-----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, It4FfwFFnZZsmzsu+PQxm04NiLa/RwzPgKty4W8eoDYhHc2EW8WMQNIHmDYvxTGq utFpBhlK3tL0FQfls94JtQ== 0000950134-04-016571.txt : 20041105 0000950134-04-016571.hdr.sgml : 20041105 20041105170523 ACCESSION NUMBER: 0000950134-04-016571 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041105 DATE AS OF CHANGE: 20041105 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: 041123482 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 c89243e10vq.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 SEPTEMBER 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 incorporation or organization) Identification No.) 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 Not Applicable ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 October 31, 2004, was: Common Stock, $.01 par value 30,765,316 shares ================================================================================ INDEX
Page(s) ------- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of September 30, 2004, and December 31, 2003 3 Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 5 Notes to Consolidated Financial Statements 6 - 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 20 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 21 ITEM 4. Controls and Procedures 21 PART II. OTHER INFORMATION ITEM 6. Exhibits 22 SIGNATURES 23 EXHIBIT INDEX 24
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ATS MEDICAL, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share and share data)
SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------------- ------------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $20,670 $6,472 Short-term investments 22 2,003 Accounts receivable, net 6,772 4,939 Inventories 20,398 20,377 Other current assets 497 508 ------------------- ------------------- Total current assets 48,359 34,299 Furniture, machinery and equipment, net 6,933 5,895 Inventories 8,000 17,000 Intangible assets 18,727 18,500 Other assets 437 440 ------------------- ------------------- Total assets $82,456 $76,134 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $2,851 $989 Due to related party 217 217 Accrued payroll and expenses 1,669 1,343 Accrued distributor liabilities 430 475 Current maturities of long-term debt 556 - ------------------- ------------------- Total current liabilities 5,723 3,024 Due to related party 145 307 Long-term debt 1,944 - Shareholders' equity: Common stock, $.01 par value: authorized 40,000,000 shares; issued and outstanding 30,764,816 and 26,778,557 shares at September 30, 2004 and December 31, 2003 307 268 Additional paid-in capital 136,337 123,412 Deferred compensation (27) (70) Accumulated other comprehensive income 84 51 Accumulated deficit (62,057) (50,858) ------------------- ------------------- Total shareholders' equity 74,644 72,803 ------------------- ------------------- Total liabilities and shareholders' equity $82,456 $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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 2004 2003 2004 2003 ----------------- ---------------- ----------------- ----------------- Net sales $6,547 $4,639 $20,789 $12,850 Cost of goods sold 5,178 3,255 15,372 9,252 ----------------- ---------------- ----------------- ----------------- Gross profit 1,369 1,384 5,417 3,598 Operating expenses: Sales and marketing 4,211 2,809 11,827 6,350 Research and development 278 384 651 1,213 General and administrative 1,423 1,091 4,171 3,121 Gain on extinguishment of debt - (2,575) - (2,575) ----------------- ---------------- ----------------- ----------------- Total operating expenses 5,912 1,709 16,649 8,109 ----------------- ---------------- ----------------- ----------------- Operating loss (4,543) (325) (11,232) (4,511) Net interest income (expense) 17 18 33 (438) ----------------- ---------------- ----------------- ----------------- Net loss ($4,526) ($307) ($11,199) ($4,949) ================= ================ ================= ================= Net loss per share: Basic and diluted ($0.15) ($0.01) ($0.40) ($0.21) Weighted average number of shares used in calculation: Basic and diluted 30,730 24,743 28,215 23,138
The accompanying notes are an integral part of the consolidated financial statements. 4 ATS MEDICAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited) (in thousands)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2004 2003 --------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ($11,199) ($4,949) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 802 583 Loss on disposal of equipment 14 2 Compensation expense on stock options 33 5 Non-cash interest expense 5 320 Extinguishment of debt - (2,575) Changes in operating assets and liabilities: Accounts receivable (1,833) (666) Inventories 8,979 7,947 Prepaid expenses 14 (346) Other assets - 2 Accounts payable and accrued expenses 1,981 (360) ---------------- -------------- Net cash used by operating activities (1,204) (37) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of short-term investments (1,018) (4,231) Sale of short-term investments 2,999 3,488 Purchases of intangible assets (232) (12,000) Purchases of furniture, machinery and equipment (1,854) (595) ---------------- -------------- Net cash used by investing activities (105) (13,338) CASH FLOWS FROM FINANCING ACTIVITIES Loan advances 2,500 - Net proceeds from sales of common stock 12,975 11,555 ---------------- -------------- Net cash provided by financing activities 15,475 11,555 ---------------- -------------- Effect of exchange rate changes on cash 32 - ---------------- -------------- Increase in cash and cash equivalents 14,198 (1,820) Cash and cash equivalents at beginning of period 6,472 7,472 ---------------- -------------- Cash and cash equivalents at end of period $20,670 $5,652 ================ ==============
The accompanying notes are an integral part of the consolidated financial statements. 5 ATS MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The consolidated financial statements included in this Form 10-Q have been prepared by ATS Medical, Inc. (hereinafter the "Company," "ATS," "we," "us," or "our") 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 Nine months ended September 30, September 30, ------------- ------------- (in thousands, except per share data) 2004 2003 2004 2003 ------------------------------------------------ ----------- ---------- ----------- ----------- Net loss, as reported ($4,526) ($307) ($11,199) ($4,949) Less: Total stock-based employee compensation expense determined under fair value based method for all awards (537) (424) (1,789) (835) ----------- ---------- ----------- ----------- Pro forma net loss ($5,063) ($731) ($12,988) ($5,784) =========== ========== =========== =========== Net loss per share: As reported Basic and diluted ($0.15) ($0.01) ($0.40) ($0.21) Pro forma Basic and diluted ($0.16) ($0.03) ($0.46) ($0.25)
6 NOTE 3. INVENTORIES Inventories consist of the following:
September 30, December 31, (in thousands) 2004 2003 ---------------------------------- -------------- ------------- Raw materials $ 7,703 $12,033 Work in process 8,477 9,615 Finished goods 12,418 15,929 Obsolescence reserve (200) (200) -------------- -------------- Total, net $28,398 $37,377 ============== ============== Balance sheet classification Current assets $20,398 $20,377 Non-current assets 8,000 17,000 -------------- -------------- Total, net $28,398 $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 $8.0 million and $17.0 million of inventories as non-current assets at September 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 offering costs. NOTE 8. LONG-TERM DEBT 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 received a $2.5 million three-year term loan as well as a two-year $6.0 million line of credit. The credit facility contains two financial covenants: a leverage ratio, and a required minimum tangible net worth. The term loan carries an interest rate of prime plus 1.0% with a minimum of 5.25%. The line of credit carries an interest rate of prime plus 1.5% with a minimum rate of 5.75%. 7 As of September 30, 2004, the Company had drawn all $2.5 million of the three-year term loan. The term loan carries 36 equal installment payments beginning January 30, 2005. Accordingly, $556,000 of the loan amount is included as current maturities of long-term debt at September 30, 2004. The Company had no outstanding balances on the line of credit at September 30, 2004. 8 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. Carbomedics Inc., f/k/a Sulzer Carbomedics, Inc. (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 our technology agreement with Carbomedics 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. Prior to June 30, 2004, our manufacturing facility for pyrolytic carbon components had been producing limited quantities. We have now increased production in this facility and expect to be fully ramped-up for production by the end 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 all markets. In June 2002, we reorganized the Company by 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 United States. Our U.S. sales as a percentage of our overall sales have grown from 4% in 2000 to 33% during the first three quarters of 2004. 9 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 estimates and judgments that affect (1) the reported amounts of assets, liabilities, revenues, and expenses; and (2) the related disclosure of contingent assets and liabilities. At each balance sheet date, we evaluate our estimates and judgments. The critical accounting policies that are most important to fully understanding and evaluating 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 nine month periods ended September 30, 2004 and 2003.
Three months ended September 30, Nine months ended September 30, --------------------------------------- ---------------------------------------- Increase Increase 2004 2003 (Decrease) % 2004 2003 (Decrease) % ------ ------ ---------- --------- --------- -------- ----------- --------- Net sales $6,547 $4,639 $1,908 41.1% $20,789 $12,850 $7,939 61.8% Cost of goods sold 5,178 3,255 1,923 59.1% 15,372 9,252 6,120 66.1% ------- ------- ------ ----- ------- ------- ----------- --------- Gross profit 1,369 1,384 (15) -1.1% 5,417 3,598 1,819 50.6% Gross profit % 20.9% 29.8% 26.1% 28.0% Operating expenses: Sales and marketing 4,211 2,809 1,402 49.9% 11,827 6,350 5,477 86.3% Research and development 278 384 (106) -27.6% 651 1,213 (562) -46.3% General and administrative 1,423 1,091 332 30.4% 4,171 3,121 1,050 33.6% Gain on extinguishment of debt - (2,575) - (2,575) ------- ------- ------ ----- ------- ------- ----------- --------- Total operating expenses 5,912 1,709 4,203 245.9% 16,649 8,109 8,540 105.3% ------- ------- ------ ----- ------- ------- ----------- --------- Operating loss (4,543) (325) (4,218) -1297.8% (11,232) (4,511) (6,722) -149.0% Net interest income (expense) 17 18 (1) -5.6% 33 (438) 471 107.5% ------- ------- ------ ----- ------- ------- ----------- --------- Net loss ($4,526) ($307) ($4,219) -1374.3% ($11,199) ($4,949) ($6,250) -126.3% ======== ======== ========== ========== ========= ======== =========== =========
10 The following table presents the statement of operations as a percentage of net sales for the three and nine month periods ended September 30, 2004 and 2003:
Three months ended Nine months ended September 30, September 30, ------------- ------------- 2004 2003 2004 2003 --------- --------- --------- --------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 79.1% 70.2% 73.9% 72.0% --------- --------- --------- --------- Gross profit 20.9% 29.8% 26.1% 28.0% Operating expenses: Sales and marketing 64.3% 60.6% 56.9% 49.4% Research and development 4.2% 8.3% 3.1% 9.4% General and administrative 21.7% 23.5% 20.1% 24.3% Gain on extinguishment of debt 0.0% -55.5% 0.0% -20.0% --------- --------- --------- --------- Total operating expenses 90.3% 36.8% 80.1% 63.1% --------- --------- --------- --------- Operating loss -69.4% -7.0% -54.0% -35.1% Net interest income (expense) 0.3% 0.4% 0.2% -3.4% --------- --------- --------- --------- Net loss -69.1% -6.6% -53.9% -38.5% ========= ========= ========= =========
NET SALES. The following table compares net sales between the three and nine month periods ended September 30, 2004 and 2003:
Three months ended September 30, Nine months ended September 30, ---------------------------------------- ------------------------------------------ Increase Increase (in thousands) 2004 2003 (Decrease) % 2004 2003 (Decrease) % - ------------------------ ---------- --------- ----------- ------- ---------- --------- ------------ -------- United States $2,003 $1,452 $551 37.9% $6,855 $3,358 $3,497 104.1% Outside United States 4,544 3,187 1,357 42.6% 13,934 9,492 4,442 46.8% ---------- --------- ----------- ------- ---------- --------- ------------ -------- Total $6,547 $4,639 $1,908 41.1% $20,789 $12,850 $7,939 61.8% ========== ========= =========== ======= ========== ========= ============ ========
2004 Change in 2004 Change in -------------------------------- --------------------------------- Average Average Sales Unit Sales Unit Price Sales Total Price Sales Total ---------- --------- ----------- ---------- --------- ------------ United States 1.1% 36.4% 37.9% 2.1% 99.9% 104.1% Outside United States 1.9% 40.0% 42.6% -4.1% 53.2% 46.8% ---------- --------- ----------- ---------- --------- ------------ Total 1.2% 39.5% 41.1% 2.3% 62.2% 61.8% ========== ========= =========== ========== ========= ============
Three months ended Nine months ended September 30, September 30, -------------------- -------------------- 2004 2003 2004 2003 ---------- --------- ---------- --------- Share of total sales: United States 30.6% 31.3% 33.0% 26.1% Outside United States 69.4% 68.7% 67.0% 73.9% ---------- --------- ---------- --------- Total 100.0% 100.0% 100.0% 100.0% ========== ========= ========== =========
11 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 United States. consisting of four area directors managing 31 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 United States. 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 GOODS SOLD. Our cost 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 the valves 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. 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 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, 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 has been 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. Late in the second quarter of 2004, we started the process of increasing production of our own carbon components in our own facility. This ramping-up process is expected to continue through 2004 and be substantially complete by year end. During the quarter ended September 30, 2004, approximately $0.4 million was charged to cost of goods sold as production ramp-up costs. Without these production ramp up costs, gross profit as a percent of net sales for the three and nine months ended September 30, 2004 would have been 6.3% and 2.0% higher than the actual gross profit of 20.9% and 26.1%, respectively. Specific costs related to the production ramp-up have been expensed directly to cost of sales and total approximately $0.4 million for the three months ended September 2004 and are expected to total approximately $0.5 million during the three months ending December 2004. 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. 12 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, 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 $0.8 million, respectively, during the three and nine months ended September 30, 2003. GENERAL AND ADMINISTRATIVE. Cost increases in the three month period ended September 2004 over the same period in 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 nine month period ended September 30, 2004 over the same period in 2003, cost increases were for employee salary and benefits of $0.3 million, corporate insurance costs of $0.3 million, accruals for management performance bonuses of $0.2 million, and costs of documenting and testing internal controls of $0.2 million. EXTINGUISHMENT OF DEBT. On July 21, 2003, we entered into an agreement with Centerpulse USA Holdings Co. (Centerpulse) pursuant to which we paid Centerpulse $12 million in exchange for cancellation of all of our payment obligations under our carbon technology agreement as well as a fully paid exclusive license to use the carbon technology to produce components for our valve. Prior to this agreement, we were obligated to pay Centerpulse an aggregate of $28.2 million under carbon the technology agreement over a period of approximately four years. These payments were accrued as milestones were met. Of the total $28.2 million future obligations, there were two uncompleted milestones totaling $12 million that were not accrued. Since the amount accrued exceeded the amount due, we realized a non-cash gain on the extinguishment of debt in the amount of $2.6 million on this transaction during the three month period ended September 30, 2003. 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 current 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. Interest expense will be higher in future periods if we borrow funds under the line of credit. INCOME TAXES. At the end of 2003, we had 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 during the first nine months of 2004 compared to 2003 resulted from changes in sales offset by changes in operating costs, all of which are described above. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments were $20.7 million as of September 30, 2004, compared to $8.5 million as of December 31, 2003. This increase in cash, cash equivalents, and short-term investments is described below. OPERATING ACTIVITIES. During the first nine months of 2004, we received cash payments from customers of $19.0 million. We made cash payments to employees and suppliers of $20.2 million. Our operating loss during 2004 of $11.2 million was substantially funded through the depletion of inventories. Starting in early 2003 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 expect to move steadily towards a cash flow breakeven on sales and eventually to profitability. 13 INVESTING ACTIVITIES. During the first nine months of 2004, we purchased property and equipment totaling $1.9 million. For the remainder of 2004, we expect to purchase approximately $1.0 million of additional equipment. Capital purchases during 2004 have been 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 (ErySave) and made an initial milestone payment of approximately $0.2 million. The agreement grants the Company worldwide rights to 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 nine months of 2004, we raised approximately $0.6 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. On July 30, 2004, we drew $2.5 million on the term loan. The term loan calls for equal installment payments over 36 months starting on January 30, 2005. Under the secured credit facility, we are subject to, and in compliance with as of September 30, 2004, certain financial covenants, including a liquidity ratio of not less than 2.25 to 1 and a net tangible net worth of at least $52 million. 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 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, forecasted, estimated or budgeted by us in forward-looking statements made by us from time to time in reports, proxy statements, registration statements and other written communications, or in oral forward-looking statements made from time to time by the Company's officers and agents. We do not intend to update any of these forward-looking statements after the date of this Form 10-Q to conform them to actual results. 14 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. 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. 15 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 nine months of 2004, 67% of our net sales were 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: o unforeseen changes in regulatory requirements and government health programs; o weaker intellectual property rights protection in some countries; o new export license requirements, changes in tariffs or trade restrictions; o political and economic instability in our target markets; and o 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 September 30, 2004, we had an accumulated deficit of $62 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 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. 16 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 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 during 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. 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 17 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: o production yields; o quality control; o per unit manufacturing costs; o shortages of qualified personnel; and o 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 entails 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. 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 18 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: o cease manufacturing and selling our product, which would seriously harm us; o 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 o 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: o maintain the approval of the FDA and international regulatory agencies to continue selling the ATS heart valve; o obtain the approval of international regulatory agencies in countries where the ATS heart valve is not yet marketed; o satisfy content requirements for all of our labeling, sales and promotional materials; o comply with manufacturing and reporting requirements; and o 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: o the success of our management in operating ATS effectively; o the failure of the ATS valve to gain market acceptance in the United States; o announcements of technical innovations or new products by our competitors; o the status of component supply arrangements; 19 o changes in reimbursement policies; o government regulation; o developments in patent or other proprietary rights; o public concern as to the safety and efficacy of products developed by us or others; and o 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: o No cumulative voting by shareholders for directors; o The ability of our board to set the size of the board of directors, to create new directorships and to fill vacancies; o 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; o The ability of our board to amend the bylaws; and o Restrictions under Minnesota law on mergers or other business combinations between us and any holder of 10% or more of our outstanding common stock. 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities 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 contracts 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(e) under the Securities Exchange Act of 1934, as amended (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 control 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. 21 PART II. OTHER INFORMATION ITEM 6. 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) 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) 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) 10.1 Credit Agreement between Silicon Valley Bank and the Company, dated July 28, 2004 10.2 Form of Employee Stock Option Agreement under the Company's 2000 Stock Incentive Plan 10.3 Form of Non-Qualified Stock Option Agreement under the Company's 2000 Stock Incentive Plan 10.4 Form of Non-Plan Non-Qualified Stock Option Agreement 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-15(e)/15d-15(e) (Section 302 Certification) 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) 22 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: November 5, 2004 ATS MEDICAL, INC. By: /s/ Michael D. Dale ----------------------------- Michael D. Dale, Chief Executive Officer By: /s/ John R. Judd ----------------------------- John R. Judd, Chief Financial Officer (Principal Accounting Officer) 23 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION 10.1 Credit Agreement between Silicon Valley Bank and the Company, dated July 28, 2004 10.2 Form of Employee Stock Option Agreement under the Company's 2000 Stock Incentive Plan 10.3 Form of Non-Qualified Stock Option Agreement under the Company's 2000 Stock Incentive Plan 10.4 Form of Non-Plan Non-Qualified Stock Option Agreement 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)
24 EX-10.1 2 c89243exv10w1.txt CREDIT AGREEMENT EXHIBIT 10.1 LOAN AGREEMENT This LOAN AND SECURITY AGREEMENT dated as of the Effective Date, among SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 with a loan production office located at 301 Carlson Parkway, #255, Minnetonka, Minnesota 55305 (all notices or demands to Bank should be sent to both Bank addresses) and ATS MEDICAL, INC. ("AMI") and ATS MEDICAL SALES, INC. ("AMSI") (AMI and AMSI are individually and collectively, and jointly and severally, referred to herein as "Borrower"), with an address for both AMI and AMSI of 3905 Annapolis Ln., Plymouth, Minnesota 55447, provides the terms on which Bank will lend to Borrower and Borrower will repay Bank. The parties agree as follows: 1. ACCOUNTING AND OTHER TERMS Accounting terms not determined in this Agreement will be construed following GAAP. Calculations and determinations must be made following GAAP. The term "financial statements" includes the notes and schedules. The terms "including" and "includes" always mean "including (or includes) without limitation," in this or any Loan Document. 2. LOAN AND TERMS OF PAYMENT 2.1 PROMISE TO PAY. Borrower promises to pay Bank the unpaid principal amount of all Credit Extensions and interest on the unpaid principal amount of the Credit Extensions. 2.1.1 REVOLVING ADVANCES. (a) Bank will make Revolving Advances not exceeding (i) the lesser of (A) the Committed Revolving Line or (B) the Borrowing Base. Amounts borrowed under this Section may be repaid and reborrowed during the term of this Agreement. (b) To obtain a Revolving Advance, Borrower must notify Bank by facsimile or telephone by 2:00 p.m. Pacific time on the Business Day the Revolving Advance is proposed to be made. Borrower must promptly confirm the notification by delivering to Bank the Payment/Advance Form, in the form attached hereto as Exhibit B. Bank will credit Revolving Advances to Borrower's deposit account. Bank may make Revolving Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if any such Revolving Advances are necessary to meet Obligations which have become due. Bank may rely on any telephonic notice given by a person whom Bank believes is a Responsible Officer or such Person's designee, and Borrower hereby indemnifies Bank for any loss Bank suffers due to any such reliance. (c) The Committed Revolving Line terminates on the Revolving Maturity Date, when all Revolving Advances and related Obligations are immediately payable. (d) Bank's obligation to lend the undisbursed portion of the Obligations will terminate if, in Bank's commercially reasonable discretion, there has been a material adverse change in the general affairs, results of operation, condition (financial or otherwise) or the prospect of repayment of the Obligations, or there has been any material adverse deviation by Borrower from the most recent business plan of Borrower presented to and accepted by Bank prior to the execution of this Agreement. -1- 2.1.2 OMITTED. 2.1.3 OMITTED. 2.1.4 OMITTED. 2.1.5 EQUIPMENT ADVANCES. (a) Through January 28, 2005 (the "Equipment Availability End Date"), Bank will make advances ("Equipment Advance" and, collectively, "Equipment Advances") not exceeding the Committed Equipment Line. Subject to subsection "d" below, the Equipment Advances may only be used to finance or refinance Eligible Equipment purchased on or after 90 days before the date of each Equipment Advance and may not exceed 100% of the equipment invoice excluding taxes, shipping, warranty charges, freight discounts and installation expense, provided that software licenses, leasehold improvements and other soft costs may constitute up to but not exceed 25% of the aggregate Equipment Advances. Each Equipment Advance must be for a minimum of $50,000. (b) Interest accrues from the date of each Equipment Advance at the rate in Section 2.3(a) and is payable monthly until the Equipment Availability End Date occurs. Equipment Advances outstanding on the Equipment Availability End Date are payable in 36 equal monthly installments of principal, plus accrued interest, on the 25th of each month following the Equipment Availability End Date until January 25, 2008 (the "Equipment Maturity Date"), on which date all remaining principal and accrued interest shall be paid in full. Equipment Advances when repaid may not be reborrowed. (c) To obtain an Equipment Advance, Borrower must notify Bank (the notice is irrevocable) by facsimile no later than 2:00 p.m. Pacific time 1 Business Day before the day on which the Equipment Advance is to be made. The notice in the form of Exhibit B (Payment/Advance Form) must be signed by a Responsible Officer or designee and include a copy of the invoice for the Equipment being financed. (d) Notwithstanding subsections "a" and "c" above, if an Equipment Advance is to be made immediately upon the closing hereof, for purposes of such Equipment Advance only, (i) the Equipment Advance may be used to finance or refinance Eligible Equipment purchased (y) on or after 180 days before the date of such Equipment Advance and (z) Eligible Equipment not yet purchased but to be purchased before the Equipment Availability End Date, and (ii) the notice required by subsection "c" shall specify the amount of Equipment Advances that are being requested for Eligible Equipment that has not yet been purchased. If Borrower receives Equipment Advances with respect to Eligible Equipment not yet purchased, pursuant to "z" above, then upon each purchase of such Eligible Equipment Borrower shall immediately provide a copy of the invoice for such Equipment to Bank, and if on the Equipment Availability End Date the Equipment Advances exceed the cost (computed in accordance with subsection "a" above) of Eligible Equipment which Borrower has purchased and for which Borrower has provided Bank with invoices, then Borrower shall immediately pay the amount of such excess to Bank. (e) If Borrower shall pay all or any portion of the Equipment Advances prior to its due date, or if all or any portion of the Equipment Advances is declared due and payable prior to its due date as a result of an Event of Default, then Borrower shall pay Bank a fee with respect to each such prepaid or accelerated amount equal to 1% of said amount. The foregoing fee shall not be charged with respect to a prepayment that results from the replacement of the Term Loan with a new facility from another division of the Bank, provided that no Event of Default then exists. -2- 2.1.6 OMITTED. 2.1.7 OMITTED. 2.2 OVERADVANCES. If Borrower's aggregate Obligations under Section 2.1.1 exceed the lesser of either (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower must immediately pay Bank the excess. 2.3 INTEREST RATE, PAYMENTS. (a) Interest Rate. (i) Revolving Advances accrue interest on the outstanding principal balance at a per annum rate of 1.0 percentage points above the Prime Rate, but in no event less than 5.25% per annum; and (ii) Equipment Advances accrue interest on the outstanding principal balance at a per annum rate of 1.50 percentage points above the Prime Rate, but in no event less than 5.75% per annum. After an Event of Default has occurred and while it is continuing, Obligations accrue interest at five (5) percentage points above the rate effective immediately before the Event of Default. The interest rate increases or decreases when the Prime Rate changes. Interest is computed on a 360 day year for the actual number of days elapsed. (b) Payments. Interest due on the Committed Revolving Line is payable on the 25th day of each month. Interest due on the Equipment Advances is payable on the 25th day of each month. Bank may debit any of Borrower's deposit accounts including Account Number _____________________________ for principal and interest payments owing or any amounts Borrower owes Bank. Bank will promptly notify Borrower when it debits Borrower's accounts. These debits are not a set-off. Payments received after 2:00 p.m. Pacific time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest accrue. 2.4 FEES. (a) Facility Fee. Borrower shall pay to Bank a fee of $30,000 (in aggregate for both AMI and AMSI), which is fully earned on the Closing Date, but shall be payable $15,000 concurrently herewith and $15,000 on the earlier of (i) the first anniversary of the Closing Date or (ii) the occurrence of an Event of Default. Said fee shall be in addition to interest and to all other amounts payable hereunder and shall not be refundable. (b) Bank Expenses. Borrower shall pay to the Bank all Bank Expenses (including reasonable attorneys' fees and expenses) incurred through and after the Closing Date. (c) Unused Line Fee. In the event, in any fiscal quarter (or portion thereof at the beginning and end of the term of the Committed Revolving Line), the average daily principal balance of the Revolving Advances (in aggregate for both AMI and AMSI) outstanding during such quarter (or such portion thereof) is less than $6,000,000, then Borrower shall pay Bank an unused line fee in an amount equal to 0.375% per annum on the difference between $6,000,000 and the average daily principal balance of such Revolving Advances outstanding during such quarter (or portion thereof), computed on the basis of a 360-day year. The unused line fee shall be computed and paid quarterly, in arrears, on the first day of the following quarter. -3- 2.5 SEPARATE LOANS. At Bank's discretion, Credit Extensions shall be made separately to AMI and AMSI based on the Collateral of each, but the Borrowing Base and the Credit Extension maximums set forth herein (e.g., the Committed Revolving Line amount and the Committed Equipment Line amount) shall apply for both AMI and AMSI combined. 3. CONDITIONS OF LOANS 3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. Bank's obligation to make the initial Credit Extension is subject to the condition precedent that it receive the agreements, documents and fees it requires. Without limitation upon the foregoing, Bank's obligation to make the initial Credit Extension is subject to Borrower's satisfaction of the following conditions: (a) Borrower shall have effected the lockbox or blocked account arrangement as provided for in Section 6.9 hereof. (b) AMI and AMSI shall each have signed and delivered to Bank a Negative Pledge Agreement in form and substance acceptable to Bank. (c) Each of AMI and AMSI shall have executed and delivered to Bank a guaranty of all the Obligations of the other, in form and substance acceptable to Bank. 3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. Bank's obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following: (a) timely receipt of any Payment/Advance Form; and (b) the representations and warranties in Section 5 must be materially true on the date of the Payment/Advance Form and on the effective date of each Credit Extension (except to the extent they relate expressly to an earlier date, in which case such representations and warranties shall continue to be true as of the date expressed, and except for exceptions which are disclosed in writing to Bank and approved in writing by Bank) and no Event of Default may have occurred and be continuing, or result from the Credit Extension. Each Credit Extension is Borrower's representation and warranty on that date that the representations and warranties of Section 5 remain true. 3.3 CONDITIONS PRECEDENT TO INITIAL REVOLVING ADVANCE. Bank's obligation to make the initial Revolving Advance is subject to Bank completing an audit, satisfactory to Bank, of Borrower's collateral at Borrower's expense. 4. CREATION OF SECURITY INTEREST 4.1 GRANT OF SECURITY INTEREST. Borrower grants Bank a continuing security interest in all presently existing and later acquired Collateral to secure all Obligations and performance of each of Borrower's duties under the Loan Documents. Except for Permitted Liens, any security interest will be a first priority -4- security interest in the Collateral. If this Agreement is terminated, Bank's lien and security interest in the Collateral will continue until Borrower fully satisfies its Obligations. 4.2 OMITTED. 4.3 AUTHORIZATION TO FILE. Borrower authorizes Bank to file financing statements without notice to Borrower, with all appropriate jurisdictions, as Bank deems appropriate in its commercially reasonable discretion, in order to perfect or protect Bank's interest in the Collateral. 5. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 5.1 DUE ORGANIZATION AND AUTHORIZATION. Borrower and each Subsidiary is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified, except where the failure to do so could not reasonably be expected to cause a Material Adverse Change. The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower's formation documents, nor constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which or by which it is bound in which the default could reasonably be expected to cause a Material Adverse Change. 5.2 COLLATERAL. Each Borrower has good title to its respective Collateral, free of Liens except Permitted Liens or such Borrower has Rights to each asset that is Collateral. Borrower has no other deposit account, other than the deposit accounts described in the Schedule. The Accounts are bona fide, existing obligations, and the service or property has been performed or delivered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. The Eligible Inventory is not in the possession of any third party bailee (such as at a warehouse). Borrower has no notice of any actual or imminent Insolvency Proceeding of any account debtor whose accounts are an Eligible Account in any Borrowing Base Certificate. All Inventory is in all material respects of good and marketable quality, free from material defects. Borrower is the sole owner of the Intellectual Property, except for non-exclusive licenses granted to its customers in the ordinary course of business and Intellectual Property which is leased or licensed to Borrower. Each Patent is valid and enforceable and no part of the Intellectual Property has been judged invalid or unenforceable, in whole or in part, except to the extent that Borrower has determined in its good faith business judgment that such Patent or Intellectual Property is no longer of material value to the business of Borrower, and no claim has been made that any part of the Intellectual Property violates the rights of any third party, except to the extent such claim could not reasonably be expected to cause a Material Adverse Change. 5.3 LITIGATION. Except as shown in the Schedule, there are no actions or proceedings pending or, to the knowledge of Borrower's Responsible Officers, threatened by or against Borrower or any Subsidiary in which a likely adverse decision could reasonably be expected to cause a Material Adverse Change. -5- 5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All consolidated financial statements for Borrower, and any Subsidiary, delivered to Bank fairly present in all material respects Borrower's consolidated financial condition and Borrower's consolidated results of operations. There has not been any material deterioration in Borrower's consolidated financial condition since the date of the most recent financial statements submitted to Bank. 5.5 SOLVENCY. The fair saleable value of Borrower's assets as a going concern (including goodwill minus disposition costs) exceeds the fair value of its liabilities; the Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. 5.6 REGULATORY COMPLIANCE. Borrower is not an "investment company" or a company "controlled" by an "investment company" under the Investment Company Act. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations T and U of the Federal Reserve Board of Governors). Borrower has complied in all material respects with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably be expected to cause a Material Adverse Change. None of Borrower's or any Subsidiary's properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each Subsidiary has timely filed all required tax returns and paid, or made adequate provision to pay, all material taxes, except those being contested in good faith with adequate reserves under GAAP. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted, except where the failure to do so could not reasonably be expected to cause a Material Adverse Change. 5.7 SUBSIDIARIES. Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments. 5.8 FULL DISCLOSURE. No written representation, warranty or other statement of Borrower in any certificate or written statement given to Bank (taken together with all such written certificates and written statements to Bank) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading in light of the circumstances in which such statements were made, with it being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected and forecasted results. 5.9 AMSI SUBSIDIARY. AMSI is a wholly owned, direct, subsidiary of AMI. -6- 6. AFFIRMATIVE COVENANTS Borrower will do all of the following for so long as Bank has an obligation to lend, or there are outstanding Obligations (other than contingent indemnification Obligations): 6.1 GOVERNMENT COMPLIANCE. Borrower will maintain its legal existence and good standing and the legal existence and good standing of all Subsidiaries' in the applicable jurisdiction of formation and maintain qualification in each applicable jurisdiction in which the failure to so qualify would reasonably be expected to cause a material adverse effect on Borrower's business or operations. Borrower will comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which such party is subject to the extent that noncompliance therewith could have a material adverse effect on Borrower's business or operations or could reasonably be expected to cause a Material Adverse Change. 6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. (a) Borrower will deliver to Bank: (i) as soon as available, but no later than 30 days after the last day of each month, a company prepared consolidated balance sheet, income statement, and cash flow statement covering Borrower's consolidated operations during the period certified by a Responsible Officer and in a form acceptable to Bank; (ii) as soon as available, but no later than 120 days after the last day of Borrower's fiscal year, audited consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm reasonably acceptable to Bank; (iii) a prompt report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of $500,000 or more; (iv) budgets, sales projections, operating plans or other financial information Bank reasonably requests; and (v) prompt notice of any material change in the composition of the Intellectual Property which is of material value to the business of Borrower, including any subsequent ownership right of Borrower in or to any Copyright, Patent or Trademark not shown in any intellectual property security agreement between Borrower and Bank or knowledge of an event that materially adversely affects the value of the Intellectual Property. (b) Within 30 days after the last day of each month, Borrower will deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in the form of Exhibit C, with aged (by invoice date) listings of accounts receivable and accounts payable. (For emphasis, and not by way of limitation on the fact that the covenants of "Borrower" contained in this Agreement are to be construed as obligations of each of AMI and AMSI, AMI and AMSI shall each provide such a Borrowing Base Certificate.) (c) Within 30 days after the last day of each month, Borrower will deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in the form of Exhibit D. (d) Allow Bank to audit Borrower's Collateral at Borrower's expense. Such audits may be conducted (i) within 90 days of the Closing Date, (ii) once every twelve months thereafter, and (iii) at such more frequent times as the Bank may from time to time determine. (e) At least 30 days prior to the end of each fiscal year, Borrower will deliver to Bank consolidated annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for the following fiscal year. -7- (f) Within 30 days of filing, Borrower will deliver to Bank copies of all quarterly and annual tax returns filed by AMI, AMSI and ATS Medical France SARL. (g) In addition to the other items provided for in this Section 6.2, Borrower shall provide Bank with such other information as Bank shall from time to time specify in its good faith business judgment, including, without limitation, board reports, booking/backlog reports, and projections. 6.3 INVENTORY; RETURNS. Borrower will keep all Inventory in good and marketable condition, free from material defects. Returns and allowances between Borrower and its account debtors will follow Borrower's customary practices as they exist at execution of this Agreement. Borrower must promptly notify Bank of all returns, recoveries, disputes and claims, that involve more than $250,000. 6.4 TAXES. Borrower will make, and cause each Subsidiary to make, timely payment of all material federal, state, and local taxes or assessments (other than taxes and assessments which Borrower is contesting in good faith, with adequate reserves maintained in accordance with GAAP) and will deliver to Bank, on demand, appropriate certificates attesting to the payment. 6.5 INSURANCE. Borrower will keep its business and the Collateral insured for risks and in amounts standard for Borrower's industry, and as Bank may reasonably request. Insurance policies will be in a form, with companies, and in amounts that are satisfactory to Bank in Bank's reasonable discretion. All property policies will have a lender's loss payable endorsement showing Bank as an additional loss payee and all liability policies will show the Bank as an additional insured and provide that the insurer must give Bank at least 20 days notice before canceling its policy. At Bank's request, Borrower will deliver certified copies of policies and evidence of all premium payments. Proceeds payable under any policy will, at Bank's option, be payable to Bank on account of the Obligations, except that, provided no Default or Event of Default has occurred and is continuing, Bank shall release to Borrower insurance proceeds with respect to Equipment or Inventory provided that the same do not exceed $250,000 per occurrence of insured loss or an aggregate of $500,000 per 12 month period, which shall be utilized by Borrower for the replacement of the Equipment or Inventory with respect to which the insurance proceeds were paid. 6.6 PRIMARY ACCOUNTS. On and after September 1, 2004, Borrower will maintain all of its banking and investment account relationships with or through Bank, except that until November 1, 2004, Borrower may keep up to 10% (in amount) of such account relationships other than with or through Bank. 6.7 FINANCIAL COVENANTS. Borrower will maintain at all times, on a consolidated basis: (i) LIQUIDITY RATIO. A ratio of (y) unrestricted cash (and equivalents) of Borrower on deposit with Bank plus Borrower's Eligible Accounts, (z) divided by Current Liabilities, of equal to or greater than 2.25 to 1.00. -8- (ii) TANGIBLE NET WORTH. A Tangible Net Worth of at least the following amounts for the following periods: The Closing Date through September 30, 2004 $52,000,000 October 1, 2004 through December 31, 2004 $49,000,000 January 1, 2005 through March 31, 2005 $46,000,000 April 1, 2005 through June 30, 2005 $44,000,000 July 1, 2005 and thereafter $42,000,000
6.8 INTELLECTUAL PROPERTY Except for Intellectual Property which Borrower has determined, in its good faith business judgment, is no longer of material value to the business of Borrower, Borrower will (i) protect, defend and maintain the validity and enforceability of the Intellectual Property and promptly advise Bank in writing of material infringements and (ii) not allow any Intellectual Property to be abandoned, forfeited or dedicated to the public without Bank's written consent. 6.9 PROCEEDS OF COLLATERAL. Borrower shall deposit or cause to be deposited all proceeds of Collateral into a lockbox account or such other "blocked account" as Bank may specify, pursuant to a lockbox and/or blocked account agreement in such form as Bank may specify in its good faith business judgment. The lockbox arrangement shall be established through the Bank. 6.10 FURTHER ASSURANCES. Borrower will execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank's security interest in the Collateral or to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS Borrower will not do any of the following without Bank's prior written consent, which will not be unreasonably withheld, for so long as Bank has an obligation to lend or there are any outstanding Obligations (other than contingent indemnification Obligations): 7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of (collectively "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, except for Transfers (i) of Inventory in the ordinary course of business; (ii) of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; (iii) of worn-out or obsolete Equipment which is not the subject of an Equipment Advance; (iv) Accounts, which are not Eligible Accounts because the account debtor has not paid them within 90 days of invoice date, in connection with the collection or compromise thereof in the ordinary course of business; or (v) sales of Permitted Investments not otherwise prohibited hereunder or under the other Loan Documents. To the extent any Collateral is sold or otherwise disposed of as permitted by this Section 7.1, such Collateral shall be sold or otherwise disposed of free and clear of the Liens created by this Agreement, provided no Default or Event of Default shall have occurred and be continuing, and Bank shall take any actions reasonably requested by Borrower in order to give effect to the foregoing. -9- 7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS. Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower or reasonably related thereto or have a material change in its management or AMI's ownership of greater than 25% (other than by the sale of Borrower's equity securities in a public offering or to venture capital investors so long as Borrower identifies the venture capital investors prior to the closing of the investment) or, except as permitted in Section 7.3, have AMSI become other than a wholly owned, direct, subsidiary of AMI. Borrower will not, without at least 30 days prior written notice, relocate its chief executive office or add any new offices or business locations in which Borrower maintains or stores over $100,000 in Borrower's assets or property. 7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, except for mergers or acquisitions involving Borrower where all of the following conditions are satisfied: (i) in the case of a merger, the Borrower is the surviving corporation in the merger, (ii) the acquisition, or the other party to the merger, is in the same or related lines of business to that of the Borrower, (iii) the transaction will not, in Bank's good faith business judgment, adversely affect the Collateral or Bank's security interest therein or the Borrower's financial condition, and both before and after giving effect to such transaction Borrower is and will be in compliance with all financial covenants, (iv) no Default or Event of Default exists or will occur as a result of the transaction, (v) at the closing of the transaction there are no Obligations outstanding under the Committed Revolving Line, and (vi) the aggregate of the consideration paid by Borrower for all such transactions after the date hereof does not exceed $5,000,000. If a merger or acquisition occurs pursuant to the foregoing exception to the prohibition against mergers and acquisitions, then Bank shall not be required to make any Credit Extensions under the Committed Revolving Line until Borrower has supplied Bank, and Bank shall have had a reasonable opportunity to review, such financial and other information concerning the transaction as Bank shall request in order to confirm the satisfaction of the foregoing conditions to such exception. Notwithstanding the foregoing, AMSI may merge or consolidate into AMI as long as no Default or Event of Default exists prior thereto or arises therefrom, and a Subsidiary (other than AMSI) may merge or consolidate into another Subsidiary or into Borrower as long as no Default or Event of Default exists prior thereto or arises therefrom. 7.4 INDEBTEDNESS. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness. 7.5 ENCUMBRANCE. Create, incur, or allow any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens and as permitted under Section 7.1, or permit the first priority lien status of Bank regarding the Collateral to change, subject only to Permitted Liens as may be applicable, and with respect to Collateral no longer owned by Borrower pursuant to Section 7.1. 7.6 DISTRIBUTIONS; INVESTMENTS. Directly or indirectly acquire or own any Person, or make any Investment in any Person, other than Permitted Investments, or permit any of its Subsidiaries to do so. Pay any dividends -10- or make any distribution or payment or redeem, retire or purchase any capital stock, provided that AMI may redeem or repurchase for cash, at fair value, the capital stock of AMI (or options to purchase capital stock) from any employee of Borrower upon the death, disability, retirement or other termination of such employee, if (i) no Default or Event of Default shall have occurred and be continuing or shall result from the same, and (ii) the total amount paid and/or distributed in all of the foregoing transactions shall not exceed $100,000 in any fiscal year of AMI. 7.7 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a nonaffiliated Person, provided that the foregoing restrictions shall not apply to (i) redemptions or repurchases of Borrower's stock otherwise permitted under Section 7.6, or (ii) employment arrangements (including arrangements made with respect to bonuses) entered into in the ordinary course of business with members of the Board of Directors and officers of Borrower. 7.8 SUBORDINATED DEBT. Make or permit any payment on any Subordinated Debt, except under the terms of the Subordinated Debt, or amend any provision in any document relating to the Subordinated Debt without Bank's prior written consent. 7.9 COMPLIANCE. Become an "investment company" or a company controlled by an "investment company," under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Credit Extension for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to have a material adverse effect on Borrower's business or operations or would reasonably be expected to cause a Material Adverse Change, or permit any of its Subsidiaries to do so. 8. EVENTS OF DEFAULT Any one of the following is an Event of Default: 8.1 PAYMENT DEFAULT. If Borrower fails to pay any of the Obligations within 3 days after their due date. During such additional 3 day period the failure to cure such payment default is not an Event of Default hereunder (but no Credit Extension will be made during the cure period); 8.2 COVENANT DEFAULT. If Borrower does not perform any obligation in Sections 6.2, 6.7 or 6.9, or violates any covenant in Section 7. If Borrower does not perform or observe any other material term, condition or covenant in this Agreement, any Loan Documents, or in any agreement between Borrower and Bank and as to any default under a term, condition or covenant that can be cured, has not cured the default -11- within 10 days after it occurs, or if the default cannot be cured within 10 days or cannot be cured after Borrower's attempts within 10 day period, and the default may be cured within a reasonable time, then Borrower has an additional period (of not more than 30 days) to attempt to cure the default. During the additional time, the failure to cure the default is not an Event of Default (but no Credit Extensions will be made during the cure period). 8.3 MATERIAL ADVERSE CHANGE. If there (i) occurs a material adverse change in the business, operations, or condition (financial or otherwise) of the Borrower, or (ii) is a material impairment of the prospect of repayment of any portion of the Obligations or (iii) is a material impairment of the value or priority of Bank's security interests in the Collateral (any of the foregoing is referred to herein as a "Material Adverse Change"). 8.4 ATTACHMENT. If any material portion of Borrower's assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in 10 days, or if Borrower is enjoined, restrained, or prevented by court order from conducting a material part of its business or if a judgment or other claim becomes a Lien on a material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed against any of Borrower's assets by any government agency and not paid within 10 days after Borrower receives notice. These are not Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Credit Extensions will be made during the cure period). 8.5 INSOLVENCY. If Borrower becomes insolvent or if Borrower begins an Insolvency Proceeding or an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within 30 days (but no Credit Extensions will be made before any Insolvency Proceeding is dismissed). 8.6 OTHER AGREEMENTS. If there is a default in any agreement between Borrower and a third party that gives the third party the right to accelerate any Indebtedness exceeding $250,000 or that could cause a Material Adverse Change. 8.7 JUDGMENTS. If a money judgment(s) in the aggregate of at least $250,000 is rendered against Borrower and is unsatisfied and unstayed for 10 days (but no Credit Extensions will be made before the judgment is stayed or satisfied). 8.8 MISREPRESENTATIONS. If Borrower or any Person acting for Borrower makes any material misrepresentation or material misstatement now or later in any warranty or representation in this Agreement or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document. 8.9 GUARANTY. Any guaranty of any Obligations ceases for any reason to be in full force or any Guarantor does not perform any obligation under any guaranty of the Obligations, or any material misrepresentation or material misstatement exists now or later in any warranty or -12- representation in any guaranty of the Obligations or in any certificate delivered to Bank in connection with the guaranty, or any circumstance described in Sections 8.4, 8.5 or 8.7 occurs to any Guarantor. 9. BANK'S RIGHTS AND REMEDIES 9.1 RIGHTS AND REMEDIES. When an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following: (a) Declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank); (b) Stop advancing money or extending credit for Borrower's benefit under this Agreement or under any other agreement between Borrower and Bank; (c) Settle or adjust disputes and claims directly with account debtors for amounts, on terms and in any order that Bank considers advisable; (d) Make any payments and do any acts it considers necessary or reasonable to protect its security interest in the Collateral. Borrower will assemble the Collateral if Bank requires and make it available as Bank designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank's rights or remedies; (e) Apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower; (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. Bank is granted a non-exclusive, royalty-free license or other right to use, without charge, Borrower's labels, Patents, Copyrights, Mask Works, rights of use of any name, trade secrets, trade names, Trademarks, service marks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section, Borrower's rights under all licenses and all franchise agreements inure to Bank's benefit; (g) Dispose of the Collateral according to the Code; and (h) Exercise control over deposit accounts or securities accounts for which account control agreements have been entered into by Bank, Borrower and the subject financial institution or broker (which action Bank shall take only when an Event of Default occurs and continues). Bank will use commercially reasonable efforts to give Borrower notice of: (i) action by Bank declaring the Obligations to be immediately due and payable under Section 7.1(a) above, within a reasonable time following any such action, (ii) action by Bank under Section 7.1(e) above, within a reasonable time following any such action, and (iii) sale or other disposition of the Collateral under Section 7.1(f), (g) or (h) above, to the extent required under applicable law. Notwithstanding the foregoing, Bank shall have no liability or obligation to Borrower for any inadvertent failure to give any such notice. -13- 9.2 POWER OF ATTORNEY. Effective only when an Event of Default occurs and continues, Borrower irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name on any checks or other forms of payment or security; (ii) sign Borrower's name on any invoice or bill of lading for any Account or drafts against account debtors, (iii) make, settle, and adjust all claims under Borrower's insurance policies; (iv) settle and adjust disputes and claims about the Accounts directly with account debtors, for amounts and on terms Bank determines reasonable; and (v) transfer the Collateral into the name of Bank or a third party as the Code permits. Bank may exercise the power of attorney to sign Borrower's name on any documents necessary to perfect or continue the perfection of any security interest regardless of whether an Event of Default has occurred. Bank's appointment as Borrower's attorney in fact, and all of Bank's rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid and performed and Bank's obligation to provide Credit Extensions terminates. 9.3 ACCOUNTS COLLECTION. When an Event of Default occurs and continues, Bank may notify any Person owing Borrower money of Bank's security interest in the funds and verify the amount of the Account. After an Event of Default has occurred and while it is continuing, Borrower must collect all payments in trust for Bank and, if requested by Bank, immediately deliver the payments to Bank in the form received from the account debtor, with proper endorsements for deposit. 9.4 BANK EXPENSES. If Borrower fails to pay any amount or furnish any required proof of payment to third persons, Bank may make all or part of the payment or obtain insurance policies required in Section 6.5, and take any action under the policies Bank deems prudent, and Bank shall give written notice to Borrower of the same promptly after making any such payment or taking any such action that is material. Any amounts paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then applicable rate and secured by the Collateral. No payments by Bank are deemed an agreement to make similar payments in the future or Bank's waiver of any Event of Default. 9.5 BANK'S LIABILITY FOR COLLATERAL. If Bank complies with reasonable banking practices and the Code, it is not liable for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other person. Except to the extent the Bank may be liable for any damages caused by its failure to comply with reasonable banking practices and the Code, Borrower bears all risk of loss, damage or destruction of the Collateral. 9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank's exercise of one right or remedy is not an election, and Bank's waiver of any Event of Default is not a continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given. -14- 9.7 DEMAND WAIVER. Except to the extent expressly provided for in this Agreement and the other Loan Documents, Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable. 10. NOTICES All notices or demands by any party about this Agreement or any other related agreement must be in writing and be personally delivered or sent by an overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to the addresses set forth at the beginning of this Agreement. A party may change its notice address by giving the other party written notice. Any notice that Bank is required or desires to provide to AMSI shall be deemed given upon providing such notice to AMI or AMSI. 11. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER California law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the nonexclusive jurisdiction of the State and Federal courts in Santa Clara County, California. BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL. 12. GENERAL PROVISIONS 12.1 SUCCESSORS AND ASSIGNS. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights under it without Bank's prior written consent which may be granted or withheld in Bank's discretion. Bank has the right, without the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits under this Agreement. 12.2 INDEMNIFICATION. Borrower will indemnify, defend and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or consequential to transactions between Bank and Borrower (including reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. A Person seeking to be indemnified under this Section 12.2 shall notify Borrower of any event requiring indemnification within a reasonable time following such Person's receipt of notice of commencement of any action or proceeding giving rise to a claim for indemnification hereunder, provided that (i) there shall be no obligation to so notify Borrower if an Event of -15- Default has occurred and is continuing, and (ii) neither Bank nor any such Person shall have any liability or obligation for any inadvertent failure to provide such notice, and (iii) no failure to provide such notice shall affect Borrower's obligation to provide indemnity hereunder. In such a proceeding, such Person shall use commercially reasonable efforts to keep Borrower reasonably informed of its defense and any settlement of any such action or proceeding and negotiations to settle or otherwise resolve any claim, provided that (i) such Person shall have the exclusive right to decide to accept or reject any settlement offer, and (ii) there shall be no obligation to keep Borrower so informed if an Event of Default has occurred and is continuing, and (iii) neither Bank nor any such Person shall have any liability or obligation for any inadvertent failure to keep Borrower so informed, and (iv) no failure to keep Borrower so informed shall affect Borrower's obligation to provide indemnity hereunder. 12.3 TIME OF ESSENCE. Time is of the essence for the performance of all obligations in this Agreement. 12.4 SEVERABILITY OF PROVISION. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision. 12.5 AMENDMENTS IN WRITING, INTEGRATION. All amendments to this Agreement must be in writing and signed by Borrower and Bank. This Agreement represents the entire agreement about this subject matter, and supersedes prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement merge into this Agreement and the Loan Documents. 12.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement. 12.7 SURVIVAL. All covenants, representations and warranties made in this Agreement continue in full force while any Obligations remain outstanding. The obligations of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of limitations for actions that may be brought against Bank have run. 12.8 CONFIDENTIALITY. In handling any confidential information, Bank will exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made (i) to Bank's subsidiaries or affiliates in connection with their business with Borrower, (ii) to prospective transferees or purchasers of any interest in the loans (provided, however, Bank shall use commercially reasonable efforts in obtaining such prospective transferee or purchasers written agreement to the terms of this provision), (iii) as required by law, regulation, subpoena, or other order, (iv) as required in connection with Bank's examination or audit and (v) as Bank considers appropriate exercising remedies under this Agreement. Confidential information does not include information that either: (a) is in the public domain or in Bank's possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank; or (b) is -16- disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information. 12.9 ATTORNEYS' FEES, COSTS AND EXPENSES. In any action or proceeding between Borrower and Bank arising out of the Loan Documents, the prevailing party will be entitled to recover its reasonable attorneys' fees and other reasonable costs and expenses incurred, in addition to any other relief to which it may be entitled. 12.10 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower. 13. DEFINITIONS 13.1 DEFINITIONS. In this Agreement: "ACCOUNTS" are all existing and later arising accounts, contract rights, and other obligations owed Borrower in connection with its sale or lease of goods (including licensing software and other technology) or provision of services, all credit insurance, guaranties, other security and all merchandise returned or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "AFFILIATE" of a Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person's managers and members. "BANK EXPENSES" are all audit fees and expenses and reasonable costs and expenses (including reasonable attorneys' fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including appeals or Insolvency Proceedings). "BORROWER'S BOOKS" are all Borrower's books and records including ledgers, records regarding Borrower's assets or liabilities, the Collateral, business operations or financial condition and all computer programs or discs or any equipment containing the information. "BORROWING BASE" is (a) 75% of Eligible Accounts of AMI and AMSI plus (b) the lesser of (i) 25% of the value of Eligible Inventory of AMI and AMSI calculated at the lower of cost or market and determined on a first-in, first-out basis, (ii) $1,000,000, and (iii) 25% of Eligible Accounts of AMI and AMSI; as determined and confirmed by Bank from Borrower's most recent Borrowing Base Certificate; provided, however, that Bank may lower the percentages of the Borrowing Base after performing an audit of Borrower's Collateral for the reasons given in a written notice to Borrower. "BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which the Bank is closed. -17- "CAPITALIZED PRODUCT DEVELOPMENT COSTS" are all costs associated with the development of Borrower's product, including, but not limited to software, that are not recorded as an expense and have been classified as an asset account. "CLOSING DATE" is the date of this Agreement. "CODE" is the Uniform Commercial Code, as applicable. "COLLATERAL" is the property described on Exhibit A. "COMMITTED EQUIPMENT LINE" is an aggregate of Credit Extensions of up to $2,500,000. "COMMITTED REVOLVING LINE" is an aggregate of Credit Extensions of up to $6,000,000. "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect liability, contingent or not, of that Person for (i) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (ii) any obligations for undrawn letters of credit for the account of that Person; and (iii) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but "Contingent Obligation" does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under the guarantee or other support arrangement. "COPYRIGHTS" are all copyright rights, applications or registrations and like protections in each work or authorship or derivative work, whether published or not (whether or not it is a trade secret) now or later existing, created, acquired or held. "CREDIT EXTENSION" is each Revolving Advance, Equipment Advance, or any other extension of credit by Bank for Borrower's benefit. "CURRENT ASSETS" are amounts that under GAAP should be included on that date as current assets on Borrower's consolidated balance sheet. "CURRENT LIABILITIES" are the aggregate amount of Borrower's Total Liabilities which mature within one (1) year. "DEFAULT" shall mean any event or occurrence which with the passing of time or the giving of notice or both would become an Event of Default hereunder. "EFFECTIVE DATE" is the date Bank executes this Agreement. "ELIGIBLE ACCOUNTS" are Accounts in the ordinary course of Borrower's business that meet all Borrower's representations and warranties in Section 5; but Bank may change eligibility standards for the reasons given in a written notice to Borrower. Unless Bank agrees otherwise in writing, Eligible Accounts will not include: (a) Accounts that the account debtor has not paid within 90 days of invoice date; -18- (b) Accounts for an account debtor, 50% or more of whose Accounts have not been paid within 90 days of invoice date; (c) Credit balances over 90 days from invoice date; (d) Accounts for an account debtor, including Affiliates, whose total obligations to Borrower exceed 25% of all Accounts, for the amounts that exceed that percentage, unless the Bank approves in writing; (e) [Omitted]; (f) Accounts for which the account debtor is a federal, state or local government entity or any department, agency, or instrumentality, unless Borrower has complied with the Assignments of Claim Act or comparable statute or ordinance, if required from such government entity, department, agency or instrumentality in order for a security interest in such Accounts to be enforceable or perfected, or for Bank to be able to enforce collection of such Accounts directly from such account debtor; (g) Accounts owed to an account debtor to which Borrower is obligated, but only up to the amount owed (sometimes called "contra" accounts, accounts payable, customer deposits or credit accounts); (h) Accounts for demonstration or promotional equipment, or in which goods are consigned, sales guaranteed, sale or return, sale on approval, bill and hold, or other terms if account debtor's payment may be conditional; (i) Accounts for which the account debtor is Borrower's Affiliate, officer, employee, or agent; (j) Accounts in which the account debtor disputes liability or makes any claim and Bank believes there may be a basis for dispute (but only up to the disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of business; and (k) Accounts for which Bank reasonably determines collection to be doubtful. "ELIGIBLE EQUIPMENT" shall mean new or used computer equipment, office equipment, lab and test equipment, and office furnishings, against which Bank holds a first-priority perfected security interest and that meet all of Borrower's representations and warranties in Section 5. "ELIGIBLE INVENTORY" means Inventory owned by Borrower which Bank, in its good faith business judgment, deems eligible for borrowing. Without limiting the fact that the determination of which Inventory is eligible for borrowing is a matter of Bank's good faith business judgment, the following are the minimum requirements for Inventory to be Eligible Inventory: the Inventory must (i) consist of raw materials or finished goods, in good, new and salable condition, not be perishable, not be obsolete or unmerchantable, and not be comprised of work in process, packaging materials or supplies; (ii) meet all applicable governmental standards; (iii) have been manufactured in compliance with the Fair Labor Standards Act; (iv) meet all of Borrower's representations and warranties set forth in Section 5; (v) be at all times subject to Bank's duly perfected, first priority security interest; and (vi) be situated at Borrower's premises at 3905 Annapolis Ln., Plymouth, Minnesota 55447 or 3800 Annapolis Ln., Plymouth, Minnesota 55447. -19- "EQUIPMENT" is all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "EQUIPMENT ADVANCE" is defined in Section 2.1.5(a). "EQUIPMENT AVAILABILITY END DATE" is defined in Section 2.1.5(a). "EQUIPMENT MATURITY DATE" is defined in Section 2.1.5(b). "ERISA" is the Employment Retirement Income Security Act of 1974, and its regulations. "GAAP" is generally accepted accounting principles. "GUARANTOR" is any present or future guarantor of the Obligations. "INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations and (d) Contingent Obligations. "INSOLVENCY PROCEEDING" are proceedings by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "INTELLECTUAL PROPERTY" is: (a) Copyrights, Trademarks, Patents, and Mask Works including amendments, renewals, extensions, and all licenses or other rights to use and all license fees and royalties from the use; (b) Any trade secrets and any intellectual property rights in computer software and computer software products now or later existing, created, acquired or held; (c) All design rights which may be available to Borrower now or later created, acquired or held; (d) Any claims for damages (past, present or future) for infringement of any of the rights above, with the right, but not the obligation, to sue and collect damages for use or infringement of the intellectual property rights above; All proceeds and products of the foregoing, including all insurance, indemnity or warranty payments. "INVENTORY" is present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or later owned by or in the custody or possession, actual or constructive, of Borrower, including inventory temporarily out of its custody or possession or in transit and including returns on any accounts or other proceeds (including insurance proceeds) from the sale or disposition of any of the foregoing and any documents of title. -20- "INVESTMENT" is any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "LIEN" is a mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes or guaranties or third party suretyship obligations in favor of Bank executed by Borrower or other Persons, as applicable, and any other present or future agreement between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated. "MASK WORKS" are all mask works or similar rights available for the protection of semiconductor chips, now owned or later acquired. "MATERIAL ADVERSE CHANGE" is described in Section 8.3. "OBLIGATIONS" are debts, principal, interest, Bank Expenses and other amounts Borrower owes Bank now or later, including cash management services, letters of credit and foreign exchange contracts, if any and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank. "PATENTS" are patents, patent applications and like protections, including improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. "PERMITTED INDEBTEDNESS" is: (a) Borrower's indebtedness to Bank under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and shown on the Schedule and all extensions and renewals thereof; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; and (e) Indebtedness secured by Permitted Liens. "PERMITTED INVESTMENTS" are: (a) Investments shown on the Schedule and existing on the Closing Date; (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States or its agency or any State maturing within 1 year from its acquisition, (ii) commercial paper maturing no more than 1 year after its creation and having the highest rating from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of deposit issued maturing no more than 1 year after issue; (c) extensions of trade credit in the ordinary course of business and consistent with past practices; (d) loans and advances to employees, officers and directors in connection with the purchase or retention of shares of capital stock of Borrower by such employees, officers and directors in an aggregate principal amount not to exceed $100,000 at any time outstanding, -21- provided there is a concurrent payment to Borrower in consideration for such shares, equal to the amount loaned or advanced by Borrower; (e) loans and advances to employees, in the ordinary course of business in an aggregate principal amount not to exceed $100,000 at any time outstanding; (f) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of and other disputes with, customers and suppliers arising in the ordinary course of business; (g) promissory notes acquired in connection with the dispositions of assets permitted under Section 7.1; (h) acquisitions permitted under Section 7.3; and (i) additional Investments in an aggregate amount not exceeding $500,000 outstanding at any one time. "PERMITTED LIENS" are: (a) Liens existing on the Closing Date and shown on the Schedule or arising under this Agreement or other Loan Documents; (b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, if they have no priority over any of Bank's security interests; (c) Purchase money Liens (i) on Equipment acquired or held by Borrower or its Subsidiaries incurred for financing the acquisition of the Equipment, or (ii) existing on equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the equipment; (d) Non-exclusive licenses or sublicenses granted in the ordinary course of Borrower's business and, with respect to any licenses where Borrower is the licensee, any interest or title of a licensor or under any such license or sublicense, if the licenses and sublicenses permit granting Bank a security interest; (e) Leases or subleases entered into in the ordinary course of Borrower's business, including in connection with Borrower's leased premises or leased property; (f) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (c), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase; (g) Liens in respect of property or assets of Borrower imposed by law which were incurred in the ordinary course of business, such as carriers', warehousemen's, and mechanics' Liens, statutory landlord's Liens, and other similar Liens arising in the ordinary course of business, which (y) do not in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of Borrower and (z) which are not delinquent; -22- (h) easements, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances with respect to real estate and not interfering in any material respect with the ordinary conduct of the business of Borrower; (i) banker's Liens, rights of setoff and similar Liens incurred on deposits made in the ordinary course of business; (j) Liens arising from (i) judgments or attachments (or securing of appeal bonds with respect thereto) in an aggregate amount of less than $250,000 provided that the same have no priority over any of the security interests of Bank in any of the Collateral (including, without limitation, with respect to future advances) as determined by Bank in its commercially reasonable discretion or (ii) judgments (or securing of appeal bonds with respect thereto) in circumstances not constituting an Event of Default under Section 8.7, provided that no cash or property (other than proceeds of insurance payable by reason of such judgments, decrees or attachments) is deposited or delivered to secure any such judgment, or any appeal bond in respect thereof, the fair market value of which exceeds $250,000 and provided further that the same have no priority over any of the security interests of Bank in any of the Collateral (including, without limitation, with respect to future advances) as determined by Bank in its commercially reasonable discretion; and (k) Liens imposed by law incurred in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security provided that the same have no priority over any of the security interests of Bank in any of the Collateral (including, without limitation, with respect to future advances). "PERSON" is any individual, sole proprietorship, partnership, limited liability company, joint venture, company association, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency. "PRIME RATE" is Bank's most recently announced "prime rate," even if it is not Bank's lowest rate. "RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the President, the Chief Financial Officer and the Controller of Borrower. "REVOLVING ADVANCE" or "REVOLVING ADVANCES" is a loan advance (or advances) under the Committed Revolving Line. "REVOLVING MATURITY DATE" is July 27, 2006. "RIGHTS", as applied to the Collateral, means the Borrower's rights and interests in, and powers with respect to, that Collateral, whatever the nature of those rights, interests and powers and, in any event, including Borrower's power to transfer rights in such Collateral to Bank. "SCHEDULE" is any attached schedule of exceptions. "SUBORDINATED DEBT" is debt incurred by Borrower subordinated to Borrower's indebtedness owed to Bank and which is reflected in a written agreement in a manner and form acceptable to Bank and approved by Bank in writing. "SUBSIDIARY" is for any Person, or any other business entity of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by the Person or one or more Affiliates of the Person. -23- "TANGIBLE NET WORTH" is, on any date, the consolidated total assets of Borrower plus Subordinated Debt minus, without duplication, (i) any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, Patents, trade and service marks and names, Copyrights and research and development expenses except prepaid expenses, and (c) reserves not already deducted from assets, and (ii) Total Liabilities. "TOTAL LIABILITIES" is on any day, obligations that should, under GAAP, be classified as liabilities on Borrower's consolidated balance sheet, including all Indebtedness, and current portion Subordinated Debt allowed to be paid, but excluding all other Subordinated Debt. "TRADEMARKS" are trademark and servicemark rights, registered or not, applications to register and registrations and like protections, and the entire goodwill of the business of Assignor connected with the trademarks. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. BORROWER: ATS MEDICAL, INC. ATS MEDICAL SALES, INC. By: ______________________________ By: _________________________________ Title: ___________________________ Title: ______________________________ BANK: SILICON VALLEY BANK By: ___________________________________ Title: ________________________________ Effective Date: __________________________ -24- EXHIBIT A The Collateral consists of all of Borrower's right, title and interest in and to the following personal property of Borrower: All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above; All contract rights and general intangibles now owned or hereafter acquired, including the Intellectual Property (as defined below) only, however, to the extent and subject to the limitations set forth in the Exclusion Clause (as defined below); All now existing and hereafter arising accounts, contract rights, payment intangibles, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower; All documents, cash, deposit accounts, securities, securities entitlements, securities accounts, investment property, financial assets, letters of credit, letter-of-credit rights, commercial tort claims, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's Books relating to the foregoing; and All Borrower's Books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. Notwithstanding the foregoing, the Collateral shall not include any Intellectual Property, provided that if a judicial authority (including a U.S. Bankruptcy Court) holds that a security interest in the underlying Intellectual Property is necessary to have a security interest in such items that are proceeds of the Intellectual Property consisting of payment intangibles, accounts, license revenues, or general intangibles relating to rights to payment arising therefrom or relating thereto, then in such circumstance, the Collateral shall automatically, and effective as of the Closing Date, include the Intellectual Property only to the extent necessary to permit perfection of Bank's security interest in such proceeds, including, without limitation, payment intangibles, accounts, license revenues, or general intangibles relating to rights to payment (the foregoing is referred to herein collectively as the "Exclusion Clause"). Further, Borrower and Bank are parties to that certain Negative Pledge Agreement, whereby Borrower, in connection with Bank's loans, has agreed, among other things, not to sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber, any of its Intellectual Property, without the Bank's prior written consent, other than as may be permitted thereunder or hereunder. Exhibit A The term "Intellectual Property" as used herein shall mean the following: Borrower's right, title or interest, whether now owned or hereafter acquired, in and to any intellectual property rights of Borrower of any nature or character, including without limitation, and whether domestic or foreign, the following: (i) any copyrights and copyright applications, whether registered or unregistered, copyright registration and like protection in each work of authorship and derivative work thereof, whether published or unpublished, and whether said copyrights are statutory or arise under common law, and all rights, claims and demands in any way related to any such copyrights or works, including any rights to sue for past, present or future infringement, and any rights of renewal and extension of copyrights; (ii) any patents, patent applications, patent rights and like protections and any licenses relating to any of the foregoing, and any improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part thereof and any rights to sue for past present or future infringement thereof and any rights arising therefrom and pertaining thereto; (iii) any state (including common law), federal and foreign trademarks, service marks and trade names, and applications for registration of such trademarks, service marks and trade names, and any licenses relating to any of the foregoing, whether registered or unregistered and wherever registered, any rights to sue for past, present or future infringement of unconsented use thereof, all rights arising therefrom and pertaining and any reissues, extensions and renewals thereof and the goodwill of the business of Borrower connected with and symbolized by any of the foregoing; (iv) any trade secrets, trade dress, trade styles, logos, other source of business identifiers, mask-works, mask-work registrations or mask-work applications, integrated circuit masks, software, circuit designs and documentation relating thereto, and the goodwill of the business of Borrower connected with and symbolized by any of the foregoing, including, without limitation, any rights to unpatented inventions, know-how, and operating manuals, including any rights to sue for past, present or future infringement or unconsented use thereof, all rights arising therefrom and pertaining thereto, provided that with respect to any and all of the foregoing, the term "Intellectual Property" shall not include any proceeds thereof (other than proceeds in the direct form of Intellectual Property) and specifically, without limitation, and regardless of any of the foregoing, the term "Intellectual Property" shall not include any payment intangibles, accounts, license revenues, or general intangibles relating to rights to payment arising therefrom or relating thereto. Exhibit A -2- EXHIBIT B LOAN PAYMENT/ADVANCE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 12:00 P.S.T. FAX TO: 952-475-8471 DATE: _____________ [ ] LOAN PAYMENT: From Account # _____________________ To Account # __________________ (Deposit Account #) (Loan Account #) Principal $ _______________________ and/or Interest $ ______________________ Except for exceptions thereto which have been disclosed in writing to, and approved in writing by, Bank, all Borrower's representation and warranties in the Loan and Security Agreement are true, correct and complete in all material respects on the date of the telephone transfer request for an advance, but those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of the date: AUTHORIZED SIGNATURE: ______________________ Phone Number: _________________ [ ] LOAN ADVANCE: COMPLETE OUTGOING WIRE REQUEST SECTION BELOW IF ALL OR A PORTION OF THE FUNDS FROM THIS LOAN ADVANCE ARE FOR AN OUTGOING WIRE. From Account # _________________________ To Account # __________________ (Loan Account #) (Deposit Account #) Amount of Advance $ ____________________ Except for exceptions thereto which have been disclosed in writing to, and approved in writing by, Bank, all Borrower's representation and warranties in the Loan and Security Agreement are true, correct and complete in all material respects on the date of the telephone transfer request for an advance, but those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of the date: AUTHORIZED SIGNATURE: ______________________ Phone Number: _________________ [ ] OUTGOING WIRE REQUEST COMPLETE ONLY IF ALL OR A PORTION OF FUNDS FROM THE LOAN ADVANCE ABOVE ARE TO BE WIRED. Deadline for same day processing is 12:00pm, P.S.T. Beneficiary Name: ___________________ Amount of Wire: $ _______________ Beneficiary Bank: ___________________ Account Number: _________________ City and Sate: ______________________ Beneficiary Bank Transit (ABA) #: ___________________ Beneficiary Bank Code (Swift, Sort, Chip, etc.): (FOR INTERNATIONAL WIRE ONLY) Intermediary Bank: __________________ Transit (ABA) #: _____________ For Further Credit to: _____________________________________________________ Special Instruction: _______________________________________________________ By signing below, I (we) acknowledge and agree that my (our) funds transfer request shall be processed in accordance with and subject to the terms and conditions set forth in the agreements(s) covering funds transfer service(s), which agreements(s) were previously received and executed by me (us). Authorized Signature: ______________ 2nd Signature (If Required): ________ Print Name/Title: __________________ Print Name/Title: ___________________ Telephone # ________________________ Telephone # _________________________ Exhibit B EXHIBIT C BORROWING BASE CERTIFICATE Borrower: ATS Medical, Inc. ("AMI") or Bank: Silicon Valley Bank ATS Medical Sales, Inc. ("AMSI") 3003 Tasman Drive Santa Clara, CA 95054 Commitment Amount: $6,000,000 ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of ________ $___________ 2. Additions (please explain on reverse) $___________ 3. TOTAL ACCOUNTS RECEIVABLE $___________ ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due $___________ 5. Balance of 50% over 90 day accounts $___________ 6. Credit balances over 90 days $___________ 7. Concentration Limits $___________ 8. (Omitted) $___________ 9. Governmental Accounts $___________ 10. Contra Accounts $___________ 11. Promotion or Demo Accounts $___________ 12. Intercompany/Employee Accounts $___________ 13. Other (please explain on reverse) $___________ 14. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $___________ 15. Eligible Accounts (#3 minus #14) $___________ 16. LOAN VALUE OF ACCOUNTS (75% of #15) $___________ INVENTORY 16a TOTAL INVENTORY $___________ 16b Inventory Deductions $___________ 16c Eligible Inventory (16a minus 16b) $___________ 16d LOAN VALUE OF INVENTORY $___________ (25% of #16c, not to exceed the lesser of 25% of #15 or $1MM) BALANCES 17. Maximum Loan Amount (considering both AMI and AMSI) $___________ 18. Total Funds Available [Lesser of #17 or (#16 plus #16d)] $___________ 19. Present balance owing on Line of Credit $___________ 20. Outstanding under Sublimits, if any Sublimits are in effect $___________ 21. RESERVE POSITION (#18 minus #19 and #20) $___________
The undersigned represents and warrants that this is true, complete and correct, and that the information in this Borrowing Base Certificate complies with the representations and warranties in the Loan and Security Agreement between the undersigned and Silicon Valley Bank. COMMENTS: BANK USE ONLY ATS Medical, Inc. or ATS Medical Sales, Inc. Rec'd By: ________________ Auth. Signer By: _________________________ Title: Date: ____________________ Verified: ________________ Auth. Signer Date: ____________________ Exhibit C EXHIBIT D COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK 3003 Tasman Drive Santa Clara, CA 95054 FROM: ______________________ The undersigned authorized officer of ______________________ ("Borrower") certifies that under the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below and (ii) all representations and warranties in the Agreement are true and correct in all material respects on this date (except to the extent they relate expressly to an earlier date, in which case such representations and warranties shall continue to be true as of the date expressed, and except for exceptions which are disclosed in writing to Bank and approved in writing by Bank). Attached are the required documents supporting the certification. The Officer certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The Officer acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined on an ongoing basis and not just at the date this certificate is delivered. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES - ------------------ -------- -------- Monthly financial statements + CC Monthly within 30 days Yes No Annual (Audited) FYE within 120 days Yes No A/R & A/P Agings Monthly within 30 days Yes No A/R Audit Initial and Annual Yes No Borrowing Base Certificate Monthly within 30 days Yes No Projected Budgets December 1 of each year Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES - ------------------ -------- ------ -------- Maintain: Liquidity Ratio 2.25:1.00 _____:1.00 Yes No Minimum Tangible Net Worth $________ $_________ Yes No Have there been updates to Borrower's intellectual property, or has Borrower Yes No obtained any registered, or commenced the registration of, any copyrights, trademarks or patents? (If "yes," please describe.)
Exhibit D COMMENTS REGARDING EXCEPTIONS: See Attached. {PRIVATE} BANK USE ONLY Sincerely, _______________________ Received by: _____________________ AUTHORIZED SIGNER SIGNATURE Date: ____________________________ TITLE Verified: ________________________ AUTHORIZED SIGNER DATE Date: ____________________________ Compliance Status: Yes No Exhibit D -2- EX-10.2 3 c89243exv10w2.txt FORM OF EMPLOYEE STOCK OPTION AGREEMENT Exhibit 10.2 ATS Medical, Inc. Employee Stock Option Agreement ATS Medical, Inc. (the "Company") has adopted the ATS Medical, Inc. 2000 Stock Incentive Plan (the "Plan") which permits issuance of stock options for the purchase of shares of Common Stock, $.01 par value, of the Company, and the Company has taken all necessary actions to grant this option pursuant and subject to the terms of the Plan, as follows: 1. The Company grants as of the date of this Agreement, as a matter of separate agreement and not in lieu of salary or other compensation for services rendered, the right and option (hereinafter called the "Option") to purchase all or any part of an aggregate number of shares of Common Stock, $.01 par value, at the option price per share provided pursuant to the Notice of Grant of Stock Options and Option Agreement (the "Notice"), which constitutes the first page of this Agreement, and on the terms and conditions herein set forth in this Agreement and subject to all provisions of the Plan. It is understood and agreed that the option price is not less than the per share fair market value of such shares on the date this Option was granted. The Company intends that this Option shall be an Incentive Stock Option governed by the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The terms of the Plan and the Option shall be interpreted and administered so as to satisfy the requirements of Section 422 of the Code. A copy of the Plan will be furnished upon request of the Optionee. 2. This Option shall in all events terminate at the close of business on the "Termination Date" contained in the Notice or such shorter period as is prescribed herein, and, further, may be exercised during the option period only as described in the vesting schedule contained in the Notice. Such installments shall cumulate and, if in any year the full amount purchasable in such year is not purchased, the shares not purchased shall be purchasable in any subsequent year during the term of this Option. The Optionee shall not have any of the rights of a shareholder with respect to the Common Stock subject to this Option until such shares shall be issued to the Optionee upon the due exercise of this Option. Notwithstanding the said vesting schedule, the entire Option shall become immediately exercisable upon a Change in Control (as defined below) of the Company and shall terminate if not exercised 30 days following the date of a Change in Control of the Company. The Company shall notify the Optionee in writing of the acceleration within 10 days of the Change in Control. A "Change in Control of the Company" shall be deemed to have occurred if (a) a change in control occurs of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, whether or not the Company is then subject to such reporting requirement; (b) more than 25 percent of the then outstanding common shares of the Company is acquired by any person or group; or (c) individuals who at the date hereof constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof (unless the election or the nomination for election of each new director was approved by a vote of at least two-thirds of directors then still in office who were directors at the beginning of the period and/or their 1 successor directors who were recommended or elected to succeed a beginning director by at least two-thirds of the directors who were directors at the beginning of the period). 3. This Option shall terminate and may no longer be exercised if the Optionee ceases to be employed by the Company or its subsidiaries, if any, except that: (a) In the event that the Optionee shall cease to be employed by the Company or its subsidiaries, if any, for any reason other than the Optionee's gross and willful misconduct or death or disability, the Optionee shall have the right to exercise this Option at any time within three months after such termination of employment to the extent of the full number of shares the Optionee was entitled to purchase under this Option on the date of termination; (b) In the event that the Optionee shall cease to be employed by the Company or its subsidiaries, if any, by reason of the Optionee's gross and willful misconduct during the course of employment, including but not limited to wrongful appropriation of funds of the Company or the commission of a gross misdemeanor or felony, this Option shall be terminated as of the date of the misconduct; and (c) In the event that the Optionee shall die while in the employ of the Company or any subsidiary or within three (3) months after termination of employment for any reason other than gross and willful misconduct, or become disabled (within the meaning of Section 22(e)(3) of the Code) while in the employ of the Company or a subsidiary, if any, and the Optionee shall not have fully exercised this Option, this Option may be exercised at any time within twelve months after the Optionee's death or such disability by the personal representatives, administrators, or, if applicable, guardian of the Optionee or by any person or persons to whom this Option is transferred by will or the applicable laws of descent and distribution to the extent of the full number of shares the Optionee was entitled to purchase under this Option on the date of death, disability or termination of employment, if earlier; provided, however, that this Option may not be exercised to any extent by anyone after the Termination Date. 4. The exercise of this Option is contingent upon receipt from the Optionee (or other person exercising this Option pursuant to Section 3(c) above) of a representation that, at the time of such exercise, it is the Optionee's intent to acquire the shares being purchased for investment and not with a view to distribution thereof; provided however, that the receipt of this representation shall not be required upon exercise of this Option in the event that, at the time of such exercise, the shares subject to this Option shall have been and shall continue to be registered under the Securities Act of 1933, as amended (the "Securities Act"). The certificates for shares so issued fox investment may be restricted by the Company as to transfer unless such shares are first registered under the Securities Act or the Company receives advice of counsel satisfactory to it that registration under the Securities Act is not required. This Option shall not be exercisable until and unless: (i) the Shares underlying this Option have been registered under the Securities Act and applicable state securities laws, or (ii) upon determination of the Board of Directors of the Company that the shares can be issued to 2 the Optionee upon exercise in compliance with an available exemption from registration under applicable federal and state securities laws. 5. Subject to the foregoing, this Option may be exercised in whole or in part from time to time by serving written notice of exercise on the Company at its principal officer accompanied by payment of the purchase price. Payment of the purchase price shall be made by certified or bank cashier's check payable to the Company, or by tender of shares of the Company's Common Stock, previously owned by the Optionee, having a fair market value on the date of exercise equal to the exercise price of this Option, or a combination of cash and shares equal to such exercise price. 6. This Agreement shall not confer on the Optionee any right with respect to continuance of employment with the Company or any subsidiary of the Company, nor will it interfere in any way with the right of the Company to terminate such employment at any time. Neither the Optionee nor the Optionee's legal representative, legatees or distributees, as the case may be, will be or will be deemed to be the holder of any shares subject to this Option unless and until this Option has been exercised and the purchase price of the shares purchased has been paid. 7. This Option may not be transferred, except by will or the laws of descent and distribution to the extent provided in Section 3(c). 8. If there shall be any change in the stock subject to this Option through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the corporate structure of the Company, appropriate adjustments shall be made by the Company in the number of shares and the price per share of the shares subject to this Option in order to prevent dilution or enlargement of option rights granted hereunder. 9. The Company shall at all times during the term of this Option reserve and keep available such number of shares in the Company as will be sufficient to satisfy the requirements of this Agreement. 10. If the Optionee shall dispose of any of the shares of Common Stock acquired upon exercise of this Option within two years from the date this Option was granted or within one year after exercise of this Option, then, in order to provide the Company with the opportunity to claim the benefit of any income tax deduction, Optionee shall promptly notify the Company of the dates of acquisition and disposition of such shares, the number of shares so disposed of, and the consideration, if any, received for such shares. 11. This Agreement and the Plan contain all of the terms governing this grant, and the Plan and this Agreement are intended to be complete, final and conclusive. 3 EX-10.3 4 c89243exv10w3.txt FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT Exhibit 10.3 ATS Medical, Inc. Non-Qualified Stock Option Agreement ATS Medical, Inc. (the "Company") has adopted the ATS Medical, Inc. 2000 Stock Incentive Plan (the "Plan"), which permits issuance of stock options for the purchase of shares of Common Stock, $.01 par value, of the Company, and the Company has taken all necessary actions to grant this option pursuant and subject to the terms of the Plan, as follows: 1. The Company grants as of the date of this Agreement, as a matter of separate agreement and not in lieu of salary or other compensation for services rendered, the right and option (hereinafter called the "Option") to purchase all or any part of an aggregate number of shares of Common Stock, $.01 par value, at the option price per share provided pursuant to the Notice of Grant of Stock Options and Option Agreement (the "Notice"), which Notice constitutes the first page of this Agreement, and on the terms and conditions herein set forth and subject to all provisions of the Plan. It is understood and agreed that the option price is not less than the per share fair market value of such shares on the date this Option was granted. The Company intends that this Option shall not be an Incentive Stock Option governed by the provisions of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). The terms of the Plan and the Option shall be interpreted and administered so as to satisfy the requirements of Section 422 of the Code. A copy of the Plan will be furnished upon request of the Optionee. 2. This Option shall in all events terminate at the close of business on the "Termination Date" contained in the Notice, or such shorter period as is prescribed herein, and, further, may be exercised during the option period only as described in the vesting schedule contained in the Notice. Such installments shall cumulate and, if in any year the full amount purchasable in such year is not purchased, the shares not purchased shall be purchasable in any subsequent year during the term of this Option. The Optionee shall not have any of the rights of a shareholder with respect to the Common Stock subject to this Option until such shares shall be issued to the Optionee upon the due exercise of this Option. 3. This Option shall terminate and may no longer be exercised if the Optionee ceases to be employed by or be a full-time consultant to the Company or its subsidiaries, if any, except that: (a) In the event that the Optionee shall cease to be employed by or be a full-time consultant to the Company or its subsidiaries, if any, for any reason other than the Optionee's gross and willful misconduct or death or disability, the Optionee shall have the right to exercise this Option at any time within three months after such termination to the extent of the full number of shares the Optionee was entitled to purchase under this Option on the date of termination; (b) In the event that the Optionee shall cease to be employed by or be a full-time consultant to the Company or its subsidiaries, if any, by reason of the Optionee's 1 gross and willful misconduct, including but not limited to wrongful appropriation of funds of the Company or the commission of a gross misdemeanor or felony; this Option shall be terminated as of the date of the misconduct; and (c) In the event that the Optionee shall die while in the employ of or while providing full-time consulting to the Company or any subsidiary or within three (3) months after termination for any reason other than gross and willful misconduct, or become disabled (within the meaning of Section 22(e)(3) of the Code) while in the employ of or while providing full-time consulting to the Company or a subsidiary, if any, and the Optionee shall not have fully exercised this Option, this Option may be exercised at any time within twelve months after the Optionee's death or such disability by the personal representatives, administrators, or, if applicable, guardian of the Optionee or by any person or persons to whom this Option is transferred by will or the applicable laws of descent and distribution to the extent of the full number of shares the Optionee was entitled to purchase under this Option on the date of death, disability or termination of employment services, if earlier; provided, however, that this Option may not be exercised to any extent by anyone after the Termination Date. 4. The exercise of this Option is contingent upon receipt from the Optionee (or other person exercising this Option pursuant to Section 3(c) above) of a representation that, at the time of such exercise, it is the Optionee's intent to acquire the shares being purchased for investment and not with a view to distribution thereof; provided however, that the receipt of this representation shall not be required upon exercise of this Option in the event that, at the time of such exercise, the shares subject to this Option shall have been and shall continue to be registered under the Securities Act of 1933, as amended (the "Securities Act"). The certificates for shares so issued for investment may be restricted by the Company as to transfer unless such shares are first registered under the Securities Act or the Company receives advice of counsel satisfactory to it that registration under the Securities Act is not required. This Option shall not be exercisable until and unless: (i) the Shares underlying this Option have been registered under the Securities Act and applicable state securities laws, or (ii) upon determination of the Board of Directors of the Company that the shares can be issued to the Optionee upon exercise in compliance with an available exemption from registration under applicable federal and state securities laws. 5. Subject to the foregoing, this Option may be exercised in whole or in part from time to time by serving written notice of exercise on the Company at its principal office, accompanied by payment of the purchase price. Payment of the purchase price shall be made by certified or bank cashier's check payable to the Company, or by tender of shares of the Company's Common Stock previously owned by the Optionee, having a fair market value on the date of exercise equal to the exercise price of this Option, or a combination of cash and shares equal to such exercise price. 6. This Agreement shall not confer on the Optionee any right with respect to continuance of employment with or consulting to the Company or any subsidiary of the 2 Company, nor will it interfere in any way with the right of the Company to terminate the Optionee at any time. Neither the Optionee nor the Optionee's legal representative, legatees or distributees, as the case may be, wall be or will be deemed to be the holder of any shares subject to this Option unless and until this Option has been exercised and the purchase price of the shares purchased has been paid. 7. This Option may not be transferred, except by will or the laws of descent and distribution to the extent provided in Section 3(c) or pursuant to a qualified domestic relations order as defined by the Code. 8. If there shall be any change in the stock subject to this Option through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the corporate structure of the Company, appropriate adjustments shall be made by the Company in the number of shares and the price per share of the shares subject to this Option in order to prevent dilution or enlargement of option rights granted hereunder. 9. The Company shall at all times during the term of this option reserve and keep available such number of shares in the Company as will be sufficient to satisfy the requirements of this Agreement. 10. This Agreement and the Plan contain all of the terms governing this grant, and the Plan and this Agreement are intended to be completed, final and conclusive. 3 EX-10.4 5 c89243exv10w4.txt FORM OF NON-PLAN NON-QUALIFIED STOCK OPTION AGREEMENT Exhibit 10.4 ATS Medical, Inc. Non-Qualified Stock Option Agreement ATS Medical, Inc. (the "Company") has approved the grant of an option to Optionee for the purchase of shares of Common Stock, $.01 par value, of the Company (each, a "Share"), and the Company has taken all necessary actions to grant this option, as follows: 1. The Company grants as of the date of this Agreement, as a matter of separate agreement and not in lieu of salary or other compensation for services rendered, the right and option (hereinafter called the "Option") to purchase all or any part of an aggregate number of Shares set forth in the attached Notice of Grant of Stock Options and Option Agreement (the "Notice"), at the option price per Share set forth in such Notice, which Notice constitutes the first page of this Agreement, and on the terms and conditions herein set forth. It is understood and agreed that the option price is not less than the per Share fair market value of such Shares on the date this Option was granted. The Company intends that this Option shall not be an Incentive Stock Option governed by the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. This Option shall in all events terminate at the close of business on the date of "Expiration" contained in the Notice, or on such earlier date as is prescribed herein (in either case, a "Termination Date"), and, further, may be exercised during the Option period only as described in the vesting schedule contained in the Notice. Each installment of vested Options shall cumulate and, if in any year the full amount purchasable in such year is not purchased, the shares not purchased shall be purchasable in any subsequent year during the term of this Option. The Optionee shall not have any of the rights of a shareholder with respect to the Common Stock subject to this Option until such Shares shall be issued to the Optionee upon the due exercise of this Option. Notwithstanding the foregoing vesting schedule, the entire Option shall become immediately exercisable upon a Change in Control (as defined below) of the Company and shall terminate if not exercised 30 days following the date of a Change in Control of the Company. The Company shall notify the Optionee in writing of the acceleration within 10 days of the Change in Control. A "Change in Control of the Company" shall be deemed to have occurred if (a) a change in control occurs of a nature that would be required to be reported in response to item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, whether or not the Company is then subject to such reporting requirement; (b) more than 25 percent of the then outstanding common shares of the Company is acquired by any person or group; or (c) individuals who at the date hereof constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof (unless the election or the nomination for election of each new director was approved by a vote of at least two-thirds of directors then still in office who were directors at the beginning of the period and/or their successor directors who were recommended or elected to succeed a beginning director by at least two-thirds of the directors who were directors at the beginning of the period). 1 3. This Option shall terminate and may no longer be exercised if the Optionee ceases to be employed by or be a full-time consultant to the Company or its subsidiaries, if any, except that: (a) In the event that the Optionee shall cease to be employed by or be a full-time consultant to the Company or its subsidiaries, if any, for any reason other than the Optionee's gross and willful misconduct or death or disability, the Optionee shall have the right to exercise this Option at any time within three months after such termination to the extent of the full number of shares the Optionee was entitled to purchase under this Option on the date of termination; (b) In the event that the Optionee shall cease to be employed by or be a full-time consultant to the Company or its subsidiaries, if any, by reason of the Optionee's gross and willful misconduct, including but not limited to wrongful appropriation of funds of the Company or the commission of a gross misdemeanor or felony, this Option shall be terminated as of the date of the misconduct; and (c) In the event that the Optionee shall die while in the employ of or while providing full-time consulting to the Company or any subsidiary or within three (3) months after termination for any reason other than gross and willful misconduct, or become disabled (within the meaning of Section 22(e)(3) of the Code) while in the employ of or while providing full-time consulting to the Company or a subsidiary, if any, and the Optionee shall not have fully exercised this Option, this Option may be exercised at any time within twelve months after the Optionee's death or such disability by the personal representatives, administrators, or, if applicable, guardian of the Optionee or by any person or persons to whom this Option is transferred by will or the applicable laws of descent and distribution to the extent of the full number of shares the Optionee was entitled to purchase under this Option on the date of death, disability or termination of employment services, if earlier; provided, however, that this Option may not be exercised to any extent by anyone after the Termination Date. 4. The exercise of this Option is contingent upon receipt from the Optionee (or other person exercising this Option pursuant to Section 3(c) above) of a representation that, at the time of such exercise, it is the Optionee's intent to acquire the Shares being purchased for investment and not with a view to distribution thereof; provided however, that the receipt of this representation shall not be required upon exercise of this Option in the event that, at the time of such exercise, the Shares subject to this Option shall have been and shall continue to be registered under the Securities Act of 1933, as amended (the "Securities Act"). The certificates for Shares so issued for investment may be restricted by the Company as to transfer unless such Shares are first registered under the Securities Act or the Company receives advice of counsel satisfactory to it that registration under the Securities Act is not required. This Option shall not be exercisable until and unless: (i) the Shares underlying this Option have been registered under the Securities Act and applicable state securities laws, or (ii) upon determination of the Board of Directors of the Company that the Shares can be issued to 2 the Optionee upon exercise in compliance with an available exemption from registration under applicable federal and state securities laws. 5. Subject to the foregoing, this Option may be exercised in whole or in part from time to time by serving written notice of exercise on the Company at its principal office, accompanied by payment of the purchase price. Payment of the purchase price shall be made by certified or bank cashier's check payable to the Company, or by tender of shares of the Company's Common Stock previously owned by the Optionee, having a fair market value on the date of exercise equal to the exercise price of this Option, or a combination of cash and shares equal to such exercise price. 6. This Agreement shall not confer on the Optionee any right with respect to continuance of employment with or consulting to the Company or any subsidiary of the Company, nor will it interfere in any way with the right of the Company to terminate the Optionee at any time. Neither the Optionee nor the Optionee's legal representative, legatees or distributees, as the case may be, will be or will be deemed to be the holder of any shares subject to this Option unless and until this Option has been exercised and the purchase price of the shares purchased has been paid. 7. This Option may not be transferred, except by will or the laws of descent and distribution to the extent provided in Section 3(c) or pursuant to a qualified domestic relations order as defined by the Code. 8. If there shall be any change in the stock subject to this Option through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the corporate structure of the Company, appropriate adjustments shall be made by the Company in the number of Shares and the price per Share of the Shares subject to this Option in order to prevent dilution or enlargement of option rights granted hereunder. 9. The Company shall at all times during the term of this Option reserve and keep available such number of Shares in the Company as will be sufficient to satisfy the requirements of this Agreement. 10. This Agreement contains all of the terms governing this grant, and this Agreement is intended to be complete, final and conclusive. 11. The Company may amend the terms and conditions of this Agreement, accelerate the exercisability of the Option, and waive any conditions of or rights of the Company under this Agreement, prospectively or retroactively. Notwithstanding the foregoing, except as otherwise provided in this Agreement, the Company may not amend, alter, suspend, discontinue or terminate this Agreement, prospectively or retroactively, if such action would adversely affect the rights of Optionee, without the consent of the Optionee (or such other person entitled to hold this Option pursuant to Section 3(c) above). 12. In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and 3 absolute responsibility of the Optionee, are withheld or collected from such Optionee. In order to assist an Optionee in paying all or a portion of the federal and state taxes to be withheld or collected upon exercise of the Option, the Company, in its discretion and subject to such additional terms and conditions as it may adopt, may permit the Optionee to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the Shares otherwise to be delivered upon exercise or receipt of (or the lapse of restrictions relating to) such Option with a Fair Market Value (as defined below) equal to the amount of such taxes or (ii) delivering to the Company Shares other than Shares issuable upon exercise such Option with a Fair Market Value equal to the amount of such taxes. The election, if any, must be made on or before the date that the amount of tax to be withheld is determined. For purposes of this Agreement, "Fair Market Value" shall mean, with respect to property (including without limitation any Shares), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Company. Notwithstanding the foregoing, unless otherwise determined by the Company, the Fair Market Value of Shares as of a given date shall be, if the Shares are then quoted on the NASDAQ National Market System or the NASDAQ SmallCap Market System, as the case may be (in either case, "NASDAQ System"), the closing price as reported on the NASDAQ System on such date or, if the NASDAQ System is not open for trading on such date, on the most recent preceding date when it is open for trading. 13. The validity, construction and effect of the terms of this Agreement and any rules and regulations relating to this Agreement shall be determined in accordance with the laws of the State of Minnesota. 14. If any provision of this Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Option under any law deemed applicable by the Company, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Company, materially altering the purpose or intent of the Agreement, such provision shall be stricken from this Agreement, and the remainder of the Agreement shall remain in full force and effect. 15. This Agreement shall not create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any affiliate of the Company and the Optionee or any other person. 16. No fractional shares of Common Stock shall be issued or delivered pursuant to this Agreement, and the Company shall determine whether cash shall be paid in lieu of any fraction share or whether such fractional share or any rights thereto shall be canceled, terminated or otherwise eliminated. 4 EX-31.1 6 c89243exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER - SECTION 302 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 evaluation, 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 control over financial reporting. Date: November 5, 2004 /s/ Michael D. Dale ----------------------- Name: Michael D. Dale Title: Chief Executive Officer EX-31.2 7 c89243exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER - SECTION 302 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 evaluation, 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 control over financial reporting. Date: November 5, 2004 /s/ John R. Judd ----------------------- Name: John R. Judd Title: Chief Financial Officer EX-32.1 8 c89243exv32w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER - SECTION 906 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 September 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: November 5, 2004 /s/ Michael D. Dale ----------------------- Name: Michael D. Dale Title: Chief Executive Officer EX-32.2 9 c89243exv32w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER - SECTION 906 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 September 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: November 5, 2004 /s/ John R. Judd ----------------------- Name: John R. Judd Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----