<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 0-27422
ARTHROCARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3180312
(State of incorporation) (I.R.S. Employer
Identification No.)
595 North Pastoria Avenue
Sunnyvale, California 94086
(Address of principal executive offices)
(408) 736-0224
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of the registrant's common stock as of July 31,
1996 was 8,699,236.
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ARTHROCARE CORPORATION
INDEX
<TABLE>
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Page
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PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of June 29,1996 and 3
December 31, 1995.
Condensed Statements of Operations for the quarters and
the six months ended June 29, 1996 and June 30, 1995. 4
Condensed Statements of Cash Flows for the six months
ended June 29, 1996 and June 30, 1995. 5
Notes to the Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7-22
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23-25
SIGNATURE 26
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<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARTHROCARE CORPORATION
CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 29, December 31,
ASSETS 1996 1995
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(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 20,705 $ 4,774
Available-for-sale securities 9,518 -
Accounts receivable, net 1,176 212
Inventory 1,301 516
Prepaid expenses and other current assets 334 891
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Total current assets 33,034 6,393
Property and equipment, net 1,477 1,135
Related party receivables 260 223
Available-for-sale securities 1,609 -
Other assets 69 49
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Total assets $ 36,449 $ 7,800
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LIABILITIES
Current liabilities
Accounts payable $ 439 $ 733
Related party payables 45 35
Accrued liabilities 922 472
Capital lease obligation, current 36 34
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Total current liabilities 1,442 1,274
Capital lease obligation, net of current portion 35 53
Deferred rent 163 148
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Total liabilities 1,640 1,475
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STOCKHOLDERS' EQUITY
Convertible Preferred Stock - 9
Common Stock 9 2
Additional paid in capital 48,787 16,869
Notes receivable from stockholders (92) (92)
Deferred compensation (469) (550)
Accumulated deficit (13,391) (9,913)
Unrealized loss on investment (35) -
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Total stockholders' equity 34,809 6,325
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Total liabilities and stockholders' equity $ 36,449 $ 7,800
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</TABLE>
The accompanying notes are an integral part of the financial statements
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ARTHROCARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended: Six months ended:
June 29, June 30, June 29, June 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 1,406 $ - $ 2,565 $ -
Cost of sales 1,236 - 2,301 -
---------- ---------- ---------- ----------
Gross margin 170 - 264 -
Operating expenses:
Research and development 950 1,096 1,814 1,740
Sales and marketing 872 231 1,530 419
General and administrative 527 194 1,103 329
Non-recurring charge for acquired technology - - - 260
---------- ---------- ---------- ----------
Total operating expenses 2,349 1,521 4,447 2,748
---------- ---------- ---------- ----------
Loss from operations (2,179) (1,521) (4,183) (2,748)
Interest and other income, net 444 74 707 95
---------- ---------- ---------- ----------
Loss before provision for income taxes (1,735) (1,447) (3,476) (2,653)
Income taxes - - 2 -
---------- ---------- ---------- ----------
Net loss $ (1,735) $ (1,447) $ (3,478) $ (2,653)
========== ========== ========== ==========
Net loss per share $ (0.20) $ (0.30) $ (0.45) $ (0.57)
========== ========== ========== ==========
Shares used in per share calculation 8,675,053 4,804,745 7,758,459 4,614,658
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the Financial Statements
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ARTHROCARE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended:
June 29, June 30,
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,478) $(2,653)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-recurring charge for acquired technology - 260
Depreciation and amortization 158 53
Write-off of property and equipment 233 -
Amortization of deferred compensation 81 -
Provision for doubtful accounts 53 -
Provision for excess and obsolete inventory 113 -
Deferred rent 15 53
Changes in operating assets and liabilities: -
Accounts receivable (1,017) -
Related party receivables (37) -
Inventory (898) -
Prepaid expenses and other current assets 557 6
Accounts payable (284) 127
Accrued liabilities 450 53
Other assets (20) (113)
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Net cash used in operating activities (4,074) (2,214)
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Cash flows from investing activities:
Purchases of property and equipment (733) (520)
Purchase of available-for-sale securities (11,162) -
Purchase of intellectual property rights - (100)
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Net cash used in investing activities (11,895) (620)
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Cash flows from financing activities:
Issuance of notes receivable to related parties - (138)
Repayment of capital leases (16) (3)
Proceeds from issuance of Common Stock 31,916 2
Proceeds from issuance of Preferred Stock - 5,791
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Net cash provided by financing activities 31,900 5,652
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Net increase in cash and cash equivalents 15,931 2,818
Cash and cash equivalents, beginning of period 4,774 2,599
-------- -------
Cash and cash equivalents, end of period $ 20,705 $ 5,417
======== =======
Supplemental schedule of non-cash investing and financing activities:
Issuance of Common Stock on conversion of Preferred Stock $ 15,704 $ -
Unrealized loss on avaliable for sale securities $ 35 $ -
Common stock issued for intellectual property rights $ - $ 160
Additions to PP&E acquired under capital lease $ - $ 72
</TABLE>
The accompanying notes are an integral part of the financial statements
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ARTHROCARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (all of which are normal and
recurring in nature) necessary to present fairly the financial position, results
of operations and cash flows of ArthroCare Corporation ("the Company"). Interim
results of operations are not necessarily indicative of the results to be
expected for the full year. The notes to the financial statements contained in
the Registration Statement on Form S-1 (the "Registration Statement") declared
effective by the Securities and Exchange Commission on February 5, 1996 should
be read in conjunction with these condensed financial statements. The balance
sheet at December 31, 1995 was derived from audited financial statements;
however, it does not include all disclosures required by generally accepted
accounting principles.
2. COMPUTATION OF NET LOSS PER SHARE
The net loss per share is based upon the weighted average number of
common and common equivalent shares outstanding. Common equivalent shares from
stock options, warrants and preferred stock are excluded from the computation as
their effect is anti-dilutive, except that, pursuant to the Securities and
Exchange Commission Staff Accounting Bulletin No. 83, common and common
equivalent shares issued by the Company during the twelve months preceding the
initial offering date have been included in the calculations as if they were
outstanding for all of the periods presented (using the treasury stock method
and the public offering price per share).
3. INITIAL PUBLIC OFFERING
In February 1996, the Company completed its initial public offering of
common stock. A total of 2.5 million shares of Common Stock was sold for net
proceeds to the Company of approximately $32 million, after deducting
underwriters' discounts and commissions. Upon completion of the offering, all
outstanding shares of Preferred Stock (a total of 8.7 million shares) were
converted into 4.3 million shares of Common Stock on a one-for-two basis.
4. COMPONENTS OF INVENTORY:
<TABLE>
<CAPTION>
June 29, 1996 Dec. 31, 1995
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Inventory: (In thousands)
<S> <C> <C>
Inventory:
Raw materials $ 336 $418
Work-in-process 91 2
Finished goods 874 96
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$1,301 $516
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PART 1. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
OVERVIEW
Since commencing operations in April 1993, ArthroCare Corporation has
primarily engaged in the design, development, clinical testing and manufacturing
of its Arthroscopic System. The Company has a limited history of operations
that, to date, has consisted primarily of research and development, product
engineering, obtaining FDA clearance of its Arthroscopic System and efforts to
develop a network of distributors in the United States to market the
Arthroscopic System. The Company received clearance of its 510(k) premarket
notification from the FDA in March 1995 to market its Arthroscopic System in the
United States for arthroscopic surgery of the knee, shoulder, elbow and ankle.
The Company has since received clearance for use in the wrist and hip. Although
the Company shipped a small number of sample units in August 1995, it did not
commercially introduce the Arthroscopic System until December 1995.
The Company's Arthroscopic System incorporates an electrosurgical
system consisting of a disposable, bipolar ArthroWand, a connecting cable and a
radio frequency power controller. The ArthroWand ablates soft tissue with
minimal damage to surrounding healthy tissue, and simultaneously achieves
hemostasis. The Company's long term strategy includes applying its proprietary
technology to a range of other soft tissue surgical procedures in the fields of
urology, gynecology, dermatology, and plastic, oral, and general surgery. The
Company has received 510K clearance for use of its system in the field of
urology and oral surgery.
Forward-looking statements in this report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties, including, without limitation, risks disclosed under the caption
"Additional Factors That Might Affect Future Results" beginning on page 11 of
this report, and other risks detailed from time to time in the Company's filings
with the Securities and Exchange Commission. The Company's actual results may
differ materially from the results discussed in the forward-looking statements.
RESULTS OF OPERATIONS
Overview
The three month period ended June 29, 1996 is the Company's second full
quarter of shipments. The Company was in its development stage during the
comparable three month and six month periods ended June 30, 1995.
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Revenues
Revenues for the three month period ended June 29, 1996 were $1.4
million. Revenues for the six month period ended June 29, 1996 were $2.6
million. There were no revenues in the three month or the six month periods
ended June 30, 1995, as the Company was in its development stage. The Company
first introduced its system in December 1995. In approximately seven months
since introduction the Company has grown the installed base of controllers to
over 300 units. The Company offers several promotional programs as its strategy
is to accelerate placement of controllers with doctors and hospitals in order to
facilitate future sales of wands. Controller revenues were decreased by the
promotional programs which heavily discounted controller prices in exchange for
volume wand sales or purchase commitments. The Company expects to continue
offering these promotional programs to meet the capital acquisition criteria of
its customers and to keep the installed base of controllers growing.
For the three month period, the unit mix of controllers placed with
doctors and dealers was heavily weighted toward doctors, resulting in part from
the promotional programs. For the six month period, placements were more
weighted in favor of dealers as dealers stocked initial inventory in the prior
quarter. For the end of the six month period the controller unit mix was
approximately 40% doctors and hospitals and 60% dealers. The Company expects
sales to doctors and hospitals to continue to increase, while dealer sales are
expected to decrease as a percentage of overall sales in the future. The Company
believes that the vast majority of wand revenue is coming from shoulder
procedures. Shoulder procedures are the fastest growing segment of the
arthroscopic market, however knee procedures represent the largest portion in
absolute number of procedures. The Company, in order to achieve increasing wand
sales over time, must increase wand use in knee procedures at an accelerated
rate. The Company recently introduced products to try and increase wand use in
knee procedures, if these products are not adopted by physicians revenue growth
would be adversely affected.
The revenue mix between wand and controllers in the three months ended
June 29, 1996 was approximately 25% controllers and 75% wands. For the six month
period the mix of controllers to wands was 33% controllers and 67% wands. The
Company expects the mix to continue to shift toward wand sales as more
controllers are installed.
Revenues from wand sales for the three month period ended June 29, 1996
were ahead of plan due to wand selling at near list price, promotional programs
designed to place controller in exchange for volume wand sales or purchase
commitments and increased volume due to a larger installed base of controllers.
In the six month period wand ASP was some what lower than in the three month
period due to the large number of wands sold to dealers at discounts as dealers
stocked initial inventory. In the three month period ended June 29, 1996 sales
to dealers were not discounted as the Company was paying commission on dealer
purchases.
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<PAGE> 9
The Company has limited sales and marketing experience and can make no
assurance that current trends in sales and product acceptance will continue.
Please refer to the section entitled "Additional Factors That Might Affect
Future Results".
Cost of Sales
Cost of sales was $1.2 million, or 88% of revenues for the three months
ended June 29, 1996. Cost of sales for the six months ended June 29, 1996 was
$2.3 million. There is no comparison to the three month period or the six month
period ended June 30, 1995, as the Company was in its development stage and had
no sales. During the three month period ended June 29, 1996 the Company tested
its volume manufacturing capacity. The test created higher inventories which
could impact costs of sales in future depending on sales and manufacturing
volume.
Operating Expense:
Research and development expense, which includes expenditures for
regulatory compliance and quality assurance, decreased to $1.0 million in three
the months ended June 29, 1996 from $1.1 million in the same quarter of the
prior year. The decrease was primarily due to manufacturing startup costs which
were included in research and development expense in three month period ended
June 30, 1995 when the Company was in its development stage. Research and
development expense for the six months ended June 29, 1996 was $1.8 million
compared to $1.7 million. The increase is due to the Company's continued
investment in its platform technology including costs associated with additional
product research, prototype development, patent preparation and filing,
supplemental facility requirements and additional costs associated with the
Company's increase in regulatory and clinical personnel. These costs were
partially offset by the inclusion of manufacturing startup costs in the six
month period ended June 30, 1995.
The Company believes that continued investment in its platform
technology is essential to enable it to maintain its competitive position. The
Company expects to continue to make substantial expenditures on new product
development and currently anticipates increases in research and development
spending to continue.
Sales and marketing expense increased substantially to $872K in the
quarter ended June 29, 1996 from $231K in the quarter ended June 30, 1995 when
the Company was in its development stage and to $1.5 million for the six month
period of 1996 compared with $0.4 million for the same period in 1995. The
increase is due primarily to the hiring of additional personnel, dealer
commissions, demonstration and sample expenses.
The Company currently anticipates that sales and marketing spending
will continue to increase due to dealer commissions and additional investment in
sales, marketing and support staff necessary to market its product.
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<PAGE> 10
General and administrative expense increased substantially to $527K in
the three months ended June 29, 1996 from 1995 level of $194K and to $1.1
million in the six month period of 1996 from 1995 level of $0.3 million due to
additional staffing, including management personnel, the increased cost of being
a public company, consulting fees, and information systems services necessary to
expand the corporate infrastructure.
The Company expects that general and administrative expenses will
increase as the Company expands its staffing and other support operations
required to grow the business.
Interest and Other Income
Net interest income was $444K for the quarter ended June 29, 1996 from
$74K in the prior year quarter and $707K for the six month period compared with
$95K in the comparable period a year ago. Increases in both periods are
attributable to interest received on the investment of the proceeds of the
initial public offering in early February, 1996.
Net Loss
Net loss was $1.7 million for the quarter ended June 29, 1996 compared
to $1.4 million in the same quarter of 1995, when the Company was in its
development stage. The increase is due primarily to higher operating expense
from increased business activity including product development, manufacturing
start-up, building a sales and marketing organization, bringing the ArthroCare
Arthroscopic System to market and building the corporate infrastructure, offset
by gross margin on sales in the current year and higher interest income. Net
loss was $3.5 million for the six month period ended June 29,1996 compared to
$2.7 million in the six month period ended June 30, 1995. The increase is due to
causes discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At June 29, 1996, the Company had approximately $31.6 million in
working capital and its principal sources of liquidity consisted of $31.8
million in cash, cash equivalents, and available-for-sale securities which
include long term available-for-sale securities. The cash and cash equivalents
are highly liquid with original maturities of ninety days or less. The
available-for-sale securities consist mainly of bank notes, commercial paper
rated Aa or better and US government securities. The Company's cash used in
operations increased to $4.1 million for the six months ended June 29, 1996 from
$2.2 million for the six months ended June 30, 1995 reflecting expenditures made
primarily to increase research and development, to form a marketing and sales
organization, to support administrative infrastructure and to purchase
equipment.
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<PAGE> 11
Inventories increased from $516K as of December 31, 1995 to $1,301K as
of June 29, 1996, primarily due to the increased level of manufacturing
activities and the Company's test of its manufacturing capacity discussed above.
Accounts receivable increased to $1.2 million as of June 29, 1995 from
$0.2 million as of December 31, 1995, due to the increased selling activities.
The Company began commercial delivery of its product in December 1995.
Net property and equipment increased from $1.1 million as of December
31, 1995 to $1.5 million as of June 29, 1996, primarily due to an increase in
computer equipment, software and manufacturing equipment. This was offset by a
write-off of computer equipment replaced and the write-off of small dollar
capital items.
Net cash provided by financing activities reflects the Company's
completion of its initial public offering of common stock during February 1996.
A total of 2,530,000 shares of Common Stock were sold for net proceeds to the
Company of $31.9 million. Proceeds from the sale of common stock were used to
purchase available-for-sale securities.
The Company believes that the net proceeds from the sale of common
stock, together with its current cash balances, will be sufficient to meet its
working capital and capital expenditure requirements for at least the next
twelve months.
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
Since the first quarter of 1996 was ArthroCare's first quarter as a
public company, included here are risk factors as updated from the Company's
Prospectus dated February 5, 1996 and the prior 10Q filed May 10, 1996. The
following factors represent current challenges to the Company which create risk
and uncertainty. Failure to adequately overcome any of the following challenges,
either singly or in combination, could have a materially adverse effect on the
Company's results of operations, business, or financial position.
Dependence Upon Arthroscopic System
The Arthroscopic System is the Company's only commercial product and
will account for substantially all of the Company's revenue for the foreseeable
future. The Company commercially introduced the Arthroscopic System in December
1995 and by the end of the second quarter of 1996, had reported only seven
months of sales. To date, the Company has only sold a limited number of units
and these have been utilized by a limited number of doctors primarily for
arthroscopic procedures in the knee and shoulder.
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<PAGE> 12
Uncertainty of Market Acceptance
The Company's Arthroscopic System and potential products are based upon
a new method of tissue ablation, and there can be no assurance that any of these
products will gain market acceptance. Physicians will not use the Company's
products unless they determine, based on experience, clinical data, and other
factors, that these systems are an attractive alternative to current means of
tissue ablation. To date, the Arthroscopic System has only been used to treat a
limited number of patients, and no published reports exist to support the
Company's marketing efforts, which may have an adverse effect on its ability to
obtain physician acceptance. The Company believes that recommendations and
endorsements by influential physicians will be essential for market acceptance
of its products. In addition, purchase decisions are greatly influenced by
health care administrators who are subject to increasing pressures to reduce
costs. Health care administrators must determine that the Arthroscopic System
and the Company's potential products are cost-effective alternatives to current
means of tissue ablation. The Company may be required to, among other things,
offer substantial discounts on its controller to stimulate demand for its
Arthroscopic System. Whether the Company can place sufficient quantities of
controllers to obtain physician acceptance of its products and sell disposable
ArthroWands is uncertain.
Limited Operating History
The Company has a limited history of operations that, to date, has
consisted primarily of research and development, product engineering, obtaining
FDA clearance of its Arthroscopic System and developing a network of
distributors in the United States to market the Arthroscopic System. The Company
has generated limited revenues from the sale of its products, and there can be
no assurance that it will ever achieve significant revenues on an ongoing basis.
Whether the Company can successfully manage the transition to a larger-scale
commercial enterprise will depend upon increasing sales from its domestic
distribution network, the successful development of its manufacturing
capability, obtaining foreign regulatory approvals for the Arthroscopic System,
obtaining domestic and foreign regulatory approvals for potential products and
strengthening its financial and management systems, procedures and controls.
Limited Domestic and International Marketing and Sales Experience
The Company has only sold a few of its Arthroscopic Systems and has
limited experience marketing and selling such product in commercial quantities.
The Company markets and sells its Arthroscopic System in the United States
through a network of independent orthopedic distributors. While dealer
distributors have purchased controllers at greatly reduced prices to be used for
doctor evaluations and demonstrations, there can be no assurance that sales
representatives will be successful in closing sales with doctors and hospitals.
These distributors sell orthopedic arthroscopy devices for a number of other
manufacturers, and there can be no assurance that they will commit the necessary
resources to effectively market and sell the Company's Arthroscopic System. The
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<PAGE> 13
Company may be required to, among other things, offer substantial discounts on
its controller to stimulate demand for its Arthroscopic System. The inability to
place sufficient quantities of controllers would have a material adverse effect
the Company's ability to sell ArthroWands.
The Company has not obtained the necessary regulatory approvals to
market and sell its Arthroscopic System in any foreign market. If the Company is
successful in obtaining the necessary regulatory approvals in foreign markets,
it expects to establish a sales and marketing capability in those markets.
However, regulatory requirements vary by region, and compliance with such
regulations may be costly and time-consuming. Accordingly, the distribution,
pricing and marketing structure to be established by the Company may vary from
country to country. In Europe, the Company intends to establish a network of
distributors to market and distribute its Arthroscopic System. In The Pacific
Rim, the Company intends to collaborate with one or more marketing partners to
assist with regulatory requirements and to market and distribute its
Arthroscopic System. No assurance can be given that the Company will obtain any
necessary foreign regulatory approvals, that the Company will establish a
network of distributors and successfully sell its product in Europe, that the
Company will secure a marketing partner and successfully sell its Arthroscopic
System in Pacific Rim or that any foreign distributors and marketing partners
will commit the necessary resources and successfully sell the Arthroscopic
System in foreign markets.
Limited Manufacturing Experience
The Company has only limited experience in manufacturing the
Arthroscopic System. As a result, the Company has limited experience
manufacturing its product in the volumes necessary for the Company to achieve
significant commercial sales, and there can be no assurance that reliable,
high-volume manufacturing can be achieved at a commercially reasonable cost. In
September 1995, the State of California required the Company to cease shipping
products until a manufacturing license was obtained, and the FDA, following a
Good Manufacturing Practices ("GMP") audit, instructed the Company to correct
certain record keeping practices and enter into a written contract with the
third party that sterilizes the ArthroWand. There can be no assurance that the
Company will not encounter any further manufacturing difficulties, or any of its
contract manufacturers will not experience similar difficulties, including
problems involving production yields, quality control and assurance, supplies of
components or shortages of qualified personnel.
Risk of Further Product Recalls or Required Redesign
In October 1995, the Company discovered that the ArthroWand packaging
was subject to cracking due to a flawed design of the packaging tray and
undertook a voluntary product recall of the 61 ArthroWands affected. The Company
has completed execution of its corrective action and has received written
confirmation from the FDA that the recall has been closed. There can be no
assurances that there will be no further product recalls or required redesign of
the Company's packaging or products.
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<PAGE> 14
History of Losses: Fluctuations in Operating Results, Substantial Losses
Expected to Continue
The Company has experienced significant operating losses since
inception and, as of June 29, 1996, had an accumulated deficit of $13.4 million.
The Company expects to generate substantial additional losses due to increased
operating expenditures primarily attributable to the expansion of marketing and
sales activities, scale-up of manufacturing capabilities, increased research and
development and activities to support regulatory and reimbursement applications.
Results of operations may fluctuate significantly from quarter to quarter due to
the timing of such expenditures, absence of a backlog of orders, timing of the
receipt of orders, promotional discounts of the Company's products, re-use of
the Company's disposable products, availability of third-party reimbursement,
timing of regulatory actions, introduction of new products by competitors of the
company, pricing of competitive products and the cost and effect of promotional
and marketing programs. The Company's revenues and profitability will be
critically dependent on whether it can successfully market its Arthroscopic
System. In addition, the Company's gross margins may be adversely affected due
to the necessity to promote and sell its product at significantly reduced
prices. There can be no assurance that significant revenue or profitability will
ever be achieved.
Reliance on Patents and Protection of Proprietary Technology
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology. The
Company owns four issued United States patents, six pending United States patent
applications and international patent applications in Europe (covering 16
separate countries), Pacific Rim, Canada, Australia and New Zealand
corresponding to three of the United States filings relating to its
multi-electrode technology. The initial patent is set to expire in 2008, and the
other three issued patents are currently expected to expire between 2008 and
2012. None of the issued patents have specific arthroscopic claims. There can be
no assurance that the patents that have been issued to the Company or any
patents which may be issued as a result of the Company's United States or
international patent applications will provide any competitive advantages for
the Company's products or that they will not be successfully challenged,
invalidated or circumvented in the future. In addition, there can be no
assurance that competitors, many of which have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use and sell its products either in the United States or in
international markets.
A number of medical device and other companies, universities and
research institutions have filed patent applications or have issued patents
relating to monopolar and/or bipolar electrosurgical methods and apparatus. If
third-party patents or patent applications contain claims infringed by the
Company's technology and such claims are ultimately determined to be valid,
there can be no assurance that the Company would be
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<PAGE> 15
able to obtain licenses to these patents at a reasonable cost, if at all, or be
able to develop or obtain alternative technology. There can be no assurance that
the Company will not be obliged to defend itself in court against allegations of
infringement of third-party patents.
In addition to patents, the Company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through
confidentiality and proprietary information agreements. There can be no
assurance that such confidential or proprietary information agreements will not
be breached, that the Company would have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known to or be
independently developed by competitors.
Patent Litigation
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and
companies in the medical device industry have employed intellectual property
litigation to gain a competitive advantage. There can be no assurance that the
Company will not become subject to patent infringement claims or litigation or
interference proceedings declared by the United States Patent and Trademark
Office ("USPTO") to determine the priority of inventions. The defense and
prosecution of intellectual property suits, USPTO interference proceedings and
related legal and administrative proceedings are both costly and time-consuming.
Litigation may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. Any
litigation or interference proceedings will result in substantial expense to the
Company and significant diversion of effort by the Company's technical and
management personnel. An adverse determination in litigation or interference
proceedings to which the Company may become a party could subject the Company to
significant liabilities to third parties, require dispute rights to be licensed
from third parties or require the Company to cease using such technology.
Although patent and intellectual property disputes regarding medical devices
have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, there can be no assurance that necessary licenses would
be available to the Company on satisfactory terms, if at all.
Intense Competition
The arthroscopic medical device industry is intensely competitive. The
Company competes with providers of laser systems, electrosurgical systems,
manual instruments and power shavers. Many of these competitors have
significantly greater financial, manufacturing, marketing, distribution and
technical resources than the Company. There can be no assurance that the Company
can effectively compete against such competitors. In addition, there can be no
assurance that these or other companies will not succeed in developing
technologies and products that are more effective than the Company's or that
would render the Company's technology or products obsolete or uncompetitive.
15 of 28
<PAGE> 16
Smith & Nephew Endoscopy, Inc. (which owns Acufex Microsurgical, Inc.,
and Dyonics, Inc.), Bristol-Meyers Squibb Company (including its Linvatec
division) and Stryker Corp. each have large shares of the market for manual
instruments, power shavers and arthroscopes. These companies offer broad product
lines, which they may offer as a single package, have substantially greater
resources and name recognition than the Company and frequently offer significant
discounts as a competitive tactic. In addition, Pfizer Inc. (including its
Valley Labs division) and Bristol-Meyers Squibb Company each have large shares
of the market for electrosurgical systems, and Trimedyne, Inc. and Coherent,
Inc. each have large shares of the market for laser systems. The Company expects
that competition from these well established competitors will increase, and the
Company anticipates that it may have to offer substantial discounts on its
controller in order to stimulate demand for the disposable ArthroWand.
Uncertainty of Domestic and Foreign Regulatory Approvals; Extensive Domestic and
Foreign Government Regulation
The manufacturing, labeling, distribution and marketing of the
Company's products are subject to extensive and rigorous government regulation
in the United States and certain other countries where the process of obtaining
and maintaining required regulatory approvals is lengthy, expensive and
uncertain. In order for the Company to market its products for clinical use in
the United States, the Company must obtain clearance from the FDA of a 510(k)
premarket notification or approval of a more extensive submission known as
premarket approval ("PMA"). The Company has obtained clearance of a 510(k)
premarket notification for use of its Arthroscopic System in the knee, shoulder,
elbow, ankle, hip and wrist. Although the Company is strictly limited to
marketing its product only for the indications for which it was cleared,
physicians are not prohibited by the FDA from using the products for indications
other than those cleared by the FDA. There can be no assurance that the Company
will not become subject to FDA actions resulting from physician use of its
Arthroscopic System that is outside of its approved indications.
In December 1995, the Company filed 510(k) submissions for clearance to
market tissue ablation products to treat certain urological and gynecological
conditions. In March 1996 and May, 1996, the Company received a 510(k) premarket
notification for a tissue ablation product to treat certain urological
conditions. The FDA may require clinical studies in support of the gynecological
submission. The Company has made certain modifications to the Arthroscopic
System that the Company believes do not require the submission of new 510(k)
notifications. There can be no assurance, however, that the FDA would agree with
the Company's determination not to submit a new 510(k) premarket notification
for the changes, or can there by any assurance that the FDA would not require
the Company to submit a new 510(k) premarket notification for the changes made
to the device. If the FDA requires the Company to submit a new 510(k) premarket
notification for any device modification, the Company may be prohibited from
marketing the modified device until 510(k) clearance is obtained. The Company
may be prohibited
16 of 28
<PAGE> 17
from marketing the modified device until 510(k) clearance is obtained. The
Company may also be required to make additional 510(k) submission for additional
potential products. There can be no assurance that the FDA will act favorably or
quickly in its review of the Company's 510(k) submissions, or that significant
difficulties and costs will not be encountered by the Company in its efforts to
obtain FDA clearance, all of which could delay or preclude the Company from
selling products in the United States. Furthermore, there can be no assurance
that the FDA will not request additional data, require that the Company conduct
clinical studies in support of a 510(k) submission or require a PMA, any of
which would cause the Company to incur further cost and delay. If the FDA
determines that a PMA is required for any of the company's potential products,
the application would require extensive clinical studies, manufacturing
information and likely a review by a panel of experts outside the FDA. Clinical
studies would need to be conducted in accordance with FDA requirements. Failure
to comply with FDA requirements could result in the FDA's refusal to accept the
clinical data or the imposition of regulatory sanctions. FDA review of a PMA
application takes significantly longer than that for a 510(k) premarket
notification. There can be no assurance that the Company will be able to meet
the requirements to obtain PMA approval or that any necessary approvals will be
received from the FDA. In addition, there can be no assurance that the FDA will
not place significant limitations upon the intended use of the Company's
products as a condition of 510(k) clearance or PMA approval.
The Company has not obtained any foreign regulatory approval permitting
sales outside of the United States. International regulatory bodies often
establish varying regulations governing product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. In order to commence sale in Europe, the Company
has obtain ISO 9001 certification and will be required to receive "CE" mark
certification, which is an international symbol of quality and compliance with
applicable European medical device directives. After mid-1998, the Company will
be prohibited from selling its products in Europe until such times as the
Company receives CE mark certification. There can be no assurance that the
Company will be successful in meeting such certification requirements. If the
Company obtains foreign regulatory approvals to sell the Arthroscopic System or
potential products, it may rely on independent distributors or distribution
partners to comply with the majority of the foreign regulatory requirements.
There can be no assurance that such third parties will comply with the varying
regulations or the imposition of new regulations.
The Company and its contract manufacturers will be required to adhere
to applicable FDA regulations regarding GMP and similar regulations in other
countries, which include testing, control, and documentation requirements.
Ongoing compliance with GMP and other applicable regulatory requirements will be
monitored through periodic inspections by state and federal agencies, including
the FDA, and by comparable agencies in other countries. Failure to comply with
applicable regulatory requirements could result in, among other things, warning
letters, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal of the
17 of 28
<PAGE> 18
government to grant premarket clearance or premarket approval for devices,
withdrawal of approvals and criminal prosecution.
Uncertainty Relating to Third-Party Reimbursement
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices such as the Company's Arthroscopic
System and potential products, generally rely on third-party payers, principally
federal Medicare, state Medicaid and private health insurance plans, to
reimburse all or part of the cost of the procedure in which the medical device
is being used. In addition, certain health care providers are moving towards a
managed care system in which such providers contract to provide comprehensive
health care for a fixed cost per person. Managed care providers are attempting
to control the cost of health care by authorizing fewer elective surgical
procedures, such as certain knee and shoulder arthroscopies. The Company is
unable to predict what changes will be made in the reimbursement methods
utilized by third-party health care payers. Furthermore, the Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payers, particularly to the extent any such changes affect
reimbursement for procedures in which the Company's products are used.
If the Company obtains the necessary foreign regulatory approvals,
market acceptance of the Company's products in international markets would be
dependent, in part, upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country, and include both government
sponsored health care and private insurance. The Company intends to seek
international reimbursement approvals, although there can be no assurance that
any such approvals will be obtained in a timely manner, if at all.
Dependence on Single Contract Manufacturers and Sole Source Suppliers
The controller for the Company's Arthroscopic System is assembled by a
single contract manufacturer. The agreement between the Company and the contract
manufacturer requires the Company to purchase all of its controllers from the
contract manufacturer through July 1998. The contract manufacturer is required
to operate in conformance with GMP requirements in order to produce products for
sale in the United States, and ISO 9001 standards, in order to produce products
for sale in Europe. There can be no assurance that the contract manufacturer
will remain in compliance with GMP or ISO 9001 standards. In addition, the
ArthroWand is sterilized by a single subcontractor, and the connector housings
at each end of the cable are only available from a single source. There can be
no assurance that an alternate contract manufacturer, sterilizer or connector
housings supplier would be established if necessary or that available
inventories would be adequate to meet the Company's product needs during any
prolonged interruption of supply. A reduction or stoppage in supply of the sole
source
18 of 28
<PAGE> 19
component, or the Company's inability to secure an alternative contract
manufacturer or sterilizer, if required, would limit its ability to manufacture
the Arthroscopic System.
The Company believes that its contract manufacturer, subcontractor and
suppliers are in compliance with applicable regulations. However, there can be
no assurance that the FDA, or a state, local or foreign regulator will not take
action against a contract manufacturer, subcontractor or supplier found to be
violating such regulations.
Uncertainty of New Product Development
In December 1995, the Company filed 510(k) submissions for clearance to
market tissue ablation products to treat certain urological and gynecological
conditions. In March 1996, the Company received a 510(k) premarket notification
for the tissue ablation product to treat certain urological conditions. The FDA
may require clinical studies in support of the gynecological submission. The
Company has under development certain additional potential products utilizing
the Company's proprietary technology. Each of these products is at an early
stage of development, and the Company will be required to undertake
time-consuming and costly development activities and seek regulatory approval
for these devices. There can be no assurance that product development will ever
be successfully completed, that PMAs or 510(k)s, if applied for, will be granted
by the FDA on a timely basis, if at all, or that the products will ever achieve
commercial acceptance.
Product Liability Risk: Limited Insurance Coverage
The development, manufacture and sale of medical products entail
significant risk of product liability claims. The Company's current product
liability insurance coverage limits are $5,000,000 per occurrence and $5,000,000
in the aggregate, and there can be no assurance that such coverage limits are
adequate to protect the Company from any liabilities it might incur in
connection with the development manufacture and sale of its Arthroscopic System
and potential products. In addition, the Company may require increased product
liability coverage if any potential products are successfully commercialized.
Product liability insurance is expensive and in the future may not be available
to the Company on acceptable terms, if at all. There can be no assurance that
successful product liability claim or series of claims will not be brought
against the Company in excess of its insurance coverage.
Dependence Upon Key Personnel and Key Consultants
The Company is dependent upon a number of key management and technical
personnel. The loss of the services of one or more key employees or consultants
could have a material adverse effect on the Company. The Company's success will
also depend on its ability to attract and retain additional highly qualified
management and technical personnel. The Company faces intense competition for
qualified personnel, many of
19 of 28
<PAGE> 20
whom are often subject to competing employment offers, and there can be no
assurance that the Company will be able to attract and retain such personnel.
The Company has two key consulting agreements, one with Philip E. Eggers, who is
also a director of the Company, and one with Eggers & Associates, Inc. ("E&A").
a corporation wholly owned by Mr. Eggers. Pursuant to these agreements, Mr.
Eggers performs a significant amount of the Company's research and development
and prepares materials for and attend as meetings as requested by the Company.
Mr. Eggers is not employed by the Company on a full-time basis and, as a result,
is not available to devote his full time or attention to the Company's affairs.
Control by Directors, Executive Officers and Affiliated Entities
The Company's directors, executive officers and entities affiliated
with them, in the aggregate, beneficially own approximately 48% of the Company's
outstanding Common Stock. These stockholders, if acting together, would be able
to control substantially all matters requiring approval by the stockholders of
the Company, including the election of directors and the approval of mergers or
other business combination transactions.
Potential Volatility of Stock Price
The stock markets have experienced price and volume fluctuations that
have particularly affected medical technology companies, resulting in changes in
the market prices of the stocks of many companies that may not have been
directly related to the operating performance of those companies. Such broad
market fluctuations may adversely affect the market price of the Common Stock.
In addition, the market price of the Company's Common Stock may be highly
volatile. Factors such as variations in the Company's financial results,
comments by security analysts, announcements of technological innovations or new
products by the Company or its competitors, changing government regulations and
developments with respect to FDA submissions, patents, proprietary rights or
litigation may have a significant adverse effect on the market price of the
Common Stock.
Potential Adverse Effect on Price of Common Stock and the Company's Ability to
Raise Capital
Sales of a substantial number of shares of the Company's Common Stock
in the public market could adversely affect the market price of the Company's
Common Stock. The holders of approximately 4,300,000 shares of Common Stock are
entitled to certain demand and piggyback rights with respect to registration of
such shares under the Securities Act of 1933 as amended (the "Securities Act").
If such holders, by exercising their demand registration rights, cause a large
number of securities to be registered and sold in the public market, such sales
could have an adverse effect on the market price for the Company's Common Stock.
If the Company were to initiate a registration and include shares held by such
holders pursuant to the exercise of their piggyback
20 of 28
<PAGE> 21
registration rights, such sales may have an adverse effect on the Company's
ability to raise capital.
Potential Adverse Effect of Underwriters' Release of Lock-Up Restrictions
The number of shares of Common Stock available for sale in the public
market is currently limited by lock-up agreements under which all directors,
executive officers and certain other stockholders of the Company that
beneficially own or have dispositive power over substantially all of the shares
of Common Stock outstanding prior to this offering, including Common Stock to be
issued upon the closing of the February 5 public offering upon conversion of the
Company's Preferred Stock, have agreed not to sell or otherwise dispose of any
of their shares prior to August 5, 1995 without the prior written consent of
Robertson, Stephens & Company. However, Robertson, Stephens & Company may, in
its sole discretion, release all or any portion of the securities subject to
such lock-up agreements. 3,726,503 shares of Common Stock would be eligible for
sale in compliance with certain limitations set forth in the Securities Act if
Robertson, Stephens & Company were to release the lock-up restrictions. Release
of lock-up restrictions and the subsequent sale of the shares subject thereto
may have an adverse effect on the ability of the Company to raise capital and
could adversely affect the market price of Company's Common Stock.
Anti-Takeover Effect of Certain Charter and Bylaw Provisions on Price of Common
Stock
Certain provisions of the Company's Certificate of Incorporation and
bylaws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock.
Certain of these provisions allow the company to issue Preferred Stock without
any vote or further action by the stockholders, eliminate the right of
stockholders to act by written consent without a meeting, specify procedures for
director nominations by stockholders and submission of other proposals for
consideration at stockholder meetings, and eliminate cumulative voting in the
election of directors. Certain provisions of Delaware law applicable to the
Company could also delay or make more difficult a merger, tender offer or proxy
contest involving the Company, including Section 203, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years unless certain conditions are met. The
possible issuance of Preferred Stock, the procedures required for director
nominations and stockholder proposals and Delaware law could have the effect of
delaying, deferring or preventing a change in control of the Company, including
without limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of the Company's common stock. These
Provisions could also limit the price that investors might be willing to pay in
the future for shares of the Company's Common Stock.
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<PAGE> 22
Lack of Dividends
The Company has not paid any dividends and does not anticipate paying
any dividends in the foreseeable future.
22 of 28
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K.
a) Exhibits
3.2* Certificate of Incorporation of Company
3.3* Bylaws of the Company.
4.1* Specimen Common Stock Certificate.
10.1* Form of Indemnification Agreement between
the Company and each of its directors and
officers.
10.2* Incentive Stock Plan and form of Stock
Option Agreement thereunder.
10.3* Director Option Plan and form of Director
Stock Option Agreement thereunder.
10.4* Employee Stock Purchase Plan and forms of
agreements thereunder.
10.5* Form of Exclusive Distribution Agreement.
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<PAGE> 24
10.6* Form of Exclusive Sales Representative
Agreement
10.7* Consulting Agreement, dated May 10, 1993,
between the Company and Philip E. Eggers,
and amendment thereto.
10.8* Consulting Agreement, dated May 20, 1993,
between the Company and Eggers & Associates,
Inc., and amendment thereto.
10.9* Development and Supply Agreement, dated
March 1, 1994, between the Company and
SeaMed Corporation.
10.10* Lease Agreement, dated September 15, 1994,
between Company and The Arrillaga Foundation
and the Peery Foundation for the Company's
facility located at 595 North Pastoria
Avenue, Sunnyvale, California, 94086.
10.11* Employment Letter Agreement, dated October
21, 1994, between the Company and Allan
Weinstein and amendment thereto.
10.12* Purchase Assistance Promissory Note, dated
January 19, 1995, between Company and Allan
Weinstein.
10.13* Sublease Agreement, dated February 1, 1995,
between Company and Guided Medical Systems,
Inc. for the Company's former facility at
453 Ravendale Drive, Mountain View,
California, 94043.
10.14* Mortgage Assistance Promissory Note
Agreement, dated February 5, 1995, between
the Company and Allan Weinstein.
10.15* Restricted Stock Purchase and Security
Agreement, dated February 5, 1995, between
the Company and Allan Weinstein.
10.16* Employment Letter Agreement, dated July 18,
1995, between the Company and Robert T.
Hagan.
10.17* Restricted Stock Purchase and Security
Agreement, dated August 1, 1995, between the
Company and Robert T. Hagan.
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<PAGE> 25
10.18* Employment Letter Agreement, dated September
3, 1995, between the Company and A. Larry
Tannenbaum.
10.19* Radiation Services Agreement, dated
September 13, 1995, between the Company and
SteriGenics International.
10.20* Amended and Restated Stockholder Rights
Agreement, dated October 16, 1995, between
the Company and certain holders of the
Company's securities.
10.21* Contribution Agreement, dated March 31,
1995, by and among Philip E. Eggers, Robert
S. Garvie, Anthony J. Manlove, Hira V.
Thapliyal and the Company.
11.1 Calculation of net loss per share.
27.1 Financial Data Schedule.
* Incorporated herein by reference to the same-numbered exhibit
previously filed with the Company's Registration Statement on Form S-1
(Registration No. 33-80453).
b) Reports on Form 8-K
None
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<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARTHROCARE CORPORATION
a Delaware corporation
Date: August 5, 1996
/s/ A. LARRY TANNENBAUM
--------------------------------------
A. Larry Tannenbaum
Vice President, Finance &
Administration, Chief Financial
Officer and Assistant Secretary
(Principal Financial Officer and Duly
Authorized Officer)
26 of 28
<PAGE> 27
EXHIBIT INDEX
Exhibit Page
Number Exhibit Description Number
- ------ ------------------------------ ------
11.1 Calculation of net loss per share. 24
27.1 Financial Data Schedule. 28
27 of 28
<PAGE> 1
ARTHROCARE CORPORATION
EXHIBIT 11.1
COMPUTATION OF NET LOSS PER SHARE
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended: Six months ended:
June 29, June 30, June 29, June 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 8,675 1,688 4,641 1,498
for the period
Common equivalent shares pursuant to Staff
Accounting Bulletin No. 83 - 3,117 3,117 3,117
------- ------- ------- -------
Shares used in per share calculation 8,675 4,805 7,758 4,615
======= ======= ======= =======
Net loss $(1,735) $(1,447) $(3,478) $(2,653)
======= ======= ======= =======
Net loss per share $ (0.20) $ (0.30) $ (0.45) $ (0.57)
======= ======= ======= =======
</TABLE>
28 of 28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ARTHROCARE
CORPORATION FINANCIAL STATEMENTS FOR THE SIX MONTH PERIOD ENDED JUNE 29, 1996 AS
SHOWN IN THE 10-Q FILING
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-29-1996
<CASH> 20705
<SECURITIES> 9518
<RECEIVABLES> 1176
<ALLOWANCES> 0
<INVENTORY> 1301
<CURRENT-ASSETS> 33034
<PP&E> 1477
<DEPRECIATION> 158
<TOTAL-ASSETS> 36449
<CURRENT-LIABILITIES> 1442
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 36449
<SALES> 2565
<TOTAL-REVENUES> 2565
<CGS> 2301
<TOTAL-COSTS> 2301
<OTHER-EXPENSES> 4447
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3476)
<INCOME-TAX> 2
<INCOME-CONTINUING> (3478)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3478)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
