UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended July 3, 2010
Or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ________ to ________
Commission File Number: 0-18602
ATS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
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Minnesota
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41-1595629
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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3905 Annapolis Lane N., Suite 105
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Minneapolis, Minnesota
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55447
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(Address of Principal Executive Offices)
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(Zip Code)
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(763) 553-7736
(Registrants Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days:
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files):
o
Yes
o
No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
o
Yes
þ
No
The number of shares outstanding of each of the issuers classes of common stock
as of August 6, 2010, was:
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Common Stock, $.01 par value
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81,596,406 shares
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PART I. FINANCIAL INFORMATION
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ITEM 1.
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Financial Statements
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ATS Medical, Inc.
Consolidated Balance Sheets
(
Unaudited)
(In Thousands, Except Share Data)
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July 3,
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December 31,
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2010
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2009
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Assets
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Current assets:
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Cash and cash equivalents
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$
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11,970
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$
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14,235
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Accounts receivable, less allowances of $506 at July 3, 2010
and $420 at December 31, 2009
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14,657
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14,398
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Inventories, net
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22,214
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20,814
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Prepaid expenses
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1,526
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1,774
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Total current assets
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50,367
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51,221
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Leasehold improvements, furniture and equipment, net
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7,278
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7,659
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Goodwill
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32,166
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32,166
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Other intangible assets
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27,286
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28,910
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Other assets
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1,573
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1,299
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Total assets
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$
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118,670
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$
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121,255
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Liabilities and shareholders equity
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Current liabilities:
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Current portion of bank loan payable
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$
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$
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2,646
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Accounts payable
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3,962
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4,995
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Accrued compensation
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3,569
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2,076
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Convertible senior notes payable, net of unamortized discounts
and bifurcated derivatives of $4,741 at December 31, 2009
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17,659
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Other accrued liabilities
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2,157
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2,894
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Total current liabilities
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9,688
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30,270
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Payable to Medtronic, Inc.
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30,000
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Bank loan payable
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1,323
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Other long-term liabilities
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1,081
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790
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Shareholders equity:
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Common stock, $.01 par value:
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Authorized shares 150,000,000
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Issued and
outstanding shares 81,347,228 at July 3, 2010 and 78,187,741 at December 31, 2009
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813
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782
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Additional paid-in capital
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253,240
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246,024
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Accumulated deficit
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(175,793
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)
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(158,229
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)
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Accumulated other comprehensive income (loss)
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( 359
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)
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295
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Total shareholders equity
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77,901
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88,872
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Total liabilities and shareholders equity
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$
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118,670
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$
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121,255
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The accompanying notes are an integral part of the consolidated financial statements.
3
ATS Medical, Inc.
Consolidated Statements of Operations
(Unaudited)
(In Thousands, Except Per Share Amounts)
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Three months ended July 3 (July 4)
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Six months ended July 3 (July 4)
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2010
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2009
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2010
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2009
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Net sales
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$
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19,014
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$
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19,781
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$
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37,605
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$
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38,184
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Cost of goods sold
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6,607
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7,040
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13,012
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13,170
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Gross profit
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12,407
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12,741
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24,593
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25,014
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Operating expenses:
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Sales and marketing
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9,199
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7,525
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17,903
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15,026
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Research and development
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2,755
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1,817
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6,022
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3,861
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General and administrative
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6,332
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2,431
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9,373
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4,907
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Amortization of intangibles
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812
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812
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1,624
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1,600
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Total operating expenses
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19,098
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12,585
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34,922
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25,394
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Operating income (loss)
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(6,691
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)
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156
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(10,329
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)
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(380
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)
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Net interest expense
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(888
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)
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(694
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)
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(1,505
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)
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(1,413
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Loss on redemption of
convertible senior notes
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(4,806
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)
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(4,806
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)
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Other income (expense), net
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(448
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)
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471
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(779
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)
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118
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Net loss before income taxes
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(12,833
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)
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(67
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)
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(17,419
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)
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(1,675
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)
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Income tax expense
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(61
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)
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(119
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)
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(146
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)
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(182
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)
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Net loss
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$
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(12,894
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)
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$
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(186
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)
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$
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(17,565
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)
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$
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(1,857
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)
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Net loss per share:
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Basic and diluted
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$
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(0.16
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)
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$
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(0.00
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)
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$
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(0.22
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)
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$
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(0.03
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)
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Weighted average number of
shares outstanding:
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Basic and diluted
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79,953
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71,688
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79,185
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71,471
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The accompanying notes are an integral part of the consolidated financial statements.
4
ATS Medical, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
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Six months ended
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July 3,
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July 4,
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2010
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2009
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Operating activities:
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Net loss
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$
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(17,565
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)
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$
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(1,857
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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2,643
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2,540
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Stock-based compensation expense
|
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1,869
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1,197
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Deferred income taxes
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127
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141
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Non-cash interest expense
|
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295
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|
431
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Loss on redemption of convertible senior notes
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4,806
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Change in value of derivative liability bifurcated from convertible senior notes
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(9
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)
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(18
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)
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Changes in operating assets and liabilities:
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Accounts receivable, net
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(497
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)
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(822
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)
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Inventories, net
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(2,434
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)
|
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(1,013
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)
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Prepaid expenses
|
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|
117
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|
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(782
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)
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Accounts payable and accrued expenses
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546
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(5,825
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)
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Net cash used in operating activities
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(10,102
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)
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(6,008
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)
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Investing activities:
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Payments for business acquisitions
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(2,000
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)
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Purchases of leasehold improvements, furniture and equipment
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(526
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)
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(699
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)
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Other
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|
479
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Net cash used in investing activities
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(526
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)
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|
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(2,220
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)
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Financing activities:
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Loan from Medtronic, Inc.
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30,000
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Payments on bank loan
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(3,969
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)
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|
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(1,543
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)
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Redemption and retirement of convertible senior notes
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(22,400
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)
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Proceeds from issuance of common stock, net of issuance costs
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5,379
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|
|
158
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|
Other
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(425
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)
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|
29
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|
|
|
|
|
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Net cash provided by (used in) financing activities
|
|
|
8,585
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|
|
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(1,356
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)
|
|
|
|
|
|
|
|
|
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Effect of foreign exchange rate changes on cash
|
|
|
(222
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)
|
|
|
11
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(2,265
|
)
|
|
|
(9,573
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)
|
Cash and cash equivalents at beginning of period
|
|
|
14,235
|
|
|
|
20,895
|
|
|
|
|
|
|
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Cash and cash equivalents at end of period
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|
$
|
11,970
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|
|
$
|
11,322
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
5
ATS Medical, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The consolidated financial statements included in this Form 10-Q have been prepared by ATS Medical,
Inc. (hereinafter the Company or ATS) without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC) and United States Generally Accepted Accounting
Principles (GAAP) as set forth by the Financial Accounting Standards Board (FASB) in its
Accounting Standards Codification (ASC), to ensure consistent and accurate reporting of the
Companys financial condition, results of operations and cash flows. The consolidated financial
statements include the accounts of the Company and its subsidiaries, and all significant
inter-company accounts and transactions are eliminated in consolidation. Certain information and
footnote disclosures normally included in financial statements prepared in accordance with U. S.
GAAP have been condensed or omitted pursuant to SEC rules and regulations, although the Company
believes that the disclosures made are adequate to make the information not misleading. The
year-end balance sheet was derived from audited financial statements but does not include all
disclosures required by U.S. GAAP. These unaudited consolidated interim financial statements
should be read in conjunction with the Companys consolidated financial statements and related
notes included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2009.
These statements reflect, in managements opinion, all adjustments (which include only normal,
recurring adjustments) necessary for a fair presentation of the financial position and the results
of operations and cash flows for the periods presented. The results of operations for any interim
period may not be indicative of results for the full year.
The Company utilizes a 52 week calendar year that ends on December 31. For interim periods, the
Company utilizes a 13 week quarterly period that ends on the Saturday nearest the end of the
calendar quarter. The three month periods ended July 3, 2010 and July 4, 2009 each consisted of 91
calendar days. The six month periods ended July 3, 2010 and July 4, 2009 consisted of 184 and 185
calendar days, respectively.
Certain amounts in the consolidated statement of cash flows for the six months ended July 4, 2009
have been reclassified to conform to the full year 2009 presentation. These reclassifications had
no effect on the net decrease in cash and cash equivalents as previously reported.
Note 2. Merger with Medtronic, Inc.
On April 28, 2010, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) with Medtronic, Inc. (Medtronic) and Pilgrim Merger Corporation, a wholly owned
subsidiary of Medtronic, pursuant to which Medtronic agreed to acquire all of the outstanding
shares of the Company for $4.00 per share in cash, without interest, subject to decrease under the
limited circumstances described in the Merger Agreement (the Merger Consideration), and pursuant
to which the Company will become a wholly owned subsidiary of Medtronic (the Merger). Each
option to purchase Company common stock that is outstanding as of the effective time of the Merger
(the Effective Time) will be canceled in exchange for the right to receive in cash the amount by
which the Merger Consideration exceeds the exercise price, multiplied by the number of shares
subject to such option, less applicable withholding tax obligations. Each restricted stock unit
(RSU) that is outstanding immediately prior to the Effective Time will, at the Effective Time, be
canceled in exchange for the right to receive, in cash, the Merger Consideration, less applicable
withholding tax obligations. Each warrant to purchase Company common stock that is outstanding
immediately prior to the Effective Time will be converted into the right to receive, upon exercise,
an amount in cash equal to the amount by which the Merger Consideration exceeds the exercise price,
multiplied by the number of shares subject to such warrant, less applicable withholding tax
obligations. The Merger has been unanimously approved by the Companys Board of Directors and was
approved by the Companys shareholders at a special meeting of shareholders held on August 5, 2010.
Pursuant to the Merger Agreement, the Company has made certain representations, warranties and
covenants, including, among others, not to engage in certain kinds of transactions during the
transition period from the date of the Merger Agreement until the Merger is completed, and not to
solicit proposals relating to alternative business combination transactions or, subject to certain
exceptions, enter into discussions concerning or provide confidential information in connection
with any proposals for alternative business combination transactions. In addition, the
Company was required to redeem, and in June 2010 redeemed (see next paragraph), as a condition of
and prior to the completion of the proposed Merger, all of its 6% Convertible Senior Notes due 2025
(Notes) at a redemption price in cash equal to 100% of the principal amount of the Notes,
together with accrued and unpaid interest.
6
In addition, under the Merger Agreement Medtronic agreed to loan the Company and certain of its
subsidiaries up to $30 million (the Loan). In May 2010, the Company drew the maximum permitted
advance of $30 million. Advances under the Loan bear interest at the annual rate of 10%, payable
monthly. The Loan documents provide that the proceeds of any advance may only be used to redeem
the Notes, to repay outstanding borrowings under the Companys $8.6 million term loan with Silicon
Valley Bank (the Term Loan), and/or to finance working capital or, if the Merger Agreement is
terminated, for general corporate purposes in the ordinary course of business consistent with past
practice. In accordance with the terms of the Loan, the Company used the May 2010 advance to
redeem and retire the Notes and repay all outstanding borrowings under the Term Loan. The entire
unpaid principal balance of the Loan, together with accrued and unpaid interest, will be due and
payable in full 24 months following the termination, for any reason, of the Merger Agreement. A
facility fee of 1.5% of the original principal balance of the Loan was paid at the time of the May
2010 advance. Upon final payment of the Loan, the Company will be required to pay, in addition to
the then outstanding principal and accrued but unpaid interest, a final payment equal to 6% of the
original principal balance of the Loan. In addition, if the Merger Agreement is terminated for any
reason, the Company is required under the terms of the Loan to issue Medtronic a seven-year warrant
(the Medtronic Warrant) to purchase, at a per share exercise price of $2.61, a number of shares
of the Companys common stock equal to 4% of the quotient of $30 million divided by $2.61, provided
that the maximum number of shares issuable pursuant to the Medtronic Warrant may not exceed that
number of shares which is 19.9% of the total number of shares of common stock of the Company
outstanding on the date of issuance of such shares. The exercise price and the number of shares
purchasable upon exercise of the Medtronic Warrant will be subject to the anti-dilution adjustments
provided for in the Medtronic Warrant. The Loan is secured by security interests in certain
collateral of the Company and the stock in certain subsidiaries of the Company.
The Merger Agreement contains certain termination rights for both Medtronic and the Company, and
further provides that in the event of termination of the Merger Agreement under certain specified
circumstances, the Company would be required to pay Medtronic a termination fee of $13 million.
Consummation of the Merger is subject to customary conditions and approvals, including, but not
limited to (i) the approval of the Companys shareholders, (ii) the absence of any law or order
prohibiting the consummation of the Merger, (iii) the expiration or termination of any applicable
waiting period under the HartScottRodino Antitrust Improvements Act of 1976, as amended, and
the receipt of approvals under applicable foreign antitrust laws, (iv) not more than 10% of the
outstanding shares of our Common Stock being the subject of validly exercised appraisal rights and
(v) the absence of a material adverse effect with respect to ATS. As of the date of this Form
10-Q, the Companys shareholders have approved the Merger, the Company has received all required
antitrust approvals relating to the Merger and no holders of the Companys common stock asserted
dissenters rights in accordance with Minnesota law. The Merger is expected to be completed on or
about August 12, 2010, subject to satisfaction or waiver of all conditions to closing specified in
the Merger Agreement.
Note 3. Stock-Based Compensation and Equity Plans
Stock-Based Compensation
The Company accounts for its stock-based employee compensation plans under the recognition and
measurement principles set forth in FASB ASC 718,
Stock Compensation
, which requires all
share-based payments to be recognized in the income statement based on their fair values.
7
The following table summarizes stock compensation expense recognized in the statements of
operations for the three and six month periods ended July 3, 2010 and July 4, 2009 (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
July 3,
|
|
|
July 4,
|
|
|
July 3,
|
|
|
July 4,
|
|
(in thousands, except per share data)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
60
|
|
|
$
|
47
|
|
|
$
|
109
|
|
|
$
|
47
|
|
Sales and marketing expenses
|
|
|
340
|
|
|
|
349
|
|
|
|
730
|
|
|
|
620
|
|
Research and development expenses
|
|
|
141
|
|
|
|
78
|
|
|
|
381
|
|
|
|
149
|
|
General and administrative expenses
|
|
|
306
|
|
|
|
239
|
|
|
|
649
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock compensation expense
|
|
$
|
847
|
|
|
$
|
713
|
|
|
$
|
1,869
|
|
|
$
|
1,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense per
weighted average share outstanding
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on an analysis of the Companys historical data, the Company applied forfeiture rates of
10.16% during the three and six month periods ended July 3, 2010 and 9.56% for the three and six
month periods ended July 4, 2009, to stock options and RSUs outstanding in determining its stock
compensation expense, which it believes are reasonable forfeiture estimates for these periods.
As of July 3, 2010, the Company had approximately $0.3 million of total unrecognized compensation
expense, net of estimated forfeitures, related to stock options that will be recognized over a
weighted average period of four years, and approximately $7.6 million of total unrecognized
compensation expense, net of estimated forfeitures, related to RSU awards that will be recognized
over a weighted average period of approximately 3.66 years.
Equity Plans
The Company had a total of 12,654,605 shares of common stock reserved for stock option grants and
RSU awards at July 3, 2010, of which 5,097,609 shares were available for future grants or awards
under the Companys stock-based compensation plans, including 5,000,000 shares approved at the 2010
annual meeting of shareholders. Due to the proposed Merger with Medtronic, the Company does not
intend to grant or award additional stock options or RSUs.
The following table summarizes the 2010 changes in stock options outstanding under the Companys
stock-based compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Stock Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
Average Option
|
|
|
|
Under the Plans
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
|
ISO
|
|
|
Non-ISO
|
|
|
Non-Plan Options
|
|
|
Total
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December
31, 2009
|
|
|
717,800
|
|
|
|
289,000
|
|
|
|
1,493,200
|
|
|
|
2,500,000
|
|
|
$
|
2.82
|
|
Options granted
|
|
|
176,100
|
|
|
|
|
|
|
|
|
|
|
|
176,100
|
|
|
|
2.45
|
|
Options exercised
|
|
|
(38,375
|
)
|
|
|
|
|
|
|
(84,200
|
)
|
|
|
(122,575
|
)
|
|
|
3.11
|
|
Options canceled
|
|
|
(73,400
|
)
|
|
|
(7,500
|
)
|
|
|
(75,000
|
)
|
|
|
(155,900
|
)
|
|
|
6.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 3, 2010
|
|
|
782,125
|
|
|
|
281,500
|
|
|
|
1,334,000
|
|
|
|
2,397,625
|
|
|
$
|
2.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 3, 2010, the aggregate intrinsic value of options outstanding was approximately $3.6
million and the aggregate intrinsic value of options exercisable was approximately $3.0 million.
For the six month period ended July 3, 2010, the aggregate intrinsic value of options exercised was
approximately $0.1 million.
8
The following table summarizes 2010 RSU award activity under the Companys stock-based compensation
plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Average
|
|
|
|
Number of
|
|
|
Award Date
|
|
|
Remaining
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Contractual Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding (unvested ) at December 31, 2009
|
|
|
4,167,677
|
|
|
$
|
2.12
|
|
|
1.92 years
|
Awards granted
|
|
|
2,050,203
|
|
|
|
2.56
|
|
|
|
|
|
Awards vested
|
|
|
(959,982
|
)
|
|
|
2.11
|
|
|
|
|
|
Awards forfeited
|
|
|
(98,527
|
)
|
|
|
2.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding (unvested) at July 3, 2010
|
|
|
5,159,371
|
|
|
$
|
2.30
|
|
|
2.16 years
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 3, 2010, the aggregate intrinsic value of unvested RSU awards outstanding was
approximately $20.4 million.
Note 4. Inventories
The Company carries and relieves inventories at the lower of manufacturing cost (first-in,
first-out basis) or market (net realizable value). Inventories consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Raw materials
|
|
$
|
3,350
|
|
|
$
|
2,639
|
|
Work-in-process
|
|
|
6,736
|
|
|
|
6,390
|
|
Finished goods
|
|
|
13,228
|
|
|
|
12,685
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
23,314
|
|
|
|
21,714
|
|
Less: non-current inventories
|
|
|
(1,100
|
)
|
|
|
(900
|
)
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
22,214
|
|
|
$
|
20,814
|
|
|
|
|
|
|
|
|
A portion of the Companys finished goods inventories was in excess of its current requirements
based on the historical and anticipated level of sales. Management believes that the majority of
these excess quantities will be utilized over the next two to five years. The Company therefore
included $1.1 million and $0.9 million of inventories in non-current other assets on the balance
sheets at July 3, 2010 and December 31, 2009, respectively.
Note 5. Comprehensive Income (Loss)
Comprehensive income (loss) for the Company includes gains and losses from foreign currency
translation which are charged or credited to the cumulative translation account within
shareholders equity. The Company recognized net comprehensive losses of $0.4 million and $0.7
million for the three and six month periods ended July 3, 2010, respectively, and recognized net
comprehensive gains of $0.3 million and $0.1 million for the three and six month periods ended July
4, 2009, respectively.
Note 6. Intangible Assets
Indefinite-lived intangible assets consist of goodwill, which is carried at cost. The Company
applies the accounting principles set forth in FASB ASC 350,
Intangibles-Goodwill and Other,
which
prohibits the amortization of intangible assets with indefinite useful lives and requires that
these assets be reviewed for impairment at least annually. Management reviews goodwill for
impairment annually, or more frequently if a change in circumstances or occurrence of events
suggests the remaining value may not be recoverable. The test for impairment requires management
to make estimates about fair-value which are based either on the expected present value of future
cash flows or on other measures of value such as the market capitalization of the Company. If the
carrying amount of the assets is greater than the measures of fair value, impairment is considered
to have occurred and a write-down of the asset is recorded.
Definite-lived intangible assets consist of purchased technology and patents, technology licenses
and agreements, trademarks, tradenames and distribution intangibles, which are carried at amortized
cost. The Company assesses definite-lived intangible asset impairment in accordance with FASB ASC
360-10-35,
Property, Plant and Equipment-Overall-Subsequent Measurement
. If a triggering event
occurs, the Company assesses the recoverability
of definite-lived intangible assets by reference to future gross profit cash flows from the
underlying products utilizing the capitalized intangible assets.
9
Impairment testing on all of the Companys intangible assets was completed by management as of
December 31, 2009. Management determined that the Companys intangible assets, including goodwill,
were not impaired. In performing its year-end impairment test for goodwill, the Company used a
market capitalization approach based on the closing price of the Companys common stock on the date
of measurement. This market capitalization value was compared to the net book value of the Company
(i.e. total assets, including goodwill, minus total liabilities). The total market capitalization
exceeded the net book value of the Company; therefore, no goodwill impairment was indicated. In
performing its year-end impairment review for definite-lived intangible assets, the Company
assessed the recoverability of definite-lived intangible assets by reference to future gross profit
cash flows from the underlying products using the capitalized technology and trademarks. Based on
this assessment, no impairment of definite-lived intangible assets was indicated.
Note 7. Debt and Borrowings
Medtronic Loan
In connection with the proposed Merger with Medtronic, Medtronic provided a $30 million Loan to the
Company in May 2010. This Loan and its terms are disclosed in Note 2 above.
Debt Refinancing
On February 25, 2010, the Company received a commitment letter for four-year (interest only during
the first year) term debt financing of approximately $30 million from a member of its Board of
Directors, Theodore C. Skokos, and The Ted and Shannon Skokos Foundation (the Skokos Commitment).
This financing was intended to be used to call and retire the Companys Convertible Senior Notes
and bank Term Loan, together totaling approximately $26 million, as well as to provide general
corporate working capital. In light of the Companys proposed Merger with Medtronic and the
related $30 million Loan from Medtronic (see Note 2 above), the Company allowed the Skokos
Commitment to expire. As required under the terms of the commitment letter, the Company paid a
one-time $0.45 million facility fee during the first quarter of 2010 and paid a break-up fee of
$0.45 million in the second quarter of 2010 in connection with the expiration of the Skokos
Commitment. These amounts are included in general and administrative expenses on the Consolidated
Statement of Operations for the three and six months ended July 3, 2010.
Convertible Senior Notes Payable
In 2005, the Company sold a combined $22.4 million aggregate principal amount of 6% Convertible
Senior Notes, which were, prior to their redemption and retirement in June 2010, convertible into
5,333,334 shares of the Companys common stock. Included with the Notes were Warrants to purchase
1,344,000 shares of the Companys common stock exercisable at $4.40 per share (Warrants) and
certain embedded derivatives. Interest on the Notes was payable each April and October. In June
2010, the Company redeemed and retired the Notes, which was required as a condition of the proposed
Merger with Medtronic. The Notes were redeemed using proceeds from the $30 million Loan obtained
from Medtronic in connection with the proposed Merger. See Note 2 above. For the three months
ended July 3, 2010, the Company recorded a non-cash, non-operating loss on redemption and
retirement of the Notes of $4.8 million, related primarily to the write-off of the remaining
balances of unamortized discounts on the Notes. Prior to the June 2010 redemption and retirement
of the Notes, the Note holders had the right to require the Company to repurchase the Notes at 100%
of the principal amount plus accrued interest on October 15 in 2010, 2015 and 2020. Accordingly,
the Company included the Notes within current liabilities on its balance sheet at December 31,
2009.
The Company had bifurcated embedded derivatives from the Notes as required by FASB ASC 815,
Derivatives and Hedging,
and applicable SEC rules. The Company recorded a $5.5 million derivative
liability on the date of issuance of the Notes, with an offsetting discount on the Notes. The
total value of the Warrants on the date of issuance was also recorded as a discount on the Notes.
The total discount on the Notes was being amortized to interest expense over the 20 year life of
the Notes, using the effective interest method. Interest expense attributable to discount
amortization totaled $0.07 million and $0.08 million for the six month periods ended July 3, 2010
and July 4, 2009, respectively.
10
The most significant derivative related to the lack of authorized shares to cover the potential
conversion and warrant exercise. That derivative was marked to market until appropriate
shareholder approval for additional authorized shares was obtained in 2006, at which time the
balance of the liability was offset against the remaining discount on the debt. The other
derivatives identified were not material. The derivative liability included certain time-based
provisions of the Notes which expired over time and was adjusted to fair value on a quarterly
basis. Derivative liability activity is summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
July 3, 2010
|
|
|
July 4, 2009
|
|
Derivative liability balance at beginning of period
|
|
$
|
56
|
|
|
$
|
90
|
|
Change in valuation gain included in other income:
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
(9
|
)
|
|
|
(9
|
)
|
Second quarter
|
|
|
|
|
|
|
(9
|
)
|
Write-off remaining derivative liability due to redemption of Notes
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability balance at end of period
|
|
$
|
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
The derivative liability is shown on the December 31, 2009 balance sheet within the same line as
the Convertible Senior Notes payable.
Bank Loan Payable
The Company maintained a Loan and Security Agreement with Silicon Valley Bank (Bank) from 2004
until June 2010. All Company assets were pledged as collateral under the Loan and Security
Agreement. The Loan and Security Agreement, as amended, subjected the Company to certain financial
covenants and restricted the Company from declaring or paying dividends.
In 2007, the Company entered into an Amendment to the Loan and Security Agreement whereby the Bank
provided for the $8.6 million Term Loan discussed in Note 2 above, which was used to purchase a
portion of the cryoablation surgical device business of CryoCath Technologies, Inc. (CryoCath)
and to repay then-outstanding term loans and advances from the Bank under the Loan and Security
Agreement.
Under the Term Loan, as amended, the Company began making 39 monthly payments of principal plus
interest effective April 2008 until June 2011. In June 2010, the Company exercised its right to
prepay the outstanding Term Loan, which was required as a condition of the proposed Merger with
Medtronic. The outstanding Term Loan balance was paid using proceeds from the $30 million Loan
obtained from Medtronic in connection with the proposed Merger. See Note 2 above. Under the Loan
and Security Agreement, the Company paid prepayment penalties and credit facility fees of $0.16
million in connection with the prepayment. These penalties and fees are included in net interest
expense on the Consolidated Statement of Operations for the three and six months ended July 3,
2010. Prior to the Companys prepayment of the Term Loan, interest on the Term Loan accrued at a
fixed rate per annum of 9.5%, equal to 1.25% above the prime rate in effect as of the funding date
of the Term Loan. During the life of the Term Loan, the Company maintained compliance with all
financial covenants as set forth in the Loan and Security Agreement, as amended.
Subordinated Credit Agreement
In June 2008, the Company entered into a Subordinated Credit Agreement (Credit Agreement) with
Mr. Skokos for a two-year, $5 million Revolving Credit Facility (Credit Facility). Advances
under the Credit Facility carried interest at 15% per annum payable quarterly. The Credit Facility
also carried an annual commitment fee of 1% of the average unused Revolving Commitment Amount,
payable annually. The first annual commitment fee of $50,000 was paid to Mr. Skokos in July 2009.
No advances were made under the Credit Facility prior to its termination in May 2010. All Company
assets were pledged as collateral on the Credit Facility.
In May 2010, in light of the Companys proposed Merger with Medtronic and the related $30 million
Loan from Medtronic (see Note 2 above), the Company and Mr. Skokos agreed to terminate the Credit
Agreement. In connection with the termination of the Credit Agreement, the Company paid to Mr.
Skokos a $50,000 fee (the Fee) equal to the commitment fee to which Mr. Skokos would otherwise
have been entitled had the Credit Agreement been allowed to expire by its terms in June 2010.
Other than the Fee, there were no termination fees or penalties incurred by the Company in
connection with the termination.
11
Note 8. Income Taxes
For the six month periods ended July 3, 2010 and July 4, 2009, the Company recognized income tax
expense of approximately $0.1 million and $0.2 million, respectively, related to (1) deferred
income taxes connected with the deductibility of goodwill from the 2007 acquisition of the
cryoablation surgical device business of CryoCath for tax purposes, but not for book purposes, and
the uncertainty of the timing of its reversal for book purposes and (2) current income taxes for
certain of its international subsidiaries and certain state taxes.
Note 9. Fair Value Measurements
The Company uses fair value measurement accounting principles related to its financial and
non-financial assets and liabilities as required by FASB ASC 820,
Fair Value Measurements and
Disclosures
(ASC 820)
.
ASC 820 defines fair value, establishes a framework for measuring fair
value in accordance with U.S. GAAP and expands disclosures about fair value measurements.
ASC 820 defines fair value as the price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. ASC 820 also
describes three levels of inputs that may be used to measure fair value:
|
|
|
Level 1 quoted prices in active markets for identical assets and liabilities.
|
|
|
|
Level 2 observable inputs other than quoted prices in active markets for identical
assets and liabilities.
|
|
|
|
Level 3 unobservable inputs in which there is little or no market data available,
which require the reporting entity to develop its own assumptions.
|
The fair value of the Companys Convertible Senior Notes derivative liability (described in Note 7
above) was determined based on Level 3 inputs using discounted probability cash flow valuation
models. As discussed in Note 6 above, the Companys goodwill is analyzed annually for impairment
by reference to fair value based on the Companys market capitalization, a Level 1 input. The
Company assesses the potential impairment of definite-lived intangible assets by reference to
future gross profit cash flows from the underlying products using the capitalized technology and
trademarks, a Level 3 input.
Note 10. Subsequent Events
The Company applies FASB ASC 855,
Subsequent Events,
in its accounting and reporting of subsequent
events. The Company has evaluated subsequent events for potential disclosure through the date of
filing of this Form 10-Q. See Note 2 above for subsequent event information regarding the Merger
with Medtronic.
Note 11. Recently Issued Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06),
Improving
Disclosures about Fair Value Measurements
, which includes amendments to Topic 820,
Fair Value
Measurements and Disclosures
, that will provide more robust disclosures about (1) the different
classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs
used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1,
2, and 3. The new disclosures and clarifications of existing disclosures are effective for interim
and annual reporting periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll-forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. The application of ASU 2010-06 will not have a
material impact on the Companys consolidated financial statements.
Note 12. Litigation
Medtronic Merger Class Action Litigation
In May and June 2010, seven shareholders, each purporting to act on behalf of a class of all public
shareholders, separately sued the Company and other named defendants alleging, among other things,
that the members of the Companys Board of Directors breached their fiduciary duties in connection
with the proposed Merger with Medtronic. Of the seven lawsuits filed, six were filed in the
District Court of the State of Minnesota Hennepin
County and one was filed in the U.S. District Court for the District of Minnesota. On June 16,
2010, all of the cases filed in state court were consolidated in
In re ATS Medical, Inc.
Shareholder Litigation
(the Lawsuit). On July 12, 2010, the case filed in federal court was
dismissed voluntarily without prejudice.
12
On July 26, 2010, after extensive negotiations, the Company and the other defendants reached an
agreement in principle with the plaintiffs regarding settlement of the Lawsuit. In connection with
the settlement contemplated by that agreement in principle, the Lawsuit and all claims asserted
therein will be dismissed with prejudice. The terms of the settlement contemplated by that
agreement in principle require that ATS make certain additional disclosures related to the
Merger, which the Company has done. The agreement in principle contemplates that the parties will enter into a stipulation of
settlement, which will be subject to customary conditions, including Court approval following
notice to the Companys shareholders. There can be no assurance that the parties will ultimately
enter into a stipulation of settlement, that the Court will approve any proposed settlement, or
that any eventual settlement will be under the same terms as those contemplated by the agreement in
principle. By entering into the proposed settlement, the Company and the other defendants are in
no way acknowledging that the allegations contained in the Lawsuit have merit, and the defendants
deny any liability.
See Part II, Item 1-Legal Proceedings in this Form 10-Q for additional information concerning this
litigation. The Company believes these class actions to be without merit and, if necessary, would
vigorously defend itself against the claims asserted.
Abbey Litigation
In January 2006, following execution of a Merger Agreement between the Company and 3F Therapeutics,
Inc. (3F), 3F was informed of a summons and complaint which was filed in the U.S. District Court
in the Southern District of New York by Arthur N. Abbey (Abbey) against 3F Partners Limited
Partnership II (a major stockholder of 3F, 3F Partners II), Theodore C. Skokos (the then chairman
of the board and a stockholder of 3F), 3F Management II, LLC (the general partner of 3F Partners
II), and 3F (collectively, the Defendants) (Abbey I Litigation). The summons and complaint
alleges that the Defendants committed fraud under federal securities laws, common law fraud and
negligent misrepresentation in connection with the purchase by Abbey of certain securities of 3F
Partners II. In particular, Abbey claims that the Defendants induced Abbey to invest $4 million in
3F Partners II, which, in turn, invested $6 million in certain preferred stock of 3F, by allegedly
causing Abbey to believe, among other things, that such investment would be short-term. Pursuant to
the complaint, Abbey is seeking rescission of his purchase of his limited partnership interest in
3F Partners II and return of the amount paid therefor (together with pre-and post-judgment
interest), compensatory damages for the alleged lost principal of his investment (together with
interest thereon and additional general, consequential and incidental damages), general damages for
all alleged injuries resulting from the alleged fraud in an amount to be determined at trial and
such other legal and equitable relief as the court may deem just and proper. Abbey did not
purchase any securities directly from 3F and is not a stockholder of 3F. In March 2006, 3F filed a
motion to dismiss the complaint. In August 2007, the Court granted 3Fs motion to dismiss the
complaint based on plaintiffs failure to state a claim upon which relief may be granted and
ordered the Clerk of the Court to close the case. Abbey filed a Notice of Appeal with the United
States Court of Appeals for the Second Circuit seeking to reverse the District Courts August 2007
Order dismissing the case. In December 2008, the Second Circuit issued a Summary Order that
affirmed the District Courts judgment of dismissal finding that Abbey failed to state a claim
against 3F. However, the Second Circuit remanded the case to the District Court to allow Abbey a
chance to replead his claims. On or about February 13, 2009, Abbey filed an amended complaint
which purports to allege additional facts to support the same claims against 3F that were asserted
and dismissed in the original complaint. On or about March 31, 2009, 3F served and filed its
motion to dismiss the amended complaint with prejudice. 3Fs motion to dismiss was fully submitted
on June 8, 2009. By Order entered December 2, 2009, the District Court denied 3Fs motion to
dismiss on the ground of lack of standing and converted the remainder of 3Fs motion to dismiss for
failure to state a claim into a motion for summary judgment. Accordingly, the Court ordered
limited discovery to be completed by February 26, 2010 and additional briefings on summary
judgment to be completed by April 9, 2010. This schedule has been modified and discovery is to be
completed by June 8, 2010 and additional briefings on summary judgment are to be fully submitted by
August 16, 2010.
13
In June 2006, Abbey commenced a second civil action in the Court of Chancery in the State of
Delaware by serving 3F with a complaint naming both 3F and Mr. Skokos as defendants (Abbey II
Litigation). The complaint alleges, among other things, fraud and breach of fiduciary duties in
connection with the purchase by Abbey of his partnership interest in 3F Partners II. The Delaware
action seeks: (1) a declaration that (a) for purposes of the merger, Abbey was a record stockholder
of 3F and was thus entitled to withhold his consent to the merger and seek appraisal rights after
the merger was consummated and (b) the irrevocable stockholder consent submitted by 3F
Partners II to approve the merger be voided as unenforceable; and (2) damages based upon
allegations that 3F aided and abetted Mr. Skokos in breaching Mr. Skokoss fiduciary duties of
loyalty and faith to Abbey. On July 17, 2006, 3F filed a motion to dismiss the complaint in the
Abbey II Litigation, or, alternatively, to stay the action pending adjudication of the Abbey I
Litigation. In October 2006, the Delaware Chancery Court entered an order staying the Delaware
action pending the outcome of the Abbey I litigation. In August 2007, the parties informed the
Delaware Chancery Court that they would consent to the continued stay of the Delaware action
pending the outcome of Abbeys appeal of the Abbey I Litigation. The stay remains in effect
pending the outcome of 3Fs motion to dismiss the amended complaint.
3F has been notified by its director and officer insurance carrier that such carrier will defend
and cover all defense costs as to 3F and Mr. Skokos in the Abbey I Litigation and Abbey II
Litigation, subject to policy terms and full reservation of rights. In addition, under the Merger
Agreement, 3F and the 3F stockholder representative have agreed that the Abbey I Litigation and
Abbey II Litigation are matters for which express indemnification is provided. As a result,
certain escrow shares and contingent shares, if any, which may in the future be issued under the
Merger Agreement, may be used by ATS to satisfy, in part, ATSs set-off rights and indemnification
claims for damages and losses incurred by 3F or ATS, and their directors, officers and affiliates,
that are not otherwise covered by applicable insurance arising from the Abbey I Litigation and
Abbey II Litigation. See Note 5 of Notes to Consolidated Financial Statements in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009 for a description of the contingent
shares.
Abbey
Litigation Relating to the Medtronic Merger
On
August 2, 2010, the Company received notice of an action venued in the District Court of the State of
Minnesota Hennepin County concerning the Merger. The action was instituted by Abbey, a former
beneficial owner of 3F Therapeutics, Inc. stock and current beneficial owner of ATS stock, against
the Company, its board of directors and chief executive officer, and Medtronic. The complaint seeks a
declaratory judgment of the parties rights and obligations under the Merger Agreement as it
concerns the January 23, 2006 Agreement and Plan of Merger among ATS, Seabiscuit Acquisition Corp.,
3F Therapeutics, Inc. and Boyd D. Cox (the 3F Agreement), and specifically, that the 3F Agreement
entitles plaintiff to additional consideration in the Merger. The complaint also alleges breach of
fiduciary duty by the members of the Companys board of directors arising out of the attempt to sell ATS
through an arrangement that would allegedly abrogate the right to additional consideration of ATS
shareholders who are former holders of 3F shares. The complaint also alleges that ATS and
Medtronic aided and abetted the alleged breach of fiduciary duties. In addition to the declaration
of rights and obligations under the Merger Agreement and the 3F Agreement, the complaint seeks
damages and costs.
The
Company believes that the Abbey I Litigation, Abbey II Litigation and
the Abbey Litigation relating to the Medtronic Merger are without merit
and will not have a material impact on the Companys financial
position or operating results. In addition, the Company intends to
continue to vigorously defend against the claims asserted.
14
|
|
|
ITEM 2.
|
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations
|
This document contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Words such as may, expect, believe, anticipate or
estimate identify such forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, and actual results may differ materially from those expressed
in such forward-looking statements. The factors that could cause such material
differences are identified in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2009 and in Part II, Item 1A of this Form 10-Q. We undertake no obligation to
correct or update any forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any future disclosures we make on
related subjects in future filings with the SEC.
Executive Overview
ATS Medical, Inc. (hereinafter the Company, ATS, we, us or our) develops, manufactures,
and markets medical devices for the treatment of structural heart disease used by cardiovascular
surgeons in the cardiac surgery operating theater. Currently, we participate in the markets for
heart valve therapy including mechanical bileaflet replacement heart valves, tissue heart valves
and valve repair products and the surgical treatment of cardiac arrhythmias, primarily the
treatment of atrial fibrillation. Additionally, a small portion of our business is comprised of
surgical tools and accessories used by the cardiac surgeon for the treatment of structural heart
disease.
In 1990, we licensed a patented and partially developed mechanical heart valve from CarboMedics,
Inc. Under the terms of the license, we would complete the development of the valve and agreed to
purchase carbon components from CarboMedics. As a result, ATS now holds an exclusive,
royalty-free, worldwide license to an open pivot, bileaflet mechanical heart valve design owned by
CarboMedics. In addition, we have an exclusive, worldwide right and license to use CarboMedics
pyrolytic carbon technology to manufacture components for the ATS mechanical heart valve. We
commenced selling the ATS mechanical heart valve in international markets in 1992. In 2000, we
received U.S. Food and Drug Administration (FDA) approval to sell the ATS Open Pivot
®
mechanical
heart valve and commenced sales and marketing of our valve in the United States.
During 2002, we reorganized the Company and began the process of rebuilding our sales and marketing
teams, both in the United States and internationally. This rebuilding has been a significant
factor in our operating expense levels since 2002. During 2004 and 2005, we developed and
implemented a plan to ramp-up our own manufacturing facility for pyrolytic carbon. By the end of
2005, this process was substantially complete
.
In 2004, we made our first investments outside the mechanical heart valve market. We completed a
global partnership agreement with CryoCath Technologies, Inc. to market CryoCaths surgical
cryotherapy products for the ablation of cardiac arrhythmias. CryoCath developed a portfolio of
novel products marketed under the SurgiFrost
®
and FrostByte
®
trade names which are used by cardiac
surgeons to treat cardiac arrhythmias. Treatment is accomplished through the creation of an
intricate pattern of lesions on the surface of the heart to block inappropriate electrical
conduction circuits which cause the heart to be less effective when pumping blood and can lead to
stroke, heart failure and death. Unique to this technology is the use of cryothermy (cold) to
create lesions. The agreement with CryoCath has resulted in revenues for ATS since 2005.
In 2005, we continued to expand our business outside the mechanical heart valve market. We entered
into an exclusive development, supply and distribution agreement with Genesee BioMedical, Inc.
(GBI) under which GBI develops, supplies and manufactures cardiac surgical products to include
annuloplasty repair rings and bands and accessories, and we have exclusive worldwide rights to
market and sell such products. Our agreement with GBI has produced revenues for us since 2006.
In 2006, we completed the acquisition of all the voting and non-voting stock of 3F Therapeutics,
Inc., an early stage privately-held medical device company at the forefront of the emerging field
of minimally invasive open- and closed-chest tissue valve replacement. The acquisition of 3F was a
major step in the execution of our long-standing vision of obtaining a leadership position in the
major segments of the cardiac surgery market. The acquisition was consummated pursuant to an
agreement and plan of merger, as amended (3F Merger Agreement). Under the terms of the 3F Merger
Agreement, upon closing, we paid each 3F stockholder its pro-rata portion of an initial payment of
9,000,000 shares of our common stock, subject to certain adjustments. In December 2009, we issued
5,000,000 shares of our common stock to 3F stockholders under the 3F Merger Agreement upon
obtaining the European CE Mark on our Enable
®
Aortic Bioprosthesis sutureless tissue valve product.
In addition, we are obligated under the Merger Agreement to make an additional contingent payment
to 3F stockholders of up to 5,000,000 shares of our common stock upon obtaining U.S. FDA approval
on the Enable product or FDA or
European CE Mark approval for certain future key products acquired in the 3F acquisition on or
prior to December 31, 2013. Milestone share payments may be accelerated upon completion of certain
transactions involving these future key products.
15
The first generation tissue valve of the 3F portfolio, the ATS 3f
®
Aortic Bioprosthesis, has
received both FDA approval and the European CE mark and is available for sale in the United States,
Europe and certain other international markets. As discussed above, in December 2009 we received
European CE Mark approval of our second tissue valve, the sutureless ATS 3f Enable Aortic
Bioprosthesis, which is intended to enable less invasive aortic valve replacement. We are also
developing an aortic tissue valve for use in beating heart procedures based in part on the
characteristics of the next generation of Enable valves. First in-human studies of this technology
is targeted for 2010, and if successful, commercialization of a beating heart solution could occur
within one to two years thereafter.
In 2007, we acquired the cryoablation surgical device business of CryoCath. The acquisition
included the SurgiFrost, FrostByte and SurgiFrost XL family of products for which we had served as
CryoCaths exclusive agent in the United States and distributor in certain international markets.
Under the acquisition agreement, we paid CryoCath $22.0 million upon closing of the transaction
(reduced by $0.9 million subsequent to closing) and $2.0 million during 2008 upon the achievement
of certain manufacturing transition milestones. We also paid $2.0 million in 2009 (two years after
closing) and agreed to pay up to $4.0 million in contingent payments based on future sales of
Surgifrost XL, a product the Company discontinued developing in late 2008. The Company continues
to develop less invasive procedures utilizing its existing set of tools. The acquisition of the
cryoablation surgical device business of CryoCath enables us to leverage our current operating
infrastructure and allows us to better address the rapidly growing cardiac arrhythmia market within
cardiac surgery.
Merger with Medtronic, Inc.
On April 28, 2010, we entered into an Agreement and Plan of Merger with Medtronic, Inc. and Pilgrim
Merger Corporation, a wholly owned subsidiary of Medtronic, pursuant to which Medtronic agreed to
acquire all of the outstanding shares of ATS for $4.00 per share in cash, without interest, subject
to decrease under the limited circumstances described in the Merger Agreement (the Merger Consideration), and pursuant to
which ATS will become a wholly owned subsidiary of Medtronic.
On the terms and subject to the conditions set forth in the Merger Agreement, which has been
unanimously approved by our Board of Directors and approved by our shareholders at a special
meeting of shareholders held on August 5, 2010, at the effective time of the Merger, each share of
our common stock, par value $0.01 per share, that is issued and outstanding immediately prior to
the Effective Time (other than ATS common stock held by us, Medtronic or its subsidiaries, which
will be canceled without payment of any consideration, and ATS common stock for which appraisal
rights have been validly exercised and not withdrawn) will be converted at the Effective Time into
the right to receive the Merger Consideration, subject to adjustment under certain conditions as
described in the Merger Agreement. Each option to purchase ATS common stock that is outstanding as
of the Effective Time will be canceled in exchange for the right to receive in cash the amount by
which the Merger Consideration exceeds the exercise price, multiplied by the number of shares
subject to such option, less applicable withholding tax obligations. Each restricted stock unit
that is outstanding immediately prior to the Effective Time will be, at the Effective Time,
canceled in exchange for the right to receive in cash the Merger Consideration, less applicable
withholding tax obligations. Each warrant to purchase ATS common stock that is outstanding
immediately prior to the Effective Time will be converted into the right to receive, upon exercise,
an amount in cash equal to the amount by which the Merger Consideration exceeds the exercise price,
multiplied by the number of shares subject to such warrant, less applicable withholding tax
obligations.
We have made customary representations, warranties and covenants in the Merger Agreement,
including, among others, covenants that: (i) we will conduct our business in the ordinary course
consistent with past practice during the interim period between the execution of the Merger
Agreement and the Effective Time, (ii) we will not engage in certain kinds of transactions during
such period, (iii) we hold a meeting of ATS shareholders to consider approval of the Merger
Agreement, (iv) subject to certain customary exceptions, that our Board of Directors will recommend
approval by its shareholders of the Merger Agreement and (v) both Medtronic and ATS will use their
respective reasonable best efforts to make any required filings under applicable U.S. and foreign
antitrust laws, to obtain any required consents, approvals or the expiration of any applicable
waiting periods under such laws and, if any objections are asserted under such laws, to resolve
such objections. We have also made certain additional customary covenants, including, among
others, covenants not to: (i) solicit proposals relating to alternative business combination
transactions or (ii) subject to certain exceptions, enter into discussions concerning or provide
confidential information in connection with any proposals for alternative business combination
transactions. In addition, we were required to redeem, and in June 2010 redeemed, as a condition of
the proposed Merger and prior to the Effective Time, all of our 6% Convertible Senior Notes at a
redemption price in cash equal to 100% of the principal amount of the Notes, together with accrued
and unpaid interest thereon.
16
In connection with the proposed Merger, Medtronic provided a $30 million Loan to us and certain of
our subsidiaries. This financing is discussed in Note 2 of Notes to Consolidated Financial
Statements above and in Liquidity and Capital Resources-Financing Activities below. The Merger
Agreement contains certain termination rights for both Medtronic and ATS, and further provides that
in the event of termination of the Merger Agreement under certain specified circumstances, we would
be required to pay Medtronic a termination fee of $13 million.
In connection with the Merger Agreement, Alta Partners VIII, L.P., Essex Woodlands Health Ventures
Fund VIII, L.P. and Theodore C. Skokos, each a significant shareholder of our common stock (the
Voting Parties), entered into voting agreements (the Voting Agreements) covering a total of
16,151,244 shares of our common stock legally or beneficially owned by the Voting Parties (the
Voting Party Shares). Under the Voting Agreements, each Voting Party agreed to vote its Voting
Party Shares in favor of the Merger and also agreed to certain restrictions on the disposition of
such Voting Party Shares, subject to the terms and conditions set forth in the Voting Agreements.
The Voting Agreements provide that they will terminate concurrently with any termination of the
Merger Agreement.
Consummation of the Merger is subject to customary conditions, including (i) approval of the
holders of a majority of the outstanding shares of our common stock, (ii) the absence of any law or
order prohibiting the consummation of the Merger, (iii) the expiration or termination of any
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the receipt of approvals under applicable foreign antitrust laws, (iv) not more than
10% of the outstanding shares of our common stock being the subject of validly exercised appraisal
rights and (v) the absence of a material adverse effect with respect to ATS. As of the date of
this Form 10-Q, our shareholders have approved the Merger, we have received all required antitrust
approvals relating to the Merger and no holders of our common stock asserted dissenters rights in
accordance with Minnesota law. The Merger is expected to be completed on or about August 12, 2010,
subject to satisfaction or waiver of all conditions to closing specified in the Merger Agreement.
Critical Accounting Policies and Estimates
We base our estimates on historical experience and on various other assumptions that we believe to
be reasonable under the circumstances. Managements discussion and analysis of financial condition
and results of operations is based upon the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and judgments that affect
(1) the reported amounts of assets, liabilities, revenues and expenses; and (2) the related
disclosure of contingent assets and liabilities. At each balance sheet date, we evaluate our
estimates and judgments. The critical accounting policies that are most important to fully
understanding and evaluating our financial condition and results of operations are discussed in our
most recent Annual Report on Form 10-K on file with the SEC.
See Note 11 of Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for
information on recently issued accounting pronouncements which will or could affect our accounting
policies and estimates.
17
Results of Operations
The following table provides the dollar and percentage change in the Statements of Operations for
the three and six periods ended July 3, 2010 and July 4, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 3 (July 4)
|
|
|
Six months ended July 3 (July 4)
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
Net sales
|
|
$
|
19,014
|
|
|
$
|
19,781
|
|
|
$
|
(767
|
)
|
|
|
(3.9
|
)%
|
|
$
|
37,605
|
|
|
$
|
38,184
|
|
|
$
|
(579
|
)
|
|
|
(1.5
|
)%
|
Cost of goods sold
|
|
|
6,607
|
|
|
|
7,040
|
|
|
|
(433
|
)
|
|
|
(6.2
|
)%
|
|
|
13,012
|
|
|
|
13,170
|
|
|
|
(158
|
)
|
|
|
(1.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,407
|
|
|
|
12,741
|
|
|
|
(334
|
)
|
|
|
(2.6
|
)%
|
|
|
24,593
|
|
|
|
25,014
|
|
|
|
(421
|
)
|
|
|
(1.7
|
)%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
9,199
|
|
|
|
7,525
|
|
|
|
1,674
|
|
|
|
22.2
|
%
|
|
|
17,903
|
|
|
|
15,026
|
|
|
|
2,877
|
|
|
|
19.1
|
%
|
Research and development
|
|
|
2,755
|
|
|
|
1,817
|
|
|
|
938
|
|
|
|
51.6
|
%
|
|
|
6,022
|
|
|
|
3,861
|
|
|
|
2,161
|
|
|
|
56.0
|
%
|
General and administrative
|
|
|
6,332
|
|
|
|
2,431
|
|
|
|
3,901
|
|
|
|
160.5
|
%
|
|
|
9,373
|
|
|
|
4,907
|
|
|
|
4,466
|
|
|
|
91.0
|
%
|
Amortization of intangibles
|
|
|
812
|
|
|
|
812
|
|
|
|
|
|
|
|
0.0
|
%
|
|
|
1,624
|
|
|
|
1,600
|
|
|
|
24
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
19,098
|
|
|
|
12,585
|
|
|
|
6,513
|
|
|
|
51.8
|
%
|
|
|
34,922
|
|
|
|
25,394
|
|
|
|
9,528
|
|
|
|
37.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(6,691
|
)
|
|
|
156
|
|
|
|
(6,847
|
)
|
|
|
(4,389.1
|
)%
|
|
|
(10,329
|
)
|
|
|
(380
|
)
|
|
|
9,949
|
|
|
|
2,618.2
|
%
|
Net interest expense
|
|
|
(888
|
)
|
|
|
(694
|
)
|
|
|
194
|
|
|
|
28.0
|
%
|
|
|
(1,505
|
)
|
|
|
(1,413
|
)
|
|
|
92
|
|
|
|
6.5
|
%
|
Loss on redemption of
convertible senior notes
|
|
|
(4,806
|
)
|
|
|
|
|
|
|
4,806
|
|
|
NM
|
|
|
|
(4,806
|
)
|
|
|
|
|
|
|
4,806
|
|
|
NM
|
|
Other income (expense), net
|
|
|
(448
|
)
|
|
|
471
|
|
|
|
(919
|
)
|
|
|
(195.1
|
)%
|
|
|
(779
|
)
|
|
|
118
|
|
|
|
(897
|
)
|
|
|
(760.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(12,833
|
)
|
|
|
(67
|
)
|
|
|
12,766
|
|
|
|
19,053.7
|
%
|
|
|
(17,419
|
)
|
|
|
(1,675
|
)
|
|
|
15,744
|
|
|
|
939.9
|
%
|
Income tax expense
|
|
|
(61
|
)
|
|
|
(119
|
)
|
|
|
(58
|
)
|
|
|
(48.7
|
)%
|
|
|
(146
|
)
|
|
|
(182
|
)
|
|
|
(36
|
)
|
|
|
(19.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,894
|
)
|
|
$
|
(186
|
)
|
|
$
|
12,708
|
|
|
|
6,832.3
|
%
|
|
$
|
(17,565
|
)
|
|
$
|
(1,857
|
)
|
|
$
|
15,708
|
|
|
|
845.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the Statements of Operations as a percentage of net sales for the
three and six month periods ended July 3, 2010 and July 4, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
July 3 (July 4)
|
|
|
July 3 (July 4)
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
34.7
|
%
|
|
|
35.6
|
%
|
|
|
34.6
|
%
|
|
|
34.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
65.3
|
%
|
|
|
64.4
|
%
|
|
|
65.4
|
%
|
|
|
65.5
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
48.4
|
%
|
|
|
38.0
|
%
|
|
|
47.6
|
%
|
|
|
39.4
|
%
|
Research and development
|
|
|
14.5
|
%
|
|
|
9.2
|
%
|
|
|
16.0
|
%
|
|
|
10.1
|
%
|
General and administrative
|
|
|
33.3
|
%
|
|
|
12.3
|
%
|
|
|
24.9
|
%
|
|
|
12.9
|
%
|
Amortization of intangibles
|
|
|
4.3
|
%
|
|
|
4.1
|
%
|
|
|
4.3
|
%
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
100.4
|
%
|
|
|
63.6
|
%
|
|
|
92.9
|
%
|
|
|
66.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(35.2
|
)%
|
|
|
0.8
|
%
|
|
|
(27.5
|
)%
|
|
|
(1.0
|
)%
|
Net interest expense
|
|
|
(4.7
|
)%
|
|
|
(3.5
|
)%
|
|
|
(4.0
|
)%
|
|
|
(3.7
|
)%
|
Loss on redemption of
convertible senior notes
|
|
|
(25.3
|
)%
|
|
|
0.0
|
%
|
|
|
(12.8
|
)%
|
|
|
0.0
|
%
|
Other income (expense), net
|
|
|
(2.4
|
)%
|
|
|
2.4
|
%
|
|
|
(2.1
|
)%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(67.5
|
)%
|
|
|
(0.3
|
)%
|
|
|
(46.3
|
)%
|
|
|
(4.4
|
)%
|
Income tax expense
|
|
|
(0.3
|
)%
|
|
|
(0.6
|
)%
|
|
|
(0.4
|
)%
|
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(67.8
|
)%
|
|
|
(0.9
|
)%
|
|
|
(46.7
|
)%
|
|
|
(4.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Net Sales.
The following table provides the dollar and percentage change in net sales inside
and outside the United States for the three and six month periods ended July 3, 2010 and July 4,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 3 (July 4)
|
|
|
Six months ended July 3 (July 4)
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
|
|
|
|
|
|
|
|
|
|
|
Decrease
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
7,567
|
|
|
$
|
7,581
|
|
|
$
|
(14
|
)
|
|
|
(0.2
|
)%
|
|
$
|
15,059
|
|
|
$
|
15,513
|
|
|
$
|
(454
|
)
|
|
|
(2.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside United States
|
|
|
11,447
|
|
|
|
12,200
|
|
|
|
(753
|
)
|
|
|
(6.2
|
)%
|
|
|
22,546
|
|
|
|
22,671
|
|
|
|
(125
|
)
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,014
|
|
|
$
|
19,781
|
|
|
$
|
(767
|
)
|
|
|
(3.9
|
)%
|
|
$
|
37,605
|
|
|
$
|
38,184
|
|
|
$
|
(579
|
)
|
|
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides net sales inside and outside the United States as a percentage of
total net sales for the three and six month periods ended July 3, 2010 and July 4, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
July 3 (July 4)
|
|
|
July 3 (July 4)
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
39.8
|
%
|
|
|
38.3
|
%
|
|
|
40.0
|
%
|
|
|
40.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside United States
|
|
|
60.2
|
%
|
|
|
61.7
|
%
|
|
|
60.0
|
%
|
|
|
59.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides net sales by product group for the three and six month periods
ended July 3, 2010 and July 4, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 3 (July 4)
|
|
|
Six months ended July 3 (July 4)
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
|
|
|
|
|
|
|
|
|
|
|
Decrease
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
Heart valve therapy
|
|
$
|
14,205
|
|
|
$
|
14,736
|
|
|
$
|
(531
|
)
|
|
|
(3.6
|
)%
|
|
$
|
27,858
|
|
|
$
|
27,981
|
|
|
$
|
(123
|
)
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surgical arrhythmia
|
|
|
4,717
|
|
|
|
4,722
|
|
|
|
(5
|
)
|
|
|
(0.1
|
)%
|
|
|
9,612
|
|
|
|
9,626
|
|
|
|
(14
|
)
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surgical tools and accessories
|
|
|
92
|
|
|
|
323
|
|
|
|
(231
|
)
|
|
|
(71.5
|
)%
|
|
|
135
|
|
|
|
577
|
|
|
|
(442
|
)
|
|
|
(76.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,014
|
|
|
$
|
19,781
|
|
|
$
|
(767
|
)
|
|
|
(3.9
|
)%
|
|
$
|
37,605
|
|
|
$
|
38,184
|
|
|
$
|
(579
|
)
|
|
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales in the second quarter and first half of 2010 decreased over the same periods
in 2009. We believe the announcement of the Merger with Medtronic negatively impacted sales in the second quarter of 2010, due to uncertainty related to the
future of sales and marketing employees and distributor relationships.
The first half 2010 sales decrease of 1.5% was favorably impacted by approximately 60
basis points related to higher foreign currency exchange rates against the U.S. dollar over the
first half of 2010 compared to the first half of 2009. Conversely, the second quarter 2010 net
sales decrease of 3.9% was unfavorably impacted by approximately 30 basis points related to the
strengthening of the U.S. dollar during the second quarter of 2010 compared to the second quarter
of 2009. Approximately 20% of our total sales for the first half of 2010 were invoiced in Euros or
other local currencies in European markets where we sell our products directly to hospitals.
Heart valve therapy sales, our largest product group, consists of mechanical and tissue heart
valves and heart valve repair products. Our mechanical heart valve products continue to be our
primary product line and comprised approximately 58% of our total worldwide sales for the first
half of 2010, compared to 60% for the same period in 2009. Worldwide mechanical heart valve
revenue for the second quarter and first half of 2010 decreased 6.6% and 4.5% from the same periods
in 2009, respectively, due to weaker mechanical heart valve sales in the United States as the
overall market continues to move toward tissue valves and to affect of the announcement of the Merger with Medtronic discussed above. Tissue heart valve revenue for the second
quarter and first half of 2010 was $2.0 million and $3.8 million, respectively, representing
increases of approximately 30% and 42% compared to the same periods in 2009. These increases were
driven by the ongoing commercial launch of our first generation U.S. tissue valve product, the ATS
3f Aortic Bioprosthesis, approved by the FDA in October 2008, and the limited launch of our second
generation tissue valve product, the sutureless ATS 3f Enable Aortic Bioprosthesis, which received
European CE Mark approval in December 2009 and is intended to enable less
invasive aortic valve replacement. Heart valve repair revenue decreased 17% in the second quarter
of 2010 and 10% for the first half of 2010, compared to the same periods in 2009, primarily the
result of weaker international sales.
19
Surgical arrhythmia therapy products consist of cryotherapy products for the ablation of cardiac
arrhythmias. We acquired this business from CryoCath in 2007. While overall surgical arrhythmia
therapy revenue was flat during the first half of 2010, international surgical arrhythmia therapy revenue
increased 6% while U.S. surgical arrhythmia therapy revenue declined 3% for the first half 2010
compared to the same period in 2009. Cryotherapy products in general and CryoMaze procedural
growth in particular have benefited from the growth of the surgical ablation market and increased
market acceptance of cryo-energy (cold) as a preferred technology to perform Cox-Maze lesion sets,
especially in international markets.
Surgical tools and accessories consist primarily of cardiac anastomosis assist devices and thoracic
port systems. Effective August 1, 2009, we ceased distribution of anastomotic assist devices,
which represented approximately $0.2 million and $0.4 million of sales in the second quarter and
first half of 2009, respectively.
Cost of Goods Sold and Gross Profit.
Our second quarter and first half 2010 gross profit
percentages of net sales were 65.3% and 65.4%, respectively, compared to 64.4% and 65.5% for the
same periods in the prior year.
Our 2010 gross profit as a percentage of net sales was negatively impacted by lower international
selling prices due to geographical sales mix shifts resulting from greater sales growth in
lower-margin countries, where we sell our products through independent distributors, than in
higher-margin countries where we sell our products direct. This had a combined net unfavorable
impact on our second quarter and first half 2010 gross profit percentages of net sales of
approximately 230 and 190 basis points, respectively, compared to the comparable periods in 2009.
Our second quarter and first half 2010 gross profit was also impacted by shifts in the overall
product and geography sales mix, which increased our second quarter 2010 gross profit percentage of
net sales by approximately 40 basis points but decreased our first half 2010 gross profit
percentage of net sales by approximately 20 basis points, compared to the comparable periods in
2009.
Our second quarter and first half 2010 gross profit as a percentage of net sales has benefited from
lower product manufacturing costs, particularly for mechanical heart valve and cryotherapy
products. The cost declines are attributable primarily to higher manufacturing volumes and
manufacturing efficiency improvements. Lower product costs increased our second quarter and first
half 2010 gross profit percentages of net sales by approximately 280 and 200 basis points compared
to the comparable periods in 2009.
Sales and Marketing.
In the United States, our sales and marketing costs for the second quarter
and first half of 2010 increased approximately 17% over the comparable periods in the prior year,
to $5.6 million and $11.4 million, respectively. The increases reflect infrastructure investments
and increased headcount for the U.S. sales force (field selling costs in the United States rose
25.3% in the first half of 2010) and higher bonus expense.
Internationally, our sales and marketing costs for the second quarter and first half of 2010
increased approximately 33% and 24% over the comparable periods of 2009, to $3.6 million and $6.5
million, respectively. These increases are attributable to our continuing investment in headcount
and programs to support and expand our direct sales operations in Europe and prepare for the full
commercial launch of our Enable tissue valve product line. Also contributing to the higher 2010
international sales and marketing costs was expense related to a distributor dispute in the Middle
East, higher selling costs for our Asian and Latin American markets and higher incentive
compensation expense.
Research and Development.
Research and development (R & D) expenses for both the second quarter
and first half of 2010 increased over 50% over the comparable periods in 2009, to $2.8 million and
$6.0 million, respectively. The increases reflect significantly higher pre-clinical study, testing
and prototype costs for next generation tissue valve product platforms and the Forcefield
biocompatible interface development program, as well as R & D headcount additions and higher
incentive compensation and stock compensation expense. Fluctuations in our R & D spending are
generally related to the timing and stages of individual projects and programs.
General and Administrative.
General and administrative (G & A) expenses increased significantly
in the second quarter of 2010. G & A expenses increased 160% and 91%, respectively, or
approximately $3.9 and $4.5 million, in the second quarter and first half of 2010 compared to the
same periods in 2009. The increases are primarily the result of significant additional costs, fees
and expenses in the second quarter of 2010 related to (1) the proposed Merger with Medtronic ($1.8
million) and (2) the structuring and evaluation of alternative debt refinancing options and other
corporate development activities ($1.6 million). Other G & A cost increases for the first half of
2010
compared to the same period in 2009 relate primarily to higher incentive compensation expense ($0.3
million), stock compensation expense ($0.3 million) and consulting and professional fees ($0.2
million). We anticipate recording significant additional costs, fees and expenses in 2010 related
to the proposed Merger with Medtronic.
20
In the first half of 2010 and 2009, we recognized total stock compensation expense of $1.9 million
($0.8 million in the second quarter) and $1.2 million ($0.7 million in the second quarter),
respectively. Stock compensation expense has been allocated to cost of goods sold, sales and
marketing, R & D and G & A expenses as indicated above in Note 2 of Notes to Consolidated
Financial Statements in this Form 10-Q. The increase in stock compensation expense in 2010 is
attributable to new equity grants and awards, accelerated first quarter 2010 vesting of certain
RSUs due to management incentive goals achieved and to the prior year reduction of stock
compensation expense for forfeitures of RSUs originally granted in 2005, before our adoption of
FASB ASC 718,
Stock Compensation
.
Amortization of Intangibles.
Amortization expense for the first halves of both 2010 and 2009
totaled approximately $1.6 million ($0.8 million per quarter) and consisted primarily of
amortization of our pyrolytic carbon technology license with CarboMedics as well as amortization of
definite-lived intangible assets acquired in connection with our 2006 acquisition of 3F and our
2007 acquisition of the surgical cryoablation business of CryoCath.
Net Interest Expense
.
Net interest expense for the second quarter and first half of 2010 increased
approximately 28% and 7%, respectively, from the same periods in 2009. These increases were the
result of higher interest cost on the $30 million Loan from Medtronic (10%) than on our $22.4
million aggregate principal balance of Convertible Senior Notes (6%) and our Term Loan with Silicon
Valley bank (9.5%), both of which were repaid in the second quarter of 2010 using the proceeds of
the Loan from Medtronic. Also contributing to the higher interest expense was (1) an overlapping
period of about 20 days during the second quarter of 2010 when both the Loan from Medtronic and the
Notes were outstanding, (2) prepayment and accelerated credit facility fees related to the payoff
the Term Loan and (3) amortization of deferred financing costs on the Loan from Medtronic. The
higher interest expense was offset in part by lower interest on the declining principal balance of
the Term Loan and the cessation of imputed interest expense on a $2.0 million acquisition payment
made to CryoCath in June 2009.
Loss on Redemption of Convertible Senior Notes.
During the second quarter of 2010, we recorded a
non-cash, non-operating charge of $4.8 million related primarily to the write-off of the remaining
balances of unamortized discounts on our Convertible Senior Notes after the redemption and
retirement of the Notes in June 2010 in connection with the proposed Merger with Medtronic and the
related $30 million Loan from Medtronic.
Other Income (Expense)
. The following table summarizes our net other income (expense) for the
three and six month periods ended July 3, 2010 and July 4, 2009.
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Three months ended
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Six months ended
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July 3 (July 4)
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July 3 (July 4)
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(in thousands)
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2010
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2009
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2010
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2009
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Convertible Senior Notes derivative liability gain
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$
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$
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9
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$
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9
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$
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18
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Net foreign currency transaction gains (losses):
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Realized
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29
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118
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(1
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)
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(110
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)
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Unrealized
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(477
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)
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344
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(787
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)
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210
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Net other income (expense)
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$
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(448
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)
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$
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471
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$
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(779
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)
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$
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118
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Net other expense consists primarily of net foreign currency transaction gains and losses,
including unrealized foreign currency gains and losses, related to short-term intercompany balances
with our foreign subsidiaries. These gains and losses have been impacted in recent years by larger
fluctuations in foreign currency exchange rates. The currency transaction losses in 2010 reflect a
stronger U.S. dollar and weaker Euro-to-U.S. dollar exchange rates.
Income Taxes
. In the first halves of 2010 and 2009, we recognized approximately $0.1 million and
$0.2 million of income tax expense, respectively, related to (1) deferred income taxes connected
with the deductibility of goodwill from the 2007 acquisition of the cryoablation surgical device
business of CryoCath for tax purposes, but not for book purposes, and the uncertainty of the timing
of its reversal for book purposes and (2) current income taxes for certain of our international
sales subsidiaries and certain state taxes.
21
Through 2009 we had accumulated approximately $167 million of net operating loss (NOL)
carryforwards for U.S. tax purposes ($59 million related to 3F). We believe that our ability to
fully utilize the existing NOL
carryforwards could be restricted on a portion of the NOL by changes in control that may have
occurred or may occur in the future and by our ability to generate net income. We have recorded no
net deferred tax asset related to our NOL carryforwards and other deferred items as we currently
cannot determine that it is more likely than not that this asset will be realized and we,
therefore, have provided a valuation allowance for the entire asset.
Net Loss.
The increases in net loss for the second quarter and first six months of 2010 compared
to the comparable periods in 2009 were due primarily to slightly lower gross profit on sales,
significantly increased operating expenses, non-operating foreign currency losses and the non-cash
loss related to the redemption of our Convertible Senior Notes, all of which have been described in
detail above.
Liquidity and Capital Resources
Cash and cash equivalents totaled $12.0 million and $14.2 million at July 3, 2010 and December 31,
2009, respectively.
Operating Activities.
During the first six months of 2010, we received cash payments from
customers of approximately $37.1 million (compared to approximately $37.4 million for the same
period in 2009) and made payments to employees and suppliers of approximately $45.2 million
(compared to approximately $42.5 million for the same period in 2009). Cash payments made during
the first six months of 2009 included the payment of a $4.5 million litigation settlement payment
to CarboMedics, Inc., in April 2009.
We have incurred significant expenses to support the commercialization of ATS products both in the
United States and in international markets, have invested in new products and technologies and have
completed strategic acquisitions and business partnerships to diversify our product portfolio. As
we grow sales in future periods, better leverage our operating expenses and continue to drive
declines in our product manufacturing costs, we believe that our operating losses will decrease and
that we will move toward a cash flow breakeven on sales and eventually to full-year profitability.
Investing Activities.
We used cash to purchase leasehold improvements, property and equipment
totaling $0.5 million and $0.7 million during the first six months of 2010 and 2009, respectively.
Capital spending in both 2010 and 2009 has been focused on information technology and manufacturing
improvement projects.
During the first six months of 2009, we made a $2.0 million acquisition payment to CryoCath due two
years after the June 2007 closing of the acquisition of the cryoablation surgical device business
of CryoCath. Also during the first half of 2009, we converted a long-term restricted investment of
$0.5 million to cash.
Financing Activities.
During the first half of 2010 we raised $4.8 million from the issuance of
common stock related to the exercise of 2 million warrants on our common stock. The warrants were
originally issued in connection with private placement stock sales in 2008 and 2007. During the
first halves of 2010 and 2009, we received $0.6 million and $0.2 million, respectively, in proceeds
from exercises of stock options as well as purchases of common stock under our employee stock
purchase plan.
In May 2010, in connection with the proposed Merger with Medtronic, we and certain of our
subsidiaries received a $30 million Loan from Medtronic. The Loan bears interest at the annual
rate of 10%, payable monthly. We used the proceeds of the Loan to redeem and retire our
Convertible Senior Notes, to repay outstanding borrowings under our Term Loan with Silicon Valley
Bank, and for working capital. The entire unpaid principal balance of the Loan, together with
accrued and unpaid interest, will be due and payable in full 24 months following the termination
for any reason of the Merger Agreement. A facility fee of 1.5% of the original principal balance
of the Loan was paid at the time of the May 2010 advance. Upon final payment of the Loan, we will
be required to pay, in addition to the then outstanding principal and accrued but unpaid interest,
a final payment equal to 6% of the original principal balance of the Loan. In addition, if the
Merger Agreement is terminated for any reason, we are required under the terms of the Loan to issue
Medtronic a seven-year warrant to purchase, at a per share exercise price of $2.61, a number of
shares of our common stock equal to 4% of the quotient of $30 million divided by $2.61, provided
that the maximum number of shares issuable pursuant to the Medtronic Warrant may not exceed that
number of shares which is 19.9% of the total number of shares of our common stock outstanding on
the date of issuance of such shares. The exercise price and the number of shares purchasable upon
exercise of the Medtronic Warrant will be subject to the anti-dilution adjustments provided for in
the Medtronic Warrant. The Loan is secured by security interests in certain collateral of the
Company and the stock in certain subsidiaries of the Company.
22
In February 2010, we received a commitment letter for four-year (interest only during the first
year) term debt financing of approximately $30 million from one of our directors, Theodore C.
Skokos, and The Ted and Shannon Skokos Foundation. This financing was intended to be used to call
and retire our Convertible Senior Notes and our bank Term Loan, together totaling approximately $26
million, as well as to provide general corporate working capital. In light of the proposed Merger
with Medtronic and the related Loan from Medtronic, we allowed the Skokos Commitment to expire. As
required under the terms of the commitment letter, we paid a one-time $0.45 million facility fee
during the first quarter of 2010 and paid a break-up fee of $0.45 million in the second quarter of
2010 in connection with the expiration of the Skokos Commitment.
In 2008, we entered into a Credit Agreement with Mr. Skokos, for a two-year, $5 million Credit
Facility. Advances under the Credit Facility carried interest at 15% per annum payable quarterly.
The Credit Facility also carried an annual commitment fee of 1% of the average unused Revolving
Commitment Amount, payable annually. We paid the first annual commitment fee of $0.05 million to
Mr. Skokos in July 2009. No advances were made under the Credit Facility prior to its termination
in May 2010. All assets were pledged as collateral on the Credit Facility. In light of the
proposed Merger with Medtronic and related Loan from Medtronic, we terminated the Credit Agreement
with Mr. Skokos in May 2010. In connection with the termination of the Credit Agreement, we paid
to Mr. Skokos a $0.05 million fee equal to the commitment fee to which Mr. Skokos would otherwise
have been entitled had the Credit Agreement been allowed to expire by its terms in June 2010.
Other than the Fee, there were no termination fees or penalties incurred by the Company in
connection with the termination.
In 2005, we sold a combined $22.4 million aggregate principal amount of 6% Convertible Senior Notes
due 2025, which were, prior to their redemption and retirement in June 2010, convertible into
5,333,334 shares of our common stock. We used the proceeds from the Notes for general corporate
purposes, working capital, capital expenditures and to fund business development opportunities. As
discussed above, in June 2010 we redeemed and retired the Notes, which was required as a condition
of the proposed Merger with Medtronic. The Notes were redeemed using proceeds from the Loan
obtained in connection with the proposed Merger with Medtronic. During the second quarter of 2010,
we recorded a non-cash, non-operating loss on redemption and retirement of the Notes of $4.8
million, related primarily to the write-off of the remaining balances of unamortized discounts on
the Notes.
We maintained a Loan and Security Agreement with Silicon Valley Bank from 2004 until May 2010.
Under the Loan and Security Agreement, as amended, all ATS assets were pledged as collateral and we
were subject to certain financial covenants. In 2007, we entered into an Amendment to the Loan and
Security Agreement whereby the Bank provided for an $8.6 million Term Loan, which we used to repay
then outstanding term loans and advances from the Bank and to purchase the surgical cryoablation
business from CryoCath. Under the Term Loan, as amended, we began making monthly payments of
principal plus interest beginning in 2008 and continuing until June 2011. In June 2010, the
Company exercised its right to prepay the outstanding Term Loan using proceeds from the Loan
obtained in connection with the proposed Merger with Medtronic. This prepayment was required as a
condition of the proposed Merger. Under the Loan and Security Agreement, the Company paid
prepayment penalties and credit facility fees of $0.16 million in connection with the prepayment.
Interest on the Term Loan accrued at a fixed rate per annum of 9.5%. During the life of the Term
Loan, we were in compliance with all financial covenants set forth in the Loan and Security
Agreement, as amended.
Cash Management and Funding of Future Operations
We anticipate that operating costs will remain relatively high in comparison to sales during 2010
and will continue to require the use of cash to fund operations. However, we anticipate having
sufficient cash to fund our operations until the consummation of the proposed Merger with
Medtronic. As identified in Item 1A of our Annual Report on Form 10-K for the year ended December
31, 2009, global economic turmoil may adversely impact our revenue, access to the capital markets
or future demand for our products, all of which could affect our long-term viability.
Approximately 60% of our revenue is derived from markets outside the United States and this revenue
may be adversely impacted by large swings in foreign currency exchange rates and the availability
of credit for our distributors in emerging markets. 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.
If the Merger with Medtronic is not consummated, we may need to raise additional cash in or after
2010 to fund our business and to pay off our $30 million Loan obtained from Medtronic when it comes
due 24 months after termination of the Merger Agreement. If the Merger with Medtronic is not
consummated, funding of our operations in future periods would likely require additional
investments in ATS in the form of equity or debt. Any sale of additional equity or issuance of
debt securities may result in dilution to our stockholders, and we cannot be certain
that additional public or private financing will be available in amounts or on terms acceptable to
us, or at all. If we are unable to obtain this additional financing when needed, we may be
required to delay, reduce the scope of, or eliminate one or more aspects of our business
development activities, which could harm the growth of our business.
23
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements (as such term is defined in Item 303 of
Regulation S-K) that are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, operating results, liquidity,
capital expenditures or capital resources.
Contractual Obligations
A table of our contractual obligations and other commitments is contained in Part II, Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations
Contractual Obligations, of our Annual Report on Form 10-K for the year ended December 31, 2009
(2009 Form 10-K). As of July 3, 2010, we had the following significant changes to our
contractual obligations table contained in our 2009 Form 10-K:
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We redeemed and retired our Convertible Senior Notes.
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We prepaid our Term Loan with Silicon Valley Bank.
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We repaid the Notes and Term Loan using the proceeds of the $30 million Loan
obtained from Medtronic in connection with the proposed Merger with Medtronic. The entire
unpaid principal balance of the Loan, together with accrued and unpaid interest, will be
due and payable in full 24 months following the termination, for any reason, of the Merger
Agreement. Upon final payment of the Loan, we would be required to pay, in addition to the
then outstanding principal and accrued but unpaid interest, a final payment equal to 6% of
the original principal balance of the Loan.
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ITEM 3.
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Quantitative and Qualitative Disclosures About Market Risk
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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 that we invest in 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, our portfolio of cash
equivalents and short-term investments may be invested in a variety of securities, including
commercial paper, money market funds, and both government and non-government debt securities. The
average duration of all 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.
In the United States, the United Kingdom, France, Germany, Belgium, the Netherlands and
Switzerland, we sell our products directly to hospitals. In other international markets, we sell
our products to independent distributors who, in turn, sell to medical hospitals. Loss,
termination, or ineffectiveness of distributors to effectively promote our product would have a
material adverse effect on our financial condition and results of operations.
Transactions with U.S. and non-U.S. customers and distributors, other than in our direct selling
markets in Europe, are entered into in U.S. dollars, precluding the need for foreign currency
hedges on such sales. Sales through our French and German subsidiaries, as well as sales to
Belgium and the Netherlands, are in Euros. Sales to the United Kingdom and Switzerland are
denominated in British pounds and Swiss francs, respectively. Therefore, we are subject to
profitability risk arising from exchange rate movements. Our foreign subsidiaries are also subject
to exchange rate risk related to their U.S dollar-denominated intercompany payable balances. We
have not used foreign exchange contracts or similar devices to reduce these risks. We will evaluate
the need to use foreign exchange contracts or similar devices if sales in our European direct
markets increase substantially.
24
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ITEM 4.
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Controls and Procedures
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Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, which are designed to ensure that information
required to be disclosed in the reports we file or submit under the Securities Exchange Act of
1934, as amended (Exchange Act),
is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and communicated to our management,
including our Principal Executive Officer and our Principal Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Principal
Executive Officer and our Principal Financial Officer, we evaluated the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act). Based on that evaluation, the Principal Executive Officer and Principal Financial
Officer concluded that, as of the end of the period covered by this report, our disclosure controls
and procedures were effective.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) during the fiscal quarter ended July 3, 2010 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
25
PART II. OTHER INFORMATION
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ITEM 1.
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Legal Proceedings
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Medtronic Merger Class Action Litigation
On May 4, 2010, a class action complaint was filed in the District Court of the State of Minnesota
Hennepin County concerning the Merger. The class action was instituted by Patrick Vandenberghe,
individually and on behalf of all public shareholders of ATS, against ATS, our board of directors,
our president and chief executive officer, Medtronic and Pilgrim Merger Corporation, a wholly owned
subsidiary of Medtronic (Merger Sub). The complaint alleges breach of fiduciary duty by the
members of our board of directors arising out of the attempt to sell ATS by means of unfair process
with preclusive deal protection devices and at an unfair price of $4.00 in cash for each share of
our common stock. The complaint also alleges that ATS and Medtronic aided and abetted the alleged
breaches of fiduciary duties by the other defendants. On June 2, 2010, we received notice of an
amended class action complaint, which further alleges that the preliminary proxy statement we filed
on May 25, 2010 fails to provide our shareholders with material information and/or provides our
shareholders with materially misleading information, which the complaint alleges renders our
shareholders unable to make an informed decision on whether to vote in favor of the Merger. The
amended class action complaint includes a claim brought pursuant to Minnesota Statutes §302A.467,
alleging that each member of our board of directors violated the standard of conduct imposed on him
pursuant to Minnesota Statutes §302A.251 and that each such member and our president and chief
executive officer violated the standard of conduct imposed on him pursuant to Minnesota Statutes
§302A.361, in each case by allegedly failing to discharge his respective duties as a member of our
board of directors in good faith, in a manner he reasonably believes to be in the best interests of
our shareholders and with the care an ordinarily prudent person in a like position would exercise
under similar circumstances. The complaint seeks damages, costs and injunctive relief to prevent
the consummation of the Merger, or in the event that the Merger is consummated, then rescission or
rescissory damages, and such further relief as the court deems just and proper.
On May 4, 2010, we received notice of a class action complaint venued in the District Court of the
State of Minnesota Hennepin County concerning the Merger. The class action was instituted by Scott
Kirklighter, individually and on behalf of all public shareholders of ATS, against ATS, our board
of directors, our chief executive officer, our chief financial officer, Medtronic and Merger Sub.
The complaint alleges breach of fiduciary duty by the members of our board of directors, our chief
executive officer and our chief financial officer arising out of the attempt to sell ATS by means
of unfair process with preclusive deal protection devices and at an unfair price of $4.00 in cash
for each share of our common stock. The complaint also alleges that ATS, Medtronic, Merger Sub and
our chief financial officer aided and abetted the breach of fiduciary duties. On June 11, 2010, we
received a notice of motion and motion for leave to amend the complaint, accompanied by supporting
documents, including a proposed amended complaint. The proposed amended complaint further alleges
that the preliminary proxy statement we filed on May 25, 2010 contains numerous material misleading
statements or omissions. The complaint seeks costs and injunctive relief to prevent the
consummation of the Merger unless and until we adopt and implement a procedure or process to obtain
a transaction that provides the best possible terms for our shareholders, and, rescission of, to
the extent already implemented, the Merger Agreement or any of the terms thereof. The complaint
also seeks a declaration and decree that the Merger Agreement was agreed to in breach of the
fiduciary duties of the members of our board of directors, our chief executive officer and our
chief financial officer, a direction from the court to the members of our board of directors, our
chief executive officer and our chief financial officer to exercise their fiduciary duties to
commence a sale process that is reasonably designed to secure the best possible consideration for
ATS and the imposition of a constructive trust, in favor of Mr. Kirklighter and members of the
purported class, upon any benefits improperly received by the defendants as a result of their
alleged wrongful conduct.
On May 10, 2010, we received notice of a class action complaint venued in the District Court of the
State of Minnesota Hennepin County concerning the Merger. The class action was instituted by Vance
S. Dahle, individually and on behalf of all public shareholders of ATS, against ATS, our board of
directors, Medtronic and Merger Sub. The complaint alleges breach of fiduciary duty by the members
of our board of directors arising out of the attempt to sell ATS by means of unfair process with
preclusive deal protection devices, and at an unfair price of $4.00 in cash for each share of our
common stock. The complaint also alleges that Medtronic and Merger Sub aided and abetted the
alleged breach of fiduciary duties. An amended complaint, dated May 28, 2010, further alleges that
the preliminary proxy statement we filed on May 25, 2010 is deficient with respect to disclosures
pertaining to the Merger, the financial analyses conducted by J.P. Morgan Securities, Inc. and the
alleged conflict of interest of
various parties involved in the Merger. The complaint seeks damages, costs, injunctive relief to
prevent the consummation of the Merger, or in the event that the Merger is consummated, then
rescission or rescissory damages, and filing an updated proxy statement to correct the alleged
disclosure deficiencies articulated in the complaint.
26
On May 20, 2010, we received notice of a class action complaint venued in the District Court of the
State of Minnesota Hennepin County concerning the Merger. The class action was instituted by Pricha
Tuksaudom, individually and on behalf of all public shareholders of ATS, against ATS and our board
of directors. The complaint alleges breach of fiduciary duty by the members of our board of
directors arising out of the attempt to sell ATS by means of unfair process with preclusive deal
protection devices, and at an unfair price of $4.00 in cash for each share of our common stock. An
amended complaint, dated May 28, 2010, further alleges that the preliminary proxy statement we
filed on May 25, 2010 fails to provide our shareholders with material information and/or provides
our shareholders with materially misleading information, which the complaint alleges renders our
shareholders unable to make an informed decision on whether to vote in favor of the Merger. The
complaint seeks damages, costs and injunctive relief to prevent the consummation of the Merger, or
in the event that the Merger is consummated, then rescission or rescissory damages.
On May 21, 2010, we received notice of a class action complaint venued in the District Court
of the State of Minnesota Hennepin County concerning the Merger. The class action was instituted by
Marian J. Holmquist, individually and on behalf of all public shareholders of ATS, against ATS, our
board of directors, our chief executive officer and our chief financial officer. The complaint
alleges breach of fiduciary duty by the members of our board of directors arising out of the
attempt to sell ATS by means of unfair process with preclusive deal protection devices, and at an
unfair price of $4.00 in cash for each share of our common stock. The complaint seeks costs and
injunctive relief to prevent the consummation of the Merger, to prevent the defendants from taking
any actions that violate their fiduciary duties to our shareholders and to prevent the defendants
from taking any actions that impede or deter other potential acquirers.
On May 26, 2010, we received notice of a class action complaint venued in the District Court of the
State of Minnesota Hennepin County concerning the Merger. The class action was instituted by Mark
W. Johnson, individually and on behalf of all public shareholders of ATS, against ATS, our board of
directors, Medtronic and Merger Sub. The complaint alleges breach of fiduciary duty by the members
of our board of directors arising out of the attempt to sell ATS by means of unfair process with
preclusive deal protection devices, and at an unfair price of $4.00 in cash for each share of our
common stock. The complaint also alleges that ATS and Medtronic aided and abetted the alleged
breach of fiduciary duties. The complaint also alleges that the preliminary proxy statement we
filed on May 25, 2010 fails to disclose certain material information necessary for our shareholders
to make a rational and fully-informed decision regarding the Merger. The complaint seeks costs and
injunctive relief to prevent the consummation of the Merger, or in the event that the Merger is
consummated, then rescission or rescissory damages.
On June 22, 2010, we became aware of the filing of a class action complaint venued in the U.S.
District Court for the District of Minnesota concerning the Merger. The class action was instituted
by Larry P. Fournier and Patrice M. Fournier individually and on behalf of all public shareholders
of ATS against ATS, our board of directors, Medtronic and Merger Sub. The complaint alleges: (a)
violations of Section 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 promulgated
thereunder by all defendants arising out of the defendants alleged dissemination of a false and
misleading preliminary proxy statement, in reference to the preliminary proxy statement we filed on
May 25, 2010, which the plaintiffs allege the defendants knew or should have known was misleading
in that it allegedly contained misrepresentations and failed to disclose material facts necessary
in order to make the statements made, in light of the circumstances under which they were made, not
misleading, including regarding alleged conflicts of interest of certain members of our board of
directors; (b) breach of fiduciary duty by the members of our board of directors arising out of the
attempt to sell ATS by means of unfair process with preclusive deal protection devices, and at an
unconscionable, unfair and grossly inadequate price of $4.00 in cash for each share of our common
stock; (c) breach of fiduciary duty by the members of our board of directors arising out of the
alleged failure of our preliminary proxy statement, which we filed on May 25, 2010, to provide our
shareholders with material information and/or providing them with materially misleading
information, thereby rendering our shareholders unable to make an informed decision regarding
whether to vote in favor of the Merger; and (d) that ATS and Medtronic aided and abetted the
alleged breach of fiduciary duties. The complaint seeks costs and injunctive relief to prevent the
consummation of the Merger.
27
On June 16, 2010, all of the cases filed in state court were consolidated in
In re ATS Medical,
Inc. Shareholder Litigation
(the Lawsuit). On July 12, 2010, the case filed in federal court
was dismissed voluntarily without prejudice.
On July 26, 2010, after extensive negotiations, ATS and the other defendants reached an agreement
in principle with the plaintiffs regarding settlement of the Lawsuit. In connection with the
settlement contemplated by that agreement in principle, the Lawsuit and all claims asserted therein
will be dismissed with prejudice. The terms of the settlement contemplated by that agreement in
principle require that ATS make certain additional disclosures related to the Merger, which the Company has done. The agreement
in principle contemplates that the parties will enter into a stipulation of settlement, which will
be subject to customary conditions, including Court approval following notice to ATSs
shareholders. There can be no assurance that the parties will ultimately enter into a stipulation
of settlement, that the Court will approve any proposed settlement, or that any eventual settlement
will be under the same terms as those contemplated by the agreement in principle. By entering into
the proposed settlement, ATS and the other defendants are in no way acknowledging that the
allegations contained in the Lawsuit have merit, and the defendants deny any liability.
We
believe the class actions described above are without merit and, if
necessary, would vigorously defend against the claims asserted.
Abbey Litigation
On January 23, 2006, following execution of a Merger Agreement between the Company and 3F
Therapeutics, Inc. (3F), 3F was informed of a summons and complaint which was filed in the U.S.
District Court in the Southern District of New York by Arthur N. Abbey (Abbey) against 3F
Partners Limited Partnership II (a major stockholder of 3F, 3F Partners II), Theodore C. Skokos
(the then chairman of the board and a stockholder of 3F), 3F Management II, LLC (the general
partner of 3F Partners II), and 3F (collectively, the Defendants) (the Abbey I Litigation).
The summons and complaint alleges that the Defendants committed fraud under federal securities
laws, common law fraud and negligent misrepresentation in connection with the purchase by Abbey of
certain securities of 3F Partners II. In particular, Abbey claims that the Defendants induced
Abbey to invest $4 million in 3F Partners II, which, in turn, invested $6 million in certain
preferred stock of 3F, by allegedly causing Abbey to believe, among other things, that such
investment would be short-term. Pursuant to the complaint, Abbey is seeking rescission of his
purchase of his limited partnership interest in 3F Partners II and return of the amount paid
therefor (together with pre-and post-judgment interest), compensatory damages for the alleged lost
principal of his investment (together with interest thereon and additional general, consequential
and incidental damages), general damages for all alleged injuries resulting from the alleged fraud
in an amount to be determined at trial and such other legal and equitable relief as the court may
deem just and proper. Abbey did not purchase any securities directly from 3F and is not a
stockholder of 3F. In March 2006, 3F filed a motion to dismiss the complaint. In August 2007, the
Court granted 3Fs motion to dismiss the complaint based on plaintiffs failure to state a claim
upon which relief may be granted and ordered the Clerk of the Court to close the case. Abbey filed
a Notice of Appeal with the United States Court of Appeals for the Second Circuit seeking to
reverse the District Courts August 2007 Order dismissing the case. In December 2008, the Second
Circuit issued a Summary Order that affirmed the District Courts judgment of dismissal finding
that Abbey failed to state a claim against 3F. However, the Second Circuit remanded the case to
the District Court to allow Abbey a chance to replead his claims. On or about February 13, 2009,
Abbey filed an amended complaint which purports to allege additional facts to support the same
claims against 3F that were asserted and dismissed in the original complaint. On or about March
31, 2009, 3F served and filed its motion to dismiss the amended complaint with prejudice. 3Fs
motion to dismiss was fully submitted on June 8, 2009. By Order entered December 2, 2009, the
District Court denied 3Fs motion to dismiss on the ground of lack of standing and converted the
remainder of 3Fs motion to dismiss for failure to state a claim into a motion for summary
judgment. Accordingly, the Court ordered limited discovery to be completed by February 26, 2010
and additional briefings on summary judgment to be completed by April 9, 2010. This schedule has
been modified and discovery is to be completed by June 8, 2010 and additional briefings on summary
judgment are to be fully submitted by August 16, 2010.
On or about June 14, 2006, Abbey commenced a second civil action in the Court of Chancery in the
State of Delaware by serving 3F with a complaint naming both 3F and Mr. Skokos as defendants (the
Abbey II Litigation). The complaint alleges, among other things, fraud and breach of fiduciary
duties in connection with the purchase by Abbey of his partnership interest in 3F Partners II. The
Delaware action seeks: (1) a declaration that (a) for purposes of the merger, Abbey was a record
stockholder of 3F and was thus entitled to withhold his consent to the merger and seek appraisal
rights after the merger was consummated and (b) the irrevocable stockholder consent submitted by 3F
Partners II to approve the merger be voided as unenforceable; and (2) damages based upon
allegations that 3F aided and abetted Mr. Skokos in breaching Mr. Skokoss fiduciary duties of
loyalty and faith to Abbey. On July 17, 2006, 3F filed a motion to dismiss the complaint in the
Abbey II Litigation, or, alternatively, to stay the action pending adjudication of the Abbey I
Litigation. In October 2006, the Delaware Chancery Court entered an order staying the Delaware
action pending the outcome of the Abbey I litigation. In August 2007, the parties informed the
Delaware Chancery Court that they would consent to the continued stay of the Delaware action
pending the outcome of
Abbeys appeal of the Abbey I Litigation. The stay remains in effect pending the outcome of 3Fs
motion to dismiss the amended complaint.
28
3F has been notified by its director and officer insurance carrier that such carrier will defend
and cover all defense costs as to 3F and Mr. Skokos in the Abbey I Litigation and Abbey II
Litigation, subject to policy terms and full reservation of rights. In addition, under the Merger
Agreement, 3F and the 3F stockholder representative have agreed that the Abbey I Litigation and
Abbey II Litigation are matters for which express indemnification is provided. As a result,
certain escrow shares and contingent shares, if any, which may in the future be issued under the
Merger Agreement, may be used by ATS to satisfy, in part, ATSs set-off rights and indemnification
claims for damages and losses incurred by 3F or ATS, and their directors, officers and affiliates,
that are not otherwise covered by applicable insurance arising from the Abbey I Litigation and
Abbey II Litigation. See Note 5 of Notes to Consolidated Financial Statements in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009 for a description of the contingent
shares.
Abbey
Litigation Relating to the Medtronic Merger
On August 2, 2010, we received notice of an action venued in the District Court of the State of
Minnesota Hennepin County concerning the Merger. The action was instituted by Abbey, a former
beneficial owner of 3F Therapeutics, Inc. stock and current beneficial owner of ATS stock, against
ATS, our board of directors, our chief executive officer, and Medtronic. The complaint seeks a
declaratory judgment of the parties rights and obligations under the Merger Agreement as it
concerns the January 23, 2006 Agreement and Plan of Merger among ATS, Seabiscuit Acquisition Corp.,
3F Therapeutics, Inc. and Boyd D. Cox (the 3F Agreement), and specifically, that the 3F Agreement
entitles plaintiff to additional consideration in the Merger. The complaint also alleges breach of
fiduciary duty by the members of our board of directors arising out of the attempt to sell ATS
through an arrangement that would allegedly abrogate the right to additional consideration of ATS
shareholders who are former holders of 3F shares. The complaint also alleges that ATS and
Medtronic aided and abetted the alleged breach of fiduciary duties. In addition to the declaration
of rights and obligations under the Merger Agreement and the 3F Agreement, the complaint seeks
damages and costs.
We
believe that the Abbey I Litigation, Abbey II Litigation and the
Abbey Litigation relating to the Medtronic Merger are
without merit and will not have a material impact on our financial
position or operating results. In addition, we intend to continue to
vigorously defend against the claims asserted.
You should carefully consider the risk factors discussed below and in Item 1A of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2009, any of which could have a material impact
on our business, financial condition or results of operations.
Included below are updated versions of the three new risk factors we included in Part II, Item 1A
of our Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2010. Such risk factors
should be read in conjunction with the risk factors disclosed in Item 1A of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2009:
Our business and our financial condition may be adversely affected if the proposed Merger with
Medtronic is not completed, which could cause our stock price to decline.
The proposed Merger with Medtronic is subject to several customary conditions, including obtaining
clearance from governmental entities and the approval of the Merger by the outstanding holders of
our common stock. While we have received the required antitrust clearances and the Merger has been
approved by our shareholders, certain conditions to closing remain to be satisfied or waived.
During the months following execution of the Merger Agreement with Medtronic until we are able to
close the transaction, our employees and customers may have been and could continue, until closing,
to be significantly distracted and our business could be adversely affected by the uncertainty
created by the announcement of the proposed Merger. If the proposed Merger with Medtronic
ultimately is not completed, we believe our business would have been, and would continue to be,
adversely affected by a variety of risks, including those identified below, and we believe we would
not be in as good of a position as we would have been had we not entered into a transaction with
Medtronic in the first place:
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the consequences of our managements attention having been diverted from our
day-to-day business over an extended period of time between execution of the Merger
Agreement with Medtronic and the date on which the agreement would terminate;
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the disruption to our relationships with customers and suppliers as a result
of our and their efforts relating to the Merger;
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actual and potential litigation associated with the proposed
transaction with Medtronic;
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damage to our financial condition as a result of actions triggered by the
proposed Merger, such as the redemption of our 6% Convertible Senior Notes, that we
otherwise would not have taken as soon or at all if we had not entered into the proposed
Merger with Medtronic;
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our inability to acquire further necessary financing to fund our ongoing operations
post-termination of the proposed Merger with Medtronic;
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the potential distraction to our sales force caused by uncertainties relating to
the proposed Merger;
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the potential delay in approval of products in the regulatory submission process; and
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the potential loss of business to our competitors.
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29
If the proposed Merger with Medtronic is not completed, the holders of our common stock, restricted
stock units and options and warrants to purchase common stock will not receive the cash merger
consideration provided in the Merger Agreement.
Pursuant to the Merger Agreement, each share of our common stock that is issued and outstanding
immediately prior to the completion of the Merger (other than shares held by us, Medtronic or its
subsidiaries, which will be canceled without payment of any consideration, and shares for which
appraisal rights have been validly exercised and not withdrawn) will be converted into the right to
receive $4.00 in cash, without interest. Each option to purchase our common stock that is
outstanding immediately prior to the completion of the Merger will be canceled in exchange for the
right to receive in cash the amount by which $4.00 exceeds the exercise price, multiplied by the
number of shares subject to such option. Each restricted stock unit that is outstanding
immediately prior to the completion of the Merger will be canceled in exchange for the right to
receive $4.00 per restricted stock unit in cash. Each warrant to purchase our common stock that is
outstanding immediately prior to the completion of the Merger will be converted into the right to
receive, upon exercise, an amount in cash equal to the amount by which $4.00 exceeds the exercise
price, multiplied by the number of shares subject to such warrant. The proposed Merger with
Medtronic is subject to customary conditions, including obtaining clearance from governmental
entities and the approval of the Merger by a majority of the outstanding holders of our common
stock. While we have received the required antitrust clearances and the Merger has been approved
by our shareholders, certain conditions to closing remain to be satisfied or waived. We may not be
able to meet all closing conditions in order to complete the proposed Merger. If we are not able
to complete the Merger, the holders of our common stock, restricted stock units and options and
warrants to purchase common stock will not receive the cash merger consideration provided in the
Merger Agreement.
In connection with the proposed Merger with Medtronic, we may incur litigation costs which may harm
our business and financial condition and cause our stock price to decline.
The proposed Merger with Medtronic has resulted in and could result in additional litigation
against our Company in connection with the transaction itself regardless of whether we are able to
close the transaction. This would result in additional litigation costs and management distraction
and any failure to successfully defend against these actions could harm our business and our
financial condition and cause our stock price to decline.
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ITEM 5.
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Other Information
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On July 28, 2010, the Personnel and Compensation Committee of the Companys Board of Directors determined to terminate the Companys 2010 Management Incentive Compensation Plan (the
2010 MICP) prior to the closing of the proposed Merger with Medtronic and to make payments under
the 2010 MICP based on the performance of the Company to date. The amounts to be paid to each of
the Companys named executive officers pursuant to the 2010 MICP are set forth in the table below.
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2010 MICP
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Name
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Position
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Payout ($)
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Michael D. Dale
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Chairman, Chief Executive Officer and President
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$
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84,788
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Michael R. Kramer
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Chief Financial Officer
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42,394
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Thaddeus Coffindaffer
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Vice President, Sales
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46,049
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Craig A. Swandal
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Vice President, Operations
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45,069
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Michael E. Reinhardt
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Vice President, Global Marketing
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42,394
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2.1
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Agreement and Plan of Merger, dated as of April 28, 2010, among Medtronic, Inc., Pilgrim
Merger Corporation and ATS Medical, Inc. (Incorporated by reference to Exhibit 2.1 to the
Companys Current Report on Form 8-K filed on April 29, 2010).
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3.1
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Third Restated Articles of Incorporation of ATS Medical, Inc. (Incorporated by reference to
Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June
28, 2008).
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3.2
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Bylaws of the Company, as amended February 13, 2007 (Incorporated by reference to Exhibit
10.2 to the Companys Current Report on Form 8-K filed on February 20, 2007).
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30
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4.1
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Specimen certificate for shares of common stock of the Company (Incorporated by reference to
Exhibit 4.1 to the Companys Annual Report on Form 10-K for the year ended December 31, 1997).
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10.1
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Description of amendment to the ATS Medical, Inc. 1998 Employee Stock Purchase Plan, as
amended (Incorporated by reference to Item 1.01 contained in the Companys Current Report on
Form 8-K filed on May 4, 2010).
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10.2
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|
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ATS Medical, Inc. 2010 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on May 18, 2010).
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10.3
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Promissory Note, dated May 21, 2010, executed by ATS Medical, Inc., 3F Therapeutics, Inc. and
ATS Acquisition Corp. in favor of Medtronic, Inc. (including the form of Warrant issuable
under certain circumstances by ATS Medical, Inc. to Medtronic, Inc.) (Incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on May 21, 2010).
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10.4
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Security Agreement, dated May 21, 2010, executed by ATS Medical, Inc., 3F Therapeutics, Inc.
and ATS Acquisition Corp. in favor of Medtronic, Inc. (Incorporated by reference to Exhibit
10.2 to the Companys Current Report on Form 8-K filed on May 21, 2010).
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10.5
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Pledge Agreement, dated May 21, 2010, made by ATS Medical, Inc. to Medtronic, Inc.
(Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed
on May 21, 2010).
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12.1
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|
Computation of Ratio of Earnings to Fixed Charges.
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31.1
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Certification of Principal Executive Officer pursuant to Rules 13a-15(e)/15d-15(e) of the
Securities Exchange Act, as amended (Section 302 Certification).
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31.2
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Certification of Principal Financial Officer pursuant to Rules 13a-15(e)/15d-15(e) of the
Securities Exchange Act, as amended (Section 302 Certification).
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32.1
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Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 (Section
906 Certification).
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32.2
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Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section
906 Certification).
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31
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.
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Date: August 11, 2010
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ATS MEDICAL, INC.
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By:
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/s/ Michael D. Dale
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Michael D. Dale
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Chief Executive Officer
(Principal Executive Officer)
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By:
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/s/ Michael R. Kramer
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Michael R. Kramer
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Chief Financial Officer
(Principal Financial Officer)
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32
EXHIBIT INDEX
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Exhibit
|
|
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Number
|
|
Description
|
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2.1
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Agreement and Plan of Merger, dated as of April 28, 2010, among Medtronic, Inc., Pilgrim Merger Corporation
and ATS Medical, Inc. (Incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K
filed on April 29, 2010).
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|
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3.1
|
|
|
Third Restated Articles of Incorporation of ATS Medical, Inc. (Incorporated by reference to Exhibit 3.1 to the
Companys Quarterly Report on Form 10-Q for the quarterly period ended June 28, 2008).
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3.2
|
|
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Bylaws of the Company, as amended February 13, 2007 (Incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed on February 20, 2007).
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4.1
|
|
|
Specimen certificate for shares of common stock of the Company (Incorporated by reference to Exhibit 4.1 to
the Companys Annual Report on Form 10-K for the year ended December 31, 1997).
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|
|
|
|
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10.1
|
|
|
Description of amendment to the ATS Medical, Inc. 1998 Employee Stock Purchase Plan, as amended (Incorporated
by reference to Item 1.01 contained in the Companys Current Report on Form 8-K filed on May 4, 2010).
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|
|
|
|
10.2
|
|
|
ATS Medical, Inc. 2010 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed on May 18, 2010).
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|
|
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10.3
|
|
|
Promissory Note, dated May 21, 2010, executed by ATS Medical, Inc., 3F Therapeutics, Inc. and ATS Acquisition
Corp. in favor of Medtronic, Inc. (including the form of Warrant issuable under certain circumstances by ATS
Medical, Inc. to Medtronic, Inc.) (Incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on May 21, 2010).
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|
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|
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10.4
|
|
|
Security Agreement, dated May 21, 2010, executed by ATS Medical, Inc., 3F Therapeutics, Inc. and ATS
Acquisition Corp. in favor of Medtronic, Inc. (Incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K filed on May 21, 2010).
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10.5
|
|
|
Pledge Agreement, dated May 21, 2010, made by ATS Medical, Inc. to Medtronic, Inc. (Incorporated by reference
to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on May 21, 2010).
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|
|
|
|
|
|
12.1
|
|
|
Computation of Ratio of Earnings to Fixed Charges.
|
|
|
|
|
|
|
31.1
|
|
|
Certification of the Principal Executive Officer pursuant to Rules 13a-15(e)/15d-15(e) of the Securities
Exchange Act, as amended (Section 302 Certification)
|
|
|
|
|
|
|
31.2
|
|
|
Certification of the Principal Financial Officer pursuant to Rules 13a-15(e)/15d-15(e) of the Securities
Exchange Act, as amended (Section 302 Certification)
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|
|
|
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32.1
|
|
|
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 Certification)
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|
|
|
|
|
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32.2
|
|
|
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 Certification)
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33
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