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 first quarter period ended November 30, 1999
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. Yes X No
- -
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 January 13, 2000
_____ ______________________________________
Common Stock, No Par Value 22,548,343
ARROW INTERNATIONAL, INC.
Form 10-Q Index
Page
____
[S] [C]
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at November 30, 1999
and August 31, 1999 3-4
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 6-7
Consolidated Statements of Comprehensive Income 8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Exhibit Index 21
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
November 30, August 31,
1999 1999
___________ __________
ASSETS
Current assets:
Cash and cash equivalents $ 7,689 $ 3,939
Accounts receivable, net 69,828 70,467
Inventories 75,929 74,809
Prepaid expenses and other 15,707 15,394
Deferred income taxes 2,018 2,018
__________ __________
Total current assets 171,171 166,627
========== ==========
Property, plant and equipment:
Total property plant and equipment 210,823 204,939
Less accumulated depreciation (91,633) (88,005)
__________ __________
119,190 116,934
========== ==========
Goodwill, net 40,003 35,698
Intangible and other assets, net 36,781 33,487
Deferred income taxes 4,899 4,738
__________ __________
Total other assets 81,683 73,923
__________ __________
Total assets $ 372,044 $ 357,484
========== ==========
See accompanying notes to consolidated financial statements
Continued
-3-
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
November 30, August 31,
1999 1999
____________ __________
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 486 $ 470
Notes payable 44,651 32,802
Accounts payable 8,304 10,028
Cash overdrafts - 394
Accrued liabilities 9,220 8,707
Accrued compensation 6,649 6,223
Accrued income taxes 5,173 102
____________ __________
Total current liabilities 74,483 58,726
Long-term debt 10,894 11,105
Accrued postretirement benefit obligation 9,587 9,486
Commitments 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 258,902 250,931
Less treasury stock at cost:
3,733,270 and 3,420,970 shares,
respectively (21,322) (12,618)
Accumulated other comprehensive
expense (6,161) (5,807)
__________ __________
Total shareholders' equity 277,080 278,167
__________ __________
Total liabilities and
shareholders' equity $ 372,044 $ 357,484
========== ==========
See accompanying notes to consolidated financial statements
-4-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
For the Three Months Ended
__________________________
November 30, November 30,
1999 1998
____________ ____________
Net sales $ 76,717 $ 68,085
Cost of goods sold 35,337 31,036
____________ ____________
Gross profit 41,380 37,049
Operating expenses:
Research, development and engineering 5,371 5,311
Selling, general and administrative 18,243 16,855
Special charge 3,320 -
____________ ____________
Operating income 14,446 14,883
____________ ____________
Other expenses (income):
Interest expense, net of amounts
capitalized 463 222
Interest income (149) (91)
Other, net 160 (1,223)
____________ ____________
Other expenses (income), net 474 (1,092)
____________ ____________
Income before income taxes 13,972 15,975
Provision for income taxes 4,750 5,831
____________ ____________
Net income $ 9,222 $ 10,144
============ ============
Basic and diluted earnings per common
share $ .40 $ .44
============ ============
Cash dividends per common share $ .055 $ .05
============ ============
Weighted average shares outstanding 22,899,232 23,224,780
============ ============
See accompanying notes to consolidated financial statements
-5-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Three Months Ended
November 30, November 30,
1999 1998
____________ ____________
Cash flows from operating activities:
Net income $ 9,222 $ 10,144
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,838 3,280
Special charge 3,320 -
Amortization of intangible assets and goodwill 1,246 763
Amortization of unearned compensation - 44
Deferred income taxes (161) (171)
Unrealized holding loss on securities 149 171
Other 81 81
Changes in operating assets and liabilities:
Accounts receivable 1,649 1,437
Inventories (861) (1,684)
Prepaid expenses and other (455) 45
Accounts payable and accrued liabilities (2,470) (2,643)
Accrued compensation 432 (320)
Accrued income taxes 5,023 3,164
___________ __________
Total adjustments 11,791 4,167
___________ __________
Net cash provided by operating activities 21,013 14,311
___________ __________
Cash flows from investing activities:
Capital expenditures (6,266) (4,071)
(Increase) decrease in intangible and
other assets (1,036) 416
Cash paid for businesses acquired, net (10,595) -
___________ __________
Net cash used in investing activities (17,897) (3,655)
___________ __________
Cash flows from financing activities:
Increase (decrease) in notes payable 11,247 (4,931)
Principal payments of long-term debt (235) (461)
Increase (decrease) in book overdrafts (394) 80
Dividends paid (1,251) (1,161)
Purchase of treasury stock (8,703) (2)
___________ __________
Net cash provided by (used) in
financing activities 664 (6,475)
___________ __________
Effect of exchange rate changes on cash and
cash equivalents (30) 233
Net change in cash and cash equivalents 3,750 4,414
Cash and cash equivalents at beginning
of year 3,939 4,652
___________ __________
Cash and cash equivalents at end of period $ 7,689 $ 9,066
=========== ==========
See accompanying notes to consolidated financial statements
Continued
-6-
<\PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
(Unaudited)
For the Three Months Ended
___________________________
November 30, November 30,
1999 1998
___________ ___________
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 463 $ 222
Income taxes $ 903 $ 2,829
Supplemental schedule of non-cash investing and financing
activities:
Estimated fair value of assets acquired,
net of cash acquired $ 12,913 $ -
Cash paid for assets, net of cash acquired
of $460 10,595 -
___________ ____________
Liabilities assumed $ 2,318 $ -
=========== ============
Cash paid for business acquired:
Working capital $ (317) $ -
Property, plant and equipment 66 -
Goodwill, intangible assets and in-process
research and development 11,306 -
___________ ____________
$ 11,055 $ -
=========== ============
See accompanying notes to consolidated financial statements
-7-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
For the Three Months Ended
____________________________
November 30, November 30,
1999 1998
_____________ ____________
Net income $ 9,222 $ 10,144
Other comprehensive income (expense):
Currency translation adjustments (143) 2,008
Unrealized holding loss on securities, net of tax
($149 and $171, respectively) (211) (259)
_____________ ____________
Other comprehensive income (expense) (354) 1,749
_____________ ____________
Total comprehensive income $ 8,868 $ 11,893
============= ============
See accompanying notes to consolidated financial statements
-8-
<\PAGE>
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
Company's consolidated financial position, results of operations,
and cash flows 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.
Note 2 - Inventories:
Inventories are summarized as follows:
November 30, August 31,
1999 1999
___________ __________
Finished goods $ 29,494 $ 31,779
Semi-finished goods 14,285 12,654
Work-in-process 11,037 10,528
Raw materials 21,113 19,848
__________ __________
$ 75,929 $ 74,809
========== ==========
Note 3 - Commitments and Contingencies:
The Company is a party to certain legal actions arising in the
ordinary course of its business. Based upon information
presently available to the Company, the Company believes it has
adequate legal defenses or insurance coverage for these actions
and that the ultimate outcome of these actions would not have a
material adverse effect on the Company's business, financial
position or results of operations.
Note 4 - Related Party Transactions:
During the three months ended November 30, 1998, the Company
charged Arrow Precision Products, Inc. ("Precision"), which is
related to the Company through common ownership, $6 relating to
the utilization of certain of the Company's personnel. No such
charges were incurred during the three months ended November 30,
1999. The Company had a net receivable from Precision amounting
to $375 at November 30, 1998 and no net balance at November 30,
1999.
Continued
<\PAGE> -9-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 4 - Related Party Transactions: (Continued)
During the three months ended November 30, 1999 and 1998, the
Company made purchases amounting to $24 and $10, respectively,
from Precision Medical Products, Inc., ("PMP"), a former
subsidiary of Precision currently owned by certain former
management employees of Arrow Precision Products, Inc., including
T. Jerome Holleran, who serves as PMP's Chairman and Chief
Executive Officer and as Secretary and a Director of the Company.
In addition, the Company provided certain computer related
services to PMP for $3 during the three months ended November 30,
1998 but provided no such services during the same period in
1999.
Note 5 - Accounting Policies:
Certain prior period information has been reclassified for
comparative purposes.
Note 6 - Business Acquisitions:
On September 1, 1999, the Company completed the acquisition of
Sometec, S.A., a French development company that has recently
developed a non-invasive esophageal ultrasound probe that
continuously measures descending aortic blood flow, for $11.1
million. The acquisition has been accounted for using the
purchase method of accounting. The allocation of the purchase
price was prepared on a preliminary basis pending completion of
the valuation. The excess of the purchase price over the
estimated fair value of the net assets acquired of approximately
$3.8 million is being amortized over a period of 20 years.
Intangible assets acquired are being amortized over a period of
10 years. The results of operations of this business are
included in the Company's consolidated financial statements from
the date of acquisition. Proforma amounts are not presented as
this acquisition has no material effect on the Company's results
of operations or financial condition.
Note 7 - Special Charge:
In the first quarter of fiscal 2000, the Company recorded a non-
cash pre-tax special charge of $3,320 ($2,191 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
Continued
<\PAGE>
-10-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 7 - Special Charge: (Continued)
connection with the Company's recent acquisition of Sometec, S.A.
(see footnote 6). 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 transesophagael 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
get, 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 and the net cash inflows from these projects are expected
to commence within a year of the acquisition date. 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.
-11-
<\PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 8 - Segment Reporting:
In the fourth quarter of fiscal 1999, the Company adopted 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. Restatement of disclosures for prior years have been made
for comparative purposes. 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 ending Quarter ending
November 30, 1999 November 30, 1998
_________________ __________________
Critical Cardiac Critical Cardiac
Care Care Care Care
_________ ________ _________ ________
Sales to external
customers $ 63,900 $ 12,800 $ 56,100 $ 12,000
The following tables present quarterly information about geographic
areas:
Quarter ending November 30, 1999
______________________________________________________________
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
______ ________ ______ _______ ____________ ____________
Sales to
unaffiliated
customers $ 57,992 $ 9,348 $ 7,293 $ 2,084 $ - $ 76,717
Long-lived
assets $249,669 $ 3,263 $ 30,689 $ 2,108 $ (89,755) $195,974
Quarter ending November 30, 1998
______________________________________________________________
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
______ ________ ______ _______ ____________ ____________
Sales to
unaffiliated
customers $ 52,406 $ 7,133 $ 6,817 $ 1,729 $ - $ 68,085
Long-lived
assets $211,940 $ 1,605 $28,491 $ 1,770 $(75,281) $168,525
-12-
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 November 30, 1999 Compared to Three Months
Ended November 30, 1998
Net sales for the first quarter of fiscal 2000 ended November 30,
1999 increased 12.7% to $76.7 million, compared with $68.1
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 increased 13.9% to $63.9 million
from $56.1 million in the comparable prior year period due
primarily to additional unit shipments of central venous
catheters, including increased shipments of ARROWg+ard Blue
(Registration Mark) antiseptic surface treated catheter products,
special catheters, percutaneous thrombolytic devices ("PTDs")
and drug infusion pumps. Sales of cardiac care products increased
to $12.8 million from $12.0 million, an increase of 6.7% from
the comparable fiscal 1999 period, principally as a result of
increased sales of intra-aortic balloon ("IAB") pump and
catheter products. International sales increased by 13.6% to
$26.7 million from $23.5 million in the same prior year period and
represented 34.8% of net sales, compared to 34.4% in the comparable
fiscal 1999 period, principally as a result of increased sales
of central venous catheters and IAB pump and catheter products.
The increased strength of the U.S. dollar, relative to currencies in
countries where the Company operates direct sales subsidiaries,
increased net sales for the quarter by $0.3 million.
Gross profit increased 11.7% to $41.4 million in the first
quarter of the current fiscal year compared to $37.0 million in
the same period of fiscal 1999. As a percentage of net sales,
gross profit decreased to 53.9% during the three months ended
November 30, 1999 from 54.4% in the comparable prior year period,
due to product and distribution mix.
Research, development and engineering expenses increased by 1.1%
to $5.4 million in the first quarter of fiscal 2000 from $5.3
million in the comparable prior year period. As a percentage of
net sales, these expenses decreased in the first quarter of
fiscal 2000 to 7.0%, compared to 7.8% in the same period in
fiscal 1999.
-13-
<\PAGE>
ARROW INTERNATIONAL, INC.
Selling, general and administrative expenses increased by 8.2% to
$18.2 million during the first quarter of fiscal 2000 from $16.9
million in the same period of fiscal 1999 and decreased as a
percentage of net sales to 23.8% in the first quarter of fiscal
2000 from 24.8% in the comparable period of fiscal 1999. The
increase was due primarily to additional expenses related to the
acquisition of the cardiac assist division of C.R. Bard, Inc. in
the second quarter of fiscal 1999 offset by the Company's cost
containment efforts.
In the first quarter of fiscal 2000, the Company recorded a non-
cash pre-tax special charge of $3,320 ($2,191 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 recent acquisition of Sometec, S.A.
(see footnote 6). 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 transesophagael 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
get, 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 and the net cash inflows from these projects are expected
to commence within a year of the acquisition date. 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.
<\PAGE>
-14-
ARROW INTERNATIONAL, INC.
Principally due to the above factors, operating income decreased
in the first quarter of fiscal 2000 by 3.0% to $14.4 million from
$14.9 million in the comparable prior year period.
Other expenses (income), net, decreased to $0.5 million of
expense during the first quarter of fiscal 2000 from $1.1 million
of income in the comparable prior year period. Other expenses
(income), net, consist principally of interest expense and
foreign exchange gains and losses associated with the Company's
direct sales subsidiaries.
As a result of the factors discussed above, income before income
taxes decreased during the first quarter of fiscal 2000 by 12.5%
to $14.0 million from $16.0 million in the comparable prior year
period. For the first quarter of fiscal 2000, the Company's
effective income tax rate was 34.0%, a decrease from 36.5% in the
same period of fiscal 1999, principally as a result of the recent
completion of tax examinations through August 31, 1998.
Net income decreased 9.1% to $9.2 million from $10.1 million in
the comparable fiscal 1999 period. As a percentage of net sales,
net income represented 12.0% during the three months ended
November 30, 1999, compared to 14.8% in the comparable prior year
period.
Basic and diluted earnings per common share were $.40 and $.44 in
the first quarters of fiscal 2000 and 1999, respectively.
Weighted average common shares outstanding decreased to
22,899,232 in the first quarter of fiscal 2000 from 23,224,780 in
the comparable prior year period as a result of the Company's
previously announced share repurchase program, which remains in
effect.
Liquidity and Capital Resources
For the three months ended November 30, 1999, net cash provided
by operations was $21.0 million, an increase of $6.7 million from
the same period in the prior year, due to higher net income,
before a non-cash pre-tax special charge of $3,320 ($2,191 after
tax or $.10 per basic and diluted common share in the first
quarter of fiscal 2000), and to the timing of the payment of
income taxes. Accounts receivable, net of the allowance for
doubtful accounts, decreased by $.6 million in the three months
ended November 30, 1999, compared to a $1.0 million increase in
the same period in fiscal 1999. Accounts receivable, measured in
average days sales outstanding during the period, was 83 days at
November 30, 1999 and 86 days at November 30, 1998.
Net cash used in the Company's investing activities increased to
$17.9 million in the three months ended November 30, 1999 from
$3.7 million for the same period in fiscal 1999, due primarily to
the Company's acquisition of Sometec S.A..
Financing activities provided $0.7 million of net cash in the
three months ended November 30, 1999, compared to using $6.5
million in the same period in fiscal 1999,
<\PAGE> -15-
ARROW INTERNATIONAL, INC.
primarily as a result of increased borrowing related to the
Company's acquisition of Sometec S.A. and increased use of cash
to purchase shares of its common stock in the open market in
connection with the Company's previously announced share
repurchase program. As of November 30, 1999, the Company has
expended $8.7 million to fund repurchases of 312,300 shares of
its common stock pursuant to this program.
As of November 30, 1999, the Company had U.S. bank credit
facilities providing a total of $65.0 million in available
revolving credit for general business purposes, of which $30.0
million remained unused. In addition, certain of the Company's
foreign subsidiaries had revolving credit facilities totaling the
U.S. dollar equivalent of $25.0 million, of which $15.3 million
remained unused as of November 30, 1999. Combined borrowings
under these facilities increased $11.9 million and decreased $5.0
million during the three months ended November 30, 1999 and 1998,
respectively.
During the three month periods ended November 30, 1999 and 1998,
the percentage of the Company's sales invoiced in currencies
other than U.S. dollars was 24.4% and 23.0%, respectively.
As a partial hedge against adverse fluctuations in exchange
rates, the Company periodically enters into foreign currency
exchange 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
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
speculative purposes. As of November 30, 1999, outstanding
foreign currency exchange contracts totaling the U.S. dollar
equivalent of $10.2 million mature at various dates through March
2000. 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 effort in this
regard will be successful.
Based upon its present plans, the Company believes that its
working capital, operating cash flow and available credit
resources will be adequate to repay current portions of long-term
debt, to finance currently planned capital expenditures and to
meet the currently foreseeable liquidity needs of the Company.
During the periods discussed above, the overall effects of
inflation and seasonality on the Company's business were not
significant.
<\PAGE>
-16-
ARROW INTERNATIONAL, INC.
The Company expended an aggregate of approximately $1.7 million
and devoted in excess of 1,200 man-days in internal resources in
fiscal 1998 and 1999 and the first quarter of fiscal 2000 to
achieve its objective of ensuring that the Company's products,
business systems and support services to customers would continue
to operate satisfactorily on and after January 1, 2000. The
Company has described in detail its efforts to address the Year
2000 problem as it may have related to its business operations
and regulation by the Food and Drug Administration in its Annual
Report on Form 10-K for its fiscal year ended August 31, 1999 and
in its other filings with the Securities and Exchange Commission.
Subsequent to the end of the Company's first quarter of fiscal
2000, the calendar changed to the year 2000. The business and
operations of the Company experienced no material adverse effects
from the date change, nor has the Company been notified of any
disruptions or failures in the systems of any of its suppliers or
customers. There is an ongoing risk that Year 2000 related
problems could still occur and the Company will continue to
evaluate these risks; however, the Company believes that the Year
2000 issue will not pose any significant operational problems for
the Company.
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ARROW INTERNATIONAL, INC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk:
Financial Instruments:
During the three month period ended November 30, 1999 and 1998,
the percentage of the Company's sales invoiced in currencies
other than U.S. dollars was 24.4% and 23.0%, 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 does not expect the
impact of interest rate volatility to be significant.
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.
At November 30, 1999, the Company had forward exchange contracts
to sell foreign currencies which mature at various dates through
March 2000. The following table identifies forward exchange
contracts to sell foreign currencies at November 30, 1999 and
August 31, 1999 as follows:
November 30, 1999 August 31, 1999
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
_________ __________ _________ _________
Foreign currency:
(U.S. Dollar Equivalents)
Japanese yen $ 4,473 $ 4,678 $ 5,698 $ 5,855
Canadian dollars 1,591 1,595 1,115 1,108
Greek drachmas 1,809 1,842 1,571 1,603
Mexican peso 1,537 1,589 1,012 1,064
African rand 795 809 1,270 1,314
________ ________ ________ ________
$10,205 $10,513 $10,666 $10,944
======== ======== ======== ========
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ARROW INTERNATIONAL, INC.
PART II. OTHER INFORMATION
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 27 *Financial Data Schedule
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 November 30, 1999.
*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: January 14, 2000 By: /s/ Frederick J. Hirt
__________________________
(signature)
Frederick J. Hirt
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
_______ ___________ ________________
27 *Financial Data Schedule EDGAR
99.1 Cautionary Statement for Page 22-26 of this report
Purposes of the Safe
Harbor Provisions of the
Private Securities
Litigation Reform Act of
1995
*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.
-21-
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, 1999 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 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
<\PAGE>
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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.
<\PAGE>
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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
-25-
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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