UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the third quarter period ended May 31, 1998
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.)
3000 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 July 13, 1998
----- -----------------------------------
Common Stock, No Par Value 23,224,321
ARROW INTERNATIONAL, INC.
Form 10-Q Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
May 31, 1998 and August 31, 1997 3-4
Consolidated Statements of Income 5-6
Consolidated Statements of Cash Flows 7-8
Notes to Consolidated Financial
Statements 9-12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13-19
PART II. OTHER INFORMATION
Item 5. Other Events 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
Exhibit Index 22
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands)
May 31, August 31,
1998 1997
--------- -----------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,242 $ 6,276
Accounts receivable, net 64,593 60,801
Inventories 68,372 57,334
Prepaid expenses and other 13,534 8,729
Deferred income taxes 3,173 2,833
--------- ---------
Total current assets 153,914 135,973
--------- ---------
Property, plant and equipment:
Total property, plant and
equipment 180,529 171,067
Less accumulated depreciation (69,381) (60,474)
---------- ---------
Property, plant and
equipment, net 111,148 110,593
========== =========
Other assets:
Goodwill, net 47,065 48,720
Intangible and other assets, net 33,289 24,430
Deferred income taxes 109 657
---------- ---------
Total other assets 80,463 73,807
---------- ---------
Total assets $ 345,525 $ 320,373
========== =========
See accompanying notes to consolidated financial statements.
Continued
-3-
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, Continued
(All Dollar Amounts in Thousands)
May 31, August 31,
1998 1997
----------- -----------
(unaudited) (unaudited)
LIABILITIES
Current liabilities:
Current maturities of
long-term debt $ 1,498 $ 2,675
Notes payable 20,946 21,978
Accounts payable 9,463 9,983
Accrued liabilities 6,773 6,856
Accrued compensation 7,155 9,945
Accrued income taxes 6,021 3,076
----------- ----------
Total current liabilities 51,856 54,513
Long-term debt 11,567 12,043
Accrued postretirement
benefit obligation 8,919 7,900
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 45,603 45,603
Retained earnings 243,349 216,173
Less cost of treasury stock:
3,254,492 and 3,252,687 shares
of Common Stock, respectively (8,427) (8,374)
Unearned compensation (90) (239)
Cumulative translation adjustment (5,266) (5,088)
Unrealized holding loss on
securities, net of tax (1,986) (2,158)
-------- --------
Total shareholders' equity 273,183 245,917
-------- --------
Total liabilities and
shareholders' equity $ 345,525 $ 320,373
========= =========
See accompanying notes to consolidated financial statements.
-4-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
For the Three Months
Ended May 31,
1998 1997
---------- ----------
Net sales $ 65,735 $ 62,107
Cost of goods sold 28,499 27,900
--------- ---------
Gross profit 37,236 34,207
Operating expenses:
Research, development and
engineering 4,799 4,090
Selling, general and
administrative 16,291 14,366
-------- --------
Operating income 16,146 15,751
Other expenses (income):
Interest expense, net of amounts
capitalized 261 186
Interest income (56) (211)
Other, net 394 338
-------- -------
Other expenses, net 599 313
-------- -------
Income before income taxes 15,547 15,438
Provision for income taxes 5,830 5,944
-------- -------
Net income $ 9,717 $ 9,494
======== =======
Basic earnings per common share $ .42 $ .41
======== =======
Diluted earnings per common share $ .42 $ .41
======== =======
Cash dividends per common share $ .050 $ .045
======== =======
Weighted average shares
outstanding 23,224,422 23,226,428
========== ==========
See accompanying notes to consolidated financial statements.
-5-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
For the Nine Months
Ended May 31,
1998 1997
--------- ---------
Net sales $ 196,274 $ 183,262
Cost of goods sold 86,190 83,283
--------- ---------
Gross profit 110,084 99,979
Operating expenses:
Research, development and
engineering 13,286 11,891
Selling, general and administrative 46,936 42,663
--------- ---------
Operating income 49,862 45,425
--------- ---------
Other expenses (income):
Interest expense, net of
amounts capitalized 570 780
Interest income (366) (642)
Other, net 790 1,324
--------- --------
Other expenses, net 994 1,462
--------- --------
Income before income taxes 48,868 43,963
Provision for income taxes 18,326 16,926
--------- --------
Net income $ 30,542 $ 27,037
========= ========
Basic earnings per common share $ 1.32 $ 1.17
========= =========
Diluted earnings per common share $ 1.32 $ 1.17
========= =========
Cash dividends per common share $ .145 $ .130
========= =========
Weighted average shares
outstanding 23,224,960 23,227,390
========== ==========
See accompanying notes to consolidated financial statements.
-6-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(All Dollar Amounts in Thousands)
For the Nine Months Ended May 31,
1998 1997
----------- ----------
Cash flows from operating activities:
Net income $ 30,542 $ 27,037
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 8,798 8,447
Amortization of intangible assets 3,092 2,910
Amortization of unearned compensation 134 151
Deferred income taxes 209 (882)
Other 882 2,655
Changes in operating assets and liabilities:
Accounts receivable (4,953) (9,367)
Inventories (10,227) (5,847)
Prepaid expenses and other (4,843) (3,786)
Accounts payable and accrued liabilities 25 2,930
Accrued compensation (2,785) 527
Accrued income taxes 2,921 640
--------- --------
Total adjustments (6,747) (1,622)
--------- --------
Net cash provided by operating activities 23,795 25,415
Cash flows from investing activities:
Capital expenditures (9,243) (12,703)
Increase in intangible and other assets (3,746) (1,203)
Cash paid for businesses acquired (7,321) 0
-------- --------
Net cash used in investing activities (20,310) (13,906)
Cash flows from financing activities:
Decrease in notes payable (578) (4,695)
Principal payments of long-term debt (1,558) (4,952)
Dividends paid (3,251) (3,020)
Purchase of treasury stock (38) (32)
-------- --------
Net cash used in
financing activities (5,425) (12,699)
Effect of exchange rate changes on cash and
cash equivalents (94) (329)
Net change in cash and cash equivalents (2,034) (1,519)
Cash and cash equivalents at beginning
of year 6,276 4,807
--------- --------
Cash and cash equivalents at end
of period $ 4,242 $ 3,288
========= ========
See accompanying notes to consolidated financial statements
Continued
-7-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(unaudited)
(All Dollar Amounts in Thousands)
For the Nine Months
Ended May 31,
1998 1997
-------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 570 $ 780
Income taxes $ 15,000 $ 15,110
See accompanying notes to consolidated financial statements
-8-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
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 period
are not necessarily indicative of results for the entire
year.
Note 2 - Inventories
Inventories are summarized as follows:
May 31, August 31,
1998 1997
--------- ---------
Finished goods $ 23,259 $ 20,718
Semi-finished goods 18,079 13,906
Work-in-process 9,832 9,900
Raw materials 17,202 12,810
--------- ---------
$ 68,372 $ 57,334
========= =========
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
financial position or results of operations.
Continued
-9-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
Note 4 - Related Party Transactions
During the nine months ended May 31, 1998, the Company
assumed certain pension and retirement health care benefit
obligations of Arrow Precision Products, Inc. ("Precision"),
which is related to the Company through common
ownership, to former employees of Precision who are
currently, or previously were, employed by the Company in
exchange for the transfer by Precision to the Company of
appropriate assets to satisfy such obligations.
Consequently, Precision's two pension plans, both of which
were overfunded as of August 31, 1997, were merged with the
Company's pension plans covering comparable employees. The
Company paid Precision $2,975, the amount by which the value
of Precision's pension plan assets exceeded the actuarially
determined present value of Precision's pension plan
obligations. This payment was offset by the payment by
Precision to the Company of $757, the actuarially determined
present value of Precision's retirement heath care
obligations to former Precision employees who are currently,
or previously were, employed by the Company. In addition,
Precision transferred to the Company, with no payment by
either party to the other, its rights and responsibilities
under a split dollar life insurance policy covering the
former Chief Operating Officer of Precision.
During fiscal 1997, certain of the Company facilities,
personnel and services were utilized by Precision.
Effective August 29, 1997, such utilization ended when
Precision Medical Products, Inc., the wholly owned and
remaining operating subsidiary of Precision, was acquired by
a company formed by certain management employees of
Precision.
The Company charged Precision $110 and $330 for certain
facilities, personnel and services utilized by Precision
during the three months and nine months ended May 31, 1997,
respectively. The Company made purchases from Precision
amounting to $338 and $1,029 for the three months and nine
months ended May 31, 1997, respectively. In addition, the
Company made payments on behalf of Precision related to
certain costs incurred by Precision for which the Company
was reimbursed, amounting to $162 and $609 during the three
months and nine months ended May 31, 1997, respectively.
Continued
-10-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(unaudited)
Note 5 - Accounting Policies
The effect of exchange rate changes on cash and cash
equivalents have been reclassified and stated as a separate
category in the consolidated statements of Cash Flows for
the nine months ended May 31, 1998. Prior periods have been
restated to reflect this change.
Note 6 - New Accounting Standards
On June 15, 1998, the Financial Accounting Standards Board
issued FAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (FAS 133). FAS 133 establishes new
procedures for accounting for derivatives and hedging
activities and supersedes and amends a number of existing
standards. FAS 133 is effective for fiscal years beginning
after June 15, 1999, but earlier application is permitted as
of the beginning of any fiscal quarter subsequent to June 15,
1998. Although the Company has not fully completed its
evaluation of the impact of this new standard, the Company
does not anticipate that the adoption of this new standard
will have a material effect on the Company's consolidated
financial statements.
On April 3, 1998, the Accounting Standards Executive
Committee of the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities". SOP 98-5
provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred.
The standard is effective for financial statements for fiscal
years beginning after December 15, 1998. Earlier application
is encouraged. The Company does not anticipate that the
adoption of this new standard will have a material effect on
the Company's consolidated financial statements.
On March 4, 1998, the Accounting Standards Executive
Committee of the AICPA issued Statement of Position (SOP) 98-
1 "Accounting for the Costs of Computer Software Development
or Obtained for Internal Use". The SOP provided guidance on
accounting for the costs of computer software developed or
obtained for internal use. The SOP is effective for
financial statements for fiscal years beginning after
December 15, 1998, but earlier application is encouraged.
The Company does not anticipate that adoption of this new
standard will have a material effect on
the Company's consolidated financial statements.
Continued
-11-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(unaudited)
Note 6 - New Accounting Standards, Continued
During February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pension and Other
Postretirement Benefits". SFAS No. 132 does not change the
measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other
postretirement benefits, requires additional information on
changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures that are no longer
as useful. The statement is effective for fiscal years
beginning after December 15, 1997, but earlier application is
encouraged. The adoption of SFAS No. 132 is not expected to
have any impact on the Company's results of operations,
financial position or cash flows.
-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 May 31, 1998 Compared to Three Months
Ended May 31, 1997
Net sales for the three months ended May 31, 1998 increased
by $3.6 million, or 5.8%, to $65.7 million from $62.1
million in the same period last year. Net sales represent
gross sales invoiced to customers, plus royalty income, less
certain related charges, including freight costs, discounts,
returns and other allowances. This increase was due
primarily to increased shipments of intra-aortic balloon
("IAB") products, percutaneous thrombolytic devices ("PTD"),
and implantable drug infusion pumps. Sales of critical care
products, including royalty income, increased 3.4% to $54.3
million from $52.5 million in the comparable prior period,
due primarily to increased shipments of PTD's. Cardiac care
(formerly interventional procedure) product sales increased
to $11.5 million from $9.6 million, an increase of 19.3%
over the comparable prior period, due primarily to higher
sales of IAB products. International sales increased by $.3
million, or 1.3%, to 22.9 million, representing 34.9% of net
sales for the three months ended May 31, 1998, compared to
36.5% of net sales in the comparable period of fiscal 1997,
principally as a result of higher sales of IAB products.
The increased strength of the U.S. dollar, relative to
currencies in countries where the Company operates direct
sales subsidiaries, reduced net sales for the period by
$1.0 million.
Gross profit increased 8.9% to $37.2 million in the three
months ended May 31, 1998 from $34.2 million in the same
period of fiscal 1997. As a percentage of net sales, gross
profit increased to 56.6% during the three months ended May
31, 1998 from 55.1% in the comparable period of fiscal 1997,
due principally to a more profitable product mix and
improved manufacturing costs resulting from increased
production at the Company's international manufacturing
facilities.
-13-
ARROW INTERNATIONAL, INC.
Research, development and engineering expenses increased by
17.3% to $4.8 million in the three months ended May 31, 1998
from $4.1 million in the comparable prior period, primarily
as a result of increased spending related to research,
product development, process development and clinical trial
activities. As a percentage of net sales, these expenses
increased in the third quarter of fiscal 1998 to 7.3%,
compared to 6.6% in the same period in fiscal 1997. Current
research and development programs include additional
applications for the PTD, pullback atherectomy catheters for
treating coronary artery disease, microwave ablation
catheters for the treatment of heart arrythmias and a fully
implantable Left Ventricular Assist Device.
Selling, general and administrative expenses increased by
13.4% to $16.3 million in the three months ended May 31,
1998 from $14.4 million in the comparable prior period of
fiscal 1997. Selling, general and administrative expenses
increased as a percentage of net sales to 24.8% in the third
quarter of fiscal 1998 from 23.1% in the comparable period
of fiscal 1997. This increase was due primarily to
increased U.S. sales and marketing expenses and increased
expenses in Japan to implement direct sales of IAB products.
Principally due to the above factors, operating income
increased in the third quarter of fiscal 1998 by 2.5% to
$16.1 million from $15.8 million in the comparable period of
fiscal 1997.
Other expenses (income), net, increased to $0.6 million
during the third quarter of fiscal 1998 from $0.3 million in
the comparable prior period. Other expenses (income), net,
consist principally of interest expense and gains and losses
on foreign exchange transactions associated with the
Company's direct sales subsidiaries.
As a result of the factors discussed above, income before
income taxes increased by 0.7% to $15.5 million in the third
quarter of fiscal 1998 from $15.4 million in the comparable
prior period. For the third quarter of fiscal 1998, the
Company's effective tax rate was 37.5%, a decrease from
38.5% in fiscal 1997, principally as a result of a reduction
in tax accruals for certain state and international
jurisdictions.
Net income in the third quarter of fiscal 1998 increased by
2.3% to $9.7 million from $9.5 million in the comparable
prior period. As a percentage of net sales, net income
represented 14.8% in the three months ended May 31, 1998,
compared to 15.3% in the comparable period of fiscal 1997.
Basic and diluted earnings per common share were $.42 in the
three month period ended May 31, 1998, an increase of 2.4%,
or $0.01 per share, from $.41
-14-
ARROW INTERNATIONAL, INC.
per share in the comparable prior period. Weighted average
common shares outstanding decreased to 23,224,422 in the
third quarter of fiscal 1998 from 23,226,428 in the
comparable prior period.
Nine Months Ended May 31, 1998 Compared to Nine Months Ended
May 31, 1997
Net sales for the nine months ended May 31, 1998 increased
by $13.0 million, or 7.1%, to $196.3 million from $183.3
million in the same period last year. This increase was due
primarily to an increase in unit sales of the Company's
central venous catheter products, as well as increased
shipments of IAB products, PTD's and implantable drug
infusion pumps. Sales of critical care products, including
royalty income, increased 6.4% to $164.8 million from $154.9
million in the comparable prior period, due primarily to
increased shipments of central venous catheters, PTD's and
implantable drug infusion pumps. Cardiac care (formerly
interventional procedure) product sales increased to $31.4
million from $28.4 million, an increase of 10.7% over the
comparable prior period, due primarily to higher sales of
IAB products. International sales increased by $2.9
million, or 4.4%, to $68.8 million, representing 35.0% of
net sales for the nine months ended May 31, 1998, compared
to 36.0% of net sales in the comparable period of fiscal
1997, principally as a result of increased sales of central
venous catheters and IAB products. The increased strength of
the U.S. dollar, relative to currencies in countries where
the Company operates direct sales subsidiaries, reduced net
sales for the nine month period ended May 31, 1998 by $4.0
million.
Gross profit increased 10.1% to $110.1 million in the nine
months ended May 31, 1998, compared to $100.0 million in the
same period of fiscal 1997. As a percentage of net sales,
gross profit increased to 56.1% during the nine months ended
May 31, 1998 from 54.6% in the comparable period of fiscal
1997, due principally to a more profitable product mix and
improved manufacturing costs resulting from increased
production at the Company's international manufacturing
facilities.
Research, development and engineering expenses increased by
11.7% to $13.3 million in the nine months ended May 31, 1998
from $11.9 million in the comparable prior period. As a
percentage of net sales, these expenses increased in the
first nine months of fiscal 1998 to 6.8%, compared to 6.5%
in
the same period in fiscal 1997, primarily as a result of
increased spending related to research, product development,
process development and clinical trial activities. Current
research and development programs include additional
applications for the PTD, pullback atherectomy catheters for
treating coronary artery disease, microwave ablation
catheters for the treatment of heart arrythmias and a fully
implantable Left Ventricular Assist Device.
-15-
ARROW INTERNATIONAL, INC.
Selling, general and administrative expenses increased by
10.0% to $46.9 million in the nine months ended May 31, 1998
from $42.7 million in the comparable prior period and
increased as a percentage of net sales to 23.9% in the first
nine months of fiscal 1998 from 23.3% in the comparable
period of fiscal 1997. The increase was due primarily to
increased U.S. sales and marketing expenses and increased
expenses in Japan to implement direct sales of IAB products.
Principally due to the above factors, operating income
increased in the first nine months of fiscal 1998 by 9.8% to
$49.9 million from $45.4 million in the comparable period of
fiscal 1997.
Other expenses (income), net, decreased to $1.0 million in
the first nine months of fiscal 1998 from $1.5 million in
the comparable prior 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 increased in the first nine months of fiscal
1998 by 11.2% to $48.9 million from $44.0 million in the
comparable prior period. For the first nine months of
fiscal 1998, the Company's effective income tax rate was
37.5%, a decrease from 38.5% in fiscal 1997, principally as
a result of a reduction in tax accruals for certain state
and international jurisdictions.
Net income increased 13.0% to $30.5 million in the nine
months ended May 31, 1998 from $27.0 million in the
comparable prior period. As a percentage of net sales, net
income represented 15.6% during the nine months ended May
31, 1998 compared to 14.8% in the comparable period of
fiscal 1997.
Basic and diluted earnings per common share were $1.32 in
the nine month period ended May 31, 1998, an increase of
12.8%, or $0.15 per share, from $1.17 per share in the
comparable prior period. Weighted average common shares
outstanding decreased to 23,224,960 from 23,227,390 in the
comparable prior period.
-16-
ARROW INTERNATIONAL, INC.
Liquidity and Capital Resources
For the nine months ended May 31, 1998, net cash provided by
operations was $23.8 million, a decrease of $1.6 million
from the same period in the prior year. Accounts
receivable, exclusive of the impact of changes in foreign
exchange rates, increased by $5.0 million in the nine months
ended May 31, 1998, compared to a $6.6 million increase in
the same period of fiscal 1997. Accounts receivable,
measured in day sales outstanding during the period,
increased to 90 days at May 31, 1998 from 84 days at May 31,
1997, due principally to an increase in the collection
period for the Company's international sales. Inventories,
exclusive of the impact of changes in foreign exchange
rates, increased by $10.2 million in the nine months ended
May 31, 1998, compared to a $5.8 million increase in the
same period of fiscal year 1997, principally to support
increased production at the Company's international
manufacturing facilities.
Net cash used in the Company's investing activities
increased to $20.3 million in the nine months ended May 31,
1998 from $13.9 million in the comparable period of fiscal
1997, principally as a result of the acquisition in November
1997, for $7.3 million, of certain assets of the Cardiac
Assist Division of Boston Scientific Corporation.
Financing activities used $5.4 million in the nine month
period ended May 31, 1998, whereas such activities used
$12.7 million in the comparable period of fiscal 1997,
changing principally as a result of a reduction in
repayments of long-term debt and in borrowings under the
Company's revolving credit facilities.
As of May 31, 1998, the Company had U.S. bank credit
facilities providing a total of $50.0 million in revolving
credit for general business purposes, of which $34.2 million
remained unused. In addition, certain of the Company's
foreign subsidiaries have revolving credit facilities
totaling the U.S. dollar equivalent of $11.3 million, of
which $5.2 million remained unused as of May 31, 1998.
Combined borrowings under these facilities decreased $0.1
million during the nine month period ended May 31, 1998.
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 trading purposes.
-17-
ARROW INTERNATIONAL, INC.
During the nine month periods ended May 31, 1998 and 1997,
the percentage of the Company's sales invoiced in currencies
other than U.S. dollars was 24.6% and 24.7%, respectively.
As of May 31, 1998, outstanding foreign currency exchange
contracts totaling the U.S. dollar equivalent of $9.2
million mature at various dates through December 1998. 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
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.
The Company recognizes the need to ensure its operations
will not be adversely impacted by Year 2000 software
failures. Software failures due to processing errors
potentially arising from calculations using a 21st Century
date are a known risk. The Company is addressing this risk
to the availability and integrity of its financial systems
and the reliability of its operational systems. Based upon
a review of its technology and software, the Company has
concluded that there are no material issues regarding its
Year 2000 compliance that will not be resolved through
normal software upgrades and replacements that will be made
through 1999. While the Company believes its efforts to
address its Year 2000 concerns are adequate and will not
require material additional expenditures by the Company,
there can be no guarantee that the systems of other
companies on which the Company's systems and operations
rely, will be converted on a timely basis and will not have
a material adverse effect on the Company.
-18-
ARROW INTERNATIONAL, INC.
New Accounting Standards
On June 15, 1998, the Financial Accounting Standards Board
issued FAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (FAS 133 or the "Statement"). FAS 133
establishes new procedures for accounting for derivatives and
hedging activities and supersedes and amends a number of
existing standards. FAS 133 is effective for fiscal years
beginning after June 15, 1999, but earlier application is
permitted as of the beginning of any fiscal quarter
subsequent to June 15, 1998. Although the Company has not
fully completed its evaluation of the impact of this new
standard, we do not anticipate the adoption of this new
standard will have a material effect on the Company's
consolidated financial statements.
On April 3, 1998, the Accounting Standards Executive
Committee of the AICPA issued Statement of Position (SOP) 98-
5, "Reporting on the Costs of Start-up Activities". SOP 98-5
provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred.
The standard is effective for financial statements for fiscal
years beginning after December 15, 1998. Earlier application
is encouraged. The Company does not anticipate the adoption
of this new standard will have a material effect on the
Company's consolidated financial statements.
On March 4, 1998, the Accounting Standards Executive
Committee of the AICPA issued Statement of Position (SOP) 98-
1 "Accounting for the Costs of Computer Software Development
or Obtained for Internal Use". The SOP provided guidance on
accounting for the costs of computer software developed or
obtained for internal use. The SOP is effective for
financial statements for fiscal years beginning after
December 15, 1998, but earlier application is enouraged.
The Company does not anticipate the
adoption of this new standard to have a material effect on
the Company's consolidated financial statements.
During February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pension and Other
Postretirement Benefits". SFAS No. 132 does not change the
measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other
postretirement benefits, requires additional information on
changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures that are no longer
as useful. The statement is effective for fiscal years
beginning after December 15, 1997, but earlier application is
encouraged. The adoption of SFAS No. 132 is not expected to
have any impact on the Company's results of operations,
financial position or cash flows.
-19-
ARROW INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 5. Other Events.
The Securities and Exchange Commission (the "SEC") has
amended recently its rule 14a-4, which governs the use by
the Company of discretionary voting authority with respect
to certain shareholder proposals. SEC Rule 14a-4(c)(1)
provides that, if the proponent of a shareholder proposal
fails to notify the Company at least 45 days prior to the
month and day of mailing the prior year's proxy statement,
the proxies of the Company's management would be permitted
to use their discretionary authority at the Company's next
annual meeting of shareholders if the proposal were raised
at the meeting without any discussion of the matter in the
proxy statement. In order to provide shareholders with
notice of the deadline for the submission of such proposals
for the Company's 1999 Annual Meeting of Shareholders, the
Company hereby notifies all shareholders of the Company that
after November 1, 1998 any shareholder proposal submitted
outside the process of SEC Rule 14a-8 will be considered
untimely for purposes of SEC Rules 14a-4 and 14a-5(e).
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 May 31, 1998.
-20-
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: July 14, 1998 By: /s/ John H. Broadbent, Jr.
---------------------------
(signature)
John H. Broadbent, Jr.
Vice President-Finance
and Treasurer (Principal
Financial Officer and
Chief Accounting Officer)
-21-
EXHIBIT INDEX
Exhibit Description
Number of Exhibit Method of Filing
- ------ ----------- ----------------
27 *Financial Data Schedule EDGAR
99.1 Cautionary Statement for Pages 23-27 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.
-22-
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 the Company's senior management, expectations
and other statements are expressed regarding future
performance of the Company. 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
current and future performance are discussed in the
Company's Annual Report on Form 10-K for its fiscal year
ended August 31, 1997 and other filings with the Securities
and Exchange Commission (the "Commission"). In addition to
such information in the Company's Annual Report on Form 10-
K and its other filings with the Commission, the following
risk factors should be considered in evaluating the Company
and its business, as well as in reviewing forward-looking
statements contained in the Company's periodic reports filed
with the Commission and in oral statements made by the
Company's senior management. The Company's 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
The Company's products are subject to extensive
regulation by the Food and Drug Administration (the "FDA")
and, in some jurisdictions, by state and foreign
governmental authorities. In particular, the Company must
obtain specific clearance or approval from the FDA before it
can market new products or certain modified products in the
United States. With the exception of one product, the
Company has, to date, obtained FDA marketing clearance only
through the 510(k) premarket notification process. Certain
products under development and future product applications,
however, will require approval through the more rigorous
Premarket Approval application ("PMA") process. The process
of obtaining such clearances or approvals can be time
consuming and expensive, and there can be no assurance that
all clearances or approvals sought by the Company will be
granted or that FDA review will not involve delays adversely
affecting the marketing and sale of the Company's products.
The Company is required to adhere to applicable regulations
setting forth current Good Manufacturing Practices ("GMP")
which require that the Company manufacture its products and
maintain its records in a prescribed manner with respect to
manufacturing, testing and control activities. In addition,
the Company is required to comply with FDA requirements for
labeling and promotion of its products. Failure to comply
with applicable federal, state or foreign laws or
regulations could subject the Company to enforcement action,
including product
-23-
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 the Company.
Medical device laws and regulations with similar substantive
and enforcement provisions are also in effect in many of the
foreign countries where the Company does business. Federal,
state and foreign laws and regulations regarding the
manufacture and sale of medical devices are subject to
future changes. No assurance can be given that such changes
will not have a material adverse effect on the Company.
Significant Competition and Continual Technological Change
The markets for medical devices are highly competitive.
The Company currently competes with many companies in the
development and marketing of catheters and related medical
devices. Some of the Company's competitors have access to
greater financial and other resources than the Company.
Furthermore, the markets for medical devices are
characterized by rapid product development and technological
change. The present or future products of the Company could
be rendered obsolete or uneconomical by technological
advances by one or more of the Company's current or future
competitors. The Company's future success will depend upon
its ability to develop new products and technology to remain
competitive with other developers of catheters and related
medical devices. The Company's 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. There can be no
assurance that the Company 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 such products.
Cost Pressures on Medical Technology and Proposed Health
Care Reform
The Company's products are purchased principally by
hospitals, hospital networks and hospital buying groups.
Although the Company's products are used primarily for non-
optional medical procedures, the Company believes 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, which has included and will
continue to include those of the Company. 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
-24-
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. There can be no assurance 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 the Company's 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 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 limit
costs. Implementation of government health care reform and
other private sector efforts to control costs may limit the
price of, or the level at which reimbursement is provided
for, the Company's products. Similar initiatives to limit
the growth of health care costs, including price regulation,
are also under way in several other countries in which the
Company does business. The Company anticipates that
Congress, state legislatures, foreign governments and the
private sector will continue to review and assess
alternative health care delivery and payment systems. The
Company 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 its business. No
assurance can be given that any such reforms will not have a
material adverse effect on the medical device industry in
general, or the Company in particular.
Dependence on Patents and Proprietary Rights
The Company owns numerous U.S. and foreign patents and
has several U.S. and foreign patent applications pending.
The Company also has exclusive license rights to certain
patents held by third parties. These patents relate to
aspects of the technology used in certain of the Company's
products. From time to time, the Company is subject to
legal actions involving patent and other intellectual
property claims. Successful litigation against the Company
regarding its patents or infringement by the Company of the
patent rights of others could have a material adverse effect
on the Company. In addition, there can be no assurance that
pending patent applications will result in issued patents or
that patents issued to or licensed-in by the Company will
not be challenged or circumvented by competitors or found to
be valid or sufficiently broad to protect
-25-
the Company's technology or to provide it with any
competitive advantage. The Company also relies on trade
secrets and proprietary technology that it seeks to protect,
in part, through confidentiality agreements with employees,
consultants and other parties. There can be no assurance
that these agreements will not be breached, that the Company
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 the Company's 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 the Company. Future litigation may be necessary to
enforce patent and other intellectual property rights
belonging to the Company, to protect trade secrets or know-
how owned by the Company or to defend the Company against
claimed infringement of the rights of others and to
determine the scope and validity of the proprietary rights
of the Company and others. Any such litigation could result
in substantial cost to and diversion of effort by the
Company. Adverse determinations in any such litigation
could subject the Company to significant liabilities to
third parties, could require the Company to seek licenses
from third parties and could prevent the Company from
manufacturing, selling or using certain of its products, any
of which could have a material adverse effect on the
Company's business, financial condition and results of
operations.
Risks Associated with International Operations
The Company generates significant sales outside the
United States and is 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,
which could materially adversely impact the success of the
Company's international operations. As its revenues from
its international operations increase, an increasing portion
of the Company's revenues and expenses may be denominated in
currencies other than U.S. dollars, and changes in exchange
rates could have a greater effect on the Company's results
of operations. There can be no assurance that such factors
will not have a material adverse effect on the Company's
future operations and, consequently, on the Company's
business, results of operations and financial condition. In
addition, there can be no assurance that laws or
administrative practices relating to regulation of medical
devices, taxation, foreign exchange or other matters of
countries within which the Company operates will not change.
Any such change could have a material adverse effect on the
Company's business, financial condition and results of
operations.
-26-
Potential Product Liability
The Company's business exposes it to potential product
liability risks, which are inherent in the testing, and
marketing of catheters and related medical devices. The
Company's products are often used in intensive care settings
with seriously ill patients. In addition, many of the
medical devices manufactured and sold by the Company 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 the Company 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 the
Company's products. There can be no assurance that the
product liability insurance maintained by the Company will
be available or sufficient to satisfy all claims made
against it or that the Company 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 the Company's business or reputation or on its
ability to attract and retain customers for its products.
Risks Associated with Derivative Financial Instruments
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. The Company's policy prohibits the use of
derivative instruments for speculative purposes.
Dependence on Key Management
The Company's success depends upon the continued
contributions of key members of its senior management team,
certain of whom have been with the Company since its
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 the business of the Company.
None of these individuals has an employment agreement with
the Company.
-27-