UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the second quarter period ended February 28, 1999
or
( ) Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
For the transition period from ____________ to ____________
Commission File Number 0-20212
ARROW INTERNATIONAL, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1969991
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 Bernville Road, Reading, Pennsylvania 19605
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(610) 378-0131
--------------
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
-
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Class Shares outstanding at April 13, 1999
----- ------------------------------------
Common Stock, No Par Value 23,174,735
<PAGE>
ARROW INTERNATIONAL, INC.
Form 10-Q Index
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at February 28, 1999
and August 31, 1998 3-4
Consolidated Statements of Income 5-6
Consolidated Statements of Cash Flows 7-8
Consolidated Statements of Comprehensive Income 9
Notes to Consolidated Financial Statements 10-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-21
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22-23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
Exhibit Index 27
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
February 28, August 31,
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,136 $ 4,652
Accounts receivable, net 72,845 63,872
Inventories 77,395 69,162
Prepaid expenses and other 15,565 13,461
Deferred income taxes 1,844 2,040
--------- ---------
Total current assets 172,785 153,187
--------- ---------
Property, plant and equipment:
Total property, plant and equipment 196,332 186,626
Less accumulated depreciation (81,368) (73,828)
--------- ---------
114,964 112,798
--------- ---------
Goodwill, net 33,353 34,320
Intangible and other assets, net 35,046 20,118
Deferred income taxes 4,921 2,458
--------- ---------
Total other assets 73,320 56,896
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Total assets $ 361,069 $ 322,881
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
Continued
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ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
February 28, August 31,
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 963 $ 522
Notes payable 50,392 29,730
Accounts payable 6,743 6,677
Cash overdrafts 2,197 1,395
Accrued liabilities 9,887 7,053
Accrued compensation 5,176 6,877
Accrued income taxes 842 2,107
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Total current liabilities 76,200 54,361
Long-term debt 11,735 11,686
Accrued postretirement benefit obligation 9,174 8,966
Commitments and contingencies - -
SHAREHOLDERS' EQUITY
Preferred Stock, no par value;
5,000,000 shares authorized;
none issued - -
Common Stock, no par value;
50,000,000 shares authorized;
issued 26,478,813 shares 45,661 45,661
Retained earnings 236,227 220,217
Less cost of treasury stock:
3,256,078 and 3,254,752 shares
of Common Stock, respectively (8,469) (8,432)
Cumulative translation adjustment (5,373) (6,159)
Unearned compensation - (44)
Unrealized holding loss on
securities, net of tax (4,086) (3,375)
---------- ----------
Total shareholders' equity 263,960 247,868
---------- ----------
Total liabilities and
shareholders' equity $ 361,069 $ 322,881
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months
Ended
February 28, February 28,
1999 1998
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<S> <C> <C>
Net sales $ 74,274 $ 66,770
Cost of goods sold 35,625 29,831
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Gross profit 38,649 36,939
Operating expenses:
Research, development and engineering 5,440 4,330
Selling, general and administrative 17,369 15,349
Special charge 4,139 -
----------- -----------
Operating income 11,701 17,260
Other expenses (income):
Interest expense, net of amounts capitalized 502 193
Interest income (72) (124)
Other, net (1,807) 148
----------- -----------
Other expenses (income), net (1,377) 217
----------- -----------
Income before income taxes 13,078 17,043
Provision for income taxes 4,773 6,391
----------- -----------
Net income $ 8,305 $ 10,652
=========== ===========
Basic and diluted earnings per
common share $ .36 $ .46
=========== ===========
Cash dividends per common share $ .055 $ .050
=========== ===========
Weighted average shares outstanding 23,224,326 23,224,606
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Six Months
Ended
February 28, February 28,
1999 1998
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<S> <C> <C>
Net sales $ 142,359 $ 130,539
Cost of goods sold 66,661 57,691
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Gross profit 75,698 72,848
Operating expenses:
Research, development and engineering 10,751 8,488
Selling, general and administrative 34,224 30,644
Special Charge 4,139 -
---------- ----------
Operating income 26,584 33,716
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Other expenses (income):
Interest expense, net of amounts capitalized 724 309
Interest income (163) (310)
Other, net (3,030) 396
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Other expenses (income), net (2,469) 395
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Income before income taxes 29,053 33,321
Provision for income taxes 10,604 12,495
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Net income $ 18,449 $ 20,826
========== ==========
Basic and diluted earnings per
common share $ .80 $ .90
========== ==========
Cash dividends per common share $ .105 $ .095
========== ==========
Weighted average shares outstanding 23,224,554 23,225,233
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Six Months Ended
February 28, February 28,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 18,449 $ 20,826
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 7,504 5,758
Special charge 4,139 -
Amortization of intangible assets and goodwill 1,472 2,140
Amortization of unearned compensation 44 90
Deferred income taxes (2,267) (525)
Other 666 1,377
Changes in operating assets and liabilities:
Accounts receivable, net (8,036) (4,483)
Inventories (1,195) (4,297)
Prepaid expenses and other (2,205) (5,822)
Accounts payable and accrued liabilities 2,204 1,134
Accrued compensation (1,664) (3,730)
Accrued income taxes (1,233) 2,491
--------- ---------
Total adjustments (571) (5,867)
--------- ---------
Net cash provided by operating activities 17,878 14,959
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Cash flows from investing activities:
Capital expenditures (9,887) (5,573)
Increase (decrease) in intangible and
other assets 223 (3,619)
Cash paid for business acquired, net (26,364) (7,321)
--------- --------
Net cash used in investing activities (36,028) (16,513)
Cash flows from financing activities:
Increase in notes payable 21,002 4,444
Principal payments of long-term debt (764) (1,524)
Increase in book overdrafts 802 -
Dividends paid (2,439) (2,090)
Purchase of treasury stock (36) (38)
-------- --------
Net cash provided by financing activities 18,565 792
Effect of exchange rate changes on cash
and cash equivalents 69 (57)
Net change in cash and cash equivalents 484 (819)
Cash and cash equivalents at beginning of year 4,652 6,276
-------- --------
Cash and cash equivalents at end of period $ 5,136 $ 5,457
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
Continued
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<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Six Months
Ended
February 28, February 28,
1999 1998
------------ -----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 724 $ 309
Income taxes $ 13,379 $ 10,060
Supplemental schedule of non cash investing and financing
activities:
During the six months periods ended February 28, 1999 and 1998,
the Company assumed liabilities in conjunction with the purchase of
certain intangible assets as follows:
Estimated fair value of assets acquired 27,586 7,321
Cash paid for assets, net cash acquired 26,364 7,321
------------------------
Liabilites assumed 1,222 -
========================
Cash paid for business acquired:
Working capital 5,466 1,350
Property, plant & equipment 300 210
Goodwill, intangible assets and
in-process research and development 20,598 5,761
------------------------
26,364 7,321
========================
</TABLE>
See accompanying notes to consolidated financial statements
-8-
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
For the Three Months
Ended February 28,
1999 1998
--------- --------
<S> <C> <C>
Net income $ 8,305 $ 10,652
Other comprehensive income (expense):
Currency translation adjustments (1,222) 234
Unrealized holding loss on securities, net of tax (452) (461)
--------- --------
Other comprehensive income (expense) (1,674) (227)
--------- --------
Total comprehensive income $ 6,631 $ 10,425
========= ========
For the Six Months
Ended February 28,
1998 1997
-------- --------
Net income $ 18,449 $ 20,826
Other comprehensive income (expense):
Currency translation adjustments 786 123
Unrealized holding loss on securities, net of tax (711) (733)
-------- --------
Other comprehensive income (expense) 75 (610)
-------- --------
Total comprehensive income $ 18,524 $ 20,216
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
-9-
<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
Note 1 - Basis of Presentation
These unaudited consolidated financial statements include
all adjustments, consisting only of normal recurring
accruals, which management considers necessary for a fair
presentation of the Company's consolidated financial
position, results of operations, and cash flows for the
interim periods presented. Results for the interim periods
are not necessarily indicative of results for the entire
year. Such statements are presented in accordance with the
requirements of Form 10Q and do not include all disclosures
normally required by generally accepted accounting
principles or those normally made on Form 10K.
Note 2 - Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
February 28, August 31,
1999 1998
----------- ----------
<S> <C> <C>
Finished goods $ 31,049 $ 23,445
Semi-finished goods 15,035 18,492
Work-in-process 10,548 9,558
Raw materials 20,763 17,667
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$ 77,395 $ 69,162
========== =========
</TABLE>
Note 3 - Commitments and Contingencies
The Company is a party to certain legal actions arising in
the ordinary course of its business. Based upon information
presently available to the Company, the Company believes it
has adequate legal defenses or insurance coverage for these
actions and that the ultimate outcome of these actions would
not have a material adverse effect on the Company's
quarterly or annual results of operations or financial
position.
Continued
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<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
Note 4 - Related Party Transactions
During the three months ended February 28, 1998, the Company
had a net payable to Arrow Precision Products, Inc.
("Precision"), which is related to the Company through
common ownership, amounting to $37 at February 28, 1998. The
Company has no net balance as of February 28, 1999.
During the three and six months ended February 28, 1999, the
Company made purchases amounting to $10 and $11,
respectively, of products from Precision Medical Products,
Inc., ("PMP"), a former subsidiary of Precision currently
owned by certain former management employees of Precision,
including T. Jerome Holleran, who serves as PMP's President
and Chief Executive Officer and as Secretary and a director
of the Company. In addition, the Company provided certain
computer-related services to PMP for $3 and $3,
respectively.
Note 5 - Accounting Policies
Reclassifications
Certain prior period information has been reclassified for
comparative purposes.
Note 6 - 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 $26,400, to be adjusted for final
closing adjustments. The acquisition has been accounted for
using the purchase method of accounting. The results of
operations of this business are included in the Company's
Consolidated Financial Statements from the date of
acquisition. The pro forma amounts are not presented as the
aforementioned acquisition had no material effect on the
Company's quarterly or annual results of operations or
financial position.
Continued
-11-
<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(All Dollar Amounts in Thousands, Except Per Share Data)
Note 7 - Special Charge:
In the second quarter 1999, the Company recorded a non-cash
pre-tax special charge of $4,100 ($2,600 after tax or $.11
basic and diluted per share) related to the purchase of in-
process intra-aortic balloon ("IAB") and pump research and
development as part of the acquisition of the assets of the
cardiac assist division of C.R. Bard, Inc. The IAB and
pumps are class 3 life saving medical devices regulated by
the FDA. In accordance with SFAS No. 2, "Accounting for
Research and Development Costs" and FIN No. 4,
"Applicability of SFAS No. 2 to business combinations
accounted for by the Purchase Method", these costs were
charged to expense at the consummation of the acquisition.
The value assigned to purchase IAB and pump in-process
technology was based on a valuation prepared by an
independent third-party appraisal company. Each of the
technologies under development at the date of acquisition
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 are expected to commence
within a year of the acquisition date, however, while the
Company believes the projects will be completed as planned,
the risk associated with completing development on schedule
cannot be assured. The Company does not anticipate material
adverse changes from historical pricing, margins and expense
levels as a result of the introduction of the new
technologies related to the projects.
Note 8 - Subsequent Events:
On March 26, 1999, the Company announced the signing of an
agreement to purchase Somatec, S.A., a french development
company that has recently introduced a non-invasive
esophogeal 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. The Sometec
product is currently approved for marketing in the U.S.,
Europe and Japan. European clinical studies have been
recently published and U.S. clinical studies will begin
soon. The product will be sold worldwide by Arrow's
Critical Care Sales organization. Closing of the
transaction and product introduction are currently scheduled
for September 1999.
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<PAGE>
ARROW INTERNATIONAL, INC.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion includes certain forward-looking
statements. Such forward-looking statements are subject to a
number of factors, including material risks, uncertainties and
contingencies, which could cause actual results to differ
materially from the forward-looking statements. For a
discussion of important factors that could cause actual results
to differ materially from the forward-looking statements, see
Exhibit 99.1 to this Report and the Company's periodic reports
and other documents filed with the Securities and Exchange
Commission.
Results of Operations
Three Months Ended February 28, 1999 Compared to Three Months
Ended February 28, 1998
Net sales for the three months ended February 28, 1999
increased by $7.5 million, or 11.2%, to $74.3 million from
$66.8 million in the same period last year. Net sales
represent gross sales invoiced to customers, plus royalty
income, less certain related charges, including freight costs,
discounts, returns and other allowances. This increase was due
primarily to additional sales provided by the Company's
acquisition of Medical Parameters, Inc. ("MPI") in August 1998
and additional sales of intra-aortic balloon ("IAB") products
primarily related to the acquisition of the assets of the
cardiac assist division of C.R. Bard, Inc. Also contributing
to the increase was higher unit volume by the Company's central
venous catheter and percutaneous thrombectomy device ("PTD")
products. Sales of critical care products increased 7.0% to
$59.4 million from $55.3 million in the comparable prior period
due to increased shipments of central venous catheters,
percutaneous thrombectomy devices and additional sales provided
by the Company's acquisition of MPI in August 1998. Cardiac
care procedure product sales increased to $15.0 million from
$11.4 million, an increase of 32.0% from the comparable prior
period, due primarily to higher sales of IAB products.
International sales increased by $4.3 million, or 18.7%, to
36.5% of net sales, excluding royalty income, for the three
months ended February 28, 1999, compared to 34.2% of net sales
in the comparable period of fiscal 1998, principally as a
result of increased unit volumes of the Company's central
venous catheter and IAB products. The increased strength of
the U.S. dollar, relative to currencies in countries where the
Company operates direct sales subsidiaries, increased net sales
for the quarter by $0.5 million.
Gross profit increased 4.6% to $38.6 million in the three
months ended February 28, 1999 compared to $36.9 million in the
same period of fiscal 1998. As a percentage of net sales,
gross profit decreased to 52.0% during the three months
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<PAGE>
ARROW INTERNATIONAL, INC.
ended February 28, 1999 from 55.3% in the comparable period of
fiscal 1998, due primarily to increased manufacturing costs
related to the Company's IAB products, worldwide pricing
pressures in certain product lines, and a less profitable
product sales mix.
Research, development and engineering expenses increased by
25.6% to $5.4 million in the three months ended February 28,
1999 from $4.3 million in the comparable prior period. As a
percentage of net sales, these expenses increased in the second
quarter of fiscal 1999 to 7.3%, compared to 6.5% in the same
period in fiscal 1998. These increases are primarily a result
of higher spending for increased development, regulatory, and
clinical trial activity related to the Company's Left
Ventricular Assist Device ("LVAD"), new clinical studies
related to the Company's ARROWg+ard REGISTERED TRADEMARK Plus and Pullback
Atherectomy Catheter ("PAC") research programs and additional
engineering expense related to the acquisition of the cardiac
assist division of C.R. Bard, Inc.
Selling, general and administrative expenses increased by 13.2%
to $17.4 million in the three months ended February 28, 1999
from $15.3 million in the comparable prior period of fiscal
1998 and increased as a percentage of net sales to 23.4% in the
second quarter of fiscal 1999 from 23.0% in the comparable
period of fiscal 1998. These increases were due primarily to
implementation of direct sales of implantable drug infusion
pumps and additional expenses resulting from the operations of
MPI.
In the second quarter 1999, the Company recorded a non-cash pre-
tax special charge of $4,100 ($2,600 after tax or $.11 basic
and diluted per share) related to the purchase of in-process
intra-aortic balloon ("IAB") and pump research and development
as part of the acquisition of the assets of the cardiac assist
division of C.R. Bard, Inc. The IAB and pumps are class 3 life
saving medical devices regulated by the FDA. In accordance
with SFAS No. 2, "Accounting for Research and Development
Costs" and FIN No. 4, "Applicability of SFAS No. 2 to business
combinations accounted for by the Purchase Method", these costs
were charged to expense at the consummation of the acquisition.
The value assigned to purchase IAB and pump in-process
technology was based on a valuation prepared by an independent
third-party appraisal company. Each of the technologies under
development at the date of acquisition 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
are expected to commence within a year of the acquisition date,
however, while the Company
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<PAGE>
ARROW INTERNATIONAL, INC.
believes the projects will be completed as planned, the risk
associated with completing development on schedule cannot be
assured. The Company does not anticipate material adverse
changes from historical pricing, margins and expense levels as
a result of the introduction of the new technologies related to
the projects.
Principally due to the above factors, operating income
decreased in the second quarter of fiscal 1999 by 32.2% to
$11.7 million from $17.3 million in the comparable period of
fiscal 1998.
Other expenses (income), net, improved to $(1.4) million in the
second quarter of fiscal 1999 from $0.2 million in the
comparable prior period. Other expenses (income), net, consist
principally of interest income, interest expense and foreign
exchange gains and losses associated with the Company's direct
sales subsidiaries.
As a result of the factors discussed above, income before
income taxes decreased in the second quarter of fiscal 1999 by
23.3% to $13.1 million from $17.0 million in the comparable
prior period. For the second quarter of fiscal 1999, the
Company's effective income tax rate was 36.5%, a decrease from
37.5% in fiscal 1998, principally as a result of a reduction in
tax accruals for certain state and international jurisdictions.
Net income in the second quarter of fiscal 1999 decreased by
22.0% to $8.3 million from $10.7 million in the comparable
prior period primarily as a result of the above factors. As a
percentage of net sales, net income represented 11.2% in the
three months ended February 28, 1999, compared to 15.9% in the
comparable prior period of fiscal 1998.
Basic and diluted earnings per common share decreased to $.36
from $.46 in the second quarter of fiscal 1998. Weighted
average common shares outstanding decreased to 23,224,326 in
the second quarter of fiscal 1999 from 23,224,606 in the
comparable prior period.
-15-
<PAGE>
ARROW INTERNATIONAL, INC.
Six Months Ended February 28, 1999 Compared to Six Months
Ended February 28, 1998
Net sales for the six months ended February 28, 1999
increased by $11.8 million, or 9.1%, to $142.4 million from
$130.5 million in the same period last year. This increase
was due primarily to an increase in unit volume in the
Company's central venous catheter products, IAB's, primarily
related to the acquisition of the assets of the cardiac
assist division of C.R. Bard, Inc., and PTD products. Also
contributing to the increase were additional sales provided
by the Company's acquisition of MPI in August 1998. Sales
of critical care products increased 6.0% to $116.5 million
from $109.8 million in the comparable prior period due to
increased shipments of central venous catheters, PTD
products and additional sales provided by the Company's
acquisition of Medical Parameters in August 1998. Cardiac
care product sales increased to $25.9 million from $20.7
million, an increase of 25.0% from the comparable prior
period, due primarily to the acquisition of the cardiac
assist division of C.R. Bard, Inc. International sales
increased by $4.7 million, or 10.4%, and increased to 35.5%
of net sales, excluding royalty income, for the six months
ended February 28, 1999, from 35.1% in the comparable period
of fiscal 1998, principally as a result of increased sales
of central venous catheters and IAB products. The increased
strength of the U.S. dollar, relative to currencies in
countries where the Company operates direct sales
subsidiaries, reduced net sales for the six month period
ended February 28, 1999 by $0.1 million.
Gross profit increased 3.9% to $75.7 million in the six
months ended February 28, 1999 compared to $72.8 million in
the same period of fiscal 1998. As a percentage of net
sales, gross profit decreased to 53.2% during the six months
ended February 28, 1999 from 55.8% in the comparable period
of fiscal 1998 due primarily to increased manufacturing
costs related to the Company's IAB products, worldwide
pricing pressures in certain product lines and product sales
mix.
Research, development and engineering expenses increased by
26.7% to $10.8 million in the six months ended February 28,
1999 from $8.5 million in the comparable prior period. As a
percentage of net sales, these expenses increased in the
first half of fiscal 1999 to 7.6%, compared to 6.5% in the
same period in fiscal 1998, primarily as a result of higher
spending for increased development, regulatory and clinical
trial activity related to the Company's LVAD and new
clinical studies related to the Company's ARROWg+ard REGISTERED
TRADEMARK Plus and PAC research programs.
Selling, general and administrative expenses increased by
11.7% to $34.2 million in the six months ended February 28,
1999 from $30.6 million in the comparable prior period and
increased as a percentage of net sales to 24.0% in
the first half of fiscal 1999 from 23.5% in the comparable
period of fiscal 1998. The increase was due primarily to
implementation of direct sales of implantable
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<PAGE>
ARROW INTERNATIONAL, INC.
drug infusion pumps and additional expenses resulting from
the operations of MPI.
In the second quarter 1999, the Company recorded a non-cash
pre-tax special charge of $4,100 ($2,600 after tax or $.11
basic and diluted per share) related to the purchase of in-
process intra-aortic balloon ("IAB") and pump research and
development as part of the acquisition of the assets of the
cardiac assist division of C.R. Bard, Inc. The IAB and
pumps are class 3 life saving medical devices regulated by
the FDA. In accordance with SFAS No. 2, "Accounting for
Research and Development Costs" and FIN No. 4,
"Applicability of SFAS No. 2 to business combinations
accounted for by the Purchase Method", these costs were
charged to expense at the consummation of the acquisition.
The value assigned to purchase IAB and pump in-process
technology was based on a valuation prepared by an
independent third-party appraisal company. Each of the
technologies under development at the date of acquisition
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 are expected to commence
within a year of the acquisition date, however, while the
Company believes the projects will be completed as planned,
the risk associated with completing development on schedule
cannot be assured. The Company does not anticipate material
adverse changes from historical pricing, margins and expense
levels as a result of the introduction of the new
technologies related to the projects.
Principally due to the above factors, operating income
decreased in the first half of fiscal 1999 by 21.2% to $26.6
million from $33.7 million in the comparable period of
fiscal 1998.
Other expenses (income), net, improved to $(2.5) million in
the first half of fiscal 1999 from $0.4 million in the
comparable prior period. Other expenses (income), net,
consist principally of interest expense and foreign exchange
gains and losses associated with the Company's direct sales
subsidiaries.
As a result of the factors discussed above, income before
income taxes decreased in the first half of fiscal 1999 by
12.8% to $29.1 million from $33.3 million in the comparable
prior period. For the first half of fiscal 1999, the
Company's effective income tax rate was 36.5% a decrease
from 37.5% in fiscal 1998, principally as a result of a
reduction in tax accruals for certain state and
international jurisdictions.
-17-
<PAGE>
ARROW INTERNATIONAL, INC.
Net income decreased 11.4% to $18.4 million in the six
months ended February 28, 1999 from $20.8 million in the
first half of fiscal 1998. As a percentage of net sales,
net income represented 13.0% during the six months ended
February 28, 1999 compared to 15.9% in the comparable period
of fiscal 1998.
Net income per common share was $.80 in the six month period
ended February 28, 1999, a decrease of 11.4%, or $.10 per
share, from $.90 per share in the comparable prior period
primarily as a result of the above factors. Average shares
of common stock outstanding decreased to 23,224,554 in the
first half of fiscal 1999 from 23,225,233 in the comparable
prior period.
Liquidity and Capital Resources
For the six months ended February 28, 1999, net cash
provided by operations was $17.9 million, an increase of
$2.9 million from the same period in the prior year.
Accounts receivable increased by $9.0 million in the six
months ended February 28, 1999 compared to a $4.5 million
increase in the same period of fiscal 1998. Accounts
receivable, measured in days sales outstanding during the
period, increased to 93 days at February 28, 1999 from 88
days at February 28, 1998, due principally to an increase in
the collection period for the Company's domestic and
international dealers.
Net cash used in the Company's investing activities
increased to $36.0 million in the six months ended February
28, 1999 from $16.5 million in the comparable period of
fiscal 1998, principally as a result of the acquisition, for
$26.4 million, of the cardiac assist division of C.R. Bard,
Inc.
Financing activities provided $18.6 million in the six month
period ended February 28, 1999, whereas such activities
provided $0.8 million in the comparable period of fiscal
1998, changing principally as a result of a decrease in
repayments of long-term debt and an increase in borrowings
under the Company's revolving credit facilities. In March
1999, the Company announced the open market purchase of up
to 1 million shares of its common stock. This share
repurchase will be funded by the Company's operating cash
flows.
As of February 28, 1999, the Company had U.S bank credit
facilities providing an aggregate of $75.0 million in
revolving credit, of which $31.8 million remained unused.
In addition, certain of the Company's foreign subsidiaries
had revolving credit facilities totaling the U.S. dollar
equivalent of $12.7 million, of which $5.5 remained unused
as of February 28, 1999. Combined borrowings under these
facilities increased $21.0 million during the six month
period ended February 28, 1999.
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<PAGE>
ARROW INTERNATIONAL, INC.
As a partial hedge against adverse fluctuations in exchange
rates, the Company periodically enters into foreign currency
exchange contracts with certain major financial
institutions. By their nature, all such contracts involve
risk, including the risk of nonperformance by
counterparties. Accordingly, losses relating to these
contracts could have a material adverse effect upon the
Company's business, financial condition and results of
operations. Based upon the Company's knowledge of the
financial condition of the counterparties to its existing
forward contracts, the Company believes that it does not
have any material exposure to any individual counterparty.
The Company's policy prohibits the use of derivative
instruments for trading purposes.
During the six month periods ended February 28, 1999 and
February 28, 1998, the percentage of the Company's sales
invoiced in currencies other than U.S. dollars was 23.6% and
24.6%, respectively. As of February 28, 1999, outstanding
foreign currency exchange contracts totaling the U.S. dollar
equivalent of $17.0 million mature at various dates through
September 1999. The Company expects to continue to utilize
foreign currency exchange contracts to manage its exposure,
although there can be no assurance that the Company's effort
in this regard will be successful.
Based upon its present plans, the Company believes that
operating cash flow and available credit resources will be
adequate to repay current portions of long-term debt, to
finance currently planned capital expenditures, announced
acquisitions, stock repurchases on the open market and to
meet the currently foreseeable liquidity needs of the
Company.
Overall effects of inflation and seasonality in the
Company's business during the periods discussed above were
not significant.
Year 2000 Readiness
The Company has actively addressed the Year 2000 problem as
it relates to its business operations and regulation by the
FDA. This disclosure describes the Company's progress
toward its objective of ensuring that the Company's business
systems will operate satisfactorily on or after January 1,
2000.
The Company's Central Venous Catheters and other catheter
products are unaffected by the Year 2000 problem. Early in
1998, the Company responded to the FDA concerning the effect
of the Year 2000 problem on its intra-aortic balloon pumps.
The software in the more recent models of the pumps has
taken the change of century issues into account. The
operating range for the clock calendar in these pumps spans
a 100 year period from the years 1988 through 2087. The
clock calendar on certain older models advances as high as
1999. However, none of the pumps depend on the year
information for any calculations or in communicating with
other electronic devices, and all of these pumps will
function as intended or expected, regardless of the date.
Customers requesting certifications are provided with
specific pump model numbers that have or do not have the
updated clock calendars.
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<PAGE>
ARROW INTERNATIONAL, INC.
Year 2000 Readiness (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, marketing and
manufacturing management, the necessary software code
modifications have been completed in the development version
of the applications. Modified versions were tested by
advancing dates beyond December 31, 1999. The validated
software was moved to the production machines. U.S. payroll
and general ledger software is in process of being tested
and validated in the above manner and is expected to be
completed later in the late spring of 1999. The cost of the
Company's software upgrades is estimated to be approximately
$30,000 for all U.S. systems and $120,000 for all foreign
systems. Internal resources devoted to these efforts are
estimated at 500 man-days. In the event that the production
systems malfunction due to the change to the Year 2000, the
software and data will be moved back to the machines on
which the validation was done so that business processes can
continue.
The Company's engineering documentation systems which are
critical systems for manufacturing were tested and are Year
2000 compliant.
The Company's PC systems were upgraded in fiscal 1998 at a
cost of $700,000. An estimated $500,000 will be spent in
fiscal 1999 to upgrade servers and replace the e-mail
system.
The Company's computer controlled equipment includes
programmable controllers on production equipment and systems
for time and attendance recording, building management, life
safety, security, elevators, air compressors and high purity
water. For equipment or systems controlled by computer
chips or programs, the Company has determined that these
systems or equipment are Year 2000 compliant.
The status of Year 2000 compliance by key suppliers of
products and services to the Company is being determined by
using a compliance survey, which the Company mailed in
December 1998. We have received preliminary responses from
suppliers, which we are currently evaluating. Follow up
actions will be taken to obtain responses from all suppliers
and also to ensure compliance.
The Company increased its domestic revolving credit facility
to $75 million in October 1998. This additional borrowing
capacity could be utilized to support the Company's cash
flow requirements in the event that health care providers
are unable to pay amounts owed to the Company on a timely
basis due to system malfunctions related to the Year 2000
change.
-20-
<PAGE>
ARROW INTERNATIONAL, INC.
Year 2000 Readiness (Continued)
If the Company is able to fulfill its plans to secure its
business systems as described above, then any adverse Year
2000 effects will arise from circumstances outside the
Company's control. Because such circumstances can not be
reasonably anticipated at this time, the Company has not
developed a Year 2000 worst case scenario for disclosure.
While the Company believes that it is adequately addressing
the Year 2000 problem, there can be no assurance that the
costs and liabilities of the Year 2000 problem will not
materially adversely affect its business, financial
condition and results of operations.
European Union Conversion to Euro
The Company has proactively considered issues related to
conversion by eleven member states of the European Union to
a common currency, the "Euro", on January 1, 1999. For
business applications relating to sales order processing,
billing and payments the necessary software code
modifications to address the triangulation requirements of
the conversion are in process. The cost of such
modifications is approximately $50,000. Pricing of the
Company's products in the European Union generally is market
driven. As such, the Company is unable to determine at this
time whether or not the Euro conversion will have any impact
on product pricing or contractual arrangements with health
care service providers.
-21-
<PAGE>
ARROW INTERNATIONAL, INC.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
Financial Instruments:
During the six month period ended February 28, 1999 and
1998, the percentage of the Company's sales invoiced in
currencies other than U.S. dollars was 23.6% and 24.6%,
respectively. In addition, a small part of the Company's
cost of goods sold is denominated in foreign currencies.
The Company enters into foreign currency forward contracts,
which are derivative financial instruments, with major
financial institutions to reduce the effect of these foreign
currency risk exposures, primarily on U.S. dollar cash
inflows resulting from the collection of intercompany
receivables denominated in foreign currencies. Such
transactions occur throughout the year and are probable, but
not firmly committed. Forward contracts are marked to
market each accounting period, and the resulting gains or
losses on these contracts are recorded in Other Income /
Expense of the Company's consolidated statements of income.
Realized gains and losses on these contracts are offset by
the assets, liabilities and transactions being hedged. The
Company does not use financial instruments for trading or
speculative purposes. The Company expects to continue to
utilize foreign currency exchange contracts to manage its
exposure, although there can be no assurance that the
Company's efforts in this regard will be successful.
Operations of the Company are also exposed to, in the normal
course of business, fluctuations in interest rates. This
interest rate risk exposure results from changes in short-
term U.S. dollar interest rates. In an effort to manage
interest rate exposure, in April 1998, the Company entered
into an interest rate swap agreement to reduce the impact of
its floating rate debt. The swap agreement exchanges
floating rates for fixed interest payments over the life of
the agreement.
The Company's exposure to credit risk consists principally
of trade receivables. Hospitals and international dealers
account for a substantial portion of trade receivables and
collateral is generally not required. The risk associated
with this concentration is limited due to the Company's on-
going credit review procedures.
At February 28, 1999, the Company had forward exchange
contracts to sell foreign currencies which mature at various
dates through September 30, 1999. The following table
identifies forward exchange contracts to sell foreign
currencies and interest rate swap agreement at February 28,
1999 and August 31, 1998 as follows:
-22-
<PAGE>
ARROW INTERNATIONAL, INC.
Financial Instruments (Continued):
<TABLE>
<CAPTION>
February 28, 1999 August 31, 1998
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
-------- --------- --------- -------
<S> <C> <C> <C> <C>
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $ 5,196 $ 5,040 $ 7,062 $ 6,404
German marks 2,925 2,818 - -
French francs 1,337 1,345 1,168 1,191
Spanish pesetas 2,293 2,253 1,468 1,507
Canadian dollars 1,541 1,559 - -
Greek drachmas 1,339 1,371 1,136 1,203
Mexican peso 731 777 909 977
African rand 805 808 - -
Netherlands guilder 845 850 498 503
-------- -------- -------- --------
$ 17,012 $ 16,821 $ 12,241 $ 11,785
======== ======== ======== ========
Interest rate
swap agreement $ 5,000 $ (116) $ 5,000 $ (77)
======== ======== ======== ========
</TABLE>
In 1998, the Company entered into an interest rate swap to
reduce the impact of its floating rate debt. The swap
agreement allows the Company to exchange floating rates for
fixed interest payments over the life of the agreement. The
differential is accrued as interest rates change and is
recorded as interest expense. The agreement expires in May
2003, but allows for early termination. The effect of the
agreement is to limit interest rate exposure to 5.62% on
$5.0 million of its revolving credit. As a result of the
swap agreement, interest expense was increased by $14 for
the six months ended February 28, 1999.
-23-
<PAGE>
ARROW INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders.
(a) The Company held its annual meeting of shareholders on
January 20, 1999.
(b) At the annual meeting, the following matters were voted
upon: (i) the election of two directors (in
connection with which (A) proxies were solicited
pursuant to Regulation 14D under the Securities Exchange
Act of 1934, (B) there was no solicitation in opposition to
management's nominees as listed in the proxy statement and
(C) such nominees were elected); and (ii) ratification of the
appointment of Pricewaterhouse Coopers, LLP as independent
accountants of the Company for the current fiscal year.
With respect to the election of directors, votes were cast
as follows:
<TABLE>
<CAPTION>
<S> John H. Broadbent, Jr.
----------------------
<C>
Votes for 21,244,791
Withheld 155,185
George W. Ebright
-----------------
Votes for 21,232,591
Withheld 167,385
With respect to other matters, votes were cast as follows:
Ratification of the Appointment
of Independent Accountants
-------------------------------
Votes for 21,398,166
Votes against 835
Abstentions 975
There were no broker non-votes in respect of these matters.
</TABLE>
-24-
<PAGE>
ARROW INTERNATIONAL, INC.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
The following exhibits will be filed as part of
this Form 10-Q:
Exhibit 27.1 *Financial Data Schedule for the quarter ended
February 28, 1999
Exhibit 99.1 Cautionary Statement for Purposes
of the Safe Harbor Provisions of the
Private Securities Litigation Reform
Act of 1995
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter ended February 28, 1999.
*Not deemed filed for purposes of Section 11 of the
Securities Act of 1933, Section 18 of the Securities
Exchange Act of 1934 and Section 323 of the Trust Indenture
Act of 1939, or otherwise subject to the liabilities of such
sections and not deemed part of any registration statement
to which such exhibit relates.
-25-
<PAGE>
ARROW INTERNATIONAL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
ARROW INTERNATIONAL, INC.
(Registrant)
Date: April 14, 1999 By: /s/ Frederick J. Hirt
------------------------
(signature)
Frederick J. Hirt
Vice President-Finance
and Treasurer (Principal
Financial Officer and
Chief Accounting Officer)
-26-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S>
Exhibit Description
Number of Exhibit Method of Filing
- ------- ---------- ----------------
<C> <C> <C>
27 *Financial Data Schedule EDGAR
for the quarter ended
February 28, 1998
99.1 Cautionary Statement for Page 28 of this report
Purposes of the Safe
Harbor Provisions of the
Private Securities
Litigation Reform Act of
1995
*Not deemed filed for purposes of Section 11 of the
Securities Act of 1933, Section 18 of the Securities
Exchange Act of 1934 and Section 323 of the Trust Indenture
Act of 1939, or otherwise subject to the liabilities of such
sections and not deemed part of any registration statement
to which such exhibit relates.
-27-
<PAGE>
EXHIBIT 99.1
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, in both written reports and in oral
statements by our senior management, expectations and other
statements are expressed regarding our future performance. These
forward-looking statements are inherently uncertain and investors
must recognize that events could turn out to be different than
such expectations and statements. Key factors impacting our
current and future performance are discussed in our Annual Report
on Form 10-K for our fiscal year ended August 31, 1998 and other
filings with the Securities and Exchange Commission (the
"Commission"). In addition to such information in our Annual
Report on Form 10-K and our other filings with the Commission,
investors should consider the following risk factors in
evaluating us and our business, as well as in reviewing forward-
looking statements contained in our periodic reports filed with
the Commission and in oral statements made by our senior
management. Our actual results could differ materially from such
forward-looking statements due to material risks, uncertainties
and contingencies, including, without limitation, those set forth
below.
Stringent Government Regulation
Our products are subject to extensive regulation by the Food
and Drug Administration (the "FDA") and, in some jurisdictions,
by state, local and foreign governmental authorities. In
particular, we must obtain specific clearance or approval from
the FDA before we can market new products or certain modified
products in the United States. With the exception of one
product, we have, to date, obtained FDA marketing clearance for
our products only through the 510(k) premarket notification
process. Certain of our products under development and future
applications, however, will require approval through the more
vigorous Premarket Approval application ("PMA") process. The
process of obtaining such clearances or approvals can be time
consuming and expensive. We cannot assure that the FDA will
grant all clearances or approvals sought by us or that FDA review
will not involve delays adversely affecting the marketing and
sale of our products. We are also required to adhere to
applicable regulations setting forth current Good Manufacturing
Practices ("GMP") which require that we manufacture our products
and maintain our records in a prescribed manner with respect to
manufacturing, testing and control activities. In addition, we
are required to comply with FDA requirements for labeling and
promotion of our products. Failure to comply with applicable
federal, state, local or foreign laws or regulations could
subject us to enforcement action, including product seizures,
recalls, withdrawal of clearances or approvals, and civil and
criminal penalties, any one or more of which could have a
material adverse effect on our business, financial condition and
results of operations. Many of the foreign countries where we
conduct business have adopted medical device laws and regulations
with similar substantive and enforcement provisions. Federal,
state, local and foreign laws and regulations regarding the
development, manufacture and sale of medical devices are subject
to future changes. We cannot assure that such changes will not
have a material adverse effect on our business, financial
condition and results of operations.
-28-
<PAGE>
Significant Competition and Continual Technological Change
The markets for medical devices are highly competitive. We
currently compete with many companies in the development and
marketing of catheters and related medical devices. Some of our
competitors have access to greater financial and other resources
than us.
Furthermore, the markets for medical devices are
characterized by rapid product development and technological
change. Technological advances by one or more of our current or
future competitors could render our present or future products
obsolete or uneconomical. Our future success will depend upon
our ability to develop new products and technology to remain
competitive with other developers of catheters and related
medical devices. Our business strategy emphasizes the continued
development and commercialization of new products and the
enhancement of existing products for the critical care and
cardiac care markets. We cannot assure that we will be able to
continue to successfully develop new products and to enhance
existing products, to manufacture these products in a
commercially viable manner, to obtain required regulatory
approvals or to gain satisfactory market acceptance for our
products.
Cost Pressures on Medical Technology and Proposed Health Care
Reform
Our products are purchased principally by hospitals,
hospital networks and hospital buying groups. Although our
products are used primarily for non-optional medical procedures,
we believe that the overall escalating cost of medical products
and services has led and will continue to lead to increased
pressures upon the health care industry to reduce the cost or
usage of certain products and services. In the United States,
these cost pressures are leading to increased emphasis on the
price and cost-effectiveness of any treatment regimen and medical
device. In addition, third party payors, such as governmental
programs, private insurance plans and managed care plans, which
are billed by hospitals for such health care services, are
increasingly negotiating the prices charged for medical products
and services and may deny reimbursement if they determine that a
device was not used in accordance with cost-effective treatment
methods as determined by the payor, was experimental, unnecessary
or used for an unapproved indication. In international markets,
reimbursement systems vary significantly by country. Many
international markets have government managed health care systems
that control reimbursement for certain medical devices and
procedures and, in most such markets, there also are private
insurance systems which impose similar cost restraints. We cannot
assure that hospital purchasing decisions or government or
private third party reimbursement policies in the United States
or in international markets will not adversely affect the
profitability of our products.
In recent years, several comprehensive health care reform
proposals have been introduced in the U.S. Congress. While none
of these proposals have to date been adopted, the intent of these
proposals was, generally, to expand health care coverage
-29-
<PAGE>
for the uninsured and reduce the rate of growth of total health
care expenditures. In addition, certain states have made
significant changes to their Medicaid programs and have adopted
various measures to expand coverage and limit costs.
Implementation of government health care reform and other efforts
to control costs may limit the price of, or the level at which
reimbursement is provided for, our products. Several foreign
countries have recently considered, and in some countries
adopted, similar reforms to limit the growth of health care
costs, including price regulation. We anticipate that Congress,
state legislatures, foreign governments and the private sector
will continue to review and assess alternative health care
delivery and payment systems. We cannot predict what additional
legislation or regulation, if any, relating to the health care
industry may be enacted in the future or what impact the adoption
of any federal, state or foreign health care reform, private
sector reform or market forces may have on our business. We
cannot assure that any such reforms will not have a material
adverse effect on the medical device industry in general, or on
our business, in particular.
Dependence on Patents and Proprietary Rights
We own numerous U.S. and foreign patents and have several
U.S. and foreign patent applications pending. We also have
exclusive license rights to certain patents held by third
parties. These patents relate to aspects of the technology used
in certain of our products. From time to time, we are subject to
legal actions involving patent and other intellectual property
claims. Successful litigation against us regarding our patents
or infringement of the patent rights of others could have a
material adverse effect on our business, financial condition and
results of operations. In addition, we cannot assure that
pending patent applications will result in issued patents or that
patents issued to or licensed-in by us will not be challenged or
circumvented by competitors or found to be valid or sufficiently
broad to protect our technology or to provide it with any
competitive advantage. We also rely on trade secrets and
proprietary technology that we seek to protect, in part, through
confidentiality agreements with employees, consultants and other
parties. We cannot assure that these agreements will not be
breached, that we will have adequate remedies for any breach,
that others will not independently develop substantially
equivalent proprietary information or that third parties will not
otherwise gain access to our trade secrets.
There has been substantial litigation regarding patent and
other intellectual property rights in the medical devices
industry. Historically, litigation has been necessary to enforce
certain patent and trademark rights held by us. Future
litigation may be necessary to enforce patent and other
intellectual property rights belonging to us, to protect our
trade secrets or other know-how owned by us, or to defend ourself
against claimed infringement of the rights of others and to
determine the scope and validity of our and others' proprietary
rights. Any such litigation could result in substantial cost to
and diversion of effort by us. Adverse determinations in any
such litigation could subject us to significant liabilities to
third parties, require us to seek licenses from third parties and
prevent us from manufacturing, selling or using certain of our
products, any one or more of which could have a material adverse
effect on our business, financial condition and results of
operations.
-30-
<PAGE>
Risks Associated with International Operations
We generate significant sales outside the United States and
are subject to risks generally associated with international
operations, such as unexpected changes in regulatory
requirements, tariffs, customs, duties and other trade barriers,
difficulties in staffing and managing foreign operations, longer
payment cycles, problems in collecting accounts receivable,
political risks, fluctuations in currency exchange rates, foreign
exchange controls which restrict or prohibit repatriation of
funds, technology export and import restrictions or prohibitions,
delays from customs brokers or government agencies and
potentially adverse tax consequences resulting from operating in
multiple jurisdictions with different tax laws, any one or more
of which could materially adversely impact the success of our
international operations. As our revenues from international
operations increase, an increasing portion of our revenues and
expenses will be denominated in currencies other than U.S.
dollars and, consequently, changes in exchange rates could have a
greater effect on our future operations. We cannot assure that
such factors will not have a material adverse effect on our
business, financial condition and results of operations. In
addition, we cannot assure that laws or administrative practices
relating to regulation of medical devices, taxation, foreign
exchange or other matters of countries within which we operate
will not change. Any such change could also have a material
adverse effect on our business, financial condition and results
of operations.
Potential Product Liability
Our business exposes us to potential product liability risks
which are inherent in the testing and marketing of catheters and
related medical devices. Our products are often used in intensive
care settings with seriously ill patients. In addition, many of
the medical devices manufactured and sold by us are designed to
be implanted in the human body for long periods of time and
component failures, manufacturing flaws, design defects or
inadequate disclosure of product-related risks with respect to
these or other products manufactured or sold by us could result
in an unsafe condition or injury to, or death of, the patient.
The occurrence of such a problem could result in product
liability claims and/or a recall of, or safety alert relating to,
one or more of our products. We cannot assure that the product
liability insurance maintained by us will be available or
sufficient to satisfy all claims made against us or that we will
be able to obtain insurance in the future at satisfactory rates
or in adequate amounts. Product liability claims or product
recalls in the future, regardless of their ultimate outcome,
could result in costly litigation and could have a material
adverse effect on our business or reputation or on our ability to
attract and retain customers for our products.
Risks Associated with Derivative Financial Instruments
As a partial hedge against adverse fluctuations in exchange
rates, we periodically enter into foreign currency exchange
contracts with certain major financial institutions. By their
nature, all such contracts involve risk, including the risk of
-31-
<PAGE>
nonperformance by counterparties. Accordingly, losses relating
to these contracts could have a material adverse effect upon our
business, financial condition and results of operations. Our
policy prohibits the use of derivative instruments for
speculative purposes.
Dependence on Key Management
Our success depends upon the continued contributions of key
members of our senior management team, certain of whom have been
with us since our inception in 1975. Accordingly, loss of the
services of one or more of these key members of management could
have a material adverse effect on our business. None of these
individuals has an employment agreement with us.
Risks Associated with Year 2000
We are actively addressing the Year 2000 problem as it
relates to our business operations and regulation by the FDA.
The following disclosure describes our progress toward our
objective of ensuring that our business systems will operate
satisfactorily on or after January 1, 2000.
Our Central Venous Catheters and other catheter products are
unaffected by the Year 2000 problem. Early in 1998, we responded
to the FDA concerning the effect of the Year 2000 problem on our
Intra-Aortic Balloon Pumps (IABPs). The software in the more
recent models of our IABPs has taken the change of century issues
into account. The operating range for the clock calendar in
these IABPs spans a 100 year period from the years 1988 through
2087. The clock calendar on certain older models advances as
high as 1999. However, none of our IABPs depend on the year
information for any calculations or in communicating with other
electronic devices and will function as intended or expected,
regardless of the date. We provide our customers requesting
certifications with specific IABP model numbers that have or do
not have the updated clock calendars.
Therefore, our major Year 2000 concerns relate to business
systems that support the continuity of our business operations
and the delivery of products and support services to our
customers.
For business applications relating to sales order
processing, billing, disbursements, marketing and manufacturing
management, we have completed the necessary software code
modifications in the development version of the applications. We
tested the modified versions by advancing the date beyond
December 31, 1999. The validated software was moved to our
production machines. U.S. payroll and general ledger software is
in process of being tested and validated in the above manner and
is expected to be completed later in the late spring of 1999. We
estimate our cost of software upgrades to be approximately
$30,000 for all U.S. systems and $120,000 for foreign systems.
Our internal resources devoted to these efforts are estimated at
500 man-days. In the event that our production systems
malfunction due to the change to the year 2000, we plan to move
the affected software and data back to the machines
-32-
<PAGE>
on which validation was completed so that our business processes
can continue.
The Company's engineering documentation systems which are
critical systems for manufacturing were tested and are Year 2000
compliant.
We upgraded our personal computer systems in fiscal 1998 at
a cost of $700,000. We estimate spending an additional $500,000
in fiscal 1999 to upgrade our servers and replace our e-mail
system.
Our computer controlled equipment includes programmable
controllers on production equipment and systems for time and
attendance recording, building management, life safety, security,
elevators, air compressors and high purity water. For equipment
or systems controlled by computer chips or programs, we have
determined that these systems or equipment are Year 2000
compliant.
The status of Year 2000 compliance by key suppliers of
products and services to the Company is being determined by using
a compliance survey, which the Company mailed in December 1998.
We have received preliminary responses from suppliers, which we
are currently evaluating. Follow up actions will be taken to
obtain responses from all suppliers and also to ensure
compliance.
We increased our domestic revolving credit facility to $75
million in October 1998. This additional borrowing capacity
could be utilized to support our cash flow requirements in the
event that health care providers are unable to pay amounts owed
to us on a timely basis due to system malfunctions related to the
Year 2000 change.
If we are able to fulfill our plans to secure our business
systems as described above, then any adverse Year 2000 effects we
may experience will arise from circumstances outside our control.
Because we cannot reasonably anticipate such circumstances at
this time, we have not developed a Year 2000 worst case scenario.
While we believe that we are adequately addressing the Year 2000
problem, we cannot assure that the cost and liabilities
associated with the Year 2000 problem will not materially
adversely impact our business, financial condition and results of
operations.
-33-
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANACIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ARROW INTERNATIONAL, INC. FOR THE QUARTER ENDED FEBRUARY
28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> FEB-28-1999
<CASH> 5,136
<SECURITIES> 0
<RECEIVABLES> 73,890
<ALLOWANCES> 1,045
<INVENTORY> 77,395
<CURRENT-ASSETS> 172,785
<PP&E> 196,332
<DEPRECIATION> 81,368
<TOTAL-ASSETS> 361,069
<CURRENT-LIABILITIES> 76,200
<BONDS> 0
0
0
<COMMON> 45,661
<OTHER-SE> 218,299
<TOTAL-LIABILITY-AND-EQUITY> 361,069
<SALES> 142,359
<TOTAL-REVENUES> 142,359
<CGS> 66,661
<TOTAL-COSTS> 49,114
<OTHER-EXPENSES> 2,469
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 29,053
<INCOME-TAX> 10,604
<INCOME-CONTINUING> 18,449
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,449
<EPS-PRIMARY> .80
<EPS-DILUTED> .80
</TABLE>
