<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 March 29, 1997
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 April
26, 1997 was 8,794,112.
<PAGE> 2
ARTHROCARE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of March 29, 1997 and 3
December 28, 1996.
Condensed Statements of Operations for the three
months ended March 29, 1997 and March 30, 1996. 4
Condensed Statements of Cash Flows for the three months
ended March 29, 1997 and March 30, 1996. 5
Notes to the Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-25
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26-28
SIGNATURE 29
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARTHROCARE CORPORATION
CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 29, December 28,
ASSETS 1997 1996
------------------- ------------------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 17,851 $ 11,359
Available-for-sale securities 4,162 12,281
Accounts receivable, net 1,256 1,251
Inventory 944 759
Prepaid expenses and other current assets 127 155
-------- --------
Total current assets 24,340 25,805
Property and equipment, net 1,466 1,484
Related party receivables 310 298
Available-for-sale securities 4,742 5,641
Other assets 63 69
-------- --------
Total assets $ 30,921 $ 33,297
======== ========
LIABILITIES
Current liabilities
Accounts payable $ 900 $ 1,001
Related party payables 49 54
Accrued liabilities 1,096 1,245
Capital lease obligation, current 37 37
-------- --------
Total current liabilities 2,082 2,337
Capital lease obligation, net of current portion 9 21
Deferred rent 162 157
-------- --------
Total liabilities 2,253 2,515
-------- --------
STOCKHOLDERS' EQUITY
Common stock 9 9
Additional paid in capital 48,882 48,862
Notes receivable from stockholders (92) (92)
Deferred compensation (349) (388)
Accumulated deficit (19,785) (17,618)
Unrealized gain on investments 3 9
-------- --------
Total stockholders' equity 28,668 30,782
-------- --------
Total liabilities and stockholders' equity $ 30,921 $ 33,297
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed financial statements
<PAGE> 4
ARTHROCARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
Three months ended:
March 29, March 30,
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Net sales $ 2,261 $ 1,159
Cost of sales 1,679 1,065
----------- -----------
Gross margin 582 94
----------- -----------
Operating expenses:
Research and development 880 864
Sales and marketing 1,365 658
General and administrative 891 576
----------- -----------
Total operating expenses 3,136 2,098
----------- -----------
Loss from operations (2,554) (2,004)
Interest and other income, net 387 261
----------- -----------
Net loss $ (2,167) $ (1,743)
=========== ===========
Net loss per share $ (0.25) $ (0.25)
=========== ===========
Shares used in per share calculation 8,784,805 6,856,086
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
condensed financial statements
<PAGE> 5
ARTHROCARE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months ended:
March 29, March 30,
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,167) $ (1,743)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 147 77
Write-off of property and equipment -- 187
Amortization of deferred compensation 39 41
Provision for doubtful accounts 252 19
Provision for excess and obsolete inventory 183 5
Deferred rent 5 15
Changes in operating assets and liabilities:
Accounts receivable (257) (670)
Related party receivables (12) (18)
Inventory (368) (632)
Prepaid expenses and other current assets 28 536
Accounts payable (105) 319
Accrued liabilities (150) 105
Other assets 6 (20)
-------- --------
Net cash used in operating activities (2,399) (1,779)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (129) (219)
Net maturities (purchases) of available-for-sale securities 9,012 (9,863)
-------- --------
Net cash provided by (used in) investing act 8,883 (10,082)
Cash flows from financing activities:
Repayment of capital leases (12) (8)
Proceeds from issuance of Common Stock 20 31,896
Proceeds from exercise of options to purchase Common Stock -------- --------
Net cash provided by financing activities 8 31,888
-------- --------
Net increase in cash and cash equivalents 6,492 20,027
Cash and cash equivalents, beginning of period 11,359 4,774
-------- --------
Cash and cash equivalents, end of period $ 17,851 $ 24,801
======== ========
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock on conversion of preferred stock $ - $ 15,704
Net unrealized gain on avaliable-for-sale securities $ 6 $ 37
</TABLE>
The accompanying notes are an integral part of the
condensed financial statements
<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 Form 10-K for the year ended December 28, 1996 should be read in conjunction
with these condensed financial statements. The balance sheet at December 28,
1996 was derived from audited financial statements; however, the financial
statements in this report do 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. COMPONENTS OF INVENTORY:
<TABLE>
<CAPTION>
March 29, 1997 December 28, 1996
-------------- -----------------
(Unaudited)
Inventory: (In thousands)
<S> <C> <C>
Raw materials $ 182 $ 345
Work-in-process 170 32
Finished goods 592 382
----------- -----------
$ 944 $ 759
=========== ===========
</TABLE>
4. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share," which specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 128 supersedes Accounting Principles
Board Opinion No. 15 and is effective for financial statements issued for
periods after December 15, 1997. SFAS 128
<PAGE> 7
PART 1. FINANCIAL INFORMATION (CONTINUED)
================================================================================
requires restatement of all prior-period earnings per share data presented after
the effective date. SFAS 128 will not have a material impact on the Company's
earnings per share.
<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 (the
"Company" or "ArthroCare") has primarily engaged in the design, development,
clinical testing, manufacturing and sale of its Arthroscopic System. The
Arthroscopic System consists of a disposable, bipolar ArthroWand, a radio
frequency controller that powers the ArthroWand and a cable that connects the
ArthroWand to the controller. The ArthroWand ablates (removes) soft tissue with
minimal damage to surrounding healthy tissue, and simultaneously achieves
hemostasis (sealing of small bleeding vessels).
The Company has a limited history of operations. 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 use in arthroscopic
surgery of the knee, shoulder, elbow and ankle. The Company has since received
clearance for use in the wrist and hip. In December 1995, the Company
commercially introduced its Arthroscopic System through a network of
distributors in the United States. The Company's strategy includes placing
controllers that are intended to generate future wand revenues with arthroscopic
surgeons. The Company believes that if it places controllers with arthroscopic
surgeons, the controllers will be used by the surgeons and that the continued
use of the controllers will generate future wand sales. The Company's long term
strategy includes applying its proprietary platform technology to a range of
other soft tissue surgical procedures in the fields of urology, dermatology,
dental surgery, and gynecology. In that regard, the Company has received 510(k)
clearance for use of its technology in the field of urology and dental surgery.
In April 1997, the Company received 510(k) clearance for use of its technology
in the field of general dermatology but is seeking additional IDE and 510(k)
approvals for specific dermatology markets which it hopes to enter. The Company
is continuing to work with the FDA to obtain 510(k) clearance for use of its
technology in the field of gynecology. There can be no assurance that the
Company's 510(k) application for its gynecology system under development will be
cleared by the FDA on a timely basis, if at all, or that the products, if
cleared for marketing, will ever achieve commercial acceptance. See
"Additional Factors that Might Affect Future Results--Uncertainty of New
Product Development", "--Limited Domestic and International Marketing and
Sales Experience" and "--Uncertainty of Approvals; Extensive Government
Regulation."
This Report on Form 10-Q contains certain forward looking statements
regarding future events with respect to the Company. Actual events or results
may differ significantly as a result of the factors described herein and in the
documents incorporated herein by reference including, in particular, those
factors described under "Additional Factors that Might Affect Future Results."
RESULTS OF OPERATIONS
<PAGE> 9
ARTHROCARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended:
-------------------
March 29, % March 30, %
1997 of Sales 1996 of Sales % Chg
---- -------- ---- -------- -----
<S> <C> <C> <C> <C> <C>
Net sales $ 2,261 100.0% $ 1,159 100.0% 95.1%
Cost of sales 1,679 74.3% 1,065 91.9% 57.7%
------- -------
Gross margin 582 25.7% 94 8.1% 519.1%
------- -------
Operating expenses:
Research & development 880 38.9% 864 74.5% 1.9%
Sales & marketing 1,365 60.4% 658 56.8% 107.4%
General & administrative 891 39.4% 576 49.7% 54.7%
------- -------
Total operating expenses 3,136 138.7% 2,098 181.0% 49.5%
------- -------
Loss from operations (2,554) -113.0% (2,004) -172.9% 27.4%
Interest income, Net 387 17.2% 261 22.5% 48.3%
------- -------
Net loss $(2,167) -95.8% $(1,743) -150.4% 24.3%
======= =======
</TABLE>
Revenues
Revenues for the three month period ended March 29, 1997 were $2.3
million. Revenues for the three month period ended March 30, 1996 were $1.2
million. The $1.1 million increase is primarily due to higher unit volume wand
sales and higher average selling price (ASP) compared to the year ago quarter.
The Company's strategy is to increase the installed base of controllers by
offering aggressive promotional programs which bundle a discounted controller
with volume wand sales or sales commitments. This strategy has had an adverse
impact on controller revenue, ASP and gross margins, partially offsetting the
positive impact of increased wand sales.
<PAGE> 10
During the first quarter, the installed base of controllers increased by
166 units to a total installed base 748 units, which includes 548 units placed
with doctors and hospitals. The entire installed base of controllers generated
sales of approximately 18,000 wands during the quarter.
Overall, wands were sold at or near list price during the quarter. The
wand ASP was higher in the three month period ended March 29, 1997 than in the
three month period ended March 30, 1996 due to the large number of wands sold to
dealers at discounts in the prior year quarter as dealers stocked initial
inventory. The Company does not expect wand ASP to continue to increase.
During the three month period ended March 29, 1997, controller ASP was
adversely impacted by promotional programs which offer discounted controller
prices when packaged with volume wand purchases or purchase commitments. In the
three month period ended March 30, 1996, the controller ASP was higher as
dealers were purchasing their demonstration controllers and the current
controller promotional programs were not being offered. The Company expects to
continue these promotional programs as a strategy to increase controller
placements which could result in increased wand sales.
The revenue mix between wands and controllers in the three month period
ended March 29, 1997 was approximately 93% wands and 7% controllers. During the
three month period ended March 30, 1996, the approximate mix of wands and
controllers was 52% wands and 48% controllers. The Company expects wand sales to
remain the primary component of revenues in the future.
During the three month period ended March 29, 1997, approximately three
quarters of revenue generated was from sales of its Arthroscopic System to
doctors and hospitals. The three month period ended March 30, 1996, was the
Company's first full quarter of shipments, and revenues were heavily weighted
toward dealers as they bought initial stocking inventory. The Company expects
sales to doctors and hospitals to remain high as a percentage of overall sales
in the future.
The Company believes that, in its first five quarters of product
shipments, it has penetrated over 2% of the arthroscopic surgical tools market
in the United States and that approximately 60% of the Company's wand revenue is
being generated by wands purchased for use in shoulder procedures. The Company
believes that shoulder procedures are the fastest growing segment of the
arthroscopic market, and knee procedures represent the largest segment of
arthroscopic surgery in terms of the absolute number of procedures. Accordingly,
in order to achieve increasing wand sales over time, the Company must further
penetrate the market for knee procedures. The Company has introduced additional
wand styles designed to be used in both knee and shoulder arthroscopic
procedures which are intended to increase wand sales in both markets. There can
be no assurance that those wand styles will be adopted by doctors.
The Company has limited sales and marketing experience and can make no
assurance that current trends in sales and product acceptance will continue. See
"Additional Factors that Might Affect Future Results--Uncertainty of Market
Acceptance" and "--Limited Domestic and International Marketing and Sales
Experience."
<PAGE> 11
Cost of Sales
Cost of sales was $1.7 million, or 74% of sales for the three months
ended March 29, 1997. During the three month period ended March 30, 1996, cost
of sales was $1.1 million or 92% of sales. As a percentage of sales, cost of
sales decreased 18 percentage points as the fixed and semi-fixed costs were
spread over higher wand manufacturing volume resulting in improved manufacturing
efficiency. Improvements to the manufacturing process also reduced costs by
improving efficiency. The $600,000 increase in cost of sales between the periods
was due to higher volume wand and controller shipments.
The improved gross margin includes the effect of the controller
promotional programs during the quarter. The Company believes that if its
promotional programs maintain the same or higher number of wands bundled with a
discounted controller, and if the demand for the disposable wands increases over
a growing installed base of controllers, then the cost of sales will continue to
decrease as a percentage of revenue and gross margins will increase. However,
there can be no assurance the Company will be successful in maintaining the mix
of wands to discounted controllers in its promotional programs or increasing
demand for its disposable wands. See "Additional Factors that Might Affect
Future Results--History of Losses; Fluctuations in Operating Results;
Substantial Losses Expected to Continue."
Operating Expenses
Research and development expense, which includes expenditures for
regulatory compliance and quality assurance, was $900,000 in the three months
ended March 29, 1997, the same as in the prior year quarter.
The Company believes that continued investment in its platform
technology is essential if it is to maintain its competitive position. The
Company expects to continue to make substantial expenditures on new product
development, regulatory affairs, clinical studies, and to increase research and
development spending. See "Additional Factors that Might Affect Future
Results--Competition."
Sales and marketing expense increased substantially to $1.4 million in
the three month period ended March 29, 1997 from $700,000 in the three month
period ended March 30, 1996. The increase is primarily due to dealer
commissions, promotional, staffing, and trade show expenses. The three month
period ended March 29, 1997 includes the sales and marketing expenses associated
with the numerous trade shows and conferences which typically happen in the
first part of the year. The Company currently anticipates that sales and
marketing spending will continue to increase due to dealer commissions,
promotional, demonstration and sample expenses, and additional investment in
sales, marketing and support staff necessary to market its products.
General and administrative expense increased to $900,000 for the three
month period ended March 29, 1997 from $600,000 for the three month period ended
March 30, 1996 due to additional staffing, including management personnel,
provision for bad debts, the increased cost of being a public company, business
development activities, and consulting fees and expenses necessary to
<PAGE> 12
expand the corporate infrastructure. The Company expects that general and
administrative expenses will continue to increase as the Company further expands
its staffing and other support operations.
Interest and Other Income
Net interest income increased to $400,000 for the three month period
ended March 29, 1997 from $300,000 in the three month period ended March 30,
1996 due to interest received on the investment of the proceeds of the 1996
initial public offering of the Company's common stock. The Company expects that
interest income will decrease as the Company reduces its investments to meet the
cash needs of the business.
Net Loss
Net loss was $2.2 million for the three month period ended March 29,
1997 compared to $1.7 million in the three month period ended March 30, 1996.
The increased loss is due to higher operating expenses resulting from higher
revenues and increased business activities including product development,
manufacturing ramp-up, dealer commissions, sales and marketing expenses
necessary to promote the product and building the corporate infrastructure. The
higher operating expense was partially offset by an improved gross margin and
higher interest income.
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 1997, the Company had $22.3 million in working capital and
its principal sources of liquidity consisted of $26.8 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, corporate bonds,
foreign debt securities rated A1/P1, A1/A or better and U.S. government
securities.
The Company's cash used in operating activities increased to $2.4
million for three month period ended March 29, 1997 from $1.8 million for the
three month period ended March 30, 1996 due to higher levels of business
activity to support higher revenues and increased inventory.
Accounts receivable of $1.3 million as of March 29, 1997 were unchanged
from the level at December 28, 1996. The Company expects accounts receivable to
increase in the future in line with growing sales.
Inventories increased to $900,000 as of March 29, 1997 compared
to $800,000 as of December 28, 1996 due to the higher level of manufacturing
activity in support of sales during the quarter. The Company expects future
inventory levels to grow in absolute value.
As of March 29, 1997, net property and equipment was unchanged from $1.5
million at December 28, 1996. In the remainder of 1997, the Company has planned
but has not committed to
<PAGE> 13
approximately $1.3 million in capital expenditures consisting primarily of
computers, computer networking equipment and molds.
The Company plans to finance its capital needs principally from cash,
cash equivalents, and available-for-sale securities which include long term
available-for-sale securities and related interest, existing capital resources
and to the extent available, lines of credit. The Company currently has no
commitments for any credit facilities such as revolving credit agreements or
lines of credit that could provide additional working capital. The Company
believes that its current cash, cash equivalents and available-for-sale
securities, together with interest thereon and the Company's existing capital
resources, will be sufficient to fund its operations at least through fiscal
1998. The Company's future liquidity and capital requirements will depend on
numerous factors including the Company's success of commercializing the
Arthroscopic System, the ability of the Company's suppliers to continue to meet
the demands of the Company by providing sufficient quantities at current prices,
obtaining and enforcing patents important to the Company's business, the status
of regulatory approvals and competition. There can be no assurance that the
Company will not be required to raise additional capital or that such capital
will be available on acceptable terms, if at all.
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
ArthroCare became a public company in February 1996. Included here are
risk factors as updated from the Company's Annual Report on Form 10-K filed
March 28, 1997. The following factors represent current challenges to the
Company that create risk and uncertainty. Failure to adequately overcome any of
the following challenges, either singularly 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 Company commercially introduced the Arthroscopic System in December
1995 and by the quarter ended March 29, 1997, had reported 16 months of sales.
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. As such, the Company is highly dependent on its Arthroscopic System.
Currently, virtually all the Company's sales come from the United States. Before
the Arthroscopic System can be sold outside of the United States, Europe and
Australia, the Company will have to obtain foreign regulatory approvals and
establish foreign distribution capability. If such regulatory approval is
obtained, there can be no assurance that the Company will be able to establish a
successful foreign distribution capability.
Uncertainty of Market Acceptance
<PAGE> 14
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 conventional means
of tissue ablation. The Arthroscopic System was only introduced in December 1995
and no independent published clinical 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 continue to be essential for market acceptance of
its products. If the Arthroscopic System is not commercially successful, the
Company's business, financial condition and results of operations would be
materially adversely affected.
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, developing a network of distributors
in the United States to market the Arthroscopic System and 16 months of product
sales. The Company has started to realize revenues from the sale of its
products, but 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 of
disposable ArthroWands from its domestic distribution network, obtaining foreign
regulatory approvals for the Arthroscopic System, obtaining domestic and foreign
regulatory approvals for potential products and maintaining its financial and
management systems, procedures and controls.
Limited Domestic and International Marketing and Sales Experience
The Company has sold over 740 Arthroscopic System controller units and
more than 60,000 ArthroWands through the end of the first quarter of 1997. The
Company is marketing and selling its Arthroscopic System in the United States
through a network of independent orthopedic distributors. 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, or that they will
be successful in closing sales with doctors and hospitals. The Company has
offered its controller to these independent distributors at substantial
discounts and may be required to continue to offer such discounts on its
controller to generate demand for its ArthroWands. The inability to place
sufficient quantities of controllers would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has signed distribution agreements with independent
distributors to sell and market the Arthroscopic Systems in Australia, Mexico,
Brazil, Argentina and Korea. In April, the Company signed an exclusive
distribution agreement covering the European market. In other international
markets, the Company intends to collaborate with one or more marketing partners
to establish marketing and distribution channels for the Arthroscopic System and
to assist with regulatory requirements in such distributors' jurisdictions.
However, regulatory requirements vary by
<PAGE> 15
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.
No assurance can be given that the Company will successfully sell its
product through its distributors in Europe, Australia, Mexico, Brazil, Argentina
or Korea, that the Company will secure marketing partners for other
international markets, successfully sell its Arthroscopic System in foreign
markets or that any of its foreign distributors and marketing partners will
commit the necessary resources to obtain additional necessary foreign regulatory
approvals on behalf of the Company and successfully sell the Arthroscopic System
in foreign markets.
Limited Manufacturing Experience
The Company's manufacturing operations consist of an in-house assembly
operation for the manufacturing of ArthroWands. The Company has manufactured and
sold approximately 60,000 ArthroWands through the end of the first quarter of
1997. As a result, the Company has limited experience manufacturing the
ArthroWands 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 commercially reasonable cost. In April 1995,
the Company filed an application with the State of California for a license to
manufacture medical devices. 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 that 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.
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
completed execution of its corrective action and 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; Losses Expected to
Continue
The Company has experienced significant operating losses since inception
and, as of March 29, 1997, had an accumulated deficit of $19.8 million. The
Company expects to generate additional losses due to increased operating
expenditures primarily attributable to the expansion of marketing and sales
activities, increased research and development, and activities to support
regulatory 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, in
<PAGE> 16
addition to those detailed above. 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 profitability will
ever be achieved.
Patents and Proprietary Rights
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its platform technology.
The Company owns four issued United States patents, 16 pending United States
patent applications and international patent applications in Europe (covering 16
separate countries), Japan, Canada, Australia and New Zealand corresponding to
three of the United States filings relating to its multielectrode technology.
The initial patent is currently set to expire in 2008, and the other three
issued patents are currently expected to expire between 2008 and 2012. Although
the Company believes that the issued patents cover the core technology used in
the Company's Arthroscopic System, 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 issue 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 able to obtain licenses to
those patents at a reasonable cost, if at all, or be able to develop or obtain
alternative technology, either of which would have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that the Company will not be obligated 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. The Company requires its
key employees and consultants to execute confidentiality agreements upon the
commencement of an employment or consulting relationship with the Company. These
agreements generally provide that all confidential information, developed or
made known to the individual by the Company during the course of the
individual's relationship with the Company, is to be kept confidential and not
disclosed to third parties. These agreements also generally provide that
inventions conceived by the individual in the course of rendering services to
the Company shall be the exclusive property of the Company. There can be no
assurance that such agreements will not be
<PAGE> 17
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 proceeds 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 disputed rights to be licensed
from third parties or require the Company to cease using such technology.
Although patent and intellectual property disputes in the medical device area
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. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
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-
<PAGE> 18
Meyers-Squibb Company each have large shares of the market for electrosurgical
systems, and Trimedyne, Inc. and Stryker Corp. each have large shares of the
market for laser systems. The Company expects that competition from these and
other well-established competitors will increase as will competition from
start-up and development stage medical device companies such as Gyrus Medical
Ltd., a company based in the United Kingdom, and Oratec Interventions, Inc., a
company based in Menlo Park, California. The Company is aware that Mitek (a
division of Johnson & Johnson) is marketing a bipolar electrosurgical tool
developed by Gyrus Medical Ltd. The Company anticipates that it may have to
continue to offer substantial discounts on its controller in order to stimulate
demand for the disposable ArthroWand. Such competition could have a material
adverse effect on the Company's business, financial conditions and results of
operations.
Uncertainty of Approvals; Extensive Governmental Regulation
United States
The Company's products are regulated in the United States as medical
devices by the FDA under the Federal Food, Drug, and Cosmetic Act ("FDC Act")
and require premarket clearance or approval by the FDA prior to
commercialization. In addition, certain material changes or modifications to
medical devices also are subject to FDA review and clearance or approval.
Pursuant to the FDC Act, the FDA regulates the research, testing, manufacture,
safety, labeling, storage, record keeping, advertising, distribution and
production of medical devices in the United States. Noncompliance with
applicable requirements can result in warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, and criminal prosecution. Medical devices are classified
into one of three classes, Class I, II or III, on the basis of the controls
deemed by the FDA to be necessary to reasonably ensure their safety and
effectiveness. Class I devices are subject to general controls (e.g., labeling,
premarket notification for non-exempt devices and adherence to GMPs or QS
Regulations for most devices). Class II devices are subject to general controls
and to special controls (e.g., performance standards, postmarket surveillance,
patient registries, and FDA guidelines). Generally, Class III devices are those
that must receive premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices,
or new devices that have not been found substantially equivalent to legally
marketed devices), and generally require clinical testing to ensure safety and
effectiveness and FDA approval prior to marketing and distribution. The FDA also
has the authority to require clinical testing of Class I and Class II devices. A
PMA application must be filed if the proposed device is not substantially
equivalent to a legally marketed Class I or Class II predicate device or if it
is a Class III device for which the FDA has called for such applications.
If human clinical trials of a device are required and if the device
presents a "significant risk," the manufacturer or the distributor of the device
is required to file an investigational device exemption ("IDE") application
prior to commencing human clinical trials. The IDE application must be supported
by data, typically including the results of animal and, possibly, mechanical
testing. If the FDA does not object to the IDE application within 30 days from
filing of the application, human clinical trials may begin as defined in the
IDE. Sponsors of clinical trials are permitted to sell
<PAGE> 19
investigational devices distributed in the course of the study, provided such
costs do not exceed recovery of the costs of manufacture, research, development
and handling. The clinical trials must be conducted under the auspices of an
independent Institutional Review Board ("IRB") established pursuant to FDA
regulations, and with appropriate informed consent.
Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
510(k) notification or approval of a PMA application. If a medical device
manufacturer or distributor can establish that a device is "substantially
equivalent" to a legally marketed Class I or Class II device, or to a Class III
device for which FDA has not called for PMAs, the manufacturer or distributor
may seek clearance from FDA to market the device by filing a 510(k)
notification. The 510(k) notification will need to be supported by appropriate
data establishing the claim of substantial equivalence to the satisfaction of
FDA. FDA recently has been requiring a more rigorous demonstration of
substantial equivalence.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an order
is issued by the FDA. No law or regulation specifies the time limit by which FDA
must respond to a 510(k) notification. At this time, the FDA typically responds
to the submission of a 510(k) notification within 150 to 200 days, but it may
take longer. An FDA order may declare that the device is substantially
equivalent to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA, however, may determine that the
proposed device is not substantially equivalent or require further information,
including clinical data, to make a determination regarding substantial
equivalence. Such determination or request for additional information could
delay market introduction of the products that are the subject of the 510(k)
notification.
The Company has received clearance of 510(k) premarket notifications to
market its Arthroscopic System for surgery of the knee, shoulder, elbow, wrist,
hip and ankle joints. In addition, the Company received clearance of 510(k)
premarket notifications to market products based upon its proprietary core
technology to treat certain dermatological, urological and periodontal
conditions. There can be no assurance that the Company will be able to obtain
necessary clearances or approvals to market any other products on a timely
basis, if at all, and delays in receipt or failure to receive such clearances or
approvals, the loss of previously received clearances or approvals, or failure
to comply with existing or future regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.
If a manufacturer or distributor of medical devices cannot establish
that a proposed device is substantially equivalent to a legally marketed device,
the manufacturer or distributor must seek premarket approval of the proposed
device through submission of a PMA application. A PMA application must be
supported by extensive data, including, in many instances, preclinical and
clinical trial data, as well as extensive literature to prove the safety and
effectiveness of the device. Following receipt of a PMA application, if the FDA
determines that the application is sufficiently complete to permit a substantive
review, the FDA will "file" the application. Under the FDC Act, the FDA has 180
days to review a PMA application, although the review of such an application
more
<PAGE> 20
often occurs over a protracted time period, and generally takes approximately
two years or more from the date of filing to complete.
The PMA application approval process can be expensive, uncertain and
lengthy. A number of devices for which premarket approval has been sought have
never been approved for marketing. The review time is often significantly
extended by the FDA, which may require more information or clarification of
information already provided in the submission. During the review period, an
advisory committee likely will be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's GMP or QS Regulations requirements prior to
approval of an application. If granted, the approval of the PMA application may
include significant limitations on the indicated uses for which a product may be
marketed.
If necessary, the Company will file a PMA application with the FDA for
approval to sell its potential products commercially in the United States when
it has developed such products. There can be no assurance that the Company will
be able to obtain necessary PMA application approvals to market such products on
a timely basis, if at all, and delays in receipt or failure to receive such
approvals, the loss of previously received approvals, or failure to comply with
existing or future regulatory requirements could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company is also required to register as a medical device
manufacturer with the FDA and state agencies, such as the California Department
of Health Services ("CDHS") and to list its products with the FDA. As such, the
Company is subject to inspections by both the FDA and the CDHS for compliance
with the FDA's GMP or QS Regulations and other applicable regulations. These
regulations require that the Company maintain its documents in a prescribed
manner with respect to manufacturing, testing and control activities. Further,
the Company and the third party manufacturers of its products are required to
comply with various FDA requirements for design, safety, advertising and
labeling. In April 1995, the Company filed an application with the State of
California for a license to manufacture medical devices. 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 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 that 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.
The Company is required to provide information to the FDA on death or
serious injuries alleged to have been associated with the use of its medical
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. In addition, the
FDA prohibits a cleared or approved device from being marketed for uncleared or
unapproved applications. If the FDA believes that a company is not in compliance
with the law, it can institute proceedings to detain or seize products, issue a
recall, enjoin future violations and
<PAGE> 21
assess civil and criminal penalties against the Company, its officers and its
employees. Failure to comply with the regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The advertising of most FDA-regulated products is subject to both FDA
and Federal Trade Commission jurisdiction. The Company also is subject to
regulation by the Occupational Safety and Health Administration and by other
governmental entities.
Regulations regarding the manufacture and sale of the Company's products
are subject to change. The Company cannot predict the effect, if any, that such
changes might have on its business, financial condition or results of
operations.
International
International sales of the Company's products are subject to the
regulatory agency product registration requirements of each country. The
regulatory review process varies from country to country. The Company has
obtained regulatory clearance to market the Arthroscopic System in Australia &
Europe but has not obtained any other international regulatory approvals
permitting sales of its products outside of the United States. The Company
intends to seek regulatory approvals in certain other international markets.
There can be no assurance, however, that such approvals will be obtained on a
timely basis or at all.
In Europe, the Company and its third party manufacturers have received
ISO 9001 certification and the CE mark. ISO 9001 certification standards for
quality operations have been developed to ensure that companies know, on a
worldwide basis, the standards of quality to which they will be held. The
European Union has promulgated rules that require that medical products receive
by mid-1998 the CE mark, an international symbol of quality and compliance with
applicable European medical device directives. Failure to maintain the CE mark
will prohibit the Company from selling its products in Europe. ISO 9001
certification is one of the CE mark requirements. There can be no assurance that
the Company will be successful in maintaining certification requirements.
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 payors, 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 toward 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 ankle, wrist, elbow and hip
arthroscopic procedures. The Company is unable to predict what changes will be
made in the reimbursement methods used by third-party health care payors.
Furthermore, the Company could be adversely affected by changes in
<PAGE> 22
reimbursement policies of governmental or private health care payors,
particularly to the extent any such changes affect reimbursement for procedures
in which the Company's products are used. Failure by physicians, hospitals and
other users of the Company's products to obtain sufficient reimbursement from
health care payors for procedures in which the Company's products are used or
adverse changes in governmental and private third-party payors, policies toward
reimbursement for such procedures would have a material adverse effect on the
Company's business, financial condition and results of operations.
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 Company subcontracts the manufacturing of its controllers to 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 Company and its contract
manufacturer are required to operate in conformance with QS Regulation
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 QS
Regulations or ISO 9001 standards. Any failure by the Company or its contract
manufacturer to remain in compliance with QS Regulation or ISO 9001 standards
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the ArthroWand is sterilized
by a single subcontractor, and the connector housings at each end of the cable
are available only from a single source. There can be no assurance that an
alternate contract manufacturer, sterilizer or connector housing supplier could
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 and
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Although the Company believes that its contract manufacturer,
subcontractors and suppliers are in compliance with applicable regulations,
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
<PAGE> 23
The Company has undertaken preliminary animal studies and development
for the use of its ablation technology with its controller in urology,
dermatology, periodontics and gynecology. The Company has received 510(k)
premarket notifications for clearance to market tissue ablation products to
treat certain urological, dermatological and periodontal conditions and has
filed 510(k) premarket notification for clearance to market gynecological
conditions. The FDA had indicated that the 510(k) submission for gynecological
conditions and expanded dermatological conditions must be supported by clinical
trials. 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 of 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. Failure
by the Company to develop, obtain necessary regulatory approval for or to
successfully market new products could have a material adverse effect on the
Company's business, financial condition and results of operations.
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. 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. The Company has been selling its
product since December 1995 and has not experienced any product liability claims
to date. However, a successful product liability claim or series of claims
brought against the Company in excess of its insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on 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. Furthermore, the Company's scientific advisory board
members all are otherwise employed on a full-time basis. As a result, the
scientific advisory board members are not available to devote their full time or
attention to the Company's affairs.
A significant portion of the Company's research and development is
performed by Philip E. Eggers, a director of the Company, pursuant to a
consulting agreement between the Company and
<PAGE> 24
Eggers & Associates Inc. ("E&A"), a corporation wholly owned by Mr. Eggers. Mr.
Eggers is not employed by the Company on a full-time basis and, as a result, may
not be 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 44.83% of the Company's
outstanding Common Stock. These stockholders, if acting together, will have
significant influence over 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.
<PAGE> 25
Anti-Takeover Effect of Stockholder Rights Plan and Certain Charter and Bylaw
Provisions
In November 1996, the Company's Board of Directors adopted a Stockholder
Rights Plan. The Stockholder Rights Plan provides for a dividend distribution of
one Preferred Shares Purchase Right (a "Right") on each outstanding share of the
Company's Common Stock. Each Right entitles shareholders to buy 1/1000th of a
share of the Company's Series A Participating Preferred Stock at an exercise
price of $50.00. The Rights will become exercisable following the tenth day
after a person or group announces acquisition of 15 percent or more of the
Company's Common Stock, or announces commencement of a tender offer, the
consummation of which would result in ownership by the person or group of 15
percent or more of the Company's Common Stock. The Company will be entitled to
redeem the Rights at $0.01 per Right at any time on or before the tenth day
following acquisition by a person or group of 15 percent of more of the
Company's Common Stock.
The Stockholder Rights Plan and 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. This could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock. Certain provisions of the Company's Certificate of
Incorporation and Bylaws 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
Stockholder Rights Plan, 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.
Lack of Dividends
The Company has not paid any dividends and does not anticipate paying
any dividends in the foreseeable future.
<PAGE> 26
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
<TABLE>
<S> <C>
3.2* Certificate of Incorporation of the Registrant.
3.3* Bylaws of the Registrant.
4.1* Specimen Common Stock Certificate.
10.1* Form of Indemnification Agreement between the Registrant
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.
</TABLE>
<PAGE> 27
<TABLE>
<S> <C>
10.6* Form of Exclusive Sales Representative Agreement
10.7* Consulting Agreement, dated May 10, 1993, between
the Registrant and Philip E. Eggers, and amendment
thereto.
10.8* Consulting Agreement, dated May 20, 1993, between
the Registrant and Eggers & Associates, Inc., and
amendment thereto.
10.9*+ Development and Supply Agreement, dated March 1,
1994, between the Registrant and SeaMed
Corporation.
10.10* Lease Agreement, dated September 15, 1994,
between Registrant and The Arrillaga Foundation and
the Peery Foundation for the Registrant's facility
located at 595 North Pastoria Avenue, Sunnyvale,
California, 94086.
10.11* Employment Letter Agreement, dated October 21,
1994, between the Registrant and Allan Weinstein
and amendment thereto.
10.12* Purchase Assistance Promissory Note, dated
January 19, 1995, between Registrant and Allan
Weinstein.
10.13* Sublease Agreement, dated February 1, 1995,
between Registrant and Guided Medical Systems, Inc.
for the Registrant's former facility at 453
Ravendale Drive, Mountain View, California, 94043.
10.14* Mortgage Assistance Promissory Note
Agreement, dated February 5, 1995, between the
Registrant and Allan Weinstein.
10.15* Restricted Stock Purchase and Security Agreement,
dated February 5, 1995, between the Registrant and
Allan Weinstein.
10.16* Employment Letter Agreement, dated July 18, 1995,
between the Registrant and Robert T. Hagan.
10.17* Restricted Stock Purchase and Security Agreement,
dated August 1, 1995, between the Registrant and
Robert T. Hagan.
</TABLE>
<PAGE> 28
<TABLE>
<S> <C>
10.18* Employment Letter Agreement, dated September 3, 1995,
between the Registrant and A. Larry Tannenbaum.
10.19*+ Radiation Services Agreement, dated September 13, 1995,
between the Registrant and SteriGenics International.
10.20* Amended and Restated Stockholder Rights Agreement, dated
October 16, 1995, between the Registrant and certain
holders of the Registrant'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 Registrant.
10.22** Preferred Stock Rights Agreement, dated November 14,
1996, between the Registrant and Norwest Bank Minnesota,
N.A.
10.23++ Exclusive Distributor Agreement, dated April 15, 1997,
between the Registrant and Arthrex, Gmbh
11.1 Calculation of net loss per share.
27.1 Financial Data Schedule.
</TABLE>
<TABLE>
<S> <C>
* Incorporated herein by reference to the same-numbered exhibit previously
filed with the Registrant's Registration Statement on Form S-1 (Registration No.
33-80453).
** Incorporated here in by reference to exhibit 5 previously filed with the
Registrant's Registration Statement on Form 8-A (Registration No. 000-27422).
+ Confidential treatment granted.
++ Confidential treatment requested.
b) Reports on Form 8-K
</TABLE>
None
<PAGE> 29
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: May 12, 1997
/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: May 12, 1997
/s/ HIRA V. THAPLIYAL
--------------------------------
Hira V. Thapliyal, Ph.D.
President, Chief Executive Officer
and Director
<PAGE> 30
EXHIBIT INDEX
<TABLE>
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Exhibit
Number Exhibit Description
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10.22++ Exclusive Distributor Agreement, dated April 15, 1997
11.1 Calculation of net loss per share.
27.1 Financial Data Schedule.
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++ Confidential treatment requested.
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EXHIBIT 10.22
EXCLUSIVE DISTRIBUTOR AGREEMENT
This EXCLUSIVE DISTRIBUTOR AGREEMENT, including the attached Exhibits
(the "Agreement"), is made and entered into as of April 15, 1997 (the "Effective
Date"), by and between ArthroCare Corporation, a Delaware corporation with
offices at 595 North Pastoria Avenue, Sunnyvale, California 94086
("ArthroCare"), and Arthrex GMBH, a corporation organized under the laws of
Germany with offices at Liebigstrasse No. 13, 85757 Karsfeld, Munich, Germany
("Arthrex").
A. ArthroCare is engaged in the business of manufacturing,
distributing, and selling Products (as defined below) and desires to engage an
exclusive distributor in the Territory (as defined below);
B. Arthrex desires to solicit orders for Products from customers in the
Territory, and desires to be ArthroCare's sole and exclusive distributor in the
Territory for Products solely for use within the Field (as defined below); and
C. Arthrex desires to purchase, and ArthroCare desires to sell to
Arthrex, such Products for the purpose of resale to customers in the Territory;
and
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the parties agree as follows:
1. DEFINITIONS
1.1 "Electro-Surgical Products" means devices that use electricity to
ablate and/or provide hemostasis or sealing of blood vessels.
1.2 "Field" means arthroscopic applications.
1.3 "House Accounts" means those accounts in the Territory on attached
Exhibit A.
1.4 "Products" means those products listed in Exhibit B, as amended
from time to time, and products marketed by ArthroCare during the Term (as
defined in Section 9.1 below) for use in the Field.
1.5 "Territory" means the geographic area set forth in Exhibit C
hereto, including any Territory and province under the direct governmental
control of the government(s) of such geographic area.
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2. GRANT OF DISTRIBUTION RIGHTS
2.1 Appointment. Subject to the terms and conditions of this Agreement,
ArthroCare hereby grants to Arthrex the exclusive right to market, sell and
distribute Products in the Territory solely for use in the Field. Arthrex agrees
not to market, promote or distribute any Product for use outside the Field.
Arthrex may sell, market, promote and distribute Product in other European
countries outside the Territory where ArthroCare does not have another
distributor. Notwithstanding anything herein to the contrary, Arthrex shall
market, promote, sell, and otherwise distribute Products in accordance with all
applicable law and regulations. Arthrex's sole authority shall be to purchase
Products from ArthroCare and to promote, market and resell such Products for
delivery to customers in accordance with the terms of this Agreement. ArthroCare
reserves all rights not expressly granted herein.
2.2 No Rights Beyond Products. Nothing in this Agreement shall be
deemed to grant to Arthrex rights in products or technology other than the
Products; nor shall any provision of this Agreement be deemed to restrict
ArthroCare's right to exploit Products, or patents or any other intellectual
property rights, outside the Field, outside the Territory or in products other
than Products.
2.3 Sale Conveys No Right to Manufacture, Copy or Reprocess and Reuse.
The Products are offered for sale and are sold by ArthroCare subject in every
case to the condition that such sale does not convey any license, expressly or
by implication, to manufacture (notwithstanding anything herein to the
contrary), duplicate or otherwise copy or reproduce any of the Products. Arthrex
agrees that it shall not, and shall not authorize any third party to, reprocess
or reuse any Products.
2.4 Conflict of Interest. Arthrex agrees that any efforts by Arthrex to
sell competing Electro-Surgical Products in the Territory would constitute a
conflict of interest with respect to Arthrex's obligations to market
ArthroCare's Electro-Surgical Products, and Arthrex warrants to ArthroCare that
it does not currently represent or promote any lines or products that compete
with ArthroCare's Electro-Surgical Products. During the term of this Agreement,
in the event that Arthrex represents, promotes or otherwise tries to sell within
the Territory any Electro-Surgical products that, in ArthroCare's judgment,
compete with either ArthroCare's Electro-Surgical Products covered by this
Agreement, or other ArthroCare products in the Field, ArthroCare shall have the
right to terminate this Agreement upon [*] prior written notice to Arthrex
pursuant to Section 9.2 below.
2.5 Changes to Territory. ArthroCare reserves the right to appoint
other authorized distributors or resellers outside the Territory without
restriction as to number and location. ArthroCare grants to Arthrex the first
chance to represent ArthoCare in European countries outside of the Territory.
ArthroCare shall promptly notify Arthrex of each negotiation with a potential
distributor in such countries, and Arthrex shall have [*] from the date it
receives notice of such negotiations to excercise its first chance with respect
to each such notification. If Arthrex elects to exercise its first chance, then
such country will be included within the Territory as defined in Section 1.5
above. After the expiration of such [*] period, or any mutually agreed extension
thereof, if Arthrex has not exercised its first chance, ArthroCare shall be free
to enter into a distribution
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agreement with the potential distributor and shall have no further obligations
to Arthrex with respect to such country.
2.6 Exclusivity. ArthroCare agrees that it will [*] in the Field in the
Territory.
3. PRICE AND PAYMENT
3.1 Prices. The difference between Arthrex's transfer price and
Arthrex's price to its customers shall be Arthrex's sole remuneration for the
sale of the Products. The transfer price paid by Arthrex for each Product shall
be as set forth in Exhibit D.
3.2 Payment Terms. Arthrex shall make payments to ArthroCare under this
Agreement by wire transfer in United States dollars in immediately available
funds to a bank account designated by ArthroCare. Except as provided in Section
4.2 below, payment for Products supplied hereunder shall be made net [*] after
the date of shipment. Any payments due hereunder which are not paid on the date
such payments are due shall bear interest at the lesser of one and one-half
percent (1-1/2%) per month or the maximum rate permitted by California law,
calculated on the number of days such payment is delinquent. In the event that
Arthrex's payments due hereunder are delinquent for an additional [*], Arthrex
shall provide ArthroCare with a letter of credit for all Product purchases
thereafter. This Section 3.2 shall in no way limit any other remedies available
to ArthroCare.
3.3 Taxes. Any and all amounts payable hereunder do not include any
government taxes (including without limitation, withholding, sales, use, excise,
and value added taxes) or duties imposed by any governmental agency that are
applicable to the export, import, or purchase of the Products (other than taxes
on the net income of ArthroCare), and Arthrex shall bear all such taxes and
duties. When ArthroCare has the legal obligation to collect and/or pay such
taxes, the appropriate amount shall be added to Arthrex's invoice and paid by
Arthrex, unless Arthrex provides ArthroCare with a valid tax exemption
certificate authorized by the appropriate taxing authority.
4. TERMS OF PURCHASE AND SALE
4.1 Terms and Conditions. All Product purchases hereunder shall be
subject to the terms and conditions of this Agreement. Nothing contained in any
purchase order submitted pursuant to this Agreement shall in any way modify or
add any terms or conditions to said purchases, unless otherwise agreed in
writing by the parties.
4.2 Initial Stocking Order. An initial stocking order placed by Arthrex
on the Effective Date is attached hereto as Exhibit E. Such initial stocking
order will be Arthrex's minimum performance requirements for the period from the
Effective Date until one (1) year from the Effective Date. The delivery date for
such initial stocking order will be as mutually agreed upon by the parties.
Payments for such initial stocking order will be as follows: [*] of the transfer
price for such order will be due and payable by Arthrex to ArthroCare upon the
date of shipment, and the balance will be due
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and payable by Arthrex to ArthroCare within [*] of the Shipment Date, with [*]
of such balance due at the end of each [*] period starting on the [*] of such
[*] period.
4.3 Forecasts. On or before the [*] day of each month, Arthrex shall
provide to ArthroCare a good faith, monthly rolling written forecast of the
number of units of each Product, on a Product-by-Product basis, that Arthrex
expects to purchase over the following [*] ("Forecasts"). Athrex shall submit
purchase orders for products in accordance with the number of units of Products
forecasted in the first calendar month of the Forecast. The parties acknowledge
that the last [*] included in each Forecast are for ArthroCare's planning
purposes only and shall not be binding upon the parties.
4.4 Order and Acceptance. All orders shall be by means of signed
written purchase orders by an agent designated by Arthrex to a ArthroCare
employee designated by ArthroCare, sent to ArthroCare at ArthroCare's address
for notice hereunder and requesting a delivery date that is consistent with the
Forecasts. Orders shall be placed by a signed written purchase order which may
be provided to ArthroCare by fax. ArthroCare shall use reasonable efforts to
fulfill purchase orders submitted in accordance with ArthroCare's standard lead
times, it being understood that no purchase order shall be binding upon
ArthroCare until accepted by ArthroCare by fax or in writing.
4.5 Invoicing. ArthroCare shall submit an invoice to Arthrex upon
shipment of each Product ordered by Arthrex. Each such invoice shall state
Arthrex's aggregate and unit purchase price for Products in a given shipment,
plus any freight, taxes or other costs incident to the purchase or shipment
initially paid by ArthroCare but to be borne by Arthrex hereunder.
4.6 Shipping. All Products delivered pursuant to the terms of this
Agreement shall be suitably packed for surface or air shipment, in Arthrex's
discretion, in ArthroCare's standard shipping cartons, and delivered to Arthrex
or its carrier agent F.O.B. the shipping location designated by ArthroCare, at
which time risk of loss shall pass to Arthrex. ArthroCare shall ship Products
using the carrier specified in Arthrex's purchase order provided that if Arthrex
does not provide instructions with respect to the carrier to be used, ArthroCare
shall select the carrier. All freight, insurance, and other shipping expenses,
as well as any special packing expenses, shall be paid by Arthrex. Arthrex shall
also bear all applicable taxes, duties and similar charges that may be assessed
against the Products after delivery to the carrier F.O.B. the shipping location.
All shipments and freight charges shall be deemed correct unless ArthroCare
receives from Arthrex, no later than [*] after the shipping date of a given
shipment, a written notice specifying the shipment, the purchase order number,
and the exact nature of the discrepancy between the order and shipment or
discrepancy in the freight cost, as applicable.
4.7 Product Returns. During the first calendar year following the
Effective Date, Arthrex may exchange unopened and undamaged controllers in
saleable condition with a return material authorization number which is used for
tracking purposes only. Thereafter, except as set forth in Article 6 below,
Arthrex may return unopened and undamaged controllers in saleable condition only
with ArthroCare's returned material authorization and, when it's used for
tracking purposes only and only within [*] of receipt by Arthrex. Controllers
returned to ArthroCare other than under Article 6
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shall be returned F.O.B. the destination point designated by ArthroCare and
controllers returned more than [*] after receipt by Arthrex of such controllers
shall be subject to a restocking fee in an amount equal to [*] of the transfer
price paid by Arthrex to ArthroCare for such controllers.
5. ACCEPTANCE
Arthrex shall inspect all Products promptly upon receipt thereof and
may reject any Product that fails to conform to the warranties set forth in
Article 6 below at the time of delivery to Arthrex, provided that Arthrex
complies with the provisions of Section 6.2 below. Except as set forth in
Section 4.7, Article 5 and Article 6 below, Arthrex shall return Products to
ArthroCare only with ArthroCare's prior written approval.
6. WARRANTY
6.1 Product Warranty. ArthroCare warrants to Arthrex that at the time
of delivery to Arthrex the Products purchased by Arthrex shall (i) meet the
specifications for the Products as the same may be amended from time to time,
and (ii) be free from defects in materials or workmanship, all applicable laws
in the place of manufacture. This warranty is contingent upon proper use of
Products in the application for which they were intended as indicated in the
Product label claims, and ArthroCare makes no warranty (express, implied, or
statutory) for Products that are modified (except as expressly contemplated
herein), or subjected to accident, misuse, neglect, unauthorized repair, or
improper testing or storage.
6.2 Exclusive Remedy. In the event that any Product purchased by
Arthrex from ArthroCare fails to conform to the warranty set forth in Section
6.1 above or is recalled pursuant to Section 7.9.2, ArthroCare's sole and
exclusive liability and Arthrex's remedy shall be, at ArthroCare's sole
election, to repair or replace the Product, or component thereof or credit
Arthrex's account for the amount actually paid for any such Product, or
component thereof, provided that (i) Arthrex promptly notifies ArthroCare in
writing that such Product failed to conform and furnishes an explanation of any
reported nonconformity and requests a return material authorization number; (ii)
such Product is returned to ArthroCare by Arthrex F.O.B. the address designated
by ArthroCare during the warranty period with the return material authorization
number affixed prominently to the outside packaging; and (iii) the reported
nonconformities actually exist and were not caused by accident, misuse, neglect,
alteration, repair or improper testing or storage. If such Product fails to so
conform, ArthroCare will reimburse Arthrex for shipment charges for return of
the nonconforming Product.
6.3 Exclusion of Other Warranties. EXCEPT FOR THE LIMITED WARRANTIES
PROVIDED IN SECTION 6.1 ABOVE, ARTHROCARE GRANTS NO OTHER WARRANTIES OR
CONDITIONS, EXPRESS OR IMPLIED, BY STATUTE, IN ANY COMMUNICATION WITH ARTHREX OR
ITS CUSTOMERS, OR OTHERWISE, REGARDING THE PRODUCTS OR VALIDITY OF ARTHROCARE
TECHNOLOGY, AND ARTHROCARE SPECIFICALLY
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DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, AND NONINFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS.
ARTHROCARE NEITHER ASSUMES NOR AUTHORIZES ANY OTHER PERSON TO ASSUME ANY OTHER
LIABILITIES ARISING OUT OF OR IN CONNECTION WITH THE SALE OR USE OF ANY
ARTHROCARE PRODUCT.
7. Additional Obligations of Arthrex
7.1 Import-Export Approval. Arthrex shall be responsible, at their
expense, for obtaining all approval and permits necessary for export and import
of products. Arthrocare shall own all regulatory filings and shall have the
right to obtain copies directly from Arthrex of, and to reference, for any
purpose, any and all regulatory filings made by Arthrex with respect to
Products. Arthrex shall be ArthroCare's registered agent in Europe for CE Mark
requirements. In addition, Arthrex is responsible for all electrical approvals
(UL, IEC, Etc.) including the CE Mark.
7.2 Minimum Performance Requirements. Arthrex shall use best efforts to
(i) maximize Product sales for use in the Field in the Territory using at least
the same efforts as Arthrex uses to maximize sales of its own products and (ii)
ensure that ArthroCare gains appropriate market access in the Territory. During
each calendar year Arthrex shall meet the minimum performance requirements set
forth in Exhibit F (collectively, "Minimum Performance Requirements"). If
Arthrex does not meet the mutually agreed upon Minimum Performance Requirements
during [*] of the Term, (as defined in Section 9.1, below) ArthroCare shall have
the right to terminate Arthrex's rights under this Agreement pursuant to Section
9.2 below. In the event that the parties are unable to agree upon the Minimum
Performance Requirements for [*], either party may terminate this Agreement
pursuant to Section 9.2 below. It is understood and agreed that notwithstanding
any other provision of this Agreement, ArthroCare shall be under no obligation
to continue the production of any Product.
7.3 Inventory. Arthrex shall maintain a quantity of each Product at all
times during the Term of this Agreement as reasonably necessary in order to meet
the demand of Arthrex's customers and potential customers.
7.4 Translation. Arthrex shall at its cost provide any and all
resources necessary to translate all required manuals, instructions, literature,
and package insert data sheets for use in the Territory, and shall provide
ArthroCare and the applicable regulatory authorities sufficient quantities of
such materials to meet governmental and/or regulatory, and market support
requirements.
7.5 Reports. Arthrex shall provide ArthroCare, within [*] after the end
of each calendar quarter, a general report of Product sales trends and analysis
and marketing plans in the Territory during the previous calendar quarter.
7.6 Product Packaging and Labeling. Arthrex may repackage Products to
meet applicable European and country regulations required for distribution of
Products. In addition, Arthrex is responsible for sterilization under ISO 9001,
CE Mark Standards and CGMP of the wands shipped to
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Arthrex in bulk, using boxes and labels supplied to Arthrex by ArthroCare.
Arthrex will translate ArthroCare's standard labels as necessary, and in
accordance with all applicable laws and regulations.
7.7 Market Research. Arthrex shall assist ArthroCare in assessing
customer requirements for the Products, including modifications and improvements
thereto, in terms of quality, design, functional capability, and other features.
Arthrex shall advise ArthroCare on market conditions as reasonably requested by
ArthroCare.
7.8 Training. Arthrex shall maintain knowledgeable sales and marketing
personnel to provide instructions to customers in the use of the Products.
Arthrex agrees that such sales and marketing personnel will, [*], attend a
hands-on sales training session provided by ArthroCare with respect to the
Products as set forth in Section 8.2.
7.9 Other Reporting.
7.9.1 Arthrex shall provide, within [*] after publication,
copies of any and all articles, manuscripts, abstracts or other literature
relating to the Products generated in the Territory in each case to the extent
reasonably available to Arthrex.
7.9.2 Pursuant to the FDA's Medical Device Reporting (MDR)
Regulations, ArthroCare may be required to report to the FDA information that
reasonably suggests that a Product may have caused or contributed to the death
or serious injury or has malfunctioned and that the device would be likely to
cause or contribute to a death or serious injury if the malfunction were to
recur. Each of ArthroCare and Arthrex agree to supply to the other any such
information promptly after becoming aware of it so that each of ArthroCare and
Arthrex can comply with governmental reporting requirements. It is understood
and agreed that reporting to ArthroCare shall be within twenty-four (24) hours
after notification to Arthrex to enable ArthroCare to comply with FDA reporting
requirements. In the event that ArthroCare is required by any regulatory agency
to recall the Products or if ArthroCare voluntarily initiates a recall of the
Products, Arthrex shall cooperate with and assist ArthroCare in locating and
retrieving if necessary, the recalled Products from Arthrex's customers. Arthrex
shall maintain records of sales of Products to customer by lot number, and/or
Arthrex shall make such records available to ArthroCare in the event of a
Product recall or other quality related issue, upon reasonable request from
ArthroCare. Arthrex shall be responsible for obtaining all records of Arthrex
sales to end users in the event of a Product recall or other quality related
issue. During the time that the Products are commercially marketed, distributed,
or sold by Arthrex, Arthrex also shall, within five (5) business days, forward
all Product complaints which it receives to ArthroCare. Arthrex shall make
available to ArthroCare for inspection Arthrex's process and records for adverse
event and other regulatory reporting purposes at mutually agreed upon times and
further shall ensure that Arthrex's processes comply with all applicable laws
and regulations in the United States and the Territory.
7.10 Business Obligations. Any and all obligations associated with
Arthrex's business shall remain the sole responsibility of Arthrex. Any and all
sales and other agreements between Arthrex
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and its customers are and shall remain Arthrex's exclusive responsibility and
shall have no affect on Arthrex's obligations pursuant to this Agreement.
7.11 Copyright and Trademark Protection. Arthrex shall, at ArthroCare's
request and at ArthroCare's expense, promptly notify ArthroCare of the
requirements for copyright and trademark protection and registration for the
Products in the Territory and at ArthroCare's request shall assist ArthroCare in
fulfilling such requirements.
7.12 Promotions. Arthrex shall be responsible for all Product marketing
commitments and procedures in the Territory in the Field. Arthrex shall actively
promote the Products as they would their own.
7.13 Materials. Arthrex shall provide to ArthroCare for purposes of
review and comment by ArthroCare all promotional, advertising, and educational
materials and programs, package data sheets, and other literature relating to
the Products at least [*] prior to the commercial release of such materials or
commencement of such programs.
8. ADDITIONAL OBLIGATIONS OF ARTHROCARE
8.1 Promotional Materials. ArthroCare shall provide to Arthrex English
language samples of promotional support materials for the Products. Such
materials shall include, without limitation, brochures and advertising
literature.
8.2 Training. ArthroCare will provide training for Arthrex's personnel
in connection with the marketing, sale, installation, maintenance and support of
Products. All expenses incurred by Arthrex's personnel in connection with all
training including, without limitation, travel and lodging expenses, [*].
Training shall be conducted in either Naples, Florida or in Germany.
8.3 Scientific and Technical Information. ArthroCare shall provide to
Arthrex scientific and technical information required to obtain and maintain
registrations, licenses and permits required for sale and distribution of the
Products in the Territory, or to respond to inquiries from customers, or
governmental or regulatory authorities.
8.4 Patent Rights. Subject to its reasonable business judgment,
ArthroCare shall, at its expense, prosecute and maintain its patent rights,
copyrights and trademarks in the Territory.
8.5 CE Manuals. ArthroCare shall, at its expense, provide Arthrex with
all required CE manuals, translated into the applicable language.
9. TERM AND TERMINATION
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9.1 Term. This Agreement shall become effective as of the Effective
Date and shall continue in full force and effect for a period of [*] from the
Effective Date ("Initial Term"), unless earlier terminated in accordance with
this Article 9. Thereafter, this Agreement will automatically renew for
additional renewal terms of [*] (each a "Renewal Term"), unless earlier
terminated by either party pursuant to this Article 9 below by written notice to
the other party at least [*] prior to the expiration of the Initial Term or any
Renewal Term. The Initial Term and Renewal Terms are referred to collectively
herein as the "Term."
9.2 Termination for Cause. In addition to ArthroCare's right to
terminate this Agreement pursuant to Sections 2.5 or 7.2 above, either
ArthroCare or Arthrex may terminate this Agreement by written notice stating
each party's intent to terminate in the event the other shall have breached or
defaulted in the performance of any of its material obligations hereunder, and
such default shall have continued for [*] after written notice thereof was
provided to the breaching party by the non- breaching party.
9.3 Termination for Bankruptcy. Either party may terminate this
Agreement effective upon written notice to the other party in the event the
other party declares bankruptcy or becomes the subject of any voluntary or
involuntary proceeding under the U.S. Bankruptcy Code, foreign equivalent or
state insolvency proceeding and such proceeding is not terminated within [*] of
its commencement.
9.4 Effect of Termination.
9.4.1 In the event of termination by either party in
accordance with any of the provisions of this Agreement, neither party shall be
liable to the other, because of such termination, for compensation,
reimbursement or damages on account of the loss of prospective profits or
anticipated sales or on account of expenditures, inventory, investments, leases
or commitments in connection with the business or goodwill of ArthroCare or
Arthrex. Expiration or termination of this Agreement for any reason shall not
release any party hereto from any liability which, at the time of such
termination, has already accrued to the other party or which is attributable to
a period prior to such termination nor preclude either party from pursuing any
rights and remedies it may have hereunder or at law or in equity with respect to
any breach of this Agreement. It is understood and agreed that monetary damages
may not be a sufficient remedy for any breach of this Agreement and that the
non-breaching party may be entitled to injunctive relief as a remedy for any
such breach. Such remedy shall not be deemed to be the exclusive remedy for any
such breach of this Agreement, but shall be in addition to all other remedies
available at law or in equity.
9.4.2 Within [*] after the effective date of termination of
this Agreement, Arthrex shall use its reasonable efforts to provide ArthroCare
with a complete inventory of unsold, resalable Products in the Territory, and in
transit to Arthrex from ArthroCare.
9.4.3 Upon expiration or any termination of this Agreement,
ArthroCare or its designee shall repurchase and Arthrex shall sell to ArthroCare
or its designee, all of Arthrex's inventory of unused, resaleable Resale
Controllers and resaleable Demonstration Controllers existing
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on the effective date of termination. The price of inventory repurchased upon
Arthrex's termination of this Agreement pursuant to Section 9.2 shall be the
transfer price paid by Arthrex net of any prior Arthrex price adjustment,
credits or other allowances. If ArthroCare terminates this Agreement pursuant to
Section 7.2 or 9.2, then a restocking charge of [*] of the repurchase price
shall be deducted from the transfer price for Products repurchased upon
termination. Products repurchased from Arthrex by ArthroCare pursuant to this
Section 9.4.3 shall be shipped promptly by Arthrex, at ArthroCare's expense, to
a location specified by ArthroCare.
9.4.4 Upon expiration or any termination of this Agreement,
Arthrex shall transfer any ownership not then residing in ArthroCare of any and
all Product authorizations, registrations, permits, and approvals of any kind
with respect to Products and applications therefor, including without limitation
marketing approval applications, and any other governmental approvals,
registrations and the like to ArthroCare, at ArthroCare's cost and expense and
shall execute such documents and perform such acts as may be necessary, useful,
or convenient to perfect such transfer. It is understood that ArthroCare may use
and disclose the foregoing for any purpose.
9.4.5 Upon termination of this Agreement, ArthroCare will fill
orders received by ArthroCare prior to the date of notice of such termination.
9.4.6 Return of Materials. All trademarks, marks, trade names,
patents, copyrights, designs, drawings, formulas or other data, photographs,
samples, literature, and sales and promotional aids of every kind relating to
the Products shall remain the property of ArthroCare except those items Arthrex
has solely developed or translated. Effective upon the termination of this
Agreement, Arthrex shall cease to use all trademarks and trade names of
ArthroCare.
9.4.7 No Renewal, Extension or Waiver. Acceptance of any order
from, or sale of, any Product to Arthrex after the date of termination of this
Agreement shall not be construed as a renewal or extension hereof, or as a
waiver of termination by ArthroCare.
9.4.8 Survival of Certain Terms. The provisions of Articles 6,
10, 12, 13, 14 and Sections 2.3, 2.4, and 9.4; shall survive the expiration or
termination of this Agreement for any reason.
10. CONFIDENTIALITY
10.1 Confidential Information. Except as expressly provided herein, the
parties agree that, for the term of this Agreement and for five (5) years
thereafter, the receiving party shall not publish or otherwise disclose and
shall not use for any purpose, except as expressly permitted herein any
information furnished to it by the other party hereto pursuant to this Agreement
which if disclosed in tangible form is marked "Confidential" or with other
similar designation to indicate its confidential or proprietary nature, or if
disclosed orally is confirmed as confidential or proprietary by the party
disclosing such information at the time of such disclosure or within [*]
thereafter ("Confidential Information"). Notwithstanding the foregoing, it is
understood and agreed that Confidential
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Information shall not include information that, in each case as demonstrated by
written documentation:
(1) was already known to the receiving party, other than under
an obligation of confidentiality, at the time of disclosure;
(2) was generally available to the public or otherwise part of
the public domain at the time of its disclosure to the receiving party;
(3) became generally available to the public or otherwise part
of the public domain after its disclosure and other than through any act or
omission of the receiving party in breach of this Agreement; or
(4) was subsequently lawfully disclosed to the receiving party
by a person other than a party hereto or developed by the receiving party
without reference to any information or materials disclosed by the disclosing
party.
10.2 Permitted Disclosures. Notwithstanding the provisions of Section
10.1 above, each party hereto may disclose the other's Confidential Information
to the extent such disclosure is reasonably necessary in prosecuting or
defending litigation, complying with applicable governmental regulations, or
submitting information to tax or other governmental authorities provided that if
a party is required to make any such disclosure of another party hereto's
Confidential Information, to the extent it may legally do so, it will give
reasonable advance written notice to the latter party of such disclosure and
will use its reasonable efforts to secure confidential treatment of such
Confidential Information prior to its disclosure (whether through protective
orders or otherwise). If the party whose Confidential Information is to be
disclosed has not filed a patent application with respect to such Confidential
Information, it may require the other party to delay the proposed disclosure (to
the extent the disclosing party may legally do so), for up to [*] after receipt
of written notice from the disclosing party of its intent to disclose, to allow
for the filing of such an application. In addition, ArthroCare may disclose the
existence of this Agreement and the terms and conditions hereof to advisors,
prospective investors, and others under circumstances that reasonably ensure the
confidentiality thereof.
11. TRADEMARKS AND TRADE NAMES
11.1 Marks. During the term of this Agreement, Arthrex shall have the
right and agrees to, advertise and promote the Products in the Territory under
ArthroCare's trademarks and trade names identified on Exhibit G as modified by
ArthroCare pursuant to this Section 11.1 ("Marks"). ArthroCare reserves the
right to modify Marks or substitute alternative marks for any or all of the
Marks at any time upon ninety (90) days prior written notice, provided that
ArthroCare shall not modify the Marks unreasonably after the filing of the
Marketing Approval Application. The rights granted under this Section 11.1 shall
automatically terminate on termination or expiration of this Agreement.
ArthroCare shall endeavor to register the Marks with the European Patent Office
as
-11-
<PAGE> 12
trademarks in the appropriate classes and maintain the registrations of such
Marks, and Arthrex shall cooperate and upon ArthroCare's reasonable request,
provide full information and reasonable assistance to ArthroCare in registering
and maintaining the Marks, including without limitation providing evidence of
use of the Marks as reasonably required to renew registrations or defend actions
for cancellations.
11.2 Use. Arthrex shall not remove, modify, or obscure Marks affixed to
Products without the prior written consent of ArthroCare, unless required by
law. Except as set forth in this Section 11.2, nothing contained in this
Agreement shall grant to Arthrex any right, title or interest in or to Marks
whether or not specifically recognized or perfected under applicable laws of the
Territory, and Arthrex irrevocably assigns to ArthroCare all such right, title
and interest, if any, in any Marks. At no time during or after the term of this
Agreement shall Arthrex challenge or assist others to challenge Marks or the
registration thereof or attempt to register any trademarks, marks or trade names
confusingly similar to Marks. All representations of Marks that Arthrex intends
to use shall first be submitted to ArthroCare for review of design, color, and
other details or shall be exact copies of those used by ArthroCare. In addition,
Arthrex shall fully comply with all reasonable guidelines, if any, communicated
by ArthroCare concerning the use of Marks.
11.3 Foreign Corrupt Practices Act. In conformity with the United
States Foreign Corrupt Practices Act and with ArthroCare's established corporate
policies regarding foreign business practices, Arthrex and its employees and
agents shall not directly or indirectly make any offer, payment, promise to pay,
or authorize payment, or offer a gift, promise to give, or authorize the giving
of anything of value for the purpose of influencing an act or decision of an
official of any government within the Territory or the United States Government
(including a decision not to act) or inducing such a person to use his influence
to affect any such governmental act or decision in order to assist ArthroCare in
obtaining, retaining or directing any such business in violation of the Foreign
Corrupt Practices Act.
12. INTELLECTUAL PROPERTY
12.1 ArthroCare Defense. Arthrex agrees that ArthroCare has the right
to defend, or at its option to settle, and ArthroCare agrees, at its own
expense, to defend or at its option to settle, any claim, suit or proceeding
brought against Arthrex by any third party for infringement of any patent by the
Products. ArthroCare shall have sole control of any such action or settlement
negotiations, and ArthroCare agrees to pay, subject to the limitations
hereinafter set forth, any final judgment entered against Arthrex on such issue
in any such claim, suit or proceeding defended by ArthroCare. Arthrex agrees
that ArthroCare, at its sole option, shall be relieved of the foregoing
obligations unless Arthrex (i) notifies ArthroCare promptly in writing of such
claim, suit or proceeding; (ii) gives ArthroCare authority to proceed as
contemplated herein; and (iii) at ArthroCare's expense, gives ArthroCare proper
and full information and assistance to settle or defend any such claim, suit or
proceeding for infringement of any patent. Notwithstanding the foregoing,
ArthroCare's obligation to defend Arthrex under this Section 12.1 shall not
apply to any claims, suits, or proceedings to the extent they allege
infringement of third party components. ArthroCare shall not be liable for any
costs or
-12-
<PAGE> 13
expenses incurred without its prior written authorization. Notwithstanding the
provisions of this Article 12, ArthroCare assumes no infringement liability for
(x) combination of Products with other products not provided by ArthroCare,
which infringement would not arise from such Products standing alone, or (y) the
modification of such Products, where such infringement would not have occurred
but for such modifications.
12.2 Arthrex Remedy. Notwithstanding the foregoing, if it is
adjudicatively determined that any Product infringes, or in ArthroCare's sole
opinion, may be found to infringe a third party's patent, or if the sale or use
of the Products is, as a result, enjoined, then ArthroCare may, at its option
and expense, either: (i) procure for Arthrex the right under such patent to sell
or use, as appropriate, the Products; or (ii) replace the Products with other
non-infringing functionally equivalent products; or (iii) modify the Products to
make the Products functionally equivalent and non-infringing; or (iv) if the use
of the Products is prevented by injunction, discontinue Product sales under the
Agreement and remove any Products in Arthrex's inventory and refund the
aggregate payments paid therefor by Arthrex.
12.3 DISCLAIMER. THE FOREGOING PROVISIONS OF THIS ARTICLE 12 STATE THE
ENTIRE LIABILITY OF ARTHROCARE AND THE EXCLUSIVE REMEDY OF ARTHREX AND ITS
CUSTOMERS, WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF PATENTS, COPYRIGHTS,
TRADEMARKS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY THE PRODUCTS OR ANY PART
THEREOF.
13. INDEMNIFICATION
13.1 Indemnification of Arthrex. ArthroCare shall indemnify, defend,
and hold harmless Arthrex, and its directors, officers, employees, and agents,
and the successors and assigns of any of the foregoing (the "Arthrex
Indemnitees") from and against all claims, losses, costs, and liabilities
(including, without limitation, payment of reasonable attorneys' fees and other
expenses of litigation), and shall pay any damages (including settlement
amounts) finally awarded with respect to claims, suits, or proceedings (any of
the foregoing, a "Claim") brought by third parties against a Arthrex Indemnitee,
alleging bodily injury, death or property damage caused by (a) a breach by
ArthroCare of warranties and representations, or (b) the negligence or willful
misconduct of ArthroCare, its employees or agents, except to the extent such
Claim is covered under Section 13.2 below or is caused by the negligence or
willful misconduct of a Arthrex Indemnitee.
13.2 Indemnification of ArthroCare. Arthrex shall indemnify, defend,
and hold harmless ArthroCare, and its directors, officers, employees and agents,
and the successors, and assigns of any of the foregoing (the "ArthroCare
Indemnitees") from and against all claims, losses, costs, and liabilities
(including, without limitation, payment of reasonable attorneys' fees and other
expenses of litigation), and shall pay any damages (including settlement
amounts) finally awarded with respect to a Claim brought by third parties
against a ArthroCare Indemnitee, arising out of or relating to (a) Products
used, sold, or otherwise distributed by Arthrex, except to the extent such claim
is
-13-
<PAGE> 14
covered under Section 13.1 above; (b) breach of any of the representations or
warranties made by Arthrex hereunder, or (c) the negligence or willful
misconduct of Arthrex, its employees or agents.
13.3 Indemnification Procedures. A party (the "Indemnitee") that
intends to claim indemnification under this Article 13 shall promptly notify the
other party (the "Indemnitor") in writing of any claim in respect of which the
Indemnitee or any of its directors, officers, employees, agents, licensors,
successors, or assigns intends to claim such indemnification, and the Indemnitor
shall have sole control of the defense and/or settlement thereof, provided that
the indemnified party may participate in any such proceeding with counsel of its
choice at its own expense. The indemnity agreement in this Article 13 shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the consent of the Indemnitor, which consent shall not be withheld
unreasonably. The failure to deliver written notice to the Indemnitor within a
reasonable time after the commencement of any such action, if prejudicial to its
ability to defend such action, shall relieve such Indemnitor of any liability to
the Indemnitee under this Article 13, but the omission to so deliver written
notice to the Indemnitor shall not relieve the Indemnitor of any liability that
it may otherwise have to any Indemnitee than under this Article 13. The
Indemnitee under this Article 13, its employees and agents, shall cooperate
fully with the Indemnitor and its legal representatives and provide reasonable
information in the investigation of any Claim covered by this indemnification.
Notwithstanding anything to the contrary contained in this Article 13, neither
party shall be liable for any costs or expenses incurred without its prior
written authorization.
14. LIMITATION OF LIABILITY
EXCEPT FOR LIABILITY ARISING UNDER SECTION 13.1 AND ARTICLE 12,
ARTHROCARE'S LIABILITY ARISING OUT OF THIS AGREEMENT, THE TERMINATION THEREOF,
AND/OR SALE OF THE PRODUCTS SHALL BE LIMITED TO THE AMOUNT PAID BY ARTHREX FOR
THE PRODUCT. IN NO EVENT SHALL ARTHROCARE BE LIABLE TO ARTHREX FOR COSTS OF
PROCUREMENT OF SUBSTITUTE GOODS, LOST PROFITS, OR ANY OTHER SPECIAL,
CONSEQUENTIAL, OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND UNDER ANY THEORY OF
LIABILITY ARISING OUT OF THIS AGREEMENT WHETHER BASED IN CONTRACT, TORT
(INCLUDING NEGLIGENCE), OR OTHERWISE. THESE LIMITATIONS SHALL APPLY WHETHER OR
NOT ARTHROCARE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY PROVIDED
HEREIN.
15. DISPUTE RESOLUTION
15.1 Disputes. If ArthroCare and Arthrex are unable to resolve any
dispute between them, either ArthroCare or Arthrex may, by written notice to the
other, have such dispute referred to the chief executive officers (or
equivalent) of ArthroCare and Arthrex, for attempted resolution by good faith
negotiations within thirty (30) days after such notice is received. Unless
otherwise mutually
-14-
<PAGE> 15
agreed, the negotiations between the designated officers shall be conducted by
telephone, within three (3) days, and at times within the period stated above as
offered by the designated officers of Arthrex to the designated officer of
ArthroCare for consideration.
15.2 Arbitration. Any dispute, controversy or claim arising out of or
relating to the validity, construction, enforceability or performance of this
Agreement, including disputes relating to alleged breach or to termination of
this Agreement, shall be settled by final, binding arbitration in the manner
described in this Section 15.2. The arbitration shall be conducted pursuant to
the Commercial Arbitration Rules of the American Arbitration Association then in
effect ("Rules"). Notwithstanding those Rules, the following provisions shall
apply to the arbitration hereunder:
1. Arbitrators. The arbitration shall be conducted by a panel
of three (3) arbitrators ("the Panel"). Each party shall have the right to
appoint one (1) member of the Panel, with the third member to be mutually agreed
by the two (2) Panel members appointed by the parties or appointed in accordance
with the rules of the American Arbitration Association. The arbitrators shall be
persons in the medical device industry with experience in the matters in
dispute.
2. Proceedings. The parties and the arbitrators shall use
their best efforts to complete the arbitration within one (1) year after the
appointment of the Panel under Section 15.2.1 above, unless a party can
demonstrate to the Panel that the complexity of the issues or other reasons
warrant the extension of the time table. In such case, the Panel may extend such
time table as reasonably required. Notwithstanding the foregoing, any
arbitration of whether a payment is due under Article 3 above shall be completed
and a decision reached within sixty (60) days after the appointment of the
Panel. The Panel shall, in rendering its decision, apply the substantive law of
the State of California, without regard to its conflict of laws provisions,
except that the interpretation of and enforcement of this Article 15 shall be
governed by the U.S. Federal Arbitration Act. The proceeding shall take place in
the city of San Francisco, California. The fees of the Panel shall be paid by
the losing party which party shall be designated by the Panel. If the Panel is
unable to designate a losing party, it shall so state and the fees shall be
shared equally between the parties.
16. MISCELLANEOUS PROVISIONS
16.1 Independent Contractors. The relationship of ArthroCare and
Arthrex established by this Agreement is that of independent contractors, and
nothing contained in this Agreement shall be construed to (i) give either party
the power to direct or control the day-to-day activities of the other, (ii)
constitute the parties as partners, joint venturers, co-owners or otherwise as
participates in a joint or common undertaking, or (iii) allow a party to create
or assume any obligation on behalf of the other party for any purpose
whatsoever.
16.2 Notices. Any notice required or permitted by this Agreement shall
be in writing and shall be sent by prepaid registered or certified mail, return
receipt requested, internationally- recognized courier or personal delivery,
addressed to the other party at the address shown at the
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<PAGE> 16
beginning of this Agreement or at such other address for which such party gives
notice hereunder. Such notice shall be deemed to have been given when delivered:
If to Arthrex: Reinhold Schmieding
Arthrex
2885 So. Horseshoe Dr.
Naples, FL 34104
With a copy to: Stefan Krupp
Arthrex GMBH
Liebigstrasse No. 13
85757 Karsfeld
Munich, Germany
If to ArthroCare: ArthroCare Corporation
595 North Pastoria Avenue
Sunnyvale, CA 94086
Attention: Allan Weinstein
Vice President, Sales & Marketing
16.3 Force Majeure. Nonperformance of any party hereto (except for
payment obligations) shall be excused to the extent that performance is rendered
impossible by strike, fire, earthquake, flood, governmental acts or orders or
restrictions, delay or failure of suppliers, or any other reason where failure
to perform is beyond the reasonable control and not caused by the gross
negligence or willful misconduct of the nonperforming party.
16.4 Assignment. This Agreement shall not be assignable by either party
to any third party hereto without the written consent of the other party hereto,
except that either party will assign this Agreement without the other party's
consent to an entity that acquires all or substantially all of the business or
assets of the assigning party pertaining to the subject matter hereof, in each
case whether by merger, acquisition, or otherwise.
16.5 No Implied Waivers; Rights Cumulative. No failure on the part of
ArthroCare or Arthrex to exercise and no delay in exercising any right under
this Agreement, or provided by statute or at law or in equity or otherwise,
shall impair, prejudice or constitute a waiver of any such right, nor shall any
partial exercise of any such right preclude any other or further exercise
thereof or the exercise of any other right.
16.6 Partial Invalidity. If any provision of this Agreement is held to
be invalid by a court of competent jurisdiction, then the remaining provisions
shall remain, nevertheless, in full force and effect. The parties agree to
renegotiate in good faith any term held invalid and to be bound by the mutually
agreed substitute provision in order to give the most approximate effect
intended by the parties.
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<PAGE> 17
16.7 No Implied Licenses. Except as expressly provided herein, no party
hereto grants to any other party hereto any rights or licenses under such
party's patent rights, trade secrets or other intellectual property rights.
16.8 Language. This Agreement is in the English language, which
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
parties hereto. All communications and notices to be made or given pursuant to
this Agreement shall be in the English language.
16.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
16.10 Entire Agreement. This Agreement, including the Exhibits attached
hereto, constitutes the entire agreement of the parties with respect to the
subject matter hereof, and supersedes all prior or contemporaneous
understandings or agreements, whether written or oral, between ArthroCare and
Arthrex with respect to such subject matter. No amendment or modification hereof
shall be valid or binding upon the parties unless made in writing and signed by
the duly authorized representatives of both parties.
IN WITNESS WHEREOF, the undersigned are duly authorized to execute this
Agreement on behalf of ArthroCare and Arthrex as applicable effective as of the
Effective Date.
ARTHROCARE CORPORATION ARTHREX
("ArthroCare") ("Arthrex")
By: /s/ HIRA V. THAPLIYAL By: /s/ REINHOLD SCHMIEDING
---------------------------- -----------------------------
Print Name: Hira V. Thapliyal Print Name: Reinhold Schmieding
-------------------- ---------------------
Title: President & CEO Title: President
------------------------- --------------------------
Date: April 15, 1997 Date: April 11, 1997
-------------------------- ---------------------------
-17-
<PAGE> 18
Exhibit A
HOUSE ACCOUNTS
[*]
<PAGE> 19
Exhibit B
PRODUCTS
<PAGE> 20
Exhibit C
TERRITORY
Germany, France, Austria, Belgium, and the United Kingdom.
<PAGE> 21
Exhibit D
TRANSFER PRICES
- --------------------------------------------------------------------------------
Demonstration Controllers [*] each
- --------------------------------------------------------------------------------
Resale Controllers [*] each
- --------------------------------------------------------------------------------
Wands [*] each Bulk shipped unsterilized in
sealed blister pack clean room
package non- labeled.
- --------------------------------------------------------------------------------
Replacement Cables [*] each
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 22
Exhibit E
INITIAL STOCKING ORDER
- --------------------------------------------------------------------------------
[*] Demonstration Controllers 220 volt, [*] Service and Repair [*]
Controllers and [*] Additional Controllers
- --------------------------------------------------------------------------------
[*] Resale Controllers [*]
- --------------------------------------------------------------------------------
[*] WANDS [*]
- --------------------------------------------------------------------------------
Total [*]
- --------------------------------------------------------------------------------
<PAGE> 23
Exhibit F
MINIMUM PERFORMANCE REQUIREMENTS
1st Year = [*]
2nd Year = [*]
3rd Year = [*]
4th Year = [*]
<PAGE> 24
Exhibit G
MARKS
<PAGE> 1
EXHIBIT 11.1
ARTHROCARE CORPORATION
COMPUTATION OF NET LOSS PER SHARE
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended:
March 29, March 30,
1997 1996
------------------ ----------------
<S> <C> <C>
Weighted average common shares 8,785 3,739
outstanding for the period
Common equivalent shares pursuant to
Staff Accounting Bulletin No. 83 - 3,117
------------------ ----------------
Shares used in per share calculation 8,785 6,856
================== ================
Net loss $ (2,167) $ (1,743)
================== ================
Net loss per share $ (0.25) $ (0.25)
================== ================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ARTHOCARE
CORPORATION BALANCE SHEET AND INCOME STATEMENT FOR THE THREE MONTH PERIOD ENDED
MARCH 29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ARTHOCARE
CORPORATION 10-Q FOR THE THREE MONTH PERIOD ENDED MARCH 29, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> MAR-29-1997
<CASH> 17,851
<SECURITIES> 4,162
<RECEIVABLES> 1,256
<ALLOWANCES> 0
<INVENTORY> 944
<CURRENT-ASSETS> 24,340
<PP&E> 1,466
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,921
<CURRENT-LIABILITIES> 2,082
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 28,659
<TOTAL-LIABILITY-AND-EQUITY> 30,921
<SALES> 2,261
<TOTAL-REVENUES> 2,261
<CGS> 1,679
<TOTAL-COSTS> 1,679
<OTHER-EXPENSES> 3,136
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 387
<INCOME-PRETAX> (2,167)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,167)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,167)
<EPS-PRIMARY> ($0.25)
<EPS-DILUTED> ($0.25)
</TABLE>
