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 September 30, 2004.
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 ¨.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes x No ¨.
The number of shares outstanding of the registrant’s common stock as of October 29, 2004 was 21,650,341.
INDEX
| Page | ||||
| PART I: Financial Information |
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| Item 1. |
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| Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 |
1 | |||
| 2 | ||||
| 3 | ||||
| 4 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
12 | ||
| Item 3. |
24 | |||
| Item 4. |
25 | |||
| PART II: Other Information |
||||
| Item 1. |
26 | |||
| Item 6. |
26 | |||
| 27 | ||||
|
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
|
||||||||
| September 30, 2004 |
December 31, 2003 |
|||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 18,450 | $ | 20,890 | ||||
| Accounts receivable, net of allowances of $580 in 2004 and $289 in 2003 |
27,908 | 24,122 | ||||||
| Inventories |
37,203 | 33,072 | ||||||
| Prepaid expenses and other current assets |
9,030 | 6,921 | ||||||
| Total current assets |
92,591 | 85,005 | ||||||
| Available-for-sale securities |
— | 10,428 | ||||||
| Property and equipment, net |
27,640 | 23,493 | ||||||
| Related party receivables |
1,075 | 1,205 | ||||||
| Intangible assets |
13,158 | 5,864 | ||||||
| Goodwill |
28,423 | 10,383 | ||||||
| Other assets |
5,379 | 1,760 | ||||||
| Total assets |
$ | 168,266 | $ | 138,138 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 7,254 | $ | 6,808 | ||||
| Accrued liabilities |
11,383 | 5,204 | ||||||
| Accrued compensation |
6,101 | 5,323 | ||||||
| Total current liabilities |
24,738 | 17,335 | ||||||
| Other liabilities |
3,825 | 155 | ||||||
| Total liabilities |
28,563 | 17,490 | ||||||
| Commitments and contingencies: (Note 9) |
||||||||
| 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: 21,746 shares in 2004 and 21,025 shares in 2003 |
22 | 21 | ||||||
| Treasury stock: 2,704 shares in 2004 and 2003 |
(42,158 | ) | (42,158 | ) | ||||
| Additional paid-in capital |
167,752 | 156,283 | ||||||
| Deferred stock-based compensation |
(1,882 | ) | (951 | ) | ||||
| Accumulated other comprehensive loss |
(657 | ) | (836 | ) | ||||
| Retained earnings |
16,626 | 8,289 | ||||||
| Total stockholders’ equity |
139,703 | 120,648 | ||||||
| Total liabilities and stockholders’ equity |
$ | 168,266 | $ | 138,138 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||
| 2004 |
2003 |
2004 |
2003 | |||||||||
| Revenues: |
||||||||||||
| Product sales |
$ | 36,811 | $ | 28,559 | $ | 107,007 | $ | 83,409 | ||||
| Royalties, fees and other |
1,383 | 881 | 4,441 | 2,933 | ||||||||
| Total revenues |
38,194 | 29,440 | 111,448 | 86,342 | ||||||||
| Cost of product sales |
12,139 | 9,066 | 36,373 | 26,325 | ||||||||
| Gross profit |
26,055 | 20,374 | 75,075 | 60,017 | ||||||||
| Operating expenses: |
||||||||||||
| Research and development |
3,189 | 3,068 | 9,840 | 8,321 | ||||||||
| Sales and marketing |
13,916 | 11,573 | 42,332 | 34,611 | ||||||||
| General and administrative |
4,305 | 3,289 | 11,925 | 11,982 | ||||||||
| Total operating expenses |
21,410 | 17,930 | 64,097 | 54,914 | ||||||||
| Income from operations |
4,645 | 2,444 | 10,978 | 5,103 | ||||||||
| Interest and other income, net |
316 | 591 | 443 | 1,636 | ||||||||
| Income before income tax provision |
4,961 | 3,035 | 11,421 | 6,739 | ||||||||
| Income tax provision |
1,340 | 941 | 3,084 | 2,089 | ||||||||
| Net income |
$ | 3,621 | $ | 2,094 | $ | 8,337 | $ | 4,650 | ||||
| Basic net income per share |
$ | 0.17 | $ | 0.10 | $ | 0.39 | $ | 0.22 | ||||
| Shares used in calculating basic net income per share |
21,411 | 20,650 | 21,203 | 20,908 | ||||||||
| Diluted net income per share |
$ | 0.16 | $ | 0.10 | $ | 0.36 | $ | 0.21 | ||||
| Shares used in calculating diluted net income per share |
23,194 | 21,796 | 22,926 | 21,740 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Nine Months Ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| (Unaudited) | ||||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 8,337 | $ | 4,650 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
9,614 | 7,523 | ||||||
| Loss on disposition of equipment |
85 | 5 | ||||||
| Provision for doubtful accounts and product returns |
357 | — | ||||||
| Provision for excess and obsolete inventory |
247 | 227 | ||||||
| Realized gain on sale of long-term investment |
(333 | ) | — | |||||
| Stock compensation expense |
569 | 366 | ||||||
| Deferred rent |
6 | 38 | ||||||
| Changes in operating assets and liabilities, net of assets and liabilities acquired: |
||||||||
| Accounts receivable |
(4,030 | ) | (987 | ) | ||||
| Inventories |
(3,158 | ) | (9,738 | ) | ||||
| Prepaid expenses and other current assets |
(2,024 | ) | (462 | ) | ||||
| Other assets |
134 | (41 | ) | |||||
| Accounts payable |
728 | 275 | ||||||
| Accrued liabilities |
788 | (1,566 | ) | |||||
| Income taxes payable |
1,589 | 2,202 | ||||||
| Net cash provided by operating activities |
12,909 | 2,492 | ||||||
| Cash flows from investing activities: |
||||||||
| Purchases of property and equipment |
(11,441 | ) | (9,485 | ) | ||||
| Purchases of intangible assets |
— | (2,150 | ) | |||||
| Payment for purchase of MDA, net of cash acquired |
(24,694 | ) | — | |||||
| Payment for purchase of Atlantech Austria, net of cash acquired |
— | (630 | ) | |||||
| Purchases of available-for-sale securities |
(50,932 | ) | (32,170 | ) | ||||
| Sales or maturities of available-for-sale securities |
61,855 | 44,337 | ||||||
| Net cash used in investing activities |
(25,212 | ) | (98 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Purchase of treasury stock |
— | (11,262 | ) | |||||
| Repayment on loan from bank |
(15,000 | ) | (49 | ) | ||||
| Proceeds from loan from bank, net of issuance costs |
14,915 | — | ||||||
| Proceeds from issuance of common stock, net of issuance costs |
461 | 352 | ||||||
| Proceeds from exercise of options to purchase common stock |
9,509 | 1,487 | ||||||
| Net cash provided by (used in) financing activities |
9,885 | (9,472 | ) | |||||
| Effect of exchange rate on changes in cash |
(22 | ) | 17 | |||||
| Net decrease in cash and cash equivalents |
(2,440 | ) | (7,061 | ) | ||||
| Cash and cash equivalents, beginning of period |
20,890 | 40,753 | ||||||
| Cash and cash equivalents, end of period |
$ | 18,450 | $ | 33,692 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
The above condensed consolidated statements of cash flows and the end of period cash and cash equivalents balances do not include long-term available-for-sale securities of (in thousands) $0 and $10,428 at September 30, 2004 and December 31, 2003, respectively.
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Formation and Business of the Company:
ArthroCare Corporation (“ArthroCare”, “we” or the “company”) was incorporated on April 29, 1993 and our principal operations commenced in August 1995. We design, develop, manufacture and market medical devices for use in soft-tissue surgery. Our products are based on our patented soft-tissue surgical controlled ablation technology, which we call Coblation technology. Coblation technology involves an innovative use of a non-thermal process, and has the capability of performing at temperatures lower than traditional electrosurgical tools. Our strategy includes applying Coblation technology to a broad range of soft-tissue surgical markets, including sports medicine, spinal surgery, neurosurgery, cosmetic surgery, ear, nose and throat (ENT) surgery, gynecology, urology, general surgery and various cardiology applications. We are a global company with manufacturing facilities in the United States and Costa Rica and sales offices in the United States and Europe.
On November 12, 2004, we executed an agreement and plan of merger with Opus Medical, Inc. (“Opus”) under which we acquired Opus for an initial payment of $90.0 million, consisting of approximately $30.0 million in cash and approximately $60.0 million in ArthroCare common stock, plus subsequent future payments in cash or common stock aggregating up to $40.0 million, plus additional future pa