-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hh3IQTjIvWUjA+8icX/eZkk3DD4IkcN6//+thg3W1NIFnu/NNW2fbKYU0xRbeB1a KxqMmXh5dRScHk3Cgavknw== 0000950134-02-010052.txt : 20020814 0000950134-02-010052.hdr.sgml : 20020814 20020814152503 ACCESSION NUMBER: 0000950134-02-010052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATS MEDICAL INC CENTRAL INDEX KEY: 0000824068 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 411595629 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18602 FILM NUMBER: 02735735 BUSINESS ADDRESS: STREET 1: 3905 ANNAPOLIS LA STREET 2: SUITE 105 CITY: MINNEAPOLIS STATE: MN ZIP: 55447 BUSINESS PHONE: 6125537736 MAIL ADDRESS: STREET 1: 3905 ANNAPOLIS LANE STREET 2: SUITE 105 CITY: MINNEAPOLIS STATE: MN ZIP: 55447 FORMER COMPANY: FORMER CONFORMED NAME: ATS MEDCIAL INC DATE OF NAME CHANGE: 19920803 10-Q 1 c71192e10vq.txt FORM 10-Q FOR QUARTER ENDING JUNE 30, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 COMMISSION FILE NO. 0-18602 ATS MEDICAL, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-1595629 (state or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3905 ANNAPOLIS LANE, SUITE 105 55447 MINNEAPOLIS, MINNESOTA (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (763) 553-7736 Former name, if changed since last report: N/A Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of each of the registrant's classes of common stock as of August 9, 2002 was: Common Stock $.01 par value 22,281,325 shares ATS MEDICAL, INC. INDEX
PART I. FINANCIAL INFORMATION PAGE Item 1. Statements of Financial Position - June 30, 2002 (unaudited) and 3 December 31, 2001 Statements of Operations - 4 Three and Six Months Ended June 30, 2002 and 2001 (unaudited) Statements of Cash Flows - 5 Three and Six Months Ended June 30, 2002 and 2001 (unaudited) Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of 8 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About 15 Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Default Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of 15 Security Holders Item 5. Other Information 16 Item 6 Exhibit and Reports on Form 8-K 16 Signatures 17
2 ITEM 1. FINANCIAL STATEMENTS ATS MEDICAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
June 30, December 31, 2002 2001 ----------- ----------- (Unaudited) (Note) ASSETS Current assets: Cash and cash equivalents $ 5,966,491 $ 5,078,750 Short-term investments 2,485,760 7,698,290 ----------- ----------- 8,452,251 12,777,040 Accounts receivable, less allowance of $410,000 in 2002 and $400,000 in 2001 4,588,409 4,082,992 Inventories 17,505,720 17,348,901 Prepaid expenses 380,473 570,716 ----------- ----------- Total current assets 30,926,853 34,779,649 Furniture, machinery and equipment, net 6,278,115 6,753,483 Inventories 40,000,000 40,000,000 Technology license 18,500,000 13,000,000 Other assets 437,075 438,100 ----------- ----------- Total assets $96,142,043 $94,971,232 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 991,523 $ 1,345,780 Notes payable 2,500,000 0 Accrued liabilities 2,085,871 1,402,203 ----------- ----------- Total current liabilities 5,577,394 2,747,983 Long-term debt 11,100,000 0 Shareholders' equity: Common Stock, $.01 par value: Authorized 40,000,000 shares; Issued and outstanding 22,251,621 and 22,203,940 shares at June 30, 2002 and December 31, 2001, respectively 222,516 222,039 Additional paid-in capital 111,446,623 111,354,615 Accumulated deficit (32,204,490) (19,353,405) ----------- ----------- Total shareholders' equity 79,464,649 92,223,249 ----------- ----------- Total liabilities and shareholders' equity $96,142,043 $94,971,232 =========== ===========
Note: The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed financial statements. 3 ATS MEDICAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended June 30, Six months ended June 30, -------------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ----------- ------------ ----------- Net sales $ 2,475,241 $ 4,415,222 $ 6,377,504 $ 8,668,795 Less cost of goods sold 2,324,011 2,872,188 5,014,922 5,480,348 ------------ ----------- ------------ ----------- Gross profit 151,230 1,543,034 1,362,582 3,188,447 Expenses: Research, development and engineering 668,690 1,090,962 1,594,350 1,848,876 Sales and marketing 1,143,273 1,231,375 2,302,205 2,299,087 General and administrative 780,325 853,609 1,454,568 1,669,287 Impairment of technology license 8,100,000 0 8,100,000 0 Reorganization expenses 865,184 0 865,184 0 ------------ ----------- ------------ ----------- Total expenses 11,557,472 3,175,946 14,316,307 5,817,250 ------------ ----------- ------------ ----------- Operating loss (11,406,242) (1,632,912) (12,953,725) (2,628,803) Interest income 38,529 285,149 102,640 705,723 ------------ ----------- ------------ ----------- Net loss $(11,367,713) $(1,347,763) $(12,851,085) $(1,923,080) ============ =========== ============ =========== Net loss per share: Basic and diluted $ (0.51) $ (0.06) $ (0.58) $ (0.09) Weighted average number of shares outstanding: Basic and diluted 22,244,178 22,139,168 22,232,607 22,128,522
See notes to condensed financial statements. 4 ATS MEDICAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 2001 ------------ ----------- OPERATING ACTIVITIES Net loss $(12,851,085) $(1,923,080) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation 361,656 322,397 Loss on disposal of equipment 19,981 9,811 Impairment of technology license 8,100,000 0 Changes in operating assets and liabilities: Accounts receivable (505,417) (1,275,253) Prepaid expenses 190,243 57,520 Other assets 1,025 (7,631) Inventories (156,819) (925,644) Accounts payable and accrued expenses 329,411 (1,283,209) ------------ ----------- Net cash used in operating activities (4,511,005) (5,025,089) INVESTING ACTIVITIES Purchase of short-term investments (2,674,401) (6,576,903) Sale of short-term investments 7,886,931 17,171,174 Net purchases of furniture, machinery and equipment 93,731 (2,563,985) ------------ ----------- Net cash provided by investing activities 5,306,261 8,030,286 FINANCING ACTIVITIES Net proceeds from sale of common stock 92,485 391,375 ------------ ----------- Net cash provided by financing activities 92,485 391,375 Increase in cash and cash equivalents 887,741 3,396,572 Cash and cash equivalents at beginning of period 5,078,750 14,804,195 ------------ ----------- Cash and cash equivalents at end of period $ 5,966,491 $18,200,767 ============ ===========
See notes to condensed financial statements. 5 ATS MEDICAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2002 Note A - BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. Note B - COMMITMENTS In late-June, 2002 the Company amended the supply and technology transfer agreements it has with Carbomedics. The amendment to the supply agreement suspends component set purchases until January 2007, except the current work in process. This postpones component purchases totaling approximately $3 million in 2002 and approximately $18 million for the years 2003 to 2006. In January of 2007, the purchase obligations for 2003 would resume, with the obligations for 2004 through 2006 to follow in each subsequent year. In addition, the technology transfer fee of $5,000,000 due at the end of 2002 will be paid in two installments in June and December of 2003. The company will pay interest at the rate of 7% on this note from the original due date until the payment date. Furthermore, the technology payments due in 2003, 2004, 2005 and 2006 totaling $23 million begin to be paid based on a percentage of the value of the inventory drawn down starting in January of 2005 with the first payment in June 2005 and subsequent payments every six months based on a percent of the inventory drawn down during the previous six months. As part of this agreement, the Company has provided Carbomedics a security interest in its inventory covering all of its material obligations under its agreements with Carbomedics. Note C - IMPAIRMENT OF TECHNOLOGY LICENSE At the end of our first quarter of 2002, the Company evaluated the carrying value of its technology license asset of $13 million in accordance with the provisions of FASB Statement 142 (FASB No. 142), Goodwill and Other Intangible Assets, which were effective for the Company as of January 1, 2002. Utilizing a discounted cash flow model, that analysis indicated the asset's carrying value was recoverable and the Company recognized no impairment as a result of the adoption of FASB NO. 142. In the second quarter of 2002, the Company experienced decreased sales volumes, decreased average selling prices and initiated certain restructuring activities pertaining to its executive team and the manner in which it sells its product from a direct sales force to a hybrid sales force of a few direct salespeople and several independent manufacturers representatives. In response to these conditions, the Company modified its pricing strategy and sales volume estimates in 6 conjunction with the reorganization plan implemented and the increased competitive pressures in the European market. As a result of these conditions and changes, the Company reviewed its future cash flow analysis and changed its expectations of the sales volumes estimates and its selling prices of the heart valve in the cash flow model to evaluate the recoverability of its technology license. When compared to the revised fair value as calculated by discounting the changed future cash flows at June 30, 2002, the Company determined a non-cash charge representing an impairment of this asset needed to be recognized in the amount of $8.1 million in the second quarter. This charge also reflects in part the effect of the amended milestone payments in the early years of the technology transfer agreement relative to the benefits of lower cost carbon not being realized until future years after the depletion of inventories currently on hand. Note D - REORGANIZATION OF THE COMPANY In June 2002, the Board of Directors decided to implement new cost containment measures and to seek a new management team to lead the business. As part of these cost reduction measures, one half of the workforce, including all of the executive officers of the Company with the exception of the Company's current CEO, have been released from employment. The Company had 41 employees at June 30, 2002 compared to 131 employees at June 30, 2001. For the quarter ended June 30, 2002 the Company had $865,184 in reorganization expenses. The reorganization expenses consist of approximately $655,000 of severance pay and benefits, and $211,000 of rent that was expensed for the vacated portion of the Company's leased facility. Of the total reorganization expenses approximately $401,000 has not been paid as of June 30, 2002. Note E - STOCK OPTIONS CANCELLED With the reduction in personnel, stock options totaling 244,374 were cancelled as of June 30, 2002 in the current plan. The stock options outstanding at June 30, 2002 were 1,830,366 at a weighted exercise price of $7.92. Another 79,285 stock options will be subject to cancellation by the end of the year. There are 520,416 shares available for grant at June 30, 2002. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ATS Medical manufactures and markets a mechanical bileaflet heart valve with our patented open pivot design. Our heart valve is used to treat valvular heart disease caused by the natural aging process, rheumatic heart disease and congenital defects. We have received regulatory approvals to market the ATS heart valve in the United States and most international markets, principally Europe, Japan, Canada and Australia. We commenced selling the ATS heart valve in international markets in 1992. Internationally, we sell the valve to independent distributors with assigned territories (generally a specific country or region) who in turn sell the valve to hospitals or clinics. Most of our sales to international distributors are denominated in U.S. dollars so currency risk is borne by the distributor; however, as the dollar increases in value relative to the distributor's local currency, the cost of the valve increases for the distributor even though ATS does not change the selling price. From time to time, this has caused us to adjust the selling price to the affected distributors to help offset a portion of the currency loss. During 2001 we hired a direct sales force and began selling the ATS heart valve in the United States. As a result of these efforts, our U.S. sales as a percentage of our overall sales increased from 4% in 2000 to 12% in 2001 and 23% as of the second quarter 2002. Due to the cost of maintaining a full direct sales force, however, we decided in mid-June 2002 to switch to a hybrid sales force consisting of our top performing direct sales people plus independent manufacturers representatives who are now being recruited. To date we have purchased all of the pyrolytic carbon components for the ATS heart valve from Carbomedics, a division of Centerpulse (formerly Sulzer Medica) pursuant to a multi-year supply agreement entered into in 1990. The cost of the pyrolytic carbon components represents approximately 80% of the total cost of the ATS heart valve. Under the supply agreement, the cost of the pyrolytic carbon components has varied according to annual volume purchases and is adjusted annually by reference to increases in the U.S. Department of Labor Employment Cost Index. In December 1999, we renegotiated the supply agreement with Carbomedics resulting in significant reductions in our minimum purchase requirements and unit costs beginning in 2001. In late June 2002, we again amended the supply agreement such that our purchase obligations for the remainder of 2002 (with the exception of approximately eight weeks of work in process) would be suspended along with 100% of our purchase obligations for 2003, 2004, 2005 and 2006. In January of 2007 the purchase obligations for 2003 would resume, with the obligations for 2004 through 2006 to follow in each subsequent year. We also renegotiated the timing of the technology fee payments due under the carbon agreement with Carbomedics, such that, the $5 million payment that would have been due in December of this year will now be paid in two parts; one half in June 2003 and the other half in December 2003. ATS will pay interest at the rate of 7% on this note from the original due date until the payment date. Furthermore, the technology payments due in 2003, 2004, 2005 and 2006 totaling $23 million will begin to be paid based on a percentage of the value of the inventory drawn down starting in January of 2005 with the first payment in June 2005 and subsequent payments every six months based on a percent of the inventory draw down during the previous six months. These 8 adjustments to the timing of cash disbursements, relative to our two agreements with Carbomedics, together with our reduced operating costs are projected to provide working capital through 2005. As a part of this agreement, the Company has provided Carbomedics a security interest in its inventory covering all of its material obligations under its agreement with Carbomedics. In our Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2001, we identified critical accounting policies and estimates for our business. Results of Operations Net sales for the quarter ended June 30, 2002 decreased 44% to $2,475,241 compared to $4,415,222 for the quarter ended June 30, 2001. Net sales for the six months ended June 30, 2002 totaled $6,377,504 compared to $8,668,795 for the six months ended June 30, 2001. The decrease from last year's second quarter was largely attributable to Europe and was due to several factors. First, we went to distributor accounting for Italy in the fourth quarter of 2001, so we reported sales in Italy the second quarter 2001, but not in the second quarter of 2002. Second, our German distributor accelerated his plans to phase out of the market when the reorganization of ATS was announced and as a result did not place his usual order at the end of the quarter. Third, due to special circumstances, we made an agreement with our Spanish distributor to forgo any order in the second quarter to bring down the amount of inventory he was carrying and certain costs associated with that inventory. Finally, our distributor covering France and Belgium defaulted on its contract by failing to place a second quarter order. The impact of each of these items was significant, and taken together with a decrease in average selling prices in other international markets, resulted in the 44% decline in revenue. Unit sales for the quarter ended June 30, 2002 decreased 38% compared to unit sales for the quarter ended June 30, 2001 also for the reasons given above. Revenue in the United States increased 27% in the quarter ended June 30, 2002 compared to the quarter ended June 30, 2001 and increased 10% compared to the quarter ended March 31, 2002. Non-U.S. revenue in the quarter ended June 30, 2002 decreased 55% compared to the quarter ended June 30, 2001. This was primarily due to European sales as explained above. In the U.S. market, ATS reports the selling price to the hospital. In non-U.S. markets, ATS reports the selling price to the distributor. As U.S. sales increase as a percentage of overall sales, the overall average selling price may increase, even though the average selling prices in some non-U.S. markets may be steady or declining. Hospital administrators continue to apply pressure for lower prices, and the willingness of competitors to reduce prices will continue to put pressure on revenue growth and margins. In the United States, we had established a direct sales force to sell the valve during the first several months of 2001. In mid-June 2002, we took certain cost savings measures including a reduction in work force which included the majority of our direct sales people. Independent manufacturers representatives are being recruited to take the place of the former direct territories affected by the reduction in force. ATS expects to have independent manufacturers representatives covering all of the United States by the end of 2002. Valves are consigned to hospitals desiring to use the ATS valve and a sale is recorded once the valve is implanted. The "sales cycle" for new accounts can take from one to three months and we anticipate additional 9 delays caused by the transition from direct sales to sales through independent representatives. We feel that we have a superior product, however, our competitors have larger sales staffs and greater financial resources so they are currently able to reach more potential customers. The rate at which we will open new accounts and realize new implants with our hybrid sales force is difficult to forecast from quarter to quarter. Cost of sales for the three months ended June 30, 2002 totaled $2,324,011 or 94% of sales compared to $2,872,188 or 65% of sales for the three months ended June 30, 2001. Cost of sales for the six months ended June 30, 2002 totaled $5,014,922 or 79% compared to $5,480,348 or 63% for the six months ended June 30, 2001. Adjustments taken against the cost of goods in the second quarter of 2002, including a $200,000 charge relating to the lower cost or market, increased the cost of goods sold from 66% to 94% and lowered the gross margin from 34% to 6%. Gross profit totaled $151,230 for the quarter ended June 30, 2002 or 6% of sales, compared to gross profit of $1,543,034 or 35% of sales for the quarter ended June 30, 2001. For the six months ended June 30, 2002 gross profit totaled $1,362,582 or 21% of sales compared to gross profit for the six months ended June 30, 2001 of $3,188,447 or 37% of sales. The average selling price per unit decreased by 6% for the three months and six months ended June 30, 2002 compared to three months and six months ended June 30, 2001. Research, development and engineering expenses totaled $668,690 for the quarter ended June 30, 2002 versus $1,090,962 for the quarter ended June 30, 2001, a decrease of 39%. For the six months ended June 30, 2002 research, development and engineering expenses totaled $1,594,350 a decrease of 14% over the $1,848,876 research, development and engineering expense reported for the six months ended June 30, 2001. Approximately 79% of research and development expenses for the six months ended June 30, 2002 were related to our own carbon manufacturing facility. Our focus during 2001 and the first quarter of 2002 was making qualification and verification coating runs, training ATS personnel on the new carbon manufacturing equipment installed during the period, and documenting procedures. This culminated with the submissions at the end of the first quarter 2002 to the T.U.V., who we use as a notified body for our European approval, and to the U.S. Food and Drug Administration. On May 29, 2002, we received notification from the FDA of full approval of our carbon manufacturing plant. As our existing inventory is depleted over the next few years, components from this facility will allow for significant reduction in the cost of goods sold. With the development phase of our carbon facility essentially complete, ongoing R&D costs associated with this project will decrease substantially. Sales and marketing expenses decreased in the quarter ended June 30, 2002 to $1,143,273 compared to $1,231,375 in the quarter ended June 30, 2001. For the six months ended June 30, 2002 sales and marketing expenses totaled $2,302,205 compared to $2,299,087 for the six months ended June 30, 2001. We had 17 U.S. salespeople and four regional managers employed at June 30, 2001. For the majority of the second quarter 2002, we had 11 salespeople and four regional managers. After the restructuring that took place in June 2002, we have three salespeople and one national sales manager. Our sales and marketing expenses will be approximately 60% lower, in the last half of this year, compared to the first half of 2002. We are currently recruiting independent manufacturers representatives to cover the open U.S. territories. 10 General and administrative expenses totaled $780,325 for the three months ended June 30, 2002 a decrease from the $853,609 reported for the three months ended June 30, 2001. For the six months ended June 30, 2002 general and administrative expenses totaled $1,454,568, down 13% from the $1,669,287 general and administrative expense reported for the six months ended June 30, 2001. The decrease is due to fewer personnel and lower travel expenses in the general and administrative departments. For the quarter ended June 30, 2002, we took an impairment charge on our technology license in the amount of $8,100,000. In the second quarter of 2002, we reached three additional milestones in conjunction with our license agreement with Carbomedics, which resulted in an additional $13.6 million of long-term obligations to be recognized on our balance sheet. At the end of our first quarter of 2002, we evaluated the carrying value of our technology license asset of $13 million in accordance with the provisions of FASB Statement 142 (FASB No. 142), Goodwill and Other Intangible Assets, which were effective for the Company as of January 1, 2002. Utilizing a discounted cash flow model, that analysis indicated the asset's carrying value was recoverable and we recognized no impairment as a result of the adoption of FASB NO. 142. In the second quarter of 2002, we experienced decreased sales volumes, decreased average selling prices and initiated certain restructuring activities pertaining to our executive team and the manner in which we sells our product from a direct sales force to a hybrid sales force of a few direct salespeople and several independent manufacturers representatives. In response to these conditions, we modified our pricing strategy and sales volume estimates in conjunction with the reorganization plan implemented and the increased competitive pressures in the European market. As a result of these conditions and changes, we reviewed our future cash flow analysis and changed our expectations of the sales volumes estimates and selling prices of the heart valve in the cash flow model to evaluate the recoverability of our technology license. When compared to the revised fair value as calculated by discounting the changed future cash flows at June 30, 2002, we determined a non-cash charge representing an impairment of this asset needed to be recognized in the amount of $8.1 million in the second quarter. This charge also reflects in part the effect of the amended milestone payments in the early years of the technology transfer agreement relative to the benefits of lower cost carbon not being realized until future years after the depletion of inventories currently on hand. For the quarter ended June 30, 2002, we also had $865,184 in reorganization expenses. In June 2002, management proposed new cost containment measures and the Board of Directors decided to implement the new measures and to seek a new management team to lead the business. As part of these cost reduction measures, one half of the workforce, including all of the executive officers of the Company with the exception of the Company's current CEO, have been released from employment. As a result, we had 41 employees at June 30, 2002 compared to 131 employees at June 30, 2001. The reorganization expenses consist of approximately $655,000 of severance pay and benefits, and $211,000 of rent that was expensed for the vacated portion of the Company's leased facility. Of the total reorganization expenses approximately $401,000 has not been paid as of June 30, 2002. Interest income totaled $38,529 for the quarter ended June 30, 2002 compared to $285,149 for the quarter ended June 30, 2001. Interest income for the six months ended June 30, 2002 totaled $102,640 compared to $705,723 for the six months ended June 30, 2001. The decrease in 11 interest income in the first half of 2002 was the result of lower average investable cash balances and lower interest rates. ATS recorded a net loss of $11,367,713 or ($0.51) per share for the quarter ended June 30, 2002 compared to a net loss of $1,347,763 or ($0.06) per share for the quarter ended June 30, 2001. For the six months ended June 30, 2002, the company recorded a net loss of $12,851,085 or ($0.58) per share compared to a net loss of $1,923,080 or ($0.09) per share for the six months ended June 30, 2001. The decreases in gross margin and interest income, coupled with the impairment charge and reorganization expenses, were the reasons for the increased loss. We are recruiting independent manufacturers representatives in the United States and making some changes in our international representation to increase sales and to return to profitability in future quarters. ATS has accumulated approximately $24 million of net operating loss (NOL) carryforwards for U.S. tax purposes. ATS believes that its ability to fully utilize the existing net operating loss carryforwards could be restricted on a portion of the NOL for changes in control that may have occurred or may occur in the future. We have not accrued any tax benefits for such tax loss benefit. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments decreased by $4,324,789 from $12,777,040 at December 31, 2001 to $8,452,251 at June 30, 2002. Inventory purchases and operating losses including the reorganization expenses were responsible for the used cash during fiscal 2002. With the reductions in personnel and spending enacted by ATS last fall and in June 2002, our expenses will be significantly lower in future quarters. Accounts receivable increased from $4,082,992 at December 31, 2001 to $4,588,409 at June 30, 2002. The majority of the receivable balances are amounts owing from our international customers, where payments terms are 60 days or longer. Current liabilities increased $2,829,411 from $2,747,983 at December 31, 2001 to $5,577,394 at June 30, 2002. The majority of this increase is a $2.5 million short-term note on the technology transfer payment due in June 2003. The remaining increase is related to accrued severance and other reorganization costs. ATS had contracted to purchase $8.4 million of components during 2002 in accordance with the terms of its supply agreement with Carbomedics. On July 2, 2002 this agreement was amended to suspend carbon component purchases until January 2007, except for the current work in process that we will receive in the third quarter 2002. This suspension of component purchases will reduce cash expenditures for the Company by approximately $3 million dollars in 2002. For the years 2003 to 2006, the total deferred expenditures will be approximately $18 million. Under the carbon agreement entered into in December 1999, ATS agreed to pay Carbomedics a license fee of $41 million in annual installments ending in December 2006. In addition to granting ATS an exclusive worldwide right and license to use its carbon coating technology to manufacture pyrolytic carbon components for the ATS valve under this agreement, Carbomedics agreed to assist ATS in designing, building and commencing operations in its own pyrolytic 12 carbon production facility in Minneapolis, Minnesota. In May 2002, the Company received notice of approval of its carbon plant from the U.S. Food and Drug Administration. In July 2002, the timing of the technology fee payments was delayed. The $5 million payment that was due in December 2002 will be paid in two installments in June and December of 2003. The technology transfer fees due in subsequent years will be paid in semi-annual installments beginning in June 2005 in amounts equal to a percentage of the reduction in inventory occurring in the previous six months. These adjustments to the timing of cash disbursements, relative to our two agreements with Carbomedics, will defer cash expenditures of approximately $8 million dollars in 2002. Long-term debt in the amount of $11,100,000 was set up in June 2002 for the discounted amounts owing to Carbomedics for milestones achieved on the technology transfer agreement that are payable in December 2003 and semi-annual installments beginning June 2005 and beyond. The total amount owing for milestones already achieved is $16 million, of which, $2.5 million is a short-term note in current liabilities due in June 2003, $2.5 million is due in December 2003, and the remaining $11 million is due starting in June 2005 and continuing in semi-annual installments based on inventory reduction until the total amount is paid in full. There is no interest being charged to the Company on the $11 million portion, so a present value calculation was done using a 7% interest rate and this amount was discounted $2.4 million to determine the long term liability. These adjustments to the timing of cash disbursements, relative to our two agreements with Carbomedics, together with our reduced operating costs have significantly strengthened our present and projected cash position. Based upon the current forecast of sales and our reduced operating expenses, along with the adjustments to the timing of our payments to Carbomedics, we anticipate having cash to fund our operations through 2005. However, as identified under the heading of "Cautionary Statements Pursuant to the Private Litigation and Securities Reform Act of 1995" below and in Exhibit 99.1 to this Report, any adverse change that affects our revenue, access to the capital markets or future demand for our products will affect our long term viability. Maintaining adequate levels of working capital depends in part upon the success of our products in the marketplace, the relative profitability of those products and our ability to control operating and capital expenses. Funding of our operations in future periods may require additional investments in ATS in the form of equity or debt. There can be no assurance that we will achieve desired levels of sales or profitability, or that future capital infusions will be available. THE SINGLE EUROPEAN CURRENCY A significant portion of our sales occur in Europe. We sell to all of our customers in U.S. dollars. Our selling prices are similar to most of our European distributors and therefore should not cause significant disruption whether in U.S. dollars or Euros. From its introduction in January 1999, the rate of exchange for the Euro versus the U.S. dollar declined by as much as 34%, although it has recovered approximately half of that decline in the last 60 days. Several of our European distributors were unable to increase their local currency selling price for the valve, and, as a result, they informed us that their profits were being significantly reduced and we adjusted our pricing to give them some relief. Europe is a very important market for us. Disruption or loss of a portion of the European business could have a material and adverse impact on our financial position. 13 CAUTIONARY STATEMENTS PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their business, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. ATS desires to take advantage of the safe harbor provisions with respect to any forward-looking statements it may make in this filing, other filings with the Securities and Exchange Commission and any public oral statements or written releases. The words or phrases "will likely," "is expected," "will continue," "is anticipated," "estimate," "projected," "forecast," or similar expressions are intended to identify forward-looking statements within the meaning of the Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. ATS cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. In accordance with the Act, ATS identifies the following important general factors which if altered from the current status could cause our actual results to differ from those described in any forward-looking statements: the continued acceptance of our mechanical heart valve in international markets, the rate of increase of acceptance of the valve in the United States, our ability to engage a new management team and the performance of such team, our ability to recruit and manage an independent manufacturers representatives sales force in the United States, the continued performance of our mechanical heart valve without structural failure, the actions of our competitors including pricing changes and new product introductions, the continued performance of our independent distributors in international markets selling the valve, the risk of product returns in connection with distributor terminations, the actions of our supplier of pyrolytic carbon components for the valve and difficulties we may encounter operating our own pyrolytic carbon manufacturing capability. This list is not exhaustive, and we may supplement this list in filings with the Securities and Exchange Commission (including Exhibit 99.1 to this Form 10-Q) or in connection with the making of any specific forward-looking statement. 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities in which we invest may have market risk. This means that a change in prevailing interest rates may cause the fair market value of the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the fair value of the principal amount of our investment will probably decline. To minimize this risk we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities. The average duration of all of our investments has generally been less than one year. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments. We do not use derivatives and, therefore, do not face market risk from currency or interest rate changes on these types of instruments. If we were required to finance future operations with debt, we would have exposure to increases in interest rates or borrowings. PART II. OTHER INFORMATION Item 1. Legal Proceedings N/A Item 2. Changes in Securities N/A Item 3. Defaults Upon Senior Securities N/A Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- The annual meeting of shareholders of the Company was held on May 2, 2002 at which time (i) four nominees were elected to the Board of Directors for one-year terms and (ii) Ernst & Young LLP was approved as the independent auditors of the Company. Proxies for the Company were solicited pursuant to Section 14(a) of the Securities Exchange act of 1934, as amended, and there was no solicitation in opposition to management's solicitations. All nominees for directors as listed in the proxy statement were elected. The voting results were as follows:
Broker For Withheld Non-Votes --- -------- --------- Election of Directors Manual A. Villafana 14,403,197 4,376,339 0 Richard W. Kramp 15,010,893 3,768,643 0 David L. Boehnen 18,686,847 92,689 0 A. Jay Graf 18,684,927 94,609 0
15
Broker For Withheld Non-Votes --- -------- --------- Approval of Independent Auditors 18,677,030 15,516 0
Item 5. Other Information On July 31, 2002, the Company received a written notification from Nasdaq that it currently does not comply with the minimum bid price continued listing standard of The Nasdaq National Market and thus may be delisted from The Nasdaq National Market. The letter states, "For the last 30 consecutive trading days, the price of the Company's common stock has closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4450(a)(5)." The Company has 90 calendar days, or until October 29, 2002, to demonstrate compliance by having the bid price of the Company's common stock close at $1.00 per share or more for a minimum of 10 consecutive trading days. Otherwise, Nasdaq will provide notification to the Company that the Company will be delisted, subject to any Company appeal. The Company is currently reviewing its options to either attempt to maintain its listing on The Nasdaq National Market or apply to transfer its common stock listing to The Nasdaq SmallCap Market. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Letter Agreement dated June 27, 2002 with Sulzer Carbomedics Inc. amending the O.E.M. Supply Agreement dated September 24, 1990 and the Carbon Agreement dated December 29, 1999 99.1 Cautionary Statements 99.2 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes -Oxley Act of 2002 99.3 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes -Oxley Act of 2002 (b) Reports on Form 8-K None 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 2002 ATS MEDICAL, INC. By: /s/ Richard W. Kramp -------------------- Richard W. Kramp (Principal Financial Officer and Authorized Signatory) 17 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION 10.1 Letter Agreement dated June 27, 2002 with Sulzer Carbomedics Inc. amending the O.E.M. Supply Agreement dated September 24, 1990 and the Carbon Agreement dated December 29, 1999 99.1 Cautionary Statements 99.2 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 99.3 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanex - Oxley Act of 2002
18 EX-10.1 3 c71192exv10w1.txt LETTER AGREEMENT DATED JUNE 27, 2002 EXHIBIT 10.1 June 27, 2002 VIA FACSIMILE Richard W. Kramp ATS Medical, Inc. 3905 Annapolis Lane, Suite 105 Minneapolis, MN 55447 Re: O.E.M. Supply Agreement dated September 24, 1990, and Carbon Agreement dated December 29, 1999, both as amended (collectively, the "Agreements") Dear Mr. Kramp: Further to our recent discussions, it is in the best interest of ATS Medical, Inc., a Minnesota corporation ("ATS") for the parties to renegotiate and amend certain of the rights and obligations under the Agreements. Accordingly, effective as of the date of this letter agreement, ATS and Sulzer Carbomedics Inc. ("CMI") hereby agree as follows: 1. ATS' obligation to purchase a minimum number of Components and/or Component Sets pursuant to the O.E.M. Supply Agreement, including, without limitation Sections 2(a) and Exhibit B thereof ("the Minimum Purchase Obligation"), shall be suspended as of the date that this letter agreement is executed by ATS (with the exception of CMI's work-in-progress as of June 5, 2002 which ATS agrees to take delivery of and pay for pursuant to the terms of the O.E.M. Supply Agreement notwithstanding this letter agreement). Said Minimum Purchase Obligation will resume in full on January 2007 in accordance with the attached Schedule 1, notwithstanding anything to the contrary in the O.E.M. Supply Agreement. As a result of the foregoing, the term of the O.E.M. Supply Agreement shall be extended only for the time period necessary for ATS to fulfill its Minimum Purchase Obligation as defined in Schedule 1. 2. The Pricing for a Component Set, adjusted pursuant to Section 3 and Exhibit B of the O.E.M. Supply Agreement, shall be expressly made subject to a maximum price of $1,000.00 per Component Set. 3. ATS hereby grants to CMI, its successors and assigns a security interest* in all of ATS' Inventory, whether now owned or hereafter acquired, together with the products and proceeds thereof. Until terminated, as provided herein or by mutual agreement of ATS and CMI this security interest is granted to secure all material obligations of ATS now or hereafter as owed to CMI under the Agreements. As used herein, the term "Inventory" means all Components, Valves, raw materials, work in process, or materials used for or consumed to produce Valves, which have been or may in the future be delivered by CMI to ATS, and all finished goods inventory without any requirement to maintain any specific inventory level, which includes Components or Valves (whether contained in - ---------- * ATS agrees to sign and deliver, and authorizes CMI to prepare and file, one or more financing statements or supplements thereto or other instruments as CMI may from time to time reasonably require to comply with the Uniform Commercial Code or other applicable law to preserve, protect and enforce the security interest of CMI. Richard Kramp ATS Medical, Inc. Page 2 June 27, 2002 sealed packages and whether such packages contain goods other than goods delivered by CMI to ATS), all wherever located and whether in the possession of ATS or any other person. While the security interest remains in effect, ATS shall keep all Inventory insured for full replacement value and shall not sell any Inventory in or as part of a Bulk Sale or outside the ordinary course of business. As used herein, the term "Bulk Sale" shall mean any sale or transfer or series of sales or transfers made or consummated within any given 90-day period of 1,000 or more of the Component Sets and/or Valves to any one party or group of related parties. Upon payment in full by ATS of all of its payment obligations under the Agreements as amended by Paragraphs 1, 5, 6 and 7 of this letter agreement, the security interest granted in this Section 2 shall immediately terminate for all purposes. 4. Upon the occurrence of any default of ATS of its payment or other material obligations under the Agreements and until CMI acknowledges in writing that such default has been cured or waived , CMI will have the remedies of a secured party under the Uniform Commercial Code as enacted in Texas or other applicable law. 5. Section 2.5.4 of the Carbon Agreement shall be amended and restated to read as follows: "4: five million dollars ($5,000,000.00) which shall be deemed fully earned on December 28, 2002, but which shall be due and payable in accordance with ATS' promissory note in the form attached hereto Schedule 2, which note shall be payable to the order of CMI in the original principal amount of $5,000,000 and executed concurrent with this letter agreement." 6. Sections 2.5.5, 2.5.6, 2.5.7 and 2.5.8 of the Carbon Agreement shall be amended and restated to read as follows: "5: five million dollars ($5,000,000.00) which shall be due and payable in accordance with Schedule 3; 6: six million dollars ($6,000,000.00) which shall be due and payable in accordance with Schedule 3; 7: six million dollars ($6,000,000.00) which shall be due and payable in accordance with Schedule 3; and 8: six million dollars ($6,000,000.00) which shall be due and payable in accordance with Schedule 3." 7. Notwithstanding the payment schedule outlined in Section 2.5 of the Carbon Agreement (as amended by this letter agreement), ATS shall pre-pay all or any portion of the License Fee to CMI as follows: Richard Kramp ATS Medical, Inc. Page 3 June 27, 2002 From January 1, 2005, for each dollar that the balance of the Inventory is reduced by sales by ATS of the Components and/or Valves, ATS will remit to CMI seventy-seven cents ($0.77), which amount will be credited against the License Fee due and payable to CMI (beginning with a credit against the next installment scheduled to be paid to CMI after the date of such credit). Said remittance will occur on a semi-annual basis beginning on June 30, 2005. In addition to any audit rights under the Agreements, CMI shall have the right to have an independent third party audit ATS' relevant books and records upon thirty (30) days' advance notice solely for the purpose of confirming compliance with this prepayment program. 8. CMI acknowledges and agrees that as of the effective date of this letter agreement, ATS is not in default or breach of the Agreements nor has it failed to perform under the Agreements, nor will ATS be deemed to be in default or breach of the Agreements or deemed to have failed to perform under the Agreements by (i) virtue of the parties entering into this letter agreement, (ii) the rescheduling, pursuant to the terms of this letter agreement, of the payment obligations and Minimum Purchase Obligation of ATS under the Agreements, or (iii) as a result of ATS' performance in accordance with the terms of this letter agreement. Furthermore, the parties' obligations under the Agreements shall be modified as follows: (i) under the Carbon Agreement, (a) ATS, may but is not obligated, to continue to build the Production Line notwithstanding Section 2.3 thereof, (b) CMI shall not notify ATS in writing that it is ready to initiate its transfer to ATS of the Licensed Technology, equipment and machining specifications and operating capability to permit ATS to develop the Graphite Capability at any time before June 30, 2006, notwithstanding anything to the contrary in Section 2.4 thereof, and (c) CMI shall not notify ATS in writing that it is ready to initiate its transfer to ATS of the Licensed Technology, equipment and machining specifications and operating capability to permit ATS to develop the Tooling Capability at any time before June 30, 2008, notwithstanding anything to the contrary in Section 2.4 thereof, and (ii) under the O.E.M. Supply Agreement, (a) ATS has no obligation to follow the ordering requirements and procedures stated in Section 5 thereof until it resumes the purchase of a minimum number of Components and/or Component Sets from CMI in January, 2007, and (b) CMI is not authorized to maintain a supply of Raw Materials on ATS' behalf pursuant to Section 5(c) thereof unless and until ATS resumes the purchase of Components from CMI. 9. CMI and ATS entered into that certain License Agreement dated as of September 24, 1990, as amended (the "License Agreement"), which the parties acknowledge expired pursuant to its terms as of December 29, 2000. CMI acknowledges and agrees that pursuant to the License Agreement and as a result of its expiration, ATS retained a paidup, exclusive, worldwide, irrevocable and perpetual right and license, under the Patent to use and sell the Licensed Product, assemble Components for the Licensed Product and sterilize and package the Licensed Product. Nothing in this letter agreement, nor any Richard Kramp ATS Medical, Inc. Page 4 June 27, 2002 breach or default of ATS under the Agreements or this letter agreement (or any other documents referenced herein), shall in any way modify, terminate, extend, expand or otherwise affect such license rights of ATS. ATS acknowledges and agrees that (a) except as expressly stated in clause (b) of this Paragraph 9, nothing in this letter agreement shall in any way modify, terminate, extend, expand or otherwise affect the license to use the Licensed Technology granted to ATS pursuant to Article 2.0 of the Carbon Agreement (the "Technology License"), which grant, as stated in the Carbon Agreement, shall be subject to the timely payment of the License Fee pursuant to the Carbon Agreement (as amended by this letter agreement), and (b) in the event that ATS shall default in its obligation under Paragraph 1 of this letter agreement to pay for CMI's work-in-process as of June 5, 2002, then ATS's right to use the Technology License shall be suspended until ATS has cured such payment default. 10. ATS represents and warrants to CMI, its successors and assigns that (a) the Inventory is primarily located in the State of Minnesota; (b) it is duly authorized to execute this letter agreement; and (c) the execution of this letter agreement will not create or constitute a breach under any agreements pursuant to which ATS is a party. 11. All capitalized terms contained in but not specifically defined in this letter agreement shall have the meaning set forth in the Agreements. 12. Unless expressly modified by the terms of this letter agreement, the terms and conditions of the Agreements and all other obligations thereunder shall remain unchanged and in full force and effect. 13. This letter agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts with the effect of being constituted as one and the same letter agreement. 14. This letter agreement, the Agreements and the other documents referenced herein contains the entire agreement between the parties with respect to the subject matter hereof. No waiver, alteration or modification of any of the provisions hereof shall be binding unless in writing and signed by the parties hereto. This letter agreement is binding on the parties hereto and their respective successors and assignees. 15. Neither CMI nor ATS will make or authorize any other party to make any public announcement or disclosure regarding this letter agreement without the prior consent of the other party, except any such announcement or disclosure that may be required by rule, regulation or law, in which case the party required to make the announcement or disclosure will, if reasonably practicable, allow the other party at least 72 hours to comment on such announcement or disclosure in advance thereof. Richard Kramp ATS Medical, Inc. Page 5 June 27, 2002 If this letter agreement accurately reflects the parties' agreement regarding the matters set forth herein, please so indicate in the space provided below. Of course, if you have any questions or comments, please do not hesitate to contact me. Sincerely, SULZER CARBOMEDICS INC. By /s/ Dennis C. Wallach ----------------------- Dennis C. Wallach President, Cardiac Care, Vascular Care and SpinTech Group Agreed to this 27 day of June, 2002. ATS MEDICAL, INC. By /s/ Richard W. Kramp ----------------------- Richard W. Kramp Its President and Chief Executive Officer Attachments: Schedule 1 Schedule 2 Schedule 3 SCHEDULE 1 ATS COMPONENT SET MINIMUM PURCHASE OBLIGATIONS NUMBER OF EQUIVALENT NEW MINIMUM PURCHASE ORIGINAL CONTRACT YEAR VALVE SETS OBLIGATION BEGINNING DATE - ---------------------- -------------------- ------------------------- Q3 & Q4 2002 3750 January, 2011 2003 5000 January, 2007 2004 5000 January, 2008 2005 5000 January, 2009 2006 5000 January, 2010 Notwithstanding anything to the contrary in the O.E.M. Supply Agreement, CMI will endeavor to deliver all Component Sets and/or Valves required to be purchased by ATS pursuant to this Schedule 1 in approximately equal monthly installments throughout the course of the applicable Contract Year, from Contract Years 2007-2011. SCHEDULE 2 PROMISSORY NOTE $5,000,000 Minneapolis, Minnesota June 27, 2002 For value received, ATS MEDICAL, INC., a Minnesota corporation (the "Borrower"), promises to pay to the order of SULZER CARBOMEDICS, INC., a Delaware corporation (the "Lender"), at its office in Austin, Texas, or at such other place as the holder hereof may hereafter from time to time designate in writing, on December 28, 2003, in lawful money of the United States of America, the principal sum of Five Million Dollars ($5,000,000) and to pay interest on the principal balance of this Note outstanding from time to time (the "Principal Balance") (computed on the basis of the actual number of days elapsed in a 360-day year) from December 29, 2002 until this Note is fully paid, at seven percent (7%) per annum provided that, in the Lender's sole discretion, such annual rate shall equal ten percent (10%) per annum from the date the Borrower fails to make any payment of principal or interest when and as required until such payment is made in immediately available funds, and the Lender's election to charge interest at such increased rate shall not be deemed a waiver or excuse of any such default. The Principal Balance shall be due and payable in two installments of $2,500,000 each on June 28, 2003 and December 28, 2003. All payments hereunder shall be made in immediately available funds and shall be first applied to accrued but unpaid interest on the Principal Balance and the remainder, if any, shall be applied to the Principal Balance. The Borrower may prepay the Principal Balance in whole or in part at any time without premium or penalty. The payment of this Note is secured by a security interest granted by Borrower to Lender pursuant to that certain Letter Agreement between the Borrower and the Lender of even date herewith, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. If (i) any payment hereunder is not made when due in accordance with the terms of this Note and such failure shall continue for 10 days, (ii) the Borrower (a) shall be or become insolvent under the United States Bankruptcy Code, (b) shall admit in writing its inability to pay its debts as they mature, (c) shall make an assignment for the benefit of creditors, (d) shall apply for or consent to the appointment of any receiver, trustee, or similar officer for all or any substantial part of its property, (iii) any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of the Borrower and shall remain unstayed for 90 days, (iv) any receiver, trustee, or similar officer shall be appointed for all or any substantial part of its property without the application or consent of the Borrower, or (v) the Borrower shall be dissolved or liquidated or go out of business; then the holder hereof may, at its option, by notice in writing to the Borrower, declare this Note to be immediately due and payable, whereupon the Principal Balance and all interest thereon shall be immediately due and payable without further notice or demand. The Principal Balance and all interest accrued thereon shall become automatically due and payable without notice or demand if (i) Borrower institutes (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction, or (ii) any such proceeding is instituted (by petition, application or otherwise) against the Borrower and remains undismissed for 90 days. The Borrower shall pay all costs of collection, including reasonable attorneys' fees and legal expenses, if this Note is not paid when due, whether or not legal proceedings are commenced. This Note shall be governed by the substantive law of Minnesota. No delay or omission on the part of any holder hereof in exercising any right or remedy hereunder shall operate as a waiver of any right or remedy under this Note. A waiver on any one occasion shall not be construed as a waiver of any right or remedy on any future occasion. All makers, endorsers, sureties, guarantors and accommodation parties hereby waive presentment, dishonor, notice of dishonor and protest. All endorsers, sureties, guarantors and accommodation parties consent to any and all extensions, renewals, substitutions and alterations of any of the terms of this Note and any other documents related hereto and to the release of or failure by the Lender to exercise any rights against any party liable for any property securing payment thereof. ATS MEDICAL, INC. By /s/ Richard W. Kramp ----------------------- Richard W. Kramp Its President and Chief Executive Officer SCHEDULE 3 Payment pursuant to Section 2.5.5 December 28, 2006 Payment pursuant to Section 2.5.6 upon the later of (i) December 28, 2007, or (ii) if ATS has determined not to develop the Graphite Capability, the Graphite Decision or (iii) if ATS has determined to develop the Graphite Capability, the date on which CMI has completed its transfer to ATS of the Graphite Capability Payment pursuant to Section 2.5.7 December 28, 2008 Payment pursuant to Section 2.5.8 upon the later of (i) December 28, 2009, (ii) if ATS has determined not to develop the Tooling Capability, the Tooling Decision Date or (iii) if ATS has determined to develop the Tooling Capability, the date on which CMI has completed its transfer to ATS of the Tooling Capability EX-99.1 4 c71192exv99w1.txt CAUTIONARY STATEMENTS EXHIBIT 99.1 ATS MEDICAL INC. JUNE 30, 2002 CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statement. We desire to take advantage of these "safe harbor" provisions and are filing this Exhibit 99.1 in order to do so. Accordingly, we hereby identify the following important factors which could cause our actual results to differ materially from any such results which may be projected, forecast, estimated or budgeted by us in forward-looking statements made by us from time to time in reports, proxy statements, registration statements and other written communications, or in oral forward-looking statements made from time to time by the Company's officers and agents. We do not intend to update any of these forward-looking statements after the date of this Form 10-Q to conform them to actual results. OUR HEART VALVE MAY NEVER ACHIEVE WIDESPREAD MARKET ACCEPTANCE. Our success will depend, in large part, on the medical community's acceptance of the ATS heart valve. The medical community's acceptance of the ATS heart valve will depend upon our ability to demonstrate the safety and efficacy, advantages, long-term clinical performance and cost-effectiveness of the ATS heart valve as compared to other prosthetic heart valves. We cannot predict whether the medical community will accept the ATS heart valve or, if accepted, the extent of its use. Negative publicity resulting from isolated incidents involving the ATS heart valve or other prosthetic heart valves could have a significant adverse effect on the overall acceptance of our heart valve. If we encounter difficulties developing a market for the ATS heart valve in the United States, our business and results of operations will be seriously harmed. OUR STOCK MAY BE DELISTED FROM NASDAQ. The National Association of Securities Dealers, Inc., which administers Nasdaq, has adopted certain criteria for continued eligibility on The Nasdaq National Market. In order to continue to be included on The Nasdaq National Market, we must maintain, among other things, a $5 million market value of our public float and a minimum bid price of our common stock of $1.00 per share. At the time of this filing, the minimum bid price for our common stock had been below $1.00 for more than 30 consecutive trading days. On July 31, 2002, we received a written notification from Nasdaq that we do not currently comply with the minimum bid price continued listing standard of The Nasdaq National Market and thus may be delisted from The Nasdaq National Market. We have 90 calendar days, or until October 29, 2002, to demonstrate compliance by having the bid price of our common stock close at $1.00 per share or more for a minimum of 10 consecutive trading days. Otherwise, Nasdaq will notify us that we will be delisted, subject to ATS' appeal. If Nasdaq were to begin delisting proceedings against us, it could reduce the level of liquidity currently available to our shareholders. If we fail to maintain the standards necessary to be quoted on The Nasdaq National Market, or alternatively, the Nasdaq SmallCap Market, and our common stock is delisted, trading, if any, in our common stock may then continue to be conducted in the non-Nasdaq over-the-counter market commonly referred to as the Over-the-Counter Bulletin Board and the "pink sheets." If our common stock were delisted, the price of our common stock would, in all likelihood, decline. As a result, an investor may find it more difficult to dispose of or to obtain accurate quotations as to the market value of our common stock. Our common stock is deemed to be "penny stock" for the limited purpose of Section 15(b)(6) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") because it is priced at less than $5.00 per share. Section 15(b)(6) makes it unlawful for any broker-dealer to participate in a distribution of any penny stock without the consent of the Securities and Exchange Commission (the "Commission") if, in the exercise of reasonable care, the broker-dealer is aware of or should have been aware of the participation in such distribution by a person subject to an order of the Commission censoring, suspending or placing limitations on such person's activities in such distribution. This rule may make it more difficult for broker-dealers to sell our common stock, and purchasers of shares of our common stock may experience difficulty in selling such shares in the future in secondary trading markets. If our common stock is delisted from The Nasdaq Stock Market, which includes both The Nasdaq National Market and The Nasdaq SmallCap Market, our common stock is priced at less than $5.00 per share and we fail to meet certain limited net tangible asset or revenue criteria, trading, if any, in shares of our common stock would be subject to the full range of the federal regulations promulgated under the Exchange Act regulating the trading of penny stocks (the "Penny Stock Rules"). In particular, under Exchange Act Rule 15g-9, broker-dealers must take certain steps prior to selling a penny stock, which steps include: (a) obtaining financial and investment information from the investor; (b) obtaining a written suitability questionnaire and purchase agreement signed by the investor; (c) providing the investor with a written identification of the shares being offered and in what quantity; and (d) delivering to the investor a written statement setting forth the basis on which the broker-dealer approved the investor's account for the transaction. If a broker-dealer does not follow the Penny Stock Rules, the investor has no obligation to purchase the shares. Accordingly, the application of the comprehensive Penny Stock Rules may make it more difficult for broker-dealers to sell our shares of common stock and purchasers of shares of our common stock may have difficulty in selling such shares in secondary trading markets. WE CURRENTLY RELY ON THE ATS HEART VALVE AS OUR SOLE SOURCE OF REVENUE. We have developed only one product, which is currently being sold primarily outside the United States. Even if we were to develop additional products, regulatory approval would likely be required to sell them. Clinical testing and the approval process itself are very expensive and can take many years. Therefore, we do not expect to be in a position to sell additional products in 2 the foreseeable future. As a result, if we fail to achieve widespread market acceptance for the ATS heart valve, our business and results of operations will be seriously harmed. WE NEED TO HIRE AND RETAIN NEW MANAGEMENT AND A NEW SALES FORCE. We experienced losses in 2001 and the first half of 2002. In an attempt to improve our operations and financial performance, we decided in July 2002 to implement significant cost containment measures, including replacing most of our executive officers with a new management team to be appointed and elected by our board of directors. We also changed our U.S. sales strategy from a direct sales force to a hybrid of a few direct salespersons and several independent manufacturer's representatives. We cannot assure you that our efforts will be successful. Our ability to achieve operational improvements and improve our financial performance will be subject to a number of risks and uncertainties, including the following: - our success in finding and retaining a new executive management team to lead ATS; - the ability of the new management team to manage ATS effectively and increase sales of our products; - our success in hiring independent manufacturer's representatives; - our ability to successfully integrate and maintain a U.S. hybrid sales force consisting of direct sales persons and independent manufacturer's representatives; - our ability to maintain and expand our distribution capability in international markets; and - our ability to respond to competitive developments, including, but not limited to, increased pricing pressure and tissue valve competition. We cannot assure you that we will be able to hire a new executive management team and independent manufacturer's representatives on terms and conditions acceptable to ATS. Our failure to successfully address the risks and uncertainties listed above could have a material adverse effect on our business, assets, prospects, financial conditions and results of operations. THE COSTS INCURRED IN CONNECTION WITH FDA APPROVAL OF OUR VALVE AND ITS INTRODUCTION IN THE US MARKET ARE EXPECTED TO ADVERSELY AFFECT EARNINGS. In connection with the FDA approval of the ATS heart valve which we received on October 13, 2000, and the introduction of the ATS valve to the U.S. market, we have taken, and will be taking in the near term, a number of important steps that we believe will facilitate commercialization of our valve in the United States market and enhance our profitability in international markets. These steps include: - the establishment and maintenance of our licensing arrangement with Sulzer Carbomedics, Inc. ("Carbomedics") to permit us to manufacture pyrolytic carbon components; 3 - the leasing, construction, equipping, staffing and commercialization of a facility to manufacture pyrolytic carbon components; and - the recruiting and training of independent manufacturers representatives to market our valve in the United States. These actions involve incurring significant costs. The timing of these expenditures is expected to adversely affect quarter-to-quarter comparisons of our earnings. As there is no assurance of commercial success of our valve in the United States, the commitment of our resources to these matters at this time entails, in addition to the adverse effects on future earnings, substantial uncertainty and business risk. OUR U.S. SALES EFFORTS MAY NOT BE SUCCESSFUL. We recently changed our sales approach for the sale of the ATS valve in the United States from a direct sales force to a hybrid of a few direct salespersons and several independent manufacturer's representatives. As part of this change, we released most of our direct salespersons, which may adversely affect sales to customers who previously purchased our products from the salespersons that we released. In addition, we will need to continue to expend significant funds and management resources to develop and maintain our hybrid sales force. We believe there is significant competition for sales personnel and independent manufacturing representatives with the advanced sales skills and technical knowledge we need. If we are unable to recruit, retain and motivate qualified personnel and representatives, U.S. sales of the ATS valve could be adversely affected. The loss of key salespersons or independent manufacturer's representatives could have a material adverse effect on our business, assets, prospects, financial condition and results of operations. Further, we cannot assure the successful expansion of our network of independent manufacturer's representatives on terms acceptable to ATS, if at all, or the successful marketing of our products by our hybrid sales force. In addition, we do not control the amount and timing of marketing resources that these third parties devote to our product. To the extent we rely on sales through independent manufacturer's representatives, any revenues we receive will depend primarily on the efforts of these parties. WE CURRENTLY DEPEND ON THE MARKETING AND SALES EFFORTS OF INTERNATIONAL INDEPENDENT DISTRIBUTORS, AND OUR SALES HAVE BEEN CONCENTRATED IN THREE COUNTRIES. The ATS heart valve is sold internationally through independent distributors. The loss of an international distributor could seriously harm our business and results of operations if a new distributor could not be found on a timely basis in the relevant geographic market. Sales to our Japanese, German and French distributors have accounted for approximately 43% of our net sales in fiscal year 2001 and 50% of our net sales in fiscal year 2000. We do not control the amount and timing of marketing resources that these third parties devote to our product. Furthermore, to the extent we rely on sales through independent distributors, any revenues we receive will depend primarily on the efforts of these parties. In addition, as part of our agreement with our distributors, we allow for the return of unopened valves for credit. If a distributor(s) were to terminate their distributorship agreement with us, we could be obligated to buy back 4 their inventory of valves as well as valves on consignment at hospitals. Such a buyback could have an adverse impact on our results of operations for the quarter and/or year in which it occurs. WE ARE DEPENDENT UPON SALES OUTSIDE THE UNITED STATES, WHICH ARE SUBJECT TO A NUMBER OF RISKS THAT COULD HARM OUR BUSINESS. Most of our commercial sales to date have been outside the United States, and we expect that international sales will account for a substantial majority of our revenue until we fully develop relationships with independent manufacturers representatives for sale of the ATS heart valve in the United States and until the ATS heart valve receives wider market acceptance from U.S. customers. There are risks inherent in doing business in international markets, including: - unforeseen changes in regulatory requirements and government health programs; - weaker intellectual property rights protection in some countries; - potentially adverse tax consequences; - political and economic instability; and - greater difficulty in collecting payments from product sales. These factors could harm our ability to successfully commercialize our product internationally and could harm our business. The value of the U.S. dollar in relation to other currencies may also harm our sales to customers outside the United States because we sell in U.S. dollars to all of our customers abroad. For the year ended December 31, 2001, sales outside the United States decreased by about 11% compared to the same period for 2000. The decrease in sales was due primarily to the increase in value of the U.S. dollar against the Euro and competitor price pressure. Our sales in Europe declined 19% for the year ended December 31, 2001 as compared to the year ended December 31, 2000. Our dependence on sales outside of the United States will continue to expose us to U.S. dollar currency fluctuations for the foreseeable future. THE MARKET FOR PROSTHETIC HEART VALVES IS HIGHLY COMPETITIVE. The market for prosthetic heart valves is highly competitive. We expect that competition will intensify as additional companies enter the market or modify their existing products to compete directly with us. Our primary competitor, St. Jude Medical, Inc., currently controls approximately 50% of the worldwide mechanical heart valve market. Many of our competitors have long-standing FDA approval for their valves and extensive clinical data demonstrating the performance of their valves. In addition, they have greater financial, manufacturing, marketing and research and development capabilities than we have. For example, many of our competitors have the ability, due to their internal carbon manufacturing facilities and economies of scale, to manufacture their heart valves at a lower cost than we can manufacture our ATS heart valve. Our 5 primary competitor has recently used price as a method to compete in several markets, including the United States. We might not be able to compete successfully. OUR FUTURE RESULTS WILL BE HARMED IF THE USE OF MECHANICAL HEART VALVES DECLINES. Our business could suffer if the use of mechanical heart valves declines. Historically, mechanical heart valves have accounted for over two-thirds of all heart valve replacements. Recently, there has been an increase in the use of tissue valves. We estimate that mechanical heart valves are currently being used in 50 to 70% of all heart valve replacements, depending on the geographic market, down from 65 to 75% about ten years ago. We believe the tissue manufacturers' claims of improvements in tissue valve longevity and an increase in the average age of valve patients have contributed to the recent increase in the use of tissue valves. NEW PRODUCTS OR TECHNOLOGIES DEVELOPED BY OTHERS COULD HARM OUR BUSINESS AND RESULTS OF OPERATIONS. The medical device industry is characterized by significant technological advances. Several companies are developing new prosthetic heart valves based on new or potentially improved technologies. Significant advances are also being made in surgical procedures, which may delay the need for replacement heart valves. A new product or technology may emerge that renders our ATS heart valve noncompetitive or obsolete. WE MAY NEED TO RAISE CAPITAL AND WE CANNOT BE CERTAIN THAT ADDITIONAL FINANCING WILL BE AVAILABLE. We have cash in hand to support our operations and capital requirements through 2005. After that we may need to raise additional capital. Our future liquidity and capital requirements will depend upon several factors, including actions related to regulatory matters, our progress in establishing our pyrolytic carbon manufacturing operations, the extent to which the ATS heart valve gains market acceptance and the success of our efforts to establish a new sales force of independent manufacturer's representatives in the United States. WE CURRENTLY MAINTAIN A LARGE VOLUME OF INVENTORY, WHICH EXCEEDS THE CURRENT DEMAND FOR THE ATS HEART VALVE. We purchased pyrolytic carbon components under a long-term supply agreement with Carbomedics through June 2002 and we are required to resume purchases of such components in 2007. To date, our purchases of pyrolytic carbon components have exceeded our sales of the ATS heart valves. We currently have in inventory enough pyrolytic carbon components to satisfy our projected requirements for over two years. If we are unable to achieve widespread acceptance for the ATS heart valve or if competitive pressures result in price reductions, the value of the excess inventory would likely decrease, which could seriously harm our results of operations and financial condition. Because the pyrolytic carbon components are made to meet the unique specifications of the ATS heart valve, our inventory may have little, if any, value in the open market. 6 CARBOMEDICS HAS A SECURITY INTEREST IN OUR INVENTORY, AND THEY MAY FORECLOSE ON OUR INVENTORY IF WE MATERIALLY BREACH THE SUPPLY OR CARBON AGREEMENTS. In July 2002, ATS granted to Carbomedics a security interest in all our inventory to secure our payment and other material obligations to them under the supply and the carbon agreements. If we default in our payment or other material obligations to Carbomedics under these agreements, Carbomedics could exercise its rights as a secured creditor and attempt to foreclose on our inventory. The foreclosure of our inventory would cause serious harm to our business and results of operations. WE LICENSE PATENTED TECHNOLOGY AND OTHER PROPRIETARY RIGHTS FROM CARBOMEDICS. IF THESE AGREEMENTS ARE BREACHED OR TERMINATED, OUR BUSINESS AND RESULTS OF OPERATIONS COULD BE SERIOUSLY HARMED. If our agreements with Carbomedics are breached or terminated, our business and results of operations could be seriously harmed. Under our carbon technology agreement with Carbomedics, we have obtained a license to use Carbomedics' pyrolytic carbon technology to manufacture components for the ATS heart valve. Carbomedics also has agreed to assist us in completing our pyrolytic carbon manufacturing facility. If this agreement is breached or terminated, our business and results of operations could be seriously harmed. A DELAY OR INTERRUPTION IN THE SUPPLY OF PYROLYTIC CARBON COMPONENTS OR OUR FAILURE TO PURCHASE CERTAIN MINIMUM ANNUAL AMOUNTS COULD SERIOUSLY HARM OUR BUSINESS. We cannot be certain that, after our current inventory is exhausted, sufficient quantities of pyrolytic carbon components will be available to assemble the ATS heart valve. We currently purchase pyrolytic carbon components from a single source, Carbomedics, on an exclusive basis. Other than our carbon facility, there is currently no other FDA-approved alternate supplier of our pyrolytic carbon components. While Carbomedics has granted to us the right to manufacture pyrolytic carbon components, we agreed to continue to purchase a minimum annual number of pyrolytic carbon components from Carbomedics in 2007 through 2011. Failure to purchase these minimum annual amounts would give Carbomedics the right to suspend our right to manufacture the pyrolytic carbon components. The suspension of such rights could cause serious harm to our business and result of operations. BECAUSE WE LACK MANUFACTURING EXPERIENCE, WE MAY ENCOUNTER DIFFICULTIES IN MANUFACTURING PYROLYTIC CARBON COMPONENTS FOR OUR HEART VALVE. Under our agreement with Carbomedics, we have been granted an exclusive worldwide license to manufacture pyrolytic carbon components for the ATS heart valve. We cannot be certain that our strategy to establish internal manufacturing capabilities will result in a cost-effective means for manufacturing the ATS heart valve. We have limited experience in manufacturing pyrolytic carbon. We may encounter difficulties in maintaining and expanding our manufacturing operations, including problems involving: 7 - production yields; - quality control; - per unit manufacturing costs; - shortages of qualified personnel; and - compliance with FDA and international regulations and requirements regarding good manufacturing practices. Difficulties encountered by us in establishing or maintaining a commercial-scale manufacturing facility may limit our ability to manufacture our heart valve and therefore could seriously harm our business and results of operations. OUR BUSINESS COULD BE SERIOUSLY HARMED IF THIRD-PARTY PAYORS DO NOT REIMBURSE THE COSTS FOR OUR HEART VALVE. Our ability to successfully commercialize the ATS heart valve depends on the extent to which reimbursement for the cost of our product and the related surgical procedure is available from third-party payors, such as governmental programs, private insurance plans and managed care organizations. Third-party payors are increasingly challenging the pricing of medical products and procedures that they consider are not cost-effective or are used for a non-approved indication. The failure by physicians, hospitals and other users of our product to obtain sufficient reimbursement from third-party payors would seriously harm our business and results of operations. In recent years, there have been numerous proposals to change the health care system in the United States. Some of these proposals have included measures that would limit or eliminate payment for medical procedures or treatments. In addition, government and private third-party payors are increasingly attempting to contain health care costs by limiting both the coverage and the level of reimbursement. In international markets, reimbursement and health care payment systems vary significantly by country. In addition, we have encountered price resistance from government-administered health programs. Significant changes in the health care system in the United States or elsewhere, including changes resulting from adverse trends in third-party reimbursement programs, could have a material adverse effect on our business and results of operations. WE MAY FACE PRODUCT LIABILITY CLAIMS. The manufacture and sale of mechanical heart valves entail significant risk of product liability claims and product recalls. A mechanical heart valve is a life-sustaining device and the failure of any mechanical heart valve usually results in the patient's death or need for reoperation. A product liability claim or product recall, regardless of the ultimate outcome, could require us to spend significant time and money in litigation or to pay significant damages and could seriously harm our business. We currently maintain product liability insurance coverage in an aggregate amount of $25 million. However, we cannot assure you that our current insurance 8 coverage is adequate to cover the costs of any product liability claims made against us. Product liability insurance is expensive and does not cover the costs of a product recall. In the future, product liability insurance may not be available at satisfactory rates or in adequate amounts. WE DEPEND ON THE CONTINUED SERVICE OF OUR KEY PERSONNEL. Our future success depends on the continued services of key personnel. We are also dependent on our ability to attract and retain technically qualified personnel in the future. The loss of the technical knowledge and industry expertise of these key personnel could seriously impede our success. OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. Our success depends in part on our ability to maintain and enforce our patents and other proprietary rights. We rely on a combination of patents, trade secrets, know-how and confidentiality agreements to protect the proprietary aspects of our technology. These measures afford only limited protection and competitors may gain access to our intellectual property and proprietary information. The patent positions of medical device companies are generally uncertain and involve complex legal and technical issues. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights. Any litigation could be costly and divert our attention from the growth of the business. We cannot assure you that our patents and other proprietary rights will not be successfully challenged, or that others will not independently develop substantially equivalent information and technology or otherwise gain access to our proprietary technology. WE MAY BE SUED BY THIRD PARTIES WHICH CLAIM THAT OUR PRODUCT INFRINGES ON THEIR INTELLECTUAL PROPERTY RIGHTS. We may be exposed to future litigation by third parties based on intellectual property infringement claims. Any claims or litigation against us, regardless of the merits, could result in substantial costs and could harm our business. In addition, intellectual property litigation or claims could force us to: - cease manufacturing and selling our product, which would seriously harm us; - obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; or - redesign our product, which could be costly and time-consuming. WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION, WHICH IS COSTLY, TIME CONSUMING AND CAN SUBJECT US TO UNANTICIPATED DELAYS. The ATS heart valve and our manufacturing activities are subject to extensive regulation by a number of governmental agencies, including the FDA and comparable international agencies. We are required to: 9 - maintain the approval of the FDA and international regulatory agencies to continue selling the ATS heart valve; - obtain the approval of international regulatory agencies in countries where the ATS heart valve is not yet marketed; - satisfy content requirements for all of our labeling, sales and promotional materials; - comply with manufacturing and reporting requirements; and - undergo rigorous inspections by these agencies. Compliance with the regulations of these agencies may delay or prevent us from introducing any new or improved products. Violations of regulatory requirements may result in fines, marketing restrictions, product recall, withdrawal of approvals and civil and criminal penalties. THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE. Historically, the market price of our common stock has fluctuated over a wide range and it is likely that the price of our common stock will fluctuate in the future. The market price of our common stock could be impacted by the following: - the success of our new management in operating ATS effectively; - the failure of the ATS valve to gain market acceptance in the United States; - announcements of technical innovations or new products by our competitors; - the status of component supply arrangements; - changes in reimbursement policies; - government regulation; - developments in patent or other proprietary rights; - public concern as to the safety and efficacy of products developed by us or others; and - general market conditions. In addition, due to one or more of the foregoing factors, in future years, our results of operations may fall below the expectations of securities analysts and investors. In that event, the market price of our common stock could be materially and adversely affected. OUR CHARTER DOCUMENTS AND MINNESOTA LAW MAY DISCOURAGE A TAKEOVER OF OUR COMPANY. Provisions of our certificate of incorporation, bylaws and Minnesota law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. 10 EX-99.2 5 c71192exv99w2.txt CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of ATS Medical, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard W. Kramp, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard W. Kramp --------------------------- Richard W. Kramp Chief Executive Officer August 14, 2002 EX-99.3 6 c71192exv99w3.txt CERTIFICATION OF THE CHIEF FINANCIAL OFFICER EXHIBIT 99.3 CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of ATS Medical, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard W. Kramp, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard W. Kramp --------------------------- Richard W. Kramp Chief Financial Officer August 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----