UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-20212
ARROW INTERNATIONAL, INC.
(Exact name of Registrant as specified in its Charter)
PENNSYLVANIA 23-1969991
(State of Incorporation) (I.R.S. Employer Identification No.)
2400 Bernville Road
Reading, Pennsylvania 19605
(Address of principal executive offices)
Telephone number: (610) 378-0131
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class: on Which Registered:
-------------------- --------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, No Par Value
(Title of Class)
Name of Exchange on which registered: The Nasdaq Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of November 1, 2000 was approximately $461,591,736.
The number of shares of Registrant's Common Stock outstanding on November
1, 2000 was 22,001,713.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on January 17, 2001, which will be filed with the
Securities and Exchange Commission within 120 days after August 31, 2000, are
incorporated by reference in Part III of this report.
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Item 1. BUSINESS:
Certain of the information contained in this Form 10-K, including the
discussion which follows in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" found in Item 7 of this Report, contain
forward-looking statements. For a discussion of important factors that could
cause actual results to differ materially from such forward-looking statements,
carefully review this Report, including Exhibit 99.1 hereto, as well as other
information contained in Arrow International, Inc.'s periodic reports filed with
the Securities and Exchange Commission (the "SEC" or "Commission").
Arrow International, Inc. (together with its subsidiaries, "Arrow" or the
"Company") was incorporated as a Pennsylvania corporation in 1975. Arrow
develops, manufactures and markets a broad range of clinically advanced,
disposable catheters and related products for critical and cardiac care. The
Company's critical care products are used principally for central vascular
access for administration of fluids, drugs, and blood products, patient
monitoring and diagnostic purposes, as well as for pain management. These
products are used by anesthesiologists, critical care specialists, surgeons,
cardiologists, nephrologists, emergency and trauma physicians and other health
care providers. Arrow's cardiac care products are used by interventional
cardiologists, cardiac surgeons, interventional radiologists and
electrophysiologists for such purposes as the diagnosis and treatment of heart
and vascular disease and to provide short-term cardiac assist following cardiac
surgery, serious heart attack or balloon angioplasty.
Arrow's critical care products, which were originally introduced in 1977,
accounted for 82.7%, 81.4% and 83.6% of net sales in fiscal 2000, 1999 and 1998,
respectively. The majority of these products are vascular access catheters and
related devices which consist principally of the following: the Arrow-Howes(TM)
Multi-Lumen Catheter, a catheter equipped with three or four channels that
enables the simultaneous administration of multiple critical care therapies
through a single puncture site; double-and single-lumen catheters, which are
designed for use in a variety of clinical procedures; the ARROWg+ard(TM)
antiseptic surface treatment, which is applied to many of the Company's vascular
access catheters to reduce the risk of catheter-related infection; percutaneous
sheath introducers, which are used as a means for inserting cardiovascular and
other catheterization devices into the vascular system during critical care
procedures; radial artery catheters, which are used for measuring arterial blood
pressure and taking blood samples; FlexTip Plus(TM) epidural catheters, which
are designed to minimize indwelling complications associated with conventional
epidural catheters; and Percutaneous Thrombolytic Devices ("PTD"), which are
designed for clearance of thrombosed hemodialysis grafts in chronic hemodialysis
patients. On March 8, 2000, the U.S. Food and Drug Administration (FDA) approved
the Company's 510(k) application to market ARROWg+ard Blue Plus(TM), a stronger,
longer lasting formulation of the ARROWg+ard antiseptic surface treatment for
central venous catheters. Arrowg+ard Blue Plus(TM) also provides antimicrobial
treatment of the interior lumens and hubs of each catheter.
The Company's critical care product line also includes the implantable
constant flow drug delivery pumps and a broad line of implantable vascular
access ports used for the infusion of certain drugs over an extended period of
time to treat cancer, other chronic diseases and chronic pain. The implantable
pumps are used for the administration of the chemotherapy drug, 2-deoxy
5-fluorouridine ("FUDR") for the treatment of liver cancer, for the
administration of morphine to treat malignant or benign intractable pain and for
the administration of Baclofen, a drug used for the treatment of spasticity.
The Company also meets the needs of critical care physicians by
manufacturing and marketing custom tubing sets to connect central venous
catheters to blood pressure monitoring devices and drug infusion systems.
On September 1, 1999, the Company continued the expansion of its critical
care product line with the acquisition of Sometec, S.A., a French development
company. The technology acquired from Sometec allowed the Company to introduce a
non-invasive esophageal ultrasound probe that
(2)
<PAGE>
Item 1. BUSINESS (Continued):
continuously measures descending aortic blood flow. This product, the
HemoSonic(TM) 100, provides an innovative, ultrasound-based approach to
hemodynamic monitoring. Where appropriate, the Company plans to continue to
complement its internal research and development efforts with similar
acquisitions and collaborative arrangements.
Arrow's cardiac care products accounted for 17.3%, 18.6% and 16.4% of net
sales in fiscal 2000, 1999 and 1998, respectively. These products include
cardiac assist products, such as intra-aortic balloon pumps and catheters, which
are used primarily to augment temporarily the pumping capability of the heart
following cardiac surgery, serious heart attack or balloon angioplasty. In May
2000, the Company announced two new cardiac assist products expanding its
intra-aortic balloon pump (IABP) and catheter product offerings. The Company
introduced an advanced automatic intra-aortic balloon pump, the AutoCAT(TM),
which features AutoPilot(TM), a mode of operation that automatically selects
operating parameters for optimal cardiac assist. The AutoCAT(TM) continuously
monitors and selects the best signal from multiple electrocardiogram and
arterial pressure sources to automatically adjust balloon inflation and
deflation timing points. Other currently available pumps require manual
intervention on the part of the clinician to switch signal sources and initiate
balloon timing. The Company in May 2000 also began distribution of a new high
performance 8 French intra-aortic balloon catheter outside of the U.S. This
balloon catheter, the Ultra 8(TM), is configured to enable it to be introduced
through standard 8 French Cath Lab sheaths used for therapeutic interventions as
well as through a separate balloon sheath. The Ultra 8(TM) provides faster
inflation and deflation times than competitive catheters and has a larger
central lumen that reduces the potential for aortic pressure waveform dampening
and facilitates placement over standard size springwire guides. Other cardiac
care products include electrophysiology products, which are used primarily to
map the electrical signals which activate the heart; the Berman(TM) Angiographic
Catheter, which is used for pediatric cardiac angiographic procedures; and other
cardiac care products, such as the Super Arrow-Flex(TM) sheath, which provides a
kink-resistant passageway for the introduction of cardiac and other catheters
into the vascular system.
Sales and Marketing
Arrow markets its products to physicians and hospitals through a
combination of direct selling and independent distributors. Within each
hospital, marketing efforts are targeted to those physicians, including critical
care specialists, cardiologists, anesthesiologists, interventional radiologists,
electrophysiologists and surgeons, most likely to use the Company's products.
Arrow's products are generally sold in the form of pre-sterilized procedure kits
containing the catheters and virtually all of the related medical components and
accessories needed by the clinician to prepare for and perform the intended
medical procedure. Additional sales revenue is derived from equipment provided
for use in connection with certain of the Company's disposable products.
In fiscal 2000, 1999 and 1998, 64.0%, 64.1% and 64.9%, respectively, of
the Company's net sales were to U.S. customers. In this market, approximately
77.0% of the Company's fiscal 2000 revenue was generated by its direct sales
force. The remainder resulted from shipments to independent distributors. For
the majority of such distributors, the Company's products represent a principal
product line. Direct selling generally yields higher gross profit margins than
sales made through independent distributors.
Internationally, the Company sells its products through eleven direct
sales subsidiaries serving markets in Japan, Germany, the Netherlands, France,
Spain, Greece, Africa, Canada, Mexico, the Czech Republic and Slovakia. As of
November 1, 2000, independent distributors in 87 additional countries service
the remainder of the world.
To support growth in international sales, the Company operates a 40,000
square foot manufacturing facility in Chihuahua, Mexico and a 65,000 square foot
manufacturing and research facility in the Czech Republic. In fiscal 2001, the
Company plans to begin construction of additional manufacturing space at its
facility in the Czech Republic, which, when complete, will double manufacturing
capacity at that facility. The Company will also lease additional manufacturing
space in Mexico during fiscal 2001.
(3)
<PAGE>
Item 1. BUSINESS (Continued):
Sales and Marketing (Continued)
Revenues, profitability and long-lived assets attributable to significant
geographic areas are presented in Note 13 to the Company's consolidated
financial statements, included elsewhere herein.
In general, Arrow does not produce against a backlog of customer orders;
production is based primarily on the level of inventories of finished products
and projections of future customer demand with the objective of shipping from
stock upon receipt of orders. No single customer accounts for a material part of
the Company's sales. Usage of the Company's products by hospitals and physicians
has not been materially influenced by seasonal factors.
Rapid growth in U.S. health care costs, coupled with a lack of access by
some U.S. citizens to adequate health care, has resulted in numerous legislative
initiatives in the U.S. Congress during the last several years. While none of
these initiatives have to date resulted in substantive legislation, the intent
of these initiatives was, generally, to expand health care coverage for the
uninsured and reduce the rate of growth of total health care expenditures. In
addition, certain states have made significant changes to their Medicaid
programs and have adopted various measures to expand coverage and limit costs.
Implementation of government health care reform and other efforts to control
costs may limit the price of, or the level at which reimbursement is provided
for, the Company's products. The increased emphasis in the U.S. on health care
cost containment has resulted in reduced growth in demand for certain of the
Company's products in markets where Arrow has 80% or greater market shares, and
protecting that market share has affected the Company's pricing in some
instances. The Company presently believes that this emphasis has increased the
importance of competitive prices and may continue to reduce the U.S. growth rate
for certain of the Company's products. The Company anticipates that Congress,
state legislatures, foreign governments and the private sector will continue to
review and assess alternative health care delivery and payment systems. The
Company continues to face pricing pressures in certain product lines in European
markets as governments strive to curtail increases in health care costs. The
Company cannot predict what additional legislation or regulation, if any,
relating to the health care industry may be enacted in the future or what impact
the adoption of any federal, state or foreign health care reform, private sector
reform or market forces may have on its business. The Company continues attempts
to mitigate these forces through ongoing cost reduction programs. No assurance
can be given that any such reforms will not have a material adverse effect on
the medical device industry in general, or the Company in particular.
Research and Product Development
Arrow is engaged in ongoing research and development to introduce
clinically advanced new products, to enhance the effectiveness, ease of use,
safety and reliability of its existing products and to expand the clinical
applications for which use of its products is appropriate. The principal focus
of the Company's research and development effort is to identify and analyze the
needs of physicians in critical and cardiac care medicine, and to develop
products that address these needs. The Company views ideas submitted by
physicians and other health care professionals as an important source of
potential research and development projects. The Company believes that these
end-users are often in the best position to conceive of new products and to
recommend ways to improve the performance of existing products. Most of the
Company's principal products and product improvements have resulted from
collaborative efforts with physicians, other health care professionals or other
affiliated entities. For certain proprietary ideas, the Company pays royalties
to such persons, and in many instances, incorporates such persons' names in the
tradename or trademark for the specific product. The Company also utilizes other
outside consultants, inventors and medical researchers to carry on its research
and development effort and sponsors research through medical associations and at
various universities and teaching hospitals.
Certain of the Company's strategic acquisitions and investments have
provided the basis for its introduction of significant new products. The Company
entered the field of cardiac assist with the acquisition of Kontron Instruments
and supplemented this acquisition with its acquisition of the cardiac assist
division of C.R. Bard, Inc. The Company's acquisition of Therex, augmented by
its acquisition of the Strato/Infusaid implantable constant flow drug delivery
pump product line, provided
(4)
<PAGE>
Item 1. BUSINESS (Continued):
Research and Product Development (Continued)
it with a product offering of implantable drug delivery devices. The Company's
acquisition of Sometec enabled it to introduce to the market its innovative
ultrasound hemodynamic monitoring device.
Research and development expenses totaled $19.8 million (6.2% of net
sales), $20.3 million (6.9% of net sales) and $18.4 million (7.1% of net sales)
in fiscal 2000, 1999 and 1998, respectively. Such amounts were used to develop
new products, improve existing products and implement new technology to produce
these products.
In January 1994, the Company formed a cooperative relationship with
Pennsylvania State University's Hershey Medical School for the commercial
development of a fully implantable long-term Left Ventricular Assist System
("LVAS"). Although LVASs are currently used to provide short-term cardiac assist
to patients awaiting heart transplants, the Company's efforts are aimed at
developing a fully implantable device to provide long-term cardiac assist for
patients having insufficient ventricular heart function. In contrast to
currently marketed LVASs, the LionHeart(TM), the LVAS currently under
development by the Company, is not intended as a bridge to heart transplant, but
is designed, upon receipt of necessary regulatory approvals, to serve as a
long-term cardiac assist device for certain patients. The LionHeart(TM) has been
in development for over fifteen years and has undergone extensive preclinical
studies and testing. The LionHeart(TM) is electrically driven by a wearable
battery pack transmitting power non-invasively through the skin to an implanted
receiving coil that maintains a charge in batteries incorporated into the
device. These implanted batteries are capable of maintaining LVAS function for
approximately 45 minutes without the aid of any external power source. In fiscal
1997, the Company began long-term durability testing of the LionHeart(TM), which
must be satisfactorily completed before Phase I human clinical trials under an
Investigational Device Exemption ("IDE") can be commenced in the U.S. The U.S.
Food and Drug Administration is currently considering the Company's request to
begin Phase I human clinical trials of the LionHeart(TM) under an IDE. The
Company conducted animal trials in fiscal 1999. On October 26, 1999, the Company
announced the first human implant in Europe of the LionHeart(TM). The
LionHeart(TM) was introduced to the medical community at large on November 7,
1999 at the Heart Association Meeting in Atlanta, GA. Six additional
LionHeart(TM)'s were implanted in Europe during fiscal 2000. A total of ten
patients have been implanted with the LionHeart(TM) as of November 1, 2000.
Since 1988, the Company has been developing the Arrow(R)-Fischell Pullback
Atherectomy Catheter (the "PAC") for the removal of atherosclerotic plaque. The
Company acquired certain patents relating to the technology underlying the PAC
in 1990. In the fourth quarter of 1998, the Company began a European
multi-center randomized study to evaluate the effectiveness of the PAC for the
removal of plaque from restenosed coronary stents. The study continues to date.
In recent years, the Company had conducted research to determine whether
the use of microwave energy catheters for the ablation of cardiac tissue
responsible for ventricular tachycardia represented a potentially more effective
treatment for ventricular tachycardia than currently marketed radio frequency
ablation catheters. Based on the results of this research, the Company elected
to discontinue this research program during fiscal 2000. The Company is
currently evaluating technological feasibility of liver ablation using this
technology.
During the fourth quarter of fiscal 2000, the Company received approval to
begin separate U.S. and European trials of the Company's Percutaneous
Thrombolytic Device for the treatment of deep vein thrombosis. Both trials are
expected to commence in early fiscal 2001.
There can be no assurance that the FDA or any foreign government
regulatory authority will grant the Company authorization to market products
under development or, if such authorization is obtained, that such products will
prove competitive when measured against other available products.
(5)
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Item 1. BUSINESS (Continued):
Engineering and Manufacturing
Arrow has developed the core technologies that the Company believes are
necessary for it to design, develop and manufacture complex, high quality
catheter-related medical devices. This technological capability has enabled the
Company to develop internally many of the major components of its products and
reduce its unit manufacturing costs. To help further reduce manufacturing costs
and improve efficiency, the Company has increasingly automated the production of
its high-volume products and plans to continue to make significant capital
expenditures to promote efficiency and reduce operating costs.
Raw materials and purchased components essential to Arrow's business have
typically been available within the lead times required by the Company and,
consequently, procurement has not historically posed any significant problems in
the operation of the Company's business. Although the Company currently
maintains only one supplier for certain of its out-sourced components, it has
identified alternative vendors for most of these items and, therefore, does not
believe that it is dependent on any single supplier for major raw materials or
components.
Patents, Trademarks, Proprietary Rights and Licenses
Arrow believes that patents and other proprietary rights are important to
its business. The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. Arrow currently holds numerous U.S. patents and patent
applications, as well as several foreign patents and patent applications which
relate to aspects of the technology used in certain of the Company's products,
including its radial artery catheter, percutaneous sheath introducer,
interventional diagnostic catheter products, left ventricular assist device, and
esophageal ultrasound probe jacket. There can be no assurance that patent
applications filed by the Company will result in the issuance of patents or that
any patents owned by or licensed to the Company will provide competitive
advantages for the Company's products or will not be challenged or circumvented
by others.
In addition, Arrow is a party to several license agreements with unrelated
third parties pursuant to which it has obtained, for varying terms, the
exclusive rights to certain patents held by such third parties in consideration
for royalty payments. Many of the Company's major products, including its
Arrow-Howes(TM) Multi-Lumen Catheters and antiseptic surface treatment for
catheters, have been developed pursuant to such license agreements. The Company
has in the past granted rights in certain patents relating to its
Arrow-Howes(TM) Multi-Lumen Catheters to others in consideration for royalty
payments. All of the existing patents owned by or licensed to the Company
relating to its major products expire after November 2001.
From time to time, the Company is subject to legal actions involving
patent and other intellectual property claims. The Company is currently a party
to two unrelated lawsuits involving alleged infringement by third parties of
patents owned by the Company relating to its IAB catheter and constant flow
delivery pump products. The Company is also a defendant in two related lawsuits
alleging that certain of its hemodialysis catheter products infringe patents
owned by a third party. Based upon information presently available to the
Company, the Company believes it has valid and enforceable legal rights and/or
adequate legal defenses with respect to these actions. Although the ultimate
outcome of these actions is not expected to have a material adverse effect on
the Company's business or financial condition, whether an adverse outcome in any
one or more of these actions would materially adversely effect the Company's
reported results of operations in any future period cannot be predicted with
certainty.
Arrow owns a number of registered trademarks in the United States and, in
addition, has obtained registration in many of its major foreign markets for the
trademark ARROW(R) and certain other trademarks.
(6)
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Item 1. BUSINESS (Continued):
Government Regulation
As a developer, manufacturer and marketer of medical devices, the Company
is subject to extensive regulation by, among other governmental entities, the
FDA and the corresponding state, local and foreign regulatory agencies in
jurisdictions in which the Company sells its products. These regulations govern
the introduction of new medical devices, the observance of certain standards
with respect to the manufacture, testing and labeling of such devices, the
maintenance of certain records, the tracking of such devices and other matters.
Failure to comply with applicable federal, state, local or foreign laws or
regulations could subject the Company to enforcement action, including product
seizures, recalls, withdrawal of clearances or approvals, and civil and criminal
penalties, any one or more of which could have a material adverse effect on the
Company. In recent years, the FDA has pursued a more rigorous enforcement
program to ensure that regulated businesses, like the Company's, comply with
applicable laws and regulations. The Company believes that it is in substantial
compliance with such governmental regulations. However, federal, state, local
and foreign laws and regulations regarding the manufacture and sale of medical
devices are subject to future changes. No assurance can be given that such
changes will not have a material adverse effect on the Company.
On occasion, the Company has received notifications, including warning
letters, from the FDA of alleged deficiencies in the Company's compliance with
FDA requirements. The Company believes that it has been able to address or
correct such deficiencies. In addition, from time to time the Company has
recalled, or issued safety alerts on, certain of its products. No such warning
letter, recall or safety alert has had a material adverse effect on the Company,
but there can be no assurance that a warning letter, recall or safety alert
would not have such an effect in the future.
Like other medical device manufacturers, the Company in recent years has
experienced extended delays in obtaining FDA clearance or approval to market new
products in the U.S. The FDA review process may continue to delay the Company's
new product introductions in the U.S. in the future. In addition, many foreign
countries have recently adopted more stringent regulatory requirements which are
expected to add to the delays and uncertainties associated with the release of
new products, as well as the clinical and regulatory costs of supporting such
releases. It is possible that delays in receipt of, or failure to receive, any
necessary clearance or approval could have a material adverse effect on the
Company's business, financial condition or results of operations.
Competition
Arrow faces substantial competition from a number of other companies in
the market for catheters and related medical devices and equipment, including
companies with greater financial and other resources. In addition, in response
to increased concern about the rising costs of health care, U.S. hospitals and
physicians are placing increasing emphasis on cost-effectiveness in the
selection of products to perform medical procedures. The Company believes that
its products compete primarily on the basis of product differentiation and
quality and that its comprehensive manufacturing capability enables it to
expedite the development and market introduction of new products and to reduce
manufacturing costs, thereby permitting more effective responses to competitive
pricing in an environment where the Company's ability to increase prices is
limited.
(7)
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Item 1. BUSINESS (Continued):
Environmental Compliance
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. In the course of its
business, the Company is involved in the handling, storing and disposal of
materials, which are classified as hazardous. In 1991, the U.S. Environmental
Protection Agency ("EPA") made a formal request to the Company for information
about wastes which may have been disposed of at a landfill site ("Site") located
near Reading, Pennsylvania. The Company has been involved with the Site located
in the Reading, Pennsylvania area. The Site, which was closed in 1986, is a
former municipal waste disposal landfill that was added to the National
Priorities List ("NPL"), as authorized by the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), in
1989. In 1997, the EPA advised the Company that the agency regarded the Company
to be a potentially responsible party ("PRP") with respect to environmental
contamination associated with the Site. In 1998, EPA advised the Company that
the agency regarded the Company to be a de minimis party (a party whose alleged
contribution of waste materials to the Site is minimal in terms of volume and
toxicity), and was eligible for a de minimis settlement under CERCLA. In January
2000, this matter was settled by the Company without any material adverse effect
on the business, financial condition or results of operations of the Company. To
the Company's knowledge, no further action has been taken by EPA against the
Company and none is anticipated.
In a separate matter, in June 1989, the Company was notified that it was
among the PRPs under CERCLA for the costs of investigating or remediating
contamination at a waste recycling, treatment and disposal facility. The Company
was notified by the EPA in September 1995 of the means by which it may resolve
its alleged liability with respect to the conduct of a remedial investigational
feasibility study at this facility and of the opportunity to participate with
other small waste contributors to this facility in a de minimis settlement which
the EPA believes is likely to be appropriate for this facility. In December
1995, the Company indicated its interest in entering into such a de minimis
settlement, and this case has not been active since such date insofar as it
involves the Company.
The Company believes that its operations comply in all material respects
with applicable environmental laws and regulations. While the Company continues
to make capital and operational expenditures for protection of the environment,
it does not anticipate that these expenditures will have a material adverse
effect on its business, financial condition or results of operations.
Product Liability and Insurance
The design, manufacture and marketing of medical devices of the types
produced by the Company entail an inherent risk of product liability. The
Company's products are often used in intensive care settings with seriously ill
patients. While the Company believes that, based on claims made against the
Company in the past, the amount of product liability insurance maintained by the
Company has been adequate, there can be no assurance that the amount of such
insurance will be sufficient to satisfy claims made against the Company in the
future or that the Company will be able to obtain insurance in the future at
satisfactory rates or in adequate amounts.
Employees
As of November 1, 2000, Arrow had 2,817 full-time employees. All of the
Company's hourly-paid manufacturing employees at the Company's Reading and
Wyomissing, Pennsylvania facilities are represented by the United Steelworkers
of America AFL-CIO, Local 8467 (the "Union"). The Company and the Union are
currently operating under a three-year agreement that expires in September 2003.
The Company has never experienced an organized work stoppage or strike and
considers its relations with its employees to be good.
(8)
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Item 1. BUSINESS (Continued):
Executive Officers
The executive officers of the Company and their ages and positions as of
November 1, 2000 are listed below. All executive officers are elected or
appointed annually and serve at the discretion of the Board of Directors. There
are no family relationships among the executive officers of the Company.
Name Age Current Position
---- --- ----------------
Marlin Miller, Jr. 68 Chairman and Chief Executive Officer
Philip B. Fleck 56 President and Chief Operating Officer
Paul L. Frankhouser 55 Executive Vice President
Frederick J. Hirt 52 Vice President-Finance, Chief Financial
Officer and Treasurer
T. Jerome Holleran 64 Secretary
Thomas D. Nickel 61 Vice President-Regulatory Affairs
and Quality Assurance
Scott W. Hurley 42 Controller
Mr. Miller has served as Chief Executive Officer and a director of the
Company since it was founded in 1975. He served as President from 1975 to
January 20, 1999. Mr. Miller is also President and a director of Arrow Precision
Products, Inc. ("Precision"), a corporation controlled by principal shareholders
of the Company. Precision is in the process of liquidation and, in fiscal 2000,
Mr. Miller devoted none of his time to Precision. He is a director of Carpenter
Technology Corporation, a manufacturer of specialty steel.
Mr. Fleck has served as President since January 1999. From June 1994 to
January 1999, he served as Vice President - Research and Manufacturing of the
Company. From 1986 to June 1994, Mr. Fleck served as Vice President - Research
and Engineering of the Company. From 1975 to 1986, Mr. Fleck served as
Engineering Manager of the Company.
Mr. Frankhouser has served as Executive Vice President since January 1999.
He served as Vice President-Marketing of the Company from 1986 until January
1999. From 1980 to 1986, Mr. Frankhouser served as Manager of Marketing of the
Company.
Mr. Hirt has served as Vice President - Finance, Chief Financial Officer
and Treasurer of the Company since August 1998. Prior to joining the Company,
Mr. Hirt served in various capacities with Pharmacia & Upjohn, Inc., from 1980
to 1998, where he most recently served as Vice President, Accounting and
Reporting.
(9)
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Item 1. BUSINESS (Continued):
Executive Officers (Continued)
Mr. Holleran has served as Secretary and a director of the Company since
its founding in 1975 and, until September 1997, also served as a Vice President.
From July 1996, Mr. Holleran served as President and Chief Executive Officer of
Precision Medical Products, Inc., a former subsidiary of Precision, which
manufactures and markets certain non-catheter medical products and was sold on
August 29, 1997 to certain employees of Precision, including Mr. Holleran. He is
now the Chairman and Chief Executive Officer of Precision Medical Products, Inc.
From February 1986 to September 1997, Mr. Holleran was also Vice President,
Chief Operating Officer and a director of Precision. From 1991 to 1996, Mr.
Holleran served as President of Endovations, Inc., a subsidiary of Precision
that manufactured and marketed certain gastroenterological medical products,
until the sale in June 1996 of a portion of the Endovations business to the
Company and the remainder to an unrelated third party.
Mr. Nickel has served as Vice President-Regulatory Affairs and Quality
Assurance of the Company since 1991. From 1986 to 1991, Mr. Nickel served as
Director of Regulatory Affairs and Quality Assurance of the Company.
Mr. Hurley has served as Controller of the Company since April 1998. Prior
to joining the Company, from 1990 to 1998 he served in various capacities with
Rhone-Poulenc Rorer, most recently as a Director of Finance.
Item 2. PROPERTIES:
The Company's corporate headquarters and principal research center are
located in a 165,000 square foot facility in Reading, Pennsylvania. This
facility, which also includes manufacturing space, is located on 126 acres.
Other major properties owned by the Company include a 165,000 square foot
manufacturing and warehousing facility in Asheboro, North Carolina; a 145,000
square foot manufacturing facility in Wyomissing, Pennsylvania; a 40,000 square
foot manufacturing facility in Chihuahua, Mexico; a 49,000 square foot
manufacturing and warehouse facility in Mount Holly, New Jersey; and a 65,000
square foot manufacturing and research facility in the Czech Republic, at which,
as discussed under "Business: Sales and Marketing," the Company plans to
commence construction of additional space in fiscal 2001.
In addition, the Company leases a 55,000 square foot manufacturing
facility in Everett, Massachusetts, a 12,000 square foot manufacturing facility
in Walpole, Massachusetts, and a 7,700 square foot sales office and distribution
center in Woburn, Massachusetts. The Company also leases sales offices and
warehouse space in Canada, France, Germany, Japan, South Africa, the
Netherlands, Spain and Greece, sales office space in Mexico and warehouse space
in California.
The Company considers all of its facilities to be in good condition and
adequate to meet the present and reasonably foreseeable needs of the Company.
Item 3. LEGAL PROCEEDINGS:
The Company is a party to certain legal actions, including product
liability matters, 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, except as
set forth under "Business: Patents, Trademarks, Regulatory Rights and Licenses",
that the ultimate outcome of these actions would not have a material adverse
effect on the Company's business, financial condition or results of operations.
(10)
<PAGE>
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.
PART II
Item 5. MARKETS FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS:
The Company's common stock has traded publicly on The Nasdaq Stock Market
under the symbol "ARRO" since June 9, 1992, the date that its common stock was
initially offered to the public. The table below sets forth the high and low
sale prices of the Company's common stock as reported by the Nasdaq Stock Market
and the quarterly dividends per share declared by the Company during the last
eight fiscal quarters:
Quarter Ended High Low Dividends
============= =========================================
August 31, 2000 37.1250 31.8750 $.060
May 31, 2000 39.6250 28.5625 .060
February 29, 2000 39.5000 25.8750 .060
November 30, 1999 30.0625 23.7500 .055
August 31, 1999 29.7500 25.1875 $.055
May 31, 1999 26.0000 18.8750 .055
February 28, 1999 31.3750 24.1250 .055
November 30, 1998 30.8750 23.0000 .050
As of November 1, 2000, there were approximately 681 registered
shareholders of the Company's common stock.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the years ended
August 31, 2000, 1999, 1998, 1997 and 1996 have been derived from the Company's
audited consolidated financial statements. The consolidated financial statements
of the Company as of August 31, 2000 and 1999 and for each of the three years in
the period ended August 31, 2000, together with the notes thereto and the
related report of PricewaterhouseCoopers LLP, independent accountants, are
included elsewhere herein. The following data should be read in conjunction with
the Company's audited consolidated financial statements, the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which are included elsewhere herein.
(11)
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Income Data:
Net sales $ 320,340 $ 295,946 $ 260,890 $ 245,889 $ 229,945
Cost of goods sold 150,423 139,241 114,072 110,811 107,272
Gross profit 169,917 156,705 146,818 135,078 122,673
Operating expenses
Research, development and engineering 19,771 20,335 18,393 15,871 14,106
Selling, general, and administrative 75,231 71,431 62,956 57,444 54,154
Special charges* 3,320 12,819 36,249 -- --
Total operating expenses 98,322 104,585 117,598 73,315 68,260
Operating income 71,595 52,120 29,220 61,763 54,413
Other expenses (income), net 2,145 (3,221) 1,638 2,031 2,300
Income before income taxes 69,450 55,341 27,582 59,732 52,113
Provision for income taxes 23,266 19,646 19,010 22,997 19,282
--------- --------- --------- --------- ---------
Net income $ 46,184 $ 35,695 $ 8,572 $ 36,735 $ 32,831
========= ========= ========= ========= =========
Basic earnings per common share $ 2.06 $ 1.54 $ 0.37 $ 1.58 $ 1.41
========= ========= ========= ========= =========
Diluted earnings per common share $ 2.05 $ 1.54 $ 0.37 $ 1.58 $ 1.41
========= ========= ========= ========= =========
Cash dividends per common share $ .235 $ .215 $ .195 $ .175 $ .155
Weighted average common shares
outstanding 22,451 23,195 23,225 23,227 23,230
Balance Sheet Data:
Working capital $ 90,050 $ 107,901 $ 98,826 $ 81,460 $ 55,086
Total assets 385,814 358,333 324,116 320,373 299,421
Notes payable and current maturities of
long-term debt 60,481 33,272 30,252 24,653 34,001
Long-term debt, excluding current maturities 900 11,105 11,686 12,043 15,988
Shareholders' equity 285,204 278,167 247,868 245,917 219,773
</TABLE>
* See Footnote 2 of the Notes to Consolidated Financial Statements.
(12)
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
The following discussion includes certain forward-looking statements. Such
forward-looking statements are subject to a number of factors, including
material risks, uncertainties and contingencies, which could cause actual
results to differ materially from the forward-looking statements. For a
discussion of important factors that could cause actual results to differ
materially from the forward-looking statements, see Exhibit 99.1 to this Report
and the Company's periodic reports and other documents filed with the
Commission.
Results of Operations
The following table presents for the three years ended August 31, 2000
Consolidated Statements of Income expressed as a percentage of net sales and the
period-to-period percentage changes in the dollar amounts of the respective line
items.
<TABLE>
<CAPTION>
Period-to-Period
Percentage of Net Sales Percentage Change
--------------------------- ----------------------------
Year ended August 31, 2000 1999 1998
--------------------------- vs vs vs
2000 1999 1998 1999 1998 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 8.2% 13.4% 6.1%
Gross profit 53.0 53.0 56.3 8.4 6.7 8.7
Operating expenses:
Research, development and
engineering 6.2 6.9 7.1 (2.8) 10.6 15.9
Selling, general and
administrative 23.5 24.2 24.1 5.3 13.5 9.6
Special charges 1.0 4.3 13.9 (74.1) (64.6) 100.0
------ ------ ------ ------ ------ ------
Operating income 22.3 17.6 11.2 37.4 78.4 (52.7)
Other expenses (income), net 0.6 (1.1) 0.6 (166.6) * *
Income before income taxes 21.7 18.7 10.6 25.5 100.6 (53.8)
Provision for income taxes 7.3 6.6 7.3 18.4 3.3 (17.3)
------ ------ ------ ------ ------ ------
Net income 14.4 12.1 3.3 29.4 316.4 (76.7)
</TABLE>
* Not a meaningful comparison
(13)
<PAGE>
Fiscal 2000 Compared to Fiscal 1999
Net sales increased by $24.4 million, or 8.2%, to $320.3 million in fiscal 2000
from $295.9 million in fiscal 1999. Net sales represent gross sales invoiced to
customers, less certain related charges, including freight costs, discounts,
returns and other allowances. Sales of critical care products increased 9.9% to
$264.8 million from $241.0 million in fiscal 1999, due primarily to increased
shipments of central venous and special catheters. Sales of cardiac care
products increased 1.0% to $55.5 million from $54.9 million in fiscal 1999, due
primarily to increased shipments of intra-aortic balloon ("IAB") pump products.
International sales increased by $11.0 million, and represented 36.0% of net
sales in fiscal 2000, compared to 35.2% in the prior year, principally as a
result of growth in shipments of central venous catheter products and IAB pump
and catheter products. The percentage of net sales attributable to the Company's
direct sales force decreased in fiscal 2000 to approximately 73.4% compared to
approximately 75.1% in fiscal 1999.
Gross profit increased 8.4% to $169.9 million in fiscal 2000 from $156.7 million
in fiscal 1999 due primarily to increased sales volume. As a percentage of net
sales, gross profit was 53.0% in both fiscal 2000 and 1999.
Research, development and engineering expenses in fiscal 2000 decreased by 2.8%
to $19.8 million from $20.3 million in fiscal 2000. As a percentage of net
sales, these expenses decreased to 6.2% in fiscal 2000, compared to 6.9% in
fiscal 1999, due primarily to decreased spending in the development of
experimental and custom products.
Selling, general and administrative expenses increased by 5.3% to $75.2 million
during fiscal 2000 from $71.4 million in the previous year, and were 23.5% of
net sales in fiscal 2000 compared to 24.2% in fiscal 1999. The increase was due
primarily to increased amortization expense related to the Company's acquisition
of Sometec, S.A. in September 1999 and the cardiac assist division of C.R. Bard,
Inc. in December 1998.
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 acquisition
of Sometec, S.A. (see Note 3 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
(14)
<PAGE>
Fiscal 2000 Compared to Fiscal 1999 (Continued):
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 from these projects have commenced. Some cash inflows from
these projects have commenced. However, while the Company believes these
projects will be completed as planned, the Company cannot assure 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.
In the second quarter of fiscal 1999, the Company recorded a non-cash pre-tax
special charge of $4.1 million ($2.7 million after tax or $.12 per basic and
diluted common share) related to the purchase of in-process IAB and pump
research and development as part of the Company's acquisition of the assets of
the cardiac assist division of C.R. Bard, Inc. The IAB and pumps are class 3
life saving medical devices regulated by the FDA. In accordance with Statement
of Financial Accounting Standards ("FAS") No. 2, "Accounting for Research and
Development Costs" and FASB Interpretation No. 4, "Applicability of FAS No. 2 to
Business Combinations Accounted for by the Purchase Method", these costs were
charged to expense at the consummation of the acquisition. The value assigned to
purchase IAB and pump in-process technology was based on a valuation prepared by
an independent third-party appraisal company. Each of the technologies under
development at the date of acquisition were reviewed for technological
feasibility, stage of completeness at the acquisition date, and scheduled
release dates of products employing the technology to determine whether the
technology was complete or under development. At the acquisition date, the
research and development projects were in various stages of completion ranging
from 50% to 80%. The valuation was based on the estimated cash flows resulting
from commercially viable products discounted to present value using risk
adjusted discount rates ranging from 29% to 32%. The research and development
costs and the net cash inflows from the projects commenced within a year of the
acquisition date.
In accordance with FAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", and consistent with the Company's accounting policy for
marketable equity securities, in the fourth quarter of fiscal 1999, the Company
determined that the decline in the fair value of its investment in the Cardiac
Pathways Corporation was other than temporary. Accordingly, the Company has
established a new basis in the investment at $0.4 million, equivalent to its
fair market value. As a result, the Company realized a special charge of $8.7
million before tax, $5.6 million after tax or $0.24 per basic and diluted common
share.
Principally due to the above factors, operating income increased 37.4% to $71.6
million in fiscal 2000 from $52.1 million in fiscal 1999.
Other expenses (income), net, decreased to $2.1 million of expense in fiscal
2000 from $(3.2) million of income in fiscal 1999, due primarily to larger
foreign exchange gains in fiscal 1999 and higher interest expense in fiscal
2000. Other expenses (income), net, consists principally of interest expense and
foreign exchange gains and losses associated with the Company's direct sales
subsidiaries. Aggregate foreign exchange gains in fiscal 2000 were $0.1 million
and in fiscal 1999 were $4.4 million, including losses relating to foreign
currency contracts of less than $0.1 million in fiscal 2000 and gains of $0.7
million in fiscal 1999.
(15)
<PAGE>
Fiscal 2000 Compared to Fiscal 1999 (Continued):
As a result of the factors discussed above, income before income taxes increased
in fiscal 2000 by 25.5% to $69.5 million from $55.3 million in fiscal 1999. In
fiscal 2000, the Company reduced its annual effective tax rate to 33.5% from
35.5% in fiscal 1999 due to final disposition of tax audits.
Net income in fiscal 2000 increased by 29.4% to $46.2 million from $35.7 million
in fiscal 1999. As a percentage of net sales, net income represented 14.4% in
fiscal 2000 compared to 12.1% in the previous year. During the third quarter of
fiscal 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. The change in depreciation expense related
to manufacturing equipment was included in inventory value and is being
recognized as the inventory is sold; the change in depreciation expense related
to non-manufacturing assets is reflected in operating expenses. This change in
estimated fixed asset lives resulted in decreased depreciation expense of $1.9
million and increased net income of $0.6 million for fiscal 2000. Basic and
diluted earnings per common share increased by $.02 as a result of this change.
Basic earnings per common share increased to $2.06 in fiscal 2000 from $1.54 per
share in fiscal 1999. Diluted earnings per common share increased to $2.05 in
fiscal 2000 from $1.54 per share in fiscal 1999. Weighted average common shares
outstanding decreased to 22,450,581 in fiscal 2000 from 23,195,115 in fiscal
1999 as a result of the Company's previously announced share repurchase program,
which remains in effect.
Fiscal 1999 Compared to Fiscal 1998
Net sales increased by $35.0 million, or 13.4%, to $295.9 million in fiscal 1999
from $260.9 million in fiscal 1998. Sales of critical care products increased
10.5% to $241.0 million from $218.1 million in fiscal 1998, due primarily to
increased shipments of tubing products resulting from the Company's acquisition
of Medical Parameters, Inc. ("MPI") in August 1998, an increase in unit
shipments of central venous catheters, including increased shipments of
ARROWg+ard(TM) Blue(R) antiseptic surface treated catheter products and
increased shipments of percutaneous thrombectomy devices ("PTD"). Sales of
cardiac care products increased 28.4% to $54.9 million from $42.8 million in the
previous year, due primarily to increased shipments of IAB pump and catheter
products. International sales increased by $12.9 million, and represented 35.2%
of net sales, in fiscal 1999, compared to 35.0% in the prior year, principally
as a result of growth in shipments of IAB pump and catheter products as well as
multi-lumen catheters. The percentage of net sales attributable to the Company's
direct sales force increased in fiscal 1999 to approximately 75.1% compared to
approximately 74.1% in fiscal 1998.
Gross profit increased 6.7% to $156.7 million in fiscal 1999 from $146.8 million
in fiscal 1998. As a percentage of net sales, gross profit decreased to 53.0% in
fiscal 1999 from 56.3% in the prior year, due primarily to higher manufacturing
costs related to the Company's IAB products, worldwide pricing pressures in
certain market and product sectors, and a less profitable product mix.
(16)
<PAGE>
Fiscal 1999 Compared to Fiscal 1998 (Continued):
Research, development and engineering expenses in fiscal 1999 increased by 10.6%
to $20.3 million from $18.4 million in fiscal 1998. As a percentage of net
sales, these expenses decreased to 6.9% in fiscal 1999, compared to 7.1% in
fiscal 1998. These expenses increased primarily as a result of increased
development, regulatory and clinical trial activity related to the
LionHeart(TM), the Company's left ventricular assist system, new clinical
studies related to the Company's ARROWg+ard(R) Plus and PAC research programs
and additional engineering expense related to the acquisition of the cardiac
assist division of C.R. Bard, Inc.
Selling, general and administrative expenses increased by 13.5% to $71.4 million
during fiscal 1999 from $63.0 million in the previous year, and were 24.2% of
net sales in fiscal 1999 compared to 24.1% in fiscal 1998. The increase was due
primarily to additional expenses related to the operations of MPI and to the
aforementioned acquisition of the cardiac assist division of C.R. Bard, Inc.
In the second quarter of fiscal 1999, the Company recorded a non-cash pre-tax
special charge of $4.1 million ($2.7 million after tax or $.12 per basic and
diluted common share) related to the purchase of in-process IAB and pump
research and development as part of the Company's acquisition of the assets of
the cardiac assist division of C.R. Bard, Inc. The IAB and pumps are class 3
life saving medical devices regulated by the FDA. In accordance with Statement
of Financial Accounting Standards ("FAS") No. 2, "Accounting for Research and
Development Costs" and FASB Interpretation No. 4, "Applicability of FAS No. 2 to
Business Combinations Accounted for by the Purchase Method", these costs were
charged to expense at the consummation of the acquisition. The value assigned to
purchase IAB and pump in-process technology was based on a valuation prepared by
an independent third-party appraisal company. Each of the technologies under
development at the date of acquisition were reviewed for technological
feasibility, stage of completeness at the acquisition date, and scheduled
release dates of products employing the technology to determine whether the
technology was complete or under development. At the acquisition date, the
research and development projects were in various stages of completion ranging
from 50% to 80%. The valuation was based on the estimated cash flows resulting
from commercially viable products discounted to present value using risk
adjusted discount rates ranging from 29% to 32%. The research and development
costs and the net cash inflows from the projects commenced within a year of the
acquisition date.
In accordance with FAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", and consistent with the Company's accounting policy for
marketable equity securities, in the fourth quarter of fiscal 1999, the Company
determined that the decline in the fair value of its investment in the Cardiac
Pathways Corporation was other than temporary. Accordingly, the Company has
established a new basis in the investment at $0.4 million, equivalent to its
fair market value. As a result, the Company realized a special charge of $8.7
million before tax, $5.6 million after tax or $0.24 per basic and diluted common
share.
(17)
<PAGE>
Fiscal 1999 Compared to Fiscal 1998 (Continued):
In the fourth quarter of fiscal 1998, in accordance with FAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" and the Company's accounting policy for goodwill, intangible and long-lived
assets, the Company recorded a non-cash pre-tax special charge of $36.2 million
($32.0 million after tax or $1.38 per basic and diluted common share) to write
down to fair value certain goodwill and intangible assets. As a result of the
Company's successful development of more advanced cardiac assist products, the
Company estimated that the carrying value of the goodwill was not recoverable.
Accordingly, the Company has reduced the carrying value of goodwill related to
previously acquired cardiac assist products by $29.0 million. The remaining
carrying value of the goodwill is being amortized using the straight-line method
over 10 years. The Company has also reduced the carrying value of certain
intangible assets related to cardiac assist technology and other assets in the
amount of $7.2 million. The remaining carrying value of these intangible assets
is being amortized using the straight-line method over the estimated periods of
benefits, from 5 to 17 years.
Principally due to the above factors, operating income increased 78.4% to $52.1
million in fiscal 1999 from $29.2 million in fiscal 1998.
Other expenses (income), net, improved to $(3.2) million of income in fiscal
1999 from $1.6 million of expense in fiscal 1998, due primarily to foreign
exchange gains. Other expenses (income), net, consists principally of interest
expense and foreign exchange gains and losses associated with the Company's
direct sales subsidiaries. Aggregate foreign exchange gains in fiscal 1999 were
$4.4 million and foreign exchange losses in fiscal 1998 were $1.1 million,
including losses relating to foreign currency contracts of $0.7 million in
fiscal 1999 and gains of $2.2 million in fiscal 1998.
As a result of the factors discussed above, income before income taxes increased
in fiscal 1999 by 100% to $55.3 million from $27.6 million in fiscal 1998. In
the fourth fiscal quarter of 1999, the Company reduced its annual effective tax
rate from 36.5% in fiscal 1998, excluding special charges (the effective tax
rate including special charges was 35.5% and 68.9% for fiscal 1999 and 1998,
respectively), to 35.5% due to completion of tax audits. In the fourth quarter
of fiscal 1998, the Company reduced its annual effective tax rate from 37.5% to
36.5% due to lower effective state income tax rates.
Net income in fiscal 1999 increased by 316% to $35.7 million from $8.6 million
in fiscal 1998. As a percentage of net sales, net income represented 12.1% in
fiscal 1999 compared to 3.3% in the previous year.
Earnings per basic and diluted common share increased to $1.54 in fiscal 1999,
from $0.37 per share in fiscal 1998 due principally to the impact of the special
charges in fiscal 1998 for the write down to fair value of certain goodwill and
intangible assets ($1.38 per basic and diluted common share). Weighted average
common shares outstanding decreased to 23,195,115 in fiscal 1999 from 23,224,780
in fiscal 1998 as a result of the forfeiture of restricted stock awards by
certain former employees.
(18)
<PAGE>
Liquidity and Capital Resources
For fiscal 2000, net cash provided by operations was $56.8 million, an increase
of $0.2 million from the prior year. Accounts receivable, net of the allowance
for doubtful accounts, increased by $3.3 million for fiscal 2000, compared to a
$5.4 million increase in the prior year. Accounts receivable, measured in days
sales outstanding, decreased to 84 days at August 31, 2000, from 87 days at
August 31, 1999, due principally to increased collection efforts of the Company.
Inventories increased by $8.0 million in fiscal 2000 as compared to an increase
of $5.6 million in fiscal 1999, due principally to the product launch of the
Company's new HemoSonic(TM) 100 hemodynamic monitoring system.
Net cash used in the Company's investing activities decreased to $38.0 million
in fiscal 2000 from $48.9 million in the prior year. 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, S.A.
in the first quarter for $11.0 million, net of cash acquired. Capital
expenditures increased to $21.1 million in fiscal 2000 from $19.3 million in
fiscal 1999 due to expenditures related to development of internal-use software.
Net cash used by financing activities increased to $18.3 million in fiscal 2000,
compared to $8.4 million in fiscal 1999. This change resulted principally from
the Company's open market purchase of up to 1 million shares of its common stock
pursuant to its previously announced share repurchase program. 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. For the year ended August 31, 2000, the Company
expended $32.5 million to fund the repurchase of a total of 1,058,500 shares of
its common stock pursuant to this program. As of November 1, 2000, the Company
had repurchased a total of 1,223,400 shares under this program for approximately
$36.6 million.
As the Company had U.S. bank credit facilities providing a total of $65.0
million in available revolving credit for general business purposes, of which
$23.1 million remained unused. In addition, certain of the Company's foreign
subsidiaries have revolving credit facilities totaling the U.S. dollar
equivalent of $24.2 million, of which $14.0 million remained unused as of August
31, 2000. Combined borrowing under these credit facilities increased $19.3
million and $3.1 million during the years ended August 31, 2000 and 1999,
respectively, primarily to finance the purchase of the Company's common stock
pursuant to its share repurchase program. Under the U.S. credit facilities the
Company is required to maintain a ratio of total liabilities to tangible net
worth (total assets less total liabilities and intangible assets) of no more
than 1.5 to 1 and a working capital ratio of 1.25 to 1 or greater. At August 31,
2000, the Company was in compliance with all its lending agreements and
covenants.
During fiscal 2000, 1999 and 1998, the percentage of the Company's sales
invoiced in currencies other than the U.S. dollar was 24.2%, 23.8% and 24.7%,
respectively. In addition, a small part of the Company's cost of goods sold is
denominated in foreign currencies. The Company enters into foreign currency
forward contracts, which are derivative financial instruments, with major
financial institutions to reduce the effect of these foreign currency risk
exposures, primarily on U.S. dollar cash inflows resulting from the collection
of intercompany receivables denominated in foreign currencies. Such transactions
occur throughout the year and are probable, but not firmly committed. Forward
contracts are marked to market each accounting period, and the resulting gains
or losses on these contracts are recorded in Other Income / Expense of the
Company's consolidated statements of income. Realized gains and losses on these
contracts are offset by the assets, liabilities and transactions being hedged.
By their nature, all such contracts involve risk, including the risk of
nonperformance by counterparties. Accordingly, losses relating to these
contracts could have a material adverse effect upon the Company's business,
financial condition and results of operations. Based upon the Company's
knowledge of the financial condition of the counterparties to its existing
forward contracts, the Company believes that it does not have any material
exposure to any individual counterparty. The Company's policy prohibits the use
of derivative instruments for speculative purposes. As of November 1, 2000,
outstanding foreign currency exchange contracts totaling the U.S. dollar
equivalent of $6.7 million mature at various dates through December 2000. The
Company expects to continue to utilize foreign currency exchange contracts to
manage its exposure, although there can be no assurance that the Company's
efforts in this regard will be successful.
(19)
<PAGE>
Liquidity and Capital Resources (Continued):
Operations of the Company are also exposed to, in the normal course of business,
fluctuations in interest rates. This interest rate risk exposure results from
changes in short-term U.S. dollar interest rates. In an effort to manage
interest rate exposure, in April 1998 the Company entered into an interest rate
swap agreement to reduce potential interest rate fluctuations on its floating
rate debt. The interest rate swap agreement exchanges floating rate for fixed
interest payments over the 5-year life of the agreement. Based on the Company's
assessment of the interest rate environment, the Company exercised its right to
terminate the agreement in August 1999.
The Company's exposure to credit risk consists principally of trade receivables.
Hospitals and international dealers account for a substantial portion of trade
receivables and collateral is generally not required. The Company believes that
its risk associated with this concentration is limited due to the Company's
on-going credit review procedures.
As part of the Company's purchase of assets of the cardiac assist division of
C.R. Bard, Inc., the Company committed to acquire specified assets and assume
specified liabilities of the Belmont Instruments Corporation. Payments pursuant
to the commitment in the amount of $3.5 million are expected to be made in
fiscal 2001 and $1.5 million in fiscal 2002.
On October 3, 2000, the Company's Board of Directors approved spending of up to
$10.0 million for the construction of additional manufacturing capacity at its
existing manufacturing and research facility in the Czech Republic. The approved
spending includes amounts required for construction of the additional space as
well as all equipment required to meet production needs at such space.
Based upon its present plans, the Company believes that its working capital,
operating cash flow and available credit sources will be adequate to repay
current portions of long-term debt, to finance currently planned capital
expenditures and to meet the currently foreseeable liquidity needs of the
Company.
During the periods discussed above, the overall effects of inflation and
seasonality on the Company's business were not significant.
New Accounting Standards:
FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (as
amended by FAS 137) establishes new procedures for accounting for derivatives
and hedging activities and supersedes and amends a number of existing standards.
The statement requires recognition of derivatives in the Statement of Financial
Position, measured at fair value. Gains or losses resulting from changes in the
value of derivatives would be accounted for, depending on the intended use of
the derivative and whether it qualifies for hedge accounting.
The Company will adopt the standard, effective September 1, 2000. The transition
adjustment resulting from implementation of this new standard will not have a
material effect on the Company as this statement retains the provisions of
Statement of Accounting Standards No. 52 "Foreign Currency Translation" with
respect to long-term and short-term intercompany transactions eliminating the
need for special accounting. The Company does not use hedge accounting.
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 2001. The Company is currently evaluating the
impact SAB 101 will have on its financial statements, if any.
(20)
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Due to the global nature of its operations, the Company is subject to the
exposures that arise from foreign exchange rate fluctuations. Such exposures
arise from transactions denominated in foreign currencies, primarily from
translation of results of operations from outside the United States,
intercompany loans, and intercompany purchases of inventory. The Company is also
exposed to interest rate changes.
The Company's objective in managing its exposure to foreign currency
fluctuations is to minimize earnings and cash flow volatility associated with
foreign exchange rate changes. The Company enters into various contracts that
change in value as foreign exchange rates change to protect the value of its
existing foreign currency assets, liabilities, commitments, and anticipated
foreign currency revenues to meet these objectives. The contracts involve the
Japanese yen and other foreign currencies. The gains and losses on these
contracts offset changes in the value of the related exposures. It is the
Company's policy to enter into foreign currency transactions only to the extent
true exposures exist. The Company does not enter into foreign currency
transactions for speculative purposes.
The fair value of all foreign currency forward exchange contracts
outstanding at August 31, 2000 was less than $0.1 million, which does not
represent the Company's annual exposure. The following analysis estimates the
sensitivity of the fair value of all foreign currency forward exchange contracts
to hypothetical 10% favorable and unfavorable changes in spot exchange rates at
August 31, 2000 and 1999 as follows:
Fair Value of Foreign Currency
Forward Exchange Contracts
--------------------------
(in millions)
August 31, 2000 August 31, 1999
--------------- ---------------
10% adverse rate movement $ (1.1) $ (1.5)
At August 31st rates -- (.3)
10% favorable rate movement .8 .7
Any gains and losses on the fair value of forward contracts would be
largely offset by losses and gains on the underlying transactions or anticipated
transactions. These offsetting gains and losses are not reflected in the above
analysis.
Additional Quantitative and Qualitative disclosures about market risk
(e.g., interest rate and foreign currency exchange risk) are set forth in note
14 to the Company's Consolidated Financial Statements contained herein under
Item 14(a)(1).
(21)
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 (a) (1) and (2).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
Information regarding directors and nominees for directors of the Company,
as well as certain other information required by this item, will be included in
the Company's Proxy Statement to be issued in connection with its 2001 Annual
Meeting of Shareholders (the "Proxy Statement"), and is incorporated herein by
reference. The information regarding executive officers required by this item is
contained herein in Part I under the caption "Executive Officers".
PART III
Item 11. EXECUTIVE COMPENSATION
Information regarding executive compensation of Arrow's directors and
executive officers will be included in the Proxy Statement and is incorporated
herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of the Company's common stock
by certain beneficial owners and by management of the Company will be included
in the Proxy Statement and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions with
management of the Company will be included in the Proxy Statement and is
incorporated herein by reference.
(22)
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K:
(a) (1) The following financial statement schedule of the Company is filed
as part of this Form 10-K.
Page
----
Report of Independent Accountants 25
Consolidated Balance Sheets at
August 31, 2000 and 1999 26,27
Consolidated Statements of Income
for the years ended August 31, 2000,
1999 and 1998 28
Consolidated Statements of Comprehensive
Income for the years August 31, 2000,
1999 and 1998 29
Consolidated Statements of Cash Flows
for the years ended August 31, 2000,
1999 and 1998 30,31
Consolidated Statements of Changes in Shareholders' Equity
for the years ended August 31, 2000, 1999 and 1998 32-34
Notes to Consolidated Financial Statements 35-57
(a) (2) The following financial statement schedule of the Company is filed
as part of this Form 10-K:
Page
----
2. Schedule II - Valuation and Qualifying Accounts 58
Other statements and schedules are not presented because they are either
not required or the information required by statements or schedules is presented
elsewhere.
(a) (3) See Exhibit Index on pages 59 through 68 hereof for a list of the
Exhibits filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K:
None
(23)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARROW INTERNATIONAL, INC.
By: /s/ Frederick J. Hirt
-------------------------------------
Frederick J. Hirt
Chief Financial Officer,
Vice President-Finance and Treasurer
Dated: November 22, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Marlin Miller, Jr. Director, Chairman and November 22, 2000
----------------------------- Chief Executive Officer
(Marlin Miller, Jr.) (Principal Executive
Officer)
/s/ Raymond Neag Director November 22, 2000
-----------------------------
(Raymond Neag)
/s/ Frederick J. Hirt Chief Financial Officer, November 22, 2000
----------------------------- Vice President -
(Frederick J. Hirt) Finance and Treasurer
(Principal Financial and
Accounting Officer)
/s/ John H. Broadbent, Jr. Director November 22, 2000
-----------------------------
(John H. Broadbent, Jr.)
/s/ T. Jerome Holleran Director, Secretary November 22, 2000
-----------------------------
(T. Jerome Holleran)
/s/ Richard T. Niner Director November 22, 2000
-----------------------------
(Richard T. Niner)
/s/ George W. Ebright Director November 22, 2000
-----------------------------
(George W. Ebright)
/s/ Alan M. Sebulsky Director November 22, 2000
-----------------------------
(Alan M. Sebulsky)
/s/ John E. Gurski Director November 22, 2000
-----------------------------
(John E. Gurski)
/s/ Carl G. Anderson, Jr. Director November 22, 2000
-----------------------------
(Carl G. Anderson, Jr.)
/s/ R. James Macaleer Director November 22, 2000
-----------------------------
(R. James Macaleer)
(24)
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of Arrow International, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 23 present fairly, in all material
respects, the financial position Arrow International, Inc. and its subsidiaries
(the "Company") at August 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed the index appearing under Item 14(a)(2) on page 23 present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
September 29, 2000
(25)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
August 31,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,959 $ 3,939
Accounts receivable, less allowance for doubtful accounts
of $1,012 and $832 in 2000 and 1999, respectively 73,796 70,467
Inventories 82,801 74,809
Prepaid expenses and other 15,964 16,243
Deferred income taxes 3,131 2,018
--------- ---------
Total current assets 179,651 167,476
--------- ---------
Property, plant and equipment:
Land and improvements 5,582 5,628
Buildings and improvements 77,194 75,659
Machinery and equipment 127,120 101,921
Construction-in-progress 13,520 21,731
--------- ---------
223,416 204,939
Less accumulated depreciation (101,976) (88,005)
--------- ---------
121,440 116,934
--------- ---------
Goodwill, net of accumulated amortization of $9,432
and $7,154 in 2000 and 1999, respectively 38,879 35,698
Intangible and other assets, net of accumulated amortization of
$12,149 and $8,745 in 2000 and 1999, respectively 41,270 33,487
Deferred income taxes 4,574 4,738
--------- ---------
Total assets $ 385,814 $ 358,333
========= =========
</TABLE>
See notes to consolidated financial statements
Continued
(26)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, continued
(In thousands, except share amounts)
<TABLE>
<CAPTION>
August 31,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 8,400 $ 470
Notes payable 52,081 32,802
Accounts payable 8,151 10,028
Cash overdrafts 1,195 394
Accrued liabilities 9,316 8,707
Accrued compensation 8,049 6,223
Accrued income taxes 2,409 951
--------- ---------
Total current liabilities 89,601 59,575
Long-term debt 900 11,105
Accrued postretirement benefit obligation 10,109 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 in
2000 and 1999 45,661 45,661
Retained earnings 291,870 250,931
Less treasury stock at cost:
4,477,910 and 3,420,970 shares
in 2000 and 1999, respectively (45,092) (12,618)
Accumulated other comprehensive (expense) (7,235) (5,807)
--------- ---------
Total shareholders' equity 285,204 278,167
--------- ---------
Total liabilities and shareholders' equity $ 385,814 $ 358,333
========= =========
</TABLE>
See notes to consolidated financial statements
(27)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
for the years ended August 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 320,340 $ 295,946 $ 260,890
Cost of goods sold 150,423 139,241 114,072
------------ ------------ ------------
Gross profit 169,917 156,705 146,818
------------ ------------ ------------
Operating expenses:
Research, development and engineering 19,771 20,335 18,393
Selling, general and administrative 75,231 71,431 62,956
Special charges 3,320 12,819 36,249
------------ ------------ ------------
98,322 104,585 117,598
------------ ------------ ------------
Operating income 71,595 52,120 29,220
------------ ------------ ------------
Other expenses (income):
Interest expense, net of amount capitalized 2,534 1,328 784
Interest income (589) (353) (456)
Other, net 200 (4,196) 1,310
------------ ------------ ------------
2,145 (3,221) 1,638
------------ ------------ ------------
Income before income taxes 69,450 55,341 27,582
Provision for income taxes 23,266 19,646 19,010
------------ ------------ ------------
Net income $ 46,184 $ 35,695 $ 8,572
============ ============ ============
Basic earnings per common share $ 2.06 $ 1.54 $ 0.37
============ ============ ============
Diluted earnings per common share $ 2.05 $ 1.54 $ 0.37
============ ============ ============
Cash dividends per common share $ .235 $ .215 $ .195
============ ============ ============
Weighted average common shares outstanding 22,450,581 23,195,115 23,224,780
============ ============ ============
</TABLE>
See notes to consolidated financial statements
(28)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
for the fiscal years ended August 31,
-------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net income $ 46,184 $ 35,695 $ 8,572
Other comprehensive income (expense):
Foreign currency translation adjustments (2,605) (113) (1,071)
Unrealized holding gain (loss) on securities, net of tax
($(713), $545, and $804, respectively) 1,177 (1,758) (1,217)
Reclassification adjustment for losses included
in net income, net of tax ($0, $(3,082), and $0,
respectively) -- 5,598 --
--------- --------- ---------
Other comprehensive income (expense) (1,428) 3,727 (2,288)
--------- --------- ---------
Total comprehensive income $ 44,756 $ 39,422 $ 6,284
========= ========= =========
</TABLE>
See notes to consolidated financial statements
(29)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
for the years ended August 31,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 46,184 $ 35,695 $ 8,572
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 14,994 14,772 12,092
Special charges 3,320 12,819 36,249
Amortization of intangible assets and goodwill 5,937 3,809 4,030
Amortization of unearned compensation -- 44 253
Deferred income taxes (948) (2,258) (1,008)
Unrealized holding loss (gain) on securities (713) (2,536) 804
Other 606 490 1,042
Changes in operating assets and liabilities:
Accounts receivable (4,206) (4,217) (3,785)
Inventories (9,138) 1,909 (11,405)
Prepaid expenses and other (1,457) (2,800) (4,706)
Accounts payable and accrued liabilities (988) 1,293 3,296
Accrued compensation 1,891 (1,206) (3,300)
Accrued income taxes 1,319 (1,201) (1,009)
-------- -------- --------
Total adjustments 10,617 20,918 32,553
-------- -------- --------
Net cash provided by operating activities 56,801 56,613 41,125
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (21,053) (19,264) (12,685)
Increase in intangible and other assets (5,930) (1,773) (5,417)
Cash paid for businesses acquired, net (11,024) (27,903) (21,641)
-------- -------- --------
Net cash used in investing activities (38,007) (48,940) (39,743)
-------- -------- --------
Cash flows from financing activities:
Increase in notes payable 19,456 1,726 6,917
Principal payments of long-term debt,
including current maturities (859) (110) (1,233)
(Decrease) increase in book overdrafts 801 (1,001) (4,072)
Dividends paid (5,195) (4,872) (4,413)
Proceeds from stock options exercised 50 -- --
Purchase of treasury stock (32,524) (4,186) (58)
-------- -------- --------
Net cash used in financing activities (18,271) (8,443) (2,859)
-------- -------- --------
Effects of exchange rate changes on
cash and cash equivalents (503) 57 (147)
Net change in cash and cash equivalents 20 (713) (1,624)
Cash and cash equivalents at beginning of year 3,939 4,652 6,276
-------- -------- --------
Cash and cash equivalents at end of year $ 3,959 $ 3,939 $ 4,652
======== ======== ========
</TABLE>
See notes to consolidated financial statements
Continued
(30)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
<TABLE>
<CAPTION>
for the years ended August 31,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 2,534 $ 1,328 $ 784
Income taxes $ 22,409 $ 24,442 $ 20,412
Supplemental schedule of noncash investing and
financing activities:
During 2000, 1999 and 1998, the Company assumed
liabilities in conjunction with the purchase of
certain intangible assets as follows:
Estimated fair value of assets acquired $ 13,333 $ 30,096 $ 25,258
Cash paid for assets, net of cash acquired,
of $386, $0, and $0, respectively 11,024 27,903 21,641
-------- -------- --------
Liabilities assumed $ 2,309 $ 2,193 $ 3,617
======== ======== ========
Cash paid for businesses acquired:
Working capital $ (876) $ 4,262 $ 3,676
Property, plant and equipment 54 300 249
Goodwill, intangible assets and in-process
research and development 12,232 23,341 17,716
-------- -------- --------
$ 11,410 $ 27,903 $ 21,641
======== ======== ========
</TABLE>
See notes to consolidated financial statements
(31)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended August 31, 2000, 1999 and 1998
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income (Expense)
------------------------------
Unrealized
Common Stock Treasury Stock Gain (Loss) On Cumulative
---------------------- Retained ---------------------- Marketable Translation
Shares Amount Earnings Shares Amount Securities Adjustment
------ ------ -------- ------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1999 26,478,813 $ 45,661 $ 250,931 3,420,970 $ (12,618) $ 465 $ (6,272)
Cash dividends on common
stock, $.235 per share (5,245)
Purchase of treasury stock 1,058,500 (32,524)
Exercise of stock options (1,560) 50
Unrealized gain on marketable
securities, net of taxes ($713) 1,177
Translation adjustments (2,605)
Net income 46,184
---------- --------- ---------- --------- ---------- ------- --------
Balance, August 31, 2000 26,478,813 $ 45,661 $ 291,870 4,477,910 $ (45,092) $ 1,642 $ (8,877)
========== ========= ========== ========= ========== ======= ========
</TABLE>
See notes to consolidated financial statements
Continued
(32)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended August 31, 2000, 1999 and 1998
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Common Stock Treasury Stock Unearned
---------------------- Retained ---------------------- Compen-
Shares Amount Earnings Shares Amount sation
---------- --------- -------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1998 26,478,813 $ 45,661 $ 220,217 3,254,752 $ (8,432) $ (44)
Cash dividends on common
stock, $.215 per share (4,981)
Purchase of treasury stock 166,138 (4,184)
Forfeiture of restricted stock by
terminated employees 80 (2)
Amortization of unearned
compensation 44
Write-down of impaired marketable
Equity securities (see Note 2)
Unrealized loss on marketable
securities, net of taxes ($545)
Translation adjustments
Net income 35,695
---------- --------- ---------- --------- ---------- -------
Balance, August 31, 1999 26,478,813 $ 45,661 $ 250,931 3,420,970 $ (12,618) $ --
========== ========= ========== ========= ========== =======
<CAPTION>
Accumulated Other
Comprehensive Income (Expense)
------------------------------
Unrealized
Gain (Loss) On Cumulative
Marketable Translation
Securities Adjustment
---------- ----------
<S> <C> <C>
Balance, August 31, 1998 $ (3,375) $ (6,159)
Cash dividends on common
stock, $.215 per share
Purchase of treasury stock
Forfeiture of restricted stock by
terminated employees
Amortization of unearned
compensation
Write-down of impaired marketable
Equity securities (see Note 2) 5,598
Unrealized loss on marketable
securities, net of taxes ($545) (1,758)
Translation adjustments (113)
Net income
-------- --------
Balance, August 31, 1999 $ 465 $ (6,272)
======== ========
</TABLE>
See notes to consolidated financial statements
Continued
(33)
<PAGE>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY,
continued for the years ended August 31, 2000, 1999 and 1998
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Common Stock Treasury Stock Unearned
---------------------- Retained ---------------------- Compen-
Shares Amount Earnings Shares Amount sation
---------- --------- -------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1997 26,478,813 $ 45,603 $ 216,173 3,252,687 $ (8,374) $ (239)
Cash dividends on common
stock, $.195 per share (4,528)
Purchase of treasury stock 1,085 (38)
Forfeiture of restricted stock by
terminated employees 980 (20) 20
Amortization of unearned
compensation 175
Tax benefit of compensation
deduction related to
Restricted Stock Bonus Plan 58
Unrealized loss on marketable
securities, net of taxes ($804)
Translation adjustments
Net income 8,572
---------- --------- ---------- --------- ---------- -------
Balance, August 31, 1998 26,478,813 $ 45,661 $ 220,217 3,254,752 $ (8,432) $ (44)
========== ========= ========== ========= ========== =======
<CAPTION>
Accumulated Other
Comprehensive Income (Expense)
------------------------------
Unrealized
Gain (Loss) On Cumulative
Marketable Translation
Securities Adjustment
---------- ----------
<S> <C> <C>
Balance, August 31, 1997 $ (2,158) $ (5,088)
Cash dividends on common
stock, $.195 per share
Purchase of treasury stock
Forfeiture of restricted stock by
terminated employees
Amortization of unearned
compensation
Tax benefit of compensation
deduction related to
Restricted Stock Bonus Plan
Unrealized loss on marketable
securities, net of taxes ($804) (1,217)
Translation adjustments (1,071)
Net income
--------- ---------
Balance, August 31, 1998 $ (3,375) $ (6,159)
========= =========
</TABLE>
See notes to consolidated financial statements
Continued
(34)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies:
General:
Arrow International, Inc. develops, manufactures and markets a broad range of
clinically advanced, disposable catheters and related products for critical and
cardiac care medical procedures. The Company's products are used primarily by
anesthesiologists, critical care specialists, surgeons, emergency and trauma
physicians, cardiologists, interventional radiologists, electrophysiologists,
pain management specialists and other health care providers.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of Arrow
International, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform to
the fiscal 2000 presentation.
Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments purchased with a
maturity of 90 days or less to be cash equivalents. The Company's cash
management program utilizes zero balance accounts. The carrying amount of cash
and cash equivalents approximate fair value.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Inventory Valuation:
Inventories are valued at lower of cost or market. Cost is determined by the
"first-in, first-out" (FIFO) method.
Goodwill, Intangible and Other Assets:
Goodwill represents the excess of the cost over the fair value of net assets
acquired in business combinations. Goodwill is amortized using the straight-line
method over a period of 15 to 25 years depending on the circumstances.
"Intangible and Other Assets, net" include certain assets acquired from business
acquisitions and investments and are being amortized using the straight-line
method over their estimated periods of benefits, from 5-20 years. Management
reviews the carrying amount of goodwill, intangible and other assets at each
balance sheet date to assess the continued recoverability based on future gross
cash flows and operating results from the related asset, future asset
utilization and changes in market conditions. In accordance with Statement of
Financial Accounting Standards No. 121 (FAS 121) "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of", long-lived
assets and certain identifiable intangibles to be held and used or disposed of
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If an evaluation is
required and a market value is not determinable, the estimated future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if a write down to a new basis is required.
Impairment will be recorded based on an estimate of future discounted cash
flows.
Continued
(35)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
Property, Plant and Equipment:
Property, plant and equipment are stated at cost and are depreciated over the
estimated useful lives of the assets using the straight-line method ranging from
3 to 35 years. Upon retirement, sale or other disposition, the cost and
accumulated depreciation are eliminated from the accounts and any gain or loss
is included in operations.
During the year ended August 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 year ended August 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 $1,859
and increased net income of $595 for the year ended August 31, 2000. Basic and
diluted earnings per common share increased by $.02 as a result of this change.
Capitalized Interest:
Interest is capitalized as part of the historical cost of certain property,
plant and equipment constructed by the Company for its own use. The amount of
interest capitalized is based on a weighted average of the interest rates of
outstanding borrowings during the construction period.
Marketable Equity Securities:
Marketable equity securities are carried at fair market value, with unrealized
holding gains and losses, net of tax, reported as accumulated other
comprehensive income(expense) within shareholders' equity. The fair market value
of securities held at August 31, 2000 and 1999 was $3,940 and $2,050,
respectively. The unrealized holding gain was $1,642 at August 31, 2000 and $465
at August 31, 1999.
Financial Instruments:
The Company enters into foreign currency exchange forward contracts, which are
derivative financial instruments, with certain major financial institutions to
reduce the effect of fluctuating exchange rates, primarily on U.S. dollar cash
inflows resulting from the collection of intercompany receivables denominated in
foreign currencies. The Company classifies a portion of certain intercompany
receivables as long-term investments. The foreign exchange translation effect
related to the investment is reported as accumulated other comprehensive
income(expense) within shareholders' equity. Such transactions occur throughout
the year and are probable, but not firmly committed. Forward contracts are
marked to market each accounting period, and the resulting gains or losses on
these contracts are recorded in other income / expense of the consolidated
statements of income. Realized gains and losses on these contracts are offset by
the assets, liabilities and transactions being hedged. In 1998, the Company
entered into an interest rate swap agreement to reduce the impact of its
floating rate debt. The interest rate swap agreement allows the Company to
exchange floating rate for fixed interest payments over the life of the
agreement. The differential is accrued as interest rates change and is recorded
as interest expense. The agreement was terminated in August 1999. The Company
does not use financial instruments for trading or speculative purposes.
Continued
(36)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
Revenue Recognition:
Revenue is recognized at the time products are shipped and title has passed to
the customer. Net sales represent gross sales invoiced to customers, less
certain related charges, including freight costs, discounts, returns and other
allowances.
Income Taxes:
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns using current tax rates. Undistributed earnings of the
Company's foreign subsidiaries are indefinitely reinvested and amounted to
$14,440 and $10,565 at August 31, 2000 and 1999, respectively. No deferred taxes
have been provided on these earnings.
Foreign Currency Translation:
During fiscal 2000 and 1999, the Company's foreign subsidiaries used their local
currency as the functional currency and translated all assets and liabilities at
year-end exchange rates, all income and expense accounts at average rates and
recorded adjustments from the translation in accumulated other comprehensive
income(expense) within shareholders' equity. Adjustments resulting from the
translation of the entities are included in "other income/expense" of the
consolidated statements of income. Gains and losses resulting from transactions
of the Company and its foreign subsidiaries are included in "other
income/expense". Aggregate foreign exchange gains are $126 for the year ended
August 31, 2000 and $4,444 and $1,102 for the years ended August 31, 1999 and
1998, respectively.
Postretirement Benefits Other Than Pensions:
Postretirement health care and life insurance benefits are recorded using the
accrual method of accounting based on actuarially determined costs, which are
recognized over the period from the date of hire to the full eligibility date of
employees who are expected to qualify for such benefits.
Earnings/(Loss) Per Share
Basic earnings/(loss) per common share is computed by dividing net income/(loss)
available to common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings/(loss) per share is computed by
dividing net income/(loss) available to common shareholders by the
weighted-average number of shares that would have been outstanding if the
dilutive potential common shares had been issued. The diluted earnings/(loss)
per share does not assume the exercise of options that would have an
antidilutive effect on earnings/(loss) per share.
Cost of Start-up Activities:
In the fourth quarter of fiscal 1998, the Company adopted Statement of Position
(SOP) 98-5 "Reporting the Costs of Start-up Activities" issued by the Accounting
Standards Executive Committee of the Institute of Certified Public Accountants
(AcSec). It requires costs of start-up activities and organization costs to be
expensed as incurred. As a result of the adoption, the Company recorded
additional expense included in "Special Charges" of $580 ($368 after tax) or
less than $.02 per basic and diluted common share.
Continued
(37)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
Computer Software Costs
Effective September 1, 1998, the Company adopted "Statement of Position (SOP)
98-1", "Accounting for the Costs of Computer Software Development or Obtained
for Internal Use" issued by the Accounting Standards Executive Committee of the
Institute of Certified Public Accountants (AcSec). This statement required
certain internal-use computer software costs to be capitalized and amortized
over the useful life of the asset. Total cost capitalized under this policy were
$3,848 and $1,612 for fiscal years ended August 31, 2000 and 1999, respectively.
Research and Development
Research and development costs are expensed as incurred. Research and
development costs consist of direct and indirect internal costs related to
specific projects as well as fees paid to other entities which conduct certain
research activities on behalf of the Company.
2. Special Charges:
In the first quarter of fiscal 2000, the Company recorded a non-cash pre-tax
special charge of $3,320 ($2,208 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 acquisition of Sometec,
S.A. (see Note 3 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
Continued
(38)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
2. Special Charges (Continued):
adjusted after-tax discount rate of 22%. The research and development costs from
these projects have commenced. Some cash inflows from these projects have
commenced. However, while the Company believes these projects will be completed
as planned, the Company cannot assure 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.
In the second quarter of fiscal 1999, the Company recorded a non-cash pre-tax
special charge of $4,139 ($2,670 after tax or $0.12 per basic and diluted common
share) related to the purchase of in-process intra-aortic balloon ("IAB") and
pump research and development as part of the Company's acquisition of the assets
of the cardiac assist division of C.R. Bard, Inc. The IAB and pumps are class 3
life saving medical devices regulated by the FDA. In accordance with FAS No. 2,
"Accounting for Research and Development Costs" and FASB Interpretation (FIN)
No. 4, "Applicability of FAS No. 2 to Business Combinations Accounted for by the
Purchase Method", these costs were charged to expense at the consummation of the
acquisition. The value assigned to purchase IAB and pump in-process technology
was based on a valuation prepared by an independent third-party appraisal
company. Each of the technologies under development at the date of acquisition
were reviewed for technological feasibility, stage of completeness at the
acquisition date, and scheduled release dates of products employing the
technology to determine whether the technology was complete or under
development. At the acquisition date, the research and development projects were
in various stages of completion ranging from 50% to 80%. The valuation was based
on the estimated cash flows resulting from commercially viable products
discounted to present value using risk adjusted discount rates ranging from 29%
to 32%. The research and development costs and the net cash inflows from the
projects commenced within a year of the acquisition date.
In accordance with FAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", and consistent with the Company's accounting policy for
marketable equity securities, in the fourth quarter of fiscal 1999, the Company
determined that the decline in the fair value of its investment in the Cardiac
Pathways Corporation was other than temporary. Accordingly, the Company has
established a new basis in the investment at $440, equivalent to its fair market
value. As a result, the Company realized a special charge of $8,680 before tax,
$5,598 after tax or $0.24 per basic and diluted common share.
In the fourth quarter of fiscal 1998, in accordance with FAS No. 121, and the
Company's accounting policy for goodwill, intangible and long-lived assets, the
Company recorded a non-cash pre-tax special charge of $36,249 ($31,960 after tax
or $1.38 per basic and diluted common share) to write down to fair value certain
goodwill and intangible assets. As a result of the Company's successful
development of more advanced cardiac assist products, the Company estimated that
the carrying value of the goodwill was not recoverable. Accordingly, the Company
reduced the carrying value of goodwill related to previously acquired cardiac
assist products by $29,000. The remaining carrying value of the goodwill is
being amortized using the straight-line method over 10 years. The Company also
reduced the carrying value of certain intangible assets related to cardiac
assist technology and other assets in the amount of $7,249. The remaining
carrying value of these intangible assets is being amortized using the
straight-line method over the estimated periods of benefits, from 5 to 17 years.
Continued
(39)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
3. Business Acquisitions:
On September 1, 1999, the Company completed the acquisition of Sometec, S.A., a
French development company that has developed a non-invasive esophageal
ultrasound probe that continuously measures descending aortic blood flow, for
$11,024, net of cash acquired. The acquisition has been accounted for using the
purchase method of accounting. The excess of the purchase price over the
estimated fair value of the net assets acquired of approximately $4,791 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 amounts are not presented as this acquisition has no
material effect on the Company's results of operations or financial condition.
On December 1, 1998, the Company continued its expansion into the cardiac care
market by purchasing the assets of the cardiac assist division of C.R. Bard,
Inc., a manufacturer and marketer of intra-aortic balloon catheters and an
intra-aortic balloon pump, for $27,903. The acquisition has been accounted for
using the purchase method of accounting. The excess of the purchase price over
the estimated fair value of the net assets acquired of approximately $2,448 is
being amortized over a period of 25 years. Intangible assets acquired are being
amortized over periods ranging from 5 to 20 years. As part of the acquisition,
the Company committed to acquire specified assets and assume specified
liabilities of the Belmont Instruments Corporation. Payments pursuant to the
commitment in the amount of $3,500 are expected to be made in fiscal 2001 and
$1,500 in fiscal 2002. The results of operations of this business are included
in the Company's consolidated financial statements from the date of acquisition.
On August 3, 1998, the Company acquired Medical Parameters, Inc. (MPI), a maker
of custom manufactured tubing sets used by critical care physicians to connect
central venous catheters to blood pressure monitoring devices and drug infusion
systems for $15,000 in cash. The acquisition has been accounted for using the
purchase method of accounting. The results of operations are included in the
consolidated statements of income from the date of acquisition. The excess of
the purchase price over the estimated fair value of the net assets acquired of
approximately $12,200 is being amortized over a period of 25 years.
On November 5, 1997, the Company continued its expansion into the cardiac care
market by purchasing the assets of the Cardiac Assist Division of the Boston
Scientific Corporation, a manufacturer and marketer of intra-aortic balloon
catheters and an intra-aortic balloon pump, for $7,321. The acquisition has been
accounted for using the purchase method of accounting. The results of operations
are included in the consolidated statements of income from the date of
acquisition. For the second and third quarters of the fiscal year ended August
31, 1998, the excess of the purchase price over the estimated fair value of net
assets acquired of approximately $5,516 was amortized over a period of 15 years.
In the fourth quarter of 1998, the Company reduced the carrying value of this
cardiac assist asset (see Note 2, "Special Charges").
Pro forma amounts are not presented as the aforementioned acquisitions had no
material effect on the Company's results of operations or financial condition
for any of the years presented.
4. Stock Option Plans:
The Company has adopted three stock plans, the 1992 Stock Incentive Plan (the
"1992 Plan"), which was adopted on April 1, 1992, the Directors Stock Incentive
Plan, as amended (the "Directors Plan"), which was approved by the Company's
shareholders on January 17, 1996 with amendments thereto approved by the
shareholders on January 19, 2000, and the 1999 Stock Incentive Plan (the "1999
Continued
(40)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
4. Stock Option Plans (Continued):
Plan"), which was approved by the shareholders on June 19, 2000. The 1992 and
1999 Plans authorize the granting of stock options, stock appreciation rights
and restricted stock. The Directors Plan authorizes the granting of a maximum of
150,000 non-qualified stock options. Under the Directors Plan, members of the
Board of Directors of the Company and its subsidiaries are eligible to
participate if they are not also employees or consultants of the Company or its
subsidiaries, and do not serve on the Board as representatives of the interest
of shareholders who have made an investment in the Company. The Directors Plan
authorizes an initial grant of an option to purchase 5,000 shares of common
stock upon each eligible director's initial election to the Board and the grant
of an additional option to purchase 1,500 shares of common stock on the date
each year when directors are elected to the Board. The Company follows the
provision of Accounting Principles Board (APB) No. 25, "Accounting for Stock
Issued to Employees", and related interpretations, which require compensation
expense for options to be recognized only if the market price of the underlying
stock exceeds the exercise price on the date of grant. Accordingly, the Company
has not recognized compensation expense for its options granted during the 2000,
1999 and 1998 fiscal years.
In fiscal 1999 and 1998, options to purchase 481,000 and 180,900 shares,
respectively, of the Company's common stock were granted to key employees of the
Company pursuant to the 1999 and 1992 Plans. The option price per share ranged
from $25.125 to $31.875 in fiscal 1999 and $27.75 to $35 in fiscal 1998. These
amounts represent the fair market value of the common stock of the Company on
the dates the options were granted. The options expire ten years from the grant
date. The options vest ratably over five years at one year intervals from the
grant date and become exercisable at any time once vested.
On January 19, 2000, January 20, 1999 and January 21, 1998, options to purchase
13,500, 2,000 and 6,500 shares, respectively, of the Company's common stock were
granted to directors of the Company pursuant to the Directors Plan. The option
price per share for the 2000, 1999 and 1998 awards were $34.75, $25.125 and
$38.375, respectively, the fair market value of the common stock of the Company
on the dates the options were granted. The options expire ten years from the
grant date. The options vest fully one year from the grant date and become
exercisable at any time once vested.
Stock option activity for the years ended August 31, 2000, 1999 and 1998 is
summarized below:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
FY 2000 Price FY 1999 Price FY 1998 Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
September 1 808,300 $ 30.38 346,260 $ 34.50 174,420 $ 37.47
Granted 13,500 $ 34.75 483,000 $ 27.63 187,400 $ 31.95
Exercised (1,560) $ 31.88 0 -- 0 --
Terminated (17,530) $ 32.31 (20,960) $ 35.10 (15,560) $ 37.17
-------- -------- --------
Outstanding at
August 31 802,710 $ 30.40 808,300 $ 30.38 346,260 $ 34.50
Exercisable at
August 31 276,578 $ 32.73 123,360 $ 35.98 74,380 $ 36.76
</TABLE>
Continued
(41)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
4. Stock Option Plans (Continued):
Stock options outstanding at August 31, 2000 are summarized below:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$25.125 - $38.375 802,710 7.81 years $30.40 276,578 $32.73
</TABLE>
The Company adopted the disclosure provisions of FAS No. 123, "Accounting for
Stock-Based Compensation". As permitted under FAS 123, the Company continues to
apply the existing accounting rules under APB No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made as if the fair value method in measuring compensation cost for stock
options granted subsequent to December 15, 1995, had been applied.
The per share weighted average value of stock options granted in fiscal
2000,1999 and 1998 was $10.51, $10.52 and $13.35, respectively. The fair value
was estimated as of the grant date using the Black-Scholes option pricing model
with the following average assumption:
2000 1999 1998
-------- -------- --------
Risk-free interest rate 6.45% 5.09% 6.13%
Dividend yield 0.66% 0.80% 0.66%
Volatility factor 27.48% 37.28% 40.00%
Expected lives 4 years 5 years 5 years
Had compensation expense for stock options granted in fiscal 2000, 1999 and 1998
been recorded based on the fair market value at the grant date, the Company's
net income and basic and diluted earnings per share, net of income tax effects,
for the years ended August 31, 2000, 1999 and 1998 would have been reduced to
the pro forma amounts indicated below:
2000 1999 1998
-------- -------- --------
Net income applicable to common shareholders
As reported $ 46,184 $ 35,695 $ 8,572
Pro forma $ 44,848 $ 35,047 $ 7,949
Basic earnings per common share
As reported $ 2.06 $ 1.54 $ 0.37
Pro forma $ 2.00 $ 1.51 $ 0.34
Diluted earnings per common share
As reported $ 2.05 $ 1.54 $ 0.37
Pro forma $ 1.99 $ 1.51 $ 0.34
The pro forma effects are not representative of the effects on reported net
income for future years, as most of the stock option grants vest in cumulative
increments over a period of five years.
(Continued)
(42)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
5. Related Party Transactions:
During fiscal 2000 and 1999, the Company made purchases amounting to $138 and
$31, respectively, of products from Precision Medical Products, Inc. ("PMP"), a
former subsidiary of Arrow Precision Products, Inc. ("Precision"), currently
owned by certain former management employees of Precision, including T. Jerome
Holleran, who serves as PMP's Chairman and Chief Executive Officer and as
Secretary and a Director of the Company. In addition, the Company provided
certain computer related services to PMP during fiscal 1999 of $3.
During fiscal 1998, the Company assumed certain pension and retirement health
care benefit obligations of Precision, which is related to the Company through
common ownership, in exchange for the transfer by Precision to the Company of
appropriate assets to satisfy such obligations. See Note 12, Retirement
Benefits, for additional details related to this transaction. In addition,
Precision transferred to the Company, with no payment by either party to the
other, its rights and responsibilities under a split dollar life insurance
policy covering the former Chief Operating Officer of Precision.
6. Rent Expense:
The Company leases certain warehouses and production facilities, office
equipment and vehicles under leases with varying terms.
Rent expense under operating leases totaled $3,915, $4,353 and $3,638 for fiscal
years ended August 31, 2000, 1999 and 1998, respectively. Following is a
schedule by year showing future minimum rentals under operating leases.
Year Ending August 31, Total
---------------------- ----------
2001 $ 3,734
2002 2,995
2003 1,618
2004 769
2005 447
Thereafter 891
---------
$ 10,454
=========
Continued
(43)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
7. Inventories:
Inventories are summarized as follows:
August 31,
----------
2000 1999
---------- ----------
Finished goods $ 27,706 $ 31,779
Semi-finished goods 18,742 12,654
Work-in-process 10,562 10,528
Raw materials 25,791 19,848
---------- ----------
$ 82,801 $ 74,809
========== ==========
8. Credit Facilities:
The Company had U.S. bank credit facilities providing a total of $65,000 in
revolving credit for general business purposes, of which $41,863 and $24,709
were outstanding at August 31, 2000 and 1999, respectively. Interest rate terms
for both U.S. and foreign bank credit facilities are based on either bids
provided by the bank or the prime rate, London Interbank Offered Rates (LIBOR)
or Certificate of Deposit rates, plus applicable margins. Certain of these
borrowings, primarily those with U.S. banks, are due on demand. Interest is
payable monthly during the revolving credit period. At August 31, 2000 and 1999,
the weighted average interest rates on short-term borrowings were 5.4% and 5.0%,
respectively. At August 31, 2000 and 1999, certain of the Company's foreign
subsidiaries had available revolving credit facilities, at market rates of
interest, totaling the U.S. dollar equivalent of $24,180 and $23,254, under
which $10,218 and $8,093 was outstanding, respectively. Under the U.S. credit
facilities, the Company is required to maintain a ratio of total liabilities to
tangible net worth (total assets less total liabilities and intangible assets)
of no more than 1.5 to 1 and a working capital ratio of 1.25 to 1 or greater. At
August 31, 2000 and 1999, the carrying amount of short-term borrowings
approximated fair value and the Company was in compliance with its lending
agreements and covenants.
Continued
(44)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
9. Accrued Compensation:
The components of accrued compensation at August 31, 2000 and 1999 are as
follows:
2000 1999
----------- -----------
Accrued vacation pay $ 2,876 $ 2,823
Accrued payroll 3,508 1,991
Accrued productivity plan compensation 836 1,024
Other 829 385
----------- -----------
$ 8,049 $ 6,223
=========== ===========
10. Long-Term Debt:
<TABLE>
<CAPTION>
Long-term debt consists of the following: August 31,
2000 1999
------- -------
<S> <C> <C>
Bank note payable in July 2001, plus interest at a quoted fixed rate or at a
variable rate based upon LIBOR plus 0.75%. As of August 31, 2000, the interest
rate is fixed at 5.55% through January 2001. At August 31, 1999,
the interest rate was fixed at 3.71%. $ 8,060 $ 9,492
Industrial Development Authority Bonds, $3,500 face amount, subject to mandatory
annual sinking fund payments of $200 from December 1989 through December 1998;
and $300 from December 1999 through December 2003; plus interest at a variable
rate ranging from 3.4% to 6.25% in 2000 and from 2.45% to 4.50%
in 1999. 1,200 1,500
Bank note payable in monthly installments
of $8 through November 2003, plus interest at a
fixed rate of 1.875%. -- 431
Interest free loan by the French governmental agency
"Anvar" to Sometec, S.A. for research & development,
due December 31, 2000. 40 --
Bank note payable in monthly installments
of $6 through October 2001, plus interest at
a fixed rate of 1.50%. -- 152
------- -------
Total debt $ 9,300 $11,575
Less current maturities 8,400 470
------- -------
$ 900 $11,105
======= =======
</TABLE>
Continued
(45)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
10. Long-Term Debt (Continued):
The Industrial Development Authority Bonds are collateralized by a $1,211 letter
of credit and the Company's headquarters, research and development, and
manufacturing facility in Reading, PA. The Company also has a U.S. dollar
equivalent of irrevocable standby letters of credit totaling $2,952 related to
subsidiary indebtedness and workers compensation insurance coverage and foreign
performance bonds. The annual commitment fees associated with the letters of
credit were 0.70% per annum at August 31, 2000.
Following is a schedule by year showing maturities of long-term debt for each of
the five years in the period ending August 31, 2005:
Year Ending August 31, Total
---------------------- --------
2001 $ 8,400
2002 300
2003 300
2004 300
2005 -
Thereafter -
--------
$ 9,300
========
Total interest costs for fiscal 2000, 1999 and 1998 were $3,744, $2,537 and
$2,091, respectively, of which $1,210, $1,209 and $1,307, respectively, were
capitalized.
At August 31, 2000 and 1999, the carrying amount of long-term debt approximated
fair value.
11. Income Taxes:
The provision (benefit) for income taxes consists of:
2000
-------------------------------------------
Federal State Foreign Total
-------- ------- -------- --------
Current $ 19,176 $ 2,046 $ 3,694 $ 24,916
Deferred (894) (85) (671) (1,650)
-------- ------- -------- --------
$ 18,282 $ 1,961 $ 3,023 $ 23,266
======== ======= ======== ========
1999
-------------------------------------------
Federal State Foreign Total
-------- ------- -------- --------
Current $ 20,118 $ 1,854 $ 2,458 $ 24,430
Deferred (4,367) (417) -- (4,784)
-------- ------- -------- --------
$ 15,751 $ 1,437 $ 2,458 $ 19,646
======== ======= ======== ========
1998
-------------------------------------------
Federal State Foreign Total
-------- ------- -------- --------
Current $ 16,407 $ 2,020 $ 380 $ 18,807
Deferred 179 24 -- 203
-------- ------- -------- --------
$ 16,586 $ 2,044 $ 380 $ 19,010
======== ======= ======== ========
Continued
(46)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
11. Income Taxes (Continued):
Research and development tax credits were $0, $462 and $367 in fiscal 2000, 1999
and 1998, respectively.
Deferred taxes are recorded based upon differences between financial statement
and tax bases of assets and liabilities. The following deferred taxes and
balance sheet classifications are recorded as of August 31, 2000 and 1999:
Deferred tax assets (liabilities): 2000 1999
------- -------
Accounts receivable $ 285 $ 68
Inventories 1,668 1,081
Marketable securities 2,513 2,798
Property, plant and equipment (6,503) (5,480)
Intangible assets 7,737 5,712
Accrued liabilities (2,701) (1,915)
Accrued compensation 702 682
Postretirement benefits other than pensions 4,004 3,810
------- -------
$ 7,705 $ 6,756
======= =======
Balance Sheet classification:
Current deferred tax assets $ 3,131 $ 2,018
Non-current deferred tax assets 4,574 4,738
------- -------
$ 7,705 $ 6,756
======= =======
The sources of significant temporary differences which gave rise to deferred
taxes and their effects were as follows:
2000 1999 1998
------- ------- -------
Accounts receivable $ 217 $ 379 $ (604)
Depreciation and amortization (1,023) 1,261 (4,075)
Marketable securities (285) 569 804
Common stock issued
to employees 15 (70) (66)
Accrued vacation pay 5 14 (55)
Inventories 586 (646) (99)
Postretirement benefits
and other liabilities (591) (656) 484
Intangible assets 1,806 1,587 4,673
Other 219 (180) (54)
------- ------- -------
$ 949 $ 2,258 $ 1,008
======= ======= =======
Continued
(47)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
11. Income Taxes (Continued):
The following is a reconciliation of the statutory federal income tax rate to
the Company's effective tax rate expressed as a percentage of income from
operations before income taxes:
2000 1999 1998
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 1.8 2.1 4.8
Foreign statutory tax rates differential 1.2 .6 .7
Foreign sales corporation (3.2) (2.8) (6.2)
Research and development tax credit -- (1.0) (1.3)
Goodwill amortization -- -- 32.7
Other (1.3) 1.6 3.2
---- ---- ----
Effective tax rate 33.5% 35.5% 68.9%
==== ==== ====
12. Retirement Benefits:
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" does not change the measurement or recognition of those plans, but
revises disclosures about pensions and other postretirement benefit plans. The
Company adopted SFAS No. 132 in fiscal 1999. Restatement of disclosures for the
prior years have been made for comparative purposes.
Pension Plans:
The Company has three noncontributory pension plans that cover substantially all
employees. Benefits under the plans are based upon an employee's compensation
and years of service and, where applicable, the provisions of negotiated labor
contracts. It is the Company's policy to make contributions to these plans
sufficient to meet the minimum funding requirements of applicable laws and
regulations plus such additional amounts, if any, as the Company's actuarial
consultants advise to be appropriate. The projected unit credit method is
utilized for determination of actuarial amounts.
As discussed in Note 5, Related Party Transactions, the Company assumed certain
pension obligations of Precision, which is related to the Company through common
ownership, in exchange for the transfer by Precision to the Company of
appropriate assets to satisfy such obligations. Consequently, Precision's two
pension plans, both of which were overfunded as of the date of the transaction,
were merged with the Company's pension plans covering comparable employees. The
Company paid Precision $2,975, the amount by which the value of Precision's
pension plan assets exceeded the actuarially determined present value of
Precision's pension plan obligations. The payment exceeded the prepaid pension
asset recorded on Precision's financial statements by $2,071. This difference
("Plan acquisition differential") is being amortized over an actuarially
determined period.
Plan assets consist principally of U.S. government securities, short-term
investments, other equity securities and cash equivalents.
Continued
(48)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
12. Retirement Benefits (Continued):
Postretirement Benefits Other Than Pensions:
The Company provides limited amounts of postretirement health and life insurance
benefit plan coverage for some of its employees. The determination of
postretirement benefit cost for postretirement health benefit plans is based on
comprehensive hospital, medical, surgical, and dental benefit provisions. The
determination of postretirement benefit cost for postretirement life insurance
benefits is based on stated policy amounts.
As discussed in Note 5, Related Party Transactions, the Company assumed certain
postretirement benefit obligations of Precision, which is related to the Company
through common ownership, in exchange for the transfer by Precision to the
Company of appropriate assets to satisfy such obligations. Consequently,
Precision's postretirement benefit plan, which was unfunded as of the date of
the transaction, was merged with the Company's postretirement plan covering
comparable employees. Precision paid the Company $757, the actuarially
determined present value of Precision's postretirement benefit plan obligations.
The payment exceeded the postretirement benefit liability recorded on
Precision's financial statements by $607. The Plan acquisition differential is
being amortized over an actuarially determined period.
The following summarizes the Company's benefit obligations, changes in plan
assets and funded status:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
August 31, August 31,
2000 1999 2000 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 39,626 $ 40,898 $ 7,696 $ 7,856
Service cost 2,209 2,122 311 307
Interest cost 2,982 2,815 687 546
Plan participants' contributions -- -- -- --
Amendments 2,447 -- -- --
Actuarial (gain) loss (88) (4,665) 1,170 (673)
Acquisition -- -- -- --
Benefits paid (1,694) (1,544) (277) (340)
-------- -------- ------- -------
Benefit obligation at end of year $ 45,482 $ 39,626 $ 9,587 $ 7,696
======== ======== ======= =======
Change in plan assets:
Fair value of plan assets at beginning
of year $ 60,755 $ 46,646 $ -- $ --
Actual return on plan assets 8,406 13,507 -- --
Acquisitions -- -- -- --
Employer contributions 2,256 2,146 277 340
Plan participants' contributions -- -- -- --
Benefits paid (1,694) (1,544) (277) (340)
-------- -------- ------- -------
Fair value of plan assets at end of year $ 69,723 $ 60,755 $ 0 $ 0
======== ======== ======= =======
</TABLE>
Continued
(49)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
12. Retirement Benefits (Continued):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
August 31, August 31,
2000 1999 2000 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Funded status $ 24,240 $ 21,129 $ (9,587) $(7,696)
Unrecognized net actuarial (gain) loss (20,307) (19,395) (514) (1,684)
Unrecognized prior service cost 6,985 4,875 (627) (711)
Unrecognized transition obligation (asset) (618) (724) 729 778
Unrecognized plan acquisition differential 1,622 1,771 (520) (549)
-------- -------- -------- -------
Prepaid (accrued) benefit cost $ 11,922 $ 7,656 $(10,519) $(9,862)
======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
August 31, August 31,
Weighted-average assumptions as of 2000 1999 1998 2000 1999 1998
------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.75% 7.75% 7.00% 7.75% 7.75% 7.00%
Expected return on plan assets 11.00% 9.50% 9.50% N/A N/A N/A
Rate of compensation increase 4.00% 4.00% 4.00% N/A N/A N/A
Health care cost trend rate:
Initial trend rate N/A N/A N/A 9.00% 6.50% 7.00%
Ultimate trend rate N/A N/A N/A 5.00% 5.00% 5.00%
Years until ultimate trend is reached N/A N/A N/A 8 9 10
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
Components of net periodic (benefit) August 31, August 31,
cost for the fiscal years ended 2000 1999 1998 2000 1999 1998
------- ------- ------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 2,209 $ 2,122 $ 2,118 $ 311 $ 307 $ 271
Interest cost 2,982 2,815 2,768 687 546 534
Expected return on plan assets (6,711) (4,415) (4,382) -- -- --
Amortization of prior service costs 338 347 347 (84) (84) (84)
Amortization of transition obligation (asset) (107) (107) (107) 49 49 49
Amortization of net actuarial (gain) loss (872) (94) (403) -- (3) (25)
Plan acquisition differential 150 149 149 (29) (29) (29)
------- ------- ------- ----- ----- -----
Net periodic (benefit) cost $(2,011) $ 817 $ 490 $ 934 $ 786 $ 716
======= ======= ======= ===== ===== =====
</TABLE>
Continued
(50)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
12. Retirement Benefits (Continued):
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care costs trend rates would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest
cost components $ 91 $ (69)
Effect on postretirement benefit obligation $711 $(384)
Savings Plan:
The Company has a defined contribution savings plan that covers substantially
all of its eligible U.S. employees. The purpose of the plan is generally to
provide additional financial security to employees during retirement.
Participants in the savings plan may elect to contribute, on a before-tax basis,
a certain percent of their annual earnings with the Company matching a portion
of these contributions. Expense under the plan was $977, $896 and $838 for
fiscal 2000, 1999 and 1998, respectively.
13. Segment Reporting:
The Company operates as a single reportable segment. The Company operates in
four main geographic regions, therefore, information about products and
geographic areas is presented below.
Continued
(51)
<PAGE>
13. Segment Reporting (Continued):
The following table provides information about the Company's sales by product:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------ ------------------------ -------------------------
Critical Cardiac Critical Cardiac Critical Cardiac
Care Care Care Care Care Care
----------- -------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales to external
customers $ 264,800 $ 55,500 $ 241,000 $ 54,946 $ 218,100 $ 42,790
</TABLE>
The following tables presents information about geographic areas:
<TABLE>
<CAPTION>
2000
----------------------------------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
----------- -------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 242,824 $ 40,616 $ 27,597 $ 9,303 $ -- $ 320,340
Long-lived assets at
August 31 $ 255,871 $ 4,456 $ 29,566 $ 2,566 $ (90,870) $ 201,589
<CAPTION>
1999
----------------------------------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
----------- -------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 225,369 $ 34,514 $ 27,721 $ 8,342 $ 295,946
Long-lived assets at
August 31 $ 240,350 $ 1,740 $ 26,884 $ 2,047 $ (84,902) $ 186,119
<CAPTION>
1998
----------------------------------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
----------- -------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 201,561 $ 28,270 $ 24,014 $ 7,045 -- $ 260,890
Long-lived assets at
August 31 $ 214,111 $ 1,303 $ 26,935 $ 1,772 $ (76,885) $ 167,236
</TABLE>
Export sales from domestic operations to unaffiliated customers were $37,784,
$33,741 and $32,066 for fiscal 2000, 1999 and 1998, respectively.
Continued
(52)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
14. Financial Instruments:
During fiscal 2000 and 1999, the percentage of the Company's sales invoiced in
currencies other than U.S. dollars was 24.2% and 23.8%, respectively. In
addition, a small part of the Company's cost of goods sold is denominated in
foreign currencies. The Company enters into foreign currency forward contracts,
which are derivative financial instruments, with major financial institutions to
reduce the effect of these foreign currency risk exposures, primarily on U.S.
dollar cash inflows resulting from the collection of intercompany receivables
denominated in foreign currencies. Such transactions occur throughout the year
and are probable, but not firmly committed. Forward contracts are marked to
market each accounting period, and the resulting gains or losses on these
contracts are recorded in Other Income / Expense of the consolidated statements
of income. Realized gains and losses on these contracts are offset by the
assets, liabilities and transactions being hedged. The Company does not use
financial instruments for trading or speculative purposes. The Company expects
to continue to utilize foreign currency exchange contracts to manage its
exposure, although there can be no assurance that the Company's efforts in this
regard will be successful.
Operations of the Company are also exposed to, in the normal course of business,
fluctuations in interest rates. This interest rate risk exposure results from
changes in short-term U.S. dollar interest rates. In fiscal 1998, the Company
entered into an interest rate swap to reduce the impact of its floating rate
debt. The swap agreement allowed the Company to exchange floating rates for
fixed interest payments over the life of the agreement. The differential was
accrued as interest rates changed and was recorded as interest expense. The
effect of the agreement was to limit interest rate exposure to 5.62% on $5.0
million of the Company's revolving credit. The agreement was terminated on
August 31, 1999. As a result of the swap agreement, interest expense was
increased by $27 for the year ended August 31, 1999. The termination of the swap
agreement resulted in a $55 gain for fiscal 1999.
The Company's exposure to credit risk consists principally of trade receivables.
Hospitals and international dealers account for a substantial portion of trade
receivables and collateral is generally not required. The risk associated with
this concentration is limited due to the Company's on-going credit review
procedures.
At August 31, 2000, the Company had forward exchange contracts to sell foreign
currencies which mature at various dates through December 2000. The following
table identifies forward exchange contracts to sell foreign currencies at August
31, 2000 and 1999 as follows:
<TABLE>
<CAPTION>
August 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 $2,813 $ 2,766 $ 5,698 $ 5,855
French francs -- -- -- --
Spanish pesetas -- -- -- --
Canadian dollars 1,586 1,597 1,115 1,108
Greek drachmas 2,091 2,104 1,571 1,603
Mexican peso 2,115 2,173 1,012 1,064
African rand 923 932 1,270 1,314
------ ------- ------- -------
$9,528 $ 9,572 $10,666 $10,944
====== ======= ======= =======
</TABLE>
Continued
(53)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
15. Contingencies:
The Company is a party to certain legal actions including product liability
matters, arising in the ordinary course of its business. From time to time, the
Company is subject to legal actions involving patent and other intellectual
property claims. The Company is currently a party to two unrelated lawsuits
involving alleged infringement by third parties of patents owned by the Company
relating to its IAB catheter and constant flow delivery pump products. The
Company is also a defendant in two related lawsuits alleging that certain of its
hemodialysis catheter products infringe patents owned by a third party. Based
upon information presently available to the Company, the Company believes it has
valid and enforceable legal rights and/or adequate legal defenses with respect
to these actions. Although the ultimate outcome of these actions is not expected
to have a material adverse effect on the Company's business or financial
condition, whether an adverse outcome in any one or more of these actions would
materially adversely effect the Company's reported results of operations in any
future period cannot be predicted with certainty.
16. New Accounting Standards:
FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (as
amended by FAS 137) establishes new procedures for accounting for derivatives
and hedging activities and supersedes and amends a number of existing standards.
The statement requires recognition of derivatives in the Statement of Financial
Position, measured at fair value. Gains or losses resulting from changes in the
value of derivatives would be accounted for, depending on the intended use of
the derivative and whether it qualifies for hedge accounting.
The Company will adopt the standard, effective September 1, 2000. The transition
adjustment resulting from implementation of this new standard will not have a
material effect on the Company as this statement retains the provisions of
Statement of Accounting Standards No. 52 "Foreign Currency Translation" with
respect to long-term and short-term intercompany transactions eliminating the
need for special accounting. The Company does not use hedge accounting.
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 2001. The Company is currently evaluating the
impact SAB 101 will have on its financial statements, if any.
Continued
(54)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
17. Summary of Quarterly Results (unaudited):
Quarterly financial results for the year ended August 31, 2000 are as follows:
Quarter
-----------------------------------------
11-30-99 2-28-00 5-31-00 8-31-00
-------- ------- ------- -------
Net sales $76,717 $80,601 $81,290 $81,732
Cost of goods sold 35,337 37,830 38,485 38,771
------- ------- ------- -------
Gross profit 41,380 42,771 42,805 42,961
Operating expenses
Research, development
and engineering 5,371 4,753 5,369 4,278
Selling, general and
administrative 18,243 18,876 18,392 19,720
Special charges* 3,320 -- -- --
Operating income 14,446 19,142 19,044 18,963
Other expenses (income) 474 617 180 874
Income before income
taxes 13,972 18,525 18,864 18,089
Provision for income taxes 4,750 6,299 6,414 5,803
Net income $ 9,222 $12,226 $12,450 $12,286
Basic earnings
per common share $ 0.40 $ 0.54 $ 0.56 $ 0.56
Diluted earnings
per common share $ 0.40 $ 0.54 $ 0.56 $ 0.55
Weighted average common
shares outstanding (000's) 22,899 22,540 22,273 22,088
* In the first quarter of fiscal 2000, the Company recorded a special charge
(See Note 2, "Special Charges").
Continued
(55)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
17. Summary of Quarterly Results (unaudited) (Continued):
Quarterly financial results for the year ended August 31, 1999 are as follows:
Quarter
-------------------------------------------
11-30-98 2-28-99 5-31-99 8-31-99
-------- -------- -------- -------
Net sales $ 68,085 $ 74,274 $ 75,865 $77,722
Cost of goods sold 31,036 35,625 35,908 36,672
-------- -------- -------- -------
Gross profit 37,049 38,649 39,957 41,050
Operating expenses
Research, development
and engineering 5,311 5,440 4,988 4,596
Selling, general and
administrative 16,855 17,369 17,813 19,394
Special charges* -- 4,139 -- 8,680
Operating income 14,883 11,701 17,156 8,380
Other expenses (income) (1,092) (1,377) (776) 24
Income before income
taxes 15,975 13,078 17,932 8,356
Provision for income taxes 5,831 4,773 6,545 2,497
Net income $ 10,144 $ 8,305 $ 11,387 $ 5,859
Basic and diluted
earnings
per common share $ 0.44 $ 0.36 $ 0.49 $ 0.25
Weighted average common
shares outstanding (000's) 23,225 23,224 23,201 23,131
* In the second and fourth quarters of fiscal 1999, the Company recorded
special charges (See Note 2, "Special Charges").
Continued
(56)
<PAGE>
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
18. Earnings per Share:
The following is a reconciliation of weighted average common shares outstanding
to weighted average common shares outstanding assuming dilution used in the
calculation of earnings per share for the fiscal years ended August 31, 2000,
1999 and 1998:
2000 1999 1998
---------- ---------- ----------
Average common shares outstanding 22,450,581 23,195,115 23,224,780
Common shares issuable(1) 68,347 0 925
---------- ---------- ----------
Average common shares
outstanding assuming dilution 22,518,928 23,195,115 23,225,705
(1) Issuable primarily under stock option plans.
Stock options outstanding to purchase 734,363, 808,300 and 335,760 shares of
common stock were not included in the computation of earnings per common share
assuming dilution because the options' exercise prices were greater than the
average market price of the Company's common stock at August 31, 2000, 1999 and
1998, respectively.
(57)
<PAGE>
SCHEDULE II
ARROW INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(Column A) (Column B) (Column C) (Column D) (Column E)
---------- ---------- ---------- ---------- ----------
Additions
------------------------
Charges / Charged
Balance at (Credits) to to Other Balance at
Beginning Cost and Accounts Deductions End
Description of Period Expenses (Describe) (Describe)(1) of Period
------------ --------- ------------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
For the year ended August 31, 1998:
Accounts receivable:
Allowance for doubtful accounts $ 855 $ 116 -- $ 203 $ 768
========= ============ ========== ============= ==========
For the year ended August 31, 1999:
Accounts receivable:
Allowance for doubtful accounts $ 768 $ 440 -- $ 376 $ 832
========= ============ ========== ============= ==========
For the year ended August 31, 2000:
Accounts receivable:
Allowance for doubtful accounts $ 832 $ 508 -- $ 328 $ 1,012
========= ============ ========== ============= ==========
</TABLE>
(1) Deductions represent write-off of accounts receivable.
(58)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
------- ----------- ----------------
<S> <C> <C>
3.1 Restated Articles of Incorporation of Incorporated by reference from
the Company. Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal
year ended August 31, 1992
3.2 By-laws of the Company, as amended Incorporated by reference from
and restated. Exhibit 3.4 to the Company's
Registration Statement on Form S-1
File No. 33-47163 ("Registration
Statement")
4.1 Form of Common Stock certificate. Incorporated by reference from
Exhibit 4.1 to the Company's
Registration Statement
10.1 1992 Stock Incentive Plan. Incorporated by reference from
Exhibit 10.1 to the Company's
Registration Statement
10.2 Investment Plan - 401(k). Incorporated by reference from
Exhibit 10.2 to the Company's
Registration Statement
10.3.1 Amended and Restated Retirement Incorporated by reference from
Plan for Salaried Employees of the Exhibit 10.3 to the Company's
Company, effective September 1, 1989. Registration Statement
10.3.2 Amended and Restated Retirement Incorporated by reference from
Plan for Salaried Employees of the Exhibit 10.3.2 to the Company's
Company, effective September 1, 1989, Annual Report on Form 10-K for
as amended. the year ended August 31, 1993
(the "1993 Form 10-K")
10.4 Amended and Restated Restricted Incorporated by reference from
Stock Bonus Plan. Exhibit 10.4 to the Company's
Registration Statement
10.5 Split Dollar Life Insurance Incorporated by reference from
Agreements, dated December 16, Exhibit 10.5 to the Company's
1991, between the Company and Registration Statement
James H. Miller, as Trustee under the
provisions of a certain Irrevocable
Trust Agreement with Marlin Miller, Jr.
dated December 13, 1991.
10.6 Split Dollar Life Insurance Agreements, Incorporated by reference from
dated December 16, 1991, between the Exhibit 10.6 to the Company's
Company and Raymond Neag Registration Statement
Irrevocable Trust, dated October 11,
1991, Evelyn Neag, Trustee.
</TABLE>
(59)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
------- ----------- ----------------
<S> <C> <C>
10.7 Split Dollar Life Insurance Agreements, Incorporated by reference from
dated December 16, 1991, between Exhibit 10.7 to the Company's
the Company and Robert E. Gedney, Registration Statement
as Trustee under the provisions of a
certain Irrevocable Trust Agreement
with John H. Broadbent, Jr. dated
December 13, 1991.
10.8 Split Dollar Life Insurance Incorporated by reference from
Agreements, dated December 16, Exhibit 10.8 to the Company's
1991 between the Company and Registration Statement
Donald M. Mewhort, as Trustee
under Agreement of Trust dated
October 8, 1991, created by
T. Jerome Holleran, Settlor (the
"Holleran Split Dollar Life Insurance
Agreements").
10.8.1 Assignment, dated April 24, Incorporated by reference
1992, of the rights and obligations from Exhibit 10.8.1 to the
under the Holleran Split Dollar Life Company's Registration Statement
Insurance Agreements from the
Company to Arrow Precision Products,
Inc.
10.9 License Agreement, dated October 23, Incorporated by reference from
1981, between Dr. Ketan Shevde and Exhibit 10.9 to the Company's
the Company. Registration Statement
10.10 License Agreement, dated January Incorporated by reference from
18, 1992, between Innovation Exhibit 10.10 to the Company's
Associates, Inc. and the Company. Registration Statement
10.11 License Agreement, dated March 28, Incorporated by reference
1991, between Daltex Medical from Exhibit 10.11 to the
Sciences, Inc. and the Company. Company's Registration Statement
10.11.1 Modification Agreement, dated Incorporated by reference
October 25, 1995, to License Exhibit 10.11.1. to the Company's
Agreement between Daltex Medical Form 10-Q for the third quarter
Sciences, Inc. and the Company period ended May 31, 1997
10.11.2 Second Modification Agreement, Incorporated by reference
dated May 30, 1997, to License from Exhibit 10.11.2 to the
Agreement between Daltex Medical Company's Form 10-Q for the third
Sciences, Inc. and the Company. quarter period ended May 31, 1997
10.12 Agreement and Compromise Incorporated by reference
and Release, dated November from Exhibit 10.12 to the Company's
30, 1988, between Michael A. Registration Statement
Berman, Critikon, Inc. and the
Company.
</TABLE>
(60)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
------- ----------- ----------------
<S> <C> <C>
10.13 License Agreement, dated Incorporated by reference from
April 15, 1982, between Dr. Exhibit 10.13 to the Company's
Randolph M. Howes and the Registration Statement
Company, as amended pursuant
to the Addendum to License
Agreement, dated August 26, 1986,
among Dr. Randolph M. Howes,
Janice Kinchen Howes and the
Company, and the Second
Addendum to License Agreement,
dated October 9, 1990, among Dr.
Randolph M. Howes, Janice Kinchen
Howes, Baham & Anderson and
the Company.
10.14 License Agreement, dated September Incorporated by reference from
16, 1988, between J. Daniel Raulerson Exhibit 10.14 to the Company's
and the Company, as amended pursuant Registration Statement
to Addendum to License Agreement,
dated November 27, 1989, between J.
Daniel Raulerson and the Company.
10.15 License Agreement, dated February 24, Incorporated by reference from
1984, between Blair Medical Products, Exhibit 10.15 to the Company's
Inc. and the Company. Registration Statement
10.16 Stock Purchase Agreement, dated Incorporated by reference from
October 24, 1990, among Robert E. Exhibit 10.16 to the Company's
Fischell, Standard Associates, Registration Statement
Cymed Ventures, Inc., Arrow
International Investment Corp. and the
Company.
10.17 License Agreement, dated Incorporated by reference from
October 24, 1990, between Medical Exhibit 10.17 to the Company's
Innovative Technologies R&D Limited Registration Statement
Partnership and the Company.
10.18 Research and Development Agreement, Incorporated by reference from Exhibit
dated October 24, 1990, between Medical 10.18 to the Company's Registration
Innovative Technologies R&D Limited Statement
Partnership and the Company.
10.19 License Agreement, dated February 24, Incorporated by reference from Exhibit
1992, between Cathco, Inc. and the 10.19 to the Company's Registration
Company. Statement
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
--------- ----------- ----------------
<S> <C> <C>
10.20 Settlement Agreement, dated September 30, Incorporated by reference from Exhibit 10.20
1991, among Dr. Randolph M. Howes, Janice to the Company's Registration Statement
Kinchen Howes, Baham & Anderson, the Company
and Baxter Health Care Corporation and
related License Agreement, dated September
30, 1991, among Dr. Randolph M. Howes, Janice
Kinchen Howes, Baham & Anderson, the Company
and Baxter Health Care Corporation.
10.21 Agreement dated August 7, 2000 between the Filed with this report
Company and United Steelworkers of America
AFL/CIO Local 8467.
10.22 Extension of Lease Agreement between Indian Incorporated by reference from Exhibit 10.22
Mills Associates and the Company, dated to the Company's Registration Statement
December 4, 1991, extending the Lease, dated
February 5, 1988, between Lyco Associates and
the Company.
10.23.1 Amended and Restated Retirement Plan for Incorporated by reference from Exhibit 10.23
Hourly-Rated Employees of the Wyomissing to the Company's Registration Statement
Plant of the Company, effective September 1,
1989.
10.23.2 Amended and Restated Retirement Plan for Incorporated by reference from Exhibit 10.23.2
Hourly-Rated Employees of the Wyomissing to the Company's 1993 Form 10-K
Plant of the Company, effective September
1,1989, as amended.
10.24.1 Amended and Restated Retirement Plan for Incorporated by reference from Exhibit 10.24
Hourly-Rated Employees of the North Carolina to the Company's Registration Statement
and New Jersey Plants of the Company,
effective September 1, 1989.
10.24.2 Amended and Restated Retirement Plan for Incorporated by reference from Exhibit
Hourly-Rated Employees of the North Carolina 10.24.2 to the Company's 1993 Form 10-K
and New Jersey Plants of the Company,
effective September 1, 1989, as amended.
10.25.1 Loan Agreement, dated January 3, 1986, among Incorporated by reference from Exhibit
the Company, Arrow Medical Products, Limited, 10.25.1 to the Company's Registration
Arrow International Export Corporation, and Statement
Hamilton Bank.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
--------- ----------- ----------------
<S> <C> <C>
10.25.2 First Amendment to Loan Agreement, dated Incorporated by reference from Exhibit
March 18, 1987, among the Company, Arrow 10.25.2 to the Company's Registration
Medical Products, Limited, Arrow Statement
International Export Corporation, and
Hamilton Bank.
10.25.3 Second Amendment to Loan Agreement, dated Incorporated by reference from Exhibit
March 31, 1988, among the Company, Arrow 10.25.3 to the Company's Registration
Medical Products, Limited, Arrow Statement
International Export Corporation, and
Hamilton Bank.
10.25.4 Third Amendment to Loan Agreement, dated Incorporated by reference from Exhibit
March 31, 1989, among the Company, Arrow 10.25.4 to the Company's Registration
Medical Products, Limited, Arrow Statement
International Export Corporation, and
Hamilton Bank.
10.25.5 Fourth Amendment to Loan Agreement, dated Incorporated by reference from Exhibit
March 30, 1990, among the Company, Arrow 10.25.5 to the Company's Registration
Medical Products, Limited, Arrow Statement
International Export Corporation, and
Hamilton Bank.
10.25.6 Fifth Amendment to Loan Agreement, dated Incorporated by reference from Exhibit
March 1, 1991, among the Company, Arrow 10.25.6 to the Company's Registration
Medical Products, Limited, Arrow Statement
International Export Corporation, and
Hamilton Bank.
10.25.7 Sixth Amendment to Loan Agreement, dated July Incorporated by reference from Exhibit
15, 1991, among the Company, Arrow Medical 10.25.7 to the Company's Registration
Products, Limited, Arrow International Export Statement
Corporation, and Hamilton Bank.
10.25.8 Seventh Amendment to Loan Agreement, dated Incorporated by reference from Exhibit
September 6, 1991, among the Company, Arrow 10.25.8 to the Company's Registration
Medical Products, Limited, Arrow International Statement
Export Corporation, and Hamilton Bank.
10.25.9 Eighth Amendment to Loan Agreement, dated Incorporated by reference from Exhibit
February 21, 1992, among the Company, Arrow 10.25.9 to the Company's Registration
Medical Products, Limited, Arrow International Statement
Export Corporation, and Hamilton Bank.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
--------- ----------- ----------------
<S> <C> <C>
10.25.10 Letters of Amendment, dated April 10, 1992, Incorporated by reference from Exhibit
and May 19, 1992, to Loan Agreement between 10.25.17 to the Company's Registration
the Company and Hamilton Bank. Statement
10.25.11 Ninth Amendment to Loan Agreement, dated May Incorporated by reference from Exhibit
27, 1992, among the Company, Arrow Medical 10.25.18 to the Company's Registration
Products, Limited, Arrow International Export Statement
Corporation, and Hamilton Bank.
10.25.12 Letter Agreement, dated February 25, 1993, Incorporated by reference from Exhibit
among the Company, Arrow Medical Products, 10.25.12 to the 1994 Form
Limited, Arrow International Export 10-K
Corporation, and CoreStates Hamilton Bank,
and Note relating thereto.
10.25.13 Letter Agreement, dated January 31, 1994, Incorporated by reference from Exhibit
among the Company, Arrow Medical Products, 10.25.13 to the 1995 Form
Limited, Arrow International Export 10-K
Corporation, and CoreStates Hamilton Bank,
and Note relating thereto.
10.25.14 Letter Agreement, dated March 6, 1995, among Incorporated by reference from Exhibit
the Company, Arrow Medical Products, Limited, 10.25.14 to the 1995 Form
Arrow International Export Corporation, and 10-K
CoreStates Hamilton Bank, and Note relating
thereto.
10.25.15 Letter Agreement, dated November 14, 1995, Incorporated by reference from Exhibit
among the Company, Arrow Medical Products, 10.25.15 to the 1995 Form
Limited, Arrow International Export 10-K
Corporation, and CoreStates Hamilton Bank,
and Note relating thereto.
10.25.16 Letter Agreement, dated February 23, 1996, Incorporated by reference from Exhibit
among the Company, Arrow Medical Products, 10.25.16 to the Company's Form 10-Q for the
Limited, Arrow International Export second quarter period ended February 29, 1996
Corporation, and CoreStates Hamilton Bank,
and Note relating thereto.
10.25.17 Letter Agreement, dated January 29, 1996 Incorporated by reference from Exhibit
among the Company and First Union National 10.25.17 to the Company's Form 10-Q for the
Bank, and note relating thereto. second quarter period ended February 29, 1996
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
--------- ----------- ----------------
<S> <C> <C>
10.25.18 Letter Agreement, dated July 11, 1996, among Incorporated by reference from Exhibit
the Company, Arrow Medical Products, Limited, 10.25.18 to the Company's Annual Report on
Arrow International Export Corporation, and Form 10-K for the fiscal year ended August
CoreStates Hamilton Bank, and Note relating 31, 1996 (the "1996 Form 10-K")
thereto.
10.26.1 Installment Sale Agreement between Berks Incorporated by reference from Exhibit
County Industrial Development Authority and 10.25.10 to the Company's Registration
the Company, dated as of December 1, 1988. Statement
10.26.2 Indenture of Trust between Berks County Incorporated by reference from Exhibit
Industrial Development Authority and Bankers 10.25.11 to the Company's Registration
Trust Company, as trustee, dated as of Statement
December 1, 1988.
10.26.3 Irrevocable Direct Pay Letter of Credit, Incorporated by reference from Exhibit
dated December 28, 1988, issued for the 10.25.12 to the Company's Registration
benefit of Bankers Trust Company, as trustee Statement
under the Indenture of Trust, for the account
of the Company.
10.26.4 Letter of Credit Note from the Company Incorporated by reference from Exhibit
payable to the order of Hamilton Bank, dated 10.25.13 to the Company's Registration
December 28, 1988. Statement
10.26.5 Letter of Credit Reimbursement Agreement Incorporated by reference from Exhibit
between the Company and Hamilton Bank, dated 10.25.14 to the Company's Registration
as of December 1, 1988. Statement
10.26.6 Accommodation Mortgage, Security Agreement Incorporated by reference from Exhibit
and Second Assignment of Installment Sale 10.25.15 to the Company's Registration
Agreement, dated as of December 15, 1988, by Statement
and among Berks County Industrial Development
Authority, the Company and Hamilton Bank.
10.27 Variable Amount Grid Note Agreement, dated Incorporated by reference from Exhibit
May 8, 1991, between the Company and First 10.25.16 to the Company's Registration
Union National Bank. Statement
10.28 Purchase Agreement, dated January 20, 1984, Incorporated by reference from Exhibit 10.26
between the Company and Arrow Research to the Company's Registration Statement
Partners.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
--------- ----------- ----------------
<S> <C> <C>
10.29 Form of Research and Development Agreement, Incorporated by reference from Exhibit 10.27
dated August 2, 1982, between the Company and to the Company's Registration Statement
Arrow Research Partners.
10.30 Arrow International, Inc. Profit Sharing Plan Incorporated by reference from Exhibit 10.30
to the Company's Registration Statement
10.31 Agreement, dated May 19, 1992, between the Incorporated by reference from Exhibit 10.32
Company and Arrow Precision Products, Inc. to the Company's Registration Statement
10.32 Agreement, dated September 22, 1993, among Incorporated by reference from Exhibit 10.32
Microwave Medical Systems, Inc., the Company to the Company's 1993 Form 10-K
and Kenneth L. Carr.
10.33 License and Exclusive Supply Agreement, dated Incorporated by reference from Exhibit 10.33
September 22, 1993, between Microwave Medical to the Company's 1993 Form 10-K
Systems, Inc. and the Company.
10.34 Stock Purchase Agreement, dated as of January Incorporated by reference from Exhibit 2 to
28, 1994 between Kontron Instruments Holding the Company's Current Report on Form 8-K
N.V. and the Company. filed with the Securities and Exchange
Commission on February 18, 1994
10.35 Loan Agreement, dated as of February 8, 1994, Incorporated by reference from Exhibit 10.35
among the Company, Arrow Medical Products, to the 1994 Form 10-K
Limited, Arrow International Export
Corporation, and CoreStates Hamilton Bank, and
Notes relating thereto.
10.36 Loan Agreement, dated February 8, 1994, between Incorporated by reference from Exhibit 10.36
the Company and First Union National Bank of to the 1994 Form 10-K
North Carolina, and Note relating thereto.
10.37 Loan Agreement between Arrow Japan KK and the Incorporated by reference from Exhibit 10.37
Bank of Tokyo (with English translation). to the Company's Current Report on Form 8-K
filed with the Securities and Exchange
Commission on April 10, 1995 ("the 1995 Form
8-K")
10.38 Thoratec Laboratories Corporation International Incorporated by reference from Exhibit 10.38
Medical Products Distributor Agreement, dated to the 1995 Form 8-K
as of January 19, 1995, between Thoratec
Laboratories Corporation and the Company.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
--------- ----------- ----------------
<S> <C> <C>
10.39 Series F Preferred Stock Purchase Agreement, Incorporated by reference from Exhibit
dated as of March 8, 1995, between Cardiac 10.39 to the 1995 Form 8-K
Pathways Corporation and the Company.
10.40 Manufacturing and Supply Agreement, dated as of Incorporated by reference from Exhibit
March 8, 1995, between Cardiac Pathways 10.40 to the 1995 Form 8-K
Corporation and the Company.
10.41 International Distributor Agreement, dated as of Incorporated by reference from Exhibit
March 8, 1995, between Cardiac Pathways 10.41 to the 1995 Form 8-K
Corporation and Arrow.
10.42 Purchase Agreement, dated as of April 7, 1995, Incorporated by reference from Exhibit
among the Company, TLP Acquisition Corp., Therex 10.39 to the 1995 Form 8-K
Corporation, Therex Limited Partnership Holding
Corporation and each of the other persons
signatory thereto.
10.43 Amendment, dated July 27, 1995, to License Incorporated by reference from Exhibit 10.43
Agreement, dated October 24, 1990, between to the 1995 Form 10-K
Medical Innovative Technologies R&D Limited
Partnership and the Company.
10.44 Amendment, dated July 27, 1995, to Research and Incorporated by reference from Exhibit 10.44
Development Agreement, dated October 24, 1990, to the 1995 Form 10-K
between Medical Innovative Technologies R&D
Limited Partnership and the Company.
10.45 Amended and Restated License Agreement dated May Incorporated by reference from Exhibit 10.45
24, 1996, between Microwave Medical Systems, to the Company's Form 10-Q for the third
Inc. and the Company. quarter period ended May 31, 1996
10.46 Loan Agreement, dated July 11,1996, between AMH Incorporated by reference from Exhibit 10.46
(Arrow Medical Holdings) B.V. and CoreStates to the 1996 Form 10-K
Bank, N.A., and Note relating thereto.
10.47 Directors Stock Incentive Plan Incorporated by reference from
Exhibit 10.47 to the 1996 Form 10-K
10.48 Purchase Agreement, dated June 1, 1996, between Incorporated by reference from
Arrow Tray Products, Inc. (formerly known as Exhibit 10.48 to the 1996 Form 10-K
Endovations, Inc.) and the Company.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit Method of Filing
--------- ----------- ----------------
<S> <C> <C>
10.49 Purchase Agreement, dated August 3, Incorporated by reference from Exhibit
1998, between Medical Parameters, Inc. 10.49 to the Company's Annual Report
and the Company. on Form 10-K for the fiscal year ended
August 31, 1999 (the "1999 Form 10-K")
10.50 Line of Credit Note, dated October 7, Incorporated by reference from Exhibit
1998, between the Company and First 10.50 to the 1999 Form 10-K
First Union National Bank.
10.51 Interest rate swap Agreement, dated Incorporated by reference from Exhibit
April 6, 1998 between the Company 10.51 to the 1999 Form 10-K
And CoreStates Bank, N.A.
10.52 Asset Purchase Agreement, dated Incorporated by reference from Exhibit
November 5, 1997, between Arrow 10.52 to the 1999 Form 10-K
Interventional, Inc., Boston Scientific
Corporation and IABP Corporation.
10.53 Mutual Release Agreement, dated July Incorporated by reference from Exhibit
20, 1998, between Arrow International, 10.53 to the 1999 Form 10-K
Inc. and Daltex Medical Sciences, Inc.
10.54 Exclusive License Agreement, dated Incorporated by reference from Exhibit
February 14, 1996 between Arrow 10.54 to the 1999 Form 10-K
International, Inc. and Israel Schur, M.D.
10.55 Directors Stock Incentive Plan Filed with this report
(As Amended on January 19, 2000)
10.56 1999 Stock Incentive Plan Filed with this report
18 Preferability Letter of Pricewaterhouse- Incorporated by reference from
Coopers LLP Exhibit 18 to the 1994 Form 10-K
21 Subsidiaries of the Company. Page 69 of this report
23 Consent of PricewaterhouseCoopers LLP Page 70 of this report
27* Financial Data Schedule EDGAR
99.1 Cautionary Statement for Purposes Page 71 of this report
of the Safe Harbor Provisions of the
Private Securities Litigation Reform
Act of 1995.
</TABLE>
* Not deemed filed for purposes of Section 11 of the Securities Act of 1933,
Section 18 of the Securities Exchange Act of 1934 and Section 323 of the
Trust Indenture Act of 1939 or otherwise subject to the liabilities of
such sections and not deemed part of any registration statement to which
such exhibit relates.
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<PAGE>
EXHIBIT 21
Subsidiaries of the Company
1. Arrow International Export Corporation, a U.S. Virgin Islands corporation.
2. Arrow International Investment Corp., a Delaware corporation.
3. Arrow Medical Products, Ltd., a Pennsylvania corporation, qualified to do
business in Canada.
4. Kontron Instruments, Inc., a California corporation.
5. Arrow-Japan K.K. (Arrow-Japan, Ltd., English translation), a company
organized under the laws of Japan.
6. Arrow Deutschland, Gmbh., a limited liability corporation organized under
the laws of Germany.
7. Arrow France S.A., a corporation organized under the laws of France.
8. Arrow Africa (Pty) Ltd., a corporation organized under the laws of South
Africa.
9. AMH (Arrow Medical Holdings) B.V., a corporation organized under the laws
of the Netherlands.
10. Arrow Holland Medical Products B.V., a corporation organized under the
laws of the Netherlands.
11. Arrow Iberia, S.A., a corporation organized under the laws of Spain.
12. Arrow Hellas A.E.E., a corporation organized under the laws of Greece.
13. Arrow Internacional de Mexico, S.A. de C.V., a corporation organized under
the laws of Mexico.
14. Arrow Internacional de Chihuahua, S.A. de C.V., a corporation organized
under the laws of Mexico.
15. Arrow International CR, a.s., a corporation organized under the laws of
the Czech Republic.
16. Therex Limited Partnership, a Delaware limited partnership.
17. Arrow Infusion, Inc., a Massachusetts corporation.
18. Arrow-Therex Corporation, a Delaware corporation.
19. Arrow Interventional, Inc., a Delaware corporation.
20. Arrow Slovensko s.r.o., a corporation organized under the laws of Slovakia
21. Medical Parameters, Inc., a Massachusetts corporation
22. Sometec, S.A.S.
23. Sometec, Inc.
24. Sometec Holdings, S.A.S.
(69)
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 333-15215 and 33-71568) of Arrow International,
Inc. of our report dated September 29, 2000 relating to the financial statements
and financial statement schedule, which appear in this Form 10-K. We also
consent to the references to us under the heading "Selected Financial Data" in
such Registration Statement.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 22, 2000
(70)
<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 with which this
Exhibit is filed and other filings with the Securities and Exchange Commission
(the "Commission"). In addition to such information in our Annual Report on Form
10-K and our other filings with the Commission, investors should consider the
following risk factors in evaluating us and our business, as well as in
reviewing forward-looking statements contained in our periodic reports filed
with the Commission and in oral statements made by our senior management. Our
actual results could differ materially from such forward-looking statements due
to material risks, uncertainties and contingencies, including, without
limitation, those set forth below.
Stringent Government Regulation
Our products are subject to extensive regulation by the Food and Drug
Administration (the "FDA") and, in some jurisdictions, by state, local and
foreign governmental authorities. In particular, we must obtain specific
clearance or approval from the FDA before we can market new products or certain
modified products in the United States. With the exception of one product, we
have, to date, obtained FDA marketing clearance for our products only through
the 510(k) premarket notification process. Certain of our products under
development, including the LionHeart(TM), our Left Ventricular Assist System,
and future applications, however, will require approval through the more
vigorous Premarket Approval application ("PMA") process. The process of
obtaining such clearances or approvals can be time consuming and expensive. We
cannot assure you that the FDA will grant all clearances or approvals sought by
us or that FDA review will not involve delays adversely affecting the marketing
and sale of our products. We are also required to adhere to applicable
regulations setting forth current Good Manufacturing Practices ("GMP") which
require that we manufacture our products and maintain our records in a
prescribed manner with respect to manufacturing, testing and control activities.
In addition, we are required to comply with FDA requirements for labeling and
promotion of our products. Failure to comply with applicable federal, state,
local or foreign laws or regulations could subject us to enforcement action,
including product seizures, recalls, withdrawal of clearances or approvals, and
civil and criminal penalties, any one or more of which could have a material
adverse effect on our business, financial condition and results of operations.
Many of the foreign countries where we conduct business have adopted medical
device laws and regulations with similar substantive and enforcement provisions.
Federal, state, local and foreign laws and regulations regarding the
development, manufacture and sale of medical devices are subject to future
changes. We cannot assure you that such changes will not have a material adverse
effect on our business, financial condition and results of operations.
Significant Competition and Continual Technological Change
The markets for medical devices are highly competitive. We currently
compete with many companies in the development and marketing of catheters and
related medical devices. Some of our competitors have access to greater
financial and other resources than us.
(71)
<PAGE>
Furthermore, the markets for medical devices are characterized by rapid
product development and technological change. Technological advances by one or
more of our current or future competitors could render our present or future
products obsolete or uneconomical. Our future success will depend upon our
ability to develop new products and technology to remain competitive with other
developers of catheters and related medical devices. Our business strategy
emphasizes the continued development and commercialization of new products and
the enhancement of existing products for the critical care and interventional
procedure markets. We cannot assure you that we will be able to continue to
successfully develop new products and to enhance existing products, to
manufacture these products in a commercially viable manner, to obtain required
regulatory approvals or to gain satisfactory market acceptance for our products.
Cost Pressures on Medical Technology and Proposed Health Care Reform
Our products are purchased principally by hospitals, hospital networks and
hospital buying groups. Although our products are used primarily for
non-optional medical procedures, we believe that the overall escalating cost of
medical products and services has led and will continue to lead to increased
pressures upon the health care industry to reduce the cost or usage of certain
products and services. In the United States, these cost pressures have led to
increased emphasis on the price and cost-effectiveness of any treatment regimen
and medical device. In addition, third party payors, such as governmental
programs, private insurance plans and managed care plans, which are billed by
hospitals for such health care services, are increasingly negotiating the prices
charged for medical products and services and may deny reimbursement if they
determine that a device was not used in accordance with cost-effective treatment
methods as determined by the payor, was experimental, unnecessary or used for an
unapproved indication. In international markets, reimbursement systems vary
significantly by country. Many international markets have government managed
health care systems that control reimbursement for certain medical devices and
procedures and, in most such markets, there also are private insurance systems
which impose similar cost restraints. We cannot assure you that hospital
purchasing decisions or government or private third party reimbursement policies
in the United States or in international markets will not adversely affect the
profitability of our products.
In recent years, several comprehensive health care reform proposals have
been introduced in the U.S. Congress. While none of these proposals have to date
been adopted, the intent of these proposals was, generally, to expand health
care coverage for the uninsured and reduce the rate of growth of total health
care expenditures. In addition, certain states have made significant changes to
their Medicaid programs and have adopted various measures to expand coverage and
limit costs. Implementation of government health care reform and other efforts
to control costs may limit the price of, or the level at which reimbursement is
provided for, our products. Several foreign countries have recently considered,
and in some countries adopted, similar reforms to limit the growth of health
care costs, including price regulation. We anticipate that Congress, state
legislatures, foreign governments and the private sector will continue to review
and assess alternative health care delivery and payment systems. We cannot
predict what additional legislation or regulation, if any, relating to the
health care industry may be enacted in the future or what impact the adoption of
any federal, state or foreign health care reform, private sector reform or
market forces may have on our business. We cannot assure you that any such
reforms will not have a material adverse effect on the medical device industry
in general, or on our business, in particular.
(72)
<PAGE>
Dependence on Patents and Proprietary Rights
We own numerous U.S. and foreign patents and have several U.S. and foreign
patent applications pending. We also have exclusive license rights to certain
patents held by third parties. These patents relate to aspects of the technology
used in certain of our products. From time to time, we are subject to legal
actions involving patent and other intellectual property claims. Successful
litigation against us regarding our patents or infringement of the patent rights
of others could have a material adverse effect on our business, financial
condition and results of operations. In addition, we cannot assure that pending
patent applications will result in issued patents or that patents issued to or
licensed-in by us will not be challenged or circumvented by competitors or found
to be valid or sufficiently broad to protect our technology or to provide it
with any competitive advantage. We also rely on trade secrets and proprietary
technology that we seek to protect, in part, through confidentiality agreements
with employees, consultants and other parties. We cannot assure you that these
agreements will not be breached, that we will have adequate remedies for any
breach, that others will not independently develop substantially equivalent
proprietary information or that third parties will not otherwise gain access to
our trade secrets.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical devices industry. Historically,
litigation has been necessary to enforce certain patent and trademark rights
held by us. Future litigation may be necessary to enforce patent and other
intellectual property rights belonging to us, to protect our trade secrets or
other know-how owned by us, or to defend ourself against claimed infringement of
the rights of others and to determine the scope and validity of our and others'
proprietary rights. Any such litigation could result in substantial cost to and
diversion of effort by us. Adverse determinations in any such litigation could
subject us to significant liabilities to third parties, require us to seek
licenses from third parties and prevent us from manufacturing, selling or using
certain of our products, any one or more of which could have a material adverse
effect on our business, financial condition and results of operations.
Risks Associated with International Operations
We generate significant sales outside the United States and are subject to
risks generally associated with international operations, such as unexpected
changes in regulatory requirements, tariffs, customs, duties and other trade
barriers, difficulties in staffing and managing foreign operations, longer
payment cycles, problems in collecting accounts receivable, political risks,
fluctuations in currency exchange rates, foreign exchange controls which
restrict or prohibit repatriation of funds, technology export and import
restrictions or prohibitions, delays from customs brokers or government agencies
and potentially adverse tax consequences resulting from operating in multiple
jurisdictions with different tax laws, any one or more of which could materially
adversely impact the success of our international operations. As our revenues
from international operations increase, an increasing portion of our revenues
and expenses will be denominated in currencies other than U.S. dollars and,
consequently, changes in exchange rates could have a greater effect on our
future operations. We cannot assure you that such factors will not have a
material adverse effect on our business, financial condition and results of
operations. In addition, we cannot assure you that laws or administrative
practices relating to regulation of medical devices, taxation, foreign exchange
or other matters of countries within which we operate will not change. Any such
change could also have a material adverse effect on our business, financial
condition and results of operations.
(73)
<PAGE>
Potential Product Liability
Our business exposes us to potential product liability risks which are
inherent in the testing and marketing of catheters and related medical devices.
Our products are often used in intensive care settings with seriously ill
patients. In addition, many of the medical devices manufactured and sold by us
are designed to be implanted in the human body for long periods of time and
component failures, manufacturing flaws, design defects or inadequate disclosure
of product-related risks with respect to these or other products manufactured or
sold by us could result in an unsafe condition or injury to, or death of, the
patient. The occurrence of such a problem could result in product liability
claims and/or a recall of, or safety alert relating to, one or more of our
products. We cannot assure you that the product liability insurance maintained
by us will be available or sufficient to satisfy all claims made against us or
that we will be able to obtain insurance in the future at satisfactory rates or
in adequate amounts. Product liability claims or product recalls in the future,
regardless of their ultimate outcome, could result in costly litigation and
could have a material adverse effect on our business or reputation or on our
ability to attract and retain customers for our products.
Risks Associated with Derivative Financial Instruments
As a partial hedge against adverse fluctuations in exchange rates, we
periodically enter into foreign currency exchange contracts with certain major
financial institutions. By their nature, all such contracts involve risk,
including the risk of nonperformance by counterparties. Accordingly, losses
relating to these contracts could have a material adverse effect upon our
business, financial condition and results of operations. Our policy prohibits
the use of derivative instruments for speculative purposes.
Dependence on Key Management
Our success depends upon the continued contributions of key members of our
senior management team, certain of who have been with us since our inception in
1975. Accordingly, loss of the services of one or more of these key members of
management could have a material adverse effect on our business. None of these
individuals has an employment agreement with us.
(74)
