##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 28, 2008
 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 105
Minneapolis, Minnesota
    
    55447(Address of Principal Executive Offices)
    
    (Zip Code)
  (Registrants Telephone Number, Including Area Code)
  (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
  þ 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
    
    62,354,356 shares




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##### 



TABLE OF CONTENTS
 Page(s)PART I. FINANCIAL INFORMATIONITEM 1. Financial Statements (Unaudited):Consolidated Balance Sheets as of June 28, 2008 and December 31, 2007
    
    3Consolidated Statements of Operations for the three and six month periods ended June 28, 2008 and June 30, 2007
    
    4Consolidated Statements of Cash Flow for the six month periods ended June 28, 2008 and June 30, 2007
    
    5Notes to Consolidated Financial Statements
    
    6 - 15ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    16 - 24ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    24 - 25ITEM 4. Controls and Procedures
    
    25PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    26 - 27ITEM 1A. Risk Factors
    
    27ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    27ITEM 4 Submission of Matters to a Vote of Security Holders
    
    28ITEM 6. Exhibits
    
    28 - 30SIGNATURES
    
    31EXHIBIT INDEX
    
    32 - 33Third Restated Articles of IncorporationAmendment No. 3 to Original Lease Agreement2008 Management Incentive Compensation PlanCertification of the Principal Executive OfficerCertification of the Principal Financial OfficerCertification of the Principal Executive OfficerCertification of the Principal Financial Officer
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 ATS Medical, Inc.
 
 Consolidated Balance Sheets
  June 28,
    
    
    December 31,2008
    
    
    2007(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    10,907
    
    
    $
    10,480Short-term investments
    
    
    7
    
    
    
    4,189Accounts receivable, net
    
    
    12,853
    
    
    
    11,186Inventories
    
    
    20,024
    
    
    
    18,743Prepaid expenses
    
    
    1,165
    
    
    
    1,143Total current assets
    
    
    44,956
    
    
    
    45,741Leasehold improvements, furniture and equipment, net
    
    
    7,484
    
    
    
    7,739Goodwill
    
    
    16,016
    
    
    
    15,175Other intangible assets
    
    
    33,823
    
    
    
    35,604Other assets
    
    
    1,444
    
    
    
    1,638Total assets
    
    $
    103,723
    
    
    $
    105,897Liabilities and shareholders equityCurrent liabilities:Current maturities of bank notes payable
    
    $
    2,646
    
    
    $
    2,457Accounts payable
    
    
    5,230
    
    
    
    4,794Accrued compensation
    
    
    2,830
    
    
    
    2,361Accrued distributor liabilities
    
    
    475
    
    
    
    791Warrant liability
    
    
    
    
    
    
    3,913Other accrued liabilities
    
    
    2,102
    
    
    
    1,209Total current liabilities
    
    
    13,283
    
    
    
    15,525Convertible senior notes payable, net of unamortized
discounts and bifurcated derivatives of $4,922 and
$4,964 at June 28, 2008 and December 31, 2007
    
    
    17,478
    
    
    
    17,436Payable to CryoCath Technologies, Inc.
    
    
    1,824
    
    
    
    1,742Notes payable
    
    
    5,292
    
    
    
    6,143Deferred income taxes
    
    
    191
    
    
    
    95Shareholders equity:Common stock, $.01 par value:Authorized shares - 150,000,000Issued and outstanding shares- 62,041,738 at June 28, 2008
and 59,512,085 at December 31, 2007
    
    
    620
    
    
    
    595Additional paid-in capital
    
    
    203,903
    
    
    
    196,108Accumulated deficit
    
    
    (139,657
    )
    
    
    (132,577
    )Accumulated other comprehensive income
    
    
    789
    
    
    
    830Total shareholders equity
    
    
    65,655
    
    
    
    64,956Total liabilities and shareholders equity
    
    $
    103,723
    
    
    $
    105,897
 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 June 28 (30)
    
    
    Six months ended June 28 (30)2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    16,900
    
    
    $
    12,417
    
    
    $
    31,745
    
    
    $
    23,213Cost of goods sold
    
    
    6,610
    
    
    
    5,545
    
    
    
    12,507
    
    
    
    10,098Gross profit
    
    
    10,290
    
    
    
    6,872
    
    
    
    19,238
    
    
    
    13,115Operating expenses:Sales and marketing
    
    
    7,147
    
    
    
    6,115
    
    
    
    13,634
    
    
    
    12,038Research and development
    
    
    2,302
    
    
    
    1,901
    
    
    
    4,508
    
    
    
    3,558Acquired in-process research
and development
    
    
    
    
    
    
    3,500
    
    
    
    
    
    
    
    3,500General and administrative
    
    
    2,764
    
    
    
    2,491
    
    
    
    5,768
    
    
    
    5,107Amortization of intangibles
    
    
    890
    
    
    
    414
    
    
    
    1,781
    
    
    
    829Intangible asset impairment
    
    
    
    
    
    
    755
    
    
    
    
    
    
    
    755Total operating expenses
    
    
    13,103
    
    
    
    15,176
    
    
    
    25,691
    
    
    
    25,787Operating loss
    
    
    (2,813
    )
    
    
    (8,304
    )
    
    
    (6,453
    )
    
    
    (12,672
    )Net interest expense
    
    
    (657
    )
    
    
    (307
    )
    
    
    (1,276
    )
    
    
    (752
    )Other income (expense), net
    
    
    (1,040
    )
    
    
    (105
    )
    
    
    878
    
    
    
    (111
    )Net loss before income taxes
    
    
    (4,510
    )
    
    
    (8,716
    )
    
    
    (6,851
    )
    
    
    (13,535
    )Income tax expense
    
    
    (159
    )
    
    
    (1
    )
    
    
    (229
    )
    
    
    (2
    )Net loss
    
    
    ($4,669
    )
    
    
    ($8,717
    )
    
    
    ($7,080
    )
    
    
    ($13,537
    )Net loss per share:Basic and diluted
    
    
    ($0.08
    )
    
    
    ($0.18
    )
    
    
    ($0.12
    )
    
    
    ($0.30
    )Weighted average number of
shares outstanding:Basic and diluted
    
    
    60,018
    
    
    
    49,406
    
    
    
    59,877
    
    
    
    45,749
 The accompanying notes are an integral part of the consolidated financial statements.
 4




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ATS Medical, Inc.
 
 Consolidated Statements of Cash Flow
 (Unaudited)
  Six months ended June 28 (30)2008
    
    
    2007Operating activities:Net loss
    
    
    ($7,080
    )
    
    
    ($13,537
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    2,946
    
    
    
    1,813Stock compensation expense
    
    
    769
    
    
    
    623Acquired in-process research and development
    
    
    
    
    
    
    3,500Impairment of intangibles
    
    
    
    
    
    
    755Deferred income taxes
    
    
    96
    
    
    
    Non-cash interest expense
    
    
    317
    
    
    
    230Change in value of warrant liability and convertible senior
notes derivatives
    
    
    (273
    )
    
    
    241Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    (1,631
    )
    
    
    232Inventories
    
    
    (1,267
    )
    
    
    808Prepaid expenses
    
    
    (22
    )
    
    
    51Accounts payable and accrued expenses
    
    
    1,642
    
    
    
    856Net cash used in operating activities
    
    
    (4,503
    )
    
    
    (4,428
    )Investing activities:Purchases of short-term investments
    
    
    (938
    )
    
    
    Maturities of short-term investments
    
    
    5,121
    
    
    
    4,224Payments for business acquisitions
    
    
    (1,000
    )
    
    
    (22,000
    )Business acquisition costs
    
    
    
    
    
    
    (1,655
    )Payments for technology and distribution licenses
    
    
    
    
    
    
    (23
    )Purchases of leasehold improvements, furniture and equipment
    
    
    (886
    )
    
    
    (273
    )Net cash provided by (used in) investing activities
    
    
    2,297
    
    
    
    (19,727
    )Financing activities:Advances on bank notes payable
    
    
    
    
    
    
    8,600Repayments of bank notes payable
    
    
    (662
    )
    
    
    (2,327
    )Net proceeds from sales of common stock and warrants
    
    
    3,381
    
    
    
    31,071Other
    
    
    31
    
    
    
    62Net cash provided by financing activities
    
    
    2,750
    
    
    
    37,406Effect of foreign exchange rate changes
    
    
    (117
    )
    
    
    (89
    )Increase in cash and cash equivalents
    
    
    427
    
    
    
    13,162Cash and cash equivalents at beginning of period
    
    
    10,480
    
    
    
    4,612Cash and cash equivalents at end of period
    
    $
    10,907
    
    
    $
    17,774Significant non-cash transactions:Transfer of warrant liability to additional paid-in capital
    
    $
    3,670
    
    
    $
    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.
 5




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ATS Medical, Inc.
 
 Notes to Consolidated Financial Statements
 (Unaudited)
 Note 1. Basis of Presentation
 year-end
    Note 2. Common Stock and Stock-Based Compensation
 Stock-Based Compensation
 Share-Based Payment
  WeightedStock Options Outstanding
    
    
    
    
    
    
    
    
    
    Average OptionUnder the Plans
    
    Non-Plan
    
    
    
    
    
    Exercise PriceISO
    
    Non-ISO
    
    Options
    
    Total
    
    Per ShareBalance at December 31, 2007
    
    
    669,875
    
    
    
    299,000
    
    
    
    1,696,950
    
    
    
    2,665,825
    
    
    $
    3.02Options granted
    
    
    125,900
    
    
    
    
    
    
    
    
    
    
    
    125,900
    
    
    
    1.57Options exercised
    
    
    (16,000
    )
    
    
    
    
    
    
    (56,250
    )
    
    
    (72,250
    )
    
    
    0.75Options canceled
    
    
    (119,125
    )
    
    
    
    
    
    
    
    
    
    
    (119,125
    )
    
    
    4.40Balance at June 28, 2008
    
    
    660,650
    
    
    
    299,000
    
    
    
    1,640,700
    
    
    
    2,600,350
    
    
    $
    2.95
  6




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Weighted
    
    WeightedAverage
    
    AverageNumber of
    
    Award Date
    
    RemainingShares
    
    Fair Value
    
    Contractual TermUnvested at December 31, 2007
    
    
    2,037,538
    
    
    $
    2.06
    
    
    2.09 yearsAwards granted
    
    
    1,386,647
    
    
    
    1.64
    
    
    
    Awards vested
    
    
    (432,178
    )
    
    
    2.29
    
    
    
    Awards forfeited
    
    
    (183,562
    )
    
    
    2.13
    
    
    
    Unvested at June 28, 2008
    
    
    2,808,445
    
    
    $
    1.82
    
    
    2.57 years
   Three months ended
    
    Six months endedJune 28 (30)
    
    June 28 (30)(in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Stock compensation expense included in:Sales and marketing expenses
    
    $
    251
    
    
    $
    186
    
    
    $
    443
    
    
    $
    373General and administrative expenses
    
    
    191
    
    
    
    121
    
    
    
    326
    
    
    
    250Total stock compensation expense
    
    $
    442
    
    
    $
    307
    
    
    $
    769
    
    
    $
    623Stock compensation expense per share
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    Private Placements of Common Stock
   7




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(in thousands)Warrant liability balance on January 1, 2008
    
    $
    3,913Total losses (gains) included in other expense (income):First quarter 2008
    
    
    (1,521
    )Second quarter 2008
    
    
    1,278Transfer to additional-paid-in-capital
    
    
    (3,670
    )Warrant liability balance on June 28, 2008
    
    $
    
  Note 3. Acquisitions
 Acquisition of Assets from CryoCath Technologies, Inc.
 ®
  Purchase Price.
 8




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Cash paid (includes $0.9 million post-closing purchase price reduction
and $1.0 million manufacturing transition payment)
    
    $
    22,074License payments made under prior Distribution and Agency Agreements
    
    
    1,765Non-contingent cash payment to be made (discounted to present value
using discount rate of 9.25%)
    
    
    1,663Acquisition-related costs
    
    
    1,791Total purchase price
    
    $
    27,293
 Purchase Price Allocation.
 Current assets
    
    $
    951Fixed assets
    
    
    761Definite-lived intangible assets subject to amortization
    
    
    11,800Goodwill
    
    
    10,888Acquired in-process research and development
    
    
    3,500Current liabilities
    
    
    (607
    )Total purchase price allocation
    
    $
    27,293
 in-process
 Weighted AverageAmount
    
    
    Amortization(in thousands)
    
    Assigned
    
    
    PeriodDefinite-lived intangible assets:Existing technology  core
    
    $
    4,400
    
    
    16 yearsExisting technology  developed
    
    
    5,600
    
    
    5 yearsDistributor relationships
    
    
    1,500
    
    
    12 yearsProduct trademarks
    
    
    300
    
    
    10 yearsTotal definite-lived intangible assets
    
    $
    11,800
    
    
    10 yearsGoodwill
    
    $
    10,888Acquired in-process research
and development
    
    $
    3,500
  non-recurring
 Pro Forma Results of Operations
  9




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Three months
    
    
    Six monthsended
    
    
    ended(in thousands, except per share data)
    
    June 30, 2007
    
    
    June 30, 2007Net sales
    
    $
    14,606
    
    
    $
    27,577Net loss
    
    
    ($5,191
    )
    
    
    ($9,872
    )Net loss per share  basic and diluted
    
    
    ($0.09
    )
    
    
    ($0.18
    )
  Note 4. Inventories
  June 28,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Raw materials
    
    $
    4,126
    
    
    $
    3,655Work-in-process
    
    
    4,034
    
    
    
    2,920Finished goods
    
    
    11,864
    
    
    
    12,168$
    20,024
    
    
    $
    18,743
 Note 5. Comprehensive Income (Loss)
  Note 6. Intangible Assets
 Indefinite-lived Intangibles and Impairment Policy
 Goodwill and Other Intangible Assets, fair-value
 10




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Intangible Asset Impairment
  Intangible Asset Purchases
   Note 7. Long-Term Debt
 Convertible Senior Notes Payable
  Accounting for Derivative Instruments and Hedging Activities,
  Bank Notes Payable
  11




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Subordinated Credit Agreement
    12




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Note 8. Income Taxes
  Note 9. Fair Value Measurements
 Fair Value Measurements.
  
    
    Level 1  quoted prices in active markets for identical assets and liabilities.
    
    Level 2  observable inputs other than quoted prices in active markets for identical
assets and liabilities.
    
    Level 3  unobservable inputs in which there is little or no market data available,
which require the reporting entity to develop its own assumptions.
  The Fair Value Option for
Financial Assets and Financial Liabilities Accounting for
Certain Investments in Debt and Equity Securities
 Note 10. Recently Issued Accounting Pronouncements
 Business
Combinations
 13




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11. Litigation
 Abbey Litigation
    CarboMedics Litigation
  14




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15




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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, 2007. 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
  ®
 .
 ® ®
  ®
 16




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®
  Critical Accounting Policies and Estimates
  17




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Results of Operations
  Three months ended June 28 (30)
    
    Six months ended June 28 (30)Increase (Decrease)
    
    
    
    
    
    
    
    
    
    Increase (Decrease)(in thousands)
    
    2008
    
    2007
    
    $
    
    %
    
    2008
    
    2007
    
    $
    
    %Net sales
    
    $
    16,900
    
    
    $
    12,417
    
    
    $
    4,483
    
    
    
    36.1
    %
    
    $
    31,745
    
    
    $
    23,213
    
    
    $
    8,532
    
    
    
    36.8
    %Cost of goods sold
    
    
    6,610
    
    
    
    5,545
    
    
    
    1,065
    
    
    
    19.2
    %
    
    
    12,507
    
    
    
    10,098
    
    
    
    2,409
    
    
    
    23.9
    %Gross profit
    
    
    10,290
    
    
    
    6,872
    
    
    
    3,418
    
    
    
    49.7
    %
    
    
    19,238
    
    
    
    13,115
    
    
    
    6,123
    
    
    
    46.7
    %Operating expenses:Sales and marketing
    
    
    7,147
    
    
    
    6,115
    
    
    
    1,032
    
    
    
    16.9
    %
    
    
    13,634
    
    
    
    12,038
    
    
    
    1,596
    
    
    
    13.3
    %Research and development
    
    
    2,302
    
    
    
    1,901
    
    
    
    401
    
    
    
    21.1
    %
    
    
    4,508
    
    
    
    3,558
    
    
    
    950
    
    
    
    26.7
    %Acquired in-process R & D
    
    
    
    
    
    
    3,500
    
    
    
    (3,500
    )
    
    
    (100.0
    )%
    
    
    
    
    
    
    3,500
    
    
    
    (3,500
    )
    
    
    (100.0
    )%General and administrative
    
    
    2,764
    
    
    
    2,491
    
    
    
    273
    
    
    
    11.0
    %
    
    
    5,768
    
    
    
    5,107
    
    
    
    661
    
    
    
    12.9
    %Amortization of intangibles
    
    
    890
    
    
    
    414
    
    
    
    476
    
    
    
    115.0
    %
    
    
    1,781
    
    
    
    829
    
    
    
    952
    
    
    
    114.8
    %Impairment of intangibles
    
    
    
    
    
    
    755
    
    
    
    (755
    )
    
    
    (100.0
    )%
    
    
    
    
    
    
    755
    
    
    
    (755
    )
    
    
    (100.0
    )%Total operating expenses
    
    
    13,103
    
    
    
    15,176
    
    
    
    (2,073
    )
    
    
    (13.7
    )%
    
    
    25,691
    
    
    
    25,787
    
    
    
    (96
    )
    
    
    (0.4
    )%Operating loss
    
    
    (2,813
    )
    
    
    (8,304
    )
    
    
    (5,491
    )
    
    
    (66.1
    )%
    
    
    (6,453
    )
    
    
    (12,672
    )
    
    
    (6,219
    )
    
    
    (49.1
    )%Net interest expense
    
    
    (657
    )
    
    
    (307
    )
    
    
    350
    
    
    
    114.0
    %
    
    
    (1,276
    )
    
    
    (752
    )
    
    
    524
    
    
    
    69.7
    %Other income (expense), net
    
    
    (1,040
    )
    
    
    (105
    )
    
    
    935
    
    
    
    890.5
    %
    
    
    878
    
    
    
    (111
    )
    
    
    989
    
    
    
    891.0
    %Net loss before income taxes
    
    
    (4,510
    )
    
    
    (8,716
    )
    
    
    (4,206
    )
    
    
    (48.3
    )%
    
    
    (6,851
    )
    
    
    (13,535
    )
    
    
    (6,684
    )
    
    
    (49.4
    )%Income tax expense
    
    
    (159
    )
    
    
    (1
    )
    
    
    158
    
    
    NM
    
    
    (229
    )
    
    
    (2
    )
    
    
    227
    
    
    NMNet loss
    
    $
    (4,669
    )
    
    $
    (8,717
    )
    
    $
    (4,048
    )
    
    
    (46.4
    )%
    
    $
    (7,080
    )
    
    $
    (13,537
    )
    
    $
    (6,457
    )
    
    
    (47.7
    )%
  Three months ended
    
    Six months endedJune 28 (30)
    
    June 28 (30)2008
    
    2007
    
    2008
    
    2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    39.1
    %
    
    
    44.7
    %
    
    
    39.4
    %
    
    
    43.5
    %Gross profit
    
    
    60.9
    %
    
    
    55.3
    %
    
    
    60.6
    %
    
    
    56.5
    %Operating expenses:Sales and marketing
    
    
    42.3
    %
    
    
    49.2
    %
    
    
    42.9
    %
    
    
    51.9
    %Research and development
    
    
    13.6
    %
    
    
    15.3
    %
    
    
    14.2
    %
    
    
    15.3
    %Acquired in-process R & D
    
    
    0.0
    %
    
    
    28.2
    %
    
    
    0.0
    %
    
    
    15.1
    %General and administrative
    
    
    16.4
    %
    
    
    20.1
    %
    
    
    18.2
    %
    
    
    22.0
    %Amortization of intangibles
    
    
    5.3
    %
    
    
    3.3
    %
    
    
    5.6
    %
    
    
    3.6
    %Impairment of intangibles
    
    
    0.0
    %
    
    
    6.1
    %
    
    
    0.0
    %
    
    
    3.3
    %Total operating expenses
    
    
    77.5
    %
    
    
    122.2
    %
    
    
    80.9
    %
    
    
    111.1
    %Operating loss
    
    
    (16.6
    )%
    
    
    (66.9
    )%
    
    
    (20.3
    )%
    
    
    (54.6
    )%Net interest income (expense)
    
    
    (3.9
    )%
    
    
    (2.5
    )%
    
    
    (4.0
    )%
    
    
    (3.2
    )%Other income (expense), net
    
    
    (6.2
    )%
    
    
    (0.8
    )%
    
    
    2.8
    %
    
    
    (0.5
    )%Net loss before income taxes
    
    
    (26.7
    )%
    
    
    (70.2
    )%
    
    
    (21.6
    )%
    
    
    (58.3
    )%Income tax expense
    
    
    (0.9
    )%
    
    
    0.0
    %
    
    
    (0.7
    )%
    
    
    0.0
    %Net loss
    
    
    (27.6
    )%
    
    
    (70.2
    )%
    
    
    (22.3
    )%
    
    
    (58.3
    )%
 18




---



##### Table of Contents



Net Sales.
 Three months ended June 28 (30)
    
    Six months ended June 28 (30)Increase
    
    
    
    
    
    
    
    
    
    Increase(in thousands)
    
    2008
    
    2007
    
    $
    
    %
    
    2008
    
    2007
    
    $
    
    %United States
    
    $
    6,598
    
    
    $
    4,025
    
    
    $
    2,573
    
    
    
    63.9
    %
    
    $
    12,427
    
    
    $
    8,305
    
    
    $
    4,122
    
    
    
    49.6
    %Outside United States
    
    
    10,302
    
    
    
    8,392
    
    
    
    1,910
    
    
    
    22.8
    %
    
    
    19,318
    
    
    
    14,908
    
    
    
    4,410
    
    
    
    29.6
    %Total
    
    $
    16,900
    
    
    $
    12,417
    
    
    $
    4,483
    
    
    
    36.1
    %
    
    $
    31,745
    
    
    $
    23,213
    
    
    $
    8,532
    
    
    
    36.8
    %
  Three months ended
    
    Six months endedJune 28 (30)
    
    June 28 (30)2008
    
    2007
    
    2008
    
    2007United States
    
    
    39.0
    %
    
    
    32.4
    %
    
    
    39.1
    %
    
    
    35.8
    %Outside United States
    
    
    61.0
    %
    
    
    67.6
    %
    
    
    60.9
    %
    
    
    64.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Three months ended June 28 (30)
    
    Six months ended June 28 (30)Increase
    
    
    
    
    
    
    
    
    
    Increase(in thousands)
    
    2008
    
    2007
    
    $
    
    %
    
    2008
    
    2007
    
    $
    
    %Heart valve therapy
    
    $
    12,093
    
    
    $
    10,780
    
    
    $
    1,313
    
    
    
    12.2
    %
    
    $
    22,774
    
    
    $
    19,771
    
    
    $
    3,003
    
    
    
    15.2
    %Surgical arrhythmia
    
    
    4,386
    
    
    
    1,341
    
    
    
    3,045
    
    
    
    227.1
    %
    
    
    8,234
    
    
    
    2,819
    
    
    
    5,415
    
    
    
    192.1
    %Surgical tools and accessories
    
    
    421
    
    
    
    296
    
    
    
    125
    
    
    
    42.2
    %
    
    
    737
    
    
    
    623
    
    
    
    114
    
    
    
    18.3
    %Total
    
    $
    16,900
    
    
    $
    12,417
    
    
    $
    4,483
    
    
    
    36.1
    %
    
    $
    31,745
    
    
    $
    23,213
    
    
    $
    8,532
    
    
    
    36.8
    %
 mid-2006.
  19




---



##### Table of Contents



Cost of Goods Sold and Gross Profit.
   Sales and Marketing.
  Research and Development.
 Acquired In-Process R & D.
 20




---



##### Table of Contents



General and Administrative.
   Amortization of Intangibles.
 Intangible Asset Impairment.
 Net Interest Expense . Resources-Financing
   Other Income (Expense)
 21




---



##### Table of Contents



Three months ended
    
    Six months endedJune 28 (30)
    
    June 28 (30)(in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Net realized foreign currency transaction gain (loss)
    
    $
    441
    
    
    $
    124
    
    
    $
    688
    
    
    $
    70Unrealized foreign currency gains (losses) related to
short-term intercompany balances with foreign
subsidiaries
    
    
    (219
    )
    
    
    31
    
    
    
    (83
    )
    
    
    60Net foreign currency transaction gains
    
    $
    222
    
    
    $
    155
    
    
    $
    605
    
    
    $
    130
 Accounting for Derivative Instruments
and Hedging Activities.
 Income Taxes
  Net Loss.
 Liquidity and Capital Resources
  Operating Activities.
 Investing Activities.
 22




---



##### Table of Contents



Financing Activities.
      23




---



##### Table of Contents



Cash Management
   Off-Balance Sheet Arrangements
  
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
  24




---



##### 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
 Abbey Litigation
 pre-and
   26




---



##### Table of Contents



CarboMedics Litigation
    
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    27




---



##### Table of Contents



ITEM 4. Submission of Matters to a Vote of Security Holders
  1)
    
    The election of six directors to our Board of Directors to hold office for the ensuing year
and until their successors are elected and qualified;
 2)
    
    An amendment to our Second Restated Articles of Incorporation to increase the number of shares of our common stock authorized for issuance by 50,000,000 shares;
 3)
    
    Approval of the removal of certain share issuance limitations required by NASDAQ Marketplace
Rule 4350(i)(1)(C) to be included in our common stock warrants issued in June 2007;
 4)
    
    An amendment to the 2000 Stock Incentive Plan to increase the number of shares of common
stock of the Company available for awards granted under the Plan by 4,000,000 shares; and
 5)
    
    The ratification of the selection of Grant Thornton LLP as the Companys independent
registered public accounting firm for the year ending December 31, 2008.
  BrokerFor
    
    Withhold
    
    Against
    
    Abstain
    
    Non-VotesElection of Directors:Michael D. Dale
    
    
    47,829,809
    
    
    
    1,261,412
    
    
    
    
    
    
    
    
    
    
    
    Steven M. Anderson
    
    
    46,716,700
    
    
    
    2,374,521
    
    
    
    
    
    
    
    
    
    
    
    Robert E. Munzenrider
    
    
    46,711,548
    
    
    
    2,379,673
    
    
    
    
    
    
    
    
    
    
    
    Guy P. Nohra
    
    
    47,884,625
    
    
    
    1,206,596
    
    
    
    
    
    
    
    
    
    
    
    Eric W. Sivertson
    
    
    46,710,100
    
    
    
    2,381,121
    
    
    
    
    
    
    
    
    
    
    
    Theodore C. Skokos
    
    
    47,873,125
    
    
    
    1,218,096
    
    
    
    
    
    
    
    
    
    
    
    Amendment to Second Restated Articles of
Incorporation to increase the number
of authorized shares of common stock
    
    
    40,795,038
    
    
    
    
    
    
    
    8,000,158
    
    
    
    296,026
    
    
    
    Approval of the removal of share
issuance limitations included in
warrants issued June 2007
    
    
    29,178,258
    
    
    
    
    
    
    
    793,038
    
    
    
    140,681
    
    
    
    18,979,245Amendment to 2000 Stock Incentive Plan
    
    
    21,539,682
    
    
    
    
    
    
    
    8,399,077
    
    
    
    173,217
    
    
    
    18,979,245Ratification of Grant Thornton LLP
    
    
    48,709,287
    
    
    
    
    
    
    
    277,218
    
    
    
    104,716
    
    
    
    
 
 ITEM 6. Exhibits
 2.1***
    
    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).
 28




---



##### Table of Contents



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 Havek, 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 Havek, 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.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
    
    Warrant, dated June 29, 2008, issued to Theodore C. Skokos (Incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K filed on July 2, 2008).10.1
    
    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).10.2
    
    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.10.3
    
    2008 ATS Medical Management Incentive Compensation Plan.10.4
    
    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).10.5
    
    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
Companys Current Report on Form 8-K filed on July 2, 2008).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).
 29




---



##### Table of Contents



32.2
    
    Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section
906 Certification).
 
 ***
    
    Exhibits and Schedules to the acquisition agreement have been omitted but will be provided
supplementally to the Securities and Exchange Commission upon request. 30




---



##### Table of Contents



SIGNATURES
  Date: August 7, 2008
    ATS MEDICAL, INC.By:
    /s/ Michael D. DaleMichael D. DaleChief Executive Officer
(Duly Authorized Officer)By:
    /s/ Michael R. KramerMichael R. KramerChief Financial Officer
(Principal Financial Officer) 31




---



##### Table of Contents



EXHIBIT INDEX
 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 Havek, 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 Havek, 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.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
    
    Warrant, dated June 29, 2008, issued to Theodore C. Skokos (Incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed on July 2, 2008).10.1
    
    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).10.2
    
    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.10.3
    
    2008 ATS Medical Management Incentive Compensation Plan.10.4
    
    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).
 32




---



##### Table of Contents



ExhibitNumber
    
    Description10.5
    
    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 Companys Current Report on Form 8-K
filed on July 2, 2008).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)
 
 ***
    
    Certain Exhibits and Schedules have been omitted but will be provided supplementally to the Securities and
Exchange Commission upon request. 33