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, 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.)
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, 1999
----- --------------------------------------
Common Stock, No Par Value 23,223,981
ARROW INTERNATIONAL, INC.
Form 10-Q Index
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at November 30,1998
and August 31, 1998 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 9-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17-18
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
(All Dollar Amounts in Thousands, Except Share Amounts)
November 30, August 31,
1998 1998
----------- -----------
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,066 $ 4,652
Accounts receivable, net 64,888 63,872
Inventories 74,196 70,592
Prepaid expenses and other 13,347 13,461
Deferred income taxes 2,040 2,040
---------- ----------
Total current assets 163,537 154,617
---------- ----------
Property, plant and equipment:
Total property plant
and equipment 188,998 184,121
Less accumulated depreciation (76,191) (72,753)
---------- ----------
112,807 111,368
---------- ----------
Goodwill, net 34,806 34,320
Intangible and other assets, net 19,227 20,118
Deferred income taxes 2,629 2,458
---------- ----------
Total other assets 56,662 56,896
---------- ----------
Total assets $ 333,006 $ 322,881
========== ==========
See accompanying notes to consolidated financial statements
Continued
3
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands, Except Share Amounts)
November 30, August 31,
1998 1998
------------ ----------
(Unaudited) (Unaudited)
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 620 $ 522
Notes payable 24,778 29,730
Accounts payable 5,537 6,677
Cash overdrafts 1,475 1,395
Accrued liabilities 8,780 7,053
Accrued compensation 6,585 6,877
Accrued income taxes 5,134 2,107
----------- ----------
Total current liabilities 52,909 54,361
Long-term debt 12,402 11,686
Accrued postretirement benefit obligation 9,053 8,966
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 229,200 220,217
Less treasury stock at cost:
3,254,832 and 3,254,752 shares,
respectively (8,434) (8,432)
Cumulative translation adjustment (4,151) (6,159)
Unearned compensation - (44)
Unrealized holding loss on
securities, net of tax (3,634) (3,375)
---------- ----------
Total shareholders' equity 258,642 247,868
---------- ----------
Total liabilities and
shareholders' equity $ 333,006 $ 322,881
========== ==========
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 November 30,
1998 1997
--------- ---------
Net sales $ 68,085 $ 63,769
Cost of goods sold 31,036 27,860
--------- ---------
Gross profit 37,049 35,909
Operating expenses:
Research, development and engineering 5,311 4,158
Selling, general and administrative 16,855 15,295
-------- ---------
Operating income 14,883 16,456
Other expenses (income):
Interest expense, net of amounts
capitalized 222 116
Interest income (91) (186)
Other, net (1,223) 248
-------- ---------
Other expenses (income), net (1,092) 178
-------- ---------
Income before income taxes 15,975 16,278
Provision for income taxes 5,831 6,104
-------- ---------
Net income $ 10,144 $ 10,174
======== =========
Basic and diluted earnings per
common share $ .44 $ .44
========== ==========
Cash dividends per common share $ .05 $ .05
========== ==========
Weighted average shares outstanding 23,224,780 23,228,859
========== ==========
See accompanying notes to consolidated financial statements
5
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
For the Three Months
Ended November 30,
1998 1997
--------- ---------
Cash flows from operating activities:
Net income $ 10,144 $ 10,174
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,183 3,255
Amortization of intangible assets
and goodwill 763 1,027
Amortization of unearned compensation 44 44
Deferred income taxes (171) (193)
Other 252 262
Changes in operating assets and liabilities:
Accounts receivable 1,125 (1,387)
Inventories (1,939) 1,504
Prepaid expenses and other 45 (1,812)
Accounts payable and accrued liabilities (2,331) (2,244)
Accrued compensation (320) (2,523)
Accrued income taxes 3,164 4,546
-------- --------
Total adjustments 3,815 2,479
-------- --------
Net cash provided by operating
activities 13,959 12,653
-------- --------
Cash flows from investing activities:
Capital expenditures (3,719) (1,690)
Increase (decrease) in intangible
and other assets 416 (2,377)
Cash paid for businesses acquired, net - (7,316)
-------- --------
Net cash used in investing activities (3,303) (11,383)
-------- --------
Cash flows from financing activities:
Increase (decrease) in notes payable (4,931) 343
Principal payments of long-term debt (461) (228)
Increase (decrease) in book overdrafts 80 (2,142)
Dividends paid (1,161) (1,045)
Purchase of treasury stock (2) -
-------- --------
Net cash used in financing activities (6,475) (3,072)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents 233 (43)
Net change in cash and cash equivalents 4,414 (1,845)
Cash and cash equivalents at beginning
of year 4,652 6,276
-------- --------
Cash and cash equivalents at end of
period $ 9,066 $ 4,431
======== ========
See accompanying notes to consolidated financial statements
Continued
6
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
For the Three Months
Ended November 30,
1998 1997
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 222 $ 116
Income taxes $ 2,829 $ 1,237
See accompanying notes to consolidated financial statements
7
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
For the Three Months
Ended November 30,
1998 1997
--------- --------
Net income $ 10,144 $ 10,174
Other comprehensive income (expense):
Currency translation adjustments 2,008 (111)
Unrealized holding loss on
securities, net of tax (259) (272)
--------- --------
Other comprehensive income (expense) 1,749 (383)
--------- --------
Total comprehensive income $ 11,893 $ 9,791
========= ========
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 periods
are not necessarily indicative of results for the entire
year.
Note 2 - Inventories
Inventories are summarized as follows:
November 30, August 31,
1998 1998
----------- ----------
Finished goods $ 26,105 $ 24,875
Semi-finished goods 18,379 18,492
Work-in-process 9,849 9,558
Raw materials 19,863 17,667
----------- ----------
$ 74,196 $ 70,592
=========== ==========
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)
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. The Company had a net receivable from Precision
amounting to $375 at November 30, 1998.
During the three months ended November 30, 1997, the Company
made payments on behalf of Precision in the amount of $21,
relating to activities of Precision prior to August 29,
1997, for which reimbursement was offset by credits of $37
issued by the Company to Precision against previous charges
for utilization of certain of the Company's facilities,
personnel and services during the twelve month period ended
August 29, 1997. The Company made no purchases from
Precision for the three month period ending November 30,
1997. The Company had a net receivable from Precision
amounting to $221 at November 30, 1997.
During the three months ended November 30, 1998, the Company
made purchases amounting to $10 products from Precision
Medical Products, Inc., ("PMP"), a company owned by
certain former management employees of Arrow Precision
Products, Inc. including T. Jerome Holleran, who serves as
PMP's President and Chief Executive Officer. In addition,
the Company provided certain computer related services to
PMP for $3.
Note 5 - Accounting Policies
Cash Flows
The effect of exchange rate changes on cash and cash
equivalents have been reclassified and stated as a separate
category in the Company's Consolidated Statements of Cash
Flows for the three months ended November 30, 1998. Prior
periods have been restated to reflect this change.
Comprehensive Income
Effective September 1, 1998, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income."
Continued
10
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 5 - Accounting Policies (Continued)
Comprehensive income consists of net income and other gains
and losses effecting shareowners' equity which, under
generally accepted accounting principles, are excluded from
net income. For the Company, such items consist primarily
of foreign currency translation gains and losses and
unrealized gains and losses on marketable equity
investments.
Computer Software Costs
Effective September 1, 1998, the Company adopted "Statement
of Position (SOP) 98-1", "Accounting for the Costs of
Computer Software Development or Obtained for Internal Use."
Total cost capitalized under the new policy which would
otherwise have been expensed were not material to the
financial results or financial position of the Company.
Note 6 - Subsequent Events
On December 1, 1998, the Company completed its acquisition
of the previously announced agreement to purchase the global
intra-aortic balloon catheter and pump business of C.R.
Bard, Inc. The Company intends to take a pre-tax charge to
income of approximately $7 million in the second fiscal
quarter ending February 28, 1999 related to acquired in-
process research and development. The after tax charge will
be approximately $4.5 million or $.19 per basic and diluted
earnings per common share. The Company's estimates of the
amount of these charges may be modified as a result of the
Company's analysis of such acquired in-process research and
development, which has not yet been completed.
11
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, 1998 Compared to Three
Months Ended November 30, 1997
Net sales for the first quarter of the 1999 fiscal year
ended November 30, 1998 increased 6.8% to $68.1 million,
compared with $63.8 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.
Sales of critical care products, excluding royalty income,
increased 5.8% to $57.6 million from $54.4 million in the
comparable prior period due primarily to additional sales
provided by Medical Parameters, Inc. ("MPI"), a company
acquired in the fourth quarter of fiscal 1998, and increased
unit shipments of the percutaneous thrombolytic devices
("PTDs"). Sales of cardiac care products increased to $10.5
million from $9.2 million, an increase of 13.9% from the
comparable fiscal 1998 period, principally as a result of
increased sales of intra-aortic balloon ("IAB") pump and
catheter products. International sales increased by 2.1% to
$23.5 million from $23.0 million in the same prior year
period and represented 34.4% of net sales, excluding royalty
income, compared to 36.1% in the comparable fiscal 1998
period, principally as a result of increased sales of 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, reduced net
sales for the quarter by $0.4 million.
Gross profit increased 3.2% to $37.0 million in the first
quarter of the current fiscal year compared to $35.9 million
in the same period of fiscal 1998. As a percentage of net
sales, gross profit decreased to 54.4% during the three
months ended November 30, 1998 from 56.3% in the comparable
prior year period, due to a less profitable product and
distribution mix. Another factor was higher manufacturing
costs related to manufacturing IAB pumps.
12
ARROW INTERNATIONAL, INC.
Research, development and engineering expenses increased by
27.7% to $5.3 million in the first quarter of the current
fiscal year from $4.2 million in the comparable prior year
period. As a percentage of net sales, these expenses
increased in the first quarter of fiscal 1999 to 7.8%,
compared to 6.5% in the same period in fiscal 1998,
primarily as a result of higher spending for increased
development, regulatory and clinical trial activity related
to the Company's Left Ventricular Assist Device ("LVAD") and
new clinical studies related to the Company's ARROWg+ard
REGISTERED TRADEMARK Plus and Pullback Atherectomy Catheter
("PAC") research programs.
Selling, general and administrative expenses increased by
10.2% to $16.9 million during the first quarter of the
current fiscal year from $15.3 million in the same period of
fiscal 1998 and increased as a percentage of net sales to
24.8% in the first quarter of fiscal 1999 from 24.0% in the
comparable period of fiscal 1998. The increase was due
primarily to higher U.S. sales and marketing expenses,
increased expenses to implement direct sales of implantable
drug infusion pumps and additional expenses related to the
acquisition of MPI.
Principally due to the above factors, operating income
decreased in the first quarter of fiscal 1999 by 9.6% to
$14.9 million from $16.5 million in the comparable prior
period.
Other expenses (income), net, improved to $(1.1) million
during the first quarter of fiscal 1999 from $0.2 million 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
1999 by 1.9% to $16.0 million from $16.3 million in the
comparable prior year period. For the first quarter of
fiscal 1999, the Company's effective income tax rate was
36.5%, a decrease from 37.5% in fiscal 1998, principally as
a result of a reduction in tax accruals for certain state
and international jurisdictions.
Net income decreased 0.3% to $10.1 million from $10.2
million in the comparable fiscal 1998 period. As a
percentage of net sales, net income represented 14.8% during
the three months ended November 30, 1998, compared to 16.0%
in the comparable prior year period.
Basic and diluted earnings per common share was $.44 in both
the first quarters of fiscal 1999 and 1998. Weighted
average common shares outstanding decreased to 23,224,780 in
the first quarter of fiscal 1999 from 23,225,853 in the
comparable prior year period.
13
ARROW INTERNATIONAL, INC.
Liquidity and Capital Resources
For the three months ended November 30, 1998, net cash
provided by operations was $14.0 million. The increase of
$1.3 million from the same period in the prior year was due
to changes in operating assets and liabilities. Accounts
receivable in U.S. dollars increased by $1.0 million in the three
months ended November 30, 1998, compared to a $1.1 million
increase in the same period in fiscal 1998. Accounts
receivable, measured in average days sales outstanding
during the period, was 86 days at November 30, 1998 and 87
days at November 30, 1997.
Net cash used in the Company's investing activities
decreased to $3.3 million in the three months ended November
30, 1998 from $11.4 million for the three months ended
November 30, 1997. The higher amount of net cash used
during the three months ended November 30, 1997 reflects the
acquisition in November 1997 of certain assets of the
Cardiac Assist Division of Boston Scientific Corporation.
Financing activities used $6.5 million in the three months
ended November 30, 1998, compared to using $3.1 million in
the same period in fiscal 1998. This change resulted
principally from an increase in repayments under the
Company's revolving credit facilities during the three
months ended November 30, 1998 compared to the same period
during the prior fiscal year.
As of November 30, 1998, the Company had U.S. bank credit
facilities providing a total of $75.0 million in available
revolving credit for general business purposes, of which
$57.3 million remained unused. In addition, certain of the
Company's foreign subsidiaries had revolving credit
facilities totaling the U.S. dollar equivalent of $12.5
million, of which $5.4 million remained unused as of
November 30, 1998. Combined borrowings under these
facilities decreased $5.0 million and increased $0.4 million
during the three months ended November 30, 1998 and 1997,
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.
During the three month periods ended November 30, 1998 and
1997, the percentage of the Company's sales invoiced in
currencies other than U.S. dollars
14
ARROW INTERNATIONAL, INC.
was 23.0% and 25.6%, respectively. As of November 30, 1998,
outstanding foreign currency exchange contracts totaling the
U.S. dollar equivalent of $9.1 million mature at various
dates through March 1999. 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.
Year 2000 Readiness
The Company has actively addressed the Year 2000 problem as
it relates to its business operations and regulation by the
FDA. This disclosure describes the Company's progress
toward its objective of ensuring that the Company's business
systems will operate satisfactorily on or after January 1,
2000.
The Company's Central Venous Catheters and other catheter
products are unaffected by the Year 2000 problem. Early in
1998, the Company responded to the FDA concerning the effect
of the Year 2000 problem on its intra-aortic balloon pumps.
The software in the more recent models of the pumps has
taken the change of century issues into account. The
operating range for the clock calendar in these pumps spans
a 100 year period from the years 1988 through 2087. The
clock calendar on certain older models advances as high as
1999. However, none of the pumps depend on the year
information for any calculations or in communicating with
other electronic devices, and all of these pumps will
function as intended or expected, regardless of the date.
Customers requesting certifications are provided with
specific pump model numbers that have or do not have the
updated clock calendars.
The Company's major Year 2000 concerns relate to business
systems that support the continuity of its business
operations and the delivery of products and support services
to its customers.
15
ARROW INTERNATIONAL, INC.
Year 2000 Readiness (Continued)
For the Company's business applications relating to sales
order processing, billing, disbursements, marketing and
manufacturing management, the necessary software code
modifications have been completed in the development version
of the applications. Modified versions were tested by
advancing dates beyond December 31, 1999. The validated
software will then be moved to the production machines.
U.S. payroll and general ledger software will be tested and
validated in the above manner in the spring of 1999. The
cost of the Company's software upgrades is estimated to be
approximately $30,000 for all U.S. systems and $120,000 for
all foreign systems. Internal resources devoted to these
efforts are estimated at 500 man-days. In the event that
the production systems malfunction due to the change to the
Year 2000, the software and data will be moved back to the
machines on which the validation was done so that business
processes can continue.
The Company's engineering documentation systems which are
critical systems for manufacturing are planned to be tested
and Year 2000 compliant by the spring of 1999.
The Company's PC systems were upgraded in fiscal 1998 at a
cost of $700,000. An estimated $500,000 will be spent in
fiscal 1999 to upgrade servers and replace the e-mail
system.
The Company's computer controlled equipment includes
programmable controllers on production equipment and systems
for time and attendance recording, building management, life
safety, security, elevators, air compressors and high purity
water. For equipment or systems controlled by computer
chips or programs, the Company has contacted the
manufacturer to determine that these systems or equipment
are Year 2000 compliant.
The status of Year 2000 compliance by key suppliers of
products and services to the Company will be determined by
using a compliance survey, which the Company mailed in
December 1998. We have received preliminary responses from
suppliers, which we are currently evaluating. Follow up
actions will be taken to ensure responses from all suppliers
and also to ensure compliance.
The Company increased its available domestic revolving
credit facility to $75 million in October 1998. This
additional borrowing capacity could be utilized to support
the Company's cash flow requirements in the event that
health care providers are unable to pay amounts owed to the
Company on a timely basis due to system malfunctions related
to the Year 2000 change.
16
ARROW INTERNATIONAL, INC.
Year 2000 Readiness (Continued)
If the Company is able to fulfill its plans to secure its
business systems as described above, then any adverse Year
2000 effects will arise from circumstances outside the
Company's control. Because such circumstances can not be
reasonably anticipated at this time, the Company has not
developed a Year 2000 worst case scenario for disclosure.
While the Company believes that it is adequately addressing
the Year 2000 problem, there can be no assurance that the
costs and liabilities of the Year 2000 problem will not
materially adversely affect its business, financial
condition and results of operations.
European Union Conversion to Euro
The Company has proactively considered issues related to
conversion by eleven member states of the European Union to
a common currency, the "Euro", beginning on January 1, 1999.
For business applications relating to sales order
processing, billing and payments the necessary software code
modifications to address the triangulation requirements of
the conversion are in process. The cost of such
modifications is approximately $50,000. Pricing of the
Company's products in the European Union generally is market
driven. As such, the Company is unable to determine at this
time whether or not the Euro conversion will have any impact
on product pricing or contractual arrangements with health
care service providers.
Item 3. Financial Instruments:
During the three months period ended November 30, 1998 and
1997, the percentage of the Company's sales invoiced in
currencies other than U.S. dollars was 23.0% and 25.6%,
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 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.
17
ARROW INTERNATIONAL, INC.
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. In an effort to manage
interest rate exposure. In April 1998, the Company entered
into an interest rate swap agreement to reduce the impact of
its floating rate debt. The swap agreement exchanges
floating rates for fixed interest payments over the life of
the agreement.
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, 1998, the Company had forward exchange
contracts to sell foreign currencies which mature at various
dates through March 1999. The following table identifies
forward exchange contracts to sell foreign currencies and
interest rate swap agreement at November 30, 1998 and August 31, 1998
as follows:
November 30, 1998 August 31, 1998
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
--------- -------- --------- --------
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $ 3,095 $ 3,249 $ 7,062 $ 6,404
German marks - - - -
French francs 1,270 1,277 1,168 1,191
Spanish pesetas 1,552 1,561 1,468 1,507
Canadian dollars 232 228 - -
Greek drachmas 1,367 1,407 1,136 1,203
Mexican peso 560 601 909 977
African rand 321 352 - -
Netherlands guilder 729 733 498 503
--------- -------- --------- --------
$ 9,126 $ 9,408 $ 12,241 $ 11,785
========= ======== ========= ========
Interest rate swap agreement $ 5,000 $ (116) $ 5,000 $ (77)
========= ======== ========= ========
In 1998, the Company entered into an interest rate swap to
reduce the impact of its floating rate debt. The swap
agreement allows the Company to exchange floating rates for
fixed interest payments over the life of the agreement. The
differential is accrued as interest rates change and is
recorded as interest expense. The agreement expires in May
2003, but allows for early termination. The effect of the
agreement is to limit interest rate exposure to 5.62% on
$5.0 million of its revolving credit. As a result of the
swap agreement interest expense was increased by $3.2 for
the three months ended November 30, 1998.
18
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, 1998.
*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 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.
19
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, 1999 By: /s/ Frederick J. Hirt
----------------------
(signature)
Frederick J. Hirt
Vice President-Finance
and Treasurer (Principal
Financial Officer and
Chief Accounting Officer)
20
EXHIBIT INDEX
Exhibit Description
Number of Exhibit Method of Filing
- ------- ----------- ----------------
27 *Financial Data Schedule EDGAR
99.1 Cautionary Statement for Page 22-27 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.
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, 1998 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 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 that such changes will not
have a material adverse effect on our business, financial
condition and results of operations.
22
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 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 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
23
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 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 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 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.
24
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 that
such factors will not have a material adverse effect on our
business, financial condition and results of operations. In
addition, we cannot assure 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 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.
Risks Associated with Year 2000
We are actively addressing the Year 2000 problem as it
relates to our business operations and regulation by the FDA.
The following disclosure describes our progress toward our
objective of ensuring that our business systems will operate
satisfactorily on or after January 1, 2000.
Our Central Venous Catheters and other catheter products are
unaffected by the Year 2000 problem. Early in 1998, we responded
to the FDA concerning the effect of the Year 2000 problem on our
Intra-Aortic Balloon Pumps (IABPs). The software in the more
recent models of our IABPs has taken the change of century issues
into account. The operating range for the clock calendar in
these IABPs spans a 100 year period from the years 1988 through
2087. The clock calendar on certain older models advances as
high as 1999. However, none of our IABPs depend on the year
information for any calculations or in communicating with other
electronic devices and will function as intended or expected,
regardless of the date. We provide our customers requesting
certifications with specific IABP model numbers that have or do
not have the updated clock calendars.
Therefore, our major Year 2000 concerns relate to business
systems that support the continuity of our business operations
and the delivery of products and support services to our
customers.
For business applications relating to sales order
processing, billing, disbursements, marketing and manufacturing
management, we have completed the necessary software code
modifications in the development version of the applications. We
tested the modified versions by advancing the date beyond
December 31, 1999. The validated software will then be moved to
our production machines. We plan to test and validate our U.S.
payroll and general ledger systems in the above manner in the
spring of 1999. We estimate our cost of software upgrades to be
approximately $30,000 for all U.S. systems and $120,000 for
foreign systems. Our internal resources devoted to these efforts
are estimated at 500 man-days. In the event that our production
systems malfunction due to the change to the
26
year 2000, we plan to move the affected software and data back to
the machines on which validation was completed so that our
business processes can continue.
We plan to test and make Year 2000 compliant our engineering
documentation systems which are critical for our manufacturing
operations by the spring of 1999.
We upgraded our personal computer systems in fiscal 1998 at
a cost of $700,000. We estimate spending an additional $500,000
in fiscal 1999 to upgrade our servers and replace our e-mail
system.
Our computer controlled equipment includes programmable
controllers on production equipment and systems for time and
attendance recording, building management, life safety, security,
elevators, air compressors and high purity water. For equipment
or systems controlled by computer chips or programs, we plan to
contact the manufacturer to determine that these systems or
equipment are Year 2000 compliant.
The status of Year 2000 compliance by key suppliers of
products and services to the Company will be determined by using
a compliance survey, which the Company mailed in December 1998.
We have received preliminary responses from suppliers, which we
are currently evaluating. Follow up actions will be taken to
ensure responses from all suppliers and also to ensure
compliance.
We increased our available domestic revolving credit
facility to $75 million in October 1998. This additional
borrowing capacity could be utilized to support our cash flow
requirements in the event that health care providers are unable
to pay amounts owed to us on a timely basis due to system
malfunctions related to the Year 2000 change.
If we are able to fulfill our plans to secure our business
systems as described above, then any adverse Year 2000 effects we
may experience will arise from circumstances outside our control.
Because we cannot reasonably anticipate such circumstances at
this time, we have not developed a Year 2000 worst case scenario.
While we believe that we are adequately addressing the Year 2000
problem, we cannot assure that the cost and liabilities
associated with the Year 2000 problem will not materially
adversely impact our business, financial condition and results of
operations.
27