| Any of the risks discussed below, or elsewhere in this Form 10-K or our other filings with the Securities and Exchange Commission, could have a material impact on our business, financial condition or results of operations |
| Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations |
| IF OUR HEART VALVE DOES NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE IN THE UNITED STATES, OUR OPERATING RESULTS WILL BE HARMED AND WE MAY NOT ACHIEVE PROFITABILITY Our success will depend, in large part, on the medical communityapstas acceptance of the ATS heart valve in the United States, which is the largest revenue market in the world for heart valves |
| The US medical communityapstas acceptance of the ATS heart valve will depend upon our ability to demonstrate the safety and efficacy, advantages, long-term clinical performance and cost-effectiveness of the ATS heart valve as compared to other prosthetic heart valves |
| We cannot predict whether the US medical community will accept the ATS heart valve or, if accepted, the extent of its use |
| Negative publicity resulting from isolated incidents involving the ATS heart valve or other prosthetic heart valves could have a significant adverse effect on the overall acceptance of our heart valve |
| If we encounter difficulties developing a market for the ATS heart valve in the United States, we may not be able to increase our revenue enough to achieve profitability and our business and results of operations will be seriously harmed |
| WE CURRENTLY RELY ON THE ATS HEART VALVE AS OUR PRIMARY SOURCE OF REVENUE IF WE ARE NOT SUCCESSFUL IN SELLING THIS PRODUCT, OUR OPERATING RESULTS WILL BE HARMED While we commenced marketing additional products during 2005 that totaled 10prca of net revenues for the year ended December 31, 2005, there can be no assurance that these new products will decrease our dependence on the sales of mechanical heart valves |
| Increasing revenues from new products cannot be guaranteed |
| Clinical testing and the approval process itself are very expensive and can take many years |
| Therefore, we do not expect to be in a position to sell additional products in the foreseeable future |
| Adverse rulings by regulatory authorities, product liability lawsuits, the failure to achieve widespread US market acceptance, the loss of market acceptance outside of the United States, or other adverse publicity may significantly and adversely affect our sales of the ATS heart valve, and, as a result, would adversely affect our business, financial condition and results of operations |
| THE ANTICIPATED BENEFITS OF ACQUIRING 3F THERAPEUTICS MAY NOT BE REALIZED ATS and 3F entered into the merger agreement with the expectation that the merger will result in various benefits, including, among others, benefits relating to an expanded heart valve product line, enhanced revenues, a strengthened market position for ATS in the heart valve industry, cross selling opportunities, technology, cost savings and operating efficiencies |
| Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether 3Fapstas development-stage products are ultimately marketable, whether ATS integrates 3F in an efficient and effective manner, and general competitive factors in the marketplace |
| Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of managementapstas time and energy and could materially impact ATSapstas business, financial condition and operating results |
| ATS MEDICAL MAY HAVE DIFFICULTY INTEGRATING 3F THERAPEUTICS AND MAY INCUR SUBSTANTIAL COSTS IN CONNECTION WITH THE INTEGRATION Integrating 3Fapstas operations into ATSapstas business will be a complex, time-consuming and expensive process |
| Before the merger, ATS and 3F operated independently, each with its own business, products, customers, employees, culture and systems |
| ATS may experience material unanticipated difficulties or expenses in connection with the integration of 3F due to various factors |
| These factors may include: - retaining and integrating management and other key employees of the combined company; - costs and delays in implementing common systems and procedures and integrating 3Fapstas products and operations into ATSapstas business; 14 - potential charges to earnings resulting from the application of purchase accounting to the transaction; - difficulty comparing financial reports due to differing financial and accounting systems; - diversion of management resources from the business of the combined company; and - reduction or loss of customer sales due to the potential for market confusion, hesitation and delay |
| The time and expense associated with converting the businesses of the combined company to a single combined company may exceed managementapstas expectations and limit or delay the intended benefits of the transaction |
| To the extent any of these events occurs, the benefits of the transaction may be reduced, at least for a period of time |
| In addition, it is possible that unexpected transaction costs, such as taxes, fees or professional expenses, or unexpected future operating expenses, such as increased personnel costs, as well as other types of unanticipated adverse developments, could have a material adverse effect on ATSapstas business, financial condition and results of operations |
| IF THE CONDITIONS TO THE MERGER ARE NOT MET, THE MERGER MAY NOT OCCUR Certain conditions set forth in the merger agreement must be satisfied or waived to complete the merger |
| If the conditions are not satisfied or waived, the merger will not occur or will be delayed, and each of ATS and 3F may lose some or all of the intended benefits of the merger |
| In addition to other customary closing conditions, the following conditions must be satisfied or waived, if permissible, before ATS and 3F are obligated to complete the merger: - the issuance of the shares in the merger must be approved by the shareholders of ATS; and - there must be no fact, event or circumstance that would have a material adverse effect on the business of ATS or 3F, taken as a whole |
| We cannot assure you that these conditions will be satisfied |
| IN 2002, WE BEGAN USING A COMBINATION OF DIRECT SALES PERSONS AND INDEPENDENT MANUFACTURING REPRESENTATIVES TO SELL OUR VALVES IN THE UNITED STATES IF OUR US SALES STRATEGY IS NOT SUCCESSFUL, WE WILL NOT BE ABLE TO CONTINUE OUR OPERATIONS AS PLANNED Our sales approach for the sale of the ATS valve in the United States consists primarily of direct salespersons with a few independent manufacturerapstas representatives |
| We will need to continue to expend significant funds and management resources to develop and maintain this hybrid sales force |
| We believe there is significant competition for sales personnel and independent manufacturing representatives with the advanced sales skills and technical knowledge we need |
| If we are unable to recruit, retain and motivate qualified personnel and representatives, US sales of the ATS valve could be adversely affected |
| The loss of key salespersons or independent manufacturerapstas representatives could have a material adverse effect on our sales or potential sales to current customers and prospects serviced by such salespersons or representatives |
| Further, we cannot assure the successful expansion of our network of independent manufacturerapstas representatives on terms acceptable to ATS, if at all, or the successful marketing of our products by our hybrid sales force |
| To the extent we rely on sales through independent manufacturerapstas representatives, any revenues we receive will depend primarily on the efforts of these parties |
| We do not control the amount and timing of marketing resources that these third parties devote to our product |
| If our US sales strategy is not successful, we may be forced to change our US sales strategy again |
| Any such change could disrupt sales in the United States |
| Further, any change in our US sales strategy could be expensive and would likely have a material adverse impact on our results of operations |
| 15 WE CURRENTLY DEPEND ON THE MARKETING AND SALES EFFORTS OF INTERNATIONAL INDEPENDENT DISTRIBUTORS, AND OUR SALES HAVE BEEN CONCENTRATED IN THREE COUNTRIES The ATS heart valve is sold internationally through independent distributors |
| The loss of an international distributor could seriously harm our business and results of operations if a new distributor could not be found on a timely basis in the relevant geographic market |
| We do not control the amount and timing of marketing resources that these third parties devote to our product |
| Furthermore, to the extent we rely on sales through independent distributors, any revenues we receive will depend primarily on the efforts of these parties |
| WE ARE DEPENDENT UPON SALES OUTSIDE THE UNITED STATES, WHICH ARE SUBJECT TO A NUMBER OF RISKS INCLUDING A DROP IN SALES DUE TO CURRENCY FLUCTUATIONS For the year ended December 31, 2005, almost 62prca of our net sales were derived from international operations |
| We expect that international sales will account for a substantial majority of our revenue until the ATS heart valve receives wider market acceptance from US customers |
| Accordingly, any material decrease in foreign sales may materially and adversely affect our results of operations |
| We sell in US dollars to most of our customers abroad |
| An increase in the value of the US dollar in relation to other currencies can and has adversely affected our sales outside of the United States |
| In prior years, the decrease in sales was due primarily to the change in the value of the US dollar against the Euro, as well as competitor price pressure |
| Our dependence on sales outside of the United States will continue to expose us to US dollar currency fluctuations for the foreseeable future |
| Our future results of operations could also be harmed by risks inherent in doing business in international markets, including: - 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; and - greater difficulty in collecting payments from product sales |
| Slow payment of receivables by our international distributors, or the occurrence of any of the other factors listed above, could harm our ability to successfully commercialize our product internationally and could harm our business |
| WE HAVE A HISTORY OF NET LOSSES IF WE DO NOT HAVE NET INCOME IN THE FUTURE, WE MAY BE UNABLE TO CONTINUE OUR OPERATIONS We are not currently profitable and have a very limited history of profitability |
| As of December 31, 2005, we had an accumulated deficit of dlra84dtta1 million |
| We expect to incur significant expenses over the next several years as we continue to devote substantial resources to the commercialization of the ATS heart valve in the United States |
| We will not generate net income unless we are able to significantly increase revenue from US sales |
| If we continue to sustain losses, we may not be able to continue our business as planned |
| WE HAVE A HISTORY OF REGULARLY RAISING FUNDS AND INCURRING DEBT TO FUND NET LOSSES IF OUR CURRENT CASH AND INVESTMENT BALANCES ARE INADEQUATE TO CARRY US TO PROFITABILITY, WE MAY NEED TO RAISE EQUITY OR INCUR DEBT IN THE FUTURE During the last three years, we have completed financings to fund our operations |
| If our future operations require greater cash than our current balances, we would again be required to raise equity or issue debt |
| 16 THE MARKET FOR PROSTHETIC HEART VALVES IS HIGHLY COMPETITIVE, AND A NUMBER OF OUR COMPETITORS ARE LARGER AND HAVE MORE FINANCIAL RESOURCES IF WE DO NOT COMPETE EFFECTIVELY, OUR BUSINESS WILL BE HARMED The market for prosthetic heart valves is highly competitive |
| We expect that competition will intensify as additional companies enter the market or modify their existing products to compete directly with us |
| Our primary competitor, St |
| Jude Medical, Inc, currently controls approximately 50prca of the worldwide mechanical heart valve market |
| Many of our competitors have long-standing FDA approval for their valves and extensive clinical data demonstrating the performance of their valves |
| In addition, they have greater financial, manufacturing, marketing and research and development capabilities than we have |
| For example, many of our competitors have the ability, due to their internal carbon manufacturing facilities and economies of scale, to manufacture their heart valves at a lower cost than we can manufacture the ATS heart valve |
| Our primary competitor has recently used price as a method to compete in several international markets |
| If heart valve prices decline significantly we might not be able to compete successfully, which would harm our results of operations |
| OUR FUTURE RESULTS WILL BE HARMED IF THE USE OF MECHANICAL HEART VALVES DECLINES Our business could suffer if the use of mechanical heart valves declines |
| Historically, mechanical heart valves have accounted for over two-thirds of all heart valve replacements |
| Recently, there has been an increase in the use of tissue valves |
| We estimate that mechanical heart valves are currently being used in 40prca to 65prca of all heart valve replacements, depending on the geographic market, down from 65prca to 75prca about ten years ago |
| We believe the tissue manufacturers &apos claims of improvements in tissue valve longevity and an increase in the average age of valve patients have contributed to the recent increase in the use of tissue valves |
| NEW PRODUCTS OR TECHNOLOGIES DEVELOPED BY OTHERS COULD RENDER OUR PRODUCT OBSOLETE The medical device industry is characterized by significant technological advances |
| Several companies are developing new prosthetic heart valves based on new or potentially improved technologies |
| Significant advances are also being made in surgical procedures, which may delay the need for replacement heart valves |
| A new product or technology may emerge that renders the ATS heart valve noncompetitive or obsolete |
| This could materially harm our results of operations or force us to cease doing business altogether |
| WE LICENSE PATENTED TECHNOLOGY AND OTHER PROPRIETARY RIGHTS FROM CARBOMEDICS IF THESE AGREEMENTS ARE BREACHED OR TERMINATED, OUR RIGHT TO MANUFACTURE THE ATS HEART VALVE COULD BE TERMINATED Under our carbon technology agreement with Carbomedics, we have obtained a license to use Carbomedics &apos pyrolytic carbon technology to manufacture components for the ATS heart valve |
| If this agreement is breached or terminated, we would be unable to manufacture our own product |
| If our inventory is exhausted and we do not have any other sources of carbon components, we would be forced to cease doing business |
| A DELAY OR INTERRUPTION IN OUR MANUFACTURING OF PYROLYTIC CARBON COMPONENTS COULD DELAY PRODUCT DELIVERY OR FORCE US TO CEASE OPERATIONS Although we have a supply agreement with Carbomedics under which it agrees to supply us with a minimum annual number of pyrolytic carbon components starting in 2007 continuing through 2011, the amounts available under this agreement are not expected to be sufficient to supply all of our needs for components in those years |
| If our inventory is exhausted and we are unable to manufacture carbon components or obtain them from other sources, we could be forced to reduce or cease operations |
| BECAUSE WE LACK MANUFACTURING EXPERIENCE, WE MAY NOT REALIZE EXPECTED SAVINGS FROM MANUFACTURING OUR OWN PRODUCT IN ADDITION, WE COULD EXPERIENCE PRODUCTION DELAYS AND SIGNIFICANT ADDITIONAL COSTS Under our agreement with Carbomedics, we have been granted an exclusive worldwide license to manufacture pyrolytic carbon components for the ATS heart valve |
| We cannot be certain that our strategy to establish internal manufacturing capabilities will result in a cost-effective means for manufacturing the ATS heart valve |
| We have limited experience in manufacturing pyrolytic carbon |
| Although we have an FDA-approved carbon manufacturing facility, we have only just started increasing production to higher levels |
| In the future, as we continue to increase 17 production at the plant, we may encounter difficulties in maintaining and expanding our manufacturing operations, including problems involving: - 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 |
| Difficulties encountered by us in establishing or maintaining a commercial-scale manufacturing facility may limit our ability to manufacture our heart valve and therefore could seriously harm our business and results of operations |
| OUR BUSINESS COULD BE SERIOUSLY HARMED IF THIRD-PARTY PAYERS DO NOT REIMBURSE THE COSTS FOR OUR HEART VALVE Our ability to successfully commercialize the ATS heart valve depends on the extent to which reimbursement for the cost of our product and the related surgical procedure is available from third-party payers, such as governmental programs, private insurance plans and managed care organizations |
| Third-party payers are increasingly challenging the pricing of medical products and procedures that they consider not to be cost-effective or are used for a non-approved indication |
| The failure by physicians, hospitals and other users of our products to obtain sufficient reimbursement from third-party payers would seriously harm our business and results of operations |
| In recent years, there have been numerous proposals to change the health care system in the United States |
| Some of these proposals have included measures that would limit or eliminate payment for medical procedures or treatments |
| In addition, government and private third-party payers are increasingly attempting to contain health care costs by limiting both the coverage and the level of reimbursement |
| In international markets, reimbursement and health care payment systems vary significantly by country |
| In addition, we have encountered price resistance from government-administered health programs |
| Significant changes in the health care system in the United States or elsewhere, including changes resulting from adverse trends in third-party reimbursement programs, could have a material adverse effect on our business and results of operations |
| 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 The manufacture and sale of mechanical heart valves entails significant risk of product liability claims and product recalls |
| A mechanical heart valve is a life-sustaining device and the failure of any mechanical heart valve usually results in the patientapstas death or need for re-operation |
| A product liability claim or product recall, regardless of the ultimate outcome, could require us to spend significant time and money in litigation or to pay significant damages and could seriously harm our business |
| We currently maintain product liability insurance coverage in an aggregate amount of dlra25 million |
| However, we cannot be assured that our current insurance coverage is adequate to cover the costs of any product liability claims made against us |
| Product liability insurance is expensive and does not cover the costs of a product recall |
| In the future, product liability insurance may not be available at satisfactory rates or in adequate amounts |
| A product liability claim or product recall could also materially and adversely 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 Our success depends in part on our ability to maintain and enforce our patents and other proprietary rights |
| We rely on a combination of patents, trade secrets, know-how and confidentiality agreements to protect the proprietary aspects of our technology |
| These measures afford only limited protection, and competitors may gain access to our intellectual property and proprietary information |
| The patent positions of medical device companies are generally uncertain and involve complex legal and technical issues |
| Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights |
| Any litigation could be costly and divert our attention from the growth of the business |
| We cannot assure you that our patents and other proprietary rights will not be successfully challenged, or that others will not independently develop substantially equivalent information and technology or otherwise gain access to our proprietary technology |
| 18 WE MAY BE SUED BY THIRD PARTIES WHICH CLAIM THAT OUR PRODUCT INFRINGES ON THEIR INTELLECTUAL PROPERTY RIGHTS ANY SUCH SUITS COULD RESULT IN SIGNIFICANT LITIGATION OR LICENSING EXPENSES OR WE MIGHT BE PREVENTED FROM SELLING OUR PRODUCT We may be exposed to future litigation by third parties based on intellectual property infringement claims |
| Any claims or litigation against us, regardless of the merits, could result in substantial costs and could harm our business |
| In addition, intellectual property litigation or claims could force us to: - cease manufacturing and selling our product, which would seriously harm us; - obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; or - redesign our product, which could be costly and time-consuming |
| WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION, WHICH IS COSTLY, TIME CONSUMING AND CAN SUBJECT US TO UNANTICIPATED DELAYS The ATS heart valve and our manufacturing activities are subject to extensive regulation by a number of governmental agencies, including the FDA and comparable international agencies |
| We are required to: - maintain the approval of the FDA and international regulatory agencies to continue selling the ATS heart valve; - obtain the approval of international regulatory agencies in countries where the ATS heart valve is not yet marketed; - 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 |
| Compliance with the regulations of these agencies may delay or prevent us from introducing any new or improved products |
| Violations of regulatory requirements may result in fines, marketing restrictions, product recall, withdrawal of approvals and civil and criminal penalties |
| The market price of our common stock could be impacted by the following: - the success of our management in operating ATS effectively; - the failure of the ATS valve 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 - general market conditions |
| In addition, due to one or more of the foregoing factors, in future years our results of operations may fall below the expectations of securities analysts and investors |
| In that event, the market price of our common stock could be materially and adversely affected |
| Finally, in recent years the stock market has experienced extreme price and 19 volume fluctuations |
| This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance |
| These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results |
| OUR CHARTER DOCUMENTS AND MINNESOTA LAW MAY DISCOURAGE AND COULD DELAY OR PREVENT A TAKEOVER OF OUR COMPANY Provisions of our articles of incorporation, bylaws and Minnesota law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders |
| These provisions include the following: - No cumulative voting by shareholders for directors; - The ability of our board to set the size of the board of directors, to create new directorships and to fill vacancies; - The ability of our board, 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 to amend the bylaws; and - Restrictions under Minnesota law on mergers or other business combinations between us and any holder of 10prca or more of our outstanding common stock |