UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the third quarter period ended May 31, 2000
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 July 11, 2000
--------- -----------------------------------
Common Stock, No Par Value 22,120,003
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Form 10-Q Index
[S] Page
----
[C]
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at May 31, 2000
and August 31, 1999 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 10-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15-21
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 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 24
Signature 25
Exhibit Index 26
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</PAGE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
May 31, August 31,
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,942 $ 3,939
Accounts receivable, net 73,329 70,467
Inventories 82,599 74,809
Prepaid expenses and other 17,378 16,242
Deferred income taxes 2,122 2,018
---------- ---------
Total current assets 179,370 167,475
---------- ---------
Property, plant and equipment:
Total property, plant and equipment 216,718 204,939
Less accumulated depreciation (97,919) (88,005)
---------- ----------
118,799 116,934
---------- ----------
Other assets:
Goodwill, net 39,443 35,698
Intangible and other assets, net 39,648 33,487
Deferred income taxes 5,753 4,738
---------- ----------
Total other assets 84,844 73,923
---------- ----------
Total assets $ 383,013 $ 358,332
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Continued
-3-
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, Continued
(In thousands, except share amounts)
(Unaudited)
May 31, August 31,
2000 1999
--------- ----------
<S> <C> <C>
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 300 $ 470
Notes payable 53,170 32,802
Accounts payable 8,431 10,028
Cash overdrafts 1,098 394
Accrued liabilities 8,480 8,707
Accrued compensation 7,421 6,223
Accrued income taxes 5,323 950
---------- ----------
Total current liabilities 84,223 59,574
Long-term debt 9,482 11,105
Accrued postretirement benefit obligation 9,849 9,486
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 280,902 250,931
Less treasury stock at cost:
4,315,810 and 3,420,970 shares,
respectively (39,575) (12,618)
Accumulated other comprehensive
expense (7,529) (5,807)
---------- ----------
Total shareholders' equity 279,459 278,167
---------- ----------
Total liabilities and
shareholders' equity $ 383,013 $ 358,332
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
For the Three Months Ended
--------------------------
May 31, May 31,
2000 1999
-------- ---------
<S> <C> <C>
Net sales $ 81,290 $ 75,865
Cost of goods sold 38,485 35,908
--------- ---------
Gross profit 42,805 39,957
Operating expenses:
Research, development and engineering 5,369 4,988
Selling, general and administrative 18,392 17,813
--------- ---------
Operating income 19,044 17,156
--------- ---------
Other expenses (income):
Interest expense, net of
amounts capitalized 623 297
Interest income (141) (131)
Other, net (302) (942)
--------- ---------
Other expenses, net 180 (776)
--------- ---------
Income before income taxes 18,864 17,932
Provision for income taxes 6,414 6,545
--------- ---------
Net income $ 12,450 $ 11,387
========= =========
Basic and diluted earnings
per common share $ .56 $ .49
========= =========
Cash dividends per common share $ .060 $ .055
========= =========
Weighted average shares outstanding 22,277,772 23,201,489
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
For the Nine Months Ended
-------------------------
May 31, May 31,
2000 1999
---------- ---------
<S> <C> <C>
Net sales $ 238,608 $ 218,224
Cost of goods sold 111,652 102,569
Gross profit 126,956 115,655
--------- ---------
Operating expenses:
Research, development and engineering 15,493 15,739
Selling, general and administrative 55,511 52,037
Special charges 3,320 4,139
--------- ---------
Operating income 52,632 43,740
--------- ---------
Other expenses (income):
Interest expense, net of
amounts capitalized 1,675 1,021
Interest income (429) (294)
Other, net 25 (3,972)
--------- ---------
Other expenses (income), net 1,271 (3,245)
--------- ---------
Income before income taxes 51,361 46,985
Provision for income taxes 17,463 17,150
--------- ---------
Net income $ 33,898 $ 29,835
========= =========
Basic and diluted earnings
per common share $ 1.50 $ 1.29
========= =========
Cash dividends per common share $ .175 $ .160
========= =========
Weighted average shares outstanding 22,572,368 23,217,815
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Nine Months Ended
-------------------------
May 31, May 31,
2000 1999
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 33,898 $ 29,835
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 10,782 10,817
Special charge 3,320 4,139
Amortization of intangible assets
and goodwill 4,383 2,470
Amortization of unearned compensation - 44
Deferred income taxes (1,119) (2,685)
Unrealized holding (gain) loss on securities (225) 887
Other 346 320
Changes in operating assets and liabilities:
Accounts receivable, net (3,924) (7,519)
Inventories (8,754) 334
Prepaid expenses and other (2,236) (3,586)
Accounts payable and accrued liabilities (1,730) 3,960
Accrued compensation 1,255 (1,872)
Accrued income taxes 4,350 536
---------- ----------
Total adjustments 6,448 7,845
---------- ----------
Net cash provided by operating activities 40,346 37,680
Cash flows from investing activities:
Capital expenditures (13,935) (14,557)
Increase in intangible and other assets (4,511) (1,442)
Cash paid for businesses acquired, net (11,016) (27,888)
---------- ----------
Net cash used in investing activities (29,462) (43,887)
Cash flows from financing activities:
Increase in notes payable 20,390 17,962
Principal payments of long-term debt (830) (997)
Increase (decrease) in book overdrafts 704 (1,884)
Dividends paid (3,864) (3,600)
Proceeds from stock options exercised 50 -
Purchase of treasury stock (27,007) (1,564)
---------- ----------
Net cash (used in) provided
by financing activities (10,557) 9,917
Effect of exchange rate changes on cash and
cash equivalents (324) (80)
Net change in cash and cash equivalents 3 3,630
Cash and cash equivalents at beginning of year 3,939 4,652
---------- ----------
Cash and cash equivalents
at end of period $ 3,942 $ 8,282
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Continued
-7-
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
(Unaudited)
For the Nine Months Ended
-------------------------
May 31, May 31,
2000 1999
---------- ----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 1,675 $ 1,021
Income taxes $ 14,546 $ 17,843
Supplemental schedule of non-cash investing and financing activities:
Estimated fair value of assets acquired,
net of cash acquired $ 13,325 $ 29,110
Cash paid for assets, net of cash acquired,
of $386 and $0, respectively 11,016 27,888
--------- ---------
Liabilities assumed $ 2,309 $ 1,222
========= =========
Cash paid for business acquired:
Working capital $ (876) $ 7,722
Property, plant and equipment 54 300
Goodwill, intangible assets and in-process
research and development 12,224 19,866
--------- ---------
$ 11,402 $ 27,888
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
-8-
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
For the Three Months Ended
--------------------------
May 31, May 31,
2000 1999
--------- ---------
<S> <C> <C>
Net income $ 12,450 $ 11,387
Other comprehensive income (expense):
Currency translation adjustments (1,174) (1,708)
Unrealized holding loss on securities,
net of tax ($360 and $417, respectively) (579) (632)
--------- ---------
Other comprehensive expense (1,753) (2,340)
--------- ---------
Total comprehensive income $ 10,697 $ 9,047
========= =========
For the Nine Months Ended
-------------------------
May 31, May 31,
2000 1999
--------- ---------
<S> <C> <C>
Net income $ 33,898 $ 29,835
Other comprehensive income (expense):
Currency translation adjustments (2,113) (922)
Unrealized holding gain (loss) on securities,
net of tax ($(225) and $887, respectively) 391 (1,343)
--------- ---------
Other comprehensive expense (1,722) (2,265)
--------- ---------
Total comprehensive income $ 32,176 $ 27,570
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
-9-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 1 - Basis of Presentation:
These unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring accruals, which
management considers necessary for a fair presentation of the
Company's consolidated financial position, results of operations,
and cash flows for the interim periods presented. Results for
the interim period are not necessarily indicative of results for
the entire year. Such statements are presented in accordance
with the requirements of Form 10-Q and do not include all
disclosures normally required by generally accepted accounting
principles or those normally made on Form 10-K.
Note 2 - Inventories:
Inventories are summarized as follows:
<TABLE>
<CAPTION>
May 31, August 31,
2000 1999
---------- ----------
<S> <C> <C>
Finished goods $ 29,867 $ 31,779
Semi-finished goods 15,856 12,654
Work-in-process 10,922 10,528
Raw materials 25,954 19,848
---------- ----------
$ 82,599 $ 74,809
========== ==========
</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 business, results of
operations, or financial position.
Continued
-10-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 4 - Related Party Transactions:
During the three and nine months ended May 31, 2000, the Company
made purchases amounting to $37 and $116, respectively, from
Precision Medical Products, Inc., ("PMP"), a former subsidiary of
Arrow Precision Products, Inc. ("Precision"), which is related to
the Company through common ownership. PMP is 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.
Note 5 - Accounting Policies
Reclassifications
Certain prior period information has been reclassified for
comparative purposes.
Fixed Asset Lives
During the three months ended May 31, 2000, the Company completed
a study of its fixed asset lives. The study indicated that
actual lives for certain asset categories were generally longer
than the useful lives for depreciation purposes. Therefore, the
Company extended the estimated useful lives of certain categories
of property, plant and equipment, effective March 1, 2000. The
majority of the change in depreciation related to manufacturing
equipment. For the three months ended May 31, 2000, the change
in depreciation expense related to manufacturing equipment was
included in inventory value and will be recognized as the
inventory is sold; the change in depreciation expense related to
non-manufacturing assets was reflected in operating expenses.
This change in estimated fixed asset lives resulted in decreased
depreciation expense of $961 and increased net income of $203 for
both the three and nine months ended May 31, 2000. Basic and
diluted earnings per common share increased by less than $.01 as
a result of this change.
Note 6 - Business Acquisitions:
On September 1, 1999, the Company completed the acquisition of
Sometec, S.A., a French development company that has recently
developed a non-invasive esophageal ultrasound probe that
continuously measures descending aortic blood flow, for $11,402.
The acquisition has been accounted for using the purchase method
of accounting. The allocation of the purchase price was prepared
on a preliminary basis pending completion of the valuation. The
excess of the purchase price over the estimated fair value of the
net assets acquired of approximately $4,783 is being amortized
over a period of 20 years. Intangible assets acquired are being
amortized over a period of 10 years. The results of operations
of this business are included in the Company's consolidated
financial statements from the date of acquisition. Pro forma
financial information is not presented as this acquisition has no
material effect on the Company's results of operations or
financial condition.
Continued
-11-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 7 - Special Charge:
In the first quarter of fiscal 2000, the Company recorded a non-
cash pre-tax special charge of $3,320 ($2,191 after-tax or $.10
per basic and diluted common share) related primarily to a
write-down for the in-process research and development
acquired in connection with the Company's recent acquisition of
Sometec, S.A. (see Note 6 of these Notes to Consolidated
Financial Statements). The technology acquired is a compact
monitoring device that measures and monitors the descending
aortic blood flow during anesthesia and intensive care. The
device provides real-time aortic blood flow (a measurement of
cardiac output) by using both pulsed Doppler for measuring blood
velocity and M-mode ultrasound to accurately measure the aortic
diameter. The monitoring system consists of four main
components: the main console (monitor), a transesophageal probe,
a disposable jacket and an articulated probe holder. The monitor
provides the physician with a continuous display of a patient's
hemodynamic profile, including aortic blood flow, heart rate,
stroke volume, peak velocity, acceleration, left ventricular
ejection time and systemic vascular resistance. To facilitate
use of this device, a disposable jacket, containing an acoustic
gel, is placed over the probe utilizing a special vacuum mounting
tool supplied with the jacket. The Company believes that the
speed and ease of use of this new noninvasive measurement
technique has the potential of establishing cardiac output as a
frequently used physician tool with value similar to blood
pressure, EKG and pulse oximetry measurements. 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 date of consummation of the
acquisition. The value assigned to purchase Sometec in-process
technology was based on a valuation prepared by an independent
third-party appraisal company. Each of the technologies under
development at the date of acquisition was reviewed for
technological feasibility, stage of completeness at the
acquisition date, and scheduled release dates of products
employing the technology to determine whether the technology was
complete or under development. At the acquisition date, the
research and development project was estimated to be 75%
complete. Incomplete development efforts at the time of
acquisition included improved portability, software development
and development of the disposable sheath. The valuation was
based on the estimated cash flows resulting from commercially
viable products discounted to present value using a risk adjusted
after-tax discount rate of 22%. The research and development
costs and the net cash inflows from these projects have
commenced. However, while the Company believes these projects
will be completed as planned, the Company cannot assure you that
they will be completed on schedule or, once completed, that the
new products resulting from these projects will be successfully
introduced into the marketplace. 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.
-12-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 8 - 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. The Company
operates in four main geographic regions, therefore, information
by product category and geographic areas is presented below.
The following table provides quarterly information about the
Company's sales by product category:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
May 31, 2000 May 31, 1999
------------------- ------------------
Critical Cardiac Critical Cardiac
Care Care Care Care
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Sales to external
customers $ 67,800 $ 13,500 $ 61,500 $ 14,400
The following tables present quarterly information about
geographic areas:
Three Months Ended May 31, 2000
---------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
------ -------- ------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 61,600 $10,500 $6,900 $2,300 $ - $ 81,300
Three Months Ended May 31, 1999
---------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
------ -------- ------ ------- ------------ ------------
Sales to unaffiliated
customers $ 57,900 $ 8,900 $6,900 $2,200 $ - $ 75,900
</TABLE>
Export sales to unaffiliated customers were $9,200 and $9,100 for the
three months ended May 31, 2000 and May 31, 1999, respectively
-13-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 8 - Segment Reporting (continued):
The following table provides year-to-date information about the
Company's sales by product category:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
May 31, 2000 May 31, 1999
------------------ -----------------
Critical Cardiac Critical Cardiac
Care Care Care Care
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales to external
customers $198,300 $ 40,300 $177,400 $ 40,800
The following tables present year-to-date information about
geographic areas:
Nine Months Ended May 31, 2000
---------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
------ -------- ------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $180,900 $30,000 $21,100 $ 6,600 $ - $ 238,600
Nine Months Ended May 31, 1999
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
------ -------- ------ ------- ------------ ------------
Sales to unaffiliated
customers $166,500 $24,900 $20,900 $ 5,900 $ - $ 218,200
</TABLE>
Export sales to unaffiliated customers were $26,600 and $25,900 for
the nine months ended May 31, 2000 and May 31, 1999, respectively.
Note 9 - New Accounting Standards:
On December 6, 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin #101, Revenue Recognition in Financial
Statements (SAB 101). SAB 101 summarizes the staff's views in
applying generally accepted accounting principles to revenue
recognition in financial statements. SAB 101 is effective for the
fourth quarter of fiscal year 2001. The Company is currently
evaluating the impact SAB 101 will have on its financial statements,
if any.
-14-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion includes certain forward-looking
statements. Such forward-looking statements are subject to a
number of factors, including material risks, uncertainties and
contingencies, which could cause actual results to differ
materially from the forward-looking statements. For a discussion
of important factors that could cause actual results to differ
materially from the forward-looking statements, see Exhibit 99.1
to this Report and the Company's periodic reports and other
documents filed with the Securities and Exchange Commission.
Results of Operations
Three Months Ended May 31, 2000 Compared to Three Months Ended
May 31, 1999:
Net sales for the three months ended May 31, 2000 increased by
$5.4 million, or 7.2%, to $81.3 million from $75.9 million in the
same period of fiscal 1999. Net sales represent gross sales
invoiced to customers less certain related charges, including
freight, discounts, returns and other allowances. This increase
was due primarily to an increase in unit volume of the Company's
central venous catheter products. Sales of critical care
products increased 10.3% to $67.8 million from $61.5 million in
the comparable prior year period due primarily to increased
shipments of central venous catheter products. Cardiac care
product sales decreased to $13.5 million from $14.4 million, a
decrease of 6.3% from the comparable prior year period, due
primarily to lower sales of intra-aortic balloon ("IAB")
products. International sales increased by $1.8 million, or
6.8%, to $28.9 million, representing 35.6% of net sales for the
three months ended May 31, 2000, compared to 35.7% in the
comparable prior year period, principally as a result of higher
sales of central venous catheter products. The increased strength
of the U.S. dollar, relative to currencies in countries where the
Company operates direct sales subsidiaries, decreased net sales
for the three month period ended May 31, 2000 by $0.1 million.
Gross profit increased 7.1% to $42.8 million in the three months
ended May 31, 2000 from $40.0 million in the same period of
fiscal 1999. As a percentage of net sales, gross profit was
52.7% in both the three months ended May 31, 2000 and 1999.
-15-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Research, development and engineering expenses increased by 7.6%
to $5.4 million in the three months ended May 31, 2000 from $5.0
million in the comparable prior year period. As a percentage of
net sales, these expenses were 6.6% in both the third quarter of
fiscal 2000 and the same period in fiscal 1999. The increased
spending is primarily a result of increased development,
regulatory and clinical trial activity related to the LionHeartT,
the Company's left ventricular assist system.
Selling, general and administrative expenses increased by 3.3% to
$18.4 million in the three months ended May 31, 2000 from $17.8
million in the comparable prior year period. Selling, general
and administrative expenses decreased as a percentage of net
sales to 22.6% in the third quarter of fiscal 2000 from 23.5% in
the comparable prior year period of fiscal 1999. The increased
expense was due primarily to higher amortization expense
resulting from the Company's acquisition of Sometec, S.A. in
September 1999.
Principally due to the above factors, operating income increased
in the third quarter of fiscal 2000 by 11.0% to $19.0 million
from $17.2 million in the comparable prior year period.
Other expenses (income), net, decreased to $0.2 million of
expense in the third quarter of fiscal 2000 from $0.8 million of
income in the comparable prior year 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 increased by 5.2% to $18.9 million in the third quarter of
fiscal 2000 from $17.9 million in the comparable prior year
period. For the third quarter of fiscal 2000, the Company's
effective income tax rate was 34.0%, a decrease from 36.5% in the
same period of fiscal 1999, principally as a result of the recent
completion of tax examinations through August 31, 1998.
Net income in the third quarter of fiscal 2000 increased by 9.3%
to $12.5 million from $11.4 million in the comparable prior year
period primarily as a result of the above factors. As a
percentage of net sales, net income represented 15.3% in the
three months ended May 31, 2000, compared to 15.0% in the
comparable period of fiscal 1999. During the three months ended
May 31, 2000, the Company completed a study of its fixed asset
lives. The study indicated that actual lives for certain asset
categories were generally longer than the useful lives for
depreciation purposes. Therefore, the Company extended the
estimated useful lives of certain categories of property, plant
and equipment, effective March 1, 2000. The majority of the
change in depreciation related to manufacturing equipment. For
the three months ended May 31, 2000, the change in depreciation
expense related to manufacturing equipment was included in
inventory value and will be recognized as the inventory is sold;
the change in depreciation expense related to non-manufacturing
assets was reflected in operating expenses. This change in
estimated fixed asset lives resulted in decreased depreciation
expense of $1.0 million and increased net income of $0.2 million
for the three months ended May 31, 2000. Basic and diluted
earnings per common share increased by less than $.01 as a result
of this change.
-16-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Basic and diluted earnings per common share were $.56 in the
three month period ended May 31, 2000, an increase of 13.9%, or
$.07 per share, from $.49 per share in the comparable prior year
period. Weighted average common shares outstanding decreased to
22,277,772 in the third quarter of fiscal 2000 from 23,201,489 in
the comparable prior period, due primarily to the Company's
previously announced share repurchase program, which remains in
effect.
Nine Months Ended May 31, 2000 Compared to Nine Months Ended May
31, 1999
Net sales for the nine months ended May 31, 2000 increased by
$20.4 million, or 9.3%, to $238.6 million from $218.2 million in
the same period of fiscal 1999. This increase was due primarily
to an increase in unit volume in the Company's central venous
catheter products. Sales of critical care products increased
11.8% to $198.3 million from $177.4 million in the comparable
prior year period due primarily to increased shipments of central
venous and specialty catheter products. Cardiac care product
sales decreased to $40.3 million from $40.8 million, a decrease
of 1.2% from the comparable prior year period, due primarily to
lower sales of IAB products. International sales increased by
$6.7 million, or 8.6%, to $84.3 million, representing 35.3% of
net sales for the nine months ended May 31, 2000, compared to
35.6% of net sales in the comparable prior year period,
principally as a result of increased sales of central venous
catheter products. The decreased strength of the U.S. dollar,
relative to currencies in countries where the Company operates
direct sales subsidiaries, increased net sales for the nine month
period ended May 31, 2000 by $0.1 million.
Gross profit increased 9.8% to $127.0 million in the nine months
ended May 31, 2000 compared to $115.7 million in the same period
of fiscal 1999. As a percentage of net sales, gross profit
increased to 53.2% during the nine months ended May 31, 2000 from
53.0% in the comparable prior year period, due principally to
product and distribution mix.
Research, development and engineering expenses decreased by 1.6%
to $15.5 million in the nine months ended May 31, 2000 from $15.7
million in the comparable prior year period. As a percentage of
net sales, these expenses decreased in the first nine months of
fiscal 2000 to 6.5%, compared to 7.2% in the same period of
fiscal 1999, primarily as a result of decreased spending in the
development of experimental and custom products.
Selling, general and administrative expenses increased by 6.7% to
$55.5 million in the nine months ended May 31, 2000 from $52.0
million in the comparable prior year period. The increased
expenses were due primarily to additional expenses resulting from
the Company's acquisition of Sometec, S.A. in September 1999.
Selling, general and administrative expenses decreased as a
percentage of net sales to 23.3% in the first nine months of
fiscal 2000 from 23.8% in the comparable period of fiscal 1999.
-17-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
In the first quarter of fiscal 2000, the Company recorded a non-
cash pre-tax special charge of $3.3 million ($2.2 million after-
tax or $.10 per basic and diluted common share) related primarily
to a write-down for the in-process research and development
acquired in connection with the Company's recent acquisition of
Sometec, S.A. (see Note 6 of Notes to Consolidated Financial
Statements). The technology acquired is a compact monitoring
device that measures and monitors the descending aortic blood
flow during anesthesia and intensive care. The device provides
real-time aortic blood flow (a measurement of cardiac output) by
using both pulsed Doppler for measuring blood velocity and M-mode
ultrasound to accurately measure the aortic diameter. The
monitoring system consists of four main components: the main
console (monitor), a transesophageal probe, a disposable jacket
and an articulated probe holder. The monitor provides the
physician with a continuous display of a patient's hemodynamic
profile, including aortic blood flow, heart rate, stroke volume,
peak velocity, acceleration, left ventricular ejection time and
systemic vascular resistance. To facilitate use of this device,
a disposable jacket, containing an acoustic gel, is placed over
the probe utilizing a special vacuum mounting tool supplied with
the jacket. The Company believes that the speed and ease of use
of this new noninvasive measurement technique has the potential
of establishing cardiac output as a frequently used physician
tool with value similar to blood pressure, EKG and pulse oximetry
measurements. 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 related to the special charge were charged
to expense at the date of consummation of the acquisition. The
value assigned to purchase Sometec in-process technology was
based on a valuation prepared by an independent third-party
appraisal company. Each of the technologies under development at
the date of acquisition was reviewed for technological
feasibility, stage of completeness at the acquisition date, and
scheduled release dates of products employing the technology to
determine whether the technology was complete or under
development. At the acquisition date, the research and
development project was estimated to be 75% complete. Incomplete
development efforts at the time of acquisition included improved
portability, software development and development of the
disposable sheath. The valuation was based on the estimated cash
flows resulting from commercially viable products discounted to
present value using a risk-adjusted after-tax discount rate of
22%. The research and development costs and the net cash inflows
from these projects have commenced. However, while the Company
believes these projects will be completed as planned, the Company
cannot assure you that they will be completed on schedule or,
once completed, that the new products resulting from these
projects will be successfully introduced into the marketplace.
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.
-18-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
In the second quarter of fiscal 1999, the Company recorded a non-
cash pre-tax special charge of $4.1 million ($2.6 million after-
tax or $.11 per basic and diluted common share) related to the
purchase of in-process IAB and pump research and development as
part of its acquisition of the assets of the cardiac assist
division of C.R. Bard, Inc. The IAB and pumps are class 3 life
saving medical devices regulated by the Food and Drug
Administration (the "FDA"). In accordance with SFAS No. 2,
"Accounting for Research and Development Costs" and FIN No. 4,
"Applicability of SFAS No. 2 to Business Combinations Accounted
for by the Purchase Method", these costs related to the special
charge were charged to expense at the date of consummation of the
acquisition. The value assigned to this purchased IAB and pump
in-process technology was based on a valuation prepared by an
independent third-party appraisal company. Each of the
technologies under development at the date of acquisition was
reviewed for technological feasibility, stage of completeness at
the acquisition date, and scheduled release dates of products
employing the technology to determine whether the technology was
complete or under development. At the acquisition date, the
research and development projects were in various stages of
completion ranging from 50% to 80%. The valuation was based on
the estimated cash flows resulting from commercially viable
products discounted to present value using risk-adjusted discount
rates ranging from 29% to 32%. The research and development
costs from the projects commenced within a year of the
acquisition date. Net cash inflows related to certain of these
technologies have commenced and inflows from other of these
technologies are expected to commence by the end of fiscal 2000.
While the Company believes these projects will be completed as
planned, the Company cannot assure you that they will be
completed on schedule or, once completed, that the new products
resulting from these projects will be successfully introduced
into the marketplace. 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 increased
in the first nine months of fiscal 2000 by 20.3% to $52.6 million
from $43.7 million in the comparable period of fiscal 1999.
Other expenses (income), net, decreased to $1.3 million of
expense in the first nine months of fiscal 2000 from $(3.2)
million of income in the comparable prior year 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 increased in the first nine months of fiscal 2000 by 9.3%
to $51.4 million from $47.0 million in the comparable prior year
period. For the first nine months of fiscal 2000, the Company's
effective income tax rate was 34.0%, a decrease from 36.5% in the
same period of fiscal 1999, principally as a result of the recent
completion of tax examinations through August 1998.
-19-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Net income increased 13.6% to $33.9 million in the nine months
ended May 31, 2000 from $29.8 million in the comparable prior
year period. As a percentage of net sales, net income
represented 14.2% during the nine months ended May 31, 2000
compared to 13.7% in the comparable period of fiscal 1999.
During the nine months ended May 31, 2000, the Company completed
a study of its fixed asset lives. The study indicated that
actual lives for certain asset categories were generally longer
than the useful lives for depreciation purposes. Therefore, the
Company extended the estimated useful lives of certain categories
of property, plant and equipment, effective March 1, 2000. The
majority of the change in depreciation related to manufacturing
equipment. For the nine months ended May 31, 2000, the change in
depreciation expense related to manufacturing equipment was
included in inventory value and will be recognized as the
inventory is sold; the change in depreciation expense related to
non-manufacturing assets was reflected in operating expenses.
This change in estimated fixed asset lives resulted in decreased
depreciation expense of $1.0 million and increased net income of
$0.2 million for the nine months ended May 31, 2000. Basic and
diluted earnings per common share increased by less than $.01 as
a result of this change.
Basic and diluted earnings per common share were $1.50 in the
nine month period ended May 31, 2000, an increase of 16.3%, or
$.21 per share, from $1.29 per share in the comparable prior year
period. Weighted average common shares outstanding decreased to
22,572,368 from 23,217,815 in the comparable prior year period
primarily as a result of the Company's previously announced share
repurchase program, which remains in effect.
Liquidity and Capital Resources
For the nine months ended May 31, 2000, net cash provided by
operations was $40.3 million, an increase of $2.7 million from
the same period in the prior year due to higher net income,
improved accounts receivable collection efforts, and the timing
of income tax payments offset by an increase in inventory of the
Company's new HemoSonic (TRADEMARK) 100 hemodynamic monitoring
system to support the launch of this product. Accounts
receivable increased by $2.9 million in the nine months ended May
31, 2000 compared to a $7.5 million increase in the same period
of fiscal 1999. Accounts receivable, measured in days sales
outstanding during the period, decreased to 84 days at May 31,
2000 from 90 days at May 31, 1999, due principally to an
increase in collection efforts by the Company.
Net cash used in the Company's investing activities totaled $29.5
million in the nine months ended May 31, 2000 and $43.9 million
in the comparable period of fiscal 1999. Fiscal 1999 includes
the acquisition of the cardiac assist division of C.R. Bard, Inc.
in the first quarter for $27.9 million. Fiscal 2000 includes the
acquisition of Sometec, Inc. in the first quarter for $11.0
million.
-20-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Financing activities used $10.6 million of net cash in the nine
month period ended May 31, 2000, and provided $9.9 million of net
cash in the comparable period of fiscal 1999. This change is
principally attributable to increased use of cash to purchase
shares of the Company's common stock in the open market in
connection with its previously announced program to repurchase up
to one million shares of its common stock. On April 6, 2000, the
Company announced the approval by its Board of Directors to
extend this program by purchasing on the open market up to an
additional one million shares of its common stock. For the nine
months ended May 31, 2000, the Company has expended $27.0 million
to fund the repurchase of 896,400 shares of its common stock
pursuant to this program. As of July 11, 2000, the Company has
repurchased 1,104,300 shares under this program for approximately
$32.6 million.
As of May 31, 2000, the Company had U.S bank credit facilities
providing an aggregate of $65.0 million in revolving credit, of
which $24.6 million remained unused. In addition, certain of the
Company's foreign subsidiaries had revolving credit facilities
totaling the U.S. dollar equivalent of $22.6 million, of which
$9.8 million remained unused as of May 31, 2000. Incremental
borrowings under these facilities increased $20.4 million and
$17.4 million during the nine months ended May 31, 2000 and May
31, 1999, respectively.
As a partial hedge against adverse fluctuations in exchange
rates, the Company periodically enters into foreign currency
exchange contracts with certain major financial institutions. By
their nature, all such contracts involve risk, including the risk
of nonperformance by counterparties. Accordingly, losses
relating to these contracts could have a material adverse effect
upon the Company's business, financial condition and results of
operations. Based upon the Company's knowledge of the financial
condition of the counterparties to its existing forward
contracts, the Company believes that it does not have any
material exposure to any individual counterparty. The Company's
policy prohibits the use of derivative instruments for trading or
speculative purposes.
During the nine month periods ended May 31, 2000 and May 31,
1999, the percentage of the Company's sales invoiced in
currencies other than U.S. dollars was 24.2% and 23.7%,
respectively. As of May 31, 2000, outstanding foreign currency
exchange contracts totaling the U.S. dollar equivalent of $7.5
million mature at various dates through September 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 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, stock repurchases on the open
market and to meet the currently foreseeable liquidity needs of
the Company.
-21-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Overall effects of inflation and seasonality on the Company's
business during the periods discussed above were not significant.
The Company expended an aggregate of approximately $1.7 million
and devoted in excess of 1,200 man-days in internal resources in
fiscal 1999 and 2000 and the first quarter of fiscal 2000 to
achieve its objective of ensuring that the Company's products,
business systems and support services to customers would continue
to operate
satisfactorily on and after January 1, 2000. The Company has
described in detail its efforts to address the Year 2000 problem
as it may have related to its business operations and regulation
by the FDA in its Annual Report on Form 10-K for its fiscal year
ended August 31, 1999 and in its other filings with the
Securities and Exchange Commission.
Subsequent to the end of the Company's first quarter of fiscal
2000, the calendar changed to the year 2000. To date, the
business and operations of the Company have experienced no
material adverse effects from the date change, nor has the
Company been notified of any disruptions or failures in the
systems of any of its suppliers or customers. There is an
ongoing risk that Year 2000 related problems could still occur
and the Company will continue to evaluate these risks; however,
the Company believes that the Year 2000 issue will not pose any
significant operational problems for the Company.
New Accounting Standards
On December 6, 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin #101, Revenue Recognition in
Financial Statements (SAB 101). SAB 101 summarizes the staff's
views in applying generally accepted accounting principles to
revenue recognition in financial statements. SAB 101 is
effective for the fourth quarter of fiscal year 2001. The
Company is currently evaluating the impact SAB 101 will have on
its financial statements, if any.
-22-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
Financial Instruments:
During the nine month periods ended May 31, 2000 and May 31,
1999, the percentage of the Company's sales invoiced in
currencies other than U.S. dollars was 24.2% and 23.7%,
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 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.
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 May 31, 2000, the Company had forward exchange contracts to
sell foreign currencies which mature at various dates through
September 29, 2000. The following table identifies forward
exchange contracts to sell foreign currencies at May 31, 2000 and
August 31, 1999 as follows:
<TABLE>
<CAPTION>
May 31, 2000 August 31, 1999
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
-------- --------- ---------- --------
<S> <C> <C> <C> <C>
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $1,643 $1,623 $ 5,698 $ 5,855
Canadian dollars 1,599 1,570 1,115 1,108
Greek drachmas 2,056 2,088 1,571 1,603
Mexican peso 1,576 1,630 1,012 1,064
African rand 577 575 1,270 1,314
-------- ------- ------- -------
$7,451 $7,486 $10,666 $10,944
======== ======= ======= =======
</TABLE>
-23-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held a special meeting of shareholders
on June 19, 2000.
(b) At the special meeting, the following matter was
voted upon: the approval of the adoption of the
Company's 1999 Stock Incentive Plan.
With respect to the approval of the adoption of
the Company's 1999 Stock Incentive Plan, votes were
cast as follows:
Votes for 19,176,785
Votes against 1,373,277
Abstentions 535,245
There were no broker non-votes in respect of this matter.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits will be filed as part of
this Form 10-Q:
Exhibit 27 *Financial Data Schedule
Exhibit 99.1 Cautionary Statement for Purposes
of the Safe Harbor Provisions of
the Private Securities Litigation
Reform Act of 1995
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter ended May 31, 2000.
*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.
-24-
</PAGE>
<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: July 14, 2000 By: /s/ Frederick J. Hirt
-------------------------
(signature)
Frederick J. Hirt
Vice President-Finance and Treasurer
(Principal Financial Officer and
Chief Accounting Officer)
</PAGE>
-25-
<PAGE>
EXHIBIT INDEX
Exhibit Description
Number of Exhibit Method of Filing
------ ---------- ----------------
27 *Financial Data Schedule EDGAR
99.1 Cautionary Statement for Page 27 of this report
Purposes of the Safe
Harbor Provisions of the
Private Securities
Litigation Reform Act of
1995
*Not deemed filed for purposes of Section 11 of the Securities
Act of 1933, Section 18 of the Securities Exchange Act of 1934
and Section 323 of the Trust Indenture Act of 1939, or otherwise
subject to the liabilities of such sections and not deemed part
of any registration statement to which such exhibit relates.
-26-
</PAGE>
<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, 1999 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.
-27-
</PAGE>
<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 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
</PAGE>
-28-
<PAGE>
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.
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 you 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.
-29-
</PAGE>
<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 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.
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.
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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.
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