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Table of Contents
 
 
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 June 29, 2002.
 
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.)
 
680 Vaqueros Avenue
Sunnyvale, California 94085
(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 August 1, 2002 was 21,417,140.
 

Table of Contents
 
ARTHROCARE CORPORATION
 
INDEX
 
         
Page
PART I:    FINANCIAL INFORMATION
     
    Item 1.
   
Financial Statements (unaudited)
     
       
3
       
4
       
5
       
6
    Item 2.
      
11
    Item 3.
      
32
PART II:    OTHER INFORMATION
     
    Item 1.
      
33
    Item 4.
      
33
    Item 6.
      
34
  
38

Page 2 of 38

Table of Contents
PART I.    FINANCIAL INFORMATION
 
Item 1.    Financial Statements
 
ARTHROCARE CORPORATION
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
    
June 30,
2002
     
December 31,
2001
  
    
(Unaudited)
         
ASSETS
                  
Current assets:
                  
Cash and cash equivalents
   
$
47,316
 
   
$
41,507
 
Available-for-sale securities
   
 
13,836
 
   
 
26,662
 
Accounts receivable, net of allowances of $477 in 2002 and $776 in 2001
   
 
18,558
 
   
 
18,567
 
Inventories
   
 
16,038
 
   
 
14,207
 
Prepaid expenses and other current assets
   
 
6,566
 
   
 
6,250
 
    
  
Total current assets
   
 
102,314
 
   
 
107,193
 
Available-for-sale securities
   
 
16,349
 
   
 
8,526
 
Property and equipment, net
   
 
15,466
 
   
 
13,068
 
Related party receivables
   
 
1,205
 
   
 
1,205
 
Other assets
   
 
3,719
 
   
 
3,705
 
    
  
Total assets
   
$
139,053
 
   
$
133,697
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
Current liabilities:
                  
Accounts payable
   
$
3,185
 
   
$
3,142
 
Accrued liabilities
   
 
3,002
 
   
 
1,111
 
Accrued compensation
   
 
4,441
 
   
 
3,837
 
Income taxes payable
   
 
948
 
   
 
461
 
    
  
Total current liabilities
   
 
11,576
 
   
 
8,551
 
Deferred rent
   
 
80
 
   
 
53
 
    
  
Total liabilities
   
 
11,656
 
   
 
8,604
 
    
  
Contingencies (Note 6)
                  
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: 21,824 shares in 2002, and 21,855 shares in 2001
   
 
22
 
   
 
22
 
Treasury stock: 1,052 shares in 2002, 951 shares in 2001
   
 
(20,301
)
   
 
(18,987
)
Additional paid-in capital
   
 
146,751
 
   
 
146,081
 
Accumulated other comprehensive loss
   
 
(319
)
   
 
(1,724
)
Retained earnings/(accumulated deficit)
   
 
1,244
 
   
 
(299
)
    
  
Total stockholders’ equity
   
 
127,397
 
   
 
125,093
 
    
  
Total liabilities and stockholders’ equity
   
$
139,053
 
   
$
133,697
 
    
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements

Page 3 of 38

Table of Contents
ARTHROCARE CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
    
Three Months Ended
   
Six Months Ended
    
June 30,
2002
   
June 30,
2001
   
June 30,
2002
   
June 30, 2001
Revenues:
                            
Product sales
   
$
20,709
   
$
18,505
   
$
39,997
   
$
35,530
Royalties, fees and other
   
 
1,386
   
 
3,799
   
 
2,175
   
 
4,788
    
  
  
  
Total revenues
   
 
22,095
   
 
22,304
   
 
42,172
   
 
40,318
Cost of product sales
   
 
7,201
   
 
7,213
   
 
14,777
   
 
13,868
    
  
  
  
Gross profit
   
 
14,894
   
 
15,091
   
 
27,395
   
 
26,450
    
  
  
  
Operating expenses:
                            
Research and development
   
 
2,134
   
 
2,018
   
 
4,284
   
 
3,896
Sales and marketing
   
 
8,887
   
 
7,832
   
 
17,259
   
 
14,218
General and administrative
   
 
2,480
   
 
1,288
   
 
4,403
   
 
2,330
    
  
  
  
Total operating expenses
   
 
13,501
   
 
11,138
   
 
25,946
   
 
20,444
    
  
  
  
Income from operations
   
 
1,393
   
 
3,953
   
 
1,449
   
 
6,006
Interest and other income, net
   
 
329
   
 
1,082
   
 
854
   
 
2,142
    
  
  
  
Income before income tax provision
   
 
1,722
   
 
5,035
   
 
2,303
   
 
8,148
Income tax provision
   
 
551
   
 
1,813
   
 
760
   
 
2,944
    
  
  
  
Net income
   
$
1,171
   
$
3,222
   
$
1,543
   
$
5,204
    
  
  
  
Basic net income per share
   
$
0.05
   
$
0.14
   
$
0.07
   
$
0.23
    
  
  
  
Shares used in computing basic net income per share
   
 
21,851
   
 
22,268
   
 
21,842
   
 
22,312
    
  
  
  
Diluted net income per share
   
$
0.05
   
$
0.14
   
$
0.07
   
$
0.22
    
  
  
  
Shares used in computing diluted net income per share
   
 
22,769
   
 
23,470
   
 
22,764
   
 
23,480
    
  
  
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements

Page 4 of 38

Table of Contents
ARTHROCARE CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
    
Six Months Ended
  
    
June 30,
2002
     
June 30,
2001
  
Cash flows from operating activities:
                  
Net income
   
$
1,543
 
   
$
5,204
 
Adjustments to reconcile net income to net cash provided by operating activities:
                  
Depreciation and amortization
   
 
3,576
 
   
 
2,705
 
Stock compensation expense
   
 
113
 
   
 
257
 
Provision for doubtful accounts receivable and product returns
   
 
(425
)
   
 
218
 
Provision for excess and obsolete inventory
   
 
77
 
   
 
(12
)
Deferred rent
   
 
27
 
   
 
(33
)
Changes in operating assets and liabilities:
                  
Accounts receivable
   
 
190
 
   
 
(2,704
)
Inventories
   
 
(1,965
)
   
 
2,123
 
Prepaid expenses and other current assets
   
 
(333
)
   
 
(367
)
Accounts payable
   
 
39
 
   
 
2,385
 
Accrued liabilities
   
 
1,846
 
   
 
(820
)
Income taxes payable
   
 
487
 
   
 
—  
 
Deferred revenue
   
 
—  
 
   
 
(3,787
)
Other assets
   
 
(14
)
   
 
242
 
    
  
Net cash provided by operating activities
   
 
5,161
 
   
 
5,411
 
    
  
Cash flows from investing activities:
                  
Purchases of property and equipment
   
 
(5,974
)
   
 
(3,603
)
Purchases of available-for-sale securities
   
 
(105,281
)
   
 
(8,980
)
Sales or maturities of available-for-sale securities
   
 
110,265
 
   
 
26,359
 
    
  
Net cash provided by/(used in) investing activities
   
 
(990
)
   
 
13,776
 
    
  
Cash flows from financing activities:
                  
Purchase of treasury stock
   
 
(665
)
   
 
(2,736
)
Repayment of capital leases
   
 
—  
 
   
 
(52
)
Proceeds from exercise of options to purchase common stock
   
 
557
 
   
 
2,273
 
    
  
Net cash used in financing activities
   
 
(108
)
   
 
(515
)