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 October 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission File Number: 0-27422
ARTHROCARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3180312
(State of incorporation) (I.R.S. Employer Identification No.)
595 North Pastoria Avenue
Sunnyvale, California 94086
(Address of principal executive offices)
(408) 736-0224
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of the registrant's common stock as of
November 9, 1998 was 8,968,233.
<PAGE>
ARTHROCARE CORPORATION
INDEX
PART 1: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of October 3, 1998
(unaudited) and January 3, 1998
Condensed Consolidated Statements of Operations (unaudited) for the
three and nine months ended October 3, 1998 and September 27, 1997
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended October 3, 1998 and September 27, 1997
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II: Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission or Matters to Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
ARTHROCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $6,340 $8,188
Available-for-sale securities 4,080 10,674
Accounts receivable, net 4,946 2,223
Inventory 5,778 2,019
Prepaid expenses and other current assets 522 210
------------- -------------
Total current assets 21,666 23,314
Available-for-sale securities 1,652 1,010
Property and equipment, net 3,410 1,412
Related party receivables 890 876
Other assets 0 63
------------- -------------
Total assets $27,618 $26,675
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,686 $968
Deferred Revenue 666 --
Accrued liabilities 2,800 2,004
------------- -------------
Total current liabilities 5,152 2,972
Deferred rent 145 157
------------- -------------
Total liabilities 5,297 3,129
------------- -------------
Stockholders' equity:
Common stock 23 9
Additional paid-in capital 49,731 49,153
Notes receivable from stockholders (83) (92)
Deferred compensation (108) (228)
Unrealized gain on available-for-sale
securities 15 10
Cummulative translation adjustment (32) 0
Accumulated deficit (27,225) (25,306)
------------- -------------
Total stockholders' equity 22,321 23,546
------------- -------------
Total liabilities and stockholders' equity $27,618 $26,675
============= =============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
<PAGE>
ARTHROCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ----------------------
October 3, September 2October 3, September
1998 1997 1998 1997
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $6,721 $3,366 $17,265 $8,459
Cost of sales 3,136 2,201 9,131 5,874
----------- --------- ---------- ----------
Gross profit 3,585 1,165 8,134 2,585
----------- --------- ---------- ----------
Operating expenses:
Research and development 1,304 1,076 3,444 2,829
Sales and marketing 2,815 1,607 7,353 4,358
General and administrative 972 713 2,896 2,531
----------- --------- ---------- ----------
Total operating expenses 5,091 3,396 13,693 9,718
----------- --------- ---------- ----------
Loss from operations (1,506) (2,231) (5,559) (7,133)
Interest and other income, net 426 331 3,638 1,077
----------- --------- ---------- ----------
Net loss ($1,080) ($1,900) ($1,921) ($6,056)
=========== ========= ========== ==========
Net loss per common share and per common
share-assuming dilution ($0.12) ($0.22) ($0.22) ($0.69)
=========== ========= ========== ==========
Shares used in computing net loss per common
share and per common share-assuming dilution 8,950 8,812 8,921 8,801
=========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
<PAGE>
ARTHROCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
October 3, September 27,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,921) ($6,056)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 539 457
Amortization of deferred compensation 121 120
Provision for doubtful accounts receivable
and product returns 61 74
Provision for excess and obsolete inventory 91 277
Deferred rent (12) 2
Changes in operating assets and liabilities:
Accounts Receivable (2,784) (315)
Inventory (3,850) (1,196)
Prepaid expenses and other current assets (326) (80)
Accounts payable 719 312
Accrued liabilities 813 575
Deferred Revenue 666 --
Other assets 63 6
------------ ------------
Net cash used in
operating activities (5,820) (5,824)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (2,537) (394)
Purchases of available-for-sale securities (26,048) (11,931)
Sale or maturities of available-for-sale securities 31,972 18,802
------------ ------------
Net cash provided by investing activities 3,387 6,477
------------ ------------
Cash flows from financing activities:
Repayment of capital leases (16) (30)
Issuance/Repayment of notes receivable 9 (500)
Proceeds from exercise of options
to purchase common stock 592 109
------------ ------------
Net cash provided by /used in financing activities 585 (421)
------------ ------------
Net decrease /increase in cash and cash equivalents (1,848) 232
Cash and cash equivalents, beginning of period 8,188 11,359
------------ ------------
Cash and cash equivalents, end of period $6,340 $11,591
============ ============
Supplemental schedule of non-cash investing and
financing activities:
Change in net unrealized gain/loss on
available-for-sale securities $5 $54
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
<PAGE>
ARTHROCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated 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) for the periods indicated. Interim results of
operations are not necessarily indicative of the results to be expected
for the full year or any other interim periods. The notes to the
financial statements contained in the Form 10-K for the year ended
January 3, 1998 should be read in conjunction with these condensed
consolidated financial statements. The balance sheet at January 3, 1998
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 Common Share and per Common Share and
per Common Share-assuming dilution
The company has adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share: and the
Securities and Exchange Commission Staff Accounting Bulletin (SAB) No.
98, effective January 3, 1998 and has restated all prior periods
accordingly. Net loss per common share and per common share-assuming
dilution is computed using the weighted average number of shares of
common stock outstanding. Dilutive potential common equivalent shares
consist of the incremental common shares issuable upon conversion of
stock options. The company has excluded stock options from the
computation of net loss per common share-assuming dilution because all
such securities are anti-dilutive for all periods presented.
Stock options to purchase 415,288 shares of common stock at prices
ranging from $.20 per share to $24.25 per share were outstanding at
October 3, 1998, but were not included in the computation of net loss
per common share-assuming dilution because they were antidilutive. The
aforementioned stock options could potentially dilute earnings per share
in the future.
3. Interest and other income, net:
In February 1998, the company entered into a license agreement
under which Boston Scientific Corporation (BSC) will develop and market
products based on the company's Coblation (TM) technology for myocardial
revascularization procedures. Under the agreement, BSC acquires
exclusive licensing rights to the company's intellectual property in
this field. BSC will pay license fees, a portion of which will be
classified as prepaid royalties, to the company upon achievement of
designated milestones and royalties on sales of resulting products, if
any. Of this amount, the company received a license fee in the quarter
ended April 4, 1998, of $3.0 million in partial consideration for the
license granted. The company recognized $2.25 million as other income
in the quarter received. The remaining $0.75 million is being
recognized as progress is made toward the next milestone of which $0.125
million was recognized in the three-month period ended October 3, 1998.
Total revenue recognized during the nine-month period ended October 3,
1998 was $2.5 million.
In June 1998, the company entered into a license and distribution
agreement with Xomed Surgical Products ("Xomed") whereby Xomed will
acquire exclusive, worldwide, marketing rights for the company's
patented Coblation technology in the ear, nose and throat (ENT)
market. Under the terms of the agreement, Xomed will pay license fees
based upon the achievement of certain milestones. During the three and
nine-month periods ending October 3, 1998, the company recognized, $0.08
million and $0.33 million, respectively, of such payments as other
income.
4. Balance sheet detail (in thousands):
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Inventory:
Raw materials $2,358 $921
Work-in-process 1,467 165
Finished goods 1,953 933
------------ ------------
Total $5,778 $2,019
============ ============
Accrued liabilities:
Compensation $1,811 $1,314
Other 989 690
------------ ------------
Total $2,800 $2,004
============ ============
</TABLE>
5. Recent Accounting Pronouncements:
Effective April 4, 1998 the company adopted SFAS No. 130,
"Reporting Comprehensive Income" which establishes standards for the
reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. Comprehensive income
is defined as the change in equity of a business enterprise during a
period, resulting from transactions and other events and circumstances
from non-owner sources. As the components of comprehensive income for
the company are not material, the additional reporting and display of
comprehensive income and its components has not been reflected in the
accompanying condensed consolidated financial statements.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations which express that
ArthroCare Corporation (the company) "believes", "anticipates",
"expects" or "plans to..." as well as other statements which are not
historical fact, are forward-looking, statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Actual
events or results may differ materially as a result of the risks and
uncertainties described herein and elsewhere including, in particular,
those factors described under "Business" set forth in Part I of the
company's Annual Report on Form 10-K for the year ended January 3, 1998
and "ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS" set forth below.
Since commencing operations in April 1993, the company has
primarily engaged in the design, development, clinical testing,
manufacturing and marketing of its Arthroscopic System. The Arthroscopic
System uses the company's novel Coblation technology that allows
surgeons to operate with increased precision and accuracy with minimal
damage to surrounding tissue. It is currently being used in closed-joint
surgery, including many types of knee and shoulder procedures. The
Arthroscopic System consists of a disposable, multi-electrode bipolar
Device, a radio frequency controller that powers the disposable and a
cable that connects the disposable to the controller. The disposable
ablates (removes) soft tissue with minimal damage to surrounding healthy
tissue and simultaneously achieves hemostasis (sealing of small bleeding
vessels).
In February 1998, the company entered into a license and OEM
agreement under which Boston Scientific Corporation (BSC) will develop
and market products based on the company's Coblation technology for
myocardial revascularization procedures. In April 1998, the company
announced that it is entering the cosmetic surgery market and that it
has formed a new business unit, called Visage(TM), to commercialize its
technology in this field. In May 1998, the company announced that it is
entering the otorhinolaryngology (ear, nose and throat) market and that
it has formed a new business unit, called ENTec (TM), to commercialize the
technology in this field. In June 1998, the company entered into a
license agreement and OEM agreement with Xomed . Under the terms of this
agreement, Xomed will become the exclusive worldwide marketer of
ArthroCare's patented Coblation technology in the otorhinolaryngology
market.
The company received clearance of its 510(k) premarket
notification from the United States Food and Drug Administration (FDA)
in March 1995 to market its Model 970 Arthroscopic Electrosurgery 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 October 1996, the company received
clearance of its 510(k) premarket notification for the System 2000
Arthroscopic Electrosurgery System in the United States for use in
arthroscopic surgery of the knee, shoulder, elbow, ankle, wrist and hip.
In December 1995, the company commercially introduced its
Arthroscopic System through a network of distributors in the United
States. In light of the foregoing, the company has a limited history of
operations. The company's strategy includes placing with arthroscopic
surgeons, controllers that are intended to generate future disposables
revenues. The company's long-term strategy includes applying its
patented platform technology to a range of other soft-tissue surgical
procedures, including ear, nose and throat and cosmetic surgical
procedures. The company has received 510(k) clearance for use of its
technology in several fields and has received approval of an
Investigational Device Exemption (IDE) to conduct a clinical study in
one such field which may result in the company submitting a 510(k)
application to the FDA. There can be no assurance that any of the
company's clinical studies will lead to 510(k) applications or that the
applications 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.
Results of Operations
Revenues
Revenues for the three and nine-month periods ended October 3,
1998 increased to $6.7 million or 100% and $17.3 million or 104%,
respectively, as compared to $3.3 million and $8.5 million for the same
periods during the prior year. The increase in revenues of $3.4 million
and $8.8 million for the three and nine-month periods ended October 3,
1998, respectively, was primarily due to higher unit volume disposables
sales. The higher unit volume of disposables sales resulted from a
larger installed base of controllers and increased sales activity for
newly introduced disposables styles. Disposables continue to be sold at
or near list price. The company expects that the channels in which
products are distributed, including international sales and sales to the
company's marketing partner Xomed, will reduce disposable ASP in the
future.
International sales were $0.8 or 12% of total revenues for the
three-month period ended October 3, 1998. During the three and nine-
month period ending September 27, 1997 and the nine-month period ending
October 3, 1998, international sales were insignificant as a percentage
of total revenues. Sales in Europe composed the majority of
international sales during the three-month period ending October 3,
1998. While the company plans to expand its international operations,
there can be no assurance that the company will be successful in this
endeavor.
The majority of revenues for the three and nine-month periods
ended October 3, 1998 were attributable to disposable sales. The company
expects disposable sales to remain the primary component of revenues in
the future. During the three-month period ended July 4, 1998, the
company implemented a new controller placement program. This program
did not have a significant impact on revenues during the three or the
nine-month period ended October 3, 1998, for a discussion of the
program's impact on gross margin, see Cost of Sales below.
The company believes that, in its eleven quarters of product
shipments, it has penetrated 25% to 30% of hospitals that perform
arthroscopic procedures in the United States. In addition, the company
believes that approximately half of the company's disposable revenue is
being generated by disposables 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 the arthroscopic market based on the number of
procedures. In order to achieve increasing disposable sales over time,
the company believes it must continue to penetrate the market for knee
procedures, expand the education of physicans of the Coblation
technology, continue working on articular cartilage applications and
base product development focus specifically for knee applications.
To that end, during the second quarter of this year, the company
introduced five new arthroscopy disposable styles. The Eliminator,
Saber, and Covac disposables were designed to be used primarily in knee
procedures. The company also developed and introduced new disposables
for small joint procedures and for capsular shrinkage procedures. In
November 1997, the company introduced the System 2000 controller
designed for more aggressive ablation and hemostasis. The company
believes the features found in the System 2000 as well as these
additional disposables will increase disposable sales in the market for
knee and shoulder procedures. There can be no assurance that the use of
these new products 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.
Cost of Sales
Cost of sales was $3.1 million, or 47% of revenue, and $9.1
million, or 53% of revenue for the three and nine-months ended October
3, 1998, respectively. During the three and nine-month periods ended
September 27, 1997, cost of sales was $2.2 million, or 65% of revenue
and $5.9 million or 69% of revenue, respectively. The dollar increase
in cost of sales in the current-year quarter and for the nine-month
period ended October 3, 1998 is due to increased disposable unit sales.
As a percentage of revenue, cost of sales has decreased 19% and 16% as
compared with the prior year three and nine-month periods primarily as a
result of the following: fixed and semi-fixed costs are being spread
over higher disposable manufacturing volume; related disposable
manufacturing efficiencies; the cessation by the company of purchasing
controllers from a subcontract manufacturer, in November 1997, at a cost
that exceeded the current internal cost to manufacture; the
implementation of an additional controller placement program late in the
first half of 1998 in which the company maintains title to the
controllers thus allowing the company to amortize the cost over future
periods rather than expensing 100% of the cost at the time of shipment.
In addition, prior to introduction of its new controller in November
1997, the company purchased its controllers from a subcontract
manufacturer at a cost that exceeded the current internal cost to
manufacture. In 1998, the company charges expenses related to quality
control to cost of sales since most of these activities relate to on-
going manufacturing; previously, these expenses were charged to research
and development.
The company believes that future improvements to gross margin will
depend upon the mix of disposable sales versus controller sales as well
as the distribution channels utilized to sell the company's products.
The company believes the placement program will contribute to the growth
of the installed base of controllers and generate an increase in the
demand for disposables resulting in a decrease of cost of
sales as a percentage of sales and an improvement of gross margins.
There can be no assurance that the company will be successful in
maintaining the mix of disposables as compared to controller placements
or be able to increase demand for its disposables.
Operating Expenses
Research and development expense increased to $1.3 million, or 19%
of revenue and $3.4 million, or 20% of revenue for the three and nine-
month periods ended October 3, 1998, respectively, from $1.1 million and
$2.8 million, respectively, for the same periods during the prior fiscal
year. The increase in spending represents a 21% and 22% increase over
the three and the nine-month periods, respectively, of the prior fiscal
year. The increases are attributed to the cost of development of new
disposable styles and the product lines associated with the launch of
two new business units which bring the company's technology to the
cosmetic surgery and ear, nose and throat surgical markets, as well as
the costs associated with running clinical trials on certain new
products. This increase was partially offset by the decreased allocation
of expenses related to quality control, which are being charged to cost
of sales in 1998 as quality activities primarily relate to manufacturing
rather than research and development and reimbursement for contract
studies.
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 increasing research and development
spending through substantial expenditures on new product development,
regulatory affairs, clinical studies and patents, although not at the
rate seen in the past year. The company believes that its ability to
attract and retain qualified engineers in the future is critical to the
continued success of the company.
Sales and marketing expense increased to $2.8 million and $7.4
million, respectively, during the three and nine-month periods ended
October 3, 1998, as compared to $1.6 million and $4.4 million incurred
during the same periods of the previous fiscal year. The increase in
spending represents a 75% and 69% increase over the three and the nine-
month periods, respectively, of the prior fiscal year. The increases
are primarily due to higher dealer commissions resulting from increased
sales, higher staffing to meet the increased level of sales and
marketing activity, and promotional and trade show expenses relating
primarily to the company's introduction of two new business units and
several new arthroscopy products. Additional sales and marketing
expenses were incurred during 1998 as the company expanded operations in
Europe.
The company anticipates that sales and marketing spending will
continue to increase due to higher dealer commissions from increased
sales, the additional cost of penetrating international markets and new
surgical markets for the company's products, higher promotional,
demonstration and sample expenses, and additional investments in the
sales, marketing and support staff necessary to market its current
products and commercialize future products. There can be no assurance
that the company will successfully develop its own marketing and sales
capabilities and experience or that its distributors and marketing
partners will commit the necessary resources to effectively market and
sell the company's current products and future products.
General and administrative expense increased to $1.0 million and
$2.9 million, respectively, during the three and nine-month periods
ended October 3, 1998, as compared to $0.7 million and $2.5 million
incurred during the same periods of the previous fiscal year. The
increase in spending represents a 36% and 14% increase over the three
and nine-month periods, respectively, of the prior fiscal year. The $0.3
million increase during the quarter ended October 3, 1998 is primarily
due to legal expenses related to on-going patent litigation brought by
the company against certain competitors and additional infastructure
development. For a description of the patent litigation, refer to Part
II, Item 1 of this Quarterly Report on Form 10-Q. The company expects
that general and administrative expenses will continue to increase as a
result of the patent litigation, further expansion of its staff, and
business development activities.
Interest and Other Income, net
Net interest and other income increased to $0.4 million and $3.6
million for the three and nine-month periods ended October 3, 1998,
respectively, up from $0.3 million and $1.1 million for the three-month
and nine-month periods ended September 27, 1997 primarily due to
milestone payments recognized from BSC and Xomed pursuant to technology
licensing agreements signed with each party during 1998 offset partially
by a decrease in interest income from investment due to the declining
cash balance.
In February 1998, the company entered into a license agreement
under which BSC will develop and market products based on the company's
Coblation technology for myocardial revascularization procedures. Under
the agreement, BSC acquired exclusive licensing rights to the company's
intellectual property in this field. BSC will pay license fees, a
portion of which will be classified as prepaid royalties, to the company
upon achievement of designated milestones and royalties on sales of
resulting products, if any. The first milestone payment of $3.0 million
was received in the first quarter of 1998. The company recognized $2.25
million of that payment as other income during the first quarter of
fiscal year 1998. The remaining $0.75 million is being recognized as
progress is made toward future milestones of which .125 million was
recognized during the three-month period ended October 3, 1988. Total
revenue recognized during the nine-month period ended October 3, 1998
was $2.5 million.
In June 1998, the company entered into a license and distribution
agreement with Xomed whereby Xomed will acquire exclusive, worldwide,
marketing rights for the company's patented Coblation technology in the
ear, nose and throat market. Under the terms of the agreement, Xomed
will pay license fees based upon the achievement of certain milestones.
During the three and nine-month periods ended October 3, 1998, the
company recognized $0.08 million and $0.33 million, respectively, of
such payments as other income. Excluding the aforementioned milestone
payments net interest and other income would have been $0.2 million and
$0.8 million, a $0.1 million and $0.3 million decrease for the three and
nine-month periods ended October 3, 1998, respectively. The decrease in
interest income is attributable to the decrease in cash balances and
henceforth the interest earned year-over-year.
Net Loss
Net loss was $1.1 million and $1.9 million for the three and the
nine-months ended October 3, 1998, respectively, compared to a loss of
$1.9 million and $6.1 million in the three and the nine-month periods
ended September 27, 1997, respectively. Excluding the payments detailed
above, (see Interest and Other Income, net discussion above), the
company would have reported a loss of $1.3 million or $0.6 million less
than in the comparable three-month period ended September 27, 1997. For
the nine-month period ended October 3, 1998, excluding the milestone
payments discussed above, net loss would have been $4.8 million or $1.3
million less than the prior year.
Net loss decreased over the prior-year period for both the three
and nine-month periods primarily due to an overall improvement in the
operating position of the company. Specifically, the company
experienced a significant increase in sales along with an improvement to
the gross margin during both the three and nine-month periods ended
October 3, 1998. The improvement in operating income is due to the
improvement to gross margin as well as reduced costs of research and
development, sales and marketing, and general and administrative
expenses overall as a percentage of revenues during both the three and
nine-month periods ended October 3, 1998. In addition, the milestone
payments received from BSC and Xomed, which were recognized as other
income contributed significantly to the decrease in net loss for the
nine month period ending October 3, 1998, (see Interest and Other
Income, net discussion above).
The company expects net losses to continue in the future. However,
the company believes that net losses will continue to decrease as sales
increase faster than operating expenses. There can be no assurance the
company will be successful in its efforts to increase sales and control
the growth of operating expenses.
Liquidity and Capital Resources
On October 3, 1998, the company had $16.5 million in working
capital. Principal sources of liquidity consisted of $12.1 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.
Net cash used in operating activities for the nine-month period
October 3, 1998, and September 27, 1997 was $5.8 million.
Net accounts receivable increased to $4.9 million as of October
3, 1998 from $2.2 million as of January 3, 1998. The increase in
accounts receivable is due to a corresponding increase in sales as well
as timing of sales during the quarter.
Inventories increased to $5.8 million as of October 3, 1998
compared to $2.0 million at January 3, 1998 due to higher product sales
activity along with the ramp-up for two new product markets. The company
expects future inventory levels to grow both in absolute value and as a
percentage of total assets as sales volume increases.
Net property and equipment increased to $3.4 million as of October
3, 1998 from $1.4 million on January 3, 1998. The increase is primarily
attributable to the capitalization of controllers placed under the newly
implemented placement program along with an increase of computer
software and equipment for new hires and an additional facility.
The company plans to finance its capital needs principally from
cash from product sales, cash, cash equivalents, and available-for-sale
securities, which include long-term available-for-sale securities and
related interest. The company believes the existing capital resources
together with cash generated from licensing arrangements will
be sufficient to fund its operations through fiscal year 1999. 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. As of October 3, 1998, the company had
committed to capital expenditures of approximately $0.3 million. The
company's future liquidity and capital requirements will depend on
numerous factors including the company's success of commercializing its
products, development and commercialization of products in fields other
than arthroscopy, the ability of the company's suppliers to continue to
meet the demands of the company at current prices, the cost associated
with the company's ongoing patent litigation, 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.
Year 2000
The company relies on computers and computer software to run its
business as do its vendors, suppliers and customers. These computers and
computer software may not be able to properly recognize the dates
commencing in the year 2000. The company is currently upgrading its'
information technology system which includes upgrades for Year 2000;
Year 2000 and is evaluating the need for a contingency plan.
The company currently expects the project to be substantially complete
by mid 1999 and the total cost is yet to be determined,
to date the company has spent approximately $.25 million. Based upon the
company's assessment to date, the company has not found any material impact
which may result from the failure of its computers and computer
software or that of its vendors, suppliers and customers.
Significant uncertainty exists concerning the potential effects
associated with Year 2000 compliance. Any Year 2000 compliance
problem to either the company, its suppliers, its service providers
or its customers could result in a material adverse effect on the company's
financial condition and operating results. There can be no assurance that
further assessment of the company's suppliers, data processing systems or
contingency plans will address all issues of Year 2000 compliance.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, Disclosure about Segments of an Enterprise and Related
Information. This statement establishes standards for disclosure about
operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas
and major customers. This statement supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. The new standard
becomes effective for the year ended January 2, 1999 for the company and
requires that comparative information from earlier years be restated to
conform to requirements of this standard. The company is evaluating the
requirements of SFAS No. 131 and the effects, if any, on the company's
current reporting and disclosures.
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 for the year ended January 3, 1998 filed April 3, 1998. 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
material adverse effect on the company's results of operations,
business, or financial position.
Early Stage of Commercialization of Current Non-Arthroscopic Products;
Uncertainties Associated with Current Non-Arthroscopic Products.
In April 1998, the company announced the creation of its new
business division, Visage, created for the purpose of commercializing
the company's Cosmetic Surgery System ("CSS") for use in dermatology and
cosmetic surgery procedures. In May 1998, the company announced the
creation of its new business division, ENTec, created for the purpose of
commercializing the company's ENT (ear, nose and yhroat) Surgery System
("ESS") for use in head and neck surgical procedures. With respect to
CSS, the company applied the CE mark for marketing of CSS in Europe for
skin resurfacing and wrinkle removal procedures and has received 510(k)
clearances for use of CSS in general dermatology procedures in the
United States. The company is pursuing additional clearances that will
allow CSS to be marketed in the United States specifically for wrinkle
removal. With respect to ESS, the company intends to apply the CE mark
certification for marketing in Europe and has received 510(k) clearances
for use of ESS in general head and neck surgical procedures in the
United States. In addition, the company has received clearances that
will allow ESS to be marketed in the United States for certain specific
indications while it is pursuing additional clearances for certain other
indications. Both of these products have only recently been
commercially introduced and to date, the company has sold only a small
number of units, and these have been utilized by a limited number of
doctors. No assurance can be given that the company will be able to
manufacture CSS or ESS in commercial quantities at acceptable costs, or
that it will be able to market such products successfully. If CSS and
ESS are not commercially successful, the company's business, financial
condition and results of operations would be materially adversely
affected.
A significant investment in additional preclinical and clinical
testing, regulatory and sales and marketing activities will be necessary
in order for the company to commercialize CSS and ESS. There can be no
assurance that CSS or ESS will generate sufficient or sustainable
revenues to enable to the company to be profitable. Furthermore,
although the company believes that these products offer certain
advantages, there can be no assurance that these advantages will be
realized, or if realized, that these products will result in any
meaningful benefits to current or future collaborative partners or
patients.
Development and commercialization of CSS and ESS are subject to
the risks of failure inherent in the development of new medical devices.
These risks include the possibility that the company will experience
delays in testing or marketing, that such testing or marketing will
result in unplanned expenditures or in expenditures above those
anticipated by the company, that CSS or ESS will not be proven safe or
effective, that such products will not be easy to use or cost-effective,
that third parties will develop and market superior or equivalent
products, that such products will fail to receive necessary regulatory
approvals, that such products will be difficult or uneconomical to
manufacture on a commercial scale, that proprietary rights of third
parties will preclude the company or its collaborative partners from
marketing such products and that such products will not achieve market
acceptance. As a result of these risks, there can be no assurance that
research and development efforts conducted by the company or its
collaborative partners will result in any commercially viable products.
If required regulatory approvals are not obtained for CSS or ESS, or any
approved products are not commercially successful, there will be a
material adverse effect on company's business, financial condition and
results of operations.
Dependence Upon Arthroscopic System
The company commercially introduced the Arthroscopic System in
December 1995 and by the quarter ended October 3, 1998, had reported 34
months of sales. The Arthroscopic System is the company's first
commercial product and will account for a substantial portion of the
company's revenue for the near future. As such, the company is highly
dependent on its Arthroscopic System. Additionally, the company's
potential products for non-arthroscopic indications are in various
stages of development and commercialization, and the company may 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 regulatory approval, if applied for, will be granted by the United
States Food and Drug Administration (FDA) or foreign regulatory
authorities on a timely basis, if at all, or that new 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.
Currently, the majority of the company's sales come from the United
States. The company has established distribution capability in Europe,
Australia, Korea, Japan, Canada, South Africa and parts of South and
Central America. Before the Arthroscopic System can be sold in some of
these regions, the company will have to obtain additional international
regulatory approvals and establish additional distribution capability in
other geographic regions. If such regulatory approval is obtained,
there can be no assurance that the company will be able to establish a
successful distribution capability.
Dependence Upon Collaborative Arrangements
In order to successfully develop and commercialize certain
products, the company may enter into collaborative or licensing
arrangements with medical device companies and other entities to fund
and complete its research and development activities, preclinical and
clinical testing and manufacturing, to seek and obtain regulatory
approval and to achieve successful commercialization of future products.
The company has recently entered into collaborative arrangements with
BSC and Xomed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations- Overview" for a discussion of these
arrangements.
The company's dependence on collaborative and licensing
arrangements with third parties subjects it to a number of risks.
Agreements with collaborative partners typically allow such partners
significant discretion in electing whether to pursue any of the planned
activities. The company cannot control the amount and timing of
resources its collaborative partners may devote to the products and
there can be no assurance that such partners will perform their
obligations as expected. Business combinations or significant changes in
a corporate partner's business strategy may adversely affect such
partners ability to complete its obligations under the arrangements. If
any collaborative partner were to terminate or breach its agreement with
the company, or otherwise fail to complete its obligations in a timely
manner, such conduct could have a material adverse effect on the
company's business, financial condition and results of operations. To
the extent that the company is not able to establish further
collaborative arrangements or that any or all of the company's existing
collaborative arrangements are terminated, the company would be required
to seek new collaborative arrangements or to undertake product
development and commercialization at its own expense, which could
significantly increase the company's capital requirements, place
additional strain on its human resource requirements and limit the
number of products which the company would be able to develop and
commercialize. In addition, there can be no assurance that existing and
future collaborative partners will not pursue alternative technologies
or develop alternative products either on their own or in collaboration
with others, including the company's competitors. There can also be no
assurance that disputes will not arise in the future with respect to the
ownership of rights to any technology or products developed with any
collaborative partner. Lengthy negotiations with potential new
collaborative partners or disagreements between established
collaborative partners and the company could lead to delays or
termination in the research, development or commercialization of certain
products or result in litigation or arbitration, which would be time
consuming and expensive. Failure by any collaborative partner to
develop or commercialize successfully any product candidate to which it
has obtained rights from the company or the decision by a collaborative
partner to pursue alternative technologies or commercialize or develop
alternative products, either on their own or in collaboration with
others, could have a material adverse effect on the company's business,
financial condition and results of operations.
Uncertainty of 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. No independent published clinical reports exist to
support the company's marketing efforts for any of its products, which
may have an adverse effect on its ability to obtain physician
acceptance. The company believes that continued recommendations and
endorsements by influential physicians are essential for market
acceptance of its products. If the Arthroscopic System does not
continue to receive broad-based physician acceptance and endorsement by
influential physicians, the company's business, financial condition and
results of operations would be materially adversely affected. Similarly,
if CSS, ESS or the company's potential new products do not receive
broad-based physicians acceptance and endorsement by influential
physicians, the company's business, financial condition and results of
operations would be materially adversely affected.
Limited Operating History
The company's operations to date, have consisted of more than two
years of sales of its Arthroscopic System and very limited sales of CSS
and ESS. In addition, the company has incurred expenses related to
research and development, product engineering, applying for and
obtaining FDA and foreign regulatory clearance of its products and
potential new products, developing a network of distributors in the
United States and internationally and assembling a direct sales force
to market its products. The company 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 s
from its distribution network, successful commercialization of CSS, ESS
and the company's technology in additional surgical markets, obtaining
additional international regulatory approvals for the company's
products, obtaining domestic and international regulatory approvals for
its current and potential new products and maintaining its financial and
management systems, procedures and controls.
Limited Domestic and International Marketing and Sales Experience
The company has shipped over 3,000 Arthroscopic System controller
units, more than 270,000 disposables, and a limited number of CSS and
ESS units through the end of the third quarter of 1998. The company is
marketing and selling CSS domestically through a direct sales force and
internationally through its subsidiary, ArthroCare Europe AB. The
company currently has very limited experience in directly marketing and
selling its products and is in the process of assembling a marketing and
sales staff for CSS. There can be no assurance that the company will
successfully develop its own marketing and sales capabilities or
experience for CSS.
The company is marketing and selling its Arthroscopic System in
the United States and internationally through a network of independent
orthopedic distributors. These distributors sell orthopedic arthroscopy
and ENT devices for a number of other manufacturers. Xomed is the
exclusive and worldwide distributor for ESS. There can be no assurance
that these distributors will commit the necessary resources to
effectively market and sell the company's Arthroscopic System or ESS, or
that they will be successful in closing sales with doctors and
hospitals. The inability to sell sufficient quantities of disposables
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 Europe,
Australia, Mexico, Brazil, Argentina, Canada, Taiwan, South Africa,
Israel, Japan and Korea. 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 region, and compliance with
such regulations may be costly and time-consuming. Accordingly, the
distribution, pricing and marketing structure to be established by the
company may vary from country to country. In June 1998, the company
entered into a license agreement with Xomed whereby Xomed has the
exclusive worldwide distribution rights for ESS. For a description of
additional risks and uncertainties relating to Xomed's exclusive
worldwide distribution rights for ESS, see "ADDITIONAL FACTORS THAT
MIGHT AFFECT FUTURE RESULTS - Dependence on Collaborative Arrangements"
on page 19 of this Quarterly Report on Form 10-Q.
No assurance can be given that the company will successfully sell
CSS directly, successfully sell its Arthroscopic System through its
distributors in Europe, Australia, Mexico, Brazil, Argentina, Canada,
Taiwan, South Africa, Israel, Japan or Korea, successfully sell ESS
through Xomed, that the company will secure marketing partners for other
international markets, successfully sell its products in international
markets or that any of its international distributors and marketing
partners will commit the necessary resources to obtain additional
necessary international regulatory approvals on behalf of the company
and successfully sell the Arthroscopic System or other products in
international markets.
Limited Manufacturing Experience
The company's manufacturing operations consist of an in-house
assembly operation for the manufacturing of Disposables, and a separate
in-house operation for the manufacturing of the System 2000 controllers.
The company's products are manufactured from several components, some of
which are supplied to the company by third parties. Manufacture of the
System 2000 controller, of which an earlier version was manufactured by
a third party, was brought in-house in late 1997 for the purposes of
maintaining process control, managing availability, and leveraging fixed
costs.
In December 1997, the company started manufacturing and selling
units of its System 2000 controllers. As a result, the company has
limited experience manufacturing controllers in the volumes necessary
for the company to achieve additional commercial sales, and there can be
no assurance that reliable, high-volume manufacturing can be achieved at
a commercially reasonable cost. In addition, there can be no assurance
that the company or its suppliers will not encounter any manufacturing
difficulties, including problems involving regulatory compliance,
product recalls, production yields, quality control and assurance,
supplies of components or shortages of qualified personnel.
In April 1998, the company started manufacturing its System 5000
controllers for cosmetic surgery and only a small number of this model
of controllers have been manufactured and sold. In the same time
period, the company began to manufacture limited numbers of disposable
disposables for ENT and cosmetic surgery applications. As a result, the
company has limited experience manufacturing its current products for
ENT and cosmetic surgery in the volumes necessary for the company to
achieve additional commercial sales, and there can be no assurance that
reliable, high-volume manufacturing can be achieved at a commercially
reasonable cost. In addition, there can be no assurance that the
company or its suppliers will not encounter any manufacturing
difficulties, including problems involving regulatory compliance,
product recalls, production yields, quality control and assurance,
supplies of components or shortages of qualified personnel.
The company and its component suppliers are required to operate in
conformance with FDA Quality System Regulation (QSR) 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 company or its component suppliers will remain in
compliance with the QSR or ISO 9001 standards. Any failure by the
company or its component suppliers to remain in compliance with the QSR
or ISO 9001 standards could have a material adverse effect on the
company's business, financial condition and results of operations.
In addition, the Disposable is sterilized by a single
subcontractor and the connector housings at each end of the cable are
supplied from a single source. There can be no assurance that an
alternate 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.
The company's inability to secure an alternative sterilizer, if
required, would limit its ability to manufacture the company's
Arthroscopic System and would have a material adverse effect on the
company's business, financial condition and results of operations.
In connection with regulatory inspections of the company's
manufacturing facility in Sunnyvale, California, the FDA issued the
company FDA Form 483, which detailed specific areas where the FDA
observed that the company's operations were not in full compliance with
some areas of the QSR. The company has responded to the FDA, and has
implemented corrective changes and believes that it is in good standing
with the FDA.
History of Losses; Fluctuations in Operating Results; Losses Expected to
Continue
The company has experienced significant operating losses since
inception and, as of October 3, 1998, had an accumulated deficit of
$27.2 million. The company expects to generate additional losses due to
increased operating expenditures primarily attributable to the expansion
of marketing and sales activities, the launch of additional product
lines (including CSS and ESS), 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, and promotional programs for the company's products. The
company's revenues and profitability will be critically dependent on
whether it can successfully continue to market its soft-tissue surgery
systems. In addition, the company's gross margins may be adversely
affected due to the necessity to promote and sell its products 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 depends in part on
developing and maintaining the proprietary aspects of its platform
Coblation technology. The company owns eleven issued United States
patents, and has filed more than 45 pending United States patent
applications and additional international patent applications in Europe
(covering 16 separate countries), Japan, Canada, Australia and New
Zealand corresponding to fourteen of the United States filings relating
to its Coblation technology. The initial patent is currently set to
expire in 2008, three issued patents are currently expected to expire
between 2008 and 2012 and the other seven patents are expected to expire
between 2014 and 2016. The company believes that the issued patents
cover both the core technology used in the company's soft-tissue surgery
systems, including both multielectrode and single-electrode
configurations of its disposable tools, as well as the use of Coblation
technology in specific surgical procedures.
There can be no assurance that the patents that have been issued
to the company or any patents which may be issued as a result of the
company's United States or international patent applications will
provide any competitive advantages for the company's products or that
they will not be successfully challenged, invalidated or circumvented in
the future. In addition, there can be no assurance that competitors,
many of which have substantial resources and have made significant
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 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. On February 13, 1998, the company filed a
lawsuit (the "Lawsuit") against Ethicon, Inc., Mitek Surgical Products,
a division of Ethicon, Inc. and GyneCare, Inc. alleging, among other
things, infringement of several of the company's patents. See Part II,
Item I of this quarterly Report on Form 10-Q. The defense and
prosecution of the Lawsuit and intellectual property suits generally,
USPTO interference proceedings and related legal and administrative
proceedings are both costly and time-consuming. The company believes
that the Lawsuit is necessary and if others violate the proprietary
rights of the company, further 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 the Lawsuit or
other 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's Coblation technology is replacing older tissue removal
technology, such as laser systems, conventional electrosurgical systems,
manual instruments and power shavers, in arthroscopic procedures.
Consequently, the company competes indirectly with the providers of such
tissue removal systems because the company must convert customers over
to its Coblation technology. Many of these competitors have significantly
greater financial, manufacturing, marketing, distribution and technical
resources than the company. Smith & Nephew Endoscopy (which owns Acufex
Microsurgical, Inc. and Dyonics, Inc.), Conmed Corporation (including
its Linvatec unit) and Stryker Corporation 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. There can be no assurance that the company can
effectively convince surgeons and physicians to adopt the company's
Coblation technology in the face of such competition. 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.
Johnson & Johnson (including Mitek, a division of its Ethican
unit) is marketing a bipolar electrosurgical tool developed by Gyrus
Medical Ltd, a company based in the United Kingdom. The bipolar
electrosurgical tool marketed by Mitek competes directly with the
company's tissue ablation and shrinkage technology in arthroscopy. In
order to successfully compete against Mitek, the company anticipates
that it may have to continue to offer substantial discounts on its
controller in order to increase demand for the disposables, and that
such competition could have a material adverse effect on the company's
business, financial condition and results of operation. Furthermore,
certain of the company's competitors, including Ethicon, utilize
purchasing contracts that link discounts on the purchase of one product
to purchases of other products in their broad product lines. Many of
the hospitals in the United States have purchasing contracts with such
competitors of the company. Accordingly, customers may be dissuaded from
purchasing the company's products rather than the products of such
competitors to the extent the purchase would cause them to lose
discounts on products that they regularly purchase from such
competitors.
Oratec Interventions Inc., a company based in Menlo Park, California,
manufactures and sells a monopolar tissue shrinkage system that competes
directly with the company's tissue shrinkage products. The tissue
shrinkage market represents a small portion of the overall market in
arthroscopy, for the company's products.
The ENT medical device industry is rapidly becoming more
competitive. The company has an exclusive license and distribution
agreement with Xomed Surgical Products, which is currently the largest
company focused solely on the ENT market, see "ADDITIONAL FACTORS THAT
MIGHT AFFECT FUTURE RESULTS - Dependence on Collaborative Arrangements"
on page 19 of this Quarterly Report on Form 10-Q. However, other large
companies, such as Smith & Nephew, Stryker Corp. and Conmed Corporation
(including its Linvatec unit) each have shares of the market for manual
instruments, such as microdebriders for endoscopic sinus surgery. In
addition, the company faces competition with much larger laser
companies, such as ESC Medical Systems of Tel Aviv, Isreal, that
developes and markets lasers for certain ENT applications, such as
laser-assisted uvuloplasty (LAVP). The company expects that competition
from these and other well-established competitors will increase as will
competition from start-up and small cap medical device companies, such
as Somnus Medical Technologies, a company based in Sunnyvale,
California, Elmed Inc. of Addison, Illinois and Ellman International,
Inc. of Hewlett, New York. Somnus manufactures and sells medical
devices that utilize RF technology for the treatment of upper airway
disorders, such as snoring, enlarged turbinates, and obstructive sleep
apnea. Elmed and Ellman both manufacture and sell a variety of medical
devices that use conventional RF technology for tissue dessication,
cutting and/or coagulation in turbinate surgery, the treatment of
snoring and other ENT procedures.
The cosmetic surgery industry includes a number of large and well
established companies that provide devices for rejuvenating facial skin,
hair removal, scar removal, the treatment of vascular and pigmented
lesions and other applications, including companies that manufacture
and sell dermabrasion equipment or chemical peels, and companies that
manufacture and sell CO2 and Er:YAG lasers. In skin resurfacing, the
company will directly compete with much larger companies that
manufacture lasers for medical use, such as Coherent Medical Group of
Santa Clara, California and ESC Medical Systems of Tel Aviv, Isreal.
ESC recently merged with Laser Industries, Ltd, already one of the
largest medical laser manufacturers in the world. The combined company
develops and markets lasers for a broad range of cosmetic applications
including the non-invasive treatment of varicose veins and other benign
vascular lesions, hair removal, skin rejuvenation and others. In
addition, other large companies manufacture and sell medical devices
that use RF energy for certain applications in dermatology and cosmetic
surgery. One such company is Conmed Corporation, which currently sells
medical devices for electrodessication, fulguration and coagulation in
office based dermatology procedures.
The company has received 510(k) premarket notifications for
clearance to market tissue ablation products to treat certain
urological, periodontal, dermatological, ear/nose/throat and general
surgical conditions and has filed 510(k) premarket notification for
clearance to market products for gynecological conditions; the FDA has
indicated that the 510(k) submission for certain gynecological
conditions must be supported by data from clinical trials. These fields
are intensely competitive and no assurance can be given that these
potential products, if approved, would be successfully marketed.
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 design, process,
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, design, 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. Failure to
comply with the regulatory requirements could have a material adverse
effect on the company's business, financial condition and results of
operations.
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 premarket approval
application (PMA). 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
the FDA has not required PMAs, the manufacturer or distributor may seek
clearance from the 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 the FDA. The 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. At this time, the FDA typically responds to the submission
of a 510(k) notification within 90 to 120 days, but it may take longer.
The 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 be costly and 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
has received 510(k) premarket notifications to market CSS in general
dermatology procedures and is pursuing additional clearances that will
allow CSS to be marketed in the United States specifically for wrinkle
removal. With respect to ESS, the company has received clearance of
510(k) premarket notifications to market ESS in general head and neck
surgical procedures, and has received regulatory clearance that will
allow ESS to be marketed in the United States for certain specific
indications while it is pursuing additional clearances for certain other
indications. 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. 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. In addition, the FDA will inspect the manufacturing facility
prior to approval to ensure compliance with the FDA's QSR. 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 may 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 periodic inspections by both the
FDA and the CDHS for compliance with the FDA's QSR 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. There can be no assurance that the company will
not encounter any manufacturing difficulties, or that they will not
experience difficulties, including problems involving regulatory
compliance, product recalls, production yields, quality control and
assurance, supplies of components or shortages of qualified personnel.
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, Canada and Mexico, to market CSS in Europe and Canada
and is currently seeking approval for ESS in Europe but has not obtained
any other international regulatory approvals permitting sales of its
products outside of the United States. The company is seeking and
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.
For European distribution, the company has 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 requiring medical products to
receive 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 in conjunction with demonstrated
performance to the medical device directive is one of the alternatives
available to meet 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
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. Reimbursement for arthroscopic, cosmetic and ENT
procedures performed using devices that have received FDA approval has
generally been available in the United States. 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. The
company anticipates that in a prospective payment system, such as the
diagnosis related group (DRG) system utilized by Medicare, and in many
managed care systems used by private health care payors, the cost of the
company's products will be incorporated into the overall cost of the
procedure and that there will be no separate, additional reimbursement
for the company's products. The company anticipates that hospital
administrators and physicians will justify the use of the company's
products by the apparent cost savings and clinical benefits that the
company believes will be derived from the use of its products. However,
there can be no assurance that this will be the case. Furthermore, the
company could be adversely affected by changes in 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 international 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.
Uncertainty of New Product Development
The company has undertaken preliminary animal studies and
development for the use of its Coblation technology with its controller
in several fields. The company has received 510(k) clearance for use of
its technology in certain of these fields. The company has received
approval of an Investigational Device Exemption (IDE) to conduct a
clinical study on a specific indication. Following the completion of
this study, the company may submit a 510(k) application to the FDA.
Each of the company's potential products that may result from
these investigations are in early stages of development, and the company
may 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 PMA or 510(k) applications, 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 $7,000,000 per
occurrence and $7,000,000 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 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
Arthroscopic System since December 1995 and recently commenced sales of
CSS and ESS 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.
Significant Influence by Directors, Executive Officers and Affiliated
Entities
The company's directors, executive officers and entities
affiliated with them, in the aggregate, beneficially own approximately
45% of the company's 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 company's 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 company's common stock.
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 stockholders 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% 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% 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% or 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 and to call a special
meeting of the stockholders, 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
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On February 13, 1998, the company filed a lawsuit against Ethicon, Inc.
Mitek Surgical Products, a division of Ethicon, Inc. and GyneCare, Inc.
(the Defendants) in the United States District Court for the Northern
District of California. The lawsuit alleges, among other things, that
the Defendants have been and are currently infringing four patents
issued to the company in December 1997. Specifically, the Defendants
use, market and sell two separate electrosurgical systems under the
names of "VAPR" and "VersaPoint" which infringe these patents. The
company seeks: (1) a judgment that the Defendants have infringed these
patents; (2) to preliminarily and permanently restrain and enjoin the
Defendants from marketing and selling the VAPR and VersaPoint systems;
and (3) an award of damages (including attorneys' fees) to compensate
the company for lost profits, the damages to be trebled because of the
Defendants' willful infringement. In addition, the company filed a
motion on March 5, 1998 for preliminary injunction against the
Defendants marketing and selling of the VAPR system. On June 15, 1998,
the court held a claim construction hearing ("Markman hearing") to
determine the meaning of the claims of the patents in suit as a matter
of law. On July 6, 1998, the court issued a Memorandum Decision and
Order in which all of the claims were construed in ArthroCare's favor.
On September 18, 1998, the court held an evidentiary hearing on the
motion for preliminary injunction. The motion is still pending.
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
With respect to stockholer proposals not included in the company's proxy
statement for the 1999 Annual Meeting of Stockholders, the persons named
entitled to exercise the discretionary voting power conferred by such proxy
under the circumstances' specified in Rule 14a-4(c) under the Securities
Exchange Act of 1934, as amended, including with respect to proposals
received by the company within forty-five (45) days of the date of mailing
of the proxy statement for the 1999 Annual Meeting of Stockholders.
Item 6. Exhibits and Reports on Form 8 - K
a) Exhibits
3.2 (1) Certificate of Incorporation of the Registrant.
3.3 Amended Restated Bylaws of the Registrant.
4.1 (1) Specimen Common Stock Certificate.
10.1 (1) Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2 (1) Incentive Stock Plan and form of Stock Option Agreement thereunder.
10.3 (1) Director Option Plan and form of Director Stock Option Agreement
thereunder.
10.4 (1) Employee Stock Purchase Plan and forms of agreements thereunder.
10.5 (1) Form of Exclusive Distribution Agreement.
10.6 (1) Form of Exclusive Sales Representative Agreement.
10.7 (1) Consulting Agreement, dated May 10, 1993, between the Registrant and
Philip E. Eggers, and amendment thereto.
10.8 (1) Consulting Agreement, dated May 20, 1993, between the Registrant and
Eggers & Associates, Inc., and amendment thereto.
10.9 (1) Lease Agreement, dated September 15, 1994, between Registrant and The
Arrillaga Foundation and the Perry Foundation for the Registrant's
facility located at 595 North Pastoria Avenue, Sunnyvale, California
94086.
10.10 (1) Employment Letter Agreement, dated October 21, 1994, between the
Registrant and Allan Weinstein and amendment thereto.
10.11 (1) Purchase Assistance Promissory Note, dated January 19, 1995, between
Registrant and Allan Weinstein.
10.12 (1) Mortgage Assistance Promissory Note Agreement, dated February 5,
1995, between the Registrant and Allan Weinstein.
10.13 (1) Restricted Stock Purchase and Security Agreement, dated February 5,
1995, between the Registrant and Allan Weinstein.
10.14 (1) Employment Letter Agreement, dated July 18, 1995, between the
Registrant and Robert T. Hagan.
10.15 (1) Restricted Stock Purchase and Security Agreement, dated August 1,
1995, between the Registrant and Robert T. Hagan.
10.16 (1) + Radiation Services Agreement, dated September 13, 1995, between
the Registrant and SteriGenics International.
10.17 (1) Amended and Restated Stockholder Rights Agreement, dated October 16,
1995, between the Registrant and certain holders of the Registrant's
securities.
10.18 (1) Contribution Agreement, dated March 31, 1995, by and among Philip E.
Eggers, Robert S. Garvie, Anthony J. Manlove, Hira V. Thapliyal and
the Registrant.
10.19 (2) Preferred Stock Rights Agreement, dated November 14, 1996, between
the Registrant and Norwest Bank Minnesota, N.A.
10.19 A (7) Amended Preferred Shares Rights Agreement, dated October 2, 1998,
between the Registrant and Norwest Bank Minnesota, N.A.
10.20 (6) + Exclusive Distributor Agreement, dated April 15, 1997, between the
Registrant and Arthrex, Gmbh.
10.21 (4) Employment Letter Agreement, dated June 20, 1997, between the
Registrant and Michael A. Baker.
10.22 (5) + Exclusive Distributor Agreement, dated August 21, 1997, between the
Registrant and Kobayashi Pharmaceutical Company, Ltd.
10.23 (6) + License Agreement dated February 9, 1998, between the Registrant
and Boston Scientific Corporation.
10.24 (6) + Development and Supply Agreement dated February 9, 1998, between
the Registrant and Boston Scientific Corporation.
10.25 (6) Lease Agreement dated March 25, 1998 between the Registrant and Aetna
Life Insurance company for the Registrant's facility located at 840
Del Rey Avenue, Sunnyvale, California 94086.
10.26 (7) Term sheet for License and Distribution Agreement between Xomed
Surgical Products and the Registrant dated June 25, 1998.
27.1 Financial Data Schedule.
(1) 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).
(2) Incorporated herein by reference to Exhibit 5 previously filed
with the Registrant's Registration Statement on Form 8-A
(Registration No. 000-27422).
(3) Incorporated herein by reference to the same-numbered exhibit
previously filed with the Registrant's Quarterly Report on Form
10-Q for the period ended March 29, 1997.
(4) Incorporated herein by reference to the same-numbered exhibit
previously filed with the Registrant's Quarterly Report on Form
10-Q for the period ended June 28, 1997.
(5) Incorporated herein by reference to the same numbered exhibit
previously filed with the Registrant's Quarterly Report on Form
10-Q for the period ended September 27, 1997.
(6) Incorporated herein by reference to the same numbered exhibit
previously filed with the Registrant's Annual Report on Form 10-K
for the year ended January 3, 1998.
(7) Incorporated herein by reference to Exhibit 1 previously filed with the
Resgistration statement on Form 8-A/A (Registration No. 000-27422).
+ Confidential treatment granted.
b) Reports on Form 8-K
None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARTHROCARE CORPORATION
a Delaware corporation
Date: November 17, 1998
/s/ CHRISTINE E. HANNI
Christine E. Hanni
Vice President of Finance,
Chief Financial Officer and
Assistant Secretary
(Principal Financial Officer
and Accounting Officer)
Date: November 17, 1998
/s/ MICHAEL A. BAKER
Michael A. Baker
President, Chief Executive
Officer and Director
(Principal Executive Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
3.3 Amended and Restated Bylaws of the Registrant.
Surgical Products and the Registrant dated June 25, 1998.
27.1 Financial Data Schedule.
AMENDED AND RESTATED BYLAWS
OF
ARTHROCARE CORPORATION
(a Delaware corporation)
ARTICLE I
CORPORATE OFFICES
I.1 REGISTERED OFFICE
The registered office of the corporation shall be fixed in the
certificate of incorporation of the corporation.
I.2 OTHER OFFICES
The board of directors may at any time establish branch or
subordinate offices at any place or places where the corporation is
qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
II.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place within or
outside the State of Delaware designated by the board of directors. In
the absence of any such designation, stockholders' meetings shall be
held at the principal executive office of the corporation.
II.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a
date and at a time designated by the board of directors. In the absence
of such designation, the annual meeting of stockholders shall be held on
the second Wednesday of June in each year at 10:00 a.m. However, if
such day falls on a legal holiday, then the meeting shall be held at the
same time and place on the next succeeding full business day. At the
meeting, directors shall be elected, and any other proper business may
be transacted.
II.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by
the board of directors, or by the chairman of the board, or by the
president. No other person or persons are permitted to call a special
meeting.
II.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings of stockholders shall be sent or otherwise
given in accordance with Section 2.6 of these bylaws not less than ten
(10) nor more than sixty (60) days before the date of the meeting. The
notice shall specify the place, date and hour of the meeting and (i) in
the case of a special meeting, the purpose or purposes for which the
meeting is called (no business other than that specified in the notice
may be transacted) or (ii) in the case of the annual meeting, those
matters which the board of directors, at the time of giving the notice,
intends to present for action by the stockholders (but any proper matter
may be presented at the meeting for such action). The notice of any
meeting at which directors are to be elected shall include the name of
any nominee or nominees who, at the time of the notice, the board
intends to present for election.
II.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER
BUSINESS
Subject to the rights of holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon
liquidation,
(a) nominations for the election of directors, and
(b) business proposed to be brought before any stockholder
meeting
may be made by the board of directors or proxy committee appointed by
the board of directors or by any stockholder entitled to vote in the
election of directors generally if such nomination or business proposed
is otherwise proper business before such meeting. However, any such
stockholder may nominate one or more persons for election as directors
at a meeting or propose business to be brought before a meeting, or
both, only if such stockholder has given timely notice in proper written
form of their intent to make such nomination or nominations or to
propose such business. To be timely, such stockholder's notice must be
delivered to or mailed and received at the principal executive offices
of the corporation not less than one hundred twenty (120) calendar days
in advance of the date specified in the corporation's proxy statement
released to stockholders in connection with the previous year's annual
meeting of stockholders; provided, however, that in the event that no
annual meeting was held in the previous year or the date of the annual
meeting has been changed by more than thirty (30) days from the date
contemplated at the time of the previous year's proxy statement, notice
by the stockholder to be timely must be so received a reasonable time
before the solicitation is made. To be in proper form, a stockholder's
notice to the secretary shall set forth:
(i) the name and address of the stockholder who intends to
make the nominations or propose the business and, as the
case may be, of the person or persons to be nominated or of
the business to be proposed;
(ii) a representation that the stockholder is a holder of
record of stock of the corporation entitled to vote at such
meeting and, if applicable, intends to appear in person or
by proxy at the meeting to nominate the person or persons
specified in the notice;
(iii) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee and
any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be
made by the stockholder;
(iv) such other information regarding each nominee or each
matter of business to be proposed by such stockholder as
would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange
Commission had the nominee been nominated, or intended to be
nominated, or the matter been proposed, or intended to be
proposed by the board of directors; and
(v) if applicable, the consent of each nominee to serve as
director of the corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the
nomination of any person or the proposal of any business not made in
compliance with the foregoing procedure.
II.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given
either personally or by first-class mail or by telegraphic or other
written communication. Notices not personally delivered shall be sent
charges prepaid and shall be addressed to the stockholder at the address
of that stockholder appearing on the books of the corporation or given
by the stockholder to the corporation for the purpose of notice. Notice
shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.
An affidavit of the mailing or other means of giving any notice of
any stockholders' meeting, executed by the secretary, assistant
secretary or any transfer agent of the corporation giving the notice,
shall be prima facie evidence of the giving of such notice.
II.7 QUORUM
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise pro-
vided by statute or by the certificate of incorporation. If, however,
such quorum is not present or represented at any meeting of the
stockholders, then either (i) the chairman of the meeting or (ii) the
stockholders entitled to vote thereat, present in person or represented
by proxy, shall have power to adjourn the meeting in accordance with
Section 2.7 of these bylaws.
When a quorum is present at any meeting, the vote of the holders
of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which, by express provision of
the laws of the State of Delaware or of the certificate of incorporation
or these bylaws, a different vote is required, in which case such
express provision shall govern and control the decision of the question.
If a quorum be initially present, the stockholders may continue to
transact business until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum, if any action taken is
approved by a majority of the stockholders initially constituting the
quorum.
II.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time and place, unless
these bylaws otherwise require, notice need not be given of the
adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting the
corporation may transact any business that might have been transacted at
the original meeting. If the adjournment is for more than thirty (30)
days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
II.9 VOTING
The stockholders entitled to vote at any meeting of stockholders
shall be determined in accordance with the provisions of Section 2.11 of
these bylaws, subject to the provisions of Sections 217 and 218 of the
General Corporation Law of Delaware (relating to voting rights of
fiduciaries, pledgors and joint owners, and to voting trusts and other
voting agreements).
Except as may be otherwise provided in the certificate of
incorporation or these bylaws, each stockholder shall be entitled to one
vote for each share of capital stock held by such stockholder and
stockholders shall not be entitled to cumulate their votes in the
election of directors or with respect to any matter submitted to a vote
of the stockholders.
Notwithstanding the foregoing, if the stockholders of the
corporation are entitled, pursuant to Sections 2115 and 301.5 of the
California Corporations Code, to cumulate their votes in the election of
directors, each such stockholder shall be entitled to cumulate votes
(i.e., cast for any candidate a number of votes greater than the number
of votes that such stockholder normally is entitled to cast) only if the
candidates' names have been properly placed in nomination (in accordance
with these bylaws) prior to commencement of the voting, and the
stockholder requesting cumulative voting has given notice prior to
commencement of the voting of the stockholder's intention to cumulate
votes. If cumulative voting is properly requested, each holder of
stock, or of any class or classes or of a series or series thereof, who
elects to cumulate votes shall be entitled to as many votes as equals
the number of votes that (absent this provision as to cumulative voting)
he or she would be entitled to cast for the election of directors with
respect to his or her shares of stock multiplied by the number of
directors to be elected by him, and he or she may cast all of such votes
for a single director or may distribute them among the number to
be voted for, or for any two or more of them, as he or she may see fit.
II.10 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
For purposes of determining the stockholders entitled to notice of
any meeting or to vote thereat, the board of directors may fix, in
advance, a record date, which shall not precede the date upon which the
resolution fixing the record date is adopted by the board of directors
and which shall not be more than sixty (60) days nor less than ten (10)
days before the date of any such meeting, and in such event only
stockholders of record on the date so fixed are entitled to notice and
to vote, notwithstanding any transfer of any shares on the books of the
corporation after the record date.
If the board of directors does not so fix a record date, the
record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders shall be at the close of business on
the business day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held.
A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of
the meeting unless the board of directors fixes a new record date for
the adjourned meeting, but the board of directors shall fix a new record
date if the meeting is adjourned for more than thirty (30) days from the
date set for the original meeting.
The record date for any other purpose shall be as provided in
Section 8.1 of these bylaws.
II.11 PROXIES
Every person entitled to vote for directors, or on any other
matter, shall have the right to do so either in person or by one or more
agents authorized by a written proxy signed by the person and filed with
the secretary of the corporation, but no such proxy shall be voted or
acted upon after three (3) years from its date, unless the proxy
provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission, telefacsimile or otherwise) by
the stockholder or the stockholder's attorney-in-fact. The revocability
of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation
Law of Delaware.
II.12 ORGANIZATION
The president, or in the absence of the president, the chairman of
the board, or, in the absence of the president and the chairman of the
board, one of the corporation's vice presidents, shall call the meeting
of the stockholders to order, and shall act as chairman of the meeting.
In the absence of the president, the chairman of the board, and all of
the vice presidents, the stockholders shall appoint a chairman for such
meeting. The chairman of any meeting of stockholders shall determine
the order of business and the procedures at the meeting, including such
matters as the regulation of the manner of voting and the conduct of
business. The secretary of the corporation shall act as secretary of
all meetings of the stockholders, but in the absence of the secretary at
any meeting of the stockholders, the chairman of the meeting may appoint
any person to act as secretary of the meeting.
II.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or,
if not so specified, at the place where the meeting is to be held. The
list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
II.14 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of
incorporation or these bylaws, a written waiver thereof, signed by the
person entitled to notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a person
at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special
meeting of the stockholders need be specified in any written waiver of
notice unless so required by the certificate of incorporation or these
bylaws.
ARTICLE III
DIRECTORS
III.1 POWERS
Subject to the provisions of the General Corporation Law of
Delaware and to any limitations in the certificate of incorporation or
these bylaws relating to action required to be approved by the
stockholders or by the outstanding shares, the business and affairs of
the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the board of directors.
III.2 NUMBER OF DIRECTORS
The board of directors shall be not less than four (4) nor more
than seven (7) members. The exact number of directors shall be seven
(7) until changed, within the limits specified above by a bylaw amending
this Section 3.2 duly adopted by the board of directors or by the
stockholders. The indefinite number of directors may be changed, or a
definite number may be fixed without provision for an indefinite number,
by an amendment to this bylaw, duly adopted by the board of directors or
by the stockholders, or by a duly adopted amendment to the certificate
of incorporation.
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office
expires.
III.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall
be elected at each annual meeting of stockholders to hold office until
the next annual meeting. Each director, including a director elected or
appointed to fill a vacancy, shall hold office until the expiration of
the term for which elected and until a successor has been elected and
qualified.
III.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of
directors, unless the notice specifies a later time for that resignation
to become effective. If the resignation of a director is effective at a
future time, the board of directors may elect a successor to take office
when the resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of
the remaining directors, even if less than a quorum, or by a sole
remaining director; however, a vacancy created by the removal of a
director by the vote of the stockholders or by court order may be filled
only by the affirmative vote of a majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares
voting affirmatively also constitute a majority of the required quorum).
Each director so elected shall hold office until the next annual
meeting of the stockholders and until a successor has been elected and
qualified.
Unless otherwise provided in the certificate of incorporation or
these bylaws:
(i) Vacancies and newly created directorships resulting
from any increase in the authorized number of directors elected by all
of the stockholders having the right to vote as a single class may be
filled by a majority of the directors then in office, although less than
a quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock
or series thereof are entitled to elect one or more directors by the
provisions of the certificate of incorporation, vacancies and newly
created directorships of such class or classes or series may be filled
by a majority of the directors elected by such class or classes or
series thereof then in office, or by a sole remaining director so
elected.
If at any time, by reason of death or resignation or other cause,
the corporation should have no directors in office, then any officer or
any stockholder or an executor, administrator, trustee or guardian of a
stockholder, or other fiduciary entrusted with like responsibility for
the person or estate of a stockholder, may call a special meeting of
stockholders in accordance with the provisions of the certificate of
incorporation or these bylaws, or may apply to the Court of Chancery for
a decree summarily ordering an election as provided in Section 211 of
the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a
majority of the whole board (as constituted immediately prior to any
such increase), then the Court of Chancery may, upon application of any
stockholder or stockholders holding at least ten (10) percent of the
total number of the shares at the time outstanding having the right to
vote for such directors, summarily order an election to be held to fill
any such vacancies or newly created directorships, or to replace the
directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the
General Corporation Law of Delaware as far as applicable.
III.5 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, any director or the entire board of
directors may be removed, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of
directors; provided, however, that, if and so long as stockholders of
the corporation are entitled to cumulative voting, if less than the
entire board is to be removed, no director may be removed without cause
if the votes cast against his removal would be sufficient to elect him
if then cumulatively voted at an election of the entire board of
directors.
III.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at
any place within or outside the State of Delaware that has been
designated from time to time by resolution of the board. In the absence
of such a designation, regular meetings shall be held at the principal
executive office of the corporation. Special meetings of the board may
be held at any place within or outside the State of Delaware that has
been designated in the notice of the meeting or, if not stated in the
notice or if there is no notice, at the principal executive office of
the corporation.
Any meeting of the board, regular or special, may be held by
conference telephone or similar communication equipment, so long as all
directors participating in the meeting can hear one another; and all
such participating directors shall be deemed to be present in person at
the meeting.
III.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without
notice at such time as shall from time to time be determined by the
board of directors. If any regular meeting day shall fall on a legal
holiday, then the meeting shall be held at the same time and place on
the next succeeding full business day.
III.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or
purposes may be called at any time by the chairman of the board, the
president, any vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be
delivered personally or by telephone to each director or sent by first-
class mail, telecopy or telegram, charges prepaid, addressed to each
director at that director's address as it is shown on the records of the
corporation. If the notice is mailed, it shall be deposited in the
United States mail at least four (4) days before the time of the holding
of the meeting. If the notice is delivered personally or by telephone,
telecopy or telegram, it shall be delivered personally or by telephone
or to the telegraph company at least forty-eight (48) hours before the
time of the holding of the meeting. Any oral notice given personally or
by telephone may be communicated either to the director or to a person
at the office of the director who the person giving the notice has
reason to believe will promptly communicate it to the director. The
notice need not specify the purpose or the place of the meeting, if the
meeting is to be held at the principal executive office of the
corporation.
III.9 QUORUM
A majority of the authorized number of directors shall constitute
a quorum for the transaction of business, except to adjourn as provided
in Section 3.12 of these bylaws. Every act or decision done or made by
a majority of the directors present at a duly held meeting at which a
quorum is present shall be regarded as the act of the board of
directors, subject to the provisions of the certificate of incorporation
and applicable law.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any
action taken is approved by at least a majority of the quorum for that
meeting.
III.10 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who
signs a waiver of notice, whether before or after the meeting, or
(ii) who attends the meeting other than for the express purposed of
objecting at the beginning of the meeting to the transaction of any
business because the meeting is not lawfully called or convened. All
such waivers shall be filed with the corporate records or made part of
the minutes of the meeting. A waiver of notice need not specify the
purpose of any regular or special meeting of the board of directors.
III.11 ADJOURNMENT
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting of the board to another time and place.
III.12 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting of
the board need not be given unless the meeting is adjourned for more
than twenty-four (24) hours. If the meeting is adjourned for more than
twenty-four (24) hours, then notice of the time and place of the
adjourned meeting shall be given before the adjourned meeting takes
place, in the manner specified in Section 3.9 of these bylaws, to the
directors who were not present at the time of the adjournment.
III.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of
directors may be taken without a meeting, provided that all members of
the board individually or collectively consent in writing to that
action. Such action by written consent shall have the same force and
effect as a unanimous vote of the board of directors. Such written
consent and any counterparts thereof shall be filed with the minutes of
the proceedings of the board of directors.
III.14 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation,
if any, for their services and such reimbursement of expenses as may be
fixed or determined by resolution of the board of directors. This
Section 3.15 shall not be construed to preclude any director from
serving the corporation in any other capacity as an officer, agent,
employee or otherwise and receiving compensation for those services.
III.15 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of,
or otherwise assist any officer or other employee of the corporation or
any of its subsidiaries, including any officer or employee who is a
director of the corporation or any of its subsidiaries, whenever, in the
judgment of the directors, such loan, guaranty or assistance may
reasonably be expected to benefit the corporation. The loan, guaranty
or other assistance may be with or without interest and may be
unsecured, or secured in such manner as the board of directors shall
approve, including, without limitation, a pledge of shares of stock of
the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the
corporation at common law or under any statute.
ARTICLE IV
COMMITTEES
IV.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of
the authorized number of directors, designate one (1) or more
committees, each consisting of two or more directors, to serve at the
pleasure of the board. The board may designate one (1) or more
directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. The
appointment of members or alternate members of a committee requires the
vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall
have and may exercise all the powers and authority of the board, but no
such committee shall have the power or authority to (i) amend the
certificate of incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance
of shares of stock adopted by the board of directors as provided in
Section 151(a) of the General Corporation Law of Delaware, fix the
designations and any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of
such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the
corporation), (ii) adopt an agreement of merger or consolidation under
Sections 251 or 252 of the General Corporation Law of Delaware,
(iii) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets,
(iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution or (v) amend the bylaws of the corporation;
and, unless the board resolution establishing the committee, the bylaws
or the certificate of incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership
and merger pursuant to Section 253 of the General Corporation Law of
Delaware.
IV.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held
and taken in accordance with, the following provisions of Article III of
these bylaws: Section 3.6 (place of meetings; meetings by telephone),
Section 3.8 (regular meetings), Section 3.9 (special meetings; notice),
Section 3.10 (quorum), Section 3.11 (waiver of notice), Section 3.12
(adjournment), Section 3.13 (notice of adjournment) and Section 3.14
(board action by written consent without meeting), with such changes in
the context of those bylaws as are necessary to substitute the committee
and its members for the board of directors and its members; provided,
however, that the time of regular meetings of committees may be
determined either by resolution of the board of directors or by
resolution of the committee, that special meetings of committees may
also be called by resolution of the board of directors, and that notice
of special meetings of committees shall also be given to all alternate
members, who shall have the right to attend all meetings of the com-
mittee. The board of directors may adopt rules for the government of
any committee not inconsistent with the provisions of these bylaws.
IV.3 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and
report the same to the board of directors when required.
ARTICLE V
OFFICERS
V.1 OFFICERS
The Corporate Officers of the corporation shall be a president, a
secretary and a chief financial officer. The corporation may also have,
at the discretion of the board of directors, a chairman of the board,
one or more vice presidents (however denominated), one or more assistant
secretaries, a treasurer and one or more assistant treasurers, and such
other officers as may be appointed in accordance with the provisions of
Section 5.3 of these bylaws. Any number of offices may be held by the
same person.
In addition to the Corporate Officers of the Company described
above, there may also be such Administrative Officers of the corporation
as may be designated and appointed from time to time by the president of
the corporation in accordance with the provisions of Section 5.12 of
these bylaws.
V.2 ELECTION OF OFFICERS
The Corporate Officers of the corporation, except such officers
as may be appointed in accordance with the provisions of Section 5.3 or
Section 5.5 of these bylaws, shall be chosen by the board of directors,
subject to the rights, if any, of an officer under any contract of
employment, and shall hold their respective offices for such terms as
the board of directors may from time to time determine.
V.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president
to appoint, such other Corporate Officers as the business of the corpo-
ration may require, each of whom shall hold office for such period, have
such power and authority, and perform such duties as are provided in
these bylaws or as the board of directors may from time to time
determine.
The president may from time to time designate and appoint
Administrative Officers of the corporation in accordance with the
provisions of Section 5.12 of these bylaws.
V.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of a Corporate Officer under any
contract of employment, any Corporate Officer may be removed, either
with or without cause, by the board of directors at any regular or
special meeting of the board or, except in case of a Corporate Officer
chosen by the board of directors, by any Corporate Officer upon whom
such power of removal may be conferred by the board of directors.
Any Corporate Officer may resign at any time by giving written
notice to the corporation. Any resignation shall take effect at the
date of the receipt of that notice or at any later time specified in
that notice; and, unless otherwise specified in that notice, the accept-
ance of the resignation shall not be necessary to make it effective.
Any resignation is without prejudice to the rights, if any, of the
corporation under any contract to which the Corporate Officer is a
party.
Any Administrative Officer designated and appointed by the
president may be removed, either with or without cause, at any time by
the president. Any Administrative Officer may resign at any time by
giving written notice to the president or to the secretary of the
corporation.
V.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner
prescribed in these bylaws for regular appointments to that office.
V.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall,
if present, preside at meetings of the board of directors and exercise
such other powers and perform such other duties as may from time to time
be assigned to him by the board of directors or as may be prescribed by
these bylaws. If there is no president, then the chairman of the board
shall also be the chief executive officer of the corporation and shall
have the powers and duties prescribed in Section 5.7 of these bylaws.
V.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the
board of directors to the chairman of the board, if there be such an
officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors,
have general supervision, direction and control of the business and the
officers of the corporation. He or she shall preside at all meetings of
the stockholders and, in the absence or nonexistence of a chairman of
the board, at all meetings of the board of directors. He or she shall
have the general powers and duties of management usually vested in the
office of president of a corporation, and shall have such other powers
and perform such other duties as may be prescribed by the board of
directors or these bylaws.
V.8 VICE PRESIDENTS
In the absence or disability of the president, and if there is no
chairman of the board, the vice presidents, if any, in order of their
rank as fixed by the board of directors or, if not ranked, a vice
president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of,
and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as
from time to time may be prescribed for them respectively by the board
of directors, these bylaws, the president or the chairman of the board.
V.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the board of
directors may direct, a book of minutes of all meetings and actions of
the board of directors, committees of directors and stockholders. The
minutes shall show the time and place of each meeting, whether regular
or special (and, if special, how authorized and the notice given), the
names of those present at directors' meetings or committee meetings, the
number of shares present or represented at stockholders' meetings and
the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the
corporation's transfer agent or registrar, as determined by resolution
of the board of directors, a share register or a duplicate share
register, showing the names of all stockholders and their addresses, the
number and classes of shares held by each, the number and date of
certificates evidencing such shares and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the board of directors required to
be given by law or by these bylaws. He or she shall keep the seal of
the corporation, if one be adopted, in safe custody and shall have such
other powers and perform such other duties as may be prescribed by the
board of directors or by these bylaws.
V.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to
be kept and maintained, adequate and correct books and records of
accounts of the properties and business transactions of the corporation,
including accounts of its assets, liabilities, receipts, disbursements,
gains, losses, capital, retained earnings and shares. The books of
account shall at all reasonable times be open to inspection by any
director for a purpose reasonably related to his position as a director.
The chief financial officer shall deposit all money and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the board of directors. He or she
shall disburse the funds of the corporation as may be ordered by the
board of directors, shall render to the president and directors,
whenever they request it, an account of all of his or her transactions
as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or these bylaws.
V.11 ASSISTANT SECRETARY
The assistant secretary, if any, or, if there is more than one,
the assistant secretaries in the order determined by the board of
directors (or if there be no such determination, then in the order of
their election) shall, in the absence of the secretary or in the event
of his or her inability or refusal to act, perform the duties and
exercise the powers of the secretary and shall perform such other duties
and have such other powers as the board of directors may from time to
time prescribe.
V.12 ADMINISTRATIVE OFFICERS
In addition to the Corporate Officers of the corporation as
provided in Section 5.1 of these bylaws and such subordinate Corporate
Officers as may be appointed in accordance with Section 5.3 of these
bylaws, there may also be such Administrative Officers of the
corporation as may be designated and appointed from time to time by the
president of the corporation. Administrative Officers shall perform
such duties and have such powers as from time to time may be determined
by the president or the board of directors in order to assist the
Corporate Officers in the furtherance of their duties. In the
performance of such duties and the exercise of such powers, however,
such Administrative Officers shall have limited authority to act on
behalf of the corporation as the board of directors shall establish,
including but not limited to limitations on the dollar amount and on the
scope of agreements or commitments that may be made by such Admini-
strative Officers on behalf of the corporation, which limitations may
not be exceeded by such individuals or altered by the president without
further approval by the board of directors.
V.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing powers, authority and duties, all
officers of the corporation shall respectively have such authority and
powers and perform such duties in the management of the business of the
corporation as may be designated from time to time by the board of
directors.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS
VI.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, indemnify any person against
expenses (including attorneys' fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred in connection with any
threatened, pending or completed action, suit, or proceeding in which
such person was or is a party or is threatened to be made a party by
reason of the fact that such person is or was a director or officer of
the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation shall mean any person (i) who is or was a
director or officer of the corporation, (ii) who is or was serving at
the request of the corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, or
(iii) who was a director or officer of a corporation which was a
predecessor corporation of the corporation or of another enterprise at
the request of such predecessor corporation.
The corporation shall be required to indemnify a director or
officer in connection with an action, suit, or proceeding (or part
thereof) initiated by such director or officer only if the initiation of
such action, suit, or proceeding (or part thereof) by the director or
officer was authorized by the Board of Directors of the corporation.
The corporation shall pay the expenses (including attorney's fees)
incurred by a director or officer of the corporation entitled to
indemnification hereunder in defending any action, suit or proceeding
referred to in this Section 6.1 in advance of its final disposition;
provided, however, that payment of expenses incurred by a director or
officer of the corporation in advance of the final disposition of such
action, suit or proceeding shall be made only upon receipt of an
undertaking by the director or officer to repay all amounts advanced if
it should ultimately be determined that the director of officer is not
entitled to be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be
exclusive of any other rights which such person may have or hereafter
acquire under any statute, provision of the corporation's Certificate of
Incorporation, these bylaws, agreement, vote of the stockholders or
disinterested directors or otherwise.
Any repeal or modification of the foregoing provisions of this
Article shall not adversely affect any right or protection hereunder of
any person in respect of any act or omission occurring prior to the time
of such repeal or modification.
VI.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the maximum extent and in
the manner permitted by the General Corporation Law of Delaware as the
same now exists or may hereafter be amended, to indemnify any person
(other than directors and officers) against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred in connection with any threatened,
pending or completed action, suit, or proceeding, in which such person
was or is a party or is threatened to be made a party by reason of the
fact that such person is or was an employee or agent of the corporation.
For purposes of this Section 6.2, an "employee" or "agent" of the
corporation (other than a director or officer) shall mean any person
(i) who is or was an employee or agent of the corporation, (ii) who is
or was serving at the request of the corporation as an employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, or (iii) who was an employee or agent of a corporation which
was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
VI.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in any
such capacity, or arising out of his or her status as such, whether or
not the corporation would have the power to indemnify him or her against
such liability under the provisions of the General Corporation Law of
Delaware.
ARTICLE VII
RECORDS AND REPORTS
VII.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or
at such place or places as designated by the board of directors, keep a
record of its stockholders listing their names and addresses and the
number and class of shares held by each stockholder, a copy of these
bylaws as amended to date, accounting books and other records of its
business and properties.
Any stockholder of record, in person or by attorney or other
agent, shall, upon written demand under oath stating the purpose
thereof, have the right during the usual hours for business to inspect
for any proper purpose the corporation's stock ledger, a list of its
stockholders, and its other books and records and to make copies or
extracts therefrom. A proper purpose shall mean a purpose reasonably
related to such person's interest as a stockholder. In every instance
where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of
attorney or such other writing that authorizes the attorney or other
agent to so act on behalf of the stockholder. The demand under oath
shall be directed to the corporation at its registered office in
Delaware or at its principal place of business.
VII.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine (and to make copies
of) the corporation's stock ledger, a list of its stockholders and its
other books and records for a purpose reasonably related to his or her
position as a director.
VII.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and
at any special meeting of the stockholders when called for by vote of
the stockholders, a full and clear statement of the business and
condition of the corporation.
VII.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, if any, the president, any vice
president, the chief financial officer, the secretary or any assistant
secretary of this corporation, or any other person authorized by the
board of directors or the president or a vice president, is authorized
to vote, represent and exercise on behalf of this corporation all rights
incident to any and all shares of the stock of any other corporation or
corporations standing in the name of this corporation. The authority
herein granted may be exercised either by such person directly or by any
other person authorized to do so by proxy or power of attorney duly
executed by such person having the authority.
VII.5 CERTIFICATION AND INSPECTION OF BYLAWS
The original or a copy of these bylaws, as amended or otherwise
altered to date, certified by the secretary, shall be kept at the
corporation's principal executive office and shall be open to inspection
by the stockholders of the corporation, at all reasonable times during
office hours.
ARTICLE VIII
GENERAL MATTERS
VIII.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights
or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other
lawful action, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing
the record date is adopted and which shall not be more than sixty (60)
days before any such action. In that case, only stockholders of record
at the close of business on the date so fixed are entitled to receive
the dividend, distribution or allotment of rights, or to exercise such
rights, as the case may be, notwithstanding any transfer of any shares
on the books of the corporation after the record date so fixed, except
as otherwise provided by law.
If the board of directors does not so fix a record date, then the
record date for determining stockholders for any such purpose shall be
at the close of business on the day on which the board of directors
adopts the applicable resolution.
VIII.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by
resolution which person or persons may sign or endorse all checks,
drafts, other orders for payment of money, notes or other evidences of
indebtedness that are issued in the name of or payable to the
corporation, and only the persons so authorized shall sign or endorse
those instruments.
VIII.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these
bylaws, may authorize and empower any officer or officers, or agent or
agents, to enter into any contract or execute any instrument in the name
of and on behalf of the corporation; such power and authority may be
general or confined to specific instances. Unless so authorized or
ratified by the board of directors or within the agency power of an
officer, no officer, agent or employee shall have any power or authority
to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
VIII.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
The shares of the corporation shall be represented by certifi-
cates, provided that the board of directors of the corporation may
provide by resolution or resolutions that some or all of any or all
classes or series of its stock shall be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until
such certificate is surrendered to the corporation. Notwithstanding the
adoption of such a resolution by the board of directors, every holder of
stock represented by certificates and, upon request, every holder of
uncertificated shares, shall be entitled to have a certificate signed
by, or in the name of the corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by
the treasurer or an assistant treasurer, or the secretary or an
assistant secretary of such corporation representing the number of
shares registered in certificate form. Any or all of the signatures on
the certificate may be a facsimile. In case any officer, transfer agent
or registrar who has signed or whose facsimile signature has been placed
upon a certificate has ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he or she were such officer,
transfer agent or registrar at the date of issue.
Certificates for shares shall be of such form and device as the
board of directors may designate and shall state the name of the record
holder of the shares represented thereby; its number; date of issuance;
the number of shares for which it is issued; a summary statement or
reference to the powers, designations, preferences or other special
rights of such stock and the qualifications, limitations or restrictions
of such preferences and/or rights, if any; a statement or summary of
liens, if any; a conspicuous notice of restrictions upon transfer or
registration of transfer, if any; a statement as to any applicable
voting trust agreement; if the shares be assessable, or, if assessments
are collectible by personal action, a plain statement of such facts.
Upon surrender to the secretary or transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it
shall be the duty of the corporation to issue a new certificate to the
person entitled thereto, cancel the old certificate and record the
transaction upon its books.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration
to be paid therefor. Upon the face or back of each stock certificate
issued to represent any such partly paid shares, or upon the books and
records of the corporation in the case of uncertificated partly paid
shares, the total amount of the consideration to be paid therefor and
the amount paid thereon shall be stated. Upon the declaration of any
dividend on fully paid shares, the corporation shall declare a dividend
upon partly paid shares of the same class, but only upon the basis of
the percentage of the consideration actually paid thereon.
VIII.5 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of
stock or more than one series of any class, then the powers, the
designations, the preferences and the relative, participating, optional
or other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or
rights shall be set forth in full or summarized on the face or back of
the certificate that the corporation shall issue to represent such class
or series of stock; provided, however, that, except as otherwise
provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements there may be set forth on the face or
back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
the designations, the preferences and the relative, participating,
optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
VIII.6 LOST CERTIFICATES
Except as provided in this Section 8.6, no new certificates for
shares shall be issued to replace a previously issued certificate unless
the latter is surrendered to the corporation and cancelled at the same
time. The board of directors may, in case any share certificate or
certificate for any other security is lost, stolen or destroyed,
authorize the issuance of replacement certificates on such terms and
conditions as the board may require; the board may require
indemnification of the corporation secured by a bond or other adequate
security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account
of the alleged loss, theft or destruction of the certificate or the
issuance of the replacement certificate.
VIII.7 TRANSFER AGENTS AND REGISTRARS
The board of directors may appoint one or more transfer agents or
transfer clerks, and one or more registrars, each of which shall be an
incorporated bank or trust company -- either domestic or foreign, who
shall be appointed at such times and places as the requirements of the
corporation may necessitate and the board of directors may designate.
VIII.8 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions,
rules of construction and definitions in the General Corporation Law of
Delaware shall govern the construction of these bylaws. Without
limiting the generality of this provision, as used in these bylaws, the
singular number includes the plural, the plural number includes the
singular, and the term "person" includes both an entity and a natural
person.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted,
amended or repealed by the stockholders entitled to vote or by the board
of directors of the corporation. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the
power, nor limit their power to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied
in the book of bylaws with the original bylaws, in the appropriate
place. If any bylaw is repealed, the fact of repeal with the date of
the meeting at which the repeal was enacted or the filing of the
operative written consent(s) shall be stated in said book.
CERTIFICATE OF ADOPTION OF AMENDED AND RESTATED BYLAWS
OF
ARTHROCARE CORPORATION
ADOPTION BY CHIEF EXECUTIVE OFFICER
The undersigned person, in his capacity as the Chief Executive
Officer of ArthroCare Corporation, hereby adopts the foregoing bylaws,
comprising twenty-two (22) pages, as the Bylaws of the corporation.
Effective as of September 17, 1998.
Michael A. Baker, Chief
Executive Officer
Certificate by Secretary of Adoption by Chief Executive Officer
The undersigned hereby certifies that he is the duly elected,
qualified, and acting Secretary of ArthroCare Corporation and that the
foregoing Bylaws, comprising twenty-two (22) pages, were adopted as the
Bylaws of the corporation effective as of September 17, 1998, by the
Chief Executive Officer of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
affixed the corporate seal this 17th day of September 1998.
J. Casey McGlynn, Secretary
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