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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, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-20212
ARROW INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-1969991
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
2400 BERNVILLE ROAD
READING, PENNSYLVANIA 19605
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER: (610) 378-0131
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class: On Which Registered:
-------------------- --------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, No Par Value
(Title of Class)
Name of Exchange on which registered: The Nasdaq Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of November 1, 2001 was approximately $447,449,460.
The number of shares of Registrant's Common Stock outstanding on
November 1, 2001 was 21,850,468.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on January 16, 2002, which will be filed with the
Securities and Exchange Commission within 120 days after August 31, 2001, 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 and cardiac care. The
Company's critical care products are used principally for central vascular
access for administration of fluids, drugs, and blood products, patient
monitoring and diagnostic purposes, as well as for pain management. These
products are used by anesthesiologists, critical care specialists, surgeons,
cardiologists, nephrologists, emergency and trauma physicians and other health
care providers. Arrow's cardiac care products are used by interventional
cardiologists, cardiac surgeons, interventional radiologists and
electrophysiologists for such purposes as the diagnosis and treatment of heart
and vascular disease and to provide short-term cardiac assist following cardiac
surgery, serious heart attack or balloon angioplasty.
Arrow's critical care products, which were originally introduced in
1977, accounted for 82.7%, 82.5% and 81.4% of net sales in fiscal 2001, 2000 and
1999, respectively. The majority of these products are vascular access catheters
and related devices which consist principally of the following: the
Arrow-Howes(TM) Multi-Lumen Catheter, a catheter equipped with three or four
channels that enables the simultaneous administration of multiple critical care
therapies through a single puncture site; double-and single-lumen catheters,
which are designed for use in a variety of clinical procedures; percutaneous
sheath introducers, which are used as a means for inserting cardiovascular and
other catheterization devices into the vascular system during critical care
procedures; radial artery catheters, which are used for measuring arterial blood
pressure and taking blood samples; FlexTip Plus(TM) epidural catheters, which
are designed to minimize indwelling complications associated with conventional
epidural catheters; and Percutaneous Thrombolytic Devices ("PTD"), which are
designed for clearance of thrombosed hemodialysis grafts in chronic hemodialysis
patients. Many of the Company's vascular access catheters are treated with the
ARROWg+ard(TM) or ARROWg+ard Blue Plus(TM) antiseptic surface treatments to
reduce the risk of catheter related infection. ARROWg+ard Blue Plus(TM) is a
stronger, longer lasting formulation OF ARROWg+ard(TM) and provides
antimicrobial treatment of the interior lumens and hubs of each catheter.
The Company's critical care product line also includes the implantable
constant flow drug delivery pumps and a broad line of implantable vascular
access ports used for the infusion of certain drugs over an extended period of
time to treat cancer, other chronic diseases and chronic pain, as well as custom
tubing sets to connect central venous catheters to blood pressure monitoring
devices and drug infusion systems.
Through its acquisition of Sometec, S.A., a French development company,
in September 1999, the Company continued the expansion of its critical care
product line by introducing a non-invasive esophageal ultrasound probe that
continuously measures descending aortic blood flow. This product, the
HemoSonic(TM) 100, provides an innovative, ultrasound-based approach to
hemodynamic monitoring.
(2)
ITEM 1. BUSINESS (CONTINUED):
Arrow's cardiac care products accounted for 17.3%, 17.5% and 18.6% of
net sales in fiscal 2001, 2000 and 1999, respectively. These products include
cardiac assist products, such as intra-aortic balloon pumps (IABP) and
catheters, which are used primarily to augment temporarily the pumping
capability of the heart following cardiac surgery, serious heart attack or
balloon angioplasty. The newest of these products is the AutoCAT(TM), the
Company's advanced automatic IABP which features AutoPilot(TM), a mode of
operation that automatically selects operating parameters for optimal cardiac
assist. The AutoCAT(TM) continuously monitors and selects the best signal from
multiple electrocardiogram and arterial pressure sources to automatically adjust
balloon inflation and deflation timing points. Other currently available pumps
require manual intervention on the part of the clinician to switch signal
sources and initiate balloon timing. The Company also distributes a new high
performance 8 French intra-aortic balloon catheter. This balloon catheter, the
Ultra 8(TM), is configured to enable it to be introduced through standard 8
French Cath Lab sheaths used for therapeutic interventions as well as through a
separate balloon sheath. The Ultra 8(TM) provides faster inflation and deflation
times than competitive catheters and has a larger central lumen that reduces the
potential for aortic pressure waveform dampening and facilitates placement over
standard size springwire guides.
The Company's cardiac care product line also includes electrophysiology
products, which are used primarily to map the electrical signals which activate
the heart; the Berman(TM) Angiographic Catheter, which is used for pediatric
cardiac angiographic procedures; and such other cardiac care products as the
Super Arrow-Flex(TM) sheath, which provides a kink-resistant passageway for the
introduction of cardiac and other catheters into the vascular system. In
addition, as further discussed below under "Research and Product Development,"
the Company currently has under development important new cardiac care products,
including the Arrow LionHeart(TM), a fully implantable Left Ventricular Assist
System ("LVAS") capable of taking over the entire work load of the left
ventricle, and CorAide(TM), a non-pulsatile centrifugal flow ventricular assist
device designed to be used for the treatment of congestive heart failure.
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 2001, 2000 and 1999, 65.9%, 64.1% and 64.8%, respectively, of
the Company's net sales were to U.S. customers. In this market, approximately
79.2% of the Company's fiscal 2001 revenue was generated by its direct sales
force. The remainder resulted from shipments to independent distributors. For
the majority of such distributors, the Company's products represent a principal
product line. Direct selling generally yields higher gross profit margins than
sales made through independent distributors.
Internationally, the Company sells its products through eleven direct
sales subsidiaries serving markets in Japan, Germany, the Netherlands, France,
Spain, Greece, Africa, Canada, Mexico, the Czech Republic and Slovakia. As of
November 1, 2001, independent distributors in 87 additional countries service
the remainder of the world.
To support growth in international sales, the Company operates a 40,000
square foot manufacturing facility in Chihuahua, Mexico and a 65,000 square foot
manufacturing and research facility in the Czech Republic. In fiscal 2001, the
Company began construction of additional manufacturing space at its facility in
the Czech Republic, which, when complete in December 2001, will double
manufacturing capacity at that facility. The Company also leased 22,500 square
feet of additional manufacturing space in Mexico during fiscal 2001.
(3)
ITEM 1. BUSINESS (CONTINUED):
SALES AND MARKETING (CONTINUED)
Revenues, profitability and long-lived assets attributable to
significant geographic areas are presented in Note 13 to the Company's
consolidated financial statements, included elsewhere herein.
In general, Arrow does not produce against a backlog of customer orders;
production is based primarily on the level of inventories of finished products
and projections of future customer demand with the objective of shipping from
stock upon receipt of orders. No single customer accounts for a material part of
the Company's sales. Usage of the Company's products by hospitals and physicians
has not been materially influenced by seasonal factors.
Government and private sector initiatives to limit the growth of health
care costs, including price regulation, competitive pricing, coverage and
payment policies, and managed-care arrangements, are continuing in the United
States and in many other countries where the Company does business. As a result
of these changes, the marketplace has placed increased emphasis on the delivery
of more cost-effective medical therapies. Government programs, including
Medicare and Medicaid, private health care insurance and managed-care plans have
attempted to control costs by limiting the amount of reimbursement such third
party payors will pay to hospitals, other medical institutions and physicians
for particular products, procedures or treatments. The increased emphasis on
health care cost containment has resulted in reduced growth in demand for
certain of the Company's products in markets in the U.S. where Arrow has 80% or
greater market shares, and protecting that market share has affected the
Company's pricing in some instances. The Company presently believes that this
emphasis has increased the importance of competitive prices and may continue to
reduce the U.S. growth rate for certain of the Company's products. The Company
also continues to face pricing pressures in certain product lines in European
markets as governments strive to curtail increases in health care costs. The
Company anticipates that the U.S. 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 Company's business, financial
condition or results of operations.
RESEARCH AND PRODUCT DEVELOPMENT
Arrow is engaged in ongoing research and development to introduce
clinically advanced new products, to enhance the effectiveness, ease of use,
safety and reliability of its existing products and to expand the clinical
applications for which use of its products is appropriate. The principal focus
of the Company's research and development effort is to identify and analyze the
needs of physicians in critical and cardiac care medicine, and to develop
products that address these needs. The Company views ideas submitted by
physicians and other health care professionals as an important source of
potential research and development projects. The Company believes that these
end-users are often in the best position to conceive of new products and to
recommend ways to improve the performance of existing products. Most of the
Company's principal products and product improvements have resulted from
collaborative efforts with physicians, other health care professionals or other
affiliated entities. For certain proprietary ideas, the Company pays royalties
to such persons, and in many instances, incorporates such persons' names in the
tradename or trademark for the specific product. The Company also utilizes other
outside consultants, inventors and medical researchers to carry on its research
and development effort and sponsors research through medical associations and at
various universities and teaching hospitals.
Certain of the Company's strategic acquisitions and investments have
provided the basis for its introduction of significant new products. The Company
entered the field of cardiac care with the acquisition of Kontron Instruments
and supplemented this acquisition with its acquisition of the cardiac assist
division of C.R. Bard, Inc. The Company's acquisition of Therex, augmented by
its acquisition of the Strato/Infusaid implantable constant flow drug delivery
pump product line, provided
(4)
ITEM 1. BUSINESS (CONTINUED):
RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)
it with a product offering of implantable drug delivery devices. The Company's
acquisition of Sometec enabled it to introduce to the market its innovative
ultrasound hemodynamic monitoring device.
Research and development expenses totaled $25.2 million (7.5% of net
sales), $19.8 million (6.1% of net sales) and $20.3 million (6.8% of net sales)
in fiscal 2001, 2000 and 1999, respectively. Such amounts were used to develop
new products, improve existing products and implement new technology to produce
these products.
In January 1994, the Company formed a cooperative relationship with
Pennsylvania State University's Hershey Medical School for the commercial
development of a fully implantable long-term LVAS. Although LVASs are currently
used to provide short-term cardiac assist to patients awaiting heart
transplants, the Company's efforts are aimed at developing a fully implantable
device to provide long-term cardiac assist for patients having insufficient left
ventricular heart function. In contrast to currently marketed LVASs, the Arrow
LionHeart(TM), the LVAS currently under development by the Company, is not
intended as a bridge-to-heart transplant, but is designed, upon receipt of
necessary regulatory approvals, to serve as a long-term cardiac assist device
for certain patients. The Arrow LionHeart(TM) has been in development for over
sixteen years and has undergone extensive preclinical studies and testing. The
Company believes that its Arrow LionHeart(TM) LVAS, which is capable of taking
over the entire workload of the left ventricle, represents a significant advance
in mechanical circulatory assist technology. Because the Arrow LionHeart(TM) is
the first fully implantable "destination therapY" device, the ability of the
patient to experience an improved quality of life for an extended period of time
may be enhanced. The device has no lines or cables protruding through the skin
to power the system, thus eliminating a potential source of infection. It is
fully implanted in the body and does not replace the heart, but assists in the
pumping function of the heart's left ventricle. The device is electrically
driven by a wearable battery pack that transmits power non-invasively through
the skin to charge internal batteries and power the blood pump. In addition, the
Arrow LionHeart(TM) enables patients to experience limited periods of untethered
movement with energy supplied from rechargeable batteries implanted as part of
the device.
In fiscal 1997, the Company began long-term durability testing of the
LionHeart(TM). The Company conducted animal trials of the device in fiscal 1999.
The first human implant of the LionHeart(TM) took place in Germany in October
1999 as part of an ongoing European clinical investigation, sponsored by the
Company, to demonstrate the safety and performance of the LionHeart(TM) for the
purpose of obtaining a European Conformity (CE) mark.
On February 8, 2001, the Company received U.S. Food and Drug
Administration (FDA) approval under an Investigational Device Exemption (IDE) to
begin Phase I human clinical trials in the United States of the LionHeart(TM).
The Phase I trial was initially limited to seven patients at up to five U.S.
sites. On February 28, 2001, the Company announced the first United States human
implant of the LionHeart(TM) under the IDE. By August 1, 2001, the Company had
enrolled all seven U.S. patients in the Phase I U.S. feasibility trial
authorized in February under the IDE.
(5)
ITEM 1. BUSINESS (CONTINUED):
RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)
On September 28, 2001, the FDA deferred the Company's request to expand
this Phase 1 trial to an additional seven patients, suggesting that patient
inclusion and exclusion criteria be reviewed and requesting clarification on two
issues of device function. The Company's meeting with the FDA on October 12,
2001 determined the additional information required by the FDA to resume the
Phase I U.S. trial of the LionHeart(TM) with healthier patients. The Company has
recently provided this information to the FDA, whose response is expected in
December 2001. Discussion of the nature of the pivotal Phase II trial will be
ongoing with respect to end points and the appropriate number of patients. Based
on its discussions with the FDA, the Company believes that a randomized trial is
not appropriate or necessary.
The Company's European clinical trial of the LionHeart(TM) continues
and, on November 1, 2001, the Company announced an additional implant of the
LionHeart(TM) in Pavia, Italy bringing the total number of patients who have
received the LionHeart(TM) in Europe to 15 and the number of sites in Europe
which have implanted the device to five, with two additional European sites
trained and currently screening prospective patients. The European trial
protocol presently limits the device to patients that are ineligible for heart
transplant due to age or health history. The protocol is now being expanded to
include patients eligible for heart transplant, but unlikely to receive a
transplant due to the shortage of donor hearts. The Company believes the
LionHeart(TM) has the potential of improving the quality of life for this group
without the risks of driveline infection associated with currently available
bridge-to-transplant devices.
Based on the current status of the Arrow LionHeart(TM) program, the
Company believes that the CE mark required for European sale can be achieved
early in the 2002 calendar year and that a Phase II U.S. trial can begin in the
first half of the new year.
On April 18, 2001, the Company entered into an agreement with The
Cleveland Clinic Foundation ("CCF") for the exclusive license of CCF's patents
in the field of non-pulsatile centrifugal flow ventricular assist devices for
the treatment of congestive heart failure and a related agreement for continued
research and development on the CorAide(TM) ventricular assist device that had
been a joint development effort of CCF and the National Institute of Health.
The CorAide(TM) device utilizes a unique magnetically suspended flow
pumping mechanism that uses the moving blood as its lubricating system. Arrow
considers the CorAide(TM) device to be one of the most promising continuous flow
bridge-to-transplant devices currently in development and believes it may
represent a future generation permanent ventricular assist device if human organ
systems prove to be adaptable to non-pulsatile blood flow over a long period of
time. In IN VIVO trials to date, the CorAide(TM) device has shown excellent
performance without the use of anticoagulant drug therapy. Moreover, its smaller
size, low power requirements and lower cost relative to other ventricular assist
devices currently under development provide a promising approach for
bridge-to-transplant patients.
(6)
ITEM 1. BUSINESS (CONTINUED):
RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)
The initial goal of the new joint CCF/Arrow development program is to
commence human clinical trials of the device with patients needing ventricular
support prior to receiving a donor heart. These trials should provide better
understanding of human tolerance for non-pulsatile flow devices. The development
program presently anticipates beginning human clinical trials in Europe by the
end of calendar year 2002.
The Company believes the CorAide(TM) development program is
complimentary to its ongoing program to develop and market the Arrow
LionHeart(TM) LVAS.
Since 1988, the Company has been developing the Arrow(R)-Fischell
Pullback Atherectomy Catheter (the "PAC") for the removal of atherosclerotic
plaque. The Company acquired certain patents relating to the technology
underlying the PAC in 1990. In the fourth quarter of 1998, the Company began a
European multi-center randomized study to evaluate the effectiveness of the PAC
for the removal of plaque from restenosed coronary stents. The study continues
to date.
In recent years, the Company had conducted research to determine whether
the use of microwave energy catheters for the ablation of cardiac tissue
responsible for ventricular tachycardia represented a potentially more effective
treatment for ventricular tachycardia than currently marketed radio frequency
ablation catheters. Based on the results of this research, the Company elected
to discontinue this research program during fiscal 2000. The Company is
continuing to evaluate the technological feasibility of liver ablation using
this technology.
During the fourth quarter of fiscal 2000, the Company received approval
to begin separate U.S. and European trials of the Company's Percutaneous
Thrombolytic Device for the treatment of deep vein thrombosis. The Deep Vein
Thrombosis study is a feasibility study involving three clinical sites and a
total of ten patients. The primary objective of the study is to determine the
initial safety and feasibility of the Percutaneous Thrombactomy Device for the
treatment of iliofemoral deep vein thrombosis. As of November 1, 2001, there are
two patients enrolled in the study, the first of whom was enrolled in February
2001. An additional four patients are enrolled in the European clinical trial.
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 the Company believes are
necessary for it to design, develop and manufacture complex, high quality
catheter-related medical devices. This technological capability has enabled the
Company to develop internally many of the major components of its products and
reduce its unit manufacturing costs. To help further reduce manufacturing costs
and improve efficiency, the Company has increasingly automated the production of
its high-volume products and plans to continue to make significant capital
expenditures to promote efficiency and reduce operating costs.
(7)
ITEM 1. BUSINESS (CONTINUED):
ENGINEERING AND MANUFACTURING (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, interventional diagnostic catheter products, left ventricular assist
device, and esophageal ultrasound probe jacket. There can be no assurance that
patent applications filed by the Company will result in the issuance of patents
or that any patents owned by or licensed to the Company will provide competitive
advantages for the Company's products or will not be challenged or circumvented
by others.
In addition, Arrow is a party to several license agreements with
unrelated third parties pursuant to which it has obtained, for varying terms,
the exclusive rights to certain patents held by such third parties in
consideration for royalty payments. Many of the Company's major products,
including its Arrow-Howes(TM) Multi-Lumen Catheters and antiseptic surface
treatment for catheters, have been developed pursuant to such license
agreements. The Company has in the past granted rights in certain patents
relating to its Arrow-Howes(TM) Multi-Lumen Catheters to others in consideration
for royalty payments. The Company's U.S. patent for its Quick Flash(R) Radial
Artery Catheter expired on November 5, 2001. Although it is possible that the
Company will face new competition in this market, based on information currently
available to it, the Company does not presently believe that any such new
competition will have a material adverse effect on the Company's business,
financial condition or results of operations for the foreseeable future. All
other existing patents owned by or licensed to the Company relating to any of
its major products expire after fiscal 2002.
From time to time, the Company is subject to legal actions involving
patent and other intellectual property claims. The Company is currently a
defendant in two related lawsuits alleging that certain of its hemodialysis
catheter products infringe patents owned by a third party. Based upon
information presently available to the Company, the Company believes it has
adequate legal defenses with respect to these actions. Although the ultimate
outcome of these actions is not expected to have a material adverse effect on
the Company's business or financial condition, whether an adverse outcome in
these actions would materially adversely affect the Company's reported results
of operations in any future period cannot be predicted with certainty.
(8)
ITEM 1. BUSINESS (CONTINUED):
PATENTS, TRADEMARKS, PROPRIETARY RIGHTS AND LICENSES (CONTINUED)
On March 19, 2001, the Company and Medtronic, Inc. reached a settlement
of pending patent litigation (Civil Action No. CV-00-11271 PBS) in the United
States District Court for the District of Massachusetts. The settlement also
ends all litigation pending worldwide between the parties, including actions in
Germany, Belgium, The Netherlands, and the European Patent Office. As part of
the settlement, the Company has granted Medtronic a worldwide license under U.S.
Patent No. 4,978,338 and its foreign counterparts. This settlement has not had,
and is not expected to have in the future a material adverse effect on the
Company's business, financial condition or results of operations.
On August 17, 2001, the United States District Court for the District of
New Jersey granted Datascope Corp.'s motion for summary judgment in its
declaratory judgment lawsuit that certain claims of the Company's U.S. Patent
No. Re. 34,993 relating to its IAB catheter were invalid and that Datascope did
not infringe other claims of that patent which remain valid. This judgment does
not result in any liability to Arrow and is not expected to have any material
adverse effect on the Company's business, financial condition or results of
operations.
Arrow owns a number of registered trademarks in the United States and,
in addition, has obtained registration in many of its major foreign markets for
the trademark ARROW(R) and certain other trademarks.
GOVERNMENT REGULATION
As a developer, manufacturer and marketer of medical devices, the
Company is subject to extensive regulation by, among other governmental
entities, the FDA and the corresponding state, local and foreign regulatory
agencies in jurisdictions in which the Company sells its products. These
regulations govern the introduction of new medical devices, the observance of
certain standards with respect to the manufacture, testing and labeling of such
devices, the maintenance of certain records, the tracking of such devices and
other matters. Failure to comply with applicable federal, state, local or
foreign laws or regulations could subject the Company to enforcement action,
including product seizures, recalls, withdrawal of marketing clearances or
approvals, and civil and criminal penalties, any one or more of which could have
a material adverse effect on the Company. In recent years, the FDA has pursued a
more rigorous enforcement program to ensure that regulated businesses, like the
Company's, comply with applicable laws and regulations. The Company believes
that it is in substantial compliance with such governmental regulations.
However, federal, state, local and foreign laws and regulations regarding the
manufacture and sale of medical devices are subject to future changes. No
assurance can be given that such changes will not have a material adverse effect
on the Company.
On occasion, the Company has received notifications, including warning
letters, from the FDA of alleged deficiencies in the Company's compliance with
FDA requirements. The Company believes that it has been able to address or
correct such deficiencies. In addition, from time to time the Company has
recalled, or issued safety alerts on, certain of its products. No such warning
letter, recall or safety alert has had a material adverse effect on the Company,
but there can be no assurance that a warning letter, recall or safety alert
would not have such an effect in the future.
(9)
ITEM 1. BUSINESS (CONTINUED):
GOVERNMENT REGULATION (CONTINUED)
In the early to mid 1990's, the review time by the FDA to clear medical
devices for commercial release lengthened and the number of marketing clearances
and approvals decreased. In response to public and congressional concern, the
FDA Modernization Act of 1997 was adopted with the intent of bringing better
definition to the clearance process for new medical products. While FDA review
times have improved since passage of the 1997 Act, there can be no assurance
that the FDA review process will not continue to delay the Company's
introduction of new products in the U.S. in the future. In addition, many
foreign countries have adopted more stringent regulatory requirements which also
have added to the delays and uncertainties associated with the release of new
products, as well as the clinical and regulatory costs of supporting such
releases. It is possible that delays in receipt of, or failure to receive, any
necessary clearance or approval for the Company's new product offerings could
have a material adverse effect on the Company's business, financial condition or
results of operations.
COMPETITION
Arrow faces substantial competition from a number of other companies in
the market for catheters and related medical devices and equipment, including
companies with greater financial and other resources. In addition, in response
to increased concern about the rising costs of health care, U.S. hospitals and
physicians are placing increasing emphasis on cost-effectiveness in the
selection of products to perform medical procedures. The Company believes that
its products compete primarily on the basis of product differentiation, product
quality and cost-effectiveness, 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 the Company to
respond more effectively to competitive pricing in an environment where its
ability to increase prices is limited.
ENVIRONMENTAL COMPLIANCE
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. In the course of its
business, the Company is involved in the handling, storing and disposal of
materials, which are classified as hazardous. In 1991, the U.S. Environmental
Protection Agency ("EPA") made a formal request to the Company for information
about wastes which may have been disposed of at a landfill site ("Site") located
near Reading, Pennsylvania. The Site, which was closed in 1986, is a former
municipal waste disposal landfill that was added to the National Priorities List
("NPL"), as authorized by the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), in 1989. In 1997, the EPA
advised the Company that the agency regarded the Company to be a potentially
responsible party ("PRP") with respect to environmental contamination associated
with the Site. In 1998, the EPA advised the Company that the agency regarded the
Company to be a DE MINIMIS party (a party whose alleged contribution of waste
materials to the Site is minimal in terms of volume and toxicity), and was
eligible for a DE MINIMIS settlement under CERCLA. In January 2000, this matter
was settled by the Company without any material adverse effect on its business,
financial condition or results of operations.
(10)
ITEM 1. BUSINESS (CONTINUED):
ENVIRONMENTAL COMPLIANCE (CONTINUED)
In a separate matter, in 1989, the Company was notified that it was
among the PRPs under CERCLA for the costs of investigating or remediating
contamination at a waste recycling, treatment and disposal facility located in
Maryland. In August 2001, the Company was invited by the EPA to enter into a
proposed global consent decree for DE MINIMIS parties with the United States
District Court for the District of Maryland, which, if approved, would resolve
the Company's potential liability with respect to the facility on a DE MINIMIS
basis. The Company has indicated its interest in entering into such a DE MINIMIS
settlement, but currently has no knowledge as to when the proposed consent
decree will be presented to the court or when it may be approved.
The Company believes that its operations comply in all material respects
with applicable environmental laws and regulations. While the Company continues
to make capital and operational expenditures for protection of the environment,
it does not anticipate that these expenditures will have a material adverse
effect on its business, financial condition or results of operations.
PRODUCT LIABILITY AND INSURANCE
The design, manufacture and marketing of medical devices of the types
produced by the Company entail an inherent risk of product liability. The
Company's products are often used in surgical and 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 such
insurance will be available or in an amount 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. Product
liability claims 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, reputation, its ability to attract and retain customers for
its products and its results of operations.
EMPLOYEES
As of November 1, 2001, Arrow had 3,273 full-time employees. All of the
Company's hourly-paid manufacturing employees at the Company's Reading and
Wyomissing, Pennsylvania facilities are represented by the United Steelworkers
of America AFL-CIO, Local 8467 (the "Union"). The Company and the Union are
currently operating under a three-year agreement that expires in September 2003.
The Company has never experienced an organized work stoppage or strike and
considers its relations with its employees to be good.
(11)
ITEM 1. BUSINESS (CONTINUED):
EXECUTIVE OFFICERS
The executive officers of the Company and their ages and positions as of
November 1, 2001 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. 69 Chairman and Chief Executive Officer
Philip B. Fleck 57 President and Chief Operating Officer
Paul L. Frankhouser 56 Executive Vice President
Frederick J. Hirt 53 Vice President-Finance, Chief Financial
Officer and Treasurer
T. Jerome Holleran 65 Secretary
Carl N. Botterbusch 38 Vice President and General Manager,
Cardiac Assist Division
Thomas D. Nickel 62 Vice President-Regulatory Affairs
and Quality Assurance
Scott W. Hurley 43 Controller
Mr. Miller has served as Chief Executive Officer and a director of the
Company since it was founded in 1975. He served as President from 1975 to
January 1999. Mr. Miller is also President and a director of Arrow Precision
Products, Inc. ("Precision"), a corporation controlled by principal shareholders
of the Company. Precision is in the process of liquidation and, in fiscal 2001,
Mr. Miller devoted none of his time to Precision. He is a director of Carpenter
Technology Corporation, a manufacturer of specialty steel.
Mr. Fleck has served as President of the Company since January 1999. From
June 1994 to January 1999, he served as Vice President - Research and
Manufacturing of the Company. From 1986 to June 1994, Mr. Fleck served as Vice
President - Research and Engineering of the Company. From 1975 to 1986, Mr.
Fleck served as Engineering Manager of the Company.
Mr. Frankhouser has served as Executive Vice President of the Company
since January 1999. He served as Vice President-Marketing of the Company from
1986 until January 1999. From 1980 to 1986, Mr. Frankhouser served as Manager of
Marketing of the Company.
Mr. Hirt has served as Vice President - Finance, Chief Financial Officer
and Treasurer of the Company since August 1998. Prior to joining the Company,
Mr. Hirt served in various capacities with Pharmacia & Upjohn, Inc., from 1980
to 1998, where he most recently served as Vice President, Accounting and
Reporting.
Mr. Holleran has served as Secretary and a director of the Company since
its founding in 1975 and, until September 1997, also served as a Vice President.
From July 1996, Mr. Holleran served as President and Chief Executive Officer of
Precision Medical Products, Inc., a former subsidiary of Precision, which
manufactures and markets certain non-catheter medical products and was sold on
August 29, 1997 to certain employees of Precision, including Mr. Holleran. He is
now the Chairman
(12)
ITEM 1. BUSINESS (CONTINUED):
EXECUTIVE OFFICERS (CONTINUED)
and Chief Executive Officer of Precision Medical Products, Inc. From February
1986 to September 1997, Mr. Holleran was also Vice President, Chief Operating
Officer and a director of Precision. From 1991 to 1996, Mr. Holleran served as
President of Endovations, Inc., a subsidiary of Precision that manufactured and
marketed certain gastroenterological medical products, until the sale in June
1996 of a portion of the Endovations business to the Company and the remainder
to an unrelated third party.
Mr. Botterbusch has served as Vice President and General Manager of the
Company's Cardiac Assist Division since July 17, 2001. From January 1999 to
March 2001, Mr. Botterbusch served as Vice President, Research and Engineering
of the Company. He served as Manager, Product Development, Research and
Engineering from 1993 to January 1999, as Group Leader, Research and Development
from 1987 to 1993 and, from 1985, when he joined the Company, to 1987, as a
Project Engineer 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. Hurley has served as Controller of the Company since April 1998. Prior
to joining the Company, from 1990 to 1998 he served in various capacities with
Rhone-Poulenc Rorer, most recently as a Director of Finance.
ITEM 2. PROPERTIES:
The Company's corporate headquarters and principal research center are
located in a 165,000 square foot facility in Reading, Pennsylvania. This
facility, which also includes manufacturing space, is located on 126 acres.
Other major properties owned by the Company include a 165,000 square
foot manufacturing and warehousing facility in Asheboro, North Carolina; a
145,000 square foot manufacturing facility in Wyomissing, Pennsylvania; a 40,000
square foot manufacturing facility in Chihuahua, Mexico; a 49,000 square foot
manufacturing and warehouse facility in Mount Holly, New Jersey; and a 65,000
square foot manufacturing and research facility in the Czech Republic, at which,
as discussed under Item 1. "Business: Sales and Marketing," the Company is
constructing additional manufacturing space.
In addition, the Company leases a 55,000 square foot manufacturing
facility in Everett, Massachusetts, a 12,000 square foot manufacturing facility
in Walpole, Massachusetts, a 7,700 square foot sales office and distribution
center in Woburn, Massachusetts, and a 22,500 square foot manufacturing facility
in Camargo, Mexico. The Company also leases sales offices and warehouse space in
Canada, France, Germany, Japan, South Africa, the Netherlands, Spain and Greece,
sales office space in Mexico and warehouse space in California.
The Company considers all of its facilities to be in good condition and
adequate to meet the present and reasonably foreseeable needs of the Company.
ITEM 3. LEGAL PROCEEDINGS:
The Company is a party to certain legal actions, including product
liability matters, arising in the ordinary course of its business. Based upon
information presently available to the Company, the Company believes it has
adequate legal defenses or insurance coverage for these actions and, except as
set forth under "Item 1. Business: Patents, Trademarks, Regulatory Rights and
Licenses", that the ultimate outcome of these actions would not have a material
adverse effect on the Company's business, financial condition or results of
operations.
(13)
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 2001 through the solicitations of proxies or otherwise.
PART II
ITEM 5. MARKETS FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS:
The Company's common stock has traded publicly on The Nasdaq Stock
Market under the symbol "ARRO" since June 9, 1992, the date that its common
stock was initially offered to the public. The table below sets forth the high
and low sale prices of the Company's common stock as reported by the Nasdaq
Stock Market and the quarterly dividends per share declared by the Company
during the last eight fiscal quarters:
Quarter Ended High Low Dividends
============= ==================================================
August 31, 2001 39.4000 34.7600 $.065
May 31, 2001 38.2500 34.8750 .065
February 28, 2001 39.2500 34.1250 .065
November 30, 2000 40.3125 35.4375 .060
August 31, 2000 37.1250 31.8750 $.060
May 31, 2000 39.6250 28.5625 .060
February 29, 2000 39.5000 25.8750 .060
November 30, 1999 30.0625 23.7500 .055
As of November 1, 2001, there were approximately 612 registered
shareholders of the Company's common stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the years ended
August 31, 2001, 2000, 1999, 1998 and 1997 have been derived from the Company's
audited consolidated financial statements. The consolidated financial statements
of the Company as of August 31, 2001 and 2000 and for each of the three years in
the period ended August 31, 2001, together with the notes thereto and the
related report of PricewaterhouseCoopers LLP, independent accountants, are
included elsewhere herein. The following data should be read in conjunction with
the Company's audited consolidated financial statements, the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which are included elsewhere herein.
(14)
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
2001 2000 1999 1998 1997
----------- ----------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales $ 334,042 $ 325,714 $ 300,318 $ 265,314 $ 250,059
Cost of goods sold 158,573 156,107 143,953 118,780 115,240
Gross profit 175,469 169,607 156,365 146,534 134,819
Operating expenses
Research, development and engineering 25,209 19,771 20,335 18,393 15,871
Selling, general, and administrative 78,499 74,921 71,091 62,672 57,185
Special charges* - 3,320 12,819 36,249 -
Total operating expenses 103,708 98,012 104,245 117,314 73,056
Operating income 71,761 71,595 52,120 29,220 61,763
Other expenses (income), net 2,291 2,145 (3,221) 1,638 2,031
Income before income taxes 69,470 69,450 55,341 27,582 59,732
Provision for income taxes 22,925 23,266 19,646 19,010 22,997
----------- ------------ ------------ ----------- -----------
Net income $ 46,545 $ 46,184 $ 35,695 $ 8,572 $ 36,735
=========== ============ ============ =========== ===========
Basic earnings per common share $ 2.12 $ 2.06 $ 1.54 $ 0.37 $ 1.58
=========== ============ ============ =========== ===========
Diluted earnings per common share $ 2.10 $ 2.05 $ 1.54 $ 0.37 $ 1.58
=========== ============ ============ =========== ===========
Cash dividends per common share $ .255 $ .235 $ .215 $ .195 $ .175
Weighted average shares used in computing
basic earnings per common share 21,995 22,451 23,195 23,225 23,227
Weighted average shares used in computing
diluted earnings per common share 22,120 22,519 23,195 23,225 23,227
BALANCE SHEET DATA:
Working capital $ 125,556 $90,050 $ 107,901 $ 98,826 $ 81,460
Total assets 417,710 385,814 358,333 324,116 320,373
Notes payable and current maturities of
long-term debt 50,722 60,481 33,272 30,252 24,653
Long-term debt, excluding current maturities 600 900 11,105 11,686 12,043
Shareholders' equity 326,089 285,204 278,167 247,868 245,917
Certain prior period amounts in the table above have been reclassified to
conform to the fiscal 2001 presentation (see Note 1 of the Notes to Consolidated
Financial Statements).
* See Note 2 of the Notes to Consolidated Financial Statements for the fiscal
1999 and 2000 special charges. In the fourth quarter of fiscal 1998, in
accordance with Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", the Company recorded a non-cash pre-tax special charge of $36,249
($31,960 after tax or $1.38 per basic and diluted common share) to write
down to fair value certain goodwill and intangible assets.
(15)
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, 2001
Consolidated Statements of Income expressed as a percentage of net sales and the
period-to-period percentage changes in the dollar amounts of the respective line
items.
Period-to-Period
Percentage of Net Sales Percentage Change
--------------------------------- ---------------------------------
2001 2000 1999
Year Ended August 31, vs vs vs
---------------------------------
2001 2000 1999 2000 1999 1998
------- ------- ------ ------ ------- -------
Net sales 100.0% 100.0% 100.0% 2.6% 8.5% 13.2%
Gross profit 52.5 52.1 52.1 3.5 8.5 6.7
Operating expenses:
Research, development and
engineering 7.5 6.1 6.8 27.5 (2.8) 10.6
Selling, general and
administrative 23.5 23.0 23.6 4.8 5.4 13.4
Special charges - 1.0 4.3 (100.0) (74.1) (64.6)
------- ------- ------ ------- ------- -------
Operating income 21.5 22.0 17.4 0.2 37.4 78.4
Other expenses (income), net 0.7 0.7 (1.0) 6.9 (166.6) *
Income before income taxes 20.8 21.3 18.4 - 25.5 100.6
Provision for income taxes 6.9 7.1 6.5 (1.5) 18.4 3.3
------- ------- ------ ------- ------ ------
Net income 13.9 14.2 11.9 0.8 29.4 316.4
Certain prior period amounts in the table above have been reclassified to
conform to the fiscal 2001 presentation (see Note 1 of the Notes to Consolidated
Financial Statements).
* Not a meaningful comparison
(16)
FISCAL 2001 COMPARED TO FISCAL 2000
Net sales increased by $8.3 million, or 2.6%, to $334.0 million in fiscal 2001
from $325.7 million in fiscal 2000. Net sales represent gross sales invoiced to
customers, less certain related charges, including discounts, returns and other
allowances. Sales of critical care products increased 2.8% to $276.1 million
from $268.7 million in fiscal 2000, due primarily to increased shipments of
central venous and special catheters. Sales of cardiac care products increased
1.6% to $57.9 million from $57.0 million in fiscal 2000, due primarily to
increased shipments of intra-aortic balloon ("IAB") pump products. International
sales decreased by $3.0 million, and represented 34.1% of net sales in fiscal
2001, compared to 35.9% in the prior year, principally as a result of the
increased strength of the U.S. dollar, which reduced sales by $7.3 million for
fiscal 2001 when compared to the prior fiscal year.
For the fiscal year ended August 31, 2001, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10 which requires that freight expense be
classified in the Company's income statement as a cost of sales. Previously, the
Company had accounted for freight charges as primarily a reduction of net sales
and in some cases as marketing expense.
Gross profit increased 3.5% to $175.5 million in fiscal 2001 from $169.6 million
in fiscal 2000 due primarily to increased sales volume. As a percentage of net
sales, gross profit was 52.5% in fiscal 2001 compared to 52.1% in fiscal 2000,
due primarily to more efficient manufacturing during the periods in which the
inventory sold was produced and higher margins on special catheters.
Research, development and engineering expenses in fiscal 2001 increased by 27.5%
to $25.2 million from $19.8 million in fiscal 2000. As a percentage of net
sales, these expenses increased to 7.5% in fiscal 2001, compared to 6.1% in
fiscal 2000, due primarily to $5.6 million of incremental research and
development spending on the Arrow LionHeart(TM), LVAS, and CorAide(TM), the
Company's joint research and development program with CCF. See "Item 1.
Business - Research and Product Development."
Selling, general and administrative expenses increased by 4.8% to $78.5 million
during fiscal 2001 from $74.9 million in the previous year, and were 23.5% of
net sales in fiscal 2001 compared to 23.0% in fiscal 2000. The increase was due
primarily to increased legal expenses relating to patent litigation matters. See
"Item 1. Business - Patents, Trademarks, Proprietary Rights and Licenses."
In the first quarter of fiscal 2000, the Company recorded a non-cash pre-tax
special charge of $3.3 million ($2.2 million after-tax or $.10 per basic and
diluted common share) related primarily to a write-down for the in-process
research and development acquired in connection with the Company's acquisition
of Sometec, S.A. (see Notes 2 and 3 of Notes to Consolidated Financial
Statements). The technology acquired is a compact monitoring device that
measures and monitors the descending aortic blood flow during anesthesia and
intensive care. The device provides real-time aortic blood flow (a measurement
of cardiac output) by using both pulsed Doppler for measuring blood velocity and
M-mode ultrasound to accurately measure the aortic diameter. The monitoring
system consists of four main components: the main console (monitor), a
transesophageal probe, a disposable jacket and an articulated probe holder. The
monitor provides the physician with a continuous display of a patient's
hemodynamic profile, including aortic blood flow, heart rate, stroke volume,
peak velocity, acceleration, left ventricular ejection time and systemic
vascular resistance. To facilitate use of this device, a disposable jacket,
containing an acoustic gel, is placed over the probe utilizing a special vacuum
mounting tool supplied with the jacket. The Company believes that the speed and
ease of use of this new noninvasive measurement technique has the potential of
establishing cardiac output as a frequently used physician tool with value
similar to blood pressure, EKG and pulse oximetry
(17)
FISCAL 2001 COMPARED TO FISCAL 2000 (CONTINUED):
measurements. In accordance with SFAS No. 2, "Accounting for Research and
Development Costs" and FIN No. 4, "Applicability of SFAS No. 2 to Business
Combinations Accounted for by the Purchase Method", these costs related to the
special charge were charged to expense at the date of consummation of the
acquisition. The value assigned to purchase Sometec in-process technology was
based on a valuation prepared by an independent third-party appraisal company.
Each of the technologies under development at the date of acquisition was
reviewed for technological feasibility, stage of completeness at the acquisition
date, and scheduled release dates of products employing the technology to
determine whether the technology was complete or under development. At the
acquisition date, the research and development project was estimated to be 75%
complete. Incomplete development efforts at the time of acquisition included
improved portability, software development and development of the disposable
sheath. The valuation was based on the estimated cash flows resulting from
commercially viable products discounted to present value using a risk-adjusted
after-tax discount rate of 22%. The research and development costs from these
projects have commenced. Some cash inflows from these projects have commenced.
However, while the Company believes these projects will be completed as planned,
the Company cannot assure that they will be completed on schedule or, once
completed, that the new products resulting from these projects will be
successfully introduced into the marketplace. The Company does not anticipate
material adverse changes from historical pricing, margins and expense levels as
a result of the introduction of the new technologies related to the projects.
Principally due to the above factors, operating income increased 0.2% to $71.8
million in fiscal 2001 from $71.6 million in fiscal 2000.
Other expenses (income), net, increased to $2.3 million of expense in fiscal
2001 from $2.1 million of expense in fiscal 2000. Other expenses (income), net,
consists principally of interest expense and foreign exchange gains and losses
associated with the Company's direct sales subsidiaries. Aggregate foreign
exchange losses in fiscal 2001 were $0.4 million and in fiscal 2000 aggregate
foreign exchange gains were $0.1 million, including gains relating to foreign
currency contracts of $0.4 million in fiscal 2001 and losses of less than $0.1
million in fiscal 2000.
As a result of the factors discussed above, income before income taxes was $69.5
million for both fiscal 2001 and 2000. In fiscal 2001, the Company reduced its
annual effective tax rate to 33.0% from 33.5% in fiscal 2000 due to anticipated
research and development tax credits.
Net income in fiscal 2001 increased by 0.8% to $46.5 million from $46.2 million
in fiscal 2000. As a percentage of net sales, net income represented 13.9% in
fiscal 2001 compared to 14.2% in the previous year.
Basic earnings per common share were $2.12 and diluted earnings per common share
were $2.10 in fiscal 2001. Basic earnings per common share increased 2.9% in
fiscal 2001, or $.06 per share, from $2.06 per common share in fiscal 2000.
Diluted earnings per common share increased 2.4% in fiscal 2001, or $.05 per
share, from $2.05 per share in the prior year primarily as a result of the above
factors. Weighted average shares of common stock outstanding used in computing
basic earnings per common share decreased to 21,995,394 in fiscal 2001 from
22,450,581 in the prior year. Weighted average shares of common stock
outstanding used in computing diluted earnings per common share decreased to
22,120,367 in fiscal 2001 from 22,518,928 in the prior year. These decreases are
a result of the Company's previously announced share repurchase program, which
remains in effect, partially offset by the Company's issuance during fiscal 2001
of 25,000 shares from treasury to CCF as a pre-paid royalty for the rights
granted to the Company by CCF under the Company's license agreement with CCF.
(See "Item 1. Business-Research and Product Development")
(18)
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales increased by $25.4 million, or 8.5%, to $325.7 million in fiscal 2000
from $300.3 million in fiscal 1999. Sales of critical care products increased
9.9% to $268.7 million from $244.5 million in fiscal 1999, due primarily to
increased shipments of central venous and special catheters. Sales of cardiac
care products increased 2.2% to $57.0 million from $55.8 million in fiscal 1999,
due primarily to increased shipments of IAB pump products. International sales
increased by $11.2 million, and represented 35.9% of net sales in fiscal 2000,
compared to 35.2% in the prior year, principally as a result of growth in
shipments of central venous catheter products and IAB pump and catheter
products. The percentage of net sales attributable to the Company's direct sales
force decreased in fiscal 2000 to approximately 73.4% compared to approximately
75.1% in fiscal 1999.
For the fiscal year ended August 31, 2001, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10 which requires that freight expense be
classified in the Company's income statement as a cost of sales. Previously, the
Company had accounted for freight charges as primarily a reduction of net sales
and in some cases as marketing expense.
Gross profit increased 8.5% to $169.6 million in fiscal 2000 from $156.4 million
in fiscal 1999 due primarily to increased sales volume. As a percentage of net
sales, gross profit was 52.1% in both fiscal 2000 and 1999.
Research, development and engineering expenses in fiscal 2000 decreased by 2.8%
to $19.8 million from $20.3 million in fiscal 2000. As a percentage of net
sales, these expenses decreased to 6.1% in fiscal 2000, compared to 6.8% in
fiscal 1999, due primarily to decreased spending in the development of
experimental and custom products.
Selling, general and administrative expenses increased by 5.4% to $74.9 million
during fiscal 2000 from $71.1 million in the previous year, and were 23.0% of
net sales in fiscal 2000 compared to 23.6% in fiscal 1999. The increase was due
primarily to increased amortization expense related to the Company's acquisition
of Sometec, S.A. in September 1999 and the cardiac assist division of C.R. Bard,
Inc. in December 1998.
In the first quarter of fiscal 2000, the Company recorded a non-cash pre-tax
special charge of $3.3 million ($2.2 million after-tax or $.10 per basic and
diluted common share) related primarily to a write-down for the in-process
research and development acquired in connection with the Company's acquisition
of Sometec, S.A. (see Note 2 and 3 of Notes to Consolidated Financial
Statements). The technology acquired is a compact monitoring device that
measures and monitors the descending aortic blood flow during anesthesia and
intensive care. The device provides real-time aortic blood flow (a measurement
of cardiac output) by using both pulsed Doppler for measuring blood velocity and
M-mode ultrasound to accurately measure the aortic diameter. The monitoring
system consists of four main components: the main console (monitor), a
transesophageal probe, a disposable jacket and an articulated probe holder. The
monitor provides the physician with a continuous display of a patient's
hemodynamic profile, including aortic blood flow, heart rate, stroke volume,
peak velocity, acceleration, left ventricular ejection time and systemic
vascular resistance. To facilitate use of this device, a disposable jacket,
containing an acoustic gel, is placed over the probe utilizing a special vacuum
mounting tool supplied with the jacket. The Company believes that the speed and
ease of use of this new noninvasive measurement technique has the potential of
establishing cardiac output as a frequently used physician tool with value
similar to blood pressure, EKG and pulse oximetry measurements. In accordance
with SFAS No. 2, "Accounting for Research and Development Costs" and FIN No. 4,
"Applicability of SFAS No. 2 to Business Combinations Accounted for by the
Purchase Method", these costs related to the special charge were charged to
expense at the date of consummation of the acquisition. The value assigned to
purchase Sometec in-process technology was based on a valuation prepared by an
independent third-party appraisal company. Each of the technologies under
development at the date of acquisition was reviewed for technological
feasibility, stage of completeness at the acquisition date, and scheduled
release dates of products employing
(19)
FISCAL 2000 COMPARED TO FISCAL 1999 (CONTINUED):
the technology to determine whether the technology was complete or under
development. At the acquisition date, the research and development project was
estimated to be 75% complete. Incomplete development efforts at the time of
acquisition included improved portability, software development and development
of the disposable sheath. The valuation was based on the estimated cash flows
resulting from commercially viable products discounted to present value using a
risk-adjusted after-tax discount rate of 22%. The research and development costs
from these projects have commenced. Some cash inflows from these projects have
commenced. However, while the Company believes these projects will be completed
as planned, the Company cannot assure that they will be completed on schedule
or, once completed, that the new products resulting from these projects will be
successfully introduced into the marketplace. The Company does not anticipate
material adverse changes from historical pricing, margins and expense levels as
a result of the introduction of the new technologies related to the projects.
In the second quarter of fiscal 1999, the Company recorded a non-cash pre-tax
special charge of $4.1 million ($2.7 million after tax or $.12 per basic and
diluted common share) related to the purchase of in-process IAB and pump
research and development as part of the Company's acquisition of the assets of
the cardiac assist division of C.R. Bard, Inc. The IAB and pumps are class 3
life saving medical devices regulated by the FDA. In accordance with Statement
of Financial Accounting Standards ("FAS") No. 2, "Accounting for Research and
Development Costs" and FASB Interpretation No. 4, "Applicability of FAS No. 2 to
Business Combinations Accounted for by the Purchase Method", these costs were
charged to expense at the consummation of the acquisition. The value assigned to
purchase IAB and pump in-process technology was based on a valuation prepared by
an independent third-party appraisal company. Each of the technologies under
development at the date of acquisition were reviewed for technological
feasibility, stage of completeness at the acquisition date, and scheduled
release dates of products employing the technology to determine whether the
technology was complete or under development. At the acquisition date, the
research and development projects were in various stages of completion ranging
from 50% to 80%. The valuation was based on the estimated cash flows resulting
from commercially viable products discounted to present value using risk
adjusted discount rates ranging from 29% to 32%. The research and development
costs and the net cash inflows from the projects commenced within a year of the
acquisition date.
In accordance with FAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", and consistent with the Company's accounting policy for
marketable equity securities, in the fourth quarter of fiscal 1999, the Company
determined that the decline in the fair value of its investment in Cardiac
Pathways Corporation was other than temporary. Accordingly, the Company
established a new basis in the investment at $0.4 million, equivalent to its
fair market value. As a result, the Company realized a special charge of $8.7
million before tax, $5.6 million after tax or $0.24 per basic and diluted common
share.
Principally due to the above factors, operating income increased 37.4% to $71.6
million in fiscal 2000 from $52.1 million in fiscal 1999.
Other expenses (income), net, decreased to $2.1 million of expense in fiscal
2000 from $(3.2) million of income in fiscal 1999, due primarily to larger
foreign exchange gains in fiscal 1999 and higher interest expense in fiscal
2000. Aggregate foreign exchange gains in fiscal 2000 were $0.1 million and in
fiscal 1999 were $4.4 million, including losses relating to foreign currency
contracts of less than $0.1 million in fiscal 2000 and gains of $0.7 million in
fiscal 1999.
(20)
FISCAL 2000 COMPARED TO FISCAL 1999 (CONTINUED):
As a result of the factors discussed above, income before income taxes increased
in fiscal 2000 by 25.5% to $69.5 million from $55.3 million in fiscal 1999. In
fiscal 2000, the Company reduced its annual effective tax rate to 33.5% from
35.5% in fiscal 1999 due to final disposition of tax audits.
Net income in fiscal 2000 increased by 29.4% to $46.2 million from $35.7 million
in fiscal 1999. As a percentage of net sales, net income represented 14.2% in
fiscal 2000 compared to 11.9% in the previous year. During the third quarter of
fiscal 2000, the Company completed a study of its fixed asset lives. The study
indicated that actual lives for certain asset categories were generally longer
than the useful lives for depreciation purposes. Therefore, the Company extended
the estimated useful lives of certain categories of property, plant and
equipment, effective March 1, 2000. The majority of the change in depreciation
related to manufacturing equipment. The change in depreciation expense related
to manufacturing equipment was included in inventory value and is being
recognized as the inventory is sold; the change in depreciation expense related
to non-manufacturing assets is reflected in operating expenses. This change in
estimated fixed asset lives resulted in decreased depreciation expense of $1.9
million and increased net income of $0.6 million for fiscal 2000. Basic and
diluted earnings per common share increased by $.02 in fiscal 2000 as a result
of this change.
Basic earnings per common share increased to $2.06 in fiscal 2000 from $1.54 per
share in fiscal 1999. Diluted earnings per common share increased to $2.05 in
fiscal 2000 from $1.54 per share in fiscal 1999. Weighted average common shares
outstanding decreased to 22,450,581 in fiscal 2000 from 23,195,115 in fiscal
1999 as a result of the Company's previously announced share repurchase program,
which remains in effect.
LIQUIDITY AND CAPITAL RESOURCES
For fiscal 2001, net cash provided by operations was $42.6 million, a decrease
of $14.2 million from the prior year, due primarily to increases in accounts
receivable, inventories and prepaid expenses. Accounts receivable, net of the
allowances for doubtful accounts, increased by $5.4 million for fiscal 2001,
compared to a $3.3 million increase in the prior year. Accounts receivable,
measured in days sales outstanding during the period, was 86 days at August 31,
2001 and 83 days at August 31, 2000. The increase in accounts receivable was due
primarily to sales to distributors which have longer payment terms. In addition,
as previously reported, one of the Company's major U.S. distributors has
continued to experience declining net sales and a significant net loss for the
period most recently reported. In October 2001, this distributor announced plans
to begin a formal review of its strategic alternatives, including a major
refinancing effort. The Company has accounts receivable due from this
distributor in the amount of $5.7 million as of August 31, 2001. Based on
information presently available to the Company and the payment history of this
distributor, the Company continues to believe the receivables due from this
distributor will be collected in the normal course of business. However, in the
event some or all of these receivables become uncollectible, the Company's
future results of operations could be materially adversely affected. The Company
intends to continue to monitor this situation closely to mitigate its future
credit risk exposure. Inventories increased $11.6 million in fiscal 2001 from
$82.8 million at August 31, 2000, due primarily to slower than expected sales of
the Company's Hemosonic products and to higher per unit manufacturing costs at
the Company's domestic manufacturing facilities in the second half of the year.
Prepaid expenses increased $8.6 million in fiscal 2001 from $16.0 million at
August 31, 2000, due primarily to increases in prepaid pension costs and
anticipated tax refunds.
(21)
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in the Company's investing activities decreased to $28.1 million
in the year ended August 31, 2001 from $38.0 million in fiscal 2000 due
primarily to the use of less cash for business acquisitions.
At August 31, 2001, the Company had revolving credit facilities providing a
total of $65.0 million in available revolving credit for general business
purposes, of which $34.0 million was outstanding. In April 2001, the terms of
these facilities were amended and restated to, among other things, include
certain of the Company's subsidiaries as permitted borrowers, allowing up to
$25.0 million of the $65.0 million to be drawn upon by any one or more of these
subsidiaries in their local currency. In August 2001, the Company refinanced the
current portion of its long-term intercompany foreign denominated indebtedness
of $8.3 million through advances under these revolving credit facilities. The
Company has $6.6 million of both available and outstanding credit facilities
related to this foreign debt refinancing at August 31, 2001. Under these credit
facilities, the Company is required to comply with the following financial
convenants: maintain a ratio of total liabilities to tangible net worth (total
assets less total liabilities and intangible assets) of no more than 1.5 to 1
and a cash flow coverage ratio of 1.25 to 1 or greater; a limitation on certain
mergers, consolidations, and sales of assets by the Company or its subsidiaries;
a limitation on its and its subsidiaries' incurrence of liens; and a limitation
requirement that the lender approves the incurrence of indebtedness unrelated to
the revolving credit facility when the amounts are in an amount in excess of
$50.0 million in the aggregate. At August 31, 2001, the Company was in
compliance with all such covenants. In addition, certain other subsidiaries of
the Company had revolving credit facilities totaling the U.S. dollar equivalent
of $20.3 million, of which $9.8 million was outstanding as of August 31, 2001.
Interest rate terms for both U.S. and foreign bank credit facilities are based
on either bids provided by the lender or the prime rate, London Interbank
Offered Rates (LIBOR) or Certificate of Deposit Rates, plus applicable margins.
Certain of these borrowings, primarily those with U.S. banks, are due on demand.
Interest is payable monthly during the revolving credit period. At August 31,
2001, the weighted average interest rate on short-term borrowings was 4.7%.
Combined borrowings under these facilities decreased $1.7 million during fiscal
2001.
Financing activities used $15.3 million of net cash in fiscal 2001, due
primarily to the repayment of the Company's current portion of long-term foreign
denominated indebtedness and dividend payments. Financing activities used $18.3
million in fiscal 2000, primarily as a result of increased use of cash to
purchase shares of the Company's common stock in the open market in connection
with its previously announced share repurchase program offset by increased
borrowing related to the Company's acquisition of Sometec, S.A. in the first
quarter of fiscal 2000. During fiscal 2001, the Company repurchased a total of
36,900 shares of its common stock under this program for $1.3 million. As of
November 1, 2001, the Company had repurchased a total of 1,418,800 shares under
this program for approximately $43.7 million since the program's inception in
March 1999.
(22)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED):
During fiscal 2001, 2000 and 1999, the percentage of the Company's sales
invoiced in currencies other than the U.S. dollar was 21.9%, 23.9% and 23.7%,
respectively. In addition, a small part of the Company's cost of goods sold is
denominated in foreign currencies. The Company enters into foreign currency
exchange and foreign currency option contracts, which are derivative financial
instruments, with major financial institutions to reduce the effect of these
foreign currency risks, primarily on U.S. dollar cash inflows resulting from the
collection of intercompany receivables denominated in foreign currencies and to
hedge anticipated sales in foreign currencies to foreign subsidiaries. Such
transactions occur throughout the year and are probable, but not firmly
committed. Forward contracts are marked to market each accounting period, and
the resulting gains or losses on these contracts are recorded in Other Income /
Expense of the Company's consolidated statements of income. Realized gains and
losses on these contracts are offset by changes in the U.S. dollar value of the
foreign denominated assets, liabilities and transactions being hedged. The
premiums paid on the foreign currency option contracts are recorded as assets
and amortized over the life of the option. The Company's maximum exposure
related to foreign currency options is limited to the premiums paid. The total
premiums authorized to be paid in any fiscal year cannot exceed $1.0 million per
the terms of the Foreign Currency Management Policy Statement approved by the
Company's Board of Directors in January 2001. Gains and losses on purchased
option contracts result from changes in intrinsic or time value. Time value
gains and losses are recognized immediately against net sales. Intrinsic value
gains and losses are recorded in shareholders' equity (as a component of
comprehensive income) until the period in which the underlying sale by the
foreign subsidiary to an unrelated third party is recognized, at which point
those deferred gains and losses are recognized in net sales. 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, 2001, outstanding foreign currency
exchange contracts totaling the U.S. dollar equivalent of $4.8 million mature at
various dates through December 2001 and foreign currency option contracts with a
fair market value of $0.2 million mature at various dates through May 2002. The
Company expects to continue to utilize foreign currency exchange and foreign
currency option contracts to manage its exposure, although there can be no
assurance that the Company's efforts in this regard will be successful.
The Company's exposure to credit risk consists principally of trade receivables.
Hospitals and international dealers account for a substantial portion of trade
receivables and collateral is generally not required. Other than as described
above with respect to one of the Company's major U.S. distributors, the Company
believes that its risk associated with this concentration is limited due to the
Company's on-going credit review procedures.
As part of the Company's 1998 purchase of assets of the cardiac assist division
of C.R. Bard, Inc., the Company also agreed to acquire specified assets and
assume specified liabilities of the Belmont Instruments Corporation for $7.3
million based on the achievement of certain milestones. The Company paid $2.3
million in fiscal 2000 for achievement of milestones during that period. During
fiscal 2001, the Company paid $3.5 million to Belmont for achievement of
additional milestones. Included in the fiscal 2001 payments was the first two of
eight quarterly installments of $0.3 million payable by the Company (which
commenced in April 2001), leaving $1.5 million remaining to be paid as of August
31, 2001. The acquisition was accounted for using the purchase method of
accounting. The excess of the purchase price over the estimated fair value of
the net assets acquired of approximately $7.1 million is being amortized over a
period of 10 years. The results of operations of this business are included in
the Company's consolidated financial statements from the date of acquisition.
(23)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED):
In October 2000, the Company's Board of Directors approved spending of up to
$10.0 million for the construction of additional manufacturing capacity at its
existing manufacturing and research facility in the Czech Republic. The approved
spending includes amounts required for construction of the additional space as
well as all equipment required to meet production needs at such space. This new
construction commenced during fiscal 2001 and is proceeding as planned, with an
anticipated completion date in December 2001. As of August 31, 2001, the Company
had spent $3.8 million on this construction.
Based upon its present plans, the Company believes that its working capital,
operating cash flow and available credit sources will be adequate to repay
current portions of long-term debt, to finance currently planned capital
expenditures and to meet the currently foreseeable liquidity needs of the
Company.
During the periods discussed above, the overall effects of inflation and
seasonality on the Company's business were not significant.
NEW ACCOUNTING STANDARDS
Financial Accounting Standard No. 141, "Business Combinations", addresses
financial accounting and reporting for business combinations, including the
requirement that all business combinations within the scope of the statement are
to be accounted for using the purchase method. The Company was required to adopt
the provisions of FAS No. 141 as of July 1, 2001.
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets",
addresses financial accounting and reporting for acquired goodwill and other
intangible assets. The statement addresses how intangible assets should be
accounted for in financial statements upon their acquisition and how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. FAS No. 142 becomes effective
for the Company's first quarter of fiscal 2003, but earlier adoption is
permitted. The Company is currently evaluating the impact FAS No. 142 will have
on its financial statements.
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company is studying the provisions of
this statement and has not determined the impact that this statement may have on
it.
(24)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Due to the global nature of its operations, the Company is subject to the
exposures that arise from foreign exchange rate fluctuations. Such exposures
arise from transactions denominated in foreign currencies, primarily from
translation of results of operations from outside the United States,
intercompany loans, and intercompany purchases of inventory. The Company is also
exposed to interest rate changes.
The Company's objective in managing its exposure to foreign currency
fluctuations is to minimize earnings and cash flow volatility associated with
foreign exchange rate changes. The Company enters into various contracts that
change in value as foreign exchange rates change to protect the value of its
existing foreign currency assets, liabilities, commitments, and anticipated
foreign currency revenues to meet these objectives. The contracts involve
Japanese yen and other foreign currencies. The gains and losses on these
contracts are offset by changes in the value of the related exposures in the
Company's income statement. It is the Company's policy to enter into foreign
currency transactions only to the extent true exposures exist. The Company does
not enter into foreign currency transactions for speculative purposes.
The fair value of all the Company's foreign currency forward exchange
contracts outstanding at August 31, 2001 was less than $0.1 million, which does
not represent the Company's actual exposure. The following analysis estimates
the sensitivity of the fair value of all foreign currency forward exchange
contracts to hypothetical 10% favorable and unfavorable changes in spot exchange
rates at August 31, 2001 and 2000:
Fair Value of Foreign Currency
Forward Exchange Contracts
----------------------------
(in millions)
August 31, 2001 August 31, 2000
--------------- ---------------
10% adverse rate movement $ (0.9) $ (1.1)
At August 31st rates - -
10% favorable rate movement 0.6 0.8
In addition, the fair value of all the Company's foreign currency option
contracts outstanding at August 31, 2001 was less than $0.1 million, which does
not represent the Company's actual exposure. The following analysis estimates
the sensitivity of the fair value of all foreign currency forward exchange
contracts to hypothetical 10% favorable and unfavorable changes in spot exchange
rates at August 31, 2001 and 2000:
Fair Value of Foreign Currency
Option Contracts
-----------------
(in millions)
August 31, 2001 August 31, 2000
--------------- ---------------
10% adverse rate movement $ - $ -
At August 31st rates - -
10% favorable rate movement 0.5 -
Any gains and losses on the fair value of forward and option contracts
would be largely offset by losses and gains on the underlying transactions or
anticipated transactions. These offsetting gains and losses are not reflected in
the above analysis.
Additional Quantitative and Qualitative disclosures about market risk
(e.g., interest rate and foreign currency exchange risk) are set forth in Note
14 of the Notes to Consolidated Financial Statements contained herein.
(25)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 (a) (1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
Information regarding directors and nominees for directors of the
Company, as well as certain other information required by this item, will be
included in the Company's Proxy Statement to be issued in connection with its
2002 Annual Meeting of Shareholders (the "Proxy Statement"), and is incorporated
herein by reference. The information regarding executive officers required by
this item is contained herein in Part I under the caption "Executive Officers".
PART III
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation of Arrow's directors and
executive officers will be included in the Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of the Company's common stock
by certain beneficial owners and by management of the Company will be included
in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
with management of the Company will be included in the Proxy Statement and is
incorporated herein by reference.
(26)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K:
(a) (1) The following financial statement schedule of the Company is
filed as part of this Form 10-K.
PAGE
Report of Independent Accountants 29
Consolidated Balance Sheets at
August 31, 2001 and 2000 30,31
Consolidated Statements of Income
for the years ended August 31, 2001,
2000 and 1999 32
Consolidated Statements of Comprehensive
Income for the years ended August 31, 2001,
2000 and 1999 33
Consolidated Statements of Cash Flows
for the years ended August 31, 2001,
2000 and 1999 34,35
Consolidated Statements of Changes in Shareholders' Equity for the
years ended August 31, 2001, 2000 and 1999 36-38
Notes to Consolidated Financial Statements 39-63
(a) (2) The following financial statement schedule of the Company is
filed as part of this Form 10-K:
PAGE
2. Schedule II - Valuation and Qualifying Accounts 64
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 65 through 75 hereof for a list of
the Exhibits filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K:
None
(27)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARROW INTERNATIONAL, INC.
By: /s/ Frederick J. Hirt
------------------------------------
Frederick J. Hirt
Chief Financial Officer,
Vice President-Finance and Treasurer
Dated: November 21, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- -----
/s/ Marlin Miller, Jr. Director, Chairman and November 21, 2001
- -----------------------------
(Marlin Miller, Jr.) Chief Executive Officer
(Principal Executive
Officer)
/s/ Raymond Neag Director November 21, 2001
- -----------------------------
(Raymond Neag)
/s/ Frederick J. Hirt Chief Financial Officer, November 21, 2001
- ----------------------------- Vice President -
(Frederick J. Hirt) Finance and Treasurer
(Principal Financial and
Accounting Officer)
/s/ John H. Broadbent, Jr. Director November 21, 2001
- -----------------------------
(John H. Broadbent, Jr.)
/s/ T. Jerome Holleran Director, Secretary November 21, 2001
- -----------------------------
(T. Jerome Holleran)
/s/ Richard T. Niner Director November 21, 2001
- -----------------------------
(Richard T. Niner)
/s/ George W. Ebright Director November 21, 2001
- -----------------------------
(George W. Ebright)
/s/ Alan M. Sebulsky Director November 21, 2001
- -----------------------------
(Alan M. Sebulsky)
/s/ John E. Gurski Director November 21, 2001
- -----------------------------
(John E. Gurski)
/s/ Carl G. Anderson, Jr. Director November 21, 2001
- -----------------------------
(Carl G. Anderson, Jr.)
/s/ R. James Macaleer Director November 21, 2001
- -----------------------------
(R. James Macaleer)
(28)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Arrow International, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 27 present fairly, in all material
respects, the financial position of Arrow International, Inc. and its
subsidiaries (the "Company") at August 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended August 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
on page 27 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 4, 2001
(29)
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
August 31,
----------------------------------
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,968 $ 3,959
Accounts receivable, less allowance for doubtful accounts
of $965 and $1,012 in 2001 and 2000, respectively 79,151 73,796
Inventories 94,420 82,801
Prepaid expenses and other 24,596 15,964
Deferred income taxes 2,850 3,131
------------ ------------
Total current assets 203,985 179,651
------------ ------------
Property, plant and equipment:
Land and improvements 5,601 5,582
Buildings and improvements 78,159 77,194
Machinery and equipment 141,294 127,120
Construction-in-progress 16,437 13,520
------------ ------------
241,491 223,416
Less accumulated depreciation (115,231) (101,976)
------------ ------------
126,260 121,440
------------ ------------
Goodwill, net of accumulated amortization of $12,165
and $9,432 in 2001 and 2000, respectively 43,268 38,879
Intangible and other assets, net of accumulated amortization of
$15,632 and $12,149 in 2001 and 2000, respectively 41,269 41,270
Deferred income taxes 2,928 4,574
------------ ------------
Total assets $ 417,710 $ 385,814
============ ============
See notes to consolidated financial statements
Continued
(30)
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, continued
(In thousands, except share amounts)
August 31,
----------------------------------
2001 2000
------------ ------------
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 300 $ 8,400
Notes payable 50,422 52,081
Accounts payable 8,164 8,151
Cash overdrafts 1,964 1,195
Accrued liabilities 8,629 9,316
Accrued compensation 6,557 8,049
Accrued income taxes 2,393 2,409
------------ ------------
Total current liabilities 78,429 89,601
Long-term debt 600 900
Accrued postretirement and pension benefit obligations 12,592 10,109
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 2001 and 2000 45,661 45,661
Additional paid-in capital 930 38
Retained earnings 332,806 291,870
Less treasury stock at cost:
4,477,413 and 4,477,910 shares
in 2001 and 2000, respectively (45,995) (45,092)
Accumulated other comprehensive (expense) (7,313) (7,273)
------------ ------------
Total shareholders' equity 326,089 285,204
------------ ------------
Total liabilities and shareholders' equity $ 417,710 $ 385,814
============ ============
See notes to consolidated financial statements
(31)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
for the years ended August 31,
----------------------------------------------------
2001 2000 1999
--------------- -------------- --------------
Net sales $ 334,042 $ 325,714 $ 300,318
Cost of goods sold 158,573 156,107 143,953
--------------- ------------ -------------
Gross profit 175,469 169,607 156,365
--------------- ------------ -------------
Operating expenses:
Research, development and engineering 25,209 19,771 20,335
Selling, general and administrative 78,499 74,921 71,091
Special charges - 3,320 12,819
--------------- ------------ -------------
103,708 98,012 104,245
--------------- ------------ -------------
Operating income 71,761 71,595 52,120
--------------- ------------ -------------
Other expenses (income):
Interest expense, net of amount capitalized 2,686 2,534 1,328
Interest income (789) (589) (353)
Other, net 394 200 (4,196)
--------------- ------------ -------------
2,291 2,145 (3,221)
--------------- ------------ -------------
Income before income taxes 69,470 69,450 55,341
Provision for income taxes 22,925 23,266 19,646
--------------- ------------ -------------
Net income $ 46,545 $ 46,184 $ 35,695
=============== ============ =============
Basic earnings per common share $ 2.12 $ 2.06 $ 1.54
=============== ============= =============
Diluted earnings per common share $ 2.10 $ 2.05 $ 1.54
=============== ============= =============
Cash dividends per common share $ .255 $ .235 $ .215
=============== ============= =============
Weighted average shares used in computing
basic earnings per common share 21,995,394 22,450,581 23,195,115
=============== ========== =============
Weighted average shares used in computing
diluted earnings per common share 22,120,367 22,518,928 23,195,115
=============== ========== =============
See notes to consolidated financial statements
(32)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
for the Years Ended August 31,
-----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Net income $ 46,545 $ 46,184 $ 35,695
Other comprehensive income (expense):
Foreign currency translation adjustments (182) (2,643) (113)
Unrealized holding gain on foreign currency
option contracts 114 - -
Unrealized holding gain (loss) on securities, net of taxes
($(108), $(713), and $545, respectively)) 173 1,177 (1,758)
Reclassification adjustment for (gains) losses on securities
included in net income, net of taxes ($76, $0,
and $(3,082), respectively)) (123) - 5,598
Minimum pension liability adjustment (22) - -
---------------- -------------- --------------
Other comprehensive income (expense) (40) (1,466) 3,727
---------------- --------------- --------------
Total comprehensive income $ 46,505 $ 44,718 $ 39,422
=============== ============== ==============
See notes to consolidated financial statements
(33)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
for the years ended August 31,
----------------------------------------------------
2001 2000 1999
--------------- ------------- ---------------
Cash flows from operating activities:
Net income $ 46,545 $ 46,184 $ 35,695
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 16,576 14,994 14,772
Special charges - 3,320 12,819
Amortization of intangible assets and goodwill 6,120 5,937 3,809
Amortization of unearned compensation - - 44
Deferred income taxes 1,892 (948) (2,258)
Unrealized holding loss (gain) on securities (31) (713) (2,536)
Other (103) 606 490
Changes in operating assets and liabilities:
Accounts receivable, net (6,532) (4,206) (4,217)
Inventories (11,676) (9,138) 1,909
Prepaid expenses and other (8,615) (1,457) (2,800)
Accounts payable and accrued liabilities (239) (988) 1,293
Accrued compensation (1,446) 1,891 (1,206)
Accrued income taxes 89 1,319 (1,201)
--------------- -------------- --------------
Total adjustments (3,965) 10,617 20,918
---------------- -------------- --------------
Net cash provided by operating activities 42,580 56,801 56,613
--------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures (20,880) (21,053) (19,264)
Increase in intangible and other assets (3,642) (3,680) (1,773)
Cash paid for businesses acquired, net (3,601) (13,274) (27,903)
---------------- --------------- --------------
Net cash used in investing activities (28,123) (38,007) (48,940)
---------------- -------------- --------------
Cash flows from financing activities:
Increase (decrease) in notes payable (958) 19,456 1,726
Principal payments of long-term debt,
including current maturities (8,631) (859) (110)
Increase (decrease) in book overdrafts 769 801 (1,001)
Dividends paid (5,499) (5,195) (4,872)
Proceeds from stock options exercised 298 50 -
Purchase of treasury stock (1,294) (32,524) (4,186)
---------------- -------------- --------------
Net cash used in financing activities (15,315) (18,271) (8,443)
---------------- -------------- --------------
Effects of exchange rate changes on
cash and cash equivalents (133) (503) 57
Net change in cash and cash equivalents (991) 20 (713)
Cash and cash equivalents at beginning of year 3,959 3,939 4,652
--------------- -------------- --------------
Cash and cash equivalents at end of year $ 2,968 $ 3,959 $ 3,939
=============== ============== ==============
See notes to consolidated financial statements
Continued
(34)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
for the Years Ended August 31,
----------------------------------------------
2001 2000 1999
---------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 2,680 $ 2,534 $ 1,328
Income taxes $ 24,070 $ 22,409 $ 24,442
Supplemental schedule of noncash investing and financing activities:
During 2001, 2000 and 1999, the Company assumed liabilities in conjunction with the purchase of
certain intangible assets as follows:
Estimated fair value of assets acquired $ 4,952 $ 15,583 $ 30,096
Cash paid for assets, net of cash acquired,
of $0, $386, and $0, respectively 3,601 13,274 27,903
---------- ----------- -----------
Liabilities assumed $ 1,351 $ 2,309 $ 2,193
========== =========== ===========
Cash paid for businesses acquired:
Working capital $ - $ (876) $ 4,262
Property, plant and equipment 180 54 300
Goodwill, intangible assets and in-process
research and development 3,421 14,482 23,341
---------- ----------- -----------
$ 3,601 $ 13,660 $ 27,903
========== =========== ===========
Intangible assets acquired by issuing treasury stock $ 878 $ - $ -
========== =========== ===========
See notes to consolidated financial statements
(35)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended August 31, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
Common Stock Treasury Stock Additional
----------------------------- Retained --------------------------- Paid In
Shares Amount Earnings Shares Amount Capital
------------- ----------- ----------- ------------- ------------ -------------
Balance, August 31, 2000 26,478,813 $ 45,661 $291,870 4,477,910 $ (45,092) $ 38
Cash dividends on common
stock, $.255 per share (5,609)
Purchase of treasury stock 36,900 (1,294)
Exercise of stock options (9,570) 106 192
Treasury stock issued to purchase
intangible assets (25,000) 256 622
Treasury stock issued as contribution
to the Company's 401(k) Plan (2,827) 29 78
Reclassification adjustment
for gains included in net income,
net of taxes ($76)
Unrealized gain on marketable
securities, net of taxes ($108)
Unrealized holding gain on foreign
currency option contracts
Foreign currency translation adjustments
Minimum pension liability adjustment
Net income 46,545
------------- ----------- ----------- ------------- ------------ -------------
Balance, August 31, 2001 26,478,813 $ 45,661 $332,806 4,477,413 $ (45,995) $ 930
============= =========== =========== ============= ============ =============
Accumulated Other
Comprehensive Income (Expense)
-----------------------------------
Foreign
Currency
Other Effects
------------------- -------------
Balance, August 31, 2000 $ 1,642 $ (8,915)
Cash dividends on common
stock, $.255 per share
Purchase of treasury stock
Exercise of stock options
Treasury stock issued to purchase
intangible assets
Treasury stock issued as contribution
to the Company's 401(k) Plan
Reclassification adjustment
for gains included in net income,
net of taxes ($76) (123)
Unrealized gain on marketable
securities, net of taxes ($108) 173
Unrealized holding gain on foreign
currency option contracts 114
Foreign currency translation adjustments (182)
Minimum pension liability adjustment (22)
Net income
------------------- -------------
Balance, August 31, 2001 $ 1,670 $ (8,983)
=================== =============
See notes to consolidated financial statements
Continued
(36)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended August 31, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
Common Stock Treasury Stock Additional
----------------------------- Retained --------------------------- Paid In
Shares Amount Earnings Shares Amount Capital
--------------- ----------- ----------- ------------- ------------ ------------
Balance, August 31, 1999 26,478,813 $ 45,661 $250,931 3,420,970 $ (12,618) $ -
Cash dividends on common
stock, $.235 per share (5,245)
Purchase of treasury stock 1,058,500 (32,524)
Exercise of stock options (1,560) 50 38
Unrealized gain on marketable
securities, net of taxes ($713)
Foreign currency translation adjustments
Net income 46,184
--------------- ----------- ----------- ------------- ------------ ------------
Balance, August 31, 2000 26,478,813 $ 45,661 $291,870 4,477,910 $ (45,092) $ 38
=============== =========== =========== ============= ============ ===========
Accumulated Other
Comprehensive Income(Expense)
----------------------------------
Foreign
Currency
Other Effects
------------------- -------
Balance, August 31, 1999 $ 465 $ (6,272)
Cash dividends on common
stock, $.235 per share
Purchase of treasury stock
Exercise of stock options
Unrealized gain on marketable
securities, net of taxes ($713) 1,177
Foreign currency translation adjustments
Net income (2,643)
------------------ ----------
Balance, August 31, 2000 $ 1,642 $ (8,915)
================== ==========
See notes to consolidated financial statements
Continued
(37)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended August 31, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
Common Stock Retained Treasury Stock Unearned
----------------------------- --------------------------- Compen-
Shares Amount Earnings Shares Amount Sation
--------------- ----------- ----------- ------------- ------------ -------------
Balance, August 31, 1998 26,478,813 $ 45,661 $ 220,217 3,254,752 $ (8,432) $ (44)
Cash dividends on common
stock, $.215 per share (4,981)
Purchase of treasury stock 166,138 (4,184)
Forfeiture of restricted stock by
terminated employees 80 (2)
Amortization of unearned
compensation 44
Write-down of impaired marketable
equity securities (see Note 2)
Unrealized loss on marketable
securities, net of taxes ($545)
Foreign currency translation adjustments
Net income 35,695
--------------- ----------- ----------- ------------- ------------ -------------
Balance, August 31, 1999 26,478,813 $ 45,661 $ 250,931 3,420,970 $ (12,618) $ -
=============== =========== =========== ============= ============ =============
Accumulated Other
Comprehensive Income(Expense)
----------------------------------
Foreign
Currency
Other Effects
------------------- -------
Balance, August 31, 1998 $ (3,375) $ (6,159)
Cash dividends on common
stock, $.215 per share
Purchase of treasury stock
Forfeiture of restricted stock by
terminated employees
Amortization of unearned
compensation
Write-down of impaired marketable
equity securities (see Note 2) 5,598
Unrealized loss on marketable
securities, net of taxes ($545) (1,758)
Foreign currency translation adjustments (113)
Net income
------------------- -----------
Balance, August 31, 1999 $ 465 $ (6,272)
=================== ===========
See notes to consolidated financial statements
(38)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies:
General:
Arrow International, Inc. develops, manufactures and markets a broad range of
clinically advanced, disposable catheters and related products for critical and
cardiac care medical procedures. The Company's products are used primarily by
anesthesiologists, critical care specialists, surgeons, emergency and trauma
physicians, cardiologists, interventional radiologists, electrophysiologists,
pain management specialists and other health care providers.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of Arrow
International, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform to
the fiscal 2001 presentation.
Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments purchased with a
maturity of 90 days or less to be cash equivalents. The Company's cash
management program utilizes zero balance accounts. The carrying amount of cash
and cash equivalents approximate fair value.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Inventory Valuation:
Inventories are valued at lower of cost or market. Cost is determined by the
"first-in, first-out" (FIFO) method.
Goodwill, Intangible and Other Assets:
Goodwill represents the excess of the cost over the fair value of net assets
acquired in business combinations. Goodwill is amortized using the straight-line
method over a period of 15 to 25 years depending on the circumstances.
"Intangible and Other Assets", net include certain assets acquired from business
acquisitions and investments and are being amortized using the straight-line
method over their estimated periods of benefits, from 5-20 years. Management
reviews the carrying amount of goodwill, intangible and other assets at each
balance sheet date to assess the continued recoverability based on future gross
cash flows and operating results from the related asset, future asset
utilization and changes in market conditions. In accordance with Statement of
Financial Accounting Standards No. 121 (FAS 121) "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of", long-lived
assets and certain identifiable intangibles to be held and used or disposed of
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If an evaluation is
required and a market value is not determinable, the estimated future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if a write down to a new basis is required.
Impairment will be recorded based on an estimate of future discounted cash
flows.
Continued
(39)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
Property, Plant and Equipment:
Property, plant and equipment are stated at cost and are depreciated over the
estimated useful lives of the assets using the straight-line method ranging from
3 to 39 years. Upon retirement, sale or other disposition, the cost and
accumulated depreciation are eliminated from the accounts and any gain or loss
is included in operations.
During the year ended August 31, 2000, the Company completed a study of its
fixed asset lives. The study indicated that actual lives for certain asset
categories were generally longer than the useful lives for depreciation
purposes. Therefore, the Company extended the estimated useful lives of certain
categories of property, plant and equipment, effective March 1, 2000. The
majority of the change in depreciation related to manufacturing equipment. For
the year ended August 31, 2000, the change in depreciation expense related to
manufacturing equipment was included in inventory value and was recognized as
the inventory was sold; the change in depreciation expense related to
non-manufacturing assets was reflected in operating expenses. This change in
estimated fixed asset lives resulted in decreased depreciation expense of
$1,859, increased net income of $595, and an increase in basic and diluted
earnings per common share of $.02 for the year ended August 31, 2000.
Capitalized Interest:
Interest is capitalized as part of the historical cost of certain property,
plant and equipment constructed by the Company for its own use. The amount of
interest capitalized is based on a weighted average of the interest rates of
outstanding borrowings during the construction period.
Marketable Equity Securities:
Marketable equity securities are carried at fair market value, with unrealized
holding gains and losses, net of tax, reported as accumulated other
comprehensive income(expense) within shareholders' equity. The fair market value
of securities held at August 31, 2001 and 2000 was $3,581 and $3,940,
respectively. The unrealized holding gain was $1,692 at August 31, 2001 and
$1,642 at August 31, 2000.
Financial Instruments:
Effective September 1, 2000, the Company adopted FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS
133 requires that all derivative financial instruments, such as foreign exchange
contracts, be recognized in the financial statements and measured at fair value
regardless of the purpose or intent for holding them. Changes in the fair value
of derivative financial instruments are either recognized periodically in income
or shareholders' equity (as a component of comprehensive income), depending on
whether the derivative is being used to hedge changes in fair value or cash
flows. The adoption of FAS 133 did not have a material effect on the Company's
financial statements or cash flows in fiscal 2001.
The Company enters into foreign currency exchange forward contracts, which are
derivative financial instruments, with certain major financial institutions to
reduce the effect of fluctuating exchange rates, primarily on U.S. dollar cash
inflows resulting from the collection of intercompany receivables denominated in
foreign currencies. The Company classifies a portion of certain intercompany
receivables as long-term investments. The foreign exchange translation effect
related to the investment is reported as accumulated other comprehensive income
(expense) within shareholders'
Continued
(40)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
Financial Instruments (Continued):
equity. Such transactions occur throughout the year and are probable, but not
firmly committed. Forward contracts are marked to market each accounting period,
and the resulting gains or losses on these contracts are recorded in other
income / expense of the consolidated statements of income. Realized gains and
losses on these contracts are offset by the assets, liabilities and transactions
being hedged. From time to time, the Company enters into interest rate swap
agreements to reduce the impact of its floating rate debt. These interest rate
swap agreements allow the Company to exchange floating rate for fixed interest
payments over the life of the agreements. The Company does not use financial
instruments for trading or speculative purposes.
During fiscal 2001, the Company purchased foreign currency option contracts to
hedge anticipated sales in foreign currencies to foreign subsidiaries. The
option premiums paid are recorded as assets and amortized over the life of the
option. The Company's maximum exposure related to foreign currency options is
limited to the premiums paid. The total premiums authorized to be paid in any
fiscal year cannot exceed $1,000 per the terms of the Foreign Currency
Management Policy Statement approved by the Company's Board of Directors in
fiscal 2001. Gains and losses on purchased option contracts result from changes
in intrinsic or time value. Time value gains and losses are recognized
immediately against net sales. Intrinsic value gains and losses are recorded in
shareholders' equity (as a component of comprehensive income) until the period
in which the underlying sale by the foreign subsidiary to an unrelated third
party is recognized, at which point those deferred gains and losses are
recognized in net sales.
Revenue Recognition:
Revenue is recognized at the time products are shipped and title has passed to
the customer. Net sales represent gross sales invoiced to customers, less
certain related charges, including discounts, returns and other allowances.
For the fiscal year ended August 31, 2001, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10 which requires that freight expense be
classified in the Company's income statement as a cost of sales. Previously, the
Company had included freight charges as primarily a reduction of net sales and
in some cases as marketing expense. The effect of the adoption on the full year
financial results for 2001, 2000 and 1999 is to increase sales and cost of sales
and to reduce selling, general and administrative expense (SG&A) as follows:
FISCAL YEAR ENDED AUGUST 31,
----------------------------------------
2001 2000 1999
---- ---- ----
Net Sales $6,333 $5,374 $4,372
Cost of Sales $6,700 $5,684 $4,712
SG&A $ (367) $ (310) $ (340)
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
$17,179 and $14,440 at August 31, 2001 and 2000, respectively. No deferred taxes
have been provided on these earnings.
Continued
(41)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
Foreign Currency Translation:
During fiscal 2001 and 2000, the Company's foreign subsidiaries used their local
currency as the functional currency. All assets and liabilities are translated
at year-end exchange rates and the adjustments are recorded within other
comprehensive income. All income and expense accounts are translated at average
rates and adjustments from the translation are recorded in accumulated other
comprehensive income (expense) within shareholders' equity. Gains and losses
resulting from transactions of the Company and its foreign subsidiaries are
included in "other income/expense". Aggregate foreign exchange losses are $360
for the fiscal year ended August 31, 2001 and aggregate foreign exchange gains
were $126 and $4,444 for the fiscal years ended August 31, 2000 and 1999,
respectively.
Postretirement Benefits Other Than Pensions:
Postretirement health care and life insurance benefits are recorded using the
accrual method of accounting based on actuarially determined costs, which are
recognized over the period from the date of hire to the full eligibility date of
employees who are expected to qualify for such benefits.
Earnings/(Loss) Per Share:
Basic earnings/(loss) per common share is computed by dividing net income/(loss)
available to common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings/(loss) per share is computed by
dividing net income/(loss) available to common shareholders by the
weighted-average number of shares that would have been outstanding if the
dilutive potential common shares had been issued. The diluted earnings/(loss)
per share does not assume the exercise of options that would have an
antidilutive effect on earnings/(loss) per share.
Cost of Start-up Activities:
The Company expenses the cost of start-up activities and organization costs as
incurred.
Computer Software Costs:
The Company records the costs of computer software in accordance with "Statement
of Position (SOP) 98-1", "Accounting for the Costs of Computer Software
Development or Obtained for Internal Use" issued by the Accounting Standards
Executive Committee of the Institute of Certified Public Accountants (AcSec).
This statement requires that certain internal-use computer software costs to be
capitalized and amortized over the useful life of the asset. Total cost
capitalized under this policy were $3,383 and $3,848 for fiscal years ended
August 31, 2001 and 2000, respectively.
Research and Development:
Research and development costs are expensed as incurred. Research and
development costs consist of direct and indirect internal costs related to
specific projects as well as fees paid to other entities which conduct certain
research activities on behalf of the Company.
Continued
(42)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
2. Special Charges:
In the first quarter of fiscal 2000, the Company recorded a non-cash pre-tax
special charge of $3,320 ($2,208 after-tax or $.10 per basic and diluted common
share) related primarily to a write-down for the in-process research and
development acquired in connection with the Company's acquisition of Sometec,
S.A. (see Note 3 of these Notes to Consolidated Financial Statements). The
technology acquired is a compact monitoring device that measures and monitors
the descending aortic blood flow during anesthesia and intensive care. The
device provides real-time aortic blood flow (a measurement of cardiac output) by
using both pulsed Doppler for measuring blood velocity and M-mode ultrasound to
accurately measure the aortic diameter. The monitoring system consists of four
main components: the main console (monitor), a transesophageal probe, a
disposable jacket and an articulated probe holder. The monitor provides the
physician with a continuous display of a patient's hemodynamic profile,
including aortic blood flow, heart rate, stroke volume, peak velocity,
acceleration, left ventricular ejection time and systemic vascular resistance.
To facilitate use of this device, a disposable jacket, containing an acoustic
gel, is placed over the probe utilizing a special vacuum mounting tool supplied
with the jacket. The Company believes that the speed and ease of use of this new
noninvasive measurement technique has the potential of establishing cardiac
output as a frequently used physician tool with value similar to blood pressure,
EKG and pulse oximetry measurements. In accordance with SFAS No. 2, "Accounting
for Research and Development Costs" and FIN No. 4, "Applicability of SFAS No. 2
to Business Combinations Accounted for by the Purchase Method", these costs were
charged to expense at the date of consummation of the acquisition. The value
assigned to purchase Sometec in-process technology was based on a valuation
prepared by an independent third-party appraisal company. Each of the
technologies under development at the date of acquisition was reviewed for
technological feasibility, stage of completeness at the acquisition date, and
scheduled release dates of products employing the technology to determine
whether the technology was complete or under development. At the acquisition
date, the research and development project was estimated to be 75% complete.
Incomplete development efforts at the time of acquisition included improved
portability, software development and development of the disposable sheath. The
valuation was based on the estimated cash flows resulting from commercially
viable products discounted to present value using a risk adjusted after-tax
discount rate of 22%. The research and development costs from these projects
have commenced. Some cash inflows from these projects have commenced. However,
while the Company believes these projects will be completed as planned, the
Company cannot assure that they will be completed on schedule or, once
completed, that the new products resulting from these projects will be
successfully introduced into the marketplace. The Company does not anticipate
material adverse changes from historical pricing, margins and expense levels as
a result of the introduction of the new technologies related to the projects.
In the second quarter of fiscal 1999, the Company recorded a non-cash pre-tax
special charge of $4,139 ($2,670 after tax or $0.12 per basic and diluted common
share) related to the purchase of in-process intra-aortic balloon ("IAB") and
pump research and development as part of the Company's acquisition of the assets
of the cardiac assist division of C.R. Bard, Inc. The IAB and pumps are class 3
life saving medical devices regulated by the FDA. In accordance with FAS No. 2,
"Accounting for Research and Development Costs" and FASB Interpretation (FIN)
No. 4, "Applicability of FAS No. 2 to Business Combinations Accounted for by the
Purchase Method", these costs were charged to expense at the consummation of the
acquisition. The value assigned to purchase IAB and pump in-process technology
was based on a valuation prepared by an independent third-party appraisal
company. Each of the technologies under development at the date of acquisition
were reviewed for
Continued
(43)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
2. Special Charges (Continued):
technological feasibility, stage of completeness at the acquisition date, and
scheduled release dates of products employing the technology to determine
whether the technology was complete or under development. At the acquisition
date, the research and development projects were in various stages of completion
ranging from 50% to 80%. The valuation was based on the estimated cash flows
resulting from commercially viable products discounted to present value using
risk adjusted discount rates ranging from 29% to 32%. The research and
development costs and the net cash inflows from the projects commenced within a
year of the acquisition date.
In accordance with FAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", and consistent with the Company's accounting policy for
marketable equity securities, in the fourth quarter of fiscal 1999, the Company
determined that the decline in the fair value of its investment in Cardiac
Pathways Corporation was other than temporary. Accordingly, the Company has
established a new basis in the investment at $440, equivalent to its fair market
value. As a result, the Company realized a special charge of $8,680 before tax,
$5,598 after tax or $0.24 per basic and diluted common share.
3. Business Acquisitions:
As part of the Company's 1998 purchase of assets of the cardiac assist division
of C.R. Bard, Inc. the Company also agreed to acquire specified assets and
assume specified liabilities of the Belmont Instruments Corporation for $7,295
based on the achievement of certain milestones. The Company paid $2,250 in
fiscal 2000 for achievement of milestones during that period. During fiscal
2001, the Company paid $3,545 to Belmont for achievement of additional
milestones. Included in the fiscal 2001 payments was the first two of eight
quarterly installments of $250 payable by the Company (which commenced in April
2001), leaving $1,500 remaining to be paid as of August 31, 2001. The
acquisition was accounted for using the purchase method of accounting. The
excess of the purchase price over the estimated fair value of the net assets
acquired of approximately $7,146 is being amortized over a period of 10 years.
The results of operations of this business are included in the Company's
consolidated financial statements from the date of acquisition.
On September 1, 1999, the Company completed the acquisition of Sometec, S.A., a
French development company that has developed a non-invasive esophageal
ultrasound probe that continuously measures descending aortic blood flow, for
$11,024, net of cash acquired. The acquisition has been accounted for using the
purchase method of accounting. The excess of the purchase price over the
estimated fair value of the net assets acquired of approximately $4,791 is being
amortized over a period of 20 years. Intangible assets acquired are being
amortized over a period of 10 years. The results of operations of this business
are included in the Company's consolidated financial statements from the date of
acquisition.
(44)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
3. Business Acquisitions (Continued):
On December 1, 1998, the Company continued its expansion into the cardiac care
market by purchasing the assets of the cardiac assist division of C.R. Bard,
Inc., a manufacturer and marketer of intra-aortic balloon catheters and an
intra-aortic balloon pump, for $27,903. The acquisition has been accounted for
using the purchase method of accounting. The excess of the purchase price over
the estimated fair value of the net assets acquired of approximately $2,448 is
being amortized over a period of 25 years. Intangible assets acquired are being
amortized over periods ranging from 5 to 20 years. The results of operations of
this business are included in the Company's consolidated financial statements
from the date of acquisition.
Pro forma amounts are not presented as neither of the acquisitions described
above had any material effect on the Company's results of operations or
financial condition for any of the years presented.
4. Stock Option Plans:
The Company has adopted three stock plans, the 1992 Stock Incentive Plan (the
"1992 Plan"), which was adopted on April 1, 1992, the Directors Stock Incentive
Plan, as amended (the "Directors Plan"), which was approved by the Company's
shareholders on January 17, 1996 with amendments thereto approved by the
shareholders on January 19, 2000, and the 1999 Stock Incentive Plan (the "1999
Plan"), which was approved by the shareholders on June 19, 2000. The 1992 and
1999 Plans authorize the granting of stock options, stock appreciation rights
and restricted stock. The Directors Plan authorizes the granting of a maximum of
150,000 non-qualified stock options. Under the Directors Plan, members of the
Board of Directors of the Company and its subsidiaries are eligible to
participate if they are not also employees or consultants of the Company or its
subsidiaries, and do not serve on the Board as representatives of the interest
of shareholders who have made an investment in the Company. The Directors Plan
authorizes an initial grant of an option to purchase 5,000 shares of common
stock upon each eligible director's initial election to the Board and the grant
of an additional option to purchase 1,500 shares of common stock on the date
each year when directors are elected to the Board. The Company follows the
provision of Accounting Principles Board (APB) No. 25, "Accounting for Stock
Issued to Employees", and related interpretations, which require compensation
expense for options to be recognized only if the market price of the underlying
stock exceeds the exercise price on the date of grant. Accordingly, the Company
has not recognized compensation expense for its options granted during the 2001,
2000 and 1999 fiscal years.
In fiscal 2001 and 1999, options to purchase 20,000 and 481,000 shares,
respectively, of the Company's common stock were granted to key employees of the
Company pursuant to the 1999 and 1992 Plans. The option price per share was
$37.50 in fiscal 2001 and ranged from $25.125 to $31.875 in fiscal 1999. These
amounts represent the fair market value of the common stock of the Company on
the dates the options were granted. The options expire ten years from the grant
date. The options vest ratably over five years at one year intervals from the
grant date and become exercisable at any time once vested.
Continued
(45)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
4. Stock Option Plans (Continued):
On January 17, 2001, January 19, 2000 and January 20, 1999, options to purchase
13,500, 13,500 and 2,000 shares, respectively, of the Company's common stock
were granted to directors of the Company pursuant to the Directors Plan. The
option price per share for the 2001, 2000 and 1999 awards were $36.50, $34.75
and $25.125, respectively, the fair market value of the common stock of the
Company on the dates the options were granted. The options expire ten years from
the grant date. The options vest fully one year from the grant date and become
exercisable at any time once vested.
Stock option activity for the years ended August 31, 2001, 2000 and 1999 is
summarized below:
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
FY 2001 Price FY 2000 Price FY 1999 Price
------------- ------------- ------------- ------------- ------------- -------------
Outstanding at
September 1 802,710 $30.40 808,300 $30.38 346,260 $34.50
Granted 33,500 $37.10 13,500 $34.75 483,000 $27.63
Exercised (9,570) $30.24 (1,560) $31.88 0 -
Terminated (35,780) $30.06 (17,530) $32.31 (20,960) $35.10
-------------- ------------- -------
Outstanding at
August 31 790,860 $30.66 802,710 $30.40 808,300 $30.38
Exercisable at
August 31 413,116 $31.89 276,578 $32.73 123,360 $35.98
Stock options outstanding at August 31, 2001 are summarized below:
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
-------------------- ----------- --------------------- ----------- ------------------- -------------
$25.125 - $38.375 790,860 6.87 years $30.66 413,116 $31.89
Continued
(46)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
4. Stock Option Plans (Continued):
The Company adopted the disclosure provisions of FAS No. 123, "Accounting for
Stock-Based Compensation". As permitted under FAS 123, the Company continues to
apply the existing accounting rules under APB No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made as if the fair value method in measuring compensation cost for stock
options granted subsequent to December 15, 1995, had been applied.
The per share weighted average value of stock options granted in fiscal 2001,
2000 and 1999 was $9.35, $10.51 and $10.52, respectively. The fair value was
estimated as of the grant date using the Black-Scholes option pricing model with
the following average assumption:
2001 2000 1999
------------- ------------- -------------
Risk-free interest rate 4.70% 6.45% 5.09%
Dividend yield 0.71% 0.66% 0.80%
Volatility factor 24.34% 27.48% 37.28%
Expected lives 4 years 4 years 5 years
Had compensation expense for stock options granted in fiscal 2001, 2000 and 1999
been recorded based on the fair market value at the grant date, the Company's
net income and basic and diluted earnings per share, net of income tax effects,
for the years ended August 31, 2001, 2000 and 1999 would have been reduced to
the pro forma amounts indicated below:
2001 2000 1999
------------- ------------- -------------
Net income applicable to common shareholders
As reported $ 46,545 $ 46,184 $ 35,695
Pro forma $ 45,213 $ 44,848 $ 35,047
Basic earnings per common share
As reported $ 2.12 $ 2.06 $ 1.54
Pro forma $ 2.06 $ 2.00 $ 1.51
Diluted earnings per common share
As reported $ 2.10 $ 2.05 $ 1.54
Pro forma $ 2.04 $ 1.99 $ 1.51
The pro forma effects are not representative of the effects on reported net
income for future years, as most of the stock option grants vest in cumulative
increments over a period of five years.
(Continued)
(47)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
5. Related Party Transactions:
During fiscal 2001 and 2000, the Company made purchases amounting to $124 and
$138, respectively, of products from Precision Medical Products, Inc. ("PMP"), a
former subsidiary of Arrow Precision Products, Inc. ("Precision"), currently
owned by certain former management employees of Precision, including T. Jerome
Holleran, who serves as PMP's Chairman and Chief Executive Officer and as
Secretary and a Director of the Company. In addition, the Company provided
certain computer related services to PMP during fiscal 1999 of $3. Precision is
related to the Company through common ownership and is expected to be dissolved
shortly.
6. Rent Expense:
The Company leases certain warehouses and production facilities, office
equipment and vehicles under leases with varying terms.
Rent expense under operating leases totaled $4,328, $3,915 and $4,353 for fiscal
years ended August 31, 2001, 2000 and 1999, respectively. Following is a
schedule by year showing future minimum rentals under operating leases.
Year Ending August 31, Total
---------------------- --------------
2002 $ 3,734
2003 2,363
2004 1,316
2005 794
2006 467
Thereafter 671
--------------
$ 9,345
==============
Continued
(48)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
7. Inventories:
Inventories are summarized as follows:
August 31,
----------
2001 2000
---------- -----------
Finished goods $ 32,336 $ 27,706
Semi-finished goods 21,863 18,742
Work-in-process 12,890 10,562
Raw materials 27,331 25,791
---------- ----------
$ 94,420 $ 82,801
========== ==========
8. Credit Facilities:
The Company had revolving credit facilities providing a total of $65,000 in
available revolving credit for general business purposes, of which $33,963 and
$41,863 were outstanding at August 31, 2001 and 2000, respectively. In April
2001, the terms of these facilities were amended and restated to, among other
things, include certain of the Company's subsidiaries as permitted borrowers,
allowing up to $25,000 of the $65,000 to be drawn upon by any one or more of
these subsidiaries in their local currency. In August 2001, the Company
refinanced the current portion of its long-term intercompany foreign denominated
indebtedness of $8,291 through advances under these revolving credit facilities.
The Company has $6,607 of both available and outstanding credit facilities
related to this foreign debt refinancing at August 31, 2001. Under these credit
facilities, the Company is required to comply with the following financial
convenants: maintaining a ratio of total liabilities to tangible net worth
(total assets less total liabilities and intangible assets) of no more than 1.5
to 1 and a cash flow coverage ratio of 1.25 to 1 or greater; a limitation on
certain mergers, consolidations, and sales of assets by the Company or its
subsidiaries; a limitation on its and its subsidiaries' incurrence of liens; and
a limitation requirement that the lender approves the incurrence of indebtedness
unrelated to the revolving credit facility when the amounts are in an amount in
excess of $50,000 in the aggregate. At August 31, 2001 and 2000, the Company was
in compliance with all such covenants. In addition, certain other subsidiaries
of the Company had revolving credit facilities totaling the U.S. dollar
equivalent of $20,288 and $24,180, of which $9,852 and $10,218 were outstanding
as of August 31, 2001 and 2000, respectively. Interest rate terms for both U.S.
and foreign bank credit facilities are based on either bids provided by the
lender or the prime rate, London Interbank Offered Rates (LIBOR) or Certificate
of Deposit Rates, plus applicable margins. Certain of these borrowings,
primarily those with U.S. banks, are due on demand. Interest is payable monthly
during the revolving credit period. At August 31, 2001 and 2000, the weighted
average interest rates on short-term borrowings were 4.7% and 5.4%,
respectively.
Continued
(49)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
9. Accrued Compensation:
The components of accrued compensation at August 31, 2001 and 2000 are as
follows:
2001 2000
----------- -----------
Accrued vacation pay $ 3,062 $ 2,876
Accrued payroll 2,783 4,054
Accrued productivity plan compensation - 836
Other 712 283
----------- -----------
$ 6,557 $ 8,049
=========== ===========
10. Long-Term Debt:
Long-term debt consists of the following: August 31,
2001 2000
--------- ---------
Bank note payable in July 2001, plus interest at a quoted fixed rate or at a
variable rate based upon LIBOR plus 0.75%. As of August 31, 2000, the interest
rate was fixed at 5.55% through January 2001 and ranged from 5.32% to 5.45% from
January 2001 through July 2001.
$ - $ 8,060
Industrial Development Authority Bonds, $3,500 face amount, subject to mandatory
annual sinking fund payments of $200 from December 1989 through December 1998;
and $300 from December 1999 through December 2003; plus interest at a variable
rate ranging from 2.35% to 6.00% in 2001 and from 3.4% to 6.25%
in 2000. 900 1,200
Interest free loan by the French governmental agency
"Anvar" to Sometec, S.A. for research & development,
due December 31, 2000. - 40
--------- ----------
Total debt $ 900 $ 9,300
Less current maturities 300 8,400
--------- ----------
$ 600 $ 900
========= ==========
Continued
(50)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
10. Long-Term Debt (Continued):
The Industrial Development Authority Bonds are collateralized by a $911 letter
of credit and the Company's headquarters, research and development, and
manufacturing facility in Reading, PA. The Company also has a U.S. dollar
equivalent of irrevocable standby letters of credit totaling $3,513 related to
subsidiary indebtedness and workers compensation insurance coverage and foreign
performance bonds. The annual commitment fees associated with the letters of
credit were 0.70% per annum at August 31, 2001.
Following is a schedule by year showing maturities of long-term debt for each of
the five years in the period ending August 31, 2006:
Year Ending August 31, Total
---------------------- --------------
2002 $ 300
2003 300
2004 300
2005 -
2006 -
Thereafter -
--------------
$ 900
==============
Total interest costs for fiscal 2001, 2000 and 1999 were $3,597, $3,744 and
$2,537, respectively, of which $911, $1,210 and $1,209, respectively, were
capitalized.
At August 31, 2001 and 2000, the carrying amount of long-term debt approximated
fair value.
11. Income Taxes:
The provision (benefit) for income taxes consists of:
2001
-----------------------------------------------------------------------------------
Federal State Foreign Total
----------- ----------- ---------- -----------
Current $ 18,479 $ 1,050 $ 1,578 $ 21,107
Deferred 1,593 152 73 1,818
----------- ----------- ----------- -----------
$ 20,072 $ 1,202 $ 1,651 $ 22,925
=========== =========== =========== ===========
2000
-----------------------------------------------------------------------------------
Federal State Foreign Total
----------- ----------- ---------- -----------
Current $ 19,176 $ 2,046 $ 3,694 $ 24,916
Deferred (894) (85) (671) (1,650)
----------- ----------- ------------ -----------
$ 18,282 $ 1,961 $ 3,023 $ 23,266
=========== =========== =========== ===========
1999
-----------------------------------------------------------------------------------
Federal State Foreign Total
----------- ----------- ---------- -----------
Current $ 20,118 $ 1,854 $ 2,458 $ 24,430
Deferred (4,367) (417) - (4,784)
----------- ------------ ----------- -----------
$ 15,751 $ 1,437 $ 2,458 $ 19,646
=========== =========== =========== ===========
Continued
(51)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
11. Income Taxes (Continued):
Research and development tax credits were $443, $0 and $462 in fiscal 2001, 2000
and 1999, 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, 2001 and 2000:
Deferred tax assets (liabilities): 2001 2000
-------- ---------
Accounts receivable $ (83) $ 285
Inventories 1,640 1,668
Marketable securities 2,147 2,513
Property, plant and equipment (6,974) (6,503)
Intangible assets 8,299 7,737
Accrued liabilities (4,217) (2,701)
Accrued compensation 853 702
Postretirement benefits other than pensions 4,113 4,004
--------- ---------
$ 5,778 $ 7,705
========= =========
Balance Sheet classification:
Current deferred tax assets $ 2,850 $ 3,131
Non-current deferred tax assets 2,928 4,574
--------- ---------
$ 5,778 $ 7,705
========= =========
The sources of significant temporary differences which gave rise to deferred
taxes and their effects were as follows:
2001 2000 1999
--------- -------- ---------
Accounts receivable $ (368) $ 217 $ 379
Depreciation and amortization (471) (1,023) 1,261
Marketable securities (366) (285) 569
Common stock issued
to employees - 15 (70)
Accrued vacation pay 150 5 14
Inventories (28) 586 (646)
Postretirement benefits
and other liabilities (1,408) (591) (656)
Intangible assets 638 1,806 1,587
Other (74) 219 (180)
---------- --------- ---------
$ (1,927) $ 949 $ 2,258
========== ========= =========
Continued
(52)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
11. Income Taxes (Continued):
The following is a reconciliation of the statutory federal income tax rate to
the Company's effective tax rate expressed as a percentage of income from
operations before income taxes:
2001 2000 1999
--------- ------- ---------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 1.2 1.8 2.1
Foreign statutory tax rates differential .6 1.2 .6
Foreign sales corporation (3.2) (3.2) (2.8)
Research and development tax credit (.6) - (1.0)
Other - (1.3) 1.6
--------- --------- ---------
Effective tax rate 33.0% 33.5% 35.5%
========= ========= =========
12. Retirement Benefits:
Pension Plans:
The Company has three noncontributory pension plans that cover substantially all
employees. Benefits under the plans are based upon an employee's compensation
and years of service and, where applicable, the provisions of negotiated labor
contracts. It is the Company's policy to make contributions to these plans
sufficient to meet the minimum funding requirements of applicable laws and
regulations plus such additional amounts, if any, as the Company's actuarial
consultants advise to be appropriate. The projected unit credit method is
utilized for determination of actuarial amounts.
Plan assets consist principally of U.S. government securities, short-term
investments, other equity securities and cash equivalents.
On September 1, 2000, the Company established a Defined Benefit Supplemental
Executive Retirement Plan to provide pension benefits to selected executives and
retired executives/directors of the Company. The plan is unfunded and the
benefits provided under the plan are intended to be in addition to other
employee retirement benefits offered by the Company, including but not limited
to tax-qualified employee retirement plans. The accumulated benefit obligation
for this pension plan, whose accumulated benefit obligations exceed plan assets,
was $3,513 and $0 at August 31, 2001 and 2000, respectively.
Continued
(53)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
12. Retirement Benefits (Continued):
Postretirement Benefits Other Than Pensions:
The Company provides limited amounts of postretirement health and life insurance
benefit plan coverage for some of its employees. The determination of
postretirement benefit cost for postretirement health benefit plans is based on
comprehensive hospital, medical, surgical, and dental benefit provisions. The
determination of postretirement benefit cost for postretirement life insurance
benefits is based on stated policy amounts.
The following summarizes the Company's benefit obligations, changes in plan
assets and funded status:
Pension Benefits Other Benefits
---------------- --------------
August 31, August 31,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 45,482 $ 39,626 $ 9,587 $ 7,696
Service cost 2,506 2,209 224 311
Interest cost 3,751 2,982 517 687
Amendments 3,287 2,447 - -
Actuarial (gain) loss 4,471 (88) (2,249) 1,170
Benefits paid (1,882) (1,694) (339) (277)
-------------- ------------- -------------- -------------
Benefit obligation at end of year $ 57,616 $ 45,482 $ 7,740 $ 9,587
============= ============= ============= =============
Pension Benefits Other Benefits
---------------- --------------
August 31, August 31,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Change in plan assets:
Fair value of plan assets at beginning
of year $ 69,723 $ 60,755 $ - $ -
Actual return on plan assets (4,950) 8,406 - -
Employer contributions 1,877 2,256 339 277
Benefits paid (1,882) (1,694) (339) (277)
-------------- ------------- -------------- -------------
Fair value of plan assets at end of year $ 64,768 $ 69,723 $ 0 $ 0
============= ============= ============= =============
Continued
(54)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
12. Retirement Benefits (Continued):
Pension Benefits Other Benefits
---------------- --------------
August 31, August 31,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Funded status $ 7,152 $ 24,240 $ (7,740) $ (9,587)
Unrecognized net actuarial (gain) loss (2,408) (20,307) (1,720) (514)
Unrecognized prior service cost 9,607 6,985 (543) (627)
Unrecognized transition obligation (asset) (510) (618) 680 729
Unrecognized plan acquisition differential 1,472 1,622 (491) (520)
------------- ------------- -------------- -------------
Prepaid (accrued) benefit cost $ 15,313 $ 11,922 $ (9,814) $ (10,519)
============= ============= ============== ==============
Pension Benefits Other Benefits
---------------- --------------
Amounts recognized in the statement August 31, August 31,
of financial position consist of: 2001 2000 2001 2000
------------- ------------- ------------- -------------
Prepaid benefit cost $ 16,104 $ 12,471 $ - $ -
Accrued benefit liability (3,929) (549) (9,814) (10,519)
Intangible asset 3,116 - - -
Accumulated other comprehensive
income 22 - - -
------------- ------------- ------------- -------------
Net amount recognized $ 15,313 $ 11,922 $ (9,814) $ (10,519)
============= ============= ============= =============
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with plan assets in excess of accumulated
benefit obligations were $53,983, $46,510, and $64,768 for 2001, respectively,
and $45,483, $39,343 and $69,723 for 2000, respectively.
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $3,632, $3,513 and $0 for 2001.
Pension Benefits Other Benefits
---------------- --------------
August 31, August 31,
Weighted-average assumptions as of 2001 2000 1999 2001 2000 1999
------ ------ ----- ------ ---- -----
Discount rate 7.25% 7.75% 7.75% 7.25% 7.75% 7.75%
Expected return on plan assets 11.00% 11.00% 9.50% N/A N/A N/A
Rate of compensation increase 4.00% 4.00% 4.00% N/A N/A N/A
Health care cost trend rate:
Initial trend rate N/A N/A N/A 8.50% 9.00% 6.50%
Ultimate trend rate N/A N/A N/A 5.00% 5.00% 5.00%
Years until ultimate trend is reached N/A N/A N/A 7 8 9
Continued
(55)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
12. Retirement Benefits (Continued):
Pension Benefits Other Benefits
---------------- --------------
Components of net periodic (benefit) August 31, August 31,
cost for the fiscal years ended 2001 2000 1999 2001 2000 1999
-------- ------ ----- ------ ------ -----
Service cost $ 2,506 $ 2,209 $2,122 $ 224 $ 311 $ 307
Interest cost 3,751 2,982 2,815 517 687 546
Expected return on plan assets (7,625) (6,711) (4,415) - - -
Amortization of prior service costs 665 338 347 (84) (84) (84)
Amortization of transition obligation (asset) (107) (107) (107) 49 49 49
Amortization of net actuarial (gain) loss (853) (872) (94) (1,043) - (3)
Plan acquisition differential 150 150 149 (29) (29) (29)
--------- --------- -------- -------- --------- ---------
Net periodic (benefit) cost $ (1,513) $ (2,011) $ 817 $ (366) $ 934 $ 786
========== ========== ======== ======== ========= =========
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care costs trend rates would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
---------------- -----------------
Effect on total of service and interest
cost components $ 75 $ (59)
Effect on postretirement benefit obligation $ 672 $ (538)
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 $1,293, $1,042 and $977 for
fiscal 2001, 2000 and 1999, respectively.
In June 2001, this plan was amended to, among other things, permit the Company
to begin contributing to each eligible participant's 401(k) plan account an
additional amount equal to 1% of each participant's monthly compensation in the
form of vested shares of Arrow common stock. This stock contribution program
resulted in additional expense to the Company of $176.
13. Segment Reporting:
The Company operates as a single reportable segment. The Company operates in
four main geographic regions, therefore, information about products and
geographic areas is presented below.
Continued
(56)
13. Segment Reporting (Continued):
The following table provides information about the Company's sales by product
category:
2001 2000 1999
---------------------------- --------------------------- ----------------------------
Critical Cardiac Critical Cardiac Critical Cardiac
Care Care Care Care Care Care
------------ ------------ ------------ ------------ ------------ -------------
Sales to external
customers $ 276,100 $ 57,900 $ 268,700 $ 57,000 $ 244,541 $ 55,777
The following tables presents information about geographic areas:
2001
-----------------------------------------------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Export Eliminations Consolidated
------------ ------------ ------------ ------------ ------ ------------ ------------
Sales to unaffiliated
customers $ 220,042 $ 34,433 $ 28,179 $ 10,600 $40,788 $ - $334,042
Long-lived assets at
August 31 $ 284,867 $ 3,533 $ 32,347 $ 2,599 $ - $(112,549) $210,797
2000
---------------------------------------------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Export Eliminations Consolidated
------------ ------------ ------------ ------------ ------ ------------ ------------
Sales to unaffiliated
customers $ 208,714 $ 40,896 $ 27,717 $ 9,386 $39,001 $ - $325,714
Long-lived assets at
August 31 $ 255,871 $ 4,456 $ 29,566 $ 2,566 $ - $ (90,870) $201,589
1999
-----------------------------------------------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Export Eliminations Consolidated
------------ ------------ ------------ ------------ ------ ------------ ------------
Sales to unaffiliated
customers $ 194,557 $ 34,753 $ 27,831 $ 8,433 $34,744 $ - $300,318
Long-lived assets at
August 31 $ 240,350 $ 1,740 $ 26,884 $ 2,047 $ - $ (84,902) $186,119
Continued
(57)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
14. Financial Instruments:
During fiscal 2001 and 2000, the percentage of the Company's sales invoiced in
currencies other than U.S. dollars was 21.9% and 23.9%, respectively. In
addition, a small part of the Company's cost of goods sold is denominated in
foreign currencies. The Company enters into foreign currency forward contracts,
which are derivative financial instruments, with major financial institutions to
reduce the effect of these foreign currency risk exposures, primarily on U.S.
dollar cash inflows resulting from the collection of intercompany receivables
denominated in foreign currencies. Such transactions occur throughout the year
and are probable, but not firmly committed. Forward contracts are marked to
market each accounting period, and the resulting gains or losses on these
contracts are recorded in Other Income / Expense of the consolidated statements
of income. Realized gains and losses on these contracts are offset by the
changes in the U.S. dollar value of the foreign denominated assets, liabilities
and transactions being hedged. The Company does not use financial instruments
for trading or speculative purposes. The Company expects to continue to utilize
foreign currency exchange contracts to manage its exposure, although there can
be no assurance that the Company's efforts in this regard will be successful.
The Company's exposure to credit risk consists principally of trade receivables.
Hospitals and international dealers account for a substantial portion of trade
receivables and collateral is generally not required. The risk associated with
this concentration is limited due to the Company's on-going credit review
procedures.
At August 31, 2001, the Company had forward exchange contracts to sell foreign
currencies which mature at various dates through December 2001. The following
table identifies forward exchange contracts to sell foreign currencies at August
31, 2001 and 2000 as follows:
August 31, 2001 August 31, 2000
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
--------- ---------- ----------- -----------
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $ 1,661 $ 1,688 $ 2,813 $ 2,766
German marks 2,271 2,278 - -
Spanish pesetas 328 328 - -
Canadian dollars 1,942 1,933 1,586 1,597
Greek drachmas - - 2,091 2,104
Mexican peso 1,286 1,280 2,115 2,173
African rand - - 923 932
---------- ---------- ----------- ----------
$ 7,488 $ 7,507 $ 9,528 $ 9,572
========== ========== =========== ==========
Continued
(58)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
14. Financial Instruments (Continued):
During fiscal 2001, the Company purchased foreign currency option contracts to
hedge anticipated sales in foreign currencies to foreign subsidiaries. The
option premiums paid are recorded as assets and amortized over the life of the
option. The Company's maximum exposure related to foreign currency options is
limited to the premiums paid. The total premiums authorized to be paid in any
fiscal year cannot exceed $1,000 per the terms of the Foreign Currency
Management Policy Statement as approved by the Company's Board of Directors in
January 2001. Gains and losses on purchased option contracts result from changes
in intrinsic or time value. Time value gains and losses are recognized
immediately against net sales. Intrinsic value gains and losses are recorded in
shareholders' equity (as a component of comprehensive income) until the period
in which the underlying sale by the foreign subsidiary to an unrelated third
party is recognized, at which point those deferred gains and losses are
recognized in net sales. During fiscal 2001, the Company has recognized time
value loss of $404 against net sales offset by the recognition of intrinsic
value gains of $403. At August 31, 2001, the Company has unrealized holding
gains of $114 related to these foreign currency option contracts. The Company
has the following foreign currency option contracts at August 31, 2001, which
mature at various dates through February 2002.
August 31, 2001 August 31, 2000
Premium Fair Market Premium Fair Market
Paid Value Paid Value
---- ------ ----- ------
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $ 230 $ 46 $ - $ -
15. Contingencies:
The Company is a party to certain legal actions, including product liability
matters, arising in the ordinary course of its business. From time to time, the
Company is also subject to legal actions involving patent and other intellectual
property claims. The Company is currently a defendant in two related lawsuits
alleging that certain of its hemodialysis catheter products infringe patents
owned by a third party. Based upon information presently available to the
Company, the Company believes it has adequate legal defenses with respect to
these actions. Although the ultimate outcome of these actions is not expected to
have a material adverse effect on the Company's business or financial condition,
whether an adverse outcome in these actions would materially adversely affect
the Company's reported results of operations in any future period cannot be
predicted with certainty.
Continued
(59)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
15. Contingencies (Continued):
On March 19, 2001, the Company and Medtronic, Inc. reached a settlement
of pending patent litigation (Civil Action No. CV-00-11271 PBS) in the United
States District Court for the District of Massachusetts. The settlement also
ends all litigation pending worldwide between the parties, including actions in
Germany, Belgium, The Netherlands, and the European Patent Office. As part of
the settlement, the Company has granted Medtronic a worldwide license under U.S.
Patent No. 4,978,338 and its foreign counterparts. This settlement has not had,
and is not expected to have in the future a material adverse effect on the
Company's business, financial condition or results of operations.
On August 17, 2001, the United States District Court for the District of
New Jersey granted Datascope Corp.'s motion for summary judgment in its
declaratory judgment lawsuit that certain claims of the Company's U.S. Patent
No. Re. 34,993 relating to its IAB catheter were invalid and that Datascope did
not infringe other claims of that patent which remain valid. This judgment does
not result in any liability to Arrow and is not expected to have any material
adverse effect on the Company's business, financial condition or results of
operations.
16. New Accounting Standards:
Financial Accounting Standard No. 141, "Business Combinations", addresses
financial accounting and reporting for business combinations, including the
requirement that all business combinations within the scope of the statement are
to be accounted for using the purchase method. The Company was required to adopt
the provisions of FAS No. 141 as of July 1, 2001.
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets",
addresses financial accounting and reporting for acquired goodwill and other
intangible assets. The statement addresses how intangible assets should be
accounted for in financial statements upon their acquisition and how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. FAS No. 142 becomes effective
for the Company's first quarter of fiscal 2003, but earlier adoption is
permitted. The Company is currently evaluating the impact FAS No. 142 will have
on its financial statements.
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company is studying the provisions of
this statement and has not determined the impact that this statement may have on
it.
Continued
(60)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
17. Summary of Quarterly Results (unaudited):
Quarterly financial results for the year ended August 31, 2001 are as follows:
Quarter
----------------------------------------------------------------
11-30-00 2-28-01 5-31-01 8-31-01
----------- ----------- ---------- -----------
Net sales $ 78,524 $ 82,509 $ 85,993 $ 87,016
Cost of goods sold 36,923 39,445 40,760 41,445
----------- ----------- ----------- -----------
Gross profit 41,601 43,064 45,233 45,571
Operating expenses
Research, development
and engineering 6,090 6,121 7,033 5,965
Selling, general and
administrative 18,246 18,804 19,992 21,457
Operating income 17,265 18,139 18,208 18,149
Other expenses (income) 659 756 460 416
Income before income
taxes 16,606 17,383 17,748 17,733
Provision for income taxes 5,480 5,737 5,856 5,852
Net income $ 11,126 $ 11,646 $ 11,892 $ 11,881
Basic earnings
per common share $ 0.51 $ 0.53 $ 0.54 $ 0.54
Diluted earnings
per common share $ 0.50 $ 0.53 $ 0.54 $ 0.53
Weighted average shares used in
computing basic earnings per
common share 22,002 21,990 21,987 22,003
Weighted average shares used in
computing diluted earnings per
common share 22,134 22,111 22,110 22,127
As a result of the adoption of EITF 00-10, net sales increased by $1,216,
$1,783, $1,878 and $1,456 for the 1st, 2nd, 3rd and 4th quarters of fiscal 2001.
Cost of sales increased by $1,273, $1,863, $1,976 and $1,588 and selling,
general, and administrative expenses decreased by $57, $80, $98 and $132 over
the same four quarters of fiscal 2001, respectively.
Continued
(61)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
17. Summary of Quarterly Results (unaudited) (Continued):
Quarterly financial results for the year ended August 31, 2000 are as follows:
Quarter
----------------------------------------------------------------
11-30-99 2-28-00 5-31-00 8-31-00
----------- ----------- ---------- -----------
Net sales $ 77,931 $ 81,982 $ 82,653 $ 83,148
Cost of goods sold 36,613 39,288 39,925 40,281
----------- ----------- ----------- -----------
Gross profit 41,318 42,694 42,728 42,867
Operating expenses
Research, development
and engineering 5,371 4,753 5,369 4,278
Selling, general and
administrative 18,181 18,799 18,315 19,626
Special charges* 3,320 - - -
Operating income 14,446 19,142 19,044 18,963
Other expenses (income) 474 617 180 874
Income before income
taxes 13,972 18,525 18,864 18,089
Provision for income taxes 4,750 6,299 6,414 5,803
Net income $ 9,222 $ 12,226 $ 12,450 $ 12,286
Basic earnings
per common share $ 0.40 $ 0.54 $ 0.56 $ 0.56
Diluted earnings
per common share $ 0.40 $ 0.54 $ 0.56 $ 0.55
Weighted average shares used in
computing basic earnings per
common share 22,899 22,540 22,278 22,088
Weighted average shares used in
computing diluted earnings per
common share 22,899 22,603 22,374 22,202
As a result of the adoption of EITF 00-10, net sales increased by $1,214,
$1,381, $1,363 and $1,416 for the 1st, 2nd, 3rd and 4th quarters of fiscal 2001.
Cost of sales increased by $1,276, $1,458, $1,440 and $1,510 and selling,
general, and administrative expenses decreased by $62, $77, $77 and $94 over the
same four quarters of fiscal 2000, respectively.
* In the first quarter of fiscal 2000, the Company recorded a special charge
(See Note 2, "Special Charges").
Continued
(62)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
18. Earnings per Share:
The following is a reconciliation of weighted average common shares outstanding
to weighted average common shares outstanding assuming dilution used in the
calculation of earnings per share for the fiscal years ended August 31, 2001,
2000 and 1999:
2001 2000 1999
---------------- --------------- ----------------
Average common shares outstanding 21,995,394 22,450,581 23,195,115
Common shares issuable(1) 124,973 68,347 0
---------------- --------------- ----------------
Average common shares
outstanding assuming dilution 22,120,367 22,518,928 23,195,115
(1) Issuable primarily under stock option plans.
(63)
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, 1999:
Accounts receivable:
Allowance for doubtful accounts $ 768 $ 440 - $ 376 $ 832
============= ============= ============= ============= ================
For the year ended August 31, 2000:
Accounts receivable:
Allowance for doubtful accounts $ 832 $ 508 - $ 328 $ 1,012
============= ============= ============= ============= ================
For the year ended August 31, 2001:
Accounts receivable:
Allowance for doubtful accounts $ 1,012 $ 817 - $ 864 $ 965
============= ============= ============= ============== ================
(1) Deductions represent write-off of accounts receivable.
(64)
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
- ------ ----------- ----------------
3.1 Restated Articles of Incorporation of Incorporated by reference from
the Company. Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal
year ended August 31, 1992
3.2 By-laws of the Company, as amended Incorporated by reference from
and restated. Exhibit 3.4 to the Company's
Registration Statement on Form S-1
File No. 33-47163 ("Registration
Statement")
4.1 Form of Common Stock certificate. Incorporated by reference from
Exhibit 4.1 to the Company's
Registration Statement
10.1 1992 Stock Incentive Plan. Incorporated by reference from
Exhibit 10.1 to the Company's
Registration Statement
10.2 Arrow International, Inc. 401(k) Incorporated by reference from
Summary Plan Description (as Exhibit 10.2 to the Company's Quarterly
Amended on June 1, 2001). Report on Form 10-Q for the third quarter
period ended May 31, 2001 (the "May 31,
2001 Form 10-Q")
10.3.1 Amended and Restated Retirement Incorporated by reference from
Plan for Salaried Employees of the Exhibit 10.3 to the Company's
Company, effective September 1, 1989. Registration Statement
10.3.2 Amended and Restated Retirement Incorporated by reference from
Plan for Salaried Employees of the Exhibit 10.3.2 to the Company's
Company, effective September 1, 1989, Annual Report on Form 10-K for
as amended. the year ended August 31, 1993
(the "1993 Form 10-K")
10.4 Amended and Restated Restricted Incorporated by reference from
Stock Bonus Plan. Exhibit 10.4 to the Company's
Registration Statement
10.5 Split Dollar Life Insurance Incorporated by reference from
Agreements, dated December 16, Exhibit 10.5 to the Company's
1991, between the Company and Registration Statement
James H. Miller, as Trustee under the
provisions of a certain Irrevocable
Trust Agreement with Marlin Miller, Jr.
dated December 13, 1991.
10.6 Split Dollar Life Insurance Agreements, Incorporated by reference from
dated December 16, 1991, between the Exhibit 10.6 to the Company's
Company and Raymond Neag Registration Statement
Irrevocable Trust, dated October 11,
1991, Evelyn Neag, Trustee.
(65)
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
10.7 Split Dollar Life Insurance Agreements, Incorporated by reference from
dated December 16, 1991, between Exhibit 10.7 to the Company's
the Company and Robert E. Gedney, Registration Statement
as Trustee under the provisions of a
certain Irrevocable Trust Agreement
with John H. Broadbent, Jr. dated
December 13, 1991.
10.8 Split Dollar Life Insurance Incorporated by reference from
Agreements, dated December 16, Exhibit 10.8 to the Company's
1991 between the Company and Registration Statement
Donald M. Mewhort, as Trustee
under Agreement of Trust dated
October 8, 1991, created by
T. Jerome Holleran, Settlor (the
"Holleran Split Dollar Life Insurance
Agreements").
10.8.1 Assignment, dated April 24, Incorporated by reference
1992, of the rights and obligations from Exhibit 10.8.1 to the
under the Holleran Split Dollar Life Company's Registration Statement
Insurance Agreements from the
Company to Arrow Precision Products,
Inc.
10.9 License Agreement, dated October 23, Incorporated by reference from
1981, between Dr. Ketan Shevde and Exhibit 10.9 to the Company's
the Company. Registration Statement
10.10 License Agreement, dated January Incorporated by reference from
18, 1992, between Innovation Exhibit 10.10 to the Company's
Associates, Inc. and the Company. Registration Statement
10.11 License Agreement, dated March 28, Incorporated by reference
1991, between Daltex Medical from Exhibit 10.11 to the
Sciences, Inc. and the Company. Company's Registration Statement
10.11.1 Modification Agreement, dated Incorporated by reference
October 25, 1995, to License Exhibit 10.11.1. to the Company's Quarterly
Agreement between Daltex Medical Report on Form 10-Q for the third quarter
Sciences, Inc. and the Company period ended May 31, 1997 (the "May
31, 1997 Form 10-Q")
10.11.2 Second Modification Agreement, Incorporated by reference
dated May 30, 1997, to License from Exhibit 10.11.2 to the
Agreement between Daltex Medical May 31, 1997 Form 10-Q
Sciences, Inc. and the Company.
10.12 Agreement and Compromise Incorporated by reference
and Release, dated November from Exhibit 10.12 to the Company's
30, 1988, between Michael A. Registration Statement
Berman, Critikon, Inc. and the
Company.
(66)
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
10.13 License Agreement, dated Incorporated by reference from
April 15, 1982, between Dr. Exhibit 10.13 to the Company's
Randolph M. Howes and the Registration Statement
Company, as amended pursuant
to the Addendum to License
Agreement, dated August 26, 1986,
among Dr. Randolph M. Howes,
Janice Kinchen Howes and the
Company, and the Second
Addendum to License Agreement,
dated October 9, 1990, among Dr.
Randolph M. Howes, Janice Kinchen
Howes, Baham & Anderson and
the Company.
10.14 License Agreement, dated September Incorporated by reference from
16, 1988, between J. Daniel Raulerson Exhibit 10.14 to the Company's
and the Company, as amended pursuant Registration Statement
to Addendum to License Agreement,
dated November 27, 1989, between J.
Daniel Raulerson and the Company.
10.15 License Agreement, dated February 24, Incorporated by reference from
1984, between Blair Medical Products, Exhibit 10.15 to the Company's
Inc. and the Company. Registration Statement
10.16 Stock Purchase Agreement, dated Incorporated by reference from
October 24, 1990, among Robert E. Exhibit 10.16 to the Company's
Fischell, Standard Associates, Registration Statement
Cymed Ventures, Inc., Arrow
International Investment Corp. and the
Company.
10.17 License Agreement, dated Incorporated by reference from
October 24, 1990, between Medical Exhibit 10.17 to the Company's
Innovative Technologies R&D Limited Registration Statement
Partnership and the Company.
10.18 Research and Development Agreement, dated Incorporated by reference from Exhibit 10.18
October 24, 1990, between Medical Innovative to the Company's Registration Statement
Technologies R&D Limited Partnership and the
Company.
10.19 License Agreement, dated February 24, 1992, Incorporated by reference from Exhibit 10.19
between Cathco, Inc. and the Company. to the Company's Registration Statement
(67)
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
------ ---------- ----------------
10.20 Settlement Agreement, dated September 30, Incorporated by reference from Exhibit 10.20 to
1991, among Dr. Randolph M. Howes, Janice the Company's Registration Statement
Kinchen Howes, Baham & Anderson, the Company
and Baxter Health Care Corporation and
related License Agreement, dated September
30, 1991, among Dr. Randolph M. Howes, Janice
Kinchen Howes, Baham & Anderson, the Company
and Baxter Health Care Corporation.
10.21 Agreement dated August 7, 2000 between the Incorporated by reference from Exhibit 10.21
Company and United Steelworkers of America to the Company's Annual Report on Form 10-K
AFL/CIO Local 8467. for the fiscal year ended August 31, 2000 (the
"2000 Form 10-K")
10.22 Extension of Lease Agreement between Indian Incorporated by reference from Exhibit 10.22
Mills Associates and the Company, dated to the Company's Registration Statement
December 4, 1991, extending the Lease, dated
February 5, 1988, between Lyco Associates and
the Company.
10.23.1 Amended and Restated Retirement Plan for Incorporated by reference from Exhibit 10.23
Hourly-Rated Employees of the Wyomissing to the Company's Registration Statement Plant
of the Company, effective September 1, 1989.
10.23.2 Amended and Restated Retirement Plan for Incorporated by reference from Exhibit 10.23.2
Hourly-Rated Employees of the Wyomissing to the 1993 Form 10-K
Plant of the Company, effective
September 1,1989, as amended.
10.24.1 Amended and Restated Retirement Plan for Incorporated by reference from Exhibit 10.24
Hourly-Rated Employees of the North Carolina to the Company's Registration Statement
and New Jersey Plants of the Company,
effective September 1, 1989.
10.24.2 Amended and Restated Retirement Plan for Incorporated by reference from Exhibit
Hourly-Rated Employees of the North Carolina 10.24.2 to the 1993 Form 10-K
and New Jersey Plants of the Company, effective
September 1, 1989, as amended.
10.25.1 Loan Agreement, dated January 3, 1986, among Incorporated by reference from Exhibit
the Company, Arrow Medical Products, Limited, 10.25.1 to the Company's Registration
Arrow International Export Corporation, and Statement
Hamilton Bank.
(68)
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
------ ---------- ----------------
10.25.2 First Amendment to Loan Agreement, dated Incorporated by reference from Exhibit
March 18, 1987, among the Company, Arrow 10.25.2 to the Company's Registration
Medical Products, Limited, Arrow Statement
International Export Corporation, and
Hamilton Bank.
10.25.3 Second Amendment to Loan Agreement, dated Incorporated by reference from Exhibit
March 31, 1988, among the Company, Arrow 10.25.3 to the Company's Registration
Medical Products, Limited, Arrow Statement
International Export Corporation, and
Hamilton Bank.
10.25.4 Third Amendment to Loan Agreement, dated Incorporated by reference from Exhibit
March 31, 1989, among the Company, Arrow 10.25.4 to the Company's Registration
Medical Products, Limited, Arrow Statement
International Export Corporation, and
Hamilton Bank.
10.25.5 Fourth Amendment to Loan Agreement, dated Incorporated by reference from Exhibit
March 30, 1990, among the Company, Arrow 10.25.5 to the Company's Registration
Medical Products, Limited, Arrow Statement
International Export Corporation, and
Hamilton Bank.
10.25.6 Fifth Amendment to Loan Agreement, dated Incorporated by reference from Exhibit
March 1, 1991, among the Company, Arrow 10.25.6 to the Company's Registration
Medical Products, Limited, Arrow Statement
International Export Corporation, and
Hamilton Bank.
10.25.7 Sixth Amendment to Loan Agreement, dated July Incorporated by reference from
15, 1991, among the Company, Arrow Medical Exhibit 10.25.7 to the Company's
Products, Limited, Arrow International Export Registration Statement
Corporation, and Hamilton Bank.
10.25.8 Seventh Amendment to Loan Agreement, dated Incorporated by reference from Exhibit
September 6, 1991, among the Company, Arrow 10.25.8 to the Company's Registration
Medical Products, Limited, Arrow Statement
International Export Corporation, and
Hamilton Bank.
10.25.9 Eighth Amendment to Loan Agreement, dated Incorporated by reference from Exhibit
February 21, 1992, among the Company, Arrow 10.25.9 to the Company's Registration
Medical Products, Limited, Arrow Statement
International Export Corporation, and
Hamilton Bank.
(69)
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
------ ---------- ----------------
10.25.10 Letters of Amendment, dated April 10, 1992, Incorporated by reference from Exhibit
and May 19, 1992, to Loan Agreement between 10.25.17 to the Company's Registration
the Company and Hamilton Bank. Statement
10.25.11 Ninth Amendment to Loan Agreement, dated May Incorporated by reference from Exhibit
27, 1992, among the Company, Arrow Medical 10.25.18 to the Company's Registration
Products, Limited, Arrow International Export Statement
Corporation, and Hamilton Bank.
10.25.12 Letter Agreement, dated February 25, 1993, Incorporated by reference from Exhibit
among the Company, Arrow Medical Products, 10.25.12 to the 1994 Form
Limited, Arrow International Export 10-K
Corporation, and CoreStates Hamilton Bank,
and Note relating thereto.
10.25.13 Letter Agreement, dated January 31, 1994, Incorporated by reference from Exhibit
among the Company, Arrow Medical Products, 10.25.13 to the 1995 Form
Limited, Arrow International Export 10-K
Corporation, and CoreStates Hamilton Bank,
and Note relating thereto.
10.25.14 Letter Agreement, dated March 6, 1995, among Incorporated by reference from Exhibit
the Company, Arrow Medical Products, Limited, 10.25.14 to the 1995 Form
Arrow International Export Corporation, and 10-K
CoreStates Hamilton Bank, and Note relating
thereto.
10.25.15 Letter Agreement, dated November 14, 1995, Incorporated by reference from Exhibit
among the Company, Arrow Medical Products, 10.25.15 to the 1995 Form
Limited, Arrow International Export 10-K
Corporation, and CoreStates Hamilton Bank,
and Note relating thereto.
10.25.16 Letter Agreement, dated February 23, 1996, Incorporated by reference from Exhibit
among the Company, Arrow Medical Products, 10.25.16 to the Company's Quarterly Report
Limited, Arrow International Export on Form 10-Q for the second quarter period
Corporation, and CoreStates Hamilton Bank, ended February 29, 1996 (the "February 29,
and Note relating thereto. 1996 Form 10-Q")
10.25.17 Letter Agreement, dated January 29, 1996 Incorporated by reference from Exhibit
among the Company and First Union National 10.25.17 to the February 29, 1996 Form 10-Q
Bank, and note relating thereto.
(70)
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
------ ---------- ----------------
10.25.18 Letter Agreement, dated July 11, 1996, among Incorporated by reference from Exhibit
the Company, Arrow Medical Products, Limited, 10.25.18 to the Company's Annual Report on
Arrow International Export Corporation, and Form 10-K for the fiscal year ended August
CoreStates Hamilton Bank, and Note relating 31, 1996 (the "1996 Form 10-K")
thereto.
10.26.1 Installment Sale Agreement between Berks Incorporated by reference from Exhibit
County Industrial Development Authority and 10.25.10 to the Company's Registration
the Company, dated as of December 1, 1988. Statement
10.26.2 Indenture of Trust between Berks County Incorporated by reference from Exhibit
Industrial Development Authority and Bankers 10.25.11 to the Company's Registration
Trust Company, as trustee, dated as of Statement
December 1, 1988.
10.26.3 Irrevocable Direct Pay Letter of Credit, Incorporated by reference from Exhibit
dated December 28, 1988, issued for the 10.25.12 to the Company's Registration
benefit of Bankers Trust Company, as trustee Statement
under the Indenture of Trust, for the account
of the Company.
10.26.4 Letter of Credit Note from the Company Incorporated by reference from Exhibit
payable to the order of Hamilton Bank, dated 10.25.13 to the Company's Registration
December 28, 1988. Statement
10.26.5 Letter of Credit Reimbursement Agreement Incorporated by reference from Exhibit
between the Company and Hamilton Bank, dated 10.25.14 to the Company's Registration
as of December 1, 1988. Statement
10.26.6 Accommodation Mortgage, Security Agreement Incorporated by reference from Exhibit
and Second Assignment of Installment Sale 10.25.15 to the Company's Registration
Agreement, dated as of December 15, 1988, by Statement
and among Berks County Industrial Development
Authority, the Company and Hamilton Bank.
10.27 Variable Amount Grid Note Agreement, dated Incorporated by reference from Exhibit
May 8, 1991, between the Company and First 10.25.16 to the Company's Registration
Union National Bank. Statement
10.28 Purchase Agreement, dated January 20, 1984, Incorporated by reference from Exhibit 10.26
between the Company and Arrow Research to the Company's Registration Statement
Partners.
(71)
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
------ ---------- ----------------
10.29 Form of Research and Development Agreement, Incorporated by reference from Exhibit 10.27
dated August 2, 1982, between the Company and to the Company's Registration Statement
Arrow Research Partners.
10.30 Arrow International, Inc. Profit Sharing Plan Incorporated by reference from Exhibit 10.30
to the Company's Registration Statement
10.31 Agreement, dated May 19, 1992, between the Incorporated by reference from Exhibit 10.32
Company and Arrow Precision Products, Inc. to the Company's Registration Statement
10.32 Agreement, dated September 22, 1993, among Incorporated by reference from Exhibit 10.32
Microwave Medical Systems, Inc., the Company to the 1993 Form 10-K
and Kenneth L. Carr.
10.33 License and Exclusive Supply Agreement, dated Incorporated by reference from Exhibit 10.33
September 22, 1993, between Microwave Medical to the 1993 Form 10-K
Systems, Inc. and the Company.
10.34 Stock Purchase Agreement, dated as of January Incorporated by reference from Exhibit 2 to
28, 1994 between Kontron Instruments Holding the Company's Current Report on Form 8-K
N.V. and the Company. filed with the Securities and Exchange
Commission on February 18, 1994
10.35 Loan Agreement, dated as of February 8, 1994, Incorporated by reference from Exhibit 10.35
among the Company, Arrow Medical Products, to the 1994 Form 10-K
Limited, Arrow International Export
Corporation, and CoreStates Hamilton Bank, and
Notes relating thereto.
10.36 Loan Agreement, dated February 8, 1994, between Incorporated by reference from Exhibit 10.36
the Company and First Union National Bank of to the 1994 Form 10-K
North Carolina, and Note relating thereto.
10.37 Loan Agreement between Arrow Japan KK and the Incorporated by reference from Exhibit 10.37
Bank of Tokyo (with English translation). to the Company's Current Report on Form 8-K
filed with the Securities and Exchange
Commission on April 10, 1995 ("the 1995 Form
8-K")
10.38 Thoratec Laboratories Corporation International Incorporated by reference from Exhibit 10.38
Medical Products Distributor Agreement, dated to the 1995 Form 8-K
as of January 19, 1995, between Thoratec
Laboratories Corporation and the Company.
(72)
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
------ ---------- ----------------
10.39 Series F Preferred Stock Purchase Agreement, Incorporated by reference from Exhibit
dated as of March 8, 1995, between Cardiac 10.39 to the 1995 Form 8-K
Pathways Corporation and the Company.
10.40 Manufacturing and Supply Agreement, dated as of Incorporated by reference from Exhibit
March 8, 1995, between Cardiac Pathways 10.40 to the 1995 Form 8-K
Corporation and the Company.
10.41 International Distributor Agreement, dated as of Incorporated by reference from Exhibit
March 8, 1995, between Cardiac Pathways 10.41 to the 1995 Form 8-K
Corporation and Arrow.
10.42 Purchase Agreement, dated as of April 7, 1995, Incorporated by reference from Exhibit
among the Company, TLP Acquisition Corp., Therex 10.39 to the 1995 Form 8-K
Corporation, Therex Limited Partnership Holding
Corporation and each of the other persons
signatory thereto.
10.43 Amendment, dated July 27, 1995, to License Incorporated by reference from Exhibit 10.43
Agreement, dated October 24, 1990, between to the 1995 Form 10-K
Medical Innovative Technologies R&D Limited
Partnership and the Company.
10.44 Amendment, dated July 27, 1995, to Research and Incorporated by reference from Exhibit 10.44
Development Agreement, dated October 24, 1990, to the 1995 Form 10-K
between Medical Innovative Technologies R&D
Limited Partnership and the Company.
10.45 Amended and Restated License Agreement dated May Incorporated by reference from Exhibit 10.45
24, 1996, between Microwave Medical Systems, to the Company's Quarterly Report on Form
Inc. and the Company. 10-Q for the third quarter period ended May
31, 1996
10.46 Loan Agreement, dated July 11,1996, between AMH Incorporated by reference from Exhibit 10.46
(Arrow Medical Holdings) B.V. and CoreStates to the 1996 Form 10-K
Bank, N.A., and Note relating thereto.
10.47 Directors Stock Incentive Plan Incorporated by reference from Exhibit 10.47
to the 1996 Form 10-K
10.48 Purchase Agreement, dated June 1, 1996, between Incorporated by reference from Exhibit 10.48
Arrow Tray Products, Inc. (formerly known as to the 1996 Form 10-K
Endovations, Inc.) and the Company.
(73)
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
------ ---------- ----------------
10.49 Purchase Agreement, dated August 3, Incorporated by reference from Exhibit
1998, between Medical Parameters, Inc. 10.49 to the Company's Annual Report
and the Company. on Form 10-K for the fiscal year ended
August 31, 1999 (the "1999 Form 10-K")
10.50 Line of Credit Note, dated October 7, Incorporated by reference from Exhibit
1998, between the Company and First 10.50 to the 1999 Form 10-K
First Union National Bank.
10.51 Interest Rate Swap Agreement, dated Incorporated by reference from Exhibit
April 6, 1998 between the Company 10.51 to the 1999 Form 10-K
and CoreStates Bank, N.A.
10.52 Asset Purchase Agreement, dated Incorporated by reference from Exhibit
November 5, 1997, between Arrow 10.52 to the 1999 Form 10-K
Interventional, Inc., Boston Scientific
Corporation and IABP Corporation.
10.53 Mutual Release Agreement, dated July Incorporated by reference from Exhibit
20, 1998, between Arrow International, 10.53 to the 1999 Form 10-K
Inc. and Daltex Medical Sciences, Inc.
10.54 Exclusive License Agreement, dated Incorporated by reference from Exhibit
February 14, 1996 between Arrow 10.54 to the 1999 Form 10-K
International, Inc. and Israel Schur, M.D.
10.55 Directors Stock Incentive Plan Incorporated by reference from Exhibit
(as amended on January 19, 2000) 10.55 to the 2000 Form 10-K
10.56 1999 Stock Incentive Plan Incorporated by reference from Exhibit
10.56 to the 2000 Form 10-K
10.57 Loan Agreement, dated April 12, Incorporated by reference from Exhibit
2001, among First Union National 10.57 to the May 31, 2001 Form 10-Q
Bank, First Union National Bank,
London Branch, and Arrow
International, Inc., Arrow Medical
Products, Ltd., Arrow Deutschland,
GmbH, Arrow Iberia, S.A., Arrow
Internacional de Mexico S.A. de
C.V., Arrow Hellas Commercial A.E.,
Arrow Holland Medical Products B.V.,
and Arrow International CR, A.S.
10.58 Arrow International, Inc. Defined Incorporated by reference from Exhibit
Benefit Supplemental Executive 10.58 to the May 31, 2001 Form 10-Q
Retirement Plan
(74)
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
------ ---------- ----------------
18 Preferability Letter of Pricewaterhouse- Incorporated by reference from
Coopers LLP Exhibit 18 to the 1994 Form 10-K
21 Subsidiaries of the Company. Page 76 of this report
23 Consent of Pricewaterhouse- Page 77 of this report
Coopers LLP
99.1 Cautionary Statement for Purposes Page 78 of this report
of the Safe Harbor Provisions of the
Private Securities Litigation Reform
Act of 1995.
(75)