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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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: (612) 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 August 1, 1998 was:
Common Stock $.01 par value 17,772,829 shares
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<PAGE>
ATS MEDICAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Statements of Financial Position - 3
June 30, 1998 (unaudited) and
December 31, 1997
Statements of Operations - 4
Three Months and Six Months Ended
June 30, 1998 and 1997 (unaudited)
Statements of Cash Flows - 5
Six Months Ended June 30, 1998 and
1997 (unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 12
Market Risk
PART II. OTHER INFORMATION 13
Signatures 15
<PAGE>
Item 1 Financial Statements
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
JUNE 30, DECEMBER 31,
1998 1997
ASSETS ------------ ------------
(Unaudited) (Note)
CURRENT ASSETS
Cash & cash equivalents $ 4,910,394 $ 4,568,332
Marketable securities 19,108,494 20,982,176
------------ ------------
24,018,888 25,550,508
Accounts receivable, less allowance of $175,465
in 1998 and $260,000 in 1997 5,680,773 4,446,834
Inventories 24,757,532 22,686,273
Prepaid expenses 467,895 555,570
------------ ------------
TOTAL CURRENT ASSETS 54,925,088 53,239,185
FURNITURE, MACHINERY & EQUIPMENT 2,290,448 2,023,646
Less accumulated depreciation 1,299,884 1,247,459
------------ ------------
990,564 776,187
OTHER ASSETS 377,408 370,659
------------ ------------
TOTAL ASSETS $ 56,293,060 $ 54,386,031
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,710,164 $ 621,708
Accrued payroll and expenses 200,788 241,584
------------ ------------
TOTAL CURRENT LIABILITIES 1,910,952 863,292
LONG-TERM DEBT 0 0
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value:
Authorized 40,000,000 shares; Issued and
outstanding 17,770,329 & 17,589,058 at
June 30, 1998 and Dec 31, 1997, respectively 177,703 175,891
Additional paid-in capital 71,160,283 71,797,797
Other 41,202 40,306
Retained earnings (deficit) (16,997,080) (18,491,255)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 54,382,108 53,522,739
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 56,293,060 $ 54,386,031
============ ============
Note: The balance sheet at December 31, 1997 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.
<PAGE>
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
REVENUES ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 4,565,601 $ 3,695,230 $ 8,814,321 $ 7,139,880
Less cost of goods sold 2,814,975 2,297,583 5,454,949 4,469,671
----------- ----------- ----------- -----------
GROSS PROFIT 1,750,626 1,397,647 3,359,372 2,670,209
OPERATING EXPENSES
Research, development and engineering 383,478 261,266 740,756 496,760
Selling, general and administrative 898,157 801,909 1,822,202 1,521,328
----------- ----------- ----------- -----------
TOTAL EXPENSES 1,281,635 1,063,175 2,562,958 2,018,088
Interest income 330,567 325,699 697,761 585,089
----------- ----------- ----------- -----------
NET INCOME $ 799,558 $ 660,171 $ 1,494,175 $ 1,237,210
=========== =========== =========== ===========
Net income per share:
Basic $ 0.04 $ 0.04 $ 0.08 $ 0.07
=========== =========== =========== ===========
Diluted $ 0.04 $ 0.04 $ 0.08 $ 0.07
=========== =========== =========== ===========
Weighted average number of shares
outstanding during the period:
Basic 17,769,818 17,559,084 17,694,873 16,992,428
=========== =========== =========== ===========
Diluted 18,177,065 18,139,842 18,175,602 17,610,370
=========== =========== =========== ===========
</TABLE>
<PAGE>
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1998 1997
------------ ------------
OPERATING ACTIVITIES
Net income $ 1,494,175 $ 1,237,210
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 125,560 122,151
Loss on disposal of equipment 1,420 1,242
Changes in operating assets and liabilities:
Accounts receivable (1,233,939) (891,261)
Prepaid expenses 87,675 189,488
Other assets (6,749) (41,570)
Inventories (2,071,259) (1,460,866)
Accounts payable and accrued expenses 1,047,660 49,367
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (555,457) (794,239)
INVESTING ACTIVITIES
Purchase of marketable securities (47,812,126) (23,531,358)
Sale of marketable securities 49,685,808 6,745,920
Purchases of property, plant and equipment (341,357) (56,497)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,532,325 (16,841,935)
FINANCING ACTIVITIES
Net proceeds from sale of common stock (635,702) 19,486,993
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (635,702) 19,486,993
Effect of exchange rate changes on cash 896 (7,079)
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 342,062 1,843,740
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,568,332 2,320,010
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,910,394 $ 4,163,750
============ ============
<PAGE>
ATS MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998
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 month and six month periods ended June 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998.
Note B - NET INCOME PER SHARE
Net income per share is computed using the weighted average number of common
shares outstanding and dilutive common stock equivalents, if applicable. In
February 1997, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 128, "EARNINGS PER SHARE." This Statement replaces the
presentation of primary earnings per share (EPS) with basic EPS and also
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. This Statement is effective for the fiscal years ended after
December 15, 1997. All EPS amounts for all periods have been presented, and
where necessary, restated to conform to the Statement 128 requirements. The
following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
1998 1997 1998 1997
----------------------- -----------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $799,558 $660,171 $1,494,175 $1,237,210
Denominator:
Denominator for basic earnings per share-
weighted-average shares 17,769,818 17,559,084 17,694,873 16,992,428
Effect of dilutive securities:
Stock options 407,116 578,121 478,009 612,652
Warrants 331 2,637 2,720 5,290
----------------------- -----------------------
Diluted potential common shares
Denominator for diluted earnings per share 18,177,065 18,139,842 18,175,602 17,610,370
======================= =======================
Basic earnings per share $.04 $.04 $.08 $.07
Diluted earnings per share $.04 $.04 $.08 $.07
</TABLE>
<PAGE>
Note C - SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (Statement 131), which is effective for years
beginning after December 15, 1997. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Statement 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
Company will adopt the new requirement retroactively in 1998. Management has not
completed its review of Statement 131, but does not anticipate that the adoption
of this statement will have a significant effect on the Company's reported
segments.
The Company's only product is a prosthetic heart valve. "Segments" would involve
tabulation of geographically significant customers which tend to follow
worldwide market distribution for replacement heart valves.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ATS Medical, Inc. (the "Company") is engaged in the manufacturing and marketing
of a pyrolytic carbon bileaflet mechanical heart valve. The Company sells the
ATS Open Pivot(TM) valve (the "ATS Valve" or the "Valve") in international
markets and is conducting a clinical study in the United States for the purpose
of obtaining regulatory approval.
RESULTS OF OPERATIONS
Net sales for the quarter ended June 30, 1998 increased 24% to $4,565,601
compared to $3,695,230 for the quarter ended June 30, 1997. Unit sales increased
31% in the second quarter 1998 compared to 1997. Sales growth can be attributed
to continued implant growth in Europe and in several lesser developed countries.
Net sales for the six months ended June 30, 1998 totaled $8,814,321 compared to
$7,139,880 for the six months ended June 30, 1997. Revenue increased about 24%
and unit sales increased about 27% for the six months ended June 30, 1998 as
compared to the six months ended June 30, 1997.
The Company sells the valve to stocking distributors in assigned markets around
the world. Pricing for heart valves is very competitive, with hospital prices
ranging from $800 to $4200. Pricing to each distributor is set to reflect local
market conditions. There are some markets where the Company cannot compete
because prices are below the Company's cost. There are a number of countries
considered "lesser developed countries" where the Company can sell valves
slightly above cost. Depending upon the volume of sales in each country and the
specific selling price in each country the average selling price may fluctuate
between quarters and other accounting periods.
Cost of sales for the second quarter of 1998 totaled $2,814,975 or 62% of sales
compared to $2,297,583 or 62% of sales for the second quarter of 1997. Cost of
sales for the six months ended June 30, 1998 totaled $5,454,949 or 62% of sales
compared to $4,469,671 or 63% of sales for the six months ended June 30, 1997.
The price of the carbon components contained in the Valves sold in the six
months ended June 30, 1998 decreased slightly as compared to the cost of carbon
components contained in the Valves sold in the six months ended June 30, 1997
because of the volume pricing schedule contained in the Company's supply
agreement.
Gross profit totaled $1,750,626 for the quarter ended June 30, 1998 or 38% of
sales, compared to gross profit of $1,397,647 or 38% of sales for the quarter
ended June 30, 1997. Gross profit totaled $3,359,372 or 38% of sales for the six
months ended June 30, 1998 compared to $2,670,209 or 37% of sales for the six
months ended June 30, 1997. The Company realized slightly lower component costs
in the six months ended June 30, 1998 sufficient to offset a slight decline in
the average selling prices compared to the six months ended June 30, 1997.
<PAGE>
Research, development and engineering expenses totaled $383,478 for the quarter
ended June 30, 1998 versus $261,266 for the quarter ended June 30, 1997. For six
months ended June 30, 1998 research, development and engineering expenses
totaled $740,756 compared to $496,760 for six months ended June 30, 1997. The
Company began human implants in the United States under an Investigational
Device Exemption ("IDE") in January 1997. The Company sells the Valves to the
hospitals involved in the study and is eligible for reimbursement by Medicare
and most private pay insurance companies. The Company is responsible for
reimbursing the hospital for certain additional tests and procedures required by
the clinical protocol and accrues the estimated total cost of follow-up at the
time the sale is recorded as research and development expense. Approximately 77%
and 53% of research and development expense for the quarters ended June 30, 1998
and 1997, respectively, were for clinical costs.
Selling, general and administrative expenses totaled $898,157 for the quarter
ended June 30, 1998, a increase from the $801,909 reported for the quarter ended
June 30, 1997. Salaries, wages and benefits increased nearly $308,000 or
approximately 22% during the first six months of 1998. The Company had 58
employees at June 30, 1997 compared to 65 employees at June 30, 1998.
There was no interest expense incurred in the quarters or six month periods
ended June 30, 1998 and 1997.
Interest income totaled $330,567 for the quarter ended June 30, 1998 compared to
$325,699 for the quarter ended June 30, 1997. For the first half of 1998
interest income totaled $697,761 compared to $585,089 for the first six months
of 1997. The average daily balance of cash, cash equivalents and investments was
greater for the six months ended June 30, 1998 than the six months ended June
30, 1997 because the Comany received the proceeds from a $ 14.75 million private
placement of common shares in February, 1997. The Company expects the average
daily balance of cash, cash equivalents and investments to be lower for the
remaining quarters and second half of 1998 when compared to the corresponding
periods of 1997. The Company also expects interest rates on cash, cash
equivalents and investments to be at or below 1997 rates and therefore expects
the amount of interest income during the upcoming quarters and remainder of 1998
to be less than interest income in the third and fourth quarters of 1997.
Net income totaled $799,558 for the quarter ended June 30, 1998 versus net
income of $660,171 for the quarter ended June 30, 1997. Net income totaled
$1,494,175 for the six months ended June 30, 1998 compared to $1,237,210 for the
six months ended June 30, 1997. The $689,163 increase in gross profit in the
first half of 1998 as compared to the first half of 1997 was greater than the
$544,870 increase in operating expenses, which resulted in $796,414 operating
income for the six months ended June 30, 1998 and increased net income compared
to the first six months of 1997.
Earnings per share totaled $.04 for the quarter ended June 30, 1998 compared to
$.04 for the quarter ended June 30, 1997. Earnings per share for the first six
months of 1998 totaled $.08 compared to $.07 for the first six months of 1997.
The weighted average number of shares outstanding fluctuated more in 1997
because of the February, 1997 private sale of 1,568,940 shares of common stock
for $14.75 million.
<PAGE>
YEAR 2000 SITUATION
The Company has been assessing the software and hardware used in daily
operations so that all systems will function properly with respect to dates in
the Year 2000 and beyond. Until recently, computer programs were written to
store only two digits of date-related information in order to more efficiently
handle and store data. Thus, some software programs are unable to distinguish
between the year 1900 and the year 2000. This is frequently referred to as the
"Year 2000 Problem."
Utilizing internal and external resources, the Company determined that
modification or replacement of various programs would be necessary so that all
software, hardware and instrumentation systems are Year 2000 compliant.
Business applications and data for the Company are stored on a local area
network and accessed by personal computers when necessary. A significant number
of employee workstations and manufacturing hardware were upgraded and are now
Year 2000 compliant. All future hardware purchases are required to be Year 2000
compliant.
The Company has purchased "off the shelf" manufacturing and accounting software
supported by vendors who provide updated versions of the software program. These
vendors have indicated that the software upgrades available will be Year 2000
compliant.
The Company also has custom software programs and databases that are used for
manufacturing. These programs are being reviewed and tested for Year 2000
issues. As a part of this process, the Company has been negotiating conversion
of these programs. Requirements of the software programming include testing and
revision for Year 2000 issues.
While the Company believes that its planning efforts are adequate to address
Year 2000 concerns, there is no guarantee that the systems of other companies on
which the Company's systems and operations rely will be converted on a timely
basis and will not have a material effect on the Company. Costs of the Year 2000
initiatives are not expected to be material to the Company's results of
operations or financial position.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities decreased by $1,531,620 from
$25,550,508 at December 31, 1997 to $24,018,888 at June 30, 1998. Inventory
purchases and accounts receivable growth caused the Company to have negative
cash flow from operations.
During 1998 the Company is required to purchase $13.9 million of heart valve
components in accordance with the terms of its long term supply agreement with
CarboMedics, Inc. (the "Supply Agreement"). During the two contract years after
1998 the Company is obligated to purchase an aggregate of approximately $33
million of components. The minimum purchases under the Suppy Agreement are not
tied to sales of the Company's Valve and the Company does
<PAGE>
not expect sales of the Valve to exceed the minimum purchase requirements under
the Supply Agreement until the Valve is approved for sale in the United States
by the Food and Drug Administration.
Accounts receivable increased from $4,446,834 at December 31, 1997 to $5,680,773
at June 30, 1998. Most of the Company's sales have been to customers in
international markets and while the Company attempts to set standard 60 day
terms for receivables, competitive pressures and geographical economic
situations have caused the Company to selectively extend the terms for payment.
The Company received payment from one customer of $533,556 on July 7, 1998.
Accounts payable increased from $621,708 at December 31, 1997 to $1,710,164 at
June 30, 1998. The majority of the increase in accounts payable is related to
the timing of purchases from CarboMedics, Inc. under the Supply Agreement.
Based upon the Company's current rate of sales, its expected obligations under
the Supply Agreement and its expected expenses, the Company anticipates that
existing cash, cash equivalents and short-term investments will be sufficient to
satisfy its capital requirements through 2000. Beyond 2000 the Company must
continue to substantially increase revenues to meet its capital requirements.
Should revenues not increase sufficiently, the Company may be required to raise
additional equity capital. There can be no assurance that equity would be
available to the Company at favorable terms, if at all.
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 Medical, Inc.
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. The Company
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, the Company identifies the following important
general factors which if altered from the current status could cause the
Company's actual results to differ from those described in any forward-looking
statements: the continued acceptance of the Company's mechanical heart Valve in
international markets, the acceptance by the U.S. FDA of the Company's
regulatory submissions, the continued performance of the Company's mechanical
heart valve without structural failure, the actions of the Company's competitors
including pricing changes and new product introductions, the continued
performance of the Company's independent distributors in selling the Valve, and
the actions of the Company's supplier of
<PAGE>
pyrolytic carbon components for the Valve. This list is not exhaustive, and the
Company may supplement this list in any future filing or in connection with the
making of any specific forward-looking statement.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not Applicable
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of Shareholders of the Company was held on
April 30, 1998 at which time (i) five nominees were elected to
the Board of Directors for one-year terms, (ii) the ATS
Medical, Inc. 1998 Employee Stock Purchase Plan was adopted
and (iii) the appointment of Ernst & Young LLP as the
independent auditors of the Company was approved. Proxies for
the Company were solicited pursuant to Section 14(a) of the
Securities Exchange act of 1934, as amended, and there was no
solicitation in opposition to management's solicitations. All
nominees for directors as listed in the proxy statement were
elected. The voting results were as follows:
Broker
For Against Withheld Non-Votes
--- ------- -------- ---------
Election of Directors:
Manuel A. Villafana 13,645,422 0 24,268 0
Richard W. Kramp 13,645,122 0 24,568 0
Charles F. Cuddihy, Jr 13,638,872 0 30,818 0
David L. Boehnen 13,634,672 0 35,018 0
A. Jay Graf 13,641,322 0 28,368 0
Adoption of the Employee
Stock Purchase Plan 13,380,787 125,552 46,614 116,727
Approval of Independent
Auditors 13,628,945 20,700 20,045 0
Item 5. Other Information
None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
10.1 New consulting agreement with Manuel A. Villafana
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 1998 ATS MEDICAL, INC.
By: /s/ John H. Jungbauer
-------------------------------------
John H. Jungbauer, Vice President/CFO
(Principal Financial Officer and
Authorized Signatory)
<PAGE>
EXHIBIT INDEX
Number Description
------ -----------
10.1 New consulting agreement with Manuel A. Villafana
27.1 Financial Data Schedule
MANUEL A. VILLAFANA
CONSULTING AGREEMENT
THIS AGREEMENT is made as of the 20th day of April, 1998 by and between
ATS Medical, Inc., a Minnesota corporation (the "Company") and Manuel A.
Villafana, a resident of the State of Minnesota ("MAV").
WHEREAS, the parties entered into Agreements dated October 1994 and
January 1995 for the employment of MAV as Chairman and Chief Executive Officer
of the Company (the "October 1994 Agreement" and the "January 1995 Agreement");
and
WHEREAS, the Board of Directors and MAV desire to amend and restate the
October 1994 and January 1995 Agreements to modify certain provisions and to
extend the term of the agreement.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the Company and MAV, each intending to be legally bound, agree to amend
the October 1994 and January 1995 Agreements and restate them in their entirety
as follows:
1. Employment. Subject to all of the terms and conditions of this
Agreement, the Company agrees to employ MAV on a "full-time" basis as its
Chairman and Chief Executive Officer and MAV accepts this employment as
consultant.
2. Duties. MAV will make the best use of his energy, knowledge and
training in advancing the Company's interests. He will diligently and
conscientiously perform the duties of Chairman and Chief Executive Officer of
the Company, as such duties may be defined by the Company's Board of Directors
and such other tasks as may from time to time be reasonably required to further
the growth of the Company. During the term of this Agreement, MAV may engage in
any outside consulting activities which do not violate the provisions of
Sections 7 and 8 of this Agreement, provided MAV continues to devote
substantially all of MAV's full-time efforts to the Company.
3. Term. Unless terminated at an earlier date in accordance with the
provisions of this Agreement, the term of MAV's services hereunder shall
commence on the date of this Agreement and shall terminate on December 31, 2001.
The Company may terminate the relationships created by this Agreement upon 60
days notice to MAV if such termination is without cause (as defined below), and
with no notice if such termination is for Cause.
As used in this Agreement, the term "Cause" shall be defined as (i)
MAV's breach of any of his material duties or obligations under this Agreement,
which breach is not corrected within 30 days of receipt of written notice
thereof by MAV from the Company's Board of Directors, (ii) embezzlement or other
misappropriation of property of the Company or (iii) conviction of a felony
offense. No termination of the relationship created by this Agreement shall
relieve MAV of his duties under Sections 5, 6 and 7 hereof.
<PAGE>
4. Compensation.
(a) Base Salary. The Compensation Committee of the Board of Directors
shall determine the base salary for MAV in accordance with its
compensation practices.
(b) Benefits. MAV shall be entitled to participate in any benefit plans
which may be established by the Board of Directors of the Company for
his benefit.
(c) Expenses. The Company shall reimburse MAV for all ordinary and
necessary business expenses MAV incurs while performing his duties
under this Agreement, provided that MAV accounts properly for such
expenses to the Company in accordance with the general corporate policy
of the Company as determined by the Company's Board of Directors and in
accordance with the requirements of Internal Revenue Service
regulations relating to substantiation of expenses.
(d) Bonuses. MAV shall be eligible to receive discretionary bonuses in
addition to his base salary as and when determined by the Compensation
Committee of the Board of Directors of the Company during the term of
this Agreement.
5. Inventions.
(a) "Inventions," as used in this Section 5, means any discoveries,
designs, improvements or software (whether or not they are in writing
or reduced to practice) or works of authorship (whether or not they can
be patented or copyrighted) that MAV makes, authors, or conceives
(either alone or with others) and that:
(i) concerns directly the Company's products, research or
development; or
(ii) results from any work MAV performs for the Company; or
(iii) uses the Company's equipment, facilities, or trade
secret information.
(b) MAV agrees that all Inventions he makes during his employment with
the Company will be the sole and exclusive property of the Company. MAV
will, with respect to any such Invention:
(i) keep current, accurate, and complete records, which will
belong to the Company and be kept and stored on the Company's
premises while MAV is employed by the Company;
(ii) promptly and fully disclose the existence and describe
the nature of the
<PAGE>
Invention to the Company in writing (and without request);
(iii) assign (and MAV does hereby assign) to the Company all
of his rights to the Invention, any applications he makes for
patents or copyrights in any country, and any patents or
copyrights granted to him in any country; and
(iv) acknowledge and deliver promptly to the Company any
written instruments, and perform any other reasonable acts
necessary in the Company's opinion and at its expense to
preserve property rights in the Invention against forfeiture,
abandonment, or loss and to obtain and maintain letters,
patents and/or copyrights on the Invention and to vest the
entire right and title to the Invention in the Company,
provided that, MAV makes no warranty or representation to the
Company as to rights against third parties hereunder.
The requirements of this subsection 5(b) do not apply to an Invention for which
no equipment, facility, or trade secret information of the Company was used and
which was developed entirely on MAV's own time, and which (i) does not relate
directly to the Company's business or to the Company's actual research or
development, or (ii) does not result from any work MAV performed for the
Company. Except as previously disclosed to the Company in writing, MAV does not
have and will not assert any claims to or rights under any Inventions as having
been made, conceived, authored, or acquired by MAV prior to his employment
hereunder.
6. Confidential Information.
(a) Confidential Information, as used in this Section 6, means
information that is not generally known and that is proprietary to the Company
or that the Company is obligated to treat as proprietary. This information
includes, without limitation:
(i) trade secret information about the Company and its products or
services;
(ii) "Inventions," as defined in subsection 5(a) above;
(iii)information concerning the Company's business, as the Company has
conducted it or as it may conduct it in the future; and
(iv) information concerning any of the Company's past, current, or
possible future products, including (without limitation) information
about the Company's research, development, engineering, purchasing,
manufacturing, servicing, finances, marketing or selling.
Any information that reasonably can be expected to be treated as Confidential
Information will be presumed to be Confidential Information (whether MAV or
others originated it and regardless of how he obtained it).
<PAGE>
(b) Except as required in his duties to the Company, MAV will not,
during his employment or for a period of five (5) years after termination of his
employment with the Company, use or disclose Confidential Information to any
person not authorized by the Company to receive it, excluding Confidential
Information (i) which becomes publicly available by a source other than MAV, or
(ii) which is received by MAV after termination of his employment hereunder from
a source who did not obtain the information directly or indirectly from
employees or agents of the Company or (iii) for which disclosure thereof the
Company has consented in writing. When MAV's employment with the Company ends,
he will promptly turn over to the Company all records and any compositions,
articles, devices, or embody Confidential Information, including all copies,
reproductions, and specimens of the Confidential Information in his possession,
regardless of who prepared them.
7. Post-employment, Consulting and Competitive Activities. MAV agrees
that during his employment with the Company and for a minimum period of two (2)
years, extendible automatically up to five (5) years in one (1) year increments
unless terminated by ATS with a sixty (60) day notice prior to end of current
consulting year, after his employment with the Company ends:
(a) He will not alone, or in any capacity with another firm, (i)
directly or indirectly engage in any commercial activity that is competitive
with any of the Company's business in which MAV participated while he was
employed by the Company or any affiliate thereof, nor will he participate in the
management or operation of, or become a significant investor in, any venture or
enterprise of whatever kind as a principal, officer, director, employee,
representative, agent or shareholders of any entity whose business is the
design, development, production, marketing, or servicing of any product or
service competitive with the business of the Company as it exists at the time
his employment with the Company or any affiliate thereof is terminated, (ii)
solicit or in any way interfere or attempt to interfere with the Company's
relationships with any of its current or potential customers; or (iii) employ or
attempt to employ any of the Company's employees on behalf of any other entity
competing with the Company provided that, nothing in this Section 7 shall
restrict MAV's employment by or association with any entity, venture or
enterprise which engages in a business with a product or service competitive
with any product or service of the Company so long as the following conditions
are complied with: (A) MAV's employment or association with such entity, venture
or enterprise is limited to work which does not involve or relate to the design,
development, production, marketing or servicing of a product or service which is
directly competitive with any product or service of the Company; and (B) MAV's
employer takes reasonable measures to ensure that MAV is not involved with or
consulted in any aspect of the design, development, production, marketing or
servicing or such competitive product or service and, provided further, that if
the Company is purchased or acquired in a merger or similar transaction, the
provisions of this Section 7 (a) shall apply only to MAV's engaging in
activities competitive with the business in which the Company was engaged prior
to any such purchase or merger and such provisions shall not be deemed to
prohibit MAV from competing with any other aspects of the business of any
purchasing or acquiring person.
(b) He will, prior to accepting employment with any new employer,
inform that employer of this Agreement and provide that employer with a copy of
Section 7 of this
<PAGE>
Agreement, provided that he reasonably believes his new position is or may be
contrary to this Agreement.
(c) To compensate for the restrictions and consulting contained in this
Section 7, the Company will make a monthly payment to MAV commencing with the
first month after termination of employment and continuing until such
restrictions expire. The amount paid shall be MAV's monthly base salary and
medical benefits at the time of any termination of MAV's employment with the
Company adjusted annually to the CPI index. MAV hereby agrees to accept such
payment, and acknowledges that such payment, as well as other consideration
received in the course of his employment, is sufficient consideration for the
restrictions contained in this Section 7. MAV agrees that upon acceptance of
such payment, the Company shall have no further liability to MAV and such
payment shall, subject to the limitation described below, constitute a release
by MAV of all claims and liabilities against the Company arising from his
employment. The Company agrees that it shall make a good faith effort to settle
any employment-related claims by MAV prior to making the first payment due under
this Section 7 (c).
(d) He will consult on non-confidential ATS matters with the President
and/or Board of Directors at their request on a limited time basis not to exceed
20 hours per month.
8. Conflicting Business. MAV agrees that he will not transact business
with the Company personally, or as agent, owner, partner, or shareholder of any
other entity, except as approved by the Board of Directors. MAV further agrees
that he will not engage in any business activity or outside employment that may
be in conflict with the Company's proprietary or business interests.
9. No Adequate Remedy. MAV understands that if he fails to fulfill his
obligations under Section 5, 6, 7 or 8 of this Agreement, the damages to the
Company would be very difficult to determine. Therefore, in addition to any
other rights or remedies available to the Company at law, in equity or by
statute, MAV hereby consents to the specific enforcement of Sections 5, 6, 7 or
8 of this Agreement by the Company through an injunction or restraining order
issued by any appropriate court.
10. Miscellaneous.
(a) Successors and Assigns. This Agreement may not be assigned by MAV.
This Agreement may not be assigned by the Company without MAV's
consent, which consent shall not be unreasonably withheld.
(b) Modification. This Agreement may be modified or amended only by a
writing signed by each of the parties hereto.
(c) Construction. Wherever possible, each provision of this Agreement
shall be interpreted so that it is valid under applicable law. If any
provision of this Agreement is to any extent invalid under applicable
law in any jurisdiction, that provision shall still
<PAGE>
be effective to the extent it remain valid. The remainder of this
Agreement also shall continue to be valid, and the entire Agreement
shall continue to be valid in other jurisdictions.
(e) Non-Waiver. No failure or delay by any of the parties hereto in
exercising any right or remedy under this Agreement shall waive any
provision of the Agreement. Nor shall any single or partial exercise by
any of the parties hereto of any right or remedy under this Agreement
preclude any of them from otherwise or further exercising their rights
or remedies, or any other rights or remedies granted by any law or any
related document.
(f) Captions. The headings in this Agreement are for convenience only
and shall not affect the interpretation of this Agreement.
(g) Notices. All notices and other communications required or permitted
under this Agreement shall be in writing and hand delivered or sent by
registered first-class mail, postage prepaid. Such notices and other
communication shall be effective upon receipt if hand delivered and
shall be effective five (5) business days after mailing if sent by mail
to the following addresses, or such other addresses as either party
shall have notified the other party:
If to the Company: ATS Medical, Inc.
3905 Annapolis Lane
Suite 105
Minneapolis, Minnesota 55447
If to MAV: Manuel A. Villafana
P.O. Box 41946
Minneapolis, Minnesota 55447
IN WITNESS WHEREOF, the Company and MAV have executed this Agreement as
of the date first above written.
ATS MEDICAL, INC.
By:_________________________
Title: President and COO
----------------------
____________________________
Manuel A. Villafana
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