<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 September 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission File Number: 0-27422
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 November
1, 1996 was 8,771,206.
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ARTHROCARE CORPORATION
INDEX
<TABLE>
PAGE
----
<S> <C>
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of September 28, 1996 and 3
December 31, 1995
Condensed Statements of Operations for the quarters and the nine
months ended September 28, 1996 and September 30, 1995 4
Condensed Statements of Cash Flows for the nine months
ended September 28, 1996 and September 30, 1995 5
Notes to the Condensed Financial Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-23
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24-26
SIGNATURE 27
</TABLE>
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<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARTHROCARE CORPORATION
CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 28, December 31,
ASSETS 1996 1995
------ ---- ----
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 12,067 $ 4,774
Available-for-sale securities 13,949 --
Accounts receivable, net 1,144 212
Inventory 1,022 516
Prepaid expenses and other current assets 256 891
-------- --------
Total current assets 28,438 6,393
Property and equipment, net 1,462 1,135
Related party receivables 279 223
Available-for-sale securities 4,535 --
Other assets 69 49
-------- --------
Total assets $ 34,783 $ 7,800
======== ========
LIABILITIES
Current liabilities
Accounts payable $ 484 $ 733
Related party payables 45 35
Accrued liabilities 1,033 472
Capital lease obligation, current 37 34
-------- --------
Total current liabilities 1,599 1,274
Capital lease obligation, net of current portion 30 53
Deferred rent 162 148
-------- --------
Total liabilities 1,791 1,475
-------- --------
STOCKHOLDERS' EQUITY
Convertible Preferred Stock -- 9
Common Stock 9 2
Additional paid in capital 48,808 16,869
Notes receivable from stockholders (92) (92)
Deferred compensation (429) (550)
Accumulated deficit (15,323) (9,913)
Unrealized gain on investments 19 --
-------- --------
Total stockholders' equity 32,992 6,325
-------- --------
Total liabilities and stockholders' equity $ 34,783 $ 7,800
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
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<PAGE> 4
ARTHROCARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended: Nine months ended:
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 1,574 $ -- $ 4,139 $ --
Cost of sales 1,365 -- 3,666 --
----------- ----------- ----------- -----------
Gross margin 209 -- 473 --
Operating expenses:
Research and development 830 1,407 2,644 3,147
Sales and marketing 1,056 311 2,586 730
General and administrative 648 346 1,751 675
Non-recurring charge for acquired technology -- -- -- 260
----------- ----------- ----------- -----------
Total operating expenses 2,534 2,064 6,981 4,812
----------- ----------- ----------- -----------
Loss from operations (2,325) (2,064) (6,508) (4,812)
Interest and other income, net 393 55 1,100 150
----------- ----------- ----------- -----------
Loss before provision for income taxes (1,932) (2,009) (5,408) (4,662)
Income taxes -- -- 2 --
----------- ----------- ----------- -----------
Net loss $ (1,932) $ (2,009) $ (5,410) $ (4,662)
=========== =========== =========== ===========
Net loss per share $ (0.22) $ (0.41) $ (0.67) $ (0.98)
=========== =========== =========== ===========
Shares used in per share calculation 8,714,364 4,849,953 8,056,724 4,751,138
=========== =========== =========== ===========
</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>
Nine months ended:
September 28, September 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,410) $(4,662)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-recurring charge for acquired technology -- 260
Depreciation and amortization 278 108
Write-off of property and equipment 237 --
Amortization of deferred compensation 121 240
Provision for doubtful accounts 87 --
Provision for excess and obsolete inventory 64 50
Deferred rent 14 103
Changes in operating assets and liabilities:
Accounts receivable (1,019) --
Related party receivables (56) --
Inventory (570) (440)
Prepaid expenses and other current assets 635 (76)
Accounts payable (239) 314
Accrued liabilities 561 157
Other assets (20) (95)
-------- -------
Net cash used in operating activities (5,317) (4,041)
-------- -------
Cash flows from investing activities:
Purchases of property and equipment (842) (811)
Purchase of available-for-sale securities (18,465) (2,500)
Purchase of intellectual property rights -- (100)
-------- -------
Net cash used in investing activities (19,307) (3,411)
-------- -------
Cash flows from financing activities:
Issuance of notes receivable to related parties -- (149)
Repayment of capital leases (20) (14)
Proceeds from issuance of Common Stock 31,937 --
Proceeds from issuance of Preferred Stock -- 5,828
-------- -------
Net cash provided by financing activities 31,917 5,665
-------- -------
Net increase in cash and cash equivalents 7,293 (1,787)
Cash and cash equivalents, beginning of period 4,774 2,599
-------- -------
Cash and cash equivalents, end of period $ 12,067 $ 812
======== =======
Supplemental schedule of non-cash investing and financing activities:
Issuance of Common Stock on conversion of Preferred Stock $ 15,704 $ --
Unrealized gain on avaliable-for-sale securities $ 19 $ --
Common stock issued for intellectual property rights $ -- $ 160
Additions to PP&E acquired under capital lease $ -- $ 72
Common Stock issued for note receivable $ -- $ 104
</TABLE>
The accompanying notes are an integral part of the financial statements
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<PAGE> 6
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 public offering at prices substantially below the initial public
offering price 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.
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4. COMPONENTS OF INVENTORY:
<TABLE>
<CAPTION>
September 28, 1996 December. 31, 1995
------------------ ------------------
(Unaudited)
(In thousands)
<S> <C> <C>
Inventory:
Raw materials $ 521 $ 418
Work-in-process - 2
Finished goods 501 96
------------- -------------
$ 1,022 $ 516
============= =============
</TABLE>
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<PAGE> 8
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's technology 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 homeostasis.
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 long term strategy
includes placing controllers in order to generate future wand revenues, and
applying its proprietary technology to a range of other soft tissue surgical
procedures in the fields of dermatology, gynecology, periodontal, urology, and
general surgery. In that regard, the Company has received 510(k) clearances for
use of its system in the field of urology and periodontal 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 12 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.
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<PAGE> 9
RESULTS OF OPERATIONS
Overview
The three month period ended September 28, 1996 is the Company's third
full quarter of shipments. The Company was in its development stage during the
comparable three month and nine month periods ended September 30, 1995.
Revenues
Revenues for the three month period ended September 28, 1996 were $1.6
million. Revenues for the nine month period ended September 28, 1996 were $4.1
million. There were no revenues in the three month or the nine month periods
ended September 30, 1995, as the Company was in its development stage. The
Company first introduced its Arthroscopic system in December 1995. In
approximately ten months since introduction, the Company has grown the installed
base of controllers to approximately 400 units including approximately 200
controllers placed with doctors and hospitals. The Company offers several
promotional programs as its strategy is to accelerate placement of controllers
with doctors and hospitals in order to generate future sales of disposable
wands. Revenues were impacted 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 ended September 28, 1996, over 90% of
controllers were placed with doctors and hospitals resulting, in part, from
promotional programs. By the end of the nine month period, the controller unit
mix was approximately 55% sold to doctors and hospitals and 45% sold to dealers.
During the first quarter, controller sales were heavily weighted toward dealers
as they bought initial stocking inventory. The Company expects dealer sales to
decrease as a percentage of overall sales in the future.
The revenue mix between wands and controllers in the three months ended
September 28, 1996 was approximately 80% wands and 20% controllers. For the nine
month period, the mix was approximately 70% wands and 30% controllers. The
Company expects the mix to continue to shift toward wand sales.
The Company believes that the majority of wand revenue at this time 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. Accordingly, in order to
achieve increasing wand sales over time, the Company needs to increase wand
sales for knee procedures. While the Company recently introduced additional
products designed to increase wand sales related to knee procedures, there is no
assurance that these products will be adopted by doctors.
Wand ASP (average selling price) was somewhat higher in the three month
period ended September 28, 1996 than in the nine month period due to the large
number of
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wands sold to dealers at discounts in the first quarter of the year as dealers
stocked initial inventory. On a quarterly basis, the Company does not expect
wand ASP to continue to increase.
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 $1.4 million, or 87% of revenues for the three months
ended September 28, 1996. Cost of sales for the nine months ended September 28,
1996 was $3.7 million, or 89% of revenues. If demand for the disposable wand
increases and wands are manufactured in higher volume, the Company believes that
the cost of sales as a percentage of revenue will continue to improve, however
there can be no assurance the Company will be successful in achieving improved
gross margins. There is no comparison to the three month or the nine month
periods ended September 30, 1995, as the Company was in its development stage
and had no sales.
Operating Expenses:
Research and development expense, which includes expenditures for
regulatory compliance and quality assurance, was $0.8 million in the three
months ended September 28, 1996 compared to $1.4 million in the same quarter of
the prior year. Research and development expense for the nine months ended
September 28, 1996 was $2.6 million compared to $3.4 million in prior year. The
decrease is due to the inclusion of manufacturing startup costs in the three and
nine month periods ended September 30, 1995 when the Company was in its
development stage.
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 to increase research and development spending 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.
Sales and marketing expense increased substantially to $1.1 million in
the quarter ended September 28, 1996 from $0.3 million in the quarter ended
September 30, 1995 when the Company was in its development stage and to $2.6
million for the nine month period of 1996 compared to $0.7 million for the same
period in 1995. The increase is due primarily to the hiring of additional
personnel, dealer commissions, demonstration and sample expenses.
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<PAGE> 11
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.
General and administrative expense increased substantially to $0.6
million in the three months ended September 28, 1996 from 1995 level of $0.3
million and to $1.8 million in the nine month period of 1996 from 1995 level of
$0.7 million due to additional staffing, including management personnel, the
increased cost of being a public company, consulting fees and expenses 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 increased to $393K for the quarter ended September
28, 1996 from $55K in the prior year quarter and to $1,100K for the nine month
period compared with $150K in the comparable period a year ago. Increases in
both periods are attributable to interest received on the investment of the
proceeds of the February, 1996 initial public offering.
Net Loss
Net loss was $1.9 million for the quarter ended September 28, 1996
compared to $2.0 million in the same quarter of 1995, when the Company was in
its development stage. The slight decrease is due primarily to the positive
gross margin on sales and higher interest income offset by 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.
Net loss was $5.4 million for the nine month period ended September 28,
1996 compared to $4.7 million in the nine month period ended September 30, 1995.
The increase is due to increase in operating expenses as discussed above, offset
by the positive gross margin and increase in interest income.
LIQUIDITY AND CAPITAL RESOURCES
At September 28, 1996, the Company had approximately $26.8 million in
working capital and its principal sources of liquidity consisted of $30.6
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
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<PAGE> 12
used in operations increased to $5.3 million for the nine months ended September
28, 1996 from $4.0 million for the nine months ended September 30, 1995
reflecting expenditures made primarily to increase research and development, to
form a marketing and sales organization and to support the administrative
infrastructure.
Inventories increased from $0.5 million as of December 31, 1995 to $1.0
million as of September 28, 1996, primarily due to the increased level of
manufacturing activities in support of sales.
Accounts receivable increased from $0.2 million as of December 31, 1995
to $1.1 million as of September 28, 1996, 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 September 28, 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 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 ArthroCare became a public company in first quarter of 1996,
included here are risk factors as updated from the Company's Prospectus dated
February 5, 1996 and the prior 10-Q filed August 5, 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.
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Dependence Upon Arthroscopic System
The Arthroscopic System is the Company's only commercial product to
date and has been used primarily for arthroscopic procedures in the knee and
shoulder. The Company commercially introduced the Arthroscopic System in
December 1995 and by the end of the third quarter of 1996, had reported only ten
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.
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 the recommendations and
endorsements by influential physicians will continue to 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 started to realize revenues from the sale of its products, however, it
continues to generate operating losses and anticipates generating losses in the
future. 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.
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Limited Domestic and International Marketing and Sales Experience
The Company has placed approximately 400 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. 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
Company may be required to, among other things, continue to 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 obtained initial regulatory approvals to market and
sell its Arthroscopic System in Europe and Australia. The Company will need to
establish a sales and marketing capability in those and other markets.
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 Australia and 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
additional necessary foreign regulatory approvals, that the Company will
establish a network of distributors and marketing partners, or that foreign
distributors and marketing partners will commit the necessary resources to
successfully sell the Arthroscopic System in foreign markets.
Limited Manufacturing Experience
The Company has manufactured and sold approximately 35,000 wands to
date and has 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
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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.
History of Losses: Fluctuations in Operating Results, Substantial Losses
Expected to Continue
The Company has experienced significant operating losses since
inception and, as of September 28, 1996, had an accumulated deficit of $15.3
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
continue to 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, nine 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
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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 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.
16 of 29
<PAGE> 17
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.
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.
Since December 1995, the Company filed 510(k) submissions for clearance
to market tissue ablation products to treat certain gynecological, periodontal
and urological
17 of 29
<PAGE> 18
conditions. The FDA has contacted the Company regarding its gynecological 510(k)
submission requesting additional clinical studies. Because of the time and
expense of clinical studies, the Company postponed the discussion on the
clinical studies. This allowed the application with the FDA to laps. The Company
is again considering its intent to proceed with FDA clearance for this
indication. In the event that the Company elects to proceed with the submission,
there can be no assurance that clearance will be granted. In March 1996 and May,
1996, the Company received a 510(k) premarket notification for a tissue ablation
product to treat certain urological conditions. In July 1996, the Company
received clearance of its periodontal 510(k).
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 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 obtained limited foreign regulatory approval permitting
sales in Europe and Australia. International regulatory bodies often establish
varying regulations governing product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. Compliance with regulations can be costly and time consuming. In
order to commence sale in Europe, the Company has obtained the CE mark
certification and the ISO 9001 certification, which is an
18 of 29
<PAGE> 19
international symbol of quality and compliance with applicable European medical
device directives. There can be no assurance that the Company will be able to
successfully market its product in Europe. In addition, there is no assurance
that the Company will be able to receive certification in other foreign markets.
As the Company obtains foreign regulatory approvals to sell the Arthroscopic
System or potential products, it will need to 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 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.
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.
19 of 29
<PAGE> 20
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 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
Since December 1995, the Company filed 510(k) submissions for clearance
to market tissue ablation products to treat certain urological, gynecological
and periodontal conditions. The FDA has contacted the Company regarding its
gynecological 510(k) submission requesting additional clinical studies. Because
of the time and expense of clinical studies, the Company allowed the application
with the FDA to laps and is currently considering its intent to proceed with FDA
clearance for this indication. In the event that the Company elects to proceed
with the submission, there can be no assurance that clearance will be granted.
In March 1996 and May, 1996, the Company received a 510(k) premarket
notification for a tissue ablation product to treat certain urological
conditions. In July 1996, the Company received approval of its periodontal
510(k).
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.
20 of 29
<PAGE> 21
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 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
21 of 29
<PAGE> 22
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 registration rights, such
sales may have an adverse effect on the Company's ability to raise capital.
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
22 of 29
<PAGE> 23
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.
Lack of Dividends
The Company has not paid any dividends and does not anticipate paying
any dividends in the foreseeable future.
23 of 29
<PAGE> 24
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.
24 of 29
<PAGE> 25
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> 26
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
26 of 29
<PAGE> 27
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: November 11, 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)
Date: November 11, 1996
/s/ HIRA V. THAPLIYAL
---------------------------------------
Hira V. Thapliyal, Ph.D.
President, Chief Executive Officer and Director
27 of 29
<PAGE> 28
EXHIBIT INDEX
Exhibit Page
Number Exhibit Description Number
- ------ ------------------- ------
11.1 Calculation of net loss per share. 24
27.1 Financial Data Schedule.
28 of 29
<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: Nine months ended:
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares 8,714 1,733 4,940 1,634
outstanding 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 8,714 4,850 8,057 4,751
======= ======= ======= =======
Net loss $(1,932) $(2,009) $(5,410) $(4,662)
======= ======= ======= =======
Net loss per share $ (0.22) $ (0.41) $ (0.67) $ (0.98)
======= ======= ======= =======
</TABLE>
29 of 29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ArthroCare
Corporation financial statements for the nine month period ended September 28,
1996 as shown in the 10-Q filing
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-28-1996
<CASH> 12,067
<SECURITIES> 13,949
<RECEIVABLES> 1,144
<ALLOWANCES> 0
<INVENTORY> 1,022
<CURRENT-ASSETS> 28,438
<PP&E> 1,462
<DEPRECIATION> 0
<TOTAL-ASSETS> 34,783
<CURRENT-LIABILITIES> 1,599
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 34,783
<SALES> 4,139
<TOTAL-REVENUES> 4,139
<CGS> 3,666
<TOTAL-COSTS> 3,666
<OTHER-EXPENSES> 6,981
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,408)
<INCOME-TAX> 2
<INCOME-CONTINUING> (5,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,410)
<EPS-PRIMARY> ($0.67)
<EPS-DILUTED> ($0.67)
</TABLE>
