UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended August 31, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-20212
ARROW INTERNATIONAL, INC.
(Exact name of Registrant as specified in its Charter)
PENNSYLVANIA 23-1969991
(State of Incorporation) (I.R.S. Employer Identification No.)
2400 Bernville Road
Reading, Pennsylvania 19605
(Address of principal executive offices)
Telephone number: (610) 378-0131
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class: on Which Registered:
-------------------- --------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, No Par Value
(Title of Class)
Name of Exchange on which registered: The Nasdaq Stock Market
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.|X|
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of November 1, 1999 was approximately $319,773,636.
The number of shares of Registrant's Common Stock outstanding on November
1, 1999 was 22,851,643.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on January 19, 2000, which will be filed with the
Securities and Exchange Commission within 120 days after August 31, 1999, are
incorporated by reference in Part III of this report.
<PAGE>
Item 1. BUSINESS:
Certain of the information contained in this Form 10-K, including the
discussion which follows in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" found in Item 7 of this Report, contain
forward-looking statements. For a discussion of important factors that could
cause actual results to differ materially from such forward-looking statements,
carefully review this Report, including Exhibit 99.1 hereto, as well as other
information contained in Arrow International, Inc.'s periodic reports filed with
the Securities and Exchange Commission (the "SEC" or "Commission").
Arrow International, Inc. (together with its subsidiaries, "Arrow" or the
"Company") was incorporated as a Pennsylvania corporation in 1975. Arrow
develops, manufactures and markets a broad range of clinically advanced,
disposable catheters and related products for critical and cardiac care. The
Company's critical care products are used principally for central vascular
access for administration of fluids, drugs, and blood products, patient
monitoring and diagnostic purposes, as well as for pain management. These
products are used by anesthesiologists, critical care specialists, surgeons,
cardiologists, nephrologists, emergency and trauma physicians and other health
care providers. Arrow's cardiac care products are used by interventional
cardiologists, cardiac surgeons, interventional radiologists and
electrophysiologists for such purposes as the diagnosis and treatment of heart
and vascular disease and to provide short-term cardiac assist following cardiac
surgery, serious heart attack or balloon angioplasty.
Arrow's critical care products, which were originally introduced in 1977,
accounted for 81.4%, 83.6% and 84.3% of net sales in fiscal 1999, 1998 and 1997,
respectively. The majority of these products are vascular access catheters and
related devices which consist principally of the following: the Arrow-Howes(TM)
Multi-Lumen Catheter, a catheter equipped with three or four channels that
enables the simultaneous administration of multiple critical care therapies
through a single puncture site; double-and single-lumen catheters, which are
designed for use in a variety of clinical procedures; the ARROWg+ard(TM)
antiseptic surface treatment, which is applied to many of the Company's vascular
access catheters to reduce the risk of catheter-related infection; percutaneous
sheath introducers, which are used as a means for inserting cardiovascular and
other catheterization devices into the vascular system during critical care
procedures; radial artery catheters, which are used for measuring arterial blood
pressure and taking blood samples; FlexTip Plus(TM) epidural catheters, which
are designed to minimize indwelling complications associated with conventional
epidural catheters; and Percutaneous Thrombolytic Devices ("PTD") which are
designed for clearance of thrombosed hemodialysis grafts in chronic hemodialysis
patients.
In 1995, the Company acquired Therex Limited Partnership ("Therex"),
thereby expanding its critical care product line to include implantable constant
flow drug delivery pumps and a broad line of implantable vascular access ports
used for the infusion of certain drugs over an extended period of time to treat
cancer, other chronic diseases and chronic pain. The implantable pumps are used
for the administration of the chemotherapy drug, 2-deoxy 5-fluorouridine
("FUDR") for the treatment of liver cancer, for the administration of morphine
to treat malignant or benign intractable pain and for the administration of
Baclofen, a drug used for the treatment of spasticity. In 1997, the Company
expanded this product line by acquiring the implantable constant flow drug
delivery pump product business of Strato/Infusaid, Inc., a former subsidiary of
Pfizer, Inc., (Strato/Infusaid").
In August 1998, the Company strengthened its ability to meet the needs of
critical care physicians by acquiring Medical Parameters, Inc. ("MPI"). MPI
manufactures and markets custom tubing sets used by critical care physicians to
connect central venous catheters to blood pressure monitoring devices and drug
infusion systems.
Arrow's cardiac care products accounted for 18.6%, 16.4% and 15.7% of net
sales in fiscal 1999, 1998 and 1997, respectively. These products include
cardiac assist products, such as intra-aortic balloon pumps and catheters, which
are used primarily to augment temporarily the pumping capability of the heart
following cardiac surgery, serious heart attack or balloon angioplasty. The
Company's ACAT(TM)1 intra-aortic balloon pump is smaller, lighter and more
technologically advanced than the KAAT II Plus(R) pump, which it replaced in
1998, and represents the current state-of-the art
(2)
<PAGE>
Item 1. BUSINESS (Continued):
in intra-aortic balloon pumping. The Company's NarrowFlex(TM) reduced diameter
(8 Fr.) intra-aortic balloon catheter takes up less space in the femoral artery
than previously available catheters and, therefore, permits greater blood
circulation to a patient's lower extremities. Other cardiac care products
include electrophysiology products, which are used primarily to map the
electrical signals which activate the heart; the Berman(TM) Angiographic
Catheter, which is used for pediatric cardiac angiographic procedures; and other
cardiac care products, such as the Super Arrow-Flex(TM) sheath, which provides a
kink-resistant passageway for the introduction of cardiac and other catheters
into the vascular system.
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.
On September 1, 1999, the Company acquired Sometec, S.A., a French
development company that has recently introduced a non-invasive esophageal
ultrasound probe that continuously measures descending aortic blood flow. The
Company believes this well developed, patented technology represents a
potentially important tool for non-invasively tracking cardiac output of both
surgical and critically ill patients. Where appropriate, the Company plans to
continue to complement its internal research and development efforts with
similar acquisitions and collaborative arrangements.
Sales and Marketing
Arrow markets its products to physicians and hospitals through a
combination of direct selling and independent distributors. Within each
hospital, marketing efforts are targeted to those physicians, including critical
care specialists, cardiologists, anesthesiologists, interventional radiologists,
electrophysiologists and surgeons, most likely to use the Company's products.
Arrow's products are generally sold in the form of pre-sterilized procedure kits
containing the catheters and virtually all of the related medical components and
accessories needed by the clinician to prepare for and perform the intended
medical procedure. Additional sales revenue is derived from equipment provided
for use in connection with certain of the Company's disposable products.
In fiscal 1999, 1998 and 1997, 64.1%, 64.9% and 63.8%, respectively, of
the Company's net sales were to U.S. customers. In this market, approximately
80.0% of the Company's fiscal 1999 revenue was generated by its direct sales
force. The remainder resulted from shipments to independent distributors. For
the majority of such distributors, the Company's products represent a principal
product line. Direct selling generally yields higher gross profit margins than
sales made through independent distributors.
Internationally, the Company sells its products through eleven direct
sales subsidiaries serving markets in Japan, Germany, the Netherlands, France,
Spain, Greece, Africa, Canada, Mexico, the Czech Republic and Slovakia. As of
November 2, 1999, independent distributors in 85 additional countries service
the remainder of the world.
To support growth in international sales, the Company operates a 40,000
square foot manufacturing facility in Chihuahua, Mexico and a 65,000 square foot
manufacturing and research facility in the Czech Republic.
Revenues, profitability and long-lived assets attributable to significant
geographic areas are presented in Note 13 to the Company's consolidated
financial statements, included elsewhere herein.
In general, Arrow does not produce against a backlog of customer orders;
production is based primarily on the level of inventories of finished products
and projections of future customer demand with the objective of shipping from
stock upon receipt of orders. No single customer accounts for a material part of
the Company's sales. Usage of the Company's products by hospitals and physicians
has not been materially influenced by seasonal factors.
(3)
<PAGE>
Item 1. BUSINESS (Continued):
Sales and Marketing (Continued)
Rapid growth in U.S. health care costs, coupled with a lack of access by
some U.S. citizens to adequate health care, has resulted in numerous legislative
initiatives in the U.S. Congress during the last several years. While none of
these initiatives have to date resulted in substantive legislation, the intent
of these initiatives 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 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, the Company's products. The increased emphasis in the U.S. on health care
cost containment has resulted in reduced growth in demand for certain of the
Company's products in markets where Arrow has 80% or greater market shares, and
protecting that market share has affected the Company's pricing in some
instances. The Company presently believes that this emphasis has increased the
importance of competitive prices and may continue to reduce the U.S. growth rate
for certain of the Company's products. 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 continues to face pricing pressures in certain product lines in European
markets as governments strive to curtail increases in health care costs. 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.
Research and Product Development
Arrow is engaged in ongoing research and development to introduce
clinically advanced new products, to enhance the effectiveness, ease of use,
safety and reliability of its existing products and to expand the clinical
applications for which use of its products is appropriate. The principal focus
of the Company's research and development effort is to identify and analyze the
needs of physicians in critical and cardiac care medicine, and to develop
products that address these needs. The Company views ideas submitted by
physicians and other health care professionals as an important source of
potential research and development projects. The Company believes that these
end-users are often in the best position to conceive of new products and to
recommend ways to improve the performance of existing products. Most of the
Company's principal products and product improvements have resulted from
collaborative efforts with physicians, other health care professionals or other
affiliated entities. For certain proprietary ideas, the Company pays royalties
to such persons, and in many instances, incorporates such persons' names in the
tradename or trademark for the specific product. The Company also utilizes other
outside consultants, inventors and medical researchers to carry on its research
and development effort and sponsors research through medical associations and at
various universities and teaching hospitals.
Certain of the Company's strategic acquisitions and investments have
provided the basis for its introduction of significant new products. The Company
entered the field of cardiac assist with the acquisition of Kontron Instruments
and supplemented this acquisition with the acquisition of the cardiac assist
division of C. R. Bard, Inc. The Company's acquisition of Therex, augmented by
the acquisition of the Strato/Infusaid implantable constant flow drug delivery
pump product line, has provided it with a product offering of implantable drug
delivery devices, which the Company believes represents an important addition to
its critical care product line.
Research and development expenses totaled $20.3 million (6.9% of net
sales), $18.4 million (7.1% of net sales) and $15.9 million (6.5% of net sales)
in fiscal 1999, 1998 and 1997, respectively.
(4)
<PAGE>
Item 1. BUSINESS (Continued):
Research and Product Development (Continued)
Such amounts were used to develop new products, improve existing products and
implement new technology to produce these products.
Since 1988, the Company has been developing the Arrow(R)-Fischell Pullback
Atherectomy Catheter (the "PAC") for the removal of atherosclerotic plaque. The
Company acquired certain patents relating to the technology underlying the PAC
in 1990. In conjunction with the acquisition, the Company entered into a
research and development agreement under which the Company was required to make
certain payments upon the PAC's achievement of specified development milestones.
In July 1995, the Company amended this agreement to modify the terms of payment
of, and recognize as pre-paid royalties, these milestone payments. In the fourth
quarter of 1998, the Company began a European multi-center randomized study to
evaluate the effectiveness of the PAC for the removal of plaque from restenosed
coronary stents. The study continues to date.
The Company has been conducting research which uses microwave energy for
the ablation of cardiac tissue responsible for ventricular tachycardia. The
research being conducted is to determine whether microwave ablation catheter's
radioactive heating mechanism is potentially capable of creating deeper, wider
lesions than currently marketed radio frequency ablation catheters, which
lesions electrophysiologists indicate are necessary for the effective treatment
of ventricular tachycardia using ablation therapy.
In January 1994, the Company formed a cooperative relationship with
Pennsylvania State University's Hershey Medical School for the commercial
development of a fully implantable long-term Left Ventricular Assist Device
("LVAD"). Although LVADs are currently used to provide short-term cardiac assist
to patients awaiting heart transplants, the Company's efforts are aimed at
developing a fully implantable device to provide long-term cardiac assist for
patients having insufficient ventricular heart function. In contrast to
currently marketed LVADs, the LVAD currently under development by the Company is
not intended merely as a bridge to heart transplant, but is designed, upon
receipt of necessary regulatory approvals, to serve as a long-term cardiac
assist device for certain patients. The Hershey Medical School LVAD has been in
development for over fifteen years and has undergone extensive preclinical
studies and testing. The LVAD being developed is electrically driven by a
wearable battery pack transmitting power non-invasively through the skin to an
implanted receiving coil that maintains a charge in batteries incorporated into
the device. These implanted batteries are capable of maintaining LVAD function
for approximately 45 minutes without the aid of any external power source. In
fiscal 1997, the Company began long-term durability testing of its LVAD, which
must be satisfactorily completed before Phase I human clinical trials under an
IDE can be commenced in the U.S. The Company continued to conduct animal trials
in fiscal 1999. On October 26, 1999, the Company announced the first human
implant of the Company's fully implantable Left Ventricular Assist System, named
the LionHeart(TM). The LionHeart(TM) was introduced to the medical community at
large on November 7, 1999 at the Heart Association Meeting in Atlanta, GA.
There can be no assurance that the FDA or any foreign government
regulatory authority will grant the Company authorization to market products
under development or, if such authorization is obtained, that such products will
prove competitive when measured against other available products.
Engineering and Manufacturing
Arrow has developed the core technologies that the Company believes are
necessary for it to design, develop and manufacture complex, high quality
catheter-related medical devices. This technological capability has enabled the
Company to develop internally many of the major components of its products and
reduce its unit manufacturing costs. To help further reduce manufacturing costs
and improve efficiency, the Company has increasingly automated the production
(5)
<PAGE>
Item 1. BUSINESS (Continued):
Engineering and Manufacturing (Continued)
of its high-volume products and plans to continue to make significant capital
expenditures to promote efficiency and reduce operating costs.
Raw materials and purchased components essential to Arrow's business have
typically been available within the lead times required by the Company and,
consequently, procurement has not historically posed any significant problems in
the operation of the Company's business. Although the Company currently
maintains only one supplier for certain of its out-sourced components, it has
identified alternative vendors for most of these items and, therefore, does not
believe that it is dependent on any single supplier for major raw materials or
components.
Patents, Trademarks, Proprietary Rights and Licenses
Arrow believes that patents and other proprietary rights are important to
its business. The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. Arrow currently holds numerous U.S. patents and patent
applications, as well as several foreign patents and patent applications which
relate to aspects of the technology used in certain of the Company's products,
including its radial artery catheter, percutaneous sheath introducer and
interventional diagnostic catheter products. There can be no assurance that
patent applications filed by the Company will result in the issuance of patents
or that any patents owned by or licensed to the Company will provide competitive
advantages for the Company's products or will not be challenged or circumvented
by others.
In addition, Arrow is a party to several license agreements with unrelated
third parties pursuant to which it has obtained, for varying terms, the
exclusive rights to certain patents held by such third parties in consideration
for royalty payments. Many of the Company's major products, including its
Arrow-Howes(TM) Multi-Lumen Catheters and antiseptic surface treatment for
catheters, have been developed pursuant to such license agreements. The Company
has in the past granted rights in certain patents relating to its
Arrow-Howes(TM) Multi-Lumen Catheters to others in consideration for royalty
payments. The Company also has certain proprietary rights to aspects of the
technology, including certain U.S. patents, used in the PAC. See "Research and
Product Development". All of the existing patents owned by or licensed to the
Company relating to its major products expire after October 2001. The U.S.
patent licensed to the Company relating to its Arrow-Howes(TM) Multi-Lumen
Catheter expired in February 1995. Since the expiration of this patent, the
Company has not experienced significant new competition in this market, and the
Company does not presently believe that such competition will have a material
adverse effect on the Company's business, financial condition or results of
operations for the foreseeable future.
From time to time, the Company is subject to legal actions involving
patent and other intellectual property claims. Based upon information presently
available to the Company, the Company knows of no legal actions involving patent
claims that are currently pending or threatened against the Company that could
have a material adverse effect on the Company. Arrow owns a number of registered
trademarks in the United States and, in addition, has obtained registration in
many of its major foreign markets for the trademark ARROW(R) and certain other
trademarks.
Government Regulation
As a developer, manufacturer and marketer of medical devices, the Company
is subject to extensive regulation by, among other governmental entities, the
FDA and the corresponding state, local and foreign regulatory agencies in
jurisdictions in which the Company sells its products. These regulations govern
the introduction of new medical devices, the observance of certain standards
with respect to the manufacture, testing and labeling of such devices, the
maintenance of certain records, the tracking of such devices and other matters.
Failure to comply with applicable federal, state, local
(6)
<PAGE>
Item 1. BUSINESS (Continued):
Government Regulation (Continued)
or foreign laws or regulations could subject the Company 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 the Company. In recent years, the FDA has pursued a more
rigorous enforcement program to ensure that regulated businesses, like the
Company's, comply with applicable laws and regulations. The Company believes
that it is in substantial compliance with such governmental regulations.
However, federal, state, local 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.
On occasion, the Company has received notifications, including warning
letters, from the FDA of alleged deficiencies in the Company's compliance with
FDA requirements. The Company believes that it has been able to address or
correct such deficiencies. In addition, from time to time the Company has
recalled, or issued safety alerts on, certain of its products. No such warning
letter, recall or safety alert has had a material adverse effect on the Company,
but there can be no assurance that a warning letter, recall or safety alert
would not have such an effect in the future.
Like other medical device manufacturers, the Company in recent years has
experienced extended delays in obtaining FDA clearance or approval to market new
products in the U.S. The FDA review process may continue to delay the Company's
new product introductions in the U.S. in the future. In addition, many foreign
countries have recently adopted more stringent regulatory requirements which are
expected to add to the delays and uncertainties associated with the release of
new products, as well as the clinical and regulatory costs of supporting such
releases. It is possible that delays in receipt of, or failure to receive, any
necessary clearance or approval could have a material adverse effect on the
Company's business, financial condition or results of operations.
Competition
Arrow faces substantial competition from a number of other companies in
the market for catheters and related medical devices and equipment, including
companies with greater financial and other resources. In addition, in response
to increased concern about the rising costs of health care, U.S. hospitals and
physicians are placing increasing emphasis on cost-effectiveness in the
selection of products to perform medical procedures. The Company believes that
its products compete primarily on the basis of product differentiation and
quality and that its comprehensive manufacturing capability enables it to
expedite the development and market introduction of new products and to reduce
manufacturing costs, thereby permitting more effective responses to competitive
pricing in an environment where the Company's ability to increase prices is
limited.
Environmental Compliance
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. In the course of its
business, the Company is involved in the handling, storing and disposal of
materials, which are classified as hazardous. In 1991, the U.S. Environmental
Protection Agency ("EPA") made a formal request to the Company for information
about wastes which may have been disposed of at a landfill site ("Site") located
near Reading, Pennsylvania. The Company has been involved with the Site located
in the Reading, Pennsylvania area. The Site, which was closed in 1986, is a
former municipal waste disposal landfill that was added to the National
Priorities List ("NPL"), as authorized by the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), in
1989. The Company believes that some of its municipal-type wastes may have been
transported to the Site prior to 1987 by a waste transporter contracted by the
Company. In 1997, the U.S. Environmental Protection Agency ("EPA") advised the
Company that the agency regarded the Company to be a potentially responsible
party ("PRP") with respect to environmental contamination associated with the
Site. In 1998, EPA advised the Company
(7)
<PAGE>
Item 1. BUSINESS (Continued):
Environmental Compliance (Continued)
that the agency regarded the Company to be a de minimis party (a party whose
alleged contribution of waste materials to the Site is minimal in terms of
volume and toxicity), and was eligible for a de minimis settlement under CERCLA.
In 1999, EPA proposed a de minimis settlement to the Company and approximately
30 other PRPs. The Company has elected to resolve its alleged liability with
respect to the Site in an alternative manner, as described below. No further
action has been taken by EPA against the Company, and none is anticipated.
In 1994, the Company, along with 16 other parties, was named in a civil
complaint filed by a group of five corporate plaintiffs in federal district
court seeking recovery of response or remedial costs at the Site. The plaintiffs
have agreed, or were ordered by EPA, to undertake certain remedial actions at
the Site, and have incurred costs in this respect for which they seek recovery.
The Company has reached a settlement agreement in principle with the plaintiffs
in the civil action, and expects to conclude a settlement before the end of
1999. The settlement in principle requires a payment by the Company to
plaintiffs of an amount, subject to a confidentiality agreement, which will, in
the opinion of management, not have a material adverse affect on the Company's
business, financial condition or results of operations. The settlement provides
an adequate release to the Company from further liability associated with the
Site and should result in the dismissal of the Company from the action. In
addition, the Company has been pursuing a claim against one of the Company's
former insurance carriers for the recovery of some of the costs incurred in
connection with this matter. Consequently, the Company has concluded that the
settlement will not have a material adverse affect on its business, financial
condition, or results of operations.
In a separate matter, in June 1989, the Company was notified that it was
among the potentially responsible parties under CERCLA, for the costs of
investigating or remediating contamination at a waste recycling, treatment and
disposal facility. The Company was notified by the EPA in September 1995 of the
means by which it may resolve its alleged liability with respect to the conduct
of a remedial investigational feasibility study at this facility and of the
opportunity to participate with other small waste contributors to this facility
in a de minimis settlement which the EPA believes is likely to be appropriate
for this facility. In December 1995, the Company indicated its interest in
entering into such a de minimis settlement, and this case has not been active
since such date insofar as it involves the Company.
The Company believes that its operations comply in all material respects
with applicable environmental laws and regulations. While the Company continues
to make capital and operational expenditures for protection of the environment,
it does not anticipate that these expenditures will have a material adverse
effect on its business, financial condition or results of operations.
Product Liability and Insurance
The design, manufacture and marketing of medical devices of the types
produced by the Company entail an inherent risk of product liability. The
Company's products are often used in intensive care settings with seriously ill
patients. While the Company believes that, based on claims made against the
Company in the past, the amount of product liability insurance maintained by the
Company has been adequate, there can be no assurance that the amount of such
insurance will be sufficient to satisfy claims made against the Company in the
future or that the Company will be able to obtain insurance in the future at
satisfactory rates or in adequate amounts.
Employees
As of October 31, 1999, Arrow had 2,859 full-time employees. All of the
Company's hourly-paid manufacturing employees at the Company's Reading and
Wyomissing, Pennsylvania facilities are represented by the United Steelworkers
of America AFL-CIO, Local 8467 (the "Union"). The Company and the Union are
currently operating under a three-year agreement that expires in September 2000.
The Company does not anticipate problems with negotiating a new agreement with
the Union. The Company has never experienced an organized work stoppage or
strike and considers its relations with its employees to be good.
(8)
<PAGE>
Item 1. BUSINESS (Continued):
Executive Officers
The executive officers of the Company and their ages and positions as of
November 1, 1999 are listed below. All executive officers are elected or
appointed annually and serve at the discretion of the Board of Directors. There
are no family relationships among the executive officers of the Company.
Name Age Current Position
---- --- ----------------
Marlin Miller, Jr. 67 Chairman and Chief Executive Officer
Philip B. Fleck 55 President and Chief Operating Officer
Paul L. Frankhouser 54 Executive Vice President
Frederick J. Hirt 51 Vice President-Finance, Chief Financial
Officer and Treasurer
T. Jerome Holleran 63 Secretary
Thomas D. Nickel 60 Vice President-Regulatory Affairs
and Quality Assurance
Scott W. Hurley 41 Controller
Mr. Miller has served as Chief Executive Officer and a director of the
Company since it was founded in 1975. He served as President from 1975 to
January 20, 1999. Mr. Miller is also President and a director of Arrow Precision
Products, Inc. ("Precision"), a corporation controlled by principal shareholders
of the Company, and in fiscal 1998 he devoted approximately 1% of his time to
Precision. He is a director of Carpenter Technology Corporation, a manufacturer
of specialty steel.
Mr. Fleck has served as President since January 20, 1999. From June 1994
to January 20, 1999, he served as Vice President - Research and Manufacturing of
the Company. From 1986 to June 1994, Mr. Fleck served as Vice President -
Research and Engineering of the Company. From 1975 to 1986, Mr. Fleck served as
Engineering Manager of the Company.
Mr. Frankhouser has served as Executive Vice President since January 20,
1999. He served as Vice President-Marketing of the Company from 1986 until
January 20, 1999. From 1980 to 1986, Mr. Frankhouser served as Manager of
Marketing of the Company.
Mr. Hirt has served as Vice President - Finance, Chief Financial Officer
and Treasurer of the Company since August 1998. Prior to joining the Company,
Mr. Hirt served in various capacities with Pharmacia & Upjohn, Inc., from 1980
to 1998, where he most recently served as Vice President, Accounting and
Reporting.
(9)
<PAGE>
Item 1. BUSINESS (Continued):
Executive Officers (Continued)
Mr. Holleran has served as Secretary and a director of the Company since
its founding in 1975 and, until September 1997, also served as a Vice President.
Until recently and since July 1996, Mr. Holleran served as President and Chief
Executive Officer of Precision Medical Products, Inc., a former subsidiary of
Precision, which manufactures and markets certain non-catheter medical products
and was sold on August 29, 1997 to certain employees of Precision, including Mr.
Holleran. He is now the Chairman and Chief Executive Officer of Precision
Medical Products, Inc. From February 1986 to September 1997, Mr. Holleran was
also Vice President, Chief Operating Officer and a director of Precision. From
1991 to 1996, Mr. Holleran served as President of Endovations, Inc., a
subsidiary of Precision that manufactured and marketed certain
gastroenterological medical products, until the sale in June 1996 of a portion
of the Endovations business to the Company and the remainder to an unrelated
third party.
Mr. Nickel has served as Vice President-Regulatory Affairs and Quality
Assurance of the Company since 1991. From 1986 to 1991, Mr. Nickel served as
Director of Regulatory Affairs and Quality Assurance of the Company.
Mr. Hurley has served as Controller of the Company since April 1998. Prior
to joining the Company, from 1990 to 1998 he served in various capacities with
Rhone-Poulenc Rorer, most recently as a Director of Finance.
Item 2. PROPERTIES:
The Company's corporate headquarters and principal research center are
located in a 165,000 square foot facility in Reading, Pennsylvania. This
facility, which also includes manufacturing space, is located on 126 acres.
Other major properties owned by the Company include a 165,000 square foot
manufacturing and warehousing facility in Asheboro, North Carolina; a 145,000
square foot manufacturing facility in Wyomissing, Pennsylvania; a 40,000 square
foot manufacturing facility in Chihuahua, Mexico; a 49,000 square foot
manufacturing and warehouse facility in Mount Holly, New Jersey; and a 65,000
square foot manufacturing and research facility in the Czech Republic.
In addition, the Company leases a 55,000 square foot manufacturing
facility in Everett, Massachusetts, a 12,000 square foot manufacturing facility
in Walpole, Massachusetts, and a 7,700 square foot manufacturing facility and
sales office in Woburn, Massachusetts. The Company also leases sales offices and
warehouse space in Canada, France, Germany, Japan, South Africa, the
Netherlands, Spain and Greece, sales office space in Mexico and warehouse space
in California.
The Company considers all of its facilities to be in good condition and
adequate to meet the present and reasonably foreseeable needs of the Company.
Item 3. LEGAL PROCEEDINGS:
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 that it has adequate legal defenses or insurance
coverage for these actions and that the ultimate outcome of these actions will
not materially adversely affect the Company.
(10)
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matter was submitted to a vote of security holders during the fourth
quarter of fiscal 1999, through the solicitations of proxies or otherwise.
PART II
Item 5. MARKETS FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS:
The Company's common stock has traded publicly on The Nasdaq Stock Market
under the symbol "ARRO" since June 9, 1992, the date that its common stock was
initially offered to the public. The table below sets forth the high and low
sale prices of the Company's common stock as reported by the Nasdaq Stock Market
and the quarterly dividends per share declared by the Company during the last
eight fiscal quarters:
Quarter Ended High Low Dividends
============= =================================
August 31, 1999 29 3/4 25 3/16 $ .055
May 31, 1999 26 18 7/8 .055
February 28, 1999 31 3/8 24 1/8 .055
November 30, 1998 30 7/8 23 .050
August 31, 1998 35 1/2 25 3/4 $ .050
May 31, 1998 40 30 .050
February 28, 1998 41 32 5/8 .050
November 30, 1997 39 1/2 29 11/16 .045
As of November 1, 1999, there were approximately 762 registered
shareholders of the Company's common stock.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the years ended
August 31, 1999, 1998, 1997, 1996 and 1995 have been derived from the Company's
audited consolidated financial statements. The consolidated financial statements
of the Company as of August 31, 1999 and 1998 and for each of the three years in
the period ended August 31, 1999, together with the notes thereto and the
related report of PricewaterhouseCoopers LLP, independent accountants, are
included elsewhere herein. The following data should be read in conjunction with
the Company's audited consolidated financial statements, the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which are included elsewhere herein.
(11)
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- -------- -------- -------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Income Data:
Net sales $ 295,946 $260,890 $245,889 $229,945 $ 213,014
Cost of goods sold 139,241 114,072 110,811 107,272 100,343
Gross profit 156,705 146,818 135,078 122,673 112,671
Operating expenses
Research, development and engineering 20,335 18,393 15,871 14,106 11,305
Selling, general, and administrative 71,431 62,956 57,444 54,154 48,119
Special charges* 12,819 36,249 -- -- --
Total operating expenses 104,585 117,598 73,315 68,260 59,424
Operating income 52,120 29,220 61,763 54,413 53,247
Other expenses (income), net (3,221) 1,638 2,031 2,300 (569)
Income before income taxes 55,341 27,582 59,732 52,113 53,816
Provision for income taxes 19,646 19,010 22,997 19,282 19,374
--------- -------- -------- -------- ---------
Net income $ 35,695 $ 8,572 $ 36,735 $ 32,831 $ 34,442
========= ======== ======== ======== =========
Basic and diluted earnings per
common share $ 1.54 $ 0.37 $ 1.58 $ 1.41 $ 1.52
========= ======== ======== ======== =========
Cash dividends per common share $ .215 $ .195 $ .175 $ .155 $ .135
Weighted average common shares
outstanding 23,195 23,225 23,227 23,230 22,684
Balance Sheet Data:
Working capital $ 107,901 $ 98,826 $ 81,460 $ 55,086 $ 52,863
Total assets 357,484 324,116 320,373 299,421 262,510
Notes payable and current maturities of
long-term debt 33,272 30,252 24,653 34,001 23,508
Long-term debt, excluding current maturities 11,105 11,686 12,043 15,988 20,463
Shareholders' equity 278,167 247,868 245,917 219,773 190,937
</TABLE>
* See Footnote 2 of the Notes to Consolidated Financial Statements.
(12)
<PAGE>
Item 7. 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
Commission.
Results of Operations
The following table presents for the three years ended August 31, 1999
Consolidated Statements of Income expressed as a percentage of net sales and the
period-to-period changes in the dollar amounts of the respective line items.
<TABLE>
<CAPTION>
Period-to-Period
Percentage of Net Sales Percentage Increase
--------------------------- ---------------------------
Year ended August 31, 1999 1998 1997
--------------------- vs vs vs
1999 1998 1997 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 13.4% 6.1% 6.9%
Gross profit 53.0 56.3 54.9 6.7 8.7 10.1
Operating expenses:
Research, development and
engineering 6.9 7.1 6.5 10.6 15.9 12.5
Selling, general and
administrative 24.2 24.1 23.4 13.5 9.6 6.1
Special charges 4.3 13.9 -- (64.6) 100.0 --
----- ----- ----- ----- ----- ----
Operating income 17.6 11.2 25.0 78.4 (52.7) 13.5
Other expenses (income), net (1.1) 0.6 0.8 * * *
Income before income taxes 18.7 10.6 24.2 100.6 (53.8) 14.6
Provision for income taxes 6.6 7.3 9.4 3.3 (17.3) 19.3
----- ----- ----- ----- ----- ----
Net income 12.1 3.3 14.8 316.4 (76.7) 11.9
</TABLE>
* Not a meaningful comparison
(13)
<PAGE>
Fiscal 1999 Compared to Fiscal 1998
Net sales increased by $35.0 million, or 13.4%, to $295.9 million in fiscal 1999
from $260.9 million in fiscal 1998. Net sales represent gross sales invoiced to
customers, plus royalty income, less certain related charges, including freight
costs, discounts, returns and other allowances. Sales of critical care products
increased 10.5% to $241.0 million from $218.1 million in fiscal 1998, due
primarily to increased shipments of products resulting from the acquisition of
MPI in August 1998, an increase in unit shipments of central venous catheters,
including increased shipments of ARROWg+ard(TM) Blue(R) antiseptic surface
treated catheter products and increased shipments of percutaneous thrombectomy
devices ("PTD"). Sales of cardiac care products increased 28.4% to $54.9 million
from $42.8 million in the previous year, due primarily to increased shipments of
intra-aortic balloon ("IAB") pump and catheter products. International sales
increased by $14.9 million, and represented 35.9% of net sales, excluding
royalty income, in fiscal 1999, compared to 35.1% in the prior year, principally
as a result of growth in shipments of IAB pump and catheter products as well as
multi-lumen catheters. The percentage of net sales attributable to the Company's
direct sales force increased in fiscal 1999 to approximately 75.1% compared to
approximately 74.1% in fiscal 1998.
Gross profit increased 6.7% to $156.7 million in fiscal 1999 from $146.8 million
in fiscal 1998. As a percentage of net sales, gross profit decreased to 53.0% in
fiscal 1999 from 56.3% in the prior year, due primarily to higher manufacturing
costs related to the Company's IAB products, worldwide pricing pressures in
certain market and product sectors, and a less profitable product mix.
Research, development and engineering expenses in fiscal 1999 increased by 10.6%
to $20.3 million from $18.4 million in fiscal 1998. As a percentage of net
sales, these expenses decreased to 6.9% in fiscal 1999, compared to 7.1% in
fiscal 1998. These expenses increased primarily as a result of increased
development, regulatory and clinical trial activity related to the
LionHeart(TM), the Company's left ventricular assist system, new clinical
studies related to the Company's Arrowgard(R) 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 13.5% to $71.4 million
during fiscal 1999 from $63.0 million in the previous year, and were 24.2% of
net sales in fiscal 1999 compared to 24.1% in fiscal 1998. The increase was due
primarily to additional expenses related to the operations of MPI and to the
aforementioned acquisition of the cardiac assist division of C.R. Bard, Inc.
In the second quarter of fiscal 1999, the Company recorded a non-cash pre-tax
special charge of $4.1 million ($2.7 million after tax or $.12 per basic and
diluted common 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 FDA. In accordance with
Statement of Financial Accounting Standards ("FAS") No. 2, "Accounting for
Research and Development Costs" and FASB Interpretation No. 4, "Applicability of
FAS 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 were 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 the projects commenced within a
year of the acquisition date.
In accordance with FAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", and consistent with the Company's accounting policy for
marketable equity securities, in the fourth
(14)
<PAGE>
Fiscal 1999 Compared to Fiscal 1998 (Continued):
quarter of fiscal 1999, the Company determined that the decline in the fair
value of its investment in the Cardiac Pathways Corporation was other than
temporary. Accordingly, the Company has established a new basis in the
investment at $0.4 million, equivalent to its fair market value. As a result,
the Company realized a special charge of $8.7 million before tax, $5.6 million
after tax or $0.24 per basic and diluted common share.
In the fourth quarter of fiscal 1998, in accordance with FAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" and the Company's accounting policy for goodwill, intangible and long-lived
assets, the Company recorded a non-cash pre-tax special charge of $36.2 million
($32.0 million after tax or $1.38 per basic and diluted common share) to write
down to fair value certain goodwill and intangible assets. As a result of the
Company's successful development of more advanced cardiac assist products, the
Company estimated that the carrying value of the goodwill was not recoverable.
Accordingly, the Company has reduced the carrying value of goodwill related to
previously acquired cardiac assist products by $29.0 million. The remaining
carrying value of the goodwill is being amortized using the straight-line method
over 10 years. The Company has also reduced the carrying value of certain
intangible assets related to cardiac assist technology and other assets in the
amount of $7.2 million. The remaining carrying value of these intangible assets
is being amortized using the straight-line method over the estimated periods of
benefits, from 5 to 17 years.
Principally due to the above factors, operating income increased 78.4% to $52.1
million in fiscal 1999 from $29.2 million in fiscal 1998.
Other expenses (income), net, improved to $(3.2) million of income in fiscal
1999 from $1.6 million of expense in fiscal 1998, due primarily to foreign
exchange gains. Other expenses (income), net, consists principally of interest
expense and foreign exchange gains and losses associated with the Company's
direct sales subsidiaries. Aggregate foreign exchange gains in fiscal 1999 were
$4.4 million and foreign exchange losses in fiscal 1998 were $1.1 million,
including losses relating to foreign currency contracts of $0.7 million in
fiscal 1999 and gains of $2.2 million in fiscal 1998.
As a result of the factors discussed above, income before income taxes increased
in fiscal 1999 by 100% to $55.3 million from $27.6 million in fiscal 1998. In
the fourth fiscal quarter of 1999, the Company reduced its annual effective tax
rate from 36.5% in fiscal 1998, excluding special charges (the effective tax
rate including special charges was 35.5% and 68.9% for fiscal 1999 and 1998,
respectively), to 35.5% due to completion of tax audits. In the fourth quarter
of fiscal 1998, the Company reduced its annual effective tax rate from 37.5% to
36.5% due to lower effective state income tax rates.
Net income in fiscal 1999 increased by 316% to $35.7 million from $8.6 million
in fiscal 1998. As a percentage of net sales, net income represented 12.1% in
fiscal 1999 compared to 3.3% in the previous year.
Earnings per basic and diluted common share increased to $1.54 in fiscal 1999,
from $0.37 per share in fiscal 1998 due principally to the impact of the special
charges in fiscal 1998 for the write down to fair value of certain goodwill and
intangible assets ($1.38 per basic and diluted common share). Weighted average
common shares outstanding decreased to 23,195,115 in fiscal 1999 from 23,224,780
in fiscal 1998 as a result of the forfeiture of restricted stock awards by
certain former employees.
Fiscal 1998 Compared to Fiscal 1997
Net sales increased by $15.0 million, or 6.1%, to $260.9 million in fiscal 1998
from $245.9 million in fiscal 1997. Net sales represent gross sales invoiced to
customers, plus royalty income, less certain related charges, including freight
costs, discounts, returns and other allowances. Sales of critical
(15)
<PAGE>
Fiscal 1998 Compared to Fiscal 1997 (Continued):
care products increased 5.2% to $218.1 million from $207.3 million in fiscal
1997, due primarily to an increase in unit shipments of central venous
catheters, including increased shipments of ARROWg+ard(TM) Blue(R) antiseptic
surface treated catheter products, pain management catheters, percutaneous
thrombectomy devices ("PTD") and implantable constant flow drug delivery pumps.
Sales of cardiac care products increased 10.9% to $42.8 million from $38.6
million in the previous year, due primarily to increased shipments of
intra-aortic balloon ("IAB") pump and catheter products offset by lower revenue
related to discontinuation of sales of the Thoratec Corporation bi-ventricular
assist device which the Company had been distributing in Europe until July 1,
1997. International sales increased by $2.4 million, and represented 35.1% of
net sales, excluding royalty income, in fiscal 1998, compared to 36.2% in the
prior year, principally as a result of growth in shipments of IAB pump and
catheter products as well as multi-lumen catheters, offset by the effect of the
stronger U.S. dollar on sales in significant foreign markets and by lower
revenue related to a terminated contract for the sale of Thoratec products. The
percentage of net sales attributable to the Company's direct sales force
remained stable in fiscal 1998 at approximately 74.1% compared to approximately
74.2% in fiscal 1997.
This increase in net sales was below the Company's historic growth rates due to
the strength of the U.S. dollar in significant foreign markets, constrained
European health care budgets, and slower than expected new product
introductions. Health care cost containment initiatives in the U.S. have reduced
growth in demand in markets where the Company has significant market shares, and
protecting that market share has affected the Company's pricing in some
instances.
Gross profit increased 8.7% to $146.8 million in fiscal 1998 from $135.1 million
in fiscal 1997. As a percentage of net sales, gross profit improved to 56.3% in
fiscal 1998 from 54.9% in the prior year, due primarily to a more profitable
product mix and improved manufacturing costs resulting from increased production
at the Company's international manufacturing facilities.
Research, development and engineering expenses in fiscal 1998 increased by 15.9%
to $18.4 million from $15.9 million in fiscal 1997. As a percentage of net
sales, these expenses increased to 7.1% in fiscal 1998, compared to 6.5% in
fiscal 1997. These expenses increased primarily as a result of development
expenses related to several clinical trials now in progress, including the
LionHeart(TM), the Company's left ventricular assist system.
Selling, general and administrative expenses increased by 9.6% to $63.0 million
during fiscal 1998 from $57.4 million in the previous year, and increased as a
percentage of net sales to 24.1% in fiscal 1998, compared to 23.4% in fiscal
1997. The increase was due primarily to increased sales and marketing costs for
IAB products and establishing a dedicated sales force for implantable infusion
pumps.
In the fourth quarter of fiscal 1998, in accordance with FAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" and the Company's accounting policy for goodwill, intangible and long-lived
assets, the Company recorded a non-cash pre-tax special charge of $36.2 million
($32.0 million after tax or $1.38 per basic and diluted common share) to write
down to fair value certain goodwill and intangible assets. As a result of the
Company's successful development of more advanced cardiac assist products, the
Company estimated that the carrying value of the goodwill was not recoverable.
Accordingly, the Company has reduced the carrying value of goodwill related to
previously acquired cardiac assist products by $29.0 million. The remaining
carrying value of the goodwill is being amortized using the straight-line method
over 10 years. The Company has also reduced the carrying value of certain
intangible assets related to cardiac assist technology and other assets in the
amount of $7.2 million. The remaining carrying value of these intangible assets
is being amortized using the straight-line method over the estimated periods of
benefits, from 5 to 17 years.
Principally due to the above factors, operating income decreased 52.7% to $29.2
million in fiscal 1998 from $61.8 million in fiscal 1997.
(16)
<PAGE>
Fiscal 1998 Compared to Fiscal 1997 (Continued):
Other expenses (income), net, decreased to $1.6 million in fiscal 1998 from $2.0
million in fiscal 1997, due to a reduction in interest expense and decreased
losses due to foreign exchange translation. Other expenses (income), net,
consists principally of interest expense and foreign exchange gains and losses
associated with the Company's direct sales subsidiaries. Aggregate foreign
exchange losses in fiscal 1998 and 1997 were $1.1 million and $2.0 million,
respectively, including gains relating to foreign currency contracts of $2.2 and
$2.4 million, respectively.
As a result of the factors discussed above, income before income taxes decreased
in fiscal 1998 by 53.8% to $27.6 million from $59.7 million in fiscal 1997. The
effective income tax rate increased to 68.9% (without special charges, the
effective income tax rate decreased to 36.5%) in fiscal 1998 from 38.5% in
fiscal 1997, principally as a result of the non-deductibility for tax purposes
of special charges related to the write down to fair value of goodwill.
Net income in fiscal 1998 decreased by 76.7% to $8.6 million from $36.7 million
in fiscal 1997. As a percentage of net sales, net income represented 3.3% in
fiscal 1998 compared to 14.8% in the previous year.
Net income per basic and diluted common share decreased to $.37 in fiscal 1998,
a decrease of $1.21, or 76.6%, per share, from $1.58 per share in fiscal 1997
due principally to the impact of the special charges for the write down to fair
value of certain goodwill and intangible assets ($1.38 per basic and diluted
common share) offset by income from operations. Weighted average common shares
outstanding decreased to 23,224,780 in fiscal 1998 from 23,227,102 in fiscal
1997 as a result of the forfeiture of restricted stock awards by certain former
employees.
Liquidity and Capital Resources
For fiscal 1999, net cash provided by operations was $56.7 million, an increase
of $15.9 million from the prior year. This increase was due primarily to an
increase in net income adjusted for the impact of special charges for the write
down of the Company's investment in the Cardiac Pathways Corporation and a
reduction in the rate of increase of the Company's inventories. Accounts
receivable, net of the allowance for doubtful accounts, increased by $5.4
million for fiscal 1999, compared to a $3.1 million increase in the prior year.
Accounts receivable, measured in days sales outstanding, decreased to 87 days at
August 31, 1999, from 89 days at August 31, 1998, due principally to a decrease
in the collection period for both U.S. and international sales. Inventories
increased by $5.6 million in fiscal 1999 as compared to an increase of $13.3
million in fiscal 1998. This was due principally to the Company's acquisition of
the cardiac assist division of C.R. Bard, Inc. and an increase in inventory to
support marketing of IAB catheters.
Net cash used in the Company's investing activities increased to $48.9 million
in fiscal 1999 from $39.3 million in the prior year, principally as a result of
the Company's acquisition of the cardiac assist division of C.R. Bard, Inc..
Capital expenditures increased to $19.3 million in fiscal 1999 from $12.7
million in fiscal 1998 due to increased investment related to IAB products.
Net cash used by financing activities increased to $8.6 million in fiscal 1999,
compared to $3.0 million in fiscal 1998. This change resulted principally from
the Company's previously announced open market purchase of up to 1 million
shares of its common stock. As of August 31, 1999, the Company used an aggregate
of $4.1 million of available cash to fund the repurchase of 164,900 shares of
common stock.
As of August 31, 1999, the Company had U.S. bank credit facilities providing a
total of $65.0 million in available revolving credit for general business
purposes, of which $40.3 million remained unused. In addition, certain of the
Company's foreign subsidiaries have revolving credit facilities totaling the
U.S.
(17)
<PAGE>
Liquidity and Capital Resources (Continued):
dollar equivalent of $23.3 million, of which $15.2 million remained unused as of
August 31, 1999. Combined borrowing under these credit facilities increased $3.1
million and $7.8 million during the years ended August 31, 1999 and 1998,
respectively. The Company is required to maintain a ratio of total liabilities
to tangible net worth (total assets less total liabilities and intangible
assets) of no more than 1.5 to 1 and a working capital ratio of 1.25 to 1 or
greater.
During fiscal 1999, 1998 and 1997, the percentage of the Company's sales
invoiced in currencies other than the U.S. dollar was 23.8%, 24.7% and 26.8%,
respectively. In addition, a small part of the Company's cost of goods sold is
denominated in foreign currencies. As a partial hedge against these foreign
currency risk exposures, 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. As of November 1, 1999, outstanding foreign currency
exchange contracts totaling the U.S. dollar equivalent of $11.2 million mature
at various dates through February 2000. 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 potential interest rate fluctuations on its floating
rate debt. The interest rate swap agreement exchanges floating rate for fixed
interest payments over the 5-year life of the agreement. Based on the Company's
assessment of the interest rate environment, the Company exercised its right to
terminate the agreement in August 1999.
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 Company believes that
its risk associated with this concentration is limited due to the Company's
on-going credit review procedures.
Based upon its present plans, the Company believes that its working capital,
operating cash flow and available credit sources will be adequate to repay
current portions of long-term debt, to finance currently planned capital
expenditures and to meet the currently foreseeable liquidity needs of the
Company.
During the periods discussed above, the overall effects of inflation and
seasonality on the Company's business were not significant.
Year 2000 Readiness
The Company has actively addressed the Year 2000 problem as it relates to its
business operations and regulation by the FDA. This disclosure describes the
Company's progress toward its objective of ensuring that the Company's business
systems will operate satisfactorily on or after January 1, 2000.
The Company's Central Venous Catheters, other catheter products, cardiac output
computers and implantable pumps 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
(18)
<PAGE>
Year 2000 Readiness (Continued):
communicating with other electronic devices, and all of these pumps will
function as intended or expected, regardless of the date. Specific pump model
numbers that have or do not have the updated clock calendars are listed on the
Company's web site. The left ventricular assist system and hemodynamic monitor,
the Hemosonic 100, were designed to be Year 2000 compliant.
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, manufacturing management, and
general ledger, 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 Year 2000 validated software was
moved to the production machines. The cost of the Company's software upgrades
was approximately $0.04 million for all U.S. systems and $0.234 million for all
foreign systems. Internal resources devoted to these efforts were 650 man-days.
In the event that the U.S. 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
engineering and manufacturing were tested and are believed to be Year 2000
compliant. Internal resources devoted to upgrading these systems were in excess
of 550 man-days. The cost of hardware and software was $0.122 million.
The Company's PC systems were upgraded in fiscal 1998 at a cost of $0.7 million.
The Company spent $0.5 million in fiscal 1999 to upgrade servers and replace the
e-mail system. Network servers and telecommunication systems are believed to be
Year 2000 compliant. The cost to upgrade data networks was $0.01 million.
Replacements or upgrades to voice-mail systems was $0.09 million.
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.
Final testing has begun in all of the Company's manufacturing locations.
The status of Year 2000 compliance by key suppliers of products and services to
the Company was determined by using a compliance survey. Critical suppliers have
plans underway to assure their readiness for the Year 2000.
The Company has increased production by 10% to help ensure that sufficient
inventories are available for the Year 2000. In addition, the Company has
adopted a policy to discourage excessive stockpiling of Company products by
customers. Finally, 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.
The Company believes that any significant adverse Year 2000 effects will arise
from circumstances beyond its control. In addition, the Company believes that
its United States' operations can compensate for any short-term, isolated Year
2000 failures that may affect the Company's non-U.S. operations. 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.
(19)
<PAGE>
European Union Conversion to Euro:
The Company proactively considered issues related to conversion by eleven member
states of the European Union to a common currency, the "Euro", beginning on
January 1, 1999. For business applications relating to sales order processing,
billing and payments, the Company has completed the necessary software code
modification to address the triangulation requirements of the conversion. The
cost of such modifications was approximately $0.05 million. Pricing of the
Company's products in the European Union generally is market driven. As such,
the Euro conversion did not have any impact on product pricing or contractual
arrangements with health care service providers.
Recent Development:
On September 1, 1999, the Company completed the previously announced acquisition
of Sometec, S.A. for $11.0 million, a French development company that has
recently introduced a non-invasive esophageal ultrasound probe that continuously
measures descending aortic blood flow.
Statements of Financial Accounting Standards not yet Adopted:
FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (as
amended by FAS 137) establishes new procedures for accounting for derivatives
and hedging activities and supersedes and amends a number of existing standards.
This statement is effective for fiscal years beginning after June 15, 2000, but
earlier application is permitted as of the beginning of any fiscal quarter
subsequent to June 15, 1998. The adoption of this new standard will not have a
material effect on the Company as this statement retains the provisions of
Statement of Accounting Standards No. 52 "Foreign Currency Translation" with
respect to long-term and short-term intercompany transactions eliminating the
need for special accounting.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Due to the global nature of its operations, the Company is subject to the
exposures that arise from foreign exchange rate fluctuations. Such exposures
arise from transactions denominated in foreign currencies, primarily from
translation of results of operations from outside the United States,
intercompany loans, and intercompany purchases of inventory. The Company is also
exposed to interest rate changes.
The Company's objective in managing its exposure to foreign currency
fluctuations is to minimize earnings and cash flow volatility associated with
foreign exchange rate changes. The company enters into various contracts that
change in value as foreign exchange rates change to protect the value of its
existing foreign currency assets, liabilities, commitments, and anticipated
foreign currency revenues to meet these objectives. The principal currencies
hedged are the Japanese yen and major European currencies. The gains and losses
on these contracts offset changes in the value of the related exposures. It is
the Company's policy to enter into foreign currency transactions only to the
extent true exposures exist. The Company does not enter into foreign currency
transactions for speculative purposes.
The fair value of all foreign currency forward exchange contracts
outstanding at August 31, 1999 was ($0.3) million, which does not represent the
Company's annual exposure. An analysis was prepared to estimate the sensitivity
of the fair value of all foreign currency forward exchange contracts to
hypothetical 10% favorable and unfavorable changes in spot exchange rates at
August 31, 1999. The results of this estimation, which may vary from actual
results, are as follows
(20)
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk (Continued)
Fair Value of Foreign Currency
(in millions) Forward Exchange Contracts
--------------------------
10% adverse rate movement $ (1.5)
At August 31, 1999 rates (.3)
10% favorable rate movement .7
Any gains and losses on the fair value of derivative contracts would be
largely offset by losses and gains on the underlying transactions or anticipated
transactions. These offsetting gains and losses are not reflected in the above
analysis.
Additional Quantitative and Qualitative disclosures about market risk
(e.g. interest rate and foreign currency exchange risk) are set forth in note 14
to the Company's Consolidated Financial Statements contained herein under Item
14(a)(1).
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 (a) (1) and (2).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
Information regarding directors and nominees for directors of the Company,
as well as certain other information required by this item, will be included in
the Company's Proxy Statement to be issued in connection with its 2000 Annual
Meeting of Shareholders (the "Proxy Statement"), and is incorporated herein by
reference. The information regarding executive officers required by this item is
contained herein in Part I under the caption "Executive Officers".
PART III
Item 11. EXECUTIVE COMPENSATION
Information regarding executive compensation of Arrow's directors and
executive officers will be included in the Proxy Statement and is incorporated
herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of the Company's common stock
by certain beneficial owners and by management of the Company will be included
in the Proxy Statement and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions with
management of the Company will be included in the Proxy Statement and is
incorporated herein by reference.
(21)
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K:
(a) (1) The following financial statement schedule of the Company is filed
as part of this Form 10-K.
Page
----
Report of Independent Accountants 24
Consolidated Balance Sheets at
August 31, 1999 and 1998 25,26
Consolidated Statements of Income
for the years ended August 31, 1999,
1998 and 1997 27
Consolidated Statements of Comprehensive
Income for the years August 31, 1999,
1998 and 1997 28
Consolidated Statements of Cash Flows
for the years ended August 31, 1999,
1998 and 1997 29,30
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
August 31, 1999, 1998 and 1997 31-33
Notes to Consolidated Financial Statements 34-55
(a) (2) The following financial statement schedules of the Company are
filed as part of this Form 10-K:
Page
----
1. Report of Independent Accountants on
Financial Statement Schedule 56
2. Schedule II - Valuation and Qualifying Accounts 57
Other statements and schedules are not presented because they are either
not required or the information required by statements or schedules is presented
elsewhere.
(a) (3) See Exhibit Index on pages 57 through 67 hereof for a list of the
Exhibits filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K:
None
(22)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Frederick J. Hirt
------------------------------------
Frederick J. Hirt
Chief Financial Officer,
Vice President-Finance and Treasurer
Dated: November 23, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ Marlin Miller, Jr.
- ---------------------------- Director, Chairman and November 23, 1999
(Marlin Miller, Jr.) Chief Executive Officer
(Principal Executive
Officer)
/s/ Raymond Neag
- ---------------------------- Director November 23, 1999
(Raymond Neag)
/s/ Frederick J. Hirt
- ---------------------------- Chief Financial Officer, November 23, 1999
(Frederick J. Hirt) Vice President -
Finance and Treasurer
(Principal Financial and
Accounting Officer)
/s/ John H. Broadbent, Jr.
- ---------------------------- Director November 23, 1999
(John H. Broadbent, Jr.)
/s/ T. Jerome Holleran
- ---------------------------- Director, Secretary November 23, 1999
(T. Jerome Holleran)
/s/ Richard T. Niner
- ---------------------------- Director November 23, 1999
(Richard T. Niner)
/s/ George W. Ebright
- ---------------------------- Director November 23, 1999
(George W. Ebright)
/s/ Alan M. Sebulsky
- ---------------------------- Director November 23, 1999
(Alan M. Sebulsky)
/s/ John E. Gurski
- ---------------------------- Director November 23, 1999
(John E. Gurski)
/s/ Carl G. Anderson, Jr.
- ---------------------------- Director November 23, 1999
(Carl G. Anderson, Jr.)
/s/ R. James Macaleer
- ---------------------------- Director November 23, 1999
(R. James Macaleer)
</TABLE>
(23)
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of Arrow International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of Arrow International, Inc. and its subsidiaries ("the Company") at August 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended August 31, 1999 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania 19103
September 28, 1999
(24)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
August 31,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,939 $ 4,652
Accounts receivable, less allowance for doubtful accounts
of $832 and $768 in 1999 and 1998, respectively 70,467 65,107
Inventories 74,809 69,162
Prepaid expenses and other 15,394 13,461
Deferred income taxes 2,018 2,040
--------- ---------
Total current assets 166,627 154,422
--------- ---------
Property, plant and equipment:
Land and improvements 5,628 5,395
Buildings and improvements 75,659 74,650
Machinery and equipment 101,921 87,508
Construction-in-progress 21,731 19,073
--------- ---------
204,939 186,626
Less accumulated depreciation (88,005) (73,828)
--------- ---------
116,934 112,798
--------- ---------
Goodwill, net of accumulated amortization of $7,154
and $4,869 in 1999 and 1998, respectively 35,698 34,320
Intangible and other assets, net of accumulated amortization of
$8,745 and $7,240 in 1999 and 1998, respectively 33,487 20,118
Deferred income taxes 4,738 2,458
--------- ---------
Total assets $ 357,484 $ 324,116
========= =========
</TABLE>
See notes to consolidated financial statements
Continued
(25)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, continued
(In thousands, except share amounts)
August 31,
-----------------------
1999 1998
---------- --------
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 470 $ 522
Notes payable 32,802 29,730
Accounts payable 10,028 7,912
Cash overdrafts 394 1,395
Accrued liabilities 8,707 7,053
Accrued compensation 6,223 6,877
Accrued income taxes 102 2,107
--------- ---------
Total current liabilities 58,726 55,596
Long-term debt 11,105 11,686
Accrued postretirement benefit obligation 9,486 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 in
1999 and 1998 45,661 45,661
Retained earnings 250,931 220,217
Less treasury stock at cost:
3,420,970 and 3,254,752 shares
in 1999 and 1998, respectively (12,618) (8,432)
Accumulated other comprehensive income (expense) (5,807) (9,534)
Unearned compensation -- (44)
--------- ---------
Total shareholders' equity 278,167 247,868
--------- ---------
Total liabilities and shareholders' equity $ 357,484 $ 324,116
========= =========
See notes to consolidated financial statements
(26)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
for the years ended August 31,
-------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 295,946 $ 260,890 $ 245,889
Cost of goods sold 139,241 114,072 110,811
------------ ------------ ------------
Gross profit 156,705 146,818 135,078
------------ ------------ ------------
Operating expenses:
Research, development and engineering 20,335 18,393 15,871
Selling, general and administrative 71,431 62,956 57,444
Special charges 12,819 36,249 --
------------ ------------ ------------
104,585 117,598 73,315
------------ ------------ ------------
Operating income 52,120 29,220 61,763
------------ ------------ ------------
Other expenses (income):
Interest expense, net of amount capitalized 1,328 784 897
Interest income (353) (456) (894)
Other, net (4,196) 1,310 2,028
------------ ------------ ------------
(3,221) 1,638 2,031
------------ ------------ ------------
Income before income taxes 55,341 27,582 59,732
Provision for income taxes 19,646 19,010 22,997
------------ ------------ ------------
Net income $ 35,695 $ 8,572 $ 36,735
============ ============ ============
Basic earnings per common share $ 1.54 $ 0.37 $ 1.58
============ ============ ============
Diluted earnings per common share $ 1.54 $ 0.37 $ 1.58
============ ============ ============
Cash dividends per common share $ .215 $ .195 $ .175
============ ============ ============
Weighted average common shares outstanding 23,195,115 23,224,780 23,227,102
============ ============ ============
</TABLE>
See notes to consolidated financial statements
(27)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
for the fiscal years ended August 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income $ 35,695 $ 8,572 $ 36,735
Other comprehensive income (expense):
Foreign currency translation adjustments (113) (1,071) (4,566)
Unrealized holding loss on securities, net of tax
($545, $804, and $1,425, respectively) (1,758) (1,217) (2,158)
Reclassification adjustment for losses included
in net income, net of tax ($3,082) 5,598 -- --
-------- -------- --------
Other comprehensive income (expense) 3,727 (2,288) (6,724)
-------- -------- --------
Total comprehensive income $ 39,422 $ 6,284 $ 30,011
======== ======== ========
</TABLE>
See notes to consolidated financial statements
(28)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
for the years ended August 31,
-----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 35,695 $ 8,572 $ 36,735
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 14,772 12,092 11,575
Special charges 12,819 36,249 --
Amortization of intangible assets and goodwill 3,790 3,576 4,083
Amortization of unearned compensation 44 253 229
Deferred income taxes (2,258) (1,008) (1,257)
Unrealized holding loss (gain) on securities (2,536) 804 1,425
Other 490 1,042 407
Changes in operating assets and liabilities:
Accounts receivable (4,217) (3,785) (14,981)
Inventories 1,909 (11,405) (10,221)
Prepaid expenses and other (1,958) (4,700) (2,462)
Accounts payable and accrued liabilities 1,402 3,411 5,148
Accrued compensation (1,206) (3,300) 771
Accrued income taxes (2,044) (1,015) 1,450
-------- -------- --------
Total adjustments 21,007 32,214 (3,833)
-------- -------- --------
Net cash provided by operating activities 56,702 40,786 32,902
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (19,264) (12,685) (16,770)
Increase in intangible and other assets (1,753) (4,963) (3,187)
Cash paid for businesses acquired, net (27,903) (21,641) (2,002)
-------- -------- --------
Net cash used in investing activities (48,920) (39,289) (21,959)
-------- -------- --------
Cash flows from financing activities:
Increase (decrease) in notes payable 1,726 6,917 (2,880)
Principal payments of long-term debt,
including current maturities (110) (1,233) (7,508)
(Decrease) increase in book overdrafts (1,001) (4,072) 5,467
Dividends paid (4,981) (4,528) (4,065)
Purchase of treasury stock (4,186) (58) (43)
-------- -------- --------
Net cash used in financing activities (8,552) (2,974) (9,029)
-------- -------- --------
Effects of exchange rate changes on
cash and cash equivalents 57 (147) (445)
Net change in cash and cash equivalents (713) (1,624) 1,469
Cash and cash equivalents at beginning of year 4,652 6,276 4,807
-------- -------- --------
Cash and cash equivalents at end of year $ 3,939 $ 4,652 $ 6,276
======== ======== ========
</TABLE>
See notes to consolidated financial statements
Continued
(29)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
<TABLE>
<CAPTION>
for the years ended August 31,
-------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 1,328 $ 784 $ 897
Income taxes $24,442 $20,412 $21,092
Supplemental schedule of noncash investing and financing activities:
During 1999, 1998 and 1997, the Company assumed liabilities in conjunction with
the purchase of certain intangible assets as follows:
Estimated fair value of assets acquired $30,096 $25,258 $ 6,051
Cash paid for assets, net of cash acquired 27,903 21,641 2,002
------- ------- -------
Liabilities assumed $ 2,193 $ 3,617 $ 4,049
Cash paid for businesses acquired:
Working capital $ 8,401 $ 3,676 $ 2,002
Property, plant and equipment 300 249 --
Goodwill, intangible assets and in-process
research and development 19,202 17,716 --
------- ------- -------
$27,903 $21,641 $ 2,002
======= ======= =======
</TABLE>
See notes to consolidated financial statements
(30)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended August 31, 1999, 1998 and 1997
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive
Income (Expense)
-----------------------
Unrealized
Gain
Common Stock Treasury Stock Unearned (Loss) On Cumulative
---------------------- Retained ------------------- Compen- Marketable Translation
Shares Amount Earnings Shares Amount sation Securities Adjustment
---------- -------- -------- --------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1998 26,478,813 $ 45,661 $220,217 3,254,752 $ (8,432) $(44) $(3,375) $(6,159)
Cash dividends on common
stock, $.215 per share (4,981)
Purchase of treasury stock 166,138 (4,184)
Forfeiture of restricted stock by
terminated employees 80 (2)
Amortization of unearned
compensation 44
Write-down of impaired marketable
Equity securities (see Note 2)
5,598
Unrealized loss on marketable
securities, net of taxes ($545)
(1,758)
Translation adjustments (113)
Net income 35,695
---------- -------- -------- --------- -------- ---- ------- -------
Balance, August 31, 1999 26,478,813 $ 45,661 $250,931 3,420,970 $(12,618) $ -- $ 465 $(6,272)
========== ======== ======== ========= ======== ==== ======= =======
</TABLE>
See notes to consolidated financial statements
Continued
(31)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY, continued
for the years ended August 31, 1999, 1998 and 1997
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive
Income (Expense)
----------------------
Unrealized
Gain
Common Stock Treasury Stock Unearned (Loss) On Cumulative
---------------------- Retained ------------------- Compen- Marketable Translation
Shares Amount Earnings Shares Amount sation Securities Adjustment
---------- -------- -------- --------- -------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1997 26,478,813 $ 45,603 $216,173 3,252,687 $(8,374) $(239) $(2,158) $(5,088)
Cash dividends on common
stock, $.195 per share (4,528)
Purchase of treasury stock 1,085 (38)
Forfeiture of restricted stock by
terminated employees 980 (20) 20
Amortization of unearned
compensation 175
Tax benefit of compensation
deduction related to
Restricted Stock Bonus Plan 58
Unrealized loss on marketable
securities, net of taxes ($804) (1,217)
Translation adjustments (1,071)
Net income 8,572
---------- -------- -------- --------- ------- ----- ------- -------
Balance, August 31, 1998 26,478,813 $ 45,661 $220,217 3,254,752 $(8,432) $ (44) $(3,375) $(6,159)
========== ======== ======== ========= ======= ===== ======= =======
</TABLE>
See notes to consolidated financial statements
Continued
(32)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY, continued
for the years ended August 31, 1999, 1998 and 1997
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive
Income (Expense)
----------------------
Unrealized
Gain
Common Stock Treasury Stock Unearned (Loss) On Cumulative
---------------------- Retained ------------------- Compen- Marketable Translation
Shares Amount Earnings Shares Amount sation Securities Adjustment
---------- -------- -------- --------- -------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1996 26,478,813 $ 45,580 $183,502 3,249,914 $(8,308) $(469) $ -- $ (532)
Cash dividends on common
stock, $.175 per share (4,064)
Purchase of treasury stock 1,213 (33)
Forfeiture of restricted stock by
terminated employees 1,560 (33) 33
Amortization of unearned
compensation 197
Tax benefit of compensation
deduction related to
Restricted Stock Bonus Plan 23
Unrealized loss on marketable
securities, net of taxes ($1,425) (2,158)
Translation adjustments (4,556)
Net income 36,735
---------- -------- -------- --------- ------- ----- ------- -------
Balance, August 31, 1997 26,478,813 $ 45,603 $216,173 3,252,687 $(8,374) $(239) $(2,158) $(5,088)
========== ======== ======== ========= ======= ===== ======= =======
</TABLE>
See notes to consolidated financial statements
(33)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies:
General:
Arrow International, Inc. develops, manufactures and markets a broad range of
clinically advanced, disposable catheters and related products for critical care
and interventional medical procedures.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of Arrow
International, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform to
the fiscal 1999 presentation.
Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments purchased with a
maturity of 90 days or less to be cash equivalents. The Company's cash
management program utilizes zero balance accounts. The carrying amount of cash
and cash equivalents approximate fair value.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Inventory Valuation:
Inventories are valued at lower of cost or market. Cost is determined by the
"first-in, first-out" (FIFO) method.
Goodwill, Intangible and Other Assets:
Goodwill represents the excess of the cost over the fair value of net assets
acquired in business combinations. Goodwill is amortized using the straight-line
method over a period of 15 to 25 years depending on the circumstances.
"Intangible and Other Assets, net" include certain assets acquired from business
acquisitions and investments and are being amortized using the straight-line
method over their estimated periods of benefits, from 5-20 years. Management
reviews the carrying amount of goodwill, intangible and other assets at each
balance sheet date to assess the continued recoverability based on future gross
cash flows and operating results from the related asset, future asset
utilization and changes in market conditions. In accordance with Statement of
Financial Accounting Standards No. 121 (FAS 121) "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of", long-lived
assets and certain identifiable intangibles to be held and used or disposed of
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If an evaluation is
required and a market value is not determinable, the estimated future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if a write down to a new basis is required.
Impairment will be recorded based on an estimate of future discounted cash
flows.
Continued
(34)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
Property, Plant and Equipment:
Property, plant and equipment are stated at cost and are depreciated over the
estimated useful lives of the assets using the straight-line method ranging from
3 to 31 years. Upon retirement, sale or other disposition, the cost and
accumulated depreciation are eliminated from the accounts and any gain or loss
is included in operations.
Capitalized Interest:
Interest is capitalized as part of the historical cost of certain property,
plant and equipment constructed by the Company for its own use. The amount of
interest capitalized is based on a weighted average of the interest rates of
outstanding borrowings during the construction period.
Marketable Equity Securities:
Marketable equity securities are carried at fair market value, with unrealized
holding gains and losses, net of tax, reported as accumulated other
comprehensive income(expense) within shareholders' equity. The fair market value
of securities held at August 31, 1999 and 1998 was $2,050 and $4,352,
respectively. The unrealized holding gain was $465 at August 31, 1999 and the
unrealized holding loss was $3,375 at August 31, 1998.
Financial Instruments:
The Company enters into foreign currency exchange forward contracts, which are
derivative financial instruments, with certain major financial institutions to
reduce the effect of fluctuating exchange rates, primarily on U.S. dollar cash
inflows resulting from the collection of intercompany receivables denominated in
foreign currencies. The Company classifies a portion of certain intercompany
receivables as long-term investments. The foreign exchange translation effect
related to the investment is reported as accumulated other comprehensive
income(expense) within shareholders' equity. Such transactions occur throughout
the year and are probable, but not firmly committed. Forward contracts are
marked to market each accounting period, and the resulting gains or losses on
these contracts are recorded in other income / expense of the consolidated
statements of income. Realized gains and losses on these contracts are offset by
the assets, liabilities and transactions being hedged. In 1998, the Company
entered into an interest rate swap agreement to reduce the impact of its
floating rate debt. The interest rate swap agreement allows the Company to
exchange floating rate 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 was terminated in August 1999. The Company
does not use financial instruments for trading or speculative purposes.
Revenue Recognition:
Revenue is recognized at the time products are shipped and title has passed to
the customer. Net sales represent gross sales invoiced to customers, plus
royalty income, less certain related charges, including freight costs,
discounts, returns and other allowances.
Income Taxes:
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns using current tax rates. Undistributed earnings of the
Company's foreign subsidiaries are indefinitely reinvested and amounted to
$10,565 and $8,193 at August 31, 1999 and 1998, respectively. No deferred taxes
have been provided on these earnings.
Continued
(35)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
Foreign Currency Translation:
During fiscal 1999 and 1998, most of the Company's foreign subsidiaries used
their local currency as the functional currency and translated all assets and
liabilities at year-end exchange rates, all income and expense accounts at
average rates and recorded adjustments from the translation in accumulated other
comprehensive income(expense) within shareholders' equity. The foreign
subsidiaries that still used the U.S. dollar as the functional currency
translated monetary assets and liabilities at year-end exchange rates and
inventories, property and nonmonetary assets and liabilities at historical
rates. Income and expense accounts are translated at the average rates in effect
during the year, except that depreciation, amortization and cost of sales are
translated at historical rates. Adjustments resulting from the translation of
the entities are included in "other income/expense" of the consolidated
statements of income. Gains and losses resulting from transactions of the
Company and its foreign subsidiaries are included in "other income/expense".
Aggregate foreign exchange gains are $4,444 for the year ended August 31, 1999
and foreign exchange losses were $1,102 and $1,996 for the years ended August
31, 1998 and 1997, respectively.
Concentration of Credit Risk:
Concentration of credit risk with respect to trade receivables is limited due to
both the large number of customers and their geographic dispersion. As of August
31, 1999 and 1998, the Company had no significant concentrations of credit risk.
Postretirement Benefits Other Than Pensions:
Postretirement health care and life insurance benefits are recorded using the
accrual method of accounting based on actuarially determined costs, which are
recognized over the period from the date of hire to the full eligibility date of
employees who are expected to qualify for such benefits.
Earnings/(Loss) Per Share
Basic earnings/(loss) per common share is computed by dividing net income/(loss)
available to common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings/(loss) per share is computed by
dividing net income/(loss) available to common shareholders by the
weighted-average number of shares that would have been outstanding if the
dilutive potential common shares had been issued. The diluted earnings/(loss)
per share does not assume the exercise of options that would have an
antidilutive effect on earnings/(loss) per share.
Cost of Start-up Activities:
In the fourth quarter of fiscal 1998, the Company adopted Statement of Position
(SOP) 98-5 "Reporting the Costs of Start-up Activities" issued by the Accounting
Standards Executive Committee of the Institute of Certified Public Accountants
(AcSec). It requires costs of start-up activities and organization costs to be
expensed as incurred. As a result of the adoption, the Company recorded
additional expense included in "Special Charges" of $580 ($368 after tax) or
$.016 per basic and diluted common share.
Computer Software Costs
Effective September 1, 1998, the Company adopted "Statement of Position (SOP)
98-1", "Accounting for the Costs of Computer Software Development or Obtained
for Internal Use" issued by the Accounting Standards Executive Committee of the
Institute of Certified Public Accountants (AcSec). This statement required
certain internal-use computer software costs to be capitalized and amortized
over the useful life of the asset. Total cost capitalized under the new policy
which would otherwise have been expensed were not material to the financial
results or financial position of the Company.
Continued
(36)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
2. Special Charges:
In the second quarter of fiscal 1999, the Company recorded a non-cash pre-tax
special charge of $4,139 ($2,670 after tax or $0.12 per basic and diluted common
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 FDA. In accordance with FAS No. 2,
"Accounting for Research and Development Costs" and FASB Interpretation (FIN)
No. 4, "Applicability of FAS 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
were 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 the
projects commenced within a year of the acquisition date.
In accordance with FAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", and consistent with the Company's accounting policy for
marketable equity securities, in the fourth quarter of fiscal 1999, the Company
determined that the decline in the fair value of its investment in the Cardiac
Pathways Corporation was other than temporary. Accordingly, the Company has
established a new basis in the investment at $440, equivalent to its fair market
value. As a result, the Company realized a special charge of $8,680 before tax,
$5,598 after tax or $0.24 per basic and diluted common share.
In the fourth quarter of fiscal 1998, in accordance with FAS No. 121, and the
Company's accounting policy for goodwill, intangible and long-lived assets, the
Company recorded a non-cash pre-tax special charge of $36,249 ($31,960 after tax
or $1.38 per basic and diluted common share) to write down to fair value certain
goodwill and intangible assets. As a result of the Company's successful
development of more advanced cardiac assist products, the Company estimated that
the carrying value of the goodwill was not recoverable. Accordingly, the Company
reduced the carrying value of goodwill related to previously acquired cardiac
assist products by $29,000. The remaining carrying value of the goodwill is
being amortized using the straight-line method over 10 years. The Company also
reduced the carrying value of certain intangible assets related to cardiac
assist technology and other assets in the amount of $7,249. The remaining
carrying value of these intangible assets is being amortized using the
straight-line method over the estimated periods of benefits, from 5 to 17 years.
3. 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 $27,903. The acquisition has been accounted for
using the purchase method of accounting. The excess of the purchase price over
the estimated fair value of the net assets acquired of approximately $2,448 is
being amortized over a
Continued
(37)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
3. Business Acquisitions (Continued):
period of 25 years. Intangible assets acquired are being amortized over periods
ranging from 5 to 20 years. The results of operations of this business are
included in the Company's consolidated financial statements from the date of
acquisition.
On August 3, 1998, the Company acquired Medical Parameters, Inc. (MPI), a maker
of custom manufactured tubing sets used by critical care physicians to connect
central venous catheters to blood pressure monitoring devices and drug infusion
systems for $15,000 in cash. The acquisition has been accounted for using the
purchase method of accounting. The results of operations are included in the
consolidated statements of income from the date of acquisition. The excess of
the purchase price over the estimated fair value of the net assets acquired of
approximately $12,200 is being amortized over a period of 25 years.
On November 5, 1997, the Company continued its expansion into the cardiac care
market by purchasing the assets of the Cardiac Assist Division of the Boston
Scientific Corporation, a manufacturer and marketer of intra-aortic balloon
catheters and an intra-aortic balloon pump, for $7,321. The acquisition has been
accounted for using the purchase method of accounting. The results of operations
are included in the consolidated statements of income from the date of
acquisition. For the second and third quarters of the fiscal year ended August
31, 1998, the excess of the purchase price over the estimated fair value of net
assets acquired of approximately $5,516 was amortized over a period of 15 years.
In the fourth quarter of 1998, the Company reduced the carrying value of this
cardiac assist asset (see footnote 2).
On July 15, 1997, the Company expanded its critical care product line by
acquiring the implantable constant flow drug delivery pump product business of
Strato/Infusaid Inc., a former subsidiary of Pfizer, Inc. The acquisition has
been accounted for using the purchase method of accounting. In conjunction with
the acquisition, the Company discontinued manufacturing operations effective on
or about November 30, 1997, and compensation expense of $3,464 was accrued and
paid for employee terminations. The cost of the acquisition has been allocated
on the basis of the estimated fair market value of the assets acquired, $6,051
and the liabilities assumed, $4,049. The results of operations are included in
the consolidated statements of income from the date of acquisition.
Pro forma amounts are not presented as the aforementioned acquisitions had no
material effect on the Company's results of operations or financial condition
for any of the years presented.
4. Stock Option Plans:
The Company has adopted two stock plans, the 1992 Stock Incentive Plan (the
"1992 Plan"), which was adopted on April 1, 1992, and the Directors Stock
Incentive Plan (the "Directors Plan"), which was approved by the shareholders on
January 17, 1996. The 1992 Plan authorizes the granting of stock options, stock
appreciation rights and restricted stock. The Directors Plan authorizes the
granting of a maximum of 100,000 non-qualified stock options. Under the
Directors Plan, members of the Board of Directors of the Company and its
subsidiaries are eligible to participate if they are not also employees or
consultants of the Company or its subsidiaries, were not shareholders at the
time of the Company's initial public offering on June 9, 1992 and do not serve
on the Board as representatives of the interest of shareholders who have made an
investment in the Company. The Directors Plan authorizes an initial grant of an
option to purchase 5,000 shares of common stock upon each eligible director's
initial election to the Board and the grant of an additional option to purchase
500 shares of common stock on the date each year when directors are elected to
the Board.
Continued
(38)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
4. Stock Option Plans (Continued):
The Company follows the provision of Accounting Principles Board (APB) No. 25,
"Accounting for Stock Issued to Employees", and related interpretations, which
require compensation expense for options to be recognized only if the market
price of the underlying stock exceeds the exercise price on the date of grant.
Accordingly, the Company has not recognized compensation expense for its options
granted during the 1999, 1998 and 1997 fiscal years.
On December 1, 1993 and February 11, 1994, the Company issued 44,900 and 8,200
shares, respectively, of restricted common stock to certain employees pursuant
to the 1992 Plan. The market value of the shares awarded, based on the closing
price of $20.75 and $23.125 per share, as reported by the Nasdaq Stock Market on
the dates of the awards, was $932 and $190, respectively. The transactions were
recorded as unearned compensation in a separate component of shareholders'
equity and are being amortized to expense over the five-year vesting period.
In fiscal 1999, 1998 and 1996, options to purchase 481,000, 180,900 and 171,700
shares, respectively of the Company common stock were granted to key employees
of the Company pursuant to the 1992 plan. There were no options granted in the
fiscal 1997. The option price per share ranged from $25.125 to $31.875 in fiscal
1999, $27.75 to $35 in fiscal 1998 and was $38 in fiscal 1996. These amounts
represent the fair market value of the common stock of the Company on the dates
the options were granted. The options expire ten years from the grant date. The
options vest ratably over five years at one year intervals from the grant date
and become exercisable at any time once vested.
On January 20, 1999, January 21, 1998, January 15, 1997 and January 17, 1996,
options to purchase 2,000, 6,500, 10,500 and 5,000 shares, respectively, of the
Company's common stock were granted to directors of the Company pursuant to the
Directors Plan. The option price per share for the 1999, 1998, 1997 and 1996
awards were $25.125, $38.375, $29.25 and $38, respectively, the fair market
value of the common stock of the Company on the dates the options were granted.
The options expire ten years from the grant date. The options vest fully one
year from the grant date and become exercisable at any time once vested.
Stock option activity for the years ended August 31, 1999, 1998 and 1997 is
summarized below:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
1999 Price 1998 Price 1997 Price
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
September 1 346,260 $ 34.50 174,420 $ 37.47 176,700 $ 38.00
Granted 483,000 $ 27.63 187,400 $ 31.95 10,500 $ 29.25
Exercised 0 -- 0 -- 0 --
Terminated (20,960) $ 35.10 (15,560) $ 37.17 (12,780) $ 38.00
------- ------- -------
Outstanding at
August 31 808,300 $ 30.38 346,260 $ 34.50 174,420 $ 37.47
Exercisable at
August 31 123,360 $ 35.98 74,380 $ 36.76 37,120 $ 38.00
</TABLE>
Continued
(39)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
4. Stock Option Plans (Continued):
Stock options outstanding at August 31, 1999 are summarized below:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$25.125 - $38.375 808,300 8.72 years $30.38 123,360 $35.98
</TABLE>
The Company adopted the disclosure provisions of FAS No. 123, "Accounting for
Stock-Based Compensation". As permitted under FAS 123, the Company continues to
apply the existing accounting rules under APB No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made as if the fair value method in measuring compensation cost for stock
options granted subsequent to December 15, 1995, had been applied.
The per share weighted average value of stock options granted in fiscal
1999,1998 and 1997 was $10.52, $13.35 and $13.88, respectively. The fair value
was estimated as of the grant date using the Black-Scholes option pricing model
with the following average assumption:
1999 1998 1997
------- ------- -------
Risk-free interest rate 5.09% 6.13% 5.17%
Dividend yield 0.80% 0.66% 0.58%
Volatility factor 37.28% 40.00% 40.00%
Expected lives 5 years 5 years 4 years
Had compensation expense for stock options granted in fiscal 1999, 1998 and 1997
been recorded based on the fair market value at the grant date, the Company's
net income and basic and diluted earnings per share, net of income tax effects,
for the years ended August 31, 1999, 1998 and 1997 would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net income applicable to common shareholders
As reported $ 35,695 $ 8,572 $36,735
Pro forma $ 35,047 $ 7,949 $36,375
Basic and diluted earnings per
common share
As reported $ 1.54 $ 0.37 $ 1.58
Pro forma $ 1.51 $ 0.34 $ 1.57
</TABLE>
The pro forma effects are not representative of the effects on reported net
income for future years, as most of the stock option grants vest in cumulative
increments over a period of five years.
(Continued)
(40)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
5. Related Party Transactions:
During fiscal 1999 and 1998, the Company made purchases amounting to $31 and
$66, respectively, of products from Precision Medical Products, Inc. ("PMP"), a
former subsidiary of Arrow Precision Products, Inc. ("Precision"), currently
owned by certain former management employees of Precision, including T. Jerome
Holleran, who serves as PMP's Chairman and Chief Executive Officer and as
Secretary and a Director of the Company. In addition, the Company provided
certain computer related services to PMP during fiscal 1999 of $3.
During fiscal 1998, the Company assumed certain pension and retirement health
care benefit obligations of Precision, which is related to the Company through
common ownership, in exchange for the transfer by Precision to the Company of
appropriate assets to satisfy such obligations. See Note 12, Retirement
Benefits, for additional details related to this transaction. In addition,
Precision transferred to the Company, with no payment by either party to the
other, its rights and responsibilities under a split dollar life insurance
policy covering the former Chief Operating Officer of Precision.
The Company also made payments on behalf of Precision in the amount of $170,
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 during fiscal 1998. The Company had a
net receivable from Precision amounting to $369 at August 31, 1998 and no net
balance at August 31, 1999.
During fiscal 1997, certain of the Company facilities, personnel and services
were utilized by Precision. Effective August 29, 1997, such utilization ended
when Precision Medical Products, Inc., the wholly owned and remaining operating
subsidiary of Precision, was acquired by a company formed by certain management
employees of Precision.
The Company charged Precision $379 for the cost of such utilization during the
year ended August 31, 1997. The Company made purchases from Precision amounting
to $1,199 for the year ended August 31, 1997.
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
$891 during fiscal 1997. The Company had a net receivable from Precision of $190
at August 31, 1997.
Continued
(41)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
6. Rent Expense:
The Company leases certain warehouses and production facilities, office
equipment and vehicles under leases with varying terms.
Rent expense under operating leases totaled $4,353, $3,638 and $3,201 for fiscal
years ended August 31, 1999, 1998 and 1997, respectively. Following is a
schedule by year showing future minimum rentals under operating leases.
Year Ending August 31, Total
---------------------- --------
2000 $ 3,738
2001 2,029
2002 1,328
2003 523
2004 161
Thereafter 375
--------
$ 8,154
========
7. Inventories:
Inventories are summarized as follows:
August 31,
----------
1999 1998
-------- --------
Finished goods $ 31,779 $ 23,445
Semi-finished goods 12,654 18,492
Work-in-process 10,528 9,558
Raw materials 19,848 17,667
-------- --------
$ 74,809 $ 69,162
======== ========
8. Credit Facilities:
As of August 31, 1999 and 1998, the Company had U.S. bank credit facilities
providing a total of $65,000 and $50,000, respectively, in revolving credit for
general business purposes of which $24,709 and $23,322 were outstanding,
respectively. Interest rate terms for both U.S. and foreign bank credit
facilities are based on either bids provided by the bank or the prime rate,
London Interbank Offered Rates (LIBOR) or Certificate of Deposit rates, plus
applicable margins. Certain of these borrowings, primarily those with U.S.
banks, are due on demand. Interest is payable monthly during the revolving
credit period. At August 31, 1999 and 1998, the weighted average interest rates
on short-term borrowings were 5.0% and 5.3%, respectively. At August 31, 1999
and 1998, certain of the Company's foreign subsidiaries had available revolving
credit facilities, at market rates of interest, totaling the U.S. dollar
equivalent of $23,254 and $11,323, under which $8,093 and $6,407 was
outstanding, respectively. The Company is required to maintain a ratio of total
liabilities to tangible net worth (total assets less total liabilities and
intangible assets) of no more than 1.5 to 1 and a working capital ratio of 1.25
to 1 or greater. At August 31, 1999 and 1998, the carrying amount of short-term
borrowings approximated fair value and the Company was in compliance with its
lending agreements and convenants.
Continued
(42)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
9. Accrued Compensation:
The components of accrued compensation at August 31, 1999 and 1998 are as
follows:
1999 1998
--------- ---------
Accrued vacation pay $ 2,823 $ 2,780
Accrued payroll 1,991 1,983
Accrued productivity plan compensation 1,024 1,668
Other 385 446
--------- ---------
$ 6,223 $ 6,877
========= =========
10. Long-Term Debt:
<TABLE>
<CAPTION>
August 31,
1999 1998
------- -------
<S> <C> <C>
Long-term debt consists of the following:
Bank note payable in July 2001, plus interest at a quoted fixed rate or at a
variable rate based upon LIBOR plus 0.75%. As of August 31, 1999 the interest
rate is fixed at 3.71% through January 2000. At August 31, 1998,
the interest rate was fixed at 4.55% $ 9,492 $10,066
Industrial Development Authority Bonds, $3,500 face amount, subject to mandatory
annual sinking fund payments of $200 from December 1989 through December 1998;
and $300 from December 1999 through December 2003; plus interest at a variable
rate ranging from 2.45% to 4.50% in 1999 and from 3.35% to 4.90%
in 1998. 1,500 1,700
Bank note payable in monthly installments
of $8 through November 2003, plus interest at a
fixed rate of 1.875%. 431 --
Bank note payable in quarterly installments of $89 through March 1999, plus
interest at a fixed
rate of 1.34%. -- 267
Bank note payable in monthly installments
of $6 through October 2001, plus interest at
a fixed rate of 1.50%. 152 175
------- -------
Total debt $11,575 $12,208
Less current maturities 470 522
------- -------
$11,105 $11,686
======= =======
</TABLE>
Continued
(43)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
10. Long-Term Debt (Continued):
The Industrial Development Authority Bonds are collateralized by a $1,511 letter
of credit and the Company's headquarters, research and development, and
manufacturing facility in Reading, PA. The Company also has a U.S. dollar
equivalent of irrevocable standby letters of credit totaling $5,460 related to
subsidiary indebtedness and workers compensation insurance coverage and foreign
performance bonds. The annual commitment fees associated with the letters of
credit were .70% per annum at August 31, 1999.
Following is a schedule by year showing maturities of long-term debt for each of
the five years in the period ending August 31, 2004:
Year Ending August 31, Total
---------------------- ------------
2000 $ 470
2001 9,962
2002 412
2003 400
2004 331
Thereafter --
------------
$ 11,575
============
Total interest costs for fiscal 1999, 1998 and 1997 were $2,537, $2,091 and
$2,510, respectively, of which $1,209, $1,307 and $1,613, respectively, were
capitalized.
At August 31, 1999 and 1998, the carrying amount of long term debt approximated
fair value.
11. Income Taxes:
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------------
Federal State Foreign Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Current $ 20,118 $ 1,854 $ 2,458 $ 24,430
Deferred (4,367) (417) -- (4,784)
--------- --------- --------- ---------
$ 15,751 $ 1,437 $ 2,458 $ 19,646
========= ========= ========= =========
1998
--------------------------------------------------------------------------
Federal State Foreign Total
--------- --------- --------- ---------
Current $ 16,407 $ 2,020 $ 380 $ 18,807
Deferred 179 24 -- 203
--------- --------- --------- ---------
$ 16,586 $ 2,044 $ 380 $ 19,010
========= ========= ========= =========
1997
--------------------------------------------------------------------------
Federal State Foreign Total
--------- --------- --------- ---------
Current $ 19,953 $ 3,499 $ (287) $ 23,165
Deferred (148) (20) -- (168)
--------- --------- --------- ---------
$ 19,805 $ 3,479 $ (287) $ 22,997
========= ========= ========= =========
</TABLE>
Continued
(44)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
11. Income Taxes (Continued):
Research and development tax credits were $462, $367 and $509 in fiscal 1999,
1998 and 1997, respectively.
Deferred taxes are recorded based upon differences between financial statement
and tax bases of assets and liabilities. The following deferred taxes and
balance sheet classifications are recorded as of August 31, 1999 and 1998:
Deferred tax assets (liabilities): 1999 1998
------- -------
Accounts receivable $ 68 $ (311)
Inventories 1,081 1,727
Marketable securities 2,798 2,229
Property, plant and equipment (5,480) (7,942)
Intangible assets 5,712 5,506
Accrued liabilities (1,915) (1,257)
Accrued compensation 682 738
Postretirement benefits other than pensions 3,810 3,808
------- -------
$ 6,756 $ 4,498
======= =======
Balance Sheet classification:
Current deferred tax assets $ 2,018 $ 2,040
Non current deferred tax assets 4,738 2,458
------- -------
$ 6,756 $ 4,498
======= =======
The sources of significant temporary differences which gave rise to deferred
taxes and their effects were as follows:
1999 1998 1997
------- ------- -------
Accounts receivable $ 379 $ (604) $ 27
Depreciation and amortization 1,261 (4,075) (410)
Marketable securities 569 804 1,425
Common stock issued
to employees (70) (66) (21)
Accrued vacation pay 14 (55) 150
Inventories (646) (99) 248
Postretirement benefits
and other liabilities (656) 484 145
Intangible assets 1,587 4,673 --
Other (180) (54) (307)
------- ------- -------
$ 2,258 $ 1,008 $ 1,257
======= ======= =======
Continued
(45)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
11. Income Taxes (Continued):
The following is a reconciliation of the statutory federal income tax rate to
the Company's effective tax rate expressed as a percentage of income from
operations before income taxes:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 2.1 4.8 3.8
Foreign statutory tax rates differential .6 .7 1.8
Foreign sales corporation (2.8) (6.2) (2.9)
Research and development tax credit (1.0) (1.3) (1.0)
Goodwill amortization -- 32.7 --
Other 1.6 3.2 1.8
---- ---- ----
Effective tax rate 35.5% 68.9% 38.5%
==== ==== ====
12. Retirement Benefits:
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" does not change the measurement or recognition of those plans, but
revises disclosures about pensions and other postretirement benefit plans. The
Company adopted SFAS No. 132 in fiscal 1999. Restatement of disclosures for the
prior years have been made for comparative purposes.
Pension Plans:
The Company has three noncontributory pension plans that cover substantially all
employees. Benefits under the plans are based upon an employee's compensation
and years of service and, where applicable, the provisions of negotiated labor
contracts. It is the Company's policy to make contributions to these plans
sufficient to meet the minimum funding requirements of applicable laws and
regulations plus such additional amounts, if any, as the Company's actuarial
consultants advise to be appropriate. The projected unit credit method is
utilized for determination of actuarial amounts.
As discussed in Note 5, Related Party Transactions, the Company assumed certain
pension obligations of Precision, which is related to the Company through common
ownership, in exchange for the transfer by Precision to the Company of
appropriate assets to satisfy such obligations. Consequently, Precision's two
pension plans, both of which were overfunded as of August 31, 1997, were merged
with the Company's pension plans covering comparable employees. The Company paid
Precision $2,975, the amount by which the value of Precision's pension plan
assets exceeded the actuarially determined present value of Precision's pension
plan obligations. The payment exceeded the prepaid pension asset recorded on
Precision's financial statements by $2,071. This difference ("Plan acquisition
differential") is being amortized over an actuarially determined period.
Plan assets consist principally of U.S. government securities, short-term
investments, other equity securities and cash equivalents.
Continued
(46)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
12. Retirement Benefits (Continued):
Postretirement Benefits Other Than Pensions:
The Company provides limited amounts of postretirement health and life insurance
benefit plan coverage for substantially all of its employees. The determination
of postretirement benefit cost for postretirement health benefit plans is based
on comprehensive hospital, medical, surgical, and dental benefit provisions. The
determination of postretirement benefit cost for postretirement life insurance
benefits is based on stated policy amounts.
As discussed in Note 5, Related Party Transactions, the Company assumed certain
postretirement benefit obligations of Precision, which is related to the Company
through common ownership, in exchange for the transfer by Precision to the
Company of appropriate assets to satisfy such obligations. Consequently,
Precision's postretirement benefit plan, which was unfunded as of August 31,
1997, was merged with the Company's postretirement plan covering comparable
employees. Precision paid the Company $757, the actuarially determined present
value of Precision's postretirement benefit plan obligations. The payment
exceeded the post retirement benefit liability recorded on Precision's financial
statements by $607. The plan acquisition differential is being amortized over an
actuarially determined period.
The following summarizes the Company's benefit obligations, changes in plan
assets and funded status:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
August 31, August 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 40,898 $ 27,617 $ 7,856 $ 5,855
Service cost 2,122 2,118 307 271
Interest cost 2,815 2,768 546 534
Plan participants' contributions -- -- -- 5
Amendments -- 3,152 -- --
Actuarial (gain) loss (4,665) 2,176 (673) 696
Acquisition -- 4,370 -- 758
Benefits paid (1,544) (1,303) (340) (263)
-------- -------- -------- --------
Benefit obligation at end of year $ 39,626 $ 40,898 $ 7,696 $ 7,856
======== ======== ======== ========
Change in plan assets:
Fair value of plan assets at beginning
of year $ 46,646 $ 38,139 $ -- $ --
Actual return on plan assets 13,507 364 -- --
Acquisitions -- 8,252 -- --
Employer contributions 2,146 1,194 340 258
Plan participants' contributions -- -- -- 5
Benefits paid (1,544) (1,303) (340) (263)
-------- -------- -------- --------
Fair value of plan assets at end of year $ 60,755 $ 46,646 $ -0- $ -0-
======== ======== ======== ========
</TABLE>
Continued
(47)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
12. Retirement Benefits (Continued):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
August 31, August 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Funded status $ 21,129 $ 5,748 $ (7,696) $ (7,856)
Unrecognized net actuarial (gain) loss (19,395) (5,732) (1,684) (1,014)
Unrecognized prior service cost 4,875 5,222 (711) (795)
Unrecognized transition obligation (asset) (724) (832) 778 827
Unrecognized plan acquisition differential 1,771 1,921 (549) (578)
-------- -------- -------- --------
Prepaid (accrued) benefit cost $ 7,656 $ 6,327 $ (9,862) $ (9,416)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
August 31, August 31,
Weighted-average assumptions as of 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.75% 7.00% 7.75% 7.75% 7.00% 7.75%
Expected return on plan assets 9.50% 9.50% 9.50% N/A N/A N/A
Rate of compensation increase 0.00% 0.00% 0.00% N/A N/A N/A
Health care cost trend rate:
Initial trend rate N/A N/A N/A 6.50% 7.00% 8.00%
Ultimate trend rate N/A N/A N/A 5.00% 5.00% 5.00%
Years until ultimate trend is reached N/A N/A N/A 9 10 11
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
Components of net periodic benefit August 31, August 31,
cost for the fiscal years ended 1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 2,122 $ 2,118 $ 1,560 $ 307 $ 271 $ 297
Interest cost 2,815 2,768 1,903 546 534 408
Expected return on plan assets (4,415) (4,382) (2,873) -- -- --
Amortization of prior service costs 347 347 135 (84) (84) (84)
Amortization of transition obligation (asset) (107) (107) (115) 49 49 --
Amortization of net actuarial (gain) loss (94) (403) (151) (3) (25) (67)
Plan acquisition differential 149 149 -- (29) (29) --
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ 817 $ 490 $ 459 $ 786 $ 716 $ 554
======== ======== ======== ======== ======== ========
Continued
(48)
</TABLE>
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
12. Retirement Benefits (Continued):
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care costs trend rates would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest
cost components $ 78 $ (59)
Effect on postretirement benefit obligation $ 571 $ 308
Savings Plan:
The Company has a defined contribution savings plan that covers substantially
all of its eligible U.S. employees. The purpose of the plan is generally to
provide additional financial security to employees during retirement.
Participants in the savings plan may elect to contribute, on a before-tax basis,
a certain percent of their annual earnings with the Company matching a portion
of these contributions. Expense under the plan was $896, $838 and $789 for the
fiscal 1999, 1998 and 1997, respectively.
13. Segment Reporting:
In the fourth quarter of fiscal 1999, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 changes the way the Company reports information about its operating segments
to the "management approach". The management approach is based on the way
management organizes the segments within the enterprise for making operating
decisions and assessing performance. The Company operates as a single reportable
segment. Restatement of disclosures for prior years have been made for
comparative purposes. The Company operates in four main geographic regions,
therefore, information about products and geographic areas is presented below.
Continued
(49)
<PAGE>
13. Segment Reporting (Continued):
The following table provides information about the Company's sales by product:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ---------------------- -------------------------
Critical Cardiac Critical Cardiac Critical Cardiac
Care Care Care Care Care Care
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sales to external
customers $ 241,000 $ 54,946 $ 218,100 $ 42,790 $ 207,295 $ 38,594
</TABLE>
The following tables presents information about geographic areas:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------------
United Asia and Other
States(1) Africa Europe Foreign Eliminations Consolidated
----------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 225,369 $ 34,514 $ 27,721 $ 8,342 - $ 295,946
Long-lived assets at
August 31 $ 240,350 $ 1,740 $ 26,884 $ 2,047 $ (84,902) $ 186,119
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------
United Asia and Other
States(1) Africa Europe Foreign Eliminations Consolidated
----------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 200,819 $ 28,270 $ 24,756 $ 7,045 - $ 260,890
Long-lived assets at
August 31 $ 214,111 $ 1,303 $ 26,935 $ 1,772 $ (76,885) $ 167,236
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
----------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 183,531 $ 29,223 $ 27,090 $ 6,045 - $ 245,889
Long-lived assets at
August 31 $ 218,196 $ 1,594 $ 14,660 $ 1,804 $ (51,212) $ 185,042
</TABLE>
Export sales for domestic operations to unaffiliated customers were $34,233,
$32,688 and $28,410 for fiscal 1999, 1998 and 1997, respectively.
(1) Included in United States Operating income was a special charge of $12,819
and $36,249 in fiscal 1999 and 1998, respectively.
Continued
(50)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
14. Financial Instruments:
During fiscal 1999 and 1998, the percentage of the Company's sales invoiced in
currencies other than U.S. dollars was 23.8% and 24.7%, respectively. In
addition, a small part of the Company's cost of goods sold is denominated in
foreign currencies. The Company enters into foreign currency forward contracts,
which are derivative financial instruments, with major financial institutions to
reduce the effect of these foreign currency risk exposures, primarily on U.S.
dollar cash inflows resulting from the collection of intercompany receivables
denominated in foreign currencies. Such transactions occur throughout the year
and are probable, but not firmly committed. Forward contracts are marked to
market each accounting period, and the resulting gains or losses on these
contracts are recorded in Other Income / Expense of the consolidated statements
of income. Realized gains and losses on these contracts are offset by the
assets, liabilities and transactions being hedged. The Company does not use
financial instruments for trading or speculative purposes. The Company expects
to continue to utilize foreign currency exchange contracts to manage its
exposure, although there can be no assurance that the Company's efforts in this
regard will be successful.
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 fiscal 1998, the Company
entered into an interest rate swap to reduce the impact of its floating rate
debt. The swap agreement allowed the Company to exchange floating rates for
fixed interest payments over the life of the agreement. The differential was
accrued as interest rates changed and was recorded as interest expense. The
effect of the agreement was to limit interest rate exposure to 5.62% on $5.0
million of its revolving credit. The agreement was terminated on August 31,
1999. As a result of the swap agreement interest expense was increased by $27
and $2 for the years ended August 31, 1999 and 1998, respectively. The
termination of the swap agreement resulted in a $55 gain for fiscal 1999.
The Company's exposure to credit risk consists principally of trade receivables.
Hospitals and international dealers account for a substantial portion of trade
receivables and collateral is generally not required. The risk associated with
this concentration is limited due to the Company's on-going credit review
procedures.
At August 31, 1999, the Company had forward exchange contracts to sell foreign
currencies which mature at various dates through February 2000. The following
table identifies forward exchange contracts to sell foreign currencies and the
interest rate swap agreement at August 31, 1999 and 1998 as follows:
August 31, 1999 August 31, 1998
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
------- ----- ------- -----
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $ 5,698 $ 5,855 $ 7,062 $ 6,404
French francs -- -- 1,168 1,191
Spanish pesetas -- -- 1,468 1,507
Canadian dollars 1,115 1,108 -- --
Greek drachmas 1,571 1,603 1,136 1,203
Mexican peso 1,012 1,064 909 977
African rand 1,270 1,314 -- --
Netherlands guilder -- -- 498 503
-------- -------- -------- --------
$ 10,666 $ 10,944 $ 12,241 $ 11,785
======== ======== ======== ========
Interest rate swap agreement $ -- $ -- $ 5,000 $ (77)
======== ======== ======== ========
Continued
(51)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
15. Contingencies:
The Company is a party to certain legal actions arising in the ordinary course
of its business. Based upon information presently available, 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 effect
on the Company's financial position or results of operations.
16. Statements of Financial Accounting Standards not yet Adopted:
FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (as
amended by FAS 137), establishes new procedures for accounting for derivatives
and hedging activities and supersedes and amends a number of existing standards.
This statement is effective for fiscal years beginning after June 15, 2000, but
earlier application is permitted as of the beginning of any fiscal quarter
subsequent to June 15, 1998. The adoption of this new standard will not have a
material effect on the Company as this statement retains the provisions of
Statement of Accounting Standards No. 52 "Foreign Currency Translation" with
respect to long-term and short-term intercompany transactions eliminating the
need for special accounting.
Continued
(52)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
17. Summary of Quarterly Results (unaudited):
Quarterly financial results for the year ended August 31, 1999 are as follows:
Quarter
-----------------------------------------------
11-30-98 2-28-99 5-31-99 8-31-99
-------- -------- -------- --------
Net sales $ 68,085 $ 74,274 $ 75,865 $ 77,722
Cost of goods sold 31,036 35,625 35,908 36,672
-------- -------- -------- --------
Gross profit 37,049 38,649 39,957 41,050
Operating expenses
Research, development
and engineering 5,311 5,440 4,988 4,596
Selling, general and
administrative 16,855 17,369 17,813 19,394
Special charges* -- 4,139 -- 8,680
Operating income 14,883 11,701 17,156 8,380
Other expenses (income) (1,092) (1,377) (776) 24
Income before income
taxes 15,975 13,078 17,932 8,356
Provision for income taxes 5,831 4,773 6,545 2,497
Net income $ 10,144 $ 8,305 $ 11,387 $ 5,859
Basic and diluted
earnings
per common share $ 0.44 $ 0.36 $ 0.49 $ 0.25
Weighted average common
shares outstanding (000's) 23,225 23,224 23,201 23,131
* In the second and fourth quarters of fiscal 1999, the Company recorded special
charges (See Footnote 2).
Continued
(53)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
17. Summary of Quarterly Results (unaudited) (Continued):
Quarterly financial results for the year ended August 31, 1998 are as follows:
Quarter
--------------------------------------------
11-30-97 2-28-98 5-31-98 8-31-98
-------- -------- -------- --------
Net sales $ 63,769 $ 66,770 $ 65,735 $ 64,616
Cost of goods sold 27,860 29,831 28,499 27,882
-------- -------- -------- --------
Gross profit 35,909 36,939 37,236 36,734
Operating expenses
Research, development
and engineering 4,158 4,330 4,799 5,106
Selling, general and
administrative 15,295 15,349 16,291 16,021
Special charge* -- -- -- 36,249
Operating income (loss) 16,456 17,260 16,146 (20,642)
Other expenses 178 217 599 644
Income (loss) before
income taxes 16,278 17,043 15,547 (21,286)
Provision for income taxes 6,104 6,391 5,830 685
Net income (loss) $ 10,174 $ 10,652 $ 9,717 $(21,971)
Basic and diluted
earnings (loss)
per common share $ .44 $ .46 $ .42 $ (.95)
Weighted average common
shares outstanding (000's) 23,226 23,225 23,224 23,224
* In the fourth quarter of fiscal 1998, the Company recorded a special charge
(See Footnote 2).
18. Subsequent Events
On September 1, 1999, the Company completed the previously announced acquisition
of Sometec, S.A. for $11.0 million, a French development company that has
recently introduced a non-invasive esophageal ultrasound probe that continuously
measures descending aortic blood flow.
Continued
(54)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
19. Earnings per Share:
The following is a reconciliation of weighted average common shares outstanding
to weighted average common shares outstanding assuming dilution used in the
calculation of earnings per share for the fiscal years ended August 31, 1999,
1998 and 1997:
1999 1998 1997
---------- ---------- ----------
Average common shares outstanding 23,195,115 23,224,780 23,227,102
Common shares issuable(1) -0- 925 -0-
---------- ---------- ----------
Average common shares
outstanding assuming dilution 23,195,115 23,225,705 23,227,102
(1) Issuable primarily under stock option plans.
Stock options outstanding to purchase 808,300, 335,760 and 174,420 shares of
common stock were not included in the computation of earnings per common share
assuming dilution because the options' exercise prices were greater than the
average market price of the common shares at August 31, 1999, 1998 and 1997,
respectively. The net income effect of dilutive securities was not significant.
In fiscal 1999 and 1998, the weighted average number of shares outstanding for
the basic and diluted per share calculations are identical since the assumed
exercise of outstanding options would be antidilutive.
(55)
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors and
Shareholders of Arrow International, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated September 28, 1999 appearing in Item 14(a)(1) of this Form 10-K also
included an audit of the financial statement schedule listed in Item 14(a)(2) of
this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
September 28, 1999
(56)
<PAGE>
SCHEDULE II
ARROW INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(Column A) (Column B) (Column C) (Column D) (Column E)
---------- ---------- ---------- ---------- ----------
Additions
----------------------
Charges / Charged
Balance at (Credits) to to Other Balance at
Beginning Cost and Accounts Deductions End
Description of Period Expenses (Describe) (Describe)(1) of Period
----------- --------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
For the year ended August 31, 1997:
Accounts receivable:
Allowance for doubtful accounts $ 774 $ 195 -- $ 114 $ 855
========= ======== ========== ========== =========
Investment, at cost:
Valuation reserve $ 780 -- -- $ 780 $ --
========= ======== ========== ========== =========
For the year ended August 31, 1998:
Accounts receivable:
Allowance for doubtful accounts $ 855 $ 116 -- $ 203 $ 768
========= ======== ========== ========== =========
For the year ended August 31, 1999:
Accounts receivable:
Allowance for doubtful accounts $ 768 $ 440 -- $ 376 $ 832
========= ======== ========== ========== =========
</TABLE>
(1) Deductions represent write-off of accounts receivable and investment.
(57)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
- ------ ---------- ----------------
<S> <C> <C>
3.1 Restated Articles of Incorporation of Incorporated by reference from
the Company. Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal
year ended August 31, 1992
3.2 By-laws of the Company, as amended Incorporated by reference from
and restated. Exhibit 3.4 to the Company's
Registration Statement on Form S-1
File No. 33-47163 ("Registration
Statement")
4.1 Form of Common Stock certificate. Incorporated by reference from
Exhibit 4.1 to the Company's
Registration Statement
10.1 1992 Stock Incentive Plan. Incorporated by reference from
Exhibit 10.1 to the Company's
Registration Statement
10.2 Investment Plan - 401(k). Incorporated by reference from
Exhibit 10.2 to the Company's
Registration Statement
10.3.1 Amended and Restated Retirement Incorporated by reference from
Plan for Salaried Employees of the Exhibit 10.3 to the Company's
Company, effective September 1, 1989. Registration Statement
10.3.2 Amended and Restated Retirement Incorporated by reference from
Plan for Salaried Employees of the Exhibit 10.3.2 to the
Company, effective September 1, 1989, Company's Annual Report on
as amended. Form 10-K for the year ended
August 31, 1993 (the "1993
Form 10-K")
10.4 Amended and Restated Restricted Incorporated by reference from
Stock Bonus Plan. Exhibit 10.4 to the Company's
Registration Statement
10.5 Split Dollar Life Insurance Incorporated by reference from
Agreements, dated December 16, Exhibit 10.5 to the Company's
1991, between the Company and Registration Statement
James H. Miller, as Trustee under the
provisions of a certain Irrevocable
Trust Agreement with Marlin Miller, Jr.
dated December 13, 1991.
10.6 Split Dollar Life Insurance Agreements, Incorporated by reference from
dated December 16, 1991, between the Exhibit 10.6 to the Company's
Company and Raymond Neag Registration Statement
Irrevocable Trust, dated October 11,
1991, Evelyn Neag, Trustee.
</TABLE>
(58)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
- ------ ---------- ----------------
<S> <C> <C>
10.7 Split Dollar Life Insurance Agreements, Incorporated by reference from
dated December 16, 1991, between Exhibit 10.7 to the Company's
the Company and Robert E. Gedney, Registration Statement
as Trustee under the provisions of a
certain Irrevocable Trust Agreement
with John H. Broadbent, Jr. dated
December 13, 1991.
10.8 Split Dollar Life Insurance Incorporated by reference from
Agreements, dated December 16, Exhibit 10.8 to the Company's
1991 between the Company and Registration Statement
Donald M. Mewhort, as Trustee
under Agreement of Trust dated
October 8, 1991, created by
T. Jerome Holleran, Settlor (the
"Holleran Split Dollar Life Insurance
Agreements").
10.8.1 Assignment, dated April 24, Incorporated by reference
the rights and obligations 1992, of from Exhibit 10.8.1
Holleran Split Dollar Life to the under the Company's
Insurance Agreements from the Registration Statement
Company to Arrow Precision Products,
Inc.
10.9 License Agreement, dated October 23, Incorporated by reference from
1981, between Dr. Ketan Shevde and Exhibit 10.9 to the Company's
the Company. Registration Statement
10.10 License Agreement, dated January Incorporated by reference from
18, 1992, between Innovation Exhibit 10.10 to the Company's
Associates, Inc. and the Company. Registration Statement
10.11 License Agreement, dated March 28, Incorporated by reference
1991, between Daltex Medical from Exhibit 10.11 to the
Sciences, Inc. and the Company. Company's Registration Statement
10.11.1 Modification Agreement, dated Incorporated by reference
October 25, 1995, to License Exhibit 10.11.1. to the Company's
Agreement between Daltex Medical Form 10-Q for the third quarter
Sciences, Inc. and the Company period ended May 31, 1997
10.11.2 Second Modification Agreement, Incorporated by reference
dated May 30, 1997, to License from Exhibit 10.11.2 to the
Agreement between Daltex Medical Company's Form 10-Q for the third
Sciences, Inc. and the Company. quarter period ended May 31, 1997
10.12 Agreement and Compromise Incorporated by reference
and Release, dated November from Exhibit 10.12 to the Company's
30, 1988, between Michael A. Registration Statement
Berman, Critikon, Inc. and the
Company.
</TABLE>
(59)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
- ------ ---------- ----------------
<S> <C> <C>
10.13 License Agreement, dated Incorporated by reference from
April 15, 1982, between Dr. Exhibit 10.13 to the Company's
Randolph M. Howes and the Registration Statement
Company, as amended pursuant to the
Addendum to License Agreement, dated
August 26, 1986, among Dr. Randolph
M. Howes, Janice Kinchen Howes and
the Company, and the Second Addendum
to License Agreement, dated October
9, 1990, among Dr. Randolph M.
Howes, Janice Kinchen Howes, Baham &
Anderson and the Company.
10.14 License Agreement, dated September Incorporated by reference from
16, 1988, between J. Daniel Raulerson Exhibit 10.14 to the Company's
and the Company, as amended pursuant Registration Statement
to Addendum to License Agreement,
dated November 27, 1989, between J.
Daniel Raulerson and the Company.
10.15 License Agreement, dated February 24, Incorporated by reference from
1984, between Blair Medical Products, Exhibit 10.15 to the Company's
Inc. and the Company. Registration Statement
10.16 Stock Purchase Agreement, dated Incorporated by reference from
October 24, 1990, among Robert E. Exhibit 10.16 to the Company's
Fischell, Standard Associates, Registration Statement
Cymed Ventures, Inc., Arrow
International Investment Corp. and the
Company.
10.17 License Agreement, dated Incorporated by reference from
October 24, 1990, between Medical Exhibit 10.17 to the Company's
Innovative Technologies R&D Limited Registration Statement
Partnership and the Company.
10.18 Research and Development Agreement, Incorporated by reference from
dated October 24, 1990, between Medical Innovative Exhibit 10.18 to
Technologies R&D Limited Partnership the Company's Registration
and the Company. Statement
10.19 License Agreement, dated February Incorporated by reference from Exhibit
24, 1992, between Cathco, Inc. and 10.19 to the Company's Registration
the Company. Statement
</TABLE>
(60)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
- ------ ---------- ----------------
<S> <C> <C>
10.20 Settlement Agreement, dated Incorporated by reference from
September 30, 1991, among Dr. Exhibit 10.20 to the Company's
Randolph M. Howes, Janice Kinchen Registration Statement
Howes, Baham & Anderson, the Company
and Baxter Health Care Corporation
and related License Agreement, dated
September 30, 1991, among Dr.
Randolph M. Howes, Janice Kinchen
Howes, Baham & Anderson, the Company
and Baxter Health Care Corporation.
10.21 Agreement between the Company, Arrow Incorporated by reference from
Precision Products, Inc. and United Exhibit 10.21 to the Company's
Steelworkers of America AFL/CIO Annual Report on Form 10-K for the
Local 8467. year ended August 31, 1994 (the
"1994 Form 10-K")
10.22 Extension of Lease Agreement Incorporated by reference from
between Indian Mills Associates and Exhibit 10.22 to the Company's
the Company, dated December 4, Registration Statement
1991, extending the Lease, dated
February 5, 1988, between Lyco
Associates and the Company.
10.23.1 Amended and Restated Retirement Plan Incorporated by reference from Exhibit
for Hourly-Rated Employees of the 10.23 to the Company's Registration
Wyomissing Plant of the Company, Statement
effective September 1, 1989.
10.23.2 Amended and Restated Retirement Incorporated by reference from
Plan for Hourly-Rated Employees of Exhibit 10.23.2 to the Company's 1993
the Wyomissing Plant of the Form 10-K
Company, effective September
1,1989, as amended.
10.24.1 Amended and Restated Retirement Plan Incorporated by reference from Exhibit
for Hourly-Rated Employees of the 10.24 to the Company's Registration
North Carolina and New Jersey Plants Statement
of the Company, effective September
1, 1989.
10.24.2 Amended and Restated Retirement Incorporated by reference from
Plan for Hourly-Rated Employees of Exhibit 10.24.2 to the Company's 1993
the North Carolina and New Jersey Form 10-K
Plants of the Company, effective of
the Company, effective 1, 1989, as
amended.
10.25.1 Loan Agreement, dated January 3, Incorporated by reference from
1986, among the Company, Arrow Exhibit 10.25.1 to the Company's
Medical Products, Limited, Arrow Registration Statement
International Export Corporation,
and Hamilton Bank.
</TABLE>
(61)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
- ------ ---------- ----------------
<S> <C> <C>
10.25.2 First Amendment to Loan Agreement, Incorporated by reference from
dated March 18, 1987, among the Exhibit 10.25.2 to the Company's
Company, Arrow Medical Products, Registration Statement
Limited, Arrow International Export
Corporation, and Hamilton Bank.
10.25.3 Second Amendment to Loan Agreement, Incorporated by reference from
dated March 31, 1988, among the Exhibit 10.25.3 to the Company's
Company, Arrow Medical Products, Registration Statement
Limited, Arrow International Export
Corporation, and Hamilton Bank.
10.25.4 Third Amendment to Loan Agreement, Incorporated by reference from
dated March 31, 1989, among the Exhibit 10.25.4 to the Company's
Company, Arrow Medical Products, Registration Statement
Limited, Arrow International Export
Corporation, and Hamilton Bank.
10.25.5 Fourth Amendment to Loan Agreement, Incorporated by reference from
dated March 30, 1990, among the Exhibit 10.25.5 to the Company's
Company, Arrow Medical Products, Registration Statement
Limited, Arrow International Export
Corporation, and Hamilton Bank.
10.25.6 Fifth Amendment to Loan Agreement, Incorporated by reference from
dated March 1, 1991, among the Exhibit 10.25.6 to the Company's
Company, Arrow Medical Products, Registration Statement
Limited, Arrow International Export
Corporation, and Hamilton Bank.
10.25.7 Sixth Amendment to Loan Agreement, Incorporated by reference from
dated July 15, 1991, among the Exhibit 10.25.7 to the Company's
Company, Arrow Medical Products, Registration Statement
Limited, Arrow International Export
Corporation, and Hamilton Bank.
10.25.8 Seventh Amendment to Loan Agreement, Incorporated by reference from
dated September 6, 1991, among the Exhibit 10.25.8 to the Company's
Company, Arrow Medical Products, Registration Statement
Limited, Arrow International Export
Corporation, and Hamilton Bank.
10.25.9 Eighth Amendment to Loan Agreement, Incorporated by reference from
dated February 21, 1992, among the Exhibit 10.25.9 to the Company's
Company, Arrow Medical Products, Registration Statement
Limited, Arrow International Export
Corporation, and Hamilton Bank.
</TABLE>
(62)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
- ------ ---------- ----------------
<S> <C> <C>
10.25.10 Letters of Amendment, dated April Incorporated by reference from
10, 1992, and May 19, 1992, to Loan Exhibit 10.25.17 to the Company's
Agreement between the Company and Registration Statement
Hamilton Bank.
10.25.11 Ninth Amendment to Loan Agreement, Incorporated by reference from
dated May 27, 1992, among the Exhibit 10.25.18 to the Company's
Company, Arrow Medical Products, Registration Statement
Limited, Arrow International Export
Corporation, and Hamilton Bank.
10.25.12 Letter Agreement, dated February 25, Incorporated by reference from
1993, among the Company, Arrow Exhibit 10.25.12 to the 1994 Form
Medical Products, Limited, Arrow 10-K
International Export Corporation,
and CoreStates Hamilton Bank, and
Note relating thereto.
10.25.13 Letter Agreement, dated January 31, Incorporated by reference from
1994, among the Company, Arrow Exhibit 10.25.13 to the 1995 Form
Medical Products, Limited, Arrow 10-K
International Export Corporation,
and CoreStates Hamilton Bank, and
Note relating thereto.
10.25.14 Letter Agreement, dated March 6, Incorporated by reference from
1995, among the Company, Arrow Exhibit 10.25.14 to the 1995 Form
Medical Products, Limited, Arrow 10-K
International Export Corporation,
and CoreStates Hamilton Bank, and
Note relating thereto.
10.25.15 Letter Agreement, dated November 14, Incorporated by reference from
1995, among the Company, Arrow Exhibit 10.25.15 to the 1995 Form
Medical Products, Limited, Arrow 10-K
International Export Corporation,
and CoreStates Hamilton Bank, and
Note relating thereto.
10.25.16 Letter Agreement, dated February Incorporated by reference from
23, 1996, among the Company, Arrow Exhibit 10.25.16 to the Company's
Medical Products, Limited, Arrow Form 10-Q for the second quarter
International Export Corporation, period ended February 29, 1996
and CoreStates Hamilton Bank, and
Note relating thereto.
10.25.17 Letter Agreement, dated January 29, Incorporated by reference from
1996 among the Company and First Exhibit 10.25.17 to the Company's
Union National Bank, and note Form 10-Q for the second quarter
relating thereto. period ended February 29, 1996
</TABLE>
(63)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
- ------ ---------- ----------------
<S> <C> <C>
10.25.18 Letter Agreement, dated July 11, Incorporated by reference from
1996, among the Company, Arrow Exhibit 10.25.18 to the Company's
Medical Products , Limited, Arrow Annual Report on Form 10-K for the
International Export Corporation, fiscal year ended August 31, 1996
and CoreStates Hamilton Bank, and (the "1996 Form 10-K")
Note relating thereto.
10.26.1 Installment Sale Agreement between Incorporated by reference from
Berks County Industrial Development Exhibit 10.25.10 to the Company's
Authority and the Company, dated as Registration Statement
of December 1, 1988.
10.26.2 Indenture of Trust between Berks Incorporated by reference from
County Industrial Development Exhibit 10.25.11 to the Company's
Authority and Bankers Trust Registration Statement
Company, as trustee, dated as of
December 1, 1988.
10.26.3 Irrevocable Direct Pay Letter of Incorporated by reference from
Credit, dated December 28, 1988, Exhibit 10.25.12 to the Company's
issued for the benefit of Bankers Registration Statement
Trust Company, as trustee under the
Indenture of Trust, for the account
of the Company.
10.26.4 Letter of Credit Note from the Incorporated by reference from
Company payable to the order of Exhibit 10.25.13 to the Company's
Hamilton Bank, dated December 28, Registration Statement
1988.
10.26.5 Letter of Credit Reimbursement Incorporated by reference from
Agreement between the Company and Exhibit 10.25.14 to the Company's
Hamilton Bank, dated as of December Registration Statement
1, 1988.
10.26.6 Accommodation Mortgage, Security Incorporated by reference from
Agreement and Second Assignment of Exhibit 10.25.15 to the Company's
Installment Sale Agreement, dated as Registration Statement
of December 15, 1988, by and among
Berks County Industrial Development
Authority, the Company and Hamilton
Bank.
10.27 Variable Amount Grid Note Agreement, Incorporated by reference from
dated May 8, 1991, between the Exhibit 10.25.16 to the Company's
Company and First Union National Registration Statement
Bank.
10.28 Purchase Agreement, dated January Incorporated by reference from
20, 1984, between the Company and Exhibit 10.26 to the Company's
Arrow Research Partners. Registration Statement
</TABLE>
(64)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
- ------ ---------- ----------------
<S> <C> <C>
10.29 Form of Research and Development
Agreement, dated August 2, 1982, Incorporated by reference from
between the Company and Arrow Exhibit 10.27 to the Company's
Research Partners. Registration Statement
10.30 Arrow International, Inc. Profit Incorporated by reference from
Sharing Plan Exhibit 10.30 to the Company's
Registration Statement
10.31 Agreement, dated May 19, 1992, Incorporated by reference from
between the Company and Arrow Exhibit 10.32 to the Company's
Precision Products, Inc. Registration Statement
10.32 Agreement, dated September 22, 1993, Incorporated by reference from
among Microwave Medical Systems, Exhibit 10.32 to the Company's
Inc., the Company and Kenneth L. Carr. 1993 Form 10-K
10.33 License and Exclusive Supply Incorporated by reference Exhibit
Agreement, dated September 22, 10.33 to the Company's 1993 Form
1993, from between Microwave 10-K
Medical Systems, Inc. and the
Company.
10.34 Stock Purchase Agreement, dated as Incorporated by reference from
of January 28, 1994 between Kontron Exhibit 2 to the Company's Current
Instruments Holding N.V. and the Report on Form 8-K filed with the
Company. Securities and Exchange Commission
on February 18, 1994
10.35 Loan Agreement, dated as of February Incorporated by reference from
8, 1994, among the Company, Arrow Exhibit 10.35 to the 1994 Form 10-K
Medical Products, Limited, Arrow
International Export Corporation, and
CoreStates Hamilton Bank, and Notes
relating thereto.
10.36 Loan Agreement, dated February 8, Incorporated by reference from
1994, between the Company and First Exhibit 10.36 to the 1994 Form 10-K
Union National Bank of North
Carolina, and Note relating
thereto.
10.37 Loan Agreement between Arrow Japan Incorporated by reference from
KK and the Bank of Tokyo (with Exhibit 10.37 to the Company's
English translation). Current Report on Form 8-K filed
with the Securities and
Exchange Commission on April 10,
1995 ("the 1995 Form 8-K")
10.38 Thoratec Laboratories Corporation Incorporated by reference from
International Medical Products Exhibit 10.38 to the 1995 Form 8-K
Distributor Agreement, dated as of
January 19, 1995, between Thoratec
Laboratories Corporation and the
Company.
</TABLE>
(65)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
- ------ ---------- ----------------
<S> <C> <C>
10.39 Series F Preferred Stock Purchase Incorporated by reference from
Agreement, dated as of March 8, Exhibit 10.39 to the 1995 Form 8-K
1995, between Cardiac Pathways
Corporation and the Company.
10.40 Manufacturing and Supply Agreement, Incorporated by reference from
dated as of March 8, 1995, between Exhibit 10.40 to the 1995 Form 8-K
Cardiac Pathways Corporation and the
Company.
10.41 International Distributor Agreement, Incorporated by reference from
dated as of March 8, 1995, between Exhibit 10.41 to the 1995 Form 8-K
Cardiac Pathways Corporation and Arrow.
10.42 Purchase Agreement, dated as of Incorporated by reference from
April 7, 1995, among the Company, Exhibit 10.39 to the 1995 Form 8-K
TLP Acquisition Corp., Therex
Corporation, Therex Limited
Partnership Holding Corporation and
each of the other persons signatory
thereto.
10.43 Amendment, dated July 27, 1995, to Incorporated by reference from
License Agreement, dated October Exhibit 10.43 to the 1995 Form 10-K
24, 1990, between Medical
Innovative Technologies R&D Limited
Partnership and the Company.
10.44 Amendment, dated July 27, 1995, to Incorporated by reference from
Research and Development Agreement, Exhibit 10.44 to the 1995 Form 10-K
dated October 24, 1990, between
Medical Innovative Technologies R&D
Limited Partnership and the
Company.
10.45 Amended and Restated License Incorporated by reference from
Agreement dated May 24, 1996, Exhibit 10.45 to the Company's Form
between Microwave Medical Systems, 10-Q for the third quarter period
Inc. and the Company. ended May 31, 1996
10.46 Loan Agreement, dated July 11, 1996, Incorporated by reference from
between AMH (Arrow Medical Holdings) Exhibit 10.46 to the 1996 Form
B.V. and CoreStates Bank, N.A., and 10-K
Note relating thereto.
10.47 Directors Stock Incentive Plan Incorporated by reference from
Exhibit 10.47 to the 1996
Form 10-K
10.48 Purchase Agreement, dated June 1, Incorporated by reference from
1996, between Arrow Tray Products, Exhibit 10.48 to the 1996
Inc. (formerly known as Form 10-K
Endovations, Inc.) and the Company.
</TABLE>
(66)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
- ------ ---------- ----------------
<S> <C> <C>
10.49 Purchase Agreement, dated August 3, Filed with this report
1998, between Medical Parameters, Inc.
and the Company.
10.50 Line of Credit Note, dated October 7, Filed with this report
1998, between the Company and First
First Union National Bank.
10.51 Interest rate swap Agreement, dated Filed with this report
April 6, 1998 between the Company And
CoreStates Bank, N.A.
10.52 Asset Purchase Agreement, dated Filed with this report
November 5, 1997, between Arrow
Interventional, Inc., Boston Scientific
Corporation and IABP Corporation.
10.53 Mutual Release Agreement, dated July Filed with this report
20, 1998, between Arrow International,
Inc. and Daltex Medical Sciences, Inc.
10.54 Exclusive License Agreement, dated Filed with this report
February 14, 1996 between Arrow
International, Inc. and Israel Schur, M.D.
18 Preferability Letter of Incorporated by
PricewaterhouseCoopers LLP reference from Exhibit
18 to the 1994
Form 10-K
21 Subsidiaries of the Company. Page 68 of this report
23 Consent of Pricewaterhouse- Page 69 of this report
Coopers LLP
27* Financial Data Schedule EDGAR
99.1 Cautionary Statement for Purposes Page 70 of this report
of the Safe Harbor Provisions of the
Private Securities Litigation Reform
Act of 1995.
</TABLE>
* 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.
(67)
EXHIBIT 21
Subsidiaries of the Company
1. Arrow International Export Corporation, a U.S. Virgin Islands corporation.
2. Arrow International Investment Corp., a Delaware corporation.
3. Arrow Medical Products, Ltd., a Pennsylvania corporation, qualified to do
business in Canada.
4. Kontron Instruments, Inc., a California corporation.
5. Arrow-Japan K.K. (Arrow-Japan, Ltd., English translation), a company
organized under the laws of Japan.
6. Arrow Deutschland, Gmbh., a limited liability corporation organized under
the laws of Germany.
7. Arrow France S.A., a corporation organized under the laws of France.
8. Arrow Africa (Pty) Ltd., a corporation organized under the laws of South
Africa.
9. AMH (Arrow Medical Holdings) B.V., a corporation organized under the laws
of the Netherlands.
10. Arrow Holland Medical Products B.V., a corporation organized under the
laws of the Netherlands.
11. Arrow Iberia, S.A., a corporation organized under the laws of Spain.
12. Arrow Hellas A.E.E., a corporation organized under the laws of Greece.
13. Arrow Internacional de Mexico, S.A. de C.V., a corporation organized under
the laws of Mexico.
14. Arrow Internacional de Chihuahua, S.A. de C.V., a corporation organized
under the laws of Mexico.
15. Arrow International CR, a.s., a corporation organized under the laws of
the Czech Republic.
16. Therex Limited Partnership, a Delaware limited partnership.
17. Arrow Infusion, Inc., a Massachusetts corporation.
18. Arrow-Therex Corporation, a Delaware corporation.
19. Arrow Interventional, Inc., a Delaware corporation.
20. Arrow Slovensko s.r.o., a corporation organized under the laws of Slovakia
21. Medical Parameters, Inc., a Massachusetts corporation
(68)
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Registration Nos. 333-15215 and 33-71568) of Arrow
International, Inc. of our reports dated September 28, 1999 relating to the
financial statements and financial statement schedules, which appear in this
Form 10-K. We also consent to the reference to our firm under the caption
"Selected Financial Data".
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 23, 1999
(69)
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 with which this
Exhibit is filed 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 you 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 you that such changes will not have a material adverse
effect on our business, financial condition and results of operations.
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.
(70)
<PAGE>
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 interventional
procedure markets. We cannot assure you 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 you 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 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 you that any such
reforms will not have a material adverse effect on the medical device industry
in general, or on our business, in particular.
(71)
<PAGE>
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 you 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.
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 you that such factors will not have a
material adverse effect on our business, financial condition and results of
operations. In addition, we cannot assure you 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.
(72)
<PAGE>
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 you 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.
Dependence on Key Management
Our success depends upon the continued contributions of key members of our
senior management team, certain of who have been with us since our inception in
1975. Accordingly, loss of the services of one or more of these key members of
management could have a material adverse effect on our business. None of these
individuals has an employment agreement with us.
Risks Associated with Year 2000
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, other catheter products, cardiac output
computers and implantable pumps are unaffected by the Year 2000 problem. Early
in 1998, the Company responded to the FDA concerning the effect of the Year 2000
problem on its intra-aortic balloon pumps. The software in the more recent
models of the pumps has taken the change of century issues into account. The
operating range for the clock calendar in these pumps spans a 100-year period
from the years 1988 through 2087. The clock calendar on certain older models
advances as high as 1999. However, none of the pumps depend on the year
information for any calculations or in communicating with other electronic
devices, and all of these pumps will function as intended or expected,
regardless of the date. Specific pump model numbers that have or do not have the
updated clock calendars are listed on the Company's web site. The left
ventricular assist system and hemodynamic monitor, the Hemosonic 100, were
designed to be Year 2000 compliant.
(73)
<PAGE>
Risks Associated with Year 2000 (Continued)
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, manufacturing management, and
general ledger, 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 Year 2000 validated software was
moved to the production machines. The cost of the Company's software upgrades
was approximately $0.04 million for all U.S. systems and $0.254 million for all
foreign systems. Internal resources devoted to these efforts were 650 man-days.
In the event that the U.S. 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
engineering and manufacturing were tested and are believed to be Year 2000
compliant. Internal resources devoted to upgrading these systems were in excess
of 550 man-days. The cost of hardware and software was $0.122 million.
The Company's PC systems were upgraded in fiscal 1998 at a cost of $0.7 million.
The Company spent $0.5 million in fiscal 1999 to upgrade servers and replace the
e-mail system. Network servers and telecommunication systems are believed to be
Year 2000 compliant. The cost to upgrade data networks was $0.01 million.
Replacements or upgrades to voice-mail systems was $0.09 million.
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.
Final testing has begun in all of the Company's manufacturing locations.
The status of Year 2000 compliance by key suppliers of products and services to
the Company was determined by using a compliance survey. Critical suppliers have
plans underway to assure their readiness for the Year 2000.
The Company has increased production by 10% to help ensure that sufficient
inventories are available for the Year 2000. In addition, the Company has
adopted a policy to discourage excessive stockpiling of Company products by
customers. Finally, 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.
The Company believes that any significant adverse Year 2000 effects will arise
from circumstances beyond its control. In addition, the Company believes that
its United States' operations can compensate for any short-term, isolated Year
2000 failures that may affect the Company's non-U.S. operations. 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.
(74)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ARROW INTERNATIONAL, INC. FOR THE YEAR ENDED AUGUST 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> AUG-31-1999
<CASH> 3,939
<SECURITIES> 0
<RECEIVABLES> 70,467
<ALLOWANCES> 832
<INVENTORY> 74,809
<CURRENT-ASSETS> 166,627
<PP&E> 204,939
<DEPRECIATION> 88,005
<TOTAL-ASSETS> 357,484
<CURRENT-LIABILITIES> 58,726
<BONDS> 0
0
0
<COMMON> 45,661
<OTHER-SE> 232,506
<TOTAL-LIABILITY-AND-EQUITY> 357,484
<SALES> 295,946
<TOTAL-REVENUES> 295,946
<CGS> 139,241
<TOTAL-COSTS> 104,585
<OTHER-EXPENSES> (3,221)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 55,341
<INCOME-TAX> 19,646
<INCOME-CONTINUING> 35,695
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,695
<EPS-BASIC> 1.54
<EPS-DILUTED> 1.54
</TABLE>
