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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, 2009
 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
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 3905 Annapolis Lane North 
Minneapolis, 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 o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  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. REMOVED AND RESERVEDPART 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-12.1EX-21EX-23EX-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 cardiac arrythmias, the most prevalent of which is atrial
fibrillation. In 2007, we acquired this business from CryoCath. We have increased
revenue from these products to approximately $18.9 million (25% of total revenue) in 2009,
compared to $4.6 million (11% of total 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 $4.6 million (6% of total revenue) in 2009, compared to $1.1 million (less
than 3% of total revenue) 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. European CE Mark approval on our first
minimally invasive sutureless platform product was received in December 2009. In
addition, a minimally invasive beating heart valve replacement platform is in
development with human feasibility studies planned for 2010. Tissue heart valve revenues
have increased to approximately $5.6 million (7% of total revenue) in 2009, compared to
$0.2 million (less than 1% of total revenue) in 2006.
   BUSINESS STRATEGY
  
    
    Increase market share of all our core products, including the ATS Open Pivot® Heart
Valve, ATS CryoMaze® Surgical Ablation products, ATS Simulus® annuloplasty repair rings
and bands and the ATS 3f® Aortic Bioprosthesis and ATS 3f Enable® Aortic Bioprosthesis
tissue heart valves.
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
    
    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.
 OUR MARKETS AND PRODUCTS
 Heart Valve Therapy
  Prosthetic Heart Valve Market
 Overview.
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Our Mechanical Heart Valve Products
  
    
    Open pivot areas that 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
  
    
    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.
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
    
    Tubular valve design, which mimics a native aortic valve in form and function
    
    Stentless tissue valve design
    
    Pericardial tissue
  
    
    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.
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##### Table of Contents



Heart Valve Repair Market
 Overview.
 Our Heart Valve Repair Products.
 
  
    
    Generous suture target area
    
    Semi-rigid ring that employs unique Flex-zone flexible anterior segment with semi-rigid
posterior segment
    
    Adjustable flexible ring that 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 rings and bands accommodate anterior annular movement while allowing for
posterior annular remodeling
    
    Adjustable rings and bands allow precise matching with individual patient anatomy
 Heart Valve Repair Market Competition.
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Surgical Cardiac Ablation Market
 Overview.
    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.
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Surgical Cardiac Ablation Market Competition.
 MARKETING, SALES AND DISTRIBUTION
 Overview.
 U.S. Marketing and Sales.
 International Marketing, Sales and Distribution
  7




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Medical Device Industry Competition.
  MANUFACTURING AND SUPPLY
      8




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RESEARCH AND DEVELOPMENT
  FINANCIAL INFORMATION ABOUT SEGMENTS
  SEASONALITY
  PATENTS AND PROPRIETARY TECHNOLOGY
     9




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® ® ® ® ® ®
 GOVERNMENT REGULATION
 United States.
     10




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International.
  THIRD-PARTY REIMBURSEMENT
     PRODUCT LIABILITY AND INSURANCE
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EMPLOYEES
  EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionMichael D. Dale
    
    
    50
    
    
    Chairman, Chief Executive Officer and PresidentMichael R. Kramer
    
    
    34
    
    
    Chief Financial OfficerAstrid M. Berthe
    
    
    46
    
    
    Vice President, Regulatory Affairs and Quality AssuranceThaddeus Coffindaffer
    
    
    48
    
    
    Vice President, SalesDavid R. Elizondo
    
    
    42
    
    
    Vice President, Research and DevelopmentMichael E. Reinhardt
    
    
    51
    
    
    Vice President, Global MarketingCraig A. Swandal
    
    
    49
    
    
    Vice President, OperationsXavier K. Bertrand
    
    
    38
    
    
    Vice President and General Manager, Europe, Middle East and Africa
 Michael D. Dale
 Michael R. Kramer
 Astrid M. Berthe
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Thaddeus Coffindaffer
 David R. Elizondo
 Michael E. Reinhardt
 Craig A. Swandal
 Xavier K. Bertrand
 AVAILABLE INFORMATION
  
 ITEM 1A. RISK FACTORS
  We have historically relied on the ATS mechanical heart valve as our primary source of revenue. If
we are unable to maintain our current sales levels of mechanical heart valves, or if we are unable
to successfully market our other products on a broad basis, including in Europe, our operating
results may be harmed and we may not achieve profitability.
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We have a history of net losses and of regularly raising funds and incurring debt to fund our net
losses. If our current cash and investment balances are inadequate to carry us to profitability,
we may need to raise equity or incur additional debt in the future. If we are unable to obtain
adequate financing, we may be unable to continue our operations.
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The recent U.S. and global economic downturn could have adverse effects on our business and our
company.
  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, and we are subject to risks relating to non-FDA-approved, or off label, use of our
products.
  
    
    obtain the approval of the FDA or international regulatory authorities where our
products are not yet marketed;
    
    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.
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Healthcare reform legislation could adversely affect our revenue and financial condition.
   Our business could be seriously harmed if third-party payers do not reimburse the costs for our
products.
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Foreign currency fluctuations and other risks inherent in doing business in international markets
could adversely affect our operating results.
   
    
    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.
 The markets in which we compete are 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.
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Without the timely introduction of new and improved products, new products or technologies could
emerge that render our products noncompetitive and obsolete.
  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.
  If we are unsuccessful in clinical trials, our lack of success could have a material adverse effect
on our prospects.
  If we acquire other companies or businesses, we will be subject to risks that could hurt our
business.
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Any termination of our right to manufacture pyrolytic carbon components under our carbon technology
agreement with Carbomedics, or any delay or interruption in our manufacturing of these components,
could delay product delivery or force us to cease operations.
  We may encounter litigation that could have a material impact on our business.
  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.
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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 products.
  
    
    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.
 If the value of our goodwill or other intangible assets become impaired, it could materially reduce
the value of our assets and reduce our net income for the year in which the related impairment
charges occur.
   We use a combination of direct sales persons and independent sales representatives to sell our
products. If our sales strategy is not successful, we may not be able to continue our operations.
  20




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We currently depend on the marketing and sales efforts of international independent distributors.
  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.
  The price of our common stock has been volatile, which may result in losses to investors.
  
    
    general market conditions;
    
    actual or anticipated sales of common stock by existing shareholders, whether in
the market or in subsequent public offerings;
    
    capital commitments;
    
    the success of our management in operating ATS effectively;
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
    
    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;
    
    public concern as to the safety and efficacy of products developed by us or others;
and
    
    armed conflict, war or terrorism.
  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;
    
    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
  22




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ITEM 3.
    
    LEGAL PROCEEDINGS
 Abbey Litigation
    23




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ITEM 4.
    
    (REMOVED AND RESERVED)
  24




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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
  Fiscal Year 2008:
    
    High
    
    
    LowFirst Quarter
    
    $
    2.18
    
    
    $
    1.41Second Quarter
    
    $
    2.34
    
    
    $
    1.41Third Quarter
    
    $
    3.24
    
    
    $
    2.06Fourth Quarter
    
    $
    2.89
    
    
    $
    1.98
 Fiscal Year 2009:
    
    High
    
    
    LowFirst Quarter
    
    $
    2.84
    
    
    $
    2.11Second Quarter
    
    $
    3.37
    
    
    $
    2.35Third Quarter
    
    $
    3.50
    
    
    $
    2.58Fourth Quarter
    
    $
    3.26
    
    
    $
    2.52
 Holders
  Dividends
  Repurchases of Common Stock
  Sales of Unregistered Securities
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Performance Graph
  
 Name
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009NASDAQ Medical Dev/Ins/Sup
    
    $
    100.00
    
    
    $
    109.79
    
    
    $
    115.72
    
    
    $
    147.14
    
    
    $
    79.23
    
    
    $
    115.55Standard & Poors 500 Stock Index
    
    
    100.00
    
    
    
    103.00
    
    
    
    117.03
    
    
    
    121.16
    
    
    
    74.53
    
    
    
    92.01ATS Medical, Inc.
    
    
    100.00
    
    
    
    59.23
    
    
    
    44.42
    
    
    
    47.42
    
    
    
    59.66
    
    
    
    69.31
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ITEM 6.
    
    SELECTED FINANCIAL DATA
 Year Ended December 31,(in thousands, except per share data)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Statement of Operations Data:Net sales
    
    $
    75,710
    
    
    $
    65,821
    
    
    $
    49,587
    
    
    $
    40,449
    
    
    $
    34,636Cost of sales
    
    
    26,821
    
    
    
    25,267
    
    
    
    21,348
    
    
    
    19,568
    
    
    
    22,828Gross profit
    
    
    48,889
    
    
    
    40,554
    
    
    
    28,239
    
    
    
    20,881
    
    
    
    11,808Operating expenses:Sales and marketing
    
    
    30,617
    
    
    
    27,373
    
    
    
    24,633
    
    
    
    21,008
    
    
    
    18,948Research and development
    
    
    8,863
    
    
    
    8,215
    
    
    
    7,546
    
    
    
    3,381
    
    
    
    1,733Acquired in-process research
and development
    
    
    
    
    
    
    
    
    
    
    3,500
    
    
    
    14,400
    
    
    
    General and administrative
    
    
    9,905
    
    
    
    10,509
    
    
    
    10,417
    
    
    
    8,786
    
    
    
    7,314Litigation settlement
    
    
    
    
    
    
    7,500
    
    
    
    
    
    
    
    
    
    
    
    Amortization of intangibles
    
    
    3,224
    
    
    
    3,489
    
    
    
    2,516
    
    
    
    106
    
    
    
    Intangible asset impairment
    
    
    
    
    
    
    
    
    
    
    755
    
    
    
    
    
    
    
    Distributor termination expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    733
    
    
    
    Total operating expenses
    
    
    52,609
    
    
    
    57,086
    
    
    
    49,367
    
    
    
    48,414
    
    
    
    27,995Operating loss
    
    
    (3,720
    )
    
    
    (16,532
    )
    
    
    (21,128
    )
    
    
    (27,533
    )
    
    
    (16,187
    )Interest income (expense), net
    
    
    (2,696
    )
    
    
    (2,739
    )
    
    
    (1,822
    )
    
    
    (1,669
    )
    
    
    (338
    )Other income, net
    
    
    391
    
    
    
    413
    
    
    
    61
    
    
    
    1,528
    
    
    
    2,131Net loss before income taxes
    
    
    (6,025
    )
    
    
    (18,858
    )
    
    
    (22,889
    )
    
    
    (27,674
    )
    
    
    (14,394
    )Income tax expense
    
    
    288
    
    
    
    481
    
    
    
    119
    
    
    
    
    
    
    
    Net loss
    
    ($
    6,313
    )
    
    ($
    19,339
    )
    
    ($
    23,008
    )
    
    ($
    27,674
    )
    
    ($
    14,394
    )Net loss per share:Basic
    
    ($
    0.09
    )
    
    ($
    0.31
    )
    
    ($
    0.44
    )
    
    ($
    0.83
    )
    
    ($
    0.46
    )Diluted
    
    ($
    0.09
    )
    
    ($
    0.31
    )
    
    ($
    0.44
    )
    
    ($
    0.83
    )
    
    ($
    0.46
    )Weighted average number of shares outstanding:Basic
    
    
    72,114
    
    
    
    61,440
    
    
    
    52,589
    
    
    
    33,537
    
    
    
    31,009Diluted
    
    
    72,114
    
    
    
    61,440
    
    
    
    52,589
    
    
    
    33,537
    
    
    
    31,009
 As of December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Balance Sheet Data:Cash, cash equivalents and short-term
investments
    
    $
    14,235
    
    
    $
    20,895
    
    
    $
    14,669
    
    
    $
    10,704
    
    
    $
    21,709Working capital
    
    
    20,951
    
    
    
    37,976
    
    
    
    30,121
    
    
    
    32,976
    
    
    
    46,417Total assets
    
    
    121,255
    
    
    
    114,981
    
    
    
    105,897
    
    
    
    85,840
    
    
    
    85,443Long-term liabilities, excluding current maturities
    
    
    2,113
    
    
    
    21,789
    
    
    
    25,321
    
    
    
    18,588
    
    
    
    19,679Shareholders equity
    
    
    88,872
    
    
    
    74,575
    
    
    
    64,956
    
    
    
    57,890
    
    
    
    57,529
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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Executive Overview
   .
 ® ®
   28




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®
  Critical Accounting Policies and Estimates
  Revenue Recognition Policy.
 Allowance for Doubtful Accounts.
 29




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Inventory Valuation.
 Goodwill and Intangible Assets. Intangibles-Goodwill and Other
 Property, Plant and Equipment-Overall-Subsequent Measurement
  Convertible Debt and Derivative Instruments. Derivatives and Hedging,
 Fair Value Measurements. Fair Value Measurements and Disclosures .
 Deferred Tax Assets.
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Stock-Based Compensation. Stock Compensation
 Recently Issued Accounting Pronouncements.
 Results of Operations
  Increase (Decrease)
    
    
    
    
    
    
    
    
    
    Increase (Decrease)2009
    
    2008
    
    $
    
    %
    
    2008
    
    2007
    
    $
    
    %Net sales
    
    $
    75,710
    
    
    $
    65,821
    
    
    $
    9,889
    
    
    
    15.0
    %
    
    $
    65,821
    
    
    $
    49,587
    
    
    $
    16,234
    
    
    
    32.7
    %Cost of goods sold
    
    
    26,821
    
    
    
    25,267
    
    
    
    1,554
    
    
    
    6.2
    %
    
    
    25,267
    
    
    
    21,348
    
    
    
    3,919
    
    
    
    18.4
    %Gross profit
    
    
    48,889
    
    
    
    40,554
    
    
    
    8,335
    
    
    
    20.6
    %
    
    
    40,554
    
    
    
    28,239
    
    
    
    12,315
    
    
    
    43.6
    %Operating expenses:Sales and marketing
    
    
    30,617
    
    
    
    27,373
    
    
    
    3,244
    
    
    
    11.9
    %
    
    
    27,373
    
    
    
    24,633
    
    
    
    2,740
    
    
    
    11.1
    %Research and development
    
    
    8,863
    
    
    
    8,215
    
    
    
    648
    
    
    
    7.9
    %
    
    
    8,215
    
    
    
    7,546
    
    
    
    669
    
    
    
    8.9
    %Acquired in-process R&D
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    3,500
    
    
    
    (3,500
    )
    
    
    (100.0
    )%General and administrative
    
    
    9,905
    
    
    
    10,509
    
    
    
    (604
    )
    
    
    (5.7
    )%
    
    
    10,509
    
    
    
    10,417
    
    
    
    92
    
    
    
    0.9
    %Litigation settlement
    
    
    
    
    
    
    7,500
    
    
    
    (7,500
    )
    
    
    (100.0
    )%
    
    
    7,500
    
    
    
    
    
    
    
    7,500
    
    
    
    Amortization of intangibles
    
    
    3,224
    
    
    
    3,489
    
    
    
    (265
    )
    
    
    (7.6
    )%
    
    
    3,489
    
    
    
    2,516
    
    
    
    973
    
    
    
    38.7
    %Impairment of intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    755
    
    
    
    (755
    )
    
    
    (100.0
    )%Total operating expenses
    
    
    52,609
    
    
    
    57,086
    
    
    
    (4,477
    )
    
    
    (7.8
    )%
    
    
    57,086
    
    
    
    49,367
    
    
    
    7,719
    
    
    
    15.6
    %Operating loss
    
    
    (3,720
    )
    
    
    (16,532
    )
    
    
    (12,812
    )
    
    
    (77.5
    )%
    
    
    (16,532
    )
    
    
    (21,128
    )
    
    
    (4,596
    )
    
    
    (21.8
    )%Interest expense, net
    
    
    (2,696
    )
    
    
    (2,739
    )
    
    
    (43
    )
    
    
    (1.6
    )%
    
    
    (2,739
    )
    
    
    (1,822
    )
    
    
    917
    
    
    
    50.3
    %Other income, net
    
    
    391
    
    
    
    413
    
    
    
    (22
    )
    
    
    (5.3
    )%
    
    
    413
    
    
    
    61
    
    
    
    352
    
    
    
    577.0
    %Net loss before income taxes
    
    
    (6,025
    )
    
    
    (18,858
    )
    
    
    (12,833
    )
    
    
    (68.1
    )%
    
    
    (18,858
    )
    
    
    (22,889
    )
    
    
    (4,031
    )
    
    
    (17.6
    )%Income tax expense
    
    
    288
    
    
    
    481
    
    
    
    (193
    )
    
    
    (40.1
    )%
    
    
    481
    
    
    
    119
    
    
    
    362
    
    
    
    304.2
    %Net loss
    
    ($
    6,313
    )
    
    ($
    19,339
    )
    
    ($
    13,026
    )
    
    
    (67.4
    )%
    
    ($
    19,339
    )
    
    ($
    23,008
    )
    
    ($
    3,669
    )
    
    
    (15.9
    )%
 31




---



##### Table of Contents



2009
    
    2008
    
    2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    35.4
    %
    
    
    38.4
    %
    
    
    43.1
    %Gross profit
    
    
    64.6
    %
    
    
    61.6
    %
    
    
    56.9
    %Operating expenses:Sales and marketing
    
    
    40.4
    %
    
    
    41.6
    %
    
    
    49.7
    %Research and development
    
    
    11.7
    %
    
    
    12.5
    %
    
    
    15.2
    %Acquired in-process R&D
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    7.1
    %General and administrative
    
    
    13.1
    %
    
    
    16.0
    %
    
    
    21.0
    %Litigation settlement
    
    
    0.0
    %
    
    
    11.4
    %
    
    
    0.0
    %Amortization of intangibles
    
    
    4.3
    %
    
    
    5.3
    %
    
    
    5.1
    %Impairment of intangibles
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    1.5
    %Total operating expenses
    
    
    69.5
    %
    
    
    86.7
    %
    
    
    99.6
    %Operating loss
    
    
    (4.9
    )%
    
    
    (25.1
    )%
    
    
    (42.6
    )%Interest expense, net
    
    
    (3.6
    )%
    
    
    (4.2
    )%
    
    
    (3.7
    )%Other income, net
    
    
    0.5
    %
    
    
    0.6
    %
    
    
    0.1
    %Net loss before income taxes
    
    
    (8.0
    )%
    
    
    (28.7
    )%
    
    
    (46.2
    )%Income tax expense
    
    
    (0.4
    )%
    
    
    (0.7
    )%
    
    
    (0.2
    )%Net loss
    
    
    (8.3
    )%
    
    
    (29.4
    )%
    
    
    (46.4
    )%
 Net Sales
  Increase
    
    
    
    
    
    
    
    
    
    Increase2009
    
    2008
    
    $
    
    %
    
    2008
    
    2007
    
    $
    
    %United States
    
    $
    29,775
    
    
    $
    25,139
    
    
    $
    4,636
    
    
    
    18.4
    %
    
    $
    25,139
    
    
    $
    18,653
    
    
    $
    6,486
    
    
    
    34.8
    %Outside United States
    
    
    45,935
    
    
    
    40,682
    
    
    
    5,253
    
    
    
    12.9
    %
    
    
    40,682
    
    
    
    30,934
    
    
    
    9,748
    
    
    
    31.5
    %Total
    
    $
    75,710
    
    
    $
    65,821
    
    
    $
    9,889
    
    
    
    15.0
    %
    
    $
    65,821
    
    
    $
    49,587
    
    
    $
    16,234
    
    
    
    32.7
    %
  2009
    
    2008
    
    2007United States
    
    
    39.3
    %
    
    
    38.2
    %
    
    
    37.6
    %Outside United States
    
    
    60.7
    %
    
    
    61.8
    %
    
    
    62.4
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 32




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##### Table of Contents



Increase (Decrease)
    
    
    
    
    
    
    
    
    
    Increase2009
    
    2008
    
    $
    
    %
    
    2008
    
    2007
    
    $
    
    %Heart valve therapy
    
    $
    56,015
    
    
    $
    47,576
    
    
    $
    8,439
    
    
    
    17.7
    %
    
    $
    47,576
    
    
    $
    38,560
    
    
    $
    9,016
    
    
    
    23.4
    %Surgical arrhythmia therapy
    
    
    18,881
    
    
    
    16,888
    
    
    
    1,993
    
    
    
    11.8
    %
    
    
    16,888
    
    
    
    9,690
    
    
    
    7,198
    
    
    
    74.3
    %Surgical tools and
accessories
    
    
    814
    
    
    
    1,357
    
    
    
    (543
    )
    
    
    (40.0
    )%
    
    
    1,357
    
    
    
    1,337
    
    
    
    20
    
    
    
    1.5
    %Total
    
    $
    75,710
    
    
    $
    65,821
    
    
    $
    9,889
    
    
    
    15.0
    %
    
    $
    65,821
    
    
    $
    49,587
    
    
    $
    16,234
    
    
    
    32.7
    %
   2009 compared to 2008.
   2008 compared to 2007.
 33




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##### Table of Contents



Cost of Goods Sold and Gross Profit
 2009 compared to 2008.
  2008 compared to 2007.
  Sales and Marketing
 2009 compared to 2008.
 34




---



##### Table of Contents



2008 compared to 2007.
  Research and Development
 2009 compared to 2008.
 2008 compared to 2007.
 Acquired In-Process R & D
  35




---



##### Table of Contents



General and Administrative
 2009 compared to 2008.
  2008 compared to 2007.
  Litigation Settlement
  Amortization of Intangibles
  Impairment of Intangibles
  36




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##### Table of Contents



Net Interest Expense
  2009 compared to 2008.
 2008 compared to 2007.
 Net Other Income
  Year ended December 31:2009
    
    2008
    
    2007Alta Partners VIII, L.P. (Alta) warrant liability gain (loss)
    
    $
    
    
    
    $
    243
    
    
    
    ($652
    )Convertible Senior Notes derivative liability gain
    
    
    34
    
    
    
    51
    
    
    
    98Net realized foreign currency transaction gains
    
    
    246
    
    
    
    472
    
    
    
    303Unrealized foreign currency gain (loss) related to
intercompany balances with foreign subsidiaries
    
    
    54
    
    
    
    (353
    )
    
    
    312Other
    
    
    57
    
    
    
    
    
    
    
    Net other income
    
    $
    391
    
    
    $
    413
    
    
    $
    61
  .
  37




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##### Table of Contents



Income Taxes
   Net Loss
  Liquidity and Capital Resources
  Operating Activities
   Investing Activities
  38




---



##### Table of Contents



Financing Activities
 Equity Financing.
   Debt Financing.
  39




---



##### Table of Contents



Cash Management and Funding of Future Operations
  40




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Contractual Obligations
  Payments Due By PeriodLess
    
    
    
    
    
    
    
    
    
    MoreThan
    
    1-3
    
    3-5
    
    Than 5Total
    
    1 year
    
    Years
    
    Years
    
    Years (2)Convertible Senior Notes payable (1)
    
    $
    43,904
    
    
    $
    1,344
    
    
    $
    4,032
    
    
    $
    4,032
    
    
    $
    34,496Bank Term Loan payable (1)
    
    
    4,319
    
    
    
    2,943
    
    
    
    1,376
    
    
    
    
    
    
    
    Leases and other
    
    
    1,902
    
    
    
    851
    
    
    
    979
    
    
    
    72
    
    
    
    Total
    
    $
    50,125
    
    
    $
    5,138
    
    
    $
    6,387
    
    
    $
    4,104
    
    
    $
    34,496
 
 (1)
    
    Includes interest payments.(2)
    
    The holders of our Convertible Senior Notes have the option to require us to
repurchase the Convertible Senior Notes in October 2010. Therefore, the $22.4 million
face amount of the Convertible Senior Notes has been classified on our balance sheet at
December 31, 2009 as a current liability. Cautionary Statements
  41




---



##### 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
   42




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##### Table of Contents



Managements Report on Internal Control over Financial Reporting
    Changes in Internal Control Over Financial Reporting
  
 ITEM 9B.
    
    OTHER INFORMATION
  43




---



##### 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
  
 ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  44




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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 Firm
    
    Page F-1 through F-2Consolidated Balance Sheets as of December 31, 2009 and 2008
    
    Page F-3Consolidated Statements of Operations for the years ended
December 31, 2009, 2008, and 2007
    
    Page F-4Consolidated Statement of Changes in Shareholders Equity
for the years ended December 31, 2009, 2008, and 2007
    
    Page F-5Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008, and 2007
    
    Page F-6Notes to Consolidated Financial Statements for the years
ended December 31, 2009, 2008, and 2007
    
    Page F-7 through F-28
 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, 2009:Allowance for doubtful accounts
    
    $
    364
    
    
    $
    323
    
    
    $
    
    
    
    $
    (267
    )(1)
    
    $
    420Inventory reserves and allowances
    
    
    1,006
    
    
    
    386
    
    
    
    (86
    )(2)
    
    
    (256
    )(3)
    
    
    1,050Year ended December 31, 2008:Allowance for doubtful accounts
    
    
    225
    
    
    
    224
    
    
    
    
    
    
    
    (85
    )(1)
    
    
    364Inventory reserves and allowances
    
    
    634
    
    
    
    933
    
    
    
    211
    (2)
    
    
    (772
    )(3)
    
    
    1,006Year ended December 31, 2007:Allowance for doubtful accounts
    
    
    537
    
    
    
    250
    
    
    
    
    
    
    
    (562
    )(1)
    
    
    225Inventory reserves and allowances
    
    
    786
    
    
    
    43
    
    
    
    
    
    
    
    (195
    )(3)
    
    
    634
 
 (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)
    
    Inventory disposals and write-offs due to obsolescence, scrap, etc.  45




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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
 46




---



##### Table of Contents



ExhibitNumber
    
    DescriptionAssociation, 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)).4.5
    
    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
    
    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
    
    License Agreement dated September 24, 1990, with CarboMedics, Inc.
(Incorporated by reference to Exhibit 10.11 to the 1996 Form
10-K).10.9*
    
    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)).10.10
    
    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)).10.11
    
    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).
 47




---



##### Table of Contents



ExhibitNumber
    
    Description10.12
    
    Form of International Distributor Agreement (Incorporated by
reference to Exhibit 10.22 to the Companys Annual Report on Form
10-K for the year ended December 31, 1994).10.13
    
    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).10.14
    
    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).10.15
    
    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).10.16
    
    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).10.17
    
    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).10.18
    
    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).10.19
    
    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).10.20
    
    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)).10.21
    
    Form of U.S. Distribution Agreement (Incorporated by reference to
Exhibit 10.34 to the 2002 Form 10-K).10.22
    
    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).10.23*
    
    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)).10.24*
    
    Form of Incentive Stock Option Agreement for option grants made
under the Companys 2000 Stock Incentive Plan beginning April 2009
(Incorporated by reference to Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended April 4, 2009
(the First Quarter 2009 Form 10-Q)).10.25*
    
    Form of Non-Qualified Stock Option Agreement for option grants
made under the Companys 2000 Stock Incentive Plan beginning April
2009 (Incorporated by reference to Exhibit 10.3 to the Companys
First Quarter 2009 Form 10-Q).
 48




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ExhibitNumber
    
    Description10.26*
    
    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).10.27
    
    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).10.28
    
    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)).10.29
    
    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).10.30
    
    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).10.31
    
    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).10.32
    
    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).10.33
    
    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).10.34
    
    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).10.35
    
    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).10.36
    
    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).10.37*
    
    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).10.38*
    
    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).10.39
    
    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).
 49




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ExhibitNumber
    
    Description10.40*
    
    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).10.41
    
    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).10.42
    
    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).10.43
    
    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).10.44*
    
    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).10.45
    
    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).10.46
    
    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).10.47
    
    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).10.48
    
    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)).10.49
    
    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)).10.50
    
    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).10.51
    
    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).10.52
    
    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).10.53
    
    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).
 50




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ExhibitNumber
    
    Description10.54
    
    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).10.55
    
    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)).10.56
    
    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).10.57
    
    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).10.58
    
    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).10.59
    
    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).10.60
    
    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 Companys Current Report on Form
8-K filed on July 2, 2008 (the July 2008 Form 8-K)).10.61
    
    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).10.62
    
    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).10.63
    
    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).10.64
    
    Amendment to and Consent, dated December 19, 2008, regarding Loan
and Security Agreement between Silicon Valley Bank and the Company
dated July 28, 2004 (Incorporated by reference to Exhibit 10.79 of
the Companys Annual Report on Form 10-K for the year ended
December 31, 2008 (the 2008 Form 10-K)).10.65
    
    Confidential Settlement and Mutual Release Agreement dated
December 1, 2008, by and between CarboMedics, Inc. and ATS
Medical, Inc. (Incorporated by reference to Exhibit 10.80 of the
Companys 2008 Form 10-K).10.66*
    
    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).10.67
    
    Amendment, dated June 2, 2009, 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
Quarterly Report on Form 10-Q for the quarter ended July 4, 2009).
 51




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##### Table of Contents



ExhibitNumber
    
    Description10.68*
    
    2010 ATS Medical Management Incentive Compensation Plan
(Incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed on February 22, 2010).12.1
    
    Computation of Ratio of Earnings to Fixed Charges, filed herewith.21
    
    List of Subsidiaries, filed herewith.23
    
    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. 52




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SIGNATURES
  Dated:  March 12, 2010
    ATS MEDICAL, INC.By  /s/ Michael D. DaleMichael D. DaleChief Executive Officer  Signature
    
    Title/s/ Michael D. Dale
    
    Chief Executive Officer,Michael D. Dale
    
    President and Chairman of the Board 
(principal
executive officer)/s/ Michael R. Kramer
    
    Chief Financial Officer

(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
 53




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Report of Independent Registered Public Accounting Firm
 
     /s/ GRANT THORNTON LLPMinneapolis, MinnesotaMarch 12, 2010 F - 1




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Report of Independent Registered Public Accounting Firm
 
       /s/ GRANT THORNTON LLPMinneapolis, MinnesotaMarch 12, 2010 F - 2




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##### Table of Contents



(In Thousands, Except Share and Per Share Data)
 December 312009
    
    
    2008AssetsCurrent assets:Cash and cash equivalents
    
    $
    14,235
    
    
    $
    20,895Accounts receivable, less allowance of $420 in 2009
and $364 in 2008
    
    
    14,398
    
    
    
    14,532Inventories, net
    
    
    20,814
    
    
    
    20,208Prepaid expenses
    
    
    1,774
    
    
    
    958Total current assets
    
    
    51,221
    
    
    
    56,593Leasehold improvements, furniture, and equipment, net
    
    
    7,659
    
    
    
    7,031Goodwill
    
    
    32,166
    
    
    
    17,016Other intangible assets
    
    
    28,910
    
    
    
    32,115Other assets
    
    
    1,299
    
    
    
    2,226Total assets
    
    $
    121,255
    
    
    $
    114,981Liabilities and shareholders equityCurrent liabilities:Current portion of bank loan payable
    
    $
    2,646
    
    
    $
    2,646Accounts payable
    
    
    4,995
    
    
    
    4,054Accrued compensation
    
    
    2,076
    
    
    
    3,537Convertible senior notes payable, net of unamortized
discount and bifurcated derivatives of $4,741
    
    
    17,659
    
    
    
    Payable to CryoCath Technologies, Inc.
    
    
    
    
    
    
    1,910Payable to CarboMedics, Inc.
    
    
    
    
    
    
    4,500Other accrued liabilities
    
    
    2,894
    
    
    
    1,970Total current liabilities
    
    
    30,270
    
    
    
    18,617Convertible senior notes payable, net of unamortized
discount and bifurcated derivatives of $4,867
    
    
    
    
    
    
    17,533Bank loan payable
    
    
    1,323
    
    
    
    3,969Other long-term liabilities
    
    
    790
    
    
    
    287Shareholders equity:Common stock, $0.01 par value:Authorized shares  150,000,000Issued and outstanding shares  78,187,741 in
2009 and 71,077,458 in 2008
    
    
    782
    
    
    
    711Additional paid-in capital
    
    
    246,024
    
    
    
    225,657Accumulated deficit
    
    
    (158,229
    )
    
    
    (151,916
    )Accumulated other comprehensive income
    
    
    295
    
    
    
    123Total shareholders equity
    
    
    88,872
    
    
    
    74,575Total liabilities and shareholders equity
    
    $
    121,255
    
    
    $
    114,981
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 3




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(In Thousands, Except Per Share Amounts)
 Year Ended December 312009
    
    
    2008
    
    
    2007Net sales
    
    $
    75,710
    
    
    $
    65,821
    
    
    $
    49,587Cost of goods sold
    
    
    26,821
    
    
    
    25,267
    
    
    
    21,348Gross profit
    
    
    48,889
    
    
    
    40,554
    
    
    
    28,239Operating expenses:Sales and marketing
    
    
    30,617
    
    
    
    27,373
    
    
    
    24,633Research and development
    
    
    8,863
    
    
    
    8,215
    
    
    
    7,546Acquired in-process research and development
    
    
    
    
    
    
    
    
    
    
    3,500General and administrative
    
    
    9,905
    
    
    
    10,509
    
    
    
    10,417Litigation settlement
    
    
    
    
    
    
    7,500
    
    
    
    Amortization of intangibles
    
    
    3,224
    
    
    
    3,489
    
    
    
    2,516Intangible asset impairment
    
    
    
    
    
    
    
    
    
    
    755Total operating expenses
    
    
    52,609
    
    
    
    57,086
    
    
    
    49,367Operating loss
    
    
    (3,720
    )
    
    
    (16,532
    )
    
    
    (21,128
    )Interest income
    
    
    27
    
    
    
    184
    
    
    
    720Interest expense
    
    
    (2,723
    )
    
    
    (2,923
    )
    
    
    (2,542
    )Other income, net
    
    
    391
    
    
    
    413
    
    
    
    61Net loss before income tax expense
    
    
    (6,025
    )
    
    
    (18,858
    )
    
    
    (22,889
    )Income tax expense
    
    
    288
    
    
    
    481
    
    
    
    119Net loss
    
    $
    (6,313
    )
    
    $
    (19,339
    )
    
    $
    (23,008
    )Net loss per share:Basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.31
    )
    
    $
    (0.44
    )Weighted average number of shares outstanding:Basic and diluted
    
    
    72,114
    
    
    
    61,440
    
    
    
    52,589
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 4




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##### Table of Contents



(In Thousands)
 Accumulated OtherCommon Stock
    

    
    Additional
    
    
    
    
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Paid-In Capital
    
    
    Accumulated Deficit
    
    
    Income (Loss)
    
    
    TotalBalance 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 rendered
    
    
    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
    
    
    
    74,575Stock issued under the Employee Stock Purchase Plan
    
    
    125
    
    
    
    1
    
    
    
    274
    
    
    
    
    
    
    
    
    
    
    
    275Stock options exercised
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Restricted stock units issued
    
    
    983
    
    
    
    10
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of common stock warrants
    
    
    1,000
    
    
    
    10
    
    
    
    2,465
    
    
    
    
    
    
    
    
    
    
    
    2,475Stock issued upon achievement of acquisition
milestone, net of issuance costs
    
    
    5,000
    
    
    
    50
    
    
    
    15,050
    
    
    
    
    
    
    
    
    
    
    
    15,100Adjustment to private placement sale offering costs
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    28Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    2,557
    
    
    
    
    
    
    
    
    
    
    
    2,557Comprehensive loss:Change in foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172
    
    
    
    172Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,313
    )
    
    
    
    
    
    
    (6,313
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,141
    )Balance at December 31, 2009
    
    
    78,188
    
    
    $
    782
    
    
    $
    246,024
    
    
    $
    (158,229
    )
    
    $
    295
    
    
    $
    88,872
  F - 5




---



##### Table of Contents



(In Thousands)
 Year Ended December 312009
    
    
    2008
    
    
    2007Operating activities:Net loss
    
    $
    (6,313
    )
    
    $
    (19,339
    )
    
    $
    (23,008
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    5,262
    
    
    
    5,623
    
    
    
    4,622Non-cash interest expense
    
    
    768
    
    
    
    743
    
    
    
    546Stock based compensation expense
    
    
    2,557
    
    
    
    1,676
    
    
    
    1,454Change in value of warrant liability and derivative liability
bifurcated from convertible senior notes
    
    
    (34
    )
    
    
    (294
    )
    
    
    554In-process research and development related to acquisitions
    
    
    
    
    
    
    
    
    
    
    3,500Impairment of intangibles
    
    
    
    
    
    
    
    
    
    
    755Deferred income taxes
    
    
    261
    
    
    
    192
    
    
    
    95Changes in operating assets and liabilities, net of acquisition:Accounts receivable
    
    
    158
    
    
    
    (3,446
    )
    
    
    1,117Inventories
    
    
    (592
    )
    
    
    (2,500
    )
    
    
    669Accounts payable and accrued expenses
    
    
    (4,134
    )
    
    
    4,782
    
    
    
    121Other
    
    
    (789
    )
    
    
    159
    
    
    
    32Net cash used in operating activities
    
    
    (2,856
    )
    
    
    (12,404
    )
    
    
    (9,543
    )Investing activities:Purchases of short-term investments
    
    
    
    
    
    
    (938
    )
    
    
    (4,140
    )Maturities of short-term investments
    
    
    
    
    
    
    5,127
    
    
    
    6,043Payments for business acquisitions
    
    
    (2,000
    )
    
    
    (2,000
    )
    
    
    (21,074
    )Business acquisition costs, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (1,791
    )Payments for other intangibles
    
    
    (19
    )
    
    
    
    
    
    
    (277
    )Purchases of leasehold improvements, furniture, and equipment
    
    
    (2,414
    )
    
    
    (1,440
    )
    
    
    (748
    )Other
    
    
    479
    
    
    
    
    
    
    
    (36
    )Net cash (used in) provided by investing activities
    
    
    (3,954
    )
    
    
    749
    
    
    
    (22,023
    )Financing activities:Advances on bank notes payable
    
    
    
    
    
    
    
    
    
    
    8,600Payments on bank notes payable
    
    
    (2,646
    )
    
    
    (1,985
    )
    
    
    (2,327
    )Proceeds from issuance of common stock, net of issuance costs
    
    
    2,781
    
    
    
    23,943
    
    
    
    31,196Other
    
    
    (20
    )
    
    
    162
    
    
    
    168Net cash provided by financing activities
    
    
    115
    
    
    
    22,120
    
    
    
    37,637Effect of exchange rate changes on cash
    
    
    35
    
    
    
    (50
    )
    
    
    (203
    )(Decrease) increase in cash and cash equivalents
    
    
    (6,660
    )
    
    
    10,415
    
    
    
    5,868Cash and cash equivalents at beginning of year
    
    
    20,895
    
    
    
    10,480
    
    
    
    4,612Cash and cash equivalents at end of year
    
    $
    14,235
    
    
    $
    20,895
    
    
    $
    10,480Supplemental cash flow information:Net cash paid during the year for interest
    
    $
    1,945
    
    
    $
    2,139
    
    
    $
    2,241Net cash paid during the year for income taxes
    
    
    107
    
    
    
    
    
    
    
    Significant non-cash transactions:Issuance of common stock for acquisition contingent payment
    
    $
    15,150
    
    
    
    
    
    
    
    Equipment purchased under capital lease
    
    
    242
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    $
    500Assumption of liabilities in connection with asset acquisition
    
    
    
    
    
    
    
    
    
    
    2,429License agreement intangible asset tendered in asset acquisition
    
    
    
    
    
    
    
    
    
    
    1,765
 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
  Use of Estimates
  Cash Equivalents
  Accounts Receivable
  Inventories
  F - 7




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##### Table of Contents



2009
    
    
    2008Raw materials
    
    $
    2,639
    
    
    $
    4,712Work-in-process
    
    
    6,390
    
    
    
    4,880Finished goods
    
    
    12,685
    
    
    
    11,416Total inventories
    
    
    21,714
    
    
    
    21,008Less: non-current inventories
    
    
    (900
    )
    
    
    (800
    )Inventories, net
    
    $
    20,814
    
    
    $
    20,208
  Other Assets
  Leasehold Improvements, Furniture, and Equipment
  Furniture and fixtures
    
    7 yearsEquipment
    
    5 to 17 yearsComputer hardware and software
    
    3 years
  Intangible Assets
 Intangibles-Goodwill and Other,
 Property, Plant and Equipment-Overall-Subsequent Measurement
  F - 8




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##### Table of Contents



Convertible Debt and Derivative Instruments
 Derivatives and Hedging,
 Fair Value Measurements
 Fair Value Measurements and Disclosures .
  Revenue Recognition
  Advertising and Promotional Costs
  Foreign Currency Translation and Transaction Gains and Losses
   F - 9




---



##### Table of Contents



Income Taxes
 Income Taxes
  Warranties
 Guarantees
 Stock-Based Compensation
 Stock Compensation
 Net Loss Per Share
  Reclassifications
  2. Acquisition of Surgical Cryoablation Business from CryoCath Technologies, Inc.
  F - 10




---



##### Table of Contents



®
  Purchase Price.
  Cash paid (includes $0.9 million post-closing purchase price reduction
and $2.0 million manufacturing transition payments)
    
    $
    23,074License payments made under prior Distribution and Agent Agreements
    
    
    1,765Non-contingent cash payment made 24 months after closing
(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
 F - 11




---



##### Table of Contents



Amount
    
    
    Weighted Average(in thousands)
    
    Assigned
    
    
    Amortization 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
   Pro Forma Results of Operations
   F - 12




---



##### Table of Contents



Year endedDecember 31,(Unaudited pro forma data in thousands, except per share data)
    
    2007Total revenue
    
    $
    53,951Net loss
    
    $
    (19,238
    )Net loss per share  basic and diluted
    
    $
    (0.37
    )
   3. Leasehold Improvements, Furniture, and Equipment, net
  2009
    
    
    2008At cost:Furniture and fixtures
    
    $
    738
    
    
    $
    599Equipment
    
    
    16,226
    
    
    
    13,604Leasehold improvements
    
    
    3,795
    
    
    
    3,678Construction in progress
    
    
    316
    
    
    
    55621,075
    
    
    
    18,437Less accumulated depreciation
    
    
    13,416
    
    
    
    11,406$
    7,659
    
    
    $
    7,031
 4. Private Placements of Common Stock
   F - 13




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##### Table of Contents



Warrant liability balance on January 1, 2008
    
    $
    3,913Change in fair value (gain) loss included in other (income) expense:First quarter 2008
    
    
    (1,521
    )Second quarter 2008
    
    
    1,278Transfer to additional-paid-in-capital
    
    
    (3,670
    )Warrant liability balance on December 31, 2008
    
    $
    
   5. Goodwill and Other Intangible Assets
  Assets Not SubjectAssets Subject to Amortization
    
    
    
    
    
    
    
    
    
    
    to AmortizationOtherTissue Valve
    
    
    Cryoablation
    
    
    
    
    
    
    TechnologyTechnology
    
    
    Technology
    
    
    Carbon Technology
    
    
    Licenses andand Trademarks
    
    
    and Trademarks
    
    
    License
    
    
    Agreements
    
    
    Total
    
    
    GoodwillBalance at December 31, 2008:Gross carrying amount (cost)
    
    $
    7,150
    
    
    $
    11,800
    
    
    $
    18,500
    
    
    $
    777
    
    
    $
    38,227
    
    
    $
    17,016Accumulated amortization
    
    
    (956
    )
    
    
    (2,580
    )
    
    
    (2,467
    )
    
    
    (109
    )
    
    
    (6,112
    )
    
    
    Net carrying amount
    
    $
    6,194
    
    
    $
    9,220
    
    
    $
    16,033
    
    
    $
    668
    
    
    $
    32,115
    
    
    $
    17,016Balance at December 31, 2009:Gross carrying amount (cost)
    
    $
    7,150
    
    
    $
    11,800
    
    
    $
    18,500
    
    
    $
    797
    
    
    $
    38,247
    
    
    $
    32,166Accumulated amortization
    
    
    (1,381
    )
    
    
    (4,100
    )
    
    
    (3,700
    )
    
    
    (156
    )
    
    
    (9,337
    )
    
    
    Net carrying amount
    
    $
    5,769
    
    
    $
    7,700
    
    
    $
    14,800
    
    
    $
    641
    
    
    $
    28,910
    
    
    $
    32,166
  Assets Not SubjectAssets Subject to Amortization
    
    
    
    
    
    
    
    
    
    
    to AmortizationOtherTissue Valve
    
    
    Cryoablation
    
    
    
    
    
    
    TechnologyTechnology
    
    
    Technology
    
    
    Carbon Technology
    
    
    Licenses andand Trademarks
    
    
    and Trademarks
    
    
    License
    
    
    Agreements
    
    
    Total
    
    
    GoodwillBalance 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
    
    
    $
    17,016Contingent acquisition
common stock issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,150Technology acquisition payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    19
    
    
    
    -Amortization
    
    
    (425
    )
    
    
    (1,520
    )
    
    
    (1,233
    )
    
    
    (46
    )
    
    
    (3,224
    )
    
    
    -Balance at December 31, 2009
    
    $
    5,769
    
    
    $
    7,700
    
    
    $
    14,800
    
    
    $
    641
    
    
    $
    28,910
    
    
    $
    32,166
 F - 14




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##### Table of Contents



2010
    
    $
    3,2342011
    
    
    3,1892012
    
    
    2,6292013
    
    
    2,0672014
    
    
    2,062$
    13,181
 Tissue Valve Technology and Trademarks
 ®
 Cryoablation Technology and Trademarks
  Carbon Technology License
  Other Technology Licenses and Agreements
    F - 15




---



##### Table of Contents



Intangible Asset Impairment
  Goodwill
  6. Debt
 Convertible Notes Payable
      Derivatives and Hedging,
 F - 16




---



##### Table of Contents



2009
    
    
    2008
    
    
    2007Derivative liability balance at beginning of year
    
    $
    90
    
    
    $
    141
    
    
    $
    239Change in valuation gain included in other income
    
    
    (34
    )
    
    
    (51
    )
    
    
    (98
    )Derivative liability balance at end of year
    
    $
    56
    
    
    $
    90
    
    
    $
    141
   Bank Loan Payable
     F - 17




---



##### Table of Contents



2010
    
    $
    2,6462011
    
    
    1,323$
    3,969
 Subordinated Credit Agreement
    7. Stock-Based Compensation and Equity Plans
 Stock-Based Compensation
 Stock Compensation
 F - 18




---



##### Table of Contents



Fair Value.
 Assumptions used:
    
    2009
    
    2008Expected volatility
    
    
    0.77
    
    
    
    1.06Risk-free interest rate
    
    
    2.0
    %
    
    
    2.8
    %Expected life
    
    5 years
    
    5 yearsDividend yield
    
    
    0
    %
    
    
    0
    %Weighted average per share fair value of options granted
    
    $
    1.67
    
    
    $
    1.22
   Stock Compensation Expense.
  2009
    
    
    2008
    
    
    2007Stock compensation expense included in:Cost of goods sold
    
    $
    112
    
    
    $
    
    
    
    $
    Sales and marketing expenses
    
    
    1,319
    
    
    
    973
    
    
    
    805Research and development
    
    
    301
    
    
    
    
    
    
    
    General and administrative expenses
    
    
    825
    
    
    
    703
    
    
    
    649Total stock compensation expense
    
    $
    2,557
    
    
    $
    1,676
    
    
    $
    1,454Stock compensation expense per share
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.03
  Forfeitures.
 F - 19




---



##### Table of Contents



Equity Plans
 Stock Incentive Plans.
  Employee Stock Purchase Plan .
  Numberof Shares
    
    
    Price Range2009
    
    
    124,231
    
    
    $
    2.14  $2.292008
    
    
    123,278
    
    
    $
    1.40  $2.252007
    
    
    129,449
    
    
    $
    1.50  $1.84
 Stock Options.
 Weighted AverageStock Options Outstanding
    
    
    
    
    
    
    
    
    
    
    OptionUnder the Plans
    
    
    
    
    
    
    
    
    
    
    Exercise PriceISO
    
    
    Non-ISO
    
    
    Non-Plan Options
    
    
    Total
    
    
    Per ShareOutstanding 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
    
    
    
    2.89Options granted
    
    
    157,250
    
    
    
    
    
    
    
    
    
    
    
    157,250
    
    
    
    2.64Options exercised
    
    
    (3,100
    )
    
    
    
    
    
    
    
    
    
    
    (3,100
    )
    
    
    1.05Options canceled
    
    
    (79,000
    )
    
    
    (10,000
    )
    
    
    
    
    
    
    (89,000
    )
    
    
    4.27Outstanding at December 31, 2009
    
    
    717,800
    
    
    
    289,000
    
    
    
    1,493,200
    
    
    
    2,500,000
    
    
    $
    2.82
 F -20




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##### Table of Contents



Options Outstanding at
    
    
    Options Exercisable atDecember 31, 2009
    
    
    December 31, 2009Weighted Average
    
    Weighted Average
    
    
    
    
    
    
    Weighted AverageRange of
    
    
    
    Remaining
    
    Exercise
    
    
    
    
    
    
    ExerciseExercise Prices
    
    Number Outstanding
    
    Contractual Life
    
    Price
    
    
    Number Exercisable
    
    
    Price$0.37  $0.46
    
    505,000
    
    2.88 years
    
    $
    0.40
    
    
    
    505,000
    
    
    $
    0.400.51  2.51
    
    479,550
    
    3.67 years
    
    
    1.90
    
    
    
    396,430
    
    
    
    1.972.64  3.36
    
    528,950
    
    4.22 years
    
    
    3.05
    
    
    
    389,200
    
    
    
    3.193.46  3.78
    
    433,750
    
    4.09 years
    
    
    3.65
    
    
    
    433,750
    
    
    
    3.653.80  5.34
    
    439,750
    
    3.99 years
    
    
    4.05
    
    
    
    439,750
    
    
    
    4.058.19  9.88
    
    113,000
    
    0.61 years
    
    
    8.63
    
    
    
    113,000
    
    
    
    8.63$0.37  $9.88
    
    2,500,000
    
    3.62 years
    
    $
    2.82
    
    
    
    2,277,130
    
    
    $
    2.88
  Restricted Stock Units.
 WeightedWeighted Average
    
    
    AverageAward Date
    
    
    RemainingNumber of Shares
    
    
    Fair Value
    
    
    Contractual TermUnvested 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 yearsAwards granted
    
    
    2,032,236
    
    
    
    2.27Awards vested
    
    
    (982,999
    )
    
    
    2.08Awards forfeited
    
    
    (273,901
    )
    
    
    1.90Unvested at December 31, 2009
    
    
    4,167,079
    
    
    $
    2.12
    
    
    1.92 years
  F -21




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##### Table of Contents



8. Leases
  Year ending December 31:2010
    
    $
    6742011
    
    
    3102012
    
    
    2492013
    
    
    24$
    1,257
   9. Income Taxes
  2009
    
    
    2008
    
    
    2007Current income taxes:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    15
    
    
    
    12
    
    
    
    Foreign
    
    
    12
    
    
    
    277
    
    
    
    2427
    
    
    
    289
    
    
    
    24Deferred income taxes
    
    
    261
    
    
    
    192
    
    
    
    95$
    288
    
    
    $
    481
    
    
    $
    119
     F -22




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##### Table of Contents



December 312009
    
    
    2008Current deferred tax assets:Inventory
    
    $
    569
    
    
    $
    543Accrued vacation
    
    
    297
    
    
    
    295Other current deferred tax assets
    
    
    64
    
    
    
    151Net current deferred tax assets
    
    
    930
    
    
    
    989Long-term deferred tax assets (liabilities):Net operating loss carryforwards
    
    
    60,861
    
    
    
    59,376Foreign net operating loss carryforwards
    
    
    225
    
    
    
    319Research and development credits
    
    
    1,799
    
    
    
    1,605Alternative minimum tax credits
    
    
    54
    
    
    
    54Depreciation
    
    
    1,225
    
    
    
    1,188Compensation accruals and reserves
    
    
    663
    
    
    
    540Deferred financing costs
    
    
    374
    
    
    
    286Technology license amortization
    
    
    (2,176
    )
    
    
    (1,857
    )Other intangible assets and goodwill
    
    
    (885
    )
    
    
    (914
    )Other
    
    
    1,086
    
    
    
    766Net long-term deferred tax assets
    
    
    63,226
    
    
    
    61,363Net deferred tax assets before valuation allowance
    
    
    64,156
    
    
    
    62,352Less valuation allowance
    
    
    (64,704
    )
    
    
    (62,639
    )Net deferred tax liability
    
    $
    (548
    )
    
    $
    (287
    )
   2009
    
    
    2008
    
    
    2007Tax at statutory rate
    
    
    (34.0
    )%
    
    
    (34.0
    )%
    
    
    (34.0
    )%State income taxes
    
    
    (1.7
    )
    
    
    (2.0
    )
    
    
    (2.4
    )Meals & entertainment
    
    
    1.8
    
    
    
    0.6
    
    
    
    0.5Other permanent differences
    
    
    1.4
    
    
    
    0.4
    
    
    
    1.0R&D credits
    
    
    (3.2
    )
    
    
    0.5
    
    
    
    (2.7
    )Uncertain tax positions
    
    
    (0.3
    )
    
    
    0.7
    
    
    
    Other (including foreign taxes)
    
    
    0.3
    
    
    
    0.5
    
    
    
    1.5Impact of changes in valuation allowance
    
    
    40.5
    
    
    
    35.8
    
    
    
    36.64.8
    %
    
    
    2.5
    %
    
    
    0.5
    %
 Income Taxes
 F -23




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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
    
    
    816Reductions for settlements with taxing authorities
    
    
    (133
    )Reductions for tax positions related to prior periods
    
    
    (33
    )Additions for tax positions related to the current period
    
    
    59Balance at December 31, 2009
    
    $
    709
    10. Benefit Plan
  11. Significant Customers and Concentration of Credit Risk
  2009

    
    2008

    
    2007United States
    
    
    39
    %
    
    
    38
    %
    
    
    38
    %Europe
    
    
    30
    %
    
    
    36
    %
    
    
    33
    %Asia Pacific
    
    
    14
    %
    
    
    12
    %
    
    
    13
    %China
    
    
    12
    %
    
    
    9
    %
    
    
    9
    %Other Markets
    
    
    5
    %
    
    
    5
    %
    
    
    7
    %
  F -24




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##### Table of Contents



12. Quarterly Financial Data (Unaudited)
  QuarterFirst
    
    
    Second
    
    
    Third
    
    
    FourthYear ended December 31, 2009:Net sales
    
    $
    18,403
    
    
    $
    19,781
    
    
    $
    18,827
    
    
    $
    18,699Gross profit
    
    
    12,273
    
    
    
    12,741
    
    
    
    11,844
    
    
    
    12,031Net loss
    
    
    (1,671
    )
    
    
    (186
    )
    
    
    (975
    )
    
    
    (3,481
    )Net basic and diluted loss per share
    
    $
    (0.02
    )
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.05
    )Year ended December 31, 2008:Net 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
    )
  Note 13. Fair Value Measurements
 Fair Value Measurements and
Disclosures .
  
    
    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.
   F -25




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Note 14. Recently Issued Accounting Pronouncements
  Subsequent Events
 1.
    
    The period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements.
 2.
    
    The circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements.
 3.
    
    The disclosures that an entity should make about events or transactions that
occurred after the balance sheet date.
  Business Combinations
 15. Litigation
 Abbey Litigation
  F -26




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CarboMedics Litigation Settlement
  F -27




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##### Table of Contents



16. Subsequent Event  Debt Refinancing
  F -28




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##### Table of Contents



ExhibitNumber
    
    Description12.1
    
    Computation of Ratio of Earnings to Fixed Charges.21
    
    List of Subsidiaries.23
    
    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.