ArthroCare Reports 18 Percent Product Sales Growth in Third Quarter; Net Income Impacted by Manufacturing and Sales Investments.Business Editors SUNNYVALE, Calif.--(BUSINESS WIRE)--Oct. 30, 2002 ArthroCare Corp. (Nasdaq:ARTC ARTC Arthrocare Corp (stock symbol) ARTC Australian Rail Track Corporation ARTC Air Route Traffic Control ARTC Association de la Recherche Theatrale au Canada ARTC Andean Root and Tuber Crops ), a multi-business medical device company that develops products based on its patented Coblation(R) technology, said today that in the third quarter of 2002, ended September 28, 2002, the company recorded total revenues of $22.2 million and net earnings of $646,000, or $0.03 per diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. share. In the same quarter of 2001, the company reported total revenues of $20.3 million and net income of $2.6 million, or $0.11 per diluted share.
SUMMARY TABLE
Q302 Q202 Q301
----------------------------------------------------------------------
Product Sales $ 21.3 M $ 20.7 M $ 18.0 M
License Fees, $ 879,000 $ 1.4 M $ 2.3 M
Royalties and
Other Revenues
Total Revenues $ 22.2 M $ 22.1 M $ 20.3 M
Net Income $ 646,000 $ 1.2 M $ 2.6 M
Diluted Earnings Per Share $ 0.03 $ 0.05 $ 0.11
SUMMARY -- Product sales in the third quarter were $21.3 million, an 18 percent increase over the $18.0 million posted in the same quarter of the previous year. -- Product sales were driven by continued rapid growth in newly commercialized businesses with direct sales forces; 120 percent growth in spine and 67 percent growth in ear, nose and throat (ENT) compared with the third quarter of the prior year. -- Amortization of historical inventory cost and a larger than typical percentage of controller sales at original equipment manufacturer (OEM) discount resulted in gross margin on product sales of 62.6 percent and a negative after tax impact of approximately $0.04 per share. -- The company's Costa Rica manufacturing facility produced nearly 85,000 sub-assemblies in its first full quarter of production. FIRST NINE MONTHS For the first nine months of the year, total revenues reached $64.4 million in 2002 compared with $60.6 million in 2001. Net income for the nine-month period was $2.2 million, or $0.10 per diluted share in the current year compared with $7.8 million, or $0.33 per diluted share in the previous year. REVENUE In the third quarter of 2002, product sales were $21.3 million, an 18 percent increase over $18.0 million recorded in the same quarter of the previous year. License fees, royalties and other revenue of $879,000 in the third quarter of 2002 compares with $2.3 million in the third quarter of 2001. License fees and royalties in the 2001 period included $1.7 million in previously received license fees from a former distributor. This non-recurring item had a positive after-tax impact of approximately $0.05 per share in Q3 2001. In the third quarter of 2002, the company again shipped more than 125,000 disposable devices. Average selling prices The average sales price of goods or commodities. Especially used in the retail sector and technology distribution. for disposables increased to almost $170 as the company experienced favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. mix trends across all product lines. More than 750 controller units were shipped with approximately 100 of those at OEM (Original Equipment Manufacturer) The rebranding of equipment and selling it. The term initially referred to the company that made the products (the "original" manufacturer), but eventually became widely used to refer to the organization that buys the products and discounts to partners in urology urology Medical specialty dealing with the urinary system and male reproductive organs. It traces its origin to medieval lithologists, itinerant healers who specialized in surgical removal of bladder stones. and gynecology gynecology (gīn'əkŏl`əjē), branch of medicine specializing in the disorders of the female reproductive system. Modern gynecology deals with menstrual disorders, menopause, infectious disease and maldevelopment of the . Controller revenue in the third quarter comprised more than twice the percentage of product sales than in a typical quarter as the company's OEM partners began to prepare for product introductions in the gynecology and urology markets. International markets contributed approximately 18 percent of product sales, up from 15 percent in the second quarter. BUSINESS UNIT PERFORMANCE Revenue growth in the third quarter continued to be driven by newly commercialized businesses with direct sales forces. Sales from the spinal spinal /spi·nal/ (spi´n'l) 1. pertaining to a spine or to the vertebral column. 2. pertaining to the spinal cord's functioning independently from the brain. spi·nal adj. surgery business unit more than doubled compared with the same quarter of the previous year, and contributed approximately 12 percent of product sales during the quarter. The company ended the quarter with a significant backorder in spine products due to shortages of key components from suppliers. The third quarter increase in ENT ENT ears, nose, and throat (otorhinolaryngology). ENT abbr. ear, nose, and throat ENT ear, nose and throat. ENT Ears, nose & throat; formally, otorhinolaryngology product sales over the comparable period of last year was approximately 67 percent with ENT surgery products contributing approximately 13 percent of product sales. Arthroscopy Arthroscopy Definition Arthroscopy is the examination of a joint, specifically, the inside structures. The procedure is performed by inserting a specifically designed illuminated device into the joint through a small incision. product sales were essentially flat with the same period a year ago and represented 73 percent of product sales. Building on the success of the company's direct sales organization, early in the fourth quarter ArthroCare acquired the company's distributor in the United Kingdom and reached an agreement to acquire the company's distributor in Germany. These moves are intended to immediately increase ArthroCare's direct sales presence in arthroscopy and provide the logistical lo·gis·tic also lo·gis·ti·cal adj. 1. Of or relating to symbolic logic. 2. Of or relating to logistics. [Medieval Latin logisticus, of calculation capability to increase its direct sales presence in other markets in Western Europe Western Europe The countries of western Europe, especially those that are allied with the United States and Canada in the North Atlantic Treaty Organization (established 1949 and usually known as NATO). . OPERATIONS Operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. increased approximately one percent, or $156,000 compared with the immediately preceding quarter. Increased spending was attributable to increases in corporate development and legal expenses and a high level of research and development activity which resulted in 11 new product introductions, including 2 new controller platforms in the quarter. The new Costa Rica Costa Rica (kŏs`tə rē`kə), officially Republic of Costa Rica, republic (2005 est. pop. 4,016,000), 19,575 sq mi (50,700 sq km), Central America. manufacturing operations Manufacturing operations concern the operation of a facility, as opposed to maintenance, supply and distribution, health, and safety, emergency response, human resources, security, information technology and other infrastructural support organizations. are expected to lower the company's cost structure dramatically over time and current inventory is being revalued to reflect that. Gross margin on product sales was 62.6 percent, primarily due to amortization of historical inventory cost. In addition, a larger than typical percentage of controller sales at OEM discounts negatively impacted gross margin. The combination of these two factors compressed gross margin by approximately 3.7 percentage points, which resulted in a negative after tax impact on earnings per share of approximately $0.04. The Costa Rica facility produced nearly 85,000 subassemblies in its first full quarter of production. Increased volume from Costa Rica and associated lower tax rates are expected to offset the continued amortization of historical inventory cost through 2003. "ArthroCare's ENT and spinal surgery businesses continued to drive revenue growth in the third quarter," said Michael A. Baker Michael Allen Baker (Captain, USN, Ret.) is the International Space Station Program Manager for International and Crew Operations, at NASA's Johnson Space Center. He is responsible for the coordination of program operations, integration and flight crew training and support , president and chief executive officer. "We are pleased with the results of our direct sales strategy in those businesses. As we go forward, we are moving to extend that strategy to other territories in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. and internationally." RECENT CORPORATE DEVELOPMENTS -- Early in the fourth quarter, ArthroCare moved to increase the company's direct presence in arthroscopy with the acquisition of Atlantech Medical Devices, Ltd. and reached an agreement to acquire Atlantech GmbH. Atlantech, a specialist in arthroscopy and ligament ligament (lĭg`əmənt), strong band of white fibrous connective tissue that joins bones to other bones or to cartilage in the joint areas. The bundles of collagenous fibers that form ligaments tend to be pliable but not elastic. fixation fixation: see psychoanalysis. , had been ArthroCare's distributors in the United Kingdom and Germany. -- Coblation tonsillectomy tonsillectomy /ton·sil·lec·to·my/ (ton?si-lek´tah-me) excision of a tonsil. ton·sil·lec·to·my n. Surgical removal of tonsils or a tonsil. -- a procedure that uses low-temperature radio frequency energy to precisely and rapidly remove unwanted tonsil tonsil Small mass of lymphoid tissue in the wall of the pharynx. The term usually refers to the palatine tonsils on each side of the oropharynx. They are thought to produce antibodies to help prevent respiratory and digestive tract infection but often become infected tissue -- was shown to be a less painful, faster-healing procedure than conventional tonsillectomy techniques, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. an article in the June 2002 issue of The Journal of Laryngology laryngology /lar·yn·gol·o·gy/ (-gol´ah-je) the branch of medicine dealing with the throat, pharynx, larynx, nasopharynx, and tracheobronchial tree. lar·yn·gol·o·gy n. & Otology otology /otol·o·gy/ (o-tol´ah-je) the branch of medicine dealing with the ear, its anatomy, physiology, and pathology.otolog´ic o·tol·o·gy n. The branch of medicine that deals with the ear. . -- ArthroCare was ranked number 34 on Fortune magazine's annual list of the Fastest Growing Companies in America in the publication's September 2nd issue. In the August 1st issue of Inc. Magazine, the company was ranked number 33 on the magazine's Innovation 50, a list of the most innovative small companies in entrepreneurial America. -- ArthroCare appointed Richard A. Christensen senior vice president of operations. Christensen has nearly 20 years experience in senior-level operations and finance positions at General Motors (GM). The company also welcomed James Foster James Foster may refer to:
long-time medical technology senior executive, most recently at Medtronic Inc., to the company's Board of Directors. -- In the third quarter, ArthroCare repurchased 926,041 shares of the company's Common Stock at an average price of $11.67. This brings the total number of shares purchased under the current authorization The right or permission to use a system resource; the process of granting access. See access control. to 977,741. BUSINESS OUTLOOK The following statements are based on current expectations on October 30, 2002. These statements are forward-looking, and actual results may differ materially. These statements do not include the potential impact of any new businesses or license agreements the company may enter in future periods. The company's business outlook for the remainder of fiscal 2002 is as follows: -- The company expects product sales to increase approximately 20 percent in 2002 compared with 2001. -- The company continues to anticipate improving gross margin on direct product sales by approximately 4-5 percentage points in 2002 compared with 2001. -- The company intends to provide a business outlook for 2003 in early December. ArthroCare will hold a conference call with the financial community at 6:00 p.m. Eastern/3:00 p.m. Pacific time today. The call will be simultaneously webcast on www.ccbn.com and will remain available through November 13, 2002. A telephonic replay of the conference call can be accessed by dialing 800/633-8284 and entering passcode number 20933900. ABOUT ARTHROCARE ArthroCare Corp. (www.arthrocare.com), headquartered in Sunnyvale, CA, is a multi-business medical device company that develops, manufactures and markets minimally invasive invasive /in·va·sive/ (-siv) 1. having the quality of invasiveness. 2. involving puncture of the skin or insertion of an instrument or foreign material into the body; said of diagnostic techniques. soft tissue surgical products based on its patented Coblation technology. Coblation uses low-temperature radio-frequency energy to gently and precisely dissolve A Web site design technique borrowed from the film and video industry in which the transition between two Web pages is represented visually by one page fading into another. Also known as a "soft cut," the result is achieved in the HTML coding of the images to gradual pre-determined rather than burn soft tissue, minimizing damage to healthy tissue. ArthroCare targets a multi-billion dollar market opportunity across several medical specialties Medical Specialties See also anatomy; disease and illness; drugs; health; remedies; surgery. adenography the science of the description of glands. — adenographic, adj. , significantly improving surgical procedures Surgical procedures have long and possibly daunting names. The meaning of many surgical procedure names can often be understood if the name is broken into parts. For example in splenectomy, "ectomy" is a suffix meaning the removal of a part of the body. "Splene-" means spleen. and enabling new, minimally invasive procedures Minimally invasive surgical procedures avoid open invasive surgery in favor of closed or local surgery with less trauma. These procedures involve use of laparoscopic devices and remote-control manipulation of instruments with indirect observation of the surgical field through an . ArthroCare's Coblation-based devices have been used in more than 1.75 million surgical procedures worldwide. The company has developed and marketed Coblation-based products for arthroscopic, spine/neurologic, ear, nose and throat, cosmetic, urologic, gynecologic gynecologic /gy·ne·co·log·ic/ (gi?ne-) (jin?e-kah-loj´ik) pertaining to the female reproductive tract or to gynecology. and laparoscopic/general surgical procedures, and continues research in other areas. SAFE HARBOR Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. STATEMENTS Except for historical information, this press release includes forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. . These statements include, but are not limited to, the company's stated business outlook for fiscal 2002, continued strength of the company's fundamental position, the strength of the company's technology, the company's belief that strategic moves will enhance achievement of the company's long term potential, the potential and expected rate of growth of new businesses, continued success of product diversification Diversification A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance. Notes: Diversification is possibly the greatest way to reduce the risk. efforts, and other statements that involve risks and uncertainties. These risks and uncertainties include, but are not limited to the uncertainty of success of the company's non-arthroscopic products, competitive risk, uncertainty of the success of strategic business alliances, uncertainty over reimbursement Reimbursement Payment made to someone for out-of-pocket expenses has incurred. , need for governmental clearances or approvals before selling products, and the uncertainty of protecting the company's patent position. These and other risks and uncertainties are detailed from time to time in the company's Securities and Exchange Commission filings, including ArthroCare's Form 10-K Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. for the year ended December 29, 2001 and Form 10-Q Form 10-Q See 10-Q. for the quarter ended June 29, 2002. Forward-looking statements are indicated by words or phrases such as "anticipates," "estimates," "projects," "believes," "intends," "expects," and similar words and phrases Words and Phrases® A multivolume set of law books published by West Group containing thousands of judicial definitions of words and phrases, arranged alphabetically, from 1658 to the present. . Actual results may differ materially from management expectations.
ARTHROCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30, December 31,
ASSETS 2002 2001
------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 33,542 $ 41,507
Available-for-sale securities 7,285 26,662
Accounts receivable, net of allowances
of $454 in 2002 and $776 in 2001 18,237 18,567
Inventories, net 18,486 14,207
Prepaid expenses and other current
assets 5,767 6,250
------------- -------------
Total current assets 83,317 107,193
Available-for-sale securities 26,469 8,526
Property and equipment, net 17,613 13,068
Related party receivables 1,205 1,205
Other assets 3,674 3,705
------------- -------------
Total assets $ 132,278 $ 133,697
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,069 $ 3,142
Accrued liabilities 4,301 1,111
Accrued compensation 4,754 3,837
Income taxes payable 1,225 461
------------- -------------
Total current liabilities 14,349 8,551
Deferred rent 100 53
------------- -------------
Total liabilities 14,449 8,604
------------- -------------
Stockholders' equity:
Preferred stock, par value $ 0.001:
Authorized: 5,000 shares
Issued and Outstanding: none
Common stock, par value $ 0.001:
Authorized 75,000 shares:
Issued and Outstanding: 20,959
shares in 2002, and 21,855 shares
in 2001 23 22
Treasury stock: 1,977 shares in 2002,
951 shares in 2001 (31,106) (18,987)
Additional paid-in capital 147,294 146,081
Accumulated other comprehensive loss (272) (1,724)
Retained earnings/(accumulated deficit) 1,890 (299)
------------- -------------
Total stockholders' equity 117,829 125,093
------------- -------------
Total liabilities and
stockholders' equity $ 132,278 $ 133,697
============= =============
ARTHROCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
-------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001
---------- --------- -------- ----------
Revenues:
Product sales $ 21,332 $ 17,975 $ 61,329 $ 53,505
Royalties, fees and other 879 2,287 3,054 7,075
---------- --------- -------- ----------
Total revenues 22,211 20,262 64,383 60,580
Cost of product sales 7,981 7,522 22,758 21,390
---------- --------- -------- ----------
Gross profit 14,230 12,740 41,625 39,190
---------- --------- -------- ----------
Operating expenses:
Research and development 2,188 1,973 6,472 5,869
Sales and marketing 9,011 8,253 26,270 22,471
General and administrative 2,458 1,426 6,861 3,756
---------- --------- -------- ----------
Total operating expenses 13,657 11,652 39,603 32,096
---------- --------- -------- ----------
Income from operations 573 1,088 2,022 7,094
Interest and other income,
net 377 2,961 1,231 5,103
---------- --------- -------- ----------
Income before income tax
provision 950 4,049 3,253 12,197
Income tax provision 304 1,458 1,064 4,402
---------- --------- -------- ----------
Net income $ 646 $ 2,591 $ 2,189 $ 7,795
========== ========= ======== ==========
Basic net income per share $ 0.03 0.12 $ 0.10 $ 0.35
========== ========= ======== ==========
Shares used in computing
basic net income per share 21,085 22,477 21,595 22,428
========== ========= ======== ==========
Diluted net income per share $ 0.03 $ 0.11 $ 0.10 $ 0.33
========== ========= ======== ==========
Shares used in computing
diluted net income per
share 22,060 23,860 22,514 23,503
========== ========= ======== ==========
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