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, 1999
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934.
For the transition period from ____________ to ____________
Commission File Number 0-20212
ARROW INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1969991
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 Bernville Road, Reading, Pennsylvania 19605
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(610) 378-0131
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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, 1999
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Common Stock, No Par Value 23,143,843
ARROW INTERNATIONAL, INC.
Form 10-Q Index
Page
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[S] [C]
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at May 31, 1999
and August 31, 1998 3-4
Consolidated Statements of Income 5-6
Consolidated Statements of Cash Flows 7-8
Consolidated Statements of Comprehensive Income 9
Notes to Consolidated Financial Statements 10-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-20
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21-22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
Exhibit Index 25
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
May 31, August 31,
1999 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 8,282 $ 4,652
Accounts receivable, net 71,382 63,872
Inventories 75,879 69,162
Prepaid expenses and other 16,394 13,461
Deferred income taxes 1,844 2,040
---------- ----------
Total current assets 173,781 153,187
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Property, plant and equipment:
Total property, plant and equipment 200,245 186,626
Less accumulated depreciation (84,477) (73,828)
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Property, plant and equipment, net 115,768 112,798
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Other assets:
Goodwill, net 33,675 34,320
Intangible and other assets, net 35,200 20,118
Deferred income taxes 5,338 2,458
---------- ----------
Total other assets 74,213 56,896
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Total assets $ 363,762 $ 322,881
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
Continued
-3-
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, Continued
(In thousands, except per share amounts)
(Unaudited)
May 31, August 31,
1999 1998
---------- ----------
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 1,265 $ 522
Notes payable 47,146 29,730
Accounts payable 9,067 6,677
Cash overdrafts 313 1,395
Accrued liabilities 7,916 7,053
Accrued compensation 4,945 6,877
Accrued income taxes 2,421 2,107
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Total current liabilities 73,073 54,361
Long-term debt 11,185 11,686
Accrued postretirement benefit obligation 9,300 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 246,339 220,217
Less cost of treasury stock:
3,327,978 and 3,254,752 shares
of Common Stock, respectively (9,997) (8,432)
Unearned compensation - (44)
Cumulative translation adjustment (7,081) (6,159)
Unrealized holding loss on
securities, net of tax (4,718) (3,375)
---------- ----------
Total shareholders' equity 270,204 247,868
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Total liabilities and shareholders' equity $ 363,762 $ 322,881
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---------- ----------
See accompanying notes to consolidated financial statements.
-4-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
For the Three Months
Ended May 31,
1999 1998
---------- ----------
Net sales $ 75,865 $ 65,735
Cost of goods sold 35,908 28,499
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Gross profit 39,957 37,236
Operating expenses:
Research, development and engineering 4,988 4,799
Selling, general and administrative 17,813 16,291
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Operating income 17,156 16,146
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Other expenses (income):
Interest expense, net of amounts capitalized 297 261
Interest income (131) (56)
Other, net (942) 394
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Other expenses, net (776) 599
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Income before income taxes 17,932 15,547
Provision for income taxes 6,545 5,830
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Net income $ 11,387 $ 9,717
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---------- ----------
Basic and diluted earnings per common share $ .49 $ .42
---------- ----------
---------- ----------
Cash dividends per common share $ .055 $ .050
---------- ----------
---------- ----------
Weighted average shares outstanding 23,201,489 23,224,422
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
-5-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
For the Nine Months Ended
May 31, May 31,
1999 1998
--------- ---------
Net sales $ 218,224 $ 196,274
Cost of goods sold 102,569 86,190
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Gross profit 115,655 110,084
Operating expenses:
Research, development and engineering 15,739 13,286
Selling, general and administrative 52,037 46,936
Special charge 4,139 -
--------- ---------
Operating income 43,740 49,862
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Other expenses (income):
Interest expense, net of amounts capitalized 1,021 570
Interest income (294) (366)
Other, net (3,972) 790
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Other expenses, net (3,245) 994
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Income before income taxes 46,985 48,868
Provision for income taxes 17,150 18,326
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Net income $ 29,835 $ 30,542
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--------- ---------
Basic and diluted earnings per common share $ 1.29 $ 1.32
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--------- ---------
Cash dividends per common share $ .160 $ .145
--------- ---------
--------- ---------
Weighted average shares outstanding 23,217,815 23,224,960
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See accompanying notes to consolidated financial statements.
-6-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share amounts)
(Unaudited)
For the Nine Months Ended
May 31, May 31,
1999 1998
---------- ----------
Cash flows from operating activities:
Net income $ 29,835 $ 30,542
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 10,817 8,996
Special charge 4,139 -
Amortization of intangible assets and goodwill 2,049 3,092
Amortization of unearned compensation 44 134
Deferred income taxes (2,685) 209
Other 1,207 882
Changes in operating assets and liabilities:
Accounts receivable, net (7,519) (4,953)
Inventories 334 (10,255)
Prepaid expenses and other (3,295) (4,843)
Accounts payable and accrued liabilities 4,072 1,402
Accrued compensation (1,872) (2,785)
Accrued income taxes 245 2,921
--------- ---------
Total adjustments 7,536 (5,200)
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Net cash provided by operating activities 37,371 25,342
Cash flows from investing activities:
Capital expenditures (14,557) (9,413)
Increase (decrease) in intangible and other assets (1,021) (3,746)
Cash paid for businesses acquired, net (27,888) (7,321)
--------- ---------
Net cash used in investing activities (43,466) (20,480)
Cash flows from financing activities:
Increase (decrease) in notes payable 17,962 (578)
Principal payments of long-term debt (997) (1,558)
Increase (decrease) in book overdrafts (1,884) (1,377)
Dividends paid (3,712) (3,251)
Purchase of treasury stock (1,564) (38)
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Net cash provided by (used in)
financing activities 9,805 (6,802)
Effect of exchange rate changes on cash and
cash equivalents (80) (94)
Net change in cash and cash equivalents 3,630 (2,034)
Cash and cash equivalents at beginning of year 4,652 6,276
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Cash and cash equivalents at end of period $ 8,282 $ 4,242
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See accompanying notes to consolidated financial statements.
Continued
-7-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands, except per share amounts)
(Unaudited)
For the Nine Months
Ended May 31,
1999 1998
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Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 1,021 $ 570
Income taxes $ 17,843 $ 15,000
Supplemental schedule of non-cash investing and financing
activities:
During the nine month periods ended May 31, 1999 and 1998,
the Company assumed liabilities in conjunction with the
purchase of certain intangible assets as follows:
Estimated fair value of assets acquired $ 29,110 $ 7,321
Cash paid for assets, net of cash acquired 27,888 7,321
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Liabilities assumed $ 1,222 $ -
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Cash paid for business acquired:
Working capital $ 7,722 $ 1,350
Property, plant and equipment 300 210
Goodwill, intangible assets and in-process
research and development 19,866 5,761
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$ 27,888 $ 7,321
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See accompanying notes to consolidated financial statements
-8-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(Unaudited)
For the Three Months
Ended May 31,
1999 1998
---------- ----------
Net income $ 11,387 $ 9,717
Other comprehensive income (expense):
Currency translation adjustments (1,708) (301)
Unrealized holding loss on securities, net of tax (632) 905
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Other comprehensive income (expense) (2,340) 604
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Total comprehensive income $ 9,047 $ 10,321
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For the Nine Months
Ended May 31,
1999 1998
---------- ----------
Net income $ 29,835 $ 30,542
Other comprehensive income (expense):
Currency translation adjustments (922) (178)
Unrealized holding loss on securities, net of tax (1,343) 172
---------- ----------
Other comprehensive income (expense) (2,265) (6)
---------- ----------
Total comprehensive income $ 27,570 $ 30,536
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---------- ----------
See accompanying notes to consolidated financial statements
-9-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 1 - Basis of Presentation:
These unaudited consolidated financial statements include
all adjustments, consisting only of normal recurring
accruals, which management considers necessary for a fair
presentation of the Company's consolidated financial
position, results of operations, and cash flows for the
interim periods presented. Results for the interim period
are not necessarily indicative of results for the entire
year. Such statements are presented in accordance with the
requirements of Form 10-Q and do not include all disclosures
normally required by generally accepted accounting
principles or those normally made on Form 10-K.
Note 2 - Inventories:
Inventories are summarized as follows:
May 31, August 31,
1998 1998
---------- ----------
Finished goods $ 31,093 $ 23,445
Semi-finished goods 14,584 18,492
Work-in-process 9,638 9,558
Raw materials 20,564 17,667
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$ 75,879 $ 69,162
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Note 3 - Commitments and Contingencies:
The Company is a party to certain legal actions arising in
the ordinary course of its business. Based upon information
presently available to the Company, the Company believes it
has adequate legal defenses or insurance coverage for these
actions and that the ultimate outcome of these actions would
not have a material adverse effect on the Company's
business, financial position or results of operations.
Continued
-10-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 4 - Related Party Transactions:
The Company had a net payable to Arrow Precision Products, Inc.
("Precision"), which is related to the Company through common
ownership, amounting to $37 at May 31, 1998. The Company has no net
balance as of May 31, 1999.
During the three and nine months ended May 31, 1999, the Company
made purchases amounting to $3 and $14, respectively, of products
from Precision Medical Products, Inc., ("PMP"), a former subsidiary
of Precision currently owned by certain former management employees
of Precision, including T. Jerome Holleran, who serves as PMP's
President and Chief Executive Officer and as Secretary and a
Director of the Company. In addition, the Company provided certain
computer-related services to PMP for $3 and $3, respectively.
Note 5 - Business Acquisitions:
On December 1, 1998, the Company continued its expansion into the
cardiac care market by purchasing the assets of the cardiac assist
division of C.R. Bard, Inc., a manufacturer and marketer of intra-
aortic balloon catheters and an intra-aortic balloon pump for
$27,888. The acquisition has been accounted for using the purchase
method of accounting. The results of operations of this business
are included in the Company's Consolidated Financial Statements from
the date of acquisition. The pro forma amounts are not presented as
the aforementioned acquisition had no material effect on the
Company's quarterly or annual results of operations or financial
position.
Continued
-11-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 6 - Special Charge:
In the second quarter 1999, the Company recorded a non-cash pre-tax
special charge of $4,100 ($2,600 after tax or $.11 basic and diluted
per share) related to the purchase of in-process intra-aortic
balloon ("IAB") and pump research and development as part of the
acquisition of the assets of the cardiac assist division of C.R.
Bard, Inc. The IAB and pumps are class 3 life saving medical
devices regulated by the Food and Drug Administration (the "FDA").
In accordance with SFAS No. 2, "Accounting for Research and
Development Costs" and FIN No. 4, "Applicability of SFAS No. 2 to
business combinations accounted for by the Purchase Method", these
costs were charged to expense at the consummation of the
acquisition. The value assigned to purchase IAB and pump in-process
technology was based on a valuation prepared by an independent third-
party appraisal company. Each of the technologies under development
at the date of acquisition was reviewed for technological
feasibility, stage of completeness at the acquisition date, and
scheduled release dates of products employing the technology to
determine whether the technology was complete or under development.
At the acquisition date, the research and development projects were
in various stages of completion ranging from 50% to 80%. The
valuation was based on the estimated cash flows resulting from
commercially viable products discounted to present value using risk
adjusted discount rates ranging from 29% to 32%. The research and
development costs and the net cash inflows from these projects are
expected to commence within a year of the acquisition date; however,
while the Company believes the projects will be completed as
planned, the risk associated with completing development on schedule
cannot be assured. The Company does not anticipate material adverse
changes from historical pricing, margins and expense levels as a
result of the introduction of the new technologies related to the
projects.
Note 7 - Accounting Policies:
Certain prior period information has been reclassified for
comparative purposes.
Note 8 - Accounting Standards Not Yet Adopted:
On June 23, 1999, the Financial Accounting Standards Board approved
issuance of a final statement to defer the effective date of
Statement of Accounting Standards Number 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133).
Consequently, FAS 133 will now become effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The
adoption of this new standard will not have a material effect on the
Company as FAS 133 retains the provisions of FAS 52 "Foreign Currency
Translation" with respect to long-term and short-term intercompany
transactions eliminating the need for special accounting and does not
change the accounting for interest rate swaps.
-12-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
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, 1999 Compared to Three Months Ended May
31, 1998:
Net sales for the three months ended May 31, 1999 increased by $10.1
million, or 15.4%, to $75.8 million from $65.7 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 central
venous catheters and special catheters related primarily to
additional sales provided by the Company's acquisition of Medical
Parameters, Inc. ("MPI") in August 1998. The increase was also due
to increased shipments of intra-aortic balloon ("IAB") products.
Sales of critical care products, including royalty income, increased
13.9% to $61.3 million from $53.8 million in the comparable prior
period, due primarily to increased shipments of central venous and
special catheters. Cardiac care procedure product sales increased
to $14.5 million from $11.9 million, an increase of 22.2% over the
comparable prior period, due primarily to higher sales of IAB
products. International sales increased by $4.2 million, or 18%, to
$27.1 million, representing 35.7% of net sales for the three months
ended May 31, 1999, compared to 34.9% of net sales in the comparable
period of fiscal 1998, principally as a result of higher sales of
IAB and central venous catheter products.
Gross profit increased 7.3% to $40.0 million in the three months
ended May 31, 1999 from $37.2 million in the same period of fiscal
1998. As a percentage of net sales, gross profit decreased to 52.7%
during the three months ended May 31, 1999 from 56.6% in the
comparable period of fiscal 1998, due principally to increased
manufacturing costs related to the Company's IAB products and world-
wide pricing pressures in certain market and product sectors.
-13-
ARROW INTERNATIONAL, INC.
Research, development and engineering expenses increased by 3.9% to
$5.0 million in the three months ended May 31, 1998 from $4.8
million in the comparable prior period. As a percentage of net
sales, these expenses decreased in the third quarter of fiscal 1999
to 6.6%, compared to 7.3% in the same period in fiscal 1998. The
increased spending is primarily a result of higher spending for
increased development, regulatory and clinical trial activity
related to the Company's left ventricular assist device ("LVAD"),
new clinical studies related to the Company's ARROWg+ard(REGISTRATION
MARK) Plus and pullback atherectomy catheter ("PAC") research
programs and additional engineering expense related to the
acquisition of the cardiac assist division of C.R. Bard, Inc.
Selling, general and administrative expenses increased by 9.3% to
$17.8 million in the three months ended May 31, 1999 from $16.3
million in the comparable prior period of fiscal 1998. Selling,
general and administrative expenses decreased as a percentage of net
sales to 23.5% in the third quarter of fiscal 1999 from 24.8% in the
comparable period of fiscal 1998. The increased spending was due
primarily to implementation of direct sales of implantable drug
infusion pumps, additional expenses resulting from the operations of
MPI and additional expense related to the acquisition of the cardiac
assist division of C.R. Bard, Inc.
Principally due to the above factors, operating income increased in
the third quarter of fiscal 1999 by 6.3% to $17.2 million from $16.1
million in the comparable period of fiscal 1998.
Other expenses (income), net, improved to $0.8 million of income
during the third quarter of fiscal 1999 from $0.6 million of expense
in the comparable prior year 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 15.3% to $17.9 million in the third quarter of
fiscal 1999 from $15.5 million in the comparable prior period. For
the third quarter of fiscal 1999, the Company's effective tax rate
was 36.5%, a decrease from 37.5% in fiscal 1998, principally as a
result of the provision for taxes in certain state and international
jurisdictions.
Net income in the third quarter of fiscal 1999 increased by 17.1% to
$11.4 million from $9.7 million in the comparable prior period. As
a percentage of net sales, net income represented 15.0% in the three
months ended May 31, 1999, compared to 14.8% in the comparable
period of fiscal 1998.
Basic and diluted earnings per common share were $.49 in the three
month period ended May 31, 1999, an increase of 17.3%, or $.07 per
share, from $.42 per share in the comparable prior period. Weighted
average common shares outstanding decreased to 23,201,489 in the
third quarter of fiscal 1999 from 23,224,422 in the comparable prior
period, due primarily to the Company's previously announced share
repurchase program.
-14-
ARROW INTERNATIONAL, INC.
Nine Months Ended May 31, 1999 Compared to Nine Months Ended May 31,
1998:
Net sales for the nine months ended May 31, 1999 increased by $22.0
million, or 11.2%, to $218.2 million from $196.2 million in the same
period last year. This increase was due primarily to an increase in
unit sales of the Company's special catheter products resulting from
additional sales provided by the Company's acquisition of MPI in
August 1998, as well as increased shipments of IAB products, and
central venous catheters. Sales of critical care products,
including royalty income, increased 8.5% to $177.0 million from
$163.1 million in the comparable prior year period, due primarily to
increased shipments of special and central venous catheters.
Cardiac care procedure product sales increased to $41.2 million from
$33.1 million, an increase of 24.5% over the comparable prior year
period, due primarily to higher sales of IAB products.
International sales increased by $8.9 million, or 12.9%, to $77.6
million, representing 35.6% of net sales for the nine months ended
May 31, 1999, compared to 36.0% of net sales in the comparable
period of fiscal 1998, principally as a result of increased sales of
central venous catheters and IAB products.
Gross profit increased 5.1% to $115.7 million in the nine months
ended May 31, 1999, compared to $110.1 million in the same period of
fiscal 1998. As a percentage of net sales, gross profit decreased
to 53.0% during the nine months ended May 31, 1999 from 56.1% in the
comparable period of fiscal 1998, due principally to increased
manufacturing costs related to the Company's IAB products and
worldwide pricing pressures in certain market and product sectors.
Research, development and engineering expenses increased by 18.5% to
$15.7 million in the nine months ended May 31, 1999 from $13.3
million in the comparable prior period. As a percentage of net
sales, these expenses increased in the first nine months of fiscal
1999 to 7.2%, compared to 6.8% 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
LVAD, new clinical studies related to the Company's ARROWg+ard
(REGISTRATION MARK) Plus and, PAC research programs and additional
engineering expense related to the acquisition of the cardiac
assist division of C.R. Bard, Inc.
Selling, general and administrative expenses increased by 10.9% to
$52.0 million in the nine months ended May 31, 1999 from $46.9
million in the comparable prior year period and decreased as a
percentage of net sales to 23.8% in the first nine months of fiscal
1999 from 23.9% in the comparable period of fiscal 1998. The
increased spending was due primarily to implementation of direct
sales of implantable drug infusion pumps, additional expenses
resulting from the operations of MPI and additional expense related
to the acquisition of the cardiac assist division of C.R. Bard, Inc.
-15-
ARROW INTERNATIONAL, INC.
In the second quarter of 1999, the Company recorded a non-cash pre-
tax special charge of $4,100 ($2,600 after tax or $.11 basic and
diluted per share) related to the purchase of in-process IAB and
pump research and development as part of the acquisition of the
assets of the cardiac assist division of C.R. Bard, Inc. The IAB
and pumps are class 3 life saving medical devices regulated by the
FDA. In accordance with SFAS No. 2, "Accounting for Research and
Development Costs" and FIN No. 4, "Applicability of SFAS No. 2 to
business combinations accounted for by the Purchase Method", these
costs were charged to expense at the consummation of the
acquisition. The value assigned to purchase IAB and pump in-process
technology was based on a valuation prepared by an independent third-
party appraisal company. Each of the technologies under development
at the date of acquisition was reviewed for technological
feasibility, stage of completeness at the acquisition date, and
scheduled release dates of products employing the technology to
determine whether the technology was complete or under development.
At the acquisition date, the research and development projects were
in various stages of completion ranging from 50% to 80%. The
valuation was based on the estimated cash flows resulting from
commercially viable products discounted to present value using risk
adjusted discount rates ranging from 29% to 32%. The research and
development costs and the net cash inflows from these projects are
expected to commence within a year of the acquisition date; however,
while the Company believes the projects will be completed as
planned, the risk associated with completing development on schedule
cannot be assured. The Company does not anticipate material adverse
changes from historical pricing, margins and expense levels as a
result of the introduction of the new technologies related to the
projects.
Principally due to the above factors, operating income decreased in
the first nine months of fiscal 1999 by 12.3% to $43.7 million from
$49.9 million in the comparable period of fiscal 1998.
Other expenses (income), net, improved to $(3.2) million of income
in the first nine months of fiscal 1999 from $1.0 million of expense
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 decreased in the first nine months of fiscal 1999 by 3.9% to
$47.0 million from $48.9 million in the comparable prior period.
For the first nine months 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 the provision for taxes in certain state
and international jurisdictions.
-16-
ARROW INTERNATIONAL, INC.
Net income decreased 2.3% to $29.8 million in the nine months ended
May 31, 1999 from $30.5 million in the comparable prior period. As
a percentage of net sales, net income represented 13.7% during the
nine months ended May 31, 1999 compared to 15.6% in the comparable
period of fiscal 1998.
Basic and diluted earnings per common share were $1.29 in the nine
month period ended May 31, 1999, a decrease of 2.3%, or $.03 per
share, from $1.32 per share in the comparable prior year period.
Weighted average common shares outstanding decreased to 23,217,815
from 23,224,960 in the comparable prior year period.
Investment in Cardiac Pathways:
The Company owns marketable equity securities of Cardiac Pathways
Corporation ("Cardiac Pathways"), which are carried at fair market
value. The carrying amount at May 31, 1999 was $.625 million. The
unrealized losses, net of tax, which are reported as a separate component
of shareholders' equity, were $5.1 million at May 31, 1999.
Cardiac Pathways has announced that, on July 20, 1999, it will hold a
Special Meeting of Stockholders to, among other things, approve a
private placement to raise, subject to closing conditions, an aggregate
of $31.5 million that Cardiac Pathways states it needs to continue to
operate its business. If the financing does not close, Cardiac Pathways
has stated that it will not have sufficient resources to continue operations.
The Company will continue to monitor the progress of Cardiac Pathways'
financial condition. Based on the outcome of Cardiac Pathways' July 20, 1999
Special Meeting of Stockholders, the Company will determine the amount of
the impairment in the value of its investment in Cardiac Pathways. The
Company will take a charge in its consolidated statements of income in its
fourth fiscal quarter of 1999 for the write down of its investment in Cardiac
Pathways to fair value.
Liquidity and Capital Resources
For the nine months ended May 31, 1999, net cash provided by
operations was $37.4 million, an increase of $12.0 million from the
same period in the prior year. Accounts receivable increased by
$7.5 million in the nine months ended May 31, 1999 compared to a
$5.0 million increase in the same period of fiscal 1998. Accounts
receivable, measured in day sales outstanding during the period, was
90 days at both May 31, 1999 and May 31, 1998. Inventory control
measures resulted in providing cash of $.3 million for the nine
months ended May 31, 1999 whereas, an inventory build-up during the
comparable period of the fiscal year period of 1998 used cash of
$10.3 million.
Net cash used in the Company's investing activities increased to
$43.5 million in the nine months ended May 31, 1999 from $20.5
million in the comparable period of fiscal 1998, principally as a
result of the Company's acquisition of the cardiac assist division
of C.R. Bard, Inc. in December 1998.
-17-
ARROW INTERNATIONAL, INC.
Liquidity and Capital Resources (Continued)
Financing activities provided $9.8 million in the nine month period
ended May 31, 1999, whereas such activities used $6.8 million in the
comparable period of fiscal 1998, changing principally as a result
of increased borrowings under the Company's revolving credit
facilities. In March 1999, the Company announced the open market
purchase of up to 1 million shares of its common stock. This share
repurchase remains in effect and is funded by the Company's
cashflows. As of May 31, 1999, the Company has used an aggregate of
$1.5 million of available cash to fund the repurchase of 71,900
shares of its common stock.
As of May 31, 1999, the Company had U.S. bank credit facilities
providing a total of $65 million in revolving credit, of which $24.8
million remained unused. In addition, certain of the Company's
foreign subsidiaries have revolving credit facilities totaling the
U.S. dollar equivalent of $22.1 million, of which $15.2 million
remained unused as of May 31, 1999. Combined borrowings under these
facilities increased $17.4 million during the nine month period
ended May 31, 1999.
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.
During the nine month periods ended May 31, 1999 and 1998, the
percentage of the Company's sales invoiced in currencies other than
U.S. dollars was 23.7% and 24.6%, respectively. As of May 31, 1999,
outstanding foreign currency exchange contracts totaling the U.S.
dollar equivalent of $11.8 million mature at various dates through
November 30, 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 operating
cash flow and available credit resources will be adequate to repay
current portions of long-term debt, to finance currently planned
capital expenditures, announced acquisitions, stock repurchases on
the open market 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.
-18-
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 are expected to 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.
For the Company's business applications relating to sales order
processing, billing, disbursements, payroll, 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 was moved to the production machines.
U.S. general ledger software is being validated and is expected to
be completed by August 31, 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. Updates to foreign
business systems will be completed by October 1, 1999. 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 were tested and are Year 2000 compliant.
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.
-19-
ARROW INTERNATIONAL, INC.
Year 2000 Readiness (Continued)
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
determined 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 is being determined by using a compliance
survey, which the Company mailed in December 1998. We have received
and evaluated responses from suppliers. Follow up actions are being
taken to obtain responses from all suppliers to ensure compliance.
The Company's unused credit facilities will provide additional
borrowing capacity which 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.
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.
Accounting Standards Not Yet Adopted:
On June 23, 1999, the Financial Accounting Standards Board approved
issuance of a final statement to defer the effective date of
Statement of Accounting Standards Number 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133).
Consequently, FAS 133 will now become effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The
adoption of this new standard will not have a material effect on the
Company as FAS 133 retains the provisions of FAS 52 "Foreign Currency
Translation" with respect to long-term and short-term intercompany
transactions eliminating the need for special accounting and does not
change the accounting for interest rate swaps.
-20-
ARROW INTERNATIONAL, INC.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
Financial Instruments:
During the nine month periods ended May 31, 1999 and 1998, the
percentage of the Company's sales invoiced in currencies other than
U.S. dollars was 23.7% and 24.6%, 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 Company's consolidated statements of
income. Realized gains and losses on these contracts are offset by
the assets, liabilities and transactions being hedged. The Company
does not use financial instruments for trading or speculative
purposes. The Company expects to continue to utilize foreign
currency exchange contracts to manage its exposure, although there
can be no assurance that the Company's efforts in this regard will
be successful.
Operations of the Company are also exposed to, in the normal course
of business, fluctuations in interest rates. This interest rate
risk exposure results from changes in short-term U.S. dollar
interest rates. 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.
-21-
ARROW INTERNATIONAL, INC.
Financial Instruments (Continued):
At May 31, 1999, the Company had forward exchange contracts to sell
foreign currencies which mature at various dates through November
30, 1999. The following table identifies forward exchange contracts
to sell foreign currencies and interest rate swap agreement at May
31, 1999 and August 31, 1998 as follows:
May 31, 1999 August 31, 1998
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
------- ------- ------- -------
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $ 5,431 $ 5,099 $ 7,062 $ 6,404
German marks 1,137 1,069 - -
French francs - - 1,168 1,191
Spanish pesetas 557 516 1,468 1,507
Canadian dollars 1,792 1,832 - -
Greek drachmas 1,269 1,287 1,136 1,203
Mexican peso 825 877 909 977
African rand 786 801 - -
Netherlands guilder - - 498 503
------- ------- ------- -------
$11,797 $11,481 $12,241 $11,785
------- ------- ------- -------
------- ------- ------- -------
Interest rate swap agreement $ 5,000 $ 15 $ 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 $21 for the nine months ended May
31, 1999.
-22-
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 May 31, 1999.
*Not deemed filed for purposes of Section 11 of the Securities Act
of 1933, Section 18 of the Securities Exchange Act of 1934 and
Section 323 of the Trust Indenture Act of 1939 or otherwise subject
to the liabilities of such sections and not deemed part of any
registration statement to which such exhibit relates.
-23-
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, 1999 By: Frederick J. Hirt
--------------------
(signature)
Frederick J. Hirt
Vice President-Finance
and Treasurer (Principal
Financial Officer and
Chief Accounting Officer)
-24-
EXHIBIT INDEX
Exhibit Description
Number of Exhibit Method of Filing
- ------- ----------- ----------------
27 *Financial Data Schedule EDGAR
99.1 Cautionary Statement for Page 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.
-25-
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.
-26-
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 for the
uninsured and reduce the rate of growth of total health care
-27-
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.
-28-
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
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.
-29-
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.
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 are expected to 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.
For the Company's business applications relating to sales order
processing, billing, disbursements, payroll, 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 was moved to the production machines.
U.S. general ledger software is being validated and is expected to
be completed by August 31, 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. Updated to foreign
business systems will be completed by October 1, 1999. 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.
-30-
Year 2000 Readiness (Continued)
The Company's engineering documentation systems which are critical
systems for manufacturing were tested and are Year 2000 compliant.
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
determined 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 is being determined by using a compliance
survey, which the Company mailed in December 1998. We have received
and evaluated responses from suppliers. Follow up actions are being
taken to obtain responses from all suppliers to ensure compliance.
The Company's unused credit facilities will provide additional
borrowing capacity which 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.
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.
-31-