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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the Fiscal Year Ended December 31, 2008
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the transition period from  to
 Commission File No. 0-18602
 ATS MEDICAL, INC.
  Minnesota
    
    41-1595629(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 3905 Annapolis Lane NorthMinneapolis, Minnesota
    
    55447(Address of principal executive offices)
    
    (Zip Code)
 (763) 553-7736
  Title of each class
    
    Name of each exchange on which registeredCommon stock, $.01 par value
    
    NASDAQ Global Market
   o þ
  o þ
  þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
  o þ




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B.OTHER INFORMATIONPART IIIITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESEXHIBIT INDEXEX-10.79EX-10.80EX-21EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I
 
 ITEM 1. BUSINESS
 OVERVIEW
    
    
    Surgical Treatment of Cardiac Arrythmias.In 2004 we entered into a distribution
agreement with CryoCath Technologies, Inc. (CryoCath) to distribute a set of products
for the surgical treatment of atrial fibrillation. In 2007, we acquired this business
from CryoCath for approximately $22.0 million. We have increased revenue from these
products to approximately $16.9 million or 25.7% of our revenue in 2008 compared to $4.6
million or 11.3% of our revenue in 2006.
    
    Heart Valve Repair.In 2005, we entered into a development and distribution agreement
with Genesee BioMedical, Inc. (GBI), under which we co-developed a novel line of mitral
valve repair rings and bands. We have increased revenue from these products to
approximately $3.2 million in 2008 from $1.1 million in 2006.
    
    Tissue Heart Valves.In 2006, we acquired 3F Therapeutics, Inc. (3F Therapeutics or
3F), which had developed a line of tissue heart valves based on a unique tubular design.
U.S. Food and Drug Administration (FDA) pre-market approval of our first generation
tissue valve was received in October 2008. Three platforms for deployment, including a
minimally invasive sutureless platform, are in development. Tissue heart valve revenues,
primarily from our initial limited commercialization efforts outside the United States,
totaled approximately $1.5 million in 2008 and $0.5 million in 2007.
   BUSINESS STRATEGY
  
    
    Increase market share of all our core products, including the ATS Open
Pivot® Heart Valve, ATS CryoMazeTM Surgical Ablation products, ATS
Simulus® Flexible annuloplasty repair rings and bands and the ATS 3f® Aortic
Bioprosthesis tissue heart valve.
    
    Develop and introduce heart valve therapy and surgical ablation products that enable
less invasive surgery without compromising outcomes compared to traditional therapies.
    
    Broaden our relationships with cardiac surgeons by selectively adding new medical
devices to our product portfolio.
    
    Leverage our investments in our marketing and sales infrastructure.
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OUR MARKETS AND PRODUCTS
 Heart Valve Therapy
  Prosthetic Heart Valve Market
 Overview
     Our Mechanical Heart Valve Products
   
    
    Open pivot areas are exposed to the washing action of flowing blood with each cardiac
cycle
    
    A thin but durable pyrolytic carbon orifice surrounded by a titanium strengthening band
    
    Low profile design
    
    Multiple sewing cuff options
    
    Bileaflet valve design
    
    Enhanced radiopacity
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
    
    Open pivot washing contributes to low thromboembolic complications
    
    Improved patient quality of life through lower noise levels
    
    Improved hemodynamic efficiencies
    
    Ease of implantation and valve rotation
    
    Improved follow-up diagnostic capability
    Our Tissue Heart Valve Products
  ®
  
    
    Tubular valve design, which mimics a native aortic valve in form and function
    
    Stentless tissue valve design
    
    Pericardial tissue
 3




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
    
    Low pressure gradients
    
    Large effective orifice areas
    
    Maintains continuity between the annulus and the sinotubular junction
    
    Preserves the aortic sinuses
    
    Restores physiologic flow
    
    Restores native valve stress distribution
    
    No long-term anticoagulation required
  .
  Prosthetic Heart Valve Market Competition
    Heart Valve Repair Market
 Overview
  4




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Our Heart Valve Repair Products
  ® ® ® 
  
    
    Generous suture target area
    
    Semi-rigid ring employs unique Flex-zone flexible anterior segment with semi-rigid
posterior segment
    
    Adjustable flexible ring can be adjusted symmetrically or asymmetrically after
implantation
  
    
    Ease of suture placement in traditional open chest repair procedures
    
    Readily accommodates robotic or minimally invasive surgical approaches
    
    Semi-rigid ring accommodates anterior annular movement while allowing for posterior
annular remodeling
    
    Adjustable ring allows precise matching with individual patient anatomy
 Heart Valve Repair Market Competition
  Surgical Cardiac Ablation Market
 Overview
   5




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Our Surgical Cryotherapy Products
     
    
    The ablation probe is malleable to conform to the shape of the tissue.
    
    The probes feature a sleeve to adjust the lesion length.
    
    Argon-based cryoablation freezes rapidly and can reach temperatures as low as -160C.
    
    The size and malleability of the probe allow it to be easily used in minimally invasive
access sites and robotic manipulation.
  
    
    Cryoablation adheres to the heart tissue during therapy, keeping the device in place.
    
    Cryoablation does not produce thrombus.
    
    Cryoablation preserves the integrity of the hearts collagen matrix.
    
    Cryoablation can safely create all of the lesion lines of the Maze procedure.
    Surgical Cardiac Ablation Market Competition
  6




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MARKETING, SALES AND DISTRIBUTION
 Overview
  U.S. Marketing and Sales
  International Marketing, Sales and Distribution
   Medical Device Industry Competition
   7




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MANUFACTURING AND SUPPLY
       RESEARCH AND DEVELOPMENT
  FINANCIAL INFORMATION ABOUT SEGMENTS
  SEASONALITY
  8




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PATENTS AND PROPRIETARY TECHNOLOGY
       GOVERNMENT REGULATION
 United States
   9




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International
   THIRD-PARTY REIMBURSEMENT
   10




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PRODUCT LIABILITY AND INSURANCE
   EMPLOYEES
  EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionMichael D. Dale
    
    
    49
    
    
    Chairman, Chief Executive Officer and PresidentMichael R. Kramer
    
    
    33
    
    
    Chief Financial OfficerAstrid M. Berthe
    
    
    45
    
    
    Vice President, Regulatory Affairs and Quality AssuranceThaddeus Coffindaffer
    
    
    47
    
    
    Vice President, SalesDavid R. Elizondo
    
    
    41
    
    
    Vice President, Research, Development and Clinical AffairsCraig A. Swandal
    
    
    48
    
    
    Vice President, Operations
 Michael D. Dale
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Michael R. Kramer
 Astrid M. Berthe
 Thaddeus Coffindaffer
 David R. Elizondo
 Craig A. Swandal
 AVAILABLE INFORMATION
  12




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ITEM 1A. RISK FACTORS
  If our products do not achieve widespread market acceptance in the United States, our operating
results will be harmed and we may not achieve profitability.
  We currently rely on the ATS mechanical heart valve as our primary source of revenue. If we are
not successful in selling this product, our operating results will be harmed.
  We have a history of regularly raising funds and incurring debt to fund net losses. If our current
cash and investment balances are inadequate to carry us to profitability, we may need to raise
equity or incur debt in the future. The current unprecedented volatility in the worldwide credit
and equity markets may have an impact on our ability to obtain future financing.
   The recent U.S. and global economic downturn could have adverse effects on our business and our
Company.
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The anticipated benefits associated with our recent acquisitions may not be realized.
  We may have difficulty integrating recently acquired businesses and may incur substantial costs in
connection with the integration process.
  
    
    our lack of expertise and experience in manufacturing the CryoCath products;
    
    costs and delays in implementing manufacturing systems and procedures in connection
with the acquisition of the cryoablation business of CryoCath;
   We use a combination of direct sales persons and independent manufacturing representatives to sell
our products in the United States. If our U.S. sales strategy is not successful, we may not be
able to continue our operations.
  14




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We currently depend on the marketing and sales efforts of international independent distributors.
  We are dependent upon sales outside the United States, which are subject to a number of risks
including a drop in sales due to currency fluctuations.
    
    
    unforeseen changes in regulatory requirements and government health programs;
    
    weaker intellectual property rights protection in some countries;
    
    new export license requirements, changes in tariffs or trade restrictions;
    
    political and economic instability in our target markets;
    
    greater difficulty in collecting payments from product sales;
    
    lengthy/extended credit terms, and
    
    competitive price pressure.
 We have a history of net losses. If we do not have net income in the future, we may be unable to
continue our operations.
   Purchase accounting treatment of the merger with 3F and acquisition of the surgical cryoablation
assets of CryoCath could result in net losses for the foreseeable future.
  15




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The market for prosthetic heart valves is highly competitive, and a number of our competitors are
larger and have more financial resources. If we do not compete effectively, our business will be
harmed.
  Our future results will be harmed if the use of mechanical heart valves declines or if our tissue
heart valves cannot be successfully marketed.
  Our business may be adversely affected if we are unable to maintain our strategic distribution
arrangements.
  We ultimately may experience a delay in introducing, or may not successfully complete the
development of, products that are currently under development, resulting in harm to our business.
  New products or technologies developed by others could render our product obsolete.
  16




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We license patented technology and other proprietary rights from CarboMedics. If these agreements
are breached or terminated, our right to manufacture the ATS mechanical heart valve could be
terminated.
  A delay or interruption in our manufacturing of pyrolytic carbon components could delay product
delivery or force us to cease operations.
  Because we have limited manufacturing experience with some of our products, we may not realize the
expected cost savings related to manufacturing our own products. In addition, we could experience
production delays and significant additional costs.
  
    
    production yields;
    
    quality control;
    
    per unit manufacturing costs;
    
    shortages of qualified personnel; and
    
    compliance with FDA and international regulations and requirements regarding good
manufacturing practices.
  Our business could be seriously harmed if third-party payers do not reimburse the costs for our
products.
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We may face product liability claims, which could result in losses in excess of our insurance
coverage and which could negatively affect our ability to attract and retain customers.
  Our business would be adversely affected if we are not able to protect our intellectual property
rights.
  We may be sued by third parties claiming that our products infringe on their intellectual property
rights. Any such suits could result in significant litigation or licensing expenses or we might be
prevented from selling our product.
  
    
    cease manufacturing and selling our product, which would seriously harm us;
    
    obtain a license from the holder of the infringed intellectual property right,
which license may not be available on reasonable terms, if at all; or
    
    redesign our product, which could be costly and time-consuming.
 We may encounter litigation that could have a material impact on our business.
  We are subject to extensive governmental regulation, which is costly, time consuming and can
subject us to unanticipated delays or could ultimately preclude us from marketing and selling our
products.
  
    
    obtain the approval of the FDA or international regulatory authorities where our
products are not yet marketed;
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
    
    after obtaining approval or clearance of the FDA or international regulatory
authorities, maintain the approval of the FDA and international regulatory authorities
to continue selling and manufacturing our products;
    
    satisfy content requirements for all of our labeling, sales and promotional
materials;
    
    comply with manufacturing and reporting requirements; and
    
    undergo rigorous inspections by these agencies.
   The price of our common stock has been volatile, which may result in losses to investors.
  
    
    general market conditions;
    
    the success of our management in operating ATS effectively;
    
    the failure of our heart valves and other products to gain market acceptance in the
United States;
    
    announcements of technical innovations or new products by our competitors;
    
    the status of component supply arrangements;
    
    changes in reimbursement policies;
    
    government regulation;
    
    developments in patent or other proprietary rights, and
    
    public concern as to the safety and efficacy of products developed by us or others.
  Our charter documents and Minnesota law may discourage and could delay or prevent a takeover of our
company.
  
    
    No cumulative voting by shareholders for directors;
 
    
    The ability of our Board of Directors to control its size, to create new
directorships and to fill vacancies;
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
    
    The ability of our Board of Directors, without shareholder approval, to issue
preferred stock, which may have rights and preferences that are superior to our common
stock;
    
    The ability of our Board of Directors to amend the bylaws; and
    
    Restrictions under Minnesota law regarding mergers or other business combinations
between us and any holder of 10% or more of our outstanding common stock.
 
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  
 ITEM 3. LEGAL PROCEEDINGS
 Abbey Litigation
   20




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CarboMedics Litigation
     
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  21




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Information
  High
    
    LowFiscal Year 2007:First Quarter
    
    $
    2.39
    
    
    $
    2.05Second Quarter
    
    $
    2.08
    
    
    $
    1.54Third Quarter
    
    $
    2.01
    
    
    $
    1.54Fourth Quarter
    
    $
    2.21
    
    
    $
    1.57
 High
    
    LowFiscal Year 2008:First Quarter
    
    $
    2.18
    
    
    $
    1.41Second Quarter
    
    $
    2.34
    
    
    $
    1.41Third Quarter
    
    $
    3.24
    
    
    $
    2.06Fourth Quarter
    
    $
    2.89
    
    
    $
    1.98
 Holders
  Dividends
  Repurchases of Common Stock
  Sales of Unregistered Securities
  22




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Performance Graph
  
 Name
    
    
    2003
    
    
    
    2004
    
    
    
    2005
    
    
    
    2006
    
    
    
    2007
    
    
    
    2008NASDAQ Medical
Dev/Ins/Sup
    
    
    $
    100.00
    
    
    
    $
    117.16
    
    
    
    $
    128.63
    
    
    
    $
    135.58
    
    
    
    $
    172.38
    
    
    
    $
    92.84Standard & Poors
500 Stock Index
    
    
    
    100.00
    
    
    
    
    108.99
    
    
    
    
    112.26
    
    
    
    
    127.55
    
    
    
    
    132.06
    
    
    
    
    81.23ATS Medical, Inc.
    
    
    
    100.00
    
    
    
    
    115.06
    
    
    
    
    68.15
    
    
    
    
    51.11
    
    
    
    
    54.57
    
    
    
    
    68.64
 23




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA
 Year Ended December 31,(in thousands, except per share data)
    
    2008
    
    2007
    
    2006
    
    2005
    
    2004Statement of Operations Data:Net sales
    
    $
    65,821
    
    
    $
    49,587
    
    
    $
    40,449
    
    
    $
    34,636
    
    
    $
    28,015Cost of sales
    
    
    25,267
    
    
    
    21,238
    
    
    
    19,568
    
    
    
    22,828
    
    
    
    21,227Gross profit
    
    
    40,554
    
    
    
    28,239
    
    
    
    20,881
    
    
    
    11,808
    
    
    
    6,788Operating expenses:Sales and marketing
    
    
    27,373
    
    
    
    24,633
    
    
    
    21,008
    
    
    
    18,948
    
    
    
    16,520Research and development
    
    
    8,215
    
    
    
    7,546
    
    
    
    3,381
    
    
    
    1,733
    
    
    
    1,011Acquired in-process research
and development
    
    
    
    
    
    
    3,500
    
    
    
    14,400
    
    
    
    
    
    
    
    General and administrative
    
    
    10,509
    
    
    
    10,417
    
    
    
    8,786
    
    
    
    7,314
    
    
    
    5,954Litigation settlement
    
    
    7,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of intangibles
    
    
    3,489
    
    
    
    2,516
    
    
    
    106
    
    
    
    
    
    
    
    Intangible asset impairment
    
    
    
    
    
    
    755
    
    
    
    
    
    
    
    
    
    
    
    Distributor termination expense
    
    
    
    
    
    
    
    
    
    
    733
    
    
    
    
    
    
    
    Total operating expenses
    
    
    57,086
    
    
    
    49,367
    
    
    
    48,414
    
    
    
    27,995
    
    
    
    23,485Operating loss
    
    
    (16,532
    )
    
    
    (21,128
    )
    
    
    (27,533
    )
    
    
    (16,187
    )
    
    
    (16,697
    )Interest income (expense), net
    
    
    (2,739
    )
    
    
    (1,822
    )
    
    
    (1,669
    )
    
    
    (338
    )
    
    
    54Other income, net
    
    
    413
    
    
    
    61
    
    
    
    1,528
    
    
    
    2,131
    
    
    
    Net loss before income taxes
    
    
    (18,858
    )
    
    
    (22,889
    )
    
    
    (27,674
    )
    
    
    (14,394
    )
    
    
    (16,643
    )Income tax expense
    
    
    481
    
    
    
    119
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (19,339
    )
    
    $
    (23,008
    )
    
    $
    (27,674
    )
    
    $
    (14,394
    )
    
    $
    (16,643
    )Net loss per share:Basic
    
    $
    (0.31
    )
    
    $
    (0.44
    )
    
    $
    (0.83
    )
    
    $
    (0.46
    )
    
    $
    (0.58
    )Diluted
    
    $
    (0.31
    )
    
    $
    (0.44
    )
    
    $
    (0.83
    )
    
    $
    (0.46
    )
    
    $
    (0.58
    )Weighted average number of shares outstanding:Basic
    
    
    61,440
    
    
    
    52,589
    
    
    
    33,537
    
    
    
    31,009
    
    
    
    28,856Diluted
    
    
    61,440
    
    
    
    52,589
    
    
    
    33,537
    
    
    
    31,009
    
    
    
    28,856As of December 31,(in thousands)
    
    2008
    
    2007
    
    2006
    
    2005
    
    2004Balance Sheet Data:Cash, cash equivalents and short-term investments
    
    $
    20,895
    
    
    $
    14,669
    
    
    $
    10,704
    
    
    $
    21,709
    
    
    $
    15,994Working capital
    
    
    37,689
    
    
    
    30,121
    
    
    
    32,976
    
    
    
    46,417
    
    
    
    41,459Total assets
    
    
    114,981
    
    
    
    105,897
    
    
    
    85,840
    
    
    
    85,443
    
    
    
    79,051Long-term liabilities, excluding current maturities
    
    
    21,502
    
    
    
    25,321
    
    
    
    18,588
    
    
    
    19,679
    
    
    
    1,826Shareholders equity
    
    
    74,575
    
    
    
    64,956
    
    
    
    57,890
    
    
    
    57,529
    
    
    
    69,441
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Executive Overview
   .
     25




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Critical Accounting Policies and Estimates
  Revenue Recognition Policy.
  Allowance for Doubtful Accounts.
 Inventory Valuation.
 Goodwill and Intangible Assets. Goodwill and Other Intangible Asset
 26




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Deferred Tax Assets.
 Convertible Debt and Derivative Instruments. Accounting for Derivative Instruments and Hedging
Activities,
 Stock-Based Compensation. Share-Based Payment
 Recently Issued Accounting Pronouncements.
 Results of Operations
  Increase (Decrease)
    
    
    
    
    
    
    
    
    
    Increase (Decrease)(In
thousands)
    
    2008
    
    2007
    
    $
    
    %
    
    2007
    
    2006
    
    $
    
    %Net sales
    
    $
    65,821
    
    
    $
    49,587
    
    
    $
    16,234
    
    
    
    32.7
    %
    
    $
    49,587
    
    
    $
    40,449
    
    
    $
    9,138
    
    
    
    22.6
    %Cost of goods sold
    
    
    25,267
    
    
    
    21,348
    
    
    
    3,919
    
    
    
    18.4
    %
    
    
    21,348
    
    
    
    19,568
    
    
    
    1,780
    
    
    
    9.1
    %Gross profit
    
    
    40,554
    
    
    
    28,239
    
    
    
    12,315
    
    
    
    43.6
    %
    
    
    28,239
    
    
    
    20,881
    
    
    
    7,358
    
    
    
    35.2
    %Operating expenses:Sales and marketing
    
    
    27,373
    
    
    
    24,633
    
    
    
    2,740
    
    
    
    11.1
    %
    
    
    24,633
    
    
    
    21,008
    
    
    
    3,625
    
    
    
    17.3
    %Research and development
    
    
    8,215
    
    
    
    7,546
    
    
    
    669
    
    
    
    8.9
    %
    
    
    7,546
    
    
    
    3,381
    
    
    
    4,165
    
    
    
    123.2
    %Acquired in-process R&D
    
    
    
    
    
    
    3,500
    
    
    
    (3,500
    )
    
    
    (100.0
    )%
    
    
    3,500
    
    
    
    14,400
    
    
    
    (10,900
    )
    
    
    (75.7
    )%General and administrative
    
    
    10,509
    
    
    
    10,417
    
    
    
    92
    
    
    
    0.9
    %
    
    
    10,417
    
    
    
    8,786
    
    
    
    1,631
    
    
    
    18.6
    %Litigation settlement
    
    
    7,500
    
    
    
    
    
    
    
    7,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of intangibles
    
    
    3,489
    
    
    
    2,516
    
    
    
    973
    
    
    
    38.7
    %
    
    
    2,516
    
    
    
    106
    
    
    
    2,410
    
    
    
    2,273.6
    %Impairment of intangibles
    
    
    
    
    
    
    755
    
    
    
    (755
    )
    
    
    (100.0
    )%
    
    
    755
    
    
    
    
    
    
    
    755
    
    
    
    Distributor termination expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    733
    
    
    
    (733
    )
    
    
    (100.0
    )%Total operating expenses
    
    
    57,086
    
    
    
    49,367
    
    
    
    7,719
    
    
    
    15.6
    %
    
    
    49,367
    
    
    
    48,414
    
    
    
    953
    
    
    
    2.0
    %Operating loss
    
    
    (16,532
    )
    
    
    (21,128
    )
    
    
    (4,596
    )
    
    
    (21.8
    )%
    
    
    (21,128
    )
    
    
    (27,533
    )
    
    
    (6,405
    )
    
    
    (23.3
    )%Interest expense, net
    
    
    (2,739
    )
    
    
    (1,822
    )
    
    
    917
    
    
    
    50.3
    %
    
    
    (1,822
    )
    
    
    (1,669
    )
    
    
    153
    
    
    
    9.2
    %Other income, net
    
    
    413
    
    
    
    61
    
    
    
    352
    
    
    
    577.0
    %
    
    
    61
    
    
    
    1,528
    
    
    
    (1,467
    )
    
    
    (96.0
    )%Net loss before income taxes
    
    
    (18,858
    )
    
    
    (22,889
    )
    
    
    (4,031
    )
    
    
    (17.6
    )%
    
    
    (22,889
    )
    
    
    (27,674
    )
    
    
    (4,785
    )
    
    
    (17.3
    )%Income tax expense
    
    
    481
    
    
    
    119
    
    
    
    362
    
    
    
    304.2
    %
    
    
    119
    
    
    
    
    
    
    
    119
    
    
    
    Net loss
    
    $
    (19,339
    )
    
    $
    (23,008
    )
    
    $
    (3,669
    )
    
    
    (15.9
    )%
    
    $
    (23,008
    )
    
    $
    (27,674
    )
    
    $
    (4,666
    )
    
    
    (16.9
    )%
 27




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##### Table of Contents



2008
    
    2007
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    38.4
    %
    
    
    43.1
    %
    
    
    48.4
    %Gross profit
    
    
    61.6
    %
    
    
    56.9
    %
    
    
    51.6
    %Operating expenses:Sales and marketing
    
    
    41.6
    %
    
    
    49.7
    %
    
    
    51.9
    %Research and development
    
    
    12.5
    %
    
    
    15.2
    %
    
    
    8.4
    %Acquired in-process R&D
    
    
    0.0
    %
    
    
    7.1
    %
    
    
    35.6
    %General and administrative
    
    
    16.0
    %
    
    
    21.0
    %
    
    
    21.7
    %Litigation settlement
    
    
    11.4
    %
    
    
    0.0
    %
    
    
    0.0
    %Amortization of intangibles
    
    
    5.3
    %
    
    
    5.1
    %
    
    
    0.3
    %Impairment of intangibles
    
    
    0.0
    %
    
    
    1.5
    %
    
    
    0.0
    %Distributor termination expense
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    1.8
    %Total operating expenses
    
    
    86.7
    %
    
    
    99.6
    %
    
    
    119.7
    %Operating loss
    
    
    -25.1
    %
    
    
    -42.6
    %
    
    
    -68.1
    %Interest expense, net
    
    
    -4.2
    %
    
    
    -3.7
    %
    
    
    -4.1
    %Other income, net
    
    
    0.6
    %
    
    
    0.1
    %
    
    
    3.8
    %Net loss before income taxes
    
    
    -28.7
    %
    
    
    -46.2
    %
    
    
    -68.4
    %Income tax expense
    
    
    -0.7
    %
    
    
    -0.2
    %
    
    
    0.0
    %Net loss
    
    
    -29.4
    %
    
    
    -46.4
    %
    
    
    -68.4
    %
 Net Sales
  Increase
    
    
    
    
    
    
    
    
    
    Increase(In thousands)
    
    2008
    
    2007
    
    $
    
    %
    
    2007
    
    2006
    
    $
    
    %United States
    
    $
    25,139
    
    
    $
    18,653
    
    
    $
    6,486
    
    
    
    34.8
    %
    
    $
    18,653
    
    
    $
    15,551
    
    
    $
    3,102
    
    
    
    19.9
    %Outside United States
    
    
    40,682
    
    
    
    30,934
    
    
    
    9,748
    
    
    
    31.5
    %
    
    
    30,934
    
    
    
    24,898
    
    
    
    6,036
    
    
    
    24.2
    %Total
    
    $
    65,821
    
    
    $
    49,587
    
    
    $
    16,234
    
    
    
    32.7
    %
    
    $
    49,587
    
    
    $
    40,449
    
    
    $
    9,138
    
    
    
    22.6
    %
  2008
    
    2007
    
    2006United States
    
    
    38.2
    %
    
    
    37.6
    %
    
    
    38.4
    %Outside United States
    
    
    61.8
    %
    
    
    62.4
    %
    
    
    61.6
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Increase
    
    
    
    
    
    
    
    
    
    Increase(In thousands)
    
    2008
    
    2007
    
    $
    
    %
    
    2007
    
    2006
    
    $
    
    %Heart valve therapy
    
    $
    47,576
    
    
    $
    38,560
    
    
    $
    9,016
    
    
    
    23.4
    %
    
    $
    38,560
    
    
    $
    35,343
    
    
    $
    3,217
    
    
    
    9.1
    %Surgical arrhythmia
therapy
    
    
    16,888
    
    
    
    9,690
    
    
    
    7,198
    
    
    
    74.3
    %
    
    
    9,690
    
    
    
    4,554
    
    
    
    5,136
    
    
    
    112.8
    %Surgical tools and
accessories
    
    
    1,357
    
    
    
    1,337
    
    
    
    20
    
    
    
    1.5
    %
    
    
    1,337
    
    
    
    552
    
    
    
    785
    
    
    
    142.2
    %Total
    
    $
    65,821
    
    
    $
    49,587
    
    
    $
    16,234
    
    
    
    32.7
    %
    
    $
    49,587
    
    
    $
    40,449
    
    
    $
    9,138
    
    
    
    22.6
    %
 28




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##### Table of Contents



2008 compared to 2007.
   2007 compared to 2006.
   29




---



##### Table of Contents



Cost of Goods Sold and Gross Profit
 2008 compared to 2007.
  2007 compared to 2006.
  Sales and Marketing
 2008 compared to 2007.
  30




---



##### Table of Contents



2007 compared to 2006.
  Research and Development
 2008 compared to 2007.
 2007 compared to 2006.
 Acquired In-Process R & D
   General and Administrative
 2008 compared to 2007.
  31




---



##### Table of Contents



2007 compared to 2006.
  Litigation Settlement
  Amortization of Intangibles
  Impairment of Intangibles
  Distributor Termination Expense
  Net Interest Expense
  32




---



##### Table of Contents



Net Other Income
  Year ended December 31:(in thousands)
    
    2008
    
    
    2007
    
    
    2006Alta warrant liability gain (loss)
    
    $
    243
    
    
    $
    (652
    )
    
    $
    Convertible Senior Notes derivative liability gain
    
    
    51
    
    
    
    98
    
    
    
    1,528Net realized foreign currency transaction gains
    
    
    472
    
    
    
    303
    
    
    
    Unrealized foreign currency gain (loss) related
to short-term intercompany balances with foreign
subsidiaries
    
    
    (353
    )
    
    
    312
    
    
    
    Net other income
    
    $
    413
    
    
    $
    61
    
    
    $
    1,528
  Accounting for Derivative Instruments and
Hedging Activities.
  Income Taxes
  33




---



##### Table of Contents



Net Loss
  Liquidity and Capital Resources
  Operating Activities
  Investing Activities
    Financing Activities
  34




---



##### Table of Contents



35




---



##### Table of Contents



Cash Management
   Off-Balance Sheet Arrangements
  Contractual Obligations
  Payments Due By PeriodLess
    
    
    
    
    
    
    
    
    
    MoreThan
    
    1-3
    
    3-5
    
    Than 5(in thousands)
    
    Total
    
    1 year
    
    Years
    
    Years
    
    YearsConvertible notes payable (1)
    
    $
    45,248
    
    
    $
    1,344
    
    
    $
    4,032
    
    
    $
    4,032
    
    
    $
    35,840Bank notes payable (1)
    
    
    7,516
    
    
    
    3,197
    
    
    
    4,319
    
    
    
    
    
    
    
    Operating leases
    
    
    1,158
    
    
    
    827
    
    
    
    331
    
    
    
    
    
    
    
    Total
    
    $
    53,922
    
    
    $
    5,368
    
    
    $
    8,682
    
    
    $
    4,032
    
    
    $
    35,840
 
 (1)
    
    Includes interest payments. Cautionary Statements
  36




---



##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   37




---



##### Table of Contents



Managements Report on Internal Control over Financial Reporting
    Changes in Internal Control Over Financial Reporting
  
 ITEM 9B. OTHER INFORMATION
  38




---



##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
    
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
   Number of securitiesremaining available forNumber of securities
    
    
    Weighted-average
    
    
    future issuance underto be issued
    
    
    exercise price of
    
    
    equity compensationupon exercise of
    
    
    outstanding
    
    
    plans (excludingoutstanding options,
    
    
    options, warrants
    
    
    securities reflectedPlan category
    
    warrants and rights
    
    
    and rights
    
    
    in the first column)Equity compensation
plans approved
by security holders
    
    
    4,323,393
    
    
    $
    0.66
    
    
    
    4,156,748
    (1)Equity compensation
plans not approved
by security holders
    
    
    1,503,200
    
    
    $
    2.77
    
    
    
    
    (2)Total
    
    
    5,826,593
    
    
    $
    1.21
    
    
    
    4,156,748
 
 (1)
    
    Includes shares remaining available under the Plan (3,941,761 shares) and the 1998 Employee
Stock Purchase Plan (214,987 shares).(2)
    
    Nearly all of the 1,503,200 shares listed consist of individual stock options granted to new
executives or employees as an inducement to their employment with us. These options have an
exercise price equal to the fair market value of our common stock at the time of the grant,
and vest ratably over two to four year periods. Most of the options have a life of 10 years
and vesting accelerates upon a change of control of ATS Medical. We intend that these options
shall not be incentive stock options governed by the provisions of Section 422 of the Internal
Revenue Code. 39




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  40




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 Financial Statements
 Our Consolidated Financial Statements and the Independent
Registered Public Accounting Firms Reports thereon are
included herein (page numbers refer to pages following the
signature page of this Annual Report on Form 10-K):Reports of Independent Registered Public Accounting Firms
    
    Page F-1 through F-2Consolidated Balance Sheets as of December 31, 2008 and 2007
    
    Page F-3Consolidated Statements of Operations for the years ended
December 31, 2008, 2007, and 2006
    
    Page F-4Consolidated Statement of Changes in Shareholders Equity
for the years ended December 31, 2008, 2007, and 2006
    
    Page F-5Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007, and 2006
    
    Page F-6Notes to Consolidated Financial Statements for the years
ended December 31, 2008, 2007, and 2006
    
    Page F-7 through F-29
 Financial Statement Schedules
 ATS MEDICAL, INC.
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 Additions -Charged toBalance at
    
    Charged to
    
    Other
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    Accounts -
    
    Deductions -
    
    End ofDescription
    
    of Period
    
    Expenses
    
    Describe
    
    Describe
    
    PeriodValuation Accounts:Deducted from asset accounts:Year ended December 31, 2008:Allowance for doubtful accounts
    
    $
    225
    
    
    $
    224
    
    
    $
    
    
    
    $
    (85
    ) (1)
    
    $
    364Allowance for obsolete inventories
    
    
    491
    
    
    
    669
    
    
    
    211
    (2)
    
    
    (594
    ) (3)
    
    
    777Year ended December 31, 2007:Allowance for doubtful accounts
    
    
    537
    
    
    
    250
    
    
    
    
    
    
    
    (562
    ) (1)
    
    
    225Allowance for obsolete inventories
    
    
    608
    
    
    
    (117
    )
    
    
    
    
    
    
    
    
    
    
    491Year ended December 31, 2006:Allowance for doubtful accounts
    
    
    360
    
    
    
    493
    
    
    
    11
    (6)
    
    
    (327
    ) (1)
    
    
    537Allowance for obsolete inventories
    
    
    215
    
    
    
    50
    
    
    
    436
    (5)
    
    
    (93
    ) (4)
    
    
    608
 
 (1)
    
    Uncollectible accounts written off, net of recoveries.(2)
    
    Adjustments for standard manufacturing cost increases to keep net carrying value of
reserved-for inventories at zero.(3)
    
    Obsolete inventory disposals.(4)
    
    Changes in estimate recovered through a reduction in expenses.(5)
    
    Obsolescence reserve for inventories recorded in connection with the purchase accounting for
the 3F acquisition.(6)
    
    Allowance for doubtful accounts recorded in connection with the purchase accounting for the 3F
acquisition.  41




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##### Table of Contents



Exhibits
 ExhibitNumber
    
    Description2.1**
    
    Agreement and Plan of Merger, dated as of January 23, 2006, by and among ATS Medical, Inc.,
Seabiscuit Acquisition Corp., 3F Therapeutics, Inc. and Boyd D. Cox, as Stockholder
Representative (Incorporated by reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K filed on January 26, 2006).2.2
    
    Amendment No. 1 to Agreement and Plan of Merger, dated as of June 13, 2006, by and among ATS
Medical, Inc., Seabiscuit Acquisition Corp., 3F Therapeutics, Inc. and Boyd D. Cox, as
Stockholder Representative (Incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on June 19, 2006).2.3
    
    Amendment No. 2 to Agreement and Plan of Merger, dated as of August 10, 2006, by and among
the Company, Seabiscuit Acquisition Corp., 3F Therapeutics, Inc. and Boyd D. Cox, as
Stockholder Representative (Incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on August 15, 2006).2.4
    
    Escrow Agreement, effective as of September 29, 2006, by and among the Company, Boyd D. Cox,
as Stockholder Representative and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit
2.4 to the Companys Annual Report on Form 10-K for the year ended December 31, 2006).2.5**
    
    Option and Asset Purchase Agreement, dated as of May 31, 2005, by and among ATS Medical,
Inc., em Vascular, Inc., Keith L. March, M.D., John Hauck, Walter L. Sembrowich and James E.
Shapland II (Incorporated by reference to Exhibit 2.5 to the Companys Annual Report on Form
10-K for the year ended December 31, 2006).2.6
    
    Letter Amendment, dated as of November 29, 2006, to the Option and Asset Purchase Agreement,
dated as of May 31, 2005, by and among ATS Medical, Inc., em Vascular, Inc., Keith L. March,
M.D., John Hauck, Walter L. Sembrowich and James E. Shapland II, (Incorporated by reference to
Exhibit 2.6 to the Companys Annual Report on Form 10-K for the year ended December 31, 2006).2.7**
    
    Asset Purchase Agreement dated June 18, 2007 by and between ATS Medical, Inc. and CryoCath
Technologies Inc. (Incorporated by reference to Exhibit 2.1 to the Companys Current Report on
Form 8-K filed on June 25, 2007).3.1
    
    Third Restated Articles of Incorporation of ATS Medical, Inc. (Incorporated by reference to
Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 28, 2008
(the June 2008 Form 10-Q)).3.2
    
    Bylaws of the Company, as amended February 13, 2007 (Incorporated by reference to Exhibit
10.2 to the Companys Current Report on Form 8-K filed on February 20, 2007).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
    
    Indenture, dated as of October 7, 2005, between ATS Medical, Inc. and Wells Fargo Bank,
National Association, as Trustee (Incorporated by reference to Exhibit 4.1 of the Companys
Current Report on Form 8-K filed on October 12, 2005 (the October 12, 2005 Form 8-K)).4.3
    
    First Supplemental Indenture, dated October 13, 2005, to the Indenture dated as of October 7,
2005, by and between ATS Medical, Inc. and Wells Fargo Bank, National Association, as Trustee (Incorporated by reference to Exhibit 4.3 of the Companys
October 18, 2005 Form 8-K).4.4
    
    Form of 6% Convertible Senior Notes due 2025 (Incorporated by reference to Exhibit 4.1 of the
Companys Current Report on Form 8-K filed on October 18, 2005 (the October 18, 2005 Form
8-K)).
 42




---



##### Table of Contents



ExhibitNumber
    
    Description4.5
    
    Form of Warrant (Incorporated by reference to Exhibit 4.2 of the Companys October 18, 2005
Form 8-K).4.6
    
    Form of Warrant (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on
Form 8-K filed on March 16, 2007).4.7
    
    Warrant, dated June 28, 2007, issued by ATS Medical, Inc. to Alta Partners VIII, L.P.
(Incorporated by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K filed
on July 5, 2007).4.8
    
    Warrant, dated June 29, 2008, issued to Theodore C. Skokos (Incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K filed on July 2, 2008 (the July 2008
Form 8-K)).4.9
    
    Form of Warrant, dated December 19, 2008, issued by ATS Medical, Inc. to each of the
Investors (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form
8-K filed on December 23, 2008 (the December 2008 Form 8-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*
    
    ATS Medical, Inc. 2000 Stock Incentive Plan, as amended (Incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed on May 13, 2008).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
Companys Annual Report on Form 10-K for the year ended December 31, 1996 (the 1996 Form
10-K)).10.8
    
    O.E.M. Supply Contract dated September 24, 1990, with CarboMedics, Inc. (Incorporated by
reference to Exhibit 10.10 to the 1996 Form 10-K).10.9
    
    License Agreement dated September 24, 1990, with CarboMedics, Inc. (Incorporated by reference
to Exhibit 10.11 to the 1996 Form 10-K).10.10*
    
    Employment Agreement between the Company and Michael D. Dale dated September 18, 2002
(Incorporated by reference to Exhibit 10.12 to the Companys Form 10-K for the year ended 2002
(the 2002 Form 10-K)).10.11
    
    Reserved.10.12
    
    Amendment 1 to License Agreement dated December 16, 1993, with CarboMedics, Inc.
(Incorporated by reference to Exhibit 10.17 to the Companys Annual Report on Form 10-K for
the year ended December 31, 1993 (the 1993 Form 10-K)).
 43




---



##### Table of Contents



ExhibitNumber
    
    Description10.13
    
    Amendment 4 to O.E.M. Supply Contract dated December 16, 1993, with CarboMedics, Inc.
(Incorporated by reference to Exhibit 10.18 to the 1993 Form 10-K).10.14
    
    Amendment 5 to O.E.M. Supply Contract dated September 1, 1994, with CarboMedics, Inc.
(Incorporated by reference to Exhibit 10.19 to the Companys Annual Report on Form 10-K for
the year ended December 31, 1994 (the 1994 Form 10-K)).10.15
    
    Letter Agreement between the Company and Sulzer CarboMedics, Inc., dated June 27, 2002
(Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for
the quarter ended June 20, 2002).10.16
    
    Form of International Distributor Agreement (Incorporated by reference to Exhibit 10.22 to
the 1994 Form 10-K).10.17
    
    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).10.18
    
    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).10.19
    
    1998 Employee Stock Purchase Plan, as amended through September 25, 2006 (Incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on September 29,
2006).10.20
    
    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 Current Report on Form 8-K
filed on January 13, 2000 (the January 2000 Form 8-K).10.21
    
    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 January 2000
Form 8-K).10.22
    
    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 January 2000
Form 8-K).10.23
    
    Amendment No. 7 to Lease Agreement between the Company and St. Paul Properties, Inc., dated
May 18, 2000 (Incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000).10.24
    
    Lease Agreement between the Company and St. Paul Properties, Inc., dated April 29, 2000
(Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000).10.25
    
    Amendment No. 8 to Lease Agreement between the Company and St. Paul Properties, Inc., dated
December 14, 2000 (Incorporated by reference to Exhibit 10.32 to the Companys Annual Report
on Form 10-K for the year ended December 31, 2000 (the 2000 Form 10-K)).10.26
    
    Amendment 8 to OEM Supply Contract by and between Sulzer CarboMedics, Inc. and ATS Medical,
Inc., dated November 3, 2000 (Incorporated by reference to Exhibit 10.33 to the 2000 Form
10-K).10.27
    
    Form of U.S. Distribution Agreement (Incorporated by reference to Exhibit 10.34 to the 2002
Form 10-K).10.28
    
    Amendment No. 9 to Lease Agreement between the Company and St. Paul Properties, Inc., dated
September 8, 2003 (Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003).10.29*
    
    Form of Employee Stock Option Agreement under the companys 2000 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004 (the September 2004 Form 10-Q)).
 44




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##### Table of Contents



ExhibitNumber
    
    Description10.30*
    
    Form of Non-Qualified Stock Option Agreement under the Companys 2000 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.3 to the Companys September 2004 Form 10-Q).10.31*
    
    Form of Non-Plan Non-Qualified Stock Option Agreement (Incorporated by reference to Exhibit
10.4 to the Companys September 2004 Form 10-Q).10.32
    
    Reserved.10.33
    
    Credit Agreement between Silicon Valley Bank and the Company, dated July 28, 2004
(Incorporated by reference to Exhibit 10.1 to the Companys September 2004 Form 10-Q).10.34
    
    Amendment No. 10 to Lease Agreement between the Company and St. Paul Properties, Inc. dated
as of October 1, 2004 (Incorporated by reference to Exhibit 10.40 to the Companys Annual
Report on Form 10-K for the year ended December 31, 2004 (the 2004 Form 10-K)).10.35
    
    Letter Agreement between the Company and Centerpulse USA Holding Co. dated July 9, 2003
(Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed
on September 26, 2003).10.36
    
    Reserved.10.37
    
    Reserved.10.38
    
    Exclusive Development, Supply and Distribution Agreement with Genesee BioMedical, Inc.,
dated June 23, 2005 (Incorporated by reference to Exhibit 10.44 of the 2005 Form 10-K).10.39
    
    Amendment Agreement, dated March 24, 2005, to the Credit Agreement between Silicon Valley
Bank and the Company, dated July 28, 2004 (Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on March 30, 2005).10.40
    
    Securities Purchase Agreement, dated as of October 6, 2005, by and among ATS Medical, Inc.
and the Buyers listed on the Schedule of Buyers attached thereto as Exhibit A (Incorporated by
reference to Exhibit 10.1 of the Companys October 12, 2005 Form 8-K).10.41
    
    Amendment No. 1, dated October 12, 2005, to the Securities Purchase Agreement by and among
ATS Medical, Inc. and the Buyers listed therein, dated as of October 6, 2005 (Incorporated by
reference to Exhibit 10.1 of the Companys October 18, 2005 Form 8-K).10.42
    
    Registration Rights Agreement, dated as of October 7, 2005, by and among ATS Medical, Inc.
and the Buyers listed on the Schedule of Buyers attached thereto as Exhibit A (Incorporated by
reference to Exhibit 10.2 of the Companys October 12, 2005 Form 8-K).10.43
    
    Amendment No. 1, dated October 13, 2005, to the Registration Rights Agreement by and among
ATS Medical, Inc. and the Buyers, as defined therein, dated as of October 7, 2005
(Incorporated by reference to Exhibit 10.2 of the Companys October 18, 2005 Form 8-K).10.44
    
    Warrant Agent Agreement, dated as of October 7, 2005, between ATS Medical, Inc. and Wells
Fargo Bank, National Association, as Warrant Agent (Incorporated by reference to Exhibit 10.3
of the Companys October 12, 2005 Form 8-K).10.45*
    
    Form of Lock-Up Agreement with Executive Officers (Incorporated by reference to Exhibit 99.1
of the Companys Current Report on Form 8-K filed on December 29, 2005).10.46*
    
    Form of Restricted Stock Unit Agreement under the Companys 2000 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.53 of the 2005 Form 10-K).10.47
    
    Amendment, dated March 29, 2006, to the Loan and Security Agreement between Silicon Valley
Bank and the Company, dated July 28, 2004 (Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on April 3, 2006).10.48*
    
    Form of Change in Control Agreement executed by executive officers of the Company
(Incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for
the quarter ended June 30, 2006).
 45




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##### Table of Contents



ExhibitNumber
    
    Description10.49
    
    Exclusive Distribution Agreement, effective as of October 1, 2006, by and between the
Company and Novare Surgical Systems, Inc. (Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (the
September 2006 Form 10-Q)).10.50
    
    Amendment No. 2 dated September 1, 2006, to Original Lease Agreement dated April 29, 2000,
by and between the Company and St. Paul Properties, Inc. (Incorporated by reference to Exhibit
10.2 to the Companys September 2006 Form 10-Q).10.51
    
    Amendment No. 11 dated September 1, 2006, to Original Lease Agreement dated December 22,
1987, by and between the Company and St. Paul Properties, Inc. (Incorporated by reference to
Exhibit 10.3 to the Companys September 2006 Form 10-Q).10.52
    
    Amendment, dated August 15, 2006, to the Loan and Security Agreement between Silicon Valley
Bank and the Company, dated July 28, 2004 (Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on August 17, 2006).10.53
    
    Reserved.10.54
    
    Reserved.10.55*
    
    Form of Restricted Stock Unit Award Agreement for awards to Non-Employee Directors under
2000 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on February 20, 2007).10.56
    
    Amendment No. 4, dated February 15, 2007, to the Loan and Security Agreement between Silicon
Valley Bank and the Company, dated July 28, 2004 (Incorporated by reference to the Companys
Current Report on Form 8-K filed on February 23, 2007).10.57
    
    Securities Purchase Agreement, dated March 15, 2007, between the Company and Certain
Investors (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on March 16, 2007).10.58
    
    Registration Rights Agreement, dated March 15, 2007, between the Company and Certain
Investors (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form
8-K filed on March 16, 2007).10.59
    
    Confidential Separation and Release Agreement executed as of March 6, 2007 between Marc R.
Sportsman and the Company (Incorporated by reference to Exhibit 10.5 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).10.60
    
    Letter Agreement, dated June 7, 2007, by and among Endocare, Inc., CryoCath Technologies
Inc. and ATS Medical, Inc. (Incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on June 25, 2007 (the June 2007 Form 8-K)).10.61
    
    License Agreement, dated June 28, 2007, by and between ATS Acquisition Corp. and CryoCath
Technologies Inc. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on July 5, 2007 (the July 2007 Form 8-K)).10.62
    
    Manufacturing Agreement, dated June 28, 2007, by and between ATS Acquisition Corp. and
CryoCath Technologies Inc. (Incorporated by reference to Exhibit 10.2 to the July 2007 Form
8-K).10.63
    
    Termination Agreement, dated June 28, 2007, by and between ATS Medical, Inc. and CryoCath
Technologies Inc. (Incorporated by reference to Exhibit 10.3 to the July 2007 Form 8-K).10.64
    
    Common Stock and Warrant Purchase Agreement, dated as of June 19, 2007, by and between ATS
Medical, Inc. and Alta Partners VIII, L.P. (Incorporated by reference to Exhibit 10.2 to the
June 2007 Form 8-K).10.65
    
    Registration Rights Agreement, dated June 28, 2007, by and between ATS Medical, Inc. and
Alta Partners VIII, L.P. (Incorporated by reference to Exhibit 10.5 to the July 2007 Form
8-K).
 46




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##### Table of Contents



ExhibitNumber
    
    Description10.66
    
    Amendment, dated June 18, 2007, to the Loan and Security Agreement between Silicon Valley
Bank and the Company dated July 28, 2004 (Incorporated by reference to Exhibit 10.3 to the
June 2007 Form 8-K).10.67*
    
    2007 ATS Medical Management Incentive Compensation Plan (Incorporated by reference to
Exhibit 10.9 of the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
2007).10.68
    
    First Amendment, dated February 29, 2008, to the Loan and Security Agreement between Silicon
Valley Bank and the Company dated July 28, 2004 (Incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K filed on March 6, 2008 (the March 2008 Form 8-K)).10.69
    
    Second Amendment, dated February 29, 2008, to the Loan and Security Agreement between
Silicon Valley Bank and the Company dated July 28, 2004 (Incorporated by reference to Exhibit
10.2 to the March 2008 Form 8-K).10.70
    
    Unconditional Guaranty, dated February 29, 2008, entered into by 3F Therapeutics and ATS
Acquisition Corp., in favor of Silicon Valley Bank (Incorporated by reference to Exhibit 10.3
to the March 2008 Form 8-K).10.71
    
    Security Agreement, dated February 29, 2008, by and between Silicon Valley Bank, 3F
Therapeutics, Inc. and ATS Acquisition Corp. (Incorporated by reference to Exhibit 10.4 to the
March 2008 Form 8-K).10.72
    
    Confidential Separation Agreement and Release, executed as of November 14, 2007, between
Richard A. Curtis and ATS Medical, Inc. (Incorporated by reference to Exhibit 10.72 of the
Companys Annual Report on Form 10-K for the year ended December 31, 2007).10.73
    
    Amendment No. 3 dated April 30, 2008, to Original Lease Agreement dated April 29, 2000, by
and between the Company and St. Paul Properties, Inc. (Incorporated by reference to Exhibit
10.2 to the Companys June 2008 Form 10-Q).10.74
    
    2008 ATS Medical Management Incentive Compensation Plan (Incorporated by reference to
Exhibit 10.3 to the Companys June 2008 Form 10-Q).10.75
    
    Subordinated Credit Agreement, dated June 29, 2008, by and between ATS Medical, Inc. and
Theodore C. Skokos (Incorporated by reference to Exhibit 10.1 to the July 2008 Form 8-K).10.76
    
    Amendment, dated June 30, 2008, to the Loan and Security Agreement between Silicon Valley
Bank and the Company dated July 28, 2004 (Incorporated by reference to Exhibit 10.3 to the
July 2008 Form 8-K).10.77
    
    Common Stock and Warrant Purchase Agreement, dated December 19, 2008, by and between ATS
Medical, Inc. and each of the Investors named therein (Incorporated by reference to Exhibit
10.1 to the December 2008 Form 8-K).10.78
    
    Registration Rights Agreement, dated December 19, 2008, by and between ATS Medical, Inc. and
each of the Investors named therein (Incorporated by reference to Exhibit 10.3 to the December
2008 Form 8-K).10.79
    
    Amendment to and Consent, dated December 19, 2008, regarding Loan and Security Agreement
between Silicon Valley Bank and the Company dated July 28, 2004, filed herewith.10.80
    
    Confidential Settlement and Mutual Release Agreement dated December 1, 2008, by and between
CarboMedics, Inc. and ATS Medical, Inc., filed herewith.10.81
    
    2009 ATS Medical Management Incentive Compensation Plan (Incorporated by reference to
Exhibit 99.2 to the Companys Current Report on Form 8-K filed on February 23, 2009).21
    
    List of Subsidiaries, filed herewith.
 47




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##### Table of Contents



ExhibitNumber
    
    Description23.1
    
    Consent of Grant Thornton LLP, filed herewith.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, filed herewith.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, filed herewith.32.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.32.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 *
    
    Represents a management contract or compensatory plan or arrangement required to be filed as an
exhibit pursuant to Item 15 of Form 10-K.**
    
    Exhibits and Schedules to the acquisition agreement have been omitted but will be provided
supplementally to the Securities and Exchange Commission upon request. 48




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##### Table of Contents



SIGNATURES
  Dated: March 6, 2009
    
    ATS MEDICAL, INC.By
    
    /s/ Michael D. DaleMichael D. DaleChief Executive Officer
  Signature
    
    TitleChief Executive Officer,President and Chairman of the Board/s/ Michael D. Dale
    
    (principal executive officer)Michael D. DaleChief Financial Officer/s/ Michael R. Kramer
    
    (principal financial and accounting officer)Michael R. Kramer/s/ Steven M. Anderson
    
    DirectorSteven M. Anderson/s/ Robert E. Munzenrider
    
    DirectorRobert E. Munzenrider/s/ Guy P. Nohra
    
    DirectorGuy P. Nohra/s/ Eric W. Sivertson
    
    DirectorEric W. Sivertson/s/ Theodore C. Skokos
    
    DirectorTheodore C. Skokos/s/ Martin P. Sutter
    
    DirectorMartin P. Sutter
 49




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Report of Independent Registered Public Accounting Firm
 
      
 F - 1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
        
 F - 2




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##### Table of Contents



(In Thousands, Except Share and Per Share Data)
 December 312008
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    20,895
    
    
    $
    10,480Short-term investments
    
    
    
    
    
    
    4,189Accounts receivable, less allowance of $364 in 2008
and $225 in 2007
    
    
    14,532
    
    
    
    11,186Inventories, net
    
    
    20,208
    
    
    
    18,743Prepaid expenses
    
    
    958
    
    
    
    1,143Total current assets
    
    
    56,593
    
    
    
    45,741Leasehold improvements, furniture, and equipment, net
    
    
    7,031
    
    
    
    7,739Goodwill
    
    
    17,016
    
    
    
    15,175Other intangible assets
    
    
    32,115
    
    
    
    35,604Other assets
    
    
    2,226
    
    
    
    1,638Total assets
    
    $
    114,981
    
    
    $
    105,897Liabilities and shareholders equityCurrent liabilities:Current maturities of notes payable
    
    $
    2,646
    
    
    $
    2,457Accounts payable
    
    
    4,054
    
    
    
    4,794Accrued compensation
    
    
    3,537
    
    
    
    2,361Warrant liability
    
    
    
    
    
    
    3,913Payable to CryoCath Technologies, Inc.
    
    
    1,910
    
    
    
    Payable to CarboMedics, Inc.
    
    
    4,500
    
    
    
    Other accrued liabilities
    
    
    2,257
    
    
    
    2,095Total current liabilities
    
    
    18,904
    
    
    
    15,620Convertible senior notes payable, net of unamortized discounts
and bifurcated derivatives of $4,867 in 2008 and $4,964 in 2007
    
    
    17,533
    
    
    
    17,436Payable to CryoCath Technologies, Inc.
    
    
    
    
    
    
    1,742Bank notes payable
    
    
    3,969
    
    
    
    6,143Shareholders equity:Common stock, $0.01 par value:Authorized shares  150,000,000 in 2008 and
100,000,000 in 2007Issued and outstanding shares  71,077,458 in 2008 and
59,512,085 in 2007
    
    
    711
    
    
    
    595Additional paid-in capital
    
    
    225,657
    
    
    
    196,108Accumulated deficit
    
    
    (151,916
    )
    
    
    (132,577
    )Accumulated other comprehensive income
    
    
    123
    
    
    
    830Total shareholders equity
    
    
    74,575
    
    
    
    64,956Total liabilities and shareholders equity
    
    $
    114,981
    
    
    $
    105,897
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 3




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##### Table of Contents



(In Thousands, Except Per Share Amounts)
 Year Ended December 312008
    
    2007
    
    2006Net sales
    
    $
    65,821
    
    
    $
    49,587
    
    
    $
    40,449Cost of goods sold
    
    
    25,267
    
    
    
    21,348
    
    
    
    19,568Gross profit
    
    
    40,554
    
    
    
    28,239
    
    
    
    20,881Operating expenses:Sales and marketing
    
    
    27,373
    
    
    
    24,633
    
    
    
    21,008Research and development
    
    
    8,215
    
    
    
    7,546
    
    
    
    3,381Acquired in-process research and development
    
    
    
    
    
    
    3,500
    
    
    
    14,400General and administrative
    
    
    10,509
    
    
    
    10,417
    
    
    
    8,786Litigation settlement
    
    
    7,500
    
    
    
    
    
    
    
    Amortization of intangibles
    
    
    3,489
    
    
    
    2,516
    
    
    
    106Intangible asset impairment
    
    
    
    
    
    
    755
    
    
    
    Distributor termination expense
    
    
    
    
    
    
    
    
    
    
    733Total operating expenses
    
    
    57,086
    
    
    
    49,367
    
    
    
    48,414Operating loss
    
    
    (16,532
    )
    
    
    (21,128
    )
    
    
    (27,533
    )Interest income
    
    
    184
    
    
    
    720
    
    
    
    725Interest expense
    
    
    (2,923
    )
    
    
    (2,542
    )
    
    
    (2,394
    )Other income, net
    
    
    413
    
    
    
    61
    
    
    
    1,528Net loss before income tax expense
    
    
    (18,858
    )
    
    
    (22,889
    )
    
    
    (27,674
    )Income tax expense
    
    
    481
    
    
    
    119
    
    
    
    Net loss
    
    $
    (19,339
    )
    
    $
    (23,008
    )
    
    $
    (27,674
    )Net loss per share:Basic and diluted
    
    $
    (0.31
    )
    
    $
    (0.44
    )
    
    $
    (0.83
    )Weighted average number of shares outstanding:Basic and diluted
    
    
    61,440
    
    
    
    52,589
    
    
    
    33,537
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 4




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##### Table of Contents



(In Thousands)
 AccumulatedAdditional
    
    
    
    
    
    Other Compre-Common Stock
    
    Paid-In
    
    Accumulated
    
    hensive
    
    UnearnedShares
    
    Amount
    
    Capital
    
    Deficit
    
    Income (Loss)
    
    Compensation
    
    TotalBalance at December 31, 2005
    
    
    31,114
    
    
    $
    311
    
    
    $
    139,743
    
    
    $
    (81,895
    )
    
    $
    (64
    )
    
    $
    (566
    )
    
    $
    57,529Stock issued under the Employee
Stock Purchase Plan
    
    
    104
    
    
    
    1
    
    
    
    217
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    218Stock options exercised
    
    
    48
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44Restricted stock units issued
    
    
    54
    
    
    
    1
    
    
    
    (95
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (94
    )Stock issued in connection with
the acquisition of 3F
Therapeutics
    
    
    9,000
    
    
    
    90
    
    
    
    26,010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,100Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    1,103
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,103Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )Reclassification of unearned
compensation in accordance with
the adoption of SFAS 123R
    
    
    
    
    
    
    
    
    
    
    (566
    )
    
    
    
    
    
    
    
    
    
    
    566
    
    
    
    Comprehensive loss:Change in foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    709
    
    
    
    
    
    
    
    709Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,674
    )
    
    
    
    
    
    
    
    
    
    
    (27,674
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,965
    )Balance at December 31, 2006
    
    
    40,320
    
    
    
    403
    
    
    
    166,411
    
    
    
    (109,569
    )
    
    
    645
    
    
    
    
    
    
    
    57,890Stock issued under the Employee
Stock Purchase Plan
    
    
    130
    
    
    
    2
    
    
    
    208
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210Stock options exercised
    
    
    524
    
    
    
    5
    
    
    
    475
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    480Restricted stock units issued
    
    
    389
    
    
    
    4
    
    
    
    (59
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (55
    )Stock issued in private placement
sales, net of offering costs
    
    
    17,925
    
    
    
    179
    
    
    
    30,382
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,561Stock issued for purchase of
intangible assets
    
    
    224
    
    
    
    2
    
    
    
    498
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Warrant issued in connection with
private placement stock sale
    
    
    
    
    
    
    
    
    
    
    (3,261
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,261
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    1,454
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,454Comprehensive loss:Change in foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    
    
    
    
    185Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,008
    )
    
    
    
    
    
    
    
    
    
    
    (23,008
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,823
    )Balance at December 31, 2007
    
    
    59,512
    
    
    
    595
    
    
    
    196,108
    
    
    
    (132,577
    )
    
    
    830
    
    
    
    
    
    
    
    64,956Stock issued under the Employee
Stock Purchase Plan
    
    
    123
    
    
    
    2
    
    
    
    202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204Stock options exercised
    
    
    103
    
    
    
    1
    
    
    
    132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133Restricted stock units issued
    
    
    600
    
    
    
    6
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock issued in private placement
sales, net of offering costs
    
    
    8,511
    
    
    
    85
    
    
    
    19,739
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,824Exercise of common stock warrants
    
    
    2,205
    
    
    
    22
    
    
    
    3,712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,734Stock issued for services rendere
    
    
    d          23
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48Transfer of private placement
warrant liability
    
    
    
    
    
    
    
    
    
    
    3,670
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,670Credit facility warrants issued
    
    
    
    
    
    
    
    
    
    
    376
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    376Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    1,676
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,676Comprehensive loss:Change in foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (707
    )
    
    
    
    
    
    
    (707
    )Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,339
    )
    
    
    
    
    
    
    
    
    
    
    (19,339
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,046
    )Balance at December 31, 2008
    
    
    71,077
    
    
    $
    711
    
    
    $
    225,657
    
    
    $
    (151,916
    )
    
    $
    123
    
    
    $
    
    
    
    $
    74,575
  F - 5




---



##### Table of Contents



(In Thousands)
 Year Ended December 312008
    
    2007
    
    2006Operating activities:Net loss
    
    $
    (19,339
    )
    
    $
    (23,008
    )
    
    $
    (27,674
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    5,623
    
    
    
    4,622
    
    
    
    1,924Loss on disposal of equipment
    
    
    
    
    
    
    
    
    
    
    26Non-cash interest expense
    
    
    743
    
    
    
    546
    
    
    
    463Stock based compensation expense
    
    
    1,676
    
    
    
    1,454
    
    
    
    1,103Change in value of warrant liability and derivative liability
bifurcated from convertible senior notes
    
    
    (294
    )
    
    
    554
    
    
    
    (1,528
    )In-process research and development related to acquisitions
    
    
    
    
    
    
    3,500
    
    
    
    14,400Impairment of intangibles
    
    
    
    
    
    
    755
    
    
    
    Deferred income taxes
    
    
    192
    
    
    
    95
    
    
    
    Changes in operating assets and liabilities, net of acquisition:Accounts receivable
    
    
    (3,446
    )
    
    
    1,117
    
    
    
    1,010Inventories
    
    
    (2,500
    )
    
    
    669
    
    
    
    2,845Accounts payable and accrued expenses
    
    
    4,782
    
    
    
    121
    
    
    
    (2,075
    )Other
    
    
    159
    
    
    
    32
    
    
    
    (324
    )Net cash used in operating activities
    
    
    (12,404
    )
    
    
    (9,543
    )
    
    
    (9,830
    )Investing activities:Purchases of short-term investments
    
    
    (938
    )
    
    
    (4,140
    )
    
    
    (10,326
    )Maturities of short-term investments
    
    
    5,127
    
    
    
    6,043
    
    
    
    9,336Payments for business acquisitions
    
    
    (2,000
    )
    
    
    (21,074
    )
    
    
    Business acquisition costs, net of cash acquired
    
    
    
    
    
    
    (1,791
    )
    
    
    (717
    )Payments for other intangibles
    
    
    
    
    
    
    (277
    )
    
    
    (521
    )Purchases of leasehold improvements, furniture, and equipment
    
    
    (1,440
    )
    
    
    (748
    )
    
    
    (1,208
    )Other
    
    
    
    
    
    
    (36
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    749
    
    
    
    (22,023
    )
    
    
    (3,436
    )Financing activities:Advances on bank notes payable
    
    
    
    
    
    
    8,600
    
    
    
    1,500Payments on bank notes payable
    
    
    (1,985
    )
    
    
    (2,327
    )
    
    
    (909
    )Net proceeds from issuance of common stock
    
    
    23,943
    
    
    
    31,196
    
    
    
    123Other
    
    
    162
    
    
    
    168
    
    
    
    Net cash provided by financing activities
    
    
    22,120
    
    
    
    37,637
    
    
    
    714Effect of exchange rate changes
    
    
    (50
    )
    
    
    (203
    )
    
    
    544Increase (decrease) in cash and cash equivalents
    
    
    10,415
    
    
    
    5,868
    
    
    
    (12,008
    )Cash and cash equivalents at beginning of year
    
    
    10,480
    
    
    
    4,612
    
    
    
    16,620Cash and cash equivalents at end of year
    
    $
    20,895
    
    
    $
    10,480
    
    
    $
    4,612Supplemental cash flow information:Net cash paid during the year for interest
    
    $
    2,139
    
    
    $
    2,241
    
    
    $
    1,642Significant non-cash transactions:Transfer of warrant liability to additional paid-in capital
    
    $
    3,670
    
    
    
    
    
    
    
    Credit facility warrants issued
    
    
    376
    
    
    
    
    
    
    
    Issuance of common stock for acquisition of intangible assets
    
    
    
    
    
    $
    500
    
    
    
    Assumption of liabilities in connection with asset acquisition
    
    
    
    
    
    
    2,429
    
    
    
    License agreement intangible asset tendered in asset acquisition
    
    
    
    
    
    
    1,765
    
    
    
    Reclassification of unearned compensation to additional paid-in
capital in accordance with the adoption of SFAS 123R
    
    
    
    
    
    
    
    
    
    $
    566Reclassification of convertible note derivative liability against
related discount
    
    
    
    
    
    
    
    
    
    
    (1,627
    )Stock issued for acquisition
    
    
    
    
    
    
    
    
    
    
    26,100
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 6




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##### Table of Contents



1. Summary of Significant Accounting Policies
 Business Activity
  Principles of Consolidation
  Cash Equivalents
  Short-Term Investments
  Accounts Receivable
  Inventories
  2008
    
    2007Raw materials
    
    $
    4,712
    
    
    $
    3,655Work-in-process
    
    
    4,880
    
    
    
    2,920Finished goods
    
    
    11,416
    
    
    
    12,168Total inventories
    
    
    21,008
    
    
    
    18,743Less: non-current inventories
    
    
    (800
    )
    
    
    Inventories, net
    
    $
    20,208
    
    
    $
    18,743
 F - 7




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##### Table of Contents



Other Assets
  Leasehold Improvements, Furniture, and Equipment
  Furniture and fixtures
    
    7 yearsEquipment
    
    5 to 17 yearsComputers
    
    2 years
  Indefinite-Lived Intangible Assets
 Goodwill and Other Intangible Assets,
 Revenue Recognition
   F - 8




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##### Table of Contents



Use of Estimates
  Advertising and Promotional Costs
  Foreign Currency Translation
   Income Taxes
 Accounting for Income Taxes
 Accounting for Uncertainty in Income Taxes Accounting for
Contingencies Accounting for Income Taxes
 Warranties
 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Indebtedness to Others
 F - 9




---



##### Table of Contents



Stock-Based Compensation
 Share-Based Payment
 Net Loss Per Share
  Convertible Debt and Derivative Instruments
 Accounting for Derivative Instruments and Hedging
Activities, Fair Value Measurements
 2. Acquisitions
 Acquisition of Surgical Cryoablation Business from CryoCath Technologies, Inc.
   Purchase Price.
 F - 10




---



##### Table of Contents



Cash paid (includes $0.9 million post-closing purchase price reduction
and $2.0 million manufacturing transition payments)
million
)
    
    $
    23,074License payments made under prior Distribution and Agent Agreements
    
    
    1,765Non-contingent cash payment to be made (discounted to present value
using discount rate of 9.25%)
    
    
    1,663Acquisition-related costs
    
    
    1,791Total purchase price
    
    $
    28,293
 Purchase Price Allocation.
 Current assets
    
    $
    951Fixed assets
    
    
    761Definite-lived intangible assets subject to amortization
    
    
    11,800Goodwill
    
    
    11,888Acquired in-process research and development
    
    
    3,500Current liabilities
    
    
    (607
    )Total purchase price allocation
    
    $
    28,293
  Weighted AverageAmount
    
    
    Amortization(in thousands)
    
    Assigned
    
    
    PeriodDefinite-lived intangible assets:Existing technology  core
    
    $
    4,400
    
    
    16 yearsExisting technology  developed
    
    
    5,600
    
    
    5 yearsDistributor relationships
    
    
    1,500
    
    
    12 yearsProduct trademarks
    
    
    300
    
    
    10 yearsTotal definite-lived intangible assets
    
    $
    11,800
    
    
    10 yearsGoodwill
    
    $
    11,888Acquired in-process research and development
    
    $
    3,500
   F - 11




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##### Table of Contents



Acquisition of 3F Therapeutics, Inc.
   Purchase Price.
  Fair value of ATS common stock
    
    $
    26,100Other estimated acquisition-related costs
    
    
    3,316Total purchase price
    
    $
    29,416
 Purchase Price Allocation.
 Cash
    
    $
    2,599Other current assets
    
    
    2,530Intangible assets subject to amortization
    
    
    7,150Goodwill
    
    
    5,128Other long-term assets
    
    
    519Acquired in-process research and development
    
    
    14,400Current liabilities
    
    
    (2,910
    )Total purchase price allocation
    
    $
    29,416
  F - 12




---



##### Table of Contents



Weighted AverageAmount
    
    
    Amortization(in thousands)
    
    Assigned
    
    
    PeriodDefinite-lived intangible assets:Technology  core
    
    $
    5,200
    
    
    20 yearsTechnology  developed
    
    
    700
    
    
    9 yearsTradenames and trademarks
    
    
    1,200
    
    
    15 yearsOther
    
    
    50
    
    
    7 yearsTotal definite-lived intangible assets
    
    $
    7,150
    
    
    18 yearsGoodwill
    
    $
    5,128Acquired in-process research and development
    
    $
    14,400
    Pro Forma Results of Operations
   F - 13




---



##### Table of Contents



Year Ended December 31,(Unaudited pro forma data in thousands, except per share data)
    
    2007
    
    2006Net sales
    
    $
    53,951
    
    
    $
    48,383License revenue
    
    
    
    
    
    
    11,031Total revenue
    
    $
    53,951
    
    
    $
    59,414Net loss
    
    $
    (19,238
    )
    
    $
    (16,456
    )Net loss per share  basic and diluted
    
    $
    (0.37
    )
    
    $
    (0.33
    )
    3. Short-Term Investments
  4. Leasehold Improvements, Furniture, and Equipment, net
  2008
    
    2007Furniture and fixtures
    
    $
    599
    
    
    $
    608Equipment
    
    
    13,604
    
    
    
    12,310Leasehold improvements
    
    
    3,678
    
    
    
    3,491Construction in progress
    
    
    556
    
    
    
    63218,437
    
    
    
    17,041Less accumulated depreciation
    
    
    11,406
    
    
    
    9,302$
    7,031
    
    
    $
    7,739
 5. Private Placements of Common Stock
   F - 14




---



##### Table of Contents



Year ended December 31,(in thousands)
    
    2008
    
    2007Warrant liability balance at beginning of period
    
    $
    3,913
    
    
    $
    Valuation of warrants upon issuance
    
    
    
    
    
    
    3,261Total losses (gains) included in other expense (income):First quarter
    
    
    (1,521
    )
    
    
    Second quarter
    
    
    1,278
    
    
    
    279Third quarter
    
    
    
    
    
    
    (408
    )Fourth quarter
    
    
    
    
    
    
    781Transfer to additional-paid-in-capital
    
    
    (3,670
    )
    
    
    Warrant liability balance at end of period
    
    $
    
    
    
    $
    3,913
   F - 15




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##### Table of Contents



6. Goodwill and Other Intangible Assets
  Assets Subject to Amortization
    
    
    Assets Not Subject to AmortizationOtherTechnology,3F
    
    CryoCath
    
    
    
    
    
    DevelopmentTechnology
    
    Technology
    
    Carbon
    
    andand
    
    and
    
    Technology
    
    Licensing
    
    
    
    
    
    
    3F
    
    CryoCath
    
    TotalTrademarks
    
    Trademarks
    
    License
    
    Agreements
    
    Total
    
    
    Goodwill
    
    Goodwill
    
    GoodwillBalance at December 31, 2007:Gross carrying amount (cost)
    
    $
    7,150
    
    
    $
    11,800
    
    
    $
    18,500
    
    
    $
    777
    
    
    $
    38,227
    
    
    
    $
    5,128
    
    
    $
    10,047
    
    
    $
    15,175Accumulated amortization
    
    
    (531
    )
    
    
    (841
    )
    
    
    (1,233
    )
    
    
    (18
    )
    
    
    (2,623
    )
    
    
    
    
    
    
    
    
    
    
    
    Net carrying amount
    
    $
    6,619
    
    
    $
    10,959
    
    
    $
    17,267
    
    
    $
    759
    
    
    $
    35,604
    
    
    
    $
    5,128
    
    
    $
    10,047
    
    
    $
    15,175Balance at December 31, 2008:Gross carrying amount (cost)
    
    $
    7,150
    
    
    $
    11,800
    
    
    $
    18,500
    
    
    $
    777
    
    
    $
    38,227
    
    
    
    $
    5,128
    
    
    $
    11,888
    
    
    $
    17,016Accumulated amortization
    
    
    (956
    )
    
    
    (2,580
    )
    
    
    (2,467
    )
    
    
    (109
    )
    
    
    (6,112
    )
    
    
    
    
    
    
    
    
    
    
    
    Net carrying amount
    
    $
    6,194
    
    
    $
    9,220
    
    
    $
    16,033
    
    
    $
    668
    
    
    $
    32,115
    
    
    
    $
    5,128
    
    
    $
    11,888
    
    
    $
    17,016
  Assets Not SubjectAssets Subject to Amortization
    
    
    to AmortizationOtherTechnology,3F
    
    CryoCath
    
    
    
    
    
    Development
    
    
    
    
    
    
    CryoCathTechnology
    
    Technology
    
    Carbon
    
    and
    
    
    
    
    
    
    Agency &and
    
    and
    
    Technology
    
    Licensing
    
    
    
    
    
    
    DistributionTrademarks
    
    Trademarks
    
    License
    
    Agreements
    
    Total
    
    
    Agreements
    
    GoodwillBalance at December 31, 2006
    
    $
    7,044
    
    
    
    
    
    
    $
    18,500
    
    
    $
    754
    
    
    $
    26,298
    
    
    
    $
    1,765
    
    
    $
    5,092Acquisition of CryoCath
surgical cryoablation business
    
    
    
    
    
    $
    11,800
    
    
    
    
    
    
    
    
    
    
    
    11,800
    
    
    
    
    (1,765
    )
    
    
    10,047Cash Payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    277
    
    
    
    277
    
    
    
    
    
    
    
    
    36Stock Payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    500
    
    
    
    
    
    
    
    
    Amortization
    
    
    (425
    )
    
    
    (841
    )
    
    
    (1,233
    )
    
    
    (17
    )
    
    
    (2,516
    )
    
    
    
    
    
    
    
    Asset impairment write-off
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (755
    )
    
    
    (755
    )
    
    
    
    
    
    
    
    Balance at December 31, 2007
    
    
    6,619
    
    
    
    10,959
    
    
    
    17,267
    
    
    
    759
    
    
    
    35,604
    
    
    
    
    
    
    
    
    15,175Acquisition of CryoCath
surgical cryoablation business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000CryoCath acquisition
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (159
    )Amortization
    
    
    (425
    )
    
    
    (1,739
    )
    
    
    (1,234
    )
    
    
    (91
    )
    
    
    (3,489
    )
    
    
    
    
    
    
    
    Balance at December 31, 2008
    
    $
    6,194
    
    
    $
    9,220
    
    
    $
    16,033
    
    
    $
    668
    
    
    $
    32,115
    
    
    
    $
    
    
    
    $
    17,016
  2009
    
    $
    3,2252010
    
    
    3,2342011
    
    
    3,1892012
    
    
    2,6292013
    
    
    2,067$
    14,344
 F - 16




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##### Table of Contents



Intangible Asset Purchases
     Intangible Asset Impairment
  Change in Status of Indefinite-lived Intangible Asset
  Agency & Distribution Agreements Tendered in Acquisition
  Goodwill
  F - 17




---



##### Table of Contents



7. Long-Term Debt
 Convertible Notes Payable
       Accounting for Derivative Instruments and Hedging Activities,
 
    
    The embedded written option relating to the common stock that may be potentially
issuable upon conversion (conversion feature derivative)
    
    The option for Note holders to put back debt to the Company in connection with
certain corporate change of control transactions
    
    The provision relating to an additional payment in connection with the automatic
conversion of the Notes prior to October 15, 2008
    
    The provision to increase the conversion rate in the event of a change in control
transaction
 F - 18




---



##### Table of Contents



Bank Notes Payable
      F - 19




---



##### Table of Contents



2009
    
    $
    2,6462010
    
    
    2,6462011
    
    
    1,323$
    6,615
 Subordinated Credit Agreement
    8. Employee Stock Purchase Plan
   Fiscal Year
    
    Number of Shares
    
    Price Range2008
    
    123,278
    
    $1.40  $2.252007
    
    129,449
    
    $1.50  $1.842006
    
    103,947
    
    $1.95  $2.38
 F - 20




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##### Table of Contents



9. Stock-Based Compensation and Equity Plans
 Stock-Based Compensation
 Share-Based Payment
 Fair Value.
 Assumptions used:
    
    2008
    
    2006Expected volatility
    
    
    1.06
    
    
    
    0.83Risk-free interest rate
    
    
    2.8%
    
    
    
    4.8%Expected life
    
    
    5 years
    
    
    
    5 yearsDividend yield
    
    
    0%
    
    
    
    0%Weighted average per share fair value of options granted
    
    
    $1.22
    
    
    
    $2.03
   Stock Compensation Expense.
  (in thousands, except per share data)
    
    2008
    
    2007
    
    2006Stock compensation expense included in:Sales and marketing expenses
    
    $
    973
    
    
    $
    805
    
    
    $
    649General and administrative expenses
    
    
    703
    
    
    
    649
    
    
    
    454Total stock compensation expense
    
    $
    1,676
    
    
    $
    1,454
    
    
    $
    1,103Stock compensation expense per share
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    0.03
  F - 21




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##### Table of Contents



Forfeitures.
 Equity Plans
   Stock Options.
 WeightedStock Options Outstanding
    
    
    
    
    
    
    
    
    
    Average OptionUnder the Plans
    
    Non-Plan
    
    
    
    
    
    Exercise PriceISO
    
    Non-ISO
    
    Options
    
    Total
    
    Per ShareOutstanding
at December 31, 2005
    
    
    1,006,700
    
    
    
    350,000
    
    
    
    2,897,902
    
    
    
    4,254,602
    
    
    $
    3.09Options granted
    
    
    
    
    
    
    5,000
    
    
    
    
    
    
    
    5,000
    
    
    
    2.95Options exercised
    
    
    (7,625
    )
    
    
    
    
    
    
    (40,202
    )
    
    
    (47,827
    )
    
    
    0.92Options canceled
    
    
    (81,450
    )
    
    
    (56,000
    )
    
    
    (325,000
    )
    
    
    (462,450
    )
    
    
    4.57Outstanding at
December 31, 2006
    
    
    917,625
    
    
    
    299,000
    
    
    
    2,532,700
    
    
    
    3,749,325
    
    
    
    2.94Options granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    (21,500
    )
    
    
    
    
    
    
    (502,000
    )
    
    
    (523,500
    )
    
    
    0.92Options canceled
    
    
    (226,250
    )
    
    
    
    
    
    
    (333,750
    )
    
    
    (560,000
    )
    
    
    4.44Outstanding at
December 31, 2007
    
    
    669,875
    
    
    
    299,000
    
    
    
    1,696,950
    
    
    
    2,665,825
    
    
    
    3.02Options granted
    
    
    125,900
    
    
    
    
    
    
    
    
    
    
    
    125,900
    
    
    
    1.57Options exercised
    
    
    (24,750
    )
    
    
    
    
    
    
    (78,750
    )
    
    
    (103,500
    )
    
    
    1.28Options canceled
    
    
    (128,375
    )
    
    
    
    
    
    
    (125,000
    )
    
    
    (253,375
    )
    
    
    4.29Outstanding at
December 31, 2008
    
    
    642,650
    
    
    
    299,000
    
    
    
    1,493,200
    
    
    
    2,434,850
    
    
    $
    2.89
 F- 22




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##### Table of Contents



Options Outstanding at
    
    Options Exercisable atDecember 31, 2008
    
    December 31, 2008Weighted
    
    
    
    
    
    WeightedWeighted Average
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number
    
    Remaining
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Price
    
    Exercisable
    
    Price$
    0.37
    
    
    
    
    $
    0.46
    
    
    
    505,000
    
    
    3.88 years
    
    $
    0.40
    
    
    
    505,000
    
    
    $
    0.400.51
    
    
    
    
    
    2.51
    
    
    
    504,650
    
    
    4.71 years
    
    
    1.90
    
    
    
    387,250
    
    
    
    2.002.70
    
    
    
    
    
    3.46
    
    
    
    424,200
    
    
    4.56 years
    
    
    3.21
    
    
    
    424,200
    
    
    
    3.213.60
    
    
    
    
    
    3.80
    
    
    
    637,500
    
    
    5.02 years
    
    
    3.71
    
    
    
    637,500
    
    
    
    3.713.99
    
    
    
    
    
    8.50
    
    
    
    343,500
    
    
    3.58 years
    
    
    5.66
    
    
    
    343,500
    
    
    
    5.669.88
    
    
    
    
    
    
    20,000
    
    
    1.34 years
    
    
    9.88
    
    
    
    20,000
    
    
    
    9.88$
    0.37
    
    
    
    
    $
    9.88
    
    
    
    2,434,850
    
    
    4.40 years
    
    $
    2.89
    
    
    
    2,317,450
    
    
    $
    2.95
  Restricted Stock Units.
 WeightedWeighted Average
    
    AverageAward Date
    
    RemainingNumber of Shares
    
    Fair Value
    
    Contractual TermUnvested at December 31, 2005
    
    
    348,000
    
    
    $
    3.25
    
    
    1.53 yearsAwards granted
    
    
    967,272
    
    
    
    2.73Awards vested
    
    
    (87,000
    )
    
    
    3.38Awards forfeited
    
    
    (58,750
    )
    
    
    3.11Unvested at December 31, 2006
    
    
    1,169,522
    
    
    
    2.83
    
    
    2.03 yearsAwards granted
    
    
    1,537,184
    
    
    
    1.74Awards vested
    
    
    (419,055
    )
    
    
    2.75Awards forfeited
    
    
    (250,113
    )
    
    
    2.51Unvested at December 31, 2007
    
    
    2,037,538
    
    
    
    2.06
    
    
    2.09 yearsAwards granted
    
    
    2,158,634
    
    
    
    2.02Awards vested
    
    
    (600,166
    )
    
    
    2.27Awards forfeited
    
    
    (204,263
    )
    
    
    2.09Unvested at December 31, 2008
    
    
    3,391,743
    
    
    $
    2.00
    
    
    2.14 years
  F- 23




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##### Table of Contents



10. Leases
  Year ending December 31:2009
    
    $
    827,0002010
    
    
    331,000$
    1,158,000
  11. Income Taxes
      December 312008
    
    2007Current deferred tax assets
    
    $
    989
    
    
    $
    576Long-term deferred tax assets (liabilities):Net operating loss carryforwards
    
    
    59,376
    
    
    
    56,260Foreign net operating loss carryforwards
    
    
    319
    
    
    
    419Research and development credits
    
    
    1,605
    
    
    
    1,507Alternative minimum tax credits
    
    
    54
    
    
    
    54Depreciation
    
    
    1,188
    
    
    
    1,020Compensation accruals and reserves
    
    
    540
    
    
    
    467Deferred financing costs
    
    
    286
    
    
    
    194Technology license amortization
    
    
    (1,857
    )
    
    
    (1,534
    )Other intangible assets and goodwill
    
    
    (934
    )
    
    
    (1,016
    )Other
    
    
    766
    
    
    
    835Net long-term deferred tax assets
    
    
    61,343
    
    
    
    58,206Net deferred tax assets before valuation allowance
    
    
    62,332
    
    
    
    58,782Less valuation allowance
    
    
    (62,639
    )
    
    
    (58,877
    )Net deferred tax liability
    
    $
    (307
    )
    
    $
    (95
    )
 F- 24




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##### Table of Contents



2008
    
    2007
    
    2006Tax at statutory rate
    
    
    (34.0
    )%
    
    
    (34.0
    )%
    
    
    (34.0
    )%State income taxes
    
    
    (2.0
    )
    
    
    (4.0
    )
    
    
    (4.0
    )Permanent differences
    
    
    1.0
    
    
    
    (3.8
    )
    
    
    Other (including foreign taxes)
    
    
    1.0
    
    
    
    (1.4
    )
    
    
    FIN 48
    
    
    0.7
    
    
    
    
    
    
    
    Acquired in-process research and development
    
    
    
    
    
    
    
    
    
    
    17.7Impact of changes in valuation allowance
    
    
    35.8
    
    
    
    43.7
    
    
    
    20.32.5
    %
    
    
    0.5
    %
    
    
    
    %
 Accounting for Uncertainty in Income Taxes Accounting for Contingencies Accounting for Income Taxes
  Balance at January 1, 2007
    
    $
    540Additions for tax positions of prior periods
    
    
    13Reductions for tax positions related to the current period
    
    
    (23
    )Balance at December 31, 2007
    
    
    530Additions for tax positions of prior periods
    
    
    166Additions for tax positions related to the current period
    
    
    120Balance at December 31, 2008
    
    $
    816
    F- 25




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##### Table of Contents



12. Distributor Termination
  13. Benefit Plan
  14. Significant Customers and Concentration of Credit Risk
  2008
    
    2007
    
    2006United States
    
    
    38
    %
    
    
    38
    %
    
    
    38
    %Europe
    
    
    36
    %
    
    
    33
    %
    
    
    28
    %Asia Pacific
    
    
    21
    %
    
    
    22
    %
    
    
    25
    %Other Markets
    
    
    5
    %
    
    
    7
    %
    
    
    9
    %
   15. Quarterly Financial Data (Unaudited)
  QuarterFirst
    
    Second
    
    Third
    
    FourthYear ended December 31, 2008Net sales
    
    $
    14,845
    
    
    $
    16,900
    
    
    $
    16,044
    
    
    $
    18,032Gross profit
    
    
    8,948
    
    
    
    10,290
    
    
    
    9,474
    
    
    
    11,842Net loss
    
    
    (2,411
    )
    
    
    (4,669
    )
    
    
    (3,746
    )
    
    
    (8,513
    )Net basic and diluted loss per share
    
    $
    (0.04
    )
    
    $
    (0.08
    )
    
    $
    (0.06
    )
    
    $
    (0.13
    )Year ended December 31, 2007Net sales
    
    $
    10,796
    
    
    $
    12,417
    
    
    $
    12,157
    
    
    $
    14,217Gross profit
    
    
    6,243
    
    
    
    6,872
    
    
    
    6,844
    
    
    
    8,280Net loss
    
    
    (4,820
    )
    
    
    (8,717
    )
    
    
    (3,310
    )
    
    
    (6,161
    )Net basic and diluted loss per share
    
    $
    (0.11
    )
    
    $
    (0.18
    )
    
    $
    (0.06
    )
    
    $
    (0.10
    )
 F- 26




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##### Table of Contents



Note 16. Fair Value Measurements
 Fair Value Measurements.
  
    
    Level 1  quoted prices in active markets for identical assets and liabilities.
    
    Level 2  observable inputs other than quoted prices in active markets for identical
assets and liabilities.
    
    Level 3  unobservable inputs in which there is little or no market data available,
which require the reporting entity to develop its own assumptions.
    The Fair Value Option for Financial
Assets and Financial Liabilities Accounting for Certain
Investments in Debt and Equity Securities
 Note 17. Recently Issued Accounting Pronouncements
 Business
Combinations
 F- 27




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##### Table of Contents



18. Litigation
 Abbey Litigation
    F- 28




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##### Table of Contents



CarboMedics Litigation
     F- 29




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##### Table of Contents



ExhibitNumber
    
    Description10.79
    
    Amendment to and Consent, dated December 19, 2008, regarding Loan and Security Agreement
between Silicon Valley Bank and the Company dated July 28, 2004.10.80
    
    Confidential Settlement and Mutual Release Agreement dated December 1, 2008, by and between
CarboMedics, Inc. and ATS Medical, Inc.21
    
    List of Subsidiaries.23.1
    
    Consent of Grant Thornton LLP.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended.32.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.