AMERICAN MEDICAL SYSTEMS HOLDINGS INC - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - AMERICAN MEDICAL SYSTEMS HOLDINGS INC	Financial_Report.xls
EX-31.1 - EX-31.1 - AMERICAN MEDICAL SYSTEMS HOLDINGS INC	c59618exv31w1.htm
EX-31.2 - EX-31.2 - AMERICAN MEDICAL SYSTEMS HOLDINGS INC	c59618exv31w2.htm
EX-32.1 - EX-32.1 - AMERICAN MEDICAL SYSTEMS HOLDINGS INC	c59618exv32w1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended October 2, 2010


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

For the transition period from to

Commission File Number: 00030733

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware		41-1978822

(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)


10700 Bren Road West, Minnetonka, Minnesota		55343

(Address of principal executive offices)		(Zip Code)

952-930-6000

(Registrant’s telephone number, including area code)

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. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

As of November 1, 2010 there were 76,466,839 shares of the registrant’s $.01 par value Common Stock outstanding.

TABLE OF CONTENTS


	Page
PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Consolidated Statements of Operations for the three and nine month periods ended October 2, 2010 and October 3, 2009		3

Consolidated Balance Sheets as of October 2, 2010 and January 2, 2010		4

Consolidated Statements of Cash Flows for the nine month periods ended October 2, 2010 and October 3, 2009		5

Notes to Consolidated Financial Statements		6

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		27

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		39

ITEM 4. CONTROLS AND PROCEDURES		40

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		41

ITEM 1A. RISK FACTORS		41

ITEM 6. EXHIBITS		42

SIGNATURES		43

EXHIBIT INDEX		44
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION


ITEM 1.		FINANCIAL STATEMENTS

American Medical Systems Holdings, Inc.

Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)


	Three Months Ended						Nine Months Ended
	October 2, 2010			October 3, 2009			October 2, 2010			October 3, 2009
Net sales	$	124,029		$	123,231		$	395,323		$	373,257
Cost of sales		21,963			21,284			65,795			66,234

Gross profit		102,066			101,947			329,528			307,023

Operating expenses
Marketing and selling		42,637			42,489			136,948			128,690
Research and development		12,630			12,434			39,976			38,411
General and administrative		10,850			10,459			35,337			32,898
Amortization of intangibles		3,053			3,358			9,130			10,024

Total operating expenses		69,170			68,740			221,391			210,023


Operating income		32,896			33,207			108,137			97,000

Other income (expense)
Royalty income		153			961			508			2,768
Interest expense		(3,329	)		(4,674	)		(10,867	)		(15,050	)
Amortization of financing costs		(3,503	)		(4,395	)		(10,542	)		(12,350	)
Gain on extinguishment of debt		—			5,563			—			10,125
Gain on sale of non-strategic assets		—			17,446			7,719			17,446
Other income (expense)		1,883			(324	)		1,852			1,098

Total other (expense) income		(4,796	)		14,577			(11,330	)		4,037


Income before income taxes		28,100			47,784			96,807			101,037

Provision for income taxes		9,528			19,163			37,010			38,471


Net income	$	18,572		$	28,621		$	59,797		$	62,566


Net income per share
Basic net earnings	$	0.24		$	0.39		$	0.79		$	0.85
Diluted net earnings	$	0.24		$	0.38		$	0.77		$	0.84

Weighted average common shares used in calculation
Basic		76,151			74,278			75,627			73,939
Diluted		78,545			74,998			77,643			74,456

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

American Medical Systems Holdings, Inc.

Consolidated Balance Sheets
(In thousands, except share and per share data)


	October 2, 2010		January 2, 2010
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	17,836	$	30,670
Short-term investments		43,941		19,868
Accounts receivable, net		91,561		102,590
Inventories, net		35,254		30,276
Deferred income taxes		15,012		14,870
Other current assets		4,885		6,067

Total current assets		208,489		204,341

Property, plant and equipment, net		42,481		44,120
Goodwill		683,987		690,899
Developed and core technology, net		42,742		51,631
Other intangibles, net		50,713		49,937
Other long-term assets, net		5,347		6,223

Total assets	$	1,033,759	$	1,047,151


Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	7,866	$	9,114
Income taxes payable		2,140		4,495
Accrued compensation expenses		25,923		29,603
Accrued warranty expense		2,427		2,293
Other accrued expenses		21,150		25,760

Total current liabilities		59,506		71,265

Long-term debt		259,895		346,229
Deferred income taxes		58,629		62,347
Long-term income taxes payable		18,698		18,206
Long-term employee benefit obligations		3,745		3,745

Total liabilities		400,473		501,792

Stockholders’ equity
Common stock, par value $.01 per share; authorized 200,000,000 shares; issued and outstanding: 76,347,633 shares at October 2, 2010 and 74,715,839 shares at January 2, 2010		764		747
Additional paid-in capital		428,851		399,468
Accumulated other comprehensive income		5,111		6,381
Retained earnings		198,560		138,763

Total stockholders’ equity		633,286		545,359

Total liabilities and stockholders’ equity	$	1,033,759	$	1,047,151

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

American Medical Systems Holdings, Inc.

Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)


	Nine Months Ended
	October 2, 2010			October 3, 2009
Cash flows from operating activities
Net income	$	59,797		$	62,566

Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		7,202			7,290
Amortization of intangibles		9,130			10,024
Amortization of deferred financing costs		10,542			12,350
Excess tax benefit from stock-based compensation		(1,551	)		(486	)
Tax benefit from stock-based compensation		3,435			1,336
Net settlement of derivative contracts		(970	)		171
Change in net deferred income taxes		(5,061	)		3,708
Gain on extinguishment of debt		—			(10,125	)
Gain on sale of non-strategic assets		(7,719	)		(17,446	)
Stock-based compensation		6,284			6,649

Changes in operating assets and liabilities:
Accounts receivable		7,215			6,276
Inventories		(5,142	)		5,714
Accounts payable and accrued expenses		(9,852	)		9,466
Other assets		915			(308	)

Net cash provided by operating activities		74,225			97,185


Cash flows from investing activities
Purchase of property, plant and equipment		(5,826	)		(3,688	)
Net settlement of derivative contracts		970			(171	)
Sale of non-strategic assets, net		19,043			18,982
Purchase of other intangibles		(2,438	)		(5,392	)
Purchase of short-term investments		(57,516	)		(18,743	)
Sale of short-term investments		33,432			30,638

Net cash (used in) provided by investing activities		(12,335	)		21,626


Cash flows from financing activities
Issuance of common stock		21,211			6,416
Excess tax benefit from stock-based compensation		1,551			486
Debt issuance costs		—			(7,697	)
Repurchase of convertible senior subordinated notes		—			(21,125	)
Payments on senior secured credit facility		(96,963	)		(78,173	)

Net cash used in financing activities		(74,201	)		(100,093	)


Effect of currency exchange rates on cash		(523	)		(614	)


Net (decrease) increase in cash and cash equivalents		(12,834	)		18,104


Cash and cash equivalents at beginning of period		30,670			11,642


Cash and cash equivalents at end of period	$	17,836		$	29,746

Supplemental disclosure
Cash paid for interest	$	13,984		$	12,353
Cash paid for taxes	$	40,414		$	28,915

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

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

We have prepared the consolidated financial statements included in this Quarterly Report on Form 10-Q without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) 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 U.S. GAAP. These unaudited consolidated interim financial statements should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2010. All amounts presented in tables are in thousands, except per share data.

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

We have a 52 or 53 week fiscal year ending on the Saturday nearest December 31. Accordingly, the third fiscal quarters of 2010 and 2009 are represented by the three month periods ended on October 2, 2010 and October 3, 2009, respectively.

2. Recently Issued Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 will separate multiple-deliverable arrangements in more circumstances than under existing U.S. GAAP and will establish a selling price hierarchy for determining the selling price of a deliverable. In addition, it will replace the term “fair value” in the revenue allocation guidance with “selling price” to clarify the allocation of revenue is based on entity-specific assumptions rather than assumptions of a market place participant, eliminate the use of the residual method for allocation, and expand on-going disclosure requirements. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010 and can be applied prospectively or retrospectively. We plan to adopt this updated accounting guidance for multiple-deliverable revenue arrangements on a prospective basis for our fiscal year beginning on January 2, 2011, and the adoption is not expected to have a material impact on our consolidated financial position or results of operations.

3. Stock-Based Compensation

At October 2, 2010, the 2005 Stock Incentive Plan, as amended and restated (2005 Plan), is our one active stock-based employee compensation plan under which new awards may be granted. Awards under the 2005 Plan include incentive stock options, non-qualified option grants and restricted stock. Amounts recognized in our financial statements related to stock-based compensation were as follows:


	Three Months Ended				Nine Months Ended
(in thousands)	October 2, 2010		October 3, 2009		October 2, 2010		October 3, 2009

Cost of sales	$	237	$	230	$	738	$	716
Marketing and selling		486		489		1,447		1,456
Research and development		295		296		880		885
General and administrative		1,136		1,158		3,219		3,592

Total stock-based compensation expense	$	2,154	$	2,173	$	6,284	$	6,649

Options granted under the 2005 Plan generally become exercisable for twenty-five percent of the shares on the first anniversary date of the grant and 6.25 percent at the end of each quarter thereafter. Options are granted with an exercise price equal to the fair market value of the common stock on the date of the grant.

Options granted under our 2005 Plan generally have a stated expiration, if not exercised or earlier terminated, seven years after the date of grant. Options that were granted under our 2000 Equity Incentive Plan (2000 Plan) generally have a stated expiration, if not exercised or earlier terminated, ten years after the date of grant.

Stock option activity under our 2005 Plan and 2000 Plan for the nine months ended October 2, 2010 was as follows:


				Weighted average		Aggregate
	Options			exercise price		Intrinsic
	outstanding			per share		Value
						(in thousands)
Balance at January 2, 2010		7,161,545		$	15.08
Granted		1,463,785			19.15
Exercised		(1,459,340	)		13.41
Cancelled or expired		(306,191	)		17.46

Balance at October 2, 2010		6,859,799		$	16.20	$	24,663


Options exercisable at October 2, 2010		3,964,552		$	16.16	$	14,441

The total intrinsic value of options exercised during the three and nine months ended October 2, 2010 was $3.3 million and $11.1 million, respectively. As of October 2, 2010, we had $13.9 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options granted under our 2005 Plan. We expect that cost to be recognized over a weighted average period of 2.8 years.

Restricted stock awards are granted under the 2005 Plan. Restricted stock awards are subject to forfeiture if employment or service terminates prior to the release of the restrictions. Restricted stock generally vest over a three or four year period. During the vesting period, ownership of the shares cannot be transferred. Restricted stock is considered issued and outstanding at the grant date and has the same dividend and voting rights as other common stock. We recognize compensation expense for the fair value of the restricted stock grants issued based on the closing stock price on the date of grant. The 2005 Plan does not designate the specific number of shares available for restricted stock grants, as these are issued from the full pool of shares available under the plan. The option pool is reduced by two shares for each restricted share granted.

Restricted stock activity under our 2005 Plan for the nine months ended October 2, 2010 was as follows:


				Weighted average
	Unvested shares			grant date fair value
	outstanding			per share
Balance at January 2, 2010		233,525		$	15.79
Granted		196,520			19.43
Vested		(57,710	)		16.70
Cancelled		(26,450	)		15.94

Balance at October 2, 2010		345,885		$	17.69

As of October 2, 2010, we had $4.7 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock awards granted under our 2005 Plan. We expect that cost to be recognized over a weighted average period of 3.0 years.

4. Earnings per Share

The following table presents information necessary to calculate basic and diluted net income per common share and common share equivalents.


	Three Months Ended				Nine Months Ended
(in thousands, except per share data)	October 2, 2010		October 3, 2009		October 2, 2010		October 3, 2009

Net income	$	18,572	$	28,621	$	59,797	$	62,566


Weighted-average shares outstanding for basic net income per share		76,151		74,278		75,627		73,939
Dilutive effect of stock options, restricted shares and convertible notes		2,394		720		2,016		517


Adjusted weighted-average shares outstanding for diluted net income per share		78,545		74,998		77,643		74,456


Net income per share
Basic net earnings	$	0.24	$	0.39	$	0.79	$	0.85
Diluted net earnings	$	0.24	$	0.38	$	0.77	$	0.84

There were 1,606,543 and 1,555,994 weighted shares outstanding for the three and nine month periods ended October 2, 2010, respectively, that were excluded from the diluted earnings per share computation because the impact would have been anti-dilutive. For the three and nine month periods ended October 3, 2009, there were 4,411,863 and 5,981,657 weighted shares outstanding, respectively, that were excluded from the diluted earnings per share computation because the impact would have been anti-dilutive.

5. Inventories

Inventories consist of the following as of October 2, 2010 and January 2, 2010:


(in thousands)	October 2, 2010			January 2, 2010

Raw materials	$	9,288		$	10,117
Work in process		4,277			3,399
Finished goods		26,440			21,791
Obsolescence reserve		(4,751	)		(5,031	)


Net inventories	$	35,254		$	30,276

6. Warranties

Many of our products are sold with warranty coverage for periods ranging from one year up to the patient’s lifetime. The warranty allowance is our estimate of the expected future cost of honoring current warranty obligations. Factors influencing this estimate include historical claim rates, changes in product performance or deviations in product performance against our reliability commitments, the frequency of use of a prosthetic implant by the patient, patients’ performance expectations and changes in the terms of our policies.

Changes in the warranty balance during the three and nine months ended October 2, 2010 and October 3, 2009 are presented below:


	Three Months Ended						Nine Months Ended
(in thousands)	October 2, 2010			October 3, 2009			October 2, 2010			October 3, 2009

Balance, beginning of period	$	2,409		$	2,469		$	2,293		$	3,287
Provisions for warranty		316			313			1,170			1,276
Claims processed		(298	)		(353	)		(1,036	)		(2,134	)

Balance, end of period	$	2,427		$	2,429		$	2,427		$	2,429

7. Comprehensive Income

Comprehensive income is the sum of net income as reported and other comprehensive income (loss). Other comprehensive income (loss) resulted from foreign currency translation adjustments, gains (losses) on derivative instruments qualifying as hedges, and gains (losses) on available-for-sale investments. For more information on derivatives, see Note 11, Derivative Instruments and Hedging Activities. Comprehensive income for the three and nine months ended October 2, 2010 and October 3, 2009 was:


	Three Months Ended
(in thousands)	October 2, 2010			October 3, 2009

Net income	$	18,572		$	28,621

Foreign currency translation gain, net of taxes of ($60) and $0, respectively		3,029			927
Fair value adjustment on derivatives designated as cash flow hedges, net of taxes of $1,791 and $822, respectively		(2,949	)		(1,321	)
Reclassification adjustments on cash flow hedges settled and included in net income, net of tax of $117 and ($582), respectively		(192	)		1,071
Unrealized (loss) gain on available-for-sale securities, net of taxes of $43 and ($48), respectively		(69	)		80


Comprehensive income	$	18,391		$	29,378


	Nine Months Ended
(in thousands)	October 2, 2010			October 3, 2009

Net income	$	59,797		$	62,566

Foreign currency translation (loss) gain, net of taxes of $31 and ($7), respectively		(1,004	)		2,221
Fair value adjustment on derivatives designated as cash flow hedges, net of taxes of ($14) and $1,735, respectively		22			(2,867	)
Reclassification adjustments on cash flow hedges settled and included in net income, net of tax of $164 and ($1,144), respectively		(272	)		1,891
Unrealized (loss) gain on available-for-sale securities, net of taxes of $10 and ($123), respectively		(16	)		209


Comprehensive income	$	58,527		$	64,020

The after-tax components of accumulated other comprehensive income (loss) as of October 2, 2010 and January 2, 2010, were as follows:


	Net Unrealized
	Loss on								Net Unrealized		Total
	Derivative						Foreign		Gain on		Accumulated
	Instruments			Post-retirement			Currency		Available-for-		Other
	Qualifying as			Plan Liability			Translation		Sale		Comprehensive
(in thousands)	Hedges			Adjustment			Adjustment		Investments		Income

Balance at January 2, 2010	$	(1,289	)	$	(24	)	$	7,500	$	194	$	6,381

Balance at October 2, 2010	$	(1,539	)	$	(24	)	$	6,496	$	178	$	5,111

8. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the nine month period ended October 2, 2010 were:


	Nine Months Ended
(in thousands)	October 2, 2010

Goodwill, beginning of the period	$	690,899
Allocation of goodwill to sale of non-strategic assets		(6,400	)
Effect of currency translation		(512	)

Goodwill, end of the period	$	683,987

During the first quarter of 2010, we sold the Her Option^® Global Endometrial Ablation product line for $20.5 million and used the proceeds to pay down our debt. The final sale price after adjustment based on working capital balances at the time of sale was $19.5 million. We allocated a portion of our goodwill to the sale based on the

relative fair value of the Her Option^® product line and our remaining business. The consideration, less goodwill, the carrying value of tangible and intangible assets and related disposal costs resulted in a pre-tax gain of $7.7 million, which is included in “gain on sale of non-strategic assets” in the Consolidated Statements of Operations. As the majority of the goodwill that was allocated to the Her Option^® product line had no tax basis, we recorded a $5.1 million tax provision against the gain resulting in an effective tax rate of 65.7 percent of the gain on sale of Her Option^®.

The following table provides additional information concerning intangible assets:


	October 2, 2010							January 2, 2010
	Gross carrying		Accumulated			Net book		Gross carrying		Accumulated			Net book
(in thousands)	amount		amortization			value		amount		amortization			value

Developed and core technology	$	132,953	$	(90,211	)	$	42,742	$	137,553	$	(85,922	)	$	51,631

Other intangibles
Amortized
Patents		11,275		(9,637	)		1,638		11,510		(9,693	)		1,817
Licenses		18,129		(9,964	)		8,165		15,913		(9,034	)		6,879
Trademarks		2,233		(2,123	)		110		2,208		(1,767	)		441

Total amortized other intangible assets		31,637		(21,724	)		9,913		29,631		(20,494	)		9,137

Unamortized
Trademarks		40,800		—			40,800		40,800		—			40,800


Total other intangibles		72,437		(21,724	)		50,713		70,431		(20,494	)		49,937


Total intangible assets	$	205,390	$	(111,935	)	$	93,455	$	207,984	$	(106,416	)	$	101,568

The estimated amortization expense for currently-owned intangibles, as presented above, for the years 2010 through 2014 is $12.1 million, $11.5 million, $9.2 million, $9.2 million and $7.0 million, respectively.

During the second quarter of 2009, we purchased a license for the exclusive rights to certain patents through the year 2018 for $9.0 million, of which $7.9 million has been paid as of October 2, 2010, and the remaining $1.1 million is structured to be paid out within the next six months. All payments related to the patents are included in licenses and will be amortized over 7.5 years, which is the remaining useful life of the patents.

9. Debt

Senior Secured Credit Facility

On July 20, 2006, in conjunction with the Laserscope acquisition, our wholly-owned subsidiary, American Medical Systems, Inc. (AMS), entered into a credit and guarantee agreement (the Credit Facility) with CIT Healthcare LLC, as agent, and certain lenders from time to time party thereto. AMS and each majority-owned domestic subsidiary of AMS are parties to the Credit Facility as guarantors of all of the obligations of AMS arising under the Credit Facility. Each of the subsidiary guarantors is 100 percent owned by us and the guarantees are joint and several. The obligations of AMS and each of the guarantors arising under the Credit Facility are secured by a first priority security interest granted to the agent on substantially all of their respective assets, including a mortgage on the AMS facility in Minnetonka, Minnesota.

The six-year senior secured Credit Facility consists of (i) term loan debt and (ii) a revolving credit facility of up to $65.0 million which is available to fund ongoing working capital needs, including future capital expenditures and permitted acquisitions. As of October 2, 2010 and January 2, 2010, there were $28.3 million and $125.3 million, respectively, of term loans outstanding under the Credit Facility.

At our option, term loans under the Credit Facility (other than swing line loans) bear interest at a variable rate based on LIBOR or an alternative variable rate based on the greater of the prime rate or the federal funds effective rate plus 0.5 of 1.0 percent (Federal Funds Rate) plus an applicable margin. The applicable margin for term loans based on LIBOR is 2.25 percent per annum, while the applicable margin for term loans based on the prime rate or the Federal Funds Rate is 1.25 percent per annum. As of October 2, 2010, all debt under the Credit Facility had a variable interest rate based on the LIBOR index. The applicable margin for loans under the revolving credit facility

is determined by reference to our total leverage ratio, as defined in the Credit Facility. In addition to initial Credit Facility fees and reimbursement of agent expenses, we are obligated to pay commitment fees on the revolving credit facility.

The term loans amortize 1.0 percent of the current principal balance quarterly from December 2006 through September 2011 and the remaining 95 percent will amortize December 2011 through July 2012. In addition, mandatory prepayments are due under the Credit Facility equal to (i) 50 percent of Excess Cash Flow (defined generally as net income, plus depreciation and amortization and other non-cash charges including in-process research and development (IPR&D), plus decreases or minus increases in working capital, minus capital expenditures (to the extent not financed) and amortization payments with respect to the term loan, and any other indebtedness permitted under the loan documents), (ii) 100 percent of the net proceeds of any asset sale (subject to a limited reinvestment option and a $2.5 million exception), (iii) 100 percent of the net proceeds of any debt (including convertible securities) or preferred stock issuance, and (iv) 50 percent of the net proceeds of any other equity issuance. Amounts due under the Credit Facility may also be voluntarily prepaid without premium or penalty.

We have used cash provided by our operating activities, along with the proceeds from the sale of Her Option^® in the first quarter of 2010, to pay down our debt during 2010. Amortization and other prepayments of $31.1 million and $97.0 million were made during the three and nine months ended October 2, 2010, respectively. During the third quarter of 2009, we sold our Ovion female sterilization assets and technology for $23.6 million and we used the proceeds to pay down our debt. Amortization and other prepayments of $49.1 million and $78.2 million were made during the three and nine months ended October 3, 2009, respectively.

The Credit Facility contains affirmative and negative covenants and other limitations (subject to various carve-outs and baskets). The covenants limit: (a) the making of investments, the amount of capital expenditures, the payment of dividends and other payments with respect to capital, the disposition of material assets other than in the ordinary course of business, and mergers and acquisitions under certain conditions, (b) transactions with affiliates unless such transactions are completed in the ordinary course of business and upon fair and reasonable terms, (c) the incurrence of liens and indebtedness, and (d) substantial changes in the nature of the companies’ business. The Credit Facility also contains financial covenants which require us to maintain predetermined ratio levels related to leverage, interest coverage, fixed charges, and a limit on capital expenditures. In addition, the Credit Facility contains customary events of default, including payment and covenant defaults and material inaccuracy of representations. The Credit Facility further permits the taking of customary remedial action upon the occurrence and continuation of an event of default, including the acceleration of obligations then outstanding under the Credit Facility.

Fees of $10.5 million are classified as debt discount and are being accreted to amortization of financing costs using the effective interest method over a six year period. Additional debt issuance costs of approximately $2.4 million are recorded as other long term assets and are being amortized over six years on a straight-line method, which approximates the effective interest method. Upon payment of the prepayments described above, a pro rata portion of the related fees and debt issuance costs of $0.4 million and $1.3 million was immediately charged to amortization of financing costs in three and nine months ended October 2, 2010, respectively, and $0.9 million and $1.4 million was immediately charged to amortization of financing costs in the three and nine months ended October 3, 2009, respectively.

Amendment of Credit Facility

On August 12, 2009, we entered into a Consent and Second Amendment to our Credit Facility, which allowed us to exchange a portion of our existing convertible senior subordinated notes for new convertible senior subordinated notes as discussed below. On October 29, 2007, we entered into a First Amendment of our Credit Facility to modify certain financial covenant ratios as defined in the Credit Facility (the First Amendment). Pursuant to the terms of the First Amendment, certain of the financial tests and covenants were amended and restated, including the interest coverage ratio, the total leverage ratio, the fixed charge coverage ratio, and the maximum consolidated capital expenditures.

Convertible Senior Subordinated Notes Due 2036

On June 27, 2006, we issued convertible senior subordinated notes with a stated maturity of July 1, 2036 (the 2036 Notes). The 2036 Notes bear a fixed interest rate of 3.25 percent per year, payable semiannually. The 2036 Notes are our direct, unsecured, senior subordinated obligations, rank junior to the senior secured Credit Facility and will rank junior in right of payment to all of our future senior secured debt as provided in the indenture for the 2036

Notes. The 2036 Notes have the same rank as our convertible notes that are due in 2041, which are discussed below.

In March 2009, we repurchased 2036 Notes with a principal amount of $27.3 million in exchange for a cash payment of $21.1 million. In connection with this transaction, we recorded a pre-tax gain on extinguishment of debt of $4.6 million.

On September 21, 2009, we exchanged $250.0 million in principal of the 2036 Notes for $250.0 million in principal of new convertible senior subordinated notes with a stated maturity of September 15, 2041 (the 2041 Notes). Further information on the 2041 Notes is provided following this section.

We separately account for the liability and equity components of our 2036 Notes in a manner that reflects our nonconvertible borrowing rate. The equity component of our 2036 Notes was $45.4 million as of October 2, 2010 and January 2, 2010, and is recorded in additional paid-in capital. As of October 2, 2010, the principal amount of the liability component, its unamortized discount, and its net carrying amount were $62.0 million, $9.3 million and $52.7 million, respectively. The unamortized discount will be amortized over a remaining period of 2.7 years and the amortization expense is included in “amortization of financing costs” on the Consolidated Statements of Operations. As of January 2, 2010, the principal amount of the liability component, its unamortized discount, and its net carrying amount were $62.0 million, $11.5 million and $50.5 million, respectively. The effective interest rate on the liability component was 9.5% for each of the three and nine months ended October 2, 2010 and October 3, 2009. During the three and nine months ended October 2, 2010, we recognized $0.5 million and $1.5 million, respectively, of interest expense representing the contractual interest coupon on our 2036 Notes, and $0.7 million and $2.1 million, respectively, of amortization expense related to the discount on the liability component. During the three and nine months ended October 3, 2009, we recognized $2.2 million and $7.5 million, resepectively, of interest expense representing the contractual interest coupon on our 2036 Notes, and $3.0 million and $9.7 million, respectively of amortization expense related to the discount on the liability component.

Our 2036 Notes are convertible under the following circumstances for cash and shares of our common stock, if any, at a conversion rate of 51.5318 shares of our common stock per $1,000 principal amount of 2036 Notes (which is equal to an initial conversion price of approximately $19.406 per share), subject to adjustment: (1) when, during any fiscal quarter, the last reported sale price of our common stock is greater than 130% of the conversion price for at least 20 trading days in the 30 trading-day period ending on the last trading day of the preceding fiscal quarter; (2) during the five trading days immediately after any five consecutive trading-day period in which the trading price of a 2036 Note for each day of that period was less than 98% of the product of the closing price of our common stock and the applicable conversion rate; (3) if specified distributions to holders of our common stock occur; (4) if we call the 2036 Notes for redemption; (5) if an event or change occurs that results in conversion according to the Indenture; or (6) during the 60 days prior to, but excluding, any scheduled repurchase date or maturity date. Upon conversion, we would be required to satisfy up to 100 percent of the principal amount of the 2036 Notes solely in cash, with any amounts above the principal amount to be satisfied in shares of our common stock. If a holder elects to convert its 2036 Notes in connection with a designated event or change that occurs prior to July 1, 2013, we will pay, to the extent described in the Indenture, a make whole premium by increasing the conversion rate applicable to such 2036 Notes. Conversion of our 2036 Notes into common stock could result in dilution to our stockholders. From time to time, our 2036 Notes hold a fair value below their conversion rate. Any redemption due to the trading price discount, described in (2) above, would be subject to the restrictions imposed by the Credit Facility and would occur at the lower of market or conversion value, which would likely be substantially below the par value of the debt. All of the above conversion rights will be subject to certain limitations imposed by our Credit Facility.

We have the right to redeem for cash all or a portion of the 2036 Notes on or after July 6, 2011 at specified redemption prices as provided in the Indenture plus accrued and unpaid interest and contingent interest. Holders of the 2036 Notes may require us to purchase all or a portion of their 2036 Notes for cash on July 1, 2013; July 1, 2016; July 1, 2021; July 1, 2026; and July 1, 2031 or in the event of a designated event or change, at a purchase price equal to 100 percent of the principal amount of the 2036 Notes to be repurchased plus accrued and unpaid interest and contingent interest.

Convertible Senior Subordinated Notes Due 2041

On September 21, 2009, we exchanged $250.0 million in principal amount of our 2036 Notes for newly issued 2041 Notes. The 2041 Notes bear a fixed interest rate of 4.0 percent per year, payable semiannually. The 2041 Notes are our direct, unsecured, senior subordinated obligations, rank junior to the senior secured Credit Facility and will rank junior in right of payment to all of our future senior debt as provided in the indenture for the 2041 Notes. The 2041 Notes have the same rank as our 2036 Notes.

Similar to our 2036 Notes, we separately account for the liability and equity components of our 2041 Notes in a manner that reflects our nonconvertible borrowing rate. The excess of the principal amount of the liability component over its carrying amount is treated as debt discount and amortized using the effective interest method. In addition, debt issuance costs of approximately $7.7 million were allocated to the liability and equity components of the 2041 Notes. Approximately $5.3 million of the debt issuance costs were allocated to the liability component, recorded in other long-term assets, and are being amortized on a straight line basis, which approximates the effective interest method, over seven years (representing the time period until the first put date under the 2041 Notes). Approximately $2.4 million of the debt issuance costs were allocated to the equity component and are treated as equity issuance costs and are not amortized.

The equity component of our 2041 Notes was $76.4 million as of October 2, 2010 and January 2, 2010, and is recorded in additional paid-in capital. As of October 2, 2010, the principal amount of the liability component, its unamortized discount, and its net carrying amount were $250.0 million, $70.5 million and $179.5 million, respectively. The unamortized discount will be amortized over a remaining period of 6.0 years and the amortization expense is included in “amortization of financing costs” on the Consolidated Statements of Operations. As of January 2, 2010, the principal amount of the liability component, its unamortized discount, and its net carrying amount were $250.0 million, $76.7 million and $173.3 million, respectively. The effective interest rate on the liability component was 10.2% each of the the three and nine months ended October 2, 2010 and October 3, 2009. During the three and nine months ended October 2, 2010, we recognized $2.5 million and $7.5 million, respectively, of interest expense representing the contractual interest coupon on our 2041 Notes, and $2.1 million and $6.2 million of amortization expense related to the discount on the liability component. During the three and nine months ended October 3, 2009, we recognized $0.4 million, of interest expense representing the contractual interest coupon on our 2041 Notes, and $0.2 million of amortization expense related to the discount on the liability component.

Our 2041 Notes are convertible under the following circumstances for cash and shares of our common stock, if any, at a conversion rate of 51.5318 shares of our common stock per $1,000 principal amount of 2041 Notes (which is equal to an initial conversion price of approximately $19.406 per share), subject to adjustment: (1) when, during any fiscal quarter commencing after January 2, 2010 (and only during such fiscal quarter), the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 130% of the applicable conversion price on the applicable trading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of 2041 Notes for each day of that period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate; (3) if we call the 2041 Notes for redemption; (4) if specified distributions to holders of our common stock occur; (5) if an event or change occurs that results in conversion according to the Indenture; or (6) during the 60 days prior to, but excluding, any scheduled repurchase date or maturity date. Upon conversion, we would be required to satisfy up to 100 percent of the principal amount of the 2041 Notes solely in cash, with any amounts above the principal amount to be satisfied in shares of our common stock. If a holder elects to convert its 2041 Notes in connection with a designated event or change, we will pay, to the extent described in the Indenture, a make whole premium by increasing the conversion rate applicable to such 2041 Notes. Conversion of our 2041 Notes into common stock could result in dilution to our stockholders. Similar to our 2036 Notes, from time to time, our 2041 Notes may hold a fair value below their conversion rate. Any redemption due to the trading price discount, described in (2) above, would be subject to the restrictions imposed by the Credit Facility and would occur at the lower of market or conversion value, which would likely be substantially below the par value of the debt. All of the above conversion rights will be subject to certain limitations imposed by our Credit Facility.

If certain conditions are met, we will have the right to redeem for cash all or a portion of the 2041 Notes on or after September 15, 2016 at specified redemption prices as provided in the Indenture plus accrued and unpaid interest and contingent interest. Holders of the 2041 Notes may require us to purchase all or a portion of their 2041 Notes for cash on September 15, 2016 or in the event of a designated event or change, at a purchase price equal to 100 percent of the principal amount of the 2041 Notes to be repurchased plus accrued and unpaid interest and contingent interest.

Supplemental Guarantor Information

The 2036 Notes and the 2041 Notes (Convertible Notes) are fully and unconditionally guaranteed on an unsecured senior subordinated basis by four of our significant domestic subsidiaries: American Medical Systems, Inc., AMS Sales Corporation, AMS Research Corporation and Laserscope (the Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is 100 percent owned by us. The guarantees are joint and several, and are subordinated in right of payment to the guaranteed obligations of our significant domestic subsidiaries under our senior Credit Facility.

The following supplemental condensed consolidating financial information presents the statements of operations for each of the three and nine month periods ended October 2, 2010 and October 3, 2009, the balance sheets as of October 2, 2010 and January 2, 2010, and the statements of cash flows for each of the nine month periods ended October 2, 2010 and October 3, 2009, for the Guarantor Subsidiaries as a group, and separately for our non-Guarantor Subsidiaries as a group. In the condensed consolidating financial statements, we and the Guarantor Subsidiaries account for investment in wholly-owned subsidiaries using the equity method.

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statement of Operations
(In thousands)


	Three Months Ended October 2, 2010
	American
	Medical						Non-
	Systems			Guarantor			Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Net sales	$	—		$	115,517		$	23,552		$	(15,040	)	$	124,029
Cost of sales		—			21,973			14,762			(14,772	)		21,963

Gross profit		—			93,544			8,790			(268	)		102,066

Operating expenses
Marketing and selling		—			33,467			9,170			—			42,637
Research and development		—			12,715			(85	)		—			12,630
General and administrative		—			10,850			—			—			10,850
Amortization of intangibles		—			3,053			—			—			3,053

Total operating expenses		—			60,085			9,085			—			69,170


Operating income		—			33,459			(295	)		(268	)		32,896

Other (expense) income
Royalty income		—			153			—			—			153
Interest expense		(2,979	)		(342	)		(32	)		24			(3,329	)
Amortization of financing costs		(3,050	)		(453	)		—			—			(3,503	)
Gain on extinguishment of debt		—			—			—			—			—
Gain on sale of non-strategic assets		—			—			—			—			—
Other income		—			1,779			69			35			1,883

Total other (expense) income		(6,029	)		1,137			37			59			(4,796	)


(Loss) income before income taxes		(6,029	)		34,596			(258	)		(209	)		28,100

Provision (benefit) for income taxes		(2,273	)		11,900			(20	)		(79	)		9,528
Equity in earnings of subsidiary		22,458			(238	)		—			(22,220	)		—


Net income (loss)	$	18,702		$	22,458		$	(238	)	$	(22,350	)	$	18,572

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statement of Operations
(In thousands)


	Nine Months Ended October 2, 2010
	American
	Medical						Non-
	Systems			Guarantor			Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Net sales	$	—		$	361,684		$	84,524		$	(50,885	)	$	395,323
Cost of sales		—			64,804			50,398			(49,407	)		65,795

Gross profit		—			296,880			34,126			(1,478	)		329,528

Operating expenses
Marketing and selling		—			106,135			30,813			—			136,948
Research and development		—			39,834			142			—			39,976
General and administrative		—			35,337			—			—			35,337
Amortization of intangibles		—			9,130			—			—			9,130

Total operating expenses		—			190,436			30,955			—			221,391


Operating income		—			106,444			3,171			(1,478	)		108,137

Other (expense) income
Royalty income		—			508			—			—			508
Interest expense		(8,969	)		(1,883	)		(87	)		72			(10,867	)
Amortization of financing costs		(8,906	)		(1,636	)		—			—			(10,542	)
Gain on extinguishment of debt		—			—			—			—			—
Gain on sale of non-strategic assets		—			7,719			—			—			7,719
Other income (expense)		—			2,188			(263	)		(73	)		1,852

Total other (expense) income		(17,875	)		6,896			(350	)		(1	)		(11,330	)


(Loss) income before income taxes		(17,875	)		113,340			2,821			(1,479	)		96,807

Provision (benefit) for income taxes		(6,741	)		43,222			1,087			(558	)		37,010
Equity in earnings of subsidiary		71,852			1,734			—			(73,586	)		—


Net income	$	60,718		$	71,852		$	1,734		$	(74,507	)	$	59,797

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statement of Operations
(In thousands)


	Three Months Ended October 3, 2009
	American
	Medical						Non-
	Systems			Guarantor			Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Net sales	$	—		$	115,207		$	23,770		$	(15,746	)	$	123,231
Cost of sales		—			21,203			15,643			(15,562	)		21,284

Gross profit		—			94,004			8,127			(184	)		101,947

Operating expenses
Marketing and selling		—			32,831			9,658			—			42,489
Research and development		—			12,450			(16	)		—			12,434
General and administrative		—			10,459			—			—			10,459
Amortization of intangibles		—			3,358			—			—			3,358

Total operating expenses		—			59,098			9,642			—			68,740


Operating income		—			34,906			(1,515	)		(184	)		33,207

Other (expense) income
Royalty income		—			961			—			—			961
Interest expense		(2,609	)		(2,058	)		(41	)		34			(4,674	)
Amortization of financing costs		(3,290	)		(1,105	)		—			—			(4,395	)
Gain on extinguishment of debt		5,563			—			—			—			5,563
Gain on sale of non-strategic assets		—			17,446			—			—			17,446
Other (expense) income		—			(545	)		236			(15	)		(324	)

Total other (expense) income		(336	)		14,699			195			19			14,577


(Loss) income before income taxes		(336	)		49,605			(1,320	)		(165	)		47,784

Provision (benefit) for income taxes		(127	)		19,813			(460	)		(63	)		19,163
Equity in earnings of subsidiary		28,932			(860	)		—			(28,072	)		—


Net income (loss)	$	28,723		$	28,932		$	(860	)	$	(28,174	)	$	28,621

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statement of Operations
(In thousands)


	Nine Months Ended October 3, 2009
	American
	Medical						Non-
	Systems			Guarantor			Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Net sales	$	—		$	340,272		$	79,111		$	(46,126	)	$	373,257
Cost of sales		—			65,623			46,960			(46,349	)		66,234

Gross profit		—			274,649			32,151			223			307,023

Operating expenses
Marketing and selling		—			100,368			28,322			—			128,690
Research and development		—			38,434			(23	)		—			38,411
General and administrative		—			32,898			—			—			32,898
Amortization of intangibles		—			10,024			—			—			10,024

Total operating expenses		—			181,724			28,299			—			210,023


Operating income		—			92,925			3,852			223			97,000

Other (expense) income
Royalty income		—			2,768			—			—			2,768
Interest expense		(7,858	)		(7,168	)		(156	)		132			(15,050	)
Amortization of financing costs		(10,052	)		(2,298	)		—			—			(12,350	)
Gain on extinguishment of debt		10,125			—			—			—			10,125
Gain on sale of non-strategic assets		—			17,446									17,446
Other income (expense)		—			813			396			(111	)		1,098

Total other (expense) income		(7,785	)		11,561			240			21			4,037


(Loss) income before income taxes		(7,785	)		104,486			4,092			244			101,037

Provision (benefit) for income taxes		(2,936	)		39,893			1,424			90			38,471
Equity in earnings of subsidiary		67,261			2,668			—			(69,929	)		—


Net income	$	62,412		$	67,261		$	2,668		$	(69,775	)	$	62,566

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Balance Sheet
(In thousands)


	As of October 2, 2010
	American
	Medical						Non-
	Systems			Guarantor			Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	—		$	2,974		$	14,862		$	—		$	17,836
Short-term investments		10,097			33,735			109			—			43,941
Accounts receivable, net		639,946			49,531			28,647			(626,563	)		91,561
Inventories, net		—			33,018			8,403			(6,167	)		35,254
Deferred income taxes		—			14,017			995			—			15,012
Other current assets		—			3,465			1,420			—			4,885

Total current assets		650,043			136,740			54,436			(632,730	)		208,489

Property, plant and equipment, net		—			41,224			1,257			—			42,481
Goodwill		—			621,793			86,215			(24,021	)		683,987
Developed and core technology, net		—			42,742			—			—			42,742
Other intangibles, net		—			50,713			—			—			50,713
Investment in subsidiaries		263,530			45,788			—			(309,318	)		—
Other long-term assets, net		4,557			103			687			—			5,347

Total assets	$	918,130		$	939,103		$	142,595		$	(966,069	)	$	1,033,759


Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	(2,009	)	$	578,883		$	75,523		$	(644,531	)	$	7,866
Income taxes payable		(3,113	)		5,737			(484	)		—			2,140
Accrued compensation expenses		—			21,299			4,624			—			25,923
Accrued warranty expense		—			2,456			(29	)		—			2,427
Other accrued expenses		1,006			16,406			3,738			—			21,150

Total current liabilities		(4,116	)		624,781			83,372			(644,531	)		59,506

Non-current liabilities
Long-term debt		232,199			27,696			—			—			259,895
Intercompany loans payable		—			—			12,220			(12,220	)		—
Deferred income taxes		56,761			653			1,215			—			58,629
Long-term income taxes payable		—			18,698			—			—			18,698
Long-term employee benefit obligations		—			3,745			—			—			3,745

Total non-current liabilities		288,960			50,792			13,435			(12,220	)		340,967


Total liabilities		284,844			675,573			96,807			(656,751	)		400,473

Stockholders’ equity
Common stock		764			—			128			(128	)		764
Additional paid-in capital		428,851			3,424			57,659			(61,083	)		428,851
Accumulated other comprehensive income		5,110			(468	)		6,497			(6,028	)		5,111
Retained earnings (deficit)		198,561			260,574			(18,496	)		(242,079	)		198,560

Total stockholders’ equity		633,286			263,530			45,788			(309,318	)		633,286

Total liabilities and stockholders’ equity	$	918,130		$	939,103		$	142,595		$	(966,069	)	$	1,033,759

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Balance Sheet
(In thousands)


	As of January 2, 2010
	American
	Medical						Non-
	Systems			Guarantor			Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	—		$	16,973		$	13,697		$	—		$	30,670
Short-term investments		4,834			14,489			545			—			19,868
Accounts receivable, net		614,392			58,359			29,772			(599,933	)		102,590
Inventories, net		—			27,750			6,853			(4,327	)		30,276
Deferred income taxes		—			13,466			1,404			—			14,870
Other current assets		—			4,947			1,120			—			6,067

Total current assets		619,226			135,984			53,391			(604,260	)		204,341

Property, plant and equipment, net		—			42,661			1,459			—			44,120
Goodwill		—			628,193			86,727			(24,021	)		690,899
Developed and core technology, net		—			51,631			—			—			51,631
Other intangibles, net		—			49,937			—			—			49,937
Investment in subsidiaries		190,818			45,579			—			(236,397	)		—
Other long-term assets, net		5,133			839			251			—			6,223

Total assets	$	815,177		$	954,824		$	141,828		$	(864,678	)	$	1,047,151


Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	(5,058	)	$	558,217		$	72,015		$	(616,060	)	$	9,114
Accrued compensation expenses		—			24,350			5,253			—			29,603
Accrued warranty expense		—			2,293			—			—			2,293
Income taxes payable		(13,272	)		16,371			1,396			—			4,495
Other accrued expenses		3,885			17,826			4,049			—			25,760

Total current liabilities		(14,445	)		619,057			82,713			(616,060	)		71,265

Non-current liabilities
Long-term debt		223,876			122,353			—			—			346,229
Intercompany loans payable		—			—			12,221			(12,221	)		—
Deferred income taxes		60,387			645			1,315			—			62,347
Long-term income taxes payable		—			18,206			—			—			18,206
Long-term employee benefit obligations		—			3,745			—			—			3,745

Total non-current liabilities		284,263			144,949			13,536			(12,221	)		430,527


Total liabilities		269,818			764,006			96,249			(628,281	)		501,792

Stockholders’ equity
Common stock		747			—			9			(9	)		747
Additional paid-in capital		399,468			3,424			57,540			(60,964	)		399,468
Accumulated other comprehensive income		6,381			(202	)		7,137			(6,935	)		6,381
Retained earnings (deficit)		138,763			187,596			(19,107	)		(168,489	)		138,763

Total stockholders’ equity		545,359			190,818			45,579			(236,397	)		545,359

Total liabilities and stockholders’ equity	$	815,177		$	954,824		$	141,828		$	(864,678	)	$	1,047,151

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statement of Cash Flows
(In thousands)


	Nine Months Ended October 2, 2010
	American
	Medical						Non-
	Systems			Guarantor			Guarantor					Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations		Total
Cash flows from operating activities
Net cash (used in) provided by operating activities	$	(22,762	)	$	95,524		$	1,463		$	—	$	74,225

Cash flows from investing activities
Purchase of property, plant and equipment		—			(5,588	)		(238	)		—		(5,826	)
Purchase of other intangibles		—			(2,438	)		—			—		(2,438	)
Sale of non-strategic assets, net		—			19,043			—			—		19,043
Purchase of short-term investments		—			(57,284	)		(232	)		—		(57,516	)
Sale of short-term investments		—			32,737			695			—		33,432
Net settlement of derivative contracts		—			970						—		970

Net cash (used in) provided by investing activities		—			(12,560	)		225			—		(12,335	)

Cash flows from financing activities
Issuance of common stock		21,211			—			—			—		21,211
Excess tax benefit from stock-based compensation		1,551			—			—			—		1,551
Payments on senior secured credit facility		—			(96,963	)		—			—		(96,963	)
Repurchase of convertible senior subordinated notes		—			—			—			—		—

Net cash provided by (used in) financing activities		22,762			(96,963	)		—			—		(74,201	)

Effect of exchange rates on cash		—			—			(523	)		—		(523	)


Net (decrease) increase in cash and cash equivalents		—			(13,999	)		1,165			—		(12,834	)

Cash and cash equivalents at beginning of period		—			16,973			13,697			—		30,670


Cash and cash equivalents at end of period	$	—		$	2,974		$	14,862		$	—	$	17,836

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statement of Cash Flows
(In thousands)


	Nine Months Ended October 3, 2009
	American
	Medical						Non-
	Systems			Guarantor			Guarantor					Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations		Total
Cash flows from operating activities
Net cash provided by operating activities	$	21,920		$	69,205		$	6,060		$	—	$	97,185

Cash flows from investing activities
Purchase of property, plant and equipment		—			(3,391	)		(297	)		—		(3,688	)
Sale of non-strategic assets, net		—			18,982			—					18,982
Purchase of other intangibles		—			(5,392	)		—			—		(5,392	)
Purchase of short-term investments		—			(18,149	)		(594	)		—		(18,743	)
Sale of short-term investments		—			30,500			138			—		30,638
Net settlement of derivative contracts		—			(171	)		—			—		(171	)

Net cash provided by (used in) investing activities		—			22,379			(753	)		—		21,626

Cash flows from financing activities
Issuance of common stock		6,416			—			—			—		6,416
Excess tax benefit from stock-based compensation		486			—			—			—		486
Debt issuance costs		(7,697	)		—			—			—		(7,697	)
Payments on senior secured credit facility		—			(78,173	)		—			—		(78,173	)
Repurchase of convertible senior subordinated notes		(21,125	)		—			—			—		(21,125	)

Net cash (used in) financing activities		(21,920	)		(78,173	)		—			—		(100,093	)

Effect of exchange rates on cash		—			—			(614	)		—		(614	)


Net increase in cash and cash equivalents		—			13,411			4,693			—		18,104

Cash and cash equivalents at beginning of period		—			3,143			8,499			—		11,642


Cash and cash equivalents at end of period	$	—		$	16,554		$	13,192		$	—	$	29,746

10. Fair Value Measurements

Generally accepted accounting principles define and establish a framework for measuring fair value and providing disclosure about fair value measurements. Furthermore, U.S. GAAP specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect our own assumptions of market participant valuation (unobservable inputs). We have categorized our financial assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes our financial assets measured at fair value on a recurring basis as of October 2, 2010 (in thousands):


	Fair Value Measurements at Reporting Date Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
Description	Identical Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets
Money market funds	$	27,289	$	—	$	—
Available-for-sale securities		542		—		—
Other short-term investments		—		110		—
Commercial paper		—		16,000		—

Total Assets	$	27,831	$	16,110	$	—


Liabilities
Derivatives	$	—	$	3,285	$	—

Money market funds: Our money market funds are highly liquid investments with a maturity of three months or less. These assets are classified within Level 1 of the fair value hierarchy because the money market funds are valued using quoted market prices in active markets.

Available-for-sale securities: As of October 2, 2010, our available-for-sale securities included common stock of Iridex Corporation. These securities are valued using quoted market prices multiplied by the number of shares owned.

Other short-term investments: Other short-term investments consist of short-term bonds, which have maturities of three months or less. The carrying amount is a reasonable estimate of fair value and these investments have been classified as Level 2.

Commercial paper: We hold commercial paper that has a maturity of six months or less with a highly rated financial institution. Our commercial paper is classified as Level 2 in the fair value hierarchy because it is carried at amortized cost, which is a reasonable approximation of fair value.

Derivatives: The fair value of various foreign exchange forward contracts as of October 2, 2010 includes liabilities of $3.3 million, reported in other accrued expenses. We measure our derivatives at fair value on a recurring basis using significant observable inputs, which is Level 2 as defined in the fair value hierarchy. Refer to Note 11, Derivative Instruments and Hedging Activities, for more information regarding our derivatives.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Fair value measurements of non-financial assets and liabilities are primarily used in the impairment analysis of goodwill and other intangible assets. We review goodwill and other intangible assets for impairment annually, during the fourth quarter of each fiscal year, or as circumstances indicate the possibility of impairment. During the three and nine months ended October 2, 2010, we had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

Fair Value of Debt

The fair value of the Convertible Notes (see Note 9, Debt) was estimated using quoted market prices. The fair value of the Credit Facility was estimated using a discounted cash flow analysis based on our current estimated incremental borrowing rate for a similar borrowing arrangement. At October 2, 2010, our incremental borrowing rate was consistent with our current rate under our existing Credit Facility, which results in the same principle value and fair value in the table below.

The following table summarizes the principal outstanding and estimated fair values of our long-term debt, including current maturities (in thousands):


	October 2, 2010				January 2, 2010
(in thousands)	Principal		Fair Value		Principal		Fair Value
2036 Notes	$	61,985	$	69,622	$	61,985	$	70,270
2041 Notes		250,000		310,400		250,000		304,983
Credit Facility		28,374		28,374		125,307		123,230

	$	340,359	$	408,396	$	437,292	$	498,483

11. Derivative Instruments and Hedging Activities

We are exposed to certain risks relating to our ongoing business operations. We use derivatives to mitigate a portion of our exposure to volatility in interest and foreign currency exchange rates. Interest rate swaps are used to manage interest rate risk associated with our floating rate debt. Foreign exchange forward contracts are used to manage the currency risk associated with forecasted sales to and receivables from certain subsidiaries, denominated in their local currencies. We hedge only exposures in the ordinary course of business.

We account for our derivative instruments at fair value provided we meet certain documentary and analytical requirements to qualify for hedge accounting treatment. Hedge accounting creates the potential for a Consolidated Statement of Operations match between the changes in fair values of derivatives and the changes in cost of the associated underlying transactions, in this case interest expense and translation gain or loss. Derivatives held by us are designated as hedges of specific exposures at inception, with an expectation that changes in the fair value will essentially offset the change in the underlying exposure. Discontinuance of hedge accounting is required whenever it is subsequently determined that an underlying transaction is not going to occur, with any gains or losses recognized in the Consolidated Statement of Operations at such time, with any subsequent changes in fair value recognized currently in earnings. Fair values of derivatives are determined based on quoted prices for similar contracts.

In addition, we have foreign currency exchange forward contract derivatives outstanding at October 2, 2010 which are designated as cash flow hedges of currency fluctuations for a portion of our forecasted sales to certain subsidiaries, denominated in Euros, British pounds, Canadian dollars and Australian dollars. These contracts have remaining terms between one and fourteen months. The notional amount of the foreign exchange forward contracts designated as cash flow hedges was $51.4 million and $48.4 million at October 2, 2010 and January 2, 2010, respectively. We have also entered into foreign exchange forward contracts to manage a portion of our exposure to foreign exchange rate fluctuations on certain inter-company receivables denominated in Euros, British pounds, Brazilian real, Canadian dollars and Australian dollars. These contracts are not designated as an accounting hedge, and the notional amount of these contracts at October 2, 2010 and January 2, 2010 was $25.0 million and $10.9 million, respectively. The associated underlying transactions are expected to occur within the next three months. We have no interest rate swap contracts outstanding as of October 2, 2010.

The effective portion of the change in fair value of the interest rate swap and foreign currency exchange contracts is reported in accumulated other comprehensive income, a component of stockholders’ equity, and is being recognized as an adjustment to interest expense or other (expense) income, respectively, over the same period the related expenses are recognized in earnings. Ineffectiveness would occur when changes in the market value of the hedged transactions are not completely offset by changes in the market value of the derivatives. Gains and losses on derivatives representing hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized currently in earnings when incurred. No ineffectiveness was recognized during the three or nine months ended October 2, 2010 or October 3, 2009. Amounts due from counterparties (unrealized hedge gains) or

owed to counterparties (unrealized hedge losses) are included in accounts receivable, net or other accrued expenses, respectively. Cash receipts or payments related to our derivatives are generally classified in the Consolidated Statements of Cash Flows as cash flows from operating activities, consistent with the related items being hedged, unless the derivative is not designated as a hedge or if hedge accounting is discontinued, in which case the receipts or payments are classified as cash flows from investing activities.

Information on the location and amounts of derivative fair values in the Consolidated Balance Sheets is presented in the table below.


	Fair Value of Derivative Instruments
	Assets					Liabilities
	Balance Sheet	October 2,		January 2,		Balance Sheet	October 2,		January 2,
(in thousands)	Location	2010		2010		Location	2010		2010
Derivatives designated as hedging instruments
Interest rate swap contracts	Other current assets	$	—	$	—	Other accrued expenses	$	—	$	299
Foreign exchange forward contracts	Other current assets		—		—	Other accrued expenses		2,366		1,650


Total derivatives designated as hedging instruments		$	—	$	—		$	2,366	$	1,949


Derivatives not designated as hedging instruments
Foreign exchange forward contracts	Other current assets	$	—	$	10	Other accrued expenses	$	919	$	—


Total derivatives		$	—	$	10		$	3,285	$	1,949

At October 2, 2010, approximately $2.0 million of the existing loss on the foreign exchange forward contracts designated as a cash flow hedge that are in a liability position, all of which are included in accumulated other comprehensive income, are expected to be reclassified into earnings within the next twelve months.

We are exposed to credit losses in the event of non-performance by counterparties on these financial instruments, and although no assurances can be given, we do not expect any of the counterparties to fail to meet its obligations. The credit exposure related to these financial instruments is represented by the fair value of contracts with a positive fair value at the reporting date. To manage credit risks, we enter into derivative instruments with high quality financial institutions, which we monitor regularly and take action where possible to mitigate risk.

Information on the location and amounts of derivative gains and losses recorded in other comprehensive income (OCI) and recorded in the Consolidated Statements of Operations is presented in the table below.

The Effect of Derivative Instruments on the Consolidated Statement of Operations

For the Three Months Ended October 2, 2010 and October 3, 2009
(in thousands)


							Location of Gain
Derivatives in	Amount of Gain (Loss)						(Loss) Reclassified	Amount of Gain (Loss) Reclassified
Cash Flow	Recognized in OCI on Derivatives						from Accumulated	from Accumulated OCI into Income
Hedging	(Effective Portion)						OCI into Income	(Effective Portion)
Relationships	October 2, 2010			October 3, 2009			(Effective Portion)	October 2, 2010			October 3, 2009

Interest rate swap contracts	$	4		$	612		Interest expense	$	(4	)	$	(772	)
Foreign exchange contracts		(5,053	)		(1,102	)	Other income (expense)		313			(880	)

Total	$	(5,049	)	$	(490	)		$	309		$	(1,652	)


Derivatives not	Location of Gain (Loss)	Amount of Gain (Loss) Recognized
Designated as	Recognized in Income	in Income on Derivatives
Hedging Instruments	on Derivatives	October 2, 2010			October 3, 2009

Foreign exchange contracts	Other expense	$	(1,054	)	$	(306	)

For the Nine Months Ended October 2, 2010 and October 3, 2009
(in thousands)


							Location of Gain
Derivatives in	Amount of Gain (Loss)						(Loss) Reclassified	Amount of Gain (Loss) Reclassified
Cash Flow	Recognized in OCI on Derivatives						from Accumulated	from Accumulated OCI into Income
Hedging	(Effective Portion)						OCI into Income	(Effective Portion)
Relationships	October 2, 2010			October 3, 2009			(Effective Portion)	October 2, 2010			October 3, 2009
Interest rate swap contracts	$	291		$	1,773		Interest expense	$	(302	)	$	(2,683	)
Foreign exchange contracts		(691	)		(3,340	)	Other income (expense)		738			(352	)

Total	$	(400	)	$	(1,567	)		$	436		$	(3,035	)


Derivatives not	Location of Gain (Loss)	Amount of Gain (Loss) Recognized
Designated as	Recognized in Income	in Income on Derivatives
Hedging Instruments	on Derivatives	October 2, 2010			October 3, 2009
Foreign exchange contracts	Other expense	$	(318	)	$	(512	)

12. Industry Segment Information and Foreign Operations

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

We distribute products through our direct sales force and independent sales representatives in the United States, Canada, Australia, Brazil and Western Europe. Additionally, we distribute products through foreign independent distributors, primarily in Europe, Asia and South America, who then sell the products to medical institutions. No customer or distributor accounted for ten percent or more of net sales during the three and nine month periods ended October 2, 2010 or October 3, 2009. Foreign subsidiary sales are predominantly to customers in Western Europe, Canada, Australia and Brazil and our foreign subsidiary assets are located in the same countries.

The following table presents net sales and long-lived assets (excluding deferred taxes) by geographical territory. No individual foreign country’s net sales or long-lived assets accounted for more than ten percent of consolidated net sales or consolidated long-lived assets.


	Three Months Ended				Nine Months Ended
(in thousands)	October 2, 2010		October 3, 2009		October 2, 2010		October 3, 2009

United States
Net sales	$	92,906	$	92,262	$	288,086	$	271,336
Long-lived assets		807,623		828,248		807,623		828,248
International
Net sales	$	31,123	$	30,969	$	107,237	$	101,921
Long-lived assets		17,647		18,067		17,647		18,067

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. Any statements not of historical fact may be considered 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 as a result of many factors, including, but not limited to, those discussed under the heading “Forward-Looking Statements” at the end of this item of the report.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. 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 obligations, inventories, long-lived assets, warranty, legal contingencies, valuation of stock-based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The critical accounting policies that are most important in fully understanding and evaluating our financial condition and results of operations are discussed in our Form 10-K for the year ended January 2, 2010.

Overview

We are a world leader in developing and delivering innovative medical technology solutions to physicians treating men’s and women’s pelvic health conditions, thereby recognized as a technology leader in the markets we serve. Our growth is fueled by a robust pipeline of innovative products for significant, under-penetrated markets. We have a diverse product portfolio, which treats men’s incontinence, erectile dysfunction, and benign prostatic hyperplasia (BPH), and treats women’s incontinence and pelvic floor prolapse. We estimate there are as many as 1.6 billion incidences of these conditions in the global markets we serve, with many people suffering from multiple conditions. Treatment options for these conditions vary considerably depending on the severity of the condition. Approximately 350 million of these men and women have conditions sufficiently severe so as to profoundly diminish their quality of life and significantly impact their relationships. Our addressable market is contained within this group of patients. Our product development and acquisition strategies have focused on expanding our product offering for surgical solutions, including less-invasive solutions for surgeons and their patients. Our primary physician customers include urologists, gynecologists, urogynecologists and colorectal surgeons.

Our net sales were $124.0 million and $395.3 million in the three and nine month periods ended October 2, 2010, respectively, compared to $123.2 million and $373.3 million in the three and nine months ended October 3, 2009, respectively. In the three and nine months ended October 2, 2010, men’s health contributed $55.2 million and $181.0 million, or 45 percent and 46 percent of total net sales, respectively; BPH therapy contributed $26.9 million and $82.0 million, or 22 percent and 21 percent of total net sales, respectively; and women’s health contributed $41.2 million and $128.4 million, respectively, which is 33 percent of total net sales in both periods.

We are making additional investments in support of long-term growth, to expand the market globally, and to strengthen our marketing, physician training, and regulatory functions outside the U.S. We also maintain our strong commitment to product innovation. We launched the new MoXy^™ Liquid Cooled Fiber the last week of the third quarter of 2010. The MoXy^™ Liquid Cooled Fiber is designed to be used with the GreenLight^™ XPS (Xcelerated Performance System) that we launched late in the second quarter of 2010. In addition, in our female continence product line, we recently launched the MiniArc^® Precise Single-Incision Sling System for the treatment of female stress urinary incontinence (SUI). MiniArc^® Precise is the next generation of the MiniArc^® sling, the number one selling single-incision sling in the United States.

We generated net income of $18.6 million and $59.8 million in the three and nine month periods ended October 2, 2010, compared to $28.6 million and $62.6 million in the three and nine month periods ended October 3, 2009. Prior year net income includes the gain on sale of our Ovion female sterilization assets and technology (Ovion technology) of $17.4 million and the $5.6 million gain on the extinguishment of $250.0 million of our 2036 Notes for $250.0 million of our 2041 Notes, both of which occurred in the third quarter of 2009.

We continue to focus on managing our working capital, controlling costs, and driving operating leverage throughout our business. Cash provided by operating activities totaled $74.2 million for the nine months ended October 2, 2010, compared to $97.2 million in the nine months ended October 3, 2009. We also retired $97.0 million and $99.3 million of debt in the nine months ended October 2, 2010 and October 3, 2009, respectively. Finally, operating income increased to $108.1 million compared to $97.0 million in the nine months ended October 2, 2010 and October 3, 2009, respectively, which is an increase of 11.5 percent.

Based on our areas of competitive strength, our strategy is to expand the reach of our products and address unmet needs in both established and new pelvic health markets. We determined that Ovion technology and our Her Option^® global endometrial cryoablation product line did not fit our long-term strategy. During the third quarter of 2009, we sold our Ovion technology for $23.6 million (see our Annual Report on Form 10-K for fiscal 2009, Notes to Consolidated Financial Statements — No. 5, Goodwill and Intangible Assets). In February of 2010, we sold the Her Option^® product line for $20.5 million (see Notes to Consolidated Financial Statements — No. 8, Goodwill and Intangible Assets). We used the net proceeds from these sales to pay down our debt. The sale of these non-strategic assets will allow us to concentrate our efforts and resources on improving and expanding the global reach of our products to restore quality of life to men and women through innovative, life-changing solutions.

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

Results of Operations

The following table provides product category and geography details of our net sales for the three and nine month periods ended October 2, 2010 compared to the three and nine month periods ended October 3, 2009.


	Three Months Ended												Nine Months Ended
	October 2,			October 3,									October 2,			October 3,
(in thousands)	2010			2009			$ Increase			% Increase			2010			2009			$ Increase			% Increase
Net Sales
Men’s health	$	55,177		$	54,666		$	511			0.9	%	$	181,018		$	171,090		$	9,928			5.8	%
BPH therapy		26,890			27,686			(796	)		-2.9	%		81,977			81,159			818			1.0	%
Women’s health		41,192			38,848			2,344			6.0	%		128,431			113,617			14,814			13.0	%

Sub-total		123,259			121,200			2,059			1.7	%		391,426			365,866			25,560			7.0	%
Uterine health (a)		770			2,031			(1,261	)		-62.1	%		3,897			7,391			(3,494	)		-47.3	%

Total	$	124,029		$	123,231		$	798			0.6	%	$	395,323		$	373,257		$	22,066			5.9	%


Geography
United States	$	92,136		$	90,231		$	1,905			2.1	%	$	284,189		$	263,946		$	20,243			7.7	%
International		31,123			30,969			154			0.5	%		107,237			101,920			5,317			5.2	%

Sub-total		123,259			121,200			2,059			1.7	%		391,426			365,866			25,560			7.0	%
United States-Uterine health (a)		770			2,031			(1,261	)		-62.1	%		3,897			7,391			(3,494	)		-47.3	%

Total	$	124,029		$	123,231		$	798			0.6	%	$	395,323		$	373,257		$	22,066			5.9	%


	Three Months Ended												Nine Months Ended
Percent of net sales	October 2, 2010			October 3, 2009									October 2, 2010			October 3, 2009
Men’s health		44.5	%		44.4	%								45.8	%		45.8	%
BPH therapy		21.7	%		22.5	%								20.7	%		21.7	%
Women’s health		33.2	%		31.5	%								32.5	%		30.4	%

Sub-total		99.4	%		98.4	%								99.0	%		98.0	%
Uterine health (a)		0.6	%		1.6	%								1.0	%		2.0	%

Total		100.0	%		100.0	%								100.0	%		100.0	%

Geography
United States		74.9	%		74.9	%								72.9	%		72.7	%
International		25.1	%		25.1	%								27.1	%		27.3	%

Total		100.0	%		100.0	%								100.0	%		100.0	%


(a)		The uterine health product line, Her Option ^® was sold in February, 2010. Revenues in the first nine months of 2010 consist of end-customer revenue earned prior to the date of sale, in addition to revenue earned as part of the product supply agreement, which was part of the divestiture agreement with CooperSurgical, Inc.

The following table compares revenue, expense, and other income (expense) for the three and nine months ended October 2, 2010 and October 3, 2009:


	Three Months Ended						$ Increase			% Increase			Nine Months Ended						$ Increase			% Increase
(in thousands)	October 2, 2010			October 3, 2009			(Decrease)			(Decrease)			October 2, 2010			October 3, 2009			(Decrease)			(Decrease)

Net sales	$	124,029		$	123,231		$	798			0.6	%	$	395,323		$	373,257		$	22,066			5.9	%
Cost of sales		21,963			21,284			679			3.2	%	$	65,795			66,234			(439	)		-0.7	%

Gross profit		102,066			101,947			119			0.1	%		329,528			307,023			22,505			7.3	%
Operating expenses
Marketing and selling		42,637			42,489			148			0.3	%		136,948			128,690			8,258			6.4	%
Research and development		12,630			12,434			196			1.6	%		39,976			38,411			1,565			4.1	%
General and administrative		10,850			10,459			391			3.7	%		35,337			32,898			2,439			7.4	%
Amortization of intangibles		3,053			3,358			(305	)		-9.1	%		9,130			10,024			(894	)		-8.9	%

Total operating expenses		69,170			68,740			430			0.6	%		221,391			210,023			11,368			5.4	%

Operating income		32,896			33,207			(311	)		-0.9	%		108,137			97,000			11,137			11.5	%
Royalty income		153			961			(808	)		-84.1	%		508			2,768			(2,260	)		-81.6	%
Interest expense		(3,329	)		(4,674	)		(1,345	)		-28.8	%		(10,867	)		(15,050	)		(4,183	)		-27.8	%
Amortization of financing costs		(3,503	)		(4,395	)		(892	)		-20.3	%		(10,542	)		(12,350	)		(1,808	)		-14.6	%
Gain on extinguishment of debt		—			5,563			5,563			-100.0	%		—			10,125			10,125			-100.0	%
Gain on sale of non-strategic assets		—			17,446			17,446			-100.0	%		7,719			17,446			9,727			-55.8	%
Other income (expense)		1,883			(324	)		2,207			n/a			1,852			1,098			754			68.7	%

Income before income taxes		28,100			47,784			(19,684	)		-41.2	%		96,807			101,037			(4,230	)		-4.2	%
Provision for income taxes		9,528			19,163			(9,635	)		-50.3	%		37,010			38,471			(1,461	)		-3.8	%

Net income	$	18,572		$	28,621		$	(10,049	)		-35.1	%	$	59,797		$	62,566		$	(2,769	)		-4.4	%


	Percent of Sales												Percent of Sales
	For the Three Months Ended												For the Nine Months Ended
	October 2, 2010			October 3, 2009									October 2, 2010			October 3, 2009
Net sales		100.0	%		100.0	%								100.0	%		100.0	%
Cost of sales		17.7	%		17.3	%								16.6	%		17.7	%

Gross profit		82.3	%		82.7	%								83.4	%		82.3	%

Operating expenses
Marketing and selling		34.4	%		34.5	%								34.6	%		34.5	%
Research and development		10.2	%		10.1	%								10.1	%		10.3	%
General and administrative		8.7	%		8.5	%								8.9	%		8.8	%
Amortization of intangibles		2.5	%		2.7	%								2.3	%		2.7	%

Total operating expenses		55.8	%		55.8	%								56.0	%		56.3	%

Operating income		26.5	%		26.9	%								27.4	%		26.0	%

Royalty income		0.1	%		0.8	%								0.1	%		0.7	%
Interest expense		-2.7	%		-3.8	%								-2.7	%		-4.0	%
Amortization of financing costs		-2.8	%		-3.6	%								-2.7	%		-3.3	%
Gain on extinguishment of debt		0.0	%		4.5	%								0.0	%		2.7	%
Gain on sale of non-strategic assets		0.0	%		14.2	%								2.0	%		4.7	%
Other income		1.5	%		-0.3	%								0.5	%		0.3	%

Income before taxes		22.7	%		38.8	%								24.5	%		27.1	%
Provision for income taxes		7.7	%		15.6	%								9.4	%		10.3	%

Net income		15.0	%		23.2	%								15.1	%		16.8	%

Comparison of the Three Months Ended October 2, 2010 to the Three Months Ended October 3, 2009

Net sales. Net sales of $124.0 million in the third quarter of 2010 represented an increase of 0.6 percent compared to $123.2 million in the third quarter of 2009. The strengthening of the U.S. dollar in the third quarter of 2010, as compared to the third quarter of 2009, reduced revenue approximately $1.4 million. Growth in our business continues to be driven by the success of innovative products, including recent product launches. The growth in sales was offset by a softening of procedure volume in the U.S. and a decline in the sale of Greenlight^™ fibers due to the delay in the launch of the MoXy™ Liquid Cooled Fiber until the last week of the third quarter.

Men’s health products. Net sales of men’s health products increased 0.9 percent to $55.2 million in the third quarter of 2010 compared to $54.7 million in the third quarter of 2009. This includes the negative impact of foreign currency exchange rates of approximately $0.8 million. Overall growth was led by the AMS 800^{^®}Artificial Urinary Sphincter in our continence product line, while we experienced flat sales in our erectile restoration product line.

BPH therapy products. Net sales from BPH therapy products decreased by 2.9 percent to $26.9 million in the third quarter of 2010 compared to $27.7 million in the same period in 2009. This includes the negative impact of foreign currency exchange rates of approximately $0.3 million. We experienced strong sales of our Greenlight^™ consoles, which was offset by a decrease in the sale of Greenlight HPS^® fibers during the quarter in anticipation of the launch of our new MoXy™ Liquid Cooled Fibers in the last week of the third quarter.

Women’s health products. Net sales of our women’s health products increased 6.0 percent to $41.2 million in the third quarter of 2010 compared to $38.8 million in the third quarter of 2009. This includes the negative impact of foreign currency exchange rates of approximately $0.3 million. We experienced strong growth in our pelvic floor repair product line driven by both the Elevate^{^®} posterior and Elevate^{^®}anterior products. Sales from our female continence product line were relatively consistent with the same period last year, with growth from the recent launch of our MiniArc^® Precise single incision sling, partially offset by a decline in procedure volume, particularly in the United States.

Uterine health products. We sold the Her Option^® Global Endometrial Ablation product line on February 16, 2010 (see Notes to Consolidated Financial Statements — No. 8, Goodwill and Intangible Assets). Sales of $0.8 million in the three months ended October 2, 2010 resulted from the product supply agreement that is part of the divestiture agreement. We estimate that the product supply agreement will result in approximately $0.3 million in sales during the fourth quarter of 2010.

Net sales by geography and foreign exchange effects. Net sales in the United States, excluding the Her Option^® product line that was sold during the first quarter of 2010, increased 2.1 percent to $92.1 million in the third quarter of 2010 compared to $90.2 million in the third quarter of 2009. International net sales increased 0.5 percent to $31.1 million in the third quarter of 2010 compared to $31.0 million in the third quarter of 2009, which includes the negative impact of approximately $1.4 million in foreign currency exchange rate changes, caused by the strengthening of the U.S. dollar. International sales represented 25.1 percent of our total net sales in both the third quarter of 2010 and 2009.

Gross profit. Gross profit decreased slightly to 82.3 percent of sales in the third quarter of 2010, from 82.7 percent in the third quarter of 2009, mainly due to the impact of foreign currency rate fluctuations on revenue and product mix, with higher capital sales compared to the same period the previous year; capital sales have a lower gross profit than our other products. Future gross profit will continue to depend upon product and geographic mix, production levels, labor costs, raw material costs and the impact of foreign currency rate fluctuations.

Marketing and selling. Marketing and selling expenses as a percentage of sales decreased slightly to 34.4 percent in the third quarter of 2010 compared to 34.5 percent in the comparable prior year period. We will continue to make investments in existing and new geographies in order to drive revenue growth and geographic market expansion.

Research and development. Research and development includes costs to develop and improve current and possible future products plus the costs for regulatory and clinical activities for these products. Research and development expenses as a percentage of revenue increased to 10.2 percent in the third quarter of 2010 compared to 10.1 percent in the same period of 2009. These ratios are consistent with our long-term goal for spending on research and development of approximately ten percent of sales.

General and administrative. General and administrative expenses increased to $10.9 million in the third quarter of 2010 compared to $10.5 million in the third quarter of 2009 and as a percentage of sales were 8.7 and 8.5 percent in the third quarter of 2010 and third quarter of 2009, respectively. Our objective remains to leverage general and administrative expense as a percentage of sales.

Amortization of intangibles. Amortization of intangibles as a percentage of sales decreased to 2.5 percent in the third quarter of 2010 from 2.7 percent in the third quarter of 2009. The three month period ended October 2, 2010 reflects a decrease in amortization expense over the same period of 2009 primarily due to the sale of our Ovion technology in the third quarter of 2009 and the sale of the Her Option^® product line in the first quarter of 2010, as intangible assets were disposed of in these transactions, thereby reducing on-going amortization expense.

Royalty income. Our royalty income is from licensing our intellectual property. Royalty income in the third quarter of 2010 was $0.2 million, compared to approximately $1.0 million in the same period last year, due to the termination of a royalty agreement in connection with the sale of our Ovion technology in the third quarter of 2009 and the expiration of other royalty contracts.

Interest expense. Interest expense decreased by $1.3 million in the third quarter of 2010 from the comparable period in 2009 mainly due to the impact of debt prepayments made over the past year. Interest expense includes interest incurred on our 2036 Notes, which carry a fixed interest rate of 3.25 percent, the interest incurred on our 2041 Notes, which carry a fixed interest rate of 4.00 percent, and the interest incurred on our Credit Facility, which generally carries a floating interest rate of LIBOR plus 2.25 percent. During the three months ended October 2, 2010 and October 3, 2009, we used interest rate swap contracts designated as cash flow hedges of the floating rate interest payments for a portion of our borrowings under the Credit Facility. These contracts matured during the third quarter of 2010, and we had no outstanding interest rate swap contracts as of October 2, 2010. Including the impact of interest rate swap contracts, our weighted average interest rate on the credit facility was 2.6 percent and 4.4 percent for the three months ended October 2, 2010 and October 3, 2009, respectively. Average borrowings during the third quarter of 2010 on the Credit Facility were $39.3 million, compared to $186.5 million in the third quarter of 2009. Average borrowings on our 2036 Notes were $62.0 million and $276.3 million for the three months ended October 2, 2010 and October 3, 2009, respectively. Average borrowings on our 2041 Notes, which we issued in late September of 2009 in exchange for 2036 Notes, was $250.0 million for the three months ended October 2, 2010.

Amortization of financing costs. Amortization of financing costs in the third quarter of 2010 and in the third quarter of 2009 was $3.5 million and $4.4 million, respectively, and was comprised of the incremental non-cash interest cost of our convertible notes and amortization of the costs associated with the issuance of the Credit Facility and convertible notes. The lower amortization in the third quarter of 2010 was due to the impact of debt prepayments made on our Credit Facility over the past year, as we recognize a pro rata portion of the related debt discount and debt issuance costs when we retire debt.

Gain on extinguishment of debt. On September 21, 2009, we exchanged $250.0 million in principal of the 2036 Notes for $250.0 million in principal of 2041 Notes. We accounted for this transaction as an extinguishment of debt in accordance with U.S. GAAP, and we recorded a pre-tax gain on extinguishment of $5.6 million in the third quarter of 2009.

Gain on sale of non-strategic assets. During the third quarter of 2009, we sold our Ovion technology for $23.6 million. The consideration, less the carrying value of the intangible asset and related disposal costs, resulted in a pre-tax gain of $17.4 million. The transaction included termination of a royalty agreement, and as a result, royalty income was reduced by approximately $0.5 million per quarter beginning in the fourth quarter of 2009. In addition, as a result of this asset sale agreement, and separate agreements completed with third parties, we eliminated all existing and potential obligations and liabilities under previous agreements associated with the Ovion technology.

Other income (expense). Other income totaled $1.9 million in the third quarter of 2010 compared to other (expense) of $0.3 million in the same period in 2009. The primary cause of the change in other income relates to the impact of our foreign currency hedge transactions and the fluctuations in foreign currencies against the U.S. dollar on foreign denominated inter-company receivables and payables, along with an increase in other income due to a reduction in a contingent liability related to a former entity that we disposed of in early 2007.

Provision for income taxes. Our effective income tax rate was 33.9 percent and 40.1 percent for the third quarter of 2010 and third quarter of 2009, respectively. The decrease in the third quarter of 2010 effective tax rate is due to the release of a reserve for uncertain tax benefits related to the closure of a statute of limitations for fiscal year 2006. In addition, we incurred non-deductible expenses related to the sale of our Ovion technology in the third quarter of 2009 that increased our effective income tax rate that quarter.

Comparison of the Nine Months Ended October 2, 2010 to the Nine Months Ended October 3, 2009

Net sales. Net sales of $395.3 million in the first nine months of 2010 represented an increase of 5.9 percent compared to the first nine months of 2009. The weakening of the U.S. dollar in the first nine months of 2010, as compared to the same period in 2009, increased revenue approximately $1.4 million. Growth in our business continues to be driven by the success of innovative products, particularly our Elevate^® anterior and Elevate^® posterior pelvic floor repair products, and the new GreenLight^™ XPS console launched late in the second quarter of 2010.

Men’s health products. Net sales of men’s health products increased 5.8 percent to $181.0 million in the first nine months of 2010 compared to $171.1 million in the first nine months of 2009. This includes the positive impact of foreign currency exchange rates of approximately $0.7 million. Our AMS 700^{^®}MS^™, in our erectile restoration product line, and AMS 800^{^®}Artificial Urinary Sphincter, in our male continence product line, led the overall growth in the men’s health products.

BPH therapy products. Net sales from BPH therapy products increased 1.0 percent to $82.0 million in the first nine months of 2010 compared to $81.2 million in the same period in 2009. We experienced strong sales of the GreenLightXPS^™ console, which was launched in the second quarter of 2010, offset by a decrease in sales of GreenLight^™ fibers during the third quarter of 2010 largely attributable to the anticipation of the launch of our new MoXy™ Liquid Cooled Fiber in the last week of the third quarter of 2010.

Women’s health products. Net sales of our women’s health products increased 13.0 percent to $128.4 million in the first nine months of 2010 compared to $113.6 million in the first nine months of 2010. This includes the positive impact of foreign currency exchange rates of approximately $0.6 million. We experienced strong growth in our pelvic floor repair product line driven both by Elevate^® anterior and posterior. In addition, the female continence product line contributed modest sales growth in the United States, which was largely offset by declines in certain international markets.

Uterine health products. We sold the Her Option^® Global Endometrial Ablation product line on February 16, 2010 (see Notes to Consolidated Financial Statements — No. 8, Goodwill and Intangible Assets), and thus the nine month period ended October 2, 2010 includes approximately six weeks of end-customer net sales of $1.2 million from that product in addition to sales of approximately $2.7 million after February 16, 2010 from the product supply agreement that is part of the divestiture agreement. We estimate the product supply agreement will result in approximately $0.3 million in sales during the fourth quarter of 2010.

Net sales by geography and foreign exchange effects. Net sales in the United States, excluding the Her Option^® product line that was sold during the first quarter of 2010, increased 7.7 percent to $284.2 million in the first nine months of 2010 compared to $263.9 million in the first nine months of 2009. Growth in domestic sales was led by our women’s health products with the highest growth coming from Elevate^® anterior in our pelvic floor repair product line. International net sales increased by 5.2 percent to $107.2 million in the first nine months of 2010 compared to $101.9 million in the first nine months of 2009. International growth was led by our men’s health products, fueled by strong growth coming from AMS 800^{^®}Artificial Urinary Sphincter in our male continence product line.

Gross profit. Gross profit improved to 83.4 percent of sales in the first nine months of 2010 from 82.3 percent in the first nine months of 2009. We realized higher margins through a combination of factors, primarily due to the impact of ongoing manufacturing efficiencies and cost reduction programs. Margins also increased due to improved reliability on our laser therapy products, which resulted in lower warranty and service costs. Future gross profit will continue to depend upon product and geographic mix, production levels, labor costs, raw material costs and the impact of foreign currency rate fluctuations.

Marketing and selling. Marketing and selling expenses as a percentage of sales were consistent at 34.6 percent in the first nine months of 2010 compared to 34.5 percent in the first nine months of 2009. We have made investments in marketing efforts to support product launches and geographic expansion.

Research and development. Research and development includes costs to develop and improve current and possible future products plus the costs for regulatory and clinical activities for these products. Research and development expenses as a percentage of sales were consistent at 10.1 percent in the first nine months of 2010 compared to 10.3 percent in the same period of 2009. These ratios are in line with our long-term goal for spending on research and development of approximately ten percent of sales.

General and administrative. General and administrative expenses increased to $35.3 million in the first nine months of 2010 compared to $32.9 million in the first nine months of 2009. The increase is primarily due to increased

salaries and legal expenses. General and administrative expenses as a percentage of sales were 8.9 and 8.8 percent during the nine months ending October 2, 2010 and October 3, 2009, respectively. Our objective remains to leverage general and administrative expense as a percentage of sales.

Amortization of intangibles. Amortization of intangibles includes amortization expense on our definite-lived intangible assets, consisting of patents, licenses and developed technology. Amortization of intangibles decreased as percentage of sales to 2.3 percent in the first nine months of 2010 compared to 2.7 percent in the first nine months of 2009. The nine month period ended October 2, 2010 reflects a decrease in amortization expense over the same period of 2009 primarily due to the sale of our Ovion technology in the third quarter of 2009 and the sale of the Her Option^® product line in the first quarter of 2010, as intangible assets were disposed of in these transactions, thereby reducing on-going amortization expense.

Royalty income. Our royalty income is from licensing our intellectual property. Royalty income in the first nine months of 2010 decreased approximately $2.3 million compared to the first nine months of 2009 due to the termination of a royalty agreement in connection with the sale of our Ovion technology in the third quarter of 2009 and the expiration of other royalty contracts.

Interest expense. Interest expense decreased by $4.2 million in the first nine months of 2010 from the comparable period in 2009 mainly due to the impact of debt prepayments made over the past year. Interest expense includes interest incurred on our 2036 Notes, which carry a fixed interest rate of 3.25 percent, the interest incurred on our 2041 Notes, which carry a fixed interest rate of 4.00 percent, and the interest incurred on our Credit Facility, which generally carries a floating interest rate of LIBOR plus 2.25 percent. During the nine months ended October 2, 2010 and October 3, 2009, we used interest rate swap contracts designated as cash flow hedges of the floating rate interest payments for a portion of our borrowings under the Credit Facility. These contracts matured during the third quarter of 2010, and we had no outstanding interest rate swap contracts as of October 2, 2010. Including the impact of interest rate swap contracts, our weighted average interest rate on the credit facility was 3.1 percent and 4.7 percent for the first nine months of 2010 and the first nine months of 2009, respectively. Average borrowings during the first nine months of 2010 on the Credit Facility were $69.7 million, compared to $209.6 million in the first nine months of 2009. Average borrowings on our 2036 Notes were $62.0 million and $306.8 million for the nine months ended October 2, 2010 and October 3, 2009, respectively. Average borrowings on our 2041 Notes, which we issued in late September of 2009 in exchange for 2036 Notes, was $250.0 million for the nine months ended October 2, 2010.

Amortization of financing costs. Amortization of financing costs in the first nine months of 2010 and in the first nine months of 2009 was $10.5 million and $12.4 million, respectively, and was comprised of the incremental non-cash interest cost of our 2036 Notes and 2041 Notes, and amortization of the costs associated with the issuance of our debt. The lower amortization in the first nine months of 2010 was due to the impact of prepayments made on our Credit Facility during 2009 and 2010, which resulted in a decrease in average borrowings. We recognize a pro rata portion of the related debt discount and debt issuance costs when we retire debt.

Gain on extinguishment of debt. During the first nine months of 2009, we repurchased 2036 Notes with a principal amount of $27.3 million and we recorded a pre-tax gain on extinguishment of debt of $4.6 million. In addition, on September 21, 2009, we exchanged $250.0 million in principal of the 2036 Notes for $250.0 million in principal of the 2041 Notes. We accounted for this transaction as an extinguishment of debt in accordance with U.S. GAAP, and we recorded a pre-tax gain on extinguishment of $5.6 million in the third quarter of 2009.

Gain on sale of non-strategic assets. During the first quarter of 2010, we sold the Her Option^® Global Endometrial Ablation product line for $20.5 million. The final sale price after adjustment based on working capital balances at the time of sale was $19.5 million. We allocated a portion of our goodwill to the sale based on the relative fair value of the Her Option^® product line and our remaining business. The consideration, less goodwill, the carrying value of tangible and intangible assets and related disposal costs resulted in a pre-tax gain of $7.7 million.

Other income (expense). Other income increased by $0.8 million in the first nine months of 2010 compared to the same period in 2009. The primary cause of the change in other income relates to the impact of our foreign currency hedge transactions and fluctuations in foreign currencies against the U.S. dollar on foreign denominated inter-company receivables and payables, along with an increase in other income due to a reduction of a contingent liability related to a former entity that we disposed of in early 2007.

Provision for income taxes. Our effective income tax rate was 38.2 percent and 38.1 percent for the nine months ended October 2, 2010 and October 3, 2009, respectively. Our effective tax rate for the nine months ended October 2, 2010 included a non-deductible goodwill write-off in the first quarter of 2010 related to the sale of our Her Option^® product line partially offset by the release of reserves for certain matters related to the closure of a statute

of limitations for fiscal year 2006. Our effective tax rate for the nine months ended October 3, 2009 was also elevated due to the non-deductible expenses incurred in connection with the sale of the Ovion technology in the third quarter of 2009.

Liquidity and Capital Resources

Cash and cash equivalents was $17.8 million as of October 2, 2010, compared to $30.7 million as of January 2, 2010. In addition, short-term investments were $43.9 million as of October 2, 2010, compared to $19.9 million as of January 2, 2010. Short-term investments consist mostly of highly liquid money market funds and commercial paper that have not experienced any negative impact on liquidity or a decline in principal value. Overall, cash, cash equivalents and short-term investments increased $11.2 million as of October 2, 2010 compared to January 2, 2010.

Cash flows from operating activities. Cash provided by operating activities was $74.2 million in the first nine months of 2010, versus $97.2 million provided during the comparable period of 2009, which is a decrease of $23.0 million. The main driver of the decrease is related to changes in current liabilities, where $9.9 million of cash was used during the first nine months of 2010 to reduce accounts payable, income taxes payable, accrued compensation and other accrued expenses; compared to cash provided by changes in current liabilities of $9.5 million during the comparable period of 2009. This year over year change results in a decrease of $19.4 million in cash provided related to changes in current liabilities.

Cash flows from investing activities. Cash used in investing activities was $12.3 million during the first nine months of 2010, compared to cash provided by investing activities of $21.6 million in the first nine months of 2009. Net cash provided by the sale of the Her Option^® product line was $19.0 million and the proceeds were used to pay down our debt. We also increased our purchases of short-term investments during the first nine months of 2010 compared to the comparable period of 2009 resulting in a balance in short-term investments of $43.9 million at the end of the third quarter of 2010 compared to $19.9 million at the end of the third quarter of 2009.

Cash flows from financing activities. Cash used for financing activities was $74.2 million during the first nine months of 2010, versus $100.1 million used in the same period of 2009. The majority of cash was used for repayment of long-term debt in both periods. Cash used for repayment of long-term debt under our Credit Facility was $97.0 million and $78.2 million for the first nine months of 2010 and 2009, respectively. In addition, we repurchased 2036 Notes with a principal amount of $27.3 million for a cash payment of $21.1 million during the first quarter of 2009. Cash received from the issuance of common stock was $21.2 million and $6.4 million during the first nine months of 2010 and 2009, respectively, which was the result of stock option exercises and employee purchases of common stock through our employee stock purchase plan.

2036 Notes. We issued our 2036 Notes with a stated maturity of July 1, 2036 pursuant to an Indenture dated as of June 27, 2006 as supplemented by the first supplemental indenture dated September 6, 2006 (the 2036 Notes Indenture) between us, certain of our significant domestic subsidiaries, as guarantors of the 2036 Notes, and U.S. Bank National Association, as trustee for the benefit of the holders of the 2036 Notes, which specifies the terms of the 2036 Notes. The 2036 Notes bear interest at the rate of 3.25 percent per year, payable semiannually. The 2036 Notes are our direct, unsecured, senior subordinated obligations, rank junior to our Credit Facility and will rank junior in right of payment to all of our future senior secured debt as provided in the 2036 Notes Indenture. The 2036 Notes have the same rank as our 2041 Notes.

In addition to regular interest on the 2036 Notes, we will also pay contingent interest beginning July 1, 2011 at 0.25% of the average trading price of the 2036 Notes, if the average trading price for the five consecutive trading days immediately before the last trading day preceding the relevant nine-month period equals or exceeds 120 percent of the principal amount of the 2036 Notes. The 2036 Notes are convertible under certain circumstances for cash and shares of our common stock, if any, at a conversion rate of 51.5318 shares of our common stock per $1,000 principal amount of 2036 Notes (which is equal to an initial conversion price of approximately $19.406 per share), subject to adjustment. Upon conversion, we would be required to satisfy up to 100 percent of the principal amount of the 2036 Notes solely in cash, with any amounts above the principal amount to be satisfied in shares of our common stock.

If a holder elects to convert its 2036 Note in connection with a designated event or change that occurs prior to July 1, 2013, we will pay, to the extent described in the 2036 Notes Indenture, a make whole premium by increasing the

conversion rate applicable to such 2036 Notes. All of the above conversion rights will be subject to certain limitations imposed by our Credit Facility.

We may also redeem the 2036 Notes on or after July 6, 2011 at specified redemption prices as provided in the 2036 Notes Indenture plus accrued and unpaid interest and contingent interest. Holders of the 2036 Notes may require us to purchase all or a portion of their 2036 Notes for cash on July 1, 2013, July 1, 2016, July 1, 2021, July 1, 2026, and July 1, 2031 or in the event of a designated event or change, at a purchase price equal to 100 percent of the principal amount of the 2036 Notes to be repurchased plus accrued and unpaid interest and contingent interest.

2041 Notes. We issued our 2041 Notes with a stated maturity of September 15, 2041 pursuant to an Indenture dated as of September 21, 2009 (the 2041 Notes Indenture) between us, certain of our significant domestic subsidiaries, as guarantors of the 2041 Notes, and U.S. Bank National Association, as trustee for the benefit of the holders of the 2041 Notes, which specifies the terms of the 2041 Notes. The 2041 Notes bear interest at the rate of 4.00 percent per year, payable semiannually. The 2041 Notes are our direct, unsecured, senior subordinated obligations, rank junior to our Credit Facility and will rank junior in right of payment to all of our future senior debt as provided in the 2041 Notes Indenture. The 2041 Notes have the same rank as our 2036 Notes.

In addition to regular interest on the 2041 Notes, we will also pay contingent interest beginning September 15, 2016 at 0.75% of the average trading price of the 2041 Notes, if the average trading price for the five consecutive trading days immediately before the first day of such semiannual period equals or exceeds 130 percent of the principal amount of the 2041 Notes. The 2041 Notes are convertible under certain circumstances for cash and shares of our common stock, if any, at a conversion rate of 51.5318 shares of our common stock per $1,000 principal amount of 2041 Notes (which is equal to an initial conversion price of approximately $19.406 per share), subject to adjustment. Upon conversion, we would be required to satisfy up to 100 percent of the principal amount of the 2041 Notes solely in cash, with any amounts above the principal amount to be satisfied in shares of our common stock.

If a holder elects to convert its 2041 Note in connection with a designated event or change, we will pay, to the extent described in the 2041 Notes Indenture, a make whole premium by increasing the conversion rate applicable to such 2041 Notes. All of the above conversion rights will be subject to certain limitations imposed by our Credit Facility. We may also redeem the 2041 Notes on or after September 15, 2016 at specified redemption prices as provided in the 2041 Notes Indenture plus accrued and unpaid interest and contingent interest. Holders of the 2041 Notes may require us to purchase all or a portion of their 2041 Notes for cash on September 15, 2016 or in the event of a designated event or change, at a purchase price equal to 100 percent of the principal amount of the 2041 Notes to be repurchased plus accrued and unpaid interest and contingent interest.

2036 Notes and 2041 Notes — Potential Dilution. Prior to conversion, our 2036 Notes and 2041 Notes (Convertible Notes) represent potentially dilutive common share equivalents that must be considered in our calculation of diluted earnings per share (EPS). When there is a net loss, common share equivalents are excluded from the computation because they have an anti-dilutive effect. In addition, when the conversion price of our 2036 Notes and 2041 Notes is greater than the average market price of our stock during any period, the effect would be anti-dilutive and we would exclude the 2036 Notes and 2041 Notes from the EPS computation. However, when the average market price of our stock during any period is greater than the conversion price of the 2036 Notes and 2041 Notes, the impact is dilutive and the 2036 Notes and 2041 Notes will affect the number of common share equivalents used in the diluted EPS calculation. The degree to which the 2036 Notes and 2041 Notes are dilutive increases as the market price of our stock increases.

The following table illustrates the number of common share equivalents that would potentially be included in weighted average common shares for the calculation of diluted EPS, assuming various market prices of our stock:


If the average
market price	The number of common share equivalents potentially included in the computation of
of our stock is:	of diluted EPS would be (1):									Percent Dilution (2)
	2036 Notes			2041 Notes			Total			2036 Notes			2041 Notes			Total
$19.00		-	(anti-dilutive)		-	(anti-dilutive)		-	(anti-dilutive)		0.0	%		0.0	%		0.0	%
$20.00		0.1	million		0.4	million		0.5	million		0.1	%		0.5	%		0.6	%
$22.50		0.4	million		1.8	million		2.2	million		0.5	%		2.3	%		2.8	%
$25.00		0.7	million		2.9	million		3.6	million		0.9	%		3.7	%		4.6	%
$27.50		0.9	million		3.8	million		4.7	million		1.2	%		4.8	%		6.0	%
$30.00		1.1	million		4.5	million		5.6	million		1.5	%		5.6	%		7.1	%


(1)		Common share equivalents are calculated using the treasury stock method. The formula to calculate the potentially dilutive shares related to our Convertible Notes is as follows:

(

Principal Amount

$19.406 conversion price

Market price
of stock

–

Principal
Amount

)

Potentially dilutive shares
included in EPS

Market price of stock



(2)		The percent dilution is based on 76,347,633 outstanding shares as of October 2, 2010.

For the three and nine months ended October 2, 2010, our Convertible Notes had a dilutive effect on our net income per share calculation and 1,156,776 and 746,191 shares were included in the calculation of diluted earnings per share, for the three and nine months periods, respectively.

Credit Facility. On July 20, 2006, our wholly-owned subsidiary, American Medical Systems, Inc. (AMS), entered into a senior secured Credit Facility. AMS and each majority-owned domestic subsidiary of AMS are parties to the Credit Facility as guarantors of all of the obligations of AMS arising under the Credit Facility. The obligations of AMS and each of the guarantors arising under the Credit Facility are secured by a first priority security interest on substantially all of their respective assets, including a mortgage on the AMS facility in Minnetonka, Minnesota.

Our Credit Facility contains affirmative and negative covenants and other limitations (subject to various carve-outs and baskets) regarding us, AMS, and in some cases, the subsidiaries of AMS. The covenants limit: (a) investments, capital expenditures, dividend payments, the disposition of material assets other than in the ordinary course of business, and mergers and acquisitions under certain conditions, (b) transactions with affiliates, unless such transactions are completed in the ordinary course of business and upon fair and reasonable terms, (c) liens and indebtedness, and (d) substantial changes in the nature of our business. Our Credit Facility contains customary financial covenants for secured credit facilities, consisting of maximum total and senior debt leverage ratios and minimum interest coverage and fixed charge coverage ratios. These financial covenants adjust from time to time during the term of the Credit Facility. The covenants and restrictions contained in the Credit Facility could limit our ability to fund our business, make capital expenditures, and make acquisitions or other investments in the future.

On August 12, 2009, we entered into a Consent and Second Amendment to our Credit Facility, which allowed us to exchange a portion of our existing convertible senior subordinated notes for new convertible senior subordinated notes. On October 29, 2007, we entered into a First Amendment of our Credit Facility to modify certain financial covenant ratios as defined in the Credit Facility (the First Amendment). Pursuant to the terms of the First Amendment, certain of the financial tests and covenants were amended and restated, including the interest coverage ratio, the total leverage ratio, the fixed charge coverage ratio, and the maximum consolidated capital expenditures.

As of October 2, 2010, we were in compliance with all financial covenants as defined in our Credit Facility which are summarized as follows:


Financial Covenant	Required Covenant	Actual Result

Total Leverage Ratio (1)	3.00:1.00 (maximum)		1.85:1.00
Senior Leverage Ratio (2)	2.00:1.00 (maximum)		0.15:1.00
Interest Coverage Ratio (3)	4.00:1.00 (minimum)		11.94:1.00
Fixed Charge Coverage Ratio (4)	1.50:1.00 (minimum)		2.21:1.00
Maximum Capital Expenditures (5)	$20.0 million	$5.8 million


(1)		Total outstanding debt to Consolidated Adjusted EBITDA for the trailing four quarters.

(2)		Total outstanding senior secured debt to Consolidated Adjusted EBITDA for the trailing four quarters.

(3)		Ratio of Consolidated Adjusted EBITDA for the trailing four quarters to cash interest expense for such period.

(4)		Ratio of Consolidated Adjusted EBITDA for the trailing four quarters to fixed charges (cash interest expense, scheduled principal payments on debt, capital expenditures, income taxes paid, earn-out and milestone payments) for such period.

(5)		Limit of capital expenditures for the full year.

The ratios are based on EBITDA, on a rolling four quarters, calculated with certain adjustments (Consolidated Adjusted EBITDA). Consolidated Adjusted EBITDA is a non-GAAP financial measure that is defined in our Credit Facility as earnings before interest, income taxes, depreciation, amortization, and other non-cash items reducing net income including IPR&D and stock compensation charges, less other non-cash items increasing net income. Consolidated Adjusted EBITDA should not be considered an alternative measure of our net income, operating performance, cash flow or liquidity. It is provided as additional information relative to compliance with our debt covenants.

Any failure to comply with any of these financial and other affirmative and negative covenants would constitute an event of default under the Credit Facility, entitling a majority of the bank lenders to, among other things, terminate future credit availability under the Credit Facility, increase the interest rate on outstanding debt, and accelerate the maturity of outstanding obligations under the Credit Facility.

Additional Information

We are currently subject to the informational requirements of the Securities Exchange Act of 1934, as amended. As a result, we are required to file periodic reports and other information with the SEC, such as annual, quarterly, and current reports, and proxy and information statements. You are advised to read this Form 10-Q in conjunction with the other reports, proxy statements, and other documents we file with or furnish to the SEC from time to time. If you would like more information regarding our Company, you may read and copy the reports, proxy and information statements and other documents we file with or furnish to the SEC, at prescribed rates, at the SEC’s public reference room at 100 F. Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information regarding the operation of the SEC’s public reference rooms by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public free of charge at the SEC’s website. The address of this website is http://www.sec.gov.

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

Forward-Looking Statements

This quarterly report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are subject to the safe harbor created by those sections. In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on our Internet web site or otherwise. All statements other than

statements of historical facts included in this report or expressed by us orally from time to time that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our plans, objectives, strategies, the outcome of contingencies such as legal proceedings, and prospects regarding, among other things, our financial condition, results of operations and business. We have identified some of these forward-looking statements in this report with words like “believe,” “may,” “could,” “would,” “might,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” or “continue” or the negative of these words or other words and terms of similar meaning. These forward-looking statements may be contained in the notes to our consolidated financial statements and elsewhere in this report, including under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements are based on management’s beliefs, certain assumptions and current expectations and factors that affect all businesses operating in a global market as well as matters specific to us. These uncertainties and factors are difficult to predict and many of them are beyond our control.

The following are some of the uncertainties and factors known to us that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements: successfully competing against competitors; physician acceptance, endorsement, and use of our products; potential product recalls or technological obsolescence; health care reform legislation in the U.S.; successfully managing increased debt leverage and related credit facility financial covenants; the impact of worldwide economic conditions on our operations; the disruption in global financial markets potential impact on the ability of our counterparties to perform their obligations and our ability to obtain future financing; factors impacting the stock market and share price and its impact on the dilution of convertible securities; ability of our manufacturing facilities to meet customer demand; reliance on single or sole-sourced suppliers; loss or impairment of a principal manufacturing facility; clinical and regulatory matters; timing and success of new product introductions; patient acceptance of our products and therapies; changes in and adoption of reimbursement rates; adequate protection of our intellectual property rights; product liability claims; and currency and other economic risks inherent in selling our products internationally.

For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements or otherwise could materially adversely affect our business, financial condition or operating results, see our annual report on Form 10-K for the fiscal year ended January 2, 2010 under the heading “Part I — Item 1A. Risk Factors”, and “Part II — Item 1A. Risk Factors” contained in our quarterly reports on Form 10-Q for our 2010 fiscal quarters.

All forward-looking statements included in this report are expressly qualified in their entirety by the foregoing cautionary statements. We wish to caution readers not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the uncertainties and factors described above, as well as others that we may consider immaterial or do not anticipate at this time. The risks and uncertainties described above are not exclusive and further information concerning us and our business, including factors that potentially could materially affect our financial results or condition, may emerge from time to time. We assume no obligation to update, amend or clarify forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures we make on related subjects in our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K we file with or furnish to the SEC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We use derivatives to mitigate our exposure to volatility in interest and foreign currency exchange rates. We hedge only exposures in the ordinary course of business.

Interest Rates

We have interest rate risk as a result of the floating LIBOR index that is used to determine the interest rates on our Credit Facility. As of October 2, 2010 we have $28.3 million outstanding of term loans outstanding under the Credit Facility. Based on a sensitivity analysis, as of October 2, 2010, an instantaneous and sustained 100-basis-point increase in interest rates affecting our floating rate debt obligations, and assuming that we take no counteractive measures, would result in a decrease in income before income taxes of approximately $0.3 million over the next 12 months. As of October 2, 2010, we had no interest rate swap contracts outstanding to mitigate this risk, due to the relatively small exposure remaining on these term loans.

Currency

Our operations outside of the United States are maintained in their local currency, with the significant currencies consisting of Euros, British pounds, Canadian dollars, Australian dollars, and Brazilian real. All assets and liabilities of our international subsidiaries are translated to U.S. dollars at period-end exchange rates. 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 and short-term inter-company receivables from foreign subsidiaries are included in other (expense) income.

During the three and nine month periods ended October 2, 2010, revenues from sales to customers outside the United States were 25.1 percent and 27.1 percent of total consolidated revenues. International accounts receivable was 43.4 percent, inventory was 6.3 percent, cash and short-term investments was 24.2 percent, and accounts payable was 27.9 percent of total consolidated accounts for each of these items as of October 2, 2010. The reported results of our operations are influenced by the translation into U.S. dollars by currency movements against the U.S. dollar. The result of a uniform 10 percent strengthening in the value of the U.S. dollar relative to each of the currencies in which our revenues and expenses are denominated would have resulted in a decrease in net income of approximately $0.5 million and $1.7 million during the three and nine months ended October 2, 2010.

We have entered into various foreign exchange forward contracts to manage a portion of our exposure to foreign exchange rate fluctuations on our forecasted sales to and receivables from certain subsidiaries. At October 2, 2010, our net investment in foreign subsidiaries translated into dollars using the period end exchange rate was $35.1 million and the potential loss in fair value resulting from a hypothetical 10 percent strengthening in the value of the U.S. dollar currency exchange rate amounts to $3.5 million. Actual amounts may differ.

Credit Risk

Credit risk on financial instruments arises from the potential for counterparties to default on their obligations to us. Recent economic events, including failures of financial service companies and the related liquidity crisis, have considerably disrupted the capital and credit markets. Our credit risk consists of trade receivables, cash and cash equivalents, short-term investments, derivative instruments, lending commitments and insurance relationships in the ordinary course of business.

The carrying value of accounts receivable approximates fair value due to the relatively short periods to maturity on these instruments. Accounts receivable are primarily due from hospitals and clinics located mainly in the United States and Western Europe. Although we do not require collateral from our customers, concentrations of credit risk in the United States are mitigated by a large number of geographically dispersed customers. We do not presently anticipate losses in excess of allowances provided associated with trade receivables, although collection could be impacted by the underlying economies of the countries.

We place cash, cash equivalents, short-term investments and derivative instruments with high quality financial institutions, which we monitor regularly and take action where possible to mitigate risk. We do not hold investments in auction rate securities, mortgage backed securities, collateralized debt obligations, individual corporate bonds, special investment vehicles or any other investments which have been directly impacted by the recent financial crisis. To date, all previous lending commitments remain available to us, and we have not incurred any charges specific to the increased volatility in credit markets and credit risk. Insurance programs are with carriers that remain

highly rated and we have no significant pending claims. Further, we do not expect our current or future credit risk exposures to have a significant impact on our operations. However, there can be no assurance that our business will not have any adverse impact from credit risk in the future.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act of 1934). Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of October 2, 2010.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the above-referenced evaluation by management of the effectiveness of our internal control over financial reporting that occurred during the third quarter ended October 2, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As previously disclosed in the Quarterly Report on Form 10-Q for the period ended July 3, 2010, we were advised in July 2010 by the Office of Inspector General (OIG) of the United States Department of Health and Human Services that the OIG had closed, without action as to AMS, the investigation in connection with which we had received a document subpoena in May 2009.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in Part I — Item 1A. of our Annual Report on Form 10-K for the year ended January 2, 2010, except as disclosed in our Quarterly Report on Form 10-Q for the quarter ended April 3, 2010.

ITEM 6. EXHIBITS


Item No.	Item	Method of Filing
31.1	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.

31.2	Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.

101	Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended October 2, 2010, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.*	Filed Electronically


*		Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are furnished and should not be deemed “filed” under the Securities Exchange Act of 1934.

SIGNATURES

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


		AMERICAN MEDICAL SYSTEMS HOLDINGS, INC

November 8, 2010 Date	By	/s/ Anthony P. Bihl, III Anthony P. Bihl, III
		President and Chief Executive Officer
		(Principal Executive Officer)

November 8, 2010 Date	By	/s/ Mark A. Heggestad Mark A. Heggestad
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Fiscal Quarter Ended October 2, 2010


Item No.	Item	Method of Filing
31.1	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.

31.2	Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.

101	Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended October 2, 2010, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.*	Filed Electronically


*		Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are furnished and should not be deemed “filed” under the Securities Exchange Act of 1934.

AMERICAN MEDICAL SYSTEMS HOLDINGS INC - FORM 10-Q - November 8, 2010

Attached files

AMERICAN MEDICAL SYSTEMS HOLDINGS INC Reports