any commercial sale or shipment of the product in the United States. Throughout the process, we will be required to submit extensive clinical data to the FDA, which the FDA will review and analyze. This process is expensive, uncertain and generally takes several years to complete.

In addition to granting marketing approvals for our products, the FDA and international regulatory authorities 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. The FDA last inspected our Minnetonka, Minnesota manufacturing facility in 2000.

If the FDA believes we are not in compliance with law, it can institute proceedings to detain or seize products, issue a recall, enjoin future violations and assess civil and criminal penalties against us and our officers and employees. If we fail to comply with these regulatory requirements, our business, financial condition and results of operations could be harmed. In addition, regulations regarding the manufacture and sale of our products are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition and results of operations.

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In addition to the FDA’s regulation of the sale and marketing of medical devices, 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.

International

In order to market our products in European and other foreign countries, we must obtain required regulatory approvals and comply with extensive regulations governing product safety, quality and manufacturing processes. These regulations vary significantly from country to country and with respect to the nature of the particular medical device. The time required to obtain these foreign approvals to market our products may be longer or shorter than that required in the United States, and requirements for licensing may differ from FDA requirements.

In order to market our products in the member countries of the European Union, we are required to comply with the medical devices directive and obtain CE mark certification. CE mark certification is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. Under the medical devices directives, all medical devices including active implants and in-vitro diagnostic products must qualify for CE marking.

Third-Party Reimbursement

In the United States, as well as in foreign countries, government-funded or private insurance programs, commonly known as third-party payors, pay the cost of a significant portion of a patient’s medical expenses. A uniform policy of reimbursement does not exist among all these payors. Therefore, reimbursement can be quite different from payor to payor. We believe that reimbursement is an important factor in the success of any medical device. Consequently, we seek to obtain reimbursement for all of our products.

Reimbursement in the United States begins with our ability to obtain FDA clearances and approvals to market these products. Reimbursement also depends on our ability to demonstrate the short-term and long-term clinical and cost-effectiveness of our products from the results we obtain from clinical experience and formal clinical trials.

The U.S. Centers for Medicare and Medicaid Services, or CMS, sets reimbursement policy for the Medicare program in the United States. CMS has a national coverage policy, which provides for the diagnosis and treatment of erectile dysfunction in Medicare beneficiaries. It is estimated that 50-60% of penile prosthesis procedures are performed on patients covered by Medicare.

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Commercial payor coverage for erectile dysfunction varies widely across the United States. Prior authorization is required for penile prosthesis surgeries, and we have developed programs to address coverage denials for physicians and their patients. For example, the introduction of Viagra resulted in some plans establishing broad coverage exclusions for erectile dysfunction, most notably some Blue Cross/Blue Shield plans.

Medicare has a national coverage policy that provides coverage for our AMS 800 Artificial Urinary Sphincter. Likewise, the In-Fast and InVance sling fixation systems are utilized in surgical procedures that are well-accepted and paid for by third-party payors. Minimally invasive treatments for prostate disease are generally covered under many third-party reimbursement programs. Treatment for stricture of the urethra is covered by all Medicare carriers in the United States and BPH is covered by Medicare in 49 states.

All third-party reimbursement programs, whether government funded or insured commercially, whether inside the United States or outside, are developing increasingly sophisticated methods of controlling health care costs through prospective reimbursement and capitation programs, group purchasing, redesign of benefits, second opinions required prior to major surgery, careful review of bills, encouragement of healthier lifestyles and exploration of more cost-effective methods of delivering health care. These types of programs can potentially limit the amount which health care providers may be willing to pay for medical devices.

CMS implemented the Final Rule on its Prospective Payment System For Outpatient Services on August 1, 2000. We estimate that more than half of the procedures using our products are used in an outpatient hospital setting. This rule established a new system to reimburse Medicare outpatient surgical services provided in a hospital. All of our current products used on an outpatient basis are on CMS’ list of pass-through payment categories, which is necessary for device reimbursement.

Employees

As of December 29, 2001, we employed directly and through our subsidiaries 521 people in the following areas: 164 in manufacturing, 202 in sales and marketing, 69 in administration, 50 in regulatory, clinical and quality assurance, and 36 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 9 of our financial statements on page F-18 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:

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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 predominantly sell medical devices 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 in the future.

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.

Increased Supply of Sling Material

In the past we have provided human cadaveric dermal tissue as a service in conjunction with the sale 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 dermal tissue declared bankruptcy and is no longer supplying us with human tissue. We are actively working on obtaining additional sources of this material, but if we are not successful sales of our sling procedure kits could decline. We have, however, obtained a source of porcine dermal tissue that can be used with our sling procedure kits, but we cannot assure you that such supply will be sufficient to meet our demands.

Actions Related to Reimbursement for our Products

We may be unable to sell our products on a profitable basis 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 for the cost of the procedures using our products. If we are unable to obtain adequate levels of reimbursement from third-party payors outside of the United States, international sales of our products may decline. Many foreign markets have governmentally managed health care systems that govern reimbursement for new devices and procedures.

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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. 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.

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 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.

	(a)		On November 29, 2001, we held a special meeting of our stockholders.
	(b)		Not applicable.
	(c)		At the special meeting, our stockholders were presented with and asked to vote upon a proposal to amend our 2000 Equity Incentive Plan to increase the number of shares reserved for issuance under this plan from 3,900,000 to 5,355,000 shares. The voting results for this proposal are as follows: 16,642,891 shares voted for the proposal, 7,681,891 shares voted against the proposal, 200 shares abstained from voting on the proposal and no shares were represented by broker non-votes.

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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.

Our executive officers, with their ages and biographical information as of March 15, 2002, are as follows:

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., Kyphon, Inc. and Pioneer Surgical Technologies, all privately held companies.

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 17 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 Vice President and General Manager of International since June 2000. Mr. Emerson has 16 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 1988 most recently holding the position of Vice President Finance — Hospital Business, Brussels, from September 1995 to April 1997.

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Richard J. Faleschini has served as our Vice President, Sales and Marketing since November 1999. Mr. Faleschini has over 22 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. Mr. Faleschini currently serves as a director of MedAcoustics, Inc., a privately held company.

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.

Johann Neisz has served as our Vice President, Research and Development since May 1999. Mr. Neisz has 18 years of medical device product development experience. From July 1988 to May 1999, Mr. Neisz was employed by Medtronic, Inc. in senior level research and development capacities in the Netherlands, Sweden, and in the United States with its Neuro, Synectics-Dantec, Corporate Ventures and Tachyarrhythmia Instruments businesses.

J. Daniel Ruys has served as our Vice President, International since July 1999. Mr. Ruys has more than 20 years of experience in sales, marketing and general management with medical device companies and has spent most of his career based in Europe. From April 1997 to June 1999, he served as the European Director of MICROVENA International B.V. From March 1995 to March 1997, he served as the Vice President, Europe of CardioGenesis B.V.

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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 18, 2002, there were approximately 276 shareholders of record and an estimated 2,600 beneficial stockholders.

Dividends

We have never declared or paid cash dividends. We currently 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. Any payment of cash dividends on our common stock will be at the discretion of our board and will depend upon our results of operations, earnings, capital requirements, contractual restrictions and other factors deemed relevant by our board. In addition, our current senior credit facility prohibits us from paying you any cash dividends without out lenders’ consent.

Recent Sale of Unregistered Securities

Pursuant to an Exchange Agreement we entered into in December 1999 in connection with our acquisition of Influence, we issued 3,093 shares of our voting common stock to a former shareholder of Influence, Inc. on December 17, 2001. These shares were issued in a transaction exemption from registration under the Securities Act of 1933, as amended, under Section 4(2) of this Act.

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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.

Overview

Our company was founded in 1972. Pfizer, Inc. acquired the company in 1985. In September 1998, a group of investors led by Warburg, Pincus Equity Partners, L.P. purchased the assets of the company from Pfizer. We formed American Medial Systems Holdings, Inc., our current holding company, in April 2000.

We manufacture and market a broad and well-established line of medical devices for patients suffering from incontinence, erectile dysfunction and prostate disease. We are focused on expanding our product offering and adding less-invasive medical devices for urological disorders through product development and acquisitions.

Starting in 1999, we expanded our commitment to the incontinence and prostate disease market with acquisition of several technologies, most notably Influence, Inc. These acquisitions have enabled us to diversify our product portfolio by offering alternate treatments for incontinence and prostate disease.

We incurred substantial losses during 1998 and 1999. These losses resulted primarily from non-recurring costs related to the acquisition from Pfizer, including non-recurring charges to cost of sales related to acquired inventories. We incurred additional losses in 1999 related to the acquisition of Influence, Inc. and other technologies for incontinence, primarily from non-recurring charges to operating costs for in-process research and development. Without these non-recurring charges, we would have been profitable during 1998 and 1999.

Results of Operations

The following is a discussion of the results of our operations and financial condition for the year ended December 31, 2000 compared to the year ended December 29, 2001; and the year ended December 31, 1999 compared to the year ended December 31, 2000.

Comparison of the year ended December 31, 2000 to the year ended December 29, 2001

Net sales. The following chart compares net sales between 2000 and 2001.

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The following chart compares quarterly sales by product for the year ended December 29, 2001.

During the second quarter of 2001, we released a new penile implant with an antimicrobial coating. Sales of this new product led to an increase of $7.9 million, or 15.4%, in erectile dysfunction product line sales. In the incontinence product lines, new products, specifically the InVance, a male sling fixation system which we introduced late in 2000, and the SPARC, a suprapubic synthetic sling system which we introduced in the third quarter of 2001, led to an increase in sales of $9.2 million, or 21.7%.

In the United States, our sales increased across all product lines led by the introduction of the new products mentioned above and greater sales of existing products. Our international sales increased across the incontinence product lines, led by the SPARC system and the AMS 800 Urinary prosthesis, and in prostate product lines with the introduction of the ProstaJect Ethanol Injection System.

We maintain allowance for future sales returns. This allowance is calculated based on actual returns in a six-month period from sales in the previous six-month period and is charged to net sales. At December 29, 2001, this allowance was $463,000 compared to $138,000 at December 31, 2000.

Cost of sales. Cost of sales as a percentage of net sales decreased from 21.8% in 2000 to 19.6% in 2001. Cost of sales in 2001 benefited from greater spreading of fixed overhead costs over higher manufacturing volumes combined with lower obsolescence and warranty charges.

We maintain an allowance for obsolescence, which is calculated by reviewing specific quantities of on-hand inventory with actual sales history. At December 29, 2001, this allowance was $2.7 million compared to $3.1 million at December 31, 2000. Obsolescence costs are charged to cost of sales.

We maintain a warranty allowance, which is calculated by reviewing actual returns as a percentage of sales over time. At December 29, 2001, this reserve was $7.6 million compared to $7.5 million at December 21, 2000. Warranty costs are charged to cost of sales.

Marketing and sales. As a percent of sales, marketing and sales costs dropped from 39.2% of net sales in 2000 to 38.1% in 2001, although spending increased $5.7 million, or 14.4%, from $39.3 million in 2000 to $44.9 million in 2001. Commission expense was approximately $1.0 million higher in 2001 than in 2000 due to higher sales volume. Distribution costs were $0.3 million higher in 2001 than in 2000 because of higher sales volumes. United States marketing costs increased approximately $1.7 million due to the rollout of new marketing concepts and significant marketing expenditures related to new product rollouts. International sales and marketing costs were up $2.6 million in 2001 versus 2000. A substantial portion of these costs were related to new employee additions in 2001 and the last half of 2000, and marketing costs related to the rollout of new products. We expect total spending in marketing and sales to increase in 2002 but continue to decrease as a percentage of net sales.

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General and administrative. General and administrative costs were approximately equal in 2001 versus 2000. As a percentage of net sales, general and administrative costs decreased from 12.1% of sales in 2000 to 10.3% of sales in 2001. Cost increases in 2001 from 2000 were in the areas of employee compensation, public reporting costs including the cost to prepare our first Annual Report, corporate insurances, and additional bonuses. Cost decreases were experienced in the areas of information technology as development work tended to be done with internal staff versus outside consultants, and in human resources as employee recruitment costs decreased due to the utilization of lower cost methods for employee recruitment. We expect total spending in general and administrative to increase in 2002 but continue to decrease as a percentage of net sales.

We maintain an allowance for doubtful accounts, which is calculated by a combination of specific account identification as well as percentages of past due balances. At December 29, 2001, this allowance was $0.8 million compared to $0.7 million at December 31, 2000. Bad debt expense is charged as part of general and administrative costs.

Research and development. Research and development costs decreased $326,000 in 2001 versus 2000. As a percent of net sales, research and developments costs decreased from 12.2% of sales in 2000 to 10.1% of sales in 2001. Technology purchases such as ProstaJect, royalty arrangements such as with SPARC, and distribution agreements such as with DermMatrix, have allowed research and development costs to remain flat instead of internal development of such products. We expect total spending in research and development to increase in 2002 but to remain within the range, as a percentages of net sales, of the past two years.

Transition and reorganization. In the third quarter of 2001, an assessment was completed of management personnel needs. Transition and reorganization costs of $1.0 million were recorded for employee termination costs.

Amortization of intangibles. Amortization of intangibles increased $1.0 million, or 12.1%, in 2001 versus 2000. This increase is attributable to milestone payments and contingent purchase price payments following the Influence acquisition. We have made all potential milestone payments and contingent purchase price payments relating to the Influence acquisition.

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, “Business Combinations”, and No. 142, “Goodwill and Other Intangible Assets”. Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their estimated useful lives. The amortization provisions of Statement 142 apply to goodwill and intangible assets acquired after June 30, 2001.

With respect to goodwill and intangible assets acquired prior to July 1, 2001, the new accounting rules were applied beginning December 30, 2001. Application of the nonamortization provisions of Statement 142 is expected to result in an increase in net income of $4.7 million ($0.14 per share) starting in fiscal year 2002. We will test goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. We expect to perform the first of the required impairment test of goodwill and indefinite lived intangible assets as of December 29, 2001 in the first quarter of 2002. We do not anticipate that these rules on impairment will have a significant effect on our earnings or financial position.

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Below is a table detailing the quarterly pro forma impact on earnings with the adoption of Financial Accounting Standards No. 141, “Business Combinations”, and No. 142, “Goodwill and Other Intangible Assets”, as if the adoptions of the new standards were effective in fiscal year 2001.

Royalty and other income. We license our stent delivery technology to a former subsidiary of Pfizer for medical use outside of the urology field. We entered into this license agreement in September 1998 in connection with our acquisition from Pfizer. All of our royalty income is from this license.

Royalty and other income decreased from $2.9 million in 2000 to a loss of $0.1 million in 2001. 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 5, 2001, we made a $3.0 million equity investment in Collagenesis Corporation. At the time of the investment, Collagenesis was working with its existing debt holders to exchange its outstanding debt into equity and raise additional capital. Pursuant to the terms of the agreement with Collagenesis, we converted the equity position into a $3.0 million 10% Senior Subordinated Convertible Voting Promissory Note in April 2001. In December 2001, Collagenesis declared bankruptcy and is currently in dissolution. Generally accepted accounting principles require that investments such as our investment in Collagenesis be reviewed for impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. We consider Collagenesis’ bankruptcy and dissolution an event requiring such a review. Based on this review, we have determined that impairment in our Collagenesis investment exists. Accordingly, the investment has been written off and charged to other losses. In addition to the direct investment in Collagenesis, we also leased certain equipment to Collagenesis that was recorded as a note receivable and valued at approximately $400,000. This note receivable is deemed uncollectible and has also been written off to other losses. Collagenesis was our sole supplier of human cadaveric dermal tissue. We are actively working on obtaining additional sources of this material. Between our current inventory supply and our DermMatrix porcine product, we believe we can meet current customer demands.

Not taking into consideration the non-recurring receipt of $375,000 and the approximate $3.4 million of write-off related to Collagenesis, royalty income was $2.9 million in 2000 and 2001.

Interest income and interest expense. Interest expense decreased from 2000 because average borrowings under notes payable were approximately $37 million lower in 2001 than in 2000. Interest income increased from 2000 due to investment of receipts from our secondary common stock offering completed in July 2001.

Income tax expense. Income tax expense increased $4.5 million in 2001 compared to 2000, as income before income taxes in 2001 was $12.4 million compared to income before income taxes of $1.4 million

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in 2000. Effective tax rate comparisons between periods are not meaningful, as permanent non-deductible expenses are abnormally high in comparison to income before income taxes in both 2001 and 2000.

As part of our adoption of Statements of Financial Accounting Standards No. 141, “Business Combinations”, and No. 142, “Goodwill and Other Intangible Assets”, we will no longer be recording goodwill amortization that previously has been a permanent non-deductible expense. In 2001, the total of this type of amortization was approximately $2.0 million. If the new rules that will be adopted in 2002 were in place in 2001, our effective tax rate would have been approximately 41%.

Net income. Net income was $6.5 million higher in 2001 than in 2000. This increase in net income resulted from the increase in revenues described above while maintaining control over our operating costs.

Comparison of the year ended December 31, 1999 to the year ended December 31, 2000

Net sales. The following chart compares net sales between 1999 and 2000.

Net sales increased $19.0 million, or 23.3%, from $81.3 million in 1999 to $100.3 million in 2000. Of this increase, 81.6% was attributable to incontinence product sales. Incontinence sales increases related to sling products acquired as part of the Influence acquisition in December 1999 amounted to $14.2 million, or 74.9%, of our sales increase in 2000 over sales in 1999. Erectile dysfunction sales increased 8.7% with an increase in the number of units sold being somewhat offset by negative currency translation costs.

Increased sales of our incontinence and erectile dysfunction products were offset by a decline in sales in our prostate products. Sales of our UroLume Endoprosthesis stents decreased $0.6 million in 2000 compared to 1999 due to manufacturing problems at an outside supplier. This problem was corrected in the first quarter of 2000 and sales of this product have been near 1999 levels since March 2000.

Net sales in the United States increased $18.8 million, or 29.8 %, from $62.9 million in 1999 to $81.7 million in 2000. Of this increase, $13.1 million, or 72.1%, is attributable to sling product sales acquired from Influence and the balance of the increase was due to the growth in sales from erectile dysfunction and other incontinence products.

International net sales increased $0.2 million, or 1.2%, from $18.4 million 1999 to $18.6 million in 2000. Slightly improved sales of incontinence and erectile dysfunction products were almost entirely offset by

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decreased sales of prostate products. The net increase in sales revenue was negatively impacted by currency translation costs of approximately $1.9 million in 2000 compared to 1999.

Cost of sales. Cost of sales as a percentage of net sales decreased from 38.6% in 1999 to 21.8% in 2000. Our cost of sales during 1999 was negatively impacted because our inventories were recorded at fair market value at the date of our acquisition from Pfizer. Some of this inventory was sold during the first three months of 1999 resulting in an $11.6 million charge to cost of sales. Excluding this charge, cost of sales as a percentage of net sales was 24.4% in 1999. Cost of sales in 2000 benefited from improved manufacturing efficiencies, including reduced scrap and lower warranty charges.

Marketing and sales. Marketing and sales costs increased $8.9 million, or 29.2%, from $30.4 million in 1999 to $39.3 million in 2000. Approximately $5.0 million of this increase was attributable to marketing and the sales force that focuses on the sling product sales acquired from Influence in December 1999. We also had a full year of expenses relating to our 1999 restructuring of our European sales and marketing operations. These actions were required for us to create independent sales and marketing operations following our acquisition from Pfizer.

General and administrative. General and administrative costs increased $4.2 million, or 53.7%, from $7.9 million in 1999 to $12.1 million in 2000. This increase in costs is primarily attributable to accounting, information technology, and general management functions necessary to support the operations acquired from Influence.

Research and development. Research and development costs increased $2.7 million, or 28.0%, from $9.5 million in 1999 to $12.2 million in 2000. This increased spending supports our strategic emphasis on internal new product development, some of which is described below in the “Acquired In-Process Research and Development” section. We also added a number of research and development personnel through our acquisition of Influence.

Transition and reorganization. In the first six months of 1999, we completed an assessment of senior management personnel needs and also completed a strategic review of our research and development function. We accrued $3.0 million of transition and reorganization expenses as a result of this review. These costs primarily related to employee termination benefits and executive search fees. In the first six months of 2000, we completed another assessment of management personnel needs. We accrued $1.0 million of transition and reorganization expenses as a result of this review. These costs are primarily related to employee termination benefits.

Amortization of intangibles. Amortization of intangibles increased $4.1 million, or 96.2%, from $4.3 million in 1999 to $8.4 million in 2000. Amortization related to the Influence acquisition added $4.0 million to costs in 2000 versus the same period in 1999.

Royalty and other income (expense). Royalty and other income decreased $1.3 million, or 30.4%, from $4.2 million in 1999 to $2.9 million in 2000. During 1999, we benefited from a one-time $0.5 million contractual research and development project reimbursement.

Interest income and interest expense. Net interest expense was $6.9 million in 2000 and 1999. Higher interest rates in 2000 versus 1999 were offset by lower average borrowings during 2000 as compared to 1999.

Income tax benefit (expense). Income tax expense increased $6.7 million from a tax benefit of $5.3 million in 1999 to a $1.4 million tax expense in 2000. Effective tax rate comparisons between 1999 and 2000 are not meaningful as permanent non-deductible expenses, primarily related to amortization, are

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abnormally high in comparison to pretax income in 2000.

Net Income. Net income for 2000 was $0.1 million compared to a net loss of $9.8 million in 1999.

Liquidity and Capital Resources

Cash and cash equivalents were $28.8 million on December 29, 2001 compared to $12.2 million on December 31, 2000. The net increase in cash and cash equivalents is due to cash flows provided by operations and financing activities partially offset by investing activities as described below. In addition to our cash and cash equivalents balance, we had $9.0 million in short-term investments and $18.8 million in long-term investments on December 29, 2001.

Cash flows from operating activities. During 2001, our cash flows from operating activities provided $20.9 million versus $7.3 million during 2000. Our net income plus depreciation and amortization of intangibles provided $19.8 million of cash in 2001 versus $12.1 million in 2000. We incurred a non-cash expense of $0.7 million due to the acceleration of stock option vesting for a terminated employee. We incurred a non-cash expense of $3.4 million related to the write-off of our investment in Collagenesis. Our income tax expense of $5.9 million in 2001 was partially offset by tax loss carryforwards included in deferred tax assets. During 2001, accounts receivable and inventories increased $6.8 million due to higher sales in 2001 and inventories being built to support product rollouts in the last half of 2001. Accounts payable and accrued expenses increased $3.9 million in 2001 due to higher payable levels related to higher inventory levels and increased compensation accruals for bonuses, commissions, and pension liability. 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.

Cash flows from investing activities. During 2001, we made additional milestone and contingent purchase price payments relating to the Influence acquisition totaling $11.5 million. We have made all milestone and contingent purchase price payments related to the Influence acquisition. We made a $3.0 million investment in Collagenesis Corporation and an additional $1.5 million investment in InjecTx. We acquired worldwide distribution rights to distribute DermMatrix, a porcine dermis graft material used in sling and pelvic prolapse procedures, for $1.5 million. We purchased $27.8 million in short and long-term investments.

During 2000, we made milestone payments relating to the acquisition of Influence totaling $3.7 million. We paid the second $1.0 million installment related to a patent purchase. We paid $1.6 million in up-front financing fees on our senior credit facility.

Cash flows from financing activities. We have a senior credit facility, which 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. During 2001, we made regular principal payments of $4.1 million and a prepayment of principal of approximately $11.5 million under the term portion our senior credit facility. As of December 29, 2001, the outstanding principal balance under our senior credit facility was $28.9 million. As of December 29, 2001, 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 and operating leases:

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In July 2001, we completed a secondary public offering in which we sold 3,500,000 shares of common stock and Warburg Pincus, our principal stockholder, sold 3,500,000 shares at an offering price of $16.40 per share. We received proceeds of $53.8 million, after deducting $3.7 million for underwriting and issuance costs. We also received proceeds from the exercise of stock options and the Employee Stock Purchase Plan totaling $1.2 million.

In August 2000, we received $63.3 million in net proceeds form our initial public offering of common stock and the exercise of stock options. We used these proceeds to pay $35.0 million outstanding under our then guaranteed revolving line of credit. During 2000, we also made regular principal payments of $5.5 million and a prepayment of principal of $15.0 million under the term portion our senior credit facility.

Cash Commitments. On January 1, 2002, we terminated the AMS Retirement Annuity Plan and expect to distribute the plan’s assets to participants during 2002. We expect to make an approximate $5.8 million additional cash payment to the plan prior to distribution of the assets.

Since January 1, 2002, 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 $1.2 million.

Our acquisition of the distribution rights to DermMatrix, a porcine dermis graft material used in sling and pelvic prolapse procedures, requires us to make an additional $1.0 million payment in December 2002. If we do not make this payment, our supplier has the right to terminate the supply agreement.

We believe that funds generated from operations, together with the net proceeds of the secondary offering 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.

Acquired In-Process Research and Development

In connection with our acquisitions of technologies during 1999, we conducted a valuation of the intangible assets acquired. Based on this valuation, we assigned $7.4 million to acquired in-process research and development resulting in a one-time charge to 1999 earnings. A brief description of the status of our acquired in-process research and development projects is set forth below:

The InVance Male Sling System, a male sling fixation system has been released into the market. Product development and market release is currently on hold for the following products: TransFix Sutureless

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Sling Fixation System, a pull-in anchoring system that is sutureless; No-Tac, a next generation female sling system that does not require a bone screw in the pubic bone; Flast, a device to harvest human fascia lata tissue for sling procedures; and Clip-In, a clip around the suture in place of a knot.

NexTus is a soft tissue-anchoring device. We received 510(k) clearance for this device in the second quarter of 2001. We are now clinically evaluating the product with a select physician group. Our launch plans will depend on both the clinical success with the product and our ability to manufacture the product economically.

The UroVive Microballoon System is a durable reversible microballoon system to treat stress urinary incontinence. It includes a microballoon, a delivery system, and a syringe filled with saline. The clinical data we acquired with this product was subsequently deemed not suitable for FDA submission. Because of the expense necessary to meet the FDA requirements, we are not currently pursuing a U.S. launch. This product is currently under-going additional development and evaluation. Our plans to re-launch this product internationally will depend on the outcome of this development.

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 29, 2001, 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 $1.3 million, which are recorded in other comprehensive income (loss) at December 29, 2001 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 29, 2001, the fair value of the interest rate swap, based upon quoted market prices for contracts with similar maturities, was approximately $1.9 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 5.1%.

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 operations 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—Other Information About Nominees and Other Directors” sections of our 2002 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 2002 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 2002 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information in the “Principal Stockholders and Beneficial Ownership of Management” section of our 2002 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 2002 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.

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     2.     Financial Statement Schedules:

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

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	3.		Second Amendment to Employment Agreement, dated January 1, 2002, between Douglas Kohrs and American Medical Systems, Inc.
	4.		Stock Option Agreement, dated April 23, 1999, between Douglas Kohrs and American Medical Systems, Inc.
	5.		Separation Agreement, dated September 27, 2001, between Gregory J. Melsen and American Medical Systems, Inc.
	6.		Employment Agreement, dated May 1, 1999, between Johann Neisz and American Medical Systems, Inc.
	7.		Employment Agreement, dated July 30, 2001, between M. James Call and American Medical Systems, Inc.
	8.		Consulting Agreement, dated September 1, 1999, between Medical Genesis and American Medical Systems, Inc.
	9.		2000 Equity Incentive Plan, as amended.
	10.		Form of Incentive Stock Option Agreement.
	11.		Form of Non-Qualified Stock Option Agreement.
	12.		Employee Stock Purchase Plan.
	13.		2001 Management Incentive Plan.

(b) Reports on Form 8-K filed in the fourth quarter of 2001:

On December 3, 2001, we filed a Current Report on Form 8-K reporting a change in our fiscal year (Item 8) which was effective January 1, 2001. We did not file any financial statements with this Form 8-K.

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FINANCIAL STATEMENTS AND NOTES THERETO

REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors of
American Medical Systems Holdings, Inc.

We have audited the accompanying consolidated balance sheets of American Medical Systems Holdings, Inc. as of December 31, 2000 and December 29, 2001, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 29, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Medical Systems Holdings, Inc. as of December 31, 2000 and December 29, 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 29, 2001, in conformity with accounting principles generally accepted in the United States.

     Ernst & Young LLP

Minneapolis, Minnesota
January 25, 2002

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