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 29, 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 April 12, 2000
----- ------------------------------------
Common Stock, No Par Value 22,261,503
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Form 10-Q Index
[S] Page
----
PART I. FINANCIAL INFORMATION [C]
Item 1. Financial Statements
Consolidated Balance Sheets at February 29, 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 15-23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 24
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders 25
Item 6. Exhibits and Reports on Form 8-K 26
Signature 27
Exhibit Index 28
-2-
</PAGE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
February 29, August 31,
2000 1999
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,736 $ 3,939
Accounts receivable, net 74,337 70,467
Inventories 77,065 74,809
Prepaid expenses and other 16,906 16,242
Deferred income taxes 2,181 2,018
--------- ---------
Total current assets 176,225 167,475
--------- ---------
Property, plant and equipment:
Total property, plant and equipment 214,855 204,939
Less accumulated depreciation (95,146) (88,005)
--------- ---------
119,709 116,934
--------- ---------
Goodwill, net 39,697 35,698
Intangible and other assets, net 41,620 33,487
Deferred income taxes 5,520 4,738
--------- ---------
Total other assets 86,837 73,923
--------- ---------
Total assets $ 382,771 $ 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)
February 29, August 31,
2000 1999
------------ ----------
<S> <C> <C>
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 471 $ 470
Notes payable 53,530 32,802
Accounts payable 8,861 10,028
Cash overdrafts 569 394
Accrued liabilities 11,018 8,707
Accrued compensation 6,312 6,223
Accrued income taxes 4,094 950
Total current liabilities 84,855 59,574
---------- ----------
Long-term debt 10,066 11,105
Accrued postretirement benefit obligation 9,724 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 269,784 250,931
Less treasury stock at cost:
4,072,070 and 3,420,970 shares,
respectively (31,543) (12,618)
Accumulated other comprehensive
expense (5,776) (5,807)
--------- ---------
Total shareholders' equity 278,126 278,167
--------- ---------
Total liabilities and
shareholders' equity $ 382,771 $ 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
--------------------------
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 80,601 $ 74,274
Cost of goods sold 37,830 35,625
--------- ---------
Gross profit 42,771 38,649
Operating expenses:
Research, development and engineering 4,753 5,440
Selling, general and administrative 18,876 17,369
Special charge - 4,139
--------- ---------
Operating income 19,142 11,701
--------- ---------
Other expenses (income):
Interest expense, net of
amounts capitalized 589 502
Interest income (139) (72)
Other, net 167 (1,807)
--------- ---------
Other expenses (income), net 617 (1,377)
--------- ---------
Income before income taxes 18,525 13,078
Provision for income taxes 6,299 4,773
--------- ---------
Net income $ 12,226 $ 8,305
========= =========
Basic and diluted earnings
per common share $ .54 $ .36
========= =========
Cash dividends per common share $ .06 $ .055
========= =========
Weighted average shares outstanding 22,540,498 23,224,326
========== ==========
</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 Six Months Ended
------------------------
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 157,318 $ 142,359
Cost of goods sold 73,167 66,661
--------- ----------
Gross profit 84,151 75,698
Operating expenses:
Research, development and engineering 10,124 10,751
Selling, general and administrative 37,119 34,224
Special charge 3,320 4,139
--------- ---------
Operating income 33,588 26,584
--------- ---------
Other expenses (income):
Interest expense, net of
amounts capitalized 1,052 724
Interest income (288) (163)
Other, net 327 (3,030)
--------- ---------
Other expenses (income), net 1,091 (2,469)
--------- ---------
Income before income taxes 32,497 29,053
Provision for income taxes 11,049 10,604
--------- ---------
Net income $ 21,448 $ 18,449
========= ==========
Basic and diluted earnings
per common share $ .94 $ .80
========= ==========
Cash dividends per common share $ .115 $ .105
========= ==========
Weighted average shares outstanding 22,719,865 23,224,554
========== ==========
</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 Six Months Ended
------------------------
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 21,448 $ 18,449
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 7,736 7,504
Special charge 3,320 4,139
Amortization of intangible assets
and goodwill 2,207 1,472
Amortization of unearned compensation - 44
Deferred income taxes (945) (2,267)
Unrealized holding(gain)loss on securities (585) 470
Other 210 196
Changes in operating assets and liabilities:
Accounts receivable, net (4,234) (9,107)
Inventories (2,803) (1,195)
Prepaid expenses and other (1,508) (2,332)
Accounts payable and accrued liabilities 255 3,275
Accrued compensation 128 (1,664)
Accrued income taxes 3,116 (1,106)
---------- ----------
Total adjustments 6,897 (571)
---------- ----------
Net cash provided by operating activities 28,345 17,878
---------- ----------
Cash flows from investing activities:
Capital expenditures (11,203) (9,887)
(Increase) decrease in intangible
and other assets (3,505) 223
Cash paid for business acquired, net (10,980) (26,364)
---------- ----------
Net cash used in investing activities (25,688) (36,028)
Cash flows from financing activities:
Increase in notes payable 21,030 21,002
Principal payments of long-term debt (315) (764)
Increase (decrease) in book overdrafts 175 802
Dividends paid (2,595) (2,439)
Proceeds from stock options exercised 25 -
Purchase of treasury stock (18,950) (36)
---------- ----------
Net cash provided by (used in)
financing activities (630) 18,565
Effect of exchange rate changes on cash
and cash equivalents (230) 69
Net change in cash and cash equivalents 1,797 484
Cash and cash equivalents at beginning of year 3,939 4,652
---------- ----------
Cash and cash equivalents
at end of period $ 5,736 $ 5,136
=========== ===========
</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 Six Months Ended
----------------------------
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 1,052 $ 724
Income taxes $ 9,493 $ 13,379
Supplemental schedule of non cash investing and financing
activities:
Estimated fair value of assets acquired,
net of cash acquired $ 13,289 $ 27,586
Cash paid for assets, net of cash acquired,
of $386 and $0, respectively 10,980 26,364
----------- ---------
Liabilities assumed $ 2,309 $ 1,222
=========== =========
Cash paid for business acquired:
Working capital $ (876) $ 5,466
Property, plant and equipment 54 300
Goodwill, intangible assets and in-process
research and development 12,188 20,598
----------- ---------
$ 11,366 $ 26,364
=========== =========
</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
----------------------------
February 29, February 28,
2000 1999
------------ ------------
Net income $ 12,226 $ 8,305
Other comprehensive income (expense):
Currency translation adjustments (796) (1,222)
Unrealized holding gain (loss) on securities,
net of tax ($(734) and $299, respectively) 1,181 (452)
--------- ---------
Other comprehensive income (expense) 385 (1,674)
--------- ---------
Total comprehensive income $ 12,611 $ 6,631
========= =========
For the Six Months Ended
---------------------------
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
Net income $ 21,448 $ 18,449
Other comprehensive income (expense):
Currency translation adjustments (939) 786
Unrealized holding gain (loss) on securities,
net of tax ($(585) and $470, respectively) 970 (711)
--------- ---------
Other comprehensive income (expense) 31 75
--------- ---------
Total comprehensive income $ 21,479 $ 18,524
========= =========
</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 periods 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>
February 29, August 31,
2000 1999
------------ ----------
<S> <C> <C>
Finished goods $ 26,495 $ 31,779
Semi-finished goods 16,778 12,654
Work-in-process 10,816 10,528
Raw materials 22,976 19,848
--------- ---------
$ 77,065 $ 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 six months ended February 29, 2000, the
Company made purchases amounting to $55 and $79, 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.
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 $11,400.
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 $4,747 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. Proforma
amounts are not presented as this acquisition has no material
effect on the Company's results of operations or financial
condition.
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
Continued
-11-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 7 - Special Charge: (Continued)
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 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 are expected to commence within a year of the
acquisition date. 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
February 29, 2000 February 28, 1999
------------------ ------------------
Critical Cardiac Critical Cardiac
Care Care Care Care
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales to external
customers $ 66,600 $ 14,000 $ 59,900 $ 14,400
The following tables present quarterly information about
geographic areas:
Three Months Ended February 29, 2000
-----------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
------- -------- ------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 61,300 $10,200 $6,900 $2,200 $ - $ 80,600
Three Months Ended February 28, 1999
-----------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
------- -------- ------ ------- ------------ ------------
Sales to unaffiliated
customers $ 56,300 $ 8,800 $7,200 $2,000 $ - $ 74,300
</TABLE>
Export sales to unaffiliated customers were $9,300 and $9,100 for
the three months ended February 29, 2000 and February 28, 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>
Six Months Ended Six Months Ended
February 29, 2000 February 28, 1999
------------------- -----------------
Critical Cardiac Critical Cardiac
Care Care Care Care
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales to external
customers $130,500 $ 26,800 $116,000 $ 26,400
The following tables present year-to-date information about
geographic areas:
Six Months Ended February 29, 2000
------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
------- -------- ------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $119,300 $19,500 $14,200 $ 4,300 $ - $ 157,300
Six Months Ended February 28, 1999
------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
------- -------- ------ ------- ------------ ------------
Sales to unaffiliated
customers $108,700 $16,000 $14,000 $ 3,700 $ - $ 142,400
</TABLE>
Export sales to unaffiliated customers were $17,300 and $16,800
for the six months ended February 29, 2000 and February 28, 1999,
respectively.
-14-
</PAGE>
<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 29, 2000 Compared to Three Months
Ended February 28, 1999
Net sales for the three months ended February 29, 2000 increased
by $6.3 million, or 8.5%, to $80.6 million from $74.3 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 higher unit
volume of the Company's central venous and specialty catheter
products. Sales of critical care products increased 11.2% to
$66.6 million from $59.9 million in the comparable prior year
period due primarily to increased shipments of central venous and
special catheters and drug infusion pumps. Cardiac care
procedure product sales decreased to $14.0 million from $14.4
million, a decrease of 2.8% from the comparable prior year
period, due primarily to decreased sales of intra-aortic balloon
("IAB") products. International sales increased by 5.6% to $28.6
million from $27.1 million in the same prior year period and
represented 35.5% of net sales, compared to 36.5% in the
comparable fiscal 1999 period, principally as a result of
increased sales of central venous catheters. The increased
strength of the U.S. dollar, relative to currencies in countries
where the Company operates direct sales subsidiaries, reduced net
sales for the quarter by $0.1 million.
Gross profit increased 10.7% to $42.8 million in the three months
ended February 29, 2000 compared to $38.6 million in the same
period of fiscal 1999. As a percentage of net sales, gross
profit increased to 53.1% during the three months ended February
29, 2000 from 52.0% in the comparable prior year period, due to
product and distribution mix and lower costs of production as a
percentage of sales.
-15-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Research, development and engineering expenses decreased by 12.6%
to $4.8 million in the three months ended February 29, 2000 from
$5.4 million in the comparable prior year period. As a
percentage of net sales, these expenses decreased in the second
quarter of fiscal 2000 to 5.9%, compared to 7.3% in the same
period in fiscal 1999. These decreases are primarily a result of
reduced clinical study activity resulting from the March 8, 2000
Food and Drug Administration ("FDA") clearance of the Company's
510(k) application to market ARROWg+ard[REGISTERED] Blue
Plus<Trandemark> the Company's newest formulation of its
antimicrobial treatment for central venous catheters.
Selling, general and administrative expenses increased by 8.7% to
$18.9 million in the three months ended February 29, 2000 from
$17.4 million in the comparable period of fiscal 1999 and
remained constant as a percentage of net sales at 23.4%. These
expenses increased to support higher sales levels and include
higher amortization expense due to the acquisition of the assets
of the cardiac assist division of C.R. Bard, Inc. in December
1998 and the acquisition of Sometec, S.A. in September 1999.
In the second quarter of fiscal 1999, the Company recorded a
special charge related primarily to a write-down for the in-
process research and development acquired in connection with the
Company's recent acquisition of Sometec. Further information
concerning this special charge is disclosed later in this
Management's Discussion and Analysis under the caption "Six
Months Ended February 29, 2000 Compared to Six Months Ended
February 28, 1999."
Principally due to the above factors, operating income increased
in the second quarter of fiscal 2000 by 63.6% to $19.1 million
from $11.7 million in the comparable prior year period
principally due to foreign exchange gains and losses associated
with the Company's direct sales subsidiaries.
Other expenses (income), net, decreased to $0.6 million of
expense in the second quarter of fiscal 2000 from $(1.4) million
of income in the comparable prior year period principally due to
foreign exchange gains and losses associated with the Company's
direct sales subsidiaries. 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 in the second quarter of fiscal 2000 by 41.7% to
$18.5 million from $13.1 million in the comparable prior year
period. For the second 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.
-16-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Net income in the second quarter of fiscal 2000 increased by
47.2% to $12.2 million from $8.3 million in the comparable prior
year period primarily as a result of the above factors. As a
percentage of net sales, net income represented 15.2% in the
three months ended February 29, 2000, compared to 11.2% in the
comparable prior year period.
Basic and diluted earnings per common share were $.54 and $.36 in
the second quarters of fiscal 2000 and 1999, respectively.
Weighted average common shares outstanding decreased to
22,540,498 in the second quarter of fiscal 2000 from 23,224,326
in the comparable prior year period as a result of the Company's
previously announced share repurchase program, which remains in
effect.
-17-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Six Months Ended February 29, 2000 Compared to Six Months Ended
February 28, 1999
Net sales for the six months ended February 29, 2000 increased by
$14.9 million, or 10.5%, to $157.3 million from $142.4 million in
the same period last year. This increase was due primarily to an
increase in unit volume in the Company's central venous and
specialty catheter products. Sales of critical care products
increased 12.5% to $130.5 million from $116.0 million in the
comparable prior year period due primarily to increased shipments
of central venous and specialty catheter products. Cardiac care
product sales increased to $26.8 million from $26.4 million, an
increase of 1.5% from the comparable prior year period, due
primarily to a decrease in unit shipments of IAB products.
International sales increased by 9.5% to $55.3 million from $50.5
million in the same prior year period, and decreased to 35.2% of
net sales for the six months ended February 29, 2000 from 35.5%
in the comparable period of fiscal 1999, principally as a result
of increased sales of central venous catheters and IAB 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 six month period ended
February 29, 2000 by $0.2 million.
Gross profit increased 11.1% to $84.2 million in the six months
ended February 29, 2000 compared to $75.7 million in the same
period of fiscal 1999. As a percentage of net sales, gross
profit increased to 53.5% during the six months ended February
29, 2000 from 53.2% in the comparable period of fiscal 1999 due
primarily to product and distribution mix and lower costs of
production as a percentage of sales.
Research, development and engineering expenses decreased by 5.8%
to $10.1 million in the six months ended February 29, 2000 from
$10.8 million in the comparable prior year period. As a
percentage of net sales, these expenses decreased in the first
half of fiscal 2000 to 6.4%, compared to 7.6% in the same period
in fiscal 1999, primarily as a result of reduced clinical study
activity resulting from the March 8, 2000 FDA clearance of the
Company's 510(k) application to market ARROWg+ard[REGISTERED] Blue
Plus<TRADE MARK>.
Selling, general and administrative expenses increased by 8.5% to
$37.1 million in the six months ended February 29, 2000 from
$34.2 million in the comparable prior year period and decreased
as a percentage of net sales to 23.5% in the first half of fiscal
2000 from 24.0% in the comparable period of fiscal 1999. The
increased expenses are due primarily to additional expenses
related to the acquisitions of the cardiac assist division of
C.R. Bard, Inc. in December 1998 and Sometec S.A. in September
1999.
-18-
</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 are expected to commence within a year of the
acquisition date. 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.
-19-
</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 intra-aortic balloon ("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
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 half of fiscal 2000 by 26.3% to $33.6 million from
$26.6 million in the comparable period of fiscal 1999.
Other expenses (income), net, decreased to $1.1 million of
expense in the first half of fiscal 2000 from $2.5 million of
income in the prior fiscal year principally due to foreign
exchange gains and losses associated with the Company's direct
sales subsidiaries. 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 half of fiscal 2000 by 11.9% to
$32.5 million from $29.1 million in the comparable prior year
period. The Company's effective income tax rate decreased to 34%
from 36.5% in fiscal 1999, principally as a result of the recent
completion of tax examinations through August 31, 1998.
-20-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Net income increased 16.3% to $21.4 million in the six months
ended February 29, 2000 from $18.4 million in the first half of
fiscal 1999. As a percentage of net sales, net income
represented 13.7% during the six months ended February 29, 2000
compared to 13.0% in the comparable period of fiscal 1999.
Basic and diluted earnings per common share were each $.94 in the
six month period ended February 29, 2000, an increase of 17.5% or
$.14 per share, from $.80 per share in the comparable prior year
period primarily as a result of the above factors. Average
shares of common stock outstanding decreased to 22,719,865 in the
first half of fiscal 2000 from 23,224,554 in the comparable prior
period as a result of the Company's previously announced share
repurchase program, which remains in effect.
Liquidity and Capital Resources
For the six months ended February 29, 2000, net cash provided by
operations was $28.3 million, an increase of $10.5 million from
the same period in the prior year due to higher net income and
improved accounts receivable collection efforts. Accounts
receivable increased by $3.9 million in the six months ended
February 29, 2000 compared to a $9.0 million increase in the same
period of fiscal 1999. Accounts receivable, measured in days
sales outstanding during the period, decreased to 86 days at
February 29, 2000 from 93 days at February 28, 1999, due
principally to an increase in collection efforts of the Company.
Net cash used in the Company's investing activities decreased to
$25.7 million in the six months ended February 29, 2000 from
$36.0 million in the comparable period of fiscal 1999,
principally as a result of the acquisition in the first quarter
of fiscal 1999 for $26.4 million of the cardiac assist division
of C.R. Bard, Inc. and the acquisition in the first quarter of
fiscal 2000 for $11.4 million of Sometec, Inc.
Financing activities used $.6 million of net cash in the six
month period ended February 29, 2000, and provided $18.6 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. For the six months
ending February 29, 2000, the Company has expended $19.0 million
to fund the repurchase of 651,100 shares of its common stock
pursuant to this program. To date, the Company has repurchased
947,800 shares under this program for approximately $27.4
million. On April 6, 2000, the Company announced approval by the
Company's Board of Directors to extend this program by purchasing
on the open market up to an additional one million shares of its
common stock.
As of February 29, 2000, the Company had U.S bank credit
facilities providing an aggregate of $65.0 million in revolving
credit, of which $24.4 million remained unused. In addition,
certain of the Company's foreign subsidiaries had revolving
credit facilities totaling the U.S. dollar equivalent of $24.5
million, of which $11.6 million remained unused as of February
29, 2000. Incremental borrowings under these facilities
increased $20.7 million and $21.0 million during the six months
ended February 29, 2000 and February 28, 1999, respectively.
-21-
</PAGE>
<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 or
speculative purposes.
During the six month periods ended February 29, 2000 and February
28, 1999, the percentage of the Company's sales invoiced in
currencies other than U.S. dollars was 24.2% and 23.6%,
respectively. As of February 29, 2000, outstanding foreign
currency exchange contracts totaling the U.S. dollar equivalent
of $7.6 million mature at various dates through May 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, 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 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 Food and Drug Administration 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.
-22-
</PAGE>
<PAGE>
ARROW INTERNATIONAL, INC.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
Financial Instruments:
During the six month period ended February 29, 2000 and February
28, 1999, the percentage of the Company's sales invoiced in
currencies other than U.S. dollars was 24.2% and 23.6%,
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.
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 29, 2000, the Company had forward exchange contracts
to sell foreign currencies which mature at various dates through
May 2000. The following table identifies forward exchange
contracts to sell foreign currencies at February 29, 2000 and
August 31, 1999 as follows:
<TABLE>
<CAPTION>
February 29, 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 $2,361 $ 2,304 $5,698 $ 5,855
Canadian dollars 1,275 1,276 1,115 1,108
Greek drachmas 1,997 2,024 1,571 1,603
Mexican peso 1,447 1,494 1,012 1,064
African rand 477 473 1,270 1,314
------ ------- ------- -------
$7,557 $ 7,571 $10,666 $10,944
====== ======= ======= =======
</TABLE>
-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 19, 2000.
(b) At the annual meeting, the following matters were voted upon:
(i) the election of three 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); (ii) the approval of
amendments to the Company's Directors Stock Incentive
Plan; and (iii) the ratification of the appointment of
PricewaterhouseCoopers, LLP as independent accountants of the
Company for the current fiscal year.
With respect to the election of directors, votes were cast as
follows:
T. Jerome Holleran
------------------
Votes for 20,616,796
Withheld 80,873
R. James Macaleer
-----------------
Votes for 20,617,394
Withheld 80,275
Alan M. Sebulsky
----------------
Votes for 20,617,815
Withheld 79,854
With respect to other matters, votes were cast as follows:
Approval of Amendments
to the Company's Directors
Stock Incentive Plan
--------------------------
Votes for 19,167,185
Votes against 1,017,569
Abstentions 512,915
Ratification of the Appointment
of Independent Accountants
-------------------------------
Votes for 20,688,457
Votes against 4,397
Abstentions 4,815
There were no broker non-votes in respect of these matters.
-24-
</PAGE>
<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 29, 2000
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 29, 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.
-25-
</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: April 13, 2000 By: /s/ Frederick J. Hirt
-----------------------
(signature)
Frederick J. Hirt
Vice President-Finance and Treasurer
(Principal Financial Officer and
Chief Accounting Officer)
-26-
</PAGE>
<PAGE>
EXHIBIT INDEX
Exhibit Description
Number of Exhibit Method of Filing
- ------- ----------- -----------------
27 *Financial Data Schedule EDGAR
for the quarter ended
February 29, 2000
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>
<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.
-28-
</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
-29-
</PAGE>
<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 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.
-30-
</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
-31-
</PAGE>
<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.
</PAGE>
-32-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Arrow International, Inc. for the quarter ended February
29, 2000 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-END> FEB-29-2000
<CASH> 5,736
<SECURITIES> 0
<RECEIVABLES> 74,337
<ALLOWANCES> 947
<INVENTORY> 77,065
<CURRENT-ASSETS> 176,225
<PP&E> 214,855
<DEPRECIATION> 95,146
<TOTAL-ASSETS> 382,771
<CURRENT-LIABILITIES> 84,855
<BONDS> 0
0
0
<COMMON> 45,661
<OTHER-SE> 232,465
<TOTAL-LIABILITY-AND-EQUITY> 382,771
<SALES> 157,318
<TOTAL-REVENUES> 157,318
<CGS> 73,167
<TOTAL-COSTS> 50,563
<OTHER-EXPENSES> 39
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,052
<INCOME-PRETAX> 32,497
<INCOME-TAX> 11,049
<INCOME-CONTINUING> 21,448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,448
<EPS-BASIC> $.94
<EPS-DILUTED> $.94
</TABLE>
