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-----BEGIN PRIVACY-ENHANCED MESSAGE-----
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Proc-Type: 2001,MIC-CLEAR
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Originator-Name: [email protected]
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Originator-Key-Asymmetric:
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<SEC-DOCUMENT>0000351721-01-000014.txt : 20010409
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<SEC-HEADER>0000351721-01-000014.hdr.sgml : 20010409
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ACCESSION NUMBER: 0000351721-01-000014
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CONFORMED SUBMISSION TYPE: 10-K
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PUBLIC DOCUMENT COUNT: 2
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CONFORMED PERIOD OF REPORT: 20001231
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FILED AS OF DATE: 20010402
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FILER:
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COMPANY DATA:
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COMPANY CONFORMED NAME: ADVANCED NEUROMODULATION SYSTEMS INC
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CENTRAL INDEX KEY: 0000351721
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STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841]
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IRS NUMBER: 751646002
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STATE OF INCORPORATION: TX
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FISCAL YEAR END: 1231
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FILING VALUES:
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FORM TYPE: 10-K
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SEC ACT:
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SEC FILE NUMBER: 000-10521
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FILM NUMBER: 1591768
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BUSINESS ADDRESS:
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STREET 1: 6501 WINDCREST DRIVE SUITE 100
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CITY: PLANO
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STATE: TX
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ZIP: 75024
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BUSINESS PHONE: 9723098000
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MAIL ADDRESS:
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STREET 1: 6501 WINDCREST DRIVE SUITE 100
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CITY: PLANO
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STATE: TX
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ZIP: 75024
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FORMER COMPANY:
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FORMER CONFORMED NAME: QUEST MEDICAL INC
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DATE OF NAME CHANGE: 19920703
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</SEC-HEADER>
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<DOCUMENT>
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<TYPE>10-K
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<SEQUENCE>1
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<FILENAME>0001.htm
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<DESCRIPTION>FORM 10-K FOR YEAR ENDED DECEMBER 31, 2000
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<TEXT>
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<HTML>
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<HEAD>
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<TITLE>Form 10-K for Year Ended December 31, 2000</TITLE>
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</HEAD>
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<BODY>
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<H1 ALIGN=CENTER><FONT SIZE=3>SECURITIES AND EXCHANGE COMMISSION</FONT></H1>
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<H1 ALIGN=CENTER><FONT SIZE=3>Washington, D.C. 20549</FONT></H1>
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<HR SIZE=1 WIDTH=15% ALIGN=CENTER>
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<H1 ALIGN=CENTER><FONT SIZE=4>FORM 10-K</FONT></H1>
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<HR SIZE=1 WIDTH=15% ALIGN=CENTER>
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<H1 ALIGN=CENTER><FONT SIZE=3>[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
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15(d) OF THE<BR>SECURITIES EXCHANGE ACT OF 1934</FONT></H1>
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<P ALIGN=CENTER><FONT SIZE=3>For the Fiscal Year Ended December 31,
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2000</FONT></P>
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<P ALIGN=CENTER><FONT SIZE=3>OR</FONT></P>
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<H1 ALIGN=CENTER><FONT SIZE=3>[&nbsp;&nbsp;] TRANSITION REPORT PURSUANT TO
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SECTION 13 OR 15(d) OF THE<BR> SECURITIES EXCHANGE ACT OF 1934</FONT></H1>
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<HR SIZE=1 WIDTH=15% ALIGN=CENTER>
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<P ALIGN=CENTER><FONT SIZE=3>Commission file number 0-10521</FONT></P>
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<H1 ALIGN=CENTER><FONT SIZE=4>ADVANCED NEUROMODULATION SYSTEMS, INC.</FONT></H1>
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<P ALIGN=CENTER><FONT SIZE=3>Incorporated pursuant to the Laws of the State of
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Texas</FONT></P>
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<HR SIZE=1 WIDTH=15% ALIGN=CENTER>
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<P ALIGN=CENTER><FONT SIZE=3>Internal Revenue Service &#151; Employer
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Identification No. 75-1646002</FONT></P>
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<P ALIGN=CENTER><FONT SIZE=3>6501 Windcrest Drive, Plano, Texas 75024</FONT></P>
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<P ALIGN=CENTER><FONT SIZE=3>(972) 309-8000</FONT></P>
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<HR SIZE=1 WIDTH=15% ALIGN=CENTER>
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<P><FONT SIZE=2>Indicate by check mark whether the registrant (1) has filed all
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reports required to be filed by Section 13 or 15(d) of the Securities Exchange
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Act of 1934 during the preceding 12 months (or for such shorter period that the
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registrant was required to file such reports) and (2) has been subject to such
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filing requirements for the past 90 days.
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Yes&nbsp;[X]&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;[&nbsp;&nbsp;] </FONT></P>
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<P><FONT SIZE=2>Indicate by check mark if disclosure of delinquent filers
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pursuant to Item 405 of the S-K is not contained herein, and will not be
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contained, to the best of registrant's knowledge, in definitive proxy or
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information statements incorporated by reference in Part III of this Form 10-K
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or any amendment to this Form 10-K. [ ]</FONT></P>
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<P><FONT SIZE=2>Aggregate market value of the registrant&#146;s Common
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Stock held by non-affiliates of the registrant as of March 16, 2001:
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$104,494,166</FONT></P>
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<P><FONT SIZE=2>Number of shares outstanding of the registrant&#146;s Common
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Stock as of March 16, 2001: 8,913,359</FONT></P>
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<P ALIGN=CENTER><FONT SIZE=2><B>DOCUMENTS INCORPORATED BY REFERENCE</B></FONT>
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</P>
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<P><FONT SIZE=2>Portions of the registrant&#146;s definitive Proxy Statement
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for the registrant's Annual Meeting of Stockholders to be held on May 23, 2001,
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are incorporated by reference into Part III.</FONT></P>
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<HR SIZE=5>
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<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc.</B></P>
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<P ALIGN=CENTER><B>Annual Report</B></P>
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<P ALIGN=CENTER><B>Form 10-K</B></P>
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<P ALIGN=CENTER><B>Year Ended December 31, 2000</B></P>
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<P ALIGN=CENTER><B>PART I</B></P>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
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<TR>
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<TD WIDTH=15%><B>ITEM 1.</B></TD>
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<TD WIDTH=85%><B>BUSINESS</B></TD></TR></TABLE>
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<P ALIGN=CENTER><B><U>General</U></B></P>
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<P>Advanced Neuromodulation Systems, Inc. designs, develops, manufactures and
125
markets advanced implantable neuromodulation devices that improve the quality of
126
life for people with disabling chronic pain or nervous system disorders.
127
Neuromodulation is the electrical or chemical modulation of the central nervous
128
system to significantly reduce chronic pain or improve neurological
129
function.</P>
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<P>Because neuromodulation devices have gained acceptance as a viable,
131
efficacious and cost-effective treatment alternative for relieving chronic
132
intractable pain and improving neurological function, we are continuing efforts
133
to expand our product offerings in the high growth market of neuromodulation. In
134
2000, we were the market share and technology leader in the $45 million
135
radio-frequency stimulation segment of the neuromodulation market. In 2000, we
136
continued our aggressive investment in development projects to position us to
137
participate in the other larger and more rapidly growing segments of the
138
neuromodulation market. Excluding vagus nerve stimulation for treating epilepsy,
139
which we do not currently anticipate addressing, industry analysts expect the
140
neuromodulation market to grow from $425 million in 2000 to nearly $800 million
141
by 2003 solely on current FDA approved indications.</P>
142
<P ALIGN=CENTER><B><U>Recent Developments</U></B></P>
143
<P>On January 2, 2001, we acquired the assets (primarily intellectual property
144
consisting of patents and know-how) of Implantable Devices Limited Partnership
145
(IDP) and ESOX Technology Holdings, LLC (ESOX), two privately held Minnesota
146
companies, for 119,100 shares of ANS common stock. Based on the closing price of
147
ANS common stock on December 29, 2000, the value of the stock issued to acquire
148
the assets was $2.43 million. IDP was formed in 1986 to commercialize certain
149
implantable infusion technologies developed at the University of Minnesota. We
150
entered a license agreement with IDP in 1995 to license rights to implantable
151
infusion pump technologies developed by IDP and ESOX for applications in pain
152
and cancer therapy. Under the license agreement, we were obligated to pay IDP
153
royalties on worldwide sales of implantable infusion pumps using IDP technology.
154
The January 2, 2001 acquisition canceled the license agreement, thereby
155
eliminating our future royalty obligations, and expanded our rights to use the
156
pump technologies in all applications through our acquisition of the
157
intellectual property. We completed development of our AccuRx&#153; fully
158
implantable constant rate infusion pump in late 2000 using technology we
159
licensed from IDP. We received CE mark approval to distribute the pump
160
internationally, with international sales expected to commence in the second
161
quarter of fiscal 2001. We also received an Investigational Device Exemption
162
(IDE) from the FDA to initiate clinical trials in the United States. The
163
clinical trials will include 109 patients and will be conducted in twelve sites.
164
The trials commenced in the first quarter of 2001. The data gathered during the
165
trials will be used to support a Pre-Market Approval (PMA) application.</P>
166
<P ALIGN=CENTER>Page 1</P>
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<HR>
168
<P>Also on January 2, 2001, we completed the acquisition of Hi-tronics Designs,
169
Inc. (HDI or Hi-tronics), a privately-held contract developer and original
170
equipment manufacturer (OEM) of electro-mechanical devices headquartered in Budd
171
Lake, New Jersey. We acquired HDI through a stock-for-stock merger in which we
172
issued 1,104,725 shares of ANS common stock. The transaction will be accounted
173
for on a pooling of interests basis. HDI developed and is the manufacturer of
174
our Genesis&#153; totally implantable pulse generator (IPG) used in the
175
treatment of chronic intractable pain and is also the OEM manufacturer of the
176
transmitter used with our Renew&#174; radio-frequency spinal cord stimulation
177
system. HDI was founded in 1987 and has developed more than thirty medical
178
devices for some of the leading medical device companies. The core strength of
179
HDI is in developing highly sophisticated electronic circuits with very low
180
power requirements, utilizing both discreet and highly integrated technology. We
181
believe this competency, when combined with our own strengths in lead design and
182
packaging, will allow us to develop more sophisticated products in compressed,
183
development-cycle timetables. In addition, the merger will result in vertical
184
integration benefits in manufacturing that should enhance margins on our current
185
and future products. HDI&#146;s revenues for its fiscal 2000, which ended
186
November 30, 2000, were approximately $10.4 million, including approximately
187
$1.6 million of revenue associated with sales to ANS.</P>
188
<P>In September 1999, the Neurological Devices Panel of the Medical Devices
189
Advisory Committee recommended that the FDA reclassify Totally Implanted Spinal
190
Cord Stimulators (IPGs) for treatment of pain of the trunk and/or limbs from a
191
Class III device to a Class II device. Class III devices typically require a
192
PMA, supplemented with clinical trials to prove the safety and effectiveness of
193
the device. Class II devices typically require a Pre-Market Notification
194
(510(k)) to demonstrate substantial equivalence to an existing legally marketed
195
device prior to receiving market clearance by the FDA. According to the
196
FDA&#146;s 2000 ODE Annual Report, the average time for a PMA clearance was 11.9
197
months (excluding the one-year typically required for clinical trials, or
198
approximately 24 months total), while the average elapsed time for a 510(k)
199
approval was 3.4 months in 2000.</P>
200
<P>On September 6, 2000, the FDA published a Notice of Panel Recommendation in
201
the Federal Register to tentatively accept the September 1999 Medical Devices
202
Neurological Advisory Panel recommendation to reclassify the IPG device and
203
established a 30-day public comment period regarding the reclassification. The
204
FDA extended the comment period by 28 days until November 3, 2000 at the request
205
of Medtronic, Inc. On February 26, 2001, the FDA notified ANS that the agency
206
had denied ANS' petition to reclassify Totally Implanted Spinal Cord Stimulators
207
(IPGs) for treatment of pain of the trunk and/or limbs from a Class III device
208
to a Class II device. The FDA&#146;s denial was surprising and disappointing
209
principally because at a presubmission meeting with the FDA, the agency itself
210
had recommended that ANS submit a reclassification petition instead of the PMA
211
process as a "least burdensome path to market." Furthermore, the FDA Advisory
212
Panel recommended the reclassification and the agency itself had supported the
213
recommendation as late as September 6, 2000. We are currently requesting an
214
internal review of the administrative record to appeal the decision, while
215
simultaneously pursuing the PMA application to gain approval to market the IPG
216
in the United States. We are already marketing the IPG product in Europe.
217
Industry analysts estimate that the IPG market for spinal cord stimulation to
218
treat pain of the trunk and/or limbs will approach $175 million in 2001, and
219
that the market is growing at a 25% to 30% annual rate. Currently Medtronic,
220
Inc. is the sole provider of IPGs in the United States.<P>
221
<P ALIGN=CENTER><B><U>The Neuromodulation Market</U></B></P>
222
<P>The neuromodulation market is comprised of implantable electrical stimulation
223
systems and fully implantable infusion pumps that modulate the central nervous
224
system by delivering precise doses of either electricity or pharmaceuticals
225
directly to targeted nerve sites.</P>
226
<P ALIGN=CENTER>page 2</P>
227
<HR>
228
<P>Four product technology platforms address the chronic intractable pain
229
segment of the neuromodulation market. These platforms are: (1) radio-frequency
230
stimulation systems for spinal cord stimulation, (2) implantable pulse generator
231
stimulation systems for spinal cord and deep brain stimulation, (3) fully
232
implantable constant rate infusion pumps and (4) fully implantable programmable
233
rate infusion pumps. Industry analysts estimate the market for these
234
neuromodulation devices at $425 million in 2000 and growing to nearly $800
235
million by 2003 solely on current FDA approved indications. The growth in the
236
market for stimulation systems and fully implantable infusion pumps is being
237
driven by a number of factors, including:</P>
238
<UL>
239
<LI>New technology is increasing the capability of these devices
240
<LI>New clinical applications for stimulation systems and fully implantable
241
infusion pumps are being discovered and tested
242
<LI>Improved outcomes are being driven by technology, patient selection and
243
improved techniques
244
<LI>Stimulation and fully implantable infusion pump devices are generally low
245
risk and cost effective and the therapies are reversible
246
<LI>Patient awareness and advocacy is generally high
247
<LI>The base of pain specialists and centers of excellence is growing</UL>
248
<P>Listed below is the estimated revenue by market segment in 2000 and 2003 for
249
all manufacturers of such products. These estimates do not consider the use of
250
neuromodulation technology platforms for applications such as epilepsy,
251
depression, peripheral nerve stimulation, chronic intractable angina, chronic
252
headaches, functional stimulation, tens stimulation, peripheral vascular disease
253
and deep brain applications for disorders other than Parkinson's Disease
254
and Essential Tremor.</P>
255
<P><I>Estimated, for all product manufacturers, by market segment:</I></P>
256
<P></P>
257
<PRE>
258
2000 2003
259
----------- -----------
260
$(000's) $(000's)
261
----------- -----------
262
Radio-frequency stimulation systems for spinal
263
cord stimulation $ 45,000 $ 70,000
264
Implantable pulse generator stimulation systems
265
for spinal cord stimulation 142,000 275,000
266
Implantable pulse generator stimulation systems
267
for deep brain stimulation for Parkinson's Disease
268
and Essential Tremor 40,000 85,000
269
Implantable pulse generator stimulation systems
270
for sacral nerve stimulation for incontinence 15,000 55,000
271
Fully implantable constant rate infusion pumps 24,000 41,000
272
Fully implantable programmable rate infusion pumps 159,000 264,000
273
----------- -----------
274
Total $ 425,000 $ 790,000
275
----------- -----------
276
</PRE>
277
<P>According to industry analysts, there are millions of patients who could
278
benefit from the use of stimulation or fully implantable infusion pump devices.
279
Thus, we believe the market is under-served and under-penetrated. In 2000, only
280
approximately 60,000 patients benefited from neuromodulation devices.</P>
281
<P ALIGN=CENTER>Page 3</P>
282
<HR>
283
<P>Our growth strategy is to develop and license proprietary product platforms
284
to expand from our participation in only the radio-frequency stimulation segment
285
during 2000 into the other major market segments of the neuromodulation market.
286
Since most pain practitioners implant all four of the product platforms
287
(radio-frequency stimulation systems, implantable pulse generator stimulation
288
systems, fully implantable constant-rate infusion pumps and fully implantable
289
programmable infusion pumps), we believe we are in a unique position to leverage
290
our distribution capabilities.</P>
291
<P ALIGN=CENTER><B><U>Products</U></B></P>
292
<P><B>Stimulation Systems</B></P>
293
<P>Stimulation devices electrically stimulate nerve fibers along the spinal cord
294
to reduce chronic severe neuropathic pain by &#147;masking&#148; the pain
295
signals sent to the brain. Neuropathic pain usually arises from nerve damage.
296
Stimulation device implantation manages the pain associated with failed back
297
surgery syndrome (FBSS), peripheral neuropathy, phantom limb or stump pain,
298
ischemic pain and reflex sympathetic dystrophy (RSD), also known as complex
299
regional pain syndrome (CRPS). Stimulation device implantation in the brain is
300
being used to relieve the effects of various neurological disorders, such as
301
Parkinson&#146;s Disease and Essential Tremor by delivering small electrical
302
impulses to targeted structures in the brain.</P>
303
<P>The market for stimulation systems is currently divided between
304
radio-frequency stimulation systems, which use an external power source, and
305
stimulation systems that utilize implantable battery driven systems known as
306
implantable pulse generators (IPGs). According to industry analysts, lPG devices
307
account for around 80 percent of the number of spinal cord stimulation
308
procedures performed, with radio-frequency devices accounting for the remainder.
309
We currently design, develop, manufacture and market radio-frequency stimulation
310
devices and in 2000 we completed the development of our first generation IPG
311
device. The primary advantage of the radio-frequency device revolves around the
312
benefits of the system&#146;s external battery. An external battery system
313
allows the patient to recharge the device by simply changing a special nine-volt
314
battery. The IPG requires surgical intervention, revision and replacement after
315
two to four years. Due to its inexpensive power system, the radio-frequency
316
device can be programmed with a wide range of amplitude, frequency and pulse
317
width settings for a variety of programs controlled by the patient. These
318
features make the radio-frequency devices the most cost efficient for long-term
319
stimulation treatment. On the other hand, IPG devices provide the convenience of
320
a completely internalized system, although they involve added long-term cost
321
when repeat surgeries are required to replace the IPG power source. Both
322
radio-frequency systems and IPG systems are useful to the pain physician.
323
Radio-frequency systems are most often prescribed for patients who have complex
324
bilateral pain syndromes or widespread pain that require higher power levels.
325
IPGs are most often prescribed for patients with simple unilateral and single
326
extremity pain complaints or indications with lower power requirements.</P>
327
<P>Our radio-frequency stimulation systems consist of four primary components:
328
leads, a receiver, a transmitter and programmer. The leads are most commonly
329
placed percutaneously through the skin into the epidural space of the spinal
330
column. This procedure for lead placement is similar to that employed by
331
anesthesiologists in routine epidural procedures. Typically, one or two leads
332
are inserted, each of which has multiple electrodes that can be used to
333
stimulate the targeted nerve roots of the spinal cord. Laminotomy style (paddle)
334
leads are also available for neurosurgeons or orthopedic surgeons who prefer to
335
insert leads in an open surgical procedure approach. The leads are then
336
connected to a passive receiver, which is implanted under the skin on the side
337
of the abdomen. The receiver contains electronics that receive radio-frequency
338
energy and data from a source (the transmitter) outside the body, and delivers
339
the prescribed electrical pulses to the leads. The transmitter is approximately
340
the size of a pager, and is typically worn on a belt. Since it is external to
341
the body, the transmitter can be easily programmed and serviced as needed, and
342
its battery can be simply recharged or replaced.</P>
343
<P ALIGN=CENTER>Page 4</P>
344
<HR>
345
<P>Our CompuStim&#153; systems include four, seven, eight and sixteen electrodes
346
on one, two or more leads; simple and complex receivers; and an external
347
battery-powered transmitter. We believe that the CompuStim product line&#146;s
348
multi-electrode leads and advanced multiprogrammable technology have changed the
349
manner in which neuromodulation is performed worldwide. For example, our
350
&#147;Dual Octrode&#148; device, a system of dual leads with eight electrodes on
351
each lead introduced in 1995, creates a targeted current density that appears to
352
be especially effective in relieving complex and multi-extremity pain patterns.
353
Previously, quadrapolar stimulation systems only relieved the leg pain
354
associated with FBSS. Many experts support the view that the Dual Octrode device
355
provides improved pain relief to both the legs and the back. Dual Octrode
356
systems are enjoying increasing acceptance from the physician community and, in
357
our judgment, are the technological leaders in the stimulation field. We believe
358
that the long-term results of stimulation in the treatment of pain have improved
359
as a result of the technological superiority of ANS products. Moreover, the ease
360
of use of the system has expanded the potential market for these products.</P>
361
<P>In early 1999, we completed the development of our enhanced radio-frequency
362
stimulation system, the Renew System, and introduced the products in the United
363
States during June 1999. These products include enhancements that simplify the
364
procedure for implanters while providing improved function. We introduced the
365
Renew System in international markets during 2000.</P>
366
<P>In 1998, we licensed the rights to method patents for sacral nerve root
367
stimulation aimed at relieving the effects of chronic pelvic pain, including
368
interstitial cystitis. Interstitial cystitis is an extremely painful bladder
369
disease that afflicts approximately 450,000 people in the United States alone.
370
We believe our advanced radio-frequency stimulation devices can be effective in
371
treating pelvic pain indications including interstitial cystitis. In February
372
1999, we received conditional approval from the FDA to initiate a pilot study to
373
evaluate the use of our advanced radio-frequency stimulation systems to treat
374
interstitial cystitis. The pilot study is continuing and if successful, we will
375
seek approval from the FDA to initiate further clinical studies in the process
376
to receive a PMA approval to begin marketing in the United States.</P>
377
<P>We believe our radio-frequency stimulation devices represent a strong base
378
for penetration of the broader neuromodulation market. During 2000, we completed
379
development of our first generation IPG, Genesis&#153;, to better serve the
380
broad needs of the pain management market. The IPG stimulation system will allow
381
us to participate in the largest segment of the stimulation market for spinal
382
cord stimulation and leverage our sales and marketing capabilities. In late
383
2000, we received the CE mark approval for our Genesis IPG and commenced our
384
selling efforts in international markets during January 2001. In the United
385
States, we are seeking a PMA approval due to the February 26, 2001 decision by
386
the FDA denying our petition to reclassify the IPG device to a Class II device
387
from a Class III device. See Item 1. &#147;Business-Recent Developments.&#148;
388
</P>
389
<P>Our IPG platform also provides us with the opportunity to address a number
390
of new indications such as chronic intractable angina, occipital headaches,
391
urinary urge incontinence, peripheral nerve stimulation and Deep Brain
392
Stimulation (DBS) for Essential Tremor and tremor associated with
393
Parkinson&#146;s Disease. During the fourth quarter of 2000, we received an
394
Investigational Device Exemption (IDE) approval from the FDA to initiate a pilot
395
clinical study to evaluate the efficacy of our Genesis IPG stimulation system
396
for the treatment of occipital headaches (chronic severe headaches). The pilot
397
clinical study of 10 patients at 2 sites in the U.S. began in January 2001. Data
398
from the pilot study will be used to determine the parameters for a larger
399
pivotal clinical study to support a PMA application for our Genesis IPG to treat
400
occipital headaches.</P>
401
<P ALIGN=CENTER>Page 5</P>
402
<HR>
403
<P><B>PainDoc&#174;</B></P>
404
<P>In early 1997 we began marketing PainDoc, a pen-based computer system that is
405
designed to assist physicians and their patients in optimizing the performance
406
of our stimulation devices both pre- and post-operatively. PainDoc interfaces
407
with our CompuStim and Renew transmitters to optimize stimulation therapy and
408
document treatment outcomes. PainDoc allows the physician to interact with the
409
patient to map the location and intensity of the patient&#146;s pain. The
410
resulting &#147;pain map&#148; is then used to assess and select the most
411
effective stimulation sets, or combination of multi-electrode stimulation
412
arrays, to treat the pain. The idea is to generate pain coverage that overlaps
413
the patient&#146;s pain map. The selected arrays (programs) are uploaded into
414
the patient&#146;s CompuStim or Renew transmitter. The physician can visually
415
compare the patient&#146;s pain map against a stimulation map and optimize the
416
patient&#146;s stimulator setting to address the patient&#146;s needs and assess
417
whether desired levels of pain relief have been obtained and whether excess
418
stimulation has been delivered.</P>
419
<P>PainDoc enables the physician to program up to 24 different stimulation sets
420
delivering electrical stimulation every 50 milliseconds to expand pain area
421
coverage and relief. We believe that PainDoc should also allow physicians to
422
create a broad-based database tool that, by using a standardized methodology,
423
will enable physicians to share and compare outcome data, which can then be used
424
to deliver more efficacious pain relief to individual patients. We believe that
425
PainDoc and ANS transmitter devices used in tandem significantly enhance the
426
effectiveness, flexibility and precision of managing chronic neuropathic pain.
427
We expect PainDoc to promote the selection of our devices for stimulation
428
procedures, especially as stimulation devices become more sophisticated and the
429
pain management process becomes more refined.</P>
430
<P>We continue to make improvements to PainDoc and will continue to develop
431
systems that are easier to use and offer more capability.</P>
432
<P><B>Implantable Infusion Systems</B></P>
433
<P>Fully implantable infusion pumps are designed to deliver drugs directly to
434
targeted sites of action within the body. This contrasts to oral or intravenous
435
drug delivery, where a drug is distributed systemically throughout the entire
436
body. When the drug is being delivered directly to the site of action, a better
437
therapeutic effect often can be achieved with much lower quantities of drug,
438
with fewer side effects. Today, implantable infusion pumps are used for the
439
intraspinal delivery of morphine and baclofen for the treatment of pain and
440
spasticity, and for the intra-arterial delivery of various drugs for
441
chemotherapy.</P>
442
<P>Implantable infusion systems consist of an implantable pump and a delivery
443
catheter. The pump and the catheter work together as a system to deliver small,
444
precisely controlled doses of drug directly to the targeted delivery site. The
445
pump consists of a reservoir that holds a several-week supply of drug, a pumping
446
mechanism to push the drug along the catheter, and a port for refilling the pump
447
with drug as necessary. The pump is implanted under the skin generally in the
448
abdominal area and is connected to the delivery catheter. The delivery catheter
449
is a spaghetti-sized tube that runs between the pump and the targeted delivery
450
site. The pump is refilled as necessary using a needle inserted through the skin
451
into the pump&#146;s refill port. The refill procedure is generally performed on
452
an outpatient basis by a physician or under the direct supervision of a
453
physician.</P>
454
<P>In 2000, industry analysts estimated the market for implantable infusion
455
systems was $183 million and they expect the market to grow to $305 million by
456
the year 2003. There are two types of implantable pumps: constant flow pumps and
457
programmable pumps. According to industry analysts, programmable pumps hold an
458
81 percent unit share of worldwide intraspinal pump procedures, with constant
459
flow pumps accounting for the balance. Currently, Medtronic, Inc. is the sole
460
worldwide provider of a programmable pump for intraspinal applications.</P>
461
<P ALIGN=CENTER>Page 6</P>
462
<HR>
463
<P>The programmable pump is the most versatile type of implantable pump since it
464
allows the fluid (drug) flow rate to be changed non-invasively to meet varying
465
patients&#146; needs. Medtronic&#146;s programmable pump contains a battery,
466
control and telemetry circuitry, and motor. The battery delivers pulses of
467
energy to the motor, which pushes the drug from the pump into the delivery
468
catheter and to the targeted delivery site. The programmability feature allows
469
for time-modified delivery of the drug. For example, it can be non-invasively
470
programmed to deliver more medication at night and less during the day. Since
471
the pump is powered with a battery, the entire pump typically needs to be
472
replaced every five to seven years.</P>
473
<P>Constant flow pumps are designed to provide drug infusion at a constant
474
factory-set flow rate. Once implanted, the medication flow rates remain the
475
same. The physician adjusts dose by adjusting the concentration of the drug in
476
the pump reservoir. Constant flow pumps are smaller, lighter, less expensive,
477
and because they have no battery, typically have a significantly longer service
478
life than programmable pumps.</P>
479
<P>Management believes that the implantable infusion pump market offers
480
significant opportunity. In August 1998, we completed an agreement with Tricumed
481
Medizintechnik GmbH, a German corporation, granting ANS rights to distribute
482
Tricumed&#146;s implantable pump products in various international markets.
483
During 2000, ANS and Tricumed mutually agreed to terminate this
484
relationship.</P>
485
<P>In 2000, we completed development of our proprietary constant flow
486
implantable infusion pump, AccuRx&#153;, utilizing technology licensed from the
487
University of Minnesota. We received CE mark approval to distribute the pump
488
internationally, with international sales expected to commence in the second
489
quarter of fiscal 2001. We also received an Investigational Device Exemption
490
(IDE) from the FDA to initiate clinical trials in the United States. The
491
clinical trials will include 109 patients and will be conducted in twelve sites.
492
The trials commenced in the first quarter of 2001. The data gathered during the
493
trials will be used to support a PMA application.</P>
494
<P>On January 2, 2001, we acquired the intellectual property rights to our
495
AccuRx constant flow implantable infusion pump for 119,100 shares of our common
496
stock valued at $2.43 million. Prior to purchasing these rights, we licensed
497
rights from the University of Minnesota for pain and cancer therapy
498
applications. By purchasing the intellectual property rights, we eliminated
499
future royalty obligations to the University of Minnesota and expanded our
500
rights to use the AccuRx pump for any application.</P>
501
<P>Management believes that the market for constant flow implantable infusion
502
pumps will continue to expand, and that our proprietary pump products offer
503
unique features and benefits that will enable us to capture a meaningful share
504
of this market segment after the appropriate regulatory approvals are
505
secured.</P>
506
<P ALIGN=CENTER><B><U>Other Business Matters</U></B></P>
507
<P><B>Marketing and Major Customers</B></P>
508
<P>Domestically, we utilize independent specialty distributors and commissioned
509
sales agents who are focused on the chronic pain market to sell our stimulation
510
systems. Domestically, we have six distributor territories, which employ a total
511
of thirty-seven pain specialists who devote the majority of their selling
512
efforts to ANS products. In addition, we have seventeen sales agent territories
513
that employ thirty-three sales agents who are focused on the pain market and
514
depend upon ANS products as their flagship product line. We employ four regional
515
sales managers who personally interact with our customers and oversee the
516
distributors and sales agents. We also employ a Vice President of North American
517
Sales who coordinates the sales efforts of our distribution network in North
518
America.</P>
519
<P ALIGN=CENTER>Page 7</P>
520
<HR>
521
<P>Internationally, we sell ANS product to sixteen specialty pain distributors
522
who represent ANS in nineteen countries. Additionally, we employ one sales agent
523
and two direct sales representatives in two countries. All international
524
distribution reports to our Director of International Operations who is
525
headquartered in the United Kingdom.</P>
526
<P>The primary medical specialists we target in our marketing efforts are
527
anesthesiologists, neurosurgeons and orthopedic surgeons. Although neurosurgeons
528
were the first practitioners to use stimulation systems, anesthesiologists
529
(specializing in pain medicine) now account for a greater percentage of sales,
530
as the relative number of these practitioners has grown and as the understanding
531
and acceptance of stimulation treatment for chronic pain conditions has
532
increased. We derive 93 percent of net revenues from product sales of our
533
stimulation systems from domestic sales and approximately 7 percent from export
534
sales.</P>
535
<P>During 2000 and 1998, we had one major customer that accounted for 10 percent
536
or more of our net revenue from product sales. Sun Medical, Inc., a specialty
537
distributor of ANS products, accounted for $3.2 million, or 14 percent of our
538
net revenue from product sales for the year ended December 31, 2000 and $3.4
539
million, or 20 percent of our net revenue from product sales for the year ended
540
December 31, 1998. While we believe our relations with Sun Medical are good, the
541
loss of this customer could have a material adverse effect on our business,
542
financial condition and results of operations. During 1999, we had two major
543
customers that accounted for 10 percent or more of our net revenue from product
544
sales. Sun Medical, Inc. and Primesource Surgical, Inc., each a specialty
545
distributor of ANS products, accounted for $3.0 million and $2.3 million,
546
respectively, or 15 percent and 11 percent, respectively, of our net revenue
547
from product sales for the year ended December 31, 1999.</P>
548
<P><B>Research and Development</B></P>
549
<P>In 2000, we focused our research and development efforts on the continued
550
development of our enhanced radio-frequency stimulation systems and ongoing
551
research and development of new products for the neuromodulation market, such as
552
our Genesis IPG stimulation system for spinal cord stimulation, an implantable
553
pulse generator stimulation system for DBS and our proprietary AccuRx constant
554
rate infusion pump. We expended $3.56 million (15.4 percent of net revenue) on
555
our research and development activities in 2000, compared to $3.77 million (18.3
556
percent of net revenue from product sales) in 1999. We expect to increase our
557
investment in research and development and clinical trials during 2000 and
558
expect expenditures of approximately $5.0 million. These expenditures will be
559
directed toward next-generation infusion pumps, next-generation implantable
560
pulse generator stimulation systems for spinal cord stimulation, next generation
561
radio-frequency stimulation systems and our implantable pulse generator
562
stimulation system for DBS. These expenditures also include expenses for
563
clinical trials that we expect to initiate on several of our new products upon
564
approval from the FDA. The clinical trials are a necessary process to receive
565
approval from the FDA to begin marketing the products in the United States. As
566
of March 15, 2001, we had an in-house research and development staff of 38
567
personnel as compared to 29 in March 2000. The March 2001 total includes 12
568
development personnel employed by Hi-tronics Designs, Inc., which we acquired on
569
January 2, 2001.</P>
570
<P ALIGN=CENTER>Page 8</P>
571
<HR>
572
<P>We may seek strategic partners for DBS to replace our terminated agreement
573
with Sofamor Danek that could partially fund research and development
574
expenditures during 2001. In addition to DBS, we believe our implantable pulse
575
generator stimulation platform has market opportunities outside our focus of
576
chronic pain, including applications such as epilepsy, urinary incontinence,
577
angina, peripheral nerve stimulation and peripheral vascular disease. Any such
578
market expansion, however, would require PMA approvals from the FDA. We may also
579
seek strategic partners with established distribution systems to develop these
580
market opportunities outside the chronic pain market area, although there is no
581
assurance that we will be successful in negotiating and consummating agreements
582
with strategic partners.</P>
583
<P><B>Manufacturing</B></P>
584
<P>We manufacture and package our stimulation systems at our manufacturing
585
facility in Plano, Texas. This facility was re-certified to ISO 9001/EN 46001/
586
iso 13485 in January 2001. Hi-tronics Designs, Inc. is also ISO 9001 certified
587
and was re-certified in May 2000. See Item 1. "Business-Other Business
588
Matters-Government Regulations."</P>
589
<P>Our manufacturing processes consist of the assembly of standard and custom
590
component parts and the testing of completed products. We subcontract with
591
various suppliers to provide us with the quantity of component parts necessary
592
to assemble our products. Almost all of these components are available from a
593
number of different suppliers, although certain components are purchased from
594
single sources. For example, we currently rely on a single supplier for a
595
computer chip used in the receiver of our stimulation systems. The supplier of
596
this computer chip has indicated its desire to cease manufacturing and supplying
597
the computer chip in the future, but to date has not determined when this will
598
occur. The supplier has agreed to notify us once a date has been determined and
599
allow us to place a final one-time purchase order for the computer chip. In the
600
interim, we are maintaining a higher than normal inventory of the computer chip.
601
In addition, we are developing a new receiver design at Hi-tronics that does not
602
use any custom computer chips. A sudden disruption in supply from the computer
603
chip supplier or another single-source supplier could adversely affect our
604
ability to deliver finished products on time.</P>
605
<P>We devote significant attention to quality assurance. Our quality assurance
606
measures begin at the manufacturing level where components are assembled in a
607
&#147;clean room&#148; environment designed and maintained to reduce product
608
exposure to particulate matter. Products are tested throughout the manufacturing
609
process for adherence to specifications. Finished components are shipped to
610
outside processors for ethylene oxide gas sterilization.</P>
611
<P>Skills of assembly workers required for the manufacture of medical products
612
are similar to those required in typical assembly operations. We believe that
613
workers with these skills are readily available in the Dallas and New Jersey
614
geographical areas.</P>
615
<P><B>Competition</B></P>
616
<P>In marketing our stimulation systems, we compete with one other significant
617
supplier, Medtronic, Inc. Medtronic has substantially greater financial
618
resources and engages in substantially greater research and development and
619
marketing efforts. Medtronic holds a substantial majority share of the
620
stimulation market and sells both radio-frequency stimulation systems and
621
implantable pulse generator stimulation systems. Medtronic is the sole provider
622
of implantable pulse generators in the United States. Medtronic also holds the
623
substantial majority share of the market for fully implantable infusion pumps
624
and is the sole marketer worldwide of fully implantable programmable infusion
625
pumps.</P>
626
<P ALIGN=CENTER>Page 9</P>
627
<HR>
628
<P>We believe that the principal competitive factors in the neuromodulation
629
market are cost-effectiveness, impact on patient outcomes, product performance,
630
quality, ease of use, technical innovation and customer service. We intend to
631
continue to compete on the basis of our high-performance products, innovative
632
technologies, manufacturing capabilities, close customer relations and support,
633
and our strategy to increase our offerings of products within the
634
neuromodulation market.</P>
635
<P><B>Patents, Trademarks and Proprietary Information</B></P>
636
<P>We currently own twenty-two United States patents and three foreign patents.
637
In management&#146;s view, these patents offer reasonable coverage of our
638
stimulation devices&#146; electrode, receiver, transmitter and programmer
639
technology, our advanced PainDoc computer system technology, and our fully
640
implantable infusion pump technology. These patents, in part, cover both
641
radio-frequency stimulation systems and implantable pulse generator stimulation
642
systems for a wide range of current and future applications. We currently have
643
seven pending U.S patent applications and four foreign patent applications.
644
Among other things, these pending patent applications cover new stimulation
645
lead technology, implant accessories, improved connector mechanisms and
646
implantable drug delivery technology.</P>
647
<P>Additionally, we are exclusively licensing a patent directed to advanced
648
placement techniques and a patent directed to methods to facilitate relieving
649
the effects of chronic pelvic pain such as interstitial cystitis.</P>
650
<P>The validity of any patents issued to us may be challenged by others and we
651
could encounter legal and financial difficulties in enforcing our patent rights
652
against infringers. In addition, there can be no assurance that other
653
technologies cannot or will not be developed or that patents will not be
654
obtained by others which would render our patents obsolete. The loss of any one
655
patent would not have a material adverse effect on our current revenue base.
656
Although we do not believe that patents are the sole determinant of the
657
commercial success of our products, the loss of a significant percentage of our
658
patents could have a material adverse effect on our business, financial
659
condition and results of operations.</P>
660
<P>We have developed technical knowledge which, although non-patentable, we
661
consider as significant in enabling us to compete. However, the proprietary
662
nature of such knowledge may be difficult to protect. We have entered into an
663
agreement with each key employee prohibiting such employee from disclosing any
664
confidential information or trade secrets of the Company and prohibiting that
665
employee from engaging in any competitive business while the employee is working
666
for the Company and for a period of one year thereafter. In addition, these
667
agreements also provide that any inventions or discoveries by these individuals
668
relating to the business of the Company will be assigned to the Company and
669
become the Company&#146;s sole property.</P>
670
<P>Claims by competitors and other third parties that our products allegedly
671
infringe the patent rights of others could have a material adverse effect on the
672
Company. The interventional pain management market is characterized by extensive
673
patent and other intellectual property claims, which can create greater
674
potential than in less developed markets for possible allegations of
675
infringement, particularly with respect to newly developed technology.
676
Intellectual property litigation is complex and expensive and its outcome is
677
difficult to predict. Any future litigation, regardless of outcome, could result
678
in substantial expense to the Company and significant diversion of the efforts
679
of the Company&#146;s technical and management personnel. An adverse
680
determination in any such proceeding could subject the Company to significant
681
liabilities to third parties, or require the Company to seek licenses from third
682
parties or pay royalties that may be substantial. Furthermore, there can be no
683
assurance that necessary licenses would be available to the Company on
684
satisfactory terms or at all. Accordingly, an adverse determination in a
685
judicial or administrative proceeding or failure to obtain necessary licenses
686
could prevent the Company from manufacturing or selling certain of its products,
687
which could have a material adverse effect on the Company&#146;s business,
688
financial condition and results of operations.</P>
689
<P ALIGN=CENTER>Page 10</P>
690
<HR>
691
<P>Renew&reg;, Multistim&reg;, Paindoc&reg;, Octrode&reg;, ANS&reg; and Advanced
692
Neuromodulation Systems&reg; are among our registered trademarks. Registration
693
applications are pending for various trademarks, which we believe, have value in
694
the marketplace, including Compustim&#153;, Genesis&#153; and AccuRx&#153;.</P>
695
<P><B>Government Regulation</B></P>
696
<P>The manufacture and sale of our products are subject to regulation by
697
numerous governmental authorities, principally the FDA and corresponding foreign
698
agencies. The research and development, manufacturing, promotion, marketing and
699
distribution of our products in the United States are governed by the Federal
700
Food, Drug and Cosmetic Act and the regulations promulgated thereunder (the
701
&#147;FDC Act and Regulations&#148;). We are subject to inspection by the FDA
702
for compliance with such regulations and procedures.</P>
703
<P>The FDA has traditionally pursued a rigorous enforcement program to ensure
704
that regulated entities such as the Company comply with the FDC Act and
705
Regulations. A company not in compliance may face a variety of regulatory
706
actions, including warning letters, product detentions, device alerts, mandatory
707
recalls or field corrections, product seizures, recession of marketing permits,
708
injunctive actions or civil penalties and criminal prosecutions of the Company
709
or responsible employees, officers and directors. Our Texas facility was last
710
inspected in the summer of 1996, and no major non-conformance was found. In
711
September 2000, the FDA inspected Hi-tronics' New Jersey facility, and no major
712
non-conformance was found.</P>
713
<P>Under the FDA&#146;s requirements, a new medical device cannot be released
714
for commercial use until a pre-market approval application (a &#147;PMA&#148;)
715
has been filed with the FDA and the FDA has approved the device&#146;s release.
716
If a manufacturer can establish that a newly developed device is
717
&#147;substantially equivalent&#148; to a legally marketed device, the
718
manufacturer may seek marketing clearance from the FDA to market the device by
719
filing a 510(k) premarket notification with the FDA, which usually takes less
720
time than a PMA. The process of obtaining FDA clearance can be lengthy,
721
expensive and uncertain. Both a 510(k) and a PMA, if granted, may include
722
significant limitations on the indicated uses for which a product may be
723
marketed. FDA enforcement policy strictly prohibits the promotion of approved
724
medical devices for unapproved uses. In addition, product approvals can be
725
withdrawn for failure to comply with regulatory requirements or the occurrence
726
of unforeseen problems following initial marketing. Although all of our
727
currently marketed products have been the subject of successful 510(k)
728
submissions, we believe that because the products we are currently developing
729
are more innovative, some of these products will require the PMA submission
730
process, which is lengthier and more costly than the 510(k) process.</P>
731
<P>We are also subject to regulation in each of the foreign countries in which
732
we sell our products with regard to product standards, packaging requirements,
733
labeling requirements, import restrictions, tariff regulations, duties and tax
734
requirements. Many of the regulations applicable to our products in such
735
countries are similar to those of the FDA. The national health or social
736
security organizations of certain countries require our products to be qualified
737
before they can be marketed in those countries. To date, we have not experienced
738
significant difficulty in complying with these regulations.</P>
739
<P>To position ourselves for access to European and other international markets,
740
we have maintained certification under the ISO 9000 Series of Standards. ISO
741
9000 is a set of integrated requirements, which when implemented, form the
742
foundation and framework for an effective quality management system. These
743
standards were developed and published by the ISO, a worldwide federation of
744
national standard bodies, founded in Geneva, Switzerland in 1946. ISO has over
745
92 member countries. ISO certification is essential to enter European Community
746
markets.</P>
747
<P ALIGN=CENTER>Page 11</P>
748
<HR>
749
<P>In January 2001, our quality system was re-certified to ISO 9001/EN 46001/ISO
750
13485 certification. The ISO 9001 registration is the most stringent standard in
751
the ISO series. The German notified body TUV Product Services issued the
752
re-certification certificates. The ISO 9001 standard covers design, production,
753
installation and servicing of products. EN 46001 and ISO 13485 cover the same
754
elements as the ISO 9001 standard; however, the focus is on quality systems for
755
medical device manufacturing. In addition, we are certified to the Active
756
Implantable Medical Device Directive allowing us to market devices throughout
757
the European Community. We are subject to an annual audit by the notified body
758
to maintain our registrations.</P>
759
<P>The financial arrangements through which we market, sell and distribute our
760
products may be subject to certain federal and state laws and regulations in the
761
United States with respect to the provision of services or products to patients
762
who are Medicare or Medicaid beneficiaries. The &#147;fraud and abuse&#148; laws
763
and regulations prohibit the knowing and willful offer, payment or receipt of
764
anything of value to induce the referral of Medicare or Medicaid patients for
765
services or goods. In addition, the physician anti-referral laws prohibit the
766
referral of Medicare or Medicaid patients for certain &#147;Designated Health
767
Services&#148; to entities in which the referring physician has an ownership or
768
compensation interest. Violations of these laws and regulations may result in
769
civil and criminal penalties, including substantial fines and imprisonment. In a
770
number of states, the scope of fraud and abuse or physician anti-referral laws
771
and regulations, or both, have been extended to include the provision of
772
services or products to all patients, regardless of the source of payment,
773
although there is variation from state to state as to the exact provisions of
774
such laws or regulations. In other states, and on a national level, several
775
health care reform initiatives have been proposed which would have a similar
776
impact. We believe that our operations and our marketing, sales and distribution
777
practices currently comply in all respects with all current fraud and abuse and
778
physician anti-referral laws and regulations, to the extent they are applicable.
779
Although we do not believe that we will need to undertake any significant
780
expense or modification to our operations or our marketing, sales and
781
distribution practices to comply with federal and state fraud and abuse and
782
physician anti-referral regulations currently in effect or proposed, financial
783
arrangements between manufacturers of medical devices and other health care
784
providers may be subject to increasing regulation in the future. Compliance with
785
such regulation could adversely affect our marketing, sales and distribution
786
practices, and may affect us in other respects not presently foreseeable, but
787
which could have an adverse impact on our business, financial condition and
788
results of operations.</P>
789
<P><B>Third-Party Reimbursement and Cost Containment</B></P>
790
<P>Our products are purchased primarily by hospitals and ambulatory surgery
791
centers, which then bill various third-party payors for the services provided to
792
the patients. These payors, which include Medicare, Medicaid, private insurance
793
companies, managed care and worker&#146;s compensation organizations, reimburse
794
part or all of the costs and fees associated with the procedures performed with
795
these devices.</P>
796
<P>Medicare and Medicaid reimbursement for hospitals is based on a fixed amount
797
for admitting a patient with a specific diagnosis. Because of this fixed
798
reimbursement method, hospitals have incentives to use less costly methods in
799
treating Medicare and Medicaid patients, and will frequently make capital
800
expenditures to take advantage of less costly treatment technologies.
801
Frequently, reimbursement is reduced to reflect the availability of a new
802
procedure or technique, and as a result hospitals are generally willing to
803
implement new cost-saving technologies before these downward adjustments take
804
effect. Likewise, because the rate of reimbursement for certain physicians who
805
perform certain procedures has been and may in the future be reduced in the
806
event of further changes in the resource-based relative value scale method of
807
payment calculation, physicians may seek greater cost efficiency in treatment to
808
minimize any negative impact of reduced reimbursement. Any amendments to
809
existing reimbursement rules and regulations which restrict or terminate the
810
reimbursement eligibility (or the extent or amount of coverage) of medical
811
procedures using our products or the eligibility (or the extent or amount of
812
coverage) of our products could have an adverse impact on our business,
813
financial condition and results of operations. Third-party payors are
814
increasingly challenging the prices charged for medical products and services
815
and may deny reimbursement if they determine that a device was not used in
816
accordance with cost-effective treatment methods as determined by the payor, was
817
experimental or was used for an unapproved application.</P>
818
<P ALIGN=CENTER>Page 12</P>
819
<HR>
820
<P>Our stimulation systems, while cost-effective compared to repeat back
821
surgeries, have encountered some resistance to third party reimbursement.
822
Although Medicare, Medicaid and many private insurers reimburse for the
823
stimulation systems and procedure, especially after repeat back surgeries have
824
failed to relieve chronic pain, some managed care and private payors
825
occasionally refuse to reimburse for stimulation systems or restrict
826
reimbursement. There can be no assurance that in the future, third-party payors
827
will continue to reimburse for our products, or that their reimbursement levels
828
will not adversely affect the profitability of our products. In addition, health
829
care costs have risen significantly over the past decade, and there have been
830
and will continue to be proposals by legislators and regulators to curb these
831
costs. Legislative action limiting reimbursement for certain procedures could
832
have a material adverse effect on our business, financial condition and results
833
of operations.</P>
834
<P>In response to the focus of national attention on rising health care costs, a
835
number of changes to reduce costs have been proposed or have begun to emerge. In
836
addition to legislative and regulatory initiatives, there has also been a
837
significant increase in the number of Americans enrolling in some form of
838
managed care plan. It has become a typical practice for hospitals to affiliate
839
themselves with as many managed care plans as possible. Higher managed care
840
penetration typically drives down the prices of health care procedures, which in
841
turn places pressure on medical supply prices. This causes hospitals to
842
implement tighter vendor selection and certification processes, by reducing the
843
number of vendors used, purchasing more products from fewer vendors and trading
844
discounts on price for guaranteed higher volumes to vendors. Hospitals have also
845
sought to control and reduce costs over the last decade by joining group
846
purchasing organizations or purchasing alliances. We cannot predict what
847
continuing or future impact existing or proposed legislation, regulation or such
848
third-party payor measures may have on our future business, financial condition
849
or results of operations.</P>
850
<P>Changes in reimbursement policies and practices of third-party payors could
851
have a substantial and material impact on sales of our products. The development
852
or increased use of more cost-effective treatments could cause such payors to
853
decrease or deny reimbursement to favor these other treatments.</P>
854
<P><B>Employees</B></P>
855
<P>As of March 15, 2001, we employed 198 full-time employees, 38 in research and
856
development, 27 in sales and marketing, 116 in manufacturing and related
857
operations, and the remainder in executive and administrative positions. This
858
total includes 93 full-time employees at Hi-tronics Designs, Inc., which we
859
acquired on January 2, 2001. None of our employees is represented by a labor
860
union and we consider our employee relations to be good.</P>
861
<P ALIGN=CENTER>Page 13</P>
862
<HR>
863
<P><B>Advisory Board</B></P>
864
<P>We have established the Advanced Neuromodulation Systems Advisory Board,
865
which is comprised of individuals with substantial expertise in neuromodulation
866
and pain management. Members of our management and scientific and technical
867
staff consult closely with members of the Advisory Board to identify specific
868
areas where techniques are changing and where existing products do not
869
adequately fulfill the needs of the pain physician. The Advisory Board helps
870
management evaluate new product ideas and concepts and once a product is
871
approved for development, its subsequent design and development. The Advisory
872
Board may also participate in the clinical testing of products developed.</P>
873
<P>Certain members of the Advisory Board are employed by academic institutions
874
and may have commitments to or consulting or advisory agreements with other
875
entities that may limit their availability to us. The members of the Advisory
876
Board may also serve as consultants to other medical device companies. No
877
members of the Advisory Board are expected to devote more than a small portion
878
of their time to the Company.</P>
879
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
880
<TR>
881
<TD WIDTH=15%><B>ITEM 2.</B></TD>
882
<TD WIDTH=85%><B>PROPERTIES</B></TD></TR></TABLE>
883
<P>In connection with the January 1998 sale of our cardiovascular products
884
division, we granted Atrion a nine-month option to acquire our principal office
885
and manufacturing facility in Allen, Texas for $6.5 million. Atrion exercised
886
the option to acquire the facility during October 1998 and the transaction
887
closed on February 1, 1999. We repaid the outstanding mortgage debt on the
888
facility of $3.6 million at closing and received net proceeds of $2.7 million
889
after paying expenses related to the transaction. See Note 9- &#147;Sale of CVS
890
Operations/Discontinued Operations&#148; of the Notes to Consolidated Financial
891
Statements. No material gain or loss was realized on the sale of the facility.
892
We leased space, furniture and equipment from Atrion until May 1999 at the
893
monthly rate of $48,125 and paid Atrion fifty percent of certain operating
894
expenses including utilities, janitorial services, landscaping services,
895
insurance and property taxes. At that time we moved our operations to a 40,000
896
square foot leased facility in Plano, Texas, a northeast suburb of Dallas.</P>
897
<P>We entered a sixty-three month lease agreement in February 1999 for the Plano
898
facility. Under the terms of the lease agreement, which became effective on June
899
1, 1999, we received three months of free rent and the monthly rental rate for
900
the remaining term of the lease is $48,308. The monthly rental rate includes
901
certain operating expenses such as property taxes on the facility, insurance,
902
landscape and maintenance and janitorial services. We also have a right of first
903
refusal to acquire the facility.</P>
904
<P>We also lease facilities in New Jersey as a result of our acquisition of
905
Hi-tronics Designs, Inc. on January 2, 2001. One of the facilities, located in
906
Budd Lake, New Jersey, is 8,800 square feet of office space that is used for
907
administration, design engineering, drafting, documentation and regulatory
908
affairs. The lease is on a month-to month basis at a monthly rental rate of
909
$10,891. We have agreed to provide the landlord with six months notice in the
910
event that we wish to relocate. We also lease 15,000 square feet of space in
911
Hackettstown, New Jersey used for our OEM manufacturing operations. The
912
Hackettstown lease, which expires on December 31, 2001, has a monthly rental
913
rate of $9,636 and is renewable for three additional one-year periods. In
914
addition, on January 1, 2001, Hi-tronics entered an agreement to lease an
915
additional 2,200 square feet of additional space in the Hackettstown facility
916
adjacent to the 15,000 square feet of manufacturing space. The lease expires on
917
June 30, 2002 and has a monthly rental rate of $2,269. All of the monthly rental
918
rates include certain operating expenses such as property taxes, insurance,
919
utilities, landscape and maintenance and janitorial services.</P>
920
<P ALIGN=CENTER>Page 14</P>
921
<HR>
922
<P></P>
923
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
924
<TR>
925
<TD WIDTH=15%><B>ITEM 3.</B></TD>
926
<TD WIDTH=85%><B>LEGAL PROCEEDINGS</B></TD></TR></TABLE>
927
<P>We are a party to product liability claims related to ANS&#146; stimulation
928
systems. Product liability insurers have assumed responsibility for defending us
929
against these claims, subject to reservation of rights in certain cases. While
930
historically product liability claims for our stimulation systems have not
931
resulted in significant monetary liability beyond our insurance coverage, there
932
can be no assurances that we will not incur significant monetary liability to
933
the claimants if such insurance is unavailable or inadequate for any reason, or
934
that our current stimulation business and future neuromodulation products will
935
not be adversely affected by these product liability claims. While we seek to
936
maintain appropriate levels of product liability insurance with coverage that we
937
believe is comparable to that maintained by companies similar in size and
938
serving similar markets, there can be no assurance that we will avoid
939
significant future product liability claims relating to our stimulation systems.
940
</P>
941
<P>We are involved in a contractual dispute with a former customer of
942
Hi-tronics, Cyberonics, Inc. (&#147;Cyberonics&#148;), relating to the
943
development and manufacture of components for the Cyberonics NCP System.
944
Hi-tronics and Cyberonics agree that the contractual relationship has been
945
terminated, but the companies dispute who was first to terminate and the
946
ramifications of termination. Pursuant to the terms of the contract, the dispute
947
has been submitted for binding arbitration and is now pending before the
948
American Arbitration Association. We have asserted a claim for breach of
949
contract by Cyberonics and we seek as our remedy the contractual termination fee
950
of approximately $800,000 plus the payment of outstanding accounts receivable
951
and purchase of inventory related to the model 101 NCP stimulator. We also seek
952
a declaration of our rights that survive termination of the contract, such as
953
our access to intellectual property under the contract. The loss of our right to
954
maintain the existing intellectual property sublicenses could have an adverse
955
impact on our business.</P>
956
<P>In response, Cyberonics has asserted a counterclaim of breach against us and
957
is seeking monetary remedies in excess of the contractual provisions. We believe
958
we have valid claims against Cyberonics and valid defenses to their
959
counterclaims. We intend to vigorously prosecute our claims and to vigorously
960
contest Cyberonics&#146; claims in the arbitration.</P>
961
<P>In light of the preliminary state of the dispute and the inherent
962
uncertainties involved in the arbitration with Cyberonics, we are not able to
963
assess at this time the likelihood of a favorable or unfavorable outcome or
964
range of any possible gain or loss.</P>
965
<P>Except for the product liability claims and the arbitration with Cyberonics,
966
we are not currently a party to any other pending legal proceeding. We maintain
967
general liability insurance against risks arising out of the normal course of
968
business.</P>
969
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
970
<TR>
971
<TD WIDTH=15%><B>ITEM 4.</B></TD>
972
<TD WIDTH=85%><B>SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</B></TD>
973
</TR></TABLE>
974
<P>Inapplicable.</P>
975
<P ALIGN=CENTER>Page 15</P>
976
<HR>
977
<P ALIGN=CENTER><B>PART II</B></P>
978
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
979
<TR>
980
<TD WIDTH=15% VALIGN=TOP><B>ITEM 5.</B></TD>
981
<TD WIDTH=85%><B>MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
982
STOCKHOLDER MATTERS</B></TD></TR></TABLE>
983
<P>Our common stock is currently quoted on the Nasdaq National Market under the
984
symbol "ANSI." On March 16, 2001, there were approximately 640 holders
985
of record of our common stock. The following table sets forth the quarterly high
986
and low closing sales prices for our common stock. These prices do not include
987
adjustments for retail mark-ups, markdowns or commissions.</P>
988
<P></P>
989
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
990
<TR>
991
<TD WIDTH=15%>&nbsp;</TD>
992
<TD WIDTH=30%><U>1999:</U></TD>
993
<TD WIDTH=15%><U>&nbsp;&nbsp;High&nbsp;&nbsp;</U></TD>
994
<TD WIDTH=15%><U>&nbsp;&nbsp;Low&nbsp;&nbsp;</U></TD>
995
<TD WIDTH=25%>&nbsp;</TD></TR>
996
<TR>
997
<TD>&nbsp;</TD>
998
<TD>First Quarter</TD>
999
<TD>$ &nbsp;8.19</TD>
1000
<TD>$ &nbsp;6.19</TD>
1001
<TD></TD></TR>
1002
<TR>
1003
<TD>&nbsp;</TD>
1004
<TD>Second Quarter</TD>
1005
<TD>$ &nbsp;9.56</TD>
1006
<TD>$ &nbsp;6.50</TD>
1007
<TD></TD></TR>
1008
<TR>
1009
<TD>&nbsp;</TD>
1010
<TD>Third Quarter</TD>
1011
<TD>$11.44</TD>
1012
<TD>$ &nbsp;7.69</TD>
1013
<TD></TD></TR>
1014
<TR>
1015
<TD>&nbsp;</TD>
1016
<TD>Fourth Quarter</TD>
1017
<TD>$ &nbsp;9.38</TD>
1018
<TD>$ &nbsp;7.00</TD>
1019
<TD></TD></TR>
1020
</TABLE>
1021
<P></P>
1022
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1023
<TR>
1024
<TD WIDTH=15%>&nbsp;</TD>
1025
<TD WIDTH=30%><U>2000:</U></TD>
1026
<TD WIDTH=15%><U>&nbsp;&nbsp;High&nbsp;&nbsp;</U></TD>
1027
<TD WIDTH=15%><U>&nbsp;&nbsp;Low&nbsp;&nbsp;</U></TD>
1028
<TD WIDTH=25%>&nbsp;</TD></TR>
1029
<TR>
1030
<TD>&nbsp;</TD>
1031
<TD>First Quarter</TD>
1032
<TD>$19.38</TD>
1033
<TD>$ &nbsp;9.94</TD>
1034
<TD></TD></TR>
1035
<TR>
1036
<TD>&nbsp;</TD>
1037
<TD>Second Quarter</TD>
1038
<TD>$18.38</TD>
1039
<TD>$12.25</TD>
1040
<TD></TD></TR>
1041
<TR>
1042
<TD>&nbsp;</TD>
1043
<TD>Third Quarter</TD>
1044
<TD>$21.50</TD>
1045
<TD>$14.25</TD>
1046
<TD></TD></TR>
1047
<TR>
1048
<TD>&nbsp;</TD>
1049
<TD>Fourth Quarter</TD>
1050
<TD>$23.19</TD>
1051
<TD>$19.25</TD>
1052
<TD></TD></TR>
1053
</TABLE>
1054
<P></P>
1055
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1056
<TR>
1057
<TD WIDTH=15%>&nbsp;</TD>
1058
<TD WIDTH=30%><U>2001:</U></TD>
1059
<TD WIDTH=15%><U>&nbsp;&nbsp;High&nbsp;&nbsp;</U></TD>
1060
<TD WIDTH=15%><U>&nbsp;&nbsp;Low&nbsp;&nbsp;</U></TD>
1061
<TD WIDTH=25%>&nbsp;</TD></TR>
1062
<TR>
1063
<TD>&nbsp;</TD>
1064
<TD>First Quarter</TD>
1065
<TD>$26.88</TD>
1066
<TD>$12.63</TD>
1067
<TD></TD></TR>
1068
<TR>
1069
<TD>&nbsp;</TD>
1070
<TD>(through March 16, 2001)</TD>
1071
<TD></TD>
1072
<TD></TD>
1073
<TD></TD></TR>
1074
</TABLE>
1075
<P>To date, we have not declared or paid any cash dividends on our common stock
1076
and the Board of Directors does not anticipate paying cash dividends on our
1077
common stock in the foreseeable future.</P>
1078
<P>On various occasions in 1998 and 1999, the Board of Directors approved stock
1079
repurchases of up to an aggregate of 1,750,000 shares of our common stock.
1080
During the year ended December 31, 1998, we repurchased 1,258,625 shares of our
1081
common stock at an aggregate cost of $9,411,055, or an average of $7.48 per
1082
share. During the year ended December 31, 1999, we repurchased 404,875 shares
1083
of our common stock at an aggregate cost of $2,952,311, or an average of $7.29
1084
per share. We made no repurchases during the year ended December 31, 2000. In
1085
the aggregate, we purchased 1,663,500 shares under the authorized repurchase
1086
programs. In November 2000 in connection with our signing an agreement to
1087
acquire Hi-tronics designs, Inc., the Board of Directors rescinded the share
1088
repurchase program under which 86,500 shares of common stock remained authorized
1089
for repurchase. During the years ended December 31, 2000, 1999 and 1998, we
1090
issued 267,425, 162,068 and 184,874 shares respectively, from the treasury upon
1091
the exercise of stock options and a warrant.</P>
1092
<P>At December 31, 2000, 1,049,133 shares remained in the treasury. We issued
1093
119,100 of these treasury shares on January 2, 2001 in connection with our
1094
acquisition of the assets of Implantable Devices Limited Partnership and ESOX
1095
Technology Holdings, LLC. On January 2, 2001, we also issued the remaining
1096
930,033 treasury shares (plus an additional 174,692 newly issued shares) in
1097
connection with our acquisition of Hi-tronics Designs, Inc. Both issuances of
1098
common stock were exempt under Rule 506 of Regulation D under the Securities
1099
Act of 1933, as amended.</P>
1100
<P ALIGN=CENTER>Page 16</P>
1101
<HR>
1102
<P></P>
1103
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1104
<TR>
1105
<TD WIDTH=15%><B>ITEM 6.</B></TD>
1106
<TD WIDTH=85%><B>SELECTED FINANCIAL DATA</B></TD></TR></TABLE>
1107
<PRE>
1108
--------------------------------------------------------------------------
1109
Years Ended December 31,
1110
--------------------------------------------------------------------------
1111
2000 1999 1998 1997 1996
1112
-------------- -------------- -------------- -------------- --------------
1113
(in thousands, except per share data)
1114
Statement of Operations Data:(1)
1115
Net revenue-product sales $ 23,082 $ 20,578 $ 17,006 $ 14,718 $ 11,403
1116
Total net revenue 23,082 29,478 20,106 14,718 11,403
1117
Gross profit-product sales 15,593 13,949 12,021 9,878 8,088
1118
Research and development
1119
expense 3,562 3,773 2,801 977 1,316
1120
Marketing, general and
1121
administrative and
1122
amortization expenses 10,922 10,235 8,486 6,815 6,257
1123
Earnings from operations 1,109 8,842 3,833 2,086 515
1124
Net earnings from continuing
1125
operations 954 6,003 2,586 818 115
1126
Loss from discontinued
1127
operations -- -- (212) (93) (527)
1128
Gain on the sale of assets of
1129
discontinued operations -- -- 4,585 -- --
1130
Net earnings (loss) from
1131
discontinued operations -- -- 4,373 (93) (527)
1132
Net earnings (loss) $ 954 $ 6,003 $ 6,959 $ 724 $ (412)
1133
1134
Diluted earnings (loss) per
1135
share:
1136
Continuing operations $ .11 $ .75 $ .30 $ .09 $ .01
1137
Discontinued operations $ -- $ -- $ .51 $ (.01) $ (.06)
1138
Net earnings (loss) $ .11 $ .75 $ .81 $ .08 $ (.05)
1139
1140
- --------------------------
1141
(1) On January 30, 1998, the Company sold its cardiovascular and intravenous
1142
fluid delivery product lines (CVS Operations). The CVS Operations have been
1143
accounted for as discontinued operations. See Note 9 of the Notes to
1144
Consolidated Financial Statements.
1145
</PRE>
1146
<PRE>
1147
--------------------------------------------------------------------------
1148
Years Ended December 31,
1149
--------------------------------------------------------------------------
1150
2000 1999 1998 1997 1996
1151
-------------- -------------- -------------- -------------- --------------
1152
(in thousands)
1153
Balance Sheet Data:
1154
1155
Cash, cash equivalents,
1156
certificates of deposit and
1157
marketable securities $ 9,576 $ 8,752 $ 12,263 $ 2,204 $ 2,206
1158
Working capital 19,088 16,178 16,426 14,128 11,088
1159
Total assets 45,372 43,555 45,485 48,982 47,188
1160
Short-term notes payable and
1161
current maturities of
1162
long-term notes payable -- -- 3,633 8,257 2,084
1163
Notes payable, excluding
1164
current maturities -- -- -- 3,635 11,912
1165
Stockholders' equity $ 40,160 $ 37,038 $ 33,304 $ 33,906 $ 30,993
1166
</PRE>
1167
<P ALIGN=CENTER>Page 17</P>
1168
<HR>
1169
<P></P>
1170
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1171
<TR>
1172
<TD WIDTH=15% VALIGN=TOP><B>ITEM 7.</B></TD>
1173
<TD WIDTH=85%><B>MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
1174
AND RESULTS OF OPERATIONS</B></TD></TR></TABLE>
1175
<P>The following discussion of the financial condition and results of operations
1176
of the Company should be read in conjunction with the Consolidated Financial
1177
Statements of the Company and the related Notes.</P>
1178
<P><B>Overview</B></P>
1179
<P>In June 1998, we completed an agreement under which we would develop and
1180
manufacture products and systems for use in Deep Brain Stimulation ("DBS") for
1181
Sofamor Danek. See Note 10 &#150; "Product Development Agreement" of the Notes to
1182
Consolidated Financial Statements. We received a payment of $4 million upon
1183
execution of the agreement that was being recognized into income as revenue
1184
based upon the estimated completion of the development project. During the year
1185
ended December 31, 1998, we recognized $3.1 million into income as revenue. The
1186
remaining $900,000 was recognized into income as revenue during January 1999 due
1187
to the termination of the agreement with Sofamor Danek as a result of the merger
1188
of Sofamor Danek and Medtronic, Inc. In connection with the termination, we also
1189
received an additional payment of $8 million from Sofamor Danek, which was
1190
recognized into income as revenue during January 1999.</P>
1191
<P>The former agreement with Sofamor Danek fit with our strategy to strengthen
1192
and broaden our neuromodulation technology platforms and to ally ourselves with
1193
strategic partners who can help us leverage ANS' core technology into other
1194
significant market segments beyond our focus on the chronic pain segment of the
1195
neuromodulation market. We cannot assure you, however, that we will be
1196
successful in negotiating and consummating research and development agreements
1197
with other strategic partners.</P>
1198
<P>Subsequent to the end of the fiscal year, on January 2, 2001, we completed
1199
the acquisition of the assets of Implantable Devices Limited Partnership and
1200
ESOX Technology Holdings, LLC and the acquisition by merger of Hi-tronics
1201
Designs, Inc. See Note 11 of the Notes to Consolidated Financial Statements.
1202
Because these acquisitions were completed subsequent to the 2000 fiscal year,
1203
their results of operations and balance sheet data are not included in the
1204
Company's 2000 financial information but will be reflected in the results of the
1205
Company for the three months ended March 31, 2001.</P>
1206
<P>Also subsequent to the end of the fiscal year, on February 26, 2001, the FDA
1207
notified us that it had denied our petition to reclassify Totally Implanted
1208
Spinal Cord Stimulators (IPGs) for treatment of pain of the trunk and/or limbs
1209
from a Class III device to a Class II device. The FDA&#146;s denial was
1210
surprising and disappointing principally because at a presubmission meeting with
1211
the FDA, the agency itself had recommended that ANS submit a reclassification
1212
petition instead of the Pre-Market Approval (PMA) process as a "least burdensome
1213
path to market". An FDA Advisory Panel also recommended the reclassification and
1214
the agency itself had supported the panel recommendation as late as September 6,
1215
2000. We are currently requesting an appeal of the decision, while
1216
simultaneously pursuing the PMA process to gain approval to market the IPG in
1217
the United States. We are marketing the IPG product in Europe. Industry analysts
1218
estimate that the IPG market for spinal cord stimulation to treat pain of the
1219
trunk and/or limbs will approach $175 million in 2001, and that the market is
1220
growing at a 25% to 30% annual rate. Currently in the United States, Medtronic,
1221
Inc. is the sole provider of IPGs.</P>
1222
<P ALIGN=CENTER>Page 18</P>
1223
<HR>
1224
<P><B>Results of Operations</B></P>
1225
<P><I>Comparison of the Years Ended December 31, 2000 and 1999</I></P>
1226
<P>We reported net earnings of $954,000 or $.11 per diluted share in 2000
1227
compared to $6.00 million or $.75 per diluted share in 1999. Net earnings for
1228
the 1999 period benefited from $8.9 million of revenue recorded in connection
1229
with our former development agreement with Sofamor Danek.</P>
1230
<P>Total net revenue of $23.08 million for the year ended December 31, 2000, was
1231
$6.40 million below the comparable 1999 level of $29.48 million due to $8.9
1232
million of net revenue in the 1999 period associated with our former development
1233
agreement with Sofamor Danek. Excluding the development agreement revenue, net
1234
revenue from ANS product sales increased 12.2 percent to $23.08 million during
1235
2000 compared to $20.58 million in 1999. This increase in net revenue from
1236
product sales was the result of higher unit sales volume, primarily in the
1237
United States, of ANS' radio-frequency stimulation systems used to treat complex
1238
pain patterns.</P>
1239
<P>Because neuromodulation devices have gained acceptance as a viable,
1240
efficacious and cost-effective treatment alternative for relieving chronic
1241
intractable pain and improving neurological function, we are continuing our
1242
efforts to expand our product offerings in the high-growth market of
1243
neuromodulation. Today, ANS is a market share and technology leader in the $45
1244
million radio-frequency stimulation segment of the neuromodulation market.
1245
During 1999 and 2000, to position ourselves to participate in the other larger
1246
and more rapidly growing segments of the neuromodulation market, we continued to
1247
aggressively invest in development projects, including our IPG for spinal cord
1248
stimulation, IPG for deep brain stimulation and a fully implantable
1249
constant-rate infusion pump. We plan to continue these efforts in 2001.</P>
1250
<P>Gross profit from product sales increased to $15.59 million in 2000 from
1251
$13.95 million in 1999 due to the increase in net revenue from product sales
1252
discussed above. Gross profit margin from product sales remained approximately
1253
the same at 67.6 percent in the 2000 period compared to 67.8 percent in the 1999
1254
period.<P>
1255
<P>Total operating expenses (the aggregate of research and development,
1256
marketing, amortization of intangibles and administrative expenses) increased to
1257
$14.48 million in 2000 compared to $14.01 million in 1999, while as a percentage
1258
of net revenue from product sales, decreased to 62.8 percent in 2000 from 68.1
1259
percent in 1999.</P>
1260
<P>Research and development expense decreased to $3.56 million in 2000, or 15.4
1261
percent of 2000 net revenue from product sales, from $3.77 million during 1999,
1262
or 18.3 percent of 1999 net revenue from product sales. This decrease in the
1263
absolute dollar amount in 2000 compared to1999 was the result of lower
1264
consulting expense. During 2000, these expenditures were directed toward
1265
development of our IPG stimulation system for spinal cord stimulation, our next
1266
generation radio-frequency stimulation systems, our proprietary fully
1267
implantable constant-rate infusion pump and an IPG stimulation system for Deep
1268
Brain Stimulation.</P>
1269
<P>We received CE mark approval for our IPG stimulation system and began our
1270
market launch into the European markets in the first quarter of 2001. We also
1271
received CE mark approval on our proprietary fully implantable constant-rate
1272
infusion pump and expect to launch it in the European market during the second
1273
quarter of 2001. In the United States, we have received the necessary clearance
1274
from the FDA to initiate clinical trials for our fully implantable constant-rate
1275
infusion pump and initiated the trials during the first quarter of 2001. We are
1276
currently preparing our PMA submission for the FDA following the February 26,
1277
2001 denial of our petition for reclassification of this IPG.</P>
1278
<P ALIGN=CENTER>Page 19</P>
1279
<HR>
1280
<P>Marketing expense, as a percentage of net revenue from product sales,
1281
decreased from 30.6 percent in 1999 to 29.7 percent in 2000, while the absolute
1282
dollar amount increased from $6.29 million during 1999 to $6.85 million in 2000.
1283
This dollar increase during 2000 was attributable to higher commission expense
1284
from increased product sales and a change from distributors to commissioned
1285
sales agents in certain United States territories, higher expense for education
1286
and training of new implanters and higher convention expense.</P>
1287
<P>General and administrative expense increased to $2.84 million during 2000
1288
from $2.76 million in 1999 while as a percentage of net revenue from product
1289
sales, decreased to 12.3 percent in 2000 from 13.4 percent during 1999. The
1290
increase of $81,000 in absolute dollar expense during 2000 was principally the
1291
result of higher property tax and investor relation expenses.</P>
1292
<P>Amortization of ANS intangibles increased slightly to $1.23 million in 2000
1293
from $1.19 million during 1999 due to expense for additional patents we have
1294
licensed.</P>
1295
<P>Other income decreased to $579,000 in 2000 compared to $706,000 in 1999
1296
primarily as a result of a lower interest income due to lower funds available
1297
for investment.</P>
1298
<P>Income tax expense from continuing operations decreased to $734,000 in 2000
1299
from $3.55 million in 1999 due to lower earnings from ANS operations as the 1999
1300
period included the $8.0 million termination payment from our former development
1301
agreement with Sofamor Danek. This represents effective tax rates of 43.5
1302
percent in 2000 and 37.1 percent in 1999. Our expense for amortization of costs
1303
in excess of net assets acquired (goodwill) is not deductible for tax purposes,
1304
and, when combined with a provision for state taxes, results in the higher
1305
effective tax rate during both 2000 and 1999 compared to the U.S. statutory rate
1306
for corporations of 34 percent.</P>
1307
<P><I>Comparison of the Years Ended December 31, 1999 and 1998</I></P>
1308
<P>We reported net earnings of $6 million or $.75 per diluted share in 1999
1309
compared to $6.96 million or $.81 per diluted share in 1998. The 1998 results
1310
included net earnings of $4.4 million from the discontinued CVS Operations or
1311
$.51 per diluted share primarily due to an after-tax gain of $4.6 million on the
1312
sale of the discontinued operations. Net earnings from continuing operations
1313
increased to $6 million or $.75 per diluted share in 1999 compared to $2.59
1314
million or $.30 per diluted share in 1998. Net earnings from continuing
1315
operations in 1999 and 1998 benefited from $8.9 million and $3.1 million,
1316
respectively, of revenue recorded in connection with our former development
1317
agreement with Sofamor Danek.</P>
1318
<P>Total net revenue from continuing ANS operations of $29.48 million for the
1319
year ended December 31, 1999, was $9.37 million, or 46.6 percent, above the
1320
comparable 1998 level of $20.11 million. The 1999 period included $8.9 million
1321
of net revenue and the 1998 period included $3.1 million of net revenue
1322
associated with our former development agreement with Sofamor Danek. Net revenue
1323
from ANS product sales increased 21 percent to $20.58 million during 1999
1324
compared to $17.01 million in 1998. This increase in net revenue from product
1325
sales was the result of higher unit sales volume of ANS' radio-frequency
1326
stimulation systems used to treat complex pain patterns. All of the $3.57
1327
million increase in 1999 was the result of higher sales in the United States.
1328
During June 1999, we launched our enhanced radio-frequency stimulation system,
1329
the Renew&reg; System, in the United States.</P>
1330
<P>Gross profit from product sales increased to $13.95 million in 1999 from
1331
$12.02 million in 1998 due to the increase in net revenue from product sales
1332
discussed above. Gross profit margin from product sales decreased to 67.8
1333
percent in 1999 compared to 70.7 percent in 1998 due to (1) approximately
1334
$350,000 of additional costs we incurred from product transition and unexpected
1335
lower manufacturing yields related to the Renew System during the third quarter
1336
of 1999, (2) higher component costs for the Renew System, and (3) production
1337
downtime associated with our move to our new leased facility in May 1999.</P>
1338
<P ALIGN=CENTER>Page 20</P>
1339
<HR>
1340
<P>Total operating expenses (the aggregate of research and development,
1341
marketing, amortization of intangibles and administrative expenses) increased to
1342
$14.01 million in 1999 compared to $11.29 million in 1998 and as a percentage of
1343
net revenue from product sales increased to 68.1 percent in 1999 from 66.4
1344
percent in 1998.</P>
1345
<P>Research and development expense increased to $3.77 million in 1999, or 18.3
1346
percent of 1999 net revenue from product sales, from $2.80 million during 1998,
1347
or 16.5 percent of 1998 net revenue from product sales, reflecting our
1348
stepped-up commitment to develop products that will expand our presence into
1349
other rapidly growing segments of the neuromodulation market. This increase
1350
during 1999 compared to 1998 was the result of higher salary and benefit expense
1351
from staffing additions, increased consulting expense, and higher test material
1352
expense. These expenditures during 1999 were directed toward development of our
1353
Renew System, which we launched in the United States during June 1999, a
1354
fully implantable constant&#150;rate infusion pump, an IPG stimulation system
1355
for spinal cord stimulation and an IPG stimulation system for Deep Brain
1356
Stimulation.</P>
1357
<P>Marketing expense, as a percentage of net revenue from product sales,
1358
increased to 30.6 percent in 1999 from 27.5 percent in 1998, and the absolute
1359
dollar amount increased from $4.68 million during 1998 to $6.29 million in 1999.
1360
This dollar increase during 1999 was attributable to higher commission expense
1361
from increased product sales and a change from distributors to commissioned
1362
sales agents in certain United States territories, higher salary and benefit
1363
expense from staffing additions, higher expense for education and training of
1364
new implanters and expense related to the launch of our Renew System.</P>
1365
<P>General and administrative expense increased from $2.63 million during 1998
1366
to $2.76 million in 1999 while as a percentage of net revenue from product
1367
sales, decreased to 13.4 percent in 1999 from 15.5 percent during 1998. The
1368
increase of $124,000 in absolute dollar expense during 1999 was principally the
1369
result of higher salary and benefit expense from staffing additions, higher
1370
expense related to investor relations and higher patent legal expense.</P>
1371
<P>Amortization of ANS intangibles increased from $1.17 million in 1998 to $1.19
1372
million during 1999 due to expense for additional patents we have licensed.</P>
1373
<P>Other income increased to $706,000 in 1999 compared to $499,000 in 1998
1374
primarily as a result of a $287,000 reduction in interest expense due to the
1375
repayment of our mortgage debt in February 1999 when we sold our facility to
1376
Atrion Corporation.</P>
1377
<P>Income tax expense from continuing operations increased to $3.55 million in
1378
1999 from $1.75 million in 1998 due to higher earnings from ANS operations. This
1379
represents effective tax rates of 37.1 percent in 1999 and 40.3 percent in 1998.
1380
Our expense for amortization of costs in excess of net assets acquired
1381
(goodwill) was not deductible for tax purposes, and, when combined with a
1382
provision for state taxes, resulted in the higher effective tax rate during both
1383
1999 and 1998 compared to the U.S. statutory rate for corporations of 34
1384
percent.</P>
1385
<P><B>Liquidity and Capital Resources</B></P>
1386
<P>At December 31, 2000 our working capital increased to $19.09 million from
1387
$16.18 million at year-end 1999. The ratio of current assets to current
1388
liabilities was 7.56:1 at December 31, 2000, compared to 4.86:1 at December 31,
1389
1999. Cash, cash equivalents, certificates of deposit and marketable securities
1390
totaled $9.58 million at December 31, 2000 compared to $8.75 million at December
1391
31, 1999.</P>
1392
<P ALIGN=CENTER>Page 21</P>
1393
<HR>
1394
<P>In 1998 and 1999, the Board of Directors authorized stock repurchases of up
1395
to 1,750,000 shares. During 1998 and 1999, we repurchased 1,663,500 shares under
1396
the authorized repurchase programs at an aggregate cost of $12.36 million. We
1397
made no repurchases during 2000. In November 2000, in connection with signing
1398
the agreement to acquire Hi-tronics Designs, Inc. in a stock-for-stock merger,
1399
the Board of Directors rescinded the share repurchase program under which 86,500
1400
shares of common stock remained authorized for repurchase. During the three
1401
years ended December 31, 2000, we issued 267,425; 162,068 and 184,874 shares
1402
respectively, from our treasury upon the exercise of stock options and a
1403
warrant. At December 31, 2000, 1,049,133 shares remained in the treasury. On
1404
January 2, 2001, we issued 119,100 shares from the treasury for the purchase of
1405
the assets of ESOX Corporation and issued the remaining 930,033 shares from the
1406
treasury as part of the 1,104,725 shares we issued to acquire Hi-tronics
1407
Designs, Inc.</P>
1408
<P>We decreased our investment in inventories to $5.65 million at December 31,
1409
2000, from $6 million at December 31, 1999. We estimate that our investment
1410
in inventory will also decrease by year-end 2001 by approximately $500,000 to a
1411
level of $5.15 million.</P>
1412
<P>We spent $1.24 million during 2000 for capital expenditures and license fees
1413
for additional patents and intellectual property we are licensing. Of such
1414
expenditures, approximately $805,000 was spent for manufacturing tooling and
1415
equipment primarily for the new products we developed including our IPG system
1416
for spinal cord stimulation and our fully implantable constant-rate infusion
1417
pump. We also spent $435,000 during 2000 to license additional patents and
1418
intellectual property.</P>
1419
<P>We believe our current cash, cash equivalents, certificates of deposit and
1420
marketable securities and cash generated from operations will be sufficient to
1421
fund all of our operating needs and capital expenditures for the foreseeable
1422
future.</P>
1423
<P><B>Cash Flows</B></P>
1424
<P>Net cash provided by continuing operations was $1.92 million in 2000, $2.22
1425
million in 1999 and $6.93 million in 1998. This decrease of approximately
1426
$300,000 in 2000 compared to 1999 related to the decrease in net earnings from
1427
$6 million in 1999 to $954,000 in 2000 due to including the $8 million
1428
termination payment from our former development agreement with Sofamor Danek in
1429
the 1999 results. In 2000, we used $2.05 million of cash to increase our
1430
investment in assets such as accounts receivable and prepaid expenses and to
1431
reduce our accounts payable and income taxes payable. Although net earnings from
1432
continuing operations increased to $6 million in 1999 from $2.59 million in
1433
1998, net cash provided from continuing operations decreased by $4.71 million
1434
primarily due to changes in components of working capital. During 1999, we used
1435
cash to increase our investment in assets such as inventories, account
1436
receivable and prepaid expenses and other assets and to reduce our income taxes
1437
payable.</P>
1438
<P>Net cash used in investing activities was $2.67 million in 2000 while
1439
investing activities provided cash of $447,000 in 1999 and $20.81 million in
1440
1998. During 2000, we used $1.24 million for capital expenditures related to
1441
additional manufacturing tooling and equipment for new products we developed and
1442
licensing fees for patents. We also used in the 2000 period a net of $1.44
1443
million for the purchase of investments in certificates of deposit with
1444
maturities over 90 days and investment-grade municipal bonds with maturities
1445
less than one year from the date we purchased them. The 1999 period reflects
1446
$6.35 million of net proceeds we received when we sold our facility to Atrion
1447
Corporation. We utilized $5.91 million in 1999 for capital expenditures for
1448
leasehold improvements, furnishings and equipment for our new leased facility,
1449
manufacturing tooling and equipment for our Renew System and new products we are
1450
developing, and licensing fees for patents. The 1998 period reflects net
1451
proceeds of $21.8 million from the sale of discontinued operations. We utilized
1452
$1.68 million in 1998 for capital expenditures, primarily for manufacturing
1453
tooling and equipment for the new products we are developing, and license fees
1454
for patents we licensed.</P>
1455
<P ALIGN=CENTER>Page 22</P>
1456
<HR>
1457
<P>Net cash used in financing activities was $94,600 in 2000, $6.01 million in
1458
1999 and $16.85 million in 1998. During 2000, we received net cash of $1.41
1459
million from the exercise of stock options and a warrant, while $1.50 million
1460
was used for a loan to a third party. During 1999, we received net cash of
1461
$573,000 from the exercise of stock options while $2.95 million was used for
1462
share repurchases and $3.63 million was used for the repayment of our mortgage
1463
debt. During 1998, we received net cash of $818,000 from the exercise of stock
1464
options while $9.41 million was used for share repurchases and $8.26 million was
1465
used to reduce debt.</P>
1466
<P><B>Outlook and Uncertainties</B></P>
1467
<P><I>The following is a "safe harbor" statement under the Private Securities
1468
Litigation Reform Act of 1995: The matters discussed in this Annual Report on
1469
Form 10-K contain statements that constitute forward-looking statements within
1470
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
1471
The words "expect," "estimate," "anticipate," "predict," "believe," "plan,"
1472
"will," "should," "intend" and similar expressions and variations thereof are
1473
intended to identify forward-looking statements. Such statements appear in a
1474
number of places in this Annual Report on Form 10-K and include statements
1475
regarding our intent, belief or current expectations with respect to, among
1476
other things: (i) trends affecting our financial condition or results of
1477
operations; (ii) our financing plans; and (iii) our business growth strategies.
1478
We caution our readers that any forward-looking statements are not guarantees of
1479
future performance and involve risks and uncertainties. Actual results may
1480
differ materially from those projected in the forward-looking statements as a
1481
result of various factors. These risks and uncertainties include the
1482
following:</I></P>
1483
<P><I>Product Development and Market Acceptance.</I> Our growth depends in part
1484
on our ability to develop and gain market acceptance of new products, including
1485
next-generation ANS products. We cannot assure you that we will continue to
1486
develop successful products, that we will not experience delays in product
1487
introduction, or that once such products are introduced, the market will accept
1488
them.</P>
1489
<P><I>Government Regulation.</I> Our business is subject to extensive government
1490
regulation, principally by the FDA. The regulatory process, especially as it
1491
relates to product approvals, can be lengthy, expensive and uncertain and may
1492
involve the satisfactory completion of clinical trials and market tests prior to
1493
the introduction of new products. Failure to obtain government approval of our
1494
products on a timely and cost-efficient basis, including the approval of our IPG
1495
stimulation system for spinal cord stimulation, could have a material adverse
1496
effect on our business, financial condition and results of operations. See Item
1497
1-"Business-Government Regulation".</P>
1498
<P><I>Component Supply.</I> We depend on various suppliers for certain
1499
components used to manufacture our products, and our business depends in part on
1500
the adequacy, acceptability and timeliness of component supply. In addition, we
1501
rely on a single supplier for the computer chip used in the receiver of our
1502
stimulation systems. The supplier of this computer chip has indicated its desire
1503
to cease manufacturing and supplying the computer chip in the future, but to
1504
date has not determined when this will occur. The supplier has agreed to notify
1505
us when a date has been determined and allow us to place a final one-time
1506
purchase order for the computer chip. In the interim, we are maintaining a
1507
higher than normal inventory of the computer chip and are developing a new
1508
receiver design that does not use a custom computer chip. A sudden disruption in
1509
supply from the computer chip supplier or another single-source supplier could
1510
adversely affect our ability to deliver finished products on time.</P>
1511
<P ALIGN=CENTER>Page 23</P>
1512
<HR>
1513
<P><I>Competition and Technological Change.</I> The medical device market is
1514
highly competitive. We compete with larger companies that have access to greater
1515
capital, research and development, marketing, distribution and other resources
1516
than we do. In addition, our market is characterized by extensive research
1517
efforts and rapid product development and technological change, which could
1518
render our products obsolete or noncompetitive. One large supplier, Medtronic,
1519
Inc, dominates the market for electrical stimulation systems and fully
1520
implantable infusion pumps.</P>
1521
<P><I>Intellectual Property Rights.</I> We rely in part on patents, trade
1522
secrets and proprietary technology to remain competitive. It may be necessary to
1523
defend these rights or to defend against claims that we are infringing on the
1524
rights of others. Intellectual property litigation and controversies are
1525
disruptive and expensive.</P>
1526
<P><I>Cost Pressures on Medical Technology.</I> The overall escalating cost of
1527
medical products and healthcare results in significant cost pressure.
1528
Third-party payors, such as insurance companies and HMO's, are under intense
1529
pressure to challenge the prices charged for medical products and services. We
1530
rely heavily on Medicare and Medicaid reimbursement. Any amendments to existing
1531
reimbursement rules and regulations that restrict or terminate the reimbursement
1532
eligibility (or the extent or amount of coverage) of medical procedures using
1533
our products or the eligibility (or the extent or amount of coverage) of our
1534
products could adversely impact our business, financial condition and results of
1535
operations.</P>
1536
<P><I>Potential Product Liability.</I> The testing, manufacturing, marketing and
1537
sale of medical devices entail substantial risks of liability claims or product
1538
recalls.</P>
1539
<P><I>Reliance on Major Customer/Distributor.</I> During 2000, we had one major
1540
customer that accounted for 10 percent or more of our net revenue. Sun Medical,
1541
Inc., a specialty distributor of ANS products, accounted for $3.2 million, or 14
1542
percent of ANS' net revenue from product sales for the year ended December 31,
1543
2000. While we believe our relations with Sun Medical are good, the loss of this
1544
customer could have a material adverse effect on our business, financial
1545
condition and results of operations.</P>
1546
<P><I>Year 2000 Compliance.</I> Although our Year 2000 readiness efforts were
1547
successful and we have not experienced any Year 2000 issues to date, we cannot
1548
assure you that Year 2000 issues will not occur at a later date that would have
1549
a material adverse impact on our results of operations, financial condition and
1550
cash flows.</P>
1551
<P><I>Other Uncertainties.</I> We discuss other operating, financial or legal
1552
risks or uncertainties in this Form 10-K in specific contexts and in the
1553
Company's other periodic SEC filings. The Company is, of course, also subject to
1554
general economic risks, the risk of interruption in the source of supply,
1555
dependence on key personnel and other risks and uncertainties.</P>
1556
<P><B>Currency Fluctuations</B></P>
1557
<P>Substantially all of our international sales are denominated in U.S. dollars.
1558
Fluctuations in currency exchange rates in other countries could reduce the
1559
demand for our products by increasing the price of our products in the currency
1560
of the countries in which the products are sold, although we do not believe
1561
currency fluctuations have had a material effect on the Company's results of
1562
operations to date.</P>
1563
<P ALIGN=CENTER>Page 24</p>
1564
<HR>
1565
<P></P>
1566
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1567
<TR>
1568
<TD WIDTH=15% VALIGN=TOP><B>ITEM 7A.</B></TD>
1569
<TD WIDTH=85%><B>QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</B>
1570
</TD></TR></TABLE>
1571
<P>We do not use derivative financial instruments to manage the impact of
1572
interest rate changes on our investments or debt instruments.</P>
1573
<P>We invest our cash reserves in high quality short-term liquid money market
1574
instruments with major financial institutions and in certificates of deposit. At
1575
December 31, 2000, we had $5,790,323 invested in money market funds, $1,069,575
1576
in certificates of deposit with maturities less than 90 days from the purchase
1577
date and $1,040,000 in certificates of deposit with maturity dates of greater
1578
than 90 days from the purchase date. The rate of interest earned on these
1579
investments will vary with overall market rates. A hypothetical 100-basis point
1580
change in the interest rate earned on these investments would not have a
1581
material effect on our income or cash flows.</P>
1582
<P>We also have certain investments in available-for-sale securities. These
1583
investments primarily consist of investment grade municipal bonds with
1584
maturities less than one year from the date of purchase, a real estate
1585
investment trust traded on the New York Stock Exchange and an investment grade
1586
corporate preferred security also traded on the New York Stock Exchange. The
1587
cost of these investments is $1,156,442 and the fair value at December 31, 2000
1588
was $1,030,318. The investments are subject to overall stock market and interest
1589
rate risk. A hypothetical 20 percent decrease in the value of these investments
1590
from the prices at December 31, 2000 would decrease the fair value by
1591
$206,064.</P>
1592
<P>At December 31, 2000, we had no debt instruments.</P>
1593
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1594
<TR>
1595
<TD WIDTH=15% VALIGN=TOP><B>ITEM 8.</B></TD>
1596
<TD WIDTH=85%><B>FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA</B></TD></TR>
1597
</TABLE>
1598
<P>The information required by this item is set forth in Appendices A, B and C.
1599
</P>
1600
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1601
<TR>
1602
<TD WIDTH=15% VALIGN=TOP><B>ITEM 9.</B></TD>
1603
<TD WIDTH=85%><B>CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
1604
AND FINANCIAL DISCLOSURE</B></TD></TR></TABLE>
1605
<P>None.</P>
1606
<P ALIGN=CENTER><B>PART III</B></P>
1607
<P></P>
1608
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1609
<TR>
1610
<TD WIDTH=15%><B>ITEM 10.</B></TD>
1611
<TD WIDTH=85%><B>DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT</B></TD>
1612
</TR></TABLE>
1613
<P>The information required by this item is contained under the captions
1614
"Election of Directors" and "Executive Officers" in our definitive proxy
1615
material which will be filed in connection with our 2001 annual meeting of
1616
stockholders, which information is incorporated herein by reference.</P>
1617
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1618
<TR>
1619
<TD WIDTH=15% VALIGN=TOP><B>ITEM 11.</B></TD>
1620
<TD WIDTH=85%><B>EXECUTIVE COMPENSATION</B></TD></TR></TABLE>
1621
<P>The information required by this item is contained under the captions
1622
"Compensation and Committees of the Board of Directors" and "Compensation of
1623
Executive Officers" in our definitive proxy material which will be filed in
1624
connection with our 2001 annual meeting of stockholders, which information is
1625
incorporated herein by reference. Information in the section entitled
1626
"Compensation Committee Report" and in the subsection entitled " Performance
1627
Graph" are not incorporated herein by reference.</P>
1628
<P ALIGN=CENTER>Page 25</P>
1629
<HR>
1630
<P></P>
1631
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1632
<TR>
1633
<TD WIDTH=15% VALIGN=TOP><B>ITEM 12.</B></TD>
1634
<TD WIDTH=85%><B>SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
1635
</B></TD></TR></TABLE>
1636
<P>The information required by this item is contained under the caption
1637
"Security Ownership of Management and Principal Shareholders" in our definitive
1638
proxy material which will be filed in connection with our 2001 annual meeting of
1639
stockholders, which information is incorporated herein by reference.</P>
1640
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1641
<TR>
1642
<TD WIDTH=15% VALIGN=TOP><B>ITEM 13.</B></TD>
1643
<TD WIDTH=85%><B>CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OWNERS AND
1644
MANAGEMENT</B></TD></TR></TABLE>
1645
<P>Inapplicable.</P>
1646
<P ALIGN=CENTER><B>PART IV</B></P>
1647
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1648
<TR>
1649
<TD WIDTH=15% VALIGN=TOP><B>ITEM 14.</B></TD>
1650
<TD WIDTH=85%><B>EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
1651
8-K</B></TD></TR></TABLE>
1652
<P></P>
1653
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1654
<TR>
1655
<TD WIDTH=10%>(a)</TD>
1656
<TD WIDTH=90%>Documents filed as part of this report.</TD></TR></TABLE>
1657
<P></P>
1658
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1659
<TR>
1660
<TD WIDTH=10%>&nbsp;</TD>
1661
<TD WIDTH=10%>1.</TD>
1662
<TD WIDTH=90%>Financial Statements:<BR>See Index to Financial Statements on the
1663
second page of Appendix A.</TD></TR>
1664
<TR>
1665
<TD>&nbsp;</TD>
1666
<TD></TD>
1667
<TD></TD></TR>
1668
<TR>
1669
<TD>&nbsp;</TD>
1670
<TD>2.</TD>
1671
<TD>Financial Statement Schedules:*<BR>Schedule II - Valuation and Qualifying
1672
Accounts.<BR>See Appendix B.</TD></TR>
1673
</TABLE>
1674
<P></P>
1675
<P>*Those schedules not listed above are omitted as not applicable or not
1676
required.</P>
1677
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1678
<TR>
1679
<TD WIDTH=10%>&nbsp;</TD>
1680
<TD WIDTH=10%>3.</TD>
1681
<TD WIDTH=90%>Exhibits: See (c) below.</TD></TR></TABLE>
1682
<P></P>
1683
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1684
<TR>
1685
<TD WIDTH=10%>(b)</TD>
1686
<TD WIDTH=90%>Reports on Form 8-K.</TD></TR></TABLE>
1687
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1688
<TR>
1689
<TD WIDTH=10%>&nbsp;</TD>
1690
<TD WIDTH=90%>The Company filed a report on Form 8-K on December 1, 2000 to
1691
report the definitive agreement on November 30, 2000 to acquire Hi-tronics
1692
Designs, Inc.<BR><BR>The Company filed a report on Form 8-K on January 9, 2001,
1693
to report the consummation of the acquisition of Hi-tronics Designs, Inc. on
1694
January 2, 2001.<BR><BR>The Company filed a report on Form 8-K on January 18,
1695
2001 reporting certain information under Regulation FD Disclosure which the
1696
Company intended to disclose in a series of analyst/investor conferences
1697
commencing on January 18, 2001.</TD></TR>
1698
</TABLE>
1699
<P ALIGN=CENTER>Page 26</P>
1700
<HR>
1701
<P></P><TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1702
<TR>
1703
<TD WIDTH=10%>(c)</TD>
1704
<TD WIDTH=90%>Exhibits:</TD></TR>
1705
</TABLE>
1706
<P></P>
1707
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1708
<TR>
1709
<TD WIDTH=10% ALIGN=RIGHT>Exhibit<BR><U>Number</U></TD>
1710
<TD WIDTH=5%></TD>
1711
<TD WIDTH=85% ALIGN=CENTER><U>Description</U></TD></TR>
1712
</TABLE>
1713
<P></P>
1714
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1715
<TR>
1716
<TD WIDTH=10% ALIGN=RIGHT VALIGN=TOP>2.1&nbsp;&nbsp;</TD>
1717
<TD WIDTH=5%>&nbsp;</TD>
1718
<TD WIDTH=85%>Agreement and Plan of Merger, dated as of November 30, 2000, by
1719
and amoung Advanced Neuromodulation Systems, Inc., ANS Acquisition Corp, and
1720
Hi-tronics Designs, Inc.(10)</TD></TR>
1721
<TR>
1722
<TD ALIGN=RIGHT VALIGN=TOP>3.1&nbsp;&nbsp;</TD>
1723
<TD></TD>
1724
<TD>Articles of Incorporation, as amended and restated(11)</TD></TR>
1725
<TR>
1726
<TD ALIGN=RIGHT VALIGN=TOP>3.2&nbsp;&nbsp;</TD>
1727
<TD></TD>
1728
<TD>Bylaws(11)</TD></TR>
1729
<TR>
1730
<TD ALIGN=RIGHT VALIGN=TOP>4.1&nbsp;&nbsp;</TD>
1731
<TD></TD>
1732
<TD>Rights Agreement dated as of August 30, 1996, between Quest Medical, Inc.
1733
and KeyCorp Shareholder Services, Inc. as Rights Agent(5)</TD></TR>
1734
<TR>
1735
<TD ALIGN=RIGHT VALIGN=TOP>10.1&nbsp;&nbsp;</TD>
1736
<TD></TD>
1737
<TD>Quest Medical, Inc. 1979 Amended and Restated Employees Stock Option
1738
Plan(2)</TD></TR>
1739
<TR>
1740
<TD ALIGN=RIGHT VALIGN=TOP>10.2&nbsp;&nbsp;</TD>
1741
<TD></TD>
1742
<TD>Form of 1979 Employees Stock Option Agreement(3)</TD></TR>
1743
<TR>
1744
<TD ALIGN=RIGHT VALIGN=TOP>10.3&nbsp;&nbsp;</TD>
1745
<TD></TD>
1746
<TD>Quest Medical, Inc. Directors Stock Option Plan (as amended)(2)</TD></TR>
1747
<TR>
1748
<TD ALIGN=RIGHT VALIGN=TOP>10.4&nbsp;&nbsp;</TD>
1749
<TD></TD>
1750
<TD>Form of Directors Stock Option Agreement(1)</TD></TR>
1751
<TR>
1752
<TD ALIGN=RIGHT VALIGN=TOP>10.5&nbsp;&nbsp;</TD>
1753
<TD></TD>
1754
<TD>Quest Medical, Inc. 1987 Stock Option Plan(4)</TD></TR>
1755
<TR>
1756
<TD ALIGN=RIGHT VALIGN=TOP>10.6&nbsp;&nbsp;</TD>
1757
<TD></TD>
1758
<TD>Form of 1987 Employee Stock Option Agreement(4)</TD></TR>
1759
<TR>
1760
<TD ALIGN=RIGHT VALIGN=TOP>10.7&nbsp;&nbsp;</TD>
1761
<TD></TD>
1762
<TD>Quest Medical, Inc. 1995 Stock Option Plan(4)</TD></TR>
1763
<TR>
1764
<TD ALIGN=RIGHT VALIGN=TOP>10.8&nbsp;&nbsp;</TD>
1765
<TD></TD>
1766
<TD>Form of 1995 Employee Stock Option Agreement(4)</TD></TR>
1767
<TR>
1768
<TD ALIGN=RIGHT VALIGN=TOP>10.9&nbsp;&nbsp;</TD>
1769
<TD></TD>
1770
<TD>Quest Medical, Inc. 1998 Stock Option Plan(7)</TD></TR>
1771
<TR>
1772
<TD ALIGN=RIGHT VALIGN=TOP>10.10</TD>
1773
<TD></TD>
1774
<TD>Advanced Neuromodulation Systems, Inc. 2000 Stock Option Plan(9)</TD></TR>
1775
<TR>
1776
<TD ALIGN=RIGHT VALIGN=TOP>10.11</TD>
1777
<TD></TD>
1778
<TD>Employment Agreement dated April 9, 1998 between Christopher G. Chavez and
1779
Quest Medical, Inc.(6)</TD></TR>
1780
<TR>
1781
<TD ALIGN=RIGHT VALIGN=TOP>10.12</TD>
1782
<TD></TD>
1783
<TD>Employment Agreement dated April 9, 1998 between Scott F. Drees and Quest
1784
Medical, Inc.(6)</TD></TR>
1785
<TR>
1786
<TD ALIGN=RIGHT VALIGN=TOP>10.13</TD>
1787
<TD></TD>
1788
<TD>Employment Agreement dated April 9, 1998 between F. Robert Merrill III and
1789
Quest Medical, Inc.(6)</TD></TR>
1790
<TR>
1791
<TD ALIGN=RIGHT VALIGN=TOP>10.14</TD>
1792
<TD></TD>
1793
<TD>Form of Employment Agreement and Covenant Not to Compete, between the
1794
Company and key employees(1)</TD></TR>
1795
<TR>
1796
<TD ALIGN=RIGHT VALIGN=TOP>10.15</TD>
1797
<TD></TD>
1798
<TD>Lease Agreement dated as of February 4, 1999, between Advanced
1799
Neuromodulation Systems, Inc. and Legacy Lincoln I, LTD. (8)</TD></TR>
1800
<TR>
1801
<TD ALIGN=RIGHT VALIGN=TOP>11.1&nbsp;&nbsp;</TD>
1802
<TD></TD>
1803
<TD>Computation of Earnings Per Share(11)</TD></TR>
1804
<TR>
1805
<TD ALIGN=RIGHT VALIGN=TOP>21.1&nbsp;&nbsp;</TD>
1806
<TD></TD>
1807
<TD>Subsidiaries(11)</TD></TR>
1808
<TR>
1809
<TD ALIGN=RIGHT VALIGN=TOP>23.1&nbsp;&nbsp;</TD>
1810
<TD></TD>
1811
<TD>Consent of Independent Auditors(11)</TD></TR>
1812
<TR>
1813
<TD ALIGN=RIGHT VALIGN=TOP>27.1&nbsp;&nbsp;</TD>
1814
<TD></TD>
1815
<TD>Financial Data Schedule - December 31, 2000(11)</TD></TR>
1816
</TABLE>
1817
<P>__________________________________</P>
1818
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1819
<TR>
1820
<TD WIDTH=5% VALIGN=TOP>(1)&nbsp;&nbsp;</TD>
1821
<TD WIDTH=2%></TD>
1822
<TD WIDTH=93%>Filed as an Exhibit to the Company's Registration Statement on
1823
Form S-18, Registration No. 2-71198-FW, and incorporated herein by reference.
1824
</TD></TR>
1825
<TR>
1826
<TD>(2)&nbsp;&nbsp;</TD>
1827
<TD></TD>
1828
<TD>Filed as an Exhibit to the report of the Company on Form 10-K for the year
1829
ended December 31, 1987, and incorporated herein by reference.</TD></TR>
1830
<TR>
1831
<TD>(3)&nbsp;&nbsp;</TD>
1832
<TD></TD>
1833
<TD>Filed as an Exhibit to the Company's Registration Statement on Form S-1,
1834
Registration No. 2-78186, and incorporated herein by reference.</TD></TR>
1835
<TR>
1836
<TD>(4)&nbsp;&nbsp;</TD>
1837
<TD></TD>
1838
<TD>Filed as an Exhibit to the Company's Registration Statement on Form SB-2,
1839
Registration No. 33-62991, and incorporated herein by reference.</TD></TR>
1840
<TR>
1841
<TD>(5)&nbsp;&nbsp;</TD>
1842
<TD></TD>
1843
<TD>Filed as an Exhibit to the report of the Company on Form 8-K dated September
1844
3, 1996, and incorporated herein by reference.</TD></TR>
1845
<TR>
1846
<TD>(6)&nbsp;&nbsp;</TD>
1847
<TD></TD>
1848
<TD>Filed as an Exhibit to the report of the Company on Form 10-Q dated for the
1849
quarterly period ended March 31, 1998, and incorporated herein by reference.
1850
</TD></TR>
1851
<TR>
1852
<TD>(7)&nbsp;&nbsp;</TD>
1853
<TD></TD>
1854
<TD>Filed as an Exhibit to the Definitive Proxy Statement on Schedule 14A dated
1855
April 27, 1998, and incorporated herein by reference.</TD></TR>
1856
<TR>
1857
<TD>(8)&nbsp;&nbsp;</TD>
1858
<TD></TD>
1859
<TD>Filed as an Exhibit to the report of the Company on Form 10-K dated for the
1860
year ended December 31, 1998, and incorporated herein by reference.</TD></TR>
1861
<TR>
1862
<TD>(9)&nbsp;&nbsp;</TD>
1863
<TD></TD>
1864
<TD>Filed as an Exhibit to the Definitive Proxy Statement on Schedule 14A dated
1865
April 17, 2000, and incorporated herein by reference.</TD></TR>
1866
<TR>
1867
<TD>(10)</TD>
1868
<TD></TD>
1869
<TD>Filed as an Exhibit to the report of the Company on Form 8-K dated January
1870
9, 2001, and incorporated herein by reference. Upon request, the Company will
1871
furnish a copy of any omitted schedule to the Commission.</TD></TR>
1872
<TR>
1873
<TD>(11)</TD>
1874
<TD></TD>
1875
<TD>Filed herewith.</TD></TR>
1876
</TABLE>
1877
<P ALIGN=CENTER>Page 27</P>
1878
<HR>
1879
<P ALIGN=CENTER><U><B>Signatures</B></U></P>
1880
<P>Pursuant to the requirements of Section 13 or 15(d) of the Securities
1881
Exchange Act of 1934, the Company has duly caused this report to be signed on
1882
its behalf by the undersigned, thereunto duly authorized.</P>
1883
<P>Date: March 29, 2001</P>
1884
<P>ADVANCED NEUROMODULATION SYSTEMS, INC.</P>
1885
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1886
<TR>
1887
<TD WIDTH=40%></TD>
1888
<TD WIDTH=5%>By:</TD>
1889
<TD WIDTH=55%><U>/s/Christopher G. Chavez</U></TD></TR>
1890
<TR>
1891
<TD></TD>
1892
<TD></TD>
1893
<TD>Christopher G. Chavez</TD></TR>
1894
<TR>
1895
<TD></TD>
1896
<TD></TD>
1897
<TD>President and Chief Executive Officer</TD></TR></TABLE>
1898
<P></P>
1899
<P>Pursuant to the requirements of the Securities Exchange Act of 1934, this
1900
report has been signed by the following persons on behalf of the Company and in
1901
the capacities and on the dates indicated:</P>
1902
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
1903
<TR>
1904
<TD WIDTH=25% ALIGN=CENTER><U>Signature</U></TD>
1905
<TD WIDTH=5%></TD>
1906
<TD WIDTH=45% ALIGN=CENTER><U>Title</U></TD>
1907
<TD WIDTH=5%></TD>
1908
<TD WIDTH=20% ALIGN=CENTER><U>Date</U></TD></TR>
1909
<TR>
1910
<TD>&nbsp;</TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>
1911
<TD ALIGN=LEFT VALIGN=TOP><U>/s/Christopher G. Chavez</U><BR>Christopher G.
1912
Chavez</TD>
1913
<TD></TD>
1914
<TD ALIGN=LEFT>Chief Executive Officer, President and Director of Advanced
1915
Neuromodulation Systems, Inc. (Principal Executive Officer)</TD>
1916
<TD></TD>
1917
<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR><TR>
1918
<TD>&nbsp;</TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>
1919
<TD ALIGN=LEFT VALIGN=TOP><U>/s/F. Robert Merrill III</U><BR>F. Robert Merrill
1920
III</TD><TD></TD>
1921
<TD ALIGN=LEFT>Executive Vice President-Finance, Treasurer and Secretary of
1922
Advanced Neuromodulation Systems, Inc. (Principal Financial and Accounting
1923
Officer)</TD>
1924
<TD></TD>
1925
<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR><TR>
1926
<TD>&nbsp;</TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>
1927
<TD ALIGN=LEFT VALIGN=TOP><U>/s/Hugh M. Morrison</U><BR>Hugh M. Morrison</TD>
1928
<TD></TD>
1929
<TD ALIGN=LEFT>Chairman of the Board and Director of Advanced Neuromodulation
1930
Systems, Inc.</TD>
1931
<TD></TD>
1932
<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR><TR>
1933
<TD>&nbsp;</TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>
1934
<TD ALIGN=LEFT VALIGN=TOP><U>/s/Robert C. Eberhart</U><BR>Robert C. Eberhart
1935
</TD><TD></TD>
1936
<TD ALIGN=LEFT VALIGN=TOP>Director of Advanced Neuromodulation Systems, Inc.
1937
</TD><TD></TD>
1938
<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR><TR>
1939
<TD>&nbsp;</TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>
1940
<TD ALIGN=LEFT VALIGN=TOP><U>/s/Joseph E. Laptewicz</U><BR>Joseph E. Laptewicz
1941
</TD><TD></TD>
1942
<TD ALIGN=LEFT VALIGN=TOP>Director of Advanced Neuromodulation Systems, Inc.
1943
</TD><TD></TD>
1944
<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR><TR>
1945
<TD>&nbsp;</TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>
1946
<TD ALIGN=LEFT VALIGN=TOP><U>/s/A. Ronald Lerner</U><BR>A. Ronald Lerner
1947
</TD><TD></TD>
1948
<TD ALIGN=LEFT VALIGN=TOP>Director of Advanced Neuromodulation Systems, Inc.
1949
</TD><TD></TD>
1950
<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR><TR>
1951
<TD>&nbsp;</TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>
1952
<TD ALIGN=LEFT VALIGN=TOP><U>/s/Richard D. Nikolaev</U><BR>Richard D. Nikolaev
1953
</TD><TD></TD>
1954
<TD ALIGN=LEFT VALIGN=TOP>Director of Advanced Neuromodulation Systems, Inc.
1955
</TD><TD></TD>
1956
<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR><TR>
1957
<TD>&nbsp;</TD><TD></TD><TD></TD><TD></TD><TD></TD></TR><TR>
1958
<TD ALIGN=LEFT VALIGN=TOP><U>/s/Michael J. Torma</U><BR>Michael J. Torma
1959
</TD><TD></TD>
1960
<TD ALIGN=LEFT VALIGN=TOP>Director of Advanced Neuromodulation Systems, Inc.
1961
</TD><TD></TD>
1962
<TD ALIGN=CENTER VALIGN=TOP>March 29, 2001</TD></TR>
1963
</TABLE>
1964
<P ALIGN=CENTER>Page 28</P>
1965
<HR>
1966
<P ALIGN=RIGHT><B><U>Appendix A</U></B></P>
1967
<P></P><P></P>
1968
<P ALIGN=CENTER><B>Consolidated Financial Statements<BR>Independent
1969
Auditors&#146; Report<BR><BR>Three Years Ended December 31, 2000<BR><BR>
1970
Forming a Part of the Annual Report<BR><BR>Form 10-K<BR><BR>Item 8<BR><BR><BR>
1971
of<BR><BR>ADVANCED NEUROMODULATION SYSTEMS, INC.<BR>(Name of issuer)<BR><BR><BR>
1972
<BR>Filed with the<BR><BR>Securities and Exchange Commission<BR><BR>Washington,
1973
D.C. 20549<BR><BR><BR>under<BR><BR>The Securities and Exchange Act of 1934</B>
1974
</P>
1975
<HR>
1976
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
1977
<BR>Table of Contents<BR>to<BR>Consolidated Financial Statements<BR><BR>
1978
Form 10-K - Item 8</B></P>
1979
<P></P><P></P><P></P><P></P>
1980
<P><B>Independent Auditors&#146; Report</B></P>
1981
<P></P><P></P>
1982
<P><B>Consolidated Financial Statements:</B></P>
1983
<P>Consolidated Balance Sheets - December 31, 2000 and 1999<BR> Consolidated
1984
Statements of Operations - Years ended December 31, 2000, 1999 and 1998<BR>
1985
Consolidated Statements of Stockholders' Equity - Years ended December 31, 2000,
1986
1999 and 1998<BR> Consolidated Statements of Cash Flows - Years ended December
1987
31, 2000, 1999 and 1998<BR> Notes to Consolidated Financial Statements</P>
1988
<HR>
1989
<P ALIGN=CENTER>Report of Independent Auditors</P>
1990
<P>The Board of Directors<BR>Advanced Neuromodulation Systems, Inc.</P>
1991
<P>We have audited the accompanying consolidated balance sheets of Advanced
1992
Neuromodulation Systems, Inc. and subsidiaries (the Company) as of December 31,
1993
2000 and 1999, and the related consolidated statements of operations,
1994
stockholders&#146; equity and cash flows for each of the three years in the
1995
period ended December 31, 2000. Our audits also included the financial statement
1996
schedule listed in the Index at Item 14A. These consolidated financial
1997
statements and schedule are the responsibility of the Company&#146;s management.
1998
Our responsibility is to express an opinion on these financial statements and
1999
schedule based on our audits.</P>
2000
<P>We conducted our audits in accordance with auditing standards generally
2001
accepted in the United States. Those standards require that we plan and perform
2002
the audit to obtain reasonable assurance about whether the financial statements
2003
are free of material misstatement. An audit includes examining, on a test basis,
2004
evidence supporting the amounts and disclosures in the financial statements. An
2005
audit also includes assessing the accounting principles used and significant
2006
estimates made by management, as well as evaluating the overall financial
2007
statement presentation. We believe that our audits provide a reasonable basis
2008
for our opinion.</P>
2009
<P>In our opinion, the financial statements referred to above present fairly, in
2010
all material respects, the consolidated financial position of Advanced
2011
Neuromodulation Systems, Inc. and subsidiaries at December 31, 2000 and 1999,
2012
and the consolidated results of their operations and their cash flows for each
2013
of the three years in the period ended December 31, 2000, in conformity with
2014
accounting principles generally accepted in the United States. Also, in our
2015
opinion, the related financial statement schedule, when considered in relation
2016
to the basic financial statements taken as a whole, presents fairly in all
2017
material respects the information set forth therein.</P>
2018
<P></P>
2019
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
2020
<TR>
2021
<TD WIDTH=40%>&nbsp;</TD>
2022
<TD WIDTH=60%><U>/s/Ernst and Young LLP</U><BR>Ernst and Young LLP</TD></TR>
2023
</TABLE>
2024
<P></P>
2025
<P></P>
2026
<P>Dallas, Texas<BR>March 2, 2001</P>
2027
<HR>
2028
<P></P>
2029
<PRE>
2030
Advanced Neuromodulation Systems, Inc. and Subsidiaries
2031
Consolidated Balance Sheets
2032
December 31, 2000 and 1999
2033
2034
Assets 2000 1999
2035
------ ------------ ------------
2036
Current assets:
2037
Cash and cash equivalents $ 7,505,578 $ 8,353,658
2038
Certificates of deposit with maturities over
2039
90 days at purchase 1,040,000 --
2040
Marketable securities 1,030,318 398,208
2041
2042
Receivables:
2043
Trade accounts, less allowance for doubtful
2044
accounts of $130,255 in 2000 and $140,824 in 1999 3,850,605 3,785,719
2045
Note receivable-current portion 100,000 --
2046
Interest and other 282,567 70,965
2047
------------ ------------
2048
Total receivables 4,233,172 3,856,684
2049
------------ ------------
2050
Inventories:
2051
Raw materials 2,187,500 3,014,908
2052
Work-in-process 880,097 626,402
2053
Finished goods 2,580,193 2,357,907
2054
------------ ------------
2055
Total inventories 5,647,790 5,999,217
2056
------------ ------------
2057
2058
Deferred income taxes 546,671 654,086
2059
Refundable income taxes 359,953 --
2060
Prepaid expenses and other current assets 1,634,677 1,107,380
2061
------------ ------------
2062
Total current assets 21,998,159 20,369,233
2063
------------ ------------
2064
Equipment and fixtures:
2065
Furniture and fixtures 3,185,477 3,240,322
2066
Machinery and equipment 4,203,401 3,599,338
2067
Leasehold improvements 716,189 711,271
2068
------------ ------------
2069
8,105,067 7,550,931
2070
2071
Less accumulated depreciation and amortization 2,830,420 1,862,361
2072
------------ ------------
2073
Net equipment and fixtures 5,274,647 5,688,570
2074
------------ ------------
2075
Note receivable, excluding current portion 1,400,000 --
2076
2077
Cost in excess of net assets acquired, net of accumulated
2078
amortization of $2,847,824 in 2000 and $2,291,220 in 1999 7,963,840 8,520,444
2079
Patents and licenses, net of accumulated amortization
2080
of $674,220 in 2000 and $472,708 in 1999 4,160,253 4,071,196
2081
Purchased technology from acquisitions, net of accumulated
2082
amortization of $1,533,334 in 2000 and $1,266,667 in 1999 2,466,666 2,733,333
2083
Tradenames, net of accumulated amortization of
2084
$718,745 in 2000 and $593,750 in 1999 1,781,255 1,906,250
2085
Other assets, net of accumulated amortization of
2086
$221,320 in 2000 and $137,985 in 1999 326,866 265,748
2087
------------ ------------
2088
$ 45,371,686 $ 43,554,774
2089
============ ============
2090
See accompanying notes to consolidated financial statements.
2091
</PRE>
2092
<HR>
2093
<PRE>
2094
Advanced Neuromodulation Systems, Inc. and Subsidiaries
2095
Consolidated Balance Sheets
2096
December 31, 2000 and 1999
2097
2098
Liabilities and Stockholders' Equity 2000 1999
2099
------------------------------------ ------------ ------------
2100
Current liabilities:
2101
Accounts payable $ 783,761 $1,765,377
2102
Accrued salary and employee benefit costs 1,015,643 793,275
2103
Accrued tax abatement liability 969,204 969,204
2104
Income taxes payable -- 511,848
2105
Other accrued expenses 141,416 151,372
2106
------------ ------------
2107
Total current liabilities 2,910,024 4,191,076
2108
------------ ------------
2109
2110
Deferred income taxes 2,301,670 2,325,403
2111
2112
Commitments and contingencies
2113
2114
Stockholders' equity:
2115
Common stock, $.05 par value
2116
Authorized-25,000,000 shares;
2117
Issued-8,708,367 shares 435,418 435,418
2118
Additional capital 40,313,751 40,423,457
2119
Retained earnings 6,648,066 5,694,422
2120
Accumulated other comprehensive income (loss), net of
2121
tax benefit of $42,883 in 2000 and $124,437 in 1999 (83,241) (241,550)
2122
Cost of common shares in treasury; 1,049,133 shares
2123
in 2000 and 1,316,558 shares in 1999 (7,154,002) (9,273,452)
2124
------------ ------------
2125
2126
Total stockholders' equity 40,159,992 37,038,295
2127
2128
------------ ------------
2129
$45,371,686 $43,554,774
2130
============ ============
2131
2132
See accompanying notes to consolidated financial statements.
2133
</PRE>
2134
<HR>
2135
<PRE>
2136
Advanced Neuromodulation Systems, Inc. and Subsidiaries
2137
Consolidated Statements of Operations
2138
Years Ended December 31
2139
2140
2000 1999 1998
2141
------------ ------------ ------------
2142
Net revenue-product sales $23,081,624 $20,578,384 $17,006,407
2143
Net revenue-contract research and development --- 8,900,000 3,100,000
2144
------------ ------------ ------------
2145
Total net revenue 23,081,624 29,478,384 20,106,407
2146
------------ ------------ ------------
2147
Operating expenses:
2148
Cost of product sales 7,488,321 6,628,983 4,985,887
2149
General and administrative 2,838,319 2,756,931 2,633,250
2150
Research and development 3,561,956 3,772,579 2,801,175
2151
Amortization of intangibles 1,233,112 1,187,689 1,170,585
2152
Marketing 6,851,022 6,290,004 4,682,423
2153
------------ ------------ ------------
2154
21,972,730 20,636,186 16,273,320
2155
------------ ------------ ------------
2156
Earnings from operations 1,108,894 8,842,198 3,833,087
2157
2158
Other income (expense):
2159
Loss on sale of marketable securities (3,218) -- (4,381)
2160
Interest expense -- (44,861) (331,468)
2161
Investment and other income, net 582,181 751,238 834,772
2162
------------ ------------ ------------
2163
578,963 706,377 498,923
2164
------------ ------------ ------------
2165
Earnings from continuing operations
2166
before income taxes 1,687,857 9,548,575 4,332,010
2167
2168
Income taxes 734,213 3,545,294 1,746,304
2169
------------ ------------ ------------
2170
Net earnings from continuing operations 953,644 6,003,281 2,585,706
2171
------------ ------------ ------------
2172
Loss from discontinued operations, net of income
2173
tax benefits of $129,711 -- -- (211,634)
2174
2175
Gain on sale of assets of discontinued operations, net of
2176
income tax expense of $2,473,293 -- -- 4,585,130
2177
------------ ------------ ------------
2178
Net earnings from discontinued operations -- -- 4,373,496
2179
------------ ------------ ------------
2180
Net earnings $ 953,644 $ 6,003,281 $ 6,959,202
2181
============ ============ ============
2182
Basic earnings per share:
2183
Continuing operations $ .13 $ .79 $ .31
2184
Discontinued operations -- -- .53
2185
------------ ------------ ------------
2186
Net earnings $ .13 $ .79 $ .84
2187
============ ============ ============
2188
Diluted earnings per share:
2189
Continuing operations $ .11 $ .75 $ .30
2190
Discontinued operations -- -- .51
2191
------------ ------------ ------------
2192
Net earnings $ .11 $ .75 $ .81
2193
============ ============ ============
2194
2195
See accompanying notes to consolidated financial statements.
2196
</PRE>
2197
<HR>
2198
<PRE>
2199
Advanced Neuromodulation Systems, Inc. and Subsidiaries
2200
Consolidated Statements of Cash Flows
2201
Years Ended December 31
2202
2203
2000 1999 1998
2204
------------ ------------ ------------
2205
Cash flows from operating activities:
2206
Net earnings from continuing operations $ 953,644 $ 6,003,281 $ 2,585,706
2207
Adjustments to reconcile earnings from continuing
2208
operations to net cash provided by operating
2209
activities:
2210
Depreciation 1,217,331 816,125 615,388
2211
Amortization 1,233,112 1,187,689 1,170,585
2212
Deferred income taxes 2,129 225,525 103,267
2213
Non-operating loss included in net earnings 3,218 -- 4,381
2214
Increase in inventory reserve 5,133 -- 52,818
2215
Changes in operating assets and liabilities
2216
Receivables (276,488) (596,558) (748,442)
2217
Inventories 346,294 (3,355,955) 200,834
2218
Prepaid expenses and other current assets (527,297) (254,427) (383,940)
2219
Income taxes payable (267,443) (1,543,713) 1,605,319
2220
Accounts payable (981,616) 860,478 649,802
2221
Accrued expenses 212,412 (220,897) 177,904
2222
Deferred revenue -- (900,000) 900,000
2223
------------ ------------ ------------
2224
Net cash provided by continuing operations 1,920,429 2,221,548 6,933,622
2225
Net cash provided by discontinued operations -- -- 59,049
2226
------------ ------------ ------------
2227
Net cash provided by operating activities 1,920,429 2,221,548 6,992,671
2228
------------ ------------ ------------
2229
2230
Cash flows from investing activities:
2231
Purchases of certificates of deposit with maturities
2232
over 90 days (1,425,000) -- --
2233
Proceeds from certificates of deposits with maturities
2234
over 90 days 385,000 -- --
2235
Purchases of marketable securities (808,760) -- (106,001)
2236
Net proceeds from sales of marketable securities 413,290 -- 851,621
2237
Additions to equipment, fixtures and patent
2238
licenses - continuing operations (1,239,025) (5,907,550) (1,678,842)
2239
Additions to property, plant and equipment-
2240
discontinued operations -- -- (12,060)
2241
Net proceeds from sale of assets in 2000 and
2242
discontinued operations in 1999 and 1998 600 6,354,965 21,754,181
2243
------------ ------------ ------------
2244
Net cash provided by (used in) investing
2245
activities (2,673,895) 447,415 20,808,899
2246
------------ ------------ ------------
2247
2248
Cash flows from financing activities:
2249
Loan to third party (1,500,000) -- --
2250
Decrease in short-term obligations -- (3,633,475) (8,081,763)
2251
Payment of long-term notes -- -- (177,137)
2252
Exercise of stock options and warrants 1,405,386 573,272 817,766
2253
Purchase of treasury stock -- (2,952,311) (9,411,055)
2254
------------ ------------ ------------
2255
Net cash used in financing activities (94,614) (6,012,514) (16,852,189)
2256
------------ ------------ ------------
2257
2258
Net increase (decrease) in cash and cash equivalents (848,080) (3,343,551) 10,949,381
2259
Cash and cash equivalents at beginning of year 8,353,658 11,697,209 747,828
2260
------------ ------------ ------------
2261
Cash and cash equivalents at end of year $ 7,505,578 $ 8,353,658 $11,697,209
2262
============ ============ ============
2263
2264
Supplemental cash flow information is presented below:
2265
Income taxes paid $ 958,585 $ 4,863,482 $ 37,715
2266
============ ============ ============
2267
Interest paid $ -- $ 44,861 $ 370,304
2268
============ ============ ============
2269
2270
See accompanying notes to consolidated financial statements.
2271
</PRE>
2272
<HR>
2273
<PRE>
2274
Advanced Neuromodulation Systems, Inc. and Subsidiaries
2275
Consolidated Statements of Stockholders' Equity
2276
Three Years Ended December 31, 2000
2277
2278
Other
2279
Retained Comprehensive Total
2280
Common Stock Additional Earnings Income Treasury Stockholders'
2281
Shares Amount Capital (Deficit) (Loss) Stock Equity
2282
------------- ------------- ------------- ------------- ------------- ------------- -------------
2283
Balance at
2284
December 31, 1997 8,635,509 $ 431,775 $ 40,780,717 $ (7,268,061) $ (38,494) $ -- $ 33,905,937
2285
Net earnings -- -- -- 6,959,202 -- -- 6,959,202
2286
Adjustment to
2287
unrealized losses
2288
on marketable
2289
securities -- -- -- -- (92,266) -- (92,266)
2290
-------------
2291
Comprehensive income 6,866,936
2292
-------------
2293
Shares issued upon
2294
exercise of stock
2295
options 72,858 3,643 160,554 -- -- -- 164,197
2296
Compensation expense
2297
resulting from
2298
changes to stock
2299
options -- -- 1,004,654 -- -- -- 1,004,654
2300
Issuance of 184,874
2301
shares from
2302
treasury for
2303
stock option
2304
exercises -- -- (908,852) -- -- 1,562,421 653,569
2305
Purchase of
2306
1,258,625 treasury
2307
shares, at cost -- -- -- -- -- (9,411,055) (9,411,055)
2308
Tax benefit from
2309
employee stock
2310
option exercises -- -- 119,509 -- -- -- 119,509
2311
------------- ------------- ------------- ------------- ------------- ------------- -------------
2312
2313
Balance at
2314
December 31, 1998 8,708,367 435,418 41,156,582 (308,859) (130,760) (7,848,634) 33,303,747
2315
Net earnings -- -- -- 6,003,281 -- -- 6,003,281
2316
Adjustment to
2317
unrealized losses
2318
on marketable
2319
securities -- -- -- -- (110,790) -- (110,790)
2320
-------------
2321
Comprehensive income 5,892,491
2322
-------------
2323
Tax benefit from
2324
employee stock
2325
option exercises -- -- 221,096 -- -- -- 221,096
2326
Issuance of 162,068
2327
shares from
2328
treasury for
2329
stock option
2330
exercises -- -- (954,221) -- -- 1,527,493 573,272
2331
Purchase of 404,875
2332
treasury shares,
2333
at cost -- -- -- -- -- (2,952,311) (2,952,311)
2334
------------- ------------- ------------- ------------- ------------- ------------- -------------
2335
Balance at
2336
December 31, 1999 8,708,367 435,418 40,423,457 5,694,422 (241,550) (9,273,452) 37,038,295
2337
Net earnings -- -- -- 953,644 -- -- 953,644
2338
Adjustment to
2339
unrealized losses
2340
on marketable
2341
securities -- -- -- -- 158,309 -- 158,309
2342
-------------
2343
Comprehensive income 1,111,953
2344
-------------
2345
Tax benefit from
2346
employee stock
2347
option exercises -- -- 604,358 -- -- -- 604,358
2348
Issuance of 267,425
2349
shares from
2350
treasury for
2351
stock option
2352
exercises and
2353
warrant exercise -- -- (714,064) -- -- 2,119,450 1,405,386
2354
------------- ------------- ------------- ------------- ------------- ------------- -------------
2355
Balance at
2356
December 31, 2000 8,708,367 $ 435,418 $ 40,313,751 $ 6,648,066 $ (83,241) $ (7,154,002) $ 40,159,992
2357
============= ============= ============= ============= ============= ============= =============
2358
2359
See accompanying notes to consolidated financial statements.
2360
</PRE>
2361
<HR>
2362
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
2363
Notes to Consolidated Financial Statements</B></P>
2364
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
2365
<TR>
2366
<TD WIDTH=5%><B>(1)</B></TD>
2367
<TD WIDTH=95%><B>Business</B></TD></TR></TABLE>
2368
<P><B>Continuing Operations</B></P>
2369
<P>Advanced Neuromodulation Systems, Inc. (the &#147;Company&#148; or
2370
&#147;ANS&#148;) designs, develops, manufactures and markets implantable
2371
neuromodulation devices. ANS devices are used primarily to manage chronic severe
2372
pain. ANS revenues are derived primarily from sales throughout the United
2373
States, Europe and Australia.</P>
2374
<P>The neuromodulation business, described above, was acquired in March 1995.
2375
All other businesses of the Company were sold in January 1998 as described below
2376
under Discontinued Operations.</P>
2377
<P>The research and development, manufacture, sale and distribution of medical
2378
devices is subject to extensive regulation by various public agencies,
2379
principally the Food and Drug Administration and corresponding state, local and
2380
foreign agencies. Product approvals and clearances can be delayed or withdrawn
2381
for failure to comply with regulatory requirements or the occurrence of
2382
unforeseen problems following initial marketing.</P>
2383
<P>In addition, ANS products are purchased primarily by hospitals and other
2384
users who then bill various third-party payors including Medicare, Medicaid,
2385
private insurance companies and managed care organizations. These third-party
2386
payors reimburse fixed amounts for services based on a specific diagnosis. The
2387
impact of changes in third-party payor reimbursement policies and any amendments
2388
to existing reimbursement rules and regulations that restrict or terminate the
2389
eligibility of ANS products could have an adverse impact on the Company&#146;s
2390
financial condition and results of operations.</P>
2391
<P><B>Discontinued Operations</B></P>
2392
<P>On January 30, 1998, the Company sold its cardiovascular and intravenous
2393
fluid product lines (&#147;CVS Operations&#148;), including its MPS&#174;
2394
myocardial protection system product line, to Atrion Corporation (see Note 9 -
2395
&#147;Sale of CVS Operations/Discontinued Operations&#148;). The CVS Operations
2396
have been accounted for as discontinued operations in the Consolidated
2397
Statements of Operations for the year ended December 31, 1998. During October
2398
1998, Atrion also exercised an option to acquire the Company&#146;s land, office
2399
and manufacturing facility for $6.5 million. The transaction was closed on
2400
February 1, 1999.</P>
2401
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
2402
<TR>
2403
<TD WIDTH=5%><B>(2)</B></TD>
2404
<TD WIDTH=95%><B>Summary of Significant Accounting Policies</B></TD></TR>
2405
</TABLE>
2406
<P><B>Principles of Consolidation</B></P>
2407
<P>The consolidated financial statements include the accounts of Advanced
2408
Neuromodulation Systems, Inc. and all of its subsidiaries. All significant
2409
inter-company transactions and accounts have been eliminated in
2410
consolidation.</P>
2411
<P><B>Use of Estimates</B></P>
2412
<P>The preparation of financial statements in conformity with generally accepted
2413
accounting principles requires management to make estimates and assumptions that
2414
affect the amounts reported in the financial statements and accompanying notes.
2415
Actual results could differ from those estimates.</P>
2416
<P ALIGN=CENTER>Page 1</P>
2417
<HR>
2418
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
2419
Notes to Consolidated Financial Statements</B></P>
2420
<P><B>Cash Equivalents</B></P>
2421
<P>The Company considers all highly liquid investments with maturities of three
2422
months or less at the time of purchase to be cash equivalents.</P>
2423
<P><B>Revenue Recognition</B></P>
2424
<P>The Company recognizes revenue from product sales when the goods are shipped
2425
to its customers. The Company recognizes revenue from research and development
2426
contracts based upon the estimated percentage of completion of the development
2427
project which is determined by hours completed as a percentage of the total
2428
estimated hours under the product development plan.</P>
2429
<P><B>Marketable Securities</B></P>
2430
<P>The Company&#146;s marketable securities and debt securities are classified
2431
as available-for-sale and are carried at fair value with the unrealized gains
2432
and losses reported in a separate component of stockholders&#146; equity
2433
entitled &#147;Other comprehensive income&#148;. The amortized cost of debt
2434
securities in this category is adjusted for amortization of premiums and
2435
accretion of discounts to maturity. Such amortization is included in investment
2436
income. Realized gains and losses and declines in value judged to be other than
2437
temporary are included in other income. The cost of securities sold is based on
2438
the specific identification method. Interest and dividends are included in
2439
investment income.</P>
2440
<P><B>Inventories</B></P>
2441
<P>Inventories are recorded at the lower of standard cost or market. Standard
2442
cost approximates actual cost determined on the first-in, first-out
2443
(&#147;FIFO&#148;) basis. Cost includes the acquisition cost of raw materials
2444
and components, direct labor and overhead.</P>
2445
<P><B>Equipment and Fixtures</B></P>
2446
<P>Equipment and fixtures are stated at cost. Additions and improvements
2447
extending asset lives are capitalized while maintenance and repairs are expensed
2448
as incurred. The cost and accumulated depreciation of assets sold or retired are
2449
removed from the accounts and any gain or loss is reflected in the Statement of
2450
Operations.</P>
2451
<P>Depreciation is provided using the straight-line method over the estimated
2452
useful lives of the various assets as follows:</P>
2453
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
2454
<TR>
2455
<TD WIDTH=35%>Leasehold improvements</TD>
2456
<TD WIDTH=25% ALIGN=RIGHT>5 years</TD>
2457
<TD WIDTH=40%></TD></TR>
2458
<TR>
2459
<TD>Furniture and fixtures</TD>
2460
<TD ALIGN=RIGHT>2 to 10 years</TD>
2461
<TD></TD></TR>
2462
<TR>
2463
<TD>Machinery and equipment</TD>
2464
<TD ALIGN=RIGHT>3 to 10 years</TD>
2465
<TD></TD></TR></TABLE>
2466
<P><B>Intangible Assets</B></P>
2467
<P>The excess of cost over the net assets of acquired businesses
2468
(&#147;goodwill&#148;) is amortized on a straight-line basis over the estimated
2469
useful life of 20 years.</P>
2470
<P>The cost of purchased technology related to acquisitions is based on
2471
appraised values at the date of acquisition and is amortized on a straight-line
2472
basis over the estimated useful life (15 years) of such technology.</P>
2473
<P ALIGN=CENTER>Page 2</P>
2474
<HR>
2475
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
2476
Notes to Consolidated Financial Statements</B></P>
2477
<P>The cost of purchased tradenames is based on appraised values at the date of
2478
acquisition and is amortized on a straight-line basis over the estimated useful
2479
life (20 years) of such tradenames.</P>
2480
<P>The cost of purchased patents is amortized on a straight-line basis over the
2481
estimated useful life (17 years) of such patents. The cost of certain licensed
2482
patents is amortized on a straight-line basis over the estimated useful life (20
2483
years) of such patents while the cost of certain other licensed patents is
2484
amortized on a units of production method. Costs of patents that are the result
2485
of internal development are charged to current operations.</P>
2486
<P>The Company assesses the recoverability of all its intangible assets
2487
primarily based on its current and anticipated future undiscounted cash flows.
2488
At December 31, 2000, the Company does not believe there has been any impairment
2489
of its intangible assets.</P>
2490
<P><B>Research and Development</B></P>
2491
<P>Product development costs including start-up and research and development are
2492
charged to operations in the year in which such costs are incurred.</P>
2493
<P><B>Advertising</B></P>
2494
<P>Advertising expense is charged to operations in the year in which such costs
2495
are incurred. Total advertising expense included in marketing expense from
2496
continuing operations was $24,716, $40,440 and $21,843 at December 31, 2000,
2497
1999 and 1998, respectively.</P>
2498
<P><B>Deferred Taxes</B></P>
2499
<P>Deferred income taxes are recorded based on the liability method and
2500
represent the tax effect of the differences between the financial and tax basis
2501
of assets and liabilities other than costs in excess of the net assets of
2502
businesses acquired.</P>
2503
<P><B>Stock-Based Compensation</B></P>
2504
<P>The Company has adopted the disclosure-only provisions of SFAS No. 123,
2505
&#147;Accounting for Stock-Based Compensation&#148;, which disclosures are
2506
presented in Note 5, &#147;Stockholders&#146; Equity&#148;. Because of this
2507
election, the Company continues to account for its stock-based compensation
2508
plans under APB No. 25, &#147;Accounting for Stock Issued to Employees&#148;.
2509
All of the Company&#146;s stock option grants are at exercise prices equal to
2510
the fair market value of the Company&#146;s stock on the date of grant, and
2511
therefore, no compensation expense is recorded.</P>
2512
<P><B>Earnings Per Share</B></P>
2513
<P>Basic earnings per share is computed based only on the weighted average
2514
number of common shares outstanding during the period, and the dilutive effect
2515
of stock options and warrants is excluded. Diluted earnings per share is
2516
computed using the additional dilutive effect, if any, of stock options and
2517
warrants using the treasury stock method based on the average market price of
2518
the stock during the period. Basic earnings per share for 2000, 1999 and 1998
2519
are based upon 7,484,572, 7,583,159, and 8,314,290 shares, respectively. Diluted
2520
earnings per share for 2000, 1999, and 1998 are based upon 8,328,169, 8,003,087,
2521
and 8,544,040 shares, respectively. The following table presents the
2522
reconciliation of basic and diluted shares:</P>
2523
<P ALIGN=CENTER>Page 3</P>
2524
<HR>
2525
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
2526
Notes to Consolidated Financial Statements</B></P>
2527
2528
<PRE>
2529
2000 1999 1998
2530
--------- --------- ---------
2531
Weighted-average shares outstanding
2532
(basic shares) 7,484,572 7,583,159 8,314,290
2533
2534
Effect of dilutive instruments(1)
2535
Stock options 799,060 401,292 214,806
2536
Warrants 44,537 18,636 14,944
2537
--------- --------- ---------
2538
Dilutive potential common shares 843,597 419,928 229,750
2539
--------- --------- ---------
2540
Diluted shares 8,328,169 8,003,087 8,544,040
2541
========= ========= =========
2542
</PRE>
2543
<P>(1) See Note 5 for a description of these instruments.</P>
2544
<P></P>
2545
<P>For 2000, 1999 and 1998 the incremental shares used for dilutive earnings per
2546
share relate to stock options and warrants whose exercise price was less than
2547
the average market price in the underlying quarterly computations. Options to
2548
purchase 12,975 shares at an average price of $15.38 per share were outstanding
2549
in 2000, 250 shares at an average price of $8.94 per share were outstanding in
2550
1999, and options to purchase 215,981 shares at an average price of $9.02 per
2551
share were outstanding in 1998 but were not included in the computation of
2552
diluted earnings per share because the options&#146; exercise prices were
2553
greater than the average market price of the common shares and, therefore, the
2554
effect would be antidilutive.</P>
2555
<P><B>Comprehensive Income</B></P>
2556
<P>Statement of Financial Accounting Standards No. 130 &#150; &#147;Reporting
2557
Comprehensive Income&#148; &#150; requires unrealized gains or losses on the
2558
Company&#146;s available for sale securities to be included in &#147;Other
2559
comprehensive income&#148; and be reported in the Consolidated Statements of
2560
Stockholders&#146; Equity.</P>
2561
<P><B>New Accounting Standards</B></P>
2562
<P>In June 1998, the Financial Accounting Standards Board issued Statement of
2563
Financial Accounting Standards No. 133 (&#147;SFAS 133&#148;), &#147;Accounting
2564
for Derivative Instruments and Hedging Activities.&#148; SFAS 133 requires
2565
companies to record derivatives on the balance sheet as assets or liabilities,
2566
measured at fair value. Gains or losses resulting from changes in the values of
2567
those derivatives would be accounted for depending on the use of the derivative
2568
and whether it qualifies for hedge accounting. SFAS 133, as amended by SFAS 138,
2569
is effective for fiscal years beginning after June 15, 2000. The adoption of
2570
SFAS 133 as of January 1, 2001 is not expected to have a material impact on the
2571
financial position or results of operations of the Company because we have no
2572
derivatives or hedges.</P>
2573
<P><B>Reclassification</B></P>
2574
<P>Certain prior period amounts have been reclassified to conform to
2575
current-year presentation.</P>
2576
<P ALIGN=CENTER>Page 4</P>
2577
<HR>
2578
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
2579
Notes to Consolidated Financial Statements</B></P>
2580
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
2581
<TR>
2582
<TD WIDTH=5%><B>(3)</B></TD>
2583
<TD WIDTH=95%><B>Marketable Securities</B></TD></TR>
2584
</TABLE>
2585
<P>The following is a summary of available-for-sale securities at December 31,
2586
2000:</P>
2587
2588
<PRE>
2589
Gross Gross
2590
Unrealized Unrealized Estimated
2591
Cost Gains Losses Fair Value
2592
---------- ---------- ---------- ----------
2593
Investment grade preferred security $ 250,000 -- $ 89,380 $ 160,620
2594
Investment grade municipal bonds 808,760 -- -- 808,760
2595
Real estate investment trust 97,682 -- 36,744 60,938
2596
---------- ---------- ---------- ----------
2597
$1,156,442 -- $ 126,124 $1,030,318
2598
========== ========== ========== ==========
2599
</PRE>
2600
2601
<P>Estimated fair value for the investment grade preferred security and real
2602
estate investment trust are determined by the closing prices as reported on the
2603
New York Stock Exchange at each financial reporting period. In the case of the
2604
investment grade municipal bonds, the brokerage firms holding such bonds provide
2605
the values at each reporting period by utilizing a standard pricing service.</P>
2606
<P>At December 31, 2000, no individual security represented more than 45 percent
2607
of the total portfolio or 1.1 percent of total assets. The Company did not have
2608
any investments in derivative financial instruments at December 31, 2000.</P>
2609
<P>The following is a summary of available-for-sale securities at December 31,
2610
1999:</P>
2611
2612
<PRE>
2613
Gross Gross
2614
Unrealized Unrealized Estimated
2615
Cost Gains Losses Fair Value
2616
---------- ---------- ---------- ----------
2617
Investment grade preferred securities $ 554,596 -- $ 275,107 $ 279,489
2618
Publicly traded limited partnerships 51,875 -- 27,815 24,060
2619
Real estate investment trusts 141,590 -- 47,143 94,447
2620
Other 16,134 -- 15,922 212
2621
---------- ---------- ---------- ----------
2622
$ 764,195 -- $ 365,987 $ 398,208
2623
========== ========== ========== ==========
2624
</PRE>
2625
2626
<P>At December 31, 1999, no individual security represented more than 40 percent
2627
of the total portfolio or 1 percent of total assets. The Company did not have
2628
any investments in derivative financial instruments at December 31, 1999.</P>
2629
<P ALIGN=CENTER>Page 5</P>
2630
<HR>
2631
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
2632
Notes to Consolidated Financial Statements</B></P>
2633
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
2634
<TR>
2635
<TD WIDTH=5%><B>(4)</B></TD>
2636
<TD WIDTH=95%><B>Federal Income Taxes</B></TD></TR>
2637
</TABLE>
2638
<P>The significant components of the net deferred tax liability at December 31,
2639
were as follows:</P>
2640
2641
<PRE>
2642
Deferred tax assets: 2000 1999
2643
------------ ------------
2644
Tax credit and net operating loss carry forwards $ -- $ 36,649
2645
Accrued expenses and reserves 519,593 496,213
2646
Unrealized loss on marketable securities 42,883 124,437
2647
------------ ------------
2648
Total deferred tax asset 562,476 657,299
2649
2650
Deferred tax liabilities:
2651
2652
Purchased intangible assets (1,529,252) (1,670,250)
2653
Excess of tax over book depreciation (678,262) (597,425)
2654
Other (109,961) (60,941)
2655
------------ ------------
2656
Total deferred tax liabilities (2,317,475) (2,328,616)
2657
------------ ------------
2658
2659
Net deferred tax liabilities $(1,754,999) $(1,671,317)
2660
============ ============
2661
</PRE>
2662
2663
<P>The provision for income taxes on earnings from continuing operations for the
2664
years ended December 31 consists of the following:</P>
2665
2666
<PRE>
2667
2000 1999 1998
2668
----------- ----------- -----------
2669
2670
Current $ 741,382 $3,682,727 $2,005,713
2671
Deferred (7,169) (137,433) (259,409)
2672
----------- ----------- -----------
2673
$ 734,213 $3,545,294 $1,746,304
2674
=========== =========== ===========
2675
</PRE>
2676
2677
<P>A reconciliation of the provision for income taxes on earnings from
2678
continuing operations to the expense calculated at the U.S. statutory rate
2679
follows:</P>
2680
2681
<PRE>
2682
2000 1999 1998
2683
----------- ----------- -----------
2684
Income tax expense at statutory rate $ 573,871 $3,246,515 $1,472,883
2685
Tax effect of:
2686
State taxes 4,581 183,625 117,900
2687
Nondeductible amortization of goodwill 189,279 189,211 189,245
2688
Other (33,518) (74,057) (33,724)
2689
----------- ----------- -----------
2690
Income tax expense $ 734,213 $3,545,294 $1,746,304
2691
=========== =========== ===========
2692
</PRE>
2693
2694
<P>In 1998, the Company utilized net operating loss carry forwards of $4,277,540
2695
and general business credits and alternative minimum tax credits of $1,038,669
2696
to reduce its tax liabilities.</P>
2697
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
2698
<TR>
2699
<TD WIDTH=5%><B>(5)</B></TD>
2700
<TD WIDTH=95%><B>Stockholders' Equity</B></TD></TR>
2701
</TABLE>
2702
<P>The Company has a Shareholder&#146;s Rights Plan, adopted in 1996, which
2703
permits shareholders to purchase shares of the Company&#146;s common stock at
2704
significant discounts in the event a person or group acquires more than 15
2705
percent of the Company&#146;s common stock or announces a tender or exchange
2706
offer for more than 20 percent of the Company&#146;s common stock.</P>
2707
<P ALIGN=CENTER>Page 6</P>
2708
<HR>
2709
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
2710
Notes to Consolidated Financial Statements</B></P>
2711
<P>During the year ended December 31, 1998, the Company repurchased 1,258,625
2712
shares of its common stock at an aggregate cost of $9,411,055 and during the
2713
year ended December 31, 1999, the Company repurchased 404,875 shares of its
2714
common stock at an aggregate cost of $2,952,311. No repurchases were made during
2715
the year ended December 31, 2000. During the years ended December 31, 2000, 1999
2716
and 1998, the Company issued 267,425, 162,068 and 184,874 shares respectively,
2717
from its treasury upon the exercise of stock options and a warrant. At December
2718
31, 2000, 1,049,133 shares remained in the treasury. These shares were reissued
2719
in connection with two acquisitions in January 2001. See Note 11.</P>
2720
<P>In 1998, the Company issued a five-year warrant to purchase 100,000 shares of
2721
common stock at an exercise price of $6.50 per share in connection with a
2722
$2,000,000 loan from a nonaffiliate shareholder. The warrant was exercised by
2723
the nonaffiliate shareholder in December 2000.</P>
2724
<P>The Company has various stock option plans pursuant to which stock options
2725
may be granted to key employees, officers, directors and advisory directors of
2726
the Company. The most recent of the plans, approved by the shareholders during
2727
2000 (the &#147;2000 Plan&#148;), reserved 500,000 shares of common stock for
2728
options under the plan; provided, however, that on January 1 of each year
2729
(commencing in 2001), the aggregate number of shares of common stock reserved
2730
for options under the 2000 Plan shall be increased by the same percentage that
2731
the total number of issued and outstanding shares of common stock increased from
2732
the preceding January 1 to the following December 31 (if such percentage is
2733
positive). On January 1, 2001, 18,100 options were added to the 2000 Plan.</P>
2734
<P>Several of the plans allow for the grant of incentive stock options to key
2735
employees and officers intended to qualify for preferential tax treatment under
2736
Section 422 of the Internal Revenue Code of 1986. Under all of the
2737
Company&#146;s plans, the exercise price of options granted must equal or exceed
2738
the fair market value of the common stock at the time of the grant. Options
2739
granted to employees and officers expire ten years from the date of grant and
2740
for the most part are exercisable one-fourth each year over a four-year period
2741
of continuous service. Options granted to directors and advisory directors
2742
expire six years from the date of grant and for the most part are exercisable
2743
one-fourth each year over a four-year period of continuous service. Certain
2744
options, however, have a two-year vesting schedule.</P>
2745
<P>At December 31, 2000, under all of the Company&#146;s stock option plans,
2746
1,422,196 shares had been granted and were outstanding, 1,975,672 shares of
2747
common stock had been issued upon exercise, and 225,894 shares were reserved for
2748
future grants.</P>
2749
<P ALIGN=CENTER>Page 7</P>
2750
<HR>
2751
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
2752
Notes to Consolidated Financial Statements</B></P>
2753
<P>Data with respect to stock option plans of the Company are as follows:</P>
2754
2755
<PRE>
2756
------------------------------------------------- -----------------------------
2757
Options Outstanding Exercisable Options
2758
------------------------------------------------- -----------------------------
2759
Weighted Weighted
2760
Average Average
2761
Shares Exercise Price Shares Exercise Price
2762
----------------- ------------ -------------- ------------ --------------
2763
January 1, 1998 833,272 $ 5.68 568,285 $ 4.66
2764
Granted 1,352,800 $ 6.12
2765
Exercised (257,732) $ 3.49
2766
Forfeited (860,125) $ 8.10
2767
----------------- ------------ -------------- ------------ --------------
2768
January 1, 1999 1,068,215 $ 4.82 465,340 $ 4.58
2769
Granted 332,500 $ 6.73
2770
Exercised (162,068) $ 3.99
2771
Forfeited (18,000) $ 8.14
2772
----------------- ------------ -------------- ------------ --------------
2773
January 1, 2000 1,220,647 $ 5.40 499,397 $ 4.83
2774
Granted 422,332 $ 14.21
2775
Exercised (167,158) $ 4.67
2776
Forfeited (53,625) $ 6.82
2777
----------------- ------------ -------------- ------------ --------------
2778
December 31, 2000 1,422,196 $ 8.05 601,989 $ 5.19
2779
----------------- ============ ============== ============ ==============
2780
</PRE>
2781
<PRE>
2782
2783
Exercisable Options
2784
Options Outstanding at December 31, 2000 at December 31, 2000
2785
- -------------------------------------------------------- ------------------------
2786
Weighted
2787
Average Weighted Weighted
2788
Range of Remaining Average Average
2789
Exercise Price Shares Life (Years) Exercise Price Shares Exercise Price
2790
- -------------- --------- ------------ -------------- -------- --------------
2791
$ 3.50 - 5.25 728,864 7.83 $ 5.00 532,614 $ 5.00
2792
$ 5.25 - 8.00 278,000 8.30 $ 6.69 69,125 $ 6.68
2793
$ 8.00 - 12.00 39,500 9.00 $ 9.36 250 $ 8.94
2794
$12.00 - 16.00 324,332 9.49 $ 14.13 -- $ --
2795
$16.00 - 20.00 51,500 9.96 $ 19.25 -- $ --
2796
- -------------- --- ----- ------------ -------------- -------- --------------
2797
1,422,196 8.41 $ 8.05 601,989 $ 5.19
2798
========= ============ ============== ======== ==============
2799
</PRE>
2800
2801
<P>Exercisable options at January 1, 1999 and 1998 included options for 134,904
2802
and 306,297 shares, respectively, with a weighted average exercise price of
2803
$4.53 per share at January 1, 1999 and $4.22 per share at January 1, 1998, which
2804
were held by employees who terminated employment with the Company on January 30,
2805
1998 in connection with the sale of the CVS Operations (see Note 9 - &#147;Sale
2806
of CVS Operations/Discontinued Operations&#148;). The Company accelerated the
2807
vesting of the unvested portion of these terminated employee options as a result
2808
of the sale. The Company also extended the normal 90-day exercise period
2809
subsequent to termination to January 30, 1999 for these options.</P>
2810
<P>In November 1998, the Board of Directors authorized the repricing of options
2811
for certain employees, advisory directors and directors under several of the
2812
Plans. Stock options were rescinded for these participants and a new option was
2813
granted at the then fair market value of the common stock of $5.00 per share.
2814
Data with respect to the option repricing during November 1998 is as
2815
follows:</P>
2816
<P ALIGN=CENTER>Page 8</P>
2817
<HR>
2818
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
2819
Notes to Consolidated Financial Statements</B></P>
2820
2821
<PRE>
2822
1998 Option Repricing Data
2823
------------------------------------------------------
2824
Range of Exercise Weighted Average
2825
Price Before Exercise Price
2826
Repricing Shares Before Repricing
2827
-------------------- ----------- -------------------
2828
$ 5.75 - 7.75 293,000 $ 6.28
2829
$ 7.75 - 9.75 408,500 $ 8.58
2830
$ 9.75 - 11.75 77,000 $ 10.25
2831
$ 11.75 - 12.25 15,000 $ 12.13
2832
----------- -------------------
2833
793,500 $ 7.96
2834
=========== ===================
2835
</PRE>
2836
2837
<P>In accordance with APB No. 25, the Company has not recorded compensation
2838
expense for its stock option awards. As required by SFAS No. 123, the Company
2839
provides the following disclosure of hypothetical values for these awards. The
2840
weighted-average fair value of an option granted in 2000, 1999 and 1998 was
2841
$5.76, $2.73 and $2.30, respectively. For purposes of fair market value
2842
disclosures, the fair market value of an option grant was estimated using the
2843
Black-Scholes option pricing model with the following assumptions:</P>
2844
2845
<PRE>
2846
2000 1999 1998
2847
-------- -------- --------
2848
2849
Risk-free interest rate 5.9% 5.5% 4.6%
2850
Average life of options (years) 3.0 3.0 3.0
2851
Volatility 52.4% 49.1% 49.2%
2852
Dividend Yield -- -- --
2853
</PRE>
2854
2855
<P>Had the compensation expense been recorded based on these hypothetical
2856
values, pro forma net earnings (loss) for 2000, 1999 and 1998 would have been
2857
$(187,653), $5,047,706 and $6,457,825, respectively, and pro forma diluted net
2858
earnings per common share for 2000, 1999 and 1998 would have been $(0.02), $.63
2859
and $.76, respectively.</P>
2860
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
2861
<TR>
2862
<TD WIDTH=5%><B>(6)</B></TD>
2863
<TD WIDTH=95%><B>Commitments and Contingencies</B></TD></TR>
2864
</TABLE>
2865
<P>On February 1, 1999, the Company sold its principal office and manufacturing
2866
facility in Allen, Texas to Atrion Corporation. Atrion leased space to the
2867
Company at the rate of $48,125 per month from February 1, 1999 through May 31,
2868
1999. The Company entered into a sixty-three month lease agreement on 40,000
2869
square feet of space located in the North Dallas area during February 1999. The
2870
Company relocated its operations to the leased facility in May 1999 and the
2871
rental period under the lease commenced on June 1, 1999. Under the terms of the
2872
lease agreement, the Company received three months free rent and the monthly
2873
rental rate for the remaining term of the lease is $48,308. The monthly rental
2874
rate includes certain operating expenses such as property taxes on the facility,
2875
insurance, landscape and maintenance and janitorial services. The Company also
2876
has the first right of refusal to acquire the facility. Future minimum rental
2877
payments relating to the leased facility for the years ended December 31 are
2878
$579,696 in 2001, 2002 and 2003 and $386,464 in 2004.</P>
2879
<P>In addition, the Company leases transportation equipment under non-cancelable
2880
operating leases. Future minimum rental payments under non-cancelable
2881
transportation leases for the years ended December 31 are $17,667 in 2001 and
2882
$5,104 in 2002.</P>
2883
<P ALIGN=CENTER>Page 9</P>
2884
<HR>
2885
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
2886
Notes to Consolidated Financial Statements</B></P>
2887
<P>Total rent expense included in continuing operations for the years ended
2888
December 31, 2000, 1999 and 1998 was $572,447, $533,600 and $8,782,
2889
respectively.</P>
2890
<P>The Company is a party to product liability claims related to ANS
2891
neurostimulation devices. Product liability insurers have assumed responsibility
2892
for defending the Company against these claims. While historically product
2893
liability claims for ANS neurostimulation devices have not resulted in
2894
significant monetary liability for the Company beyond its insurance coverage,
2895
there can be no assurances that the Company will not incur significant monetary
2896
liability to the claimants if such insurance is inadequate or that the
2897
Company&#146;s neurostimulation business and future ANS product lines will not
2898
be adversely affected by these product liability claims.</P>
2899
<P>Except for such product liability claims and other ordinary routine
2900
litigation incidental or immaterial to its business, the Company is not
2901
currently a party to any other pending legal proceeding. The Company maintains
2902
general liability insurance against risks arising out of the normal course of
2903
business.</P>
2904
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
2905
<TR>
2906
<TD WIDTH=5%><B>(7)</B></TD>
2907
<TD WIDTH=95%><B>Financial Instruments, Risk Concentration and Major Customers
2908
</B></TD></TR>
2909
</TABLE>
2910
<P>In the United States, the Company&#146;s accounts receivable are due
2911
primarily from hospitals and distributors located throughout the country.
2912
Internationally, the Company&#146;s accounts receivable are due primarily from
2913
distributors located in Europe and Australia. The Company generally does not
2914
require collateral for trade receivables. The Company maintains an allowance for
2915
doubtful accounts based upon expected collectibility. Any losses from bad debts
2916
have historically been within management&#146;s expectations.</P>
2917
<P>Net sales of implantable neurostimulation systems to one major customer for
2918
each of the years ended December 31, as a percentage of net revenue from product
2919
sales from continuing operations, were as follows: 2000- 14 percent and 1998- 20
2920
percent. Net sales of implantable neurostimulation systems to two major
2921
customers for the year ended December 31, 1999, as a percentage of net revenue
2922
from product sales from continuing operations, were 15 percent and 11 percent,
2923
respectively.</P>
2924
<P>Foreign sales, primarily Europe and Australia, for the years ended December
2925
31, 2000, 1999 and 1998 were approximately 7 percent, 7 percent and 10 percent
2926
of net revenue from product sales from continuing operations, respectively.</P>
2927
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
2928
<TR>
2929
<TD WIDTH=5%><B>(8)</B></TD>
2930
<TD WIDTH=95%><B>Employee Benefit Plans</B></TD></TR></TABLE>
2931
<P>The Company has a defined contribution retirement savings plan (the
2932
&#147;Plan&#148;) available to substantially all employees. The Plan permits
2933
employees to elect salary deferral contributions of up to 15 percent of their
2934
compensation and requires the Company to make matching contributions equal to 50
2935
percent of the participants&#146; contributions to a maximum of 6 percent of the
2936
participants&#146; compensation. The Board of Directors may change the
2937
percentage of matching contribution at their discretion. The expense of the
2938
Company&#146;s contribution for continuing operations was $157,601 in 2000,
2939
$158,842 in 1999 and $119,543 in 1998.</P>
2940
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
2941
Notes to Consolidated Financial Statements</B></P>
2942
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
2943
<TR>
2944
<TD WIDTH=5%><B>(9)</B></TD>
2945
<TD WIDTH=95%><B>Sale of CVS Operations/Discontinued Operations</B></TD></TR>
2946
</TABLE>
2947
<P>On January 30, 1998, the Company sold its cardiovascular and intravenous
2948
fluid product lines, including its Myocardial Protection System product line, to
2949
Atrion Corporation. The Company received approximately $23 million from the sale
2950
and utilized $8.0 million of the proceeds to retire debt and $1.2 million to pay
2951
expenses related to the transaction. The Company reported a net gain (after
2952
income tax expense) from the sale of $4.6 million. This gain is net of a pre-tax
2953
expense of $969,204, discussed below, recorded in connection with the sale of
2954
the corporate facility to Atrion in February 1999. The gain is also net of a
2955
pre-tax compensation expense of $1,004,654 recorded as a result of changes made
2956
to the options held by employees of the CVS Operations (see Note 5 &#150;
2957
&#147;Stockholders&#146; Equity&#148;). The Company also reported a net loss for
2958
the CVS Operations of approximately $211,634 in January 1998 prior to the
2959
sale.</P>
2960
<P ALIGN=CENTER>Page 10</P>
2961
<HR>
2962
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
2963
Notes to Consolidated Financial Statements</B></P>
2964
<P>As part of the sale of the CVS Operations to Atrion, the Company granted
2965
Atrion a nine-month option to acquire the Company&#146;s principal office and
2966
manufacturing facility in Allen, Texas for $6.5 million. During October 1998,
2967
Atrion exercised its option to acquire the facility. When the facility was built
2968
in 1993, the Company entered a ten-year agreement with the City of Allen
2969
granting tax abatements to the Company if a minimum job base and personal
2970
property base were maintained in the City of Allen. The agreement provided for
2971
the repayment of abated taxes if the Company defaulted under the agreement. As
2972
mentioned above, during 1998 the Company recorded a pretax expense of $969,204
2973
in connection with the abated taxes. In April 1999, the Company was successful
2974
in petitioning the City of Allen to assign the abatement agreement to Atrion. In
2975
July 1999, the Company, Atrion and the City of Allen executed an assignment
2976
agreement under which Atrion (as successor in interest to the Company) must
2977
continue to meet the conditions of the original tax abatement agreement until
2978
August 2003. The City preserved its rights to collect previously abated taxes if
2979
Atrion fails to comply with its obligations any time prior to August 2003. The
2980
Company retains monetary liability for the amount of abated taxes, even after
2981
assignment, because pursuant to the purchase and sale agreement with Atrion, the
2982
Company indemnified Atrion from any tax abatement liabilities that accrued to
2983
the City of Allen prior to the sale of the CVS Operations in January 1998. If
2984
Atrion meets the minimum requirements under the agreement until August 2003,
2985
then no payment will be required. If no payment is required, the Company intends
2986
to reverse the obligation of $969,204 in September 2003.</P>
2987
<P>On February 1, 1999, the sale of the facility to Atrion was consummated. The
2988
Company repaid the mortgage debt on the facility at the closing of the
2989
transaction. After repayment of the mortgage debt and expenses related to the
2990
transaction, the Company received $2.7 million of net proceeds. No material gain
2991
or loss was recorded on the sale of the facility except related to the tax
2992
abatement liability described above. The Company moved its operations to a
2993
40,000 square foot leased facility in the North Dallas area during May 1999.
2994
Until such time, the Company leased space from Atrion at a monthly expense of
2995
$48,175 and paid Atrion fifty percent of certain operating expenses. The expense
2996
of moving and transitioning into the new leased facility was immaterial.</P>
2997
<P>Operating results of the CVS Operations have been reclassified and reported
2998
as discontinued operations. Summary operating results for the year ended
2999
December 31, 1998 for the CVS Operations were as follows (the 1998 period
3000
includes results for one month until the sale on January 30, 1998):</P>
3001
<PRE>
3002
1998
3003
--------------
3004
3005
Revenue $ 1,111,992
3006
Gross profit 206,481
3007
Loss from operations (307,120)
3008
Interest expense (34,225)
3009
--------------
3010
Loss before income tax benefit (341,345)
3011
Income tax benefit (129,711)
3012
--------------
3013
Net loss $ (211,634)
3014
==============
3015
</PRE>
3016
<P ALIGN=CENTER>Page 11</P>
3017
<HR>
3018
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
3019
Notes to Consolidated Financial Statements</B></P>
3020
<P>The above operating results of the CVS Operations reflect the revenues and
3021
expenses of the CVS Operations including direct and indirect expenses of the
3022
CVS Operations that are paid by the Company and charged directly to the CVS
3023
Operations. General overhead of the Company includes charges for regulatory,
3024
general corporate management, accounting and payroll services, human resources,
3025
management information systems and facilities expenses. These expenses were
3026
charged to the CVS Operations in amounts that approximate the discreet
3027
identifiable costs of the CVS Operations that will not continue after the sale.
3028
Management believes that the expenses charged to the CVS Operations on this
3029
basis are not materially different from the costs that would have been incurred
3030
had the CVS Operations borne such expenses on a direct basis.</P>
3031
<P>Interest expense on the Company&#146;s corporate facility has been allocated
3032
to the CVS Operations based on space utilization. Interest expense on the
3033
Company&#146;s general credit facilities was allocated to the CVS Operations
3034
based on the ratio of the net assets of the CVS Operations to the total net
3035
assets of the Company.</P>
3036
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
3037
<TR>
3038
<TD WIDTH=5%><B>(10)</B></TD>
3039
<TD WIDTH=95%><B>Product Development Agreement</B></TD></TR></TABLE>
3040
<P>In June 1998, the Company entered an agreement with Sofamor Danek Group, Inc.
3041
(&#147;Sofamor Danek&#148;) under which the Company agreed to develop and
3042
manufacture for Sofamor Danek, products and systems for use in Deep Brain
3043
Stimulation (&#147;DBS&#148;). DBS products provide electrical stimulation to
3044
certain areas of the brain and are intended to relieve the effects of various
3045
neurological disorders, such as Parkinson&#146;s Disease and Essential Tremor.
3046
Under terms of the agreement, the Company granted Sofamor Danek exclusive
3047
worldwide rights to use, market and sell the DBS products developed and
3048
manufactured by ANS. The Company received a cash payment of $4 million upon
3049
execution of the agreement that was being recognized into income as revenue
3050
based upon the estimated percentage of completion of the development project.
3051
During the year ended December 31, 1998, the Company recognized $3.1 million
3052
into income as revenue. Due to the termination of the agreement discussed below,
3053
the remaining $900,000 was recognized into income as revenue during January 1999
3054
and is included in the Statements of Operations for the year ended December 31,
3055
1999. The agreement also called for ANS to receive four additional payments of
3056
$2 million each, to be recognized into income upon the satisfactory completion
3057
of certain domestic and international regulatory milestones over the next
3058
several years.</P>
3059
<P>In December 1998, the Company and Sofamor Danek agreed to terminate the June
3060
1998 DBS agreement due to the impending merger of Sofamor Danek and Medtronic,
3061
the Company&#146;s sole competitor in the DBS market. Under the termination
3062
agreement, Sofamor Danek agreed to accelerate payments due the Company in the
3063
amount of $8 million and the Company agreed to release Sofamor Danek from
3064
further contractual obligations. The Company received the $8 million payment
3065
from Sofamor Danek in January 1999. The $8 million payment was recognized into
3066
revenue during January 1999 and is included in the Statements of Operations for
3067
the year ended December 31, 1999.</P>
3068
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
3069
<TR>
3070
<TD WIDTH=5%><B>(11)</B></TD>
3071
<TD WIDTH=95%><B>Subsequent Events</B></TD></TR></TABLE>
3072
<P>On January 2, 2001, the Company acquired the assets of Implantable Devices
3073
Limited Partnership (IDP) and ESOX Technology Holdings, LLC (ESOX), two
3074
privately held Minnesota companies, for 119,100 shares of the Company&#146;s
3075
common stock. Based on the closing price of ANS common stock on December 29,
3076
2000, the value of the stock issued to acquire the assets was $2.43 million. The
3077
assets purchased consisted primarily of intellectual property and technology for
3078
the fully implantable constant-rate infusion pump that ANS has developed. Prior
3079
to the acquisition, the Company had licensed rights to the technology only for
3080
pain and cancer therapy applications.</P>
3081
<P ALIGN=CENTER>Page 12</P>
3082
<HR>
3083
<P ALIGN=CENTER><B>Advanced Neuromodulation Systems, Inc. and Subsidiaries<BR>
3084
Notes to Consolidated Financial Statements</B></P>
3085
<P>Also on January 2, 2001, the Company completed the acquisition of Hi-tronics
3086
Designs, Inc. (HDI), a privately-held contract developer and original equipment
3087
manufacturer (OEM) of electro-mechanical devices with headquarters in Budd Lake,
3088
New Jersey. The Company acquired all of HDI&#146;s outstanding stock through a
3089
merger in exchange for 1,104,725 shares of ANS common stock. The transaction
3090
will be accounted for on a pooling of interests basis. HDI developed and is the
3091
manufacturer of the Company&#146;s totally implantable pulse generator (IPG)
3092
used in the treatment of chronic intractable pain and was also the OEM
3093
manufacturer of the transmitter used with the Company&#146;s Renew
3094
radio-frequency spinal cord stimulation system. HDI&#146;s revenues for its
3095
fiscal 2000, which ended November 30, 2000, were approximately $10.4 million,
3096
including approximately $1.6 million of revenue associated with sales to
3097
ANS.</P>
3098
<P>A summary of operations data as if the acquisition had taken place as of
3099
January 1, 1999, excluding the charges related to the acquisition, follows:</P>
3100
<PRE>
3101
2000 1999 1998
3102
------------- ------------- -------------
3103
3104
Revenues $ 31,826,998 $ 35,779,019 $ 26,516,870
3105
Net income $ 832,458 $ 5,816,922 $ 6,700,231
3106
Earnings per share $ .09 $ .64 $ .69
3107
</PRE>
3108
<P ALIGN=CENTER>Page 13</P>
3109
<HR>
3110
<P ALIGN=RIGHT><B><U>Appendix B</U></B></P>
3111
<P></P><P></P><P></P>
3112
<P ALIGN=CENTER><B>Schedule II - Valuation and Qualifying Accounts</B></P>
3113
<P></P><P></P>
3114
<P ALIGN=CENTER><B>Forming a Part of the Annual Report<BR><BR>Form 10-K<BR><BR>
3115
Item 14<BR><BR><BR>of<BR><BR>ADVANCED NEUROMODULATION SYSTEMS, INC.<BR>
3116
(Name of issuer)</B></P>
3117
<P></P><P></P>
3118
<P ALIGN=CENTER><B>Filed with the<BR><BR>Securities and Exchange Commission<BR>
3119
<BR>Washington, D.C. 20549<BR><BR><BR>under<BR><BR>The Securities and Exchange
3120
Act of 1934</B></P>
3121
<HR>
3122
<PRE>
3123
Schedule II - Valuation and Qualifying Accounts
3124
Advanced Neuromodulation Systems, Inc. and Subsidiaries
3125
December 31, 2000
3126
3127
Balance at Charged to
3128
Beginning Charged to Other Balance at
3129
Description of Year Expenses Accounts Deductions End of Year
3130
- ----------------------------------- ----------- ----------- ----------- ----------- -----------
3131
Year ended December 31, 2000:
3132
Continuing Operations:
3133
---------------------
3134
Allowance for doubtful accounts $ 140,824 $ 19,990 $ -- $ 30,559 $ 130,255
3135
Reserve for obsolete inventory 86,599 5,133 -- -- 91,732
3136
----------- ----------- ----------- ----------- -----------
3137
3138
Total $ 227,423 $ 25,123 $ -- $ 30,559 $ 221,987
3139
=========== =========== =========== =========== ===========
3140
3141
Year ended December 31, 1999:
3142
Continuing Operations:
3143
---------------------
3144
Allowance for doubtful accounts $ 249,607 $ 35,756 $ -- $ 144,539 $ 140,824
3145
Reserve for obsolete inventory 86,599 -- -- -- 86,599
3146
----------- ----------- ----------- ----------- -----------
3147
Total $ 336,206 $ 35,756 $ -- $ 144,539 $ 227,423
3148
=========== =========== =========== =========== ===========
3149
3150
Year ended December 31, 1998:
3151
Continuing Operations:
3152
---------------------
3153
Allowance for doubtful accounts $ 212,375 $ 25,000 $ -- $ (12,232)(1) $ 249,607(1)
3154
Reserve for obsolete inventory 56,005 50,709 -- 20,115 86,599
3155
----------- ----------- ----------- ----------- -----------
3156
Total $ 268,380 $ 75,709 $ -- $ 7,883 $ 336,206
3157
=========== =========== =========== =========== ===========
3158
3159
Discontinued Operations:
3160
-----------------------
3161
Allowance for doubtful accounts $ 30,610 $ 96,238 $ -- $ 126,848 $ --
3162
Reserve for obsolete inventory 154,347 -- -- 154,347 --
3163
----------- ----------- ----------- ----------- -----------
3164
Total $ 184,957 $ 96,238 $ -- $ 281,195 $ --
3165
=========== =========== =========== =========== ===========
3166
3167
(1) Includes $96,238 transferred from discontinued operations for accounts remaining with the Company.
3168
</PRE>
3169
<HR>
3170
<P ALIGN=RIGHT><B><U>Appendix C</U></B></P>
3171
<P></P><P></P><P></P>
3172
<P ALIGN=CENTER><B>Quarterly Financial Data<BR>(unaudited)</B></P>
3173
<P></P><P></P>
3174
<P ALIGN=CENTER><B>Forming a Part of the Annual Report<BR><BR>Form 10-K<BR><BR>
3175
Item 8<BR><BR><BR>of<BR><BR>ADVANCED NEUROMODULATION SYSTEMS, INC.<BR>(Name of
3176
issuer)</B></P>
3177
<P></P><P></P>
3178
<P ALIGN=CENTER><B>Filed with the<BR><BR>Securities and Exchange Commission<BR>
3179
<BR>Washington, D.C. 20549<BR><BR><BR>under<BR><BR>The Securities and Exchange
3180
Act of 1934</B></P>
3181
<HR>
3182
<PRE>
3183
2000 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
3184
- --------------------------------------------- ------------- ------------- ------------- -------------
3185
Net revenue- product sales $ 5,598,864 $ 5,707,692 $ 5,762,546 $ 6,012,522
3186
Total net revenue 5,598,864 5,707,692 5,762,546 6,012,522
3187
Gross profit- product sales 3,750,268 3,847,647 3,878,081 4,117,307
3188
Earnings from operations 189,880 312,995 277,552 328,467
3189
Earnings from operations before income taxes 317,937 449,975 425,617 494,328
3190
- --------------------------------------------- ------------- ------------- ------------- -------------
3191
Net earnings $ 181,132 $ 256,781 $ 239,357 $ 276,374
3192
- --------------------------------------------- ------------- ------------- ------------- -------------
3193
3194
- --------------------------------------------- ------------- ------------- ------------- -------------
3195
Basic earnings per share $ 0.02 $ 0.03 $ 0.03 $ 0.04
3196
- --------------------------------------------- ------------- ------------- ------------- -------------
3197
3198
- --------------------------------------------- ------------- ------------- ------------- -------------
3199
Diluted earnings per share $ 0.02 $ 0.03 $ 0.03 $ 0.03
3200
- --------------------------------------------- ------------- ------------- ------------- -------------
3201
3202
3203
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
3204
- --------------------------------------------- ------------- ------------- ------------- -------------
3205
Net revenue- product sales $ 4,595,238 $ 5,169,614 $ 5,488,479 $ 5,325,053
3206
Total net revenue 13,495,238 5,169,614 5,488,479 5,325,053
3207
Gross profit- product sales 3,235,058 3,583,979 3,413,948 3,716,416
3208
Earnings (loss) from operations 8,775,155 161,881 (70,851) (23,987)
3209
Earnings from operations before income taxes 8,957,826 375,382 97,758 117,609
3210
- --------------------------------------------- ------------- ------------- ------------- -------------
3211
Net earnings $ 5,446,358 $ 222,494 $ 216,135 $ 118,294
3212
- --------------------------------------------- ------------- ------------- ------------- -------------
3213
3214
- --------------------------------------------- ------------- ------------- ------------- -------------
3215
Basic earnings per share $ 0.70 $ 0.03 $ 0.03 $ 0.02
3216
- --------------------------------------------- ------------- ------------- ------------- -------------
3217
3218
- --------------------------------------------- ------------- ------------- ------------- -------------
3219
Diluted earnings per share $ 0.67 $ 0.03 $ 0.03 $ 0.02
3220
- --------------------------------------------- ------------- ------------- ------------- -------------
3221
</PRE>
3222
<HR>
3223
<P ALIGN=CENTER><B>INDEX TO EXHIBITS</B></P>
3224
<P></P>
3225
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
3226
<TR>
3227
<TD WIDTH=10% ALIGN=RIGHT>Exhibit<BR><U>Number</U></TD>
3228
<TD WIDTH=5%></TD>
3229
<TD WIDTH=85% ALIGN=CENTER><U>Description</U></TD></TR>
3230
</TABLE>
3231
<P></P>
3232
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
3233
<TR>
3234
<TD WIDTH=10% ALIGN=RIGHT VALIGN=TOP>2.1&nbsp;&nbsp;</TD>
3235
<TD WIDTH=5%>&nbsp;</TD>
3236
<TD WIDTH=85%>Agreement and Plan of Merger, dated as of November 30, 2000, by
3237
and amoung Advanced Neuromodulation Systems, Inc., ANS Acquisition Corp, and
3238
Hi-tronics Designs, Inc.(10)</TD></TR>
3239
<TR>
3240
<TD ALIGN=RIGHT VALIGN=TOP>3.1&nbsp;&nbsp;</TD>
3241
<TD></TD>
3242
<TD>Articles of Incorporation, as amended and restated(11)</TD></TR>
3243
<TR>
3244
<TD ALIGN=RIGHT VALIGN=TOP>3.2&nbsp;&nbsp;</TD>
3245
<TD></TD>
3246
<TD>Bylaws(11)</TD></TR>
3247
<TR>
3248
<TD ALIGN=RIGHT VALIGN=TOP>4.1&nbsp;&nbsp;</TD>
3249
<TD></TD>
3250
<TD>Rights Agreement dated as of August 30, 1996, between Quest Medical, Inc.
3251
and KeyCorp Shareholder Services, Inc. as Rights Agent(5)</TD></TR>
3252
<TR>
3253
<TD ALIGN=RIGHT VALIGN=TOP>10.1&nbsp;&nbsp;</TD>
3254
<TD></TD>
3255
<TD>Quest Medical, Inc. 1979 Amended and Restated Employees Stock Option
3256
Plan(2)</TD></TR>
3257
<TR>
3258
<TD ALIGN=RIGHT VALIGN=TOP>10.2&nbsp;&nbsp;</TD>
3259
<TD></TD>
3260
<TD>Form of 1979 Employees Stock Option Agreement(3)</TD></TR>
3261
<TR>
3262
<TD ALIGN=RIGHT VALIGN=TOP>10.3&nbsp;&nbsp;</TD>
3263
<TD></TD>
3264
<TD>Quest Medical, Inc. Directors Stock Option Plan (as amended)(2)</TD></TR>
3265
<TR>
3266
<TD ALIGN=RIGHT VALIGN=TOP>10.4&nbsp;&nbsp;</TD>
3267
<TD></TD>
3268
<TD>Form of Directors Stock Option Agreement(1)</TD></TR>
3269
<TR>
3270
<TD ALIGN=RIGHT VALIGN=TOP>10.5&nbsp;&nbsp;</TD>
3271
<TD></TD>
3272
<TD>Quest Medical, Inc. 1987 Stock Option Plan(4)</TD></TR>
3273
<TR>
3274
<TD ALIGN=RIGHT VALIGN=TOP>10.6&nbsp;&nbsp;</TD>
3275
<TD></TD>
3276
<TD>Form of 1987 Employee Stock Option Agreement(4)</TD></TR>
3277
<TR>
3278
<TD ALIGN=RIGHT VALIGN=TOP>10.7&nbsp;&nbsp;</TD>
3279
<TD></TD>
3280
<TD>Quest Medical, Inc. 1995 Stock Option Plan(4)</TD></TR>
3281
<TR>
3282
<TD ALIGN=RIGHT VALIGN=TOP>10.8&nbsp;&nbsp;</TD>
3283
<TD></TD>
3284
<TD>Form of 1995 Employee Stock Option Agreement(4)</TD></TR>
3285
<TR>
3286
<TD ALIGN=RIGHT VALIGN=TOP>10.9&nbsp;&nbsp;</TD>
3287
<TD></TD>
3288
<TD>Quest Medical, Inc. 1998 Stock Option Plan(7)</TD></TR>
3289
<TR>
3290
<TD ALIGN=RIGHT VALIGN=TOP>10.10</TD>
3291
<TD></TD>
3292
<TD>Advanced Neuromodulation Systems, Inc. 2000 Stock Option Plan(9)</TD></TR>
3293
<TR>
3294
<TD ALIGN=RIGHT VALIGN=TOP>10.11</TD>
3295
<TD></TD>
3296
<TD>Employment Agreement dated April 9, 1998 between Christopher G. Chavez and
3297
Quest Medical, Inc.(6)</TD></TR>
3298
<TR>
3299
<TD ALIGN=RIGHT VALIGN=TOP>10.12</TD>
3300
<TD></TD>
3301
<TD>Employment Agreement dated April 9, 1998 between Scott F. Drees and Quest
3302
Medical, Inc.(6)</TD></TR>
3303
<TR>
3304
<TD ALIGN=RIGHT VALIGN=TOP>10.13</TD>
3305
<TD></TD>
3306
<TD>Employment Agreement dated April 9, 1998 between F. Robert Merrill III and
3307
Quest Medical, Inc.(6)</TD></TR>
3308
<TR>
3309
<TD ALIGN=RIGHT VALIGN=TOP>10.14</TD>
3310
<TD></TD>
3311
<TD>Form of Employment Agreement and Covenant Not to Compete, between the
3312
Company and key employees(1)</TD></TR>
3313
<TR>
3314
<TD ALIGN=RIGHT VALIGN=TOP>10.15</TD>
3315
<TD></TD>
3316
<TD>Lease Agreement dated as of February 4, 1999, between Advanced
3317
Neuromodulation Systems, Inc. and Legacy Lincoln I, LTD. (8)</TD></TR>
3318
<TR>
3319
<TD ALIGN=RIGHT VALIGN=TOP>11.1&nbsp;&nbsp;</TD>
3320
<TD></TD>
3321
<TD>Computation of Earnings Per Share(11)</TD></TR>
3322
<TR>
3323
<TD ALIGN=RIGHT VALIGN=TOP>21.1&nbsp;&nbsp;</TD>
3324
<TD></TD>
3325
<TD>Subsidiaries(11)</TD></TR>
3326
<TR>
3327
<TD ALIGN=RIGHT VALIGN=TOP>23.1&nbsp;&nbsp;</TD>
3328
<TD></TD>
3329
<TD>Consent of Independent Auditors(11)</TD></TR>
3330
<TR>
3331
<TD ALIGN=RIGHT VALIGN=TOP>27.1&nbsp;&nbsp;</TD>
3332
<TD></TD>
3333
<TD>Financial Data Schedule - December 31, 2000(11)</TD></TR>
3334
</TABLE>
3335
<P>__________________________________</P>
3336
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
3337
<TR>
3338
<TD WIDTH=5% VALIGN=TOP>(1)&nbsp;&nbsp;</TD>
3339
<TD WIDTH=2%></TD>
3340
<TD WIDTH=93%>Filed as an Exhibit to the Company's Registration Statement on
3341
Form S-18, Registration No. 2-71198-FW, and incorporated herein by reference.
3342
</TD></TR>
3343
<TR>
3344
<TD>(2)&nbsp;&nbsp;</TD>
3345
<TD></TD>
3346
<TD>Filed as an Exhibit to the report of the Company on Form 10-K for the year
3347
ended December 31, 1987, and incorporated herein by reference.</TD></TR>
3348
<TR>
3349
<TD>(3)&nbsp;&nbsp;</TD>
3350
<TD></TD>
3351
<TD>Filed as an Exhibit to the Company's Registration Statement on Form S-1,
3352
Registration No. 2-78186, and incorporated herein by reference.</TD></TR>
3353
<TR>
3354
<TD>(4)&nbsp;&nbsp;</TD>
3355
<TD></TD>
3356
<TD>Filed as an Exhibit to the Company's Registration Statement on Form SB-2,
3357
Registration No. 33-62991, and incorporated herein by reference.</TD></TR>
3358
<TR>
3359
<TD>(5)&nbsp;&nbsp;</TD>
3360
<TD></TD>
3361
<TD>Filed as an Exhibit to the report of the Company on Form 8-K dated September
3362
3, 1996, and incorporated herein by reference.</TD></TR>
3363
<TR>
3364
<TD>(6)&nbsp;&nbsp;</TD>
3365
<TD></TD>
3366
<TD>Filed as an Exhibit to the report of the Company on Form 10-Q dated for the
3367
quarterly period ended March 31, 1998, and incorporated herein by reference.
3368
</TD></TR>
3369
<TR>
3370
<TD>(7)&nbsp;&nbsp;</TD>
3371
<TD></TD>
3372
<TD>Filed as an Exhibit to the Definitive Proxy Statement on Schedule 14A dated
3373
April 27, 1998, and incorporated herein by reference.</TD></TR>
3374
<TR>
3375
<TD>(8)&nbsp;&nbsp;</TD>
3376
<TD></TD>
3377
<TD>Filed as an Exhibit to the report of the Company on Form 10-K dated for the
3378
year ended December 31, 1998, and incorporated herein by reference.</TD></TR>
3379
<TR>
3380
<TD>(9)&nbsp;&nbsp;</TD>
3381
<TD></TD>
3382
<TD>Filed as an Exhibit to the Definitive Proxy Statement on Schedule 14A dated
3383
April 17, 2000, and incorporated herein by reference.</TD></TR>
3384
<TR>
3385
<TD>(10)</TD>
3386
<TD></TD>
3387
<TD>Filed as an Exhibit to the report of the Company on Form 8-K dated January
3388
9, 2001, and incorporated herein by reference. Upon request, the Company will
3389
furnish a copy of any omitted schedule to the Commission.</TD></TR>
3390
<TR>
3391
<TD>(11)</TD>
3392
<TD></TD>
3393
<TD>Filed herewith.</TD></TR>
3394
</TABLE>
3395
<HR>
3396
<P></P>
3397
<P></P>
3398
<P></P>
3399
<P></P>
3400
<P></P>
3401
<P></P>
3402
<P ALIGN=CENTER><B>EXHIBIT 3.1</B></P>
3403
<P></P>
3404
<P></P>
3405
<P></P>
3406
<P></P>
3407
<P></P>
3408
<P></P>
3409
<HR>
3410
<P ALIGN=CENTER><B>ARTICLES OF INCORPORATION</B></P>
3411
<P ALIGN=CENTER><B>OF</B></P>
3412
<P ALIGN=CENTER><B>ADVANCED NEUROMODULATION SYSTEMS, INC.</B></P>
3413
<P ALIGN=CENTER>(restated March 2001 for purposes of filing with the Securities
3414
and Exchange Commission)</P>
3415
<P ALIGN=CENTER><B>ARTICLE ONE</B></P>
3416
<P>The name of the corporation is Advanced Neuromodulation Systems, Inc. (the
3417
"Corporation")</P>
3418
<P ALIGN=CENTER><B>ARTICLE TWO</B></P>
3419
<P>The period of duration of the Corporation is perpetual.</P>
3420
<P ALIGN=CENTER><B>ARTICLE THREE</B></P>
3421
<P>The purpose for which the Corporation is organized is to engage in the
3422
transaction of any and all lawful business for which Corporations may be
3423
incorporated under the Texas Business Corporation Act.</P>
3424
<P ALIGN=CENTER><B>ARTICLE FOUR</B></P>
3425
<P>The Corporation shall have authority to issue 25,000,000 shares of common
3426
stock, $.05 par value (&#147;Common Stock&#148;). Each share of Common Stock
3427
shall have identical rights and privileges in every respect.</P>
3428
<P ALIGN=CENTER><B>ARTICLE FIVE</B></P>
3429
<P>No holder of any shares of Common Stock shall have any preemptive or
3430
preferential right to receive, purchase, or subscribe to (a) any unissued or
3431
treasury shares of any class of stock (whether now or hereafter authorized) of
3432
the Corporation, (b) any obligations, evidences of indebtedness, or other
3433
securities of the Corporation convertible into or exchangeable for, or carrying
3434
or accompanied by any rights to receive, purchase, or subscribe to, any such
3435
unissued or treasury shares, (c) any right of subscription to or right to
3436
receive, or any warrant or option for the purchase of, any of the foregoing
3437
securities, or (d) any other securities that may be issued or sold by the
3438
Corporation.</P>
3439
<P ALIGN=CENTER><B>ARTICLE SIX</B></P>
3440
<P>The Corporation will not commence business until it has received for the
3441
issuance of its shares consideration of the value of $1,000, consisting of
3442
money, labor done, or property actually received.</P>
3443
<P ALIGN=CENTER><B>ARTICLE SEVEN</B></P>
3444
<P>Cumulative voting for the election of directors is expressly denied and
3445
prohibited.</P>
3446
<P ALIGN=CENTER><B>ARTICLE EIGHT</B></P>
3447
<P>No contract or other transaction between the Corporation and any other person
3448
(as used herein the term &#147;person&#148; means an individual, firm, trust,
3449
partnership, joint venture, association, corporation, or other entity) shall be
3450
affected or invalidated by the fact that any director of the Corporation is
3451
interested in, or is a member, director, or an officer of, such other person,
3452
and any director may be a party to or may be interested in any contract or
3453
transaction of the Corporation or in which the Corporation is interested; and no
3454
contract, act, or transaction of the Corporation with any person shall be
3455
affected or invalidated by the fact that any director of the Corporation is a
3456
party to, or interested in, such contract, act, or transaction, or in any way
3457
connected with such person. Each and every person who may become a director of
3458
the Corporation is hereby relieved from any liability that might otherwise exist
3459
from contracting with the Corporation for the benefit of himself or any person
3460
in which he may be in any way interested; provided that the fact of such
3461
interest shall have been disclosed to or shall be known by the other directors
3462
or the shareholders of the Corporation, as the case may be, acting upon or with
3463
reference to such act, contract, or transaction, even though the presence at a
3464
meeting or vote or votes of such interested director might have been necessary
3465
to obligate the Corporation upon such act, contract, or transaction.</P>
3466
<HR>
3467
<P ALIGN=CENTER><B>ARTICLE NINE</B></P>
3468
<P>To the extent permitted by applicable law, and by resolution or other proper
3469
action of the board of directors of the Corporation, the Corporation may
3470
indemnify (a) any present or former director or officer of the Corporation, (b)
3471
any other employee or agent of the Corporation, and (c) any other person serving
3472
at the request of the Corporation as a director, trustee, officer, employee, or
3473
agent of another corporation, domestic or foreign, nonprofit or for profit,
3474
partnership, joint venture, association, trust, or other enterprise, against
3475
expenses, including attorneys&#146; fees, judgments, fines, and amounts paid in
3476
settlement actually and reasonably incurred in connection with any threatened,
3477
pending, or completed action, suit, or proceeding to which any such person is,
3478
or is threatened to be made, a party and which may arise by reason of the fact
3479
he is or was a person occupying any such office or position.</P>
3480
<P ALIGN=CENTER><B>ARTICLE TEN</B></P>
3481
<P>The Corporation shall have the authority to purchase, directly or indirectly,
3482
its own shares to the extent of the aggregate of the unrestricted capital
3483
surplus available therefore and unrestricted reduction surplus available
3484
therefore, without submitting such purchase to a vote of the shareholders of the
3485
Corporation.</P>
3486
<P ALIGN=CENTER><B>ARTICLE ELEVEN</B></P>
3487
<P>Any action of the Corporation which, under the provisions of the Texas
3488
Business Corporation Act, is required to be authorized or approved by the
3489
holders of two-thirds or any other specified fraction which is in excess of
3490
one-half or any specified percentage which is in excess of 50%, of the
3491
outstanding shares (or any class or series thereof) of the Corporation shall,
3492
notwithstanding any such provisions of the Texas Business Corporation Act, be
3493
deemed effectively and properly authorized or approved if authorized or approved
3494
by the vote of the holders of more than 50% of the outstanding shares entitled
3495
to vote thereon (or, if the holders of any class or series of the
3496
Corporation&#146;s shares shall be entitled by the Texas Business Corporation
3497
Act to vote thereon separately as a class, by the vote of the holders of more
3498
than 50% of the outstanding shares of each such class or series). Nothing
3499
contained in this article is intended to require shareholder authorization or
3500
approval of any action of the Corporation whatsoever unless such authorization
3501
or approval is specifically required by the other provisions of these articles
3502
of incorporation, the bylaws of the Corporation, or by the Texas Business
3503
Corporation Act.</P>
3504
<HR>
3505
<P ALIGN=CENTER><B>ARTICLE TWELVE</B></P>
3506
<P>The post office address of the registered office of the Corporation is 6501
3507
Windcrest Dr., Suite 100, Plano, Texas 75024, and the name of its registered
3508
agent at such address is Christopher G. Chavez.</P>
3509
<P ALIGN=CENTER><B>ARTICLE THIRTEEN</B></P>
3510
<P>The number of directors constituting the board of directors of the
3511
Corporation is seven, and the names and addresses of the persons who are to
3512
serve as directors until the next annual meeting of shareholders and until their
3513
successors are elected and qualified are:</P>
3514
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
3515
<TR>
3516
<TD WIDTH=30%><U>Name</U></TD>
3517
<TD WIDTH=70%><U>Address</U></TD></TR>
3518
<TR>
3519
<TD>Hugh M. Morrison</TD>
3520
<TD>6501 Windcrest Dr., Suite 100, Plano, Texas 75024</TD></TR>
3521
<TR>
3522
<TD>Christopher G. Chavez</TD>
3523
<TD>6501 Windcrest Dr., Suite 100, Plano, Texas 75024</TD></TR>
3524
<TR>
3525
<TD>Robert C. Eberhart</TD>
3526
<TD>6501 Windcrest Dr., Suite 100, Plano, Texas 75024</TD></TR>
3527
<TR>
3528
<TD>Joseph E. Laptewicz</TD>
3529
<TD>6501 Windcrest Dr., Suite 100, Plano, Texas 75024</TD></TR>
3530
<TR>
3531
<TD>A. Ronald Lerner</TD>
3532
<TD>6501 Windcrest Dr., Suite 100, Plano, Texas 75024</TD></TR>
3533
<TR>
3534
<TD>Richard D. Nikolaev</TD>
3535
<TD>6501 Windcrest Dr., Suite 100, Plano, Texas 75024</TD></TR>
3536
<TR>
3537
<TD>Michael J. Torma</TD>
3538
<TD>6501 Windcrest Dr., Suite 100, Plano, Texas 75024</TD></TR>
3539
</TABLE>
3540
<P ALIGN=CENTER><B>ARTICLE FOURTEEN</B></P>
3541
<P>A director of the Corporation is not liable to the Corporation or its
3542
shareholders for monetary damages for an act or omission in the director&#146;s
3543
capacity as a director, except that this article does not eliminate or limit the
3544
liability of a director for:</P>
3545
<OL>
3546
<LI>a breach of a director's duty of loyalty to the
3547
Corporation or its shareholders;
3548
<LI>an act or omission not in good faith or that
3549
involves intentional misconduct or a knowing violation of the law;
3550
<LI>a transaction from which a director received an
3551
improper benefit, whether or not the benefit resulted from an action taken
3552
within the scope of the director's office;
3553
<LI>an act or omission for which the liability of a director is expressly
3554
provided for by statute; or
3555
<LI>an act related to an unlawful stock repurchase or payment of a
3556
dividend.</OL>
3557
<HR>
3558
<P>If the Texas Business Corporation Act, Texas Miscellaneous Corporation Laws
3559
or related laws are amended after approval by the shareholders of this Article
3560
to authorize corporation action further eliminating or limiting the personal
3561
liability of directors, then the liability of a director of the Corporation
3562
shall be eliminated or limited to the fullest extent permitted by applicable
3563
Texas law, as so amended.</P>
3564
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
3565
<TR>
3566
<TD WIDTH=40%></TD>
3567
<TD WIDTH=60%>ADVANCED NEUROMODULATION SYSTEMS, INC.</TD></TR>
3568
<TR>
3569
<TD>&nbsp;</TD><TD></TD></TR><TR>
3570
<TD>&nbsp;</TD>
3571
<TD><U>/s/F. Robert Merrill III</U></TD></TR><TR>
3572
<TD>&nbsp;</TD>
3573
<TD>F. Robert Merrill III</TD></TR><TR>
3574
<TD>&nbsp;</TD>
3575
<TD>Executive Vice President - Finance,</TD></TR><TR>
3576
<TD>&nbsp;</TD>
3577
<TD>Treasurer and Secretary</TD></TR></TABLE>
3578
<HR>
3579
<P></P>
3580
<P></P>
3581
<P></P>
3582
<P></P>
3583
<P></P>
3584
<P></P>
3585
<P ALIGN=CENTER><B>EXHIBIT 3.2</B></P>
3586
<P></P>
3587
<P></P>
3588
<P></P>
3589
<P></P>
3590
<P></P>
3591
<P></P>
3592
<HR>
3593
<P ALIGN=CENTER>AMENDED AND RESTATED BYLAWS<BR><BR>OF<BR><BR>ADVANCED
3594
NEUROMODULATION SYSTEMS, INC., a Texas Corporation</P>
3595
<P ALIGN=CENTER>(Restated in March 2001 for purposes of filing with the
3596
Securities and Exchange Commission)</P>
3597
<P></P>
3598
<P ALIGN=CENTER>PREAMBLE</P>
3599
<P></P>
3600
<P>These bylaws are subject to, and governed by, the Texas Business Corporation
3601
Act and the articles of incorporation of Advanced Neuromodulation Systems, Inc.
3602
(the &#147;Corporation&#148;). In the event of a direct conflict between the
3603
provisions of these bylaws and the mandatory provisions of the Texas Business
3604
Corporation Act or the provisions of the articles of incorporation of the
3605
Corporation, such provisions of the Texas Business Corporation Act or the
3606
articles of incorporation of the Corporation, as the case may be, will be
3607
controlling.</P>
3608
<P></P>
3609
<P ALIGN=CENTER>ARTICLE ONE: OFFICES</P>
3610
<P></P>
3611
<P>1.01&nbsp;&nbsp;&nbsp;&nbsp;<U>Registered Office and Agent.</U> The
3612
registered office and registered agent of the Corporation shall be as designated
3613
from time to time by the appropriate filing by the Corporation in the office of
3614
the Secretary of State of Texas.</P>
3615
<P>1.02&nbsp;&nbsp;&nbsp;&nbsp;<U>Other Offices</U>. The Corporation may also
3616
have offices at such other places, both within and without the State of Texas,
3617
as the board of directors may from time to time determine or the business of the
3618
Corporation may require.</P>
3619
<P></P>
3620
<P ALIGN=CENTER>ARTICLE TWO: SHAREHOLDERS</P>
3621
<P></P>
3622
<P>2.01&nbsp;&nbsp;&nbsp;&nbsp;<U>Annual Meetings.</U> An annual meeting of
3623
shareholders of the Corporation shall be held during each calendar year on such
3624
date and at such time as shall be designated from time to time by the board of
3625
directors and stated in the notice of the meeting. At such meeting, the
3626
shareholders shall elect directors and transact such other business as may
3627
properly be brought before the meeting.</P>
3628
<P>2.02&nbsp;&nbsp;&nbsp;&nbsp;<U>Special Meetings</U>. A special meeting of the
3629
shareholders may be called at any time by the chairman of the board, the
3630
president, the board of directors, or the holders of not less than ten percent
3631
of all shares entitled to vote at such meeting. Only such business shall be
3632
transacted at a special meeting as may be stated or indicated in the notice of
3633
such meeting.</P>
3634
<P>2.03&nbsp;&nbsp;&nbsp;&nbsp;<U>Place of Meetings</U>. The annual meeting of
3635
shareholders may be held at any place within or without the State of Texas as
3636
may be designated by the board of directors. Special meetings of shareholders
3637
may be held at any place within or without the State of Texas as may be
3638
designated by the person or persons calling such special meeting as provided in
3639
Section 2.02. If no place for a meeting is designated, it shall be held at the
3640
registered office of the Corporation.</P>
3641
<P>2.04&nbsp;&nbsp;&nbsp;&nbsp;<U>Notice</U>. Written or printed notice stating
3642
the place, day, and hour of each meeting of shareholders, and, in case of a
3643
special meeting, the purpose or purposes for which the meeting is called, shall
3644
be delivered not less than ten nor more than 50 days before the date of the
3645
meeting, either personally or by mail, by or at the direction of the chairman of
3646
the board, the president, the secretary, or the person calling the meeting, to
3647
each shareholder of record entitled to vote at such meeting.</P>
3648
<HR>
3649
<P>2.05&nbsp;&nbsp;&nbsp;&nbsp;<U>Voting List</U>. At least ten days before each
3650
meeting of shareholders, the secretary shall prepare a complete list of
3651
shareholders entitled to vote at such meeting, arranged in alphabetical order,
3652
including the address of each shareholder and the number of voting shares held
3653
by each shareholder. For a period of ten days prior to such meeting, such list
3654
shall be kept on file at the registered office of the Corporation and shall be
3655
subject to inspection by any shareholder during usual business hours. Such list
3656
shall be produced at such meeting, and at all times during such meeting shall be
3657
subject to inspection by any shareholder. The original stock transfer books
3658
shall be prima facie evidence as to who are the shareholders entitled to examine
3659
such list or stock transfer books.</P>
3660
<P>2.06&nbsp;&nbsp;&nbsp;&nbsp;<U>Voting of Shares</U>. Treasury shares, shares
3661
of the Corporation&#146;s own stock owned by another corporation the majority of
3662
the voting stock of which is owned or controlled by the Corporation, and shares
3663
of the Corporation&#146;s own stock held by another corporation in a fiduciary
3664
capacity, shall not be shares entitled to vote or to be counted in determining
3665
the total number of outstanding shares. Shares held by an administrator,
3666
executor, guardian, or conservator may be voted by him, either in person or by
3667
proxy, without transfer of such shares into his name so long as such shares form
3668
a part of the estate and are in the possession of the estate being served by
3669
him. Shares standing in the name of a trustee may be voted by him, either in
3670
person or by proxy, only after the shares have been transferred into his name as
3671
trustee. Shares standing in the name of a receiver may be voted by such
3672
receiver, and shares held by or under the control of a receiver may be voted by
3673
such receiver without transfer of such shares into his name if authority to do
3674
so is contained in the court order by which such receiver was appointed. Shares
3675
standing in the name of another domestic or foreign corporation of any type or
3676
kind may be voted by such officer, agent, or proxy as the bylaws of such
3677
corporation may provide or, in the absence of such provision, as the board of
3678
directors of such corporation may determine. A shareholder whose shares are
3679
pledged shall be entitled to vote such shares until they have been transferred
3680
into the name of the pledgee, and thereafter, the pledgee shall be entitled to
3681
vote such shares.</P>
3682
<P>2.07&nbsp;&nbsp;&nbsp;&nbsp;<U>Quorum</U>. The holders of a majority of the
3683
outstanding shares entitled to vote, present in person or represented by proxy,
3684
shall constitute a quorum at any meeting of shareholders, except as otherwise
3685
provided by law, the articles of incorporation, or these bylaws. If a quorum
3686
shall not be present or represented at any meeting of shareholders, a majority
3687
of the shareholders entitled to vote at the meeting, who are present in person
3688
or represented by proxy, may adjourn the meeting from time to time, without
3689
notice other than announcement at the meeting, until a quorum shall be present
3690
or represented. At any reconvening of an adjourned meeting at which a quorum
3691
shall be present or represented any business may be transacted which could have
3692
been transacted at the original meeting, if a quorum had been present or
3693
represented.</P>
3694
<P>2.08&nbsp;&nbsp;&nbsp;&nbsp;<U>Majority Vote; Withdrawal of Quorum.</U> If a
3695
quorum is present in person or represented by proxy at any meeting, the vote of
3696
the holders of a majority of the outstanding shares entitled to vote, present in
3697
person or represented by proxy, shall decide any question brought before such
3698
meeting, unless the question is one on which, by express provision of law, the
3699
articles of incorporation, or these bylaws, a different vote is required, in
3700
which event such express provision shall govern and control the decision of such
3701
question. The shareholders present at a duly convened meeting may continue to
3702
transact business until adjournment, notwithstanding any withdrawal of
3703
shareholders which may leave less than a quorum remaining.</P>
3704
<HR>
3705
<P>2.09&nbsp;&nbsp;&nbsp;&nbsp;<U>Method of Voting; Proxies</U>. Every
3706
shareholder of record shall be entitled at every meeting of shareholders to one
3707
vote on each matter submitted to a vote, for every share standing in his name on
3708
the original stock transfer books of the Corporation except to the extent that
3709
the voting rights of the shares of any class or classes are limited or denied by
3710
the articles of incorporation. Such books shall be prima facie evidence as to
3711
the identity of shareholders entitled to vote. At any meeting of shareholders,
3712
every shareholder having the right to vote may vote either in person or by a
3713
proxy executed in writing by the shareholder or by his duly authorized
3714
attorney-in-fact. Each such proxy shall be filed with the secretary of the
3715
Corporation before or at the time of the meeting. No proxy shall be valid after
3716
11 months from the date of its execution, unless otherwise provided in the
3717
proxy. If no date is stated on a proxy, such proxy shall be presumed to have
3718
been executed on the date of the meeting at which it is to be voted. Each proxy
3719
shall be revocable, unless expressly provided therein to be irrevocable, or
3720
unless otherwise made irrevocable by law.</P>
3721
<P>2.10&nbsp;&nbsp;&nbsp;&nbsp;<U>Closing of Transfer Books; Record Date.</U>
3722
For the purpose of determining shareholders entitled to notice of or to vote at
3723
any meeting of shareholders or any reconvening thereof or entitled to receive
3724
payment of any dividend or in order to make a determination of shareholders for
3725
any other proper purpose, the board of directors may provide that the stock
3726
transfer books of the Corporation shall be closed for a stated period but not to
3727
exceed in any event 50 days. If the stock transfer books are closed for the
3728
purpose of determining shareholders entitled to notice of or to vote at a
3729
meeting of shareholders, such books shall be closed for at least ten days
3730
immediately preceding such meeting. In lieu of closing the stock transfer books,
3731
the board of directors may fix in advance a date as the record date for any such
3732
determination of shareholders, such date in any case to be not more than 50 days
3733
and, in case of a meeting of shareholders, not less than ten days prior to the
3734
date on which the particular action requiring such determination of shareholders
3735
is to be taken. If the stock transfer books are not closed and if no record date
3736
is fixed for the determination of shareholders entitled to notice of or to vote
3737
at a meeting of shareholders or entitled to receive payment of a dividend, the
3738
date on which the notice of the meeting is mailed or the date on which the
3739
resolution of the board of directors declaring such dividend is adopted, as the
3740
case may be, shall be the record date for such determination of shareholders.
3741
</P>
3742
<P>2.11&nbsp;&nbsp;&nbsp;&nbsp;<U>Presiding Officials at Meetings</U>. Unless
3743
some other person or persons are elected by a vote of a majority of the shares
3744
then entitled to vote at a meeting of shareholders, the chairman of the board
3745
shall preside at and the secretary shall prepare minutes of each meeting of
3746
shareholders. </P>
3747
<P></P>
3748
<P ALIGN=CENTER>ARTICLE THREE: DIRECTORS</P>
3749
<P></P>
3750
<P>3.01&nbsp;&nbsp;&nbsp;&nbsp;<U>Management</U>. The business and affairs of
3751
the Corporation shall be managed by the board of directors, subject to the
3752
restrictions imposed by law, the articles of incorporation, or these bylaws.
3753
</P>
3754
<P>3.02&nbsp;&nbsp;&nbsp;&nbsp;<U>Number; Election; Term; Qualification</U>. The
3755
first board of directors shall consist of the number of directors named in the
3756
articles of incorporation. Thereafter, the number of directors which shall
3757
constitute the entire board of directors shall be determined by resolution of
3758
the board of directors at any meeting thereof or by the shareholders at any
3759
meeting thereof, but shall never be less than one. At each annual meeting of
3760
shareholders, directors shall be elected to hold office until the next annual
3761
meeting of shareholders and until their successors are elected and qualified. No
3762
director need be a shareholder, a resident of the State of Texas, or a citizen
3763
of the United States.</P>
3764
<P>3.03&nbsp;&nbsp;&nbsp;&nbsp;<U>Decreases in Number</U>. No decrease in the
3765
number of directors constituting the entire board of directors shall have the
3766
effect of shortening the term of any incumbent director.</P>
3767
<HR>
3768
<P>3.04&nbsp;&nbsp;&nbsp;&nbsp;<U>Removal</U>. At any meeting of shareholders
3769
called expressly for that purpose, any director or the entire board of directors
3770
may be removed, with or without cause, by a vote of the holders of a majority of
3771
the shares then entitled to vote on the election of directors.</P>
3772
<P>3.05&nbsp;&nbsp;&nbsp;&nbsp;<U>Vacancies; Increases in Number</U>. Any
3773
vacancy occurring in the board of directors (by death, resignation, removal, or
3774
otherwise) may be filled by the affirmative vote of a majority of the remaining
3775
directors though less than a quorum of the board of directors. A director
3776
elected to fill a vacancy shall be elected to serve for the unexpired term of
3777
his predecessor in office. In case of any increase in the number of directors
3778
constituting the entire board of directors, the additional directors shall be
3779
elected at a meeting of shareholders.</P>
3780
<P>3.06&nbsp;&nbsp;&nbsp;&nbsp;<U>First Meeting</U>. Each newly elected board of
3781
directors may hold its first meeting for the purpose of organization and the
3782
transaction of business, if a quorum is present, immediately after and at the
3783
same place as the annual meeting of shareholders, and notice of such meeting
3784
shall not be necessary.</P>
3785
<P>3.07&nbsp;&nbsp;&nbsp;&nbsp;<U>Regular Meetings</U>. Regular meetings of the
3786
board of directors may be held without notice at such times and places as may be
3787
designated from time to time by the chairman of the board, or by resolution of
3788
the board of directors and communicated to all directors. </P>
3789
<P>3.08&nbsp;&nbsp;&nbsp;&nbsp;<U>Special Meetings</U>. A special meeting of the
3790
board of directors shall be held whenever called by any director at such time
3791
and place as such director shall designate in the notice of such special
3792
meeting. The director calling any special meeting shall cause notice of such
3793
special meeting to be given to each director at least 24 hours before such
3794
special meeting. Neither the business to be transacted at, nor the purpose of,
3795
any special meeting of the board of directors need be specified in the notice or
3796
waiver of notice of any special meeting. </P>
3797
<P>3.09&nbsp;&nbsp;&nbsp;&nbsp;<U>Quorum; Majority Vote</U>. At all meetings of
3798
the board of directors, a majority of the directors, fixed in the manner
3799
provided in these bylaws, shall constitute a quorum for the transaction of
3800
business. If a quorum is not present at a meeting, a majority of the directors
3801
present may adjourn the meeting from time to time, without notice other than an
3802
announcement at the meeting, until a quorum is present. The vote of a majority
3803
of the directors present at a meeting at which a quorum is in attendance shall
3804
be the act of the board of directors, unless the vote of a different number is
3805
required by the articles of incorporation or these bylaws.</P>
3806
<P>3.10&nbsp;&nbsp;&nbsp;&nbsp;<U>Procedure; Minutes</U>. At meetings of the
3807
board of directors, business shall be transacted in such order as the chairman
3808
of the board or the board of directors may determine from time to time. If
3809
present, the chairman of the board shall preside at the meeting. If not so
3810
present, the board of directors shall appoint at the meeting another director to
3811
preside at the meeting and a person to act as secretary of the meeting. The
3812
secretary of the meeting shall prepare minutes of the meeting which shall be
3813
delivered to the secretary of the Corporation for placement in the minute books
3814
of the Corporation.</P>
3815
<P>3.11&nbsp;&nbsp;&nbsp;&nbsp;<U>Presumption of Assent</U>. A director of the
3816
Corporation who is present at any meeting of the board of directors at which
3817
action on any matter is taken shall be presumed to have assented to the action
3818
unless his dissent shall be entered in the minutes of the meeting or unless he
3819
shall file his written dissent to such action with the person acting as
3820
secretary of the meeting before the adjournment thereof or shall forward any
3821
dissent by certified or registered mail to the secretary of the Corporation
3822
immediately after the adjournment of the meeting. Such right to dissent shall
3823
not apply to a director who voted in favor of such action. </P>
3824
<HR>
3825
<P>3.12&nbsp;&nbsp;&nbsp;&nbsp;<U>Compensation</U>. Directors, in their capacity
3826
as directors, may receive, by resolution of the board of directors, a fixed sum
3827
and expenses of attendance, if any, for attending meetings of the board of
3828
directors or a stated salary. No director shall be precluded from serving the
3829
Corporation in any other capacity or receiving compensation there for. </P>
3830
<P></P>
3831
<P ALIGN=CENTER>ARTICLE FOUR: COMMITTEES</P>
3832
<P></P>
3833
<P>4.01&nbsp;&nbsp;&nbsp;&nbsp;<U>Designation.</U> The board of directors may,
3834
by resolution adopted by a majority of the entire board of directors, designate
3835
executive and other committees.</P>
3836
<P>4.02&nbsp;&nbsp;&nbsp;&nbsp;<U>Number; Qualification; Term</U>. Each
3837
committee shall consist of one or more directors appointed by resolution adopted
3838
by a majority of the entire board of directors. The number of committee members
3839
may be increased or decreased from time to time by resolution adopted by a
3840
majority of the entire board of directors. Each committee member shall serve as
3841
such until the expiration of his term as a director or his earlier resignation,
3842
unless sooner removed as a committee member or as a director. </P>
3843
<P>4.03&nbsp;&nbsp;&nbsp;&nbsp;<U>Authority</U>. The executive committee, unless
3844
expressly restricted in the resolution adopted by a majority of the entire board
3845
of directors establishing the executive committee, shall have and may exercise
3846
all of the authority of the board of directors in the management of the business
3847
and affairs of the Corporation. Each other committee, to the extent expressly
3848
provided for in the resolution adopted by a majority of the entire board of
3849
directors establishing such committee, shall have and may exercise all of the
3850
authority of the board of directors in the management of the business and
3851
affairs of the Corporation. However, no committee shall have the authority of
3852
the board of directors in reference to: </P>
3853
<OL TYPE=a>
3854
<LI>amending the articles of incorporation;
3855
<LI>approving a plan of merger or consolidation;
3856
<LI>recommending to the shareholders the sale, lease, or exchange of all or
3857
substantially all of the property and assets of the Corporation otherwise than
3858
in the usual and regular course of its business;
3859
<LI>recommending to the shareholders a voluntary dissolution of the Corporation
3860
or a revocation thereof;
3861
<LI>amending, altering, or repealing these bylaws or adopting new bylaws;
3862
<LI>filling vacancies in or removing members of the board of directors or of any
3863
committee;
3864
<LI>electing or removing officers or committee members;
3865
<LI>fixing the compensation of any committee member; and
3866
<LI>altering or repealing any resolution of the board of directors which by its
3867
terms provides that it shall not be amendable or repealable.</OL>
3868
<P>In the resolution adopted by a majority of the entire board of directors
3869
establishing an executive or other committee, the board of directors may
3870
expressly authorize such committee to declare dividends or to authorize the
3871
issuance of shares of the Corporation.</P>
3872
<P>4.04&nbsp;&nbsp;&nbsp;&nbsp;<U>Committee Changes.</U> The board of directors
3873
shall have the power at any time to fill vacancies in, to change the membership
3874
of, and to discharge any committee. However, a committee member may be removed
3875
by the board of directors, only if, in the judgment of the board of directors,
3876
the best interests of the Corporation will be served thereby, but such removal
3877
shall be without prejudice to the contract rights, if any, of the person so
3878
removed.</P>
3879
<HR>
3880
<P>4.05&nbsp;&nbsp;&nbsp;&nbsp;<U>Regular Meetings.</U> Regular meetings of any
3881
committee may be held without notice at such times and places as may be
3882
designated from time to time by resolution of the committee and communicated to
3883
all committee members.</P>
3884
<P>4.06&nbsp;&nbsp;&nbsp;&nbsp;<U>Special Meetings</U>. A special meeting of any
3885
committee may be held whenever called by any committee member at such time and
3886
place as such committee member shall designate in the notice of such special
3887
meeting. The committee member calling any special meeting shall cause notice of
3888
such special meeting to be given to each committee member at least 12 hours
3889
before such special meeting. Neither the business to be transacted at, nor the
3890
purpose of, any special meeting of any committee need be specified in the notice
3891
or waiver of notice or any special meeting. </P>
3892
<P>4.07&nbsp;&nbsp;&nbsp;&nbsp;<U>Quorum; Majority Vote</U>. At all meetings of
3893
any committee, a majority of the number of committee members designated by the
3894
board of directors shall constitute a quorum for the transaction of business. If
3895
a quorum is not present at a meeting of any committee, a majority of the
3896
committee members present may adjourn the meeting from time to time, without
3897
notice other than an announcement at the meeting, until a quorum is present. The
3898
vote of a majority of the committee members present at any meeting at which a
3899
quorum is in attendance shall be the act of a committee, unless the vote of a
3900
different number is required by the articles of incorporation or these bylaws.
3901
</P>
3902
<P>4.08&nbsp;&nbsp;&nbsp;&nbsp;<U>Minutes</U>. Each committee shall cause
3903
minutes of its proceedings to be prepared and shall report the same to the board
3904
of directors upon the request of the board of directors. The minutes of the
3905
proceedings of each committee shall be delivered to the secretary of the
3906
Corporation for placement in the minute books of the Corporation. </P>
3907
<P>4.09&nbsp;&nbsp;&nbsp;&nbsp;<U>Compensation</U>. Committee members may, by
3908
resolution of the board of directors, be allowed a fixed sum and expenses of
3909
attendance, if any, for attending any committee meetings or a stated salary.
3910
</P>
3911
<P>4.10&nbsp;&nbsp;&nbsp;&nbsp;<U>Responsibility</U>. The designation of any
3912
committee and the delegation of authority to it shall not operate to relieve the
3913
board of directors or any director of any responsibility imposed upon it or such
3914
director by law.</P>
3915
<P></P>
3916
<P ALIGN=CENTER>ARTICLE FIVE: GENERAL PROVISIONS RELATING TO MEETINGS</P>
3917
<P></P>
3918
<P>5.01&nbsp;&nbsp;&nbsp;&nbsp;<U>Notice</U>. Whenever by law, the articles of
3919
incorporation, or these bylaws, notice is required to be given to any
3920
shareholder, director, or committee member and no provision is made as to how
3921
such notice shall be given, it shall be construed to mean that notice may be
3922
given either (a) in person, (b) in writing, by mail, (c) except in the case of a
3923
shareholder, by telegram, telex, cable, telecopies, or similar means, or (d) by
3924
any other method permitted by law. Any notice required or permitted to be given
3925
hereunder (other than personal notice) shall be addressed to such shareholder,
3926
director, or committee member at his address as it appears on the books of the
3927
Corporation or, in the case of a shareholder, on the stock transfer records of
3928
the Corporation or at such other place as such shareholder, director, or
3929
committee member is known to be at the time notice is mailed or transmitted. Any
3930
notice required or permitted to be given by mail shall be deemed to be delivered
3931
and given at the time when the same is deposited in the United States mail,
3932
postage prepaid. Any notice required or permitted to be given by telegram,
3933
telex, cable, telecopier, or similar means shall be deemed to be delivered and
3934
given at the time transmitted.</P>
3935
<HR>
3936
<P>5.02&nbsp;&nbsp;&nbsp;&nbsp;<U>Waiver of Notice</U>. Whenever by law, the
3937
articles of incorporation, or these bylaws, any notice is required to be given
3938
to any shareholder, director, or committee member of the Corporation a waiver
3939
thereof in writing signed by the person or persons entitled to such notice,
3940
whether before or after the time notice should have been given, shall be
3941
equivalent to the giving of such notice. Attendance of a director at a meeting
3942
shall constitute a waiver of notice of such meeting, except where a director
3943
attends a meeting for the express purpose of objecting to the transaction of any
3944
business on the ground that the meeting is not lawfully called or convened. </P>
3945
<P>5.03&nbsp;&nbsp;&nbsp;&nbsp;<U>Telephone and Similar Meetings.</U>
3946
Shareholders, directors, or committee members may participate in and hold a
3947
meeting by means of a conference telephone or similar communications equipment
3948
by means of which persons participating in the meeting can hear each other.
3949
Participation in such a meeting shall constitute presence in person at such
3950
meeting, except where a person participates in the meeting for the express
3951
purpose of objecting to the transaction of any business on the ground that the
3952
meeting is not lawfully called or convened.</P>
3953
<P>5.04&nbsp;&nbsp;&nbsp;&nbsp;<U>Action Without Meeting</U>. Any action which
3954
may be taken, or is required by law, the articles of incorporation, or these
3955
bylaws to be taken, at a meeting of shareholders, directors, or committee
3956
members may be taken without a meeting if a consent in writing, setting forth
3957
the action so taken, shall be signed by all of the shareholders, directors, or
3958
committee members, as the case may be, entitled to vote with respect to the
3959
subject matter thereof, and such consent shall have the same force and effect,
3960
as of the date stated therein, as a unanimous vote of such shareholders,
3961
directors, or committee members, as the case may be, and may be stated as such
3962
in any document filed with the Secretary of State of Texas or in any certificate
3963
or other document delivered to any person. The consent may be in one or more
3964
counterparts so long as each shareholder, director, or committee member signs
3965
one of the counterparts. The signed consent shall be placed in the minute books
3966
of the Corporation.</P>
3967
<P></P>
3968
<P ALIGN=CENTER>ARTICLE SIX: OFFICERS AND OTHER AGENTS</P>
3969
<P></P>
3970
<P>6.01&nbsp;&nbsp;&nbsp;&nbsp;<U>Number; Titles; Election; Term</U>. The
3971
Corporation shall have a president and a secretary, and such other officers and
3972
agents as the board of directors may deem desirable. The board of directors
3973
shall elect a president and secretary at its first meeting at which a quorum
3974
shall be present after the annual meeting of shareholders or whenever a vacancy
3975
exists. The board of directors then, or from time to time, may also elect or
3976
appoint one or more other officers or agents as it shall deem advisable. Each
3977
officer and agent shall hold office until his successor has been elected or
3978
appointed and qualified, or, if earlier, at his death, resignation, or removal.
3979
Any two or more offices may be held by the same person. No officer or agent need
3980
be a shareholder, a director, a resident of the State of Texas, or a citizen of
3981
the United States.</P>
3982
<P>6.02&nbsp;&nbsp;&nbsp;&nbsp;<U>Removal</U>. Any officer or agent elected or
3983
appointed by the board of directors may be removed by the board of directors,
3984
whenever, in the judgment of the board of directors, the best interests of the
3985
Corporation will be served thereby, but such removal shall be without prejudice
3986
to the contract rights, if any, of the person so removed. Election or
3987
appointment of an officer or agent shall not of itself create contract rights.
3988
</P>
3989
<P>6.03&nbsp;&nbsp;&nbsp;&nbsp;<U>Vacancies.</U> Any vacancy occurring in any
3990
office of the Corporation (by death, resignation, removal, or otherwise) may be
3991
filled by the board of directors.</P>
3992
<P>6.04&nbsp;&nbsp;&nbsp;&nbsp;<U>Authority</U>. Officers shall have such
3993
authority and perform such duties in the management of the Corporation as are
3994
provided in these bylaws or as may be determined by resolution of the board of
3995
directors not inconsistent with these bylaws.</P>
3996
<HR>
3997
<P>6.05&nbsp;&nbsp;&nbsp;&nbsp;<U>Compensation.</U> The compensation, if any, of
3998
the officers shall be fixed, increased, or decreased from time to time by the
3999
board of directors.
4000
<P>6.06&nbsp;&nbsp;&nbsp;&nbsp;<U>Chairman of the Board</U>. The chairman of the
4001
board, if a person is elected to such office by the board of directors, shall
4002
perform the following duties and have the following responsibilities: schedule
4003
regular meetings of the board of directors; work with the officers and other
4004
directors of the Corporation to set the agenda for regular and special meetings
4005
of the board of directors; preside at all meetings of the board of directors
4006
that the chairman is able to attend; ensure that the directors are given
4007
adequate information to render informed decisions at board meetings; work with
4008
the president and the other officers of the Corporation to formulate public
4009
announcements, press releases and shareholder and analyst communications and
4010
oversee and coordinate their release; ensure the smooth operation of the
4011
committees of the board of directors; see that all orders and resolutions of the
4012
board are carried into effect; and perform such other duties and have such other
4013
authority and powers as the board of directors may from time to time prescribe.
4014
</P>
4015
<P>6.07&nbsp;&nbsp;&nbsp;&nbsp;<U>President and Chief Executive Officer</U>. The
4016
president and chief executive officer shall be the chief executive officer of
4017
the Corporation subject to the supervision of the board of directors. The
4018
president and chief executive officer shall perform the following duties and
4019
have the following responsibilities: generally manage the business and property
4020
of the Corporation in the ordinary course of business with all such powers of
4021
oversight, supervision and management with respect to such business and property
4022
as may be reasonably incident to such responsibilities, including, but not
4023
limited to, the power to employ, discharge, or suspend employees or agents of
4024
the Corporation, to fix the compensation of employees and agents, and to
4025
suspend, with or without cause, any officer of the Corporation pending final
4026
action by the board of directors with respect to continued suspension, removal,
4027
or reinstatement of such officer; perform such other duties and have such other
4028
authority and powers as are typically possessed and exercised by corporate
4029
presidents and chief executive officers, all subject to the board&#146;s further
4030
instructions on discharging the duties of managing the business and property of
4031
the Corporation. If the board of directors has not elected a person to the
4032
office of chairman of the board, the president shall exercise all of the powers
4033
and discharge all of the duties of the chairman of the board. As between the
4034
Corporation and third parties, any action taken by the president in the
4035
performance of the duties of the chairman of the board shall be conclusive
4036
evidence that there is no chairman of the board. </P>
4037
<P>6.08&nbsp;&nbsp;&nbsp;&nbsp;<U>Secretary</U>. The secretary shall maintain
4038
minutes of all meetings of the board of directors, of any committee, and of the
4039
shareholders or consents in lieu of such minutes in the Corporation&#146;s
4040
minute books, and shall cause notice of such meetings to be given when requested
4041
by any person authorized to call such meetings. With respect to any contract,
4042
deed, deed of trust, mortgage, or other instrument executed by the Corporation
4043
through its duly authorized officer or officers, the attestation to such
4044
execution by the secretary shall not be necessary to constitute such contract,
4045
deed, deed of trust, mortgage, or other instrument a valid and binding
4046
obligation against the Corporation unless the resolution, if any, of the board
4047
of directors authorizing such execution expressly states that such attestation
4048
is necessary. The secretary shall have charge of the certificate books, stock
4049
transfer books, and stock papers as the board of directors may direct, all of
4050
which shall at all reasonable times be open to inspection by any director. The
4051
secretary shall perform such other duties as may be prescribed from time to time
4052
by the board of directors or as may be delegated from time to time by the
4053
president.</P>
4054
<HR>
4055
<P></P>
4056
<P ALIGN=CENTER>ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS</P>
4057
<P></P>
4058
<P>7.01&nbsp;&nbsp;&nbsp;&nbsp;<U>Certificates for Shares</U>. The certificates
4059
for shares of stock of the Corporation shall be in such form as shall be
4060
approved by the board of directors in conformity with law. The certificates
4061
shall be consecutively numbered, shall be entered as they are issued in the
4062
books of the Corporation or in the records of the Corporation&#146;s designated
4063
transfer agent, if any, and shall state the shareholder&#146;s name, the number
4064
of shares, and such other matters as may be required by law. The certificates
4065
shall be signed by the president or any vice president and also by the
4066
secretary, an assistant secretary, or any other officer, and may be sealed with
4067
the seal of the Corporation or a facsimile thereof. If any certificate is
4068
countersigned by a transfer agent or registered by a registrar, either of which
4069
is other than the Corporation itself or an employee of the Corporation, the
4070
signatures of the foregoing officers may be a facsimile. </P>
4071
<P>7.02&nbsp;&nbsp;&nbsp;&nbsp;<U>Lost, Stolen, or Destroyed Certificates.</U>
4072
The Corporation shall issue a new certificate in place of any certificate for
4073
shares previously issued if the registered owner of the certificate:</P>
4074
<OL TYPE=a>
4075
<LI><U>Claim.</U> Makes proof by affidavit, in form and substance satisfactory
4076
to the board of directors, that a previously issued certificate for shares has
4077
been lost, destroyed, or stolen;
4078
<LI><U>Timely Request.</U> Requests the issuance of a new certificate before the
4079
Corporation has notice that the certificate has been acquired by a purchaser for
4080
value in good faith and without notice of an adverse claim;
4081
<LI><U>Bond</U>. If requested by the board of directors, delivers to the
4082
Corporation a bond, in form and substance satisfactory to the board of
4083
directors, with such surety or sureties and with fixed or open penalty, as the
4084
board of directors may direct, in its discretion, to indemnify the Corporation
4085
(and its transfer agent and registrar, if any) against any claim that may be
4086
made on account of the alleged loss, destruction, or theft of the certificate;
4087
and
4088
<LI><U>Other Requirements.</U> Satisfies any other reasonable requirements
4089
imposed by the board of directors.</OL>
4090
<P>When a certificate has been lost, destroyed, or stolen, and the shareholder
4091
of record fails to notify the Corporation within a reasonable time after he has
4092
notice of it, and the Corporation registers a transfer of the shares represented
4093
by the certificate before receiving such notification, the shareholder of record
4094
is precluded from making any claim against the Corporation for the transfer or
4095
for a new certificate.</P>
4096
<P>7.03&nbsp;&nbsp;&nbsp;&nbsp;<U>Transfer of Shares</U>. Shares of stock of the
4097
Corporation shall be transferable only on the books of the Corporation by the
4098
shareholders thereof in person or by their duly authorized attorneys or legal
4099
representatives. Upon surrender to the Corporation or the transfer agent of the
4100
Corporation of a certificate representing shares duly endorsed or accompanied by
4101
proper evidence of succession, assignment, or authority to transfer, the
4102
Corporation or its transfer agent shall issue a new certificate to the person
4103
entitled thereto, cancel the old certificate, and record the transaction upon
4104
its books. </P>
4105
<P>7.04&nbsp;&nbsp;&nbsp;&nbsp;<U>Registered Shareholders.</U> The Corporation
4106
shall be entitled to treat the shareholder of record as the shareholder in fact
4107
of any shares and, accordingly, shall not be bound to recognize any equitable or
4108
other claim to or interest in such shares on the part of any other person,
4109
whether or not it shall have actual or other notice thereof, except as otherwise
4110
provided by law.</P>
4111
<HR>
4112
<P></P>
4113
<P ALIGN=CENTER>ARTICLE EIGHT: MISCELLANEOUS PROVISIONS</P>
4114
<P></P>
4115
<P>8.01&nbsp;&nbsp;&nbsp;&nbsp;<U>Fiscal Year.</U> The fiscal year of the
4116
Corporation shall be fixed by the board of directors; provided, that if such
4117
fiscal year is not fixed by the board of directors it shall be the calendar
4118
year.</P>
4119
<P>8.02&nbsp;&nbsp;&nbsp;&nbsp;<U>Seal</U>. The seal, if any, of the Corporation
4120
shall be in such form as may be approved from time to time by the board of
4121
directors. If the board of directors approves a seal, the affixation of such
4122
seal shall not be required to create a valid and binding obligation against the
4123
Corporation. </P>
4124
<P>8.03&nbsp;&nbsp;&nbsp;&nbsp;<U>Resignation</U>. A director, committee member,
4125
officer, or agent may resign by so stating at any meeting of the board of
4126
directors or by giving written notice to the Corporation. The effective time of
4127
such resignation shall be any time specified in the statement made at the board
4128
of directors&#146; meeting or in the written notice given to the Corporation,
4129
but in no event may the effective time of such resignation be prior to the time
4130
such statement is made or such notice is given. If no effective time is
4131
specified in the resignation, the resignation shall be effective immediately.
4132
Unless a resignation specifies otherwise, it is effective without being
4133
accepted. </P>
4134
<P>8.04&nbsp;&nbsp;&nbsp;&nbsp;<U>Securities of Other Corporations</U>. The
4135
president or any vice president of the Corporation or any other person
4136
authorized by resolution of the board of directors shall have the power and
4137
authority to transfer, endorse for transfer, vote, consent, or take any other
4138
action with respect to any securities of another issuer which may be held or
4139
owned by the Corporation and to make, execute, and deliver any waiver, proxy, or
4140
consent with respect to any such securities. </P>
4141
<P>8.05&nbsp;&nbsp;&nbsp;&nbsp;<U>Amendment</U>. The power to alter, amend, or
4142
repeal these bylaws or to adopt new bylaws is vested in the board of directors,
4143
subject to repeal or change by action of the shareholders. </P>
4144
<P>8.06&nbsp;&nbsp;&nbsp;&nbsp;<U>Invalid Provisions</U>. If any provision of
4145
these bylaws is held to be illegal, invalid, or unenforceable under present or
4146
future laws, such provision shall be fully severable; these bylaws shall be
4147
construed and enforced as if such illegal, invalid, or unenforceable provision
4148
had never comprised a part hereof; and the remaining provisions hereof shall
4149
remain in full force and effect and shall not be affected by the illegal,
4150
invalid, or unenforceable provision or by its severance herefrom. Furthermore,
4151
in lieu of such illegal, invalid, or unenforceable provision there shall be
4152
added automatically as a part of these bylaws a provision as similar in terms to
4153
such illegal, invalid, or unenforceable provision as may be possible and be
4154
legal, valid, and enforceable. </P>
4155
<P>8.07&nbsp;&nbsp;&nbsp;&nbsp;<U>Headings.</U> The headings used in these
4156
bylaws are for reference purposes only and do not affect in any way the meaning
4157
or interpretation of these bylaws.
4158
<P></P>
4159
<P ALIGN=CENTER><U>CERTIFICATE</U></P>
4160
<P></P>
4161
<P>These Amended and Restated Bylaws were adopted by the Board of Directors of
4162
the Corporation on July 3, 1996. </P>
4163
<P></P>
4164
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
4165
<TR>
4166
<TD WIDTH=60%></TD>
4167
<TD WIDTH=40%><U>/s/ F. Robert Merrill III</U><BR>F. Robert Merrill III<BR>
4168
Secretary</TD></TR></TABLE>
4169
<HR>
4170
<P></P>
4171
<P></P>
4172
<P></P>
4173
<P></P>
4174
<P></P>
4175
<P></P>
4176
<P ALIGN=CENTER><B>EXHIBIT 11.1</B></P>
4177
<P></P>
4178
<P></P>
4179
<P></P>
4180
<P></P>
4181
<P></P>
4182
<P></P>
4183
<HR>
4184
<PRE>
4185
4186
Advanced Neuromodulation Systems, Inc.
4187
Computation of Earnings Per Share
4188
Years Ended December 31
4189
4190
2000 1999 1998
4191
------------ ------------ ------------
4192
Basic earnings per share:
4193
4194
Weighted average common
4195
shares outstanding 7,484,572 7,583,159 8,314,290
4196
------------ ------------ ------------
4197
4198
Net earnings from continuing operations $ 953,644 $ 6,003,281 $ 2,585,706
4199
Net earnings from discontinued operations -- -- 4,373,496
4200
------------ ------------ ------------
4201
Net earnings $ 953,644 $ 6,003,281 $ 6,959,202
4202
------------ ------------ ------------
4203
4204
4205
Net earnings from continuing operations
4206
per share $ 0.13 $ 0.79 $ 0.31
4207
Net earnings from discontinued operations
4208
per share -- -- 0.53
4209
------------ ------------ ------------
4210
Net earnings per share $ 0.13 $ 0.79 $ 0.84
4211
------------ ------------ ------------
4212
4213
4214
Diluted earnings per share:
4215
4216
Weighted average common
4217
shares outstanding 7,484,572 7,583,159 8,314,290
4218
Stock options and warrants--based on the treasury
4219
stock method using average market price 843,597 419,928 229,750
4220
------------ ------------ ------------
4221
Diluted common and common equivalent
4222
shares outstanding 8,328,169 8,003,087 8,544,040
4223
------------ ------------ ------------
4224
4225
4226
Net earnings from continuing operations $ 953,644 $ 6,003,281 $ 2,585,706
4227
Net earnings from discontinued operations -- -- 4,373,496
4228
------------ ------------ ------------
4229
Net earnings $ 953,644 $ 6,003,281 $ 6,959,202
4230
------------ ------------ ------------
4231
4232
4233
Net earnings from continuing operations
4234
per share $ 0.11 $ 0.75 $ 0.30
4235
Net earnings from discontinued operations
4236
per share -- -- 0.51
4237
------------ ------------ ------------
4238
Net earnings per share $ 0.11 $ 0.75 $ 0.81
4239
------------ ------------ ------------
4240
</PRE>
4241
<HR>
4242
<P></P>
4243
<P></P>
4244
<P></P>
4245
<P></P>
4246
<P></P>
4247
<P></P>
4248
<P ALIGN=CENTER><B>EXHIBIT 21.1</B></P>
4249
<P></P>
4250
<P></P>
4251
<P></P>
4252
<P></P>
4253
<P></P>
4254
<P></P>
4255
<HR>
4256
<PAGE>
4257
<P ALIGN=CENTER><B><U>SUBSIDIARIES</U></B></P>
4258
<P></P>
4259
<P>The Company has no "significant subsidiaries" as defined in Rule 1-02 (w) of
4260
Regulation S-X.</P>
4261
<HR>
4262
<P></P>
4263
<P></P>
4264
<P></P>
4265
<P></P>
4266
<P></P>
4267
<P></P>
4268
<P ALIGN=CENTER><B>EXHIBIT 23.1</B></P>
4269
<P></P>
4270
<P></P>
4271
<P></P>
4272
<P></P>
4273
<P></P>
4274
<P></P>
4275
<HR>
4276
<P ALIGN=CENTER><U>Consent of Independent Auditors</U></P>
4277
<P></P>
4278
<P>We consent to the incorporation by reference in the Registration Statements
4279
(Form S-8 - Nos. 2-82414, 2-91410, 33-235312, 33-00967 and 333-75879, and Form
4280
S-3 - Nos. 333-40927 and 333-53440) pertaining to the Advanced Neuromodulation
4281
Systems, Inc. 1979 Amended and Restated Employees&#146; Stock Option Plan; the
4282
Advanced Neuromodulation Systems, Inc. Directors&#146; Stock Option Plan; the
4283
Advanced Neuromodulation Systems, Inc. 1987 Employees&#146; Stock Option Plan;
4284
the Advanced Neuromodulation Systems, Inc. 1995 Stock Option Plan; the Advanced
4285
Neuromodulation Systems, Inc. Sales and Marketing Employees Stock Option Plan;
4286
the Heaton Stock Option Plan; the Advanced Neuromodulation Systems, Inc. 1998
4287
Stock Option Plan; the registration of 100,000 shares of Common Stock issued
4288
pursuant to a Common Stock Purchase Warrant between Advanced Neuromodulation
4289
Systems, Inc. and Robert L. Swisher, Jr., the registration of 1,223,825 shares
4290
of Common Stock issued pursuant to an Agreement and Plan of Merger dated
4291
November 30, 2000 between the Company and Hi-tronics Designs, Inc. and an Asset
4292
Purchase Agreement dated as of January 2, 2001 between the Company and
4293
Implantable Devices Limited Partnership, ESOX Technology Corporation and
4294
Implantable Devices, Inc. and the related Prospectuses of our report dated March
4295
2, 2001, with respect to the consolidated financial statements of Advanced
4296
Neuromodulation Systems, Inc. and Subsidiaries, included in the Annual Report
4297
(Form 10-K) for the year ended December 31, 2000.</P>
4298
<P></P>
4299
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
4300
<TR>
4301
<TD WIDTH=40%>&nbsp;</TD>
4302
<TD WIDTH=60%><U>/s/Ernst and Young LLP</U><BR>Ernst and Young LLP</TD></TR>
4303
</TABLE>
4304
<P></P>
4305
<P>Dallas, Texas<BR>March 27, 2001</P>
4306
<H1 ALIGN=CENTER><FONT SIZE=3>EXHIBIT 27.1</FONT></H1>
4307
</BODY>
4308
</HTML>
4309
</TEXT>
4310
</DOCUMENT>
4311
<DOCUMENT>
4312
<TYPE>EX-27
4313
<SEQUENCE>2
4314
<FILENAME>0002.txt
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<DESCRIPTION>FDS --
4316
<TEXT>
4317
4318
<TABLE> <S> <C>
4319
4320
4321
<ARTICLE> 5
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<LEGEND>
4323
(Exhibit 27.1, Financial Data Sheet)
4324
</LEGEND>
4325
<CIK> 0000351721
4326
<NAME> Advanced Neuromodulation Systems, Inc.
4327
4328
<S> <C>
4329
<PERIOD-TYPE> YEAR
4330
<FISCAL-YEAR-END> DEC-31-2000
4331
<PERIOD-START> JAN-01-2000
4332
<PERIOD-END> DEC-31-2000
4333
<CASH> 8,545,578
4334
<SECURITIES> 1,030,318
4335
<RECEIVABLES> 3,980,860
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<ALLOWANCES> 130,255
4337
<INVENTORY> 5,647,790
4338
<CURRENT-ASSETS> 21,998,159
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<PP&E> 8,105,067
4340
<DEPRECIATION> 2,830,420
4341
<TOTAL-ASSETS> 45,371,686
4342
<CURRENT-LIABILITIES> 2,910,024
4343
<BONDS> 0
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<PREFERRED-MANDATORY> 0
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<PREFERRED> 0
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<COMMON> 435,418
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<OTHER-SE> 39,724,574
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<TOTAL-LIABILITY-AND-EQUITY> 45,371,686
4349
<SALES> 23,081,624
4350
<TOTAL-REVENUES> 23,081,624
4351
<CGS> 7,488,321
4352
<TOTAL-COSTS> 14,484,409
4353
<OTHER-EXPENSES> (578,963)
4354
<LOSS-PROVISION> 0
4355
<INTEREST-EXPENSE> 0
4356
<INCOME-PRETAX> 1,687,857
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<INCOME-TAX> 734,213
4358
<INCOME-CONTINUING> 953,644
4359
<DISCONTINUED> 0
4360
<EXTRAORDINARY> 0
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<CHANGES> 0
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<NET-INCOME> 953,644
4363
<EPS-BASIC> .13
4364
<EPS-DILUTED> .11
4365
4366
4367
</TABLE>
4368
</TEXT>
4369
</DOCUMENT>
4370
</SEC-DOCUMENT>
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-----END PRIVACY-ENHANCED MESSAGE-----
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