-----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, Oi3CCha0qYq4DNftxMJiSYo4NtFZx4/o8HywjuJS6ZrgCQeE3vHGLUuT0RiqPRLS F1xrNiIuYoLAsrk1jFx04Q== 0000950134-05-020708.txt : 20051107 0000950134-05-020708.hdr.sgml : 20051107 20051107142059 ACCESSION NUMBER: 0000950134-05-020708 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20051107 DATE AS OF CHANGE: 20051107 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: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-129521 FILM NUMBER: 051182937 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 S-3 1 c99733s3sv3.txt FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 2005 REGISTRATION NO. 333-________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ATS MEDICAL, INC. (Exact name of registrant as specified in its charter) MINNESOTA 3842 41-1595629 (State or other jurisdiction of (Primary Standard (I.R.S. Employer incorporation or organization) Industrial Classification Identification No.) Code)
3905 ANNAPOLIS LANE, SUITE 105 MINNEAPOLIS, MINNESOTA 55447 (763) 553-7736 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) MICHAEL D. DALE PRESIDENT AND CHIEF EXECUTIVE OFFICER ATS MEDICAL, INC. 3905 ANNAPOLIS LANE, SUITE 105 MINNEAPOLIS, MINNESOTA 55447 (763) 553-7736 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: MICHAEL D. DALE TIMOTHY S. HEARN, ESQ. PRESIDENT AND CHIEF EXECUTIVE OFFICER DORSEY & WHITNEY LLP ATS MEDICAL, INC. 50 SOUTH SIXTH STREET, SUITE 1500 3905 ANNAPOLIS LANE, SUITE 105 MINNEAPOLIS, MINNESOTA 55402 MINNEAPOLIS, MINNESOTA 55447 (612) 340-2600 (763) 553-7736 FACSIMILE: (612) 340-2868 FACSIMILE: (763) 553-1492
Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering: [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ] CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT PRICE REGISTRATION FEE - ------------------------------------ ------------ ---------------- ------------------ ---------------- 6% Convertible Senior Notes due 2025 $22,400,000(1) N/A $22,400,000(1) $2,637(2) Common Stock, $.01 par value 5,600,000(3)(4) N/A N/A N/A(5) Warrants to Purchase Common Stock 1,344,000(6) N/A N/A N/A(7) Common Stock, $.01 par value 1,411,200(4)(8) $4.40(9) $ 6,209,280 $ 731(10) --------- ----- ----------- ------ Total -- -- $28,609,280 $3,368 --------- ----- ----------- ------
(1) Represents aggregate principal amount of the notes being registered. (2) Calculated in accordance with Rule 457(i) under the Securities Act of 1933, as amended (the "Securities Act"). (3) Pursuant to an agreement with the selling securityholders, represents 105% of the shares currently issuable upon conversion of the notes. (4) Pursuant to Rule 416 under the Securities Act, this Registration Statement also covers an indeterminable number of additional shares of common stock which may be issued from time to time as a result of stock splits, stock dividends and similar events, and the adjustment provisions of the notes and warrants. (5) No additional consideration will be received from the common stock issuable upon conversion of the notes and so no registration fee is required pursuant to Rule 457(i) under the Securities Act. (6) Represents 1,344,000 warrants, each of which is exercisable for one share of common stock. (7) Pursuant to Rule 457(g) under the Securities Act, no registration fee is required with respect to the warrants. (8) Pursuant to an agreement with the selling securityholders, represents 105% of the shares currently issuable upon exercise of the warrants. (9) Represents the exercise price of the warrants. (10) Calculated in accordance with Rule 457(g) under the Securities Act. ---------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. The information in this prospectus is not complete and is subject to change. The selling securityholders named in this prospectus may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. PROSPECTUS Subject to completion, dated November 7, 2005 ATS MEDICAL, INC. (ATS MEDICAL LOGO) $22,400,000 6% CONVERTIBLE SENIOR NOTES DUE 2025 WARRANTS TO PURCHASE 1,344,000 SHARES OF COMMON STOCK 7,011,200 SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES AND EXERCISE OF THE WARRANTS This prospectus relates to $22,400,000 aggregate principal amount of 6% Convertible Senior Notes due 2025 of ATS Medical, Inc. and warrants to purchase 1,344,000 shares of common stock of ATS Medical, Inc. that may be offered and sold from time to time by certain holders, referred to in this prospectus as the selling securityholders, of the notes and warrants, as well as 7,011,200 shares of common stock, which represent 105% of the common stock issuable upon conversion of the notes and cash exercise of the warrants. We will receive no part of the proceeds from sales made under this prospectus. Upon any exercise of the warrants by payment of cash, however, we will receive the exercise price of the warrants. We are paying the expenses incurred in registering the notes, warrants and shares, but all selling and other expenses incurred by the selling securityholders will be borne by the selling securityholders. We originally issued the notes and warrants as of October 7, 2005 and October 14, 2005, at an issue price of $1,000 per $1,000 principal amount of the notes. For each $1,000 in principal amount of the notes issued, we issued warrants to purchase 60 shares of our common stock. Each warrant represents the right to purchase one share of our common stock. Neither the notes nor the warrants are listed on any securities exchange or included in any automated quotation system. The notes are eligible for trading on The PORTAL Market of the National Association of Securities Dealers, Inc. Our common stock is traded on the Nasdaq National Market under the symbol "ATSI". On November 2, 2005, the last reported sale price of our common stock on the Nasdaq National Market was $3.16 per share. ---------- INVESTING IN THE NOTES, WARRANTS AND OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. BEFORE INVESTING IN THE NOTES, WARRANTS OR OUR COMMON STOCK, WE RECOMMEND THAT YOU CAREFULLY READ THIS ENTIRE PROSPECTUS, INCLUDING THE "RISK FACTORS" SECTION BEGINNING ON PAGE 8, OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004, OUR QUARTERLY REPORTS ON FORM 10-Q FILED DURING 2005 AND THE OTHER DOCUMENTS WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ---------- ATS MEDICAL, INC. 3905 Annapolis Lane, Suite 105 Minneapolis, Minnesota 55447 (763) 553-7736 The date of this prospectus is _________, 2005. 2 TABLE OF CONTENTS
Page ---- PROSPECTUS SUMMARY....................................................... 4 RATIO OF EARNINGS TO FIXED CHARGES....................................... 8 RISK FACTORS............................................................. 8 USE OF PROCEEDS.......................................................... 16 DESCRIPTION OF THE NOTES................................................. 16 DESCRIPTION OF THE WARRANTS.............................................. 25 DESCRIPTION OF CAPITAL STOCK............................................. 28 MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS.......................... 29 SELLING SECURITYHOLDERS.................................................. 37 PLAN OF DISTRIBUTION..................................................... 40 EXPERTS.................................................................. 42 LEGAL MATTERS............................................................ 42 WHERE YOU CAN FIND MORE INFORMATION...................................... 42 INCORPORATION OF DOCUMENTS BY REFERENCE.................................. 42
YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR PROVIDED IN THIS PROSPECTUS OR ANY SUPPLEMENT TO THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE ELSE TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR ANY SUPPLEMENT TO THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE COVER PAGE OF THIS PROSPECTUS OR ANY SUPPLEMENT. 3 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus or incorporated by reference. However, it may not contain all of the information that is important to you. You should carefully read the entire prospectus, especially the risks of investing in our securities discussed under "Risk Factors," and the documents incorporated by reference. As used in this prospectus, the words "our company," "we," "us," "our" or "ATS Medical, Inc." refer only to ATS Medical, Inc., unless the context requires otherwise, and do not include any subsidiary. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus and the documents incorporated by reference in this prospectus contain forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. Forward-looking statements may be identified by the use of language such as "may," "will," "expect," "anticipate," "estimate," "should" or "continue," and similar language. These forward-looking statements involve risk and uncertainty. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, some of which are described under the heading "Risk Factors" and in our reports to the Securities and Exchange Commission (the "SEC") incorporated by reference into this prospectus. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. BUSINESS OF ATS MEDICAL, INC. ATS Medical, Inc. is a Minnesota corporation founded in June 1987. We develop, manufacture, and market medical devices. Our primary interest lies with devices used by cardiovascular surgeons in the cardiac surgery operating theater. Currently, we participate in the mechanical bileaflet portion of the replacement heart valve market and in the market for the surgical treatment of atrial fibrillation. We also are engaged in a development project for autotransfusion products. Carbomedics, Inc. (f/k/a Sulzer Carbomedics, Inc.) 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) mechanical heart valve 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, for 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 built up significant inventories. The drawing down of these inventories since 2002 has provided a source of cash for operations. During 2004, we started manufacturing our own carbon components. In 2005 our manufacturing levels will approach our sales and in 2006 our inventory levels will flatten with manufacturing and sales being more in balance. 4 We have been steadily building both our domestic and international sales and marketing infrastructure since 2003. This rebuilding is the most significant factor in our expense levels since that time. 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 37% during the first half of 2005. During 2004, we made our first ventures outside the mechanical heart valve market by completing two business development agreements. The first, signed in April 2004, is with ErySave AB ("ErySave"), a Swedish research firm, for exclusive worldwide rights to ErySave's PARSUS filtration technology for cardiac surgery procedures. We had no revenues in 2004 nor do we expect any for 2005 from this technology. In November, we completed a global partnership agreement with CryoCath Technologies, Inc. ("CryoCath") to market CryoCath's surgical cryotherapy products for the ablation of cardiac arrhythmias. We realized revenue from the CryoCath agreement starting in the first quarter of 2005. In 2005 we have continued our ventures outside the mechanical heart valve market by entering into two additional business development agreements. On June 22, 2005, we entered into a Marketing Services Agreement with Alabama Tissue Center, Inc. ("ATC," a/k/a Regeneration Technologies, Inc. - Cardiovascular), a subsidiary of Regeneration Technologies, Inc. Under the terms of the agreement, ATC has appointed us as its exclusive marketing services representative to promote, market and solicit orders for ATC's processed cardiovascular allograft tissue from doctors, hospitals, clinics and patients throughout North America. On June 23, 2005, we entered into an Exclusive Development, Supply and Distribution Agreement with Genesee BioMedical, Inc. ("GBI"), under which GBI will develop, supply, and manufacture cardiac surgical products to include annuloplasty repair rings, c-rings and accessories, and we will have exclusive worldwide rights to market and sell such products. Our principal executive offices are located at 3905 Annapolis Lane, Suite 105, Minneapolis, Minnesota 55447 and our telephone number is (763) 553-7736. THE OFFERING Issuer........................ ATS Medical, Inc. Selling Securityholder........ Accredited investors who purchased our notes and warrants in October 2005. Securities Offered............ $22,400,000 aggregate principal amount of 6% Convertible Senior Notes due October 15, 2025, warrants to purchase 1,344,000 shares of our common stock and 7,011,200 shares of common stock, which represent 105% of the common stock issuable upon conversion of the notes and cash exercise of the warrants. Use of Proceeds............... We will not receive any proceeds from sales of the notes, warrants or shares of common stock sold from time to time under this prospectus by the selling securityholders. Upon any exercise of the warrants by payment of cash, however, we will receive the exercise price of the warrants, which will be used for general corporate purposes. Notes Interest................... The notes bear interest at an annual rate of 6%. Interest is payable semi-annually on April 15 and October 15 of each year, beginning on April 15, 2006. Maturity Date.............. October 15, 2025.
5 Conversion................. The notes are convertible at the holder's option at any time prior to maturity into shares of our common stock (or, under certain circumstances, into cash; see "Risk Factors" heading below), initially at a conversion price of $4.20 per share, subject to adjustment upon certain events. Auto-Conversion............ At any time prior to maturity (subject to certain limitations), we may elect to automatically convert some or all of the notes into shares of our common stock if the closing price of our common stock exceeds 150% of the conversion price for 20 trading days during any 30 trading day period ending within 5 days of the notice of automatic conversion and either (x) a registration statement covering the resale of the common stock issued upon conversion is effective and available for use from the date we notify you of the automatic conversion through and including the earlier of the date of the automatic conversion or the last date on which the registration statement registering the resale of such common stock is required to be kept effective under the terms of the registration rights agreement, or (y) the common stock issuable upon conversion may be sold pursuant to Rule 144(k) under the Securities Act. Additional Payment upon Conversion during the first Three Years....... If we effect an automatic conversion of the notes prior to October 15, 2008, we will make an additional payment equal to three full years of interest, less any interest actually paid or provided for prior to the conversion date. We may pay this additional payment in cash or, at our option, in shares of common stock. If we elect to pay the additional payment in common stock, the stock will be valued at 95% of the closing price of the stock for the 10 trading days ending on and including the second trading day immediately preceding the conversion date. Additional Shares upon Conversion in Connection with Certain Events..... If a holder elects to convert the notes prior to October 15, 2010 in connection with certain corporate change of control transactions in which 10% or more of the consideration for the common stock consists of cash, securities or other property that is not traded or scheduled to be traded immediately following such transaction on a U.S. national securities exchange or the NASDAQ National Market, we will increase the conversion rate for the notes surrendered for conversion by a number of additional shares as described in the indenture. Noteholders should read the indenture for a description of how we will determine the number of additional shares. Under certain circumstances, some or all of the notes may be converted into cash. See "Risk Factors" heading below. Adjustments to the Conversion Price........ The conversion price of the notes will be subject to adjustment under certain circumstances including, but not limited to, the payment of any cash dividend on our common stock. Noteholders should read the indenture for a description of events that cause an adjustment to the conversion price as well as the mechanics of the adjustments. Optional Redemption........ At any time on or after October 20, 2008, we may redeem some or all of the notes at 100% of the principal amount plus accrued and unpaid interest to, but excluding, the redemption date. If we elect to redeem the notes, we will provide notice of redemption to the noteholders not less than 20 days and not more than 90 days before the redemption date.
6 Repurchase at Holder's Option.................. A holder may require us to repurchase the holder's notes for cash on October 15, 2010, October 15, 2015 or October 15, 2020, at a price equal to 100% of the principal amount plus accrued and unpaid interest, if any, to the applicable repurchase date. Repurchase at Holder's Option upon Certain Events.................. Upon a fundamental change or if our common stock is no longer traded on a national exchange, a holder may require us to repurchase the holder's notes in cash at a price equal to 100% of the principal amount plus accrued and unpaid interest, if any, to the applicable repurchase date. Ranking.................... The notes are our senior unsecured debt and will be structurally subordinated to any secured indebtedness (to the extent of its security), rank on parity with all of our existing and future senior debt and be senior to all future subordinated debt. Warrants Exercise................... Each warrant is exercisable for one share of our common stock at an initial exercise price of $4.40 per share, subject to adjustment upon certain events. The warrants are exercisable (in whole or in part) at any time on or before October 15, 2010. Expiration................. Each of the warrants will expire at 5:00 p.m., New York City time, on October 15, 2010. Trading....................... The notes, warrants and the underlying common stock have been registered under the Securities Act. Currently, there is no public market for the notes or warrants, and we cannot assure you that any such market will develop. The notes and warrants will not be listed on any securities exchange or included in any automated quotation system. Our common stock is currently traded on the NASDAQ National Market under the symbol "ATSI." CUSIP Numbers................. The CUSIP numbers for the notes and the warrants after the registration of their resale with the SEC are 002083 AB 9 and 002083 14 5, respectively. Federal Tax Consequences...... For a discussion of tax considerations concerning the notes, the warrants and the common stock into which they may be converted or exercised, see "Material U.S. Federal Income Tax Considerations" beginning on page 29. Risk Factors.................. An investment in the notes involves a high degree of risk. See "Risk Factors" beginning on page 8 for a discussion of certain factors that you should consider when evaluating an investment in the notes, warrants and the underlying common stock. Our articles of incorporation authorize the issuance of 40,000,000 shares of common stock, which may not be enough for us to deliver shares upon conversion of some or all the notes. We intend to increase our authorized shares at our 2006 annual meeting of shareholders. Unless or until an increase in our authorized shares is approved, we will have the right to deliver cash of equivalent value instead of shares of common stock in connection with any conversion of the notes to the extent that sufficient shares are not available.
7 RATIO OF EARNINGS TO FIXED CHARGES The ratio of earnings to fixed charges for each of the years indicated is as follows:
NINE MONTHS FISCAL YEAR ENDED DECEMBER 31 ENDED -------------------------------------------------------- SEPTEMBER 30, 2000 2001 2002 2003 2004 2005 -------- ------- -------- -------- ------------- ------------- Ratio of Earnings to Fixed Charges 7.81 -- -- -- -- -- Deficiency of Earnings Available to Cover Fixed Charges (in thousands) -- $(6,844) $(18,212) $(13,292) $(16,643) $(11,170)
For purposes of computing these ratios, earnings represent income from continuing operations before income taxes and fixed charges. Fixed charges represent interest expense plus the interest factor in rental expenses. There were insufficient earnings available to cover fixed charges for years 2001 through 2005. As a result, the ratio of earnings to fixed charges was less than 1.0 for these years. The deficiencies of earnings to fixed charges for these years are indicated in the table above. RISK FACTORS An investment in the notes and warrants involves a number of risks. These risks include those described in this prospectus and others we have not anticipated or discussed. Before you purchase the notes and warrants you should carefully consider the information about risks identified below, as well as the information about risks stated in other parts of this prospectus and in the SEC filings that we have incorporated by reference in this prospectus. Any of the risks discussed below or elsewhere in this prospectus or in our SEC filings, and other risks we have not anticipated or discussed, could have a material impact on our business, results of operations, and financial condition. As a result, they could have an impact on our ability to pay interest on the notes, our ability to repay the notes at maturity, or our stock price. RISKS RELATING TO OUR BUSINESS 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 States, 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 primary 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 8 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 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. 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 nine months ended September 30, 2005, more than 61% 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: - unforeseen changes in regulatory requirements and government health programs; - weaker intellectual property rights protection in some countries; 9 - new export license requirements, changes in tariffs or trade restrictions; - political and economic instability in our target markets; and - greater difficulty in collecting payments from product sales. Slow payment of receivables by our international distributors, or the occurrence of any of the other factors listed above, could harm our ability to successfully commercialize our product internationally and could harm our business. We have a history of net losses. If we do not have net income in the future, we may be unable to continue our operations. We are not currently profitable and have a very limited history of profitability. As of September 30, 2005, we had an accumulated deficit of $78.7 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. 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 10 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 2005. 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, we have only just started increasing production to higher levels. In the future, as we continue to increase production at the plant, we may encounter difficulties in maintaining and expanding our manufacturing operations, including problems involving: - production yields; - quality control; - per unit manufacturing costs; - shortages of qualified personnel; and - compliance with FDA and international regulations and requirements regarding good manufacturing practices. Difficulties encountered by us in establishing or maintaining a commercial-scale manufacturing facility may limit our ability to manufacture our heart valve and therefore could seriously harm our business and results of operations. 11 Our business could be seriously harmed if third-party payers 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 payers, such as governmental programs, private insurance plans and managed care organizations. Third-party payers are increasingly challenging the pricing of medical products and procedures that they consider not to be cost-effective or are used for a non-approved indication. The failure by physicians, hospitals and other users of our products to obtain sufficient reimbursement from third-party payers 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 payers 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 re-operation. 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 be assured 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 intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights. Any litigation could be costly and divert our attention from the growth of the business. We cannot assure you that our patents and other proprietary rights will not be successfully challenged, or that others will not independently develop substantially equivalent information and technology or otherwise gain access to our proprietary technology. We may be sued by third parties which claim that our product infringes on their intellectual property rights. Any such suits could result in significant litigation or licensing expenses or we might be prevented from selling our product. We may be exposed to future litigation by third parties based on intellectual property infringement claims. Any claims or litigation against us, regardless of the merits, could result in substantial costs and could harm our business. In addition, intellectual property litigation or claims could force us to: - cease manufacturing and selling our product, which would seriously harm us; 12 - obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; or - redesign our product, which could be costly and time-consuming. We are subject to extensive governmental regulation, which is costly, time consuming and can subject us to unanticipated delays. The ATS heart valve and our manufacturing activities are subject to extensive regulation by a number of governmental agencies, including the FDA and comparable international agencies. We are required to: - maintain the approval of the FDA and international regulatory agencies to continue selling the ATS heart valve; - obtain the approval of international regulatory agencies in countries where the ATS heart valve is not yet marketed; - satisfy content requirements for all of our labeling, sales and promotional materials; - comply with manufacturing and reporting requirements; and - undergo rigorous inspections by these agencies. Compliance with the regulations of these agencies may delay or prevent us from introducing any new or improved products. Violations of regulatory requirements may result in fines, marketing restrictions, product recall, withdrawal of approvals and civil and criminal penalties. The price of our common stock has been volatile, which may result in losses to investors. Historically, the market price of our common stock has fluctuated over a wide range and it is likely that the price of our common stock will fluctuate in the future. The market price of our common stock could be impacted by the following: - the success of our management in operating ATS effectively; - the failure of the ATS valve to gain market acceptance in the United States; - announcements of technical innovations or new products by our competitors; - the status of component supply arrangements; - changes in reimbursement policies; - government regulation; - developments in patent or other proprietary rights; - public concern as to the safety and efficacy of products developed by us or others; and - general market conditions. In addition, due to one or more of the foregoing factors, in future years, our results of operations may fall below the expectations of securities analysts and investors. In that event, the market price of our common stock could be materially and adversely affected. Finally, in recent years the stock market has experienced extreme price and 13 volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results. Our charter documents and Minnesota law may discourage and could delay or prevent a takeover of our company. Provisions of our articles of incorporation, bylaws and Minnesota law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. These provisions include the following: - No cumulative voting by shareholders for directors; - The ability of our board to set the size of the Board of Directors, to create new directorships and to fill vacancies; - The ability of our board, without shareholder approval, to issue preferred stock, which may have rights and preferences that are superior to our common stock; - The ability of our board to amend the bylaws; and - Restrictions under Minnesota law on mergers or other business combinations between us and any holder of 10% or more of our outstanding common stock. RISKS RELATING TO THE NOTES AND THE WARRANTS The notes will be structurally subordinate in right of payment to our secured debt. The notes will be our general obligations and will be structurally subordinate in right of payment to all of our existing secured debt and any future secured debt that we incur to the extent of the security therefor and will rank on parity with all of our existing and future senior debt. In the event of our bankruptcy, liquidation or reorganization or upon acceleration of the notes due to an event of default, our assets will be available to pay obligations on the notes only after all secured debt has been paid. As a result, there may not be sufficient assets remaining to pay amounts due on any or all of the outstanding notes. In addition, we will not make any payments on the notes in the event of payment defaults on any future secured debt financing that we may incur. As of September 30, 2005, we had $1.9 million of secured indebtedness (as defined in the indenture) outstanding to which the notes would have been effectively subordinated. The notes will also be effectively subordinated to the liabilities of our subsidiaries. We may not have sufficient funds to pay our debt and other obligations. Our cash, cash equivalents, short and long term investments and operating cash flows may be inadequate to meet our obligations under the notes or our other obligations. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the notes, we will be in default under the notes, which could cause defaults under any other of our indebtedness then outstanding. Any such default would have a material adverse effect on our business, prospects, financial condition and results of operations. In addition, we cannot be sure that we would be able to repay amounts due in respect of the notes if payment of those notes were to be accelerated following the occurrence of an event of default as described in the indenture. We may not have sufficient funds to purchase the notes upon a repurchase event. We may not have the funds necessary to purchase the notes at the option of the holders upon certain repurchase events, including a change in control. If a repurchase event were to occur, we may not have sufficient funds to pay the purchase price for all tendered notes, or restrictions in our outstanding debt may not allow those purchases. We are only obligated to offer to repurchase the notes upon certain specified repurchase events. There may be other events that could hurt our financial condition that would not entitle you to have your notes repurchased by us. 14 The notes do not require us to achieve or maintain minimum financial results, the lack of which could negatively impact holders of the notes. The notes do not require us to achieve or maintain any minimum financial results relating to our financial position or results of operations. Our ability to recapitalize and take a number of other actions that are not limited by the terms of the indenture and the notes could have the effect of diminishing our ability to make payments on the notes when due. In addition, we are not restricted from repurchasing subordinated indebtedness or common stock by the terms of the indenture and the notes. If you hold notes or warrants, you will not be entitled to any rights as a holder of our common stock, but you will be subject to all changes made with respect to our common stock. If you hold the notes or the warrants, other than the right to adjustments in the conversion price of the notes and the exercise price of the warrants upon certain events, you will not be entitled to any rights with respect to our common stock (including, without limitation, voting rights and rights to receive any dividends or other distributions on our common stock), but you will be subject to all changes affecting the common stock. You will only be entitled to rights as a holder of common stock if and when we deliver shares of common stock to you upon conversion of your notes and exercise of your warrants. For example, in the event that an amendment is proposed to our charter or bylaws requiring shareholder approval and the record date for determining shareholders of record entitled to vote on the amendment occurs prior to conversion of your notes, you will not be entitled to vote on the amendment, although the common stock you receive upon conversion of your notes and exercise of your warrants will nevertheless be subject to any changes in the powers, preferences or special rights of our common stock or other classes of capital stock. If we automatically convert the notes, you should be aware that there is a substantial risk of fluctuation in the price of our common stock from the date we elect to automatically convert to the conversion date. We may elect to automatically convert the notes on or prior to maturity if the closing price of our common stock has exceeded 150% of the conversion price for at least 20 trading days during any 30-day period ending within five trading days prior to the notice of automatic conversion. You should be aware that there is a risk of fluctuation in the price of our common stock between the time when we may first elect to automatically convert the notes and the automatic conversion date. These fluctuations may adversely affect the value of the shares of common stock into which the notes may be converted and the additional shares, if applicable, issued in satisfaction of the interest make-whole payment. If we do not receive shareholder approval to increase the number of shares of common stock authorized in our articles of incorporation, the notes may only be convertible into cash, and we may not have sufficient cash available. Our articles of incorporation authorize the issuance of 40,000,000 shares of common stock. Given the number of shares of common stock that is currently outstanding and the number of options that are exercisable into shares of common stock, there is a risk that we will not have enough authorized shares available to issue common stock upon conversion of the notes. In order to increase the number of shares of common stock authorized, we will need to get shareholder approval to amend our articles of incorporation. There is a risk that the shareholders will not approve the amendment to our articles of incorporation and, therefore, that some or all of the notes may only be convertible into cash, at our option. If this occurs, you will not be able to control whether you will receive cash or shares upon conversion of your notes. Furthermore, there may be a risk that we will not have sufficient funds available to fund the conversion of some or all of the notes. The notes were issued with original issue discount. The notes were issued with original issue discount, and accordingly, during the period in which you hold the notes, you will in general be required to recognize ordinary interest income with respect to the notes in excess of the stated interest paid on the notes. The notes and the warrants were initially issued together as an investment unit, and accordingly the purchase price of the investment unit was required to be allocated between the note and the warrant based on their relative fair market values. Because the principal amount of the note exceeds the allocated purchase 15 price, the excess amount is characterized as original issue discount for tax purposes and results in recognition by the holder of interest income in excess of stated interest. Your purchase and holding of the notes may have certain other tax consequences to you depending on your particular circumstances. See "Material U.S. Federal Income Tax Considerations - U.S. Federal Income Tax Consequences to U.S. Holders - Notes" below. USE OF PROCEEDS We will not receive any proceeds from sales of the notes, warrants or shares of common stock sold from time to time under this prospectus by the selling securityholders. Upon any exercise of the warrants by payment of cash, however, we will receive the exercise price of the warrants, which will be used for general corporate purposes. DESCRIPTION OF THE NOTES We issued the notes under an indenture dated as of October 7, 2005 and a supplemental indenture dated as of October 13, 2005, between us and Wells Fargo Bank, National Association, a national banking association, as trustee. Wells Fargo Bank, National Association also acts as paying agent, conversion agent and registrar for the notes. The terms of the notes include those provided in the notes, the indenture and the supplemental indenture and those provided in the securities purchase agreement, the amendment to the securities purchase agreement, the registration rights agreement and the amendment to the registration rights agreement, each of which we entered into with the buyers of the notes. The following description reflects all amendments and supplements to the operative documents to date. The following description is only a summary of the material provisions of the notes, the indenture and the supplemental indenture. The form of note, the indenture, the supplemental indenture, the securities purchase agreement, the amendment to the securities purchase agreement, the registration rights agreement, the amendment to the registration rights agreement and other operative documents are filed as exhibits to the registration statement of which this prospectus is a part. We urge you to read these documents in their entirety because they, and not this description, define the rights of a holder of the notes. GENERAL The notes: - were issued in an aggregate principal amount of $22,400,000; - were issued in registered form, without coupons, in denominations of $1,000 principal amount at maturity and integral multiples of $1,000; - are our senior unsecured debt and are structurally subordinated to any secured indebtedness, rank on parity with all of our existing and future senior debt and be senior to all future subordinated debt; - are convertible into our common stock initially at a conversion price of $4.20 per share, under the conditions and subject to such adjustments as are described under "-Conversion Rights-Conversion at Holder's Option" and "-Conversion Rights-Conversation Rate Adjustments"; - are automatically convertible at our option into our common stock at the then effective conversion price if the closing price of our common stock exceeds 150% of the then effective conversion price for any 20 trading days during any 30-day period ending within five trading days prior to the notice of automatic conversion, under the conditions and subject to such adjustments as are described under "Conversion Rights-Automatic Conversion" and "-Conversion Rights-Conversion Rate Adjustments"; - are redeemable at our option in whole or in part beginning on October 20, 2008 upon the terms set forth under "-Optional Redemption by Us"; 16 - are subject to repurchase by us at the holder's option on October 15, 2010, October 15, 2015 and October 15, 2020 or upon a change in control of ATS Medical or in the event our common stock is no longer authorized for quotation or listing on any of The New York Stock Exchange, Inc., the American Stock Exchange, Inc. or The Nasdaq National Market or SmallCap Market, upon the terms and at the repurchase prices set forth under "-Repurchase of Notes at the Option of Holders"; and - mature on October 15, 2025, unless earlier converted, redeemed by us at our option or repurchased by us at the option of the holder. The notes bear interest at the annual rate of 6%. Interest accrues on the notes from October 7, 2005. Interest will be paid on each April 15 and October 15 of each year, beginning on April 15, 2006, subject to limited exceptions if the notes are converted, redeemed or repurchased prior to an interest payment date. The record dates for payment of interest are April 4 and October 4. Interest is computed on the basis of a 360-day year consisting of twelve 30-day months. No sinking fund is provided for the notes. CONVERSION RIGHTS Conversion at Holder's Option A holder may convert any outstanding notes at any time prior to maturity into shares of our common stock at an initial conversion price of $4.20 per share of common stock. The conversion price is subject to adjustment as described below. We will not issue fractional shares of common stock upon conversion of the notes. Instead, we will pay the cash value of such fractional share based upon the sale price of our common stock on the business day immediately preceding the conversion date. A holder may convert notes only in denominations of $1,000 principal amount at maturity and integral multiples of $1,000. If a holder delivers a notice regarding its election to require us to repurchase its notes following the occurrence of a repurchase event as described under "Repurchase of Notes at Option of Holders" (a "repurchase event"), the holder may convert such notes only if the holder withdraws such repurchase notice by delivering a written notice of withdrawal to us prior to the close of business on the last business day prior to the repurchase date. We will pay in cash, on any note or portion of a note surrendered for conversion during the period from the close of business on any interest payment date to which interest has been fully paid through the close of business on the business day preceding the record date for the next such interest payment date, accrued and unpaid interest, if any, on the note or portion thereof surrendered for conversion to, but excluding, the date of conversion. However, any note or portion of a note surrendered for conversion during the period from the close of business on the record date for any interest payment date through the close of business on the business day next preceding such interest payment date must (unless such note or portion of a note being converted will have been called for redemption or will have become due prior to such interest payment date as a result of a repurchase event) be accompanied by payment, in immediately available funds or other funds acceptable to us, of an amount equal to the interest otherwise payable on such interest payment date on the principal amount being converted; provided, however, that no such payment need be made if there exists at the time of conversion a default in the payment of interest on the notes. Conversion Procedures A holder will not be required to pay any taxes or duties relating to the issuance or delivery of our common stock if the holder exercises its conversion rights, but will be required to pay any tax or duty which may be payable relating to any transfer involved in the issuance or delivery of the common stock in a name other than the holder's. Certificates representing shares of common stock will be issued or delivered only after all applicable taxes and duties, if any, payable by the holder have been paid. 17 To convert a definitive note (a registered note held in certificated form), a holder must: - complete a written notice in the form of the conversion notice attached as an exhibit to the indenture; - deliver the completed conversion notice to the Trustee, to us (with a copy to our legal counsel) and to our Transfer Agent, Wells Fargo Shareowner Services, Compliance Department, 161 North Concord Exchange, Saint Paul, Minnesota 55075; - if such note is surrendered for conversion during the period from the close of business on the record date for any interest payment date through the close of business on the last business day prior to such interest payment date, pay an amount equal to the interest otherwise payable on such interest payment date on the principal amount being converted; - pay all taxes or duties, if any, as described in the preceding paragraph; and - surrender the definitive note to us. In the case of an interest in a Global Note, conversion notices may be delivered and a participant's interest in a Global Note may be surrendered for conversion in accordance with the rules and procedures of The Depository Trust Company as in effect from time to time. The conversion date will be the date on which all of the foregoing requirements have been satisfied. The notes will be deemed to have been converted immediately prior to the close of business on the conversion date. We will use our best efforts to, within three business days after the conversion date, (a) (1) in the case of shares of common stock issuable upon such conversion that will not, following issuance, be restricted securities, at the holder's request, credit such aggregate number of full shares of common stock to which the holder shall be entitled to the holder's or its designee's balance account with The Depository Trust Company through its Deposit Withdrawal Agent Commission system or (2) issue and deliver a certificate for the number of shares of common stock into which the notes are converted to the converting holder, and (b) deliver to such holder a check or cash in lieu of any fractional shares arising upon such conversion. If we have not delivered the number of shares of common stock issued upon conversion of notes within five business days after the conversion date, we will pay liquidated damages to the holder of the notes being converted at the rate of 0.5% per month of the outstanding principal amount of notes converted by such holder. Automatic Conversion All of the notes may be automatically converted at any time prior to October 15, 2025, at our option, into shares of our common stock at the then effective conversion price if the closing price of our common stock exceeds 150% of the then effective conversion price for at least 20 trading days during any 30-day period ending within five trading days prior to the notice of automatic conversion. If we effect the automatic conversion, we will deliver a notice of automatic conversion to the holders at least five days prior to the automatic conversion date. If we elect to automatically convert notes on or prior to October 15, 2008, we will make an additional payment in cash or, at our election under certain circumstances, in shares of common stock, with respect to notes in an amount equal to $181.33 per $1,000 principal amount of the notes converted, less the amount of any interest we actually paid on the notes prior to the automatic conversion date. We may not automatically convert the notes unless either: - a registration statement covering the resale of the common stock issuable upon conversion of the notes is effective and available for use from the date of the notice of an automatic conversion through and including the earlier of the automatic conversion date or the last date on which the registration statement is required to be kept effective under the terms of the registration rights agreement, or - the common stock issuable upon the automatic conversion may be sold pursuant to Rule 144 under the Securities Act. 18 In addition, we may only elect to automatically convert the notes if we have, as of the date of the automatic conversion notice, sufficient shares of our common stock authorized and available for issuance on conversion of the notes so called for automatic conversion. Conversion Rate Adjustments We will adjust the conversion rate if any of the following occurs: (1) we issue common stock as a dividend or distribution on our common stock; (2) we subdivide or combine our common stock; (3) we issue to all holders of our common stock specified rights or warrants to purchase our common stock; (4) we distribute to all holders of our common stock any class of our capital stock (other than those dividends or distributions listed in (1) above) or evidences of indebtedness or other assets, including securities but excluding: (a) rights or warrants listed in (3) above; and (b) dividends or distributions paid exclusively in cash (except as otherwise described below); or (5) we distribute to all holders of our common stock cash (excluding cash distributed upon merger or consolidation or as part of a distribution described in clauses (1) through (4) above). To the extent, at the time of conversion of notes, we have a shareholder rights plan in effect, a holder will receive, in addition to the common stock, the rights under the shareholder rights plan whether or not the rights have separated from the common stock at the time of conversion, subject to limited exceptions. We will not be required to make an adjustment in the conversion price unless the adjustment would require a change of at least one percent in the conversion price. However, we will carry forward any adjustments that are less than one percent of the conversion price and include them in any subsequent adjustment. Except as described above in this section, we will not adjust the conversion rate for any issuance of our common stock or convertible or exchangeable securities or rights to purchase our common stock or convertible or exchangeable securities. We may also make such reductions in the conversion price as our Board of Directors considers to be advisable to avoid or diminish any income tax to holders of common stock or rights to purchase common stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for tax purposes. To the extent permitted by applicable law, we may from time to time reduce the conversion price by any amount for any period of time if the period is at least twenty days, the reduction is irrevocable during the period and our Board of Directors shall have determined that such reduction would be in our best interests. Whenever we reduce the conversion price as described in the preceding sentence, we will mail to the holders of notes a notice of the reduction at least five days prior to the date the reduced conversion price takes effect. In the event of: - any reclassification of our common stock, subject to limited exceptions; - any consolidation, merger, statutory share exchange or combination involving our company; or - a sale or conveyance to another person or entity of all or substantially all of our property or assets; 19 in which holders of common stock would be entitled to receive stock, other securities, other property, assets or cash for their common stock, upon conversion of its notes, a holder will be entitled to receive the same type of consideration which the holder would have been entitled to receive if the holder had converted the notes into our common stock immediately prior to any of these events. OPTIONAL REDEMPTION BY US Prior to October 20, 2008, the notes will not be redeemable at our option. Beginning on October 20, 2008, we may redeem the notes for cash at any time as a whole, or from time to time in part, at a redemption price equal to the principal amount of such notes, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. We will give at least 20 days but not more than 90 days notice of redemption by mail to holders of notes. Notes or portions of notes called for redemption will be convertible by the holder until the close of business on the last business day prior to the redemption date, unless we fail to pay all amounts due on redemption. We may not redeem any notes unless a registration statement covering resales of the common stock issuable upon conversion of the notes is effective and available during the 30 day period prior to the giving of a notice of redemption and at all times from the date of such notice until the redemption date, to the extent that such a registration statement is required by the terms of the registration rights agreement to remain effective as of the date that notice of redemption is provided. In addition, we may only elect to redeem all or any part of the notes if we have, as of the date of the notice of redemption, sufficient shares of our common stock authorized and available for issuance to enable the holders of all of the notes (or parts thereof) called for redemption to convert such notes (or parts thereof) into our common stock. If we do not redeem all of the notes, the trustee will select the notes to be redeemed in principal amounts at maturity of $1,000 or integral multiples of $1,000, by lot or on a pro rata basis. If any notes are to be redeemed in part only, we will issue a new note or notes with a principal amount at maturity equal to the principal at maturity of the unredeemed portion of the notes. If a portion of a holder's notes is selected for partial redemption and the holder converts a portion of its notes, the converted portion will be deemed to be taken from the portion selected for redemption. REPURCHASE OF NOTES AT OPTION OF HOLDERS If a "repurchase event", as described below, occurs, a holder will have the right (subject to certain exceptions set forth below) to require us to repurchase all of its notes not previously called for redemption, or any portion of those notes that is equal to $1,000 in principal amount at maturity or integral multiples of $1,000. If the repurchase event occurs, such repurchase will be made in cash at a price equal to 100% of the principal amount of notes the holder elects to require us to repurchase, together, in each case, with accrued interest, if any, to, but excluding, the applicable repurchase date; provided, that if the relevant repurchase date occurs after a record date or special record date and before the related interest payment date or special interest payment date, the amount payable on such interest payment date or special interest payment date shall be paid to the record holder at the close of business on the record date or special record date and shall not constitute part of the repurchase price. In addition, the notes shall be purchased by us at the option of the holder on October 15, 2010, October 15, 2015 and October 15, 2020 at a price equal to 100% of the principal amount of notes the holder elects to require us to repurchase, together, in each case, with accrued interest, if any, to, but excluding, the applicable repurchase date. Unless we have previously called for redemption all of the outstanding notes and deposited or set aside an amount of money sufficient to redeem such notes on the redemption date, on or before (1) the 10th calendar day following the occurrence of a repurchase event and (2) September 1, 2010, September 1, 2015 and September 1, 2020, we or the trustee will mail to the holders notice of the occurrence of the repurchase event and of the holders' repurchase right arising as a result, or on October 15, 2010, October 15, 2015 or October 15, 2020, as applicable. We will also deliver a copy of such notice of a repurchase right to the Trustee. To exercise a repurchase right, a holder must deliver to the Trustee on or before the close of business on the last business day prior to the repurchase date (as defined in the indenture) written notice to us of the exercise of such right, together with the notes with respect to which the repurchase right is being exercised, duly endorsed for transfer to us. An election to exercise a repurchase right will be revocable at any time prior to, but excluding, the 20 repurchase date, by delivering written notice to that effect to the trustee prior to the close of business on the business day prior to the repurchase date. If we fail to repurchase on the repurchase date any notes as to which the repurchase right has been properly exercised, then the principal amount of such notes will, until paid, bear interest to the extent permitted by applicable law from the repurchase date at the rate borne by the note and each such note will be convertible into common stock. If we are unable to repurchase on the repurchase date all of the notes (or portions of the notes) as to which the repurchase right has been properly exercised, the aggregate amount of notes we may repurchase will be allocated pro rata among each note (or portion of a note) surrendered for repurchase, based on the principal amount of such note, in proportion to the aggregate amount of notes surrendered for repurchase. A "repurchase event" will occur upon a change in control of ATS Medical or if our common stock is no longer authorized for quotation or listing on The New York Stock Exchange, Inc., the American Stock Exchange, Inc. or The Nasdaq National Market or SmallCap Market. A "change in control" will be deemed to have occurred when any of the following has occurred: - the acquisition by any person or group (as such terms are used in Sections 13(e) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership of shares of our capital stock entitling that person to exercise more than 50% of the total voting power of all shares of our capital stock entitled to vote generally in elections of directors; - approval by our shareholders of any plan or proposal for the liquidation, dissolution or winding up of ATS Medical; - our consolidation or merger with or into any other corporation or any merger of another corporation into us that results in the change or exchange of our common stock into other assets or securities, unless our shareholders (determined immediately before such transaction) own, directly or indirectly immediately following such transaction, at least a majority of the combined voting power of the outstanding voting securities of the corporation resulting from such transaction in substantially the same proportion as their ownership of the voting stock immediately before such transaction; - our conveyance, transfer, sale, lease or other disposition of all or substantially all of our properties and assets to another person (other than a wholly-owned subsidiary as a result of which we become a holding company), unless our shareholders (determined immediately before such transaction) own, directly or indirectly immediately following such transaction, at least a majority of the combined voting power of the outstanding voting securities of the corporation resulting from such transaction in substantially the same proportion as their ownership of the voting stock immediately before such transaction; or - any time that a majority of the members of the Board of Directors of ATS Medical are not "continuing directors." For purposes of this provision, a "continuing director" is a person who either was one of our existing directors on October 6, 2005 or is subsequently elected or nominated for election by a majority of directors who were continuing directors at the time of such election or nomination. A change in control will not be deemed to have occurred if at least 90% of the consideration in the transaction or transactions constituting the change in control consists of (and the capital stock into which the notes would be convertible consists of) shares of capital stock that are, or upon issuance will be, traded on a United States national securities exchange or approved for trading on an established automated over-the-counter trading market in the United States. The change in control purchase feature of the notes may in some circumstances make it more difficult to, or discourage, a takeover of our company. The change in control purchase feature, however, is not the result of our knowledge of any specific effort: - to accumulate shares of our common stock; 21 - to obtain control of us by means of a merger, tender offer solicitation or otherwise; or - by management to adopt a series of anti-takeover provisions. Instead, the change in control purchase feature is a standard term contained in securities similar to the notes. MERGER AND SALES OF ASSETS The indenture provides that we may not consolidate with or merge into any other person or convey, transfer, sell, lease or otherwise dispose of all or substantially all of our properties and assets to another person unless, among other things: - the resulting, surviving or transferee person is organized and existing under the laws of the United States, any state thereof, or the District of Columbia; - such person assumes all of our obligations under the notes and the indenture; and - we or such successor are not then or immediately after such consolidation or merger in default under the indenture. The occurrence of any of the foregoing transactions could constitute a change in control. EVENTS OF DEFAULT Each of the following constitutes an event of default under the indenture: - default for a period of 30 days in our obligation to pay the interest or any liquidated damages on the notes; - default in our obligation to pay the principal and premium, if any, on any of the notes at maturity or otherwise; - default in our obligation to pay the repurchase price of the notes on the repurchase date following a repurchase event; - our failure to provide notice of a repurchase event and the continuation of such failure for 30 days after written notice of default is given to us by the trustee or to us and the trustee by the holders of at least 20% in aggregate principal amount at maturity of the notes then outstanding; - our failure to perform or observe any other covenants contained in the notes or the indenture for a period of 30 days after written notice of default is given to us by the trustee or to us and the trustee by the holders of at least 20% in aggregate principal amount at maturity of the notes then outstanding; - the failure by us or our significant subsidiaries to pay when due at maturity, or a default that results in the acceleration of maturity of, any indebtedness for borrowed money of ours or any of our subsidiaries in an aggregate amount of $5 million or more, unless the default is cured or waived or the acceleration is rescinded, stayed or annulled within 15 days after written notice of default is given to us by the trustee or to us and the trustee by holders of not less than 20% in aggregate principal amount at maturity of the notes then outstanding; and - specific events of bankruptcy, insolvency or reorganization with respect to us or any of our significant subsidiaries. The indenture provides that the trustee will, within 90 days after the trustee obtains knowledge of the occurrence of a default, give to the registered holders of the notes notice of all uncured defaults known to it, but the 22 trustee will be protected in withholding such notice if it, in good faith, determines that the withholding of such notice is in the best interest of such registered holders, except in the case of default in the payment of the principal of, or premium, if any, or interest on any of the notes. If an event of default occurs and is continuing, the trustee may in its discretion proceed to protect and enforce the rights vested in it by the indenture by such appropriate judicial proceedings as the trustee will deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in the indenture or in aid of the exercise of any power granted in the indenture, or to enforce any other legal or equitable right vested in the trustee by the indenture or by law. The indenture contains a provision entitling the trustee, subject to the duty of the trustee during default to act with the required standard of care, to be indemnified by the holders of notes before proceeding to exercise any right or power under the indenture at the request of such holders. The indenture provides that the holders of a majority in aggregate principal amount at maturity of the notes then outstanding, through their written consent, may direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred upon the trustee. We are required to furnish annually to the trustee a statement as to the fulfillment of our obligations under the indenture. MODIFICATION AND WAIVER Changes Requiring Approval of Each Affected Holder The indenture (including the terms and conditions of the notes) cannot be modified or amended without the written consent or the affirmative vote of the holder of each note affected by such change to: - extend the maturity of any note or the payment date of any installment of interest payable on any notes; - reduce the principal amount at maturity of, premium, if any, on, or interest rate of, any note; - reduce any amount payable on redemption or repurchase of any note; - impair or change in any manner adverse to the holders of notes, our obligation to repurchase the notes upon the occurrence of a repurchase event; - impair or adversely affect the conversion rights of any holder of notes; - impair or adversely affect the right of any holder to institute suit for repayment of any note; - subordinate the notes in right of payment to other indebtedness; or - change the currency of payment of the notes. All of the holders of notes must consent to reduce the percentage of holders of notes which are required to consent to the above-described actions. Changes Requiring Majority Approval The indenture (including the terms and conditions of the notes) may be modified or amended, subject to the provisions described above, with the written consent of the holders of at least a majority in aggregate principal amount at maturity of the notes then outstanding. 23 Changes Requiring No Approval The indenture (including the terms and conditions of the notes) may be modified or amended by us and the trustee, without the consent of the holder of any note, for the purposes of, among other things: - adding to our covenants for the benefit of the holders of notes; - to convey, transfer, assign, mortgage or pledge to the trustee as security for the notes, any property or assets; - providing for the assumption of our obligations to the holders of notes in the case of a merger, consolidation, conveyance, transfer or lease; - complying with the requirements of the SEC in order to effect or maintain the qualification of the indenture under the Trust Indenture Act of 1939, as amended; or - curing any ambiguity or correcting or supplementing any provision contained in the indenture; provided that modification or amendment does not adversely affect interests of the holders of notes. FORM, DENOMINATION AND REGISTRATION The notes are issued in fully registered form, without coupons, in denominations of $1,000 principal amount at maturity and integral multiples of $1,000. Notes may be issued as definitive notes or global notes. Definitive notes are registered in the names of the registered holders. Global notes are registered in the name of a depositary or its nominee for the holders. As of the date of this prospectus, all of the notes have been issued as global notes. RESTRICTIONS ON TRANSFER; LEGENDS The notes are subject to restrictions on transfer set forth on the notes and in the indenture, and certificates evidencing the notes bear a legend regarding such transfer restrictions. GOVERNING LAW The indenture and the notes are governed by, and construed in accordance with, the laws of the State of New York. INFORMATION CONCERNING THE TRUSTEE Wells Fargo Bank, National Association, as trustee under the indenture, has been appointed by us as paying agent, conversion agent and registrar with regard to the notes. Wells Fargo Bank, National Association is also the transfer agent and registrar for our common stock. The trustee or its affiliates may from time to time in the future provide banking and other services to us in exchange for a fee. CALCULATIONS IN RESPECT OF NOTES We or our agents are responsible for making all calculations called for under the notes. These calculations include, but are not limited to, determination of the market prices of the notes and of our common stock and amounts of interest and contingent payments, if any, on the notes. We or our agents will make all these calculations in good faith and, absent manifest error, our and their calculations will be final and binding on holders of notes. We or our agents will provide a schedule of these calculations to the trustee, and the trustee is entitled to conclusively rely upon the accuracy of these calculations without independent verification. 24 DESCRIPTION OF THE WARRANTS We issued the warrants pursuant to the securities purchase agreement and the amendment to the securities purchase agreement and entered into a warrant agent agreement with Wells Fargo Bank, National Association, a national banking association, as warrant agent. The following description is only a summary of the material provisions of the warrants and the warrant agent agreement. The form of warrant and the warrant agent agreement are filed as exhibits to the registration statement of which this prospectus is a part. We urge you to read these documents in their entirety because they, and not this description, define your rights as holders of the warrants. GENERAL Each warrant is exercisable for one share of our common stock, initially at an exercise price of $4.40 per share, subject to adjustment upon certain events. The warrants are exercisable at any time on or before October 15, 2010, unless earlier terminated by us under specific circumstances. WARRANT AGENT Wells Fargo Bank, National Association serves as the warrant agent under a warrant agent agreement in order to facilitate the transfer, exchange and exercise of warrants. The warrant agent will register the transfer of any outstanding warrant certificates upon surrender of the warrant certificate duly endorsed for transfer or accompanied (if so required by us) by a duly executed written instrument of transfer in form satisfactory to us. Upon any such registration of transfer, a new warrant certificate will be issued to the transferee(s) and the surrendered warrant certificate will be cancelled by the warrant agent. Cancelled warrant certificates will thereafter be disposed of by the warrant agent in its customary manner. Warrant certificates may be exchanged at the option of the holders, when surrendered to the warrant agent at its principal corporate trust office, which is currently located at Sixth and Marquette, MAC N9303-120, Minneapolis, Minnesota 55979, Attention: Corporate Trust Services, for another warrant certificate or other warrant certificates of like tenor and representing in the aggregate a like number of warrants. Any holder desiring to exchange a warrant certificate must deliver a written request to the warrant agent, and must surrender, duly endorsed for transfer or accompanied (if so required by the warrant agent) by a duly executed written instrument or instruments of transfer in form satisfactory to the warrant agent, the warrant certificate or certificates to be so exchanged. Warrant certificates surrendered for exchange will be cancelled by the warrant agent. Such cancelled warrant certificates will then be disposed of by the warrant agent in its customary manner. 25 EXERCISE OF THE WARRANTS The warrants may be exercised in whole or in part. If a holder desires to exercise its warrants, it must deliver an exercise notice to us at the principal corporate trust office of the warrant agent and to our transfer agent which specifies the number of shares of common stock to be purchased upon exercise ("warrant shares"). Unless the holder has elected a "cashless exercise" of the warrant as described below, the notice must also be accompanied by payment to the warrant agent of an amount equal to the per share exercise price multiplied by the number of warrant shares as to which the warrant is being exercised in cash or by delivery of a certified check or bank draft payable to the order of the warrant agent or wire transfer of immediately available funds. A holder may in its sole discretion elect, in lieu of making such cash payment, instead to receive upon such exercise the net number of shares of common stock (a "cashless exercise") determined according to the following formula: Net Number = (A x B) -- (A x C) ------------------ B For purposes of the foregoing formula: A = the total number of shares with respect to which the warrant is then being exercised; B = the closing price of the common stock on the trading day immediately preceding the date of the exercise notice; and C = the exercise price then in effect for the applicable warrant shares at the time of such exercise. We will not be required to issue fractions of shares of common stock upon exercise of the warrants or to distribute certificates which evidence such fractional shares. In lieu of any fractional shares, there will be paid to the holder an amount of cash equal to the same. We are generally obligated within five business days after exercise of a warrant to issue the holder a certificate for the number of shares of common stock to which the holder is entitled or to credit the holder's or its designee's balance account with DTC for the number of shares of common stock to which the holder is entitled upon the holder's exercise of the warrant and, in the event that a warrant is exercised in part, to issue a new warrant identical in all respects to the warrant exercised except it will represent rights to purchase the number of warrant shares purchasable immediately prior to the exercise of the warrant, less the number of warrant shares with respect to which the warrant is exercised. If we fail to complete the required share issuance by such date (the "Warrant Share Delivery Date") or fail to issue the warrant required by such date (the "Warrant Delivery Date"), we will pay as additional damages in cash to such holder on each day after we failed to take such action in an amount equal to 0.5% per month multiplied by the sum of (1) the product of the number of shares of common stock not issued to the holder on or prior to the Warrant Share Delivery Date and the closing price of the common stock on the Warrant Share Delivery Date and (2) the product of the number of shares of common stock issuable upon exercise of any warrant not delivered on or prior to the Warrant Delivery Date and to which such holder is entitled and the closing price of the common stock, on the Warrant Delivery Date, provided that if the common stock is not listed on a principal market (as defined in the warrant), then the closing price shall be as determined in good faith by a majority of our Board of Directors. We will pay any and all documentary, stamp, transfer and other similar taxes which may be payable with respect to the issuance and delivery of shares of common stock issued upon exercise of the warrants. ADJUSTMENT OF EXERCISE PRICE We will adjust the exercise price, the number of warrant shares issuable upon the exercise of each warrant and the number of warrants outstanding if any of the following events occur: (1) we issue common stock as a dividend or distribution on our common stock; 26 (2) we subdivide or combine our common stock; (3) we issue to all holders of our common stock specified rights or warrants to purchase our common stock; (4) we distribute to all holders of our common stock any class of our capital stock (other than those dividends or distributions listed in (1) above) or evidences of indebtedness or other assets, including securities but excluding: (a) rights or warrants listed in (3) above; and (b) dividends or distributions paid exclusively in cash (except as otherwise described below); or (5) we distribute to all holders of our common stock cash (excluding cash distributed upon merger or consolidation or as part of a distribution described in clauses (1) through (4) above). To the extent that we have a shareholder rights plan in effect at the time of exercise of the warrants into common stock, each holder will receive, in addition to the common stock, the rights under the shareholder rights plan whether or not the rights have separated from the common stock at the time of exercise, subject to limited exceptions. In the event of: - any reclassification of our common stock; - a consolidation, merger, binding share exchange or combination involving us; or - a sale or conveyance to another person or entity of all or substantially all of our property or assets; in which holders of common stock would be entitled to receive stock, other securities, other property, assets or cash for their common stock, upon exercise of a holder's warrants, the holder will be entitled to receive the same type of consideration which the holder would have been entitled to receive if the holder had exercised the warrants immediately prior to any of these events. We will not be required to make an adjustment to the exercise price unless the adjustment would require a change of at least one percent in the exercise price. However, we will carry forward any adjustments that are less than one percent of the exercise price and include them in any subsequent adjustment. Except as described above in this section, we will not adjust the exercise price for any issuance of our common stock or convertible or exchangeable securities or rights to purchase our common stock or convertible or exchangeable securities. We may also make such reductions in the exercise price as our Board of Directors considers to be advisable to avoid or diminish any income tax to holders of common stock or rights to purchase common stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. To the extent permitted by applicable law, we may reduce the exercise price by any amount for any period of time of at least 20 days, if the reduction is irrevocable during such period and our Board of Directors has made a determination that such reduction would be in our best interests. Upon each adjustment of the exercise price, each warrant will evidence the right to purchase that number of shares of common stock (calculated to the nearest hundredth of a share) obtained by multiplying the number of shares of common stock purchasable immediately prior to such adjustment upon exercise of the warrant by the exercise price in effect immediately prior to such adjustment and dividing the product so obtained by the exercise price in effect immediately after such adjustment. The adjustment to the number of shares of common stock purchasable upon exercise of a warrant will be made each time an adjustment of the exercise price is made. 27 AMENDMENTS The warrants may be amended, changed, waived, discharged, or terminated only by an instrument in writing signed by us and the holder of such warrant; provided, however, that the warrant provisions providing for damages in the event of our untimely delivery of shares upon warrant exercises may be waived only be an instrument in writing signed by us and all of the warrantholders. DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 40,000,000 shares, par value $.01 per share. The authorized capital stock is divisible into the classes and series, has the designation, voting rights, and other rights and preferences and is subject to the restrictions that the Board of Directors may from time to time establish. Unless otherwise designated, all shares are common stock. CAPITAL STOCK The holders of our common stock: (1) have equal ratable rights to dividends from funds legally available therefor, when, as and if declared by our Board of Directors; (2) are entitled to share ratably in all of our assets available for distribution to holders of our common stock upon liquidation, dissolution or winding up of our affairs; (3) do not have preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions applicable thereto; and (4) are entitled to one vote per share on all matters which shareholders may vote on at all meetings of shareholders. All shares of our common stock now outstanding are fully paid and nonassessable. The holders of shares of our common stock do not have cumulative voting rights, which means that the holders of more than 50% of the outstanding shares voting for the election of directors can elect all of our directors to be elected, if they so choose. In such event, the holders of the remaining shares will not be able to elect any of our directors. Wells Fargo Bank, National Association is the transfer agent for our common stock. Our Board of Directors, without further action by the shareholders, is authorized to issue preferred stock or other senior equity securities in one or more series and, with certain limitations, to determine preferences as to dividends and in liquidation, and conversion, redemption and other rights of each such series. The Board of Directors could issue a class or series of preferred stock or other senior equity securities with rights more favorable with respect to dividends, voting and liquidation than those held by the holders of our common stock. The issuance of preferred stock or other senior equity securities may have the effect of delaying, deferring or preventing a change in control of ATS Medical. No shares of preferred stock or other senior equity securities are outstanding and we have no present plans to issue such stock or securities. MINNESOTA ANTI-TAKEOVER LAWS We are governed by the provisions of Sections 302A.671, 302A.673 and 302A.675 of the Minnesota Business Corporation Act. These provisions may discourage a negotiated acquisition or unsolicited takeover of us and deprive our securityholders of an opportunity to sell their shares at a premium over the market price. In general, Section 302A.671 provides that a corporation's shares acquired in a control share acquisition have no voting rights unless voting rights are approved in a prescribed manner. A "control share acquisition" is a direct or indirect acquisition of beneficial ownership of shares that would, when added to all other shares beneficially owned by the acquiring person, entitle the acquiring person to have voting power of 20% or more in the election of directors. In general, Section 302A.673 prohibits a public Minnesota corporation from engaging in a business combination with an interested shareholder for a period of four years after the date of the transaction in which the person became an interested shareholder, unless the business combination is approved in a prescribed manner. The term "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to 28 the interested shareholder. An "interested shareholder" is a person who is the beneficial owner, directly or indirectly, of 10% or more of a corporation's voting stock, or who is an affiliate or associate of the corporation, and who, at any time within four years before the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the corporation's voting stock. Section 302A.673 does not apply if a committee of our Board of Directors consisting of all of our disinterested directors (excluding our current and former officers) approves the proposed transaction or the interested shareholder's acquisition of shares before the interested shareholder becomes an interested shareholder. If a tender offer is made for our stock, Section 302A.675 of the Minnesota Business Corporation Act precludes the offeror from acquiring additional shares of stock (including in acquisitions pursuant to mergers, consolidations or statutory share exchanges) within two years following the completion of the tender offer, unless shareholders selling their shares in the later acquisition are given the opportunity to sell their shares on terms that are substantially the same as those contained in the earlier tender offer. Section 302A.675 does not apply if a committee of our Board of Directors consisting of all of our disinterested directors (excluding our current and former officers) approves the proposed acquisition before any shares are acquired pursuant to the earlier tender offer. MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS The following discussion summarizes the material U.S. federal income tax, and in the case of non-U.S. holders (as defined below) estate tax, consequences of the purchase, beneficial ownership and disposition of the notes, warrants and the common stock into which they may be converted or exercised. This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations issued under the Code, judicial authority and administrative rulings and practice, all as of the date of this prospectus, and all of which are subject to change. Any such change may be applied retroactively and may adversely affect the U.S. federal income tax consequences described in this prospectus. This summary addresses only the U.S. federal income tax consequences to investors that hold the notes, warrants and stock as capital assets (generally, as investment assets) and not as part of a hedge, straddle, conversion, constructive sale or other risk reduction transaction for U.S. federal income tax purposes. This summary does not discuss all of the tax consequences that may be relevant to a particular investor or to investors subject to special treatment under the U.S. federal income tax laws (such as insurance companies, partnerships or other entities treated as partnerships for U.S. federal income tax purposes, financial institutions, tax-exempt organizations, retirement plans, regulated investment companies, securities dealers, certain former citizens or residents of the United States, U.S. holders (as defined below) whose functional currency is not the U.S. dollar) or persons subject to the alternative minimum tax. We will not seek a ruling from the Internal Revenue Service (the "IRS") with respect to any matters discussed in this section, and we cannot assure you that the IRS will not challenge one or more of the tax consequences described below. When we use the term "holder" in this section, we are referring to a beneficial owner of the notes, warrants or stock and not necessarily the record holder. TO ENSURE COMPLIANCE WITH TREASURY DEPARTMENT CIRCULAR 230 PERSONS CONSIDERING THE PURCHASE OF THE NOTES, WARRANTS AND COMMON STOCK ARE HEREBY ADVISED: (1) THE TAX ADVICE SET FORTH HEREIN IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED BY YOU OR ANYONE ELSE, FOR THE PURPOSE OF AVOIDING FEDERAL TAX PENALTIES THAT MAY BE IMPOSED; (2) THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS DESCRIBED HEREIN; AND (3) WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR TO DETERMINE YOUR TAX LIABILITY IN CONNECTION WITH THE PURCHASE, BENEFICIAL OWNERSHIP AND DISPOSITION OF THE NOTES, WARRANTS AND COMMON STOCK. U.S. FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS This section summarizes certain U.S. federal income tax consequences of the ownership and disposition of the notes, warrants and common stock by "U.S. holders." The term "U.S. holder" in this discussion means a beneficial owner of notes, warrants or common stock that is: - a citizen or resident of the United States, as defined for U.S. federal income tax purposes; 29 - a corporation (or any entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or of any state; - an estate the income of which is subject to U.S. federal income taxation regardless of its source; or - a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or certain electing trusts that were in existence on August 20, 1996, and were treated as domestic trusts on the previous day. Issue Price of the Notes and Warrants For U.S. federal income tax purposes, the notes and the warrants were treated as an investment unit upon initial issuance. The "issue price" of the unit is the first price at which we sold a substantial portion of the units, disregarding sales to bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents, or wholesalers. The issue price of a note and warrant is determined by allocating the issue price of an investment unit between the note and the warrant based on their relative fair market values. We have treated 93.3% of the issue price of each unit as allocable to the note and 6.7% of the issue price as allocable to the warrant. Our allocation of the issue price is binding on a U.S. holder of the notes and the warrants, unless the holder explicitly discloses on a statement attached to its federal income tax return for the year in which it acquires the notes or the warrants that it has made a different determination. Our allocation is not binding on the IRS, however, and the IRS may challenge such allocation. If the IRS successfully asserts that the issue price of a note is less than the amount allocated by us, a greater amount of original issue discount (as discussed below) will accrue on the notes. Notes Stated Interest Stated interest paid or accrued on a note will be taxable to a U.S. holder as ordinary income in accordance with the holder's method of accounting for U.S. federal income tax purposes. Original Issue Discount The notes have been issued with "original issue discount" for U.S. federal income tax purposes. The amount of original issue discount on a note equals the excess of the "stated redemption price at maturity" of the note over its issue price. The stated redemption price at maturity of a note equals the sum of its principal amount plus all other payments scheduled to be made thereunder, other than payments of stated interest. The "issue price" of a note is that portion of the issue price of an investment unit that we have allocated to the note under the rules described in "Issue Price of the Notes and Warrants" above. Each U.S. holder of a note must include original issue discount in income as ordinary interest income for federal income tax purposes as it accrues using a constant yield method, in advance of the receipt of cash payments attributable to such income, regardless of such holder's regular method of tax accounting. In general, the amount of original issue discount includible by a U.S. holder for a taxable year is the sum of the "daily portions" of original issue discount with respect to a note for each day during the taxable year (or portion of the taxable year) on which the holder held such note. The daily portion is determined by allocating to each day in an accrual period (generally, the period between interest payments or compounding dates) a pro rata portion of the original issue discount allocable to such accrual period. The amount of original issue discount allocable to an accrual period is the product of the "adjusted issue price" of the note at the beginning of the accrual period multiplied by its yield to maturity, less the amount of any stated interest allocable to such accrual period. The adjusted issue price of a note at the beginning of an accrual period is equal to its issue price, increased by the aggregate amount of original issue discount that has accrued on the note in all prior accrual periods, and decreased by any payments other than payments of stated interest made during all prior accrual periods. Original issue discount allocable to the final accrual period is the difference between the amount payable at maturity of the note (other than stated interest) and the note's adjusted 30 issue price at the beginning of the final accrual period. Special rules apply for calculating original issue discount for an initial short accrual period. If the notes are converted prior to October 15, 2008, we may be required to make additional payments to the holders of the notes ("Conversion Payments"). We also may be required to make payments to holders of the notes if we do not meet certain deadlines set forth in the Registration Rights Agreement ("Registration Delay Payments"). We intend to take the position that the possibility of any Conversion Payments or Registration Delay Payments does not affect the determination of the yield to maturity of the notes or give rise to any additional accrual of original issue discount or recognition of ordinary income upon the exchange, sale or redemption of a note. This position is based in part on our determination that as of the date of the issuance of the notes, the possibility that Conversion Payments or Registration Delay Payments will have to be made is a "remote" or "incidental" contingency within the meaning of applicable Treasury regulations. Our determination that this possibility is a remote or incidental contingency is binding on a U.S. holder unless the U.S. holder explicitly discloses that it is taking a different position in its federal income tax return for the year in which it acquires a note. Our determination is not, however, binding on the IRS, and the IRS could take a contrary position. If the IRS were to take a contrary position, the amount and timing of interest income recognized on a note and the character of income recognized on the sale, exchange or redemption of a note could be different than that described in this prospectus. U.S. holders should consult their own tax advisors concerning the appropriate tax treatment of the Conversion Payments and the Registration Delay Payments in the event that we are required to make these payments. Market Discount If a U.S. holder purchases a note for an amount that is less than the note's original issue price plus the aggregate amount of the original issue discount includible in the gross income of all holders of the note for periods before the purchase of the note, that U.S. holder will be treated as having purchased the note at a "market discount," unless such amount is less than a specified de minimis amount. Under the market discount rules, a U.S. holder will be required to treat any partial principal payment on, or any gain realized on the sale, exchange, retirement or other disposition of, a note having market discount as ordinary income to the extent of the accrued market discount (not previously included in income) at the time of such payment or disposition. Market discount will be considered to accrue ratably during the period from the date of acquisition to the maturity date of the note, unless the U.S. holder elects to accrue market discount on the basis of a constant-yield method. A U.S. holder may be required to defer the deduction of all or a portion of the interest paid or accrued on any indebtedness incurred or maintained to purchase or carry a note with market discount until the maturity of the note or certain earlier dispositions, because a current deduction is only allowed to the extent the interest expense exceeds an allocable portion of market discount. A U.S. holder may elect to include market discount in income currently as it accrues (on either a ratable or a constant interest rate basis), in which case the rules described above regarding the treatment as ordinary income of gain upon the disposition of the note and upon the receipt of certain cash payments and regarding the deferral of interest deductions will not apply. Generally, market discount that a taxpayer elects to include currently in income is treated as ordinary interest income for United States federal income tax purposes. Such an election applies to all market discount debt instruments acquired by the U.S. holder on or after the first day of the taxable year to which this election applies and may be revoked only with the consent of the IRS. The tax basis of a note will be increased by the amount of any market discount included in gross income pursuant to such an election. Acquisition Premium; Amortizable Bond Premium A U.S. holder that purchases a note for an amount that is greater than its adjusted issue price, as defined above under the heading "Original Issue Discount," but equal to or less than the sum of all amounts payable on the note after the purchase date, other than payments of qualified stated interest, will be considered to have purchased the note at an acquisition premium. Under the acquisition premium rules, the amount of original issue discount that the holder must include in its gross income with respect to the note for any taxable year will be reduced by the portion of acquisition premium properly allocable to that year. 31 If a U.S. holder purchases a note for an amount that is greater than the amount payable at maturity, the U.S. holder will be considered to have purchased the note with "amortizable bond premium" equal in amount to such excess (reduced, however, in the case of a convertible bond such as the notes, by any premium attributable to the conversion feature of the bond). Such holder will be exempt from the requirement to include original issue discount on the notes in income currently. A U.S. holder may elect to amortize such amortizable bond premium using a constant yield method over the remaining term of the note and offset qualified stated interest otherwise required to be included in respect of the note during any taxable year by the amortized amount of such excess for the taxable year. Under applicable regulations, if the amortizable bond premium allocable to an accrual period exceeds the amount of qualified stated interest allocable to the accrual period, the excess would be allowed as a deduction for the accrual period, but only to the extent of the U.S. holder's prior interest inclusions on the note. Any excess is generally carried forward and allocable to the next accrual period. Any election to amortize bond premium applies to all taxable debt obligations then owned and thereafter acquired by the U.S. holder and may be revoked only with the consent of the IRS. If a U.S. holder elects to amortize bond premium, the U.S. holder's tax basis in the note will be reduced by the amount of allowable amortization. If the election is not made, a U.S. holder must include the full amount of each interest payment in income as it accrues or is paid, and premium will not be taken into account until principal payments are received on the note or the note is sold or otherwise disposed of. Conversion A U.S. holder of a note generally will not recognize gain or loss on the conversion of the note into common stock except with respect to any cash received in lieu of a fractional share and except to the extent common stock received is attributable to accrued and unpaid interest on the note. The U.S. holder's holding period for the common stock (other than stock received with respect to accrued and unpaid interest) received upon conversion will include the period during which the note was held, and the U.S. holder's aggregate tax basis in the common stock received upon conversion will be equal to the holder's adjusted tax basis in the note at the time of conversion, less any portion allocable to any fractional share. A U.S. holder of a note will recognize gain or loss upon the receipt of cash in lieu of a fractional share of common stock in an amount equal to the difference between the amount of cash received and the portion of the holder's tax basis in the note that is attributable to such fractional share. This gain or loss will generally be capital gain or loss, except to the extent of accrued market discount on the notes, which is taxable as ordinary income, and will be taxable in the same manner as described under "Common Stock--Dispositions," below. Common stock received in payment of accrued but unpaid interest will generally be taxable as ordinary interest income in accordance with the holder's method of accounting for tax purposes, with the amount of such interest income equal to the fair market value of the common stock received. The holding period for such common stock will begin on the date of receipt. Common stock received upon conversion of a note with market discount will be subject to special rules that require gain recognized on a disposition of the stock to be treated as ordinary income to the extent of accrued market discount existing at the time of the conversion. Changes in Conversion Price The terms of the notes provide for changes in their conversion price in certain circumstances. A change in the conversion price that has the effect of increasing a U.S. holder's proportionate interest in our earnings and profits could be treated as though such holder received a distribution in the form of our common stock. Any taxable constructive stock distribution resulting from a change to, or failure to change, the conversion price of a note would be treated in the same manner as distributions paid in cash or other property as described below under "Common Stock--Distributions." As a result, a U.S. holder may be required to include amounts in income even though the holder has not received any cash or other property with which to pay the related tax. In general, however, a change in the conversion price of a note to prevent the dilution of a U.S. holder's interests upon a stock split or other change in our capital structure should not be treated as a constructive stock distribution. U.S. holders should carefully review the conversion rate adjustment provisions and consult their tax advisors with respect to the tax consequences of any such adjustment. 32 Dispositions Upon the sale, retirement, redemption, or other taxable disposition of a note, a U.S. holder will recognize gain or loss equal to the difference between (1) the sum of the amount of cash and the fair market value of any property received in exchange (except to the extent attributable to accrued interest, which generally will be taxed as ordinary income to the extent that the holder has not previously recognized this income) and (2) the U.S. holder's adjusted tax basis in the note. A U.S. holder's adjusted tax basis in a note generally will be equal to the portion of the issue price of the investment unit allocable to the note (as described above under "Issue Price of the Notes and Warrants") in the case of a holder who purchased the investment unit at initial issuance, or, in other cases, the holder's purchase price for the note, in either case increased by the amount of original issue discount and market discount previously included in the U.S. holder's income with respect to the note (including in the tax year of the disposition) and decreased by the amount of payments of principal and by any amortizable bond premium used to offset qualified stated interest and certain amortizable bond premium allowed as a deduction. Generally, except as discussed above under the heading "Market Discount," any gain or loss recognized by a U.S. holder upon the sale, retirement, redemption, or other taxable disposition of a note will be capital gain or loss, and will be long-term capital gain or loss if, at the time of such disposition, the note has been held for more than one year. Net long-term capital gain recognized by a non-corporate U.S. holder generally is subject to U.S. federal income tax at a reduced rate. The deductibility of capital losses is subject to limitations. Warrants Exercise A U.S. holder generally will not recognize gain or loss upon exercise of a warrant (except with respect to any cash received in lieu of a fractional share, which will be taxed in a manner similar to that described above under "Notes--Conversion"). A U.S. holder that acquires a warrant upon initial issuance will have a tax basis in the warrant equal to the portion of the issue price of the investment unit allocable to the warrant (as described above under "Issue Price of the Notes and Warrants"). A subsequent purchaser of a warrant will have a tax basis in the warrant equal to the holder's purchase price. A U.S. holder will have a tax basis in the common stock received upon the exercise of a warrant equal to the sum of its tax basis in the warrant and the aggregate cash exercise price paid in respect of such exercise, less any amount attributable to any fractional shares. The holding period of common stock received upon the exercise of a warrant will commence on the day after the warrant is exercised. The tax consequences of a cashless exercise of a warrant are not clear. It is possible that a cashless exercise would result in a taxable exchange. In such event, a U.S. holder could be deemed to have surrendered warrants (the "Surrendered Warrants") equal to the number of common shares having a value equal to the exercise price for the total number of warrants to be exercised (the "Exercised Warrants"). The U.S. holder would recognize capital gain or loss in an amount equal to the difference between the fair market value of common stock represented by the Surrendered Warrants and the holder's tax basis in the Surrendered Warrants. In this case, the U.S. holder's basis in the common stock received would equal the sum of the fair market value of the common stock represented by the Surrendered Warrants and the holder's tax basis in the Exercised Warrants. The U.S. holder's holding period for the common stock would commence on the day after the warrants were exercised. Alternatively, it is possible that a cashless exercise would be tax-free, either because the exercise is not a gain realization event or because the exercise is treated as a recapitalization for federal income tax purposes. In either tax-free situation, a U.S. holder's basis in the common stock received would equal the holder's basis in the Surrendered Warrants and the Exercised Warrants. If the cashless exercise were treated as not being a gain realization event, a U.S. holder's holding period in the common stock would be treated as commencing on the day after the warrants were exercised. If the cashless exercise were treated as a recapitalization, the holding period of such common stock would include the holding period of the warrants. U.S. holders should consult their tax advisors regarding the tax consequences of a cashless exercise of a warrant. Expiration and Dispositions If a warrant expires without being exercised, a U.S. holder will recognize a capital loss in an amount equal to its tax basis in the warrant. Upon the sale, exchange, or redemption of a warrant, a U.S. holder generally will recognize 33 gain or loss equal to the difference between the amount realized on such sale, exchange, or redemption and the U.S. holder's tax basis in such warrant. Such gain or loss will be long-term capital gain or loss if, at the time of such sale, exchange, or redemption, the warrant has been held for more than one year. The deductibility of capital losses is subject to limitations. Adjustments to Exercise Ratio Adjustments made to the number of shares that may be acquired upon the exercise of a warrant or to the exercise price thereof, or the failure to make such adjustments, may result in a constructive distribution to holders of warrants in a manner similar to that described above under "Notes--Changes in Conversion Price." As a result, a U.S. holder of a warrant may be required to include amounts in income even though such holder has not received any cash or other property with which to pay the related tax. Common Stock Distributions Any distribution we make in respect of our common stock will be treated as a dividend to the extent paid out of our current or accumulated earnings and profits. If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a tax-free return of capital to the extent of the U.S. holder's adjusted tax basis in the common stock, and thereafter as capital gain. Dividend income received by an individual U.S. holder on or before December 31, 2008 and that satisfies certain requirements generally will be subject to tax at a reduced rate. Unless this reduced rate provision is extended or made permanent by subsequent legislation, for tax years beginning after December 31, 2008 dividends will be taxed at regular ordinary income rates. Subject to certain restrictions, dividends received by a U.S. holder that is a corporation may be eligible for a dividends received deduction. Dispositions A U.S. holder will recognize gain or loss upon the sale, exchange, or other taxable disposition of common stock in an amount equal to the difference between (1) the amount of cash and the fair market value of any other property received in exchange for such common stock and (2) the U.S. holder's adjusted tax basis in the common stock. Subject to the special rules that apply to stock received upon conversion of a note with market discount, discussed above under "Notes--Conversion," any such gain or loss will generally be capital gain or loss, and will be long-term capital gain or loss if, at the time of such disposition, the U.S. holder has held the common stock for more than one year. Net long-term capital gain recognized by a non-corporate U.S. holder generally is subject to U.S. federal income tax at a reduced rate. The deductibility of capital losses is subject to limitations. U.S. FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS The following is a general discussion of the material U.S. federal income and estate tax consequences of the ownership and disposition of the notes, warrants and common stock by a holder that is not a U.S. holder (a "non-U.S. holder"). Special rules, which are not discussed here, may apply to certain non-U.S. holders such as "controlled foreign corporations," "passive foreign investment companies," persons eligible for benefits under income tax conventions to which the United States is a party and U.S. expatriates. Non-U.S. holders should consult their own tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them. For purposes of this discussion, any interest or dividend income and any gain realized on the sale, exchange, redemption, retirement or other taxable disposition of a note, warrant or common stock will be considered "U.S. trade or business income" if such income or gain is (1) effectively connected with the conduct of a trade or business in the United States or (2) in the case of a treaty resident, attributable to a permanent establishment (or in the case of an individual, to a fixed base) in the United States. 34 Interest Subject to the discussion of backup withholding below, a non-U.S. holder will not be subject to U.S. federal income tax (or any withholding thereof) in respect of interest income (including original issue discount) on a note if each of the following requirements is satisfied: - The non-U.S. holder certifies on IRS Form W-8BEN (or successor form), under penalties of perjury, that it is not a U.S. person. - The non-U.S. holder does not actually or constructively own 10% or more of the voting power of our stock. - The non-U.S. holder is not a "controlled foreign corporation" (as defined for U.S. federal income tax purposes) that is actually or constructively related to us. If all of these conditions are not satisfied, a 30% U.S. withholding tax will apply to interest income (including original issue discount) on the notes, unless either (1) an applicable income tax treaty reduces or eliminates such tax or (2) the interest is U.S. trade or business income (as defined above) and, in each case, the non-U.S. holder complies with applicable certification requirements. In the case of the second exception, the non-U.S. holder generally will be subject to U.S. federal income tax with respect to all income from the notes on a net income basis in the same manner as a U.S. holder, as described above. In addition, non-U.S. holders that are corporations could be subject to a branch profits tax on such income. Special procedures contained in Treasury regulations may apply to partnerships, trusts and intermediaries. We urge non-U.S. holders to consult their own tax advisors for information on the impact of these withholding regulations. Conversion Payments; Registration Delay Payments Absent further relevant guidance from the IRS, we intend to treat any Conversion Payments and Registration Delay Payments as subject to U.S. federal withholding tax. Therefore, non-U.S. holders will be subject to withholding on these Conversion Payments and Registration Delay Payments, if any, at a rate of 30% unless we receive an IRS Form W-8BEN (or successor form) or IRS Form W-8ECI (or successor form) from the non-U.S. holder claiming, respectively, that such payments are subject to reduction of withholding under an applicable treaty or that such payments are U.S. trade or business income exempt from withholding tax. A non-U.S. holder that is subject to withholding tax should consult its own tax advisors as to whether it can obtain a refund for all or a portion of the withholding tax imposed on any Conversion Payments or Registration Delay Payments. Dividends Dividends paid to a non-U.S. holder of common stock generally will be subject to U.S. withholding tax at a 30% rate unless such rate is reduced or eliminated under the terms of a tax treaty between the United States and the non-U.S. holder's country of residence, and the U.S. holder complies with applicable certification requirements. Dividends that are U.S. trade or business income are generally subject to U.S. federal income tax at regular income tax rates as though the non-U.S. holder were a U.S. resident, but are not generally subject to the 30% withholding tax provided that the U.S. holder complies with applicable certification requirements. Any U.S. trade or business income received by a non-U.S. holder that is a corporation may also be subject to a branch profits tax. Changes in Conversion or Exercise Price The conversion rate of the notes and the exercise price of the warrants are subject to adjustment in certain circumstances. Such adjustments could give rise to a deemed distribution to a non-U.S. holder of the notes, as described above in "U.S. Federal Income Tax Consequences to U.S. Holders--Notes--Changes in Conversion Price" and "U.S. Federal Income Tax Consequences to U.S. Holders--Warrants--Adjustments to Exercise Ratio." In such events, the deemed distribution would constitute a dividend for U.S. federal income tax purposes to the extent of our current or accumulated earnings and profits. Any such dividends will generally be taxed as described above in "--Dividends." 35 Conversion of Notes or Exercise of Warrants A non-U.S. holder generally will not be subject to U.S. federal income tax on the conversion of notes or exercise of warrants into common stock. However, if a cashless exercise of warrants results in a taxable exchange, as discussed above in "U.S. Federal Income Tax Consequences to U.S. Holders--Warrants--Exercise," or if the non-U.S. holder receives any cash in lieu of a fractional share of common stock, the rules described below with respect to the tax consequences of the disposition of notes, warrants and common stock will apply. Dispositions of Notes, Warrants and Common Stock Subject to the discussion of backup withholding below and except to the extent that any payments with respect to a note are attributable to accrued and unpaid interest (which will be treated as discussed above in "--Interest"), generally, a non-U.S. holder will not be subject to U.S. federal income tax (or any withholding thereof) on any gain realized upon the sale, exchange, redemption, retirement, conversion or other disposition of a note, warrant or common stock, or with respect to the receipt of cash instead of a fractional share of common stock on conversion of a note, unless: - such non-U.S. holder is an individual present in the United States for 183 days or more in the taxable year of the sale, exchange, redemption, retirement or other disposition and certain other conditions are met; - the gain is U.S. trade or business income; or - we are or have been a "U.S. real property holding corporation" for U.S. federal income tax purposes. We do not believe that we are currently a U.S. real property holding corporation or that we will become one in the future. Treatment of the Notes, Warrants and Common Stock for U.S. Federal Estate Tax Purposes A note held, or treated as held, by an individual who is a non-U.S. holder at the time of death will not be subject to U.S. federal estate tax, provided that such person does not at the time of death actually or constructively own 10% or more of the combined voting power of all classes of our stock and payments on such notes would not have been considered U.S. trade or business income. Common stock held, or treated as held, by an individual who is a non-U.S. holder at the time of death will be includible in the estate of such person for U.S. federal estate tax purposes and may be subject to U.S. federal estate tax. An individual may be subject to U.S. federal estate tax and not U.S. federal income tax as a resident or may be subject to U.S. federal income tax as a resident and not be subject to U.S. federal estate tax. INFORMATION REPORTING AND BACKUP WITHHOLDING In general, information reporting requirements will apply with respect to certain payments of principal and interest (including original issue discount) on the notes, dividends paid on the common stock, Conversion Payments, Registration Delay Payments and the proceeds of the sale of a note, warrant, or share of common stock paid to a U.S. holder, unless the U.S. holder is an exempt recipient (such as a corporation). Backup withholding tax at a rate of 28% will apply to such payments if a U.S. holder fails to provide its correct taxpayer identification number or certification of exempt status or fails to report in full dividend and interest income. In general, a non-U.S. holder will not be subject to backup withholding with respect to payments made by us with respect to the notes or common stock if the non-U.S. holder has provided us with an IRS Form W-8BEN (or successor form), and we do not have actual knowledge or reason to know that such non-U.S. holder is a U.S. person, although such payments may be subject to certain information reporting. In addition, no backup withholding or information reporting will be required regarding the proceeds of the sale of notes made within the United States or conducted through certain U.S. financial intermediaries if the payer receives the IRS Form W 8 BEN and does not have actual knowledge or reason to know that such non-U.S. holder is a U.S. person or the non-U.S. holder otherwise establishes an exemption. 36 Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against federal income tax provided the required information is furnished to the IRS in a timely manner. THE U.S. FEDERAL TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING ON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE BENEFICIAL OWNERSHIP AND DISPOSITION OF THE NOTES, WARRANTS AND THE COMMON STOCK RECEIVED UPON CONVERSION OF NOTES AND EXERCISE OF THE WARRANTS, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL AND OTHER TAX LAWS. SELLING SECURITYHOLDERS The notes and warrants were originally issued by us in transactions exempt from the registration requirements of the Securities Act to persons reasonably believed to be "accredited investors" as defined in Regulation D under the Securities Act. These accredited investors, together with their transferees, pledgees or donees or their successors, comprise the persons who are "selling securityholders" under this prospectus and may from time to time offer and sell pursuant to this prospectus any or all of the notes and warrants and the common stock into which the notes are convertible or for which the warrants may be exercised. The following table sets forth information with respect to the selling securityholders, the principal amount of notes and the number of warrants beneficially owned by each selling securityholder, as well as the number of shares of our common stock that may be offered by each selling securityholder under this prospectus following conversion of the notes and exercise of the warrants. As of November 2, 2005, $22,400,000 in aggregate principal amount of the notes was outstanding and warrants to purchase 1,344,000 shares of our common stock were outstanding. We agreed to register the notes, the warrants and 105% of the common stock issuable upon conversion of the notes and cash exercise of the warrants for resale by the selling securityholders. The information in the table below is based on information provided by or on behalf of the selling securityholders to us in selling securityholder questionnaires and is as of the date specified by the holders in those questionnaires. The selling securityholders may offer all, some or none of the notes, warrants or common stock into which the notes are convertible or for which the warrants may be exercised. The selling securityholders identified below may have acquired, sold, transferred or otherwise disposed of all or a portion of their notes, warrants or the underlying common stock since the date on which they provided the information regarding their notes and warrants. We have assumed for purposes of the table below that the selling securityholders will sell all of the notes, warrants and common stock issuable upon conversion of the notes and exercise of the warrants pursuant to this prospectus, and that any other shares of our common stock beneficially owned by the selling securityholders will continue to be beneficially owned by them. However, we do not know whether the selling securityholders will sell all, some or none of the notes, warrants or common stock issuable upon conversion of the notes or exercise of the warrants. Each of the selling securityholders listed below has certified that (1) it purchased the shares in the ordinary course of business, and (2) at the time of purchase of the shares to be resold, it had no agreements or understandings, directly or indirectly, with any person to distribute such shares. 37 Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or investment power with respect to the notes, warrants and common stock. Unless otherwise indicated below, to our knowledge, all persons named in the table below have sole voting and investment power with respect to their securities, except to the extent authority is shared by spouses under applicable law. The inclusion of any securities in this table does not constitute an admission of beneficial ownership by the persons named below. To prevent dilution to the selling securityholders, the following numbers may change because of stock splits, stock dividends or similar events involving our common stock, or as a result of anti-dilution provisions contained in the notes and warrants held by the selling securityholders.
NUMBER NUMBER PRINCIPAL OF SHARES OF NUMBER OF OF SHARES OF AMOUNT OF NUMBER OF COMMON STOCK SHARES OF COMMON STOCK NOTES WARRANTS BENEFICIALLY COMMON STOCK BENEFICIALLY BENEFICIALLY BENEFICIALLY OWNED PRIOR THAT MAY BE OWNED AFTER OWNED AND OWNED AND TO THE OFFERED THE NAME OFFERED OFFERED OFFERING(1)(2) (1)(2)(3) OFFERING(4) - ---- ------------ ------------ -------------- ------------ ------------- SF Capital Partners Ltd.(5) $ 4,000,000 240,000 1,192,381 1,252,000 0 Whitebox Convertible Arbitrage Partners LP(6) $ 3,300,000 198,000 983,714 1,032,900 0 Whitebox Intermarket Partners, LP(7) $ 500,000 30,000 149,048 156,500 0 HFR RVA Combined Master Trust(8) $ 200,000 12,000 59,619 62,600 0 DBZ Acquisition Partners II, LLC(9) $ 3,000,000 180,000 894,286 939,000 0 The Northwestern Mutual Life Insurance Company(10) $ 3,000,000 180,000 894,286 939,000 0 Radcliffe SPC, Ltd. for and on behalf of the Class A Convertible Crossover Segregated Portfolio(11) $ 2,500,000 150,000 745,238 782,500 0 Capital Ventures International(12) $ 1,500,000 90,000 447,143 469,500 0 Smithfield Fiduciary LLC(13) $ 1,000,000 60,000 298,095 313,000 0 Deerfield Partners, L.P.(14) $ 1,632,000 97,920 486,491 510,816 933,814 (15) Deerfield International Limited(16) $ 1,768,000 106,080 527,032 553,384 1,000,386 (17) ----------- --------- --------- --------- --------- TOTAL $22,400,000 1,344,000 6,677,333 7,011,200 1,934,200
(1) Includes shares of common stock into which the notes are convertible and for which the warrants may be exercised. (2) Assumes a conversion price of $4.20 per share with respect to shares acquired upon conversion of the notes. (3) Represents 105% of (a) 5,333,333 shares of common stock issuable upon conversion of the notes at a conversion price of $4.20 per share and (b) 1,344,000 shares of common stock issuable upon exercise of the warrants. (4) Assumes that all of the notes, warrants and shares offered in the offering are sold. (5) Michael A. Roth and Brian J. Stark are the Managing Members of Stark Offshore Management, LLC ("Stark Offshore"), which acts as investment manager and has sole power to direct the management of SF Capital Partners Ltd. ("SF Capital"). Through Stark Offshore, Messrs. Roth and Stark possess voting and investment control over the shares of common stock held by SF Capital; however, Messrs. Roth and Stark disclaim beneficial ownership of these shares. SF Capital is not a registered broker-dealer but is affiliated with Reliant Trading and Shepherd Trading Ltd, both of which are registered broker-dealers. (6) The securities offered by Whitebox Convertible Arbitrage Partners LP are beneficially owned by Whitebox Convertible Arbitrage Advisors, LLC, as general partner of Whitebox Convertible Arbitrage Partners LP; by Whitebox Advisors LLC, as managing member of Whitebox Convertible Arbitrage Advisors, LLC; and Andrew J. Redleaf as managing member of Whitebox Advisors, LLC. 38 (7) The securities offered by Whitebox Intermarket Partners, LP are beneficially owned by Whitebox Intermarket Advisors, LLC, as general partner of Whitebox Convertible Arbitrage Partners LP; by Whitebox Advisors LLC, as managing member of Whitebox Convertible Arbitrage Advisors, LLC; and Andrew J. Redleaf as managing member of Whitebox Advisors, LLC. (8) Pursuant to an investment management agreement, Whitebox Advisors, LLC serves as investment adviser to HFR RVA Combined Master Trust and consequently has voting control and investment discretion over securities offered by HFR RVA Combined Master Trust. Andrew Redleaf serves as managing member of Whitebox Advisors, LLC, and therefore, may be deemed to beneficially own the securities offered by HFR RVA Combined Master Trust. (9) D.B. Zwirn & Co., L.P. is the trading manager of this selling securityholder and consequently has voting control and investment discretion over the securities held by this selling securityholder. Daniel B. Zwirn is the managing member of and thereby controls Zwirn Holdings, LLC, which in turn is the managing member of and thereby controls DBZ GP, LLC, which in turn is the general partner of and thereby controls D.B. Zwirn & Co., L.P. (10) Northwestern Investment Management Company, LLC ("NIMC") is one of the investment advisors to The Northwestern Mutual Life Insurance Company ("Northwestern Mutual") and is the investment advisor for Northwestern Mutual with respect to the securities. NIMC therefore may be deemed to be an indirect beneficial owner with shared voting power and investment power with respect to the securities. Jerome R. Baier is a portfolio manager for NIMC and manages the portfolio which holds the securities and therefore may be deemed to be an indirect beneficial owner with shared voting power and investment power with respect to the securities. Pursuant to Rule 13d-4 under the Exchange Act, the immediately preceding sentence shall not be construed as an admission that Mr. Baier is, for the purposes of section 13(d) or 13(g) of the Exchange Act, the beneficial owner of any of the securities. Northwestern Mutual is not a registered broker-dealer but is affiliated with the following registered broker-dealers: Northwestern Mutual Investment Services, LLC, Frank Russell Capital Inc., Frank Russell Securities, Inc. and Russell Fund Distributors, Inc. (11) Pursuant to an investment management agreement, RG Capital Management, L.P. ("RG Capital") serves as the investment manager of Radcliffe SPC, Ltd.'s Class A Convertible Crossover Segregated Portfolio. RGC Management Company, LLC ("Management") is the general partner of RG Capital. Steve Katznelson and Gerald Stahlecker serve as the managing members of Management. Each of RG Capital, Management and Messrs. Katznelson and Stahlecker disclaims beneficial ownership of the securities owned by Radcliffe SPC, Ltd. for and on behalf of the Class A Convertible Crossover Segregated Portfolio. (12) Heights Capital Management, Inc., the authorized agent of Capital Ventures International ("CVI"), has discretionary authority to vote and dispose of the securities held by CVI and may be deemed to be the beneficial owner of these securities. Martin Kobinger, in his capacity as Investment Manager of Heights Capital Management, Inc., may also be deemed to have investment discretion and voting power over the securities held by CVI. Mr. Kobinger disclaims any such beneficial ownership of the securities. CVI is not a registered broker-dealer but is affiliated with one or more registered broker-dealers. (13) Highbridge Capital Management, LLC is the trading manager of Smithfield Fiduciary LLC and consequently has voting control and investment discretion over securities held by Smithfield Fiduciary LLC. Glenn Dubin and Henry Swieca control Highbridge Capital Management, LLC. Each of Highbridge Capital Management, LLC, Glenn Dubin and Henry Swieca disclaims beneficial ownership of the securities held by Smithfield Fiduciary LLC. (14) Deerfield Capital, L.P. is the investment advisor to Deerfield Partners, L.P. and exercises voting and investment power with respect to the securities held by Deerfield Partners, L.P. Snider Capital is the general partner of Deerfield Capital, L.P. and Arnold H. Snider is the President of Snider Capital. (15) This number of shares of common stock constitutes 3.0% of the shares of ATS Medical common stock outstanding as of October 28, 2005. 39 (16) Deerfield Management Company is the investment advisor to Deerfield International Limited and exercises voting and investment power with respect to the securities held by Deerfield International Limited. Snider Management is the general partner of Deerfield Management Company, and Arnold H. Snider is the President of Snider Management. (17) This number of shares of common stock constitutes 3.2% of the shares of ATS Medical common stock outstanding as of October 28, 2005. PLAN OF DISTRIBUTION The selling securityholders, which as used in this prospectus includes donees, pledgees, transferees or other successors-in-interest selling notes, warrants and shares of common stock (together, the "securities") or interests in the securities received after the date of this prospectus from a selling securityholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their securities or interests in securities on any stock exchange, market or trading facility on which the securities are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. The selling securityholders may use any one or more of the following methods when disposing of securities or interests in securities: - ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; - block trades in which the broker-dealer will attempt to sell the securities as agent, but may position and resell a portion of the block as principal to facilitate the transaction; - purchases by a broker-dealer as principal and resale by the broker-dealer for its account; - an exchange distribution in accordance with the rules of the applicable exchange; - privately negotiated transactions; - short sales effected after the date the registration statement of which this prospectus is a part is declared effective by the SEC; - through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; - broker-dealers may agree with the selling securityholders to sell a specified number of shares at a stipulated price per share; - a combination of any such methods of sale; and - any other method permitted pursuant to applicable law. These sales may include crosses. Crosses are transactions in which the same broker acts as agent on both sides of the transaction. The selling securityholders may, from time to time, pledge or grant a security interest in some or all of the securities owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the securities, from time to time, under this prospectus, or under a supplement or an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling securityholders to include the pledgee, transferee or other successors-in-interest as selling securityholders under this prospectus. The selling securityholders also may transfer the securities in other 40 circumstances, in which case the transferees, pledgees or other successors-in-interest will be the selling beneficial owners for purposes of this prospectus. In connection with the sale of our securities or interests in our securities, the selling securityholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the securities in the course of hedging the positions they assume. The selling securityholders may also sell our securities short and deliver these securities to close out their short positions, or loan or pledge the securities to broker-dealers that in turn may sell these securities. The selling securityholders may also enter into option or other transactions with broker-dealers or other financial institutions for the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of securities offered by this prospectus, which securities such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction). The aggregate proceeds to the selling securityholders from the sale of the securities offered by them will be the purchase price of the securities less discounts or commissions, if any. Each of the selling securityholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of securities to be made directly or through agents. We will not receive any of the proceeds from the sales of the securities from time to time under this prospectus by the selling securityholders. Upon any exercise of the warrants by payment of cash, however, we will receive the exercise price of the warrants. The selling securityholders also may resell all or a portion of the securities in open market transactions in reliance upon Rule 144 under the Securities Act, provided that they meet the criteria, and conform to the requirements, of that rule. The selling securityholders, including any selling securityholders who are registered broker-dealers or affiliates of registered broker-dealers, and any underwriters, broker-dealers or agents that participate in the sale of the securities or interests in the securities may be "underwriters" within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the securities may be underwriting discounts and commissions under the Securities Act. We cannot presently estimate the amount of such compensation. Selling securityholders who are "underwriters" within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act. We will not pay any compensation or give any discounts or commissions to any underwriter in connection with the securities being registered by this prospectus. Based on the information provided to us by the selling securityholders, we know of no existing arrangements between any selling securityholder, any other selling securityholder, broker, dealer, underwriter or agent relating to the sale or distribution of the securities. Upon notification to us by a selling securityholder that any material arrangement has been entered into with a broker or dealer for the sale of shares through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing (1) the name of each such selling securityholder and of the participating brokers or dealers, (2) the number of shares involved, (3) the price at which such shares were sold, (4) the commissions paid or discounts or concessions allowed to such brokers or dealers, where applicable, (5) that such brokers or dealers did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus and (6) other facts material to the transaction. In addition, upon notification to us by a selling securityholder that a donee or pledgee intends to sell more than 500 shares, a supplement to this prospectus will be filed if required. In order to comply with the securities laws of some states, if applicable, the securities may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the notes, warrants or shares of common stock may not be sold unless they have been registered or qualified for sale or an exemption from registration or qualification requirements is available and the conditions of which are satisfied. We have advised the selling securityholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling securityholders and their affiliates. In addition, we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling securityholders for the purpose of satisfying the prospectus delivery requirements of 41 the Securities Act. The selling securityholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act. We have agreed to indemnify the selling securityholders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the securities offered by this prospectus. EXPERTS The consolidated financial statements of ATS Medical, Inc. incorporated by reference in ATS Medical Inc.'s Annual Report (Form 10-K/A) for the year ended December 31, 2004 including schedules appearing therein, and ATS Medical, Inc. management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 incorporated by reference therein, have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their reports thereon, incorporated by reference therein, and incorporated herein by reference. Such consolidated financial statements and management's assessment is incorporated herein by reference in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. LEGAL MATTERS The validity of the issuance of shares of the securities offered in this offering will be passed upon for us by Dorsey & Whitney LLP, Minneapolis, Minnesota. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy these documents at the SEC's public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers like us that file electronically with the SEC. The address of the SEC's web site is http://www.sec.gov. Copies of our SEC filings are also available through our website (www.atsmedical.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the SEC. We have filed with the SEC a registration statement on Form S-3 to register the notes, the warrants and the common stock offered by this prospectus. This prospectus is part of the registration statement. As allowed by SEC rules, this prospectus does not contain all of the information that is in the registration statement and the exhibits and schedules to the registration statement. For further information regarding ATS Medical, Inc., investors should refer to the registration statement and its exhibits and schedules. A copy of the registration statement may be inspected, without charge, at the offices of the SEC at 100 F Street, NE, Washington, DC 20549, and copies of all or any part of the registration statement may be obtained from the SEC's public reference room at 100 F Street, NE, Washington, DC 20549, upon the payment of any fees required by the SEC. The registration statement is also available on the SEC's web site at http://www.sec.gov. INCORPORATION OF DOCUMENTS BY REFERENCE The SEC allows us to "incorporate by reference" the information we file with it, which means that we can disclose important information to you by referring you to those documents. The information that we incorporate by reference is considered to be part of this prospectus, and later information that we file with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, until the selling securityholders sell all of the shares or the earlier termination of this offering: - our annual report on Form 10-K for the fiscal year ended December 31, 2004, as amended; - our quarterly reports on Form 10-Q for the fiscal quarters ended March 31, 2005 and June 30, 2005; - our current reports on Form 8-K filed on February 25, 2005, March 30, 2005, May 10, 2005, June 27, 2005, June 29, 2005, July 6, 2005, July 19, 2005, October 12, 2005 and October 18, 2005; and 42 - the description of our common stock contained in any registration statement or report filed by us under the Exchange Act, and any amendment or report filed for the purpose of updating such description. We will provide, at no cost to you, upon your written or oral request, a copy of any or all of the documents incorporated by reference in this prospectus (other than exhibits, unless such exhibits are specifically incorporated by reference into such documents) and any report, proxy statement or other communication distributed by us to our shareholders generally. Requests for such copies should be directed to Deborah K. Chapman, Controller, ATS Medical, Inc., 3905 Annapolis Lane, Suite 105, Minneapolis, Minnesota 55447, (763) 553-7736. You should rely only on the information incorporated by reference or provided in this prospectus or any supplement to this prospectus. We have not authorized anyone else to provide you with different information. You should not assume that the information in this prospectus or any supplement to this prospectus is accurate as of any date other than the date on the cover page of this prospectus or any supplement. 43 ATS MEDICAL, INC. (ATS MEDICAL LOGO) $22,400,000 6% CONVERTIBLE SENIOR NOTES DUE 2025 WARRANTS TO PURCHASE 1,344,000 SHARES OF COMMON STOCK 7,011,200 SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES AND EXERCISE OF THE WARRANTS ---------- PROSPECTUS ---------- ____________, 2005 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION SEC Registration Fee .......... $ 3,368 Accounting Fees and Expenses... 5,000 Legal Fees and Expenses ....... 20,000 Miscellaneous ................. 1,632 ------- Total ...................... $30,000
All fees and expenses other than the SEC registration fee are estimated. We will pay all the expenses listed above. ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS Minnesota Statutes Section 302A.521 provides that a corporation shall indemnify any person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of such person against judgments, penalties, fines (including, without limitation excise taxes assessed against such person with respect to any employee benefit plan), settlements and reasonable expenses, including attorneys' fees and disbursements, incurred by such person in connection with the proceeding, if, with respect to the acts or omissions of such person complained of in the proceeding, such person (1) has not been indemnified therefor by another organization or employee benefit plan; (2) acted in good faith; (3) received no improper personal benefit and Section 302A.255 (with respect to director conflicts of interest), if applicable, has been satisfied; (4) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and (5) reasonably believed that the conduct was in the best interests of the corporation in the case of acts or omissions in such person's official capacity for the corporation or reasonably believed that the conduct was not opposed to the best interests of the corporation in the case of acts or omissions in such person's official capacity for other affiliated organizations. Our Bylaws provide that we shall indemnify our officers and directors under such circumstances and to the extent permitted by Section 302A.521 as now enacted or hereafter amended. We have established a Self-Insurance Trust Agreement to assist in funding indemnification of our directors and officers to the extent permissible under Minnesota Law. We have contributed $300,000 plus interest to an irrevocable trust (the "Trust") to be invested by an independent trustee in governmental issued or insured obligations. The Trust funds may be used only for indemnification of our officers or directors or, at our direction and with the consent of the beneficiaries under the Trust, to pay directors' and officers' liability insurance premiums. The rights of the beneficiaries under the Trust are contract rights enforceable against ATS Medical and the trustee. In addition to the Trust, since November 1995 we have maintained a liability insurance policy for our directors and officers. ITEM 16. EXHIBITS
Exhibit Number Description of Exhibit - ------- ---------------------- 4.1 Restated Articles of Incorporation, as amended to date (incorporated by reference to Exhibit 3.1 to ATS Medical, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993). 4.2 Bylaws of ATS Medical, Inc., as amended to date (incorporated by reference to Exhibit 3.2 to ATS Medical, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 4.3 Specimen certificate for shares of ATS Medical, Inc. Common Stock (incorporated by reference to Exhibit 4.1 to ATS Medical, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997).
II-1 4.4 Indenture, dated as of October 7, 2005, between ATS Medical, Inc. and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 12, 2005). 4.5 First Supplemental Indenture, dated October 13, 2005, to the Indenture dated as of October 7, 2005, by and between ATS Medical, Inc. and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 18, 2005). 4.6 Form of 6% Convertible Senior Notes due 2025 (incorporated by reference to Exhibit 4.1 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 18, 2005). 4.7 Form of Warrant (incorporated by reference to Exhibit 4.2 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 18, 2005). 5.1 Opinion of Dorsey & Whitney LLP. 10.1 Securities Purchase Agreement, dated as of October 6, 2005, by and among ATS Medical, Inc. and the Buyers listed on the Schedule of Buyers attached thereto as Exhibit A (incorporated by reference to Exhibit 10.1 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 12, 2005). 10.2 Amendment No. 1, dated as of October 12, 2005, to the Securities Purchase Agreement by and among ATS Medical, Inc. and the Buyers listed therein, dated as of October 6, 2005 (incorporated by reference to Exhibit 10.1 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 18, 2005). 10.3 Registration Rights Agreement, dated as of October 7, 2005, by and among ATS Medical, Inc. and the buyers listed on the Schedule of Buyers attached thereto as Exhibit A (incorporated by reference to Exhibit 10.2 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 12, 2005). 10.4 Amendment No. 1, dated as of October 13, 2005, to the Registration Rights Agreement by and among ATS Medical, Inc. and the Buyers listed therein, dated as of October 7, 2005 (incorporated by reference to Exhibit 10.2 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 18, 2005). 10.5 Warrant Agent Agreement, dated as of October 7, 2005, between ATS Medical, Inc. and Wells Fargo Bank, National Association, as Warrant Agent (incorporated by reference to Exhibit 10.3 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 12, 2005). 12.1 Computation of Ratio of Earnings to Fixed Charges. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1). 24.1 Power of Attorney (included on signature page). 25.1 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of Wells Fargo Bank, National Association.
II-2 ITEM 17. UNDERTAKINGS (a) Rule 415 Offering. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the SEC by the registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Filings Incorporating Subsequent Exchange Act Documents by Reference. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Indemnification for Liability under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis, State of Minnesota, on November 3, 2005. ATS MEDICAL, INC. By: /s/ Michael D. Dale ------------------------------------- Michael D. Dale President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael D. Dale and John R. Judd, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all (i) amendments (including post-effective amendments) to this Registration Statement and (ii) registration statements and any and all amendments thereto (including post-effective amendments) for the same offering that is effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933 and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents and each of them full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the indicated capacities on November 3, 2005.
SIGNATURE TITLE - --------- ----- /s/ Michael D. Dale President, Chief Executive Officer and - ------------------------------------- Chairman of the Board Michael D. Dale (principal executive officer) /s/ John R. Judd Chief Financial Officer - ------------------------------------- (principal financial and accounting John R. Judd officer) /s/ John D. Buck Director - ------------------------------------- John D. Buck /s/ David D. Koentopf Director - ------------------------------------- David D. Koentopf /s/ Robert E. Munzenrider Director - ------------------------------------- Robert E. Munzenrider /s/ Eric W. Sivertson Director - ------------------------------------- Eric W. Sivertson
II-4 EXHIBIT INDEX
Exhibit Number Description of Exhibit - ------- ---------------------- 4.1 Restated Articles of Incorporation, as amended to date (incorporated by reference to Exhibit 3.1 to ATS Medical, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993). 4.2 Bylaws of ATS Medical, Inc., as amended to date (incorporated by reference to Exhibit 3.2 to ATS Medical, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 4.3 Specimen certificate for shares of ATS Medical, Inc. Common Stock (incorporated by reference to Exhibit 4.1 to ATS Medical, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997). 4.4 Indenture, dated as of October 7, 2005, between ATS Medical, Inc. and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 12, 2005). 4.5 First Supplemental Indenture, dated October 13, 2005, to the Indenture dated as of October 7, 2005, by and between ATS Medical, Inc. and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 18, 2005). 4.6 Form of 6% Convertible Senior Notes due 2025(incorporated by reference to Exhibit 4.1 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 18, 2005). 4.7 Form of Warrant (incorporated by reference to Exhibit 4.2 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 18, 2005). 5.1 Opinion of Dorsey & Whitney LLP. 10.1 Securities Purchase Agreement, dated as of October 6, 2005, by and among ATS Medical, Inc. and the Buyers listed on the Schedule of Buyers attached thereto as Exhibit A (incorporated by reference to Exhibit 10.1 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 12, 2005). 10.2 Amendment No. 1, dated as of October 12, 2005, to the Securities Purchase Agreement by and among ATS Medical, Inc. and the Buyers listed therein, dated as of October 6, 2005 (incorporated by reference to Exhibit 10.1 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 18, 2005). 10.3 Registration Rights Agreement, dated as of October 7, 2005, by and among ATS Medical, Inc. and the buyers listed on the Schedule of Buyers attached thereto as Exhibit A (incorporated by reference to Exhibit 10.2 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 12, 2005). 10.4 Amendment No. 1, dated as of October 13, 2005, to the Registration Rights Agreement by and among ATS Medical, Inc. and the Buyers listed therein, dated as of October 7, 2005 (incorporated by reference to Exhibit 10.2 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 18, 2005). 10.5 Warrant Agent Agreement, dated as of October 7, 2005, between ATS Medical, Inc. and Wells Fargo Bank, National Association, as Warrant Agent (incorporated by reference to Exhibit 10.3 to ATS Medical, Inc.'s Current Report on Form 8-K filed on October 12, 2005).
12.1 Computation of Ratio of Earnings to Fixed Charges. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1). 24.1 Power of Attorney (included on signature page). 25.1 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of Wells Fargo Bank, National Association.
EX-5.1 2 c99733s3exv5w1.txt OPINION/CONSENT OF DORSEY & WHITNEY LLP EXHIBIT 5.1 [Letterhead of Dorsey & Whitney LLP] November 4, 2005 ATS Medical, Inc. 3905 Annapolis Lane, Suite 105 Minneapolis, Minnesota 55447 RE: Registration Statement on Form S-3 Ladies and Gentlemen: We have acted as counsel to ATS Medical, Inc., a Minnesota corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended, of (1) up to $22,400,000 aggregate principal amount of 6% Convertible Senior Notes due 2025 (the "Notes") issued pursuant to an Indenture, dated as of October 7, 2005 and supplemented on October 13, 2005 (as supplemented, the "Indenture"), by and between the Company and Wells Fargo Bank, National Association, as trustee (the "Trustee"), which are convertible into shares of common stock, $0.01 par value per share (the "Common Stock"), of the Company (as converted, the " Conversion Shares"), (2) warrants (the "Warrants") to purchase 1,344,000 shares of Common Stock (as exercised, the "Warrant Shares"), and (3) 7,011,200 shares of Common Stock, which represent 105% of the Conversion Shares and 105% of the Warrant Shares (the "Shares" and collectively with the Notes and the Warrants, the "Securities"). The Securities are to be offered and sold by certain securityholders of the Company (the "Selling Securityholders"). In this regard, we have participated in the preparation of a Registration Statement on Form S-3 registering the Securities for resale (such Registration Statement, as it may be amended from time to time, is referred to herein as the "Registration Statement"). We have examined such documents and have reviewed such questions of law as we have considered necessary and appropriate for the purposes of our opinions set forth below. In rendering our opinions, we have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures and the conformity to authentic originals of all documents submitted to us as copies. We have also assumed the legal capacity for all purposes relevant hereto of all natural persons and, with respect to all parties to agreements or instruments relevant hereto other than the Company, that such parties had the requisite power and authority (corporate or otherwise) to execute, deliver and perform such agreements or instruments, that such agreements or instruments have been duly authorized by all requisite action (corporate or otherwise), executed and delivered by such parties and that such agreements or instruments are the valid, binding and enforceable obligations of such parties. As to questions of fact material to our opinions, we have relied upon certificates of officers of the Company and of public officials. We are of the opinion that the Notes have been duly authorized, executed and delivered in accordance with the Indenture, the Warrants have been duly authorized, executed and delivered, and the Notes and the Warrants are the valid and binding obligations of the Company, subject to the following: (a) We express no opinion as to (i) the effect of any bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium or other similar laws relating to or affecting the rights of creditors generally, including, without limitation, laws relating to fraudulent transfers or conveyances and preferences, (ii) rights to indemnification and contribution contained in the Notes, the Indenture and the Registration Rights Agreement dated as of October 7, 2005 and amended on October 13, 2005 among the Company and the Selling Securityholders, which may be limited by applicable law or equitable principles, or (iii) the effect of general principles of equity, including without limitation, concepts of materiality, reasonableness, good faith and fair dealing, and the possible unavailability of specific performance, injunctive relief or other equitable relief, and limitations on rights of acceleration regardless of whether considered in a proceeding in equity or at law. (b) To the extent that the obligations of the Company under the Indenture may be dependent upon such matters, we assume for purposes of this opinion that the Trustee under the Indenture has been duly organized, is validly existing and is in good standing under the laws of its jurisdiction of organization; that the Trustee is duly qualified to engage in the activities contemplated by the Indenture; that the Indenture has been duly authorized, executed and delivered by the Trustee and constitutes a legally valid, binding and enforceable obligation of the Trustee enforceable against the Trustee in accordance with its terms; that the Trustee is in compliance, generally and with respect to acting as trustee under the Indenture, with all applicable laws and regulations; and that the Trustee has the requisite organizational and legal power and authority to perform its obligations under the Indenture. (c) Minnesota Statutes Section 290.371, Subd. 4, provides that any corporation required to file a Notice of Business Activities Report does not have a cause of action upon which it may bring suit under Minnesota law unless the corporation has filed a Notice of Business Activities Report and provides that the use of the courts of the State of Minnesota for all contracts executed and all causes of action that arose before the end of any period for which a corporation failed to file a required report is precluded. Insofar as our opinions may relate to the valid, binding and enforceable character of any agreement under Minnesota law or in Minnesota court, we have assumed that any party seeking to enforce such agreement has at all times been, and will continue at all times to be, exempt from the requirement of filing a Notice of Business Activities Report or, if not exempt, has duly filed, and will continue to duly file, all Notice of Business Activities Reports. We are of the further opinion that the Conversion Shares and the Warrant Shares, when issued upon conversion of the Notes and exercise of the Warrants, will be legally issued, fully paid and nonassessable. Our opinions expressed above are limited to the laws of the States of Minnesota and New York. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and to the reference to our firm under the heading "Legal Matters" in the Prospectus constituting part of the Registration Statement. Very truly yours, /s/ Dorsey & Whitney LLP TSH/SMD EX-12.1 3 c99733s3exv12w1.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES . . . EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED)
NINE MONTHS FOR THE YEARS ENDED DECEMBER 31 ENDED SEPTEMBER 30, (IN THOUSANDS, EXCEPT RATIO) 2000 2001 2002 2003 2004 2005 - ------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------- Earnings: Earnings from continuing operations before income taxes $579 ($6,844) ($18,212) ($13,292) ($16,643) ($11,170) Fixed charges 85 99 583 581 202 260 - ------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------- Total earnings before fixed charges $664 ($6,745) ($17,629) ($12,711) ($16,441) ($10,910) ===================================== ============ ============ ============ ============ ============ ============= Fixed Charges: Interest expense $ 0 $ 0 $ 480 $ 506 $ 102 $ 185 Rental interest factor 85 99 103 75 100 75 - ------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------- Total fixed charges $ 85 $ 99 $ 583 $ 581 $ 202 $ 260 ===================================== ============ ============ ============ ============ ============ ============= Ratio of earnings to fixed charges 7.81 -- -- -- -- -- Deficiency of earnings to fixed charges -- ($6,844) ($18,212) ($13,292) ($16,643) ($11,170)
EX-23.1 4 c99733s3exv23w1.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the reference to our firm under the caption "Experts" in the Registration Statement on Form S-3 and related Prospectus of ATS Medical, Inc. for the registration of $22,400,000 6% Convertible Senior Notes due 2025, warrants to purchase 1,344,000 shares of its common stock and 7,011,200 shares of its common stock issuable upon conversion of the Notes and cash exercise of the warrants and to the incorporation by reference therein of our reports dated February 14, 2005, with respect to the consolidated financial statements and schedules of ATS Medical, Inc., ATS Medical Inc. management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of ATS Medical Inc., included in its Annual Report (Form 10-K/A) for the year ended December 31, 2004, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP ------------------------ Minneapolis, Minnesota November 4, 2005 EX-25.1 5 c99733s3exv25w1.txt FORM T-1 STATEMENT OF ELIGIBILITY & QUALIFICATION EXHIBIT 25.1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ---------- [ ] CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b) (2) WELLS FARGO BANK, NATIONAL ASSOCIATION (Exact name of trustee as specified in its charter) A NATIONAL BANKING ASSOCIATION 94-1347393 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.)
101 NORTH PHILLIPS AVENUE SIOUX FALLS, SOUTH DAKOTA 57104 (Address of principal executive offices) (Zip code)
WELLS FARGO & COMPANY LAW DEPARTMENT, TRUST SECTION MAC N9305-175 SIXTH STREET AND MARQUETTE AVENUE, 17TH FLOOR MINNEAPOLIS, MINNESOTA 55479 (612) 667-4608 (Name, address and telephone number of agent for service) ---------- ATS MEDICAL, INC. (Exact name of obligor 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)
---------- 6% CONVERTIBLE SENIOR NOTES DUE 2025 (Title of the indenture securities) ================================================================================ Item 1. General Information. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Comptroller of the Currency Treasury Department Washington, D.C. 20230 Federal Deposit Insurance Corporation Washington, D.C. 20429 Federal Reserve Bank of San Francisco San Francisco, California 94120 (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. Item 2. Affiliations with Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. None with respect to the trustee. No responses are included for Items 3-14 of this Form T-1 because the obligor is not in default as provided under Item 13. Item 15. Foreign Trustee. Not applicable. Item 16. List of Exhibits. List below all exhibits filed as a part of this Statement of Eligibility. Exhibit 1. A copy of the Articles of Association of the trustee now in effect.* Exhibit 2. A copy of the Comptroller of the Currency Certificate of Corporate Existence and Fiduciary Powers for Wells Fargo Bank, National Association, dated February 4, 2004.** Exhibit 3. See Exhibit 2 Exhibit 4. Copy of By-laws of the trustee as now in effect.*** Exhibit 5. Not applicable. Exhibit 6. The consent of the trustee required by Section 321(b) of the Act. Exhibit 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority.**** Exhibit 8. Not applicable. Exhibit 9. Not applicable.
* Incorporated by reference to the exhibit of the same number to the trustee's Form T-1 filed as exhibit 25 to the Form T-3 dated March 3, 2004 of Trans-Lux Corporation file number 022-28721. ** Incorporated by reference to the exhibit of the same number to the trustee's Form T-1 filed as exhibit 25 to the Form T-3 dated March 3, 2004 of Trans-Lux Corporation file number 022-28721. *** Incorporated by reference to the exhibit of the same number to the trustee's Form T-1 filed as exhibit 25.1 to the Form S-4 dated May 26, 2005 of Penn National Gaming, Inc. file number 333-125274. **** Incorporated by reference to exhibit of the same number to the trustee's Form T-1 filed as exhibit 25.1 to the Form F-4 dated October 14, 2005 of Videotron LTEE file number 333-128998. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, Wells Fargo Bank, National Association, a national banking association organized and existing under the laws of the United States of America, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Minneapolis and State of Minnesota on the 28th day of October 2005. WELLS FARGO BANK, NATIONAL ASSOCIATION /s/ Timothy P. Mowdy ---------------------------------------- Timothy P. Mowdy Vice President EXHIBIT 6 October 28, 2005 Securities and Exchange Commission Washington, D.C. 20549 Gentlemen: In accordance with Section 321(b) of the Trust Indenture Act of 1939, as amended, the undersigned hereby consents that reports of examination of the undersigned made by Federal, State, Territorial, or District authorities authorized to make such examination may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor. Very truly yours, WELLS FARGO BANK, NATIONAL ASSOCIATION /s/ Timothy P. Mowdy ---------------------------------------- Timothy P. Mowdy Vice President -----END PRIVACY-ENHANCED MESSAGE-----