##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended July 3, 2010
 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 Number: 0-18602
 ATS MEDICAL, INC.
  Minnesota
    
    41-1595629(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)3905 Annapolis Lane N., Suite 105Minneapolis, Minnesota
    
    55447(Address of Principal Executive Offices)
    
    (Zip Code)
 (763) 553-7736  (Registrants Telephone Number, Including Area Code)
 Not Applicable  (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
  þ 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
  Common Stock, $.01 par value
    
    81,596,406 shares




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##### 



TABLE OF CONTENTS
 Page(s)PART I. FINANCIAL INFORMATIONITEM 1. Financial Statements (Unaudited):Consolidated Balance Sheets as of July 3, 2010 and
December 31, 2009
    
    
    3Consolidated Statements of Operations for the
three and six month periods ended July 3, 2010
and July 4, 2009
    
    
    4Consolidated Statements of Cash Flows for the six
month periods ended July 3, 2010 and July 4, 2009
    
    
    5Notes to Consolidated Financial Statements
    
    
    6  14ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    15  24ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24ITEM 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    26  29ITEM 1A. Risk Factors
    
    29  30ITEM 5. Other Information
    
    30ITEM 6. Exhibits
    
    30  31SIGNATURES
    
    32EXHIBIT INDEX
    
    33EX-12.1EX-31.1EX-31.2EX-32.1EX-32.2
   2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1.
    
    Financial Statements
 ATS Medical, Inc.
 
 Consolidated Balance Sheets
 Unaudited)
  July 3,
    
    
    December 31,2010
    
    
    2009AssetsCurrent assets:Cash and cash equivalents
    
    $
    11,970
    
    
    $
    14,235Accounts receivable, less allowances of $506 at July 3, 2010
and $420 at December 31, 2009
    
    
    14,657
    
    
    
    14,398Inventories, net
    
    
    22,214
    
    
    
    20,814Prepaid expenses
    
    
    1,526
    
    
    
    1,774Total current assets
    
    
    50,367
    
    
    
    51,221Leasehold improvements, furniture and equipment, net
    
    
    7,278
    
    
    
    7,659Goodwill
    
    
    32,166
    
    
    
    32,166Other intangible assets
    
    
    27,286
    
    
    
    28,910Other assets
    
    
    1,573
    
    
    
    1,299Total assets
    
    $
    118,670
    
    
    $
    121,255Liabilities and shareholders equityCurrent liabilities:Current portion of bank loan payable
    
    $
    
    
    
    $
    2,646Accounts payable
    
    
    3,962
    
    
    
    4,995Accrued compensation
    
    
    3,569
    
    
    
    2,076Convertible senior notes payable, net of unamortized discounts
and bifurcated derivatives of $4,741 at December 31, 2009
    
    
    
    
    
    
    17,659Other accrued liabilities
    
    
    2,157
    
    
    
    2,894Total current liabilities
    
    
    9,688
    
    
    
    30,270Payable to Medtronic, Inc.
    
    
    30,000
    
    
    
    Bank loan payable
    
    
    
    
    
    
    1,323Other long-term liabilities
    
    
    1,081
    
    
    
    790Shareholders equity:Common stock, $.01 par value:Authorized shares  150,000,000Issued and
outstanding shares  81,347,228 at July 3, 2010 and 78,187,741 at December 31, 2009
    
    
    813
    
    
    
    782Additional paid-in capital
    
    
    253,240
    
    
    
    246,024Accumulated deficit
    
    
    (175,793
    )
    
    
    (158,229
    )Accumulated other comprehensive income (loss)
    
    
    ( 359
    )
    
    
    295Total shareholders equity
    
    
    77,901
    
    
    
    88,872Total liabilities and shareholders equity
    
    $
    118,670
    
    
    $
    121,255
 The accompanying notes are an integral part of the consolidated financial statements.
  3




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ATS Medical, Inc.
 
 Consolidated Statements of Operations
 (Unaudited)
  Three months ended July 3 (July 4)
    
    
    Six months ended July 3 (July 4)2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales
    
    $
    19,014
    
    
    $
    19,781
    
    
    $
    37,605
    
    
    $
    38,184Cost of goods sold
    
    
    6,607
    
    
    
    7,040
    
    
    
    13,012
    
    
    
    13,170Gross profit
    
    
    12,407
    
    
    
    12,741
    
    
    
    24,593
    
    
    
    25,014Operating expenses:Sales and marketing
    
    
    9,199
    
    
    
    7,525
    
    
    
    17,903
    
    
    
    15,026Research and development
    
    
    2,755
    
    
    
    1,817
    
    
    
    6,022
    
    
    
    3,861General and administrative
    
    
    6,332
    
    
    
    2,431
    
    
    
    9,373
    
    
    
    4,907Amortization of intangibles
    
    
    812
    
    
    
    812
    
    
    
    1,624
    
    
    
    1,600Total operating expenses
    
    
    19,098
    
    
    
    12,585
    
    
    
    34,922
    
    
    
    25,394Operating income (loss)
    
    
    (6,691
    )
    
    
    156
    
    
    
    (10,329
    )
    
    
    (380
    )Net interest expense
    
    
    (888
    )
    
    
    (694
    )
    
    
    (1,505
    )
    
    
    (1,413
    )Loss on redemption of
convertible senior notes
    
    
    (4,806
    )
    
    
    
    
    
    
    (4,806
    )
    
    
    Other income (expense), net
    
    
    (448
    )
    
    
    471
    
    
    
    (779
    )
    
    
    118Net loss before income taxes
    
    
    (12,833
    )
    
    
    (67
    )
    
    
    (17,419
    )
    
    
    (1,675
    )Income tax expense
    
    
    (61
    )
    
    
    (119
    )
    
    
    (146
    )
    
    
    (182
    )Net loss
    
    $
    (12,894
    )
    
    $
    (186
    )
    
    $
    (17,565
    )
    
    $
    (1,857
    )Net loss per share:Basic and diluted
    
    $
    (0.16
    )
    
    $
    (0.00
    )
    
    $
    (0.22
    )
    
    $
    (0.03
    )Weighted average number of
shares outstanding:Basic and diluted
    
    
    79,953
    
    
    
    71,688
    
    
    
    79,185
    
    
    
    71,471
 The accompanying notes are an integral part of the consolidated financial statements.
  4




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ATS Medical, Inc.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
  Six months endedJuly 3,
    
    
    July 4,2010
    
    
    2009Operating activities:Net loss
    
    $
    (17,565
    )
    
    $
    (1,857
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    2,643
    
    
    
    2,540Stock-based compensation expense
    
    
    1,869
    
    
    
    1,197Deferred income taxes
    
    
    127
    
    
    
    141Non-cash interest expense
    
    
    295
    
    
    
    431Loss on redemption of convertible senior notes
    
    
    4,806
    
    
    
    Change in value of derivative liability bifurcated from convertible senior notes
    
    
    (9
    )
    
    
    (18
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (497
    )
    
    
    (822
    )Inventories, net
    
    
    (2,434
    )
    
    
    (1,013
    )Prepaid expenses
    
    
    117
    
    
    
    (782
    )Accounts payable and accrued expenses
    
    
    546
    
    
    
    (5,825
    )Net cash used in operating activities
    
    
    (10,102
    )
    
    
    (6,008
    )Investing activities:Payments for business acquisitions
    
    
    
    
    
    
    (2,000
    )Purchases of leasehold improvements, furniture and equipment
    
    
    (526
    )
    
    
    (699
    )Other
    
    
    
    
    
    
    479Net cash used in investing activities
    
    
    (526
    )
    
    
    (2,220
    )Financing activities:Loan from Medtronic, Inc.
    
    
    30,000
    
    
    
    Payments on bank loan
    
    
    (3,969
    )
    
    
    (1,543
    )Redemption and retirement of convertible senior notes
    
    
    (22,400
    )
    
    
    Proceeds from issuance of common stock, net of issuance costs
    
    
    5,379
    
    
    
    158Other
    
    
    (425
    )
    
    
    29Net cash provided by (used in) financing activities
    
    
    8,585
    
    
    
    (1,356
    )Effect of foreign exchange rate changes on cash
    
    
    (222
    )
    
    
    11Decrease in cash and cash equivalents
    
    
    (2,265
    )
    
    
    (9,573
    )Cash and cash equivalents at beginning of period
    
    
    14,235
    
    
    
    20,895Cash and cash equivalents at end of period
    
    $
    11,970
    
    
    $
    11,322
 The accompanying notes are an integral part of the consolidated financial statements.
  5




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ATS Medical, Inc.
 
 Notes to Consolidated Financial Statements
 (Unaudited)
 Note 1. Basis of Presentation
     Note 2. Merger with Medtronic, Inc.
    6




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Note 3. Stock-Based Compensation and Equity Plans
 Stock-Based Compensation
 Stock Compensation
  7




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Three months ended
    
    
    Six months endedJuly 3,
    
    
    July 4,
    
    
    July 3,
    
    
    July 4,(in thousands, except per share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Stock compensation expense included in:Cost of goods sold
    
    $
    60
    
    
    $
    47
    
    
    $
    109
    
    
    $
    47Sales and marketing expenses
    
    
    340
    
    
    
    349
    
    
    
    730
    
    
    
    620Research and development expenses
    
    
    141
    
    
    
    78
    
    
    
    381
    
    
    
    149General and administrative expenses
    
    
    306
    
    
    
    239
    
    
    
    649
    
    
    
    381Total stock compensation expense
    
    $
    847
    
    
    $
    713
    
    
    $
    1,869
    
    
    $
    1,197Stock compensation expense per
weighted average share outstanding
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.02
   Equity Plans
   WeightedStock Options Outstanding
    
    
    
    
    
    
    
    
    
    
    Average OptionUnder the Plans
    
    
    
    
    
    
    
    
    
    
    Exercise PriceISO
    
    
    Non-ISO
    
    
    Non-Plan Options
    
    
    Total
    
    
    Per ShareOutstanding at December
31, 2009
    
    
    717,800
    
    
    
    289,000
    
    
    
    1,493,200
    
    
    
    2,500,000
    
    
    $
    2.82Options granted
    
    
    176,100
    
    
    
    
    
    
    
    
    
    
    
    176,100
    
    
    
    2.45Options exercised
    
    
    (38,375
    )
    
    
    
    
    
    
    (84,200
    )
    
    
    (122,575
    )
    
    
    3.11Options canceled
    
    
    (73,400
    )
    
    
    (7,500
    )
    
    
    (75,000
    )
    
    
    (155,900
    )
    
    
    6.15Outstanding at July 3, 2010
    
    
    782,125
    
    
    
    281,500
    
    
    
    1,334,000
    
    
    
    2,397,625
    
    
    $
    2.57
   8




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WeightedWeighted Average
    
    
    AverageNumber of
    
    
    Award Date
    
    
    RemainingShares
    
    
    Fair Value
    
    
    Contractual TermOutstanding (unvested ) at December 31, 2009
    
    
    4,167,677
    
    
    $
    2.12
    
    
    1.92 yearsAwards granted
    
    
    2,050,203
    
    
    
    2.56Awards vested
    
    
    (959,982
    )
    
    
    2.11Awards forfeited
    
    
    (98,527
    )
    
    
    2.10Outstanding (unvested) at July 3, 2010
    
    
    5,159,371
    
    
    $
    2.30
    
    
    2.16 years
  Note 4. Inventories
  July 3,
    
    
    December 31,2010
    
    
    2009Raw materials
    
    $
    3,350
    
    
    $
    2,639Work-in-process
    
    
    6,736
    
    
    
    6,390Finished goods
    
    
    13,228
    
    
    
    12,685Total inventories
    
    
    23,314
    
    
    
    21,714Less: non-current inventories
    
    
    (1,100
    )
    
    
    (900
    )Inventories, net
    
    $
    22,214
    
    
    $
    20,814
  Note 5. Comprehensive Income (Loss)
  Note 6. Intangible Assets
 Intangibles-Goodwill and Other,
 Property, Plant and Equipment-Overall-Subsequent Measurement
  9




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Note 7. Debt and Borrowings
 Medtronic Loan
  Debt Refinancing
  Convertible Senior Notes Payable
  Derivatives and Hedging,
  10




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Six months endedJuly 3, 2010
    
    
    July 4, 2009Derivative liability balance at beginning of period
    
    $
    56
    
    
    $
    90Change in valuation gain included in other income:First quarter
    
    
    (9
    )
    
    
    (9
    )Second quarter
    
    
    
    
    
    
    (9
    )Write-off remaining derivative liability due to redemption of Notes
    
    
    (47
    )
    
    
    Derivative liability balance at end of period
    
    $
    
    
    
    $
    72
  Bank Loan Payable
    Subordinated Credit Agreement
    11




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##### Table of Contents



Note 8. Income Taxes
  Note 9. 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.
  Note 10. Subsequent Events
 Subsequent Events,
 Note 11. Recently Issued Accounting Pronouncements
 Improving
Disclosures about Fair Value Measurements Fair Value
Measurements and Disclosures
 Note 12. Litigation
 Medtronic Merger Class Action Litigation
 In re ATS Medical, Inc.
Shareholder Litigation
  12




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Abbey Litigation
   13




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##### Table of Contents



Abbey
Litigation Relating to the Medtronic Merger
    14




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ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
 This document contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Words such as may, expect, believe, anticipate or
estimate identify such forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, and actual results may differ materially from those expressed
in such forward-looking statements. The factors that could cause such material
differences are identified in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2009 and in Part II, Item 1A of this Form 10-Q. We undertake no obligation to
correct or update any forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any future disclosures we make on
related subjects in future filings with the SEC.
 Executive Overview
  ®
 .
 ® ®
  ®
  15




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®
  Merger with Medtronic, Inc.
     16




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Critical Accounting Policies and Estimates
    17




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##### Table of Contents



Results of Operations
  Three months ended July 3 (July 4)
    
    
    Six months ended July 3 (July 4)Increase (Decrease)
    
    
    
    
    
    
    
    
    
    
    Increase (Decrease)(in thousands)
    
    2010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Net sales
    
    $
    19,014
    
    
    $
    19,781
    
    
    $
    (767
    )
    
    
    (3.9
    )%
    
    $
    37,605
    
    
    $
    38,184
    
    
    $
    (579
    )
    
    
    (1.5
    )%Cost of goods sold
    
    
    6,607
    
    
    
    7,040
    
    
    
    (433
    )
    
    
    (6.2
    )%
    
    
    13,012
    
    
    
    13,170
    
    
    
    (158
    )
    
    
    (1.2
    )%Gross profit
    
    
    12,407
    
    
    
    12,741
    
    
    
    (334
    )
    
    
    (2.6
    )%
    
    
    24,593
    
    
    
    25,014
    
    
    
    (421
    )
    
    
    (1.7
    )%Operating expenses:Sales and marketing
    
    
    9,199
    
    
    
    7,525
    
    
    
    1,674
    
    
    
    22.2
    %
    
    
    17,903
    
    
    
    15,026
    
    
    
    2,877
    
    
    
    19.1
    %Research and development
    
    
    2,755
    
    
    
    1,817
    
    
    
    938
    
    
    
    51.6
    %
    
    
    6,022
    
    
    
    3,861
    
    
    
    2,161
    
    
    
    56.0
    %General and administrative
    
    
    6,332
    
    
    
    2,431
    
    
    
    3,901
    
    
    
    160.5
    %
    
    
    9,373
    
    
    
    4,907
    
    
    
    4,466
    
    
    
    91.0
    %Amortization of intangibles
    
    
    812
    
    
    
    812
    
    
    
    
    
    
    
    0.0
    %
    
    
    1,624
    
    
    
    1,600
    
    
    
    24
    
    
    
    1.5
    %Total operating expenses
    
    
    19,098
    
    
    
    12,585
    
    
    
    6,513
    
    
    
    51.8
    %
    
    
    34,922
    
    
    
    25,394
    
    
    
    9,528
    
    
    
    37.5
    %Operating income (loss)
    
    
    (6,691
    )
    
    
    156
    
    
    
    (6,847
    )
    
    
    (4,389.1
    )%
    
    
    (10,329
    )
    
    
    (380
    )
    
    
    9,949
    
    
    
    2,618.2
    %Net interest expense
    
    
    (888
    )
    
    
    (694
    )
    
    
    194
    
    
    
    28.0
    %
    
    
    (1,505
    )
    
    
    (1,413
    )
    
    
    92
    
    
    
    6.5
    %Loss on redemption of
convertible senior notes
    
    
    (4,806
    )
    
    
    
    
    
    
    4,806
    
    
    NM
    
    
    
    (4,806
    )
    
    
    
    
    
    
    4,806
    
    
    NMOther income (expense), net
    
    
    (448
    )
    
    
    471
    
    
    
    (919
    )
    
    
    (195.1
    )%
    
    
    (779
    )
    
    
    118
    
    
    
    (897
    )
    
    
    (760.2
    )%Net loss before income taxes
    
    
    (12,833
    )
    
    
    (67
    )
    
    
    12,766
    
    
    
    19,053.7
    %
    
    
    (17,419
    )
    
    
    (1,675
    )
    
    
    15,744
    
    
    
    939.9
    %Income tax expense
    
    
    (61
    )
    
    
    (119
    )
    
    
    (58
    )
    
    
    (48.7
    )%
    
    
    (146
    )
    
    
    (182
    )
    
    
    (36
    )
    
    
    (19.8
    )%Net loss
    
    $
    (12,894
    )
    
    $
    (186
    )
    
    $
    12,708
    
    
    
    6,832.3
    %
    
    $
    (17,565
    )
    
    $
    (1,857
    )
    
    $
    15,708
    
    
    
    845.9
    %
  Three months ended
    
    
    Six months endedJuly 3 (July 4)
    
    
    July 3 (July 4)2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    34.7
    %
    
    
    35.6
    %
    
    
    34.6
    %
    
    
    34.5
    %Gross profit
    
    
    65.3
    %
    
    
    64.4
    %
    
    
    65.4
    %
    
    
    65.5
    %Operating expenses:Sales and marketing
    
    
    48.4
    %
    
    
    38.0
    %
    
    
    47.6
    %
    
    
    39.4
    %Research and development
    
    
    14.5
    %
    
    
    9.2
    %
    
    
    16.0
    %
    
    
    10.1
    %General and administrative
    
    
    33.3
    %
    
    
    12.3
    %
    
    
    24.9
    %
    
    
    12.9
    %Amortization of intangibles
    
    
    4.3
    %
    
    
    4.1
    %
    
    
    4.3
    %
    
    
    4.2
    %Total operating expenses
    
    
    100.4
    %
    
    
    63.6
    %
    
    
    92.9
    %
    
    
    66.5
    %Operating income (loss)
    
    
    (35.2
    )%
    
    
    0.8
    %
    
    
    (27.5
    )%
    
    
    (1.0
    )%Net interest expense
    
    
    (4.7
    )%
    
    
    (3.5
    )%
    
    
    (4.0
    )%
    
    
    (3.7
    )%Loss on redemption of
convertible senior notes
    
    
    (25.3
    )%
    
    
    0.0
    %
    
    
    (12.8
    )%
    
    
    0.0
    %Other income (expense), net
    
    
    (2.4
    )%
    
    
    2.4
    %
    
    
    (2.1
    )%
    
    
    0.3
    %Net loss before income taxes
    
    
    (67.5
    )%
    
    
    (0.3
    )%
    
    
    (46.3
    )%
    
    
    (4.4
    )%Income tax expense
    
    
    (0.3
    )%
    
    
    (0.6
    )%
    
    
    (0.4
    )%
    
    
    (0.5
    )%Net loss
    
    
    (67.8
    )%
    
    
    (0.9
    )%
    
    
    (46.7
    )%
    
    
    (4.9
    )%
  18




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##### Table of Contents



Net Sales.
 Three months ended July 3 (July 4)
    
    
    Six months ended July 3 (July 4)Decrease
    
    
    
    
    
    
    
    
    
    
    Decrease(in thousands)
    
    2010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %United States
    
    $
    7,567
    
    
    $
    7,581
    
    
    $
    (14
    )
    
    
    (0.2
    )%
    
    $
    15,059
    
    
    $
    15,513
    
    
    $
    (454
    )
    
    
    (2.9
    )%Outside United States
    
    
    11,447
    
    
    
    12,200
    
    
    
    (753
    )
    
    
    (6.2
    )%
    
    
    22,546
    
    
    
    22,671
    
    
    
    (125
    )
    
    
    (0.6
    )%Total
    
    $
    19,014
    
    
    $
    19,781
    
    
    $
    (767
    )
    
    
    (3.9
    )%
    
    $
    37,605
    
    
    $
    38,184
    
    
    $
    (579
    )
    
    
    (1.5
    )%
  Three months ended
    
    
    Six months endedJuly 3 (July 4)
    
    
    July 3 (July 4)2010
    
    
    2009
    
    
    2010
    
    
    2009United States
    
    
    39.8
    %
    
    
    38.3
    %
    
    
    40.0
    %
    
    
    40.6
    %Outside United States
    
    
    60.2
    %
    
    
    61.7
    %
    
    
    60.0
    %
    
    
    59.4
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Three months ended July 3 (July 4)
    
    
    Six months ended July 3 (July 4)Decrease
    
    
    
    
    
    
    
    
    
    
    Decrease(in thousands)
    
    2010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Heart valve therapy
    
    $
    14,205
    
    
    $
    14,736
    
    
    $
    (531
    )
    
    
    (3.6
    )%
    
    $
    27,858
    
    
    $
    27,981
    
    
    $
    (123
    )
    
    
    (0.4
    )%Surgical arrhythmia
    
    
    4,717
    
    
    
    4,722
    
    
    
    (5
    )
    
    
    (0.1
    )%
    
    
    9,612
    
    
    
    9,626
    
    
    
    (14
    )
    
    
    (0.1
    )%Surgical tools and accessories
    
    
    92
    
    
    
    323
    
    
    
    (231
    )
    
    
    (71.5
    )%
    
    
    135
    
    
    
    577
    
    
    
    (442
    )
    
    
    (76.6
    )%Total
    
    $
    19,014
    
    
    $
    19,781
    
    
    $
    (767
    )
    
    
    (3.9
    )%
    
    $
    37,605
    
    
    $
    38,184
    
    
    $
    (579
    )
    
    
    (1.5
    )%
     19




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##### Table of Contents



Cost of Goods Sold and Gross Profit.
   Sales and Marketing.
  Research and Development.
 General and Administrative.
  20




---



##### Table of Contents



Stock Compensation
 Amortization of Intangibles.
 Net Interest Expense .
 Loss on Redemption of Convertible Senior Notes.
 Other Income (Expense)
 Three months ended
    
    
    Six months endedJuly 3 (July 4)
    
    
    July 3 (July 4)(in thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Convertible Senior Notes derivative liability gain
    
    $
    
    
    
    $
    9
    
    
    $
    9
    
    
    $
    18Net foreign currency transaction gains (losses):Realized
    
    
    29
    
    
    
    118
    
    
    
    (1
    )
    
    
    (110
    )Unrealized
    
    
    (477
    )
    
    
    344
    
    
    
    (787
    )
    
    
    210Net other income (expense)
    
    $
    (448
    )
    
    $
    471
    
    
    $
    (779
    )
    
    $
    118
  Income Taxes
  21




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##### Table of Contents



Net Loss.
 Liquidity and Capital Resources
  Operating Activities.
  Investing Activities.
  Financing Activities.
   22




---



##### Table of Contents



Cash Management and Funding of Future Operations
    23




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Contractual Obligations
  
    
    We redeemed and retired our Convertible Senior Notes.
 
    
    We prepaid our Term Loan with Silicon Valley Bank.
 
    
    We repaid the Notes and Term Loan using the proceeds of the $30 million Loan
obtained from Medtronic in connection with the proposed Merger with Medtronic. The entire
unpaid principal balance of the Loan, together with accrued and unpaid interest, will be
due and payable in full 24 months following the termination, for any reason, of the Merger
Agreement. Upon final payment of the Loan, we would be required to pay, in addition to the
then outstanding principal and accrued but unpaid interest, a final payment equal to 6% of
the original principal balance of the Loan.
 
 ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
     24




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##### Table of Contents



ITEM 4.
    
    Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
   25




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1.
    
    Legal Proceedings
 Medtronic Merger Class Action Litigation
     26




---



##### Table of Contents



27




---



##### Table of Contents



In re ATS Medical,
Inc. Shareholder Litigation
   Abbey Litigation
    28




---



##### Table of Contents



Abbey
Litigation Relating to the Medtronic Merger
   
 ITEM 1A.
    
    Risk Factors
   Our business and our financial condition may be adversely affected if the proposed Merger with
Medtronic is not completed, which could cause our stock price to decline.
  
    
    the consequences of our managements attention having been diverted from our
day-to-day business over an extended period of time between execution of the Merger
Agreement with Medtronic and the date on which the agreement would terminate;
 
    
    the disruption to our relationships with customers and suppliers as a result
of our and their efforts relating to the Merger;
 
    
    actual and potential litigation associated with the proposed
transaction with Medtronic;
 
    
    damage to our financial condition as a result of actions triggered by the
proposed Merger, such as the redemption of our 6% Convertible Senior Notes, that we
otherwise would not have taken as soon or at all if we had not entered into the proposed
Merger with Medtronic;
 
    
    our inability to acquire further necessary financing to fund our ongoing operations
post-termination of the proposed Merger with Medtronic;
 
    
    the potential distraction to our sales force caused by uncertainties relating to
the proposed Merger;
 
    
    the potential delay in approval of products in the regulatory submission process; and
 
    
    the potential loss of business to our competitors.
  29




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##### Table of Contents



If the proposed Merger with Medtronic is not completed, the holders of our common stock, restricted
stock units and options and warrants to purchase common stock will not receive the cash merger
consideration provided in the Merger Agreement.
  In connection with the proposed Merger with Medtronic, we may incur litigation costs which may harm
our business and financial condition and cause our stock price to decline.
  
 ITEM 5.
    
    Other Information
  2010 MICPName
    
    Position
    
    Payout ($)Michael D. Dale
    
    Chairman, Chief Executive Officer and President
    
    $
    84,788Michael R. Kramer
    
    Chief Financial Officer
    
    
    42,394Thaddeus Coffindaffer
    
    Vice President, Sales
    
    
    46,049Craig A. Swandal
    
    Vice President, Operations
    
    
    45,069Michael E. Reinhardt
    
    Vice President, Global Marketing
    
    
    42,394
 
 ITEM 6.
    
    Exhibits
 2.1
    
    
    Agreement and Plan of Merger, dated as of April 28, 2010, among Medtronic, Inc., Pilgrim
Merger Corporation and ATS Medical, Inc. (Incorporated by reference to Exhibit 2.1 to the
Companys Current Report on Form 8-K filed on April 29, 2010).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 quarterly period ended June
28, 2008).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).
  30




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##### Table of Contents



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).10.1
    
    
    Description of amendment to the ATS Medical, Inc. 1998 Employee Stock Purchase Plan, as
amended (Incorporated by reference to Item 1.01 contained in the Companys Current Report on
Form 8-K filed on May 4, 2010).10.2
    
    
    ATS Medical, Inc. 2010 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on May 18, 2010).10.3
    
    
    Promissory Note, dated May 21, 2010, executed by ATS Medical, Inc., 3F Therapeutics, Inc. and
ATS Acquisition Corp. in favor of Medtronic, Inc. (including the form of Warrant issuable
under certain circumstances by ATS Medical, Inc. to Medtronic, Inc.) (Incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on May 21, 2010).10.4
    
    
    Security Agreement, dated May 21, 2010, executed by ATS Medical, Inc., 3F Therapeutics, Inc.
and ATS Acquisition Corp. in favor of Medtronic, Inc. (Incorporated by reference to Exhibit
10.2 to the Companys Current Report on Form 8-K filed on May 21, 2010).10.5
    
    
    Pledge Agreement, dated May 21, 2010, made by ATS Medical, Inc. to Medtronic, Inc.
(Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed
on May 21, 2010).12.1
    
    
    Computation of Ratio of Earnings to Fixed Charges.31.1
    
    
    Certification of Principal Executive Officer pursuant to Rules 13a-15(e)/15d-15(e) of the
Securities Exchange Act, as amended (Section 302 Certification).31.2
    
    
    Certification of Principal Financial Officer pursuant to Rules 13a-15(e)/15d-15(e) of the
Securities Exchange Act, as amended (Section 302 Certification).32.1
    
    
    Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 (Section
906 Certification).32.2
    
    
    Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section
906 Certification).
  31




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##### Table of Contents



SIGNATURES
  Date:      August 11, 2010
    ATS MEDICAL, INC.By:
    /s/ Michael D. DaleMichael D. DaleChief Executive Officer
(Principal Executive Officer)By:
    /s/ Michael R. KramerMichael R. KramerChief Financial Officer
(Principal Financial Officer)  32




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description2.1
    
    
    Agreement and Plan of Merger, dated as of April 28, 2010, among Medtronic, Inc., Pilgrim Merger Corporation
and ATS Medical, Inc. (Incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K
filed on April 29, 2010).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 quarterly period ended June 28, 2008).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).10.1
    
    
    Description of amendment to the ATS Medical, Inc. 1998 Employee Stock Purchase Plan, as amended (Incorporated
by reference to Item 1.01 contained in the Companys Current Report on Form 8-K filed on May 4, 2010).10.2
    
    
    ATS Medical, Inc. 2010 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed on May 18, 2010).10.3
    
    
    Promissory Note, dated May 21, 2010, executed by ATS Medical, Inc., 3F Therapeutics, Inc. and ATS Acquisition
Corp. in favor of Medtronic, Inc. (including the form of Warrant issuable under certain circumstances by ATS
Medical, Inc. to Medtronic, Inc.) (Incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on May 21, 2010).10.4
    
    
    Security Agreement, dated May 21, 2010, executed by ATS Medical, Inc., 3F Therapeutics, Inc. and ATS
Acquisition Corp. in favor of Medtronic, Inc. (Incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K filed on May 21, 2010).10.5
    
    
    Pledge Agreement, dated May 21, 2010, made by ATS Medical, Inc. to Medtronic, Inc. (Incorporated by reference
to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on May 21, 2010).12.1
    
    
    Computation of Ratio of Earnings to Fixed Charges.31.1
    
    
    Certification of the Principal Executive Officer pursuant to Rules 13a-15(e)/15d-15(e) of the Securities
Exchange Act, as amended (Section 302 Certification)31.2
    
    
    Certification of the Principal Financial Officer pursuant to Rules 13a-15(e)/15d-15(e) of the Securities
Exchange Act, as amended (Section 302 Certification)32.1
    
    
    Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 Certification)32.2
    
    
    Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 Certification)
  33