ArthroCare Reports Third Quarter 2012 Financial Results

Total operating expenses were $47.1 million in the third quarter of 2012 compared to $53.4 million in the third quarter of 2011. Exit costs decreased $2.8 million and investigation and restatement costs decreased $3.8 million in this quarter as compared to the third quarter of 2011. Sales and marketing expenses increased $1.4 million, to 31.2 percent of total revenues this quarter compared to 30.9 percent for the same quarter of 2011.

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

Earnings per share from continuing operations applicable to common stockholders was $0.27 per diluted share in the third quarter of 2012 compared to $0.05 per diluted share in the third quarter of 2011.

BALANCE SHEET AND CASH FLOWS

Cash and cash equivalents was $203.2 million as of September 30, 2012 compared to $219.6 million at December 31, 2011. In the first quarter of 2012, the Company paid $74 million as required under the proposed settlement of the private securities class actions. Excluding this payment, cash and cash equivalents increased $57.6 million during the nine months ended September 30, 2012. Cash used in operating activities for the nine months ended September 30, 2012 was $10.6 million compared to cash provided by operating activities of $69.8 million for the nine months ended September 30, 2011. Adjusting for the funding of the $74 million settlement of the private securities class actions, cash provided by operating activities in the first nine months of 2012 would have been $63.4 million.

CONFERENCE CALL

ArthroCare will hold a conference call with the financial community to present these results at 8:30 a.m. ET/5:30 a.m. PT on Thursday, November 1, 2012. To participate in the live conference call dial 855-724-2350. A live and on-demand webcast of the call will be available on ArthroCare’s Web site at www.arthrocare.com. A telephonic replay of the conference call can be accessed by dialing 800-633-8284 and entering pass code number 21609480. The replay will remain available through November 15, 2012.

ABOUT ARTHROCARE

ArthroCare develops and manufactures surgical devices, instruments, and implants that strive to enhance surgical techniques as well as improve patient outcomes. Its devices improve many existing surgical procedures and enable new minimally invasive procedures. Many of ArthroCare’s devices use its internationally patented Coblation ^® technology. This technology precisely dissolves target tissue and limits damage to surrounding healthy tissue. ArthroCare also develops surgical devices utilizing other patented technology including its OPUS ^® line of fixation products as well as re-usable surgical instruments. ArthroCare is leveraging these technologies in order to offer a comprehensive line of surgical devices to capitalize on a multi-billion dollar market opportunity across several surgical specialties, including its two core product areas consisting of Sports Medicine and Ear, Nose, and Throat as well as other areas such as spine, wound care, urology and gynecology.

FORWARD-LOOKING STATEMENTS

The information provided herein includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not historical facts are forward-looking statements. Forward-looking statements are based on beliefs and assumptions by management and on information currently available to management. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update any of them publicly in light of new information or future events. Additional factors that could cause actual results to differ materially from those contained in any forward-looking statement include, without limitation: the resolution of litigation pending against the Company; the impact upon the Company’s operations of legal compliance matters which may require improvement and remediation; the ability of the Company to control expenses relating to legal or compliance matters; the Company’s ability to remain current in its periodic reporting requirements under the Exchange Act and to file required reports with the Securities and Exchange Commission on a timely basis; the results of the investigation being conducted by the United States Department of Justice; the impact on the Company of additional civil and criminal investigations by state and federal agencies and civil suits by private third parties involving the Company’s financial reporting and its previously announced restatement and its insurance billing and healthcare fraud-and-abuse compliance practices; the results of the civil investigation by the Department of Justice related to the Civil Investigative Demand we received arising under the False Claims Act; the possibility that the Department of Justice could institute civil proceedings against us, based on the results of the investigation related to the Civil Investigative Demand; the risk that we could be subject to qui tam suits involving the False Claims Act; the possibility that the Department of Justice could institute a criminal enforcement action against us based on the results of the civil investigation related to the Civil Investigative Demand; the resolution of any litigation related to the civil investigation; the ability of the Company to attract and retain qualified senior management and to prepare and implement appropriate succession planning for its Chief Executive Officer; general business, economic and political conditions; competitive developments in the medical devices market; changes in applicable legislative or regulatory requirements; the Company’s ability to effectively and successfully implement its business strategies, and manage the risks in its business; and the reactions of the marketplace to the foregoing.

ARTHROCARE CORPORATION
Condensed Consolidated Balance Sheets - Unaudited
(in thousands, except par value data)
		September 30, 2012				December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents		$	203,163			$	219,605
Accounts receivable, net of allowances of $2,002 and $2,251 at September 30, 2012 and December 31, 2011, respectively			41,196				51,350
Inventories, net			49,591				35,761
Deferred tax assets			28,321				40,622
Prepaid expenses and other current assets			5,136				5,532
Total current assets			327,407				352,870
Property and equipment, net			30,946				35,769
Intangible assets, net			2,685				5,457
Goodwill			119,924				119,159
Deferred tax assets			18,178				18,159
Other assets			2,064				1,587
Total assets		$	501,204			$	533,001
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	13,665			$	15,258
Accrued liabilities			38,203				112,586
Deferred Revenue			451				742
Deferred tax liabilities			76				-
Income tax payable			-				1,542
Total current liabilities			52,395				130,128
Deferred tax liabilities			296				29
Other non-current liabilities			18,976				18,922
Total liabilities			71,667				149,079
Commitments and contingencies (Notes 6 and 7)
Series A 3% Redeemable Convertible Preferred Stock, par value $0.001; Authorized: 100 shares;
Issued and outstanding: 75 shares at September 30, 2012 and December 31, 2011; Redemption
value: $87,089			79,850				77,184
Stockholders' equity:
Preferred stock, par value $0.001; Authorized: 4,900 shares; Issued and outstanding: none			-				-
Common stock, par value $0.001; Authorized: 75,000 shares; Issued: 31,801 and 31,523 shares
Outstanding: 27,851 and 27,562 shares at September 30, 2012 and December 31, 2011, respectively			28				28
Treasury stock: 3,950 and 3,968 shares at September 30, 2012 and December 31, 2011, respectively			(106,645	)			(107,126	)
Additional paid-in capital			409,942				400,580
Accumulated other comprehensive income			5,180				4,615
Retained earnings			41,182				8,641
Total stockholders' equity			349,687				306,738
Total liabilities, redeemable convertible preferred stock and stockholders' equity		$	501,204			$	533,001

ARTHROCARE CORPORATION
Condensed Consolidated Statements of Operations - Unaudited
(in thousands, except per share data)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2012				2011				2012				2011
Revenues:
Product sales		$	82,602			$	79,432			$	258,448			$	249,864
Royalties, fees and other			4,338				3,835				13,070				12,609
Total revenues			86,940				83,267				271,518				262,473
Cost of product sales			26,204				25,529				80,210				76,170
Gross profit			60,736				57,738				191,308				186,303
Operating expenses:
Research and development			8,184				8,037				23,677				21,460
Sales and marketing			27,175				25,752				86,217				81,124
General and administrative			8,191				9,479				24,833				26,372
Amortization of intangible assets			1,363				1,338				4,000				3,972
Exit costs			-				2,814				(778	)			5,304
Investigation and restatement-related costs			2,139				5,963				4,363				12,145
Total operating expenses			47,052				53,383				142,312				150,377
Income from operations			13,684				4,355				48,996				35,926
Non-operating gains (losses)			183				(1,028	)			(578	)			(661	)
Income from continuing operations before income taxes			13,867				3,327				48,418				35,265
Income tax provision			3,882				898				13,211				9,677
Net income from continuing operations			9,985				2,429				35,207				25,588
Income from discontinued operations, net of taxes			-				-				-				1,911
Net income			9,985				2,429				35,207				27,499
Accrued dividend and accretion charges on Series A
3% Redeemable Convertible Preferred Stock			(900	)			(857	)			(2,666	)			(2,546	)
Net income available to common stockholders			9,085				1,572				32,541				24,953
Other comprehensive income
Foreign currency translation adjustments			951				751				565				365
Total comprehensive income		$	10,936			$	3,180			$	35,772			$	27,864
Weighted average shares outstanding:
Basic			27,714				27,466				27,698				27,335
Diluted			28,087				27,855				28,096				27,755
Earnings per share from continuing operations
applicable to common stockholders:
Basic		$	0.27			$	0.05			$	0.97			$	0.70
Diluted		$	0.27			$	0.05			$	0.96			$	0.68
Earnings per share applicable to common stockholders:
Basic		$	0.27			$	0.05			$	0.97			$	0.75
Diluted		$	0.27			$	0.05			$	0.96			$	0.74

ARTHROCARE CORPORATION
Supplemental Schedule of Product Sales - Unaudited
(in thousands)
		Three Months Ended													Three Months Ended
		September 30, 2012													September 30, 2011
		Americas			International			Total Product Sales			% Net Product Sales				Americas			International			Total Product Sales			% Net Product Sales
Sports medicine		$	36,787		$	18,414		$	55,201		66.8	%			$	33,251		$	18,850		$	52,101		65.6	%
ENT			19,677			5,846			25,523		30.9	%				20,046			4,851			24,897		31.3	%
Other			322			1,556			1,878		2.3	%				658			1,776			2,434		3.1	%
Total product sales		$	56,786		$	25,816		$	82,602		100.0	%			$	53,955		$	25,477		$	79,432		100.0	%
		Nine Months Ended													Nine Months Ended
		September 30, 2012													September 30, 2011
		Americas			International			Total Product Sales			% Net Product Sales				Americas			International			Total Product Sales			% Net Product Sales
Sports medicine		$	113,868		$	58,357		$	172,225		66.6	%			$	106,980		$	58,987		$	165,967		66.4	%
ENT			62,985			16,629			79,614		30.8	%				62,732			13,903			76,635		30.7	%
Other			1,322			5,287			6,609		2.6	%				2,203			5,059			7,262		2.9	%
Total product sales		$	178,175		$	80,273		$	258,448		100.0	%			$	171,915		$	77,949		$	249,864		100.0	%

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