-----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, Ijvip6aYkzAPDmk8H1xu+5112AHSHH39H3XvHZu26OZOkA5n8fUdB/txkmHjtHpE Bd+SpDVoaJsfeL9gJtjHfQ== 0000950137-02-002198.txt : 20020416 0000950137-02-002198.hdr.sgml : 20020416 ACCESSION NUMBER: 0000950137-02-002198 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATS MEDICAL INC CENTRAL INDEX KEY: 0000824068 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 411595629 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18602 FILM NUMBER: 02611440 BUSINESS ADDRESS: STREET 1: 3905 ANNAPOLIS LA STREET 2: SUITE 105 CITY: MINNEAPOLIS STATE: MN ZIP: 55447 BUSINESS PHONE: 6125537736 MAIL ADDRESS: STREET 1: 3905 ANNAPOLIS LANE STREET 2: SUITE 105 CITY: MINNEAPOLIS STATE: MN ZIP: 55447 FORMER COMPANY: FORMER CONFORMED NAME: ATS MEDCIAL INC DATE OF NAME CHANGE: 19920803 10-Q 1 c68907e10-q.txt QUARTERLY REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X Quarterly report pursuant to Section 13 or 15(d) of the --- Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 COMMISSION FILE NO. 0-18602 ATS MEDICAL, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-1595629 (state or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3905 ANNAPOLIS LANE, SUITE 105 55447 MINNEAPOLIS, MINNESOTA (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (763) 553-7736 Former name, if changed since last report: N/A Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- The number of shares outstanding of each of the registrant's classes of common stock as of April 12, 2002 was: Common Stock $.01 par value 22,229,773 shares ================================================================================ ATS MEDICAL, INC. INDEX
PART I. FINANCIAL INFORMATION PAGE Item 1. Statements of Financial Position - 3 March 31, 2002 (unaudited) and December 31, 2001 Statements of Operations - 4 Three Months Ended March 31, 2002 and 2001 (unaudited) Statements of Cash Flows - 5 Three Months Ended March 31, 2002 and 2001 (unaudited) Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of 7 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About 12 Market Risk PART II. OTHER INFORMATION 13 Signatures 14
Item 1 Financial Statements ATS MEDICAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
MARCH 31, DECEMBER 31, 2002 2001 ---------------------------------------------------- ASSETS (Unaudited) (Note) Current assets: Cash and cash equivalents $ 7,558,326 $ 5,078,750 Short-term investments 3,271,392 7,698,290 ---------------------------------------------------- 10,829,718 12,777,040 Accounts receivable, less allowance of $405,000 in 2002 and $400,000 in 2001 4,944,000 4,082,992 Inventories 17,240,765 17,348,901 Prepaid expenses 465,488 570,716 ---------------------------------------------------- Total current assets 33,479,971 34,779,649 Furniture, machinery and equipment, net 6,629,891 6,753,483 Inventories 40,000,000 40,000,000 Technology license 13,000,000 13,000,000 Other assets 435,256 438,100 ---------------------------------------------------- Total assets $ 93,545,118 $ 94,971,232 ==================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,226,752 $ 2,271,100 Accrued payroll and expenses 521,397 476,883 ---------------------------------------------------- Total current liabilities 2,748,149 2,747,983 Long-term debt 0 0 Shareholders' equity: Common Stock, $.01 par value: Authorized 40,000,000 shares; Issued and outstanding 22,229,773 and 22,203,940 shares at March 31, 2002 and December 31, 2001, respectively 222,298 222,039 Additional paid-in capital 111,411,447 111,354,615 Accumulated deficit (20,836,776) (19,353,405) ---------------------------------------------------- Total shareholders' equity 90,796,969 92,223,249 ---------------------------------------------------- Total liabilities and shareholders' equity $ 93,545,118 $ 94,971,232 ====================================================
Note: The statement of financial position at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed financial statements. ATS MEDICAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED MARCH 31, 2002 2001 ---------------------------------------------------- Net sales $3,902,263 $4,253,573 Less cost of goods sold 2,690,911 2,608,160 ---------------------------------------------------- Gross profit 1,211,352 1,645,413 Expenses: Research, development and engineering 925,659 757,914 Sales and marketing 1,158,932 1,067,712 General and administrative 674,243 815,678 ---------------------------------------------------- Total expenses 2,758,834 2,641,304 ---------------------------------------------------- Operating loss (1,547,482) (995,891) Interest income 64,111 420,574 ---------------------------------------------------- Net loss ($1,483,371) ($575,317) ==================================================== Net loss per share: Basic ($0.07) ($0.03) Diluted ($0.07) ($0.03) Weighted average number of shares outstanding: Basic 22,220,775 22,117,758 Diluted 22,220,775 22,117,758
See notes to condensed financial statements. ATS MEDICAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31 2002 2001 --------------------------- --------------------------- OPERATING ACTIVITIES Net loss ($1,483,371) ($575,317) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 182,896 151,550 Loss on disposal of equipment 570 9,580 Changes in operating assets and liabilities: Accounts receivable (861,008) (317,486) Prepaid expenses 105,228 (60,735) Other assets 2,844 (5,700) Inventories 108,136 (734,528) Accounts payable and accrued expenses 166 (1,310,053) ----------- ----------- Net cash used in operating activities (1,944,539) (2,842,689) INVESTING ACTIVITIES Purchase of short-term investments (1,188,119) (2,523,648) Sale of short-term investments 5,615,017 15,887,863 Purchases of furniture, machinery and equipment (59,874) (1,186,026) ----------- ----------- Net cash provided by investing activities 4,367,024 12,178,189 FINANCING ACTIVITIES Net proceeds from sale of common stock 57,091 145,336 ----------- ----------- Net cash provided by financing activities 57,091 145,336 Increase in cash and cash equivalents 2,479,576 9,480,836 Cash and cash equivalents at beginning of period 5,078,750 14,804,195 ----------- ----------- Cash and cash equivalents at end of period $7,558,326 $24,285,031 =========== ===========
ATS MEDICAL, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) March 31, 2002 Note A - BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. In our Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2001, we identified critical accounting policies and estimates for our business. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We manufacture and market a mechanical bileaflet heart valve with a patented pivot design. Our heart valve is used to treat valvular heart disease caused by the natural aging process, rheumatic heart disease and congenital defects. We have received regulatory approvals to market the ATS heart valve in the United States and most international markets, principally Europe, Japan, Canada and Australia. We commenced selling the ATS heart valve in international markets in 1992. We sell the valve to independent distributors with assigned territories (generally a specific country or region) who in turn sell the valve to hospitals or clinics. Most of our sales to international distributors are denominated in U.S. dollars so currency risk is borne by the distributor; however, as the dollar increases in value relative to the distributor's local currency, the cost of the valve increases for the distributor even though ATS does not change the selling price. This has caused us to adjust the selling price to the affected distributors to help offset a portion of the currency loss. During 2001 we hired a direct sales force and began selling the ATS heart valve in the United States. As a result of these efforts, our U.S. sales as a percentage of our overall sales increased from 4% in 2000 to 17% in 2001 and 2002. We currently purchase all of the pyrolytic carbon components for the ATS heart valve from Sulzer Carbomedics, Inc. (Carbomedics) pursuant to a multi-year supply agreement entered into in 1990. The cost of the pyrolytic carbon components represents approximately 80% of the total cost of the ATS heart valve. Under the supply agreement with Carbomedics, the cost of the pyrolytic carbon components has varied according to annual volume purchases and is adjusted annually by reference to increases in the U.S. Department of Labor Employment Cost Index. In December 1999, we renegotiated the supply agreement with Carbomedics. The supply agreement, as amended, provides for significant reductions in our minimum purchase requirements and unit costs beginning in 2001. In December 2000 we again amended the supply agreement to purchase additional valves in 2001 and eliminate the minimum units for 2007. We are obligated to purchase pyrolytic carbon components from Carbomedics through 2006 and the Supply Agreement runs through 2007. In addition, under a new carbon agreement, Carbomedics has granted us an exclusive right to use its carbon coating technology to manufacture pyrolytic carbon components for the ATS heart valve. Carbomedics also has agreed to assist us in establishing our own pyrolytic carbon component manufacturing facility. In return, we have agreed to pay a license fee totaling $41 million over seven years, $13 million of which has been paid as of March 31, 2002. Results of Operations Net sales for the quarter ended March 31, 2002 decreased 8% to $3,902,263 compared to $4,253,573 for the quarter ended March 31, 2001. The decrease from last year's first quarter was primarily due to lower selling prices in several international markets. Unit sales for the quarter ended March 31, 2002 decreased 4% compared to unit sales for the quarter ended March 31, 2001. Revenue in the United States increased 66% in the quarter ended March 31, 2002 compared to the quarter ended March 31, 2001, but decreased 18% compared to the quarter ended December 31, 2001. Non-U.S. revenue in the quarter ended March 31, 2002 decreased 16% compared to the quarter ended March 31, 2001, but increased 75% compared to the quarter ended December 31, 2001. Net sales in Europe were essentially flat for the quarter ended March 31, 2002 compared to the quarter ended March 31, 2001, however unit sales in Europe increased 14% for the quarter ended March 31, 2002 compared to the quarter ended March 31, 2001. In the face of continued weakness of the Euro relative to the U.S. dollar and price-cutting by our competitors, we have reduced our selling prices in several European markets. In the U.S. market, ATS reports the selling price to the hospital. In non-U.S. markets, ATS reports the selling price to the distributor. As U.S. sales increase as a percentage of overall sales, the overall average selling price may increase, even though the average selling prices in some non-U.S. markets may be steady or declining. Hospital administrators continue to apply pressure for lower prices, and the willingness of competitors to reduce prices will continue to put pressure on revenue growth and margins. In the United States, we have established a direct sales force to sell the valve. Valves are consigned to hospitals desiring to use the ATS valve and a sale is recorded once the valve is implanted. We had 12 sales people and four regional managers located in the United States at March 31, 2002. The launch of a product of critical importance to patients such as a heart valve is an ongoing process. The "sales cycle" for new accounts can take from one to three months. We feel that we have a superior product, however, our competitors have larger sales staffs and greater financial resources so they are currently able to reach more potential customers. The rate at which we open new accounts and realize new implants is difficult to forecast from quarter to quarter. Cost of sales for the three months ended March 31, 2002 totaled $2,690,911 or 69% of sales compared to $2,608,160 or 61% of sales for the three months ended March 31, 2001. ATS uses the first-in first-out ("FIFO") method of accounting for inventory. All of our valves sold in the first quarter of 2002 were made with carbon purchased in 1999 (under FIFO). A significant portion of our inventory is made up of finished goods and we also had workforce reductions in September and November 2001. As a result, production (assembly) is at only a fraction of capacity and in the first quarter 2002. Overhead cost variances relating to such reduced level of production and approximating 4% of sales were charged to cost of goods sold. Until sales increase substantially, we expect the level of assembly to be insufficient to absorb all of our manufacturing overhead costs. Gross profit totaled $1,211,352 for the quarter ended March 31, 2002 or 31% of sales, compared to gross profit of $1,645,413 or 39% of sales for the quarter ended March 31, 2001. The average selling price per unit decreased in the first three months of 2002 compared to the first three months of 2001 by about 4%. The average cost per unit sold decreased slightly but not enough to increase gross profit even before taking into account the overhead variances. Research, development and engineering expenses totaled $925,659 for the quarter ended March 31, 2002 versus $757,914 for the quarter ended March 31, 2001, an increase of 22%. In the quarter ended March 31, 2001, we were still installing equipment, and had eight people on the project. In the quarter ended March 31, 2002, we had 17 people on the project. Approximately 78% of research and development expenses for the quarter ended March 31, 2002 were related to our own carbon manufacturing facility. Our focus during 2001 and the first quarter of 2002 was making qualification and verification coating runs, training ATS personnel on the new carbon manufacturing equipment installed during the period, and documenting procedures. This culminated with the submissions at the end of the first quarter 2002 to the T.U.V., who we use as a notified body for our European approval, and the U.S. Food and Drug Administration. Sales and marketing expenses increased as expected in the quarter ended March 31, 2002 to $1,158,932 compared to $1,067,712 in the quarter ended March 31, 2001. We hired U.S. salespeople during the first quarter 2001 and went from eight salespeople and three regional managers at December 31, 2000 to 15 salespeople and four regional managers employed at March 31, 2001. At March 31, 2002 we had 12 salespeople and four regional managers. The 9% increase in sales and marketing expense in the quarter ended March 31, 2002 compared to the quarter ended March 31, 2001 was due to having the salespeople employed for the entire quarter and increased marketing expenses. General and administrative expenses totaled $674,243 for the three months ended March 31, 2002, a decrease from the $815,678 reported for the three months ended March 31, 2001. We had 81 employees at March 31, 2002 compared to 120 employees at March 31, 2001. The Company had work force reductions that started in September 2001 and to date have resulted in the layoff of 48 people. Interest income totaled $64,111 for the quarter ended March 31, 2002 compared to $420,574 for the quarter ended March 31, 2001. The decrease in interest income in the first quarter of 2002 was the result of lower average investable cash balances during the first quarter of 2002 and lower interest rates. ATS recorded a net loss of $1,483,371 or ($0.07) per share for the quarter ended March 31, 2002 compared to a net loss of $575,317 or ($0.03) per share for the quarter ended March 31, 2001. The decreases in gross margin and interest income, coupled with the 4.4% increase in expenses, were the reasons for the increased loss. We are working to increase sales, particularly in the United States, in order to return to profitability in future quarters. Sales will have to approximately double in order to report positive operating income. ATS has accumulated approximately $22 million of net operating loss carryforwards for U.S. tax purposes. ATS believes that its ability to fully utilize the existing net operating loss carryforwards could be restricted on a portion of the NOL for changes in control occurring in prior years. We do not accrue any tax benefits for such losses. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments decreased by $1,947,322 from $12,277,040 at December 31, 2001 to $10,829,718 at March 31, 2002. ATS will continue to use more cash than it generates from operations in 2002, as it expands its direct sales force, purchases carbon components from Carbomedics and makes the carbon technology milestone payment in December 2002 to Carbomedics. ATS has contracted to purchase $8.4 million of components during 2002 in accordance with the terms of its amended long-term supply agreement with Carbomedics (the "Supply Agreement"). These purchases are not tied to sales of the ATS valve, and we do not expect sales of the valve to exceed the minimum purchase requirements under the Supply Agreement in 2002. In December 1999, ATS renegotiated its Supply Agreement with Carbomedics. The Supply Agreement, as amended, provides for significant reductions in our minimum purchase requirements and unit costs for the years 2001 through 2006. ATS estimates that its minimum purchase requirements under the Supply Agreement from 2003 through 2006 will total approximately $18 million. Under the new carbon agreement entered into in December 1999, ATS agreed to pay Carbomedics a license fee of $41 million in installments over the next seven years. In addition to granting ATS an exclusive worldwide right and license to use its carbon coating technology to manufacture pyrolytic carbon components for the valve under this agreement, Carbomedics agreed to assist ATS in designing, building and commencing operations in its own pyrolytic carbon production facility in Minneapolis, Minnesota. Accounts receivable increased from $4,082,992 at December 31, 2001 to $4,944,000 at March 31, 2002, as sales increased from $2,666,904 in the fourth quarter, 2001 to $3,902,263 in the first quarter, 2002. Current liabilities have remained constant at approximately $2.7 million between December 31, 2001 and March 31, 2002, as well as the preceding last three quarters. Based upon the current forecast rate of 2002 sales, the anticipated purchase obligations under the Supply Agreement, the license fee payments under the carbon agreement, the expenses associated with establishing a direct sales force in the United States and other expected expenses, ATS anticipates that cash and marketable securities on hand at March 31, 2002 should meet its requirements through 2002. Our minimum purchase commitment for carbon components in 2003 will be approximately one half of our 2002 minimum purchase commitment. However, we must achieve a significant rate of increase in U.S. valve sales, and reverse the decline in European sales experienced in 2001 or we will need to raise additional capital in the future. In addition, as identified in our cautionary statement below, any adverse change that affects our access to the capital markets, the construction of our carbon facility, or future demand for our products will affect our longer term liquidity. Maintaining adequate levels of working capital depends in part upon the success of our products in the marketplace, the relative profitability of those products and our ability to control operating and capital expenses. Funding of our operations in future periods may require additional investments in ATS in the form of equity or debt. There can be no assurance that we will achieve desired levels of sales or profitability, or that future capital infusions will be available. THE SINGLE EUROPEAN CURRENCY A significant portion of our sales occur in Europe. We sell to all of our customers in U.S. dollars. Our selling prices are similar to those of most of our European distributors and therefore should not cause significant disruption whether in U.S. dollars or Euros. From its introduction in January 1999, the rate of exchange for the Euro versus the U.S. dollar declined by as much as 34%. Several of our European distributors were unable to increase their local currency selling price for the valve, and, as a result, they informed us that their profits were being significantly reduced and we adjusted our pricing to give them some relief. Europe is a very important market for us. Disruption or loss of a portion of the European business could have a material and adverse impact on our financial position. CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their business, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. ATS desires to take advantage of the safe harbor provisions with respect to any forward-looking statements it may make in this filing, other filings with the Securities and Exchange Commission and any public oral statements or written releases. The words or phrases "will likely," "is expected," "will continue," "is anticipated," "estimate," "projected," "forecast," or similar expressions are intended to identify forward-looking statements within the meaning of the Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. ATS cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. In accordance with the Act, ATS identifies the following important general factors which if altered from the current status could cause our actual results to differ from those described in any forward-looking statements: the continued acceptance of our mechanical heart valve in international markets, the rate of increase of acceptance of the valve in the United States, our ability to recruit, hire and manage a direct sales force in the United States, the continued performance of our mechanical heart valve without structural failure, the actions of our competitors including pricing changes and new product introductions, the continued performance of our independent distributors in selling the valve, the risk of product returns in connection with distributor terminations, the actions of our supplier of pyrolytic carbon components for the valve and difficulties we may encounter establishing and operating our own pyrolytic carbon manufacturing capability. This list is not exhaustive, and we may supplement this list in filings with the Securities and Exchange Commission (including Exhibit 99.1 to this Form 10-Q) or in connection with the making of any specific forward-looking statement. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities in which we invest may have market risk. This means that a change in prevailing interest rates may cause the fair market value of the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the fair value of the principal amount of our investment will probably decline. To minimize this risk we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities. The average duration of all of our investments has generally been less than one year. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments. We do not use derivatives and, therefore, do not face market risk from currency or interest rate changes on these types of instruments. If we were required to finance future operations with debt, we would have exposure to increases in interest rates or borrowings. PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 99.1 Cautionary Statements (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: April 15, 2002 ATS MEDICAL, INC. By: /s/ John H. Jungbauer ------------------------------------- John H. Jungbauer, Vice President/CFO (Principal Financial Officer and Authorized Signatory) EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION 99.1 Cautionary Statements.
EX-99.1 3 c68907ex99-1.txt CAUTIONARY STATEMENTS EXHIBIT 99.1 ATS MEDICAL INC. REPORT ON FORM 10-Q MARCH 31, 2002 CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statement. We desire to take advantage of these "safe harbor" provisions and are filing this Exhibit 99 in order to do so. Accordingly, we hereby identify the following important factors which could cause our actual results to differ materially from any such results which may be projected, forecast, estimated or budgeted by us in forward-looking statements made by us from time to time in reports, proxy statements, registration statements and other written communications, or in oral forward-looking statements made from time to time by the Company's officers and agents. We do not intend to update any of these forward-looking statements after the date of this Form 10-K to conform them to actual results. OUR HEART VALVE MAY NEVER ACHIEVE MARKET ACCEPTANCE. Our success will depend, in large part, on the medical community's acceptance of the ATS heart valve. The medical community's acceptance of the ATS heart valve will depend upon our ability to demonstrate the safety and efficacy, advantages, long-term clinical performance and cost-effectiveness of the ATS heart valve as compared to other prosthetic heart valves. We cannot predict whether the medical community will accept the ATS heart valve or, if accepted, the extent of its use. Negative publicity resulting from isolated incidents involving the ATS heart valve or other prosthetic heart valves could have a significant adverse effect on the overall acceptance of our heart valve. If we encounter difficulties developing a market for the ATS heart valve in the United States, our business and results of operations will be seriously harmed. WE CURRENTLY RELY ON THE ATS HEART VALVE AS OUR SOLE SOURCE OF REVENUE. We have developed only one product, which is currently being sold primarily outside the United States. Even if we were to develop additional products, regulatory approval would likely be required to sell them. Clinical testing and the approval process itself are very expensive and can take many years. Therefore, we do not expect to be in a position to sell additional products in the foreseeable future. As a result, if we fail to achieve widespread market acceptance for the ATS heart valve, our business and results of operations will be seriously harmed. INCURRENCE OF COSTS IN CONNECTION WITH FDA APPROVAL OF OUR VALVE IS EXPECTED TO ADVERSELY AFFECT EARNINGS. In connection with the FDA approval of the ATS heart valve which we received on October 13, 2000, we have taken, and will be taking in the near term, a number of important steps that we believe will facilitate commercialization of our valve in the United States market and enhance our profitability in international markets. These steps include: - the establishment of a licensing arrangement with Sulzer Carbomedics, Inc. ("Carbomedics") to permit us to manufacture pyrolytic carbon components; - the leasing, construction, equipping, staffing and commercialization of a facility to manufacture pyrolytic carbon components; and - the employment and training of a direct sales force to market our valve in the United States. These actions involve incurring significant costs. The timing of these expenditures is expected to adversely affect quarter-to-quarter comparisons of our earnings. As there is no assurance of commercial success of our valve in the United States, the commitment of our resources to these matters at this time entails, in addition to the adverse effects on earnings for at least the next three years, substantial uncertainty and business risk. WE CURRENTLY DEPEND ON THE MARKETING AND SALES EFFORTS OF INDEPENDENT DISTRIBUTORS, AND OUR SALES HAVE BEEN CONCENTRATED IN THREE COUNTRIES. The ATS heart valve is sold internationally through independent distributors. The loss of an international distributor could seriously harm our business and results of operations if a new distributor could not be found on a timely basis in the relevant geographic market. Sales to our Japanese, German and French distributors have accounted for approximately 43% of our net sales in fiscal year 2001 and 50% of our net sales in fiscal years 2000. We do not control the amount and timing of marketing resources that these third parties devote to our product. Furthermore, to the extent we rely on sales through independent distributors, any revenues we receive will depend primarily on the efforts of these parties. In addition, as part of our agreement with our distributors, we allow for the return of unopened valves for credit. If a distributor(s) were to terminate their distributorship agreement with us, we could be obligated to buy back their inventory of valves as well as valves on consignment at hospitals. Such a buyback could have an adverse impact on our results of operations for the quarter and/or year in which it occurs. WE ARE DEPENDENT UPON SALES OUTSIDE THE UNITED STATES, WHICH ARE SUBJECT TO A NUMBER OF RISKS THAT COULD HARM OUR BUSINESS. Most of our commercial sales to date have been outside the United States, and we expect that international sales will account for a substantial majority of our revenue until we fully develop our sales force for sale of the ATS heart valve in the United States and until the ATS heart valve receives wider market acceptance from U.S. customers. There are risks inherent in doing business in international markets, including: 2 - unforeseen changes in regulatory requirements and government health programs; - weaker intellectual property rights protection in some countries; - potentially adverse tax consequences; - political and economic instability; and - greater difficulty in collecting payments from product sales. These factors could harm our ability to successfully commercialize our product internationally and could harm our business. The value of the U.S. dollar in relation to other currencies may also harm our sales to customers outside the United States because we sell in U.S. dollars to all of our customers abroad. For the year ended December 31, 2001, sales outside the United States decreased by about 11% compared to the same period for 2000. The decrease in sales was due primarily to the increase in value of the U.S. dollar against the Euro and competitor price pressure. Our sales in Europe declined 19% for the year ended December 31, 2001 as compared to the year ended December 31, 2000. Our dependence in sales outside of the United States will continue to expose us to U.S. dollar currency fluctuations for the foreseeable future. OUR DIRECT SALES EFFORTS MAY NOT BE SUCCESSFUL. We are marketing the ATS heart valve directly in the United States. We will need to continue to expend significant funds and management resources to develop and maintain an internal sales force. We believe there is significant competition for direct sales personnel with the advanced sales skills and technical knowledge we need. We may not be able to hire, retain and motivate qualified personnel. Our business and results of operations may suffer if we do not establish or maintain an effective direct sales force. THE MARKET FOR PROSTHETIC HEART VALVES IS HIGHLY COMPETITIVE. The market for prosthetic heart valves is highly competitive. We expect that competition will intensify as additional companies enter the market or modify their existing products to compete directly with us. Our primary competitor, St. Jude Medical, Inc., currently controls approximately 50% of the worldwide mechanical heart valve market. Many of our competitors have long-standing FDA approval for their valves and extensive clinical data demonstrating the performance of their valves. In addition, they have greater financial, manufacturing, marketing and research and development capabilities than we have. For example, many of our competitors have the ability, due to their internal carbon manufacturing facilities and economies of scale, to manufacture their heart valves at a lower cost than we can manufacture our ATS heart valve. Our primary competitor has recently used price as a method to compete in several markets, including the United States. We might not be able to compete successfully. WE MAY NEED TO RAISE CAPITAL AND WE CANNOT BE CERTAIN THAT ADDITIONAL FINANCING WILL BE AVAILABLE. We have cash in hand to support our operations and capital requirements through 2002. After that we may need to raise additional capital. Our future liquidity and capital requirements will depend upon several factors, including actions related to regulatory matters, our progress in establishing our pyrolytic carbon manufacturing operations and the extent to which the ATS heart valve gains market acceptance. 3 NEW PRODUCTS OR TECHNOLOGIES DEVELOPED BY OTHERS COULD HARM OUR BUSINESS AND RESULTS OF OPERATIONS. The medical device industry is characterized by significant technological advances. Several companies are developing new prosthetic heart valves based on new or potentially improved technologies. Significant advances are also being made in surgical procedures, which may delay the need for replacement heart valves. A new product or technology may emerge that renders our ATS heart valve noncompetitive or obsolete. OUR FUTURE RESULTS WILL BE HARMED IF THE USE OF MECHANICAL HEART VALVES DECLINES. Our business could suffer if the use of mechanical heart valves declines. Historically, mechanical heart valves have accounted for over two-thirds of all heart valve replacements. Recently, there has been an increase in the use of tissue valves. We estimate that mechanical heart valves are currently being used in 50 to 70% of all heart valve replacements, depending on the geographic market, down from 65 to 75% about ten years ago. We believe the tissue manufacturers' claims of improvements in tissue valve longevity and an increase in the average age of valve patients have contributed to the recent increase in the use of tissue valves. WE CURRENTLY MAINTAIN A LARGE VOLUME OF INVENTORY, WHICH EXCEEDS THE CURRENT DEMAND FOR THE ATS HEART VALVE. We currently purchase pyrolytic carbon components under a long-term supply agreement with Carbomedics. To date, our purchases of pyrolytic carbon components have exceeded our sales of the ATS heart valve. We currently have in inventory enough pyrolytic carbon components to satisfy our projected requirements for over two years. In addition, we expect that our minimum purchase requirements in 2002 under the supply agreement will exceed our product sales in 2002. 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 TERMINATED, OUR BUSINESS AND RESULTS OF OPERATIONS COULD BE SERIOUSLY HARMED. If our agreements with Carbomedics are breached or terminated, our business and results of operations could be seriously harmed. We have licensed from Carbomedics an exclusive right to the basic design of an open pivot, bileaflet mechanical valve from which our ATS heart valve has been developed. Termination of this agreement would prevent or delay us from manufacturing and selling the ATS heart valve. In addition, under our carbon technology agreement with Carbomedics, we have obtained a license to use Carbomedics' pyrolytic carbon technology to manufacture components for the ATS heart valve. Carbomedics also has agreed to assist us in establishing our pyrolytic carbon 4 manufacturing facility. If this agreement is breached or terminated, our business and results of operations could be seriously harmed. A DELAY OR INTERRUPTION IN THE SUPPLY OF PYROLYTIC CARBON COMPONENTS COULD SERIOUSLY HARM OUR BUSINESS. We cannot be certain that, after our current inventory is exhausted, sufficient quantities of pyrolytic carbon components will be available to assemble the ATS heart valve. We currently purchase pyrolytic carbon components from a single source, Carbomedics, on an exclusive basis. There is currently no other FDA-approved alternate supplier of our pyrolytic carbon components. While Carbomedics has granted to us the right to manufacture pyrolytic carbon components, we agreed to continue to purchase a minimum annual number of pyrolytic carbon components from Carbomedics through 2006. Failure to purchase these minimum annual amounts would cause us to lose our right to manufacture the pyrolytic carbon components. We anticipate that our carbon manufacturing facilities should be operational in 2002 but may not receive all the necessary regulatory approvals until at least 2003. Consequently, any interruption in our supply from Carbomedics could seriously harm our business. BECAUSE WE LACK MANUFACTURING EXPERIENCE, WE MAY ENCOUNTER DIFFICULTIES IN MANUFACTURING PYROLYTIC CARBON COMPONENTS FOR OUR HEART VALVE. Under our agreement with Carbomedics, we have been granted an exclusive worldwide license to manufacture pyrolytic carbon components for the ATS heart valve. We cannot be certain that our strategy to establish internal manufacturing capabilities will result in a cost-effective means for manufacturing the ATS heart valve. We have no experience in manufacturing pyrolytic carbon. We may encounter difficulties in establishing and maintaining our manufacturing operations, including problems involving: - equipping the facility; - production yields; - quality control; - per unit manufacturing costs; - shortages of qualified personnel; and 5 - compliance with FDA and international regulations and requirements regarding good manufacturing practices. Difficulties encountered by us in establishing or maintaining a commercial-scale manufacturing facility may limit our ability to manufacture our heart valve and therefore could seriously harm our business and results of operations. OUR BUSINESS COULD BE SERIOUSLY HARMED IF THIRD-PARTY PAYORS DO NOT REIMBURSE THE COSTS FOR OUR HEART VALVE. Our ability to successfully commercialize the ATS heart valve depends on the extent to which reimbursement for the cost of our product and the related surgical procedure is available from third-party payors, such as governmental programs, private insurance plans and managed care organizations. Third-party payors are increasingly challenging the pricing of medical products and procedures that they consider are not cost-effective or are used for a non-approved indication. The failure by physicians, hospitals and other users of our product to obtain sufficient reimbursement from third-party payors would seriously harm our business and results of operations. In recent years, there have been numerous proposals to change the health care system in the United States. Some of these proposals have included measures that would limit or eliminate payment for medical procedures or treatments. In addition, government and private third-party payors are increasingly attempting to contain health care costs by limiting both the coverage and the level of reimbursement. In international markets, reimbursement and health care payment systems vary significantly by country. In addition, we have encountered price resistance from government-administered health programs. Significant changes in the health care system in the United States or elsewhere, including changes resulting from adverse trends in third-party reimbursement programs, could have a material adverse effect on our business and results of operations. WE MAY FACE PRODUCT LIABILITY CLAIMS. The manufacture and sale of mechanical heart valves entail significant risk of product liability claims and product recalls. A mechanical heart valve is a life-sustaining device and the failure of any mechanical heart valve usually results in the patient's death. A product liability claim or product recall, regardless of the ultimate outcome, could require us to spend significant time and money in litigation or to pay significant damages and could seriously harm our business. We currently maintain product liability insurance coverage in an aggregate amount of $25 million. However, we cannot assure you that our current insurance coverage is adequate to cover the costs of any product liability claims made against us. Product liability insurance is expensive and does not cover the costs of a product recall. In the future, product liability insurance may not be available at satisfactory rates or in adequate amounts. 6 WE DEPEND ON THE CONTINUED SERVICE OF OUR KEY PERSONNEL. Our future success depends on the continued services of our officers and other key personnel. We are also dependent on our ability to attract and retain technically qualified personnel in the future. The loss of the technical knowledge and industry expertise of these officers and other personnel could seriously impede our success. OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. Our success depends in part on our ability to maintain and enforce our patents and other proprietary rights. We rely on a combination of patents, trade secrets, know-how and confidentiality agreements to protect the proprietary aspects of our technology. These measures afford only limited protection and competitors may gain access to our intellectual property and proprietary information. The patent positions of medical device companies are generally uncertain and involve complex legal and technical issues. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights. Any litigation could be costly and divert our attention from the growth of the business. We cannot assure you that our patents and other proprietary rights will not be successfully challenged, or that others will not independently develop substantially equivalent information and technology or otherwise gain access to our proprietary technology. WE MAY BE SUED BY THIRD PARTIES WHICH CLAIM THAT OUR PRODUCT INFRINGES ON THEIR INTELLECTUAL PROPERTY RIGHTS. We may be exposed to future litigation by third parties based on intellectual property infringement claims. Any claims or litigation against us, regardless of the merits, could result in substantial costs and could harm our business. In addition, intellectual property litigation or claims could force us to: - cease manufacturing and selling our product, which would seriously harm us; - obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; or - redesign our product, which could be costly and time-consuming. WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION, WHICH IS COSTLY, TIME CONSUMING AND CAN SUBJECT US TO UNANTICIPATED DELAYS. The ATS heart valve and our manufacturing activities are subject to extensive regulation by a number of governmental agencies, including the FDA and comparable international agencies. We are required to: - obtain the approval of the FDA and international regulatory agencies before we can market and sell the ATS heart valve; - satisfy content requirements for all of our labeling, sales and promotional materials; 7 - 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 the ATS heart valve in the United States or introducing any new or improved products. Violations of regulatory requirements may result in fines, marketing restrictions, product recall, withdrawal of approvals and civil and criminal penalties. THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE. Historically, the market price of our common stock has fluctuated over a wide range and it is likely that the price of our common stock will fluctuate in the future. The market price of our common stock could be impacted by the following: - the failure of the ATS valve to gain market acceptance in the United States; - announcements of technical innovations or new products by our competitors; - the status of component supply arrangements; - changes in reimbursement policies; - government regulation; - developments in patent or other proprietary rights; - public concern as to the safety and efficacy of products developed by us or others; and - general market conditions. In addition, due to one or more of the foregoing factors, in future years, our results of operations may fall below the expectations of securities analysts and investors. In that event, the market price of our common stock could be materially and adversely affected. OUR CHARTER DOCUMENTS AND MINNESOTA LAW MAY DISCOURAGE A TAKEOVER OF OUR COMPANY. Provisions of our certificate of incorporation, bylaws and Minnesota law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. 8 -----END PRIVACY-ENHANCED MESSAGE-----