-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PjXW2ZdZ7UUrRaUYNB004UmL4gy0mlKzefuEMcrz6Q4OiQDRLIQ3c/nrqsfFKgv1 m0/jt0tr/7olOmQynca9TQ== 0000950134-04-011781.txt : 20040809 0000950134-04-011781.hdr.sgml : 20040809 20040809164407 ACCESSION NUMBER: 0000950134-04-011781 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATS MEDICAL INC CENTRAL INDEX KEY: 0000824068 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 411595629 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18602 FILM NUMBER: 04961878 BUSINESS ADDRESS: STREET 1: 3905 ANNAPOLIS LA STREET 2: SUITE 105 CITY: MINNEAPOLIS STATE: MN ZIP: 55447 BUSINESS PHONE: 6125537736 MAIL ADDRESS: STREET 1: 3905 ANNAPOLIS LANE STREET 2: SUITE 105 CITY: MINNEAPOLIS STATE: MN ZIP: 55447 FORMER COMPANY: FORMER CONFORMED NAME: ATS MEDCIAL INC DATE OF NAME CHANGE: 19920803 10-Q 1 c87379e10vq.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 COMMISSION FILE NO. 0-18602 ATS MEDICAL, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-1595629 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3905 ANNAPOLIS LANE N., SUITE 105 MINNEAPOLIS, MINNESOTA 55447 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (763) 553-7736 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The number of shares outstanding of each of the registrant's classes of common stock as of July 30, 2004, was: Common Stock, $.01 par value 30,700,789 shares INDEX
Page(s) ------ PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of June 30, 2004, and December 31, 2003 3 Statements of Operations for the three and six months ended June 30, 2004 and 2003 4 Statements of Cash Flows for the six months ended June 30, 2004 and 2003 5 Notes to Consolidated Financial Statements 6 - 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 18 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 19 ITEM 4. Controls and Procedures 19 PART II. OTHER INFORMATION ITEM 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities 20 ITEM 4. Submission of Matters to a Vote of Security Holders 20 ITEM 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 22 EXHIBIT INDEX 23
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ATS MEDICAL, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share and share data)
JUNE 30, DECEMBER 31, 2004 2003 ---------- ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 21,242 $ 6,472 Short-term investments 250 2,003 Accounts receivable, net 6,560 4,939 Inventories 20,194 20,377 Other current assets 575 508 ---------- ----------- Total current assets 48,821 34,299 Furniture, machinery and equipment, net 5,810 5,895 Inventories 10,000 17,000 Intangible assets 18,688 18,500 Other assets 436 440 ---------- ----------- Total assets $ 83,755 $ 76,134 ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,295 $ 989 Due to related party 217 217 Accrued payroll and expenses 1,556 1,343 Accrued distributor liabilities 559 475 ---------- ----------- Total current liabilities 4,627 3,024 Due to related party 199 307 Shareholders' equity: Common stock, $.01 par value: authorized 40,000,000 shares; issued and outstanding 30,698,789 and 26,778,557 shares at June 30, 2004 and December 31, 2003 307 268 Additional paid-in capital 136,155 123,412 Deferred compensation (61) (70) Accumulated other comprehensive income 59 51 Accumulated deficit (57,531) (50,858) ---------- ----------- Total shareholders' equity 78,929 72,803 ---------- ----------- Total liabilities and shareholders' equity $ 83,755 $ 76,134 ========== ===========
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 data)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net sales $ 7,548 $ 4,246 $ 14,242 $ 8,211 Cost of goods sold 5,428 3,248 10,194 5,997 ---------- ---------- ---------- ---------- Gross profit 2,120 998 4,048 2,214 Operating expenses: Sales and marketing 3,950 2,388 7,616 3,542 Research and development 186 442 373 828 General and administrative 1,367 1,043 2,748 2,030 ---------- ---------- ---------- ---------- Total operating expenses 5,503 3,873 10,737 6,400 ---------- ---------- ---------- ---------- Operating loss (3,383) (2,875) (6,689) (4,186) Net interest income (expense) 15 (228) 16 (457) ---------- ---------- ---------- ---------- Net loss ($ 3,368) ($ 3,103) ($ 6,673) ($ 4,643) ========== ========== ========== ========== Net loss per share: Basic and diluted ($ 0.12) ($ 0.14) ($ 0.25) ($ 0.21) Weighted average number of shares used in calculation: Basic and diluted 27,159 22,325 26,978 22,322
The accompanying notes are an integral part of the consolidated financial statements. 4 ATS MEDICAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited) (in thousands)
SIX MONTHS ENDED JUNE 30, ------------------------- 2004 2003 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ($ 6,673) ($ 4,643) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 532 379 Loss on disposal of equipment 2 2 Compensation expense on stock options 34 3 Imputed interest long-term debt - 320 Changes in operating assets and liabilities: Accounts receivable (1,621) (359) Inventories 7,183 5,177 Prepaid expenses (67) (221) Other assets 4 3 Accounts payable and accrued expenses 1,495 (733) ---------- ---------- Net cash provided by (used in) operating activities 889 (72) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of short-term investments (996) (2,490) Sale of short-term investments 2,749 3,994 Payment for technology license (188) - Purchases of furniture, machinery and equipment (449) (385) ---------- ---------- Net cash provided by investing activities 1,116 1,119 CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from sales of common stock 12,757 8 ---------- ---------- Net cash provided by financing activities 12,757 8 ---------- ---------- Effect of exchange rate changes on cash 8 9 ---------- ---------- Increase in cash and cash equivalents 14,770 1,064 Cash and cash equivalents at beginning of period 6,472 7,472 ---------- ---------- Cash and cash equivalents at end of period $ 21,242 $ 8,536 ========== ==========
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. without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). 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 accounting principles generally accepted in the United States have been condensed or omitted pursuant to these rules and regulations. The year-end balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. These unaudited consolidated interim financial statements should be read in conjunction with the Company's consolidated financial statements and related notes included in its Annual Report on Form 10-K for 2003. These statements reflect, in management's opinion, all adjustments (which include only normal, recurring adjustments) necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented. The results of operations for any interim period may not be indicative of results for the full year. NOTE 2. STOCK-BASED COMPENSATION The Company accounts for its stock-based employee compensation plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The exercise price of the Company's employee stock options generally equals the market price of the underlying stock on the date of grant for all options granted, and thus, under APB 25, no compensation expense is recognized. Stock options granted to non-employees are valued and accounted for in accordance with Financial Accounting Statement No. 123, Accounting for Stock-Based Compensation (FAS 123). Accordingly, these costs are charged to operating expenses over the vesting period of the option. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation.
Three months ended Six months ended June 30, June 30, ----------------------- ----------------------- (in thousands, except per share data) 2004 2003 2004 2003 - ------------------------------------- ---- ---- ---- ---- Net loss, as reported ($ 3,368) ($ 3,103) ($ 6,673) ($ 4,643) Subtract: Total stock-based employee compensation expense determined under fair value based method for all awards (579) (334) (1,252) (436) --------- --------- --------- --------- Pro forma net loss ($ 3,947) ($ 3,437) ($ 7,925) ($ 5,079) ========= ========= ========= ========= Net loss per share: As reported Basic and diluted ($ 0.12) ($ 0.14) ($ 0.25) ($ 0.21) Pro forma Basic and diluted ($ 0.15) ($ 0.15) ($ 0.29) ($ 0.23)
6 NOTE 3. INVENTORIES Inventories consist of the following:
June 30, December 31, (in thousands) 2004 2003 -------------- -------- ------------ Raw materials $ 7,707 $ 12,033 Work in process 10,358 9,615 Finished goods 12,329 15,929 Obsolescence reserve (200) (200) ---------- ---------- Total, net $ 30,194 $ 37,377 ========== ========== Balance sheet classification Current assets $ 20,194 $ 20,377 Non-current assets 10,000 17,000 ---------- ---------- Total, net $ 30,194 $ 37,377 ========== ==========
The Company maintains significant levels of inventory that exceed current demand. Management believes that these excess quantities will be utilized over several years. Therefore, the Company has classified $10.0 million and $17.0 million of inventories as noncurrent assets at June 30, 2004 and December 31, 2003, respectively. NOTE 4. COMPREHENSIVE INCOME Comprehensive income for the Company includes net income from foreign currency translation which is charged or credited to the cumulative translation account within shareholders' equity. Gains and losses from foreign currency translation are not material. NOTE 5. NEW PRONOUNCEMENTS In December 2003, the FASB issued FASB Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. The Company believes it has no variable interest entities and, therefore, FIN 46R did not have an impact on the Company's consolidated financial statements. NOTE 6. ACQUISITION OF LICENSING AGREEMENT On April 26, 2004 the Company signed an exclusive development and licensing agreement with ErySave AB and made an initial milestone payment of approximately $0.2 million. The agreement grants the Company worldwide rights for ErySave's filtration technology for cardiac surgery procedures. Payments under the agreement, based upon the achievement of certain development milestones, could total approximately $1.3 million. NOTE 7. SHAREHOLDER'S EQUITY On June 28, 2004, in a private placement, the Company issued 3.7 million shares of common stock and received $12.4 million, net of accrued offering costs. NOTE 8. SUBSEQUENT EVENT On July 28, 2004, the Company entered into an agreement with Silicon Valley Bank to establish a secured revolving credit facility for $8.5 million. Under terms of the agreement, the Company will receive a $2.5 million three-year term loan as well as a two year $6 million line of credit. The credit facility contains two financial covenants: a leverage ratio, and a required minimum tangible net worth. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements 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. Some of the factors that could cause such material differences are identified in "Cautionary Statements." 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 We manufacture and market a mechanical bileaflet heart valve with a patented pivot design. Our heart valve is used to treat valvular heart disease caused by the natural aging process, rheumatic heart disease and congenital defects. Sulzer Carbomedics ("Carbomedics") developed the basic design from which the ATS heart valve evolved. Carbomedics is a large and experienced manufacturer of pyrolytic carbon components used in mechanical heart valves. Carbomedics has also designed and patented numerous mechanical valves. Carbomedics offered to license a patented and partially developed valve to us if we would complete the development of the valve and agree to purchase carbon components from Carbomedics. We hold an exclusive, royalty-free, worldwide license to an open pivot, bileaflet mechanical heart valve design owned by Carbomedics from which the ATS heart valve has evolved. In addition, we have an exclusive, worldwide right and license to use Carbomedics' pyrolytic carbon technology to manufacture components for the ATS heart valve. We commenced selling the ATS heart valve in international markets in 1992. In October 2000, we received FDA approval to sell the ATS Open Pivot(R) MHV and commenced sales and marketing of our valve in the United States. The original sales forecasts as well as the pricing models that were used when the original Supply Agreement was signed with Carbomedics proved to be too optimistic. Accordingly, to keep the Supply Agreement active and the license to sell the valve exclusive, we purchased quantities of inventory far in excess of demand. From 1990 through 2002, we paid Carbomedics approximately $125 million for the development of our valve, the technology to manufacture our pyrolytic carbon components, and for pyrolytic valve components manufactured by Carbomedics. On December 31, 2002, we had remaining payments due under the Technology Agreement that totaled $28 million. This led us in 2003 to negotiate an accelerated but reduced payment for all outstanding debts to Carbomedics related to the Technology Agreement. In August 2003, we paid $12 million to satisfy all future obligations under this Agreement. With inventory purchases exceeding sales through the years, we have built inventory levels that today provide a source of cash. We are drawing down these paid-for inventories and using the cash it generates to fund operations. Our manufacturing facility for pyrolytic carbon components has been producing limited quantities. We will increase production in this facility during the last half of 2004. Once we have exhausted our high priced components, we expect to have lower manufacturing costs per valve which will allow us to realize higher gross profit in more international markets. In June 2002, we reorganized the company laying off more than half of the work force including all executive management. With the hiring of a new president late in 2002, we started the process of rebuilding our sales and marketing teams, especially in the United States. This rebuilding is the most significant factor contributing to our increase in expense levels during 2003 and into 2004. Because sales prices in the United States exceed selling prices elsewhere, we feel that our future success will depend on achieving increased market share in the U.S. Our U.S. sales as a percentage of our overall sales have grown from 4% in 2000 to 34% during the first half of 2004. 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. Management's discussion and analysis of financial condition and results of operations are 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 8 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 judgements. The critical accounting policies that are most important to fully understanding and evaluating the financial condition and results of operations are discussed in our most recent Annual Report on Form 10-K on file with the SEC. RESULTS OF OPERATIONS The following table compares the dollar and percentage change in the Statements of Operations for the three and six month periods ended June 30, 2004 and 2003.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------------------------- ------------------------------------------- Increase Increase (Decrease) (Decrease) 2004 2003 $ % 2004 2003 $ % --------- -------- -------- ----- --------- -------- -------- ----- Net sales $ 7,548 $ 4,246 $ 3,302 77.8% $ 14,242 $ 8,211 $ 6,031 73.5% Cost of goods sold 5,428 3,248 2,180 67.1% 10,194 5,997 4,197 70.0% ---------- --------- --------- ----- ---------- --------- --------- ----- Gross profit 2,120 998 1,122 112.4% 4,048 2,214 1,834 82.8% Gross profit % 28.1% 23.5% 28.4% 27.0% Operating expenses: Sales and marketing 3,950 2,388 1,562 65.4% 7,616 3,542 4,074 115.0% Research and development 186 442 (256) -57.9% 373 828 (455) -55.0% General and administrative 1,367 1,043 324 31.1% 2,748 2,030 718 35.4% ---------- --------- --------- ----- ---------- --------- --------- ----- Total operating expenses 5,503 3,873 1,630 42.1% 10,737 6,400 4,337 67.8% ---------- --------- --------- ----- ---------- --------- --------- ----- Operating loss (3,383) (2,875) (508) -17.7% (6,689) (4,186) (2,503) -59.8% Net interest income (expense) 15 (228) 243 106.6% 16 (457) 473 103.5% ---------- --------- --------- ----- ---------- --------- --------- ----- Net loss ($ 3,368) ($ 3,103) ($ 265) -8.5% ($ 6,673) ($ 4,643) ($ 2,030) -43.7% ========== ========= ========= ===== ========== ========= ========= =====
The following table presents the statement of operations as a percentage of net sales for the three and six month periods ended June 30, 2004 and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- 2004 2003 2004 2003 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 71.9% 76.5% 71.6% 73.0% ----- ----- ----- ----- Gross profit 28.1% 23.5% 28.4% 27.0% Operating expenses: Sales and marketing 52.3% 56.2% 53.5% 43.1% Research and development 2.5% 10.4% 2.6% 10.1% General and administrative 18.1% 24.6% 19.3% 24.7% ----- ----- ----- ----- Total operating expenses 72.9% 91.2% 75.4% 77.9% ----- ----- ----- ----- Operating loss -44.8% -67.7% -47.0% -51.0% Net interest income (expense) 0.2% -5.4% 0.1% -5.5% ----- ----- ----- ----- Net loss -44.6% -73.1% -46.9% -56.5% ===== ===== ===== =====
9 NET SALES. The following table compares net sales between the three and six month periods ended June 30, 2004 and 2003:
Three months ended June 30, Six months ended June 30, ------------------------------------------- ------------------------------------------ Increase Increase (in thousands) 2004 2003 (Decrease) % 2004 2003 (Decrease) % -------------- --------- --------- --------- ----- --------- --------- --------- ----- United States $ 2,462 $ 1,053 $ 1,409 133.8% $ 4,852 $ 1,906 $ 2,946 154.6% Outside United States 5,086 3,193 1,893 59.3% 9,390 6,305 3,085 48.9% --------- --------- --------- ----- --------- --------- --------- ----- Total $ 7,548 $ 4,246 $ 3,302 77.8% $ 14,242 $ 8,211 $ 6,031 73.5% ========= ========= ========= ==== ========= ========= ========= ====
2004 Change in 2004 Change in -------------------------------- -------------------------------- Average Average Sales Unit Sales Unit Price Sales Total Price Sales Total ------- ----- ----- ------- ----- ----- United States 0.9% 133.2% 133.8% 3.3% 146.4% 154.6% Outside United States 5.6% 50.7% 59.3% -7.1% 60.4% 48.9% ---- ----- ----- ---- ----- ----- Total 12.2% 58.4% 77.8% 2.8% 72.3% 73.5% ==== ===== ===== ==== ===== =====
Three months ended Six months ended June 30, June 30, ------------------ ------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Share of total sales: United States 32.6% 24.8% 34.1% 23.2% Outside United States 67.4% 75.2% 65.9% 76.8% ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% ===== ===== ===== =====
In June 2002, the majority of our U.S. sales persons were terminated. In the fourth quarter of 2002, we hired a new CEO and began building our "new sales organization" in the U.S. consisting of four area directors managing 30 sales territories. Our representation within these territories now consists of both direct sales representatives and independent agents. This new sales organization and overall greater sales efforts contributed to our increase in sales in 2004 as compared to 2003 and to our sales within the U.S. accounting for a larger percentage of overall sales. During 2003 we aggressively entered several international markets that represented opportunities for greater sales unit growth but at prices lower than our other markets. Prices in some of these territories are lower than our current manufacturing costs. We feel this strategy is reasonable because it allows us to increase our market share while reducing our high priced, but paid for inventories. Once we have exhausted our high priced components, we expect to have lower manufacturing costs per valve which will allow us to realize gross profit in these international markets. COST OF GOOD SOLD. Our costs of goods sold as a percentage of net sales has varied due to changes in average selling price. Our gross margin is anticipated to improve as sales within the Unites States increase as a percentage of total sales and as we start selling valves that have been entirely manufactured in our facilities. Our inventories of high priced carbon components currently exceed our expected sales during 2004. The ATS valve is made of materials that do not deteriorate. Other than the need to resterilize them periodically, there is no risk of perishability. Pyrolytic carbon, which is the substrate used in manufacturing our valves, has been the only material used to manufacture mechanical heart valves for humans for many years and remains the most advanced raw material for our products. The other sources of prosthetic heart valves for humans are cadaver and porcine tissues. However, inventory obsolescence issues are remote because of certain advantages offered by mechanical heart valves including superior durability. Similarly, we believe that, given the lead time that would be 10 required, there is no material risk that there would be the introduction and FDA approval of another substrate that would replace pyrolytic carbon prior to the end of the period over which we expect to sell our inventory of valves. To date, all purchased pyrolytic carbon components for the ATS heart valve have come from Carbomedics, Inc. (Carbomedics), pursuant to a multi-year supply agreement entered into in 1990. The cost of the pyrolytic carbon components represents approximately 80% of the total cost of the ATS heart valve. Under the supply agreement, the cost of the pyrolytic carbon components has varied according to annual volume purchases and was adjusted annually by reference to increases in the U.S. Department of Labor Employment Cost Index. The supply agreement with Carbomedics is still in effect but has been re-negotiated several times. Our current obligations under the supply agreement call for future purchase obligations starting in 2007 and continuing through 2011. We maintain significant levels of carbon components in inventory that exceed current demand due to past purchase requirements under the supply agreement. In addition, the cost of these components has been high and at times exceeded selling prices necessitating lower of cost or market write-downs of inventories. We have set up our own manufacturing facility and we will increase the production of our own carbon components during 2004. In future years, as higher priced inventory purchased from Carbomedics is replaced by lower cost inventory that we manufacture, cost of goods sold will decrease as a percentage of net sales. SALES AND MARKETING. Cost increases in 2004 over 2003 were for the building of our "new sales and marketing organizations". We have substantially completed the hiring and training of our new sales and marketing organizations. RESEARCH AND DEVELOPMENT. Research and development expenses include the costs to develop and improve current and future products and the costs for regulatory and clinical activities for these products. In addition, during 2003, the costs to set up and maintain our carbon components manufacturing facility while it was in pre-production mode and the operational qualification and validation of the carbon production equipment and making pilot coating runs were charged to research and development costs and totaled approximately $0.3 million and $0.5 million during the three and six months ended June 2003. GENERAL AND ADMINISTRATIVE. Cost increases in the three month period ended June 2004 over 2003 were for employee salary and benefits of $0.1 million, corporate insurance costs of $0.1 million, and outside consulting services relating to our costs of documenting and testing internal controls of $0.1 million. For the six month period ended June 2004 over 2003, cost increases for employee salary and benefits were $0.3 million, corporate insurances of $0.2 million, and costs of documenting and testing internal controls of $0.1 million. NET INTEREST INCOME (EXPENSE). Prior to June 30, 2004 our interest expense was primarily attributable to imputed interest on our long-term debt previously owed to Centerpulse. Our interest income is primarily attributable to the investment of our cash balances. On July 28, 2004, we entered into an agreement for a credit facility consisting of a $2.5 million term loan and a $6.0 million line of credit. On July 30, 2004 we fully drew down the term loan. Minimum interest expense, including amortization of deferred financing costs will be approximately $50,000 per quarter and could be higher if we borrow funds under the line of credit. INCOME TAXES. At the end of 2003, we have accumulated approximately $42 million of net operating loss (NOL) carryforwards for U.S. tax purposes. We believe that our ability to fully utilize the existing NOL carryforwards could be restricted on a portion of the NOL for changes in control that may have occurred or may occur in the future. We have not conducted a formal study of whether a change in control of ATS has occurred in the past that impairs our NOL carryforwards because we are unable to utilize such NOL carryforwards until we achieve profitability and because this study would be very expensive to complete. When we attain profitability, we will conduct a formal study of any restrictions on our carryforwards. We have not recorded any net assets related to our NOL carryforwards and other deferred items as we currently cannot determine that it is reasonably likely that this asset will be realized and we, therefore, have provided a valuation allowance for the entire asset. NET LOSS. Our increase in net loss in 2004 compared to 2003 resulted from changes in sales offset by changes in operating costs, all of which are described above. 11 LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments were $21.5 million as of June 30, 2004 compared to $8.5 million as of December 31, 2003. OPERATING ACTIVITIES. During the first six months of 2004, we received cash payments from customers of $12.6 million. We made cash payments to employees and suppliers of $11.6 million. Our operating loss during 2004 of $6.7 million was substantially funded through the depletion of inventories. During 2003 and into 2004, we incurred significant expenses commercializing the ATS heart valve in the United States. As we build sales in future periods and our cost of inventories decrease, our operating losses will decrease and we will move steadily towards a cash flow breakeven on sales and eventually to profitability. INVESTING ACTIVITIES. During the first six months of 2004 we purchased property and equipment totaling $0.4 million. For the remainder of 2004, we expect to purchase approximately $3.0 million of additional equipment, mainly in support of increasing production in our pyrolytic carbon facility. On April 26, 2004 the Company signed an exclusive development and licensing agreement with ErySave AB and made an initial milestone payment of approximately $0.2 million. The agreement grants the Company worldwide rights for ErySave's filtration technology for cardiac surgery procedures. Payments under the agreement, based upon the achievement of certain development milestones, could total approximately $1.3 million. FINANCING ACTIVITIES. On June 28, 2004, we raised approximately $12.4 million in a private placement of common stock. During the first six months of 2004, we raised approximately $0.4 million through the issuance of common stock through stock options and our employee stock purchase plan. On July 28, 2004, we entered into a secured credit facility consisting of a $2.5 million term loan and a $6.0 million line of credit. The credit facility contains two financial covenants: a leverage ratio, and a required minimum tangible net worth. We are currently in compliance with both covenants. CASH MANAGEMENT During 2004 and into 2005, we will increase production of pyrolytic carbon components in our own manufacturing facility. This will require the use of cash as we purchase raw materials and hire employees to make the inventory. Current inventory levels are adequate into 2005. We estimate that operating costs will remain high in comparison to sales during 2004 and 2005 and will require the use of cash to fund operations. We will draw down cash balances to build inventories and fund operations during 2004 and 2005. Based upon the current forecast of sales and operating expenses, we anticipate having cash to fund our operations through 2005. However, as identified under the heading of "Cautionary Statements" below, any adverse change that affects our revenue, access to the capital markets or future demand for our products will affect our long term viability. Maintaining adequate levels of working capital depends in part upon the success of our products in the marketplace, the relative profitability of those products and our ability to control operating and capital expenses. Funding of our operations in future periods may require additional investments in ATS in the form of equity, debt or a combination of both. There can be no assurance that we will achieve desired levels of sales or profitability, or that future capital infusions will be available. 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, results of operations, liquidity, capital expenditures or capital resources. CAUTIONARY STATEMENTS This document contains forward-looking statements within the meaning of federal securities laws that may include statements regarding intent, belief or current expectations of our Company and our management. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage 12 companies to provide prospective information without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statement. We desire to take advantage of these "safe harbor" provisions. Accordingly, we hereby identify the following important factors which could cause our actual results to differ materially from any such results which may be projected, forecast, estimated or budgeted by us in forward-looking statements made by us from time to time in reports, proxy statements, registration statements and other written communications, or in oral forward-looking statements made from time to time by the company's officers and agents. We do not intend to update any of these forward-looking statements after the date of this Form 10-K to conform them to actual results. IF OUR HEART VALVE DOES NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE IN THE UNITED STATES, OUR OPERATING RESULTS WILL BE HARMED AND WE MAY NOT ACHIEVE PROFITABILITY. Our success will depend, in large part, on the medical community's acceptance of the ATS heart valve in the United Sates, which is the largest revenue market in the world for heart valves. The U.S. medical community's acceptance of the ATS heart valve will depend upon our ability to demonstrate the safety and efficacy, advantages, long-term clinical performance and cost-effectiveness of the ATS heart valve as compared to other prosthetic heart valves. We cannot predict whether the U.S. medical community will accept the ATS heart valve or, if accepted, the extent of its use. Negative publicity resulting from isolated incidents involving the ATS heart valve or other prosthetic heart valves could have a significant adverse effect on the overall acceptance of our heart valve. If we encounter difficulties developing a market for the ATS heart valve in the United States, we may not be able to increase our revenue enough to achieve profitability and our business and results of operations will be seriously harmed. WE CURRENTLY RELY ON THE ATS HEART VALVE AS OUR SOLE SOURCE OF REVENUE. IF WE ARE NOT SUCCESSFUL IN SELLING THIS PRODUCT, OUR OPERATING RESULTS WILL BE HARMED. We have developed only one product, which is currently being sold primarily outside the United States. Even if we were to develop additional products, regulatory approval would likely be required to sell them. Clinical testing and the approval process itself are very expensive and can take many years. Therefore, we do not expect to be in a position to sell additional products in the foreseeable future. Adverse rulings by regulatory authorities, product liability lawsuits, the failure to achieve widespread U.S. market acceptance, the loss of market acceptance outside of the United States, or other adverse publicity may significantly and adversely affect our sales of the ATS heart valve, and, as a result, would adversely affect our business, financial condition and results of operations. IN 2002 WE BEGAN USING A COMBINATION OF DIRECT SALES PERSONS AND INDEPENDENT MANUFACTURING REPRESENTATIVES TO SELL OUR VALVES IN THE UNITED STATES. IF OUR NEW U.S. SALES STRATEGY IS NOT SUCCESSFUL, WE WILL NOT BE ABLE TO CONTINUE OUR OPERATIONS AS PLANNED. Our sales approach for the sale of the ATS valve in the United States consists primarily of direct salespersons with a few independent manufacturer's representatives. We will need to continue to expend significant funds and management resources to develop and maintain this hybrid sales force. We believe there is significant competition for sales personnel and independent manufacturing representatives with the advanced sales skills and technical knowledge we need. If we are unable to recruit, retain and motivate qualified personnel and representatives, U.S. sales of the ATS valve could be adversely affected. The loss of key salespersons or independent manufacturer's representatives could have a material adverse effect on our sales or potential sales to current customers and prospects serviced by such salespersons or representatives. Further, we cannot assure the successful expansion of our network of independent manufacturer's representatives on terms acceptable to ATS, if at all, or the successful marketing of our products by our hybrid sales force. To the extent we rely on sales through independent manufacturer's representatives, any revenues we receive will depend primarily on the efforts of these parties. We do not control the amount and timing of marketing resources that these third parties devote to our product. If our U.S. sales strategy is not successful, we may be forced to change our U.S. sales strategy again. Any such change could disrupt sales in the United States. Further, any change in our U.S. sales strategy could be expensive and would likely have a material adverse impact on our results of operations. 13 WE CURRENTLY DEPEND ON THE MARKETING AND SALES EFFORTS OF INTERNATIONAL INDEPENDENT DISTRIBUTORS, AND OUR SALES HAVE BEEN CONCENTRATED IN THREE COUNTRIES. The ATS heart valve is sold internationally through independent distributors. The loss of an international distributor could seriously harm our business and results of operations if a new distributor could not be found on a timely basis in the relevant geographic market. We do not control the amount and timing of marketing resources that these third parties devote to our product. Furthermore, to the extent we rely on sales through independent distributors, any revenues we receive will depend primarily on the efforts of these parties. WE ARE DEPENDENT UPON SALES OUTSIDE THE UNITED STATES, WHICH ARE SUBJECT TO A NUMBER OF RISKS INCLUDING A DROP IN SALES DUE TO CURRENCY FLUCTUATIONS. For the first six months of 2004, 66% of our net sales are derived from international operations. We expect that international sales will account for a substantial majority of our revenue until the ATS heart valve receives wider market acceptance from U.S. customers. Accordingly, any material decrease in foreign sales may materially and adversely affect our results of operations. We sell in U.S. dollars to most of our customers abroad. An increase in the value of the U.S. dollar in relation to other currencies can and has adversely affected our sales outside of the United States. In prior years, the decrease in sales was due primarily to the change in the value of the U.S. dollar against the Euro, as well as competitor price pressure. Our dependence on sales outside of the United States will continue to expose us to U.S. dollar currency fluctuations for the foreseeable future. Our future results of operations could also be harmed by risks inherent in doing business in international markets, including: - unforeseen changes in regulatory requirements and government health programs; - weaker intellectual property rights protection in some countries; - new export license requirements, changes in tariffs or trade restrictions; - political and economic instability in our target markets; and - greater difficulty in collecting payments from product sales. Slow payment of receivables by our international distributors, or the occurrence of any of the other factors listed above, could harm our ability to successfully commercialize our product internationally and could harm our business. WE HAVE A HISTORY OF NET LOSSES. IF WE DO NOT HAVE NET INCOME IN THE FUTURE, WE MAY BE UNABLE TO CONTINUE OUR OPERATIONS. We are not currently profitable and have a very limited history of profitability. As of June 30, 2004, we had an accumulated deficit of $57.5 million. We expect to incur significant expenses over the next several years as we continue to devote substantial resources to the commercialization of the ATS heart valve in the United States. We will not generate net income unless we are able to significantly increase revenue from U.S. sales. If we continue to sustain losses, we may not be able to continue our business as planned. THE MARKET FOR PROSTHETIC HEART VALVES IS HIGHLY COMPETITIVE, AND A NUMBER OF OUR COMPETITORS ARE LARGER AND HAVE MORE FINANCIAL RESOURCES. IF WE DO NOT COMPETE EFFECTIVELY, OUR BUSINESS WILL BE HARMED. The market for prosthetic heart valves is highly competitive. We expect that competition will intensify as additional companies enter the market or modify their existing products to compete directly with us. Our primary 14 competitor, St. Jude Medical, Inc., currently controls approximately 50% of the worldwide mechanical heart valve market. Many of our competitors have long-standing FDA approval for their valves and extensive clinical data demonstrating the performance of their valves. In addition, they have greater financial, manufacturing, marketing and research and development capabilities than we have. For example, many of our competitors have the ability, due to their internal carbon manufacturing facilities and economies of scale, to manufacture their heart valves at a lower cost than we can manufacture our ATS heart valve. Our primary competitor has recently used price as a method to compete in several international markets. If heart valve prices decline significantly we might not be able to compete successfully, which would harm our results of operations. OUR FUTURE RESULTS WILL BE HARMED IF THE USE OF MECHANICAL HEART VALVES DECLINES. Our business could suffer if the use of mechanical heart valves declines. Historically, mechanical heart valves have accounted for over two-thirds of all heart valve replacements. Recently, there has been an increase in the use of tissue valves. We estimate that mechanical heart valves are currently being used in 40% to 65% of all heart valve replacements, depending on the geographic market, down from 65 to 75% about ten years ago. We believe the tissue manufacturers' claims of improvements in tissue valve longevity and an increase in the average age of valve patients have contributed to the recent increase in the use of tissue valves. NEW PRODUCTS OR TECHNOLOGIES DEVELOPED BY OTHERS COULD RENDER OUR PRODUCT OBSOLETE. The medical device industry is characterized by significant technological advances. Several companies are developing new prosthetic heart valves based on new or potentially improved technologies. Significant advances are also being made in surgical procedures, which may delay the need for replacement heart valves. A new product or technology may emerge that renders the ATS heart valve noncompetitive or obsolete. This could materially harm our results of operations or force us to cease doing business altogether. WE MAINTAIN A LARGE VOLUME OF INVENTORY, WHICH EXCEEDS THE CURRENT DEMAND FOR THE ATS HEART VALVE. IF SALES OF OUR PRODUCT DO NOT INCREASE, THE VALUE OF OUR INVENTORY COULD DECREASE SUBSTANTIALLY. We purchased pyrolytic carbon components under a long-term supply agreement with Carbomedics, Inc. (formerly Sulzer Carbomedics, Inc.) through June 2002 and we are required to resume purchases of such components in 2007. To date, our purchases of pyrolytic carbon components have exceeded our sales of the ATS heart valves. We currently have in inventory enough pyrolytic carbon components to satisfy our projected requirements through 2004. If we are unable to achieve widespread acceptance for the ATS heart valve or if competitive pressures result in price reductions, the value of the excess inventory would likely decrease, which could seriously harm our results of operations and financial condition. Because the pyrolytic carbon components are made to meet the unique specifications of the ATS heart valve, our inventory may have little, if any, value in the open market. WE LICENSE PATENTED TECHNOLOGY AND OTHER PROPRIETARY RIGHTS FROM CARBOMEDICS. IF THESE AGREEMENTS ARE BREACHED OR TERMINATED, OUR RIGHT TO MANUFACTURE THE ATS HEART VALVE COULD BE TERMINATED. Under our carbon technology agreement with Carbomedics, we have obtained a license to use Carbomedics' pyrolytic carbon technology to manufacture components for the ATS heart valve. If this agreement is breached or terminated, we would be unable to manufacture our own product. If our inventory is exhausted and we do not have any other sources of carbon components, we would be forced to cease doing business. A DELAY OR INTERRUPTION IN THE SUPPLY OF PYROLYTIC CARBON COMPONENTS COULD DELAY PRODUCT DELIVERY OR FORCE US TO CEASE OPERATIONS. We cannot be certain that, after our current inventory is exhausted, sufficient quantities of pyrolytic carbon components will be available to assemble the ATS heart valve. Other than our carbon facility, the only other FDA-approved alternate supplier of our pyrolytic carbon components is Carbomedics. Although we have a supply agreement with Carbomedics under which it agrees to supply us with a minimum annual number of pyrolytic carbon components in 2007 through 2011, the amounts available under this agreement are not expected to be sufficient to supply all of our needs for components in those years. If our inventory is exhausted and we are unable to manufacture carbon components or obtain them from other sources, we could be forced to reduce or cease operations. 15 BECAUSE WE LACK MANUFACTURING EXPERIENCE, WE MAY NOT REALIZE EXPECTED SAVINGS FROM MANUFACTURING OUR OWN PRODUCT. IN ADDITION, WE COULD EXPERIENCE PRODUCTION DELAYS AND SIGNIFICANT ADDITIONAL COSTS. Under our agreement with Carbomedics, we have been granted an exclusive worldwide license to manufacture pyrolytic carbon components for the ATS heart valve. We cannot be certain that our strategy to establish internal manufacturing capabilities will result in a cost-effective means for manufacturing the ATS heart valve. We have limited experience in manufacturing pyrolytic carbon. Although we have an FDA-approved carbon manufacturing facility, it is currently operating at the minimal level necessary to maintain the plant and our technical expertise in producing carbon components. In the future when we increase production at the plant we may encounter difficulties in maintaining and expanding our manufacturing operations, including problems involving: - production yields; - quality control; - per unit manufacturing costs; - shortages of qualified personnel; and - compliance with FDA and international regulations and requirements regarding good manufacturing practices. Difficulties encountered by us in establishing or maintaining a commercial-scale manufacturing facility may limit our ability to manufacture our heart valve and therefore could seriously harm our business and results of operations. OUR BUSINESS COULD BE SERIOUSLY HARMED IF THIRD-PARTY PAYORS DO NOT REIMBURSE THE COSTS FOR OUR HEART VALVE. Our ability to successfully commercialize the ATS heart valve depends on the extent to which reimbursement for the cost of our product and the related surgical procedure is available from third-party payors, such as governmental programs, private insurance plans and managed care organizations. Third-party payors are increasingly challenging the pricing of medical products and procedures that they consider are not cost-effective or are used for a non-approved indication. The failure by physicians, hospitals and other users of our product to obtain sufficient reimbursement from third-party payors would seriously harm our business and results of operations. In recent years, there have been numerous proposals to change the health care system in the United States. Some of these proposals have included measures that would limit or eliminate payment for medical procedures or treatments. In addition, government and private third-party payors are increasingly attempting to contain health care costs by limiting both the coverage and the level of reimbursement. In international markets, reimbursement and health care payment systems vary significantly by country. In addition, we have encountered price resistance from government-administered health programs. Significant changes in the health care system in the United States or elsewhere, including changes resulting from adverse trends in third-party reimbursement programs, could have a material adverse effect on our business and results of operations. WE MAY FACE PRODUCT LIABILITY CLAIMS, WHICH COULD RESULT IN LOSSES IN EXCESS OF OUR INSURANCE COVERAGE AND WHICH COULD NEGATIVELY AFFECT OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS. The manufacture and sale of mechanical heart valves entail significant risk of product liability claims and product recalls. A mechanical heart valve is a life-sustaining device and the failure of any mechanical heart valve usually results in the patient's death or need for reoperation. A product liability claim or product recall, regardless of the ultimate outcome, could require us to spend significant time and money in litigation or to pay significant damages and could seriously harm our business. We currently maintain product liability insurance coverage in an aggregate amount of $25 million. However, we cannot assure you that our current insurance coverage is adequate to cover the costs of any product liability claims made against us. Product liability insurance is expensive and does not cover the costs of a product recall. In the future, product liability insurance may not be available at satisfactory rates or in adequate amounts. A product liability claim or product recall could also materially and adversely affect our ability to attract and retain customers. 16 OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. Our success depends in part on our ability to maintain and enforce our patents and other proprietary rights. We rely on a combination of patents, trade secrets, know-how and confidentiality agreements to protect the proprietary aspects of our technology. These measures afford only limited protection and competitors may gain access to our intellectual property and proprietary information. The patent positions of medical device companies are generally uncertain and involve complex legal and technical issues. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights. Any litigation could be costly and divert our attention from the growth of the business. We cannot assure you that our patents and other proprietary rights will not be successfully challenged, or that others will not independently develop substantially equivalent information and technology or otherwise gain access to our proprietary technology. WE MAY BE SUED BY THIRD PARTIES WHICH CLAIM THAT OUR PRODUCT INFRINGES ON THEIR INTELLECTUAL PROPERTY RIGHTS. ANY SUCH SUITS COULD RESULT IN SIGNIFICANT LITIGATION OR LICENSING EXPENSES OR WE MIGHT BE PREVENTED FROM SELLING OUR PRODUCT. We may be exposed to future litigation by third parties based on intellectual property infringement claims. Any claims or litigation against us, regardless of the merits, could result in substantial costs and could harm our business. In addition, intellectual property litigation or claims could force us to: - cease manufacturing and selling our product, which would seriously harm us; - obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; or - redesign our product, which could be costly and time-consuming. WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION, WHICH IS COSTLY, TIME CONSUMING AND CAN SUBJECT US TO UNANTICIPATED DELAYS. The ATS heart valve and our manufacturing activities are subject to extensive regulation by a number of governmental agencies, including the FDA and comparable international agencies. We are required to: - maintain the approval of the FDA and international regulatory agencies to continue selling the ATS heart valve; - obtain the approval of international regulatory agencies in countries where the ATS heart valve is not yet marketed; - satisfy content requirements for all of our labeling, sales and promotional materials; - comply with manufacturing and reporting requirements; and - undergo rigorous inspections by these agencies. Compliance with the regulations of these agencies may delay or prevent us from introducing any new or improved products. Violations of regulatory requirements may result in fines, marketing restrictions, product recall, withdrawal of approvals and civil and criminal penalties. THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE, WHICH MAY RESULT IN LOSSES TO INVESTORS. Historically, the market price of our common stock has fluctuated over a wide range and it is likely that the price of our common stock will fluctuate in the future. The market price of our common stock could be impacted by the following: - the success of our management in operating ATS effectively; 17 - the failure of the ATS valve to gain market acceptance in the United States; - announcements of technical innovations or new products by our competitors; - the status of component supply arrangements; - changes in reimbursement policies; - government regulation; - developments in patent or other proprietary rights; - public concern as to the safety and efficacy of products developed by us or others; and - general market conditions. In addition, due to one or more of the foregoing factors, in future years, our results of operations may fall below the expectations of securities analysts and investors. In that event, the market price of our common stock could be materially and adversely affected. Finally, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results. OUR CHARTER DOCUMENTS AND MINNESOTA LAW MAY DISCOURAGE AND COULD DELAY OR PREVENT A TAKEOVER OF OUR COMPANY. Provisions of our articles of incorporation, bylaws and Minnesota law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. These provisions include the following: - No cumulative voting by shareholders for directors; - The ability of our board to set the size of the board of directors, to create new directorships and to fill vacancies; - The ability of our board, without shareholder approval, to issue preferred stock, which may have rights and preferences that are superior to our common stock; - The ability of our board to amend the bylaws; and - Restrictions under Minnesota law on mergers or other business combinations between us and any holder of 10% or more of our outstanding common stock. 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of our investments 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, Canada, and France, 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 France, are entered into in U.S. dollars, precluding the need for foreign currency hedges on such sales. Sales through our French subsidiary, which was established in 2002 to replace a distributor, are in Euros, so we are subject to profitability risk arising from exchange rate movements. We have not used foreign exchange contract or similar devices to reduce this risk. We will evaluate the need to use foreign exchange contracts or similar devices, if sales in France increase substantially. We do not believe that inflation has had a material effect on our results of operations in recent years and periods. There can be no assurance, however, that our business will not be adversely affected by inflation in the future. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(f) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us required to be included in our periodic SEC filings. (b) Changes in Internal Control During the most recent fiscal quarter, there has been no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 19 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES On June 28, 2004, the Company sold an aggregate of 3,687,183 shares of common stock at $3.55 per share for aggregate gross proceeds of $13.1 million. The purchases were made by 19 institutional investors or private investment funds. The issuance and sale of the shares were effected without registration under the Securities Act in reliance on Section 4(2) as a transaction by an issuer not involving a public offering and under the safe harbor provisions of Regulation D under the Securities Act. The purchasers were given access to information about the Company, represented that they were accredited investors able to bear the economic risk of loss of the investment and represented that the shares were being acquired for investment purposes only and not with a view to or for sale in connection with any distribution. Adam, Harkness & Hill, Inc.. acted as placement agent for the sale of the shares. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders of the Company was held on May 6, 2004 at which time (i) four nominees were elected to the Board of Directors for one-year terms, and (ii) Ernst & Young LLP was approved as the independent auditors of the Company. Proxies for the Company were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended, and there was no solicitation in opposition to management's solicitations. All nominees for directors as listed in the proxy statement were elected. The voting results were as follows:
For Withhold Against Abstain --- -------- ------- ------- Election of Directors Michael D. Dale 22,183,108 47,183 0 0 David L. Boehnen 22,130,770 99,521 0 0 Eric W. Sivertson 22,116,170 114,121 0 0 Robert E. Munzenrider 22,142,608 87,683 0 0 Approval of Independent Auditors 22,113,548 0 96,680 19,763
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Restated Articles of Incorporation, as amended to date (Incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (the "1993 Form 10-K")). 3.2 Bylaws of the Company, as amended to date (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K")). 4.1 Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K")). 10.1 Development and License Agreement dated as of April 26, 2004 between the Company and ErySave AB 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-15(e)/15d-15(e) (Section 302 Certification) 20 31.2 Certification of Chief Financial Officer pursuant to Rules 13a-15(e)/15d-15(e) (Section 302 Certification) 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 Certification) 32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 Certification) (b) Reports on Form 8-K The Company "furnished" (in accordance with Item 12 of Form 8-K) to the SEC one Form 8-K as follows: On April 30, 2004, the Company reported its results of operations and financial condition for the fiscal quarter ended March 31, 2004. The Company filed (in accordance with Item 5 of Form 8-K) with the SEC one Form 8-K as follows: On June 28, 2004, our entering into stock purchase agreements to sell 3,687,183 shares of our common stock to institutional investors through our agent, Adams, Harkness & Hill, Inc. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 9, 2004 ATS MEDICAL, INC. By: /s/ Michael D. Dale ------------------- Michael D. Dale, Chief Executive Officer (Principal Executive Officer and Authorized Signatory) By: /s/ John R. Judd ---------------- John R. Judd, Chief Financial Officer (Principal Accounting Officer) 22 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION 10.1 Development and License Agreement dated as of April 26, 2004 between the Company and ErySave AB 31.1 Certification of the Chief Executive Officer pursuant to Rules 13a-15(e)/15d-15(e) (Section 302 Certification) 31.2 Certification of the Chief Financial Officer pursuant to Rules 13a-15(e)/15d-15(e) (Section 302 Certification) 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 Certification) 32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 Certification)
23 EX-10.1 2 c87379exv10w1.txt DEVELOPMENT & LICENSE AGREEMENT Exhibit 10.1 DEVELOPMENT AND LICENSE AGREEMENT This Development and License Agreement (the "Agreement") is entered into as of 26th April, 2004 (the "Effective Date"), by and between ATS MEDICAL, INC. and ERYSAVE AB. ATS and ErySave may be referred to in this Agreement, individually, as a "party," and, collectively, as "parties.") Witness that, WHEREAS A. ATS is a medical device company engaged in, among other things, the development, manufacture and commercialisation of medical and related products. B. ErySave is a technology company engaged in, among other things, the development of medical products and wishes to enter into this Agreement to complete their development, in collaboration with ATS, and to license ATS to develop, manufacture, import, export, market, distribute, sell and use the subject products. C. ATS wishes to collaborate with ErySave to complete the development of the products which are the subject of this Agreement and to market, distribute and sell those products on the terms set out in this Agreement. In consideration of the mutual promises and agreements of the parties set out in this Agreement, the receipt and sufficiency of which is acknowledged by the parties, THE PARTIES AGREE as follows: 1. DEFINITIONS 1.1 In this Agreement the capitalized terms defined below and parenthetically elsewhere shall have the meanings here or there supplied whenever such terms are used in their capitalised form: 1.1.1 Affiliate(s) means in respect of either party any corporation or other business entity which is part of the same enterprise grouping as the party and which controls, is controlled by, or is under common control with such party, where control means at least majority ownership or control of at least a majority of the voting shares or the power in fact to control management decisions. 1.1.2 Agreement means this agreement, all annexes, appendices and additions to this agreement, and all modifications, amendments, extensions and renewals of this agreement. 1.1.3 ATS means ATS Medical, Inc., a Minnesota corporation which has its principal place of business at 3905 Annapolis Lane, Suite 105, Minneapolis, Minnesota, 55447 USA. 1.1.4 CE Certification or CE-Mark means compliance with the European Union Medical Device Directive (93/42/EEC). ** The appearance of a double asterisk denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934. - 1 - 1.1.5 CE-Approved Prototype - the Prototype designed and/or manufactured in conformance with the Specifications and which has obtained CE Certification. 1.1.6 ErySave means ErySave AB, a Swedish corporation which has its principal place of business at IDEON, SE-223 70 Lund, Sweden. 1.1.7 Know-How means all present and future confidential and substantial information, research, studies, specifications, samples, materials, documents, trade secrets, data, methods, processes, and special abilities acquired, licensed, owned or controlled by or on behalf of ErySave concerning or relating to the PARSUS Technology, including but not limited to analytical and clinical data, product forms and specifications, methods of preparation, assembly and manufacture, information contained in registration dossiers, and all third party data relating to the PARSUS Technology to which ErySave has access. 1.1.8 License means the licenses granted by ErySave to ATS pursuant to Part 5 of this Agreement 1.1.9 Licensed Field means the field of intra-operative cardiovascular surgery. 1.1.10 Net Sales means the gross revenues invoiced or otherwise receivable by ATS or its Affiliates in respect of revenues from Products that were made by (or were made under authority of) ATS or its Affiliates and were sold, leased, transferred or otherwise made available to independent third parties, less (i) reasonable, customary and usual trade or quantity discounts actually taken by customers, (ii) sales, use, value-added and excise taxes imposed and paid in respect of sales of Products and included in the invoice price, (iii) import and export duties or fees, and shipping and delivery charges; and (iv) refunds for customer returns. 1.1.11 PARSUS Technology means any device or method, as now existing or later developed, for separating particles from fluids using ultrasound, including, but not limited to, any device or method that is within the scope of any claim of PCT Patent Application Publication No. WO 02/072235, filed March 11, 2002 and entitled "Device And Method For Separation." 1.1.12 Patents means those patent rights, patents applications and patents owned or controlled by ErySave or to which ErySave has acquired rights, and which claim any PARSUS Technology, including patents and patent rights deriving or issuing therefrom and all extensions, additions, reissues, continuations, continuations-in-part or divisions thereof and any substitute applications thereof and any protection certificate for any of the aforesaid and all other patents claiming priority with or from such patents anywhere in the world and all derivations, improvements or further developments thereof created by, applied for, granted to, acquired, controlled or licensed by ErySave after the date of this Agreement relating to the PARSUS Technology. 1.1.13 Product(s) means any device made from, made with, based on, containing, or incorporating PARSUS Technology, including but not limited to, the Prototype, restricted to applications and indications in the Licened Field where the development, manufacture, importation, export, marketing, distribution, sale or use involves in any - 2 - way the Know-How or is dependent upon, covered by or within the scope of any claim or invention disclosed in the Patents. 1.1.14 Prototype means the ErySave fat emboli cleaner device known as "MindShield" presently under development and which includes a "Base Unit," a "Disposable Disc" and "Disposable Disc/Kit," which, upon completion of development, shall be deemed to be a Product. 1.1.15 Royalty means the royalty payable by ATS to ErySave pursuant to Part 7 of this Agreement. 1.1.16 Specifications means the design requirements, functional requirements, testing procedures, quality assurance procedures, and documentation requirements for the Prototype or other Products as agreed upon by the parties. 1.1.17 Trademarks means the trademark or marks listed in Appendix 2 to this Agreement and such other of ErySave's trademarks or tradenames and such further identification and marks as ErySave may from time to time designate for use on, with or in relation to, among other things, Products. 2. PROTOTYPE DEVELOPMENT PHASE 2.1 The Prototype Development Phase shall comprise the time period and relate to all work with respect to the development of the Prototype into a commercially viable Product. The Prototype Development Phase shall be deemed completed upon obtaining CE Certification for the Prototype. It is anticipated that obtaining CE Certification for the Prototype will be completed within twenty four (24) months from the date of execution of this Agreement. 2.2 ErySave shall, in accordance with a development plan and budget elaborated by ErySave in consultation with ATS, complete the development of the Prototype in accordance with the Specifications and provide the CE-Approved Prototype and/or its related design documentation to contract manufacturers to be chosen by agreement of both parties for the purpose of establishing full-scale production of the CE-Approved Prototype for commercial sale. ATS will, on request and at no additional cost to ErySave, provide reasonable assistance to ErySave in this process. 2.3 The parties shall, where appropriate or necessary and acting reasonably, elaborate and agree on the Specifications. Additionally, the parties shall establish target dates for completion of the development for the Prototype, the provision of the CE-Approved Prototype and/or its related design documentation to contract manufacturers for full-scale commercial production, and obtaining marketing authorization in the U.S., Europe and other markets for the CE-Approved Prototype. 2.4 ErySave shall be responsible for and shall bear all costs associated with obtaining a CE-Certification for the Prototype. 2.5 ErySave shall be responsible for achieving the development milestones set out in sub-paragraphs (b) - (g) of this paragraph as described in more detail in Appendix 4; and ATS shall pay ErySave the aggregate sum of SEK 10,000,000.00 in the following installments - 3 - and based on the completion of the following milestones, regardless of the order in which each milestone is achieved: (a) Execution of this Agreement - SEK 1,430,000. (b) Completion of development of the Disposable Disc in accordance with the Specifications - SEK 1,430,000. At a minimum the Disposable Disc shall be a full-size disc (5-1/2 inch or equivalent size) made of disposable material (polymer or other) and shall incorporate micromechanical channels in the Disposable Disc. (c) Completion of development of the Disposable Disc/Kit in accordance with the Specifications - SEK 1,430,000. At a minimum the Disposable Disc/Kit shall be a full-size disc (5-1/2 inch or equivalent size) made of disposable material with a lid attached to the disc, and shall include tubing and flow control devices attached to the disc/lid set, and shall have a throughput of a minimum of one liter/hour, with a minimum fat emboli removal of 90%. (d) Completion of the GLP (Good Laboratory Practice) animal studies for the Prototype needed for CE-Certification - SEK 1,430,000. (e) Completion of development of the Base Unit in accordance with the Specifications - SEK 1,430,000. (f) Completion of the transfer of manufacturing information for the CE-Approved Prototype to selected contract manufacturers for full-scale production of the CE-Approved Prototype for commercial sale - SEK 1,430,000. Transfer of manufacturing information shall be defined as the transfer from ErySave to the relevant manufacturer or manufacturers of all documentation in ErySave's possession or control which are relevant or necessary for the manufacturing of all components comprising the CE-Approved Prototype. (g) Receipt of CE-Mark Approval - SEK 1,420,000. 2.6 ErySave shall invoice ATS for each installment amount payable under paragraph 2.5 upon the occurrence of the events specified and ATS shall make payment of such invoices within thirty days of receipt of the invoice. Interest shall accrue and be paid by ATS on all overdue invoice amounts at the rate of 1.0% simple interest per month (12% simple interest per annum) until paid. 2.7 All amounts payable under this Part 2 shall be paid in full without any withholding or deduction. ErySave shall return any amounts that are not required for expenses related to the achievement of the development milestones to ATS. 2.8 ATS shall make all payments required to be made under this Part 2 to ErySave in Swedish Kronor (SEK). - 4 - 2.9 ErySave shall have no obligation to manufacture and supply any Prototype or CE-Approved Prototype for use by ATS other than as may be set out herein or mutually agreed in writing. 2.10 Notwithstanding anything to the contrary in this Agreement, upon thirty (30) days prior written notice and with the prior written consent from ATS, ErySave may subcontract the performance of all its obligations for the Prototype Development Phase under this Part 2. 2.11 The parties shall, as far as reasonably practicable, carry out the Prototype Development Phase in a timely manner and using their commercially reasonable efforts. 2.12 The parties shall immediately advise one another of any anticipated delay in meeting the schedule or milestone during the Prototype Development Phase. 2.13 In the event of any anticipated or possible delay which has the potential to cause substantial inconvenience, cost or loss to the parties or either of them, the parties shall forthwith consult with one another as to ways of avoiding the delay and of dealing with the consequences of the delay. 2.14 The parties acknowledge their mutual understanding that the Prototype Development Phase involves development work, the progress and results of which cannot necessarily be anticipated or planned for in advance, and that there needs to be a high degree of mutual flexibility in terms of scheduling, support and resources, particularly in respect of unforeseen delays and other difficulties which might arise. 2.15 In the event ATS develops additional Products and elects to involve ErySave in any related development process, the parties will follow a similar product development phase as set forth in this Part 2 followed by a commercial phase as set forth in Part 3. The specific terms, conditions and requirements for completing the product development phase and commercial phase for any future Products involving ErySave are to be determined by mutual agreement of the parties. 3. COMMERCIAL PHASE 3.1 The Commercial Phase for the CE-Approved Prototype shall commence upon the completion of the Prototype Development Phase and shall involve all duties and obligations as set forth in this Part 3. During the Commercial Phase, ATS shall undertake the tasks described in this Section 3; and the parties shall elaborate and agree on target launch dates for the U.S., major European markets, and other markets. 3.2 ATS shall be responsible for and shall bear all costs associated with obtaining the permits, licences, registrations, certificates, approvals and other regulatory authorisations required to manufacture, distribute, market, sell and use the CE-Approved Prototype, including without limitation, obtaining regulatory approvals in all non-CE countries and for any local work needed to transform the CE-Mark into a marketing authorization in any other countries. ErySave will, on request, provide reasonable assistance to ATS and share with ATS any required information in ErySave's possession or control. - 5 - 3.3 ErySave shall co-operate with ATS by providing data and information produced in the course of ErySave's development work on the Prototype as may assist ATS in obtaining the authorisations referred to in paragraph 3.2. ATS will, on request, share with ErySave all information in ATS' possession or control arising out of ATS activities in obtaining the authorizations referred to in paragraph 3.2 for use by ErySave with respect to any CE-Approved Product. 3.4 ErySave and ATS shall be jointly responsible for procuring the manufacturing of the Disposable Discs for the CE-Approved Prototype and for ensuring the supply of the Disposable Discs for the CE-Approved Prototype to ATS's contract manufacturer(s). 3.5 ATS shall be responsible for procuring the commercial manufacture and supply of remaining components of the CE-Approved Prototype and for assembly, sterilization and packaging of the final components of the CE-Approved Prototype; and ErySave shall assist ATS in the transfer and set-up of the processes and methods which will be required to manufacture the CE-Approved Prototypes by a commercial contract manufacturer or manufacturers agreed to in writing by both parties. 3.6 ATS shall use commercially reasonable efforts to diligently pursue the commercialization of the CE-Approved Prototypes and shall meet the requirements of the market by making or having made and offering or having offered for sale adequate quantities of the CE-Approved Prototypes on commercially reasonable terms. 3.7 ATS shall at all times in relation to the CE-Approved Prototypes conduct itself and use efforts substantially consistent with like conduct and effort devoted to other products of similar commercial potential or significance. 3.8 ATS shall use commercially reasonable efforts to actively and effectively promote, market, distribute and sell the CE-Approved Prototypes at its own expense and for its own account, maintain an adequate sales force, assign sufficient staff to the CE-Approved Prototypes for the purposes of this Agreement, establish and maintain a system of after-sales support for the CE-Approved Prototypes, maintain sufficient stocks of the CE-Approved Prototypes, and properly handle and store the CE-Approved Prototypes. In markets where ATS does not have its own representation, ErySave and ATS shall be jointly responsible for the commercialisation of the Product. 3.9 ATS shall conduct its advertising, promotional and marketing activities consistent with industry practices and may make use of marketing information, materials and documentation and product and technical documentation, specifications, instructions for use, directions, indications and standards supplied by ErySave, if any. 3.10 ATS shall use commercially reasonable efforts to ensure that all the CE-Approved Prototypes are properly packaged and labelled and are accompanied by proper and sufficient manuals and other literature setting out and containing such clear and plain safety information, instructions and warnings as may be required by applicable law and as may be required or advisable in the circumstances. ATS shall not alter, remove or modify the CE-Approved Prototypes or any aspect of their safety systems or features, without the prior, specific, written permission of ErySave. - 6 - 3.11 ATS shall use commercially reasonable efforts to substantially comply with all laws, rules, regulations and administrative directions concerning the production, marketing, distribution, sale and use of the CE-Approved Prototypes. ErySave shall, on request, provide reasonable assistance to ATS to enable compliance with all such laws, rules, regulations and administrative directions. Each of the parties shall promptly notify the other of changes or other developments in the applicable laws, rules, regulations and administrative directions of which it becomes aware and which are relevant to either parties' obligations under this Agreement. 3.12 ATS shall not distribute or sell any obsolete CE-Approved Prototypes or CE-Approved Prototypes with insufficient remaining shelf-life. 3.13 ATS shall prepare and deliver to ErySave at the commencement of this Agreement, and then periodically (at least yearly, but no more than quarterly), a report containing specific detail of ATS' future development, manufacturing, marketing, and sales activities, plans and projections relating to the CE-Approved Prototypes, together with a comparison of actual activities and results to the activities, plans and projections that had been predicted in the prior report. ErySave shall have the right to approve such future plans and projections, acting reasonably. 3.14 In addition to and without in any way limiting its obligations under this Part 3, ATS shall adhere to the following minimum marketing performance criteria described in more detail in Appendix 3: a. development of brochure(s) for the CE-Approved Prototypes; b. development of sales training programs and implementation of sales force training classes the CE-Approved Prototypes; c. development of website content and relevant links for the CE-Approved Prototypes; d. incorporation of graphics in ATS trade show exhibit booths the CE-Approved Prototypes; e. inclusion of the CE-Approved Prototypes in cardiac surgery symposia supported by ATS; f. hiring and training of manager for the CE-Approved Prototypes; g. inclusion of the CE-Approved Prototypes in journal advertising campaigns; h. development of a design and performance manual, and development and maintenance of processes for order entry, equipment service requests, etc. for the CE-Approved Prototypes; i. During each twelve month period beginning twenty four months after U.S. FDA approval, ATS shall make royalty payment(s) at least equal to **.This amount will increase ** for each subsequent year. For example the amount will be ** in year one, ** in year two, ** in year three and so on. If FDA approval has not been received within twenty four months of CE Certification, ATS shall make royalty payment(s) at least equal to **. This amount will increase ** for each subsequent year until FDA approval has been received (at which point the amount will be increased to ** plus an extra ** for each subsequent year. - 7 - 3.15 ATS shall carry out its obligations under this Part 3 using commercially reasonable efforts, in a timely manner and at its own expense. 3.16 ATS shall report to ErySave, on a quarterly basis or as otherwise agreed upon by the parties, regarding the activities to be undertaken by ATS under this Part 3 and, to the extent permitted by law, shall share with ErySave all data and information relating to or arising from such activities. 4. PROJECT GROUP AND REPORTING 4.1 Each party shall designate one person to be the focal point for contact between the parties in respect of the Products. Any change to the designations shall be by notice in writing to the other party. 4.2 The parties' designated persons appointed pursuant to this Part 4 shall form a Steering Committee consisting of at least one representative of ATS and one or more representative of ErySave. The Steering Committee shall meet in person or by telephone conference at such intervals as the designated persons may from time to time determine for the purposes of regular reporting regarding both the product development and commercial phases. In addition and without limiting the foregoing, with respect to the Prototype, the Steering Committee shall meet at a minimum once every two weeks via Webcast Conference Call and once every two months face-to-face to review matters during both the Prototype Development Phase and the Commercial Phase. 4.3 With respect to the Prototype, progress reviews shall include ErySave's Development Project Manager, ErySave's President, ATS's Medical PARSUS Product Manager, ATS's Vice President Marketing & Business Development, and others to be determined by mutual agreement of ErySave's President and ATS's Vice President Marketing & Business Development. 5. GRANT OF LICENSE 5.1 ErySave hereby grants ATS, and ATS hereby accepts, the world-wide, and exclusive right and license under the Know-How and Patents to use and practise the PARSUS Technology to develop, manufacture, import, export, market, distribute, sell and use the CE-Approved Prototype and any future Products during the term of this Agreement. 5.2 ErySave hereby grants to ATS, and ATS hereby accepts, the world-wide, non-exclusive right and license to use the Trademarks on and in connection with the sale, offering for sale, distribution and advertising of the CE-Approved Prototype and any future Products during the term of this Agreement subject to the restrictions under Part 6. 5.3 ATS is authorized to sub-license its rights and obligations under this Agreement to sub-distributors, provided ATS remains liable for performance by all sub-licensees of all obligations sub-licensed and ATS informs ErySave of the identity of sub-licensees as soon as reasonably practicable following their agreement and provides ErySave with a copy of the sublicense agreements. - 8 - 5.4 The License is restricted to the Licensed Field and the CE-Approved Prototype and future Products and does not in any way limit or restrict the rights of ErySave or any third party licensee of ErySave from using and practising the PARSUS Technology for any purpose outside the Licensed Field. 6. TRADEMARKS 6.1 All CE-Approved Prototypes and future Products or their packaging shall be marked with an acknowledgement that the CE-Approved Prototype or Product is manufactured and marketed under license from ErySave. 6.2 ATS shall, if commercially reasonable, include the ErySave name, logo and PARSUS trademark on the Prototypes and Products, as may be directed by ErySave in accordance with ErySave's corporate identity policies in effect from time to time or otherwise as advised by ErySave; and all CE-Approved Prototypes and Products shall, if commercially reasonable, bear such of the Trademarks as ErySave may determine. ATS shall show ErySave its intended uses of the Trademarks (including the ErySave name, logo and trademark(s)) in advance of such use, and seek ErySave's approval thereof, which shall not be unreasonably withheld. ATS will provide rationale for all instances where the ErySave name, logo or trademark(s) are not included on the Prototypes and Products, .after which ATS may sell, offer for sale, distribute and advertise the CE-Approved Prototype and any other Products bearing only ATS trademarks. ATS may, in its sole discretion, use the Trademarks along with ATS trademarks subject to the following restrictions set forth in this Part 6. 6.3 The Trademarks shall be and remain the sole and exclusive property of ErySave, who shall be responsible to obtain and maintain all such trademark registrations as deemed necessary or advantageous. 6.4 ATS shall not use the Trademarks for any article, product, goods, merchandise or service other than the CE-Approved Prototype and Products. ATS shall use the Trademarks in respect of the CE-Approved Prototype and Products in a manner consistent with this Agreement and ErySave's corporate identity policies in effect from time to time, without any addition, deletion, amendment or modification other than with ErySave's prior, written permission. ATS and ErySave are not authorized to use any of the Trademarks owned by the other party as a corporate name. 6.5 Both parties, shall conduct their respective activities at all times in a manner that maintains the reputation, status and goodwill of each parties trademarks, and neither party shall do anything that could tend to damage, impair or destroy the reputation, status or goodwill of the other's trademarks, the CE-Approved Prototype, Products or the parties to this Agreement. 6.6 ErySave shall have the right upon reasonable notice to inspect ATS's records of utilizing the Trademarks, as well as of the quality of the Products and Prototypes on which they are affixed or applied, and to require reasonable adjustment therein to the extent necessary to safeguard its rights under trademark law. - 9 - 7. ROYALTY AND OTHER PAYMENTS 7.1 In respect of all CE-Approved Prototypes which are being developed or marketed and sold by ATS or its Affiliates, ATS shall pay to ErySave on all Net Sales the Royalty calculated in accordance with the criteria set out in Appendix 1 to this agreement. The Royalty shall accrue whenever a CE-Approved Prototype or future Product sale is invoiced by ATS or its Affiliates to or otherwise becomes owing by their customers. 7.2 In respect of all permitted sub-licenses of the PARSUS Technology granted to independent third parties by ATS or its Affiliates relating to CE-Approved Prototypes, ATS shall pay to ErySave ** of all up-front, down payment, milestone, fee, royalties, or like payments (if any) receivable by ATS or its Affiliates. Such amounts shall be payable to ErySave within thirty (30) days from the date of receipt of such up-front, down payment, milestone, fee or like payment by ATS or its Affiliate, and ATS shall provide a monthly accounting of such receipts (as well as of the number of CE-Approved Prototypes or future Products invoiced by ATS's sub-licensees in sufficient detail as to permit calculation of the amounts due to ATS and its Affiliates, and the related calculation of the amounts due by them to ErySave), or shall provide a statement that no CE-Approved Prototype or future Product sales were invoiced and/or that no amounts were due by sublicensees to ATS and Affiliates. Such monthly accountings or statements shall be made by ATS. 7.3 The Net Sales Royalty shall be calculated and payable on a calendar quarterly basis in arrears commencing on the last day of the first calendar quarter after the first sale of a CE-Approved Prototype is invoiced. 7.4 Within thirty days after the end of each calendar quarter, ATS shall pay the Royalty. Within thirty days after the end of each calendar month, ATS shall provide a monthly accounting of the number of CE-Approved Prototypes or future Products invoiced by ATS, its Affiliates, and its sub-licensees in sufficient detail as to permit calculation of the amounts due or shall provide a statement that no CE-Approved Prototype or future Product sales were invoiced. Such accountings or statements shall be made by ATS. 7.5 ATS shall make all payments due under this Part 7 in US dollars. All of ATS's accruals in non-US currency shall be translated into US dollars at the exchange rates prevailing at the time of ATS's invoice (or otherwise as required by US GAAP, consistently applied), free and clear of and without deduction or delay in respect of any demand, set-off, counter claim or other dispute and, so far as legally possible, each such payment shall be made free and clear of any taxes imposed by or under the authority of any government or public authority. 7.6 ATS shall pay interest on overdue payments owing under this Part 7 at the rate of 1% simple interest per month (12% simple interest per annum) until paid. 7.7 Royalties and other payments accruing hereunder shall be paid to ErySave or ErySave's designated payee, named by ErySave in written notice to ATS. 7.8 ATS may deduct and withhold and shall remit and pay to the proper authority, any withholding or similar tax which ATS is required to deduct, withhold and remit in - 10 - respect of Royalty on ErySave's behalf. ATS shall claim, or assist ErySave to do so, exemption from withholding tax on royalties, if any, under applicable taxation treaties. Proof of such withholding tax payments in a form satisfactory to the payee shall be secured and sent to the payee as evidence of such payment. 7.9 ATS shall at its principal place of business, during the term of this Agreement and for a period of three (3) years thereafter, keep true and accurate records of all matters connected with the development, manufacture and sale of CE-Approved Prototypes and shall also keep proper records of sales invoices and all books of account relating to payments from sub-licensees containing such correct entries complete in every particular as may be necessary to enable the amounts due to ErySave to be conveniently ascertained and audited. 7.10 Upon not less then ten (10) day's prior written request by ErySave, ATS shall produce the records and books of account referred to in paragraph 7.9 and calculations for Cost of Goods Sold (as defined in Appendix 1) certified as correct by ATS or its agents and, if so requested by ErySave, which shall not be more than twice in any calendar year, ATS shall permit those records and books to be examined by an independent accountant nominated by ErySave and reasonably acceptable to ATS, and, at ErySave's expense, ATS shall permit that accountant to take copies of or extracts from the records and books. In addition, ATS shall give the independent accountant all assistance, access and facilities reasonably necessary to enable the independent accountant to verify the records and books and shall supply such other information as may be reasonably necessary or proper to enable the amounts payable to ErySave under this Agreement to be ascertained and verified. If the independent accountant identifies a deviation equal to or greater than ten percent (10%) from the amounts identified as payable to ErySave by ATS then the independent accountant's cost shall be paid by ATS. ATS shall immediately remit to ErySave any outstanding Royalty or other payments identified as owing and unpaid by the independent accountant and overdue interest thereon. If the independent accountant identifies that excess Royalties have been paid, such excess Royalties shall be applied against the Royalties owed in the next calendar quarter. 7.11 In the event that an investigation of ATS' books and records is made pursuant to paragraph 7.10, certain confidential and proprietary business information of ATS may necessarily be made available to the person or persons conducting such investigation. It is agreed that such confidential and proprietary business information shall be retained in confidence by ErySave, its agent or representative, and shall not be used by ErySave, its agent or representative, or disclosed to any third party other than as contemplated under this Agreement without the prior express written permission of ATS unless required by law. It is understood and agreed, however, that such information may be used in any proceeding based on ATS' failure to make payment of Royalties or other payments required under this Agreement. 8. RIGHT OF FIRST REFUSAL 8.1 ATS is hereby granted a right of first refusal to exploit any new devices or products or applications for any devices or products for use outside of the Licensed Field but relating to the care of cardiac surgery patients. - 11 - 8.2 In the case of each such new device or product or application for any new device or product, ATS's right of first refusal shall arise upon receipt from ErySave of written notice that such a device or product or application for such a device or product has been developed to at least the concept stage and shall expire 90 days thereafter if the parties are unable to reach an agreement, acting reasonably, for the further development and commercialization of the device or product or application for the device or product. 8.3 ATS is hereby granted a right of first negotiation for all healthcare applications not included in Section 8 above. 9. FUTURE PRODUCT DEVELOPMENT 9.1 To the extent ATS elects to have ErySave participate in the development of future Products that employ the PARSUS Technology in the Licensed Field, the parties shall share equally the cost of all future development of and improvements to such future Products, including the cost of all patenting arising out of inventions relating to such future Products. If ATS does not elect to have ErySave participate, then ATS shall pay such costs. As indicated in Section 12.5, all such inventions and the associated patent and other intellectual property rights shall be and remain the property of ErySave and shall fall within the scope of the License, as provided in this Agreement. ATS and its agents, employees, contractors and representatives shall execute such assignments as ErySave may consider necessary or desirable to implement its property interest. 9.2 To the extent ATS elects to have ErySave participate in the development of such future Products, the parties shall consult with one another regarding such future Product development work and shall, acting reasonably, establish agreed plans and budgets for such work. 9.3 Neither party shall acquire any rights in the other party's intellectual property or other proprietary rights or technology with respect to any future Products except as explicitly set forth by written agreement executed by both parties. 10. ERYSAVE'S REPRESENTATIONS, OBLIGATIONS, INDEMNITY AND DISCLAIMER 10.1 ErySave shall provide to ATS, in useable form, all Know-How in existence as of the Effective Date and reasonable technical support, information, ongoing research, and any other later acquired Know-How for future Product developments referred to in paragraph 9.1, to the extent ErySave has such technical information and research, but ErySave shall have no obligation to create or develop technical information or research for ATS. 10.2 ErySave shall provide such other or additional assistance to ATS in the form of promotion and training on the use of the CE-Approved Prototypes or future Products as ATS may from time to time reasonably request and ATS shall reimburse and remunerate ErySave for such assistance as the parties may from time to time agree, provided that ErySave shall have no obligation to provide such support in the absence of agreement as to its reimbursement and remuneration or due to lack of availability of ErySave staff or other resources. 10.3 ErySave represents and warrants that it has the sole, exclusive and unencumbered right to grant the licences and rights herein granted to ATS, and that it has not granted any - 12 - option, licence, right or interest in or to the PARSUS Technology to any third party which would conflict with the rights granted by this Agreement. 10.4 ErySave represents and warrants that, insofar as it is aware, the PARSUS Technology, Patents, Know-How, or Trademarks do not infringe or misappropriate any patent, trademark, copyright, mask right, moral right, trade secret or other industrial, intellectual or proprietary rights of any third party ("Third Party IP Rights"). 10.5 ErySave shall defend, indemnify and hold harmless ATS and its directors, officers, employees and agents from all claims, suits, demands, losses, costs, attorney's fees, damages, and loss of profits in any way connected with, caused by, resulting from or related to: (i) information, materials, components or items provided, developed or produced by ErySave to the extent attributable to such provision, development or production; or (ii) breach of any term or condition of this Agreement; or (iii) any warranty made by ErySave under this Agreement; but excluding any claims, suits, losses, costs, attorney's fees, damages, and loss of profits or part thereof to the extent based solely on ATS's negligence or breach of this Agreement or the negligence of any third party acting by, through or under ATS or to the extent arising from ATS's operations or actions. ErySave shall conduct the defense in any such third party action arising as described herein and ATS shall cooperate with such defense, at the expense of ErySave, provided that ErySave reasonably consults with ATS. ATS may, at its own expense, assist in such defense if it so chooses, provided that ErySave will control such defense and all negotiations relative to the settlement of any such claim. Notwithstanding any of the foregoing, ErySave shall not settle any such claim without ATS' prior written consent, which consent will not be unreasonably withheld. 10.5.1 If, under this Agreement, any Product or any part thereof, which becomes the subject of any claim, suit or proceeding for infringement or misappropriation of any Third Party IP Rights, or if any Products, or any part thereof, is held or otherwise determined to infringe or misappropriate any Third Party IP Rights, then ErySave will at its expense, and without limiting its other obligations under this Agreement, achieve the following results in the listed order of preference: (i) Secure for ATS the right to continue using and practising the PARSUS Technology and to continue manufacturing, importing, marketing, distributing, selling and using the Products or any part thereof to the fullest extent consistent with the License granted by this Agreement; (ii) Replace or modify the Products, or any part thereof, to make the Products non-infringing but without degradation in operation, performance, or utility; or 10.5.2 Notwithstanding anything to the contrary set forth in this Agreement, ErySave has no liability for misappropriation or infringement of any Third Party IP Rights arising from: (i) ErySave's compliance with any designs, specifications or instructions of ATS; (ii) modification of the Product by ATS or its representatives without the prior knowledge and written approval of ErySave; or (iii) use of the Product by ATS in violation of this Agreement or not in accordance with instructions for use. - 13 - 10.6 Except as otherwise provided in this Agreement, ErySave makes no other representation or warranty (including any warranty of merchantability or fitness for a particular purpose) to ATS or anyone else with respect to the use of the PARSUS Technology or the development, manufacture, use, marketing, distribution, and sale of Products pursuant to this Agreement and except as otherwise provided in this Agreement disclaims all liability in connection therewith, including liability for special, incidental, consequential or penalty damages, including for lost profits or goodwill, even if advised of the possibility thereof. 11. ATS'S REPRESENTATIONS, OBLIGATIONS AND INDEMNITY 11.1 ATS shall indemnify and save harmless ErySave and its directors, officers, employees and agents from all claims, suits, actions, judgments, losses, costs, expenses, attorney's fees, damages, and loss of profits in any way connected with, caused by, resulting from or related to: (i) information, materials, components or items provided, developed or produced by ATS, or (ii) breach of any term or condition under this Agreement; or (iii) breach of any warranty made by ATS under this Agreement; but excluding any claims, suits, losses, costs, attorney's fees, damages, and loss of profits or part thereof based solely on ErySave's negligence or breach of this Agreement or the negligence of any third party acting by, through or under ErySave. ATS shall conduct the defense in any such third party action arising as described herein and ErySave shall cooperate with such defense, at ATS's expense, provided that ATS reasonably consults with ErySave. ErySave may, at its own expense, assist in such defense if it so chooses, provided that ATS will control such defense and all negotiations relative to the settlement of any such claim. Notwithstanding any of the foregoing, ATS shall not settle any such claim without ErySave's prior written consent, which consent will not be unreasonably withheld. 11.2 ATS shall obtain and carry in full force and effect commercial, general liability and product liability insurance which shall protect ATS and ErySave with respect to events covered by paragraph 11.1. Such insurance shall be written by a reputable insurance company authorized to do business in the State of Minnesota, USA and the country of Sweden, shall list ErySave as an additional named insured thereunder, shall be endorsed to include product liability coverage and shall require thirty (30) days written notice to be given to ErySave prior to any cancellation or material change thereof. The limits of such insurance shall not be less than Three Million Dollars ($3,000,000 USD) per occurrence with an aggregate of Ten Million Dollars ($10,000,000 USD) for personal injury or death, and Three Million Dollars ($3,000,000 USD) per occurrence with an aggregate of Ten Million Dollars ($10,000,000 USD) for property damage. Upon request, ATS shall provide ErySave with certificates of insurance evidencing the same. 11.3 ATS warrants that it will substantially follow all applicable standards, specifications, laws, regulations, guidelines and rules relating to the development, manufacture, use, distribution and sale of Products. 11.4 Except with respect to obtaining CE Certification for the Products, ATS shall be responsible for obtaining all approvals, authorisations, permissions or licenses necessary or desirable to enable the Products to be used in its business operations. ErySave shall be provided with copies of all such approvals, etc. and any associated filings and information provided to and received from applicable authorities. - 14 - 12. INTELLECTUAL PROPERTY RIGHTS 12.1 Subject to this paragraph, ErySave shall take all steps necessary to file, prosecute and maintain the validity and subsistence of the PARSUS Technology and the Know-How and Patents. In each case that ErySave decides not to file, prosecute and maintain any patent application or patent for any PARSUS Technology in the Licensed Field, it shall promptly notify ATS and ATS shall have the option thereafter to file, prosecute and maintain such patent applications or patents in and to any PARSUS Technology itself. ErySave will do all acts and execute all documents reasonably necessary for the purposes of this paragraph. If ATS so files, prosecutes or maintains, then 50% of any reasonable attorney's fees, government fees and expenses incurred by ATS in filing, prosecuting and maintaining any Patents, Trademarks or Know-How shall be applied against and reduce any future Royalties or other payment(s) otherwise payable to ErySave under this Agreement. 12.2 ATS shall not do any act (or fail to act) so as to reduce the rights of ErySave in the PARSUS Technology. 12.3 Other than as expressly provided for in this Agreement, nothing in this Agreement shall be construed as granting either party any right or license, either express or implied, under any patents or other industrial or intellectual property right, including trade secrets and know-how, of the other party. 12.4 ErySave shall own all right, title and interest in, to and associated with any improvement, development, discovery or invention or any future Products as it relates to and employs the PARSUS Technology, whether made by ErySave or any ErySave employee, or ATS or ATS employee or any third party during the term of and in connection with this Agreement, including any intellectual property rights, know-how, trade secrets, inventions, data and information, but then any such improvement, development, discovery, invention, data and information, and any intellectual property rights, know-how, trade secrets thereto shall be subject to the License. 12.5 Each party shall, within 30 days of becoming aware of any complaint, claim or allegation that the exercise of the rights under this Agreement constitutes an infringement or misappropriation of any Third Party IP Rights, give the other party written notice of such claim, etc. Likewise, each party shall, within 30 days of acquiring knowledge or reasonable belief that any third party is infringing or misappropriating any Patents, Trademarks or Know-How, give the other party written notice of such knowledge or reasonable belief. 12.6 Any prosecution against third party infringers of ErySave Patents or Know-how shall be conducted by ErySave, upon consultation with ATS. The parties shall equally share the costs of, all claims and legal proceedings against third parties relating to third party infringement of any Patents or Know-How in the Licensed Field, and the benefits of such proceedings (after reimbursement to the parties of their respective legal and court costs thereof) shall be shared equally between them. 12.7 If either party elects not to participate in a proceeding referred to in paragraph 12.7 it shall notify the other party within ninety (90) days of giving or receiving notice pursuant to paragraph 12.6, the other may elect to proceed alone and shall have the right to - 15 - institute or defend proceedings in its own name and at its own expense and shall be entitled to receive all benefits derived therefrom, subject to, in the case where ATS is the continuing party, remaining liable to pay Royalty on all such benefits that are intended to compensate for lost or reduced Product sales or similar loss or damage. The non-participating party shall, if so requested in writing by the continuing party, lend all necessary support to the proceedings on condition that the continuing party indemnifies it against all costs, damages and expenses which may be incurred in so doing. 12.8 Neither party shall settle or compromise any proceedings under this Part 12 without the consent of the other party if the settlement or compromise obliges the other party to make any payment or part with any property or other right or assume any obligation or grant any licence or other rights or be subject to any injunction or other restraint by reason of such settlement or compromise. 13. CONFIDENTIALITY 13.1 In this Part 13 the following terms shall have the following meanings whenever such terms are used in their capitalised form: 13.1.1 Confidential Information means any information which was not or is not in the public domain at the time of its disclosure and which is communicated in any way or form by either party to the other, either before or after the date of this Agreement, whether or not such information is identified as confidential, including, without limitation, information relating to products, processes, services, businesses, personnel, research, commercial activities, formulas, substances, materials, programmes, devices, concepts, inventions, patents, designs, methods, techniques, marketing and commercial strategies, data, trade secrets, know-how, plans, operations, tests, studies, manuals, market reports, customers, financial status, and the like. 13.1.2 Disclosing Party means the party making disclosure of or otherwise communicating Confidential Information to the other party. 13.1.3 Recipient means the party receiving or otherwise obtaining Confidential Information from the other party. 13.2 The provisions of this Part 13 shall supersede and replace any confidentiality agreement previously entered into between the parties regarding the subject matter of this Agreement. 13.3 Confidential Information shall be and remain the property of the Disclosing Party. The Recipient shall obtain no right of any kind in Confidential Information other than the right to use it for the purposes consistent with this Agreement. 13.4 Confidential Information shall be used by the Recipient only for the purposes consistent with this Agreement and for no other use or purpose so long as the Confidential Information is subject to this Agreement. 13.5 Confidential Information shall be kept strictly confidential by the Recipient and shall not be disclosed to any third party by the Recipient, other than with the prior, written - 16 - permission of the Disclosing Party or as may be required by law or under appropriate confidentiality obligations. 13.6 The Recipient may disclose Confidential Information only to those of its directors, officers, employees and agents, including permitted contractors, who are necessarily and directly involved in, and who need to know of the Confidential Information as an essential part of, performing the Recipient's obligations under this Agreement; and the Recipient shall ensure that they enter into a confidentiality agreement with the Recipient covering the disclosed Confidential Information on terms no less onerous than those of this Part 13, that they use the Confidential Information only for the purposes of this Agreement and that they do not make any copies of or extracts from the Confidential Information, except as authorised by the Disclosing Party in writing or as necessitated by the requirements of this Agreement. 13.7 In the event the Recipient is required to make disclosure of Confidential Information under the compulsion of law or authority, the Recipient shall promptly inform the Disclosing Party and shall cooperate with the Disclosing Party, but at no cost to Recipient, in order to enable the Disclosing Party to take such action as it deems necessary or appropriate to avoid or minimize the disclosure of such Confidential Information. 13.8 In the event of any unauthorised disclosure of Confidential Information, the Recipient shall immediately inform the Disclosing Party and shall co-operate with it in determining what steps should be taken. 13.9 The obligations of confidence, non-use and non-disclosure set out in this Part 13 shall not apply to any information that is: (a) information which the Recipient can establish was known to the Recipient prior to its disclosure hereunder; (b) information which is or becomes generally available to the public through no act or omission of the Recipient; (c) information which is rightfully received by the Recipient from a third party who is not under an obligation of confidentiality; or (d) information which is specifically released, in writing, from the scope of this Agreement by the Disclosing Party. 13.10 Upon the expiry or termination of this Agreement, the parties shall each immediately return to the other all Confidential Information received from the other in whatever form and all copies thereof. 13.11 The obligations of the parties under this Part 13 shall survive the expiry or termination of this Agreement and shall remain binding upon the parties, unless otherwise agreed, for a period of five (5) years thereafter. 14. TERM 14.1 This Agreement shall remain in full force and effect, unless earlier terminated in accordance with the provisions of this Agreement, until the expiry of the last to expire - 17 - patent right which makes up the Patents or until the Know-How is no longer confidential, whichever is the longer. 15. EARLY TERMINATION 15.1 Breach. If either party is in material default or breach of any of its representations, covenants or obligations under this Agreement, the other party may give notice of such breach to the defaulting party requesting the latter to remedy the default or breach and stating the intention of the notifying party that this Agreement should terminate in the event the other party fails to remedy the breach or default. If the defaulting party fails to remedy the breach within sixty (60) days after the date of notice, then this Agreement shall terminate immediately upon the expiry of the sixty day period. 15.2 Insolvency. This Agreement shall terminate immediately if ATS shall become insolvent or bankrupt, or if a receiver shall be voluntarily or involuntarily appointed to direct its business for the benefit of creditors or otherwise. 15.3 CE Certification. If CE Certification for the Prototype is not obtained within thirty-six (36) months from the date of execution of this Agreement, ATS may terminate this Agreement by written notice of such termination given within the 30 days following the end of such 36th month. 15.4 ATS Challenge to Patents. In the event ATS disputes or challenges the validity or subsistence of any of the patent rights which make up the Patents, ErySave may terminate this Agreement upon ninety (90) days' written notice to ATS in respect of each such patent right or in respect of this entire Agreement, in ErySave's discretion, unless ATS withdraws or abandons such dispute or challenge to any of the patent rights which make up the Patents with that ninety (90) day period. 15.5 Effects of termination (a) Goodwill, etc. After Termination or Expiration. In the event of termination of this Agreement under this Part 15, or in the event of expiration, ATS shall have no claim, right or entitlement to any compensation for the loss of any right, advantage or goodwill associated with this Agreement and all rights granted to ATS under this Agreement, and all rights granted by ATS to any sub-licensee, shall cease and they shall forthwith cease any further use, practise under or exploitation of the Technology, provided however they shall be entitled for a period of three (3) months after the date of termination to dispose of any stock of Products in existence at the date of termination, subject to the payment of Royalty and other amounts due in respect thereof. (b) No Prejudice of Accrued Rights. Termination or expiration of this Agreement, for whatever cause, shall be without prejudice to the rights of the parties accrued under this Agreement up to the date of termination. (c) Termination for ATS's Breaches of Certain Marketing Obligations Entails Payment by ErySave. If ATS fails to meet the performance criteria set out in one of sub-paragraphs 3.14a-h within 60 days of receipt of written notice from ErySave that such performance criteria has not been met, despite ATS's having attempted in good faith to perform, and if as a consequence, ErySave obtains the right to terminate this Agreement - 18 - under Section 15.1 ErySave must pay to ATS one half of the total sum paid to ErySave by ATS pursuant to paragraph 2.5. This provision shall not apply if ATS has also failed to meet the performance criteria in subparagraph 3.14(i). (d) No Use of Trademarks After Termination. Upon the expiry or termination of this Agreement, regardless of the reasons for termination, ATS's licence under paragraph 5.2 shall terminate, and ATS shall cease using the Trademarks and shall have no claim to the Trademarks or any right or property in the intangibles or goodwill of the Trademarks. 16. MISCELLANEOUS 16.1 For good and valid commercial reasons, the parties shall keep the terms of this Agreement confidential and shall make no disclosure of its contents other than as may be agreed by both parties in writing, required by law, or required by either party to enforce its rights hereunder. However, both parties have the right to disclose the agreement to financial institutions, given that a valid Non Disclosure Agreement has been signed. 16.2 If any provision of this Agreement should as a matter of law be or become void or unenforceable, this Agreement shall be construed as if such provision was not contained herein and the remainder of this Agreement shall remain in full force and effect. 16.3 In the event that any strike, lockout, other industrial disturbance, epidemic, landslide, lightning, earthquake, fire, storm, flood, drought, other act of God, rebellion, war, civil disturbance, act of terrorism, explosion, or act or decision of any governmental authority or court of law renders impossible the performance of any of the obligations of the parties or either of them under this Agreement, the party or parties affected shall be excused the performance of the relevant obligation or obligations upon notifying the other party in writing, giving a detailed explanation of the occurrence in question. Upon the giving of such a notice, the performance of the party giving notice shall be abated only to the extent and for so long as performance remains impossible. Except for the payment of money, neither party shall be required to make up any performance that is abated in accordance with this paragraph. 16.4 This Agreement may not be assigned by either party, other than to an Affiliate of the party, without the prior, written permission of the other party which consent shall not be unreasonably withheld, except that ErySave and ATS may assign the agreement to any third party that acquires substantially all its assets or of its shares and also may assign to a wholly owned subsidiary. 16.5 During the term of this Agreement, Erysave and ATS shall not develop, manufacture, produce, market, distribute, sell, handle, acquire an interest in, or become involved, with any product, or service, which directly or indirectly competes with Products' or which in any way conflicts or could conflict with their obligations under this agreement, other than with prior written permission of the other party. Any violation should of this paragraph would constitute a breach of the agreement. 16.6 In entering into and carrying out their obligations under this Agreement, the parties are independent contractors and shall have no power or authority, express or implied, to bind the other party, act on the other party's behalf, or in any way enter into or incur any - 19 - liability for or on behalf of the other party, and nothing in this Agreement shall be construed as giving rise to a relation of partnership or agency between the parties. 16.7 Any disagreement or dispute which may arise between the parties in relation to or connection with this Agreement shall be settled amicably and expeditiously by good faith negotiation. Any such dispute, other than non-payment by ATS to ErySave of any amount or amounts owing under this Agreement, which cannot be so settled within 60 days after the commencement of negotiation shall be referred to non-binding mediation by a single, independent mediator who is an expert in the field of medical product development to be appointed by agreement of the parties. Any such dispute which cannot be so settled within 90 days of the cessation of the time for negotiation shall be referred to and finally settled by arbitration by three arbitrators, one to be appointed by each party and the third to be appointed by the first two, in accordance with the international commercial arbitration rules of the London Court of International Arbitration. All decisions, determinations and rulings of the arbitrators shall be final and shall be fully and irrevocably accepted by the parties. Any such arbitration shall be held in London, England in the English language. The parties shall use their best efforts to conduct all dispute resolution procedures under this Agreement as expeditiously, efficiently and cost-effectively as possible. 16.8 This Agreement shall be governed by the laws of England in respect of all matters, including without limitation the execution, interpretation and performance of this Agreement. 16.9 All notices and payments required or permitted by this Agreement shall be delivered to the relevant party as noted in Part 1, and either party may, in writing, change the address to which notices may be given. 16.10 This Agreement constitutes the entire agreement between the parties concerning the subject matter of this Agreement and any representation, promise or condition not incorporated in this Agreement shall not be binding upon either party. No amendment, modification or addition to this Agreement shall be binding on the parties unless made in writing and executed by both parties. 16.11 The waiver on the part of either party of any right or interest hereunder shall not imply the waiver of any other right or interest or any subsequent waiver. 16.12 In the event ATS and ErySave elects to develop additional Products in any related development process, the parties will follow a similar commercial phase procedure with specific terms, conditions and requirements to be determined by mutual agreement of the parties. ` - 20 - IN WITNESS WHEREOF the parties have executed two (2) copies of this Agreement, each of which shall be considered an original. ATS MEDICAL INC ERYSAVE AB _____________________________________ ___________________________________ MICHAEL DALE HENRIK JONSSON CEO CEO April 26th 2004 April 26th 2004 _____________________________________ ___________________________________ RICHARD CURTIS LENNART SJOLUND VP Marketing Business development Chairman April 26th 2004 April 26th 2004 - 21 - APPENDIX 1 CALCULATION OF ROYALTY ROYALTY IS THE SHARE OF GROSS PROFITS ATTRIBUTABLE TO ERYSAVE PURSUANT TO THE FOLLOWING: 1. PRODUCT DISPOSABLE KITS A. WHERE ATS SELLS THE DISPOSABLES DIRECTLY: - - ErySave and ATS will ** all Gross Profit **. Gross Profit shall be defined as: Net Sales less Cost of Goods Sold less the ATS Fee. The ATS Fee shall be defined as ** of Net Sales until cumulative Net Sales under this Agreement reach **, then ** of Net Sales until cumulative Net Sales exceed **, and then ** of Net Sales thereafter. Cost of Goods Sold shall be calculated as determined in accordance with the US generally accepted accounting principles, consistently applied, followed by ATS. Cost of Goods Sold shall include the following costs of ATS related only to the Product(s): raw materials, direct labor including wages and benefits, sub-contract purchases, indirect labor, factory overhead, depreciation, facility overhead, supplies, bad debt expense and freight in. - Example 1
Sales <** Sales ** Sales >** Net Sales amount ** ** ** ATS Fee ** ** ** Cost of Goods Sold ** ** ** Gross Profit ** ** ** Royalty ** ** **
- Example 2
Sales <** Sales ** Sales >** Net Sales amount ** ** ** ATS Fee ** ** ** Cost of Goods Sold ** ** ** Gross Profit ** ** ** Royalty ** ** **
B. WHERE ATS USES SUB-DISTRIBUTORS TO SELL DISPOSABLE: - - ErySave and ATS will ** all Gross Profit **. Gross Profit shall be defined as: Net Sales from amounts invoiced to sub-distributors less ATS's Cost of Goods Sold less the ATS Fee. The ATS Fee is defined as ** of Net Sales regardless of cumulative sales growth. Cost of Goods Sold shall be calculated as first described above. In the case that gross profit is negative ErySave will not have to cover any loss. - Example Net Sales amount ** ATS Fee ** Cost of goods ** Gross profit ** Royalty **
- 22 - - - If any other model is used for a sub-distributor, ATS shall notify ErySave in advance and obtain ErySave's consent, including agreement as to the calculation of Royalty, before ATS signs an agreement with the sub-distributor. 2. PRODUCT DEVICES A. WHERE ATS SELLS THE DEVICES DIRECTLY: - - ErySave and ATS will ** all Gross Profit **. Gross Profit shall be defined as: Net Sales less Cost of Goods Sold less the ATS Fee. Cost of Goods Sold shall be calculated as first described above. The ATS Fee shall be defined as ** of Net Sales. In the case that gross profit is negative ErySave will not have to cover any loss. - Example Net Sales amount ** ** ** ATS Fee ** ** ** Cost of Goods Sold ** ** ** Gross Profit ** ** ** Royalty ** ** **
B. WHERE ATS USES SUB-DISTRIBUTORS TO SELL DEVICES: - - ErySave and ATS will ** all Gross Profit **. Gross Profit shall be defined as: Net Sales less Cost of Goods Sold less the ATS Fee. Cost of Goods Sold shall be calculated as first described above. The ATS Fee is defined as ** of Net Sales regardless of cumulative sales growth. In the case that gross profit is negative ErySave will not have to cover any loss - Example Net Sales amount ** ** ** ATS Fee ** ** ** Cost of Goods Sold ** ** ** Gross Profit ** ** ** Royalty ** ** **
- 23 - APPENDIX 2 TRADEMARKS PARSUS MindShield ErySave - 24 - EX-31.1 3 c87379exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 CERTIFICATION I, Michael D. Dale, certify that: 1. I have reviewed this quarterly report on Form 10-Q of ATS Medical, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for , the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations, and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors; a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, summarize and report financial information; and b) Any Fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 9, 2004 /s/ Michael D. Dale Name: Michael D. Dale Title: Chief Executive Officer EX-31.2 4 c87379exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 CERTIFICATION I, John R. Judd, certify that: 1. I have reviewed this quarterly report on Form 10-Q of ATS Medical, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for , the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations, and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors; a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, summarize and report financial information; and b) Any Fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 9, 2004 /s/ John R. Judd --------------------------------------------- Name: John R. Judd Title: Chief Financial Officer EX-32.1 5 c87379exv32w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 32.1 CERTIFICATION I, Michael D. Dale, Chief Executive Officer of ATS Medical, Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: The Quarterly Report of Form 10-Q of the Company for the quarter ended June 30, 2004 (the "Report") fully complies with the requirements of Section 13(a) of the Securities and Exchange Act of 1934 (15 U.S.C. 78m); and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 9, 2004 /s/ Michael D. Dale --------------------------------------------- Name: Michael D. Dale Title: Chief Executive Officer EX-32.2 6 c87379exv32w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 32.2 CERTIFICATION I, John R. Judd, Chief Financial Officer of ATS Medical, Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: The Quarterly Report of Form 10-Q of the Company for the quarter ended June 30, 2004 (the "Report") fully complies with the requirements of Section 13(a) of the Securities and Exchange Act of 1934 (15 U.S.C. 78m); and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 9, 2004 /s/ John R. Judd --------------------------------------------- Name: John R. Judd Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----