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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, 1996
[ ] 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.)
3000 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)
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.[ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT AS OF NOVEMBER 1, 1996 WAS APPROXIMATELY $295,832,189.
THE NUMBER OF SHARES OF REGISTRANT'S COMMON STOCK OUTSTANDING ON
NOVEMBER 1, 1996 WAS 23,228,899.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR ITS ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON JANUARY 15, 1997, WHICH WILL BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS AFTER AUGUST 31, 1996,
ARE INCORPORATED BY REFERENCE IN PART III OF THIS REPORT.
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 care
medicine and interventional cardiology and radiology. 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 and emergency and trauma
physicians and other health care providers. Arrow's interventional
procedure products are used by interventional cardiologists,
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 82.2%, 82.2% and 84.2% of net sales in fiscal 1996,
1995 and 1994, respectively. The majority of these products are
vascular access catheters and related devices which consist principally
of the following: the Arrow-Howes trademark 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 trademark antiseptic surface
treatment that 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; and FlexTip Plus trademark epidural catheters,
which are designed to minimize indwelling complications associated with
conventional epidural catheters.
In April 1995, the Company expanded its critical care product line
by acquiring Therex Limited Partnership, a developmental stage
company ("Therex"), engaged in the development, manufacture and
marketing of 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 in connection with the treatment of
cancer, other chronic diseases and chronic pain. The Company received
FDA marketing clearance in March 1996 for its Model 3000 Constant
Flow Implantable Pump for the administration of the chemotherapy drug,
2-Deoxy 5-Flourouridine (FUDR), for the treatment of liver cancer.
Broader application of the pump for use with the drug, morphine, to
relieve pain is anticipated following FDA marketing clearance, which the
Company expects to receive in fiscal 1997. The pump is currently used
with morphine in certain international markets.
Arrow's interventional procedure products accounted for 17.5%,
17.6% and 15.2% of net sales in fiscal 1996, 1995 and 1994,
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; electrophysiology
products, such as pacing and mapping catheters, which are used
primarily to provide temporary pacing of the heart and to map the
electrical signals which activate the heart; the Berman trademark Angiographic
Catheter, which is used for pediatric cardiac angiographic procedures;
and other interventional procedure products, such as the Super Arrow-
Flex trademark sheath, which provides a kink-resistant passageway for the
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ITEM 1. BUSINESS (CONTINUED):
introduction of cardiac and other catheters into the vascular system. The
Company entered the interventional procedure market in 1987 through
the purchase of certain assets from Critikon, Inc. and, in February 1994,
expanded into the field of cardiac assist by acquiring the intra-aortic
balloon pump and catheter business of Kontron Instruments, Inc.
("Kontron Instruments").
In March 1995, the Company extended its line of electrophysiology
products by entering into agreements with Cardiac Pathways Corporation
("Cardiac Pathways") for certain distribution and manufacturing rights to
Cardiac Pathways' Trio/Ensemble trademark mapping catheter system and
Radii trademark radio frequency ablation catheters used for the diagnosis and
treatment of certain cardiac tachyarrhythmias (conditions involving
abnormal, potentially life-threatening electrical signals in the heart). For
the Trio/Ensemble trademark mapping catheter, the Company's distribution rights
are worldwide, with the exception of Japan and certain countries in
Europe, where Cardiac Pathways had distribution arrangements already
in place. For the Radii trademark radio frequency ablation catheter, the
Company has distribution rights in Germany. The Company received FDA
marketing clearance in December 1995 for the Trio/Ensemble trademark mapping
catheter system and currently sells this product in the U.S. In connection
with these agreements, the Company entered into an agreement with
Cardiac Pathways to purchase for $9.0 million preferred stock convertible
into approximately 9.5% of the then outstanding common stock of
Cardiac Pathways, which was paid in two equal installments in June and
December 1995. In connection with the initial public offering of Cardiac
Pathways' common stock in June 1996, the Company converted its
preferred stock into common stock of Cardiac Pathways representing
approximately 9.2% of the outstanding common stock of Cardiac
Pathways.
The Company received FDA marketing clearance in May 1996 for
its Narrow-Flex trademark reduced diameter (8 Fr.) intra-aortic balloon
catheter based on new, patented construction technology. The Company
believes this catheter is the smallest available with full 40cc balloon
augmentation capability, the same degree of heart pumping
augmentation that previously had been available only through the use of
larger diameter catheters. This smaller diameter catheter takes up less
space in the femoral artery than previously available catheters and,
therefore, is designed to improve blood circulation to the lower
extremities. Reduced blood flow to the leg is a major complication of
intra-aortic balloon pumping.
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 1996, 1995 and 1994, 61.8%, 64.3% and 69.1%,
respectively, of the Company's net sales were to U.S. customers. In this
market, approximately 78% of the Company's fiscal 1996 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 generates higher gross profit margins than sales
made through independent distributors.
Internationally, the Company sells its products through ten direct
sales subsidiaries serving markets in Japan, Germany, the Netherlands,
France, Spain, Greece, Africa, Canada, Mexico and the Czech Republic. As of
November 1, 1996, independent distributors in 58 additional countries service
the remainder of the world.
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ITEM 1. BUSINESS (CONTINUED):
To further promote growth in international sales, in August 1993,
the Company opened a 40,000 square foot manufacturing facility in
Chihuahua, Mexico to support marketing initiatives in Latin America and
other markets and, in January 1996, completed construction of a 65,000
square foot manufacturing and research facility in the Czech Republic,
which began shipments in the fourth quarter of fiscal 1996 to support the
growing European market.
Revenues, profitability and identifiable assets attributable to
significant geographic areas are presented in Note 16 to the Company's
Consolidated Financial Statements, included 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 is increasing 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 cannot predict what additional legislation or regulation, if any,
relating to the health care industry may be enacted in the future or what
impact the adoption of any federal, state or foreign health care reform,
private sector reform or market forces may have on its business. No
assurance can be given that any such reforms will not have a material
adverse effect on the medical device industry in general, or the Company
in particular.
RESEARCH AND PRODUCT DEVELOPMENT
Arrow is engaged in ongoing research and development to
introduce clinically advanced new products, to enhance the
effectiveness, ease of use, safety and reliability of its existing products
and to expand the clinical applications for which use of its products is
appropriate. The principal focus of the Company's research and
development effort is to identify and analyze the needs of physicians in
critical care medicine and interventional cardiology and radiology, 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 person's name
in the
(4)
ITEM 1. BUSINESS (CONTINUED):
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.
In addition, in recent years, the Company has pursued research
and development of certain specialized products in collaboration with
other medical device manufacturers. Certain of the Company's strategic
acquisitions and investments have provided the basis for its introduction
of significant new products. For example, the Company's acquisition of
the intra-aortic balloon pump and catheter business of Kontron
Instruments significantly expanded its business in the field of
interventional cardiology. The Company anticipates that its alliance with
Cardiac Pathways will enhance its strategic presence in the field of
electrophysiology, and the Company's acquisition of Therex provides it
with a new product offering of implantable drug delivery devices that the
Company believes represents an important addition to its critical care
product line. Where appropriate, the Company plans to continue to
complement its internal research and development efforts with similar
acquisitions and collaborative arrangements.
Research and development expenses totaled $14.1 million (6.1%
of net sales), $11.3 million (5.3% of net sales) and $10.5 million (5.9% of
net sales) in fiscal 1996, 1995 and 1994, respectively. Such amounts
were used to develop new products, improve existing products and
implement new technology to produce these products.
Since 1988, the Company has been developing the Arrow (registered trademark) -
Fischell Pullback Atherectomy Catheter (the "PAC") for the removal of
atherosclerotic plaque. The Company acquired certain patents relating
to the technology underlying the PAC in 1990. In conjunction with the
acquisition, the Company entered into a research and development
agreement under which the Company was required to make certain
payments upon the PAC's achievement of specified development
milestones. In July 1995, the Company amended this agreement to
modify the terms of payment of, and recognize as pre-paid royalties,
such milestone payments thereunder. Since December 1994, the
Company has been conducting human clinical trials outside the U.S.
using the PAC in coronary arteries, and in March 1995, the Company
received FDA approval under an Investigational Device Exemption
("IDE") to conduct Phase I human clinical trials in the U.S. for use of the
PAC in treating atherosclerosis of coronary arteries. The Company
believes that use of the device for removing plaque at arterial junctions
(bifurcations) and for debulking vessels prior to stenting is attracting
increasing interest from cardiologists. The device has been used
successfully in 93 cases internationally and in 48 U.S. Phase I clinical
trials, and a Phase II study prior to a FDA Premarket Approval
application ("P.M.A.") is expected to begin in fiscal 1997. Additional
study sites in both the U.S. and abroad are currently being identified.
Although the Company is focusing primarily on development of the PAC
for treatment of atherosclerosis in coronary arteries, the Company also
has conducted Phase II clinical trials of the device under an IDE for use
in treating atherosclerosis of leg arteries.
The Company has been developing a more compact intra-aortic
balloon pump to augment temporarily the pumping capability of the heart
following cardiac surgery, serious heart attack or balloon angioplasty. In
fiscal 1997, the Company expects to introduce this pump in certain
international markets and, later in fiscal 1997, to submit a 510(k)
application for FDA marketing clearance for sale of this pump in the U.S.
The Company began conducting clinical trials under an IDE in
August 1996 for a catheter device which uses microwave energy for the
ablation of cardiac tissue responsible for ventricular tachycardia.
Currently marketed radio frequency ablation catheters rely on resistive
heating to ablate tissue and, consequently, their effectiveness is highly
dependent on physical contact with the targeted tissue and the resistive
nature of the adjacent tissue. The Company's
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ITEM 1. BUSINESS (CONTINUED):
microwave energy ablation catheter uses radiative heating to ablate
tissue and, therefore, is not as dependent on precise contact with the
targeted tissue and the resiliency of the adjacent tissue. The microwave
ablation catheter's radiative heating mechanism is also capable of
creating deeper, wider lesions which electrophysiologists indicate are
necessary for the effective treatment of ventricular tachycardia using
ablation therapy. This microwave ablation catheter also incorporates
several advanced features that are designed to permit continuous
monitoring of catheter/tissue interface temperature, reduce the risk of
tissue overheating and enhance maneuverability of the catheter to
facilitate proper placement in the heart. In June 1996, the Company
acquired additional exclusive, worldwide rights with respect to the
technology underlying its microwave ablation catheter program from
Microwave Medical Systems, Inc., the owner of the patents relating
thereto, for $3.2 million.
The Company also began conducting U.S. clinical trials in April
1996 in advance of a 510(k) Premarket Notification for its new
Percutaneous Thrombolytic Device ("PTD") for use in clearing
thrombosed synthetic hemodialysis grafts. This mechanical rotating
device, patented by Johns Hopkins University and exclusively licensed by
the Company, has shown superior graft de-clotting results in animal
studies when compared with presently used methods. The IDE is
designed to compare this new device with the leading currently used
device in a 122 patient human clinical trial. Product introduction and
physician training for the PTD is underway in selected international
markets.
In January 1994, the Company formed a cooperative relationship
with Pennsylvania State University's Hershey Medical School for the
commercial development of a fully implantable long-term Left Ventricular
Assist Device ("LVAD"). Although LVADs are currently used to provide
short-term cardiac assist to patients awaiting heart transplants, the
Company's efforts are aimed at developing a fully implantable device to
provide long-term cardiac assist for patients having insufficient
ventricular heart function. In contrast to currently marketed LVADs, the
LVAD currently under development by the Company is not intended
merely as a bridge to heart transplant, but is designed, upon receipt of
necessary regulatory approvals, to serve as a long-term cardiac assist
device for certain patients. The Hershey Medical School LVAD has been
in development for over fifteen years and has undergone extensive
preclinical studies and testing. The product being developed for clinical
trials will be 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 LVAD. These
implanted batteries are capable of maintaining LVAD function for
approximately 45 minutes without the aid of any external power source.
In fiscal 1997, the Company expects to commence long-term durability
testing of its LVAD, which must be satisfactorily completed before Phase
I human clinical trials under an IDE can be commenced in the U.S. In
addition, the Company currently anticipates conducting human clinical
trials in Europe in fiscal 1998.
There can be no assurance that the FDA or any foreign
government regulatory authority will grant the Company authorization to
market products under development or, if such authorization is obtained,
that such products will prove competitive when measured against other
available products.
ENGINEERING AND MANUFACTURING
Arrow has developed the core technologies that it 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
further help 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.
(6)
ITEM 1. BUSINESS (CONTINUED):
Raw materials and purchased components essential to Arrow's
business have typically been available within the lead times required by
the Company and, consequently, procurement has not historically posed
any significant problems in the operation of the Company's business.
Although the Company currently maintains only one supplier for certain
of its out-sourced components, it has identified alternative vendors for
most of these items and, therefore, does not believe that it is dependent
on any single supplier for major raw materials or components.
PATENTS, TRADEMARKS, PROPRIETARY RIGHTS AND LICENSES
Arrow believes that patents and other proprietary rights are
important to its business. The Company also relies upon trade secrets,
know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position. Arrow
currently holds numerous U.S. patents and patent applications, as well
as several foreign patents and patent applications which relate to
aspects of the technology used in certain of the Company's products,
including its radial artery catheter, percutaneous sheath introducer and
interventional diagnostic catheter products. There can be no assurance
that patent applications filed by the Company will result in the issuance of
patents or that any patents owned by or licensed to the Company will
provide competitive advantages for the Company's products or will not be
challenged or circumvented by others.
In addition, Arrow is a party to several license agreements with
unrelated third parties pursuant to which it has obtained, for varying
terms, the exclusive rights to certain patents held by such third parties in
consideration for royalty payments. Many of the Company's major
products, including its Arrow-Howes trademark Multi-Lumen Catheters and
antiseptic surface treatment for catheters, have been developed pursuant
to such license agreements. The Company has in the past also granted
rights in certain patents relating to its Arrow-Howes trademark Multi-Lumen
Catheters to others in consideration for royalty payments. The Company
also has certain proprietary rights to aspects of the technology, including
certain U.S. patents, used in the PAC. See "Research and Product
Development." All of the existing patents owned by or licensed to the
Company expire after November 1998. The U.S. patent licensed to the
Company relating to its Arrow-Howes trademark Multi-Lumen Catheter expired in
February 1995. Since the expiration of this patent, the Company has not
experienced significant new competition in this market and the Company
does not presently believe that such competition will have a material
adverse effect on the Company's business, financial condition or results
of operations for the foreseeable future.
From time to time, the Company is subject to legal actions
involving patent and other intellectual property claims. Based upon
information presently available to the Company, the Company knows of
no legal actions involving patent claims that are currently pending or
threatened against the Company. 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 registered trademark and certain other trademarks. Arrow Electronics,
Inc., a publicly traded manufacturer of electronic and computer-related
products ("Arrow Electronics"), has filed notices of opposition to the
Company's applications for the trademark ARROW in the United States, South
Africa, Israel, Korea, Portugal, Taiwan and Thailand and sought to cancel
the Company's registration in Poland. The basis for Arrow Electronics'
objection is the use of such trademark for catheter systems with
electronic controls or displays (e.g., the Company's KAAT II PLUS trademark
intra-aortic balloon pump). Subsequent to the opposition in the United
States, on December 1, 1995 the Company filed a civil action against
Arrow Electronics in the United States District Court in Philadelphia ("the
Action") alleging trademark infringement and unfair competition arising
out of Arrow Electronics' sales in the medical field. By declaratory
judgment, the Company also seeks to have its rights in such trademark
confirmed. In the Action, Arrow Electronics has asserted counterclaims
of trademark and trade name infringement and unfair competition against
the Company and is seeking a declaratory judgment that the Company is
not entitled to registration for the same reasons raised in its U.S.
(7)
ITEM 1. BUSINESS (CONTINUED):
opposition. Decisions have been rendered in favor of the Company in
the oppositions to the Korean and Taiwan applications and in the
cancellation action in Poland; appeals have been filed by Arrow
Electronics to both such decisions. A decision adverse to the Company
has been received in Thailand. Trademark counsel in Thailand has
recommended refiling the Company's trademark application. Decisions
have not been rendered to date in the other jurisdictions. The outcome
of the Action and the oppositions is not expected to have a material
adverse effect on the Company's business, financial condition or results
of operations.
GOVERNMENT REGULATION
As a manufacturer of medical devices, the Company is subject to extensive
regulation by, among other governmental entities, the FDA and the corresponding
agencies of states and foreign countries 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 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 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
future. 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.
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 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.
(8)
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, Arrow is involved in the handling, storing and
disposal of materials which are classified as hazardous. In June 1989,
the Company was notified that it was among the potentially responsible
parties under the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), for
the costs of investigating or remediating contamination at a waste
recycling, treatment and disposal facility. The Company was notified by
the U.S. Environmental Protection Agency ("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. In November
1991, the EPA made a formal request for information regarding the
nature of the Company's waste that was transported to a municipal
landfill which is included on the National Priority List under CERCLA. In
June 1994, the Company, together with 16 other parties, was named in a
complaint filed by a group of five companies seeking to recover costs
incurred as a result of an EPA order directing such companies to take
certain response actions in connection with environmental contamination
of this landfill. The Company has been informed that further
investigation as to the identification of additional potentially responsible
parties is ongoing and, therefore, no determination has yet been made
as to allocation of responsibility for such actions. CERCLA imposes strict
joint and several liability for the costs of investigating and remediating
certain contaminated properties. Although the costs of investigation,
study and remediation at the sites referred to above may be substantial,
the Company, based on present information, does not believe that its
share of the liability for such matters will have a material adverse effect
on its business, financial condition or results of operations. Therefore,
the Company has not accrued any amounts toward such liability.
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 those
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, 1996, Arrow had 1,668 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 1997. The Company
has never experienced an organized work stoppage or strike and
considers its relations with its employees to be good.
(9)
ITEM 1. BUSINESS (CONTINUED):
EXECUTIVE OFFICERS
The executive officers of the Company and their ages and
positions as of November 1, 1996 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. 64 President
Raymond Neag 65 Executive Vice President
John H. Broadbent, Jr. 58 Vice President-Finance
and Treasurer
T. Jerome Holleran 60 Vice President
and Secretary
Philip B. Fleck 52 Vice President-Research
and Manufacturing
Paul L. Frankhouser 51 Vice President-Marketing
Thomas D. Nickel 57 Vice President-Regulatory Affairs
and Quality Assurance
Keith S. Bair 40 Controller
Mr. Miller has served as President and Chief Executive Officer and a
director of the Company since it was founded in 1975. Mr. Miller is also
President and a director of Arrow Precision Products, Inc. a corporation
controlled by principal shareholders of the Company ("Precision"), and
devotes approximately 10% of his business time to Precision. He is a
director of Carpenter Technology Corporation, a manufacturer of
specialty steel, and CoreStates Financial Corp., a financial institution.
Mr. Neag has served as Executive Vice President since April 1992
and prior thereto served as Senior Vice President of the Company. Mr.
Neag has been an officer and a director of the Company since it was
founded in 1975. Mr. Neag also serves as Secretary and a director of
Precision.
Mr. Broadbent has served as Vice President - Finance, Treasurer
and a director of the Company since it was founded in 1975. Mr.
Broadbent also serves as Vice President-Finance, Treasurer and a
director of Precision, and devotes approximately 10% of his business
time to Precision.
Mr. Holleran has served as Vice President, Secretary and a director
of the Company since it was founded in 1975. Since February 1986, Mr.
Holleran has also been Vice President, Chief Operating Officer and a
director of Precision. Mr. Holleran devotes approximately 90% of his
business time to Precision and approximately 10% of his business time
to Arrow. Since 1991, Mr. Holleran has 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 its business to the Company and the remainder
to an unrelated third party.
(10)
ITEM 1. BUSINESS (CONTINUED):
Mr. Fleck has served as Vice President - Research and
Manufacturing of the Company since June 1994. 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 Vice President-Marketing of the
Company since 1986. From 1980 to 1986, Mr. Frankhouser served as
Manager of Marketing of the Company.
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. Bair has served as Controller of the Company since 1991. From
1984 to 1991, Mr. Bair served as General Accounting Manager of the
Company.
ITEM 2. PROPERTIES:
The Company's corporate headquarters and principal research
center are located in Reading, Pennsylvania in a 165,000 square foot
facility completed in January 1992. This facility, which also includes
manufacturing space, is located on 126 acres, a portion of which is
subject to mortgage and related arrangements entered into in connection
with a financing in the outstanding principal amount of $2.1 million as of
August 31, 1996.
Other major properties owned by the Company include a 130,000
square foot manufacturing and warehousing facility in Asheboro, North
Carolina; a 145,000 square foot manufacturing facility in Wyomissing,
Pennsylvania (of which approximately 34,000 square feet is leased to
Precision); a 40,000 square foot manufacturing facility in Chihuahua,
Mexico; a 49,000 square foot manufacturing and warehouse facility in
Mount Holly, New Jersey, which became operational in December 1993;
and a 65,000 square foot manufacturing and research facility in the
Czech Republic, which became operational in January 1996.
In addition, the Company leases a 55,000 square foot
manufacturing facility in Everrett, Massachusetts and a 12,000 square
foot manufacturing facility in Walpole, Massachusetts. The Company
also leases sales offices and warehouse space in Canada, France,
Germany, Japan, South Africa, the Netherlands, Spain and Greece,
sales office space in Mexico and warehouse space in California.
The Company considers all of its facilities to be in good condition
and adequate to meet the present and reasonably foreseeable needs of
the Company.
ITEM 3. LEGAL PROCEEDINGS:
The Company is a party to certain legal actions arising in the
ordinary course of its business. Based upon information presently
available to the Company, the Company believes that it has adequate
legal defenses or insurance coverage for these actions and that the
ultimate outcome of these actions will not materially adversely affect the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matter was submitted to a vote of security holders during the
fourth quarter of fiscal 1996, through the solicitations of proxies or
otherwise.
(11)
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
National Market System 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 National Market System and the quarterly
dividends per share declared by the Company during the last eight fiscal
quarters:
Quarter Ended High Low Dividends
============= ======================================
August 31, 1996 40 3/8 21 $.040
May 31, 1996 45 38 1/2 .040
February 29, 1996 46 3/4 35 .040
November 30, 1995 48 3/4 38 3/4 .035
August 31, 1995 45 1/4 37 $.035
May 31, 1995 39 3/4 29 3/4 .035
February 28, 1995 37 1/4 27 .035
November 30, 1994 28 3/4 22 3/4 .030
As of November 1, 1996, there were approximately 985 registered
shareholders of the Company's common stock.
(12)
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the years
ended August 31, 1996, 1995, 1994, 1993 and 1992 have been derived
from the Company's audited consolidated financial statements. The
consolidated financial statements of the Company as of August 31, 1996
and 1995 and for each of the three years in the period ended August 31,
1996 together with the notes thereto and the related report of Coopers &
Lybrand L.L.P., 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.
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales $229,945 $213,014 $178,777 $150,157 $133,353
Cost of goods sold(1) 107,272 100,343 86,586 73,640 68,707
Gross profit 122,673 112,671 92,191 76,517 64,646
Operating expenses(1)
Research, development
and engineering 14,106 11,305 10,462 9,578 8,179
Selling, general,
and administrative 54,154 48,119 37,453 30,555 26,169
Total operating expenses 68,260 59,424 47,915 40,133 34,348
Operating income 54,413 53,247 44,276 36,384 30,298
Patent litigation
settlement (income) (2) - - - - (7,000)
Other expenses (income), net 2,300 (569) (812) (879) (1,154)
Income before income taxes and
cumulative effect of change in
accounting principle 52,113 53,816 45,088 37,263 38,452
Provision for income taxes 19,282 19,374 16,232 13,564 14,381
-------- -------- -------- -------- --------
Income before cumulative effect of
change in accounting principle 32,831 34,442 28,856 23,699 24,071
Cumulative effect of change in accounting
principle, net of tax (3) - - - - (3,380)
-------- -------- -------- -------- --------
Net income $ 32,831 $ 34,442 $ 28,856 $ 23,699 $ 20,691
======== ======== ======== ======== ========
Income per common share before
cumulative effect of change in
accounting principle (4) $ 1.41 $ 1.52 $ 1.29 $ 1.06 $ 4.74
Cumulative effect of change in
accounting principle (4) - - - - (.81)
-------- -------- -------- -------- --------
Net income per common share (4) $ 1.41 $ 1.52 $ 1.29 $ 1.06 $ 3.93
======== ======== ======== ======== ========
Cash dividends declared per
common share (4) $ .155 $ .135 $ .115 $ .095 $ .30
Weighted average shares
outstanding (4) 23,230 22,684 22,394 22,355 5,186
(13)
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED):
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA:
Working capital $ 55,086 $ 52,863 $ 32,437 $ 29,730 $ 32,237
Total assets 299,421 262,510 209,720 141,003 119,706
Notes payable and current
maturities of long-term debt 34,001 23,508 18,580 4,554 2,213
Long-term debt, excluding
current maturities 15,988 20,463 32,003 2,794 9,614
Shareholders' equity 219,774 190,937 132,803 106,362 84,787
(1) Cost of sales and operating expenses include non-recurring charges
for vesting of restricted stock as of the Company's initial public offering
on June 9, 1992. For the year ended August 31, 1992, these charges
were $202 to cost of goods sold and $789 to operating expenses.
(2) This patent litigation settlement had the effect of increasing net
income and net income per common share by $4,382 and $.20 (after
giving effect to the recapitalization of the Company effected on June 9,
1992 in connection with the Company's initial public offering pursuant
to which each previously outstanding share of the Company's Class A
common stock and Class B common stock was converted into 5.0 and
5.25 shares of the Company's common stock, respectively (the
"Recapitalization").
(3) In conjunction with the adoption of SFAS 106, the Company elected to
recognize immediately the accumulated postretirement benefit
obligation for current and future retirees. This had the effect of
decreasing net income per common share in fiscal 1992 by $0.15
(after giving effect to the Recapitalization).
(4) Historical basis before giving effect to the Recapitalization for the
year ended August 31, 1992. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for Earnings per
Common Share adjusted for the Recapitalization.
(14)
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, 1996
statements of income expressed as a percentage of net sales and the
period-to-period changes in the dollar amounts of the respective line items.
Period-to-Period
Percentage of Net Sales Percentage Increase
----------------------- -------------------
1996 1995 1994
Year ended August 31, vs vs vs
-----------------------
1996 1995 1994 1995 1994 1993
----- ----- ----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 7.9% 19.2% 19.1%
Gross profit 53.3 52.9 51.6 8.9 22.2 20.5
Operating expenses:
Research, development
and engineering 6.1 5.3 5.9 24.8 8.1 9.2
Selling, general and
administrative 23.5 22.6 20.9 12.5 28.5 22.6
----- ----- ----- ----- ----- -----
Operating income 23.7 25.0 24.8 2.2 20.3 21.7
Other expenses (income), net 1.0 (0.3) (0.4) * * *
Income before income taxes and
cumulative effect of change
in accounting principle 22.7 25.3 25.2 (3.2) 19.4 21.0
Provision for income taxes 8.4 9.1 9.1 (0.5) 19.4 19.7
Income before cumulative
effect of change in
accounting principle 14.3 16.2 16.1 (4.7) 19.4 21.8
Cumulative effect of change
in accounting principle - - - - - -
----- ----- ----- ----- ----- -----
Net income 14.3 16.2 16.1 (4.7) 19.4 21.8
* Not a meaningful comparison
(15)
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased by $16.9 million, or 7.9%, to $229.9 million in fiscal
1996 from $213.0 million in fiscal 1995. Net sales represent gross sales
invoiced to customers, plus royalty income, less certain related charges,
including freight costs, discounts, returns and other allowances. This
increase was due primarily to an increase in unit volume in the Company's
major product lines, including increased shipments of ARROWg+ard trademark
Blue registered trademark antiseptic surface treated catheter products. Sales
of critical care products increased 8.1% to $189.1 million from $175.0 million
in fiscal 1995. Sales of interventional procedure products increased 7.4% to
$40.3 million from $37.5 million in the previous year. International sales
increased by $11.8 million, or 15.5%, to 38.2% of net sales, excluding royalty
income, in fiscal 1996, compared to 35.7% in the prior year, principally as a
result of growth in shipments of multi-lumen catheters and intra-aortic balloon
catheters. The percentage of net sales attributable to the Company's direct
sales force increased in fiscal 1996 to approximately 75% from
approximately 72% in fiscal 1995, principally as a result of the Company's
gradual conversion of dealer-based sales to direct sales.
This increase in net sales was lower than the Company anticipated due to
an unforeseen reduction in the rate of growth in the U.S. market for certain
high volume products, the strength of the U.S. dollar, particularly against the
Japanese yen, and slower than anticipated new product introductions.
Health care cost containment initiatives in the U.S. have reduced growth in
demand 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 anticipates that new sales and marketing
strategies will result in increased U.S. sales of several products in fiscal
1997; however, U.S. demand for certain of the Company's core products is
expected to remain sluggish. The Company also anticipates that demand in
fiscal 1997 in international markets will continue to grow more rapidly than
U.S. sales as the Company increases supply from its Mexico and new
Czech Republic production facilities and expands international marketing
activity. A return to the Company's traditionally higher rates of sales growth
is dependent on its new products now in various stages of development or
market introduction, as well as timely receipt of required regulatory
approvals and timely completion of late stage research and development
programs.
Gross profit increased 8.9% to $122.7 million in fiscal 1996 from $112.7
million in fiscal 1995. As a percentage of net sales, gross profit improved to
53.3% in fiscal 1996 from 52.9% in the prior year, due primarily to the
reduction in manufacturing costs resulting from the Company's new
sterilization facility which does not require the use of freon gas, operating
efficiencies created by increased production at the Company's
manufacturing facility in Mexico and increased sales of higher margin
ARROWg+ard trademark Blue registered trademark antiseptic surface treated
catheter products. This increase was lower than the Company anticipated due
principally to the unfavorable impact of currency translations of foreign sales.
Research, development and engineering expenses in fiscal 1996 increased
by 24.8% to $14.1 million from $11.3 million in fiscal 1995. As a percentage
of net sales, these expenses increased to 6.1% in fiscal 1996 compared to
5.3% in fiscal 1995. These expenses increased primarily as a result of
development expenses related to certain products of Therex, which was
acquired in April 1995, and certain cardiac assist products.
Selling, general and administrative expenses increased by 12.5% to $54.1
million during fiscal 1996 from $48.1 million in the previous year, and
increased as a percentage of net sales to 23.5% in fiscal 1996 compared to
22.6% in fiscal 1995. This percentage increase was due primarily to
additions to the domestic direct sales force to replace a distributor in the
New England area, the expansion of the Company's Japanese and
European sales subsidiaries and the addition of expenses related to Therex.
(16)
FISCAL 1996 COMPARED TO FISCAL 1995 (CONTINUED):
Principally due to the above factors, operating income increased 2.2% to
$54.4 million in fiscal 1996 from $53.2 million in fiscal 1995.
Other expenses (income), net, increased to $2.3 million in fiscal 1996
from $(0.6) million in fiscal 1995. Other expenses (income), net, consists
principally of interest expense and foreign exchange gains and losses
associated with the Company's direct sales subsidiaries, which
resulted in a net loss in fiscal 1996, compared to a net gain in the prior
fiscal year, due to the increased strength of the U.S. dollar.
As a result of the factors discussed above, income before income taxes
decreased in fiscal 1996 by 3.2% to $52.1 million from $53.8 million in
fiscal 1995. The effective income tax rate increased to 37.0% in fiscal
1996 from 36.0% in fiscal 1995, principally as a result of generating a
larger proportion of earnings in higher tax jurisdictions and the reduction in
the benefit of the research and development tax credit prior to its
reinstatement on July 1, 1996.
Net income in fiscal 1996 decreased by 4.7% to $32.8 million from $34.4
million in fiscal 1995. As a percentage of net sales, net income
represented 14.3% in fiscal 1996 compared to 16.2% in the previous
year.
Net income per common share decreased to $1.41 for fiscal 1996, a
decrease of $.11, or 6.9% per share, from $1.52 per share in fiscal 1995.
Weighted average common shares outstanding increased to 23,229,687
in fiscal 1996 from 22,684,480 in fiscal 1995 as a result of the issuance
on April 7, 1995 of 325,000 shares of Common Stock in connection with
the acquisition of Therex and the issuance on May 8, 1995 of 500,000
shares of Common Stock in an underwritten public offering by the
Company.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales increased by $34.2 million, or 19.2%, to $213.0 million in fiscal
1995 from $178.8 million in fiscal 1994. This increase was due primarily
to an increase in unit volume in the Company's major product lines, the
favorable impact of currency translations of foreign sales, increased
shipments of ARROWg+ard trademark Blue registered trademark antiseptic surface
treated catheter products and sales of intra-aortic balloon pumps and catheters.
Sales of critical care products increased 16.2% to $175.0 million from $150.6
million in fiscal 1994. Sales of interventional procedure products
increased 37.8% to $37.5 million from $27.2 million in the previous year.
International sales increased by $20.9 million, or 37.9%, to 35.7% of net
sales, excluding royalty income, in fiscal 1995, compared to 30.9% in the
prior year, principally as a result of growth in shipments of multi-lumen
catheters, the favorable impact of currency translations of foreign sales
and sales of intra-aortic balloon pumps and catheters. The increase in
international sales as a percentage of net sales was attributable
principally to sales of intra-aortic balloon pumps and catheters and faster
growth in international sales, as compared to U.S. sales, of the
Company's principal product lines. The percentage of net sales
attributable to the Company's direct sales force increased in fiscal 1995
to approximately 72% from approximately 70% in fiscal 1994, principally
as a result of the Company's gradual conversion of dealer-based sales to
direct sales.
Gross profit increased 22.2% to $112.7 million in fiscal 1995 from $92.2
million in fiscal 1994. As a percentage of net sales, gross profit improved
to 52.9% in fiscal 1995 from 51.6% in the prior year, due primarily to the
favorable impact of currency translations of foreign sales and a more
profitable product and distribution mix. This impact was partially offset by
higher sterilization costs resulting from the rising price of, and increasing
excise tax imposed on, freon gas, which the Company used in its
ethylene oxide sterilization process. The Company's new sterilization
facility that does not require the use of freon gas became operational in
May 1995. Because the Company uses the first-in, first-out (FIFO)
method of inventory accounting, the Company did not realize lower costs
through the use of this facility until late in the fourth quarter of fiscal
1995.
(17)
FISCAL 1995 COMPARED TO FISCAL 1994 (CONTINUED):
Research, development and engineering expenses in fiscal 1995
increased by 8.1% to $11.3 million from $10.5 million in fiscal 1994. As a
percentage of net sales, these expenses decreased to 5.3% in fiscal
1995 compared to 5.9% in fiscal 1994. In July 1995, the Company
amended its Arrow-Fischell trademark Pullback Atherectomy Catheter research
and development and license agreements to modify the terms of
payment of, and recognize as pre-paid royalties, certain milestone
payments thereunder. These amendments have eliminated the need to
make additional accruals toward these milestone payments under the
research and development agreement.
Selling, general and administrative expenses increased by 28.5% to
$48.1 million during fiscal 1995 from $37.5 million in the previous year,
and increased as a percentage of net sales to 22.6% in fiscal 1995
compared to 20.9% in fiscal 1994. This percentage increase was due
primarily to the relocation and expansion of the Company's sales offices
and warehouse in Japan; the unfavorable impact of currency translations
of foreign subsidiary operating expenses; the addition of sales and
marketing expenses related to the Company's intra-aortic balloon pump
and catheter business; operating expenses related to Arrow Iberia, the
Company's direct sales subsidiary in Spain; and the amortization of
goodwill resulting from the Company's acquisition of the intra-aortic
balloon pump and catheter business of Kontron Instruments.
Principally due to the above factors, operating income increased 20.3%
to $53.2 million in fiscal 1995 from $44.3 million in fiscal 1994.
Other expenses (income), net, decreased to $(0.6) million in fiscal 1995
from $(0.8) million in fiscal 1994. Other expenses (income), net, consists
principally of gains on foreign exchange transactions associated with the
Company's direct sales subsidiaries, which resulted in net gains in both
periods, but were offset in fiscal 1995 and 1994 by interest expense of
approximately $2.0 million and $1.0 million, respectively, on debt incurred
primarily in connection with the acquisition of the Company's intra-aortic
balloon pump and catheter business.
As a result of the factors discussed above, income before income taxes
increased in fiscal 1995 by 19.4% to $53.8 million from $45.1 million in
fiscal 1994. The effective income tax rate was 36.0% in both fiscal 1995
and fiscal 1994.
Net income in fiscal 1995 increased by 19.4% to $34.4 million from $28.9
million in fiscal 1994. As a percentage of net sales, net income
represented 16.2% in fiscal 1995 compared to 16.1% in the previous
year.
Net income per common share increased to $1.52 for fiscal 1995, an
increase of $.23, or 17.8% per share, from $1.29 per share in fiscal
1994. Weighted average common shares outstanding increased to
22,684,480 in fiscal 1995 from 22,393,517 in fiscal 1994 as a result of
the issuance on April 7, 1995 of 325,000 shares of Common Stock in
connection with the acquisition of Therex and the issuance on May 8,
1995 of 500,000 shares of Common Stock in an underwritten public
offering by the Company.
(18)
The following table compares Historical Earnings per Common Share
with Earnings per Common Share adjusted for the Recapitalization,
retroactive to the earliest year presented:
HISTORICAL DATA: 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Income per common share
before cumulative effect of
change in accounting principle $ 1.41 $ 1.52 $ 1.29 $ 1.06 $ 4.74
Cumulative effect of change in
accounting principle - - - - (.81)
------ ------ ------ ------ ------
Net income per common share $ 1.41 $ 1.52 $ 1.29 $ 1.06 $ 3.93
------ ------ ------ ------ ------
Weighted average shares
outstanding (000 omitted) 23,230 22,684 22,394 22,355 5,186
------ ------ ------ ------ ------
RECAPITALIZED DATA:
Income per common share
before cumulative effect of
change in accounting principle $ 1.10
Cumulative effect of change in
accounting principle (.15)
------
Net income per common share $ . 95
------
Weighted average shares
outstanding (000 omitted) 21,831
------
LIQUIDITY AND CAPITAL RESOURCES
For the year ended August 31, 1996, net cash provided by operations
was $31.5 million, an increase of $2.6 million from the prior year. This
increase was due primarily to changes in operating assets and liabilities.
Accounts receivable increased by $6.8 million for the year ended August
31, 1996, compared to an $8.2 million increase in the prior year.
Accounts receivable, measured in days sales outstanding, increased to
76 days at August 31, 1996, from 67 days at August 31, 1995, due
principally to an increase in the collection period for the Company's
international sales.
Net cash used in the Company's investing activities increased to $38.5
million in fiscal 1996 from $29.0 million in the prior year, principally as a
result of an increase of $5.7 million in capital expenditures related to the
construction and equipping of the Company's new manufacturing and
research facility in the Czech Republic, payment in December 1995 of
the remaining $4.5 million to Cardiac Pathways pursuant to an
agreement to purchase for $9.0 million preferred stock convertible into
approximately 9.5% of the then outstanding common stock of Cardiac
Pathways, payment of a $3.0 million pre-paid royalty to Cardiac
Pathways in December 1995 in exchange for certain distribution and
manufacturing rights acquired by the Company upon receipt of FDA
510(k) marketing clearance in December 1995 for Cardiac Pathways'
Trio/Ensemble trademark mapping catheter system and payment of $3.2 million
to Microwave Medical Systems, Inc. in May 1996 for the purchase of
certain technology related to the Company's microwave ablation catheter
program.
Net cash provided by financing activities decreased to $2.4 million in
fiscal 1996 compared to $5.6 million in fiscal 1995. This change resulted
principally from an increase in borrowings under the Company's revolving
credit facility, offset by repayments of long-term debt.
(19)
As of August 31, 1996, the Company had U.S. bank credit facilities
providing a total of $55.0 million in available revolving credit for general
business purposes, of which $31.0 million remained unused. In addition,
certain of the Company's foreign subsidiaries have revolving credit
facilities totaling the U.S. dollar equivalent of $8.9 million, of which $5.2
million remained unused as of August 31, 1996. Combined borrowing
under these credit facilities increased $13.2 million and $3.5 million
during the years ended August 31, 1996 and 1995, respectively.
During fiscal 1996, 1995 and 1994, the percentage of the Company's
sales invoiced in currencies other than the U.S. dollar was 27.0%, 25.1%
and 19.5%, respectively. In addition, a small part of the Company's cost
of goods sold is denominated in foreign currencies. As a partial hedge
against adverse fluctuations in exchange rates, the Company periodically
enters into foreign currency exchange contracts with certain major
financial institutions. By their nature, all such contracts involve risk,
including the risk of nonperformance by counterparties. Accordingly,
losses relating to these contracts could have a material adverse effect
upon the Company's business, financial condition and results of
operations. Based upon the Company's knowledge of the financial
condition of the counterparties to its existing forward contracts, the
Company believes that it does not have any material exposure to any
individual counterparty. The Company's policy prohibits the use of
derivative instruments for speculative purposes. As of November 1,
1996, outstanding foreign currency exchange contracts totaling the U.S.
dollar equivalent of $20.8 million mature at various dates through May
1997. 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.
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.
(20)
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.
PART III
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 1997 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."
ITEM 11. EXECUTIVE COMPENSATION:
Information regarding executive compensation of Arrow's directors
and executive officers will be included in the Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT:
Information regarding beneficial ownership of the Company's
common stock by certain beneficial owners and by management of the
Company will be included in the Proxy Statement and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Information regarding certain relationships and related transactions
with management of the Company will be included in the Proxy
Statement and is incorporated herein by reference.
(21)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K:
(a) (1) The following financial statements of the Company are filed as
part of this Form 10-K.
Page
----
1. Report of Independent Accountants 24
2. Consolidated Balance Sheets at
August 31, 1996 and 1995 25,26
3. Consolidated Statements of Income
for the years ended August 31, 1996,
1995 and 1994 27
4. Consolidated Statements of Cash Flows
for the years ended August 31, 1996,
1995 and 1994 28,29
5. Consolidated Statements of Changes in
Shareholders' Equity for the years ended
August 31, 1996, 1995 and 1994 30
6. Notes to Consolidated Financial Statements 31-45
(a) (2) The following financial statement schedules of the Company are
filed as part of this Form 10-K:
Page
----
1. Report of Independent Accountants on
Financial Statement Schedule 46
2. Schedule II - Valuation and Qualifying Accounts 47
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 48 through 58 hereof for a list of the
Exhibits filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K:
None
(22)
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/ John H. Broadbent, Jr.
--------------------------
John H. Broadbent, Jr.
Vice President-Finance
and Treasurer
Dated: November 27, 1996
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, President and November 27, 1996
- --------------------------
(Marlin Miller, Jr.) Chief Executive Officer
(Principal Executive
Officer)
/s/ Raymond Neag Director, Executive November 27, 1996
- --------------------------
(Raymond Neag) Vice President
/s/ John H. Broadbent, Jr. Director, Vice President- November 27, 1996
- --------------------------
(John H. Broadbent, Jr.) Finance and Treasurer
(Principal Financial
Officer and Principal
Accounting Officer)
/s/ T. Jerome Holleran Director, Vice President, November 27, 1996
- --------------------------
(T. Jerome Holleran) Secretary
/s/ Robert L. McNeil, Jr. Director November 27, 1996
- --------------------------
(Robert L. McNeil, Jr.)
/s/ Richard T, Niner Director November 27, 1996
- --------------------------
(Richard T. Niner)
/s/ George W. Ebright Director November 27, 1996
- --------------------------
(George W. Ebright)
(23)
Coopers
& Lybrand
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Arrow International, Inc.:
We have audited the accompanying consolidated balance sheets of Arrow
International, Inc. as of August 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended August 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arrow
International, Inc. as of August 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended August 31, 1996, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
September 27, 1996
(24)
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands, Except Share Amounts)
August 31,
------------------------
1996 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 4,807 $ 9,453
Accounts receivable, less
allowance for doubtful accounts
of $774 and $650 in 1996 and
1995, respectively 50,093 43,399
Inventories 43,509 33,887
Prepaid expenses and other 9,575 8,806
Deferred income taxes 2,709 1,129
--------- ---------
Total current assets 110,693 96,674
--------- ---------
Property, plant and equipment:
Land and improvements 5,520 5,486
Buildings and improvements 71,674 61,381
Machinery and equipment 65,457 54,823
Construction-in-progress 15,900 14,419
--------- ---------
158,551 136,109
Less accumulated depreciation (49,552) (40,088)
--------- ---------
108,999 96,021
--------- ---------
Goodwill, net of accumulated
amortization of $6,730
and $4,185 in 1996 and
1995, respectively 51,754 54,533
Intangible and other assets,
net of accumulated amortization of
$6,894 and $5,802 in 1996 and
1995, respectively 27,975 13,007
Deferred income taxes - 2,275
--------- ---------
Total assets $ 299,421 $ 262,510
========= =========
See notes to consolidated financial statements
Continued
(25)
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, continued
(All Dollar Amounts in Thousands, Except Share Amounts)
August 31,
-------------------------
1996 1995
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 6,293 $ 8,969
Notes payable 27,708 14,539
Accounts payable 8,079 6,729
Accrued liabilities 6,297 5,715
Accrued compensation 5,493 6,264
Accrued income taxes 1,738 1,595
--------- ---------
Total current liabilities 55,607 43,811
Long-term debt 15,988 20,463
Accrued postretirement benefit obligation 7,577 7,299
Deferred income taxes 476 -
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 1996 and 1995 45,580 45,608
Retained earnings 183,502 154,272
Less cost of treasury stock:
3,249,914 and 3,247,805 shares
in 1996 and 1995, respectively (8,308) (8,240)
Cumulative translation adjustment (532) -
Unearned compensation (469) (703)
--------- ---------
Total shareholders' equity 219,773 190,937
--------- ---------
Total liabilities and
shareholders' equity $ 299,421 $ 262,510
========= =========
See notes to consolidated financial statements
(26)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(All Dollar Amounts in Thousands, Except per Share Amounts)
for the years ended August 31,
----------------------------------
1996 1995 1994
--------- --------- ---------
Net sales $ 229,945 $ 213,014 $ 178,777
Cost of goods sold 107,272 100,343 86,586
--------- --------- ---------
Gross profit 122,673 112,671 92,191
--------- --------- ---------
Operating expenses:
Research, development
and engineering 14,106 11,305 10,462
Selling, general
and administrative 54,154 48,119 37,453
--------- --------- ---------
68,260 59,424 47,915
--------- --------- ---------
Operating income 54,413 53,247 44,276
--------- --------- ---------
Other expenses (income):
Interest expense, net
of amounts capitalized 1,849 1,974 1,024
Interest income (611) (239) (130)
Other, net 1,062 (2,304) (1,706)
--------- --------- ---------
2,300 (569) (812)
--------- --------- ---------
Income before income taxes 52,113 53,816 45,088
Provision for income taxes 19,282 19,374 16,232
--------- --------- ---------
Net income $ 32,831 $ 34,442 $ 28,856
========= ========= =========
Net income per common share $ 1.41 $ 1.52 $ 1.29
========== ========== ==========
Cash dividends per common share $ .155 $ .135 $ .115
========== ========== ==========
Weighted average shares outstanding 23,229,867 22,684,480 22,393,517
========== ========== ==========
See notes to consolidated financial statements
(27)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Dollar Amounts in Thousands)
for the years ended August 31,
------------------------------
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
Net income $ 32,831 $ 34,442 $ 28,856
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 9,746 8,087 6,985
Amortization of intangible assets 3,637 3,378 2,043
Amortization of unearned compensation 210 226 160
Deferred income taxes 1,171 2,113 (1,874)
Other (157) 304 352
Changes in operating assets and liabilities:
Accounts receivable (6,819) (8,178) (6,665)
Inventories (9,623) (7,225) (2,147)
Prepaid expenses and other (769) (3,325) (112)
Accounts payable and
accrued liabilities 1,931 (2,094) (1,031)
Accrued compensation (771) 1,115 546
Accrued income taxes 143 67 (2,065)
-------- -------- --------
Total adjustments (1,301) (5,532) (3,808)
-------- -------- --------
Net cash provided by
operating activities 31,530 28,910 25,048
-------- -------- --------
Cash flows from investing activities:
Capital expenditures, net (22,724) (17,275) (16,970)
Increase in intangible and other assets (15,826) (5,330) (6,079)
Cash paid for business acquired - (6,442) (41,417)
-------- -------- --------
Net cash used in
investing activities (38,550) (29,047) (64,466)
-------- -------- --------
Cash flows from financing activities:
Increase in notes payable 13,168 3,453 8,384
Proceeds from issuance of long-term debt 12,037 4,967 40,280
Principal payments of long-term debt (19,187) (15,033) (5,430)
Proceeds from issuance of common stock - 15,293 -
Dividends paid (3,601) (3,083) (2,575)
Purchase of treasury stock (43) (24) -
-------- -------- --------
Net cash provided by
financing activities 2,374 5,573 40,659
-------- -------- --------
Net change in cash and cash equivalents (4,646) 5,436 1,241
Cash and cash equivalents at
beginning of year 9,453 4,017 2,776
-------- -------- --------
Cash and cash equivalents at end of year $ 4,807 $ 9,453 $ 4,017
======== ======== ========
See notes to consolidated financial statements
Continued
(28)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(All Dollar Amounts in Thousands)
for the years ended August 31,
------------------------------
1996 1995 1994
-------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 1,849 $ 1,974 $ 1,024
Income taxes $ 17,305 $ 19,449 $ 16,481
Supplemental schedule of noncash investing and financing activities:
During 1996, 1995 and 1994, the Company assumed liabilities in conjunction with
the purchase of certain intangible assets as follows:
Fair value of assets acquired $ - $ 19,488 $ -
Fair value of common stock issued - 11,253 -
Cash paid for assets - 6,442 -
-------- -------- --------
Liabilities assumed $ - $ 1,793 $ -
======== ======== ========
Cash paid for business acquired:
Working capital, other than cash $ - $ (61) $ 4,010
Property, plant and equipment - 150 315
Goodwill - 6,353 37,092
-------- -------- --------
$ - $ 6,442 $ 41,417
======== ======== ========
See notes to consolidated financial statements
(29)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended August 31, 1994, 1995 and 1996
(All Dollar Amounts in Thousands Except Share Amounts)
Unearned
Common Stock Retained Treasury Stock Compen-
--------------------- -------------------
Shares Amount Earnings Shares Amount sation
---------- -------- -------- --------- ------- --------
Balance, August 31, 1993 25,653,813 $ 17,914 $ 96,632 3,298,562 $(8,184) -
Cash dividends on common
stock, $.115 per share (2,575)
Issuance of treasury stock
to employees under the
1992 Stock Incentive Plan 1,121 (53,100) $ (1,121)
Amortization of unearned
compensation 160
Net income 28,856
---------- -------- -------- --------- ------- --------
Balance, August 31, 1994 25,653,813 19,035 122,913 3,245,462 (8,184) (961)
---------- -------- -------- --------- ------- --------
Cash dividends on common
stock, $.135 per share (3,083)
Issuance of common stock 825,000 26,546
Purchase of treasury stock 883 (24)
Forfeiture of restricted stock by
terminated employees 1,460 (32) 32
Amortization of unearned
compensation 226
Tax benefit of compensation
deduction related to
Restricted Stock Bonus Plan 27
Net income 34,442
---------- -------- -------- --------- ------- --------
Balance, August 31, 1995 26,478,813 45,608 154,272 3,247,805 (8,240) (703)
---------- -------- -------- --------- ------- --------
Cash dividends on common
stock, $.155 per share (3,601)
Registration costs (109)
Purchase of treasury stock 1,009 (44)
Forfeiture of restricted stock by
terminated employees 1,100 (24) 24
Amortization of unearned
compensation 210
Tax benefit of compensation
deduction related to
Restricted Stock Bonus Plan 81
Net income 32,831
---------- -------- -------- --------- ------- --------
Balance, August 31, 1996 26,478,813 $ 45,580 $183,502 3,249,914 $(8,308) $ (469)
========== ======== ======== ========= ======= ========
See notes to consolidated financial statements
(30)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Amounts)
1. Summary of Significant Accounting Policies:
General:
Arrow International, Inc. develops, manufactures and markets a broad range of
clinically advanced, disposable catheters and related products for critical
care and interventional medical procedures.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
Arrow International, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform
to the fiscal 1996 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 carrying amount of
cash and cash equivalents approximated 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.
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. 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.
Goodwill:
Goodwill represents the excess of cost over the fair value of net assets
acquired and is being amortized using the straight-line method over 25 years.
The recoverability of goodwill is periodically reviewed by the Company. In
assessing recoverability, many factors are considered, including operating
results and cash flows. The Company believes that no impairment of goodwill
existed at August 31, 1996.
Intangible and Other Assets:
Intangible and other assets, net, include certain assets acquired resulting
from business acquisitions and investments and are being amortized using the
straight-line method over their estimated periods of benefits.
Revenue Recognition:
Revenue is recognized at the time products are shipped and title has passed to
the customer. Net sales represent gross sales invoiced to customers, plus
royalty income, less certain related charges, including freight costs,
discounts, returns and other allowances.
Continued
(31)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued):
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 $6,588 and $5,527 at August 31, 1996 and 1995,
respectively. No deferred taxes have been provided on these earnings.
Foreign Currency Translation:
Most of the Company's foreign subsidiaries use the U.S. dollar as the
functional currency. Monetary assets and liabilities are translated at year-
end exchange rates and inventories, property and nonmonetary assets and
liabilities at historical rates. Income and expense accounts are translated at
the average rates in effect during the year, except that depreciation,
amortization and cost of sales are translated at historical rates. Adjustments
resulting from the translation of the entities are included in "Other expenses
(income)" of the consolidated statements of income. Foreign subsidiaries that
use the local currency as the functional currency translate all assets and
liabilities at year-end exchange rates, all income and expense accounts at
average rates and record adjustments from the translation in a separate
component of shareholders' equity. Gains and losses resulting from
transactions of the Company and its foreign subsidiaries are included in "Other
expenses (income)". Aggregate foreign exchange (gains) and losses were
$919, ($3,090) and ($2,105) for the years ended August 31, 1996, 1995 and
1994, respectively.
Concentration of Credit Risk:
Concentration of credit risk with respect to trade receivables is limited due
to both the large number of customers and their geographic dispersion. As of
August 31, 1996 and 1995, the Company had no significant concentrations of
credit risk.
Postretirement Benefits Other Than Pensions:
Postretirement health care and life insurance benefits are recorded using the
accrual method of accounting based on actuarially determined costs which are
recognized over the period from the date of hire to the full eligibility date
of employees who are expected to qualify for such benefits.
2. Business Acquisitions:
On April 7, 1995, the Company acquired Therex Limited Partnership, a
developmental stage company ("Therex"), for approximately $6,300 in cash
and 325,000 shares of Common Stock valued at $34 5/8 per share. Therex is
engaged in the development, manufacture and marketing of implantable,
constant flow delivery pumps and a broad line of implantable vascular access
ports. The acquisition has been accounted for using the purchase method of
accounting. The cost of the acquisition has been allocated on the basis of the
fair market value of the assets acquired and the liabilities assumed. The
excess of the purchase price over the estimated fair market value of the net
assets acquired of approximately $17,631 was recognized as goodwill and is
being amortized over a period of 25 years. Pro forma results of operations are
not significant.
On February 8, 1994, the Company purchased all of the outstanding common
stock of Kontron Instruments, Inc. ("Kontron Instruments") for approximately
$41,400, subject to certain adjustments. Kontron Instruments develops,
manufactures, markets and services intra-aortic balloon pumps and catheters
frequently used to temporarily augment the pumping capability of the heart
following heart
Continued
(32)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business Acquisitions (Continued):
surgery, balloon angioplasty or serious heart attack. The funds used to
acquire Kontron Instruments were provided by the proceeds from the
incurrence of $40,000 in long-term debt and approximately $1,400 in
borrowings under the Company's existing bank credit facilities.
The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the results of Kontron Instruments have been
included in the accompanying consolidated financial statements since the date
of acquisition. The cost of the acquisition has been allocated on the basis of
the estimated fair market values of the assets acquired and the liabilities
assumed. The excess of the aggregate purchase price over the estimated fair
market values of the net assets acquired of approximately $37,100 was
recognized as goodwill and is being amortized over a period of 25 years.
The following unaudited pro forma financial information combines the
consolidated results of operations as if Kontron Instruments had been acquired
as of the beginning of the period presented. Pro forma adjustments include
only the effects of events directly attributed to a transaction that are
factually supportable and expected to have a continuing impact. The pro forma
adjustments contained in the table below include amortization of intangibles,
interest expense on the acquisition debt and the related income tax effects.
For the Year
Ended,
August 31, 1994
---------------
Net sales $ 185,694
Net income $ 28,913
Net income per common share $ 1.29
The pro forma financial information does not necessarily reflect the operating
results that would have occurred had the acquisition been consummated as of
the above dates, nor is such information indicative of future operating
results. In addition, the pro forma financial results contain estimates since
Kontron Instruments did not maintain information on a period comparable with
the Company's fiscal year-end.
Continued
(33)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Employees' Stock Plans:
The 1992 Stock Incentive Plan authorizes the granting of stock options, stock
appreciation rights and restricted stock.
On December 1, 1993 and February 11, 1994, the Company issued 44,900
and 8,200 shares, respectively, of restricted Common Stock to certain
employees pursuant to its 1992 Stock Incentive Plan. The market value of the
shares awarded was $932 and $190, respectively. The transactions were
recorded as unearned compensation in a separate component of shareholders'
equity and are being amortized to expense over the five year vesting period.
On January 17, 1996, the Company granted 171,700 options to key employees
of the Company and its subsidiaries pursuant to the 1992 Stock Incentive Plan.
The option price per share was equal to the fair market value of the Common
Stock on the date the option was granted and shall expire ten years from the
date such option was granted. These options are exercisable upon the first
anniversary of the date of grant and each of the following four years at the
rate of 20% per year.
The Arrow International, Inc. Directors Stock Incentive Plan was approved by
shareholders on January 17, 1996. The plan provides for a maximum of
100,000 non-qualified stock options. The option price per share is equal to
the fair market value of the Common Stock on the date the option is granted.
The term of each option is ten years and an option becomes exercisable one year
after the date of grant. Under the plan, members of the Board of Directors of
the Company and its subsidiaries are eligible to participate in this plan if
they are not also employees or consultants of the Company and its subsidiaries,
were not shareholders at the time of the Company's initial public offering on
June 9, 1992, and do not serve on the Board as representatives of the interest
of shareholders who have made an investment in the Company. An initial
grant of 5,000 options shall be made upon each eligible director's initial
election to the Board and an additional 500 options on the date each year
when directors are elected to the Board.
Stock option activity is summarized below:
Number Option Price Expiration
of shares per share Date
--------- ---------- --------
Outstanding at beginning of year - - -
Granted 176,700 $38.00 2006
Exercised - - -
Canceled - - -
--------- ---------- --------
Outstanding at August 31, 1996 176,700 $38.00 2006
Exercisable at August 31, 1996 - - -
The Company follows the provisions of Accounting Principles Board (APB)
Opinion 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 in fiscal 1996.
Continued
(34)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Related Party Transactions:
Certain of the Company's facilities, personnel and services are being utilized
by Arrow Precision Products, Inc. ("Precision"). Precision is related to the
Company through common ownership. The Company charged Precision
$478, $367 and $573 for the cost of such utilization during the years ended
August 31, 1996, 1995 and 1994, respectively. The Company made
purchases from Precision amounting to $1,222, $1,085 and $1,108 for the
years ended August 31, 1996, 1995 and 1994, respectively. In addition, the
Company made payments on behalf of Precision related to certain costs
incurred by Precision for which the Company was reimbursed, amounting to
$974, $1,025 and $1,170 during the years ended August 31, 1996, 1995 and
1994, respectively. The Company had a net receivable from Precision of $107
and $194 at August 31, 1996 and 1995, respectively.
In June 1996, the Company purchased for $1,135 certain assets from a
subsidiary of Precision that manufactured and marketed gastroenterological
medical products.
5. 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 $3,094, $2,684 and $1,838 for
the years ended August 31, 1996, 1995 and 1994, respectively. Following is a
schedule by year showing future minimum rentals under operating leases.
Year Ending August 31, Total
--------------------- --------
1997 $ 2,761
1998 1,924
1999 715
2000 222
2001 30
Thereafter -
--------
$ 5,652
========
Continued
(35)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Inventories:
Inventories are summarized as follows:
1996 1995
-------- --------
Finished goods $ 16,878 $ 13,246
Semi-finished goods 10,010 7,133
Work-in-process 7,107 5,768
Raw materials 9,514 7,740
-------- --------
$ 43,509 $ 33,887
======== ========
7. Credit Facilities:
As of August 31, 1996 and 1995, the Company had U.S. bank credit facilities
providing a total of $55,000 and $25,000 in revolving credit for general
business purposes of which $30,978 and $10,763 remained unused. Interest,
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,
is payable monthly during the revolving credit period. At August 31, 1996 and
1995, the weighted average interest rates on short-term borrowings were 5.6%
and 6.3%, respectively. At August 31, 1996 and 1995, certain of the
Company's foreign subsidiaries had available revolving credit facilities, at
market rates of interest, totaling the U.S. dollar equivalent of $8,894 and
$1,787, under which $3,685 and $302 was outstanding, respectively. At
August 31, 1996, the Company is required to maintain tangible net worth (total
assets less total liabilities and intangible assets) of at least $50,000,
working capital of $10,000 and a working capital ratio of 1.25 to 1. At August
31, 1996 and 1995, the carrying amount of short-term borrowings approximated
fair value.
8. Accrued Compensation:
The components of accrued compensation at August 31, 1996 and 1995 are
as follows:
1996 1995
-------- -------
Accrued vacation pay $ 2,480 $ 2,232
Accrued payroll 1,149 2,334
Accrued productivity
plan compensation 1,772 1,626
Other 92 72
-------- -------
$ 5,493 $ 6,264
======== =======
Continued
(36)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Long-Term Debt:
Long-term debt consists of the following:
1996 1995
------- --------
Bank note payable in equal quarterly installments
of $1,250 through February 1997, plus interest at
a variable rate based upon the London Interbank
Offered Rate (LIBOR) plus 0.875%, currently 6.47%
at August 31, 1996 $ 2,500 $ 7,500
Bank note payable in equal quarterly installments
of $500 through May 1999, plus interest at a
variable rate based upon LIBOR plus 0.875%,
currently 6.486% at August 31, 1996 3,500 5,500
Bank note payable in February 1999, paid in July
1996, plus interest at a variable rate based upon
LIBOR plus 0.875%, previously 6.434% at
August 31, 1995 - 10,000
Bank note payable in July 2001, plus interest at
a variable rate based upon LIBOR plus 0.75%,
currently 4.31% at August 31, 1996 12,037 -
Bank note payable in quarterly installments of
$411 through October 1997, plus interest at 4.2% 2,019 3,904
Individual, $1,500 face amount,
noninterest bearing; due in semi-annual
installments of $62 through July 1997,
net of imputed interest of $81 at 8.72% 125 228
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 floating rate of 2.85% to 5.5% in 1996 2,100 2,300
------- -------
Total debt $22,281 $29,432
Less current maturities 6,293 8,969
------- -------
$15,988 $20,463
======= =======
Continued
(37)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Long-Term Debt (Continued):
The Industrial Development Authority Bonds are collateralized by a $2,147
letter of credit, and the Company's headquarters, research and development,
and manufacturing facility in Reading, PA.
Following is a schedule by year showing maturities of long-term debt for each
of the five years in the period ending August 31, 2001:
Year Ending August 31, Total
--------------------- -------
1997 $ 6,293
1998 2,251
1999 300
2000 300
2001 300
Thereafter 12,837
-------
$22,281
=======
Total interest costs for fiscal 1996, 1995 and 1994 were $3,170, $3,055 and
$1,953, respectively, of which $1,321, $1,081 and $929, respectively, were
capitalized.
At August 31, 1996 and 1995, the carrying amount of long term debt
approximated fair value.
10. Income Taxes:
The provision for income taxes consists of:
1996
----------------------------------------
Federal State Foreign Total
-------- -------- -------- --------
Current $ 15,459 $ 1,405 $ 1,247 $ 18,111
Deferred 1,030 141 - 1,171
-------- -------- -------- --------
$ 16,489 $ 1,546 $ 1,247 $ 19,282
======== ======== ======== ========
1995
----------------------------------------
Federal State Foreign Total
-------- -------- -------- --------
Current $ 13,714 $ 1,203 $ 2,344 $ 17,261
Deferred 1,855 258 - 2,113
-------- -------- -------- --------
$ 15,569 $ 1,461 $ 2,344 $ 19,374
======== ======== ======== ========
1994
----------------------------------------
Federal State Foreign Total
-------- -------- -------- --------
Current $ 12,769 $ 1,312 $ 970 $ 15,051
Deferred 1,127 54 - 1,181
-------- -------- -------- --------
$ 13,896 $ 1,366 $ 970 $ 16,232
======== ======== ======== ========
Continued
(38)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes (Continued):
Research and development tax credits were $88, $463 and $459 in fiscal 1996,
1995 and 1994, 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, 1996 and
1995:
1996 1995
Deferred tax assets (liabilities): ------- -------
Accounts receivable $ 266 $ 217
Inventories 1,578 (182)
Property, plant and equipment (3,530) (262)
Intangible assets 912 112
Accrued liabilities (903) (320)
Accrued compensation 730 809
Postretirement benefits other than pensions 3,180 3,030
------- -------
$ 2,233 $ 3,404
======= =======
Balance Sheet classification:
Current deferred tax assets $ 2,709 $ 1,129
Non current deferred tax assets - 2,275
Non current deferred tax liabilities (476) -
------- -------
$ 2,233 $ 3,404
======= =======
The sources of significant temporary differences which gave rise to deferred
taxes and their effects were as follows:
1996 1995 1994
------- ------- -------
Depreciation and amortization $ 1,731 $ 1,307 $ (39)
Common stock issued
to employees 94 26 (64)
Accrued vacation pay (15) (140) (75)
Inventories (1,759) (399) 527
Postretirement benefits
and other liabilities (150) (154) (121)
Intangible assets 735 1,365 955
Other 535 108 (2)
------- ------- -------
$ 1,171 $ 2,113 $ 1,181
======= ======= =======
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:
1996 1995 1994
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 1.9 2.2 3.0
Foreign statutory tax rates differential 3.0 2.3 1.2
Foreign sales corporation (3.3) (2.5) (1.7)
Research and development tax credit - (1.0) (1.0)
Other .4 - (0.5)
---- ---- ----
Effective tax rate 37.0% 36.0% 36.0%
==== ==== ====
Continued
(39)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Retirement Benefits:
Pension Plans:
The Company has 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.
The following tables set forth the plan's funded status and amounts recognized
in the Company's balance sheet at August 31, 1996 and 1995:
1996 1995
--------- ---------
Actuarial present value
of benefit obligations:
Vested $ (18,131) $ (17,014)
Nonvested (623) (1,062)
--------- ---------
Accumulated benefit obligation (18,754) (18,076)
Effect of projected future
salary increases (5,321) (4,637)
--------- ---------
Projected benefit obligation (24,075) (22,713)
Less plan assets at fair value 29,807 26,270
--------- ---------
Plan assets in excess of
projected benefit obligation 5,732 3,557
Unrecognized net (gain) (4,876) (2,836)
Unrecognized net obligation 963 968
--------- ----------
Prepaid pension asset $ 1,819 $ 1,689
========= ==========
Net periodic pension cost includes the following components:
1996 1995 1994
------- ------- --------
Service cost $ 1,577 $ 1,278 $ 1,212
Interest cost 1,701 1,501 1,312
Actual return on plan assets (3,455) (2,686) (512)
Net amortization and deferral 924 482 (1,719)
------- ------- --------
Net periodic pension cost $ 747 $ 575 $ 293
======= ======= ========
In 1996 and 1995, the discount rates and rates of increases of future
compensation levels used in determining the actuarial present value of
projected benefit obligations were 8.0% and 5.0% and 7.5% and 5.0%,
respectively. In 1996 and 1995, the expected long-term rates of return on
assets were 9.5% and 9.0%, respectively.
Plan assets consist principally of U.S. government securities, short-term
investments, other equity securities and cash equivalents.
Continued
(40)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Retirement Benefits (Continued):
Postretirement Benefits Other Than Pensions:
The Company provides limited amounts of postretirement health and life
insurance benefit plan coverage for substantially all of its employees. The
determination of postretirement benefit cost for postretirement health benefit
plans is based on comprehensive hospital, medical, surgical, and dental
benefit provisions. The determination of postretirement benefit cost for
postretirement life insurance benefits is based on stated policy amounts.
For the years ended August 31, 1996, 1995 and 1994, respectively, the
components of periodic expense for the postretirement benefits are as follows:
1996 1995 1994
------ ------ ------
Service cost - benefits earned during year $ 305 $ 297 $ 298
Interest cost on postretirement
benefit obligation 300 280 246
------ ------ ------
Total expense $ 605 $ 577 $ 544
====== ====== ======
At August 31, 1996 and 1995, respectively, the actuarial and recorded
liabilities for these postretirement benefits, none of which have been funded,
are as follows:
1996 1995
-------- --------
Accumulated postretirement
benefit obligation:
Retirees and dependents $ 1,645 $ 1,601
Fully eligible active plan participants 1,157 1,152
Other active participants 2,426 3,063
-------- -------
Excess of accumulated postretirement
benefit obligation over assets 5,228 5,816
Unrecognized prior service credit 963 989
Unrecognized gain 1,646 636
-------- -------
Liability included on the balance sheet 7,837 7,441
Less current portion 260 142
-------- -------
Noncurrent liability $ 7,577 $ 7,299
======== =======
The assumed discount rate at the beginning and end of the year used to
measure the accumulated postretirement benefit obligation was 7.5% and
8.0%, respectively. The annual rate of increase in the per capita cost of
covered health care benefits was assumed to be 8.0% in 1997; the rate was
assumed to decrease gradually to 5.0% over the next 12 years and remain
level thereafter. An increase of one percentage point in the assumed health
care cost trend rates for each future year would have increased the aggregate
of the service and interest cost components of 1996 net periodic
postretirement benefit cost by $92 and would have increased the accumulated
postretirement benefit obligation as of August 31, 1996 by $654.
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 $737, $657 and $602
for the fiscal years ended August 31, 1996, 1995 and 1994, respectively.
Continued
(41)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Foreign Operations:
The following tables present information about operations in different
geographic areas:
1996
United Foreign
States Operations Eliminations Consolidated
Sales to unaffiliated --------- --------- ---------- ---------
customers $ 167,914 $ 62,031 - $ 229,945
Transfers between
geographic areas 44,071 - $ (44,071) -
--------- --------- ---------- ---------
Total revenue $ 211,985 $ 62,031 $ (44,071) $ 229,945
========= ========= ========== =========
Operating income $ 51,534 $ 2,879 $ 54,413
========= =========
Other income, net (2,300)
---------
Income from operations
before income taxes $ 52,113
=========
Identifiable assets at
August 31 $ 305,726 $ 58,171 $ (64,476) $ 299,421
========= ========= ========== =========
1995
----------------------------------------------------
United Foreign
States Operations Eliminations Consolidated
Sales to unaffiliated --------- --------- ------------ ---------
customers $ 159,705 $ 53,309 - $ 213,014
Transfers between
geographic areas 31,513 - $ (31,513) -
--------- --------- ---------- ---------
Total revenue $ 191,218 $ 53,309 $ (31,513) $ 213,014
========= ========= ========== =========
Operating income $ 46,855 $ 6,392 $ 53,247
========= =========
Other income, net 569
---------
Income from operations
before income taxes $ 53,816
=========
Identifiable assets at
August 31 $ 275,064 $ 39,136 $ (51,690) $ 262,510
========= ========= ========== =========
1994
United Foreign
States Operations Eliminations Consolidated
Sales to unaffiliated --------- --------- ---------- ---------
customers $ 143,908 $ 34,869 - $ 178,777
Transfers between
geographic areas 20,430 - $ (20,430) -
--------- --------- ---------- ---------
Total revenue $ 164,338 $ 34,869 $ (20,430) $ 178,777
========= ========= ========== =========
Operating income $ 42,435 $ 1,841 $ 44,276
========= =========
Other income, net 812
Income from operations ---------
before income taxes $ 45,088
=========
Identifiable assets at
August 31 $ 214,188 $ 20,055 $ (24,523) $ 209,720
========= ========= ========== =========
Export sales for domestic operations to unaffiliated customers were $25,562,
$22,531 and $20,116 for the years ended August 31, 1996, 1995 and 1994,
respectively.
Continued
(42)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Foreign Exchange Contracts:
During fiscal 1996 and 1995, the percentage of the Company's sales invoiced
in currencies other than U.S. dollars was 27.0% and 25.1%, respectively. In
addition, a small part of the Company's cost of goods sold is denominated in
foreign currencies. As a partial hedge against adverse fluctuations in
exchange rates, the Company periodically enters into foreign currency
exchange contracts with certain major financial institutions. At August 31,
1996, the Company had forward exchange contracts to sell foreign currency
totaling $20,750, which mature at various dates through May 1997. 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.
14. Contingencies:
The Company is a party to certain legal actions arising in the ordinary course
of its business. Based upon information presently available, the Company
believes it has adequate legal defenses or insurance coverage for these
actions and that the ultimate outcome of these actions would not have a
material effect on the Company's financial position or results of operations.
15. Adoption of New Accounting Standards:
The Company will adopt the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets To Be Disposed Of" (FAS 121) in its first quarter of
fiscal 1997. In accordance with FAS 121, the Company will evaluate the
carrying value of its long-lived assets and intangibles, including goodwill,
when events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. The Company does not anticipate the effect
of adopting this new standard to have a material effect on the Company's
consolidated financial position or results of operations.
The Company will adopt the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123) in
the first quarter of fiscal 1997. The Company will continue to measure
compensation cost using the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company does not anticipate the effect of
adopting this new standard to have a material effect on the Company's
consolidated financial position or results of operations.
Continued
(43)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Summary of Quarterly Results (unaudited):
Quarterly financial results for the year ended August 31, 1996 are as follows:
(Thousands of dollars, except per share amounts)
Quarter
---------------------------------------
11-30-95 2-29-96 5-31-96 8-31-96 FY 1996
-------- -------- -------- -------- --------
Net sales $ 54,511 $ 58,779 $ 57,548 $ 59,107 $229,945
Cost of goods sold 24,829 27,556 27,772 27,114 107,272
-------- -------- -------- -------- --------
Gross profit 29,682 31,223 29,776 31,993 122,673
Operating expenses
Research, development
and engineering 3,159 3,240 3,631 4,075 14,106
Selling, general and
administrative 13,169 12,729 13,660 14,596 54,154
Operating income 13,354 15,254 12,485 13,322 54,413
Other expenses (income) 215 671 844 572 2,300
Income before income
taxes 13,139 14,583 11,641 12,750 52,113
Provision for income taxes 4,861 5,396 4,307 4,717 19,282
Net income $ 8,278 $ 9,187 $ 7,334 $ 8,033 $ 32,831
Net income per common
share $ .36 $ .40 $ .32 $ .35 $ 1.41
Weighted average shares
outstanding (000's) 23,231 23,230 23,229 23,229 23,230
Continued
(44)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Summary of Quarterly Results (unaudited)(Continued):
Quarterly financial results for the year ended August 31, 1995 are as follows:
(Thousands of dollars, except per share amounts)
Quarter
----------------------------------------
11-30-94 2-28-95 5-31-95 8-31-95 FY 1995
--------
Net sales $ 47,712 $ 52,226 $ 55,464 $ 57,612 $213,014
Cost of goods sold 22,930 25,290 25,606 26,517 100,343
-------- -------- -------- -------- --------
Gross profit 24,782 26,936 29,858 31,095 112,671
Operating expenses
Research, development
and engineering 2,659 2,671 2,866 3,109 11,305
Selling, general and
administrative 11,051 11,119 12,827 13,122 48,119
Operating income 11,072 13,146 14,165 14,864 53,247
Other expenses (income) (188) 223 (157) (447) (569)
Income before income
taxes 11,260 12,923 14,322 15,311 53,816
Provision for income taxes 4,054 4,652 5,156 5,512 19,374
Net income $ 7,206 $ 8,271 $ 9,166 $ 9,799 $ 34,442
Net income per common
share $ .32 $ .37 $ .40 $ .42 $ 1.52
Weighted average shares
outstanding (000's) 22,408 22,407 22,683 23,231 22,684
(45)
Coopers
& Lybrand
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Arrow International, Inc.:
Our report on the consolidated financial statements of Arrow International,
Inc. is included on page 24 of this Form 10-K. In connection with our audit of
such consolidated financial statements, we have also audited the related
consolidated financial statement schedule listed in the index on page 22 of
this Form 10-K.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
September 27, 1996
(46)
SCHEDULE II
ARROW INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
(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
----------- ---------- ------------ ---------- ---------- ----------
For the year ended August 31, 1994:
Accounts receivable:
Allowance for doubtful accounts $ 696 $ 93 - $ 29 $ 760
========== ============ ========== ========== ==========
Investment, at cost:
Valuation reserve $ 780 - - - $ 780
========== ============ ========== ========== ==========
For the year ended August 31, 1995:
Accounts receivable:
Allowance for doubtful accounts $ 760 $ (110) - $ - $ 650
========== ============ ========== ========== ==========
Investment, at cost:
Valuation reserve $ 780 - - - $ 780
========== ============ ========== ========== ==========
For the year ended August 31, 1996:
Accounts receivable:
Allowance for doubtful accounts $ 650 $ 150 $ 26 $ 774
========== ============ ========== ========== ==========
Investment, at cost:
Valuation reserve $ 780 - $ 780 $ -
========== ============ ========== ========== ==========
(1) Deductions represent write-off of accounts receivable and investment.
(47)
EXHIBIT INDEX
Exhibit Description
Number of Exhibit Method of Filing
- ------- ----------- ----------------
3.1 Restated Articles of Incorporated by reference
Incorporation of from Exhibit 3.1 to the
the Company. Company's Annual Report
on Form 10-K for the fiscal
year ended August 31, 1992
3.2 By-laws of the Company, Incorporated by reference
as amended and from Exhibit 3.4 to the
restated. Company's Registration
Statement on Form S-1 File
No. 33-47163 ("Registration
Statement")
4.1 Form of Common Stock Incorporated by reference
certificate. 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 Incorporated by reference
Retirement Plan for from Exhibit 10.3 to the
Salaried Employees of Company's Registration
the Company, effective Statement
September 1, 1989.
10.3.2 Amended and Restated Incorporated by reference
Retirement Plan for from Exhibit 10.3.2 to the
Salaried Employees of Company's Annual Report on
the Company, effective Form 10-K for the year ended
September 1, 1989, as August 31, 1993 (the "1993
amended. Form 10-K")
10.4 Amended and Restated Incorporated by reference from
Restricted Stock Bonus Exhibit 10.4 to the Company's
Plan. Registration Statement
10.5 Split Dollar Life Incorporated by reference from
Insurance Agreements, Exhibit 10.5 to the Company's
dated December 16, Registration Statement
1991, between the
Company and James H.
Miller, as Trustee
under the provisions
of a certain Irrevocable
Trust Agreement with
Marlin Miller, Jr. dated
December 13, 1991.
(48)
Exhibit Description
Number of Exhibit Method of Filing
- ------- ----------- ----------------
10.6 Split Dollar Life Incorporated by reference from
Insurance Agreements, Exhibit 10.6 to the Company's
dated December 16, Registration Statement
1991, between the Company
and Raymond Neag
Irrevocable Trust, dated
October 11, 1991, Evelyn
Neag, Trustee.
10.7 Split Dollar Life Incorporated by reference from
Insurance Agreements, Exhibit 10.7 to the Company's
dated December 16, Registration Statement
1991, between the Company
and Robert E. Gedney, 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 Incorporated by reference from
Insurance Agreements, Exhibit 10.8 to the Company's
dated December 16, 1991 Registration Statement
between the Company and
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 from
1992, of the rights and Exhibit 10.8.1 to the Company's
obligations under the Registration Statement
Holleran Split Dollar Life
Insurance Agreements from
the Company to Arrow
Precision Products, Inc.
10.9 License Agreement, dated Incorporated by reference from
October 23, 1981, between Exhibit 10.9 to the Company's
Dr. Ketan Shevde and the Registration Statement
Company.
10.10 License Agreement, dated Incorporated by reference from
January 18, 1992, between Exhibit 10.10 to the Company's
Innovation Associates, Registration Statement
Inc. and the Company.
10.11 License Agreement, dated Incorporated by reference from
March 28, 1991, between Exhibit 10.11 to the Company's
Daltex Medical Sciences, Registration Statement
Inc. and the Company.
10.12 Agreement and Compromise Incorporated by reference from
and Release, dated Exhibit 10.12 to the Company's
November 30, 1988, Registration Statement
between Michael A. Berman,
Critikon, Inc. and the
Company.
(49)
Exhibit Description
Number of Exhibit Method of Filing
- ------- ----------- ----------------
10.13 License Agreement, dated Incorporated by reference from
April 15, 1982, between Exhibit 10.13 to the Company's
Dr. Randolph M. Howes and Registration Statement
the 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 Incorporated by reference from
September 16, 1988, Exhibit 10.14 to the Company's
between J. Daniel Registration Statement
Raulerson and the Company,
as amended pursuant to
Addendum to License
Agreement, dated November
27, 1989, between J.
Daniel Raulerson and the
Company.
10.15 License Agreement, dated Incorporated by reference from
February 24, 1984, between Exhibit 10.15 to the Company's
Blair Medical Products, Registration Statement
Inc. and the Company.
10.16 Stock Purchase Agreement, Incorporated by reference from
dated October 24, 1990, Exhibit 10.16 to the Company's
among Robert E. Fischell, Registration Statement
Standard Associates, Cymed
Ventures, Inc., Arrow
International Investment
Corp. and the Company.
10.17 License Agreement, dated Incorporated by reference from
October 24, 1990, between Exhibit 10.17 to the Company's
Medical Innovative Registration Statement
Technologies R&D Limited
Partnership and the
Company.
10.18 Research and Development Incorporated by reference from
Agreement, dated October Exhibit 10.18 to the Company's
24, 1990, between Medical Registration Statement
Innovative Technologies
R&D Limited Partnership
and the Company.
(50)
Exhibit Description
Number of Exhibit Method of Filing
- ------- ----------- ----------------
10.19 License Agreement, dated Incorporated by reference from
February 24, 1992, Exhibit 10.19 to the Company's
between Cathco, Inc. and Registration Statement
the Company.
10.20 Settlement Agreement, Incorporated by reference from
dated September 30, 1991, Exhibit 10.20 to the Company's
among Dr. Randolph M. Registration Statement
Howes, Janice 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 between the Incorporated by reference from
Company, Arrow Precision Exhibit 10.21 to the Company's
Products, Inc. and United Annual Report on Form 10-K for
Steelworkers of America the year ended August 31, 1994
AFL/CIO Local 8467. (the "1994 Form 10-K")
10.22 Extension of Lease Incorporated by reference from
Agreement between Indian Exhibit 10.22 to the Company's
Mills Associates and the Registration Statement
Company, dated December 4,
1991, extending the Lease,
dated February 5, 1988,
between Lyco Associates
and the Company.
10.23.1 Amended and Restated Incorporated by reference from
Retirement Plan for Exhibit 10.23 to the Company's
Hourly-Rated Employees Registration Statement
of the Wyomissing Plant
of the Company, effective
September 1, 1989.
10.23.2 Amended and Restated Incorporated by reference from
Retirement Plan for Exhibit 10.23.2 to the
Hourly-Rated Employees Company's 1993 Form 10-K
of the Wyomissing Plant
of the Company, effective
September 1,1989, as
amended.
10.24.1 Amended and Restated Incorporated by reference from
Retirement Plan for Exhibit 10.24 to the Company's
Hourly-Rated Employees Registration Statement
of the North Carolina
and New Jersey Plants of
the Company, effective
September 1, 1989.
(51)
Exhibit Description
Number of Exhibit Method of Filing
- ------- ----------- ----------------
10.24.2 Amended and Restated Incorporated by reference from
Retirement Plan for Exhibit 10.24.2 to the
Hourly-Rated Employees Company's 1993 Form 10-K
of the North Carolina
and New Jersey Plants of
the Company, effective
September 1, 1989, as
amended.
10.25.1 Loan Agreement, dated Incorporated by reference from
January 3, 1986, among Exhibit 10.25.1 to the Company's
the Company, Arrow Medical Registration Statement
Products, Limited, Arrow
International Export
Corporation, and Hamilton
Bank.
10.25.2 First Amendment to Loan Incorporated by reference from
Agreement, dated March 18, Exhibit 10.25.2 to the Company's
1987, among the Company, Registration Statement
Arrow Medical Products,
Limited, Arrow
International Export
Corporation, and Hamilton
Bank.
10.25.3 Second Amendment to Loan Incorporated by reference from
Agreement, dated March 31, Exhibit 10.25.3 to the Company's
1988, among the Company, Registration Statement
Arrow Medical Products,
Limited, Arrow
International Export
Corporation, and Hamilton
Bank.
10.25.4 Third Amendment to Loan Incorporated by reference from
Agreement, dated March 31, Exhibit 10.25.4 to the Company's
1989, among the Company, Registration Statement
Arrow Medical Products,
Limited, Arrow
International Export
Corporation, and Hamilton
Bank.
10.25.5 Fourth Amendment to Loan Incorporated by reference from
Agreement, dated March 30, Exhibit 10.25.5 to the Company's
1990, among the Company, Registration Statement
Arrow Medical Products,
Limited, Arrow
International Export
Corporation, and Hamilton
Bank.
10.25.6 Fifth Amendment to Loan Incorporated by reference from
Agreement, dated March 1, Exhibit 10.25.6 to the Company's
1991, among the Company, Registration Statement
Arrow Medical Products,
Limited, Arrow
International Export
Corporation, and Hamilton
Bank.
(52)
Exhibit Description
Number of Exhibit Method of Filing
- ------- ----------- ----------------
10.25.7 Sixth Amendment to Loan Incorporated by reference from
Agreement, dated July 15, Exhibit 10.25.7 to the Company's
1991, among the Company, Registration Statement
Arrow Medical Products,
Limited, Arrow
International Export
Corporation, and Hamilton
Bank.
10.25.8 Seventh Amendment to Loan Incorporated by reference from
Agreement, dated September Exhibit 10.25.8 to the Company's
6, 1991, among the Company, Registration Statement
Arrow Medical Products,
Limited, Arrow
International Export
Corporation, and Hamilton
Bank.
10.25.9 Eighth Amendment to Loan Incorporated by reference from
Agreement, dated February Exhibit 10.25.9 to the Company's
21, 1992, among the Registration Statement
Company, Arrow Medical
Products, Limited, Arrow
International Export
Corporation, and Hamilton
Bank.
10.25.10 Letters of Amendment, dated Incorporated by reference from
April 10, 1992, and May 19, Exhibit 10.25.17 to the Company's
1992, to Loan Agreement Registration Statement
between the Company and
Hamilton Bank.
10.25.11 Ninth Amendment to Loan Incorporated by reference from
Agreement, dated May 27, Exhibit 10.25.18 to the Company's
1992, among the Company, Registration Statement
Arrow Medical Products,
Limited, Arrow
International Export
Corporation, and Hamilton
Bank.
10.25.12 Letter Agreement, dated Incorporated by reference from
February 25, 1993, among Exhibit 10.25.12 to the 1994
the Company, Arrow Form 10-K
Medical Products, Limited,
Arrow International Export
Corporation, and CoreStates
Hamilton Bank, and Note
relating thereto.
10.25.13 Letter Agreement, dated Incorporated by reference from
January 31, 1994, among Exhibit 10.25.13 to the 1995
the Company, Arrow Medical Form 10-K
Products, Limited, Arrow
International Export
Corporation, and CoreStates
Hamilton Bank, and Note
relating thereto.
(53)
Exhibit Description
Number of Exhibit Method of Filing
- ------- ----------- ----------------
10.25.14 Letter Agreement, dated Incorporated by reference from
March 6, 1995, among the Exhibit 10.25.14 to the 1995
Company, Arrow Medical Form 10-K
Products, Limited, Arrow
International Export
Corporation, and CoreStates
Hamilton Bank, and Note
relating thereto.
10.25.15 Letter Agreement, dated Incorporated by reference from
November 14, 1995, among Exhibit 10.25.15 to the 1995
the Company, Arrow Form 10-K
Medical Products, Limited,
Arrow International
Export Corporation, and
CoreStates Hamilton Bank,
and Note relating thereto.
10.25.16 Letter Agreement, dated Incorporated by reference from
February 23, 1996, among Exhibit 10.25.16 to the
the Company, Arrow Medical Company's Form 10-Q for
Products, Limited, Arrow the second quarter period
International Export ended February 29, 1996
Corporation, and CoreStates
Hamilton Bank, and Note
relating thereto.
10.25.17 Letter Agreement, dated Incorporated by reference from
January 29, 1996 among the Exhibit 10.25.17 to the Company's
Company and First Union Form 10-Q for the second quarter
National Bank, and note period ended February 29, 1996
relating thereto.
10.25.18 Letter Agreement, dated Filed with this report
July 11, 1996, among the
Company, Arrow Medical
Products, Limited, Arrow
International Export
Corporation, and CoreStates
Hamilton Bank, and Note
relating thereto.
10.26.1 Installment Sale Agreement Incorporated by reference from
between Berks County Exhibit 10.25.10 to the Company's
Industrial Development Registration Statement
Authority and the Company,
dated as of December 1,
1988.
10.26.2 Indenture of Trust between Incorporated by reference from
Berks County Industrial Exhibit 10.25.11 to the Company's
Development Authority and Registration Statement
Bankers Trust Company, as
trustee, dated as of
December 1, 1988.
(54)
Exhibit Description
Number of Exhibit Method of Filing
- ------- ----------- ----------------
10.26.3 Irrevocable Direct Pay Incorporated by reference from
Letter of Credit, dated Exhibit 10.25.12 to the Company's
December 28, 1988, issued Registration Statement
for the benefit of Bankers
Trust Company, as trustee
under the Indenture of
Trust, for the account of
the Company.
10.26.4 Letter of Credit Note from Incorporated by reference from
the Company payable to the Exhibit 10.25.13 to the Company's
order of Hamilton Bank, Registration Statement
dated December 28, 1988.
10.26.5 Letter of Credit Incorporated by reference from
Reimbursement Agreement Exhibit 10.25.14 to the Company's
between the Company and Registration Statement
Hamilton Bank, dated as
of December 1, 1988.
10.26.6 Accommodation Mortgage, Incorporated by reference from
Security Agreement and Exhibit 10.25.15 to the Company's
Second Assignment of Registration Statement
Installment Sale
Agreement, dated as of
December 15, 1988, by
and among Berks County
Industrial Development
Authority, the Company
and Hamilton Bank.
10.27 Variable Amount Grid Incorporated by reference from
Note Agreement, dated Exhibit 10.25.16 to the Company's
May 8, 1991, between Registration Statement
the Company and First
Union National Bank.
10.28 Purchase Agreement, dated Incorporated by reference from
January 20, 1984, between Exhibit 10.26 to the Company's
the Company and Arrow Registration Statement
Research Partners.
10.29 Form of Research and Incorporated by reference from
Development Agreement, Exhibit 10.27 to the Company's
dated August 2, 1982, Registration Statement
between the Company and
Arrow Research Partners.
10.30 Arrow International, Inc. Incorporated by reference from
Profit Sharing Plan Exhibit 10.30 to the Company's
Registration Statement
10.31 Agreement, dated May 19, Incorporated by reference from
1992, between the Company Exhibit 10.32 to the Company's
and Arrow Precision Registration Statement
Products, Inc.
(55)
Exhibit Description
Number of Exhibit Method of Filing
- ------- ----------- ----------------
10.32 Agreement, dated September Incorporated by reference from
22, 1993, among Microwave Exhibit 10.32 to the Company's
Medical Systems, Inc., the 1993 Form 10-K
Company and Kenneth L.
Carr.
10.33 License and Exclusive Incorporated by reference from
Supply Agreement, dated Exhibit 10.33 to the Company's
September 22, 1993, 1993 Form 10-K
between Microwave Medical
Systems, Inc. and the
Company.
10.34 Stock Purchase Agreement, Incorporated by reference from
dated as of January 28, Exhibit 2 to the Company's
1994 between Kontron Current Report on Form 8-K
Instruments Holding N.V. filed with the Securities and
and the Company. Exchange Commission on
February 18, 1994
10.35 Loan Agreement, dated Incorporated by reference from
as of February 8, 1994, Exhibit 10.35 to the 1994
among the Company, Arrow Form 10-K
Medical Products, Limited,
Arrow International Export
Corporation, and CoreStates
Hamilton Bank, and Notes
relating thereto.
10.36 Loan Agreement, dated Incorporated by reference from
February 8, 1994, between Exhibit 10.36 to the 1994
the Company and First Form 10-K
Union National Bank of
North Carolina, and Note
relating thereto.
10.37 Loan Agreement between Incorporated by reference from
Arrow Japan KK and the Exhibit 10.37 to the Company's
Bank of Tokyo (with Current Report on Form 8-K filed
English translation). with the Securities and Exchange
Commission on April 10, 1995
("the 1995 Form 8-K")
10.38 Thoratec Laboratories Incorporated by reference from
Corporation International Exhibit 10.38 to the 1995
Medical Products Form 8-K
Distributor Agreement,
dated as of January 19,
1995, between Thoratec
Laboratories Corporation
and the Company.
(56)
Exhibit Description
Number of Exhibit Method of Filing
- ------- ----------- ----------------
10.39 Series F Preferred Incorporated by reference from
Stock Purchase Agreement, Exhibit 10.39 to the 1995
dated as of March 8, Form 8-K
1995, between Cardiac
Pathways Corporation and
the Company.
10.40 Manufacturing and Supply Incorporated by reference from
Agreement, dated as of Exhibit 10.40 to the 1995
March 8, 1995, between Form 8-K
Cardiac Pathways
Corporation and the
Company.
10.41 International Distributor Incorporated by reference from
Agreement, dated as of Exhibit 10.41 to the 1995
March 8, 1995, between Form 8-K
Cardiac Pathways
Corporation and Arrow.
10.42 Purchase Agreement, dated Incorporated by reference from
as of April 7, 1995, among Exhibit 10.39 to the 1995
the Company, TLP Form 8-K
Acquisition Corp., Therex
Corporation, Therex
Limited Partnership
Holding Corporation and
each of the other persons
signatory thereto.
10.43 Amendment, dated July 27, Incorporated by reference from
1995, to License Exhibit 10.43 to the 1995
Agreement, dated October Form 10-K
24, 1990, between
Medical Innovative
Technologies R&D Limited
Partnership and the
Company.
10.44 Amendment, dated July 27, Incorporated by reference from
1995, to Research and Exhibit 10.44 to the 1995
Development Agreement, Form 10-K
dated October 24, 1990,
between Medical
Innovative Technologies
R&D Limited Partnership
and the Company.
10.45 Amended and Restated Incorporated by reference from
License Agreement dated Exhibit 10.45 to the Company's
May 24, 1996, between Form 10-Q for the third quarter
Microwave Medical period ended May 31, 1996
Systems, Inc. and the
Company.
10.46 Loan Agreement, dated Filed with this report
July 11,1996, between
AMH (Arrow Medical
Holdings) B.V. and
CoreStates Bank, N.A.,
and Note relating thereto.
(57)
Exhibit Description
Number of Exhibit Method of Filing
- ------- ----------- ----------------
10.47 Directors Stock Incentive Filed with this report
Plan
10.48 Purchase Agreement, dated Filed with this report
June 1, 1996, between
Arrow Tray Products, Inc.
(formerly known as
Endovations, Inc.) and
the Company.
18 Preferability Letter of Incorporated by reference from
Coopers & Lybrand L.L.P. Exhibit 18 to the 1994 Form 10-K
21 Subsidiaries of the Filed with this report
Company.
23 Consent of Coopers & Filed with this report
Lybrand L.L.P.
27 Financial Data Schedule EDGAR
99.1 Cautionary Statement for Page 59 of this report
Purposes of the Safe
Harbor Provisions of the
Private Securities
Litigation Reform Act
of 1995.
(58)
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.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this annual report on Form 10-
K of our reports dated September 27, 1996, on our audits of the consolidated
financial statements and financial statement schedule of Arrow International,
Inc. as of August 31, 1996 and 1995, and for the three years in the period
ended August 31, 1996, appearing in the registration statement on Forms S-8
(SEC File Nos. 333-15215 and 33-71568) of Arrow International, Inc. filed with
the Securities and Exchange Commission pursuant to the Securities Act of
1933.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 25, 1996
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 the
Company's senior management, expectations and other statements are expressed
regarding future performance of the Company. 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 current and future performance are discussed in the
Company's 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 the Company's Annual Report on Form 10-K
and its other filings with the Commission, the following risk factors should be
considered in evaluating the Company and its business, as well as in reviewing
forward-looking statements contained in the Company's periodic reports filed
with the Commission and in oral statements made by the Company's senior
management. The Company's 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
The Company's products are subject to extensive regulation by the Food and
Drug Administration (the "FDA") and, in some jurisdictions, by state and
foreign governmental authorities. In particular, the Company must obtain
specific clearance or approval from the FDA before it can market new products
or certain modified products in the United States. With the exception of one
product, the Company has, to date, obtained FDA marketing clearance only
through the 510(k) premarket notification process. Certain products under
development and future product applications, however, will require approval
through the more rigorous Premarket Approval application ("PMA") process.
The process of obtaining such clearances or approvals can be time consuming
and expensive, and there can be no assurance that all clearances or approvals
sought by the Company will be granted or that FDA review will not involve
delays adversely affecting the marketing and sale of the Company's products.
The Company is required to adhere to applicable regulations setting forth
current Good Manufacturing Practices ("GMP") which require that the
Company manufacture its products and maintain its records in a prescribed
manner with respect to manufacturing, testing and control activities. In
addition, the Company is required to comply with FDA requirements for
labeling and promotion of its products. Failure to comply with applicable
federal, state 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. Medical device
laws and regulations with similar substantive and enforcement provisions are
also in effect in many of the foreign countries where the Company does
business. Federal, state 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.
SIGNIFICANT COMPETITION AND CONTINUAL TECHNOLOGICAL CHANGE
The markets for medical devices are highly competitive. The Company currently
competes with many companies in the development and marketing of
catheters and related medical devices. Some of the Company's competitors
have access to greater financial and other resources than the
(59)
Company. Furthermore, the markets for medical devices are characterized by
rapid product development and technological change. The present or future
products of the Company could be rendered obsolete or uneconomical by
technological advances by one or more of the Company's current or future
competitors. The Company's future success will depend upon its ability to
develop new products and technology to remain competitive with other
developers of catheters and related medical devices. The Company's
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. There can be no
assurance that the Company 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 such products.
COST PRESSURES ON MEDICAL TECHNOLOGY AND PROPOSED HEALTH CARE REFORM
The Company's products are purchased principally by hospitals, hospital
networks and hospital buying groups. Although the Company's products are used
primarily for non-optional medical procedures, the Company believes 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, which has included
and will continue to include those of the Company. In the United States, these
cost pressures are leading to increased emphasis on the price and cost-
effectiveness of any treatment regimen and medical device. In addition, third
party payors, such as governmental programs, private insurance plans and
managed care plans, which are billed by hospitals for such health care
services, are increasingly negotiating the prices charged for medical products
and services and may deny reimbursement if they determine that a device was
not used in accordance with cost-effective treatment methods as determined
by the payor, was experimental, unnecessary or used for an unapproved
indication. In international markets, reimbursement systems vary significantly
by country. Many international markets have government managed health
care systems that control reimbursement for certain medical devices and
procedures and, in most such markets, there also are private insurance
systems which impose similar cost restraints. There can be no assurance 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 the Company's 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, the Company's products. Similar
initiatives to limit the growth of health care costs, including price
regulation, are also underway in several other countries in which the Company
does business. 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 cannot
predict what additional legislation or regulation, if any, relating to the
health care industry may be enacted in the future or what impact the adoption
of any federal, state or foreign health care reform, private sector reform or
market forces may have on its business. No assurance can be given that any
such reforms will not have a material adverse effect on the medical device
industry in general, or the Company in particular.
(60)
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS
The Company owns numerous U.S. and foreign patents and has several U.S. and
foreign patent applications pending. The Company also has exclusive license
rights to certain patents held by third parties. These patents relate to
aspects of the technology used in certain of the Company's products. From time
to time, the Company is subject to legal actions involving patent and other
intellectual property claims. Successful litigation against the Company
regarding its patents or infringement by the Company of the patent rights of
others could have a material adverse effect on the Company. In addition, there
can be no assurance that pending patent applications will result in issued
patents or that patents issued to or licensed-in by the Company will not be
challenged or circumvented by competitors or found to be valid or sufficiently
broad to protect the Company's technology or to provide it with any competitive
advantage. The Company also relies on trade secrets and proprietary
technology that it seeks to protect, in part, through confidentiality
agreements with employees, consultants and other parties. There can be no
assurance that these agreements will not be breached, that the Company 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 the Company's 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 the
Company. Future litigation may be necessary to enforce patent and other
intellectual property rights belonging to the Company, to protect trade secrets
or know-how owned by the Company or to defend the Company against
claimed infringement of the rights of others and to determine the scope and
validity of the proprietary rights of the Company and others. Any such
litigation could result in substantial cost to and diversion of effort by the
Company. Adverse determinations in any such litigation could subject the
Company to significant liabilities to third parties, could require the Company
to seek licenses from third parties and could prevent the Company from
manufacturing, selling or using certain of its products, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company generates significant sales outside the United States and is
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, which could
materially adversely impact the success of the Company's international
operations. As its revenues from its international operations increase, an
increasing portion of the Company's revenues and expenses are denominated
in currencies other than U.S. dollars, and changes in exchange rates could have
a greater effect on the Company's results of operations. There can be no
assurance that such factors will not have a material adverse effect on the
Company's future operations and, consequently, on the Company's business,
results of operations and financial condition. In addition, there can be no
assurance that laws or administrative practices relating to regulation of
medical devices, taxation, foreign exchange or other matters of
countries within which the Company operates will not change. Any such
change could have a material adverse effect on the Company's business,
financial condition and results of operations.
(61)
POTENTIAL PRODUCT LIABILITY
The Company's business exposes it to potential product liability risks which
are inherent in the testing and marketing of catheters and related medical
devices. The Company's products are often used in intensive care settings with
seriously ill patients. In addition, many of the medical devices manufactured
and sold by the Company 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 the Company 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 the Company's products. There can be
no assurance that the product liability insurance maintained by the Company
will be available or sufficient to satisfy all claims made against it or that
the Company 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 the Company's business
or reputation or on its ability to attract and retain customers for its
products.
RISKS ASSOCIATED WITH DERIVATIVE FINANCIAL INSTRUMENTS
As a partial hedge against adverse fluctuations in exchange rates, the Company
periodically enters into foreign currency exchange contracts with certain major
financial institutions. By their nature, all such contracts involve risk,
including the risk of nonperformance by counterparties. Accordingly, losses
relating to these contracts could have a material adverse effect upon the
Company's business, financial condition and results of operations. The
Company's policy prohibits the use of derivative instruments for speculative
purposes.
DEPENDENCE ON KEY MANAGEMENT
The Company's success depends upon the continued contributions of key
members of its senior management team, certain of whom have been with the
Company since its 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 the business of the Company. None of these individuals has an
employment agreement with the Company.
(62)