ArthroCare (ARTC) Expands Periods Covered by Restatement of Financial Statements; Withdraws Previously Announced Adjustments
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ArthroCare Corp. (NASDAQ: ARTC) announced today that it will expand the periods covered by the previously announced restatement of its financial statements, and that it has withdrawn its estimates of the ranges of the effects of the restatement, which were previously announced on July 21, 2008. The Company also announced certain facts identified in the review of the Company's internal controls being conducted under the supervision of the Audit Committee of the Board of Directors as well as matters identified by management as part of the restatement process. In addition, the Company announced the resignation of three officers of the Company, including two executive officers, as well as other management changes. Finally, the Company announced the receipt of two subpoenas for the production of documents relating to DiscoCare, Inc.
While the Review is not complete, the Audit Committee has identified facts indicating that there were accounting errors and possible irregularities, which are now being considered as part of the restatement. Substantially all of these facts relate to the manner in which the Company recognized revenue on (a) sales to certain of the Company's distributors, sales agents and customers and (b) other sales programs, during the period from fiscal 2005 through fiscal 2008. These transactions involved distributors, customers or programs in the Company's Spine, Sports Medicine, and Ear, Nose, and Throat business units. The transactions that were improperly accounted for were primarily quarter-end transactions and were frequently structured in an effort to meet revenue forecasts.
Facts identified in the Review indicate that actions employed by senior sales management, including the Senior Vice President of the Strategic Business Units (John Raffle) and the former Senior Vice President and General Manager of the Spine Unit (David Applegate), primarily led to the accounting errors and possible irregularities now being considered as part of the Company's financial restatement. Those actions included failing to communicate and/or withholding key information and practices bearing on revenue recognition and other accounting issues to the Company's accounting staff or the Company's independent registered public accounting firm.
As a result of the facts identified in the Review to date, three officers, including two executive officers, have resigned. Michael Gluk, Senior Vice President and Chief Financial Officer; John Raffle, Senior Vice President, Strategic Business Units; and David Applegate, former Senior Vice President and General Manager, Spine, have resigned effective immediately. The Company is currently negotiating separation agreements with these individuals that may include separation payments and limited benefits in exchange for their entry into release of claims agreements. It is anticipated that Mr. Raffle will be offered a consulting agreement with respect to an ongoing intellectual property litigation matter.
The Review also identified facts that suggest that the Company had deficiencies, some of which constituted material weaknesses in internal control over financial reporting, that, in part, likely led to the improper accounting for these transactions, including, but not limited to an inadequate control environment in that the Company environment appears to be overly driven by sales generation, and certain senior executives appeared to lack a significant appreciation for internal control over financial reporting and accounting principles relating to revenue recognition. Other deficiencies in internal control over financial reporting include: inadequate or lack of revenue recognition training for sales and sales support personnel; insufficient technical expertise in Generally Accepted Accounting Principles prior to February 2007; inadequate controls or processes for contract and purchase order review, for the checking of exceptions to the revenue recognition policies and procedures on an ongoing basis, for communication of key information bearing on revenue recognition and other accounting issues, and for the assessment of customers' credit or appropriate credit levels; and an inadequate reporting structure, particularly with respect to the customer service and order entry functions. While management is in the process of remediating some of these deficiencies, some of the material weaknesses may not be remediated before the restatement is completed.
In addition to the Review, management is conducting its own analysis as part of the restatement process. This analysis has identified additional items that will require adjustments to the Company's historical financial statements such that the restatement will now include the years ended December 31, 2000 through 2005, in addition to the previously announced years ended December 31, 2006 and 2007, and will now include all quarters in those years and the quarter ended March 31, 2008. Management has determined that the errors identified to date by the Review and by management in its separate analysis can collectively be categorized into four areas: revenue recognition, expense reclassification, purchase price allocation and/or intangible asset impairments in connection with the Company's acquisition of DiscoCare and foreign exchange translation.
ArthroCare Corporation designs, develops, manufactures, and markets medical devices for use in soft-tissue surgery.
While the Review is not complete, the Audit Committee has identified facts indicating that there were accounting errors and possible irregularities, which are now being considered as part of the restatement. Substantially all of these facts relate to the manner in which the Company recognized revenue on (a) sales to certain of the Company's distributors, sales agents and customers and (b) other sales programs, during the period from fiscal 2005 through fiscal 2008. These transactions involved distributors, customers or programs in the Company's Spine, Sports Medicine, and Ear, Nose, and Throat business units. The transactions that were improperly accounted for were primarily quarter-end transactions and were frequently structured in an effort to meet revenue forecasts.
Facts identified in the Review indicate that actions employed by senior sales management, including the Senior Vice President of the Strategic Business Units (John Raffle) and the former Senior Vice President and General Manager of the Spine Unit (David Applegate), primarily led to the accounting errors and possible irregularities now being considered as part of the Company's financial restatement. Those actions included failing to communicate and/or withholding key information and practices bearing on revenue recognition and other accounting issues to the Company's accounting staff or the Company's independent registered public accounting firm.
As a result of the facts identified in the Review to date, three officers, including two executive officers, have resigned. Michael Gluk, Senior Vice President and Chief Financial Officer; John Raffle, Senior Vice President, Strategic Business Units; and David Applegate, former Senior Vice President and General Manager, Spine, have resigned effective immediately. The Company is currently negotiating separation agreements with these individuals that may include separation payments and limited benefits in exchange for their entry into release of claims agreements. It is anticipated that Mr. Raffle will be offered a consulting agreement with respect to an ongoing intellectual property litigation matter.
The Review also identified facts that suggest that the Company had deficiencies, some of which constituted material weaknesses in internal control over financial reporting, that, in part, likely led to the improper accounting for these transactions, including, but not limited to an inadequate control environment in that the Company environment appears to be overly driven by sales generation, and certain senior executives appeared to lack a significant appreciation for internal control over financial reporting and accounting principles relating to revenue recognition. Other deficiencies in internal control over financial reporting include: inadequate or lack of revenue recognition training for sales and sales support personnel; insufficient technical expertise in Generally Accepted Accounting Principles prior to February 2007; inadequate controls or processes for contract and purchase order review, for the checking of exceptions to the revenue recognition policies and procedures on an ongoing basis, for communication of key information bearing on revenue recognition and other accounting issues, and for the assessment of customers' credit or appropriate credit levels; and an inadequate reporting structure, particularly with respect to the customer service and order entry functions. While management is in the process of remediating some of these deficiencies, some of the material weaknesses may not be remediated before the restatement is completed.
In addition to the Review, management is conducting its own analysis as part of the restatement process. This analysis has identified additional items that will require adjustments to the Company's historical financial statements such that the restatement will now include the years ended December 31, 2000 through 2005, in addition to the previously announced years ended December 31, 2006 and 2007, and will now include all quarters in those years and the quarter ended March 31, 2008. Management has determined that the errors identified to date by the Review and by management in its separate analysis can collectively be categorized into four areas: revenue recognition, expense reclassification, purchase price allocation and/or intangible asset impairments in connection with the Company's acquisition of DiscoCare and foreign exchange translation.
ArthroCare Corporation designs, develops, manufactures, and markets medical devices for use in soft-tissue surgery.
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