SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-K
_X_ Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NO. 0-18602
ATS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1595629
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3905 ANNAPOLIS LANE
MINNEAPOLIS, MINNESOTA 55447
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 553-7736
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 17, 2000, was approximately $157,364,793.75 (based on the
last sale price of such stock as reported by the NASDAQ National Market).
The number of shares outstanding of each of the registrant's classes of
common stock as of March 17, 2000, was:
Common Stock, $.01 par value 17,926,371 shares
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instruction G, the responses to Items 5, 6, 7, and
8 of Part II of this report are incorporated by reference to certain information
contained in the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1999 and the responses to Items 10, 11, 12 and 13 of Part III
of this report are incorporated herein by reference to certain information
contained in the Registrant's definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders to be held on May 4, 2000.
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ATS MEDICAL, INC.
1999 FORM 10-K
PART I
ITEM 1. BUSINESS
OVERVIEW
We manufacture and market a mechanical bileaflet heart valve with a unique open
pivot design. Our valve is used to treat heart valve failure caused by the
natural aging process, rheumatic heart disease, prosthetic valve failure and
congenital defects. Our Chairman, Chief Executive Officer and founder, Manuel
Villafana, has led ATS in the development of a valve designed to achieve a
significant advancement in mechanical heart valve technology. Mechanical heart
valves have been in use since the early 1960s. In 1976, Mr. Villafana founded
St. Jude Medical, Inc. to develop a bileaflet mechanical heart valve that has
become the world's most frequently implanted prosthetic heart valve and is
currently the industry standard. The U.S. market for replacement heart valves in
1998 was estimated to be over $325 million.
The ATS heart valve is designed to "advance the standard" among mechanical heart
valves by incorporating a pivot consisting of protruding spheres upon which the
leaflets of the valve pivot to open and close. This unique open pivot has been
designed to eliminate the cavity associated with the pivot of other bileaflet
valves and to improve the ability of the blood to flow through the valve without
forming clots.
PROSTHETIC HEART VALVE MARKET
There are two types of replacement heart valves: tissue and mechanical. Tissue
valves are made from animal or cadaver tissue or in some cases the patient's own
tissue. Tissue valves do not present the same level of risk of blood clotting
around the valve as mechanical valves. Tissue valves, however, have limited
long-term durability due to calcification and deterioration. If a tissue valve
fails, a new prosthetic valve must be implanted, requiring another open heart
surgery. Mechanical valves are made from durable materials such as metals and
carbon. In vitro testing of current pyrolytic carbon mechanical valves has
yielded estimated useful lives in excess of any patient's lifetime. Current
mechanical valves, however, require the use of anti-coagulants to prevent
formation of blood clots; tissue valves generally do not require anti-coagulant
treatment. Tissue valves are generally prescribed for patients who are less able
to tolerate anti-coagulants due to conditions such as gastrointestinal ulcers or
liver dysfunction, elderly patients, women in their childbearing years and very
active people.
Heart surgeons choose a particular type of mechanical valve based on a number of
factors. A principal factor in the choice of a valve is the potential for
forming blood clots, or thrombosis, resulting from areas in the valve where the
blood can stagnate. Blood clots can impair the performance of a valve and, if
the clot detaches and moves through the bloodstream (a thromboembolism), result
in an arterial blockage or stroke. Another principal factor in the choice of a
mechanical valve is the blood flow efficiency, or hemodynamics, of the valve. A
mechanical valve should allow blood to flow easily through the valve with
minimal pressure required to open the valve and minimal backflow of blood when
the valve closes. The valve also should not exert force on the blood that could
damage the fragile blood cells. Other factors that are important in a surgeon's
choice of a mechanical valve are the ease in implanting and monitoring the
valve's performance, the patient's quality of life and the physician's
familiarity with and confidence in the valve.
In addition to heart surgeons, administrators or business managers at hospitals
and clinics have become increasingly influential in the purchase decision-making
process in recent years. The increasing emphasis on medical cost containment in
most world markets has elevated the decision-making power of the administrator
to a level equal to or greater than that of the surgeon. The administrator tends
to focus on cost-effectiveness and, in some markets, primarily on the cost of
the valve.
We estimate that the total heart valve market in the U.S. in 1997 was
approximately $310 million. We estimate that approximately 75,000 heart valve
replacement surgeries were conducted in the United States in 1997. Of the total
number of heart valve replacement surgeries, approximately 50,000, or 67%,
involved mechanical heart valves and approximately
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25,000, or 33%, involved tissue heart valves. Since 1993, the total U.S.
replacement heart valve market grew at a compound annual growth rate of 2.5 to
3.0%, with mechanical valves growing at an annual rate of 1.5 to 2.0%.
THE ATS OPEN PIVOT BILEAFLET VALVE
Our product is designed to advance the standard of existing mechanical heart
valves by combining a proprietary open pivot design and other innovative
features with the widely accepted biocompatibility and durability of pyrolytic
carbon. The standard ATS heart valve is available in seven sizes ranging from
19mm to 31mm in diameter, with sewing cuffs for either aortic valve or mitral
valve replacement. In 1994, we introduced the Advanced Performance series of the
ATS heart valve in international markets. This valve is available in seven sizes
ranging from 16mm to 28mm in diameter. Our 16mm valve is currently the world's
smallest mechanical valve.
The major design features of the ATS heart valve are:
OPEN PIVOT AREAS. The proprietary open pivot areas of the ATS heart
valve feature spherical protrusions from the orifice that match
spherical notches in the leaflets. The pivot areas protrude into the
orifice and so are exposed to the washing action of the blood flowing
through the heart valve. All other currently marketed bileaflet valves
contain pivot cavities in the orifice wall into which protrusions from
the semi-circular leaflets extend to allow the leaflets to open and
close. The open pivot design also features angled inflow and outflow
pivot stops.
A THIN BUT DURABLE ORIFICE. The orifice of the ATS heart valve is
manufactured using a mandrel which is coated with pyrolytic carbon. The
mandrel is then removed, leaving a solid pyrolytic carbon orifice. In
contrast, the industry standard valve's orifice is composed of a soft
graphite substrate coated with pyrolytic carbon. By eliminating the
graphite substrate, we have made the orifice wall thinner, resulting in
a larger average inside diameter. The orifice is surrounded by a
titanium stiffening ring and is rotatable.
LOW PROFILE DESIGN. The ATS heart valve has a low profile design. The
profile of a mechanical heart valve refers to the extension of the
orifice and leaflets above and below the natural tissue anulus, or
location of the natural heart valve. The inflow side of the orifice of
the ATS heart valve is flat, unlike the most popular cavity pivot valve
which has upward protrusions on the orifice to house the cavity.
AN ADVANCED SEWING CUFF. The sewing cuff surrounding the orifice of the
ATS heart valve is made of double velour polyester and includes a
surgical felt ring for ease of sewing. An extended sewing cuff is used
with the 31mm carbon components to create a 33mm valve for special
mitral valve replacements. The Advanced Performance series offers a
reconfigured sewing cuff, allowing a valve with a larger inside
diameter to be used in small anulus situations.
PYROLYTIC CARBON. Pyrolytic carbon has been used in mechanical heart
valves for over 25 years. The orifice of our heart valve is fabricated
entirely from pyrolytic carbon, while the leaflets are fabricated by
coating pyrolytic carbon on graphite substrates. Pyrolytic carbon used
in other mechanical valves has been tested to function longer than any
patient's lifetime. Pyrolytic carbon is believed to be superior to
metal and plastics in terms of the human body's acceptance of the
material, thus resulting in lower rates of thrombosis and
thromboembolism than with other materials. Because of its durability
and biocompatibility, pyrolytic carbon is used in virtually every
mechanical heart valve in the market.
TWO LEAFLETS. Bileaflet valves are used in substantially all mechanical
heart valves being marketed today. The leaflets in the ATS heart valve
have tungsten impregnated in the substrate to make them visible under
x-ray.
The ATS heart valve is designed to provide the following primary advances over
the industry standard mechanical heart valve:
REDUCED RATES OF THROMBOEMBOLIC COMPLICATIONS. The pivot cavities found
in other bileaflet heart valves are areas of blood flow stagnation and
possible blood clot formation. By eliminating the cavities in the
orifice and placing the pivot areas within the normal blood flow, the
improved washing action in the ATS heart valve is intended to lower the
likelihood of blood clot formation and the resulting incidence of
thromboembolism. The open pivot design as well as the angled inflow and
outflow pivot stops also result in low levels of hemolysis (damage to
blood cells), which may contribute to a low rate of thromboembolic
complications.
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IMPROVED BLOOD FLOW EFFICIENCIES. We have made the orifice of our
product both durable and thinner, thereby resulting in a larger inside
diameter. The larger inside diameter of the ATS heart valve is intended
to result in lower pressure gradients in our product. (The term
"gradients" refers to the pressure difference between the inflow and
outflow side of the valve needed to support the required blood flow
through the valves.) The ATS heart valve is also designed to have less
regurgitation (backflow of blood when the valve is closing and closed)
due to the geometry of its angled inflow and outflow pivot stops which
minimize the direct leakage paths. These design characteristics are
intended to result in superior blood flow efficiencies which should
reduce the workload on the heart.
EASE OF IMPLANT. Our product has been designed for ease of use by the
heart surgeon. The low profile of the ATS heart valve is intended to
minimize implant complications. Leaflets that extend significantly
below the natural tissue anulus in the mitral position may obstruct
blood outflow or interfere with the septum or other parts of the heart.
Protrusions on the inflow side of the anulus in the aortic position may
snag sutures used to attach the mechanical valve to the heart. In
addition, because the orifice can be rotated , the surgeon can optimize
valve orientation by adjusting the position of the leaflets after the
ATS heart valve has been sutured in the natural anatomical position in
the patient's heart. Suturing the ATS heart valve into the heart is
made easier by reducing the number of layers of polyester material in
the aortic and mitral cuffs and by adding the surgical felt ring in the
sewing cuff, thereby easing the passage of the suture needle through
the sewing cuff. The packaging and accessories of the ATS heart valve
also are designed to facilitate the implant procedure by including all
of the required items pre-assembled in a sterilized dual barrier
container.
IMPROVED FOLLOW-UP DIAGNOSTIC CAPABILITY. Our product facilitates the
follow-up diagnostic process by being more easily visible to x-rays.
The titanium stiffening ring provides a clear image on x-rays when
taken from any angle. The leaflets also have a higher density of
tungsten impregnated in the substrate, making them more visible to
x-rays.
IMPROVED PATIENT QUALITY OF LIFE THROUGH LOWER NOISE LEVELS. Patients
with other implanted mechanical heart valves frequently complain of
disturbances resulting from the clicking sound created as the valve
closes. These disturbances range from irritability and insomnia to
paranoia and depression. Spouses of patients with implanted mechanical
valves also report disturbances resulting from the noise of the valve.
Based on informal surveys, we believe that the ATS heart valve is
quieter than our competitors' valves and below the threshold of hearing
of most patients. We believe that the reduced noise level of our
product further improves the quality of life of the patient.
In 1997, we introduced an aortic valved graft. The aortic valved graft consists
of an ATS heart valve connected to a collagen-impregnated vascular graft. It is
used in cases where the aortic valve and a portion of the ascending aorta must
be replaced.
CLINICAL RESULTS AND REGULATORY STATUS
The ATS heart valve has not yet been approved for sale in the United States. On
August 3, 1999, the FDA accepted for filing our PMA application for approval to
sell the ATS heart valve in the United States. On February 4, 2000, we received
a letter from the FDA requesting additional information regarding the ATS heart
valve. To support our PMA application with the FDA, we submitted data on over
950 implants of the ATS heart valve in 17 U.S. and 3 international clinical
centers. An application for marketing the ATS heart valve is also under review
in Canada by Health Canada.
In May 1992, we began to sell the ATS heart valve in Switzerland, Germany,
Belgium and the United Kingdom. We received ISO 9001 certification in April 1994
and European Regulatory Approval ("CE") for the ATS heart valve in March 1995.
The ISO 9001 certification signifies that our procedures and manufacturing
facilities comply with international standards for quality assurance. The CE
mark denotes conformity with European standards for safety and allows certified
devices to be sold in all European Union countries. By the end of 1995, the ATS
heart valve was available in most European countries. We received approval to
begin commercial sales in Japan in June 1996 and in Australia in September 1998.
We have obtained regulatory approvals in other countries where required. As of
December 31, 1999, the ATS heart valve was available for sale in 32 countries
worldwide.
As of December 31, 1999, we estimate that over 33,500 ATS heart valves have been
implanted in patients. We have received implant registration data from over 172
institutions in 26 countries which have implanted the ATS heart valve in
patients.
MARKETING, SALES AND DISTRIBUTION
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Our international marketing strategy combines the substantial cardiovascular
sales experience of our senior officers with a network of experienced
independent distributors to sell the ATS heart valve internationally. We believe
that our independent distributor network has provided a rapid and cost efficient
means of increasing market penetration and commercial acceptance of the ATS
heart valve in key international markets. The use of an independent distributor
does not involve significant expense to us. We have been able to attract
experienced mechanical valve sales organizations familiar with local markets and
customs to act as independent distributors.
If we receive FDA approval of our PMA application, we intend to market the ATS
heart valve in the United States through a direct sales force. We plan to focus
our marketing efforts on the top 20 to 30% of the approximately 880 open heart
centers and on leading cardiac surgeons at those institutions. We believe that
we can effectively market and sell to these surgeons through a 25 to 30 person
direct sales force divided into three to four regions. The cardiac surgeons at
these centers perform a significant portion of the heart valve implant
procedures in the United States and tend to adopt new technologies and devices
more readily. We also believe that acceptance of our product by leading U.S.
cardiac surgeons will help to generate greater demand.
At December 31, 1999, we had contracts with 24 independent distributors covering
32 countries outside the United States. Sales to distributors in Japan, France
and Germany represented over 45% of our total sales for each of the past three
years. The table below sets forth the sales to our top three independent
distributors and the respective countries in which they operate.
SALES AS A PERCENTAGE OF TOTAL
REVENUE
-------------------------------------
1997 1998 1999
---- ---- ----
Japan 17.2% 19.2% 18.6%
Germany 16.7 15.1 16.2
France 11.2 16.0 14.7
Each of our independent distributors has the exclusive right to sell the ATS
heart valve within a defined territory. These distributors also market other
medical products, although they have agreed not to sell other mechanical heart
valves. Most of our distributor agreements establish quotas for sales of the ATS
heart valve in the distributor's territory. Under most of the distributor
agreements, we may, at our option, terminate the agreement upon the departure of
certain key employees of the distributor or a change in control of us. We sell
the ATS heart valve to each distributor F.O.B. Minneapolis, Minnesota. Sales to
international distributors are denominated in U.S. dollars. We allow the return
of unused valves as long as the valve packaging has not been opened and the
sterilization date has not expired.
Our sales, marketing and customer service personnel provide support to our
independent distributors. Our marketing efforts include displaying the ATS heart
valve at major international, national and regional medical meetings attended by
cardiovascular surgeons and cardiologists. We also distribute product brochures
and product information bulletins and conduct product training sessions.
RELATIONSHIP WITH SULZER CARBOMEDICS
Sulzer Carbomedics ("Carbomedics") developed the basic design from which the ATS
heart valve evolved. Carbomedics is the largest and most 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. Since 1990, Carbomedics has been our sole source of
the carbon components used in our valve and the licensor of certain technology
upon which our product is based. We recently restructured our contractual
relationships with Carbomedics to lower our cost of carbon components and to
begin the technology transfer which will enable us to manufacture those
components ourselves.
We have three agreements with Carbomedics: a license agreement and a long-term
carbon supply agreement entered into in September 1990, and a carbon technology
agreement entered into in December 1999. Under the terms of the license
agreement with Carbomedics, we hold an exclusive, royalty-free, worldwide
license to an open pivot, bileaflet mechanical heart valve from which the ATS
heart valve was developed. The license agreement does not include the right to
manufacture
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the pyrolytic carbon components of the ATS heart valve, except that if
Carbomedics were unable to produce the components, we would have the right and
license to make the components or have them made for us. Carbomedics may
terminate the license agreement or declare the license to be non-exclusive if we
fail to meet the minimum purchase requirements under the supply agreement during
any year prior to 2001. Upon satisfaction of these minimum purchase requirements
under the supply agreement, we will have a paid-up, exclusive, royalty-free,
worldwide license. After making certain design changes in the valve, we
finalized the design of the ATS heart valve and filed and received an additional
U.S. patent covering the design modifications. The design improvements and the
U.S. patent covering the modifications are the exclusive property of ATS.
The supply agreement, as amended through December 1999, runs through the end of
2007 and requires us to purchase a minimum number of valve components each year.
If we do not satisfy the minimum purchase requirements during any year prior to
2001, Carbomedics will have the right to terminate the supply agreement and the
license agreement or to declare the license agreement to be non-exclusive. In
addition, prior to 2001, we cannot purchase valve components from any source
other than Carbomedics, unless Carbomedics is unable to deliver suitable
components. We have currently satisfied all of our purchase obligations under
the supply agreement. We are obligated to purchase 16.5 million heart valve
components from Carbomedics in 2000. After 2000, the number of valve components
and the price of each set of components that we are obligated to purchase under
the supply agreement will decrease substantially as compared to prior years
under the agreement, subject to a yearly price adjustment for changes in the
U.S. Department of Labor Employment Cost Index.
In December 1999, we entered into a carbon technology agreement with Carbomedics
under which we obtained an exclusive, worldwide right and license to use
Carbomedics' pyrolytic carbon technology to manufacture components for the ATS
heart valve, and a non-exclusive worldwide right and license to use the
technology to produce pyrolytic carbon components for other devices and
manufacturers, including, after 2008, for other heart valve manufacturers. Under
the agreement Carbomedics has also agreed to assist us in designing, building,
equipping, qualifying and commencing operations in a pyrolytic carbon component
production facility in Minneapolis, Minnesota. In return, we have agreed to pay
Carbomedics a license fee totaling $41 million in eight installments over seven
years, subject to deferral if certain milestones are not satisfied.
We are obligated under the carbon technology agreement to pay all of the costs
of establishing the new carbon production facility, including hourly fees and
out-of-pocket expenses of the Carbomedics employees assigned to assist us in
setting up the facility. We and Carbomedics have also mutually agreed not to
solicit or hire each other's employees (other than sales and marketing
employees) for two years after completion of the milestone payments or
termination of the agreement.
The carbon technology agreement may be terminated by either party upon a
material breach of the agreement by the other party, subject to certain waiting
periods during which the breaching party will have an opportunity to cure the
default. In addition, Carbomedics may terminate the agreement if we cease
business, make an assignment for the benefit of creditors, or enter into certain
insolvency, receivership or bankruptcy proceedings. We can terminate the
agreement at any time after the third anniversary if we determine to exit the
mechanical heart valve business.
MANUFACTURING
We assemble the ATS heart valve in a controlled clean room environment at our
facility in a suburb of Minneapolis, Minnesota. Our manufacturing operation
currently consists of fabricating the sewing cuff, assembling, inspecting,
testing and packaging all of the components into a finished valve, and then
sterilizing the valve prior to shipment to distributors.
We will have to establish a facility for manufacturing pyrolytic carbon
components under the Carbomedics technology agreement. We are currently in the
process of locating a facility. Our preliminary plans call for a 19,000
square-foot building with facilities capable of producing 10,000 valve sets per
year. The manufacturing operations will include substrate machining and
preparation, carbon coating, coated part machining and final polishing and
finishing activities. We expect to hire 7 to 10 technical and production
personnel over the next twelve months. We anticipate that the facility will not
be operational until 2003. The key steps required to complete the facility
include:
o outfitting the building;
o purchasing and installing manufacturing equipment;
o training technical and production personnel;
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o conducting pilot production runs;
o demonstrating compliance with FDA and international good
manufacturing practices and quality system regulations; and
o scaling up production.
Under the terms of our agreement with Carbomedics, we may also elect to have
Carbomedics train our personnel how to machine graphite and pyrolytic carbon
parts, and teach us how to fabricate our own tooling. We have not yet determined
whether we will develop these capabilities internally or contract these steps
out to third party vendors. We currently have in inventory enough carbon
components to satisfy our projected requirements for pyrolytic carbon components
for over two years. In addition, we are obligated to continue to buy some valve
components from Carbomedics under the supply agreement through 2007.
COMPETITION
The prosthetic heart valve market is highly competitive with one dominant
company, St. Jude Medical, Inc. In 1999, according to industry estimates, St.
Jude Medical supplied approximately 50% of the mechanical heart valves sold
worldwide. Other companies that sell mechanical valves include Medtronic, Inc.,
Carbomedics, Baxter Edwards, Sorin Biomedica sPa and Medical Carbon Research,
Inc. St. Jude Medical, Medtronic, Baxter Edwards, Sorin Biomedica and CryoLife
also sell tissue valves. Many of our competitors have greater financial,
manufacturing, and marketing resources than we have.
We are aware of several companies that are developing new prosthetic heart
valves. Several companies are developing and testing new autologous (created
from the patient's own tissue) valves, potentially more durable tissue valves
and new bileaflet and trileaflet mechanical designs. Advancements also are being
made in surgical procedures such as mitral valve reconstruction, whereby the
natural mitral valve is repaired, delaying the need for a replacement valve.
Other companies are pursuing biocompatible coatings to be applied to mechanical
valves in an effort to reduce the incidence of thromboembolic events and to
treat tissue valves to forestall or eliminate calcific degeneration in these
valves.
Competition within the prosthetic heart valve market is based on, among other
things, clinical performance record, minimalization of complications, ease of
use for the surgeon, patient comfort and cost effectiveness. We believe that the
most important factors in a heart surgeon's selection of a particular prosthetic
valve are the perceived benefits of the valve and the heart surgeon's confidence
in the valve design. As a result, valves that have developed a favorable
clinical performance record have a significant marketing advantage over new
valves. In addition, negative publicity resulting from isolated incidents can
have a significant negative effect on a valve's overall acceptance. Our success
is dependent upon the surgeon's willingness to use a new prosthetic heart valve
as well as the future clinical performance of the ATS heart valve compared with
the more established competition.
We believe that mechanical heart valves are currently being marketed to
hospitals at prices that vary significantly from country to country due to
market conditions, currency valuations, distributor mark-ups and government
regulations. We believe that, after distributor mark-up, the ATS heart valve
sells at or above the current price of other valves in most markets. In many
markets, government agencies are imposing or proposing price controls or
restrictions on medical products. We work with our independent distributors to
price the ATS heart valve in each market to meet these limitations. In addition,
our primary competitors have the ability, due to their internal carbon
manufacturing facilities and economies of scale, to manufacture their valves at
a lower cost than we can currently manufacture the ATS heart valve. The market
leader has recently been using price as a method to compete in several markets.
PATENTS AND PROPRIETARY TECHNOLOGY
Our policy is to protect our proprietary position by obtaining U.S. and foreign
patents to protect technology, inventions and improvements important to the
development of our business. Under our agreements with Carbomedics, we have
obtained a royalty-free license to the Carbomedics patent on the basic design of
an open pivot bileaflet mechanical heart valve and, in December 1999, the right
to manufacture pyrolytic carbon components, subject to the payment of license
fees. See "Business--Relationship with Sulzer Carbomedics." The Carbomedics
patent expires in 2004. We subsequently made modifications to the basic design.
We were issued a U.S. patent covering our design improvements to the ATS heart
valve in October 1994. We also have filed patent applications in Japan, Belgium,
France, Germany, Netherlands, Spain, Switzerland
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and the United Kingdom relating to the design improvements. Patents have been
granted in all of these countries. We cannot be certain that any patents will
not be challenged or circumvented by competitors.
We also rely on trade secrets and technical know-how in the manufacture and
marketing of the ATS heart valve. We typically require our employees,
consultants and contractors to execute confidentiality agreements with respect
to our proprietary information.
We claim trademark protection on ATS Medical(TM) and ATS Open Pivot
Bileaflet(TM).
GOVERNMENT REGULATION
Our ATS heart valve is regulated in the United States as a medical device by the
FDA under the Federal Food, Drug and Cosmetic Act, or FDC Act. Under the FDC
Act, the FDA regulates the research, testing, manufacturing, safety, labeling,
storage, record keeping, advertising and distribution of medical devices. The
FDA classifies our ATS heart valve as a Class III device, which is subject to
the highest level of controls. Noncompliance with applicable regulations can
result in withdrawal of prior approvals, total or partial suspension of
production, fines, injunctions, recall of products, civil penalties and criminal
prosecution.
Before it can be sold in the United States, the ATS heart valve requires
premarket approval by the FDA. In December 1996, we received approval of our
investigational device exemption application to start limited clinical studies,
and on August 3, 1999, the FDA accepted for filing our PMA application. Under
the FDC Act, the FDA has 180 days to review a PMA application, although the
review time usually takes longer and may require additional information. The PMA
application process can be expensive, uncertain and lengthy. A number of devices
for which premarket approval has been sought have never been approved for
marketing and sale.
On February 4, 2000, we received a letter from the FDA relating to our PMA
application. In this letter, the FDA requested additional information regarding
the ATS heart valve. We expect to submit the requested information in April
2000. Upon completion of this review, the FDA could, among other things, request
additional information or schedule a meeting for presentation of clinical data
to a FDA advisory panel. Premarket approval to sell the ATS heart valve will be
subject to the advisory panel's recommendation.
We also are subject to FDA regulations concerning manufacturing processes and
reporting obligations. These regulations require that manufacturing steps be
performed according to FDA standards and in accordance with documentation,
control and testing standards. The FDA monitors compliance with its good
manufacturing practices regulations by conducting periodic inspections. We are
required to provide information to the FDA on adverse incidents as well as
maintain a detailed record keeping system in accordance with FDA guidelines. We
expect that our carbon fabrication processes and new manufacturing facility will
be subject to domestic and international regulatory inspection and review. We
will be required to perform testing and analysis on the components we
manufacture before we can sell the ATS heart valve in the United States and
international markets. We may be required to conduct clinical studies of the ATS
heart valve incorporating the components that we manufacture.
Even if regulatory approval of a product is granted, the FDA may require testing
and surveillance programs to monitor the safety and effect of the product and
may prevent or limit further marketing of the product based on the results of
these post-marketing programs.
The advertising of our product also will be subject to both FDA and Federal
Trade Commission regulations. In addition, we will be subject to the "fraud and
abuse" laws and regulations promulgated by the U.S. Department of Health and
Human Services and the U.S. Health Care Finance Administration if we sell the
ATS heart valve to Medicare or Medicaid patients.
Regulation of heart valves varies widely in foreign countries. Foreign countries
vary from having no regulations to having a pre-market notice or pre-market
approval process. The European Union has adopted rules which require that
medical products receive the right to affix the CE mark, an international symbol
that denotes conformity with European standards for safety and allows certified
devices to be marketed in all European Union countries. As part of the CE
compliance, manufacturers are required to comply with the ISO 9000 series of
standards for quality operations. We received ISO 9001 certification in 1994 and
CE mark approval in March 1995. We will continue to be subjected to various
audits and tests under the European Community directives. In June 1996, we
received approval to begin commercial sales in Japan through a Shonin regulatory
approval obtained by our distributor, Century Medical, Inc. In September 1998,
we received approval from the
7
<PAGE>
Therapeutic Goods Administration for commercial sales in Australia. We are in
the process of pursuing regulatory approval for the ATS heart valve in Canada.
THIRD PARTY REIMBURSEMENT
In the United States, healthcare providers that purchase medical devices, such
as our product, generally rely on third-party payors, including Medicare,
Medicaid, private health insurance carriers and managed care organizations, to
reimburse all or part of the cost and fees associated with the procedures
performed using these devices. The commercial success of the ATS heart valve
will depend on the ability of health care providers to obtain adequate
reimbursement from third-party payors for the surgical procedures in which our
products are used. Third-party payors are increasingly challenging the pricing
of medical products and procedures. Even if a procedure is eligible for
reimbursement, the level of reimbursement may not be adequate. In addition,
third-party payors may deny reimbursement if they determine that the device used
in the treatment was not cost-effective or was used for a non-approved
indication.
In international markets, market acceptance of the ATS heart valve depends in
part upon the availability of reimbursement from healthcare payment systems.
Reimbursement and healthcare payment systems in international markets vary
significantly by country. The main types of healthcare payment systems in
international markets are government sponsored healthcare and private insurance.
Countries with governmental sponsored healthcare, such as the United Kingdom,
have a centralized, nationalized healthcare system. New devices are brought into
the system through negotiations between departments at individual hospitals at
the time of budgeting. In Japan, France and Germany, the government sets an
upper limit of reimbursement for various valve types. In most foreign countries,
there are also private insurance systems that may offer payments for alternative
devices.
We have pursued reimbursement for our ATS heart valve internationally through
our independent distributors. While the healthcare financing issues in these
countries are substantial, we have been able to sell the ATS heart valve to
private clinics and nationalized hospitals in each of the countries served by
our distributors.
PRODUCT LIABILITY AND INSURANCE
Cardiovascular device companies are subject to an inherent risk of product
liability and other liability claims in the event that the use of their products
results in personal injury. A mechanical heart valve is a life-sustaining
device, and the failure of any mechanical heart valve usually results in the
death of the patient. We have not received any reports of mechanical failure of
our valves implanted to date and have not experienced any product liability
claims. Any product liability claim could subject us to costly litigation,
damages and adverse publicity.
We currently maintain product liability insurance policy with an annual coverage
limit of $25 million in the aggregate. A $5 million product liability insurance
policy is required by the supply agreement with Carbomedics. We are financially
responsible for any uninsured claims or claims which exceed the insurance policy
limits. Product liability insurance is expensive for mechanical valves. If
insurance becomes completely unavailable, we must either develop a
self-insurance program or sell without insurance, which would require the
consent of Carbomedics. The development of a self-insurance program would
require significant capital.
Carbomedics has made no warranty on our valve components. We have agreed to hold
Carbomedics harmless and indemnify Carbomedics in the event claims are made or
damages are assessed against Carbomedics as a result of our valve.
EMPLOYEES
As of January 1, 2000 we had 80 full-time employees, of whom 21 were engaged in
regulatory affairs and quality assurance, 38 in production and 21 in
administrative, purchasing and marketing activities.
ITEM 2. PROPERTIES
We lease approximately 23,912 square feet of administrative, production and
engineering space in a suburb of Minneapolis, Minnesota. The lease expires on
February 28, 2003. Although we believe that this facility is adequate for our
current needs,
8
<PAGE>
we intend to establish a new pyrolytic carbon manufacturing facility in close
proximity to our principal executive offices. Also, see our discussion of a
possible new manufacturing facility under Item 1, "Manufacturing."
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Name Age Position
- ---- --- --------
Manuel A. Villafana 59 Chairman of the Board and Chief Executive Officer
Richard W. Kramp 54 President, Chief Operating Officer and Director
Russell W. Felkey 49 Executive Vice President of Regulatory Affairs and
Secretary
John H. Jungbauer 50 Vice President, Treasurer and Chief Financial Officer
Frank R. Santiago 48 Vice President, Sales and Marketing
MANUEL A. VILLAFANA, a founder of our company, has served as Chief Executive
Officer and Chairman of the Board since our inception in 1987. From 1983 to
1987, Mr. Villafana served as Chairman of GV Medical, Inc., a company co-founded
by Mr. Villafana to develop, manufacture and market the LASTAC System, a laser
transluminal angioplasty catheter system. From 1976 to 1982, Mr. Villafana
served as President and Chairman of St. Jude Medical, Inc., a company founded by
Mr. Villafana to develop, manufacture and market a prosthetic bileaflet heart
valve manufactured from pyrolytic carbon. From 1972 to 1976, Mr. Villafana
served as President and Chairman of Cardiac Pacemakers, Inc., a company founded
by Mr. Villafana to develop, manufacture and market a new generation of lithium
powered pacemakers.
RICHARD W. KRAMP has served as our President and Chief Operating Officer and a
Director since March 1988. Mr. Kramp also will be responsible for overseeing the
development of and managing the new pyrolytic carbon manufacturing facility.
Prior to joining us, Mr. Kramp was Vice President of Sales and Marketing for St.
Jude Medical, Inc., where Mr. Kramp served in a variety of sales and marketing
capacities from 1978 to 1988. From 1976 through 1978, Mr. Kramp served as
Illinois Sales Manager for Life Instruments, a distributor of cardiovascular
products. From 1972 to 1976, Mr. Kramp was the Senior Design Engineer and then
Supervisor of Electrical Design for Cardiac Pacemakers, Inc., where he designed
the first lithium powered demand pacemaker for which he received a U.S. patent.
Mr. Kramp also is a director of MedAmicus, Inc., a medical products company.
RUSSELL W. FELKEY has served as our Executive Vice President of Regulatory
Affairs since April 1991 and as Secretary since October 1995. From 1989 to 1991,
Mr. Felkey was Vice President of Regulatory Affairs and Quality Assurance at
Cardiovascular Imaging Systems, Inc., a company involved in the development of
peripheral and coronary ultrasound catheters. From 1984 to 1989, Mr. Felkey was
Vice President of Regulatory Affairs at GV Medical, Inc.
JOHN H. JUNGBAUER has served as Vice President since April 1995 and as Treasurer
and Chief Financial Officer since October 1990. From 1988 to 1990, Mr. Jungbauer
was Executive Vice President of Titan Medical, Inc., a medical products company.
During 1987, Mr. Jungbauer served as a consultant to Titan Medical, Inc. From
1981 to 1987, Mr. Jungbauer was Vice President of Finance at St. Jude Medical,
Inc.
FRANK R. SANTIAGO has served as our Vice President, Sales and Marketing since
June 1998 and as Director of Sales and Marketing since June 1997. From March
1985 to March 1997, Mr. Santiago owned and operated Hemotech Systems, a
cardiovascular products and services company providing services such as
ambulatory recording of electrocardiograms and
9
<PAGE>
blood pressure. Prior to 1987, Mr. Santiago was a cardiovascular specialist at
American Edwards/Baxter, a regional training manager in various sales and
marketing divisions of Johnson and Johnson and a product specialist at Ayerst
Laboratories/American Home Products.
MEDICAL ADVISORY BOARD
The Company has a Medical Advisory Board that meets periodically to review and
guide the design and testing of the valve as well as to provide assessments of
potential new cardiovascular products. The members of the Medical Advisory Board
are as follows:
DR. DEMETRE M. NICOLOFF is a world-renowned cardiac surgeon practicing with
Cardiac Surgical Associates in association with the Minneapolis Heart Institute
and St. Paul Heart and Lung Center. Previously, Dr. Nicoloff was an Associate
Professor of Surgery at the University of Minnesota and taught in the Department
of Surgery at the University of Minnesota for over 15 years. Dr. Nicoloff
participated in the first human implant of the ATS Medical valve in May 1992.
Dr. Nicoloff also participated in the design of the first general of bileaflet
valves and performed the first human implant of the most frequently implanted
mechanical bileaflet valve. Dr. Nicoloff previously was a member of the
Scientific Advisory Board of St. Jude Medical, Inc. Dr. Nicoloff received his
medical degree from Ohio State University.
DR. H. DAVID FRIEDBERG is a Clinical Professor of Medicine and Cardiology at the
University of South Florida. Dr. Friedberg is certified in cardiac pacing and
electrophysiology. He is a Fellow of the American College of Cardiology,
American College of Chest Physicians and the Council of Clinical Cardiology of
the American Heart Association. Dr. Friedberg participated in the first implant
of the ATS Medical valve in May 1992. Dr. Friedberg previously was a member of
the Scientific Advisory Board of St. Jude Medical, Inc. Dr. Friedberg obtained
his medical degree in South Africa and performed his internal medicine studies
and residencies in London, England.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information contained under the heading "Common Stock Information" on page
10 of the Company's Annual Report to Shareholder's for the year ended December
31, 1999 (the "Annual Report to Shareholders") is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the heading "Financial Highlights" on the inside
cover of the Annual Report to Shareholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 6 to 10 of
the Annual Report to Shareholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" on page 8 of the Annual Report to Shareholders is incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained under the headings "Consolidated Statements of
Financial Position," "Consolidated Statements of Income," "Consolidated
Statement of Changes in Shareholders' Equity," "Consolidated Statements of Cash
Flows," and "Notes to Consolidated Financial Statements" on pages 12 to 20 of
the Annual Report to Shareholders is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Part I of this Report. Pursuant to General Instruction G(3), reference is
made to information contained under the heading "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement for its 2000 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission on or before April 30, 2000,
which information is incorporated herein.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3), reference is made to information contained
under the heading "Executive Compensation" and "Compensation of Directors" in
the Company's definitive proxy statement for its 2000 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before April 30, 2000, which information is incorporated herein, excluding the
"Report of the Compensation Committee Concerning Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3), reference is made to information contained
under the heading "Security Ownership of Certain Beneficial Owners and
Management" and "Election of Directors" in the Company's definitive proxy
statement for its 2000 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before April 30, 2000, which
information is incorporated herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), reference is made to information contained
under the heading "Election of Directors" and "Executive Compensation" in the
Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission on or before April 30,
2000, which information is incorporated herein, excluding the "Report of the
Compensation Committee Concerning Executive Compensation."
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements of the Company are incorporated by reference from the
Company's Annual Report to Shareholders.
(a) 2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedule is incorporated by reference from the Company's
Annual Report to Shareholders.
All other schedules have been omitted because of absence of conditions under
which they are required or because the required information is included in the
financial statements or notes thereto.
(a) 3. LISTING OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1 Restated Articles of Incorporation, as amended to date
(Incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993 (the "1993 Form 10-K")).
3.2 Bylaws of the Company, as amended to date (Incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (the "1996 Form
10-K")).
4.1 Specimen certificate for shares of Common Stock of the Company
(Incorporated by reference to Exhibit 4.1 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997 (the "1997 Form 10-K")).
4.2 Form of Warrant issued in 1993 Private Placement (Incorporated
by reference to Exhibit 4.4 to the 1993 Form 10-K).
10.1** 1987 Stock Option and Stock Award Plan, as restated and
amended to date (Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997).
10.2** Agreement between the Company and Manuel A. Villafana dated
April 20, 1998 (Incorporated by reference to Exhibit 10.1 to
the Company's Form 10-Q for the quarter ended June 30, 1998).
10.3 Lease Agreement between the Company and Crow Plymouth Land
Limited Partnership dated December 22, 1987 (Incorporated by
reference to Exhibit 10(d) to the Company's Registration
Statement on Form S-18, File No. 33-34785-C (the "Form
S-18")).
10.4 Amendment No. 1 to Lease Agreement between the Company and
Crow Plymouth Land Limited Partnership, dated January 5, 1989
(Incorporated by reference to Exhibit 10(e) to the Form S-18).
10.5 Amendment No. 2 to Lease Agreement between the Company and
Crow Plymouth Land Limited Partnership, dated January 1989
(Incorporated by reference to Exhibit 10(f) to the Form S-18).
10.6 Amendment No. 3 to Lease Agreement between the Company and
Crow Plymouth Land Limited Partnership, dated June 14, 1989
(Incorporated by reference to Exhibit 10(g) to the Form S-18).
10.7 Amendment No. 4 to Lease Agreement between the Company and
Plymouth Business Center Limited Partnership, dated February
10, 1992 (Incorporated by reference to Exhibit 10.8 to the
1996 Form 10-K).
13
<PAGE>
10.8 Development Agreement dated September 24, 1990, with
CarboMedics, Inc. (confidential treatment granted)*
(Incorporated by reference to Exhibit 10.9 to the 1996 Form
10-K).
10.9 O.E.M. Supply Contract dated September 24, 1990, with
CarboMedics, Inc. (confidential treatment granted)*
(Incorporated by reference to Exhibit 10.10 to the 1996 Form
10-K).
10.10 License Agreement dated September 24, 1990, with CarboMedics,
Inc. (confidential treatment granted)* (Incorporated by
reference to Exhibit 10.11 to the 1996 Form 10-K).
10.11 Option Agreement dated September 24, 1990, with CarboMedics,
Inc. (confidential treatment granted)* (Incorporated by
reference to Exhibit 10.12 to the 1996 Form 10-K).
10.12 Helix BioCore, Inc. Self-Insurance Trust Agreement dated
February 28, 1991 (Incorporated by reference to Exhibit 10.13
to the 1996 Form 10-K).
10.13 Amendment 1 to License Agreement dated December 16, 1993, with
CarboMedics, Inc. (Incorporated by reference to Exhibit 10.17
to the 1993 Form 10-K).
10.14 Amendment 4 to O.E.M. Supply Contract dated December 16, 1993,
with CarboMedics, Inc. (confidential treatment granted)*
(Incorporated by reference to Exhibit 10.18 to the 1993 Form
10-K).
10.15 Amendment 5 to O.E.M. Supply Contract dated September 1, 1994,
with CarboMedics, Inc. (confidential treatment granted)*
(Incorporated by reference to Exhibit 10.19 to the 1994 Form
10-K).
10.16 Amendment 1 to Option Agreement dated December 16, 1993, with
CarboMedics, Inc. (confidential treatment granted)*
(Incorporated by reference to Exhibit 10.19 to the 1993 Form
10-K).
10.17 Line of Credit dated August 11, 1994, between the Company and
First Bank National Association (Incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
September 30, 1994).
10.18 Form of Distributor Agreement. (Incorporated by reference to
Exhibit 10.22 to the 1994 Form 10-K).
10.19** Form of Agreement between ATS Medical, Inc. and each officer
dated June 30, 1995, concerning severance benefits upon a
change in control (Incorporated by reference to Exhibit 10.23
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 Form 10-K")).
10.20 ATS Medical, Inc. Change in Control Severance Pay Plan
(Incorporated by reference to Exhibit 10.24 to the 1995 Form
10-K).
10.21 Amendment No. 5 to Lease Agreement between the Company and St.
Paul Properties, Inc., dated May 30, 1996 (Incorporated by
reference to Exhibit 10.22 to the 1996 Form 10-K).
10.22 Stock Purchase Agreement dated February 3, 1997 between ITOCHU
Corporation and the Company (Incorporated by reference to
Exhibit 1 to Schedule 13D filed with respect to the Company by
ITOCHU Corporation on February 18, 1997).
10.23 Amendment No. 6 to Lease Agreement between the Company and St.
Paul Properties, Inc., dated November 25, 1997 (Incorporated
by reference to Exhibit 10.23 to the 1997 Form 10-K).
10.24 1998 Employee Stock Purchase Plan (Incorporated by reference
to Exhibit 4 to the Company's Registration Statement on Form
S-8, File No. 333-57527).
10.25** 1998 Management Incentive Compensation Plan (Incorporated by
reference to Exhibit 10.25 to the 1998 Form 10-K).
14
<PAGE>
10.26* Carbon Agreement by and between Sulzer Carbomedics, Inc. and
ATS Medical, Inc., dated December 29, 1999 (Incorporated by
reference to Exhibit 99.1 to the Company's Registration
Statement on Form S-8, January 13, 2000, File No. 000-18602).
10.27* Amendment 7 to OEM Supply Contract by and between Sulzer
Carbomedics, Inc. and ATS Medical, Inc., dated December 29,
1999 (Incorporated by reference to Exhibit 99.2 to the
Company's Registration Statement on Form S-8, January 13,
2000, File No. 000-18602).
10.28 Amendment 2 to License Agreement by and between Sulzer
Carbomedics, Inc. and ATS Medical, Inc., dated December 29,
1999 (Incorporated by reference to Exhibit 99.3 to the
Company's Registration Statement on Form S-8, January 13,
2000, File No. 000-18602).
13 1999 Annual Report to Shareholders
23 Consent of Ernst & Young LLP.
24 Power of Attorney.
27 Financial Data Schedule.
99 Cautionary Statements.
*Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of this exhibit have been redacted.
**Represents a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K
None.
(c) Exhibits
See Exhibit Index and Exhibits attached as a separate section of this report.
(d) Financial Statement Schedule
See Financial Statement Schedule attached on a separate section of this report.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 28, 2000 ATS MEDICAL, INC.
By /s/ John H. Jungbauer
---------------------
John H. Jungbauer
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C> <C> <C>
Manuel A. Villafana* Chairman, Chief Executive)
Officer, and Director )
(principal executive officer) )
)
Richard W. Kramp* President, Chief Operating )
Officer and Director ) By: /s/ John H. Jungbauer
---------------------
) John H. Jungbauer
John H. Jungbauer* Vice President, Treasurer ) Pro se and
and Chief Financial Officer ) Attorney-in-fact
(principal financial and )
accounting officer) )
) Dated: March 28, 2000
Charles F. Cuddihy, Jr.* Director )
)
David L. Boehnen* Director )
)
A. Jay Graf* Director )
</TABLE>
*By Power of Attorney filed with this report as Exhibit 24 hereto.
16
<PAGE>
ATS MEDICAL, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1999
ITEM 8 AND ITEM 14(a) (1) AND (2) AND (d)
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
COMMISSION FILE NUMBER 0-18602
17
<PAGE>
ATS MEDICAL, INC.
FORM 10-K ITEM 8 AND ITEM 14(a) (1) and (2) and (d)
LIST OF FINANCIAL STATEMENTS AND STATEMENT SCHEDULE
The following financial statements of ATS Medical, Inc. are incorporated in Part
II, Item 8 and Part IV, Item 14(a)(1) of this Annual Report on Form 10-K by this
reference:
Report of Independent Auditors.
Consolidated Statements of Financial Position at December 31, 1999 and 1998.
Consolidated Statements of Income for the years ended December 31, 1999, 1998
and 1997.
Consolidated Statement of Changes in Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997.
Notes to Consolidated Financial Statements.
The following financial statement schedule of ATS Medical, Inc. is incorporated
in Part IV, Item 14(a)(2) and (d) of this Annual Report on Form 10-K by this
reference:
Schedule II - Valuation and Qualifying Accounts and Reserves
18
<PAGE>
ATS MEDICAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
Additions
(2)
(1) Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts- Deductions- End of
Description of Year Expenses Describe Describe Year
Allowance for Doubtful Accounts
- -------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $185,000 $ 20,000 -- -- $205,000
-------- -------- -------- -------- --------
Totals $185,000 $ 20,000 $ 0 $ 0 $205,000
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $260,000 $ 20,000 -- $ 95,000(1) $185,000
-------- -------- -------- -------- --------
Totals $260,000 $ 20,000 $ 0 $ 95,000 $185,000
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $200,000 $ 60,000 -- -- $260,000
-------- -------- -------- -------- --------
Totals $200,000 $ 60,000 $ 0 $ 0 $260,000
Reserve for Obsolete Inventory
- ------------------------------
Year ended December 31, 1999:
Deducted from asset accounts:
Reserve for Obsolete Inventory $200,000 $ 38,045 -- $ 38,045(2) $200,000
-------- -------- -------- -------- --------
Totals $200,000 $ 38,045 $ 0 $ 38,045 $200,000
Year ended December 31, 1998:
Deducted from asset accounts:
Reserve for Obsolete Inventory $ 0 $200,000 -- -- $200,000
-------- -------- -------- -------- --------
Totals $ 0 $200,000 $ 0 $ 0 $200,000
</TABLE>
(1) Uncollectible accounts written off due to a single customer going bankrupt.
(2) Obsolete part written off that is no longer in use.
19
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
3.1 Restated Articles of Incorporation, as amended to date
(Incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year eDecember 31, 1993
(the "1993 Form 10-K")).
3.2 Bylaws of the Company, as amended to date. (Incorporated by
Reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (the "1996 Form
10-K")).
4.1 Specimen certificate for shares of Common Stock of the Company
(Incorporated by reference to Exhibit 4.1 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997 (the "1997 Form 10-K")).
4.2 Form of Warrant issued in 1993 Private Placement (Incorporated
by reference to Exhibit 4.4 to the 1993 Form 10-K).
10.1** 1987 Stock Option and Stock Award Plan, as restated and
amended to date (Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997).
10.2** Agreement between the Company and Manuel A. Villafana dated
April 20, 1998 (Incorporated by reference to Exhibit 10.1 to
the Company's Form 10-Q for the quarter ended June 30, 1998).
10.3 Lease Agreement between the Company and Crow Plymouth Land
Limited Partnership dated December 22, 1987 (Incorporated by
reference to Exhibit 10(d) to the Company's Registration
Statement on Form S-18, File No. 33-34785-C (The "Form
S-18")).
10.4 Amendment No. 1 to Lease Agreement between the Company and
Crow Plymouth Land Limited Partnership, dated January 5, 1989
(Incorporated by reference to Exhibit 10(e) to the Form S-18).
10.5 Amendment No. 2 to Lease Agreement between the Company and
Crow Plymouth Land Limited Partnership, dated January 1989
(Incorporated by reference to Exhibit 10(f) to the Form S-18).
10.6 Amendment No. 3 to Lease Agreement between the Company and
Crow Plymouth Land Limited Partnership, dated June 14, 1989
(Incorporated by reference to Exhibit 10(g) to the Form S-18).
10.7 Amendment No. 4 to Lease Agreement between the Company and
Plymouth Business Center Limited Partnership, dated February
10, 1992 (Incorporated by reference to Exhibit 10.8 to the
1996 Form 10-K).
10.8 Development Agreement dated September 24, 1990, with
CarboMedics, Inc. (confidential treatment granted)*
(Incorporated by reference to Exhibit 10.9 to the 1996 Form
10-K).
10.9 O.E.M. Supply Contract dated September 24, 1990, with
CarboMedics, Inc. (confidential treatment granted)*
(Incorporated by reference to Exhibit 10.10 to the 1996 Form
10-K).
10.10 License Agreement dated September 24, 1990, with CarboMedics,
Inc. (confidential treatment granted)* (Incorporated by
reference to Exhibit 10.11 to the 1996 Form 10-K).
10.11 Option Agreement dated September 24, 1990, with CarboMedics,
Inc. (confidential treatment granted)* (Incorporated by
reference to Exhibit 10.12 to the 1996 Form 10-K).
20
<PAGE>
10.12 Helix BioCore, Inc. Self-Insurance Trust Agreement dated
February 28, 1991 (incorporated by reference to Exhibit 10.13
to the 1996 Form 10-K).
10.13 Amendment 1 to License Agreement dated December 16, 1993, with
CarboMedics, Inc. (incorporated by reference to Exhibit 10.17
to the 1993 Form 10-K).
10.14 Amendment 4 to O.E.M. Supply Contract dated December 16, 1993,
with CarboMedics, Inc. (confidential treatment granted)*
(Incorporated by reference to Exhibit 10.18 to the 1993 Form
10-K).
10.15 Amendment 5 to O.E.M. Supply Contract dated September 1, 1994,
with CarboMedics, Inc. (confidential treatment granted)*
(Incorporated by reference to Exhibit 10.19 to the 1994 Form
10-K).
10.16 Amendment 1 to Option Agreement dated December 16, 1993, with
CarboMedics, Inc. (confidential treatment granted)*
(Incorporated by reference to Exhibit 10.19 to the 1993 Form
10-K).
10.17 Line of Credit dated August 11, 1994, between the Company and
First Bank National Association (Incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
September 30, 1994).
10.18 Form of Distributor Agreement. (Incorporated by reference to
Exhibit 10.22 to the 1994 Form 10-K).
10.19** Form of Agreement between ATS Medical, Inc. and each officer
dated June 30, 1995 concerning severance benefits upon a
change in control (Incorporated by reference to Exhibit 10.23
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (The "1995 Form 10-K")).
10.20 ATS Medical, Inc. Change in Control Severance Pay Plan
(Incorporated by reference to Exhibit 10.24 to the 1995 Form
10-K).
10.21 Amendment No. 5 to Lease Agreement between the Company and St.
Paul Properties, Inc., dated May 30, 1996 (Incorporated by
reference to Exhibit 10.22 to the 1996 Form 10-K).
10.22 Stock Purchase Agreement dated February 3, 1997 between ITOCHU
Corporation and the Company (Incorporated by reference to
Exhibit 1 to Schedule 13D filed with respect to the Company by
ITOCHU Corporation on February 18, 1997).
10.23 Amendment No. 6 to Lease Agreement between the Company and St.
Paul Properties, Inc., dated November 25, 1997 (Incorporated
by reference to Exhibit 10.23 to the 1997 Form 10-K).
10.24 1998 Employee Stock Purchase Plan (Incorporated by reference
to Exhibit 4 to the Company's Registration Statement on Form
S-8, File No. 333-57527).
10.25** 1998 Management Incentive Compensation Plan (Incorporated by
reference to Exhibit 10.25 to the 1998 Form 10-K).
10.26* Carbon Agreement by and between Sulzer Carbomedics, Inc. and
ATS Medical, Inc., dated December 29, 1999 (Incorporated by
reference to Exhibit 99.1 to the Company's Registration
Statement on Form S-8, January 13, 2000, File No. 000-18602).
10.27* Amendment 7 to OEM Supply Contract by and between Sulzer
Carbomedics, Inc. and ATS Medical, Inc., dated December 29,
1999 (Incorporated by reference to Exhibit 99.2 to the
Company's Registration Statement on Form S-8, January 13,
2000, File No. 000-18602).
10.28 Amendment 2 to License Agreement by and between Sulzer
Carbomedics, Inc. and ATS Medical, Inc., dated December 29,
1999 (Incorporated by reference to Exhibit 99.3 to the
Company's Registration Statement on Form S-8, January 13,
2000, File No. 000-18602).
13 1999 Annual Report to Shareholders.
21
<PAGE>
23 Consent of Ernst & Young LLP.
24 Power of Attorney.
27 Financial Data Schedule.
99 Cautionary Statements.
*Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of this exhibit have been redacted.
**Represents a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
22
Exhibit 13
[LOGO]
ATS MEDICAL
1999 ANNUAL REPORT
[PHOTO]
ADVANCING THE STANDARD
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $17,461,964 $17,960,483 $14,515,915 $11,859,765 $9,300,540
Operating income
for the year 1,766,243 1,555,296 689,150 702,727 21,756
Net income
for the year 2,637,911 2,838,943 2,102,667 1,321,602 714,524
Net income
per share--diluted 0.14 0.16 0.12 0.08 0.05
Total assets 61,116,685 58,431,376 54,386,031 33,320,300 31,329,128
Long-term debt 0 0 0 0 0
Total shareholders' equity 58,841,598 55,819,575 53,522,739 31,926,739 29,059,421
</TABLE>
[BAR CHARTS OMITTED]
FDA Disclaimer
This annual report to shareholders is for communication with shareholders and
potential shareholders of ATS Medical, Inc. The ATS Medical, Inc. heart valve is
being studied according to a protocol which is part of the INVESTIGATIONAL
DEVICE EXEMPTION issued by the U.S. FOOD AND DRUG ADMINISTRATION (FDA) and as
such is available for use only at participating clinical centers in the United
States. None of the information contained in this annual report is intended for
use by physicians or patients in the United States for determining the
appropriateness of the ATS Medical, Inc. heart valve in the care of heart valve
patients in the United States.
<PAGE>
[PHOTO]
Mr. Shinmura of Century Medical, Inc.
meets with Dr. Murata.
INTERNATIONAL
SALES
We have been selling the ATS heart valve since 1992 through independent
distributors in most major international markets, including Europe, Japan and
Australia. At December 31, 1999 we had contracts with 24 independent
distributors covering 32 countries. We estimate that over 35,000 ATS heart
valves have been implanted in patients since 1992.
Our international marketing strategy combines the substantial cardiovascular
sales experience of our senior officers with a network of experienced
independent distributors to sell the ATS heart valve internationally. We believe
that our independent distributor network has provided a rapid and cost effective
means of increasing market penetration and commercial acceptance of the ATS
heart valve in key international markets. The use of an independent distributor
does not involve significant expense to us. We have been able to attract
experienced mechanical valve sales organizations familiar with local markets and
customs to act as independent distributors.
Each of our independent distributors has the exclusive right to sell the ATS
heart valve within a defined territory. These distributors also market other
medical products, although they have agreed not to sell other mechanical heart
valves. Most of our distributor agreements establish quotas for the sales of the
ATS heart valve in the distributor's territory. Sales to international
distributors are denominated in United States dollars. Sales to distributors in
Japan, France and Germany represented over 45% of our total sales for each of
the past three years.
Our sales, marketing and customer service personnel provide support to our
independent distributors. Our marketing efforts include displaying the ATS heart
valve at major international, national and regional medical meetings attended by
cardiovascular surgeons and cardiologists. We distribute product brochures and
product information bulletins and conduct product training sessions.
PAGE 1 [LOGO]
<PAGE>
TO OUR
SHAREHOLDERS
Dear Shareholders and Friends,
When we started this project ten years ago, we knew that we faced many
challenges in bringing to the hands of the physicians a new generation heart
valve capable of reducing valve-related complications which continue to occur
with currently available heart valves.
Additionally, we knew that we faced a difficult regulatory path and would need
to market against financially stronger competitors. We also knew that we would
be working with supply conditions that would make it difficult for us to compete
on the basis of price and that we would have to rely entirely on the talents and
skills of our employees and our distribution network, coupled with the fine
product we intended to develop.
Ten years have passed. We entered the new millennium with a tremendous track
record, still facing difficult challenges, but encouraged by the fact that we
now have over 35,000 implants throughout the world without a single
post-operative structural failure and with credible data being received which
supports our belief that we have, in fact, developed the finest valve in the
world.
[SIDEBAR]
"However, due to strong fiscal controls
as well as improvements in productivity,
we were able to remain profitable."
Manny A. Villafana
CHAIRMAN/CEO
On the regulatory side, in 1995, we completed a rigorous clinical study at five
international institutions which demonstrated the safety and efficacy of our
valve to the satisfaction of the European Community resulting in the issuance of
our CE Mark. Similarly, we successfully completed a thorough study in Japan
resulting in the issuance of the Shonin. In 1997, we began a clinical study of
our valve in the United States, and during 1999, we submitted to the FDA our
clinical data with over 1,300 patient years of data. These data were accepted
for review in September of 1999. In early February, 2000 we received a letter
from the FDA requesting additional information regarding our valve. We expect to
be able to respond to these questions soon and continue the approval process.
During 1999, our valve units sold continued to grow but, due to the strong U.S.
dollar and the decline of the exchange value of the Euro in particular, we had
to make price concessions to remain competitive resulting in a 2.6% decrease in
revenues. However, due to strong fiscal controls as well as improvements in
productivity, we were able to remain profitable. We are one of very few medical
device companies that do not have FDA approval but still achieve profitability
from business overseas.
- --------------------------------------------------------------------------------
Mission Statement
The mission of ATS Medical is to continuously "Advance the Standard" of
cardiovascular products worldwide through a dedicated organization working
together to improve the quality of life for patients and our community
profitably.
PAGE 2 [LOGO]
<PAGE>
[PHOTO]
Manuel A. Villafana
[PHOTO]
Richard W. Kramp
For the past several years, we have faced the challenge of increasing component
costs due to the terms of our multi-year supply agreement with Sulzer
Carbomedics. At the same time the market price for mechanical heart valves has
been declining due to currency fluctuations and price-cutting by competitors.
Recognizing that pyrolytic carbon components, which make up the major part of
our valve, represented over 80% of the cost of our final product, we decided to
investigate the possibility of making our own pyrolytic carbon. That
investigation led us to modify our contracts with Carbomedics, in a manner which
allows us to reduce the purchases that we were previously required to make,
reduce our component costs, and secure all the technical know-how to make our
own pyrolytic carbon parts. Furthermore, a new agreement with Carbomedics allows
us to eventually become an OEM manufacturer of pyrolytic material for other
medical companies. We were able to structure this agreement in such a way that
the cost of the technology license ($41 million) would be paid over a period of
seven years. Further, Carbomedics agreed that it would not manufacture
components for the ATS valve for anyone (other than ATS) even after our patent
has expired. It will give us, once and for all, the much needed technology to be
a fully integrated, stand-alone company. We now feel that we are further on our
way to accomplishing one of the goals that we set in 1990, and that is, being
No. 1 in the heart valve industry.
We indicated in 1998 that 1999 would be a transitional year, it truly
was. We will continue the transition through 2000. We have been blessed with a
staff of competent, loyal employees who have enthusiastically pursued this goal.
As we get closer to U.S. approval, we will be meeting new challenges including
that of establishing a first class sales and marketing force in the United
States to complement the excellent distribution network that we have overseas.
We will be making significant investments to meet the costs of setting up this
sales force, to fund our obligations to Carbomedics, and to fund the
establishment of the new carbon manufacturing facility. By the time you read
this we should have closed on a $9.9 million private equity sale. While this
transaction will carry us through 2000, we may need to raise additional capital
to fund our plans for 2001 and beyond.
Again, we thank you for being patient with us. We all knew that to
"Advance the Standard" would be a difficult challenge as well as a worthy goal.
We thank you for your continued support and we ask that you join us in a most
exciting adventure as we go into the new millennium.
Respectfully submitted for the Board of Directors,
March 2000
/s/ Manuel A. Villafana
Manuel A. Villafana
CHAIRMAN/CEO
/s/ Richard W. Kramp
Richard W. Kramp
PRESIDENT/COO
PAGE 3 [LOGO]
<PAGE>
[PHOTO]
Rich Kramp, our president and chief operating officer, has
assumed full responsibility for this important project.
CARBON
The basic design from which the ATS heart valve evolved was developed by Sulzer
Carbomedics, Inc. Carbomedics is the largest and most experienced manufacturer
of the pyrolytic carbon components used in mechanical valves. Since 1990,
Carbomedics has been the sole source of the carbon components used in our valve
and the licensor of certain technology upon which our product is based. Since
1990, most of the major mechanical heart valve manufacturers have acquired or
established their own carbon manufacturing capability. Competition in the heart
valve market has intensified since 1990 leading to price cutting in some
markets. Manufacturers with control of their component costs are usually in a
better position to use price to gain market share, especially in lesser
developed countries where price is a critical factor.
Late in 1999, we restructured our contractual relationships with Carbomedics to
lower our cost of carbon components and to begin the technology transfer which
will enable us to manufacture those components ourselves.
First, our supply agreement with Carbomedics was revised. Under the 1990
contract we were obligated to buy certain minimum quantities of heart valve
components through the year 2000. We were also obligated to replace each unit we
sold during each year from 2001 through 2007. The price of components was set
under formulas from 1990, which escalated the price each year according to
changes in the U.S. Department of Labor, Employment Cost Index, but also allowed
for volume discounts. In the revised supply agreement, we agreed to declining
minimum quantities of valve components for 2001 through 2007. We feel these
minimums are well below the quantities we would have been required to buy under
the old agreement. We also reset the base price for these Carbomedics purchases
to a level approximately 20% lower than our 1999 cost. These prices will
escalate under the same formula tied to the U.S. Department of Labor, Employment
Cost Index.
Under the 1990 agreements, there was no plan for component supply after 2007.
Therefore in December 1999, we entered into a carbon technology agreement with
Carbomedics under which we obtained an exclusive, worldwide right and license to
use Carbomedics' pyrolytic carbon technology to manufacture components for the
ATS heart valve. We also received a non-exclusive worldwide right and license to
use the technology to produce pyrolytic carbon components for other devices and
manufacturers, including, after 2008, for other heart valve manufacturers. Under
the agreement Carbomedics has also agreed to assist us in designing, building,
equipping, qualifying and commencing operations in a pyrolytic carbon component
manufacturing facility in Minneapolis, Minnesota. In return, we have agreed to
pay Carbomedics a license fee totaling $41 million in eight installments over
seven years, subject to deferral if certain milestones are not satisfied. We are
obligated under the carbon technology agreement to pay all of the costs of
establishing the new carbon production facility, including hourly fees and
out-of-pocket expenses of the Carbomedics employees assigned to assist us in
setting up the facility.
We are currently in the process of locating a facility. Our preliminary plans
call for a 19,000 square foot building for facilities capable of producing
approximately 10,000 valve sets per year. The manufacturing operations will
include substrate machining and preparation, carbon coating, coated part
machining and final polishing and finishing activities. We expect to hire 7 to
10 technical and production personnel over the next 12 months. We anticipate
that the facility will not be operational until 2003. The key steps required to
complete the facility include:
o Outfitting the building
o Purchasing and installing manufacturing equipment
o Conducting pilot production, qualification and validation runs
o Demonstrating compliance with FDA and international good manufacturing
practices and quality system regulations; conducting human clinical
testing, if required; and
o Scaling up production.
Under the terms of the agreement with Carbomedics, we may also elect to have
Carbomedics train our personnel how to machine graphite and pyrolytic carbon
parts and teach us how to fabricate our own production tooling. We have not
determined whether we will develop these capabilities internally or contract
these steps out to third party vendors. We currently have in our inventory
enough carbon components to satisfy our projected requirements for pyrolytic
carbon components for over two years. In addition, we are obligated to continue
to buy some valve components from Carbomedics under the supply agreement through
2007.
This is an important strategic step for our Company. We look forward to sharing
its progress with you.
PAGE 4 [LOGO]
<PAGE>
ATS Medical, Inc.
Consolidated Financial Statements
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CONTENTS
Management's Discussion and Analysis of Financial
Condition and Results of Operations PAGE 6
Common Stock Information PAGE 10
Report of Independent Auditors PAGE 11
Consolidated Statements of Financial Position PAGE 12
Consolidated Statements of Income PAGE 13
Consolidated Statement of Changes in Shareholders' Equity PAGE 14
Consolidated Statements of Cash Flows PAGE 15
Notes to Consolidated Financial Statements PAGE 16
PAGE 5 [LOGO]
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
We manufacture and market a mechanical bileaflet heart valve with a unique pivot
design. Our heart valve is used to treat heart valve failure caused by the
natural aging process, rheumatic heart disease and congenital defects. We have
received regulatory approvals to market the ATS heart valve in several
international markets, principally Europe, Japan and Australia. On August 3,
1999, the FDA accepted for filing our PMA application to sell the ATS heart
valve in the United States. On February 3, 2000, the FDA sent us a letter
requesting additional information about our valve.
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. Sales to our European distributors represented approximately 60% of our
net sales in 1997, 1998 and 1999. Sales to our international distributors are
denominated in U.S. dollars so currency risk is borne by the distributor;
however, as the dollar increases in value against the distributor's local
currency, the cost of the valve increases for the distributor even though ATS
does not change the selling price. We expect that substantially all of our
revenue will be derived from sales to international distributors, unless we
receive FDA approval to market the ATS heart valve in the United States.
Assuming we receive FDA approval, we plan to sell the ATS heart valve in the
United States with a direct sales force.
We currently purchase all of the pyrolytic carbon components for the ATS heart
valve from Sulzer Carbomedics, Inc. pursuant to a multi-year supply agreement.
The cost of the pyrolytic carbon components represents approximately 80% of the
total cost of the ATS heart valve. Under the supply agreement, the cost of the
pyrolytic carbon components has varied according to annual volume purchases and
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. We are obligated to purchase pyrolytic carbon components from Carbomedics
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.
Results of Operations
YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998
Net sales for the year ended December 31, 1999 decreased 3% to $17,461,964
compared to $17,960,483 for the year ended December 31, 1998. Unit sales
increased 2% in 1999 compared to 1998. The decline in net sales was primarily
due to a decrease in the average selling price for the valve. The exchange rate
for most of the currencies in the countries where our customers are located
declined significantly from 1998 to 1999 which effectively increased the price
of our valve to our distributors. The average selling price for the valve
decreased 4% on a worldwide basis, and over 5% in Europe, from 1998 to 1999, due
to price concessions granted by us to our distributors. We felt these
concessions were necessary as our competitors lowered their prices and as the
Euro declined in value by nearly 15%. We do not have direct control over the
price the distributor charges the hospital or clinic. Given the current strength
of the U.S. dollar and the pricing strategies of our competitors we do not
expect to be able to raise prices in 2000.
The other significant component of the revenue decline for the year ended
December 31, 1999 compared to 1998 was a decline in sales in the United States.
Prior to January 1997, all sales of valves were to customers outside of the
United States. In 1997, we commenced a clinical study of the valve at seventeen
hospitals in the United States. During the study, valves were being provided to
the hospitals at prices designed to recover some of the costs of the clinical
study. As we reached the desired number of implants in our U.S. clinical study
of the valve, the rate of sales in the United States declined because surgeons
were not eager to voluntarily fill out the additional paperwork and perform the
additional tests required by the clinical protocol.
Cost of sales totaled $10,986,114 and $11,328,647 for 1999 and 1998,
respectively, or 63% of sales for each of those years. The price of the carbon
components contained in the valves sold in 1999 increased 3% as compared to the
price of carbon components contained in the valves sold in 1998. Based upon the
Company's internal sales projections, the price of the carbon contained in
valves sold in 2000 is expected to be 1% lower than in 1999. The Company uses
the first-in first-out ("FIFO")
PAGE 6 [LOGO]
<PAGE>
method of accounting for inventory. Approximately 71% of the valves sold in 1999
were made with carbon purchased in 1997 (under FIFO) and the remainder with
carbon purchased in 1996. The cost of carbon components, after giving effect to
volume discounts and inflationary adjustments, rose 3.3% in 1995 (the third
contract year), decreased 7% in 1996, rose 3% in 1997, decreased 4.5% in 1998
and rose 3.8% in 1999 (the seventh contract year). We expect to pay 6% less for
carbon components in 2000 than in 1999.
Gross profit totaled $6,475,850 or 37% of sales for year ended December 31,
1999, compared to gross profit of $6,631,836 for the year ended December 31,
1998 or 37% of sales.
Research, development and engineering expenses totaled $1,306,531 for the year
ended December 31, 1999 versus $1,484,989 for the year ended December 31, 1998.
The decrease in research, development and engineering expenses in 1999 was
primarily due to the winding down of our U.S. clinical study during that year.
Approximately 31% and 27% of our research and development expenses for 1999 and
1998, respectively, were for testing and outside consulting services related to
the valve.
We began human implants in the United States under an Investigational Device
Exemption ("IDE") in January 1997. We sold the valves to the hospitals involved
in the U.S. clinical study and the cost of the valve is eligible for
reimbursement by Medicare and most private pay insurance companies. We are
responsible for reimbursing the hospital for certain additional tests and
procedures required by the clinical protocol. The estimated total cost of
follow-up is accrued at the time of the sale as research and development
expense.
Selling, general and administrative expenses totaled $3,403,076 for the year
ended December 31, 1999, a decrease from the $3,591,551 reported for the year
ended December 31, 1998. We accrued a significantly smaller amount of money for
management bonuses in 1999 compared to 1998. Management bonuses are determined
by a formula that takes into account growth in sales and operating income. We
had 86 employees at December 31, 1999 compared to 78 employees at December 31,
1998.
Interest income totaled $927,552 for the year ended December 31, 1999 compared
to $1,355,647 for the year ended December 31, 1998. The decrease in interest
income in 1999 was primarily due to lower average cash balances caused by using
cash to meet our obligations under the Carbomedics supply agreement.
Net income totaled $2,637,911 for the year ended December 31, 1999 compared to
$2,838,943 for the year ended December 31, 1998. The $428,095 decrease in
interest income in 1999 as compared to 1998 was the primary factor in the
decrease in net income.
We have accumulated net operating loss carryforwards for U.S. tax purposes.
Section 382 of the Internal Revenue Code of 1986, as amended, provides, in part,
that if an "ownership change" occurs with respect to any corporation with net
operating loss carryforwards, such as our Company, the net operating loss
carryforwards can be used to offset future income only to the extent of the
annual "Section 382 limitation." An ownership change generally occurs if there
has been more than a 50 percent change in the stock ownership of a corporation
over a three-year period. The Section 382 limitation is an amount determined by
multiplying the value of the corporation's stock on the date of an ownership
change by the federal long-term tax-exempt rate in effect for the month of the
ownership change. As a result of Section 382, utilization of all or a portion of
a corporation's net operating loss carryforwards may be limited. We believe that
as a result of our registered direct equity offering in early 1995 and the sale
of 1,568,940 shares of common stock in 1997, we experienced an ownership change,
and our ability to fully utilize $15 million of our existing net operating loss
carryforwards will be restricted to approximately $3 million per year. Due to
the application of the annual Section 382 limitation and the other provisions of
Section 382, some of our net operating loss carryforwards may expire before we
can use them to reduce our federal income tax liabilities.
Income taxes for years ended December 31, 1999 and 1998 are mostly due to
alternative minimum tax on earnings. The alternative minimum tax can be used as
a credit against future regular tax liabilities, however, we have provided 100%
valuation allowances against this credit and all of its other tax attributes. We
will recognize the benefit of our tax attributes when it is more likely than not
that these benefits will be realized.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997
Net sales for the year ended December 31, 1998 increased 24% to $17,960,483
compared to $14,515,915 for the year ended December 31, 1997. Unit sales
increased 22% in 1998 compared to 1997 which was more than four times the rate
of unit growth in the overall heart valve market. The two largest revenue
increases in 1998 over 1997 were in France and Japan. Combined, these two
markets represented 59% of the
PAGE 7 [LOGO]
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(CONTINUED)
total revenue increase. For 1998 the sales growth over the corresponding period
was achieved in spite of significant price competition from other valve
manufacturers and the increased strength of the U.S. dollar relative to almost
all foreign currencies. During 1998 and 1997 we were selling valves in most
developed countries and several lesser developed countries, or LDCs, so sales
growth came primarily from increased usage in existing markets. In 1996 and each
of the previous years, a portion of the sales increase came from opening new
markets as well as increased usage within existing markets. The average selling
price of the valve increased 3% from 1997 to 1998.
Cost of sales for 1998 totaled $11,328,647, or 63% of sales, compared to
$9,428,959 or 65% of sales for 1997. The price of the carbon components
contained in the valves sold in 1998 decreased 4% as compared to the cost of
carbon components contained in the valves sold in 1997. Based upon our internal
sales projections, the price of the carbon contained in valves sold in 1999 is
expected to be 3% higher than in 1998.
Gross profit totaled $6,631,836 for the year ended December 31, 1998, or 37% of
sales, compared to gross profit of $5,086,956, or 35% of sales, for year ended
December 31, 1997. The increase in average selling price accounted for most of
the gross profit increase. This improvement, along with the 4% decrease in
carbon component prices and operating efficiencies accounts for the gross profit
increase.
Research, development and engineering expenses totaled $1,484,989 for the year
ended December 31, 1998 versus $1,058,318 for the year ended December 31, 1997.
The majority of the increase is related to the costs associated with our U.S.
clinical study. Approximately 27% and 42% of research and development expenses
for the years ended December 31, 1998 and 1997, respectively, were for testing
and outside consulting services related to the valve. During the year ended
December 31, 1997 a significant component of the development expense was for
work on our aortic valved graft. The aortic valved graft is a standard
replacement aortic heart valve sutured at the end of a collagen-impregnated
dacron tube. This product extension is used in surgeries where the patient's
aorta and aortic valve are damaged or degenerated. Most other valve
manufacturers provide a similar product. This development project was completed
in 1997 and there was not a similar project expense in 1998.
Selling, general and administrative expenses totaled $3,591,551 for the year
ended December 31, 1998, an increase from the $3,339,488 reported for the year
ended December 31, 1997. The year ended December 31, 1997 included $225,000
related to the shutdown of our subsidiary in Glasgow, Scotland. Separation pay
totalling $153,921 and the loss on the disposal of fixtures and equipment were
the major portion of this expense. The increase in selling, general and
administrative expenses for the year ended December 31, 1998 compared to 1997 is
in part because salaries and benefits increased 14% in 1998. We had 78 employees
at December 31, 1998 compared to 65 employees at December 31, 1997.
Interest income totaled $1,355,647 for the year ended December 31, 1998 compared
to $1,427,363 for the year ended December 31, 1997. The decrease in interest
income in 1998 was the result of lower average investable cash balances during
1998 and lower interest rates. Cash on hand at December 31, 1998 was less than
the amount on hand at December 31, 1997.
Income taxes for years ended December 31, 1998 and 1997 are mostly due to
alternative minimum tax on earnings. The alternative minimum tax can be used as
a credit against future regular tax liabilities, however, we have provided 100%
valuation allowances against this credit and all of its other tax attributes.
Net income totaled $2,838,943 for the year ended December 31, 1998 compared to
$2,102,667 for the year ended December 31, 1997. The $866,146 increase in
operating income in 1998 as compared to 1997 was the primary factor in the
increase in net income.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities decreased by $10,916,959 from
$20,606,962 at December 31, 1998 to $9,690,003 at December 31, 1999. Inventory
purchases and the $5 million first payment under our new carbon agreement with
Carbomedics, caused us to have negative cash flow from operations.
During 1999 we purchased $15.3 million of heart valve components in accordance
with the terms of our long-term supply agreement with Carbomedics. During 2000
we are obligated to purchase approximately $16.5 million of carbon components
under the supply agreement. The minimum purchases under the supply agreement are
not tied to sales of our valve and we do not expect sales of the valve to exceed
the minimum purchase requirements under the supply agreement unless the valve is
approved for sale in the United States.
PAGE 8 [LOGO]
<PAGE>
In December 1999, we renegotiated our 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 2007. We
estimate that our minimum purchase requirements under the supply agreement from
2001 through 2007 will total approximately $39 million. Under the new carbon
agreement entered into in December 1999, we have agreed to pay Carbomedics a
license fee of $41 million in installments over the next seven years. In
addition to granting us an exclusive worldwide right and license to use its
carbon coating technology to manufacture pyrolytic carbon components for the
valve under this agreement, Carbomedics has agreed to assist us in designing,
building and commencing operations in our own pyrolytic carbon production
facility in Minneapolis, Minnesota.
Accounts receivable increased from $5,820,699 at December 31, 1998 to $6,159,624
at December 31, 1999. Most of our sales have been to customers in international
markets. We have standard 60 day terms for receivables, however, competitive
pressures and local economic situations have caused us to selectively extend the
terms for payment. At December 31, 1999, the account balance for our five
largest European distributors totaled 69% of outstanding receivables. We have
done business with these customers since 1992 and the size of the receivables,
while substantial, is consistent with the growth of business in these markets
and in line with the size of these customers' overall business.
Current liabilities decreased from $2,611,801 at December 31, 1998 to $2,275,087
at December 31, 1999. The decrease reflects primarily a decrease in accounts
payable related to the amount owing to Carbomedics under the supply agreement.
Based upon our current rate of sales, our 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, we anticipate that we will need substantial
additional capital during 2000. Depending on the amount of capital raised in
2000, the timing of FDA approval for sales of our valve in the United States and
the rate of increase in worldwide valve sales, we may need to raise additional
capital in the future.
On March 22, 2000, the Company accepted a subscription agreement for the private
sale of 1,100,000 shares of our common stock. The stock is priced at $9.00 per
share and after expenses we expect to realize $9.75 million. This transaction is
expected to close in April 2000. This capital should be sufficient to meet our
needs through March 2001. We will need additional capital after that date. We
cannot be certain that additional capital will be available or that, if
available, it will be on terms favorable to the Company.
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 are required to
finance future operations with debt we would have exposure to increases in
interest rates on borrowings. Assuming that we did use borrowing to meet our
cash needs during 2000, and that interest rates increased by 10%, we estimate
that we could incur an additional $25,000 in interest expense.
THE SINGLE EUROPEAN CURRENCY
A significant portion of our sales occurs in Europe. Effective January 1, 1999
various European countries began utilizing a single currency, the "Euro." From
January 1999 through December 2001, merchants will be encouraged to discontinue
using local country currencies and begin using the Euro to transact business.
Beginning in 2002, it will be required that business in the European community
be conducted using the Euro. We sell to all of our customers in U.S. dollars and
do not expect to have accounting system issues relative to currency translation.
Our selling prices are similar to most of our European distributors and
therefore should not cause significant disruption whether in 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 15%. Several of the our European
distributors were unable to increase their local currency selling price for the
valve. These distributors complained to us that their profits were being
squeezed. Our European revenue declined 5% in 1999 compared to 1998. We did
offer volume price discounts to some distributors who met or exceeded quota. The
decline in the Euro offset the potential positive effect of these discounts, and
units sold in Europe only increased 1.4% in 1999 compared to 1998. Europe is a
very important market for us. Disruption or loss of a portion of our 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 Medical, Inc.
desires to take advantage of the safe harbor provisions with respect to any
forward-looking statements it may make
PAGE 9 [LOGO]
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(CONTINUED)
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, the
risk of product returns in connection with distributor terminations, the actions
of the Company's supplier of pyrolytic carbon components for the valve and
difficulties we may encounter in establishing and operating our own pyrolytic
carbon manufacturing capability. 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.
Common Stock Information
The Company's common stock (the "Common Stock") is traded on the Nasdaq National
Market(R) under the symbol "ATSI." The following table sets forth the high and
low sale prices since January 1, 1998. Prices represent transactions between
dealers and do not reflect retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
1999 High Low 1998 High Low
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <S> <C> <C>
First Quarter $ 8.87 $6.50 First Quarter $8.18 $4.75
Second Quarter 8.13 6.00 Second Quarter 8.37 6.37
Third Quarter 11.38 7.69 Third Quarter 8.00 5.00
Fourth Quarter 14.94 8.88 Fourth Quarter 7.69 4.31
</TABLE>
As of December 31, 1999 there were 509 record holders of the Common Stock. The
Company has not paid cash dividends and has no present intentions of paying cash
dividends on its Common Stock.
MARKET MAKERS
During 1999, the following securities firms were the most significant market
makers of the Company's Common Stock:
Piper Jaffray Companies Inc. Knight Securities L.P.
A.G. Edwards & Sons, Inc. Mayer & Schweitzer Inc.
Raymond James & Associates Herzog, Heine, Geduld, Inc.
PaineWebber, Inc. John G. Kinnard & Co., Inc.
Spear, Leeds & Kellogg
[LOGO]
ATSI
------
NASDAQ
LISTED
PAGE 10 [LOGO]
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
ATS Medical, Inc.
We have audited the accompanying consolidated statements of financial position
of ATS Medical, Inc. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ATS Medical, Inc.
and subsidiary at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
March 23, 2000
PAGE 11 [LOGO]
<PAGE>
ATS Medical, Inc.
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,030,641 $ 7,754,077
Short-term investments 5,659,362 12,852,885
------------------------------
9,690,003 20,606,962
Accounts receivable, less allowance of $205,000
in 1999 and $185,000 in 1998 6,159,624 5,820,699
Inventories 38,634,589 29,954,718
Prepaid expenses 427,834 458,663
------------------------------
Total current assets 54,912,050 56,841,042
Furniture and equipment, net 801,443 1,202,784
Technology license 5,000,000 --
Other assets 403,192 387,550
------------------------------
Total assets $61,116,685 $58,431,376
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,022,302 $ 2,355,443
Accrued payroll and expenses 252,785 256,358
------------------------------
Total current liabilities 2,275,087 2,611,801
Shareholders' equity:
Common Stock, $.01 par value:
Authorized shares--40,000,000
Issued and outstanding shares--17,909,010 in 1999
and 17,824,137 in 1998 179,090 178,241
Additional paid-in capital 71,633,414 71,249,846
Accumulated other comprehensive income 43,494 43,799
Accumulated deficit (13,014,400) (15,652,311)
------------------------------
Total shareholders' equity 58,841,598 55,819,575
------------------------------
Total liabilities and shareholders' equity $61,116,685 $58,431,376
==============================
</TABLE>
SEE ACCOMPANYING NOTES.
PAGE 12 [LOGO]
<PAGE>
ATS Medical, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $17,461,964 $17,960,483 $14,515,915
Cost of goods sold 10,986,114 11,328,647 9,428,959
----------------------------------------------------
Gross profit 6,475,850 6,631,836 5,086,956
Expenses:
Research, development and engineering 1,306,531 1,484,989 1,058,318
Selling, general and administrative 3,403,076 3,591,551 3,339,488
----------------------------------------------------
4,709,607 5,076,540 4,397,806
----------------------------------------------------
Operating income 1,766,243 1,555,296 689,150
Interest income 927,552 1,355,647 1,427,363
----------------------------------------------------
Income before income taxes 2,693,795 2,910,943 2,116,513
Income tax expense 55,884 72,000 13,846
----------------------------------------------------
Net income $ 2,637,911 $ 2,838,943 $ 2,102,667
====================================================
Net income per share:
Basic $ .15 $ .16 $ .12
Diluted $ .14 $ .16 $ .12
Weighted average number of shares outstanding:
Basic 17,858,310 17,737,887 17,284,784
Diluted 18,370,964 18,130,540 17,872,989
----------
</TABLE>
SEE ACCOMPANYING NOTES.
PAGE 13 [LOGO]
<PAGE>
ATS Medical, Inc.
Consolidated Statement of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
-------------------- Paid-In Comprehensive Accumulated
Shares Amount Capital Income Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 15,288,042 $152,880 $52,313,315 $54,465 $(20,593,921) $31,926,739
Common stock issued in a private placement,
net of selling expenses of $27,627 1,568,940 15,690 14,706,682 -- -- 14,722,372
Stock options exercised 26,327 263 41,451 -- -- 41,714
Stock warrants exercised 705,749 7,058 4,736,348 -- -- 4,743,406
Change in unrealized loss on short-term investments,
net of tax -- -- -- (5,591) -- (5,591)
Change in foreign currency translation -- -- -- (8,568) -- (8,568)
Net income for the year -- -- -- -- 2,102,667 2,102,667
---------
Comprehensive income 2,088,508
--------------------------------------------------------------------------
Balance at December 31, 1997 17,589,058 175,891 71,797,796 40,306 (18,491,254) 53,522,739
Common stock issued under the
Employee Stock Purchase Plan 7,934 79 42,020 -- -- 42,099
Stock options exercised 227,145 2,271 (589,970) -- -- (587,699)
Change in foreign currency translation -- -- -- 3,493 -- 3,493
Net income for the year -- -- -- -- 2,838,943 2,838,943
---------
Comprehensive income 2,842,436
--------------------------------------------------------------------------
Balance at December 31, 1998 17,824,137 178,241 71,249,846 43,799 (15,652,311) 55,819,575
Common stock issued under the
Employee Stock Purchase Plan 17,792 178 108,960 -- -- 109,138
Stock options exercised 67,081 671 274,608 -- -- 275,279
Change in foreign currency translation -- -- -- (305) -- (305)
Net income for the year -- -- -- -- 2,637,911 2,637,911
---------
Comprehensive income 2,637,606
--------------------------------------------------------------------------
Balance at December 31, 1999 17,909,010 $179,090 $71,633,414 $43,494 $(13,014,400) $58,841,598
==========================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
PAGE 14 [LOGO]
<PAGE>
ATS Medical, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,637,911 $ 2,838,943 $ 2,102,667
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 290,070 267,187 246,140
Loss on disposal of equipment 209,872 1,965 50,985
Changes in operating assets and liabilities:
Accounts receivable (338,925) (1,373,865) (1,307,275)
Prepaid expenses 30,829 96,907 (87,322)
Other assets (5,015,642) (16,891) 17,574
Inventories (8,679,871) (7,268,445) (4,444,207)
Accounts payable and accrued expenses (227,607) 1,748,509 (530,269)
-----------------------------------------------------
Net cash used in operating activities (11,093,363) (3,705,690) (3,951,707)
INVESTING ACTIVITIES
Purchases of short-term investments (11,398,525) (20,103,048) (29,435,865)
Maturities of short-term investments 18,592,048 28,232,339 16,315,717
Purchases of furniture and equipment (207,708) (695,749) (178,748)
-----------------------------------------------------
Net cash (used in) provided by investing activities 6,985,815 7,433,542 (13,298,896)
FINANCING ACTIVITIES
Net proceeds (payments) from issuance (redemption) of common stock 384,417 (545,600) 19,507,493
-----------------------------------------------------
Net cash provided by (used in) financing activities 384,417 (545,600) 19,507,493
Effect of exchange rate changes on cash (305) 3,493 (8,568)
-----------------------------------------------------
Increase (decrease) in cash and cash equivalents (3,723,436) 3,185,745 2,248,322
Cash and cash equivalents at beginning of year 7,754,077 4,568,332 2,320,010
-----------------------------------------------------
Cash and cash equivalents at end of year $ 4,030,641 $ 7,754,077 $ 4,568,332
=====================================================
</TABLE>
SEE ACCOMPANYING NOTES.
PAGE 15 [LOGO]
<PAGE>
ATS Medical, Inc.
Notes to Consolidated Financial Statements
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
ATS Medical, Inc. (the "Company") manufactures and sells a bileaflet mechanical
heart valve. The principal markets for the Company's mechanical heart valve
include Europe, Asia, Australia, South Africa and South America. The Company is
sponsoring clinical trials of the valve in Canada and the United States in order
to demonstrate safety and effectiveness and to be allowed to market the valve in
these countries.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, ATS Medical, Ltd., after elimination of significant
intercompany accounts and transactions.
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Cash equivalents
are carried at cost which approximates market value.
SHORT-TERM INVESTMENTS
Short-term investments are composed of debt securities and are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a part of
comprehensive income in shareholders' equity. Realized gains and losses and
declines in value judged to be other than temporary on available-for-sale
securities are included in other income.
INVENTORIES
Inventories are carried at the lower of cost (first-in, first-out basis) or
market. The majority of the inventories consists of purchased components. The
Company has recorded a valuation reserve against inventories of $200,000 as of
December 31, 1999 and 1998.
OTHER ASSETS
Prior to obtaining directors' and officers' liability insurance, the Company had
placed monies into a self-insurance trust to provide coverage for potential
issues. At December 31, 1999 and 1998, the deposits within the trust amounted to
$403,192 and $387,550, respectively.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets as follows:
Furniture and fixtures 7 years
Equipment 5 to 7 years
Leasehold improvements are amortized over the related lease term or estimated
useful life, whichever is shorter (approximately 3 years).
TECHNOLOGY LICENSE
The Company has a commitment to purchase an exclusive, worldwide right and
license to use Sulzer Carbomedics, Inc. ("Carbomedics") pyrolytic carbon
technology (see Note 9 - Commitments). As the specific criteria are met that
obligate the Company to make payments under the commitment, the payment amount
will be capitalized as part of the technology license with amortization
commencing upon the Company's utilization of the technology in their own
manufacturing facility.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment and invoicing of the
product.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred income taxes
are provided for temporary differences between financial reporting and tax bases
of assets and liabilities.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
NET INCOME PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average shares outstanding and excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share gives effect to
all dilutive potential common shares outstanding during the year.
PAGE 16 [LOGO]
<PAGE>
2. SHORT-TERM INVESTMENTS
As of December 31, 1999 and 1998, the cost of short-term investments held by the
Company, which have maturity dates of one year or less, approximated their fair
market value of $5,659,362 and $12,852,885, respectively. As a result no
unrealized gains or losses were recognized at December 31, 1999 and 1998.
3. FURNITURE AND EQUIPMENT, NET
Furniture and equipment consists of the following:
DECEMBER 31
1999 1998
---------------------------
Furniture and fixtures $ 190,325 $ 181,947
Equipment 1,639,836 1,506,627
Leasehold improvements 593,819 588,830
Construction in progress 54,307 318,907
---------------------------
2,478,287 2,596,311
Less accumulated depreciation 1,676,844 1,393,527
---------------------------
$ 801,443 $1,202,784
===========================
In fiscal 1999, the Company took delivery on customized measuring equipment. The
equipment was expected to improve processing time needed to inspect the
Company's products. Vendor personnel installed the machine and attempted to
correct operating deficiencies of the equipment and related software. Unable to
get the equipment to perform up to specification, the Company disposed of the
equipment and recognized an expense of $186,000 associated with the write-off of
the equipment.
4. FINANCING ARRANGEMENT
The Company has a $5 million revolving line of credit with a bank which accrues
interest at a rate .5% below the bank's reference rate (8.0% at December 31,
1999) and is secured by a portion of the Company's short-term investments. The
Company must repay any amounts owed under the line of credit by June 30, 2000.
Interest on the line of credit is payable monthly. The Company had no borrowing
against this facility at December 31, 1999.
5. EMPLOYEE STOCK PURCHASE PLAN
In May 1998, the Company implemented the 1998 ATS Medical, Inc. 423 Employee
Stock Purchase Plan. Under the terms of the plan, employees are eligible to
purchase common stock of the Company on a quarterly basis. Employees can
purchase common stock at 85% of the lesser of the market price of the common
stock on the first day of the quarter or the last day of the quarter. During
1999 and 1998, shares of common stock totaling 17,792 and 7,934 were purchased
under the plan at prices ranging from $4.78 to $7.86 and $4.68 to $5.95 per
share, respectively.
6. STOCK OPTIONS
The Company has a Stock Option and Stock Award Plan (the "Plan") under which
options to purchase Common Stock of the Company may be awarded to employees and
non-employees of the Company. The options may be granted under the Plan as
incentive stock options (ISO) or as non-qualified stock options (non-ISO).
The following table summarizes the options to purchase shares of the Company's
Common Stock under the Plan:
<TABLE>
<CAPTION>
Stock Options
Outstanding
Shares Under the Plan Weighted Average
Reserved ------------------------- Exercise Price
for Grant ISO Non-ISO Per Share
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance December 31, 1996 113,129 654,670 650,375 $4.37
Additional shares reserved 1,000,000 -- -- --
Options granted (374,600) 284,928 89,672 5.51
Options exercised -- (7,500) (18,827) 1.59
Options canceled 151,250 (123,125) (28,125) 9.15
-------------------------------------------------------------------
Balance December 31, 1997 889,779 808,973 693,095 4.23
Options granted (47,500) 25,000 22,500 6.45
Options exercised -- (90,271) (271,173) .95
Options canceled 43,100 (18,100) (25,000) 6.86
-------------------------------------------------------------------
Balance December 31, 1998 885,379 725,602 419,422 5.27
Options granted (333,000) 155,218 177,782 7.75
Options exercised -- (57,638) (10,000) 4.15
Options canceled 14,300 (14,300) -- 6.39
-------------------------------------------------------------------
Balance December 31, 1999 566,679 808,882 587,204 $5.90
===================================================================
</TABLE>
PAGE 17 [LOGO]
<PAGE>
ATS Medical, Inc.
Notes to Consolidated Financial Statements
DECEMBER 31, 1999
(CONTINUED)
The following table summarizes information about stock options outstanding
including non-plan options to purchase 25,000 shares at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00 - $ 3.63 465,607 2.91 years $3.31 465,607 $3.31
5.06 - 8.25 742,979 7.60 years 6.40 355,629 6.44
9.00 - 10.13 212,500 8.26 years 9.56 194,125 9.54
--------- ---------
$1.00 - $10.13 1,421,086 6.16 years $5.86 1,015,361 $5.60
========= =========
</TABLE>
The weighted average fair value of options granted during the
years ended December 31, 1999, 1998 and 1997 was $7.75, $6.45 and $5.51,
respectively.
Non-Plan options to purchase 25,000 shares exercisable at $3.63 per share were
outstanding at December 31, 1999 and 1998.
At December 31, 1999, 1998 and 1997, Plan and non-Plan options for 1,015,361,
804,274 and 984,218 shares of common stock, respectively, were exercisable at a
weighted average price of $5.60, $4.67 and $3.06 per share, respectively.
Options can be exercised by tendering shares previously acquired.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for 1999, 1998 and 1997: risk-free interest rate of 5.30%, 4.65% and
5.20%, respectively; dividend yield of 0%; volatility factor of the expected
market price of the Company's common stock of .73, .79 and .80 and a weighted
average expected life of the option of 7, 6 and 5 years, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
1999 1998 1997
- -----------------------------------------------------------------------
Pro forma net income $888,867 $2,053,588 $1,634,401
Pro forma net income per share:
Basic $ .05 $ .12 $ .09
Diluted $ .05 $ .11 $ .09
--------
The pro forma effect on net income is not representative of the pro forma effect
on net income in future years because it does not take into consideration pro
forma compensation expense related to grants made prior to 1995.
The Company has 1,962,765 shares of Common Stock reserved for issuance under
various option plans.
PAGE 18 [LOGO]
<PAGE>
7. LEASES
The Company has an operating lease for its facilities in Plymouth, Minnesota.
The lease has a remaining life of 38 months and expires February 28, 2003.
Future minimum lease payments under the agreement are as follows:
2000 $227,799
2001 245,453
2002 248,553
2003 41,425
--------
$763,230
========
The rent expense was $206,717, $198,408 and $159,096 for 1999, 1998 and 1997,
respectively.
8. INCOME TAXES
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $12,329,000 plus credits for increasing research and development
costs of approximately $616,000 and a credit of approximately $89,000 from
alternative minimum tax, which are available to offset future taxable income or
reduce taxes payable through 2012. The Company paid income taxes of $55,884,
$72,000 and $13,846 in 1999, 1998 and 1997, respectively.
Components of deferred tax assets and liabilities are as follows:
DECEMBER 31
1999 1998
- ---------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $4,932,000 $6,008,000
Research and development credits 616,000 616,000
AMT credit 89,000 69,000
Accrued compensation 229,000 237,000
Other accrued expenses 206,000 61,000
----------------------
6,072,000 6,991,000
Deferred tax liabilities:
Depreciation (501,000) (557,000)
----------------------
Net deferred tax assets before
valuation allowance 5,571,000 6,434,000
Less valuation allowance (5,571,000) (6,434,000)
----------------------
Net deferred tax assets $ -- $ --
======================
The Company's ability to utilize its net operating loss carryforwards to offset
future taxable income is subject to certain limitations under Section 382 of the
Internal Revenue Code due to changes in the equity ownership of the Company.
Income tax expense consists of:
1999 1998 1997
- ---------------------------------------------------------------
Current:
Federal $47,884 $52,000 $ 3,846
State 8,000 20,000 10,000
------------------------------
$55,884 $72,000 $13,846
==============================
Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
1999 1998 1997
- ---------------------------------------------------------------
Tax at statutory rate 34.0% 34.0% 34.0%
State income taxes 6.0 6.0 6.0
Impact of net operating loss
carryforwards (39.0) (39.0) (39.0)
-----------------------------
1.0% 1.0% 1.0%
=============================
9. COMMITMENTS
In 1990, the Company entered into various agreements with Carbomedics giving the
Company the exclusive worldwide license to sell a bileaflet mechanical heart
valve under patents held by Carbomedics. As part of the agreements, the Company
entered into a 15-year supply contract that was amended several times.
In December 1999, the Company and Carbomedics entered into an agreement which
entitles the Company to an exclusive, worldwide right and license to use
Carbomedics' pyrolytic carbon technology to manufacture components for the
Company's mechanical heart valve. This agreement further provides that
Carbomedics will assist the Company in various aspects to enable the Company's
completion of a manufacturing facility in Minneapolis, Minnesota to produce its
own pyrolytic carbon components. The purchase price for the technology license
totals $41 million payable in eight installments contingent upon the attainment
of specified milestones. The first installment of $5 million was paid in
December 1999 and has been included in the statement of financial position at
December 31, 1999.
The Company also amended the various other agreements with Carbomedics including
changes to the supply agreement, which requires the Company to purchase
approximately $17 million of components in 2000 and specified minimums of
components for the years 2001-2007, which will approximate $40 million. Payments
to Carbomedics were $15,301,784, $14,454,642 and $12,478,323 in 1999, 1998 and
1997, respectively. The amounts payable to Carbomedics were $1,266,452 and
$826,383 at December 31, 1999 and 1998, respectively.
At December 31, 1999, the Company's inventory is in excess of its current
requirements based on the recent level of sales. Management believes that excess
quantities will be utilized upon United States Food and Drug Administration
("FDA") approval of its technology and believes no loss will be incurred on its
disposition. As of December 31, 1999, management cannot estimate a range of
amounts of loss that could occur if FDA approval is not granted. Management is
unable to make a meaningful estimate of inventory usage for the next twelve
months and, accordingly, inventory is classified as a current asset as of
December 31, 1999.
PAGE 19 [LOGO]
<PAGE>
ATS Medical, Inc.
Notes to Consolidated Financial Statements
DECEMBER 31, 1999
(CONTINUED)
10. BENEFIT PLAN
The Company has a defined contribution salary deferral plan covering
substantially all employees under Section 401(k) of the Internal Revenue Code.
The plan allows eligible employees to contribute up to 12% of their annual
compensation with the Company contributing an amount equal to 25% of each
employee's contribution. The Company recognized expense for contributions to the
plan of $51,302, $47,946 and $40,920 during 1999, 1998 and 1997, respectively.
11. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company operates in one segment, the sale of a bileaflet mechanical heart
valve. As a result, the information disclosed herein materially represents all
of the financial information related to the Company's principal operating
segment. The Company derived the following percentages of its net sales from its
distributors in the following geographic markets where net sales exceeded 10% of
the consolidated total:
YEAR ENDED DECEMBER 31
1999 1998 1997
- ---------------------------------------------------------------
Japan 18.6% 19.2% 17.2%
France 14.7 16.0 11.2
Germany 16.2 15.1 16.7
----
The Company had a balance owing by one distributor which represented 19% and 26%
of its outstanding accounts receivable at December 31, 1999 and 1998,
respectively.
12. SUBSEQUENT EVENT
On March 22, 2000, the Company accepted a subscription agreement for the private
sale of 1,100,000 shares of ATS Medical, Inc. common stock. The stock is priced
at $9.00 per share and after expenses the Company expects to realize $9.75
million. The transaction is expected to close April 2000. This capital should be
sufficient to meet the Company's needs through March 2001. The Company will need
additional capital after that date. There is no guarantee that additional
capital will be available or that, if available, it will be on terms favorable
to the Company.
13. NET INCOME PER SHARE
The following table sets forth the reconciliation of the denominator for the
calculation of basic and diluted net income per share:
1999 1998 1997
- --------------------------------------------------------------------------------
Denominator for basic net income
per share-weighted-average shares 17,858,310 17,737,887 17,284,784
Effect of dilutive securities:
Stock options 512,654 392,653 585,908
Warrants -- -- 2,297
----------------------------------------
Denominator for diluted net income
per share-adjusted
weighted-average shares 18,370,964 18,130,540 17,872,989
========================================
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly data for 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Quarter
First Second Third Fourth
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Net sales $4,190,296 $4,721,854 $4,258,127 $4,291,687
Gross profit 1,643,384 1,783,887 1,618,877 1,429,702
Net income 688,012 779,518 655,716 514,665
Earnings per share:
Basic $ .04 $ .04 $ .04 $ .03
Diluted $ .04 $ .04 $ .04 $ .03
Year ended December 31, 1998
Net sales $4,248,720 $4,565,601 $4,138,721 $5,007,441
Gross profit 1,608,745 1,750,626 1,545,562 1,726,903
Net income 694,617 799,558 707,239 637,529
Earnings per share:
Basic $ .04 $ .04 $ .04 $ .04
Diluted $ .04 $ .04 $ .04 $ .04
</TABLE>
PAGE 20 [LOGO]
<PAGE>
Investor Information
ANNUAL MEETING
The annual meeting of the Shareholders will be held at 3:30 p.m. Thursday, May
4, 2000 at the Minneapolis Club, 729 Second Avenue South, Minneapolis,
Minnesota.
INDEPENDENT AUDITORS
Ernst & Young LLP
Minneapolis, Minnesota
LEGAL COUNSEL
Dorsey & Whitney LLP
Minneapolis, Minnesota
PATENT COUNSEL
Haugen Law Firm PLLP
Minneapolis, Minnesota
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A.
161 N. Concord Exchange
South St. Paul, Minnesota 55075
FORM 10-K
A copy of the Company's annual report to the Securities and Exchange Commission
will be provided without charge to any shareholder upon written request to the
Corporate Secretary at the corporate headquarters.
ATS MEDICAL, INC.
3905 Annapolis Lane
Minneapolis, Minnesota 55447 USA
Phone (763) 553-7736 FAX (763) 553-1492
BOARD OF DIRECTORS
Manuel A. Villafana
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ATS MEDICAL, INC.
Richard W. Kramp
PRESIDENT AND CHIEF OPERATING OFFICER
ATS MEDICAL, INC.
Charles F. Cuddihy
RETIRED, FORMER EXECUTIVE VICE PRESIDENT
MEDTRONIC, INC.
David L. Boehnen
EXECUTIVE VICE PRESIDENT
SUPERVALU, INC.
A. Jay Graf
GROUP CHAIRMAN
GUIDANT CORPORATION
OFFICERS
Manuel A. Villafana
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Richard W. Kramp
PRESIDENT AND CHIEF OPERATING OFFICER
Russell W. Felkey
EXECUTIVE VICE PRESIDENT OF REGULATORY AFFAIRS
John H. Jungbauer
VICE PRESIDENT OF FINANCE AND CHIEF FINANCIAL OFFICER
Frank R. Santiago
VICE PRESIDENT OF SALES AND MARKETING
ATS Medical(TM) and ATS Open Pivot(TM) are Trademarks of ATS Medical, Inc.
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of ATS Medical, Inc. of our report dated March 23, 2000, included in the 1999
Annual Report to Shareholders of ATS Medical, Inc.
Our audit also included the financial statement schedule of ATS Medical, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We consent to the incorporation by reference in the Registration Statements on
Form S-8 No. 333-49985 pertaining to the 1998 Employee Stock Purchase Plan, Form
S-3 No.333-33017 pertaining to the registration of 1,568,940 shares of ATS
Medical, Inc. common stock, Form S-8 Nos. 33-44940 and 333-49985 pertaining to
the 1987 Stock Option and Stock Award Plan of ATS Medical, Inc. (formerly Helix
BioCore, Inc.), Form S-3 No. 33-60104 pertaining to the registration of
3,710,676 shares of ATS Medical, Inc. common stock, and Post-Effective Amendment
No. 1 to Form S-3 No. 33-89070 pertaining to the registration of 900,000 shares
of ATS Medical, Inc. common stock, of our report dated March 23, 2000, with
respect to the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in the Annual Report (Form 10-K) of
ATS Medical, Inc.
Ernst & Young LLP
Minneapolis, Minnesota
March 27, 2000
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose
signature appears below hereby constitutes and appoints Manuel A. Villafana and
John H. Jungbauer, and each of them, his attorney-in-fact, with full power of
substitution, for the purpose of signing on his behalf, in any and all
capacities, the Annual Report on Form 10-K of ATS Medical, Inc. pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended, for the
fiscal year ended December 31, 1999 (the "10-K Report") and of signing any and
all amendments to the 10-K Report and to deliver the 10-K Report and any and all
amendments thereto as each thereof is so signed for filing with the Securities
and Exchange Commission.
/s/ Manual A. Villafana Dated: February 11, 2000
- ------------------------
Manual A. Villafana
/s/ Richard W. Kramp Dated: February 11, 2000
- --------------------
Richard W. Kramp
/s/ John H. Jungbauer Dated: February 11, 2000
- ---------------------
John H. Jungbauer
/s/ Charles F. Cuddihy, Jr. Dated: February 11, 2000
- ---------------------------
Charles F. Cuddihy, Jr.
/s/ David L. Boehnen Dated: February 11, 2000
- --------------------
David L. Boehnen
/s/ A. Jay Graf Dated: February 11, 2000
- ---------------
A. Jay Graf
Exhibit 99
Cautionary Statements
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 mechanical heart valve in international
markets
* The acceptance by the U.S. FDA of regulatory submissions
* The continued performance of the mechanical heart valve without
structural failure
* The actions of competitors including pricing changes and new product
introductions
* The continued performance of independent distributors in selling the
mechanical heart valve
* The risk of product returns in connection with distributor terminations
* The actions of the supplier of pyrolytic carbon components for the
mechanical heart valve
* Difficulties in establishing and operating our own pyrolytic carbon
manufacturing capability
* The continued contractual relationship with Carbomedics
* Reimbursement of costs by third-party payors
* Potential liability claims
* Protection of our intellectual property rights
* Volatility of Common Stock
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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,030,641
<SECURITIES> 5,659,362
<RECEIVABLES> 6,364,624
<ALLOWANCES> 205,000
<INVENTORY> 38,634,589
<CURRENT-ASSETS> 54,912,050
<PP&E> 2,478,287
<DEPRECIATION> 1,676,844
<TOTAL-ASSETS> 61,116,685
<CURRENT-LIABILITIES> 2,275,087
<BONDS> 0
0
0
<COMMON> 179,090
<OTHER-SE> 58,662,508
<TOTAL-LIABILITY-AND-EQUITY> 61,116,685
<SALES> 17,461,964
<TOTAL-REVENUES> 17,461,964
<CGS> 10,986,114
<TOTAL-COSTS> 10,986,114
<OTHER-EXPENSES> 1,766,243
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,693,795
<INCOME-TAX> 55,884
<INCOME-CONTINUING> 2,637,911
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,637,911
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.14
</TABLE>
