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, 1997
or
( ) Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
For the transition period from ____________ to ____________
Commission File Number 0-20212
ARROW INTERNATIONAL, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1969991
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 Bernville Road, Reading, Pennsylvania 19605
- ------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(610) 378-0131
--------------
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
-- --
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Class Shares outstanding at January 13, 1998
----- --------------------------------------
Common Stock, No Par Value 23,225,726
<PAGE>
ARROW INTERNATIONAL, INC.
Form 10-Q Index
Page
<TABLE>
<CAPTION> ----
<C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets at November 30,1997
and August 31, 1997 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
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
November 30, August 31,
1997 1997
------------ ----------
(Unaudited)
<C> <C>
<S>
ASSETS
Current assets:
Cash and cash equivalents $ 4,431 $ 6,276
Accounts receivable, net 61,860 60,801
Inventories 59,777 57,334
Prepaid expenses and other 10,938 8,729
Deferred income taxes 3,103 2,833
---------- ----------
Total current assets 140,109 135,973
---------- ----------
Property, plant and equipment:
Total property, plant and equipment 172,395 171,067
Less accumulated depreciation (63,690) (60,474)
---------- ----------
Property, plant and equipment, net 108,705 110,593
---------- ----------
Other assets:
Goodwill, net 48,159 48,720
Intangible and other assets, net 33,021 24,430
Deferred income taxes 581 657
---------- ----------
Total other assets 81,761 73,807
---------- ----------
Total assets $ 330,575 $ 320,373
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
Continued
3
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
November 30, August 31,
1997 1997
----------- ----------
(Unaudited)
<C> <C>
<S>
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 2,317 $ 2,675
Notes payable 22,361 21,978
Accounts payable 7,126 9,983
Accrued liabilities 8,867 6,856
Accrued compensation 7,426 9,945
Accrued income taxes 7,642 3,076
----------- -----------
Total current liabilities 55,739 54,513
Long-term debt 12,141 12,043
Accrued postretirement benefit obligation 7,989 7,900
SHAREHOLDERS' EQUITY
Preferred Stock, no par value;
5,000,000 shares authorized;
none issued - -
Common Stock, no par value;
50,000,000 shares authorized;
issued 26,478,813 shares 45,603 45,603
Retained earnings 225,302 216,173
Less cost of treasury stock:
3,253,087 and 3,252,687 shares
of Common Stock, respectively (8,382) (8,374)
Unearned compensation (188) (239)
Cumulative translation adjustment (5,199) (5,088)
Unrealized holding loss on
securities, net of tax (2,430) (2,158)
---------- ----------
Total shareholders' equity 254,706 245,917
---------- ----------
Total liabilities and
shareholders' equity $ 330,575 $ 320,373
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months
Ended November 30,
1997 1996
---------- ----------
<C> <C>
<S>
Net sales $ 63,769 $ 59,190
Cost of goods sold 27,860 27,405
---------- ----------
Gross profit 35,909 31,785
Operating expenses:
Research, development and engineering 4,158 3,808
Selling, general and administrative 15,295 13,960
---------- ----------
Operating income 16,456 14,017
---------- ----------
Other expenses (income):
Interest expense, net of amounts capitalized 116 461
Interest income (186) (199)
Other, net 248 290
---------- ----------
Other expenses (income), net 178 552
---------- ----------
Income before income taxes 16,278 13,465
Provision for income taxes 6,104 5,184
---------- ----------
Net income $ 10,174 $ 8,281
========== ==========
Net income per common share $ .44 $ .36
========== ==========
Cash dividends per common share $ .05 $ .04
========== ==========
Weighted average shares outstanding 23,225,853 23,228,859
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
For the Three Months
Ended November 30,
1997 1996
-------- --------
<C> <C>
<S>
Cash flows from operating activities:
Net income $ 10,174 $ 8,281
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,216 2,871
Amortization of intangible assets 1,027 991
Amortization of unearned compensation 44 51
Deferred income taxes (193) (375)
Other 152 506
Changes in operating assets and liabilities:
Accounts receivable (1,060) (1,114)
Inventories (2,443) (1,840)
Prepaid expenses and other (2,209) (897)
Accounts payable and accrued liabilities (847) (221)
Accrued compensation (2,519) 89
Accrued income taxes 4,566 3,770
-------- --------
Total adjustments (266) 3,831
-------- --------
Net cash provided by operating activities 9,908 12,112
-------- --------
Cash flows from investing activities:
Capital expenditures (1,322) (4,567)
Increase in intangible and other assets (2,193) (344)
Cash paid for businesses acquired (7,316) -
-------- --------
Net cash used in investing activities (10,831) (4,911)
-------- --------
Cash flows from financing activities:
Increase (decrease) in notes payable 384 (678)
Principal payments of long-term debt (261) (2,638)
Dividends paid (1,045) (929)
-------- --------
Net cash used in
financing activities (922) (4,245)
-------- --------
Net change in cash and cash equivalents (1,845) 2,956
Cash and cash equivalents at beginning of year 6,276 4,807
-------- --------
Cash and cash equivalents at end of period $ 4,431 $ 7,763
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
Continued
6
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
For the Three Months
Ended November 30,
1997 1996
-------- --------
<C> <C>
<S>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 116 $ 461
Income taxes $ 1,237 $ 379
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
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 periods
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:
<TABLE>
<CAPTION>
November 30, August 31,
1997 1997
----------- ----------
<C> <C>
<S>
Finished goods $ 22,563 $ 20,718
Semi-finished goods 14,625 13,906
Work-in-process 7,703 9,900
Raw materials 14,886 12,810
----------- ----------
$ 59,777 $ 57,334
=========== ==========
</TABLE>
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
<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 4 - Related Party Transactions
During fiscal 1997, certain of the Company facilities,
personnel and services were utilized by Arrow Precision
Products, Inc. ("Precision"). Precision is related to the
Company through common ownership. Effective August 29,
1997, such utilization ended when Precision Medical
Products, Inc., the wholly owned and remaining operating
subsidiary of Precision, was acquired by a company formed by
certain management employees of Precision.
During the three months ended November 30, 1997, the Company
made payments on behalf of Precision in the amount of $21,
relating to activities of Precision prior to August 29,
1997, for which reimbursement was offset by credits of $37
issued by the Company to Precision against previous charges
for utilization of certain of the Company's facilities,
personnel and services during the twelve month period ended
August 29, 1997. The Company made no purchases from
Precision for the three month period ending November 30,
1997. The Company had a net receivable from Precision
amounting to $221 at November 30, 1997.
The Company charged Precision $110 for certain facilities,
personnel and services utilized by Precision during the
three months ended November 30, 1996. The Company made
purchases from Precision amounting to $396 for the three
months ended November 30, 1996. 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 for the three months ended
November 30, 1996. The Company had a net receivable from
Precision amounting to $1 at November 30, 1996.
Note 5 - Adoption of New Accounting Standards
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (FAS 128). FAS 128 is designed to
improve the Earnings Per Share ("EPS") information in
financial statements by simplifying the existing
computational guidelines (i.e., APB Opinion No. 15,
"Earnings Per Share"), revising the disclosure requirements
and increasing the comparability of EPS on an international
basis. FAS 128 is effective for financial statements issued
for periods ending after December 15, 1997. The Company
does not anticipate that the adoption of this new standard
will have a material effect on the Company's EPS amounts
computed under the present accounting standard.
9
<PAGE>
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, 1997 Compared to Three
Months Ended November 30, 1996
Net sales for the first 1998 fiscal year quarter ended
November 30, 1997 increased 7.7% to $63.8 million, compared
with $59.2 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 shipments
of the Company's central venous catheter products, including
ARROWg+ard Blue(TM) antiseptic surface treated catheter
products, increased shipments of implantable drug delivery
pumps and sales of the Company's new Percutaneous
Thrombolytic Device ("PTD"), which is designed to treat
thrombosed grafts in chronic hemodialysis patients.
In the quarter ended November 30, 1997, sales of critical
care products, excluding royalty income, increased 9.6% to
$54.4 million from $49.7 million in the comparable prior
period. Sales of cardiac care products decreased to $9.2
million from $9.5 million, a decrease of 3.1% from the
comparable fiscal 1997 period, principally as a result of
the discontinuation of sales of the Thoratec Corporation
("Thoratec") bi-ventricular assist device, which the Company
had been distributing in Europe until July 1, 1997 when
Thoratec initiated direct sales of the device in that
market. International sales increased by 3.5% to $23.0
million from $22.2 million in the same prior year period and
represented 36.1% of net sales, excluding royalty income,
compared to 37.5% in the comparable fiscal 1997 period,
principally as a result of increased sales of central venous
catheter products. The increased strength of the U.S.
dollar, relative to currencies in countries where the
Company operates direct sales subsidiaries, reduced net
sales for the quarter by $1.6 million.
10
<PAGE>
ARROW INTERNATIONAL, INC.
Gross profit increased 13.0% to $35.9 million in the first
quarter of the current fiscal year compared to $31.7 million
in the same period of fiscal 1997. As a percentage of net
sales, gross profit increased to 56.3% during the three
months ended November 30, 1997 from 53.7% in the comparable
prior period, due to a more profitable product mix, the
reduction in manufacturing costs resulting from increased
production at the Company's international manufacturing
facilities and from the favorable effect of the stronger
U.S. dollar on such costs.
Research, development and engineering expenses increased by
9.1% to $4.2 million in the first quarter of the current
fiscal year from $3.8 million in the comparable prior period.
As a percentage of net sales, these expenses increased in the
first quarter of fiscal 1998 to 6.5%, compared to 6.4% in
the same period in fiscal 1997, primarily as a result of
increased spending related to research, product development,
process development and clinical trial activities. Current
research 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
9.6% to $15.3 million during the first quarter of the
current fiscal year from $14.0 million in the same period of
fiscal 1997 and increased as a percentage of net sales to
24.0% in the first quarter of fiscal 1998 from 23.6% in the
comparable period of fiscal 1997. The increase was due
primarily to increased U.S. sales and marketing expenses and
increased expenses in Japan to implement direct sales of
intra-aortic balloon products.
Principally due to the above factors, operating income
increased in the first quarter of fiscal 1998 by 17.4% to
$16.5 million from $14.0 million in the comparable prior
period.
Other expenses (income), net, decreased to $0.2 million
during the first quarter of fiscal 1998 from $0.5 million in
the comparable prior period. Other expenses (income), net,
consist principally of interest expense and foreign exchange
gains and losses associated with the Company's direct sales
subsidiaries, 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
1998 by 20.9% to $16.3 million from $13.5 million in the
comparable prior period. For the first quarter of fiscal
1998, the Company's effective income tax rate was 37.5%, a
decrease from 38.5% in fiscal 1997, principally as a result
of a reduction in tax accruals for certain state and
international jurisdictions.
11
<PAGE>
ARROW INTERNATIONAL, INC.
Net income increased 22.9% to $10.2 million from $8.3
million in the comparable fiscal 1997 period. As a
percentage of net sales, net income represented 16.0% during
the three months ended November 30, 1997, compared to 14.0%
in the comparable prior period.
Net income per common share increased to $.44 from $.36 in
the first quarter of fiscal 1997. Weighted average common
shares outstanding decreased to 23,225,853 in the first
quarter of fiscal 1998 from 23,228,859 in the comparable
prior period.
Liquidity and Capital Resources
For the three months ended November 30, 1997, net cash
provided by operations was $9.9 million, a decrease of $2.2
million from the same period in the prior year. Accounts
receivable increased by $1.1 million in the three months
ended November 30, 1997, compared to a $1.1 million increase
in the same period in fiscal 1997. Accounts receivable,
measured in average days sales outstanding during the
period, increased to 87 days at November 30, 1997, from 78
days at November 30, 1996, due principally to an increase in
the collection period for both U.S. and international sales.
Net cash used in the Company's investing activities
increased to $10.8 million in the three months ended
November 30, 1997 from $4.9 million for the three months
ended November 30, 1996, principally as a result of the
acquisition, for $7.3 million, of certain assets of the
Cardiac Assist Division of Boston Scientific Corporation.
Financing activities used $0.9 million in the three months
ended November 30, 1997, compared to using $4.2 million in
the same period in fiscal 1997. This change resulted
principally from a decrease in repayments of long-term debt
and an increase in borrowings under the Company's
revolving credit facilities.
As of November 30, 1997, the Company had U.S. bank credit
facilities providing a total of $50.0 million in available
revolving credit for general business purposes, of which
$32.1 million remained unused. In addition, certain of the
Company's foreign subsidiaries had revolving credit
facilities totaling the U.S. dollar equivalent of $11.7
million, of which $7.2 million remained unused as of
November 30, 1997. Combined borrowings under these
facilities increased $0.4 million and $0.7 million during
the three months ended November 30, 1997 and 1996,
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
12
<PAGE>
ARROW INTERNATIONAL, INC.
contracts could have a material adverse effect upon the
Company's business, financial condition and results of
operations. Based upon the Company's knowledge of the
financial condition of the counterparties to its existing
forward contracts, the Company believes that it does not
have any material exposure to any individual counterparty.
The Company's policy prohibits the use of derivative
instruments for speculative purposes.
During the three month periods ended November 30, 1997 and
1996, the percentage of the Company's sales invoiced in
currencies other than U.S. dollars was 25.6% and 26.4%,
respectively. As of November 30, 1997, outstanding foreign
currency exchange contracts totaling the U.S. dollar
equivalent of $23.8 million mature at various dates through
August 1998. The Company expects to continue to utilize
foreign currency exchange contracts to manage its exposure,
although there can be no assurance that the Company's effort
in this regard will be successful.
Based upon its present plans, the Company believes that 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
<PAGE>
ARROW INTERNATIONAL, INC.
<TABLE>
<CAPTION>
<S>
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
<C>
(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, 1997.
</TABLE>
14
<PAGE>
ARROW INTERNATIONAL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
ARROW INTERNATIONAL, INC.
(Registrant)
Date: January 14, 1998 By:/s/ John H. Broadbent, Jr.
--------------------------
(signature)
John H. Broadbent, Jr.
Vice President-Finance
and Treasurer (Principal
Financial Officer and
Chief Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
- ------ ----------- ----------------
27 *Financial Data Schedule EDGAR
99.1 Cautionary Statement for Page 17-21 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.
16
<PAGE>
EXHIBIT 99.1
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
From time to time, in both written reports and in oral
statements by the Company's senior management, expectations
and other statements are expressed regarding future
performance of the Company. These forward-looking
statements are inherently uncertain and investors must
recognize that events could turn out to be different than
such expectations and statements. Key factors impacting
current and future performance are discussed in the
Company's Annual Report on Form 10-K for its fiscal year
ended August 31, 1997 and other filings with the Securities
and Exchange Commission (the "Commission"). In addition to
such information in the Company's Annual Report on Form 10-
K and its other filings with the Commission, the following
risk factors should be considered in evaluating the Company
and its business, as well as in reviewing forward-looking
statements contained in the Company's periodic reports filed
with the Commission and in oral statements made by the
Company's senior management. The Company's actual results
could differ materially from such forward-looking statements
due to material risks, uncertainties and contingencies,
including, without limitation, those set forth below.
STRINGENT GOVERNMENT REGULATION
The Company's products are subject to extensive
regulation by the Food and Drug Administration (the "FDA")
and, in some jurisdictions, by state and foreign
governmental authorities. In particular, the Company must
obtain specific clearance or approval from the FDA before it
can market new products or certain modified products in the
United States. With the exception of one product, the
Company has, to date, obtained FDA marketing clearance only
through the 510(k) premarket notification process. Certain
products under development and future product applications,
however, will require approval through the more rigorous
Premarket Approval application ("PMA") process. The process
of obtaining such clearances or approvals can be time
consuming and expensive, and there can be no assurance that
all clearances or approvals sought by the Company will be
granted or that FDA review will not involve delays adversely
affecting the marketing and sale of the Company's products.
The Company is required to adhere to applicable regulations
setting forth current Good Manufacturing Practices ("GMP")
which require that the Company manufacture its products and
maintain its records in a prescribed manner with respect to
manufacturing, testing and control activities. In addition,
the Company is required to comply with FDA requirements for
labeling and promotion of its products. Failure to comply
with applicable federal, state or foreign laws or
regulations could subject the Company to enforcement action,
including product
17
<PAGE>
seizures, recalls, withdrawal of clearances or approvals,
and civil and criminal penalties, any one or more of which
could have a material adverse effect on the Company.
Medical device laws and regulations with similar substantive
and enforcement provisions are also in effect in many of the
foreign countries where the Company does business. Federal,
state and foreign laws and regulations regarding the
manufacture and sale of medical devices are subject to
future changes. No assurance can be given that such changes
will not have a material adverse effect on the Company.
SIGNIFICANT COMPETITION AND CONTINUAL TECHNOLOGICAL CHANGE
The markets for medical devices are highly competitive.
The Company currently competes with many companies in the
development and marketing of catheters and related medical
devices. Some of the Company's competitors have access to
greater financial and other resources than the Company.
Furthermore, the markets for medical devices are
characterized by rapid product development and technological
change. The present or future products of the Company could
be rendered obsolete or uneconomical by technological
advances by one or more of the Company's current or future
competitors. The Company's future success will depend upon
its ability to develop new products and technology to remain
competitive with other developers of catheters and related
medical devices. The Company's business strategy emphasizes
the continued development and commercialization of new
products and the enhancement of existing products for the
critical care and cardiac care markets. There
can be no assurance that the Company will be able to
continue to successfully develop new products and to enhance
existing products, to manufacture these products in a
commercially viable manner, to obtain required regulatory
approvals or to gain satisfactory market acceptance for such
products.
COST PRESSURES ON MEDICAL TECHNOLOGY AND PROPOSED HEALTH CARE REFORM
The Company's products are purchased principally by
hospitals, hospital networks and hospital buying groups.
Although the Company's products are used primarily for non-
optional medical procedures, the Company believes that the
overall escalating cost of medical products and services has
led and will continue to lead to increased pressures upon
the health care industry to reduce the cost or usage of
certain products and services, which has included and will
continue to include those of the Company. In the United
States, these cost pressures are leading to increased
emphasis on the price and cost-effectiveness of any
treatment regimen and medical device. In addition, third
party payors, such as governmental programs, private
insurance plans and managed care plans, which are billed by
hospitals for such health care services, are increasingly
negotiating the prices charged for medical products and
services and may deny reimbursement if they determine that a
device was not used in
18
<PAGE>
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 PROPIERTARY RIGHTS
The Company owns numerous U.S. and foreign patents and
has several U.S. and foreign patent applications pending.
The Company also has exclusive license rights to certain
patents held by third parties. These patents relate to
aspects of the technology used in certain of the Company's
products. From time to time, the Company is subject to
legal actions involving patent and other intellectual
property claims. Successful litigation against the Company
regarding its patents or infringement by the Company of the
patent rights of others could have a material adverse effect
on the Company. In addition, there can be no assurance that
pending patent applications will result in issued patents or
that patents issued to or licensed-in by the Company will
not be challenged or circumvented by competitors or found to
be valid or sufficiently broad to protect
19
<PAGE>
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
international operations increase, an increasing portion of
the Company's revenues and expenses may be denominated in
currencies other than U.S. dollars, and changes in exchange
rates could have a greater effect on the Company's results
of operations. There can be no assurance that such factors
will not have a material adverse effect on the Company's
future operations and, consequently, on the Company's
business, results of operations and financial condition. In
addition, there can be no assurance that laws or
administrative practices relating to regulation of medical
devices, taxation, foreign exchange or other matters of
countries within which the Company operates will not change.
Any such change could have a material adverse effect on the
Company's business, financial condition and results of
operations.
20
<PAGE>
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 THREE MONTHS ENDED
NOVEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> NOV-30-1997
<CASH> 1,105
<SECURITIES> 0
<RECEIVABLES> 62,672
<ALLOWANCES> 812
<INVENTORY> 59,777
<CURRENT-ASSETS> 136,783
<PP&E> 172,395
<DEPRECIATION> 63,690
<TOTAL-ASSETS> 327,249
<CURRENT-LIABILITIES> 52,413
<BONDS> 0
0
0
<COMMON> 45,603
<OTHER-SE> 209,103
<TOTAL-LIABILITY-AND-EQUITY> 327,249
<SALES> 63,769
<TOTAL-REVENUES> 63,679
<CGS> 27,860
<TOTAL-COSTS> 47,313
<OTHER-EXPENSES> 248
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,278
<INCOME-TAX> 6,104
<INCOME-CONTINUING> 10,174
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,174
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
</TABLE>
