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 second quarter period ended February 28, 2001
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 0-20212
ARROW INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1969991
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 Bernville Road, Reading, Pennsylvania 19605
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(610) 378-0131
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. YesXNo
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Shares outstanding at April 11, 2001
Common Stock, No Par Value 21,976,153
ARROW INTERNATIONAL, INC.
Form 10-Q Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at February 28, 2001
- and August 31, 2000 3-4
Consolidated Statements of Income 5-6
Consolidated Statements of Cash Flows 7-8
Consolidated Statements of Comprehensive Income 9
Notes to Consolidated Financial Statements 10-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23-25
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
Signature 28
Exhibit Index 29
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
February 28, August 31,
2001 2000
ASSETS
Current assets:
Cash and cash equivalents $ 3,509 $ 3,959
Accounts receivable, net 79,197 73,796
Inventories 87,243 82,801
Prepaid expenses and other 19,292 15,964
Deferred income taxes 4,168 3,131
Total current assets 193,409 179,651
Property, plant and equipment:
Total property, plant and equipment 233,041 223,416
Less accumulated depreciation (108,816) (101,976)
124,225 121,440
Goodwill, net 44,621 40,996
Intangible and other assets, net 36,485 39,153
Deferred income taxes 4,592 4,574
Total other assets 85,698 84,723
Total assets $ 403,332 $ 385,814
See accompanying notes to consolidated financial statements
Continued
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ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, Continued
(In thousands, except share amounts)
(Unaudited)
February 28, August 31,
2001 2000
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 8,678 $ 8,400
Notes payable 47,616 52,081
Accounts payable 9,238 8,151
Cash overdrafts 2,318 1,195
Accrued liabilities 11,607 9,316
Accrued compensation 6,359 8,049
Accrued income taxes 2,960 2,409
Total current liabilities 88,776 89,601
Long-term debt 600 900
Accrued postretirement benefit obligation 10,475 10,109
Commitment and contingencies
SHAREHOLDERS' EQUITY
Preferred Stock, no par value;
5,000,000 shares authorized;
none issued - - -
Common Stock, no par value;
50,000,000 shares authorized;
issued 26,478,813 shares 45,661 45,661
Retained earnings 311,894 291,870
Less treasury stock at cost:
4,501,020 and 4,477,910 shares,
respectively (46,046) (45,092)
Accumulated other comprehensive
expense (8,028) (7,235)
Total shareholders' equity 303,481 285,204
Total liabilities and
shareholders' equity $ 403,332 $ 385,814
See accompanying notes to consolidated financial statements
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ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
For the Three Months Ended
February 28, February 29,
2001 2000
Net sales �� $ 80,726 $ 80,601
Cost of goods sold 37,582 37,830
Gross profit 43,144 42,771
Operating expenses:
Research, development and engineering 6,121 4,753
Selling, general and administrative 18,884 18,876
Operating income 18,139 19,142
Other expenses (income):
Interest expense, net of amounts capitalized 709 589
Interest income (168) (139)
Other, net 215 167
Other expenses (income), net 756 617
Income before income taxes 7,383 18,525
Provision for income taxes 5,737 6,299
Net income $ 1,646 $ 12,226
Basic earnings per common share $ .53 $ .54
Diluted earnings per common share $ .53 $ .54
Cash dividends per common share $ .065 $ .060
Weighted average shares outstanding
used in computing basic earnings
per common share 21,989,606 22,540,498
Weighted average shares outstanding
used in computing diluted earnings
per common share 22,110,690 22,603,371
See accompanying notes to consolidated financial statements
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ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
For the Six Months Ended
February 28, February 29,
2001 2000
Net sales $ 158,034 $ 157,318
Cost of goods sold 73,232 73,167
Gross profit 84,802 84,151
Operating expenses:
Research, development and engineering 12,211 10,124
Selling, general and administrative 37,187 37,119
Special charge - - 3,320
Operating income 35,404 33,588
Other expenses (income):
Interest expense, net of amounts capitalized 1,438 1,052
Interest income (330) (288)
Other, net 307 327
Other expenses (income), net 1,415 1,091
Income before income taxes 33,989 32,497
Provision for income taxes 11,217 11,049
Net income $ 22,772 $ 21,448
Basic earnings per common share $ 1.04 $ .94
Diluted earnings per common share $ 1.03 $ .94
Cash dividends per common share $ .125 $ .115
Weighted average shares outstanding
used in computing basic earnings
per common share 21,995,605 22,719,865
Weighted average shares outstanding
used in computing diluted earnings
per common share 21,122,190 22,751,302
See accompanying notes to consolidated financial statements
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ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six Months Ended |
February 28, February 29, |
2001 2000 |
Cash flows from operating activities: | | |
Net income | $ 22,772 | $ 21,448 |
Adjustments to reconcile net income to | | |
net cash provided by operating activities: | | |
Depreciation | 7,834 | 7,736 |
Special charge | - | 3,320 |
Amortization of intangible assets and goodwill | 2,797 | 3,038 |
Deferred income taxes | (1,076) | (945) |
Unrealized holding loss (gain) on securities | 729 | (585) |
Other | 560 | 210 |
Changes in operating assets and liabilities: | | |
Accounts receivable, net | (6,116) | (4,234) |
Inventories | (4,178) | (2,803) |
Prepaid expenses and other | (2,949) | (660) |
Accounts payable and accrued liabilities | 2,738 | 179 |
Accrued compensation | (1,654) | 128 |
Accrued income taxes | 592 | 2,268 |
Total adjustments | (723) | 7,652 |
Net cash provided by operating activities | 22,049 | 29,100 |
Cash flows from investing activities: | | |
Capital expenditures | (10,272) | (11,203) |
Increase in intangible and other assets | (2,631) | (3,336) |
Cash paid for business acquired, net | (3,000) | (11,980) |
Net cash used in investing activities | (15,903) | (26,519) |
Cash flows from financing activities: | | |
(Decrease) Increase in notes payable | (3,533) | 21,030 |
Principal payments of long-term debt | (340) | (315) |
Increase in book overdrafts | 1,123 | 175 |
Dividends paid | (2,640) | (2,519) |
Proceeds from stock options exercised | 59 | 25 |
Purchase of treasury stock | (1,013) | (18,950) |
Net cash used in financing activities | (6,344) | (554) |
Effect of exchange rate changes on cash | | |
and cash equivalents | (252) | (230) |
Net change in cash and cash equivalents | (450) | 1,797 |
Cash and cash equivalents at beginning of year | 3,959 | 3,939 |
Cash and cash equivalents at end of period | $ 3,509 | $ 5,736 |
See accompanying notes to consolidated financial statements
Continued
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ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
(Unaudited)
| For the Six Months EndedFebruary 28, February 29, 2001 2000 |
|
Supplemental disclosure of cash flow information: | | |
| | |
Cash paid during the year for: | | |
Interest (net of amounts capitalized) | $ 1,422 | $ 1,052 |
Income taxes | $ 10,292 | $ 9,493 |
Supplemental schedule of non cash investing and financing activities: |
Estimated fair value of assets acquired, | | |
net of cash acquired | $4,850 | $ 14,289 |
Cash paid for assets, net of cash acquired, | | |
of $0 and $386, respectively | 3,000 | 11,980 |
Liabilities assumed | $ 1,850 | $ 2,309 |
| | |
Cash paid for business acquired: | | |
Working capital | $ - | $ (876) |
Property, plant and equipment | 180 | 54 |
Goodwill, intangible assets and in-process | | |
research and development | 2,820 | 13,188 |
| $ 3,000 | $ 12,366 |
See accompanying notes to consolidated financial statements
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ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
| For the Three Months Ended February 28, February 29, 2001 2000 |
|
|
Net income | $ 11,646 | $ 12,226 |
Other comprehensive income (expense): | | |
Currency translation adjustments | 846 | (796) |
Unrealized holding gain on foreign currency option contracts | 172 | - |
Unrealized holding (loss) gain on securities, | | |
net of tax ($109 and $(734), respectively) | (175) | 1,181 |
Other comprehensive income (expense) | 843 | 385 |
Total comprehensive income | $ 12,489 | $ 12,611 |
| | |
| | |
| For the Six Months Ended February 28, February 29, 2001 2000 |
|
|
Net income | $ 22,772 | $ 21,448 |
| | |
Other comprehensive income (expense): | | |
Currency translation adjustments | 208 | (939) |
Unrealized holding gain on foreign currency option contracts | 172 | - |
Unrealized holding (loss) gain on securities, net of tax ($729 and $(585), respectively) | (1,173) | 970 |
Other comprehensive income (expense) | (793) | 31 |
Total comprehensive income | $ 21,979 | $ 21,479 |
See accompanying notes to consolidated financial statements
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ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 1 - Basis of Presentation
These unaudited consolidated financial statements include all adjustments, consisting only of normal recurring accruals, which management considers necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows of Arrow International, Inc. (the "Company") for the interim periods presented. Results for the interim periods are not necessarily indicative of results for the entire year. Such statements are presented in accordance with the requirements of Form 10-Q and do not include all disclosures normally required by generally accepted accounting principles or those normally made on Form 10-K. These statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report to the Stockholders for the fiscal year ended August 31, 2000.
Note 2 - Inventories
Inventories are summarized as follows: | | |
|
| February 28, 2001 | August 31, 2000 |
Finished goods | $ 29,958 | $ 27,706 |
Semi-finished goods | 18,821 | 18,742 |
Work-in-process | 10,870 | 10,562 |
Raw materials | 27,594 | 25,791 |
| $ 87,243 | $ 82,801 |
Note 3 - Commitments and Contingencies
The Company is a party to certain legal actions, including product liability matters, arising in the ordinary course of its business. From time to time, the Company is also subject to legal actions involving patent and other intellectual property claims. The Company is currently a party to two unrelated lawsuits involving alleged infringement by third parties of patents owned by the Company relating to its intra-aortic balloon (IAB) catheter and constant flow delivery pump products. The Company is also a defendant in two related lawsuits alleging that certain of its hemodialysis catheter products infringe patents owned by a third party. Based upon information presently available to the Company, the Company believes it has valid and enforceable legal rights and/or adequate legal defenses with respect to these actions.
Continued
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ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Although the ultimate outcome of these actions is not expected to have a material adverse effect on the Company's business or financial condition, whether an adverse outcome in any one or more of these actions would materially adversely effect the Company's reported results of operations in any future period cannot be predicted with certainty. See "Note 9 - Subsequent Events."
Note 4 - Accounting Policies
Reclassifications
Certain prior period information has been reclassified for comparative purposes.
Financial Instruments:
Effective September 1, 2000, the Company adopted FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires that all derivative financial instruments, such as foreign exchange contracts, be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized periodically in income or shareholders' equity (as a component of comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. The adoption of FAS 133 did not have a material effect on the Company's financial statements or cash flows.
The carrying value of the Company's financial instruments approximates fair value. The fair value of financial instruments is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market. In cases where quoted market prices are not available, such as for derivative financial instruments, fair value is based on estimates using present value or other valuation techniques.
Note 5 - Business Acquisitions:
As part of the Company's 1998 purchase of assets of the cardiac assist division of C.R. Bard, Inc. the Company also agreed to acquire specified assets and assume specified liabilities of the Belmont Instruments Corporation for $7,250 based on the achievement of certain milestones. The Company paid $2,250 in fiscal 2000 for achievement of milestones during that period. During the quarter ended February 28, 2001, Belmont achieved additional milestones. As a result, the Company paid $3,000 in January 2001. The remaining $2,000 is payable over the next two years in eight quarterly installments of $250, commencing in April 2001. The acquisition was accounted for using the purchase method of accounting.
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ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 6 - Special Charge:
In the first quarter of fiscal 2000, the Company recorded a non-cash pre-tax special charge of $3,320 ($2,208 after-tax or $0.10 per basic and diluted common share) related primarily to a write-down for the in-process research and development acquired in connection with the Company's acquisition of Sometec, S.A. in September 1999. The technology acquired is a compact monitoring device that measures and monitors the descending aortic blood flow during anesthesia and intensive care. The device provides real-time aortic blood flow (a measurement of cardiac output) by using both pulsed Doppler for measuring blood velocity and M-mode ultrasound to accurately measure the aortic diameter. The monitoring system consists of four main components: the main console (monitor), a transesophageal probe, a disposable jacket and an articulated probe holder. The monitor provides the physician with a continuous display of a patient's hemodynamic profile, including aortic blood flow, heart rate, stroke volume, peak velocity, acceleration, left ventricular ejection time and systemic vascular resistance. To facilitate use of this device, a disposable jacket, containing an acoustic gel, is placed over the probe utilizing a special vacuum mounting tool supplied with the jacket. The Company believes that the speed and ease of use of this new noninvasive measurement technique has the potential of establishing cardiac output as a frequently used physician tool with value similar to blood pressure, EKG and pulse oximetry measurements. In accordance with SFAS No. 2, "Accounting for Research and Development Costs" and FIN No. 4, "Applicability of SFAS No. 2 to business combinations accounted for by the Purchase Method", these costs were charged to expense at the date of consummation of the acquisition. The value assigned to purchase Sometec in-process technology was based on a valuation prepared by an independent third-party appraisal company. Each of the technologies under development at the date of acquisition was reviewed for technological feasibility, stage of completeness at the acquisition date, and scheduled release dates of products employing the technology to determine whether the technology was complete or under development. At the acquisition date, the research and development project was estimated to be 75% complete. Incomplete development efforts at the time of acquisition included improved portability, software development and development of the disposable sheath. The valuation was based on the estimated cash flows resulting from commercially viable products discounted to present value using a risk adjusted after tax discount rate of 22%. The research and development costs from these projects have commenced. Some cash inflows from these projects have commenced. However, while the Company believes these projects will be completed as planned, the Company cannot assure you that they will be completed on schedule or, once completed, that the new products resulting from these projects will be successfully introduced into the marketplace. The Company does not anticipate material adverse changes from historical pricing, margins and expense levels as a result of the introduction of the new technologies related to the projects.
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ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 7 - Segment Reporting:
The Company uses the "Management Approach" specified by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 changes the way the Company reports information about its operating segments to the "Management Approach". The Management Approach is based on the way management organizes the segments within the enterprise for making operating decisions and assessing performance. The Company operates as a single reportable segment. The Company operates in four main geographic regions, therefore, information by product category and geographic areas is presented below.
The following table provides quarterly information about the Company's sales by product category:
| Quarter ended February 28, 2001 | | Quarter ended February 29, 2000 |
| CriticalCare | CardiacCare | | CriticalCare | CardiacCare |
| | | | | |
Sales to external customers | $ 65,600 | $ 15,100 | | $ 66,600 | $ 14,000 |
The following tables present quarterly information about geographic areas:
Quarter ended February 28, 2001
United Asia and Other
States Africa Europe Foreign Export Consolidated
Sales to unaffiliated
customers $ 52,700 $ 8,900 $ 6,900 $ 2,500 $ 9,700 $ 80,700
Quarter ended February 29, 2000
United Asia and Other
States Africa Europe Foreign Export Consolidated
Sales to unaffiliated
customers $ 52,000 $ 10,200 $ 6,900 $ 2,200 $ 9,300 $ 80,600
Continued
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ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 7 - Segment Reporting (Continued):
The following table provides year-to-date information about the Company's sales by product category:
| Six Months Ended February 28, 2001 | | Six Months ended February 29, 2000 |
| CriticalCare | CardiacCare | | CriticalCare | CardiacCare |
| | | | | |
Sales to external customers | $130,500 | $ 27,500 | | $ 130,500 | $ 26,800 |
The following tables present year-to-date information about geographic areas:
The following tables present quarterly information about geographic areas:
Six Months Ended February 28, 2001
United Asia and Other
States Africa Europe Foreign Export Consolidated
Sales to unaffiliated
customers $105,300 $17,900 $13,200 $ 5,000 $17,400 $ 158,000
Six Months Ended February 29, 2000
United Asia and Other
States Africa Europe Foreign Export Consolidated
Sales to unaffiliated
customers $102,000 $ 19,500 $ 14,200 $ 4,300 $17,300 $ 157,300
Note 8 - New Accounting Standards:
Recently, the FASB's Emerging Issue Task Force ("EITF") released Issue 00-10, "Accounting for Shipping and Handling Revenues and Costs", which requires amounts charged to customers for shipping and handling be classified as revenue and provides further guidance in accounting for shipping and handling costs. This EITF Issue is effective for the fourth quarter of fiscal 2001. The Company is currently evaluating the impact EITF Issue 00-10 will have on its financial statements, if any.
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ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 9 - Subsequent Events:
As disclosed in Note 3 "Commitments and Contingencies", during the second quarter of fiscal 2001, the Company was a party to a lawsuit involving alleged infringement by a third party of a patent owned by the Company relating to its constant flow delivery pump products. On March 19, 2001, the Company and Medtronic, Inc. reached a settlement of this pending patent litigation (Civil Action No. CV-00-11271 PBS) in the United States District Court for the District of Massachusetts. The settlement also ends all litigation pending worldwide between the parties, including actions in Germany, Belgium, The Netherlands, and the European Patent Office. As part of the settlement, the Company has granted Medtronic a worldwide license under U.S. Patent No. 4,978,338 and its foreign counterparts. The Company does not expect this settlement to have a material adverse effect on its business, financial condition or results of operations.
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ARROW INTERNATIONAL, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion includes certain forward-looking statements. Such forward-looking statements are subject to a number of factors, including material risks, uncertainties and contingencies, which could cause actual results to differ materially from the forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the forward-looking statements, see Exhibit 99.1 to this Report and the Company's periodic reports and other documents filed with the Securities and Exchange Commission.
Results of Operations
Three Months Ended February 28, 2001 Compared to Three Months Ended February 29, 2000
Net sales for the three months ended February 28, 2001 increased by $0.1 million, or 0.2%, to $80.7 million from $80.6 million in the same period last year. Net sales represent gross sales invoiced to customers, less certain related charges, including freight costs, discounts, returns and other allowances. Sales of critical care products decreased 1.5% to $65.6 million from $66.6 million in the comparable prior year period due primarily to decreased sales of central venous catheters. Cardiac care product sales increased to $15.1 million from $14.0 million, an increase of 7.9% from the comparable fiscal 2000 period, due primarily to increased sales of intra-aortic balloon ("IAB") products. International sales decreased by 2.1% to $28.0 million from $28.6 million in the same prior year period and represented 34.7% of net sales, compared to 35.5% in the comparable fiscal 2000 period, principally as a result of the increased strength of the U.S. dollar relative to currencies in countries where the Company operates direct sales subsidiaries. The increased strength of the U.S. dollar reduced net sales for the quarter by $1.6 million.
During the second quarter of fiscal 2001, the Japanese Ministry of Health and Welfare decided to combine both double and triple lumen central venous catheters into one functional reimbursement category, effective as of February 1, 2001. During the three months ended February 28, 2001, the impact on the Company's sales and net income due to this change in Japanese reimbursement policy was immaterial.
Gross profit increased 0.9% to $43.1 million in the three months ended February 28, 2001 compared to $42.8 million in the same period of fiscal 2000. As a percentage of net sales, gross profit increased to 53.4% during the three months ended February 28, 2001 from 53.1% in the comparable prior year period, due primarily to increased production at the Company's lower cost international manufacturing facilities and a more profitable product and distribution mix.
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ARROW INTERNATIONAL, INC.
Research, development and engineering expenses increased by 28.8% to $6.1 million in the three months ended February 28, 2001 from $4.8 million in the comparable prior year period due primarily to incremental research and development spending on the Arrow LionHeartTM, the Company's Left Ventricular Assist System. As a percentage of net sales, these expenses increased in the second quarter of fiscal 2001 to 7.6%, compared to 5.9% in the same period in fiscal 2000 due primarily to the aforementioned incremental spending on the LionHeartTM.
Selling, general and administrative expenses were $18.9 million in both of the three month periods ended February 28, 2001 and February 29, 2000. These expenses were also constant as a percentage of net sales at 23.4%.
Principally due to the above factors, operating income decreased in the second quarter of fiscal 2001 by 5.2% to $18.1 million from $19.1 million in the comparable prior year period.
Other expenses (income), net, increased to $0.8 million of expense in the second quarter of fiscal 2001 from $0.6 million in the comparable prior year period principally due to higher interest expense on the Company's revolving credit facility.
As a result of the factors discussed above, income before income taxes decreased in the second quarter of fiscal 2001 by 6.2% to $17.4 million from $18.5 million in the comparable prior year period. For the second quarter of fiscal 2001, the Company's effective income tax rate was 33.0%, a decrease from 34.0% in the same period of fiscal 2000, principally as a result of anticipated tax credits and completion of tax audits.
Net income in the second quarter of fiscal 2001 decreased by 4.7% to $11.6 million from $12.2 million in the comparable prior year period primarily as a result of the above factors. As a percentage of net sales, net income represented 14.4% in the three months ended February 28, 2001, compared to 15.2% in the comparable prior year period.
Basic and diluted earnings per common share were $0.53 and $0.54 in the second quarters of fiscal 2001 and 2000, respectively. Weighted average common shares outstanding used in computing basic earnings per common share decreased to 21,989,606 in the second quarter of fiscal 2001 from 22,540,498 in the comparable prior year period. Weighted average shares of common stock outstanding used in computing diluted earnings per common share decreased to 21,110,690 in the second quarter of fiscal 2001 from 22,603,371 in the comparable prior year period. These changes are a result of the Company's previously announced share repurchase program, which remains in effect.
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ARROW INTERNATIONAL, INC.
Six Months Ended February 28, 2001 Compared to Six Months Ended February 29, 2000
Net sales for the six months ended February 28, 2001 increased by $0.7 million, or 0.5%, to $158.0 million from $157.3 million in the same period last year. This increase was due primarily to increased sales of the Company's cardiac care products. Sales of critical care products were $130.5 million for both of the six month periods ended February 28, 2001 and February 29, 2000. Cardiac care product sales increased to $27.5 million from $26.8 million, an increase of 2.6% from the comparable prior year period, due primarily to a increase in unit shipments of IAB products, including the Company's new AutoCATTM IAB pump. International sales decreased by 4.7% to $52.7 million from $55.3 million in the same prior year period, and decreased to 33.3% of net sales for the six months ended February 28, 2001 from 35.2% in the comparable period of fiscal 2000, principally as a result of the increased strength of the U.S. dollar relative to currencies in countries where the Company operates direct sales subsidiaries. The increased strength of the U.S. dollar, relative to currencies in countries where the Company operates direct sales subsidiaries, decreased net sales for the six month period ended February 28, 2001 by $3.6 million.
During the second quarter of fiscal 2001, the Japanese Ministry of Health and Welfare decided to combine both double and triple lumen central venous catheters into one functional reimbursement category, effective as of February 1, 2001. During the six months ended February 28, 2001, the impact on the Company's sales and net income due to this change in Japanese reimbursement policy was immaterial.
Gross profit increased 0.8% to $84.8 million in the six months ended February 28, 2001 compared to $84.2 million in the same period of fiscal 2000. As a percentage of net sales, gross profit increased to 53.7% during the six months ended February 28, 2001 from 53.5% in the comparable period of fiscal 2000 due primarily to increased production at the Company's lower cost international manufacturing facilities and to a more profitable product and distribution mix.
Research, development and engineering expenses increased by 20.6% to $12.2 million in the six months ended February 28, 2001 from $10.1 million in the comparable prior year period. As a percentage of net sales, these expenses increased in the first half of fiscal 2001 to 7.7%, compared to 6.4% in the same period in fiscal 2000, primarily as a result of increased incremental research and development spending on the Arrow LionHeartTM, the Company's Left Ventricular Assist System.
Selling, general and administrative expenses increased by 0.2% to $37.2 million in the six months ended February 28, 2001 from $37.1 million in the comparable prior year period and were 23.5% as a percentage of net sales in both of the first half of fiscal 2001 and 2000.
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ARROW INTERNATIONAL, INC.
In the first quarter of fiscal 2000, the Company recorded a non-cash pre-tax special charge of $3.3 million ($2.2 million after tax or $.10 per basic and diluted common share) related primarily to a write-down for the in-process research and development acquired in connection with the Company's acquisition of Sometec, S.A. The technology acquired is a compact monitoring device that measures and monitors the descending aortic blood flow during anesthesia and intensive care. The device provides real-time aortic blood flow (a measurement of cardiac output) by using both pulsed Doppler for measuring blood velocity and M-mode ultrasound to accurately measure the aortic diameter. The monitoring system consists of four main components: the main console (monitor), a transesophageal probe, a disposable jacket and an articulated probe holder. The monitor provides the physician with a continuous display of a patient's hemodynamic profile, including aortic blood flow, heart rate, stroke volume, peak velocity, acceleration, left ventricular ejection time and systemic vascular resistance. To facilitate use of this device, a disposable jacket, containing an acoustic gel, is placed over the probe utilizing a special vacuum mounting tool supplied with the jacket. The Company believes that the speed and ease of use of this new noninvasive measurement technique has the potential of establishing cardiac output as a frequently used physician tool with value similar to blood pressure, EKG and pulse oximetry measurements. In accordance with SFAS No. 2, "Accounting for Research and Development Costs" and FIN No. 4, "Applicability of SFAS No. 2 to business combinations accounted for by the Purchase Method", these costs were charged to expense at the date of consummation of the acquisition. The value assigned to purchase Sometec in-process technology was based on a valuation prepared by an independent third-party appraisal company. Each of the technologies under development at the date of acquisition was reviewed for technological feasibility, stage of completeness at the acquisition date, and scheduled release dates of products employing the technology to determine whether the technology was complete or under development. At the acquisition date, the research and development project was estimated to be 75% complete. Incomplete development efforts at the time of acquisition included improved portability, software development and development of the disposable sheath. The valuation was based on the estimated cash flows resulting from commercially viable products discounted to present value using a risk adjusted after tax discount rate of 22%. The research and development costs from these projects have commenced. Some of the net cash inflows from these projects have commenced. However, while the Company believes these projects will be completed as planned, the Company cannot assure you that they will be completed on schedule or once completed, that the new products resulting from these projects will be successfully introduced into the marketplace. The Company does not anticipate material adverse changes from historical pricing, margins and expense levels as a result of the introduction of the new technologies related to the projects .
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ARROW INTERNATIONAL, INC.
Principally due to the above factors, operating income increased in the first half of fiscal 2001 by 5.4% to $35.4 million from $33.6 million in the comparable period of fiscal 2000.
Other expenses (income), net, increased to $1.4 million of expense in the first half of fiscal 2001 from $1.1 million of expense in the same period of the prior fiscal year principally due to higher interest expense on the Company's revolving credit facility.
As a result of the factors discussed above, income before income taxes increased in the first half of fiscal 2001 by 4.6% to $34.0 million from $32.5 million in the comparable prior year period. The Company's effective income tax rate decreased to 33.0% from 34.0% in fiscal 2000, principally as a result of anticipated tax credits and the completion of tax audits.
Net income increased 6.2% to $22.8 million in the six months ended February 28, 2001 from $21.4 million in the first half of fiscal 2000. As a percentage of net sales, net income represented 14.4% during the six months ended February 28, 2001 compared to 13.7% in the comparable period of fiscal 2000.
Basic earnings per common share were $1.04 and diluted earnings per common share were $1.03 in the six month period ended February 28, 2001. Basic earnings per common share increased 10.6%, or $.10 per share, and diluted earnings per common share increased 9.6%, or $.09 per share, from $.94 per share in the comparable prior year period primarily as a result of the above factors. Weighted average shares of common stock outstanding used in computing basic earnings per common share decreased to 21,995,605 in the first half of fiscal 2001 from 22,719,865 in the comparable prior year period. Weighted average shares of common stock outstanding used in computing diluted earnings per common share decreased to 22,122,190 in the first half of fiscal 2001 from 22,751,302 in the comparable prior period. These changes are a result of the Company's previously announced share repurchase program, which remains in effect.
Liquidity and Capital Resources
For the six months ended February 28, 2001, net cash provided by operations was $22.0 million, a decrease of $7.1 million from the same period in the prior year, due to increased accounts receivable, inventory, and prepaid expenses. Accounts receivable net of the allowances for doubtful accounts, increased by $5.4 million in the six months ended February 28, 2001, compared to a $3.9 million increase in the same period of fiscal 2000. Accounts receivable, measured in days sales outstanding during the period, was 91 days at February 28, 2001 and 86 days at February 29, 2000.
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ARROW INTERNATIONAL, INC.
The increase in accounts receivable was due primarily to sales to distributors that had extended payment terms. In addition, one of the Company's major U.S. distributors recently announced declining net sales, a significant net loss for the period reported and new loan agreements with its bankers. The Company has significant accounts receivable due from this distributor. Based on information presently available to the Company and the payment history of this distributor, the Company presently believes the receivables due from this distributor will be collected in the normal course of business. However, in the event some or all of these receivables become uncollectible, the Company's future results of operations could be materially adversely affected. The Company intends to monitor this situation closely to mitigate its future credit risk exposure. Inventories increased $4.4 million in the six months ended February 28, 2001 compared to a $2.3 million increase in the same period of fiscal 2000. These increased inventory levels are intended to ensure the Company meets anticipated sales demand. Prepaid expenses increased $3.3 million in the first half of fiscal 2001 from $16.0 million at August 31, 2000 due primarily to increases in prepaid pension and insurance costs.
Net cash used in the Company's investing activities decreased to $15.9 million in the six months ended February 28, 2001 from $26.5 million for the same period in fiscal 2000 due primarily to the additional cash used in connection with the Company's acquisition of Sometec in the first quarter of fiscal 2000.
As of February 28, 2001, the Company had U.S bank credit facilities providing a total of $65.0 million in available revolving credit for general purposes, of which $27.5 million remained unused. In addition, certain of the Company's foreign subsidiaries had revolving credit facilities totaling the U.S. dollar equivalent of $24.5 million, of which $14.4 million remained unused as of February 28, 2001. Combined borrowings under these facilities decreased $4.5 million and $20.7 million during the six months ended February 28, 2001 and February 29, 2000, respectively.
Financing activities used $6.3 million of net cash in the six months ended February 28, 2001, due primarily to payments made against the Company's U.S. revolving credit facility and dividend payments. Financing activities used $0.6 million in the same period in fiscal 2000, primarily as a result of increased borrowing related to the Company's acquisition of Sometec and increased use of cash to purchase shares of the Company's common stock in the open market in connection with its previously announced share repurchase program. During the six months ended February 28, 2001, the Company purchased 29,000 shares of its common stock under this program for $1.0 million. As of February 28, 2001, the Company has expended a total of $37.6 million to fund repurchases of a total of 1,252,400 shares of its common stock pursuant to this program.
During the six month periods ended February 28, 2001 and February 29, 2000, the Company's sales invoiced in currencies other than U.S. dollars was 22.3% and 24.2%, respectively.
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ARROW INTERNATIONAL, INC.
As a partial hedge against adverse fluctuations in exchange rates, the Company periodically enters into foreign currency exchange and foreign currency option contracts with certain major financial institutions. By their nature, all such contracts involve risk, including the risk of nonperformance by counterparties. Accordingly, losses relating to these contracts could have a material adverse effect upon the Company's business, financial condition and results of operations. Based upon the Company's knowledge of the financial condition of the counterparties to its existing forward and option contracts, the Company believes that it does not have any material exposure to any individual counterparty. The Company's policy prohibits the use of derivative instruments for trading or speculative purposes. As of February 28, 2001, outstanding foreign currency exchange contracts totaling the U.S. dollar equivalent of $11.2 million mature at various dates through July 2001 and a foreign currency option contract with a fair market value of $0.2 million matures at May 2001. The Company expects to continue to utilize foreign currency exchange and foreign currency option contracts to manage its exposure, although there can be no assurance that the Company's effort in this regard will be successful.
As part of the Company's 1998 purchase of assets of the cardiac assist division of C.R. Bard, Inc. the Company also agreed to acquire specified assets and assume specified liabilities of the Belmont Instruments Corporation for $7.3 million based on the achievement of certain milestones. The Company paid $2.3 million in fiscal 2000 for achievement of milestones during that period. During the quarter ended February 28, 2001, Belmont achieved additional milestones. As a result, the Company paid $3.0 million in January 2001. The remaining $2.0 million is payable over the next two years in eight quarterly installments of $0.3 million, commencing in April 2001. The acquisition was accounted for using the purchase method of accounting.
In October 2000, the Company's Board of Directors approved spending of up to $10.0 million for the construction of additional manufacturing capacity at its existing manufacturing and research facility in the Czech Republic. The approved spending includes amounts required for construction of the additional space as well as all equipment required to meet production needs at such space. This new construction commenced during the first quarter of fiscal year 2001.
Based upon its present plans, the Company believes that operating cash flow and available credit resources will be adequate to repay current portions of long-term debt, to finance currently planned capital expenditures, stock repurchases on the open market and to meet the currently foreseeable liquidity needs of the Company.
During the periods discussed above, overall effects of inflation and seasonality on the Company's business were not significant.
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ARROW INTERNATIONAL, INC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Financial Instruments:
During the six month periods ended February 28, 2001 and February 29, 2000, the percentage of the Company's sales invoiced in currencies other than U.S. dollars was 22.3% and 24.2%, respectively. In addition, a small part of the Company's cost of goods sold is denominated in foreign currencies. The Company enters into foreign currency forward contracts, which are derivative financial instruments, with major financial institutions to reduce the effect of these foreign currency risk exposures, primarily on U.S. dollar cash inflows resulting from the collection of intercompany receivables denominated in foreign currencies. Such transactions occur throughout the year and are probable, but not firmly committed. Forward contracts are marked to market each accounting period, and the resulting gains or losses on these contracts are recorded in Other Income / Expense of the Company's consolidated statements of income. Realized gains and losses on these contracts are offset by the assets, liabilities and transactions being hedged. The Company does not use financial instruments for trading or speculative purposes. The Company expects to continue to utilize foreign currency exchange contracts to manage its exposure, although there can be no assurance that the Company's efforts in this regard will be successful.
Operations of the Company are also exposed to, in the normal course of business, fluctuations in interest rates. This interest rate risk exposure results from changes in short-term U.S. dollar interest rates.
The Company's exposure to credit risk consists principally of trade receivables. Hospitals and international dealers account for a substantial portion of trade receivables and collateral is generally not required. The risk associated with this concentration is limited due to the Company's on-going credit review procedures. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
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ARROW INTERNATIONAL, INC.
At February 28, 2001, the Company had forward exchange contracts to sell foreign currencies which mature at various dates through July 2001. The following table identifies forward exchange contracts to sell foreign currencies at February 28, 2001 and August 31, 2000 as follows:
| February 28, 2001 | August 31, 2000 |
| NotionalAmounts | Fair Market Value | NotionalAmounts | Fair MarketValue |
| | | | |
Foreign currency: (U.S. Dollar Equivalents) |
Japanese yen | $ 2,153 | $ 2,134 | $ 2,813 | $ 2,766 |
Canadian dollars | 1,970 | 1,954 | 1,586 | 1,597 |
Greek drachmas | 2,425 | 2,443 | 2,091 | 2,104 |
Mexican peso | 1,403 | 1,399 | 2,115 | 2,173 |
African rand | 624 | 643 | 923 | 932 |
| $ 8,575 | $ 8,573 | $ 9,528 | $ 9,572 |
At February 28, 2001, the Company also had forward exchange contracts to buy foreign currencies which mature at various dates through July 2001. The following table identifies forward exchange contracts to buy foreign currencies at February 28, 2001 and August 31, 2000 as follows:
| February 28, 2001 | August 31, 2000 |
| Notional Amounts | Fair Market Value | NotionalAmounts | Fair MarketValue |
| | | | |
Foreign currency: (U.S. Dollar Equivalents) |
Czech koruna | $ 2,621 | $ 2,666 | $ - | $ - |
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ARROW INTERNATIONAL, INC.
During the three and six month periods ended February 28, 2001, the Company purchased foreign currency option contracts to hedge anticipated sales in foreign currencies to foreign subsidiaries. The option premiums paid are recorded as assets and amortized over the life of the option. The Company's maximum exposure related to foreign currency options is limited to the premiums paid. The total premiums authorized to be paid in any fiscal year cannot exceed $1,000 per the terms of the Foreign Currency Management Policy Statement approved by the Company's Board of Directors. Gains and losses on purchased option contracts result from changes in intrinsic or time value. Time value gains and losses are recognized immediately against net sales. Intrinsic value gains and losses are recorded in shareholders' equity (as a component of comprehensive income) until the period in which the underlying sale by the foreign subsidiary to an unrelated third party is recognized, at which point those deferred gains and losses are recognized in net sales. During the three and six month periods ended February 28, 2001, the Company has recognized time value expense of $73 against net sales. The Company has the following foreign currency option contract at February 28, 2001, which matures at May 2001.
February 28, 2001 August 31, 2000
Premium Fair Market Premium Fair Market
Paid Value Paid Value
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $ 97 $ 157 $ - $ -
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ARROW INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders.
(a) The Company held its annual meeting of shareholders on January 17, 2001
(b) At the annual meeting, the following matters were voted upon: (i) the election of three directors (in connection with which (A) proxies were solicited
pursuant to Regulation 14D under the Securities Exchange Act of 1934,
(B) there was no solicitation in opposition to management's nominees as
listed in the proxy statement and (C) such nominees were elected); and
(ii) the ratification of the appointment of PricewaterhouseCoopers,
LLP as independent accountants of the Company for the current fiscal year.
With respect to the election of directors, votes were cast as follows:
Carl G. Anderson, Jr.
Votes for 20,182,800
Withheld 51,547
John E. Gurski
Votes for 20,172,800
Withheld 61,547
Marlin Miller, Jr.
Votes for 20,176,950
Withheld 57,397
With respect to the other matter, votes were cast as follows:
Ratification of the Appointment
of Independent Accountants
Votes for 20,216,080
Votes against 3,740
Abstentions 14,527
There were no broker non-votes in respect of these matters.
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ARROW INTERNATIONAL, INC.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
The following exhibits will be filed as part of this Form 10-Q:
Exhibit 99.1 Cautionary Statement for Purposes
of the Safe Harbor Provisions of the
Private Securities Litigation Reform
Act of 1995
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter ended February 28, 2001.
*Not deemed filed for purposes of Section 11 of the Securities Act of 1933, Section 18 of the Securities Exchange Act of 1934 and Section 323 of the Trust Indenture Act of 1939, or otherwise subject to the liabilities of such sections and not deemed part of any registration statement to which such exhibit relates.
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ARROW INTERNATIONAL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ARROW INTERNATIONAL, INC.
(Registrant)
Date: April 13, 2001 By:/s/ Frederick J. Hirt
(signature)
Frederick J. Hirt
Chief Financial Officer
Vice President-Finance and Treasurer
(Principal Financial Officer and
Chief Accounting Officer)
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EXHIBIT INDEX |
Exhibit | Description | | | |
Number | of Exhibit | Method of Filing | | |
| | | | |
99.1 | Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 | Page 30 of this report | | |
| | | | |
| | | | |
| | | | |
*Not deemed filed for purposes of Section 11 of the Securities Act of 1933, Section 18 of the Securities Exchange Act of 1934 and Section 323 of the Trust Indenture Act of 1939, or otherwise subject to the liabilities of such sections and not deemed part of any registration statement to which such exhibit relates.
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Exhibit 99.1
Cautionary statement for purposes of the safe harbor provisions of the private securities litigation reform act of 1995
From time to time, in both written reports and in oral statements by our senior management, expectations and other statements are expressed regarding our future performance. These forward-looking statements are inherently uncertain and investors must recognize that events could turn out to be different than such expectations and statements. Key factors impacting our current and future performance are discussed in our Annual Report on Form 10-K for our fiscal year ended August 31, 2000 and other filings with the Securities and Exchange Commission (the "Commission"). In addition to such information in our Annual Report on Form 10-K and our other filings with the Commission, investors should consider the following risk factors in evaluating us and our business, as well as in reviewing forward-looking statements contained in our periodic reports filed with the Commission and in oral statements made by our senior management. Our actual results could differ materially from such forward-looking statements due to material risks, uncertainties and contingencies, including, without limitation, those set forth below.
Stringent Government Regulation
Our products are subject to extensive regulation by the Food and Drug Administration (the "FDA") and, in some jurisdictions, by state, local and foreign governmental authorities. In particular, we must obtain specific clearance or approval from the FDA before we can market new products or certain modified products in the United States. With the exception of one product, we have, to date, obtained FDA marketing clearance for our products only through the 510(k) premarket notification process. Certain of our products under development, including the LionHeart™, our Left Ventricular Assist System, and future applications, however, will require approval through the more vigorous Premarket Approval application ("PMA") process. The process of obtaining such clearances or approvals can be time consuming and expensive. We cannot assure you that the FDA will grant all clearances or approvals sought by us or that FDA review will not involve delays adversely affecting the marketing and sale of our products. We are also required to adhere to applicable regulations setting forth current Good Manufacturing Practices ("GMP") which require that we manufacture our products and maintain our records in a prescribed manner with respect to manufacturing, testing and control activities. In addition, we are required to comply with FDA requirements for labeling and promotion of our products. Failure to comply with applicable federal, state, local or foreign laws or regulations could subject us to enforcement action, including product seizures, recalls, withdrawal of clearances or approvals, and civil and criminal penalties, any one or more of which could have a material adverse effect on our business, financial condition and results of operations. Many of the foreign countries where we conduct business have adopted medical device laws and regulations with similar substantive and enforcement provisions. Federal, state, local and foreign laws and regulations regarding the development, manufacture and sale of medical devices are subject to future changes. We cannot assure you that such changes will not have a material adverse effect on our business, financial condition and results of operations.
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Significant Competition and Continual Technological Change
The markets for medical devices are highly competitive. We currently compete with many companies in the development and marketing of catheters and related medical devices. Some of our competitors have access to greater financial and other resources than us.
Furthermore, the markets for medical devices are characterized by rapid product development and technological change. Technological advances by one or more of our current or future competitors could render our present or future products obsolete or uneconomical. Our future success will depend upon our ability to develop new products and technology to remain competitive with other developers of catheters and related medical devices. Our business strategy emphasizes the continued development and commercialization of new products and the enhancement of existing products for the critical care and cardiac care markets. We cannot assure you that we will be able to continue to successfully develop new products and to enhance existing products, to manufacture these products in a commercially viable manner, to obtain required regulatory approvals or to gain satisfactory market acceptance for our products.
Cost Pressures on Medical Technology and Proposed Health Care Reform
Our products are purchased principally by hospitals, hospital networks and hospital buying groups. Although our products are used primarily for non-optional medical procedures, we believe that the overall escalating cost of medical products and services has led and will continue to lead to increased pressures upon the health care industry to reduce the cost or usage of certain products and services. In the United States, these cost pressures are leading to increased emphasis on the price and cost-effectiveness of any treatment regimen and medical device. In addition, third party payors, such as governmental programs, private insurance plans and managed care plans, which are billed by hospitals for such health care services, are increasingly negotiating the prices charged for medical products and services and may deny reimbursement if they determine that a device was not used in accordance with cost-effective treatment methods as determined by the payor, was experimental, unnecessary or used for an unapproved indication. In international markets, reimbursement systems vary significantly by country. Many international markets have government managed health care systems that control reimbursement for certain medical devices and procedures and, in most such markets, there also are private insurance systems which impose similar cost restraints. We cannot assure you that hospital purchasing decisions or government or private third party reimbursement policies in the United States or in international markets will not adversely affect the profitability of our products.
In recent years, several comprehensive health care reform proposals have been introduced in the U.S. Congress. While none of these proposals have to date been adopted, the intent of these proposals was, generally, to expand health care coverage
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for the uninsured and reduce the rate of growth of total health care expenditures. In addition, certain states have made significant changes to their Medicaid programs and have adopted various measures to expand coverage and limit costs. Implementation of government health care reform and other efforts to control costs may limit the price of, or the level at which reimbursement is provided for, our products. Several foreign countries have recently considered, and in some countries adopted, similar reforms to limit the growth of health care costs, including price regulation. We anticipate that Congress, state legislatures, foreign governments and the private sector will continue to review and assess alternative health care delivery and payment systems. We cannot predict what additional legislation or regulation, if any, relating to the health care industry may be enacted in the future or what impact the adoption of any federal, state or foreign health care reform, private sector reform or market forces may have on our business. We cannot assure you that any such reforms will not have a material adverse effect on the medical device industry in general, or on our business, in particular.
Dependence on Patents and Proprietary Rights
We own numerous U.S. and foreign patents and have several U.S. and foreign patent applications pending. We also have exclusive license rights to certain patents held by third parties. These patents relate to aspects of the technology used in certain of our products. From time to time, we are subject to legal actions involving patent and other intellectual property claims. Successful litigation against us regarding our patents or infringement of the patent rights of others could have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot assure you that pending patent applications will result in issued patents or that patents issued to or licensed-in by us will not be challenged or circumvented by competitors or found to be valid or sufficiently broad to protect our technology or to provide it with any competitive advantage. We also rely on trade secrets and proprietary technology that we seek to protect, in part, through confidentiality agreements with employees, consultants and other parties. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information or that third parties will not otherwise gain access to our trade secrets.
There has been substantial litigation regarding patent and other intellectual property rights in the medical devices industry. Historically, litigation has been necessary to enforce certain patent and trademark rights held by us. Future litigation may be necessary to enforce patent and other intellectual property rights belonging to us, to protect our trade secrets or other know-how owned by us, or to defend ourself against claimed infringement of the rights of others and to determine the scope and validity of our and others' proprietary rights. Any such litigation could result in substantial cost to and diversion of effort by us. Adverse determinations in any such litigation could subject us to significant liabilities to third parties, require us to seek licenses from third parties and prevent us from manufacturing, selling or using certain of our products, any one or more of which could have a material adverse effect on our business, financial condition and results of operations.
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Risks Associated with International Operations
We generate significant sales outside the United States and are subject to risks generally associated with international operations, such as unexpected changes in regulatory requirements, tariffs, customs, duties and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, political risks, fluctuations in currency exchange rates, foreign exchange controls which restrict or prohibit repatriation of funds, technology export and import restrictions or prohibitions, delays from customs brokers or government agencies and potentially adverse tax consequences resulting from operating in multiple jurisdictions with different tax laws, any one or more of which could materially adversely impact the success of our international operations. As our revenues from international operations increase, an increasing portion of our revenues and expenses will be denominated in currencies other than U.S. dollars and, consequently, changes in exchange rates could have a greater effect on our future operations. We cannot assure you that such factors will not have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot assure you that laws or administrative practices relating to regulation of medical devices, taxation, foreign exchange or other matters of countries within which we operate will not change. Any such change could also have a material adverse effect on our business, financial condition and results of operations.
Potential Product Liability
Our business exposes us to potential product liability risks which are inherent in the testing and marketing of catheters and related medical devices. Our products are often used in intensive care settings with seriously ill patients. In addition, many of the medical devices manufactured and sold by us are designed to be implanted in the human body for long periods of time and component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks with respect to these or other products manufactured or sold by us could result in an unsafe condition or injury to, or death of, the patient. The occurrence of such a problem could result in product liability claims and/or a recall of, or safety alert relating to, one or more of our products. We cannot assure you that the product liability insurance maintained by us will be available or sufficient to satisfy all claims made against us or that we will be able to obtain insurance in the future at satisfactory rates or in adequate amounts. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could result in costly litigation and could have a material adverse effect on our business or reputation or on our ability to attract and retain customers for our products.
Risks Associated with Derivative Financial Instruments
As a partial hedge against adverse fluctuations in exchange rates, we periodically enter into foreign currency exchange contracts with certain major financial institutions. By their nature, all such contracts involve risk, including the risk of
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nonperformance by counterparties. Accordingly, losses relating to these contracts could have a material adverse effect upon our business, financial condition and results of operations. Our policy prohibits the use of derivative instruments for speculative purposes.
Dependence on Key Management
Our success depends upon the continued contributions of key members of our senior management team, certain of whom have been with us since our inception in 1975. Accordingly, loss of the services of one or more of these key members of management could have a material adverse effect on our business. None of these individuals has an employment agreement with us.
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