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, 1996
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ____________ to ____________
Commission File Number 0-20212
ARROW INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1969991
--------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 Bernville Road, Reading, Pennsylvania 19605
- ------------------------------------------ --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 378-0131
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
- -
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares outstanding at January 13, 1997
-------- --------------------------------------
Common Stock, No Par Value 23,228,779
ARROW INTERNATIONAL, INC.
Form 10-Q Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at November 30, 1996
and August 31, 1996 3-4
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
Exhibit Index 16
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands)
November 30, August 31,
1996 1996
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,763 $ 4,807
Accounts receivable, net 51,176 50,093
Inventories 45,350 43,509
Prepaid expenses and other 10,472 9,575
Deferred income taxes 2,746 2,709
----------- -------------
Total current assets 117,507 110,693
----------- -------------
Property, plant and equipment:
Total property, plant and equipment 163,118 158,551
Less accumulated depreciation 52,423 49,552
----------- -------------
Property, plant and equipment, net 110,695 108,999
----------- -------------
Other assets:
Goodwill, net 51,042 51,754
Intangible and other assets, net 26,304 27,975
----------- -------------
Total other assets 77,346 79,729
----------- -------------
Total assets $ 305,548 $ 299,421
=========== =============
See accompanying notes to consolidated financial statements
Continued
3
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands)
November 30, August 31,
1996 1996
------------ ------------
(Unaudited)
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 5,156 $ 6,293
Notes payable 27,028 27,708
Accounts payable 5,654 8,078
Accrued liabilities 8,501 6,297
Accrued compensation 5,582 5,493
Accrued income taxes 5,508 1,738
-------------- -------------
Total current liabilities 57,429 55,607
Long-term debt 14,488 15,988
Accrued postretirement benefit obligation 7,686 7,577
Deferred income taxes 137 476
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 45,580 45,580
Retained earnings 190,855 183,502
Less cost of treasury stock:
3,250,034 and 3,249,914 shares
of Common Stock, respectively (8,311) (8,308)
Unearned compensation (415) (469)
Cumulative translation adjustment (856) (532)
Unrealized holding loss on
securities, net of tax (1,045) -
----------- -----------
Total shareholders' equity 225,808 219,773
----------- -----------
Total liabilities and
shareholders' equity $ 305,548 $ 299,421
=========== ===========
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,
1996 1995
---------- ----------
Net sales $ 59,190 $ 54,511
Cost of goods sold 27,405 24,829
---------- ----------
Gross profit 31,785 29,682
Operating expenses:
Research, development and engineering 3,808 3,159
Selling, general and administrative 13,960 13,169
---------- ----------
Operating income 14,017 13,354
---------- ----------
Other expenses (income):
Interest expense, net of amounts capitalized 461 448
Interest income (199) (133)
Other, net 290 (100)
---------- ----------
Other expenses (income), net 552 215
---------- ----------
Income before income taxes 13,465 13,139
Provision for income taxes 5,184 4,861
---------- ----------
Net income $ 8,281 $ 8,278
========== ==========
Net income per common share $ .36 $ .36
========== ==========
Cash dividends per common share $ .04 $ .035
========== ==========
Weighted average shares outstanding 23,228,859 23,231,008
========== ==========
See accompanying notes to consolidated financial statements
5
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All Dollar Amounts in Thousands)
For the Three Months
Ended November 30,
1996 1995
---------- -----------
Cash flows from operating activities:
Net income $ 8,281 $ 8,278
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,871 2,437
Amortization of intangible assets 991 603
Amortization of unearned compensation 51 54
Deferred income taxes (375) 312
Other 506 (234)
Changes in operating assets and liabilities:
Accounts receivable (1,114) (1,555)
Inventories (1,840) (2,282)
Prepaid expenses and other (897) (749)
Accounts payable and accrued liabilities (221) (185)
Accrued compensation 89 87
Accrued income taxes 3,770 2,958
---------- ---------
Total adjustments 3,831 1,447
---------- ---------
Net cash provided by operating activities 12,112 9,724
---------- ---------
Cash flows from investing activities:
Capital expenditures (4,567) (7,859)
Increase in intangible and other assets (344) (1,156)
---------- ---------
Net cash used in investing activities (4,911) (9,015)
---------- ---------
Cash flows from financing activities:
Decrease (increase) in notes payable (678) 1,128
Principal payments of long-term debt (2,638) (2,318)
Dividends paid (929) (813)
---------- ---------
Net cash used in
financing activities (4,245) (2,003)
---------- ---------
Net change in cash and cash equivalents 2,956 (1,294)
Cash and cash equivalents at beginning of year 4,807 9,453
---------- ---------
Cash and cash equivalents at end of period $ 7,763 $ 8,159
========== =========
See accompanying notes to consolidated financial statements
Continued
6
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All Dollar Amounts in Thousands)
For the Three Months
Ended November 30,
1996 1995
-------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 461 $ 448
Income taxes $ 379 $ 397
See accompanying notes to consolidated financial statements
7
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(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. All dollar amounts are presented in thousands,
except per share amounts.
Note 2 - Inventories
Inventories are summarized as follows:
November 30, August 31,
1996 1996
----------- ----------
Finished goods $ 17,531 $ 16,878
Semi-finished goods 11,710 10,010
Work-in-process 6,169 7,107
Raw materials 9,940 9,514
----------- ----------
$ 45,350 $ 43,509
=========== ==========
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
8
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 4 - Related Party Transactions
Certain of the Company's facilities, personnel and services are being utilized
by Arrow Precision Products, Inc. ("Precision"). Precision is related to the
Company through common ownership. The Company charged Precision $110 and $131
for the cost of such utilization during the three months ended November 30,
1996 and 1995, respectively. The Company made purchases from Precision
amounting to $396 and $305 for the three months ended November 30, 1996
and 1995, respectively. In addition, the Company made payments on behalf of
Precision related to certain costs incurred by Precision for which the Company
was reimbursed, amounting to $166 and $204 for the three months ended
November 30, 1996 and 1995, respectively. The Company had a net payable to
Precision amounting to $1 and a net receivable from Precision amounting to
$49 ended November 30, 1996 and 1995, respectively.
9
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, 1996 Compared to Three Months Ended
November 30, 1995
Net sales for the three months ended November 30, 1996 increased 8.6% to
$59.2 million compared with $54.5 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 an increase in unit volume in the
Company's central venous catheter products, including increased shipments of
ARROWg+ard Blue trademark antiseptic surface treated catheter products.
Sales of critical care products increased 10.4% to $49.7 million from $45.0
million in the comparable prior period. Interventional procedure product
sales increased to $9.5 million from $9.2 million, an increase of 3.2% over
the comparable fiscal 1996 period. International sales increased by $2.4
million, or 12.1%, to 37.5% of net sales, excluding royalty income, compared
to 36.5% in the comparable period of fiscal 1996, principally as a result of
increased sales of multi-lumen catheter products.
Gross profit increased 7.1% to $31.2 million in the first quarter of the
current fiscal year compared to $29.7 million in the same period of fiscal 1996.
As a percentage of net sales, gross profit decreased to 53.7% during the three
months ended November 30, 1996 from 54.5% in the comparable prior period
due primarily to a reduction in royalty income and an increase in royalty
expenses included in cost of sales.
Research, development and engineering expenses increased by 20.5% to $3.8
million in the first quarter of the current fiscal year from $3.2 million in
the comparable prior period. As a percentage of net sales, these expenses
increased in the first quarter of fiscal 1997 to 6.4%, compared to 5.8% in the
10
ARROW INTERNATIONAL, INC.
same period in fiscal 1996, primarily as a result of increased spending related
to research, product development, process development and clinical trial
activities. Current research programs include the development of pullback
atherectomy catheters for treating coronary artery disease, microwave ablation
catheters for the treatment of heart arrythmias and a fully implantable Left
Ventricular Assist Device.
Selling, general and administrative expenses increased by 6.0% to $14.0 million
during the first quarter of the current fiscal year from $13.2 million in the
same period of fiscal 1996 and decreased as a percentage of net sales to 23.6%
in the first quarter of fiscal 1997 from 24.2% in the comparable period of
fiscal 1997. The increase was due primarily to additions to the Company's
domestic direct sales force to replace a distributor in the New England area
and an increase in expenses related to the amortization of certain intangible
assets.
Principally due to the above factors, operating income increased in the first
quarter of fiscal 1997 by 5.0% to $14.0 million from $13.3 million in the
comparable prior period.
Other expenses (income), net, increased to $0.5 million during the first quarter
of fiscal 1997 from $0.2 million in the comparable prior period. Other
expenses (income), net, consist principally of interest expense and foreign
exchange gains and losses associated with the Company's direct sales
subsidiaries, which resulted in a net loss in both periods.
As a result of the factors discussed above, income before income taxes
increased during the first quarter of fiscal 1997 by 2.5% to $13.5 million from
$13.1 million in the comparable prior period. For the first quarter of fiscal
1997, and for the remainder of fiscal 1997, the Company's effective income tax
rate was, and is expected to remain, 38.5%, an increase from 37.0% in fiscal
1996, principally as a result of its generating a larger proportion of earnings
in higher-tax jurisdictions.
Net income was $8.3 million in both periods. As a percentage of net sales, net
income represented 14.0% during the three months ended November 30, 1996,
compared to 15.2% in the comparable prior period.
Net income per common share was $.36 for both periods. Weighted average
common shares outstanding decreased to 23,228,859 in the first quarter of
fiscal 1997 from 23,231,008 in the comparable prior period.
11
ARROW INTERNATIONAL, INC.
Liquidity and Capital Resources
For the three months ended November 30, 1996, net cash provided by
operations was $12.1 million, an increase of $2.4 million from the same
period in the prior year. Accounts receivable increased by $1.1 million in the
three months ended November 30, 1996, compared to a $1.6 million increase in the
same period in fiscal 1996. Accounts receivable, measured in average days
sales outstanding during the period, increased to 78 days at November 30, 1996,
from 74 days at November 30, 1995, due principally to an increase in the
collection period for the Company's international sales.
Net cash used in the Company's investing activities decreased to $4.9 million
in the three months ended November 30, 1996 from $9.0 million for the three
months ended November 30, 1995, principally as a result of a decrease in
capital expenditures related to the completion of the construction and equipping
of the Company's new manufacturing and research facility in the Czech Republic,
which became operational in January 1996 and began shipments in the fourth
quarter of fiscal 1996 to support the growing European market.
Financing activities used $4.2 million in the three months ended November 30,
1996, compared to using $2.0 million in the same period in fiscal 1996. This
change resulted principally from a decrease in borrowings under the Company's
revolving credit facility and repayments of long-term debt.
As of November 30, 1996, the Company had U.S. bank credit facilities providing
a total of $55.0 million in available revolving credit for general business
purposes, of which $32.7 million remained unused. In addition, certain of the
Company's foreign subsidiaries have revolving credit facilities totaling the
U.S. dollar equivalent of $9.7 million, of which $5.0 million remained unused as
of November 30, 1996. Combined borrowings under these facilities decreased
$0.7 million and increased $1.2 million during the three months ended November
30, 1996 and 1995, 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.
12
ARROW INTERNATIONAL, INC.
During the three month periods ended November 30, 1996 and 1995, the
percentage of the Company's sales invoiced in currencies other than U.S.
dollars was 26.4% and 26.1%, respectively. As of November 30, 1996,
outstanding foreign currency exchange contracts totaling the U.S. dollar
equivalent of $23.2 million mature at various dates through May 1997. 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.
13
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, 1996.
14
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 13, 1997 By: /s/ John H. Broadbent, Jr.
--------------------------
(signature)
John H. Broadbent, Jr.
Vice President-Finance
and Treasurer (Principal
Financial Officer and
Chief Accounting Officer)
15
EXHIBIT INDEX
Exhibit Description Method of Filing
Number of Exhibit
- ------- ---------- ----------------
27 *Financial Data Schedule EDGAR
99.1 Cautionary Statement for Purposes Page 17 of this report
*Not deemed filed for purposes of Section 11 of the Securities Act of 1933,
Section 18 of the Securities Exchange Act of 1934 and Section 323 of the Trust
Indenture Act of 1939, or otherwise subject to the liabilities of such
sections and not deemed part of any registration statement to which such
exhibit relates.
16
EXHIBIT 99.1
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
From time to time, in both written reports and in oral statements by the
Company's senior management, expectations and other statements are
expressed regarding future performance of the Company. These forward-
looking statements are inherently uncertain and investors must recognize that
events could turn out to be different than such expectations and statements.
Key factors impacting current and future performance are discussed in the
Company's Annual Report on Form 10-K for its fiscal year ended August 31,
1996 and other filings with the Securities and Exchange Commission (the
"Commission"). In addition to such information in the Company's Annual Report
on Form 10-K and its other filings with the Commission, the following risk
factors should be considered in evaluating the Company and its business,
as well as in reviewing forward-looking statements contained in the Company's
periodic reports filed with the Commission and in oral statements made by the
Company's senior management. The Company's actual results could differ
materially from such forward-looking statements due to material risks,
uncertainties and contingencies, including, without limitation, those set forth
below.
STRINGENT GOVERNMENT REGULATION
The Company's products are subject to extensive regulation by the Food
and Drug Administration (the "FDA") and, in some jurisdictions, by state and
foreign governmental authorities. In particular, the Company must obtain
specific clearance or approval from the FDA before it can market new products
or certain modified products in the United States. With the exception of one
product, the Company has, to date, obtained FDA marketing clearance only
through the 510(k) premarket notification process. Certain products under
development and future product applications, however, will require approval
through the more rigorous Premarket Approval application ("PMA") process. The
process of obtaining such clearances or approvals can be time consuming and
expensive, and there can be no assurance that all clearances or approvals
sought by the Company will be granted or that FDA review will not involve
delays adversely affecting the marketing and sale of the Company's products.
The Company is required to adhere to applicable regulations setting forth
current Good Manufacturing Practices ("GMP") which require that the Company
manufacture its products and maintain its records in a prescribed manner with
respect to manufacturing, testing and control activities. In addition, the
Company is required to comply with FDA requirements for labeling and
promotion of its products. Failure to comply with applicable federal, state
or foreign laws or regulations could subject the Company to enforcement
17
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 the Company. Medical device laws and
regulations with similar substantive and enforcement provisions are also in
effect in many of the foreign countries where the Company does business.
Federal, state and foreign laws and regulations regarding the manufacture and
sale of medical devices are subject to future changes. No assurance can be
given that such changes will not have a material adverse effect on the Company.
SIGNIFICANT COMPETITION AND CONTINUAL TECHNOLOGICAL CHANGE
The markets for medical devices are highly competitive. The Company
currently competes with many companies in the development and marketing of
catheters and related medical devices. Some of the Company's competitors
have access to greater financial and other resources than the Company.
Furthermore, the markets for medical devices are characterized by rapid product
development and technological change. The present or future products of the
Company could be rendered obsolete or uneconomical by technological
advances by one or more of the Company's current or future competitors. The
Company's future success will depend upon its ability to develop new products
and technology to remain competitive with other developers of catheters and
related medical devices. The Company's business strategy emphasizes the
continued development and commercialization of new products and the
enhancement of existing products for the critical care and interventional
procedure markets. There can be no assurance that the Company will be able to
continue to successfully develop new products and to enhance existing products,
to manufacture these products in a commercially viable manner, to obtain
required regulatory approvals or to gain satisfactory market acceptance for
such products.
COST PRESSURES ON MEDICAL TECHNOLOGY AND PROPOSED HEALTH CARE REFORM
The Company's products are purchased principally by hospitals, hospital
networks and hospital buying groups. Although the Company's products are
used primarily for non-optional medical procedures, the Company believes that
the overall escalating cost of medical products and services has led and will
continue to lead to increased pressures upon the health care industry to reduce
the cost or usage of certain products and services, which has included and will
continue to include those of the Company. In the United States, these cost
pressures are leading to increased emphasis on the price and cost-effectiveness
of any treatment regimen and medical device. In addition, third party payors,
such as governmental programs, private insurance plans and managed care
plans, which are billed by hospitals for such health care services, are
increasingly negotiating the prices charged for medical products and services
and may deny reimbursement if they determine that a device was not used in
18
accordance with cost-effective treatment methods as determined by the payor,
was experimental, unnecessary or used for an unapproved indication. In
international markets, reimbursement systems vary significantly by country.
Many international markets have government managed health care systems that
control reimbursement for certain medical devices and procedures and, in most
such markets, there also are private insurance systems which impose similar
cost restraints. There can be no assurance that hospital purchasing decisions
or government or private third party reimbursement policies in the United States
or in international markets will not adversely affect the profitability of the
Company's products.
In recent years, several comprehensive health care reform proposals
have been introduced in the U.S. Congress. While none of these proposals
have to date been adopted, the intent of these proposals was, generally, to
expand health care coverage for the uninsured and reduce the rate of growth of
total health care expenditures. In addition, certain states have made
significant changes to their Medicaid programs and have adopted various measures
to limit costs. Implementation of government health care reform and other
private sector efforts to control costs may limit the price of, or the level at
which reimbursement is provided for, the Company's products. Similar
initiatives to limit the growth of health care costs, including price
regulation, are also underway in several other countries in which the Company
does business. The Company anticipates that Congress, state legislatures,
foreign governments and the private sector will continue to review and assess
alternative health care delivery and payment systems. The Company cannot
predict what additional legislation or regulation, if any, relating to the
health care industry may be enacted in the future or what impact the
adoption of any federal, state or foreign health care reform, private
sector reform or market forces may have on its business. No assurance can be
given that any such reforms will not have a material adverse effect on the
medical device industry in general, or the Company in particular.
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS
The Company owns numerous U.S. and foreign patents and has several
U.S. and foreign patent applications pending. The Company also has exclusive
license rights to certain patents held by third parties. These patents relate
to aspects of the technology used in certain of the Company's products. From
time to time, the Company is subject to legal actions involving patent and
other intellectual property claims. Successful litigation against the Company
regarding its patents or infringement by the Company of the patent rights of
others could have a material adverse effect on the Company. In addition,
there can be no assurance that pending patent applications will result in issued
patents or that patents issued to or licensed-in by the Company will not be
challenged or circumvented by competitors or found to be valid or
19
sufficienty broad to protect the Company's technology or to provide it with
any competitive advantage. The Company also relies on trade secrets and
proprietary technology that it seeks to protect, in part, through
confidentiality agreements with employees, consultants and other parties.
There can be no assurance that these agreements will not be breached, that
the Company will have adequate remedies for any breach, that others will not
independently develop substantially equivalent proprietary information or
that third parties will not otherwise gain access to the Company's
trade secrets.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical devices industry. Historically,
litigation has been necessary to enforce certain patent and trademark rights
held by the Company. Future litigation may be necessary to enforce patent and
other intellectual property rights belonging to the Company, to protect trade
secrets or know-how owned by the Company or to defend the Company against
claimed infringement of the rights of others and to determine the scope and
validity of the proprietary rights of the Company and others. Any such
litigation could result in substantial cost to and diversion of effort by the
Company. Adverse determinations in any such litigation could subject the
Company to significant liabilities to third parties, could require the Company
to seek licenses from third parties and could prevent the Company from
manufacturing, selling or using certain of its products, any of which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company generates significant sales outside the United States and is
subject to risks generally associated with international operations, such as
unexpected changes in regulatory requirements, tariffs, customs, duties and
other trade barriers, difficulties in staffing and managing foreign operations,
longer payment cycles, problems in collecting accounts receivable, political
risks, fluctuations in currency exchange rates, foreign exchange controls which
restrict or prohibit repatriation of funds, technology export and import
restrictions or prohibitions, delays from customs brokers or government agencies
and potentially adverse tax consequences resulting from operating in multiple
jurisdictions with different tax laws, which could materially adversely impact
the success of the Company's international operations. As its revenues from
its international operations increase, an increasing portion of the Company's
revenues and expenses are denominated in currencies other than U.S. dollars,
and changes in exchange rates could have a greater effect on the Company's
results of operations. There can be no assurance that such factors will not
have a material adverse effect on the Company's future operations and,
consequently, on the Company's business, results of operations and financial
condition. In addition, there can be no assurance that laws or administrative
practices relating to regulation of medical devices, taxation, foreign exchange
or other matters of countries within which the Company operates will not change.
Any such change could have a material adverse effect on the Company's
business, financial condition and results of operations.
20
POTENTIAL PRODUCT LIABILITY
The Company's business exposes it to potential product liability risks
which are inherent in the testing and marketing of catheters and related
medical devices. The Company's products are often used in intensive care
settings with seriously ill patients. In addition, many of the medical devices
manufactured and sold by the Company are designed to be implanted in the human
body for long periods of time and component failures, manufacturing flaws,
design defects or inadequate disclosure of product-related risks with respect to
these or other products manufactured or sold by the Company could result in an
unsafe condition or injury to, or death of, the patient. The occurrence of such
a problem could result in product liability claims and/or a recall of, or safety
alert relating to, one or more of the Company's products. There can be no
assurance that the product liability insurance maintained by the Company will be
available or sufficient to satisfy all claims made against it or that the
Company will be able to obtain insurance in the future at satisfactory rates or
in adequate amounts. Product liability claims or product recalls in the future,
regardless of their ultimate outcome, could result in costly litigation and
could have a material adverse effect on the Company's business or reputation
or on its ability to attract and retain customers for its products.
RISKS ASSOCIATED WITH DERIVATIVE FINANCIAL INSTRUMENTS
As a partial hedge against adverse fluctuations in exchange rates, the
Company periodically enters into foreign currency exchange contracts with
certain major financial institutions. By their nature, all such contracts
involve risk, including the risk of nonperformance by counterparties.
Accordingly, losses relating to these contracts could have a material adverse
effect upon the Company's business, financial condition and results of
operations. The Company's policy prohibits the use of derivative instruments
for speculative purposes.
DEPENDENCE ON KEY MANAGEMENT
The Company's success depends upon the continued contributions of key
members of its senior management team, certain of whom have been with the
Company since its inception in 1975. Accordingly, loss of the services of
one or more of these key members of management could have a material adverse
effect on the business of the Company. None of these individuals has an
employment agreement with the Company.
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ARROW INTERNATIONAL, INC. FOR THE QUARTER ENDED NOVEMBER
30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> NOV-30-1996
<CASH> 7,763
<SECURITIES> 0
<RECEIVABLES> 51,981
<ALLOWANCES> 805
<INVENTORY> 45,350
<CURRENT-ASSETS> 13,218
<PP&E> 163,118
<DEPRECIATION> 52,423
<TOTAL-ASSETS> 305,548
<CURRENT-LIABILITIES> 57,429
<BONDS> 0
0
0
<COMMON> 45,580
<OTHER-SE> 180,228
<TOTAL-LIABILITY-AND-EQUITY> 305,548
<SALES> 59,190
<TOTAL-REVENUES> 59,190
<CGS> 27,405
<TOTAL-COSTS> 45,173
<OTHER-EXPENSES> 91
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 461
<INCOME-PRETAX> 13,465
<INCOME-TAX> 5,184
<INCOME-CONTINUING> 8,281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,281
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
