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 April 3, 1999.
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
May 7, 1999 was 9,021,007.
<PAGE>
ARTHROCARE CORPORATION
INDEX
PART 1: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of April 3, 1999
(unaudited) and January 2, 1999
Condensed Consolidated Statements of Operations (unaudited) for the
three-months ended April 3, 1999 and April 4, 1998
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three-months ended April 3, 1999 and April 4, 1998
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. Quantitative and Qualitiative Disclosures About Market Risk
Item 3. Changes in Securities
Item 4. Defaults upon Senior Securities
Item 5. Submission or Matters to Vote of Security Holders
Item 6. Other Information
Item 7. Exhibits and Reports on Form 8-K
SIGNATURE
Part 1. Financial Information
Item 1. Financial Statements
ARTHROCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
April 3, January 2,
1999 1999
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $3,553 $2,826
Available-for-sale securities 4,577 5,232
Accounts receivables, net of allowance for bad debt 6,431 5,972
Inventories 7,211 7,069
Prepaid expenses and other current assets 402 1,038
------------- -------------
Total current assets 22,174 22,137
Property and equipment, net 5,220 4,560
Related party receivables 575 723
Other assets 281 340
------------- -------------
Total assets $28,250 $27,760
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,231 $1,797
Accrued liabilities 963 1,734
Accrued compensation 1,660 1,056
Deferred revenue 1,122 517
Capital lease obligation, current portion 59 60
------------- -------------
Total current liabilities 5,035 5,164
Capital lease obligation, less current portion 132 151
Deferred rent 138 140
------------- -------------
Total liabilities 5,305 5,455
------------- -------------
Stockholders' equity:
Common stock 9 9
Additional paid in capital 50,307 49,901
Notes receivable from stockholders (61) (51)
Deferred compensation (28) (68)
Accumulated other comprehensive income (loss) (75) (39)
Accumulated deficit (27,207) (27,447)
------------- -------------
Total stockholders' equity 22,945 22,305
------------- -------------
Total liabilities and stockholders' equity $28,250 $27,760
============= =============
</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
---------------------------
April 3, April 4,
1999 1998
------------- -------------
<S> <C> <C>
Revenues:
Product sales $9,077 $4,871
License fees and royalty revenue 625 2,250
------------- -------------
Total revenue: 9,702 7,121
Cost of product sales 3,876 2,850
------------- -------------
Gross profit 5,826 4,271
------------- -------------
Operating expenses: 1,024 985
Research and development 3,336 2,116
Sales and marketing 1,349 1,211
General and administrative ------------- -------------
Total operating expenses 5,709 4,312
------------- -------------
Net Income (loss)from operations 117 (41)
Interest and other income, net 134 294
------------- -------------
Income before taxes 251 253
Income tax provision 11 --
------------- -------------
Net income
$240 $253
============= =============
Basic net income per common share
$0.03 $0.03
Diluted net income per common share ============= =============
$0.03 $0.03
============= =============
Shares used in computing basic
net income per common share
8,973 8,889
Shares used in computing diluted ============= =============
net income per common share 9,505 9,244
============= =============
</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>
Three months ended:
--------------------------
April 3, April 4,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $240 $253
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 470 167
Amortization of deferred compensation 40 40
Provision for doubtful accounts receivable
and product returns 93 60
Provision for excess and obsolete inventory 525 100
Deferred rent (2) (2)
Changes in operating assets and liabilities:
Accounts receivable (552) (592)
Inventory (666) (270)
Prepaid expenses and other current assets 636 (2)
Accounts payable (566) 434
Accrued liabilities (167) 1,211
Deferred revenue 605 --
Other assets 59 --
------------ ------------
Net cash provided by operating activities 715 1,399
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (1,130) (106)
Purchases of available-for-sale securities (347) (9,937)
Sale or maturities of available-for-sale securities 1,001 12,864
------------ ------------
Net cash provided by (used in) investing activities (476) 2,821
------------ ------------
Cash flows from financing activities:
Issuance of notes receivable to related parties (11) --
Repayment of capital leases (19) (14)
Repayment of notes receivable from related parties 148 (6)
Proceeds from exercise of options
to purchase common stock 406 173
------------ ------------
Net cash provided by financing activities 524 153
------------ ------------
Effect of exchange rate on changes in cash (36) --
------------ ------------
Net increase in cash and cash equivalents 727 4,373
Cash and cash equivalents, beginning of period 2,826 8,188
------------ ------------
Cash and cash equivalents, end of period $3,553 $12,561
============ ============
</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 2, 1999 should be read in conjunction with these condensed
consolidated financial statements. The balance sheet at January 2, 1999
was derived from audited financial statements; however, the financial
statements in this report do not include all disclosures required by
generally accepted accounting principles.
Computation of Net Income Per Share:
Basic net income per share is computed using the weighted average
number of shares of common stock. Diluted net income per share is
computed using the weighted average number of shares of common stock and
common equivalent share outstanding during the period. Common
equivalent shares consist of stock options. Common equivalent shares
are excluded from the computation if their effect is anti-dilutive.
The following is a reconciliation of the computation for basic and
diluted EPS (in thousands):
Three months ended
------------------------
April 3, April 4,
1999 1998
----------- -----------
Net income $240 $253
=========== ===========
Shares calculation:
Average basic shares outstanding 8,973 8,889
Options 532 355
----------- -----------
Total shares used to compute
diluted earnings per share 9,505 9,244
=========== ===========
Earnings per basic share $0.03 $0.03
=========== ===========
Earning per diluted share $0.03 $0.03
=========== ===========
Options to purchase 316,481 and 70,700 shares of common stock at
prices ranging from $17.25-$24.25 per share were outstanding during the
three months ended April 3, 1999, and April 4, 1998, respectively, but
were not included in the computation of diluted EPS because either the
option's exercise price was greater than the average market price of the
common shares or inclusion of such options would have been anti-
dilutive.
2. Comprehensive Income
Comprehensive income is comprised of net income and other
comprehensive earnings such as foreign currency translation gain/loss
and unrealized gains or losses on available-for-sale marketable
securities. The company's unrealized gains and losses on available for
sale marketable securities have been insignificant for all periods
presented. ArthroCare's total comprehensive earnings were as follows
(in thousands):
<TABLE>
<CAPTION>
Three months ended
-------------------
April 3, April 4,
1999 1998
--------- ---------
<S> <C> <C>
Net income $240 $253
Other comprehensive income
Foreign translation adjustment (36) --
--------- ---------
Comprehensive net income 204 253
========= =========
</TABLE>
4. Balance sheet detail (in thousands):
<TABLE>
<CAPTION>
April 3, April 4,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Inventory:
Raw materials $2,838 $3,127
Work-in-process 1,429 1,852
Finished goods 2,944 2,090
------------ ------------
Total $7,211 $7,069
============ ============
Other accrued liabilities:
Accrued professional fees $134 $150
Accrued warranty 290 302
Other 539 1,282
------------ ------------
Total $963 $1,734
============ ============
</TABLE>
ARTHROCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. Litigation
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 the company believes
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.
In addition, the company filed a motion on March 5, 1998 for preliminary
injunction against the Defendants marketing and selling of the VAPR
system. The court denied this motion for preliminary injunction in
December 1998, stating that the defendants have raised questions that
should be more fully addressed by the parties, and then be resolved by a
jury at trial. The jury trial will begin on June 14, 1999 in San
Francisco, California.
On February 4, 1999, Xomed Surgical Products ("Xomed") of
Jacksonville, Florida filed a complaint against the company in the
Fourth Judicial Circuit, Duval County, Florida, alleging breach of
contract by the company. In the complaint, Xomed has demanded a full
refund of the amounts paid for certain products bought by Xomed from the
company, and for a portion of an exclusive license fee paid by Xomed
pursuant to an exclusive license and distribution agreement between
Xomed and the company. This license and distribution agreement was
terminated by the company on February 5, 1999. The company believes the
suit is without merit, and filed a Motion to Dismiss and Answer to the
Complaint on May 3, 1999. In addition, the company filed two
counterclaims against Xomed for damages caused by Xomed's failure to
perform under the contract and for a certain milestone payment owed to
ArthroCare by Xomed.
6. Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments,
embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at
fair value. The company must adopt this standard no later than fiscal
year 2000. To date, the company does not engage in hedging activities.
7. Segment Information:
The company is organized into four segments on the basis of
product markets, Arthroscopy, ENTec, Visage and AngioCare. To date,
substantially all the company's product revenue was related to the
Arthroscopic segment. During the three-month period ended April 3,
1999, approximately $0.1 million of the company's license revenue was
attributable to the AngioCare segment and $0.5 million was attributable
to the Visage segment.
8. Subsequent Events:
In April 1999, the company negotiated a $7.0 million line of
credit with a bank which matures in twelve months. Borrowings under the
line of credit bear interest at the bank's prime rate plus .25%.
Borrowings under this line are secured by the company's assets and are
subject to certain covenants related to financial ratios and profits.
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 2, 1999 and "ADDITIONAL
FACTORS THAT MIGHT AFFECT FUTURE RESULTS" set forth below.
ArthroCare develops, manufactures and markets surgical instruments
based on its novel Coblation(TM) technology. The company has developed a
broad technology platform for operating on soft-tissue that is being
commercialized across a range of surgical applications. Coblation
technology applies energy to create a plasma- etching effect which
disintegrates tissue at cooler temperatures than traditional
electrosurgical or laser surgical tools, allowing surgeons to operate
with greater precision and less damage to surrounding tissue.
ArthroCare's Coblation Systems replace the multiple surgical tools
traditionally used in soft-tissue surgery procedures with one multi-
purpose, surgical system that consists of a controller unit and a series
of disposable surgical tools that are specialized for particular types
of surgery. The disposable surgical tool ablates (removes) soft tissue
with minimal damage to surrounding healthy tissue and simultaneously
achieves hemostasis (sealing of small bleeding vessels). Although the
company's Coblation technology is most commonly used in arthroscopic
procedures, ArthroCare has developed Coblation technology for use in
cosmetic surgery, ear, nose and throat (ENT) surgery, and cardiology.
The company's long-term strategy includes applying its patented
technology to other soft-tissue surgery fields.
During the year ended January 2, 1999, the company formed a new
business division, AngioCare(TM), for the purpose of commercializing the
company's technology in the cardiac and interventional cardiology
markets. As part of those efforts, in February 1998, the company entered
into a license and OEM agreement under which Boston Scientific
Corporation ("BSC") will provide input into the development of, obtain
regulatory approval for and market products based on the company's
Coblation technology for myocardial revascularization procedures. The
company believes that there may be additional applications within
cardiology for which the company's technology could be utilized.
In April 1998, the company announced that it had entered the
cosmetic surgery market, and that it had formed a new business division
called Visage(TM) to commercialize Coblation technology in this field. In
January 1999, the company entered into a license and distribution
agreement with Collagen Aesthetics ("Collagen"), which was expanded in
February 1999, under this agreement, Collagen acquired exclusive,
worldwide, marketing rights for the company's Visage line of products
for the dermatology and cosmetic surgery markets.
In May 1998, the company announced that it had entered the
otorhinolaryngology (ear, nose and throat) market, and that it had
formed a new business unit called ENTec(TM) to commercialize Coblation
technology in this field. In June 1998, the company entered into a
license and OEM agreement with Xomed Surgical Products ("Xomed") to market
the Coblation products in the otorhinolaryngology market. This agreement
was terminated by the company in February 1999, following which the
company has been pursuing direct marketing and distribution of the ENTec
product lines.
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 Arthroscopic Electrosurgery System
in the United States for use in arthroscopic surgery of the knee,
shoulder, elbow and ankle. The company has since received FDA clearance
for use of this system in the wrist and hip. The company applied the CE
mark for marketing the Visage System in Europe for general dermatology,
cosmetic surgery, skin resurfacing and wrinkle reduction procedures and
has received 510(k) clearance for use in general dermatology procedures
in the United States. The company is pursuing additional clearances that
will allow the system to be marketed in the United States specifically
for skin resurfacing and wrinkle reduction. The company applied the CE
mark for marketing the ENTec System in Europe and has received 510(k)
clearances for use in general head and neck surgical procedures and
functional endoscopic sinus surgery in the United States. In addition,
the company may pursue clearance in other indications.
In December 1995, the company first commercially introduced its
Arthroscopic System through a network of distributors in the United
States. The company's strategy includes placing controller units, that
are intended to generate future disposable revenue with arthroscopic
surgeons. The company's long-term strategy includes applying its
patented platform technology to a range of other soft-tissue surgical
procedures including the newly introduced products in the fields of
cosmetic surgery and ear, nose and throat surgery. The company has
received 510(k) clearance for use of its technology in several fields.
There can be no assurance that any of the company's clinical studies in
other fields 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:
Product sales for the three-month period ended April 3, 1999
increased by 83.7% to $9.1 million from $4.9 million for the three-month
period ended April 4, 1998. The increase in product sales was primarily
due to an increase in the number of sales of both controller and
disposable units. The higher unit volume of sales resulted primarily
from increased activity for newly introduced styles of disposables for
arthroscopy, and controllers and disposables sales for new product
lines. During the second half of fiscal year 1998, the company
introduced new disposable styles, including the Saber(TM) and Covac(TM), that
are designed primarily to be used in arthroscopic knee procedures. Sales
of these disposables accounted for over 15% of total product sales for
the three-month period ended April 3, 1999.
The company's strategy in arthroscopy has been, and continues to be, to
increase future disposable sales by increasing the installed base of
controllers through promotional programs. Disposables are consistently
sold at or near list price except for sales to international
distributors and marketing partners, which are currently, and are
expected in the future to be, sold at discounted prices. The company
expects disposable sales to remain the primary component of product
sales in the near future. Substantially all revenue was derived
domestically during the three-month periods ended April 3, 1999 and
April 4, 1998.
The company believes that the majority of its disposables sales
revenue is being generated by the sale of disposables for use in
shoulder procedures. Based on the estimated number of procedures
performed each year, the company believes that knee procedures represent
the largest segment of the arthroscopic market. In order to achieve
increasing disposable sales over time, the company believes it must
continue to penetrate the market in knee procedures, expand the
physicians education with respect to the Coblation technology, continue
working on articular cartilage applications that and focus product
development efforts specifically for knee applications.
During the year ended January 3, 1998, the company introduced its
System 2000 controller designed for more aggressive ablation and
hemostasis compared to its predecessor unit. The company believes
features found in the System 2000, as well as the new disposables, will
increase disposable sales for knee and shoulder procedures. There can be
no assurance that the use of these new products will be adopted by
physicians. In addition, the company has limited sales and marketing
experience and can make no assurance that the current trends in sales
and product acceptance will continue.
License fees and royalty revenue decreased to $0.6 million for the
three-month period ended April 2, 1999 from $2.3 million for the three-
month period April 3, 1998. The decrease is primarily due to the timing
of licensing payments from business partners. In February 1998, the
company entered into a license agreement under which BSC was granted an
exclusive right to develop and market products based on the company's
Coblation technology for myocardial revascularization procedures. BSC
pays license fees, a portion of which has been classified as prepaid
royalties, to the company upon achievement of designated milestones and
royalties on sales of resulting products, if any. The company received a
license payment from BSC of $3.0 million in February of 1998, of which
$2.3 million was recognized as revenue during the three-month period
ended April 4, 1998.
In January 1999, the company entered into a license and
distribution agreement with Collagen, which was broadened by mutual
agreement in February 1999, whereby Collagen acquired exclusive,
worldwide, marketing rights for the company's patented Coblation
technology in the dermatology, cosmetic and plastic surgery markets.
Under the terms of the agreement, Collagen pays license fees based upon
the achievement of certain milestones and royalties on sales of product
to end-users. During the three-month period ended April 3, 1999, the
company recognized $0.5 million of such payments as license fees and
royalty revenue.
There can be no assurance that the company will be able to
continue to achieve the milestones required to recognize future license
fees, or that products will be developed, cleared for marketing or
achieve sufficient commercial acceptance so that the company may
continue to receive licensing and royalty revenues from its business
partners.
Cost of Product Sales
Cost of product sales for the three-month period ended April 3,
1999 was $3.9 million or 43.3% of product sales, as compared with $2.9
million or 59.2% of product sales for the three-month period ended April
4, 1998. The absolute dollar increase in cost of sales year-over-year
is attributable to increasing unit sales of both controllers and
disposables. The overall decrease in cost of sales as a percentage of
product sales resulted from improved efficiencies in manufacturing,
fixed and semi-fixed costs being spread over higher manufacturing
volumes, and improvements to the manufacturing process.
Operating Expenses
Research and development expense was $1.0 million, for the three-
month periods ended April 3, 1999 and April 4, 1998. In general, the
overall spending patterns in research and development remained
consistent as the company continues to focus on introducing new products
in its current product lines as well as development efforts for
potential additional product lines. The company believes that
investment in a platform technology is essential for it to maintain its
competitive position. The company expects to increase the dollar amount
of research and development spending through substantial expenditures on
new product development, regulatory affairs, clinical studies and
patents. 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 $3.3 million or 36.7% of
product sales during the three-month period ended April 3, 1999, as
compared to $2.1 million or 42.9% of product sales during the same
period of the previous fiscal year. The increase in spending was
primarily due to higher dealer commissions resulting from increased
sales, higher staffing and increased travel associated with higher
levels of sales and marketing activity. Additional sales and marketing
expenses were incurred during the current year period 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, 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 and future products.
General and administrative expense increased to $1.3 million or
14.5% of product sales during the three-month period ended April 3,
1999, as compared to $1.2 million or 24.5% of product sales during the
same period of the previous fiscal year. Overall, the most significant
spending was attributable to legal expenses related to the patent
infringement claims brought by the company against certain competitors.
The company expects that general and administrative expenses will
continue to increase as a result of the patent litigation and additional
business development activities.
Interest and Other Income, net
Interest and other income, net decreased to $0.1 million during
the three-month period ended April 3, 1999 from $0.3 million for the
three-month period ended April 4, 1998 primarily due to a decrease in
interest income from investments due to the declining balance of cash
and investments.
Income Tax Provision
The provision for income taxes was $11,000 for the three-month
period ended April 3, 1999. The company's tax rate is below the
statutory rate due to the utilization of net operating loss
carryforwards incurred in prior years. The company is subject to
certain alternative minimum tax requirements for which an estimate is
made based on the anticipated effective tax rate at the end of the
fiscal year.
Net Income
Net income was $0.3 million for each of the three-month periods
ended April 3, 1999 and April 4, 1998. Net income for the current
period reflects an increase in product sales primarily offset by
increased spending in sales and marketing.
Liquidity and Capital Resources
On April 3, 1999, the company had $17.1 million in working
capital. Principal sources of liquidity consisted of $8.1 million in
cash, cash equivalents and available-for-sale securities. The cash and
cash equivalents are highly liquid with original maturities of ninety
days or less.
Net cash provided by operating activities for the three-month
period ended April 3, 1999 was $0.7 million. Cash generated by operating
activities for the three-month period ended April 4, 1998 was $1.4
million. The decrease in cash provided by operating activities year-
over-year was primarily due to the license fee revenue received from BSC
of $2.3 million in the first quarter of 1998, offset by a reduction in
accrued liabilities.
Net accounts receivable increased to $6.4 million as of April 3,
1999 from $6.0 million as of January 2, 1999. The increase in accounts
receivable is mainly attributable to the corresponding increase in
product sales offset by a decrease in the overall number of days sales
outstanding.
Inventories increased slightly to $7.2 million as of April 3, 1999
from $7.1 million at January 2, 1999 due to higher product sales
activity along with the anticipated ramp-up of new product markets. The
company expects future inventory levels to grow as sales volume
increases.
Net property and equipment increased to $5.2 million as of April
3, 1999 from $4.6 million on January 2, 1999. The increase is primarily
attributable to the capitalization of controllers placed under various
promotional programs along with an increase of computer software and
equipment.
The company plans to finance its capital needs principally from
cash from product sales, license fees and royalty income, cash, cash
equivalents and related interest. The company believes the existing
capital resources together with cash generated from licensing and
royalty arrangements and product sales will be sufficient to fund its
operations through fiscal year 1999. The company has negotiated a $7.0
million line of credit that could provide additional working capital.
As of April 3, 1999, the company had committed to capital expenditures
of approximately $0.2 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, costs 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.
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 has assigned a Task Force to
handle the significant uncertainty that exists concerning the potential
effects associated with Year 2000 compliance. The Task Force has
formulated and begun to implement a plan to address Year 2000 compliance
including the formulation of contingency plans. To date, the company has
not found a material impact that may result from the failure of its
computers and computer software or that of its vendors, suppliers, and
customers, to recognize dates. The company has completed an upgrade of
its information technology system including its financial system, order
processing, manufacturing and inventory system which included Year 2000
compliance. To date the company has spent approximately $250,000
upgrading its computer technology. The company has not yet undertaken
the steps to quantify the effects of noncompliance of its customers,
suppliers and/or its service providers. The company's goal is to
complete all phases of its review and be Year 2000 compliant by
December, 1999.
Any Year 2000 compliance problem with 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 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments,
embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at
fair value. The company must adopt this standard no later than fiscal
year 2000. To date, the company does not engage in hedging activities.
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 2, 1999 filed April 2, 1999. 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 Non-Arthroscopic Products;
Uncertainties Associated with 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 Coblation technology 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 Coblation technology for use in head and
neck surgical procedures. The company applied the CE mark for marketing
of the Visage product line in Europe for general dermatology, cosmetic
surgery, skin resurfacing and wrinkle reduction procedures and has
received 510(k) clearances for use of Visage product line in general
dermatology procedures in the United States. The company is pursuing
additional clearances that will allow the Visage product line to be
marketed in the United States specifically for skin resurfacing and
wrinkle reduction. The company has applied the CE mark certification for
marketing the ENTec line of Coblation-based products in Europe and has
received 510(k) clearances for use of this system in general head and
neck surgical procedures, as well as endoscopic sinus surgery in the
United States. In addition, the company may pursue additional clearances
for certain other indications. Both of these product lines have only
recently been commercially introduced and to date, the company has sold
only a small number of units, which have been utilized by a limited
number of doctors. No assurance can be given that the company will be
able to market the Visage or ENTec product lines successfully. If the
Visage or ENTec product lines are not commercially successful, the
company's business, financial condition and results of operations could
be materially adversely affected.
A significant investment in additional preclinical and clinical
testing, regulatory and sales and marketing activities may be necessary
in order for the company to commercialize the Visage, ENTec and
AngioCare product lines. There can be no assurance that the Visage,
ENTec or AngioCare product lines will generate sufficient or sustainable
revenues to enable 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 the Visage, ENTec and
AngioCare product lines 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 the Visage, ENTec and AngioCare product lines 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
the Visage, ENTec and AngioCare product lines or any approved products
are not commercially successful, there may 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 three-month period ended April 3, 1999, had
reported 40 months of sales. Since the Arthroscopic System accounts for
substantially all of the company's product sales, the company is highly
dependent on its sales. The company's Visage, ENTec and AngioCare
product lines have only recently become available, and to date, the
company has sold only a small number of units. No assurance can be given
that the company will be able to manufacture the Visage, ENTec and
AngioCare product lines in commercial quantities at acceptable costs, or
that it will be able to market such products successfully. Additionally,
the company's potential products for non-arthroscopic indications are in
various 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 regulatory
approval, if applied for, will be granted by the FDA or foreign
regulatory authorities on a timely basis, if at all, or that the
potential products will ever achieve commercial acceptance.
Currently, the majority of the company's sales are from its
Arthroscopic System in the United States. The company has established
distribution capability in Europe, Australia, New Zealand, Korea, Japan,
Taiwan, Canada, Mexico, Caribbean, Russia, South Africa, the Middle
East, Northern Africa and 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. If
such regulatory approval is obtained, there can be no assurance that the
company will be able to establish a successful distribution capability
in these or in other geographic regions or for other than the
arthroscopic product line.
Dependence Upon Collaborative Arrangements
In order to successfully develop and commercialize certain
products, the company may enter into collaborative or licensing
arrangements with other medical device companies and other entities to
fund and complete its research and development activities, pre-clinical
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 Collagen. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations- Overview" for a
discussion of these arrangements.
The company's participation in 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 meet 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 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
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
Despite the benefits of the company's Coblation technology,
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.
Only a few, independently published clinical reports exist to support
the company's marketing efforts for its products and technology. The
company believes that continued recommendations and endorsements by
influential physicians are essential for market acceptance of its
products and technology. If Coblation technology does not continue to
receive broad-based physician acceptance and endorsement by influential
physicians, the company's business, financial condition and results of
operations could be materially adversely affected.
Limited Domestic and International Marketing and Sales Experience
The company has shipped over 4,600 controller units and more than
385,000 disposables through the quarter ended April 3, 1999. The company
is marketing and selling its Arthroscopic and ENTec product lines in the
United States and internationally through a network of independent
distributors and its subsidiary, ArthroCare Europe AB. These
distributors sell orthopedic arthroscopy and ENT devices for a number of
other manufacturers. 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 its ENTec division. There
can be no assurance that the company will successfully develop its own
marketing and sales capabilities or experience for the ENTec products.
In addition, there can be no assurance that these distributors will
commit the necessary resources to effectively market and sell the
company's Arthroscopic or ENTec product lines, or that they will be
successful in closing sales with doctors and hospitals. Collagen is the
exclusive and worldwide distributor for the Visage product line. The
inability to sell sufficient quantities of the cosmetic surgery products
could have a material adverse effect on the company's business,
financial condition and results of operations.
The company has established distribution capability in Europe,
Australia, New Zealand, Korea, Japan, Taiwan, Canada, Mexico, the
Caribbean, Russia, South Africa, the Middle East, Northern Africa and
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. If such regulatory approval is
obtained, there can be no assurance that the company will be able to
establish a successful distribution capability in these or in other
geographic regions. In January 1999, the company entered into a license
agreement with Collagen whereby Collagen has the exclusive worldwide
distribution rights for Visage. For a description of additional risks
and uncertainties relating to Collagen's exclusive worldwide
distribution rights for Visage, see "Additional Factors That Might
Affect Future Results - Dependence on Collaborative Arrangements" on
page 20 of this Quarterly Report on Form 10-Q.
No assurance can be given that the company will successfully its
products directly, or through its distributors or its business partners,
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
its products in international markets.
Limited Manufacturing Experience
The company's manufacturing operations consist of an in-house
assembly operation for the manufacture of disposables, and a separate
in-house operation for the manufacture of controllers. The company's
products are manufactured from several components, some of which are
supplied to the company by third parties. Manufacture of the
controllers, of which an earlier version was manufactured by a third
party, was brought in-house in late 1997 for purposes of maintaining
process control, managing availability, and leveraging fixed costs.
In April 1998, the company started manufacturing its System 5000
controllers for its Visage product line 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 disposables
for the ENTec and Visage product lines. As a result, the company has
limited experience manufacturing ENTec and Visage product lines in
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. In addition,
the company must conform to the Medical Device Directive (MDD) for sale
in Europe. There can be no assurance that the company or its component
suppliers will remain in compliance with the QSR, ISO 9001 or MDD
standards. Any failure by the company or its component suppliers to
remain in compliance with the QSR, ISO 9001 or MDD standards could have
a material adverse effect on the company's business, financial condition
and results of operations.
In addition, the disposables are sterilized by a single
subcontractor. There can be no assurance that an alternate sterilizer
can be identified and qualified for sterilizing the disposables. The
company's inability to secure an alternative sterilizer, if required,
would limit its ability to manufacture the company's disposables and
could have a material adverse effect on the company's business,
financial condition and results of operations.
History of Losses; Fluctuations in Operating Results
The company has experienced significant operating losses since
inception and, as of April 3, 1999, had an accumulated deficit of $27.2
million. Results of operations may fluctuate significantly from quarter
to quarter due to the timing of 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 or not it can successfully continue
to market its Coblation based technology product lines. 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 18 issued United States patents,
more than 50 pending United States patent applications, 8 issued
international patents and over 40 international patent applications
corresponding to eighteen of the United States filings. The initial
U.S. patent is currently set to expire in 2008, three issued U.S.
patents are currently expected to expire between 2008 and 2012 and the
other 14 U.S. 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.
The issued patents cover, among other things, systems and methods
for applying radio frequency energy to tissue in the presence of
electrically conductive fluid such as isotonic saline; disposables
having an electrode array and a means to supply current independently to
individual electrodes; and systems and methods for employing radio
frequency energy in arthroscopy, urology, gynecology, ENT, cosmetic
surgery and cardiac procedures (e.g. transmyocardial revascularization
of the heart). The pending patent applications include coverage for the
fundamental tissue ablation and cutting technology as well as methods
and apparatus for specific 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 substantial
investments in competing technologies, will not seek to apply for and
obtain patents that will prevent, limit or interfere with the company's
ability to make, use and sell its products either in the United States
or in international markets.
A number of medical device and other companies, universities and
research institutions have filed patent applications or have issued
patents relating to monopolar and/or bipolar electrosurgical methods and
apparatus. If third-party patents or patent applications contain claims
infringed by the company's technology and such claims are ultimately
determined to be valid, there can be no assurance that the company would
be able to obtain licenses to those patents at a reasonable cost, if at
all, or be able to develop or obtain alternative technology, either of
which would have a material adverse effect on the company's business,
financial condition and results of operations. There can be no assurance
that the company will not be obligated to defend itself in court against
allegations of infringement of third-party patents.
In addition to patents, the company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through
confidentiality and proprietary information agreements. The company
requires its key employees and consultants to execute confidentiality
agreements upon the commencement of an employment or consulting
relationship with the company. These agreements generally provide that
all confidential information, developed or made known to the individual
by the company during the course of the individual's relationship with
the company, is to be kept confidential and not disclosed to third
parties. These agreements also generally provide that inventions
conceived by the individual in the course of rendering services to the
company shall be the exclusive property of the company. There can be no
assurance that such agreements will not be 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 all 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, 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 beginning to replace older tissue
removal technology, such as laser systems, conventional electrosurgical
systems, manual instruments and power shavers, in certain arthroscopic
procedures. Consequently, the company competes indirectly with the
providers of such tissue removal systems because the company must
convert customers 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 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.
The ENT medical device industry is rapidly becoming more
competitive. The company recently cancelled its 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 20 of this Annual Report on Form 10-Q). However,
other large companies, such as Smith & Nephew, Stryker Corporation and
Conmed Corporation, each have shares of the market for manual
instruments, such as microdebriders for endoscopic sinus surgery. In
ENT, the company faces competition from large laser companies, such as
ESC Medical Systems of Tel Aviv, Israel, which develops and markets
lasers for certain ENT applications, such as laser-assisted uvuloplasty
(LAUP). 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 Medical Technologies 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 Inc.
and Ellman International, Inc. both manufacture and sell a variety of
medical devices that use conventional RF technology for tissue
desiccation, cutting and/or coagulation in turbinate surgery, the
treatment of snoring and other ENT procedures.
The company has entered into an exclusive license and distribution
agreement with Collagen, which is currently one of the largest company's
focused on the cosmetic surgery market. The cosmetic surgery industry
includes a number of large and well established companies that provide
devices for rejuvenating 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 carbon dioxide 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, Israel. ESC recently merged with Laser Industries,
Ltd., already one of the largest medical laser manufacturers in the
world. The combined entity 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
resurfacing 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 other surgical
fields that the company may enter. 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 material changes or
modifications to medical devices also are subject to FDA review and
clearance or approval. Pursuant to the FDC Act, the FDA regulates the
research, testing, manufacture, safety, labeling, storage, record
keeping, advertising, distribution and production of medical devices in
the United States. Noncompliance with applicable requirements can result
in warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure
of the government to grant premarket clearance or premarket approval for
devices, and criminal prosecution. Failure to comply with the regulatory
requirements could have a material adverse effect on the company's
business, financial condition and results of operations.
If human clinical trials of a device are required and if the
device presents a "significant risk," the manufacturer or the
distributor of the device is required to file an IDE application prior
to commencing human clinical trials. The IDE application must be
supported by data, typically including the results of animal and,
possibly, mechanical testing. Sponsors of clinical trials are permitted
to sell investigational devices distributed in the course of the study,
provided such costs do not exceed recovery of the costs of manufacture,
research, development and handling. The clinical trials must be
conducted under the auspices of an independent Institutional Review
Board ("IRB") established pursuant to FDA regulations, and with
appropriate informed consent of the patient.
Generally, before a new device can be introduced into the market
in the United States, the manufacturer or distributor must obtain FDA
clearance of a 510(k) notification or approval of a PMA application. If
a medical device manufacturer or distributor can establish that a device
is "substantially equivalent" to a legally marketed Class I or Class II
device, or to a Class III device for which FDA has not called for PMAs,
the manufacturer or distributor may seek clearance from FDA to market
the device by filing a 510(k) notification. The 510(k) notification will
need to be supported by appropriate data establishing the claim of
substantial equivalence to the satisfaction of FDA. FDA recently has
been requiring a more rigorous demonstration of substantial equivalence.
Following submission of the 510(k) notification, the manufacturer
or distributor may not place the device into commercial distribution
until an order is issued by the FDA. No law or regulation specifies the
time limit by which FDA must respond to a 510(k) notification. At this
time, the FDA typically responds to the submission of a 510(k)
notification within 90 to 120 days, but it may take longer. An FDA order
may declare that the device is substantially equivalent to another
legally marketed device and allow the proposed device to be marketed in
the United States. The FDA, however, may determine that the proposed
device is not substantially equivalent or require further information,
including clinical data, to make a determination regarding substantial
equivalence. Such determination or request for additional information
could delay market introduction of the products that are the subject of
the 510(k) notification.
The company has received clearance of 510(k) premarket
notifications to market its Arthroscopic System for surgery of the knee,
shoulder, elbow, wrist, hip and ankle joints. In addition, the company
has received 510(k) premarket notifications to market Visage in general
dermatology procedures and is pursuing additional clearances that will
allow Visage to be marketed in the United States specifically for skin
resurfacing and wrinkle reduction. With respect to ENTec, the company
has received clearance of 510(k) premarket notifications to market the
ENTec product line in general head and neck surgical procedures, as well
as endoscopic sinus surgery. There can be no assurance that the company
will be able to obtain necessary clearances or approvals to market any
other products on a timely basis, if at all, and delays in receipt or
failure to receive such clearances or approvals, the loss of previously
received clearances or approvals, or failure to comply with existing or
future regulatory requirements could have a material adverse effect on
the company's business, financial condition and results of operations.
If a manufacturer or distributor of medical devices cannot
establish that a proposed device is substantially equivalent to a
legally marketed device, the manufacturer or distributor must seek
premarket approval of the proposed device through submission of a PMA
application. A PMA application must be supported by extensive data,
including, in many instances, preclinical and clinical trial data, as
well as extensive literature to prove the safety and effectiveness of
the device. Following receipt of a PMA application, if the FDA
determines that the application is sufficiently complete to permit a
substantive review, the FDA will "file" the application. Under the FDC
Act, the FDA has 180 days to review a PMA application, although the
review of such an application more often occurs over a protracted time
period, and generally takes approximately two years or more from the
date of filing to complete.
The PMA application approval process can be expensive, uncertain
and lengthy. A number of devices for which premarket approval has been
sought have never been approved for marketing. The review time is often
significantly extended by the FDA, which may require more information or
clarification of information already provided in the submission. In
addition, the FDA will inspect the manufacturing facility to ensure
compliance with the FDA's Good Manufacturing Practice (GMP) or QS
Regulations requirements prior to approval of an application. If
granted, the approval of the PMA application may include significant
limitations on the indicated uses for which a product may be marketed.
If necessary, the company will file a PMA application with the FDA
for approval to sell its potential products commercially in the United
States when it has developed such products. There can be no assurance
that the company will be able to obtain necessary PMA application
approvals to market such products on a timely basis, if at all, and
delays in receipt or failure to receive such approvals, the loss of
previously received approvals, or failure to comply with existing or
future regulatory requirements could have a material adverse effect on
the company's business, financial condition and results of operations.
The company is also required to register as a medical device
manufacturer with the FDA and state agencies, such as the California
Department of Health Services (CDHS) and to list its products with the
FDA. As such, the company is subject to inspections by both the FDA and
the CDHS for compliance with the FDA's QSR requirements and other
applicable regulations. These regulations require that the company
maintain its documents in a prescribed manner with respect to
manufacturing, testing and control activities. Further, the company and
the third party manufacturers of its products are required to comply
with various FDA requirements for design, safety, advertising and
labeling. There can be no assurance that the company or its component
suppliers will not encounter any manufacturing difficulties, or that the
company any of its subcontractors or component suppliers will not
experience similar 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 Visage in Europe,
Australia and Canada and to market ENTec 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/EN46001 certification and the CE mark. ISO 9001/EN46001
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/EN46001
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, day-surgery
facilities, 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 and ENT procedures performed using devices that have
received FDA approval has generally been available in the United States.
Generally, cosmetic procedures are not reimbursed. 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.
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 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 $7.0 million per
occurrence and $7.0 million 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
the Visage and ENTec product lines 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.
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 has assigned a Task Force to
handle the significant uncertainty that exists concerning the potential
effects associated with Year 2000 compliance. The Task Force has
formulated and begun to implement a plan to address Year 2000 compliance
including the formulation of contingency plans. To date, the company has
not found a material impact that may result from the failure of its
computers and computer software or that of its vendors, suppliers, and
customers, to recognize dates. The company has completed an upgrade of
its information technology system including its financial system, order
processing, manufacturing and inventory system which included Year 2000
compliance. To date the company has spent approximately $250,000
upgrading its computer technology. The company has not yet undertaken
the steps to quantify the effects of noncompliance of its customers,
suppliers and/or its service providers. The company's goal is to
complete all phases of its review and be Year 2000 compliant by
December, 1999.
Any Year 2000 compliance problem with 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.
Significant Influence by Directors, Executive Officers and Affiliated
Entities
As of April 4, 1999, the company's directors, executive officers
and entities affiliated with them, in the aggregate, beneficially own
approximately 27% of the company's outstanding common stock. These
stockholders, if acting together, will have significant influence over
all matters requiring approval by the stockholders of the company,
including the election of directors and the approval of mergers or other
business combination transactions.
Potential Volatility of Stock Price
The stock markets have experienced price and volume fluctuations
that have particularly affected small-cap medical device 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 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 shareholders to buy 1/1000th of a share of the company's Series
A participating preferred stock at an exercise price of $50.00. The
Rights will become exercisable following the tenth day after a person or
group announces acquisition of 15 percent or more of the company's
common stock, or announces commencement of a tender offer, the
consummation of which would result in ownership by the person or group
of 15 percent or more of the company's common stock. The company will be
entitled to redeem the Rights at $0.01 per Right at any time on or
before the tenth day following acquisition by a person or group of 15
percent 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, 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 the company believes
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.
In addition, the company filed a motion on March 5, 1998 for preliminary
injunction against the Defendants marketing and selling of the VAPR
system. The court denied this motion for preliminary injunction in
December 1998, stating that the defendants have raised questions that
should be more fully addressed by the parties, and then be resolved by a
jury at trial. The jury trial will begin on June 14, 1999 in San
Francisco, California.
On February 4, 1999, Xomed Surgical Products (Xomed) of
Jacksonville, Florida filed a complaint against the company in the
Fourth Judicial Circuit, Duval County, Florida, alleging breach of
contract by the company. In the complaint, Xomed has demanded a full
refund of the amounts paid for certain products bought by Xomed from the
company, and for a portion of an exclusive license fee paid by Xomed
pursuant to an exclusive license and distribution agreement between
Xomed and the company. This license and distribution agreement was
terminated by the company on February 5, 1999. The company believes the
suit is without merit, and filed a Motion to Dismiss and Answer to the
Complaint on May 3, 1999. In addition, the company filed two
counterclaims against Xomed for damages caused by Xomed's failure to
perform under the contract and for a certain milestone payment owed to
ArthroCare by Xomed.
Item 2. Quantitative and Qualitative Disclosures About Market
Risk
The company has an investment portfolio of fixed income
securities that are classified as "available-for-sale securities."
These securities, like all fixed income instruments, are subject to
interest rate risk and will fall in value if market interest rates
increase. ArthroCare attempts to limit this exposure by investing
primarily in short-term securities.
Item 3. Changes in Securities
None
Item 4. Defaults upon Senior Securities
None
Item 5. Submission of Matters to a Vote of Security Holders
None
Item 6. Other Information
None
Item 7. Exhibits and Reports on Form 8 - K
a) Exhibits
3.2 (1) Certificate of Incorporation of the Registrant.
3.3 (7) 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 (10) + Exclusive Distributor Agreement, between the
Registrant and Arthrex, Gmbh. amended October 1, 1998.
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 (8) + Term sheet for License and Distribution Agreement between Xomed
Surgical Products and the Registrant dated June 25, 1998.
10.27 (9) ++ License Agrement dated February 9, 1999 between the
Registrant and Collagen Aesthetics.
10.28 (9) Change of Control Agreement between the Registrant and the CEO.
10.29 (9) The form of "VP Continutiy Agreement" between the Registrant
and its Vice presidents.
10.30 (10) Employment Letter Agreement, between the Registrant
and John R. Tighe dated January 26, 1999.
10.31 (10) Employment Letter Agreement, between the Registrant
and Christine E. Hanni amended May 19, 1999.
10.32 (9) Employment Letter Agreement, between the Registrant
and Bruce Prothro amended May 19, 1999.
27.1 Financial Data Schedule.
(1) Incorporated herein by reference to 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 Registrant's Quarterly
Report on Form 10-Q for the period ended March 29, 1997.
(4) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 28, 1997.
(5) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q for the period ended September 27, 1997.
(6) Incorporated herein by reference to 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
Registration statement on Form 8-A/A (Registration No. 000-27422).
(8) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q for the period ended July 4, 1998.
(9) Incorporated herein by reference to the same numberd exhibit
Registrant's Annual Report on Form 10-K for the year ended
January 2, 1999.
(10) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q for the period ended April 3, 1999.
+ Confidential treatment granted.
++ Confidential treatment requested.
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: April 18, 1999
/s/ CHRISTINE E. HANNI
Christine E. Hanni
Vice President of Finance,
Chief Financial Officer and
Assistant Secretary
(Principal Financial Officer
and Accounting Officer)
Date: April 18, 1999
/s/ MICHAEL A. BAKER
Michael A. Baker
President, Chief Executive
Officer and Director
(Principal Executive Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
10.20 ++ Exclusive Distributor Agreement, between the
Registrant and Arthrex, Gmbh. amended October 1, 1998.
10.30 Employment Letter Agreement, between the Registrant
and John R. Tighe dated January 26, 1999.
10.31 Employment Letter Agreement, between the Registrant
and Christine E. Hanni amended May 19, 1999.
10.32 Employment Letter Agreement, between the Registrant
and Bruce Prothro amended May 19, 1999.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
DISTRIBUTION AGREEMENT
This Distribution Agreement (the "Agreement") effective as of
October 1, 1998 (the "Effective Date") is entered into by and between
ArthroCare Corporation, a Delaware corporation having an address at 595
North Pastoria Avenue, Sunnyvale, California 94086 ("ArthroCare"), and
Arthrex, Inc., a Delaware company with offices at 2885 S. Horseshoe
Drive, Naples, Florida 34104 ("Arthrex").
BACKGROUND
A. ArthroCare is engaged in the business of manufacturing,
distributing, and selling Products (as defined below) and desires to
engage a marketing and distribution partner in the Territory (as defined
below);
B. Arthrex desires to solicit orders for Products from
customers in the Territory, and desires to be ArthroCare's marketing and
distribution partner in the Territory for the Products (as defined
below); and
C. Arthrex desires to purchase, and ArthroCare desires to sell
to Arthrex, such Products for the purpose of resale to customers in the
Territory.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the parties agree as follows:
ARTICLE 1
APPOINTMENT
1.1 Appointment Use. ArthroCare will grant to Arthrex the
exclusive right to market, sell and distribute the Products (as defined
in Annex B) in the Territory solely for use in Arthroscopy. The
Territory shall include the European Community, South Africa, the
countries of the former Warsaw Pact, the countries of South and Central
America with the exception of Mexico and the countries of the Caribbean
as specifically set forth in Annex A. [*****] In addition, the annual
minimum target revenues for countries outside of Europe and South Africa
will be mutually agreed upon at this time. The Territory may be
expanded in the future upon mutual agreement of ArthroCare and Arthrex.
1.2 No Rights Beyond Products.3 No Rights Beyond Products.
Nothing in this Agreement shall be deemed to
grant to Arthrex rights in products or technology other than the
Products; nor shall any provision of this Agreement be deemed to
restrict ArthroCare's right to exploit Products, or patents or any other
intellectual property rights, outside the Field, outside the Territory
or in products other than the Products.
ARTICLE 2
DISTRIBUTION OF PRODUCTS
In addition to all other duties set forth in this Agreement,
Arthrex shall have the following obligations:
2.1 Target Revenue. During each Period of this Agreement
(defined below)
Arthrex shall order, for delivery within the respective Period, a
sufficient quantity of Products to cause the aggregate payments received
by ArthroCare for such orders to equal or exceed an amount denominated
in United States Dollars ("USD") (each such amount, a "Target
Revenue"). [****]The parties acknowledge that Arthrex orders will
count towards the applicable Target Revenue if Arthrex orders Products
for delivery that Period regardless of whether ArthroCare actually ships
the orders during that Period. The Target Revenues applicable during
the term of this Agreement are set forth below:
Period Target Revenue
[****]
[*****]
[*****]
2.2 Forecasts. Arthrex shall furnish ArthroCare a 6-month
forecast with estimated purchase dates and quantities of Products, and
shall deliver an updated forecast on a rolling monthly basis. The first
two months of each forecast will be binding on Arthrex. Such forecasts
shall include monthly delivery schedules. Based on the then current
forecast, ArthroCare will maintain its production capability and
adequate materials and labor to meet the forecasted monthly delivery
schedule for Products. [****]
Notwithstanding the above, all Arthrex forecasts prior to
December 31,
1998 will be non-binding on Arthrex.
ArthroCare shall release Products on a monthly basis in
accordance with
the delivery schedule set forth on the then current forecast; provided,
however, that: (a) Arthrex may make changes to the delivery schedule
and the quantities requested on the then current forecast at any time up
to 30 days prior to a scheduled delivery; (b) in the event that Arthrex
desires to increase the volume of any Products on an Order with less
than 90 days notice to ArthroCare, ArthroCare shall use its best efforts
to supply such increased volume of Products; and (c) ArthroCare shall
not be required to accept any Order for a Product to the extent that it
is based on a forecast that shows an increase in the volume of Product
ordered that exceeds 50% of the average volume of such Product ordered
during the preceding 90-day period.
ArthroCare's right to not accept a particular order must be
made within ten (10) days after Arthrex supplies ArthroCare with the two
(2) month binding forecast for the period within which the non-accepted
order is to be purchased. Any non-acceptance of an order by ArthroCare
must be based on ArthroCare's reasonable business judgment and any such
non-acceptance will cause a reduction in the Target Revenue for the
applicable Period by an amount equal to the transfer price of the order
which was not accepted.
ARTICLE 3
PRICES
3.1 Prices. ArthroCare will supply Products to Arthrex in
the manner and as initially set forth in Annex B.
3.2 [****]
ARTICLE 4
TERM & TERMINATION
4.1 Term. This Agreement shall become effective on October 1,
1998 (the "Effective Date") and shall continue in force through [*****],
unless terminated sooner as provided herein. [****]
4.2 Notice. Pursuant to Article 4.1 above, this Agreement will
expire on [*****] unless this Agreement is automatically renewed by the
provisions outlined in Section 4.1 . The parties hereby agree that if
one party has not provided the other party with written notice of their
intention to extend the term of this Agreement (with or without
modifications) by [*****], then this absence of notice shall be
construed as sufficient, lawful, valid and proper notice that this
Agreement shall expire [*****] without any further notification.
[4.3 *****].
(a) [*****]
(b) [*****]
(c)
(d) [*****]
4.4 Termination for Cause. Either party may terminate this
Agreement in the
event the other party has materially breached or defaulted in the
performance of any of its obligations hereunder, and such default has
continued for 60 days after written notice thereof was provided to the
breaching party by the nonbreaching party. Any termination shall become
effective at the end of such 60-day period unless the breaching party
has cured any such breach or default prior to the expiration of such
period. If ArthroCare terminates this Agreement for cause, [*****] . If
Arthrex terminates this agreement for cause, [*****]
4.5 Effects of Termination or Expiration.
(a) Upon termination or expiration of this Agreement, all
rights granted or
obligations undertaken hereunder shall terminate forthwith, unless
provided otherwise herein, and all amounts owed by either party to the
other pursuant to the terms of this Agreement shall become immediately
due and payable.
(b) Upon termination or expiration of this Agreement,
Arthrex shall fill customer orders accepted by it prior to termination
or expiration but shall otherwise cease to sell the Products, except at
ArthroCare's request.
(c) Unless otherwise specified, the acceptance of any order from
or the sale of any Products to Arthrex after notice to terminate this
Agreement has been set or the expiration of termination of this
Agreement shall be subject to all the pertinent terms of this Agreement,
but shall not be construed to be a renewal or extension of this
Agreement or a waiver of the right to terminate the same; provided,
however, that ArthroCare may at its discretion refuse to process and/or
ship such order except on its payment terms (including without
limitation cash in advance, direct billing by ArthroCare and payment to
ArthroCare from the end customer, and/or payment of other amounts.)
(d) ArthroCare will have the right and shall be required, by
giving Arthrex written notice within thirty (30) days following the
termination of this Agreement, to repurchase from Arthrex the Products
as per the formula set forth in Article 4.3 above.
(e) [*****] three (3) months after the expiration or termination
of this Agreement, whichever is earlier, Arthrex shall cease using
ArthroCare trademarks. Arthrex shall deliver to ArthroCare all
advertising and promotional materials, stationery, signs, labels,
packaging, samples kits, parts, tools or other items relating to the
Products that ArthroCare may have furnished to Arthrex free of charge
(except for shipping and import costs).
(f) Upon termination of this Agreement for cause due to a
material breach by Arthrex or expiration of this Agreement, Arthrex
shall cooperate with ArthroCare to ensure an orderly transition and the
continuity of sales of the Products. Arthrex shall not be required to
provide ArthroCare with any customer lists or customer information upon
any termination or expiration of the Agreement. Arthrex shall assign to
ArthroCare or any ArthroCare designee all right, title and interest in
any Authorizations issued to it or shall use its best efforts to have
such Authorizations reissued to ArthroCare or any ArthroCare designee.
(h) Upon termination of this Agreement for cause due to a
material breach by Arthrex or expiration of this Agreement, Arthrex
shall transfer any ownership not then residing in ArthroCare of any and
all Product authorizations, registrations, permits, and approvals of any
kind with respect to Products and applications therefor, including
without limitation marketing approval applications, and any other
governmental approvals, registrations and the like to ArthroCare, at
ArthroCare's cost and expense and shall execute such documents and
perform such acts as may be necessary, useful, or convenient to perfect
such transfer. It is understood that ArthroCare may use and disclose the
foregoing for any purpose.
(i) No Renewal, Extension or Waiver. Acceptance of any order
from,
or sale of, any Product to Arthrex after the date of termination of this
Agreement shall not be construed as a renewal or extension hereof, or as
a waiver of termination by ArthroCare.
(j) Survival of Certain Terms. The provisions of sections 4.5,
6.4 and
Articles E, G, J and K, shall survive the expiration or termination of
this Agreement for any reason.
ARTICLE 5
GOVERNING LAW; ARBITRATION
5.1 Governing Law. The validity, interpretation, construction
and enforcement of this Agreement shall be governed solely by the laws
of the state of California, U.S.A, without giving effect to any conflict
of laws provision thereof.
5.2 Arbitration. All disputes arising in connection with this
Agreement shall be finally settled under the Rules of Conciliation and
Arbitration of the International Chamber of Commerce by three (3)
arbitrators appointed in accordance with said Rules. The English
language shall be used in any and all arbitral proceedings. The place
of arbitration shall be Stockholm, Sweden.
ARTICLE 6
MISCELLANEOUS
6.1 General Terms and Conditions. The General Terms and
Conditions of this Agreement are attached hereto and are expressly
incorporated as an integral part of this Agreement.
6.2 Defined Terms. Capitalized terms not defined herein shall
be as defined in the General Terms and Conditions of this Agreement.
[6.3 *****]
6.4 Mutual Solicitation. Both parties agree not to solicit
employees, agents, distributors, etc. of the other party during the term
of this agreement, and for one year after the termination thereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed on the date written below.
ARTHROCARE, INC. ARTHREX, INC.
By: ________________________ By: ________________________
Name: Michael A. Baker Name: Reinhold Schmieding
Title: President and CEO Title: President and
Founder
Date: ________________________ Date: ________________________
GENERAL TERMS AND CONDITIONS
ARTICLE A
DUTIES OF ARTHREX
A.1 Staffing. Arthrex shall maintain at its expense a
sufficient number of trained sales and marketing personnel to carry out
its obligations under this Agreement.
A.2 Training. Arthrex shall train its sales and marketing
personnel in all aspects of the Products. In addition, ArthroCare shall
provide at least one (1) training session annually in Miami, Florida or
Munich, Germany at a time to be mutually determined by the parties for
such personnel.
A.3 Advertising and Promotion.
(a) Arthrex shall at its own expense advertise the
Products in the
Territory.
(b) Prior to publishing, mailing or distributing any
advertising or promotional materials relating to the Products other than
those provided to Arthrex by ArthroCare, Arthrex shall submit such
materials to ArthroCare for its review and comment at least thirty (30)
days prior to the date of proposed publication, mailing or distribution,
and shall not publish, mail or distribute, or allow publication, mailing
or distribution of, such materials without prior written approval from
ArthroCare. ArthroCare shall at its cost provide any and all resources
necessary to procure translations of any and all technical or other
literature required in order to distribute the Products in the
Territory.
(c) Arthrex shall assist ArthroCare in assessing customer
requirements for the Products, including modifications and improvements
thereto, in terms of quality, design, functional capability, and other
features. Arthrex shall advise ArthroCare on market conditions as
reasonably requested by ArthroCare
(d) Arthrex shall not publish, mail or otherwise
disseminate outside the Territory any advertising or promotional
materials relating to the Products.
A.4 Reporting Requirements. Pursuant to the FDA's medical
device reporting (MDR) Regulations, ArthroCare may be required to report
to the FDA information that reasonably suggests that a Product may have
caused or contributed to death or serious injury or has malfunctioned
and that the device would be likely to cause or contribute to a death or
serious injury if the malfunction were to recur. The parties hereto
agree to supply to the other any such information twenty-four (24) hours
after becoming aware of it so that each can comply with governmental
reporting requirements. In the event that ArthroCare is required by any
regulatory agency to recall the Products or if ArthroCare voluntarily
initiates such recall, Arthrex shall cooperate with and assist
ArthroCare in locating and retrieving if necessary, the recalled
Products from Arthrex's customers. . Arthrex shall maintain all records
of Products sales to customer by lot number, and/or serial number in the
event of a Product recall or other quality related issue. Arthrex shall
only be required to make such sales records available to ArthroCare in
the event of a Product recall or other quality related issue. During
the time that the Products are commercially marketed, distributed, or
sold by Arthrex, Arthrex also shall, within five (5) business days,
forward all Product complaints which it receives to ArthroCare.
A.5 No Modification of Products. Arthrex shall not remove,
modify, or obscure ArthroCare Trademarks (as defined in Article J.1)
affixed to Products without the written consent of ArthroCare, unless
required by law.
A.6 Compliance With Requirements of Law.
(a) In performing its obligations hereunder, Arthrex shall
comply with
any Requirements of Law applicable to it or to the purchase of Products
by any given customer.
(b) Arthrex shall not perform its obligations hereunder in
a manner that would cause ArthroCare to not be in compliance with any
Requirements of Law of the Territory or of the United States of America
(including but not limited to the U.S. Export Administration regulations
and related laws and the Foreign Corrupt Practices Act).
A.7 Restrictions on Sale. [*****] Notwithstanding any other
provision in this Agreement, ArthroCare has the right to permissively
terminate [*****] at any time during the Term of this Agreement with
thirty (30) days notice to Arthrex. If ArthroCare exercises this right
of permissive termination, ArthroCare shall be under no obligation to
repurchase any Products from Arthrex for these countries, and ArthroCare
shall not have to pay any type of fee, including the Transition Fee
detailed in Section 4.3(b).
In addition, if ArthroCare, after the Effective Date of this
Agreement, [*****]
A.8 Restrictions on Resale. Arthrex shall not sell Products to
any purchaser if Arthrex has reason to believe such purchaser may resell
them to a third party without complying with all applicable Requirements
of Law.
A.9 Import-Export Approval. Arthrex shall be responsible, at
its expense, for obtaining all approval and permits necessary for the
importation of the Products into the Territory. Arthrex shall be
ArthroCare's registered agent in the European Union ("E.U.") uniquely
and solely for the purpose of CE Mark requirements for the Products in
the Territory. In addition, Arthrex is responsible for all electrical
approvals for the Products in the Territory, including those imposed by
the E.U. Electromagnetic Compatibility Directive, the Medical Devices
Directive and other similar E.U. legislation, whether applicable via
transposition into the national laws of the E.U. Member States, or
directly applicable (such as certain E.U. Regulations).
A.10 Product Packaging and Labeling. Arthrex may package and/or
repackage Products to meet applicable European and country regulations
required for distribution of Products. In addition, Arthrex is
responsible for sterilization under ISO 9001, CE Mark Standards and CGMP
of the wands shipped to Arthrex in bulk, using boxes and labels supplied
to Arthrex by ArthroCare. Arthrex will translate ArthroCare's standard
labels as necessary, and in accordance with all applicable laws and
regulations.
A.11 Additional Reports. Arthrex shall provide ArthroCare,
within fifteen (15) days after the end of each calendar quarter, a
general report of Product sales in the Territory during the previous
calendar quarter.
ARTICLE B
DUTIES OF ARTHROCARE
B.1 Supply of Products. ArthroCare shall use its best efforts
to supply Products ordered by Arthrex and shall process promptly all
orders for Products received from Arthrex. If at any time there is a
shortfall in the supply of any given Product, ArthroCare reserves the
right to allocate its supply of such Product among its distributors and
customers as it deems appropriate in its sole discretion. If ArthroCare
is unable to supply any Products ordered by Arthrex, then (i) the Target
Revenue for such Period of this Agreement shall be correspondingly
reduced and (ii) ArthroCare shall return to Arthrex any payments
relating to such Products ordered. ArthroCare shall otherwise not be
liable to Arthrex for such inability, unless expressly stated otherwise
herein. If the failure of ArthroCare to supply Products ordered by
Arthrex has a material and adverse effect on the sale of ArthroCare's
Products by Arthrex, then Arthrex shall have the right to provide notice
to ArthroCare that Arthrex is terminating this Agreement for cause
pursuant to Article 4.4 if such default has continued for 60 days after
written notice thereof was provided to ArthroCare by Arthrex. Any
termination shall become effective at the end of such 60-day period
unless ArthroCare has cured any such breach or default prior to the
expiration of such period. In such event, ArthroCare shall be obligated
to pay Arthrex the Transition Fee outlined in Article 4.3. Arthrex's
Revenues for purposes of the Transition Fee in this instance will be
calculated from the one year period immediately prior to the date that
ArthroCare fails to supply Arthrex with the Products, provided that
Arthrex provides notice of such failure and notice of the intent to
terminate the Agreement within sixty (60) days of the date in which
ArthroCare fails to supply such Products.
B.2 Advertising and Promotional Materials. ArthroCare shall
furnish to Arthrex a reasonable quantity of ArthroCare's advertising and
promotional materials for use by Arthrex.
B.3 Training. ArthroCare will provide training for Arthrex's
personnel in connection with the marketing, sale, installation,
maintenance and support of Products. Training shall be conducted in
either Miami, Florida or Munich, Germany.
B.4 Scientific and Technical Information. ArthroCare shall
diligently provide to Arthrex, in a timely manner, scientific and
technical information required to obtain and maintain registrations,
licenses and permits required for sale and distribution of the Products
in Arthrex, or to respond to inquiries from customers, or governmental
or regulatory authorities.
B.5 Support. ArthroCare, at ArthroCare's expense and as deemed
reasonable by ArthroCare, shall provide consultation to Arthrex
concerning technical aspects and use of the Products. In addition, if
ArthroCare introduces a modified version of a Product which is then
added to this Agreement, ArthroCare will provide to Arthrex any
information and additional marketing and sales support materials
necessary to permit Arthrex to promote Products in Arthrex or obtain
registration for such Products.
B.6 Patent Rights. Subject to its reasonable business judgment,
ArthroCare shall, at its expense, prosecute and maintain the Patent
Rights specifically designated in Annex E [*****.] Notwithstanding the
foregoing, if the failure to prosecute and maintain such Patent Rights
[*****] has a material and adverse effect on sales of ArthroCare's
Products by Arthrex, then Arthrex shall have the right to provide notice
to ArthroCare that Arthrex is terminating this Agreement for cause
pursuant to Article 4.4 if such default has continued for 60 days after
written notice thereof was provided to ArthroCare by Arthrex. Any
termination shall become effective at the end of such 60-day period
unless ArthroCare has cured any such breach or default prior to the
expiration of such period and such failure shall be deemed a
"permissive termination" of this Agreement by ArthroCare as defined in
Article 4 herein. Arthrex's Revenues for purposes of the Transition Fee
in this instance will be calculated from the one year period immediately
prior to the date that ArthroCare fails to maintains such Patent Rights.
.
ARTICLE C
PRODUCT CHANGES
C.1 Product Changes. ArthroCare may at its discretion modify
any Product or change the source of supply of any Product.
C.2 Addition or Deletion of Products. ArthroCare may at its
discretion add products to or delete Products from Annex B hereto.
Nothing in this Agreement shall require that ArthroCare make available
to Arthrex newly released or acquired products or shall prevent
ArthroCare from discontinuing the manufacture, sale or promotion of any
Product. Notwithstanding the forgoing, however, if the effect of any
such deletion(s), in the aggregate, has the effect, direct or indirect,
of significantly decreasing or interfering with the sale of Products by
Arthrex, then Arthrex shall have the right to provide notice to
ArthroCare that Arthrex is terminating this Agreement for cause
pursuant to Article 4.4 if such default has continued for 60 days after
written notice thereof was provided to ArthroCare by Arthrex. Any
termination shall become effective at the end of such 60-day period
unless ArthroCare has cured any such breach or default prior to the
expiration of such period. In such event, ArthroCare shall be required
to pay Arthrex the Transition Fee described in Article 4.3 above.
Arthrex's Revenues for purposes of the Transition Fee in this instance
will be calculated from the one year period immediately prior to the
date that ArthroCare fails to supply Arthrex with the Products, provided
that Arthrex provides notice of such failure and notice of the intent to
terminate the Agreement within sixty (60) days of the date in which
ArthroCare fails to supply such Products.
ARTICLE D
DELIVERY AND PAYMENT
D.1 Invoice and Payment Terms.
(a) ArthroCare shall invoice Arthrex for any given
purchase order as
of the date ArthroCare ships such purchase order, and Arthrex shall pay
for the Products in such currency, at such place and on such terms as
ArthroCare shall from time to time direct in writing. In the absence of
such written instructions, payment shall be made in United States
Dollars to ArthroCare's address as set forth above and shall be received
by ArthroCare within sixty (60) days from the invoice date.
(b) Arthrex's credit limit on unpaid invoices for Products
shall be [*****]. If Arthrex wishes to exceed such limit, any excess
shall be guaranteed by means of a bank guarantee from a Western European
or North American bank that is acceptable to ArthroCare.
(c) In the event that full payment for any Products
purchased by Arthrex is not received by ArthroCare within [*****] of the
invoice date, the amount outstanding shall accrue interest at a rate of
one and [*****] per month, or the legal maximum, whichever is greater,
as determined at the end of each calendar month.
(d) In the event that Arthrex fails to pay any amounts due
ArthroCare within the time herein provided [*****] ArthroCare may, in
addition to other remedies available to it, cease acceptance and/or
delivery of orders for Products from Arthrex until such time as
Arthrex's payments are current and may thereafter condition acceptance
and delivery of future orders on such other or additional payment terms
as it shall, in its discretion, determine.
D.2 Shipment. All Products delivered pursuant to this Agreement
shall be suitably packed for surface or air shipment, in Arthrex's
discretion, in ArthroCare's standard shipping cartons and delivered to
Arthrex or its carrier agent F.O.B. the shipping location designated by
ArthroCare, at which time the risk of loss shall pass to Arthrex.
ArthroCare shall ship Products using the carrier specified in Arthrex's
purchase order provided that if Arthrex does not provide instructions
with respect to the carrier to be used, ArthroCare shall select the
carrier. All freight, insurance, and other shipping expenses, as well as
any special packing expenses, shall be paid by Arthrex. Arthrex shall
also bear all applicable taxes, duties and similar charges that may be
assessed against the Products after delivery to the carrier F.O.B. the
shipping location.
D.3 Shortage or Discrepancy. Arthrex shall notify ArthroCare of
the existence of any shortage or discrepancy in any shipment within
[*****] of receipt of the related shipment. If ArthroCare is solely
responsible for such shortage or discrepancy, ArthroCare shall correct
it by delivering at its own cost additional or replacement Products, as
the case may be.
D.4 Accounts Receivable. Arthrex shall obviously, as per the
nature of this Agreement, be responsible for collections from its
customers and shall pay ArthroCare for Products delivered to customers
by ArthroCare regardless of whether Arthrex has been paid for such
Products by the customers.
D.5 Taxes.
(a) Arthrex shall be responsible for all taxes, tariffs,
fees, duties,
assessments and other charges, however designated, imposed by any
Governmental Authority in the Territory in connection with the execution
of this Agreement or Arthrex's performance of its obligations hereunder.
(b) Except as expressly stated otherwise, prices set forth
herein do not include any existing or future taxes, tariffs, fees,
duties, assessments or other charges (other than income taxes assessed
on ArthroCare) that may be applicable to the Products sold to Arthrex
pursuant to this Agreement. If such additional sums are required to be
withheld, collected or paid, then Arthrex shall add them to the purchase
price payable by Arthrex.
D.6 Product Returns. All product returns must comply with the
policy set forth in Annex E hereto
D.7 Terms & Conditions. All Product purchases hereunder shall
be subject to the terms and conditions of this Agreement. Nothing
contained in any purchase order submitted pursuant to this Agreement
shall in any way modify or add any terms or conditions to said
purchases, unless otherwise agreed in writing by the parties.
ARTICLE E
COMPETING PRODUCTS
E.1 Competing Products.
(a) Annex C hereto lists all Competing Products for sale
by Arthrex in
the Territory as of the date hereof.
(b) Arthrex shall not, and shall ensure that its
employees, agents and representatives do not, without the prior written
approval of ArthroCare (i) directly or indirectly sell in the Territory
any electrosurgical product that ArthroCare determines to be comparable
in its use, purpose or construction to any of the Products that are
being sold to Arthrex by ArthroCare under this Agreement, or (ii) enter
into any agreement to do any of the foregoing or any agreement otherwise
in conflict with Arthrex's obligations hereunder. In the event that
ArthroCare approves Arthrex's sale in the Territory of any product that
is comparable in its use, purpose or construction to any of the
Products, such product shall be specified on Annex C hereto. If Arthrex
violates any of the prohibitions set forth in this Article E.1, in
addition to other remedies available to ArthroCare, ArthroCare will have
the right to provide Arthrex with notice of such violations and, if
Arthrex does not cure such violations within thirty (30) days,
ArthroCare will have the right to immediately convert the Agreement into
a non-exclusive distribution agreement without any penalties to
ArthroCare whatsoever.
(c) The obligations of Arthrex under this Article E.1 shall
remain in
force during the entire term of this Agreement and any extensions
thereof, [*****]
ARTICLE F
REPRESENTATIONS AND WARRANTIES
Each of the parties hereto represents and warrants to the other party as
follows:
F.1 Existence; Compliance with Law. The representing party is
duly organized and validly existing under the laws of its jurisdiction
of organization, has the authority to conduct the business in which it
is currently engaged, and is in compliance with all Requirements of Law.
F.2 Legal Capacity. The representing party has the legal
capacity to execute this Agreement and perform its obligations
hereunder. The representing party is not required to obtain any
Authorizations in connection with its execution and delivery of this
Agreement and the performance of its obligations hereunder.
F.3 No Breach. Execution and delivery of this Agreement by the
representing party and performance by the representing party of its
obligations hereunder shall not (i) violate any Requirements of Law
applicable to the representing party or (ii) violate or constitute a
default under the provisions of any agreement, instrument or undertaking
by which the representing party is bound. In particular, the receipt by
it of any amount paid or benefit provided pursuant to this Agreement,
including but not limited to any fee, credit, discount or similar
consideration, shall be in all respects in full compliance with all
applicable Requirements of Law.
F.4 No Government Officials. Neither the representing party
nor, if applicable, any of its shareholders, directors, officers,
employees, agents or representatives is a Government Official. If at
any time during the term of this Agreement, the representing party or
any shareholder, director, officer, employee, agent or representative of
the representing party becomes, or proposes to become, a Government
Official, the representing party shall immediately notify the other
party and the other party shall have the unilateral right, without
provision of any compensation whatsoever, to modify or terminate this
Agreement as necessary to ensure that any Requirements of Law of the
Territory and of the United States of America shall not be violated.
ARTICLE G
WARRANTY ON THE PRODUCTS
G.1 Standard Limited Warranty. ArthroCare warrants to Arthrex
that, subject to the exclusions set forth in Section G.2 below, at the
time of shipment, the Products (i) shall be substantially free from
defects in material and workmanship for the applicable warranty period
as set forth in Annex F hereto; and (ii) shall have been manufactured in
accordance with Good Manufacturing Practices ("GMP"). Arthrex's
exclusive remedy and ArthroCare's sole liability for breach of the
foregoing warranty shall be the remedy set forth in Section G.3. All
defective Products shall be returned to ArthroCare in accordance with
Section G.3. Arthrex shall not pass on to its Customers a warranty or
limitation of liability which is more protective of such Customers than
the warranty (including the limited remedy and exclusions) set forth in
this Article G.
G.2 Warranty Limitations. The warranties in Section G.1 are
contingent upon proper use of Products in the applications for which
they were intended, and ArthroCare makes no warranty (express, implied
or statutory) for Products or spare parts that have been modified or
altered in any manner by anyone other than ArthroCare such that the
modification or alteration has a significant impact on the defect or to
defects directly caused (i) through no fault of ArthroCare during
shipment to or from Arthrex; (ii) by the use or operation in an
application or environment other than that intended or recommended by
ArthroCare; (iii) by service by anyone other than employees of, or
persons approved in writing by, ArthroCare; or (iv) by accident,
negligence, misuse, or unusual physical or electrical stress. ArthroCare
shall not be liable for misbranding with respect to any product labeling
or package insert text provided or used by Arthrex, or any translation
thereof.
G.3 Return of Defective Product. In the event that any Product
purchased by Arthrex from ArthroCare fails to conform to the warranty
set forth in Section G.1, ArthroCare's sole and exclusive liability and
Arthrex's exclusive remedy shall be (in addition to ArthroCare's
liability under Article I of this Agreement), at ArthroCare's sole
election, to repair or replace the Product or credit Arthrex's account
for the net amount actually paid for any such Product, provided that
Arthrex promptly notifies ArthroCare in writing that such Product failed
to conform and furnishes a detailed explanation of any alleged
nonconformity and requests a return material authorization number. If
such Product fails to so conform, ArthroCare will reimburse Arthrex for
shipment charges for return of the nonconforming Product.
G.4 Exclusion of Other Warranties. EXCEPT FOR THE LIMITED
WARRANTY PROVIDED IN SECTION G.1 ABOVE, ARTHROCARE GRANTS NO OTHER
WARRANTIES OR CONDITIONS, EXPRESS OR IMPLIED, BY STATUTE, IN ANY
COMMUNICATION WITH ARTHREX OR THE CUSTOMER, OR OTHERWISE, REGARDING THE
PRODUCTS, THEIR FITNESS FOR ANY PURPOSE, THEIR QUALITY, OR THEIR
MERCHANTABILITY.
ARTICLE H
COMMERCIAL POLICY
H.1 Commercial Policy.
(a) Each of the parties hereto warrants that it shall not,
in connection
with this Agreement or the performance of its obligations hereunder,
directly or indirectly pay, offer to pay, promise to pay or authorize
payment of, or give, offer to give, promise to give or authorize the
giving of, any money or thing of value to any Government Official,
customer or person in the knowledge that all or a portion of such money
or thing of value shall be offered, given or promised, directly or
indirectly, to a Government Official or customer for the purpose of
corruptly influencing any act or decision of such Government Official or
customer, including a decision to fail to perform his or her lawful
duty, or inducing such Government Official or customer to use influence
on any Governmental Authority or customer to corruptly affect or
influence any act or decision of such Governmental Authority in order to
assist ArthroCare or Arthrex in connection with the use or sale of the
Products in the Territory.
(b) Arthrex acknowledges that no employee of ArthroCare or
any of its Affiliates has any authority to give any direction, written
or oral, in connection with the making of any payment or commitment by
Arthrex to any third party in contravention of the foregoing.
(c) Arthrex acknowledges that ArthroCare is committed to
adhering to its Corporate Policies which require, inter alia, ArthroCare
to conduct its business in a manner consistent with the highest
standards of moral and ethical behavior and in strict compliance with
the letter and spirit of all Requirements of Law. In signing this
Agreement, Arthrex agrees to comply with all the principles set forth
herein. Arthrex further agrees not to do, or fail to do, anything that
may cause ArthroCare and/or any of its employees, agents or
representatives to violate any provision of the foregoing.
(d) If Arthrex violates any of the provisions of this
Article, this Agreement shall be deemed immediately terminated without
need of notice. Upon such termination, Arthrex shall waive any claim
for payment due it under this Agreement and shall immediately refund any
and all payments made to it by ArthroCare under this Agreement.
(e) Arthrex acknowledges that its failure to observe
strictly these terms and conditions may subject ArthroCare's and its
Affiliates' employees, agents and representatives to substantial fines,
penalties, damages, expenses, the imposition of additional taxes or the
loss of tax deductions, the loss of business opportunities, including
those which are sought in connection with this Agreement, and other
consequential losses, damages and expenses.
ARTICLE I
INDEMNIFICATION
I.1 Indemnification of Arthrex. ArthroCare shall indemnify,
defend, and hold harmless Arthrex, and its directors, officers,
employees, and agents, and the successors and assigns of any of the
foregoing (the "Arthrex Indemnitees") from and against all claims,
losses, costs, and liabilities (including, without limitation, payment
of reasonable attorneys' fees and other expenses of litigation), and
shall pay any damages (including settlement amounts) finally awarded
with respect to claims, suits, or proceedings (any of the foregoing, a
"Claim") brought by third parties against an Arthrex Indemnitee,
alleging bodily injury, death or property damage caused by (a) a breach
by ArthroCare of the warranties and representations herein, or (b) the
negligence or willful misconduct of ArthroCare, its employees or agents,
except to the extent such Claim is covered under Article I.2 below or is
caused by the error, mistake, negligence or willful misconduct of an
Arthrex Indemnitee.
I.2 Indemnification of ArthroCare. Arthrex shall indemnify,
defend, and hold harmless ArthroCare, and its directors, officers,
employees and agents, and the successors, and assigns of any of the
foregoing (the "ArthroCare Indemnitees") from and against all claims,
losses, costs, and liabilities (including, without limitation, payment
of reasonable attorneys' fees and other expenses of litigation), and
shall pay any damages (including settlement amounts) finally awarded
with respect to a Claim brought by third parties against a ArthroCare
Indemnitee, arising out of or relating to (a) Products sold, or
otherwise distributed by Arthrex, except to the extent such claim is
covered under Article I.1 above; (b) breach of any of the terms of this
Agreement, or (c) the error, mistake, negligence or willful misconduct
of Arthrex or its employees.
I.3 Indemnification Procedures. A party (the "Indemnitee") that
intends to claim indemnification under this Article I shall promptly
notify the other party (the "Indemnitor") in writing of any claim in
respect of which the Indemnitee or any of its directors, officers,
employees, agents, licensors, successors, or assigns intends to claim
such indemnification, and the Indemnitor shall have sole control of the
defense and/or settlement thereof, provided that the indemnified party
may participate in any such proceeding with counsel of its choice at its
own expense. The indemnity agreement in this Article I shall not apply
to amounts paid in settlement of any Claim if such settlement is
effected without the consent of the Indemnitor, which consent shall not
be withheld unreasonably. The failure to deliver written notice to the
Indemnitor within a reasonable time after the commencement of any such
action, if prejudicial to its ability to defend such action, shall
relieve such Indemnitor of any liability to the Indemnitee under this
Article I, but the omission to so deliver written notice to the
Indemnitor shall not relieve the Indemnitor of any liability that it may
otherwise have to any Indemnitee than under this Article I. The
Indemnitee under this Article I, its employees and agents, shall
cooperate fully with the Indemnitor and its legal representatives and
provide reasonable information in the investigation of any Claim covered
by this indemnification. Notwithstanding anything to the contrary
contained in this Article I, neither party shall be liable for any costs
or expenses incurred without its prior written authorization.
ARTICLE J
TRADEMARKS & PATENTS
J.1 Use of Trademarks. Subject to Article A.3 hereof,
ArthroCare grants to Arthrex the right to use the trademarks, service
marks, trade names, logos or other words or symbols identifying the
Products, related services or ArthroCare's business (the
"Trademarks") on its advertising and promotional materials,
stationery, signs, labels and packaging in order to convey that it is
acting as distributor of the Products on behalf of ArthroCare.
ArthroCare grants such right to Arthrex free of any charge. Each use of
the Trademarks by Arthrex shall (i) clearly identify ArthroCare as the
owner of the Trademarks, (ii) conform to ArthroCare's rules regarding
reproduction or reference to the Trademarks and (iii) otherwise comply
with any local notice or marking requirement. Any other use by Arthrex
of ArthroCare trademarks shall require the prior approval of ArthroCare.
Arthrex shall not in use any ArthroCare trademarks or any variations
thereof, alone or in combination with other words, in connection with
any product not supplied by ArthroCare.
J.2 Rights to the Trademarks. The Trademarks are and shall
remain the exclusive property of ArthroCare, whether or not such
ownership is specifically recognized or protected under the laws of the
Territory. Arthrex shall acquire no rights to the Trademarks other than
those set forth in Article J.1 hereof, and Arthrex hereby assigns and
transfer to ArthroCare all rights other than those granted pursuant to
Article J.1 hereof that it may acquire in and to the Trademarks, whether
by operation of law or otherwise. Arthrex shall not adopt or use any
trademarks, service marks, trade names, product names or logos that
might be confusingly similar to the Trademarks. Arthrex shall not do
anything or omit to do anything which would or might prejudice the
validity and registration of the Trademarks or which would or might
impair or limit their use. Arthrex shall not contest the validity of
the Trademarks and ArthroCare's proprietary rights therein.
J.3 Claims Against Arthrex. Arthrex shall promptly notify
ArthroCare of (i) any claim against Arthrex that any Product or part
thereof or any advertising or promotional materials supplied to Arthrex
by ArthroCare infringes any patent, trademark or copyright and (ii) any
suit, action or proceeding brought against Arthrex on the basis of any
such claim. ArthroCare shall, in its sole discretion, defend or settle
any such suit, action or proceeding in any manner and on any terms it
shall deem appropriate, and the costs thereof (including any final award
of damages) shall be borne entirely by ArthroCare. If ArthroCare elects
to defend any such suit, action or proceeding, Arthrex shall provide
ArthroCare, at ArthroCare's expense, with all the needed information,
assistance and authority necessary to enable ArthroCare to defend such
claim. Arthrex shall not without ArthroCare's prior written approval
itself defend or settle any such suit, action or proceeding.
J.4 Infringement By Third Parties. Arthrex shall promptly
inform ArthroCare if it becomes aware of any infringement of, or unfair
competition with respect to, the Trademarks or any ArthroCare patent or
copyright by any third party. ArthroCare shall, in its sole discretion,
prosecute at its own expense any and any suits, proceedings or actions
arising therefrom. Arthrex shall cooperate fully with ArthroCare in the
prosecution of any such suit, proceeding or action, and shall not
without ArthroCare's prior approval itself bring any such suit,
proceeding or action.
J.5 Reproduction. The Products are sold to Arthrex subject
to the condition that such sale does not convey any license, expressly
or by implication, to manufacture, duplicate or otherwise copy or
reproduce any of the Products. Arthrex agrees that it shall not
reprocess or reuse any Products.
J.6 ArthroCare Defense. Arthrex agrees that ArthroCare has the
right to defend, or at its option to settle, and ArthroCare agrees, at
its own expense, to defend or at its option to settle, any claim, suit
or proceeding brought against Arthrex by any third party for
infringement of any patent by the Products. ArthroCare shall have sole
control of any such action or settlement negotiations, and ArthroCare
agrees to pay, subject to the limitations hereinafter set forth, any
final judgment entered against Arthrex on such issue in any such claim,
suit or proceeding defended by ArthroCare. Arthrex agrees that
ArthroCare shall be relieved of the foregoing obligations unless Arthrex
(i) notifies ArthroCare promptly in writing of such claim, suit or
proceeding; (ii) gives ArthroCare authority to proceed as contemplated
herein; and (iii) at ArthroCare's expense, gives ArthroCare proper and
complete information to the best of Arthrex's knowledge and assistance
to settle or defend any such claim, suit or proceeding for infringement
of any patent. Notwithstanding the foregoing, ArthroCare's obligation
to defend Arthrex under this Article J.6 shall not apply to any claims,
suits, or proceedings to the extent they allege infringement of third
party components. Notwithstanding the provisions of this Article J,
ArthroCare assumes no infringement liability for: (a) combination of
Products with other products not approved by ArthroCare, which
infringement would not arise from such Products standing alone; or (b)
the modification of such Products not approved by ArthroCare, where such
infringement would not have occurred but for such modifications.
J.7 Arthrex Remedy. Notwithstanding the foregoing, if it is
adjudicatively determined that any Product infringes, or in ArthroCare's
sole opinion, may be found to infringe a third party's patent, or if the
sale or use of the Products is, as a result, enjoined, then ArthroCare
may, at its option and expense, either: (i) procure for Arthrex the
right under such patent to sell or use, as appropriate, the Products; or
(ii) replace the Products with other non-infringing functionally
equivalent products; or (iii) modify the Products to make the Products
functionally equivalent and non-infringing; or (iv) if the use of the
Products is prevented by injunction, discontinue Product sales under the
Agreement and remove any Products in Arthrex's inventory and refund the
aggregate payments paid therefor by Arthrex.
J.8 DISCLAIMER. THE FOREGOING PROVISIONS OF THIS ARTICLE J
STATE THE ENTIRE LIABILITY OF ARTHROCARE AND THE EXCLUSIVE REMEDY OF
ARTHREX AND ITS CUSTOMERS, WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF
PATENTS, COPYRIGHTS, TRADEMARKS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY
THE PRODUCTS OR ANY PART THEREOF. This Article J.8 is in lieu of and
replaces any other express, implied or statutory warranty against
infringement. In no event shall ArthroCare be liable for any indirect,
special, incidental or consequential damages resulting from any such
infringement
ARTICLE K
CONFIDENTIALITY
K.1 Confidentiality.
(a) Any information acquired by Arthrex from ArthroCare or
elsewhere in the course of performing its obligations hereunder
concerning ArthroCare's existing or contemplated products, services,
processes, techniques, know-how, unless otherwise identified as non-
confidential by ArthroCare (hereafter "Confidential Information"),
shall be the property of ArthroCare and shall be maintained in
confidence and not used in any way by Arthrex other than as necessary to
perform Arthrex's obligations hereunder and shall not be provided or
disclosed to others without the prior written approval of ArthroCare.
(b) The obligations of Arthrex under this Article K.1
shall remain in force during the entire term of this Agreement and any
extensions hereof and for a period of two (2) years thereafter, except
with respect to such Confidential Information as becomes public
knowledge through no fault of Arthrex.
(c) Upon termination of this Agreement, Arthrex shall
return to ArthroCare all data, information and materials of any kind
which constitute Confidential Information, along with all copies,
adaptations and independent compilations thereof made by Arthrex or
otherwise in its possession.
K.2 Permitted Disclosures10.2 Permitted Disclosures.
Notwithstanding the provisions of Article K.1 above, each party hereto
may disclose the other's Confidential Information to the extent such
disclosure is reasonably necessary in prosecuting or defending
litigation, complying with applicable governmental regulations, or
submitting information to tax or other governmental authorities provided
that if a party is required to make any such disclosure of another party
hereto's Confidential Information, to the extent it may legally do so,
it will give reasonable advance written notice to the latter party of
such disclosure and will use its reasonable efforts to secure
confidential treatment of such Confidential Information prior to its
disclosure (whether through protective orders or otherwise). If the
party whose Confidential Information is to be disclosed has not filed a
patent application with respect to such Confidential Information, it may
require the other party to delay the proposed disclosure (to the extent
the disclosing party may legally do so), for up to ninety (90) days
after receipt of written notice from the disclosing party of its intent
to disclose, to allow for the filing of such an application. In
addition, ArthroCare may disclose the existence of this Agreement and
the terms and conditions hereof to advisors, prospective investors, and
others under circumstances that reasonably ensure the confidentiality
thereof.
ARTICLE L
CHANGE OF CONTROL
L.1 Change of Control. For purposes of this Agreement "Change
in Control" means:
(a) the sale, lease, exchange or other transfer, directly
or indirectly of
substantially all of the assets of either party (in one transaction or
in a series of related transactions) to one or more persons or entities
that are not Affiliates of the party;
(b) the approval by the shareholders of either party of any
plan or
proposal for its liquidation or dissolution;
(c) a merger or consolidation to which either party is a
party if the
shareholders of that party immediately prior to the effective date of
such merger or consolidation have beneficial ownership, immediately
following the effective date of such merger or consolidation, of
securities of the surviving corporation representing 50% or less of the
combined voting power of the surviving corporation's then outstanding
securities ordinarily having the right to vote at elections of
directors; or
(d) any other change in control of either party of a
nature that would
be required to be reported pursuant to Article 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, whether or not that party
is then subject to such reporting requirements.
[******]
ARTICLE M
MISCELLANEOUS
M.1 Assignment. This Agreement is personal in its nature and is
therefore not assignable, in whole or in part, by Arthrex without the
written permission of ArthroCare. This means that Arthrex does not have
the right to appoint any third party to perform any portion of this
Agreement without the express written consent of ArthroCare. ArthroCare
may, upon written notice to Arthrex, assign the performance of part or
all of its duties under this Agreement to one or more of its Affiliates,
such as ArthroCare Europe A.B. Notwithstanding the above, ArthroCare
may not assign this Agreement, in whole or in part, if the effect
thereof is that Arthrex is unable to obtain an obligated Transition Fee
because of the financial weakness of the involved assignee.
M.2 Excuse of Performance. If either party hereto shall be
rendered wholly or partly unable to carry out its obligations under this
Agreement by reason of causes beyond its control, including but not
limited to war, civil insurrection, fire, flood, explosion, accident, or
shortage of material, equipment or transportation, then the performance
of the obligations of such party shall be excused during the continuance
of any inability so caused, provided that the party affected shall give
prompt notice to the other party, shall use its best efforts to avoid or
remove such causes and shall continue performance hereunder whenever
such causes are removed or settled.
M.3 Notice. Notices permitted or required to be given under
this Agreement shall be deemed sufficient if delivered by registered or
certified mail or by Federal Express, DHL Worldwide Express or a similar
carrier, postage prepaid, and addressed to the respective parties at the
address first noted on page one of this Agreement or at such other
addresses as the respective parties may designate by like notice.
M.4 Entire Agreement. This Agreement is the entire agreement
between the parties and supersedes and shall be substituted for each and
every agreement between Arthrex and ArthroCare regardless of the subject
matter, whether written, oral or otherwise, [******].
M.5 Relationship of Parties. The relationship between
ArthroCare and Arthrex is and during the term hereof shall be that of
vendor and vendee. Arthrex and its employees and agents shall not be
the legal representatives, employees or agents of ArthroCare for any
purpose and shall have no right or authority to assume or create,
whether in writing, orally or otherwise, any obligation of any kind,
express or implied, in the name of or on behalf of ArthroCare with
respect to advertising commitments or for any other reason. Arthrex
shall make no representations inconsistent with the foregoing.
M.6 Headings. The article and section headings contained in
this Agreement are included solely for convenience of reference and are
not intended to affect the interpretation of any provision of this
Agreement.
M.7 Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof,
and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other
jurisdiction.
M.8 No Waiver. No failure to exercise, or delay in exercising,
any right hereunder on the part of either party hereto shall operate as
a waiver thereof, nor shall any single or partial exercise of any right
hereunder preclude any other or further exercise thereof or the exercise
of any other right hereunder.
ARTICLE N
DEFINITIONS
N.1 Certain Defined Terms. As used herein, the following terms
shall have the following meanings:
"Affiliate" shall mean any person or entity which,
directly or indirectly, is in control of, is controlled by or is under
common control with any other person or entity.
"Competing Products" shall mean any electrosurgical product
that is comparable in its use, purpose or construction to any of the
Products that are sold to Arthrex by ArthroCare under this Agreement.
"Governmental Authority" shall mean any national, state or
local government or any subdivision, authority, agency or
instrumentality thereof.
"Government Official" shall mean any officer, employee,
agent or representative of any Governmental Authority of the Territory
(including any medical care provider controlled or funded in whole or in
part by any Governmental Authority of the Territory) or any political
party, political party official or candidate for political office.
"Products" shall mean those products listed on Annex B
hereof, subject to the stipulations set forth in Article C of the
General Terms and Conditions.
"Requirements of Law" shall mean the organizational
documents of any entity, any law, treaty, rule or regulation, order,
decree, permit, license or other restriction or requirement of any
Governmental Authority, and any determination of an arbitrator or court
or other Governmental Authority, in each case applicable to or binding
upon such person or entity or any of its property or to which such
person or entity or any of its property is subject.
"Year of this Agreement" shall mean the twelve (12) -month
period commencing the date this Agreement becomes effective and each
subsequent twelve (12) -month period during the term hereof.
* * * * *
ANNEX A
TERRITORY
The term "Territory" means the geographic areas set forth in this Annex
A, as follows:
1. The Member States of the European Union as of the Effective Date
of this Agreement.
2. South Africa
3. Albania
4. Bulgaria
5. The Czech Republic
6. Slovakia
7. Hungary
8. Poland
9. Romania
10. Switzerland
11. Norway
12. The Newly Independent States of the Former Soviet Union.
13. The countries within South and Central America.
14. Mexico
15. The countries within the Caribbean
* * * * * *
ANNEX B
PRODUCTS
[******]
* * * * * *
ANNEX C
APPROVED COMPETING PRODUCTS
As of the Effective Date of this Agreement, Arthrex does not
manufacture, market or otherwise handle any Competing Products (as
defined above) in the Territory.
* * * * * *
ANNEX D
PRODUCT RETURN POLICY
1. Prior to returning any Products to ArthroCare, Arthrex shall
indicate to ArthroCare its reason for wishing to effect such return. If
ArthroCare accepts such reason, it shall issue a Product Return
Authorization Number.
2. Products returned by Arthrex shall be sent to the ArthroCare
facility specified by ArthroCare. All transportation and insurance
costs incurred shall be borne by Arthrex, and Arthrex shall bear all
risk of loss or damage.
3. Any returned Products must be accompanied by a copy of the
original packing slip or invoice, and the Product Return Authorization
Number must be noted.
4. ArthroCare shall accept return of Products in the following
circumstances, and shall provide the following credit with respect
thereto:
a. Products that are in salable condition, and are returned within
sixty (60) days of the invoice date. Full credit.
b. Products that when received by Arthrex did not conform to
ArthroCare's quality standards or were damaged. Full credit plus
transportation and insurance costs incurred by Arthrex in returning the
Products.
c. Products sent to Arthrex due to ArthroCare error. Full credit
plus transportation and insurance costs incurred by Arthrex in returning
the Products.
5. ArthroCare will not accept return of the following Products:
a. Products ordered on a "custom order" basis.
b. Products held by Arthrex for over sixty (60) days from the
invoice date.
c. Products that are in an unsalable condition and became so while
under the
control of Arthrex.
d. Products not set forth on Annex C hereto, as amended.
e. Products used or relabeled by Arthrex.
* * * * * *
ANNEX E
PATENT RIGHTS
Title Application # Filing Date
Reference
[******]
ANNEX F
WARRANTY PERIODS
Product Period
Controller [******]
Connective cable [******]
Disposable Products [******]
January 26, 1999
Dear John:
On behalf of ArthroCare Corporation (the "Company"), I am pleased to
offer you a promotion to Vice President, Sales and Marketing. In this
position, you will be expected to devote your full business time,
attention, and energies to the performance of your duties with the
Company. The effective date of your employment will be February 3,
1999, and you will be reporting directly to me.
The terms of this offer of employment are as follows:
1. Compensation: Your annual salary will be $140,000.00. The
Company will pay you $5,384.62 bi-weekly in accordance with the
Company's standard payroll policies. Your salary will begin as of
the effective date of employment. The first and last payment by
the Company to you will be adjusted, if necessary, to reflect a
commencement or termination date other than the first or last
working day of a pay period. You will also be eligible for
participation in an incentive/bonus plan which will be based on
meeting agreed upon individual goals and objectives as well as the
overall Company's performance to plan. (Last year, the vice
president level bonus was approximately 30% of annual salary.)
2. Benefits: You will be entitled, during the term of your
employment, to the Company's standard vacation and benefits
covering employees, as such may be in effect from time to time.
3. Stock Options: Subject to action at the Company's next Board of
Directors Compensation Committee meeting and compliance with
applicable state and federal securities laws, the Company will
grant you an option to purchase an additional 30,000 shares of the
Company's Common Stock pursuant to the Company's 1993 Stock Plan
(the "Plan"), a copy of which will be provided to you. The
exercise price of the option will be the fair market value of the
Company's Common Stock on the date of acceptance of this offer.
The option will vest over four years with 1/48 of the shares
vesting at the end of each full month after the effective date of
your employment until all shares are vested, subject to all
provisions of the Plan and your continued employment with the
Company.
John R. Tighe
January 26, 1999
Page 2 of 3
4. Restricted Stock Award: Subject to action at the Company's next
Board of Directors Compensation Committee meeting and in
compliance with applicable state and federal securities laws, the
Company will grant you restricted stock in the amount of 4,000
shares of the Company's Common Stock. These Shares are restricted
pursuant to SEC regulations as well as a vesting schedule by the
Company. Such vesting schedule is 25% per year beginning February
3, 2000. Therefore, said Shares become available to you as
follows: 1,000 on February 3, 2000; 1,000 on February 3, 2001;
1,000 on February 3, 2002; and 1,000 on February 3, 2003. This
vesting is subject to continued employment with the Company and
not subject to proration should termination occur between vesting
periods. The grant date and pricing date is effective January 29,
1999.
5. Relocation Expenses: At ArthroCare's election, we will either
engage a relocation company or we'll pay you a lump sum payment to
cover the reasonable and customary expenses associated with (i)
you and your family's move from Maryland to the Bay Area; (ii)
house hunting trip(s); (iii) relocation of family, car, and
household goods, including travel; (iv) temporary living expenses
in the Bay Area; and (v) federal and state taxes related to the
relocation.
6. Housing Assistance Loan: In the event you purchase a home in the
Bay Area, the Company will agree to lend you $300,000.00 (the
"Relocation Loan") provided that you obtain a first mortgage
that permits a second mortgage to be placed against the residence
at the close of escrow. The $300,000.00 loan will be secured by a
second mortgage interest in the purchased home and will bear
interest at the minimum applicable federal rate; provided,
however, in the event that if the Relocation Loan can be
structured as an "employee relocation loan" (as that term is
defined under Treasury Regulations), the loan will be interest
free. *
7. Relocation Loan Repayment: The Relocation Loan (including any
accrued interest) will be due and payable upon the first to occur
of:
a) following a sale of transfer of the property or any interest
therein;
b) if you leave the employment of Company, the loan becomes
immediately payable;
8. Change of Control Agreement: As a term of this offer, we will
recommend to the Board of Directors that you be named as a vice
president of the organization as defined in the Company's Change
of Control Agreement. The terms of this Agreement provide for a
24 month severance package and vesting of options should your
employment terminate involuntarily, subject to a change of
control.
John R. Tighe
January 26, 1999
Page 3 of 3
9. At-Will Employment: You should be aware that your employment with
the Company is for no specified period and constitutes "at-will"
employment. As a result, you are free to terminate your
employment at any time, for any reason or for no reason.
Similarly, the Company is free to terminate your employment at any
time, for any reason or for no reason. In the event of
termination of your employment, you will not be entitled to any
payments, benefits, damages, awards, or compensation other than as
may otherwise be available in accordance with the Company's
established employee plans and policies at the time of
termination.
John, we look forward to you joining the Company. If the foregoing
terms are agreeable, please indicate your acceptance by signing the
enclosed copy of this letter in the space provided below and returning
it to me. This offer will terminate if not accepted on or before
January 29, 1998.
Sincerely yours,
ArthroCare Corporation
Michael A. Baker
President & CEO
ACCEPTED:
_______________________________ _______________________
John R. Tighe Date
* The loan amount reflected in the above paragraph entitled the
"Housing Assistance Loan" has been increased to $350,000.00 and is
subject to the same terms as outlined previously.
May 12, 1999
Dear Christine:
This letter is to serve as confirmation of the employment agreement
between you and ArthroCare Corporation (the "Company"). You currently
hold the position of Vice President, Finance and Chief Financial
Officer. In this position, you are expected to devote your full
business time, attention and energies to the performance of your duties
with the Company. The effective date of your employment was January 9,
1998, and you report directly to me.
The terms of your offer are as follows:
1. Compensation: Your annual salary is $135,000.00. The Company pays
you $5,192.23 bi-weekly in accordance with the Company's standard
payroll policies. Your salary began as of the effective date of
employment at a rate agreed upon at that time. The first and last
payment by the Company to you will be adjusted, as necessary, to
reflect a commencement or termination date other than the first or
the last working day of any period. You are also eligible for an
annual bonus of approximately 30% of your then-current salary which
is based upon the successful completion of agreed upon goals and
objectives and the Company's financial performance.
2. Benefits: You are entitled, during the term of your employment, to
the Company's standard vacation and benefits covering employees, as
such may be in effect from time to time.
3. Stock Options: The Company granted you an initial option to purchase
75,000 shares of the Company's Common Stock pursuant to the Company's
1993 Stock Plan (the "Plan"), a copy of which was provided to you.
The options vest over four years with 1/4 of the shares subject to
the options vesting one year from the effective date of your
employment and 1/48 of the shares vesting at the end of each full
month thereafter until all shares are vested, subject to all
provisions of the Plan and your continued employment with the
Company. Subsequent stock option grants have been, and will be, made
pursuant to this same Plan with vesting schedules pursuant to
standard Company practice at the time of grant.
Christine Hanni
May 12, 1999
Page 2 of 2
4. At-Will Employment: You should be aware that your employment with
the Company is for no specified period and constitutes "at-will"
employment. As a result, you are free to terminate your employment
at any time, for any reason or for no reason. Similarly, the Company
is free to terminate your employment at any time, for any reason or
no reason. In the event of termination of your employment, you will
not be entitled to any payments, benefits, damages, awards, or
compensation other than as may otherwise be available in accordance
with the Company's established employee plans and policies at the
time of termination.
5. The terms of this letter supersede any remaining current terms of any
previous employment arrangements with the Company.
Christine, we look forward to your continued employment with the
Company. If the foregoing terms are agreeable, please indicate your
acceptance by signing the enclosed copy of this letter in the space
provided below and returning it to me.
Sincerely yours,
ArthroCare Corporation
Michael A. Baker
President and Chief Executive Officer
MAB/gt
Accepted:
__________________________________ ______________________________
Christine Hanni Date
May 12, 1999
Dear Bruce:
This letter is to serve as confirmation of the employment agreement
between you and ArthroCare Corporation (the "Company"). You currently
hold the position of Vice President, Regulatory Affairs and Quality
Assurance. In this position, you are expected to devote your full
business time, attention, and energies to the performance of your duties
with the Company. The effective date of your employment was October 5,
1998, and you report directly to me.
The terms your offer are as follows:
1. Compensation: Your annual salary is $125,000.00. The Company
pays you $4,807.69 bi-weekly in accordance with the Company's
standard payroll policies. Your salary began as of the effective
date of employment at a rate agreed upon at that time. The first
and last payment by the Company to you will be adjusted, if
necessary, to reflect a commencement or termination date other
than the first or last working day of a pay period. You are also
eligible for an annual bonus of approximately 30% of your then-
current salary which is based upon the successful completion of
agreed upon goals and objectives and the Company's financial
performance.
2. Benefits: You are entitled, during the term of your employment,
to the Company's standard vacation and benefits covering
employees, as such may be in effect from time to time.
3. Stock Options: The Company granted you an initial option to
purchase 40,000 shares of the Company's Common Stock pursuant to
the Company's 1993 Stock Plan (the "Plan"), a copy of which was
provided to you. The option will vest over four years with 1/4 of
the shares subject to the option vesting one year from the
effective date of your employment and 1/48 of the shares vesting
at the end of each full month thereafter until all shares are
vested, subject to all provisions of the Plan and your continued
employment with the Company. Subsequent stock option grants have
been, and will be, made pursuant to this same Plan with vesting
schedules pursuant to standard Company practice at the time of
grant.
Bruce Prothro
May 12, 1999
Page 2 of 2
4. At-Will Employment: You should be aware that your employment with
the Company is for no specified period and constitutes "at-will"
employment. As a result, you are free to terminate your
employment at any time, for any reason or for no reason.
Similarly, the Company is free to terminate your employment at any
time, for any reason or for no reason. In the event of
termination of your employment, you will not be entitled to any
payments, benefits, damages, awards, or compensation other than as
may otherwise be available in accordance with the Company's
established employee plans and policies at the time of
termination.
5. The terms of this letter supersede any remaining current terms of
any previous employment arrangements with the Company.
Bruce, we look forward to your continued employment with the Company.
If the foregoing terms are agreeable, please indicate your acceptance by
signing the enclosed copy of this letter in the space provided below and
returning it to me.
Sincerely yours,
ArthroCare Corporation
Michael A. Baker
President and CEO
ACCEPTED:
_______________________________ _______________________
Bruce Prothro Date
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