ArthroCare Reports Record $20.3 Million Gross Product Sales in First Quarter; All Commercial Business Units Post Strong Results.Business Editors & Health/Medical Writers SUNNYVALE, Calif.--(BW HealthWire)--April 18, 2002 ArthroCare Corporation (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, today reported that in the first quarter, ended March 30, 2002, gross product sales reached a record $20.3 million, an increase of 14 percent sequentially compared with $17.7 million reported in the fourth quarter of 2001. In the first quarter of 2001, the company posted $18.1 million in gross product sales. Cash and investments remained strong at $77 million at quarter-end. Accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying decreased $1.3 million on the $2.6 million sequential increase in gross sales Gross Sales A measure of overall sales that isn't adjusted for customer discounts or returns, calculated simply by adding all sales invoices, and not including operating expenses, cost of goods sold, payment of taxes, or any other charge. and days sales outstanding In accountancy, Days Sales Outstanding is a company's average collection period. A low figure indicates that the company collects its outstanding receivables quickly. Typically it is looked at either quarterly or yearly (90 or 365 days). dropped to 75 from 91 during the period. The company shipped more than 120,000 disposable devices during the quarter, a new record, with all commercial business units posting significant growth. During 2001, the company invested in increasing its direct sales presence, which has contributed meaningfully to sales growth as direct sales has become more productive. In the first quarter of 2002, 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. contributed $15.8 million in gross sales, a 6 percent sequential increase. Gross sales in the company's spinal surgery business unit increased 136 percent sequentially, and contributed approximately 11 percent of gross sales in the first quarter. The company's ear, nose and throat (ENT ENT ears, nose, and throat (otorhinolaryngology). ENT abbr. ear, nose, and throat ENT ear, nose and throat. ENT Ears, nose & throat; formally, otorhinolaryngology ) business also expanded, contributing approximately 11 percent of first quarter gross sales. International sales were also strong, contributing approximately 19 percent of gross product sales, and increasing 138 percent compared with the same quarter of last year. Total net revenue, including license fees, royalties and other revenues, reached $20.1 million in the first quarter of 2002 compared with $17.8 million in the prior quarter and $18.0 million in the first quarter of 2001. In the first quarter of 2002, ArthroCare adopted Emerging Issues Task Force (EITF EITF Emerging Issues Task Force EITF Edinburgh International Television Festival EITF Europe International Taekwon-Do Federation ) Issue 01-09, Accounting for Consideration Given by a Vendor (including a Customer or a Reseller An organization that sells hardware and software to the general public. Resellers purchase products from software publishers and hardware manufacturers. of the Vendor's Products). This issue presumes that consideration from a vendor to a customer or reseller of the vendor's products, including commissions paid to selling agents, to be a reduction of the selling prices of the vendor's products. Upon adoption, the company is required to reclassify Verb 1. reclassify - classify anew, change the previous classification; "The zoologists had to reclassify the mollusks after they found new species" class, classify, sort out, assort, sort, separate - arrange or order by classes or categories; "How would you all prior period amounts to conform to Verb 1. conform to - satisfy a condition or restriction; "Does this paper meet the requirements for the degree?" fit, meet coordinate - be co-ordinated; "These activities coordinate well" the current period presentation. This reclassification Reclassification The process of changing the class of mutual funds once certain requirements have been met. These requirements are generally placed on load mutual funds. Reclassification is not considered to be a taxable event. reduces reported net revenue, gross profit and sales and marketing expense without changing operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. or net income. Under the new presentation, net product sales in the first quarter of 2002 were $19.3 million, compared with $16.8 million in the prior quarter and $17.0 million in the first quarter of last year. During the first quarter of 2002, the company relocated re·lo·cate v. re·lo·cat·ed, re·lo·cat·ing, re·lo·cates v.tr. To move to or establish in a new place: relocated the business. v.intr. its manufacturing facility to a new site in Sunnyvale, CA, resulting in a temporary efficiency loss, which negatively impacted gross margin. Gross margin on net sales Net Sales The amount a seller receives from the buyer after costs associated with the sale are deducted. Notes: This amount is calculated by subtracting the following items from gross sales: merchandise returned for credit, allowances for damaged or missing goods, freight was 61 percent in the current year quarter, below the 62 percent gross margin on net sales achieved in the fourth quarter of 2001 and even with the first quarter a year ago. The company continues to believe it can improve gross margin on gross and net sales by approximately 4-5 percentage points in fiscal 2002, with most of the improvement coming in the second half of the year as ArthroCare's second manufacturing facility in 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. comes on line. 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. were well controlled, decreasing slightly to 61 percent of gross sales in the first quarter of 2002 from 62 percent of gross sales in the previous quarter. Compared with the first quarter of 2001, spending growth was primarily attributable to the investment in a direct sales presence and intellectual property enforcement actions during the intervening period. Lower gross margin and lower levels of interest and other income, negatively impacted first quarter net income compared with the same period last year. In the first quarter of 2002, net income was $372,000, or $0.02 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, compared with net income of $2.0 million, or $0.09 per diluted share in the first quarter of last year. "All of our commercialized businesses grew both year over year and sequentially," 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 added 150 ENT customers and 100 Nucleoplasty customers 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. in the first quarter. In arthroscopy, the recently introduced RazorVac(TM) disposable device has been well received, and we believe we have continued to make modest market share gains. We are disappointed that the physical relocation RELOCATION, Scotch law, contracts. To let again to renew a lease, is called a relocation. 2. When a tenant holds over after the expiration of his lease, with the consent of his landlord, this will amount to a relocation. of our manufacturing facility resulted in lower production levels, but we believe the issues have been identified and solved. We are back to our planned production rate, and we are confident we can deliver product efficiently to meet the increasing demand." RECENT CORPORATE DEVELOPMENTS -- Product sales to increase sequentially by up to 10 percent. -- Some gross margin improvement in the second quarter. -- Operating expenses to grow at a slower rate sequentially than sales. BUSINESS OUTLOOK The following statements are based on current expectations on April 18, 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 fiscal 2002 is as follows: -- Product sales to increase sequentially by up to 10 percent. -- Some gross margin improvement in the second quarter. -- Operating expenses to grow at a slower rate sequentially than sales. Regarding the second quarter of 2002, the company expects: -- Product sales to increase sequentially by up to 10 percent. -- Some gross margin improvement in the second quarter. -- Operating expenses to grow at a slower rate sequentially than sales. ArthroCare will hold a conference call with the financial community at 4:30 p.m. Eastern/1:30 p.m. Pacific time today. The call will be simultaneously webcast on www.ccbn.com and will remain available through May 3, 2002. A telephonic replay of the conference call can be accessed by dialing 800-633-8284 and entering passcode number 20514136. ABOUT ARTHROCARE ArthroCare Corporation (www.arthrocare.com) headquartered in Sunnyvale, Calif., is a multi-business medical device company that develops, manufactures and markets minimally invasive soft-tissue surgical products based on its patented Coblation technology. Coblation technology 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, which minimizes damage to surrounding healthy tissue, thereby potentially decreasing patient pain and recovery time. ArthroCare leverages its Coblation technology to capitalize on Cap´i`tal`ize on` v. t. 1. To turn (an opportunity) to one's advantage; to take advantage of (a situation); to profit from; as, to capitalize on an opponent's mistakes s>. a $2.8 billion 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 many existing 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 . 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 research continues in additional areas. ArthroCare's Coblation-based devices have been used in more than 1.5 million surgical procedures worldwide. 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. 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 Statements of Operations
(In thousands, except per share data; unaudited)
For the Three Months Ended
---------------------------------
March 30, Dec. 29, March 31,
2002 2001 2001
-------- -------- --------
Revenue:
Product sales $ 20,284 $ 17,721 $ 18,097
Dealer commissions * (996) (925) (1,072)
-------- -------- --------
Net product sales 19,288 16,796 17,025
Royalties, fees and other 789 1,000 989
-------- -------- --------
Total revenue 20,077 17,796 18,014
Cost of product sales 7,576 6,301 6,655
-------- -------- --------
Gross profit 12,501 11,495 11,359
-------- -------- --------
Operating expenses:
Research and development 2,150 2,167 1,878
Sales and marketing 8,372 7,182 6,386
General and administrative 1,923 1,550 1,042
-------- -------- --------
Total operating expenses 12,444 10,899 9,306
-------- -------- --------
Income from operations 57 596 2,053
Interest and other income, net 525 2,944 1,060
-------- -------- --------
Income before income
tax provision 582 3,540 3,113
Income tax provision 209 1,275 1,131
-------- -------- --------
Net income $ 372 $ 2,265 $ 1,982
======== ======== ========
Basic net income per share $ 0.02 $ 0.10 $ 0.09
======== ======== ========
Diluted net income per share $ 0.02 $ 0.10 $ 0.09
======== ======== ========
Shares used in computing
basic net income per share 21,834 21,883 22,258
======== ======== ========
Shares used in computing
diluted net income per share 22,800 22,972 23,285
======== ======== ========
* Reflects the adoption of EITF Issue No. 01-09 "Accounting for
Consideration Given by a Vendor (including a Customer or a
Reseller of the Vendor's Products)." All prior period data have
been reclassified to conform with the new accounting standard.
ARTHROCARE CORPORATION
Condensed Consolidated Balance Sheets
(In thousands)
March 30, Dec. 29,
2002 2001
ASSETS (unaudited)
-------- --------
Current assets:
Cash, cash equivalents, and available-for-sale
securities $ 63,694 $ 68,169
Accounts receivable, net 17,244 18,567
Inventories 14,911 14,207
Deferred income taxes 4,079 4,079
Prepaid expenses and other current assets 1,440 2,171
-------- --------
Total current assets 101,368 107,193
Property and equipment, net 14,326 13,068
Related party receivables 1,205 1,205
Deferred income taxes 3,415 3,415
Other assets 313 290
Available-for-sale securities 13,393 8,526
-------- --------
Total assets $134,020 $133,697
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,368 $ 3,142
Accrued liabilities 5,616 4,948
Income tax payable 508 461
-------- --------
Total current liabilities 8,492 8,551
Long-term liabilities 56 53
-------- --------
Total liabilities 8,548 8,604
Stockholders' equity 125,472 125,093
-------- --------
Total liabilities and stockholders' equity $134,020 $133,697
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