| ARTHROCARE CORP ITEM 1A RISK FACTORS We operate in a dynamic and rapidly changing industry that involves numerous risks and uncertainties |
| The risks and uncertainties described below are those that we currently believe may materially affect us |
| Other risks and uncertainties that we do not presently consider to be material or of which we are not presently aware, may become important factors that affect us in the future |
| Circumstances Associated with Our Acquisition Strategy and Internal Growth May Adversely Affect Our Operating Results An important element of our growth strategy has been the pursuit of acquisitions of other businesses that expand or complement our existing products |
| Integrating businesses, however, involves a number of special risks, including the possibility that management may be distracted from regular business concerns by the need to 19 ______________________________________________________________________ [59]Table of Contents [60]Index to Financial Statements integrate operations, unforeseen difficulties in integrating operations and systems, problems assimilating and retaining our employees or the employees of the acquired company, accounting issues that could arise in connection with, or as a result of, the acquisition of the acquired company, regulatory or compliance issues that could exist at an acquired company, challenges in retaining our customers or the customers of the acquired company following the acquisition and potential adverse short term effects on operating results through increased costs or otherwise |
| In addition, we will incur additional debt to fund future payments to Opus stockholders and ATI and, we may incur debt to finance future acquisitions and/or may issue securities in connection with future acquisitions which may dilute the holdings of our current and future stockholders |
| In addition to the risks associated with acquisition-related growth, our business has grown in size and complexity over the past few years as a result of internal growth |
| This growth and increase in complexity have placed significant demands on management, systems, internal controls and financial and physical resources |
| To meet such demands, we intend to continue to invest in new technology, make other capital expenditures and, where appropriate, hire and/or train employees with expertise to handle these particular demands |
| If we are unable to successfully complete and integrate strategic acquisitions in a timely manner or if we fail to efficiently manage operations in a way that accommodates continued internal growth, our business, financial condition or operating results could be adversely affected |
| In 2005, we acquired substantially all of the assets of ATI, a maker of wound care products for ear, nose and throat (ENT) indications |
| In 2004 and 2002, we acquired three companies representing three lines of business independent of our core Coblation platform: Atlantech and its mechanical handheld instruments; MDA and its line of Parallax bone cement and delivery systems; and Opus and its line of tissue suturing and anchoring products |
| Integration of these businesses has been a significant challenge to our existing resources |
| At times, these integration issues have restricted sales of one or more product lines as a host of systems, distribution, logistics and product supply issues have materialized |
| While we are diligently focused on successful integration, the newness of these technologies along with the dispersed nature of the product development and supply chain represents a risk to our business and availability of internal resources |
| If we are unsuccessful in integrating these businesses, or experience disruptions related to our integration efforts, then our financial condition, results of operations and future growth prospects could be materially adversely affected |
| We Face Intense Competition The markets for our current products in our core businesses are intensely competitive |
| These markets include arthroscopy, spinal surgery and ENT surgery |
| We cannot assure you that other companies will not succeed in developing technologies and products that are more effective than ours, or that would render our technology or products obsolete or uncompetitive in these markets |
| In arthroscopy, we compete against companies, such as Johnson & Johnson, Smith & Nephew, Inc, Conmed Corporation, Stryker Corp, and Arthrex |
| Specifically, Johnson & Johnson, Smith & Nephew and Stryker are currently marketing bipolar electrosurgical systems for tissue ablation and shrinkage and Arthrex and Conmed are currently marketing monopolar electrosurgical systems for tissue ablation |
| Arthrex, Smith & Nephew, Conmed, and DePuy-Mitek market products that directly compete with shoulder anchors, acquired as part of our Opus acquisition |
| In spinal surgery, we compete against companies that market products to remove tissue and treat spinal disorders |
| We compete against Stryker, which markets the Dekompressor device, which uses a mechanical auger to perform percutaneous discectomy |
| In addition, the Oratec division of Smith & Nephew, and the Radionics division of Tyco, are currently marketing percutaneous thermal heating products for treating certain types of disc pain |
| Our Coblation-assisted microdiscectomy (CAM) procedure competes indirectly with large spine companies and their mechanical instruments, such as DePuy Acromed, Medtronic Sofamor Danek, Centerpulse Spine Tech, Stryker Spine and Synthes |
| Stryker, Cardinal Health, Cook and Kyphon market products that compete directly with our Parallax product line |
| In ENT surgery, we compete against companies that offer manual instruments, such as Smith & Nephew, Inc, Stryker Corp, Conmed Corporation, and Xomed Surgical Products Inc, which was acquired by Medtronic, Inc |
| In addition, we compete 20 ______________________________________________________________________ [61]Table of Contents [62]Index to Financial Statements with companies that develop and market lasers for various ENT surgery applications, including Lumenis |
| (purchased by Gyrus Group International, Inc, a company based in Cardiff, Wales), also sell medical devices for the treatment of various ENT disorders, including snoring and obstructive sleep apnea |
| In addition, Gyrus has recently introduced a bipolar system for tonsillectomy procedures that competes directly with our Coblation-based tonsillectomy products |
| Medtronic and Gyrus both market sinus surgery packing products that compete with our newly acquired ATI products |
| Many of our competitors have significantly greater financial, manufacturing, marketing, distribution and technical resources than we do |
| Some of these companies offer broad product lines that they may offer as a single package and frequently offer significant discounts as a competitive tactic |
| For example, in order to compete successfully, we anticipate that we may have to continue to offer substantial discounts on our controllers, place controllers at customers sites at no cost or in return for a minimum purchase commitment of our surgical wands in order to increase demand for our disposable devices, and that this competition could have a material adverse effect on our business, financial condition, results of operations and future growth prospects |
| Furthermore, some of our competitors utilize purchasing contracts that link discounts on the purchase of one product to purchases of other products in their broad product lines |
| Many of the hospitals in the United States have purchasing contracts with our competitors |
| Accordingly, customers may be dissuaded from purchasing our products rather than the products of these competitors to the extent the purchase would cause them to lose discounts on products |
| We May Not Be Able to Keep Pace with Technological Change or to Successfully Develop New Products with Wide Market Acceptance, Which Could Cause Us to Lose Business to Competitors We may not be able to keep pace with technology or to develop viable new products, as we compete in a market characterized by rapidly changing technology |
| Our future financial performance will depend in part on our ability to develop and manufacture new products in a cost-effective manner, to introduce them to the market on a timely basis, and to achieve market acceptance |
| Factors which may result in delays of new product introductions or cancellation of our plans to manufacture and market new products include capital constraints, research and development delays or delays in acquiring regulatory approvals |
| Our new products and new product introductions may fail to achieve expected levels of market acceptance |
| Factors impacting the level of market acceptance include our ability to successfully implement new technologies, the timeliness of our product introductions, our product pricing strategies, and the financial and technological resources for product promotion and development available |
| We Are Dependent Upon Our Arthroscopic System We commercially introduced our Arthroscopic System in December 1995 |
| Since our Arthroscopic System accounted for 60prca of our product sales in 2005, we are highly dependent on its sales |
| We cannot assure you that we will be able to continue to manufacture arthroscopy products in commercial quantities at acceptable costs, or that we will be able to continue to market such products successfully |
| To achieve increasing disposable device sales over time, we believe we must continue to penetrate the market in knee procedures, expand physicians’ education with respect to Coblation technology and continue working on new product development efforts specifically for knee applications |
| Furthermore, in order to maintain and increase current market penetration we must continue to increase our installed base of controllers to generate increased disposable device revenue |
| To date, we have placed at no charge or have priced our arthroscopic controllers at substantial discounts in order to stimulate demand for our disposable devices |
| We believe that surgeons will not use our 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 |
| There are only a few independently published clinical reports and limited long-term clinical follow-up to support the marketing efforts for our Arthroscopic System |
| We believe that if continued recommendations and endorsements by influential surgeons or long-term data do not support our current claims of efficacy, our business, financial condition, results of operations and future growth prospects could be materially adversely affected |
| 21 ______________________________________________________________________ [63]Table of Contents [64]Index to Financial Statements Commercial Success of Products Outside of Our Core Businesses Is Uncertain We have developed several applications for our Coblation technology in spinal surgery, neurosurgery, ENT surgery, cosmetic surgery, gynecology, urology, cardiac surgery and general surgery |
| At the present time, we consider sports medicine, spine surgery and ENT surgery to be our core businesses |
| Sales of our spinal surgery and ENT surgery products collectively accounted for 32prca and 34prca of our product sales in 2005 and 2004, respectively, such that product sales in our three core businesses accounted for approximately 100prca of our product sales in 2005 |
| Our products for neurosurgery, cosmetic surgery, gynecology, urology, general surgery and cardiac surgery, our non-core business, are in various stages of commercialization and development, and we may be required to undertake time-consuming and costly commercialization, development and additional regulatory approval activities for any of these products |
| If we do not receive future clearances we may be unable to market these and other products for specific indications and our business, financial condition, results of operations and future growth prospects could be materially adversely affected |
| We cannot assure you that product development will ever be successfully completed, that regulatory clearances or approvals, if applied for, will be granted by the FDA or foreign regulatory authorities on a timely basis, if at all, or that the products will ever achieve commercial acceptance |
| We may have to make a significant investment in additional preclinical and clinical testing, regulatory, physician training and sales and marketing activities to further develop and commercialize our neurosurgery, gynecology, urology, cosmetic surgery, general surgery and cardiovascular product offerings |
| Although we believe that these products offer certain advantages, we cannot assure you that these advantages will be realized, or if realized, that these products will result in any meaningful benefits to physicians or patients |
| Development and commercialization of our current and future non-core business products are subject to the risks of failure inherent in the development for new medical devices |
| These risks include the following: • Such products may not be easy to use, may require extensive training or may not be cost-effective; • New products may experience delays in testing or marketing; • There may be unplanned expenditures or in expenditures above those anticipated by us; • Such products may not be proven safe or effective; • Third parties may develop and market superior or equivalent products; • Such products may not receive necessary regulatory clearances or approvals; and • Proprietary rights of third parties may preclude us and our collaborative partners from marketing such products |
| In addition, the success of our non-core business products will depend on their adoption as alternatives to conventional means of tissue ablation |
| Clinical experience and follow-up data for our non-core business indications are limited, and we have sold only a small number of units to date |
| We believe that recommendations and endorsement of influential physicians are essential for market acceptance of such products |
| For information regarding the status of our regulatory approvals for our products, see the information under the heading “Government Regulation” |
| If Our Costa Rica Facility is Unable to Produce Our Coblation Products in Sufficient Quantities or With Adequate Quality, or if Our Operations at Our Costa Rican Facility are Disrupted, We Will Be Forced to Find Alternative Manufacturing Options, Which Could Cause Sales to be Delayed or Increase Our Manufacturing Costs, Which Could Harm Our Reputation and Profitability Our high-volume disposable devices and controllers are primarily manufactured at our Company-owned facility in an industrial park in San Jose, Costa Rica |
| This facility commenced operations in 2002 and by year-end 2005 was producing approximately 99prca of our disposable device requirements, including as of 22 ______________________________________________________________________ [65]Table of Contents [66]Index to Financial Statements December 31, 2005, 100prca of our requirements for controllers |
| If our Costa Rica facility is not able to produce sufficient quantities of our controllers and other high-volume Coblation products with adequate quality, or if our Costa Rica operations are disrupted for any reason, then we may be forced to locate alternative manufacturing facilities, including facilities operated by third parties |
| Disruptions may include, but are not limited to, changes in the legal and regulatory environment in Costa Rica; slowdowns or work stoppages within the Costa Rican customs authorities; acts of God and other issues associated with significant operations that are remote from our headquarters and operations centers |
| Locating alternative facilities would be time-consuming, would disrupt our production and cause shipment delays and could result in damage to our reputation and profitability |
| We cannot guarantee that alternative manufacturing facilities offering the cost and tax advantages associated with our Costa Rica facility would be available on favorable terms, or at all |
| Our Business May Become Increasingly Susceptible to Risks Associated with International Operations International operations are generally subject to a number of risks, including: • protectionist laws and business practices that favor local competition; • changes in jurisdictional tax laws including laws regulating intercompany transactions; • dependence on local vendors; • multiple, conflicting and changing governmental laws and regulations; • difficulties in collecting accounts receivable; • seasonality of operations; • difficulties in staffing and managing foreign operations; • licenses, tariffs, and other trade barriers; • loss of proprietary information due to piracy, misappropriation or weaker laws regarding intellectual property protection; • foreign currency exchange rate fluctuations; • political and economic instability; and • acquisitions and related IPR&D We derived 21prca and 25prca of our total revenue for the years ended December 31, 2005 and 2004, respectively, from customers located outside of the Americas |
| We expect international revenue to remain a large percentage of total revenue and we believe that we must continue to expand our international sales activities to be successful |
| Historically, a majority of our international revenues and costs have been denominated in foreign currencies, and we expect future international revenues and costs will be denominated in foreign currencies |
| Our international sales growth will be limited if we are unable to establish appropriate foreign operations, expand international sales channel management and support organizations, hire additional personnel, develop relationships with international sales representatives, and establish relationships with additional distributors |
| In that case, our business, operating results and financial condition could be materially adversely affected |
| Even if we are able to successfully expand international operations, we cannot be certain that we will be able to maintain or increase international market demand for our products |
| Our Operating Results May Fluctuate We achieved profitability in 1999 and, as of December 31, 2005, we had retained earnings of dlra5dtta6 million |
| Results of operations may fluctuate significantly from quarter to quarter due to many factors, including the following: • The introduction of new product lines; • Increased penetration in existing applications; 23 ______________________________________________________________________ [67]Table of Contents [68]Index to Financial Statements • Product returns; • Achievement of research and development milestones; • The amount and timing of receipt and recognition of license fees; • Manufacturing or supply disruptions; • Internal systems availability and uptimes; • Timing of expenditures; • Absence of a backlog of orders; • Receipt of necessary regulatory approvals; • The level of market acceptance for our products; • Acquisition related in-process research and development write-offs; • Timing of the receipt of orders and product shipments; and • Promotional programs for our products |
| We cannot provide assurance that future quarterly fluctuations will not adversely affect our business, financial condition, results of operations of future growth prospects |
| Our revenues and profitability will be critically dependent on whether or not we can successfully continue to market our Coblation-based technology product lines and continue to integrate our recent acquisitions |
| We cannot assure investors that we will maintain or increase our revenues or level of profitability |
| The Market Price of Our Stock May Be Highly Volatile During the fiscal year ended December 31, 2005 our common stock has traded in a price range of dlra25dtta62 to dlra42dtta18 per share |
| The market price of our common stock could continue to fluctuate substantially due to a variety of factors, including: • Quarterly fluctuations in results of our operations; • Our ability to successfully commercialize our products; • Announcements regarding results of regulatory approval filing, clinical studies or other testing, technological innovations or new products commercialized by us or our competitors; • Developments concerning government regulations, proprietary rights or public concern as to the safety of our technology; • The execution of new collaborative agreements and material changes in our relationships with our business partners; • Market reaction to acquisitions and trends in sales, marketing, and research and development; • Changes in coverage or earnings estimates by analysts; • Sales of common stock by existing stockholders; and • Economic and political conditions |
| The market price for our common stock may also be affected by our ability to meet analysts’ expectations |
| Any failure to meet such expectations, even slightly, could have an adverse effect on the market price and volume fluctuations |
| This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies |
| In the past, following periods of volatility in the market price of a company’s securities, the risk of securities class action litigation has increased |
| If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management’s attention 24 ______________________________________________________________________ [69]Table of Contents [70]Index to Financial Statements and resources, which could have an adverse effect on our business, results of operations and financial condition |
| See “Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” for more information regarding fluctuations in the price of our common stock |
| We May Be Unable to Effectively Protect Our Intellectual Property Our ability to compete effectively depends in part on developing and maintaining the proprietary aspects of our Coblation technology and our acquired technologies |
| We believe that our issued patents are directed at the core technology used in our soft-tissue surgery systems, including both multi-electrode and single electrode configurations of our disposable devices, as well as the use of Coblation technology in specific surgical procedures |
| In addition, we believe that our issued patents are directed at many of the core features of our acquired technologies from Opus, Parallax, Atlantech and ATI There is no assurance that the patents we have obtained, or any patents we may obtain as a result of our pending US or international patent applications, will provide any competitive advantages for our products |
| We also cannot assure investors that those patents will not be successfully challenged, invalidated or circumvented in the future |
| In addition, we cannot provide assurance that competitors, many of which have substantial resources and have made substantial investments in competing technologies, have not already applied for or obtained, or will not seek to apply for and obtain, patents that will prevent, limit or interfere with our ability to make, use and sell our products either in the United States or in international markets |
| Patent applications are maintained in secrecy for a period after filing |
| We may not be aware of all of the patents and patent applications potentially adverse to our interests |
| 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 |
| We have received, and we may receive in the future, notifications of potential conflicts of existing patents, pending patent applications and challenges to the validity of existing patents |
| In addition, we have become aware of, potential conflicts of existing patents, pending patent applications and challenges to the validity of existing patents |
| In addition, we have become aware of, and may become aware of in the future, patent applications and issued patents that relate to our products and/or the surgical applications and issued patents and, in some cases, have obtained internal and/or external opinions of counsel regarding the relevance of certain issued patents to our products |
| We do not believe that our products currently infringe any valid and enforceable claims of the issued patents that we have reviewed |
| However, if third-party patents or patent applications contain claims infringed by our technology and such claims are ultimately determined to be valid, we may not be able to obtain licenses to those patents at a reasonable cost, if at all, or be able to develop or obtain alternative technology |
| Our inability to do either would have a material adverse effect on our business, financial condition, results of operations and prospects |
| We cannot assure investors that we will not have to defend ourselves in court against allegations of infringement of third-party patents, or that such defense would be successful |
| In addition to patents, we rely on trade secrets and proprietary know-how, which we seek to protect, in part, through confidentiality and proprietary information agreements |
| We require our key employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting relationship with us |
| These agreements generally provide that all confidential information, developed or made known to the individual during the course of the individual’s relationship with us, 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 us shall be our exclusive property |
| We cannot assure investors that employees will not breach such agreements, that we would have adequate remedies for any breach or that our trade secrets will not otherwise become known to or be independently developed by competitors |
| We May Become Subject to 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 25 ______________________________________________________________________ [71]Table of Contents [72]Index to Financial Statements litigation to gain a competitive advantage |
| We cannot assure investors that we will not become subject to patent infringement claims or litigation or interference proceedings declared by the USPTO, to determine the priority of inventions |
| In February 1998, we filed a lawsuit against Ethicon, Inc, Mitek Surgical Products, a division of Ethicon, Inc, and GyneCare, Inc |
| alleging, among other things, infringement of several of our patents |
| The parties subsequently settled this lawsuit |
| Under the terms of the settlement, Ethicon, Inc |
| has licensed a portion of our US patents for current products in the arthroscopy and hysterocopic gynecology markets |
| The settlement agreement also established a procedure for resolution of certain potential intellectual property disputes in these two markets without litigation |
| Under this procedure, the licenses granted in the Ethicon settlement have been extended to Australia, Canada and Japan |
| In June 2000, we filed a lawsuit against Stryker, alleging infringement of several of our patents |
| The lawsuit has been settled and under the terms of the settlement, Stryker has licensed a portion of our worldwide patents for products in the arthroscopy market |
| On July 25, 2001, we filed a lawsuit against Smith & Nephew, Inc |
| The lawsuit alleged, among other things, that Smith & Nephew was infringing three patents issued to ArthroCare |
| Specifically, Smith & Nephew uses, imports, markets and sells electrosurgical products under the names of Dyonics Control RF System, ElectroBlade and Saphyre^™ that infringed these patents |
| On April 3, 2003, Smith & Nephew filed a lawsuit against us in the United States District Court, Western Tennessee alleging that we infringed two Smith & Nephew patents—nos |
| In addition, Smith & Nephew alleged that we were in violation of Section 43(A) of the Lanham Act for allegedly making false or misleading statements to deceive potential purchasers of Smith & Nephew’s medical devices |
| Smith & Nephew requested the Court to issue preliminary and permanent injunction preventing ArthroCare from further infringement of the above-mentioned patents and from making further false or misleading statements concerning Smith & Nephew’s medical devices |
| These lawsuits were dismissed and the claims settled pursuant to a Settlement and License Agreement between ArthroCare and Smith & Nephew on September 2, 2005 |
| As a consequence of this settlement, we received a one-time cash payment at signing, which has been recorded as a reduction of legal fees in general and administrative expenses, and will receive a series of related milestone payments over the next twelve months, which will also be record in general and administrative expenses |
| This agreement settles all legal disputes between ArthroCare and Smith & Nephew, including the pending legal matters in Delaware and Tennessee described above |
| On December 15, 2005, Bonutti IP, LLC filed a lawsuit against us in the United States District Court, Southern District of Illinois alleging that our Opus AutoCuff anchoring system infringed ten Bonutti patents (Nos |
| Bonutti requested the Court to award damages and to issue a permanent injunction preventing us from further infringement of the above-mentioned patents |
| Upon initial review, we believe that these claims have no merit and we intend to defend ourselves vigorously |
| We Must Obtain Governmental Clearances or Approvals Before We Can Sell Our Products; We Must Continue to Comply with Applicable Laws and Regulations Our products are considered medical devices and are subject to extensive regulation in the United States |
| We must obtain premarket clearance or approval by the FDA for each of our products and indications before they can be commercialized |
| International sales of our products are also subject to strict regulatory requirements |
| For more information about the US and foreign regulatory requirements, see information under the heading “Government Regulation” above |
| Information pertaining to our products and indications before they can be commercialized can be found under the heading “Government Regulations” in Item 1, above |
| 26 ______________________________________________________________________ [73]Table of Contents [74]Index to Financial Statements We Face Uncertainty Over Reimbursement Failure by physicians, hospitals and other users of our products to obtain sufficient reimbursement from health care payers for procedures in which our products are used, or adverse changes in environmental and private third-party payers’ policies toward reimbursement for such procedures would have a material adverse effect on our business, financial condition, results of operations and future growth prospects |
| Reimbursement for arthroscopic, spinal surgery, neurosurgery, ENT surgery, gynecology, urology, cardiology and general surgery procedures performed using our devices that have received FDA clearance has generally been available in the United States |
| Typically, cosmetic surgery procedures are not reimbursed |
| We are unable to predict what changes will be made in the reimbursement methods used by third-party health care payors |
| In addition, some health care providers are moving toward a managed care system in which 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 |
| We anticipate that in a prospective payment system, such as the diagnosis related group system utilized by Medicare, and in many managed care systems used by private health care payers, the cost of our products will be incorporated into the overall cost of the procedure and that there will be no separate, additional reimbursement for our products |
| If we obtain the necessary international regulatory approvals, market acceptance of our 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 |
| We intend to seek international reimbursement approvals, although we cannot assure investors that any such approvals will be obtained in a timely manner, if at all |
| Nucleoplasty is our version of percutaneous discectomy, where tissue is removed from the nucleus to decompress the disc |
| Several payors consider percutaneous discectomy in any form investigational, and others cover percutaneous discectomy, but consider Nucleoplasty investigational |
| There is no assurance that we will be able to obtain coverage with these payors for percutaneous discectomy in general, and Nucleoplasty specifically |
| We Are Dependent on Key Suppliers Some of the key components of our products are purchased from single vendors |
| If the supply of materials from a sole source supplier were interrupted, replacement or alternative sources might not be readily obtainable due to the regulatory requirements applicable to our manufacturing operations or the availability of certain product drawings and/or specifications |
| In addition, a new or supplemental filing with applicable regulatory authorities may require clearance prior to our marketing a product containing new material |
| This clearance process may take a substantial period of time and we cannot assure investors that we would be able to obtain the necessary regulatory approval for a new material to be used in our products on a timely basis, if at all |
| This could create supply disruptions that would materially adversely affect our business, financial condition, results of operations and future growth prospects |
| In addition, we currently single source our product sterilization requirements |
| While there are alternate sources available, we would be required to qualify and validate a new supplier(s), which could lead to a disruption in our operation and ability to supply products for a period of time |
| We are also dependent on the performance of DHL, our logistics partner |
| Should this supplier experience a work stoppage for whatever reason, we would be unable to supply products to its customers on a timely basis |
| This work stoppage could take the form of labor action, significant weather events or extended systems downtime, which could materially adversely affect our business |
| 27 ______________________________________________________________________ [75]Table of Contents [76]Index to Financial Statements We Have Limited Marketing and Sales Experience We currently have limited experience in marketing and selling our products |
| To the extent that we have established or will enter into distribution arrangements for the sale of our products, we are and will be dependent upon the efforts of third parties |
| We are marketing and selling our arthroscopic surgery, spinal surgery and ENT surgery product lines in the United States through a combination of a direct sales force and a network of independent distributors supported by regional sales managers |
| These distributors sell arthroscopy, spinal surgery and ENT surgery products for a number of other manufacturers |
| We cannot provide assurance that these distributors will commit the necessary resources to effectively market and sell our sports medicine, spinal surgery and ENT surgery product lines, or that they will be successful in selling our products |
| Delaware Law, Provisions in Our Charter and Our Stockholder Rights Plan Could Make the Acquisition of Our Company By Another Company More Difficult Our stockholder rights plan and certain provisions of our 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 our company |
| This could limit the price that certain investors might be willing to pay in the future for shares of our common stock |
| Some provisions of our certificate of incorporation and bylaws allow us to issue preferred stock without any vote or further action by the stockholders, to eliminate the right of stockholders to act by written consent without a meeting, to specify procedures for director nominations by stockholders and submission of other proposals for consideration at stockholder meetings, and to eliminate cumulative voting in the election of directors |
| Some provisions of Delaware law applicable to us could also delay or make more difficult a merger, tender offer or proxy contest involving us, 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 |
| Our 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 ArthroCare, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock |
| Beginning with Fiscal 2006, We are Required to Recognize Expense for Stock-Based Compensation Related to Employee Stock Options and Employee Stock Purchases, and the Recognition of This Expense Could Cause the Trading Price of Our Common Stock to Decline In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Nodtta 123R (“Statement 123R”), pursuant to which we must measure all stock-based compensation awards, including grants of employee stock options, using a fair value method and record such expense in our consolidated financial statements |
| Through 2005, we disclosed such expenses on a pro forma basis in the notes to our annual financial statements, but did not record a charge for employee stock option expense in the reported financial statements |
| On January 1, 2006 we adopted Statement 123R, which requires the measurement and recognition of compensation expense for all stock-based compensation based on estimated fair values |
| This will be reflected in our first quarter 2006 Form 10-Q and, as a result, our operating results for the first quarter of fiscal 2006 and beyond will contain a charge for stock-based compensation related to employee stock options and employee stock purchases |
| The application of Statement 123R requires the use of an option-pricing model to determine the fair value of share-based payment awards |
| This fair value determination is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables |
| These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and anticipated employee stock option exercise behaviors |